Hyatt Hotels Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in millions of U.S. dollars unless stated otherwise. Hyatt operates, manages, franchises and owns hotels and related properties worldwide; its portfolio comprised 573 properties in 48 countries at quarter-end.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1,104 | $1,026 | $3,336 | $3,093 |
| Income before taxes | $63 | $94 | $264 | $264 |
| Net income attributable to Hyatt | $32 | $55 | $162 | $175 |
| Diluted EPS attributable to Hyatt | $0.21 | $0.35 | $1.05 | $1.10 |
| Adjusted EBITDA | $179 | $159 | $582 | $502 |
- Revenue increased 8% in both periods. Growth reflected stronger owned-hotel results and management/franchise fees; a substantial portion of reported revenue and expense consists of pass-through reimbursements from managed properties.
- Q3 net income attributable to Hyatt fell 42%. Lower real-estate gains ($3 versus $26) and equity earnings from unconsolidated ventures ($6 versus $16) were significant factors. Nine-month net income declined 7%, despite unchanged pretax income, as the tax provision rose to $100 from $89.
- Adjusted EBITDA, a company-defined non-GAAP measure, rose 13% in Q3 and 16% for nine months. Approximate Adjusted EBITDA margins were 16.2% versus 15.5% in Q3 and 17.4% versus 16.2% for nine months.
- Comparable RevPAR grew across regions in Q3: Americas full service 8.4%, Americas select service 9.7%, ASPAC 3.5%, and EAME/SW Asia 7.2%. Management cited stronger transient rates and group demand; Eastern Europe remained affected by political instability.
- Nine-month operating cash flow was $362, compared with $356. Investing used $250, versus $178 provided in the prior year; financing used $287, versus $173. Cash and cash equivalents were $263 at September 30, down from $454 at year-end; short-term investments were $30. Restricted cash was $95.
- Debt was $1,427, including current maturities. Total debt to capital was 23.4%; net debt, after cash and short-term investments, was $1,134, or 18.6% of capital. The $1.5 billion revolving facility had $130 outstanding and approximately $1.4 billion available. Hyatt reported covenant compliance. Its share of unconsolidated venture debt, largely non-recourse, was approximately $668 and excluded from consolidated debt.
Material changes and significant events
- Hyatt acquired the Park Hyatt New York for approximately $392, including cash acquired, and exercised its option to buy the Hyatt Regency Grand Cypress for $191.
- Hyatt sold nine select-service hotels and one full-service hotel for net proceeds of $310, recognizing a $65 pretax gain for the first nine months. The hotels remain Hyatt-branded under long-term agreements. Prior-year real-estate gains were $125.
- After quarter-end, Hyatt closed the sale of Hyatt Residential Group for approximately $220 and the sale of Park Hyatt Washington for approximately $100; Hyatt expects recurring license fees from the former and will continue managing the latter.
- Hyatt announced a planned sale of 38 Hyatt Place and Hyatt House hotels for approximately $590, expected to close in November 2014, with long-term franchise agreements intended for the properties.
- Hyatt repurchased $229 of common stock in the first nine months and had $259 remaining under its authorization at September 30.
Outlook, risks and contingencies
- No broad numerical earnings or revenue guidance is provided in the filing. Management said available cash, operating cash flow, the revolving facility and capital-market access should meet foreseeable funding needs.
- For four managed hotels in France, Hyatt expected no incentive fees for the rest of 2014 and approximately €15–€20 in net guarantee payments for the year. The guarantee has no annual cap; its maximum potential payments were approximately $507, with $109 of guarantee liabilities recorded.
- Hyatt had up to $254 of conditional lending or investment commitments and $267 of maximum debt-repayment guarantees, against which $8 was recorded. These exposures, along with performance guarantees, may require cash if specified conditions occur.
- Management identified economic and travel demand, occupancy and room rates, owner and franchisee financial health, foreign exchange, interest rates, political instability, natural or other disasters, cyber and technology risks, labor costs, competition, transaction execution and legal/regulatory matters as risks. The filing reported no material change in previously disclosed risk factors and no expected material effect from pending litigation.
- Q3’s effective tax rate was 47.7% and the nine-month rate was 37.8%; management cited earnings mix and uncertain tax positions, among other items. Unrecognized tax benefits were $51, of which $27 would affect the effective rate if recognized.
Investor verification priorities
- Confirm completion, proceeds and continuing franchise or management terms for the announced hotel portfolio sale, and track the results of the post-quarter residential and Park Hyatt Washington sales.
- Monitor the France hotel guarantee’s actual payments and performance, as well as Hyatt’s other guarantees and conditional commitments.
- Separate recurring operating and fee growth from property-sale gains and other investment or transaction-related items; review the reconciliation and limitations of Adjusted EBITDA.
- Assess cash generation against acquisitions, capital expenditures, share repurchases and debt service; distinguish unrestricted cash from restricted cash and assets held for sale.
- Track regional RevPAR, particularly group demand and pricing in the Americas and exposure to political instability and currency movements in international markets.