Hyatt Hotels Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing also reports fourth-quarter results. Unless noted otherwise, financial amounts are in U.S. dollars and millions.
Business context and reporting period
Hyatt operates a global hospitality business spanning owned and leased hotels, hotel management and franchising, wellness, loyalty, and related services. At year-end, its worldwide hotel portfolio comprised 843 full- and select-service hotels with 208,207 rooms. The company’s strategy emphasizes expanding management and franchising while selectively reducing owned real estate.
In November 2018, Hyatt acquired Two Roads Hospitality, adding five brands and management agreements. The acquisition added 65 hotel properties, approximately 12,000 rooms, and a pipeline of approximately 5,000 rooms.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $4,454 | $4,462 |
| Net income attributable to Hyatt | $769 | $389 |
| Diluted earnings per share attributable to Hyatt | $6.68 | $3.08 |
| Adjusted EBITDA | $777 | $792 |
| Cash from operating activities | $341 | $587 |
| Capital expenditures | $297 | $298 |
| Cash and cash equivalents plus short-term investments, year-end | $686 | $552 |
| Consolidated debt, year-end | $1,634 | $1,451 |
| Net debt, year-end | $948 | $899 |
System-wide RevPAR rose 3.1% in constant currency. Management, franchise, and other fees increased 10.7% to $552 million; owned and leased hotel revenue declined 12.2% to $1,918 million, primarily reflecting property dispositions. At year-end, Hyatt had $1.5 billion available under its revolving credit facility, with no outstanding revolver balance.
For Q4 2018, revenue was $1,138 million and net income attributable to Hyatt was $44 million, compared with $1,117 million and $213 million, respectively, in Q4 2017.
Material changes versus the prior comparable period
- Net income nearly doubled, but the increase principally reflects real estate sale gains and a lower tax expense, rather than growth in Adjusted EBITDA. Hyatt recorded $772 million of pretax gains on real estate sales in 2018, versus $236 million in 2017.
- Adjusted EBITDA declined 1.9%, while total revenue was nearly flat. Management cited growth in fee revenue, offset by lower contribution from owned hotels following dispositions.
- Operating cash flow fell $246 million to $341 million, primarily because of higher tax payments and the absence of $94 million of interest income received in 2017 on redemption of Playa preferred shares.
- The effective tax rate declined to 19.1% from 45.9%, reflecting the lower U.S. corporate tax rate, tax effects of the Hyatt Regency Mexico City transaction, and a release of a foreign-tax-credit valuation allowance. The 2017 rate included Tax Act-related charges.
- Hyatt repurchased $946 million of common stock in 2018 and paid $68 million in dividends. The company issued $400 million of 4.375% notes due 2028 and redeemed its remaining 2019 notes.
Outlook, commentary, risks, and unusual items
- Asset strategy: Hyatt targets approximately $1.5 billion in gross proceeds from reducing its owned real estate portfolio by the end of 2020; it reported approximately $1.1 billion realized to date. Dispositions may be delayed, occur at unfavorable prices, or fail to deliver anticipated benefits.
- Growth: The executed development contract base was approximately 445 hotels, or 89,000 rooms. Hyatt expects growth primarily through management and franchise agreements. The filing provides no clear numerical earnings or RevPAR guidance for 2019.
- Acquisition and sale items: Two Roads had a stated purchase price of $405 million, with contingent consideration; Hyatt estimated total acquisition consideration at $509 million. 2018 also included major hotel and Mexico City-related dispositions. The filing reports a $25 million goodwill impairment, primarily related to the Mexico City transaction.
- Tax contingency: The IRS disputes Hyatt’s treatment of loyalty-program contributions for 2009–2014. If the IRS position prevails, Hyatt estimates a $179 million tax payment, including estimated interest, partly offset by a deferred tax asset. Hyatt disputes the position and says it has recorded an adequate liability.
- Guarantees and commitments: Year-end maximum performance-guarantee exposure was $257 million; debt repayment and other guarantees totaled $717 million, with stated maximum exposure net of recoveries of $267 million. These are contingent exposures, not necessarily expected cash payments.
- Other risks: Results are exposed to economic and travel cycles, labor and operating-cost pressures, competition and third-party booking channels, currency movements, cyber and technology incidents, property-owner financing, and the ability to meet hotel performance tests. Two antitrust lawsuits were pending; management did not believe their outcomes would materially affect the company.
- Accounting and controls: Hyatt adopted revenue-recognition standards retrospectively and completed its accounting for the 2017 Tax Act. It expected 2019 lease accounting adoption to add $450–$550 million of operating lease assets and $380–$480 million of related liabilities, without a material effect on income or cash flows. Management and the auditor reported effective internal control over financial reporting, excluding Two Roads from the assessment as a recent acquisition.
Important facts for investors to verify
- How much of 2018 net income and EPS growth came from property-sale gains and tax effects, and how recurring operating performance compares using Adjusted EBITDA and cash flow.
- Progress toward the $1.5 billion asset-sale target, including proceeds actually available for general use and the impact of sale-and-management-back transactions on future earnings.
- Two Roads’ final purchase accounting, contingent consideration, integration progress, and contribution to fee revenue and margins.
- The status and potential financial effects of the IRS loyalty-program tax dispute and other tax examinations.
- Actual cash exposure, recoveries, and expirations for performance and debt guarantees, especially the French hotel guarantees.
- Debt maturities, lease-accounting effects, capital returns, and whether operating cash flow supports planned investments and repurchases.