Hyatt Hotels Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the same 2012 periods. Amounts are in U.S. dollars, millions, except per-share data and operating statistics.
Business context and results
Hyatt managed, franchised, owned or leased 535 properties with 143,656 rooms and units across 47 countries. Its business includes hotel ownership and leasing, management and franchising, and vacation ownership and residential operations. Segment reporting reflects a reorganization effective in Q4 2012; 2012 segment results were recast for comparison.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,026 | $977 | $3,093 | $2,949 |
| Income before tax | $94 | $20 | $264 | $91 |
| Net income attributable to Hyatt | $55 | $23 | $175 | $72 |
| Diluted EPS | $0.35 | $0.14 | $1.10 | $0.44 |
| Adjusted EBITDA (non-GAAP) | $159 | $154 | $502 | $459 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $356 | $366 |
Q3 revenue rose 5%, while net income increased $32 million. Nine-month revenue also rose 5%; net income increased $103 million. Reported earnings benefited from real estate gains of $26 million in Q3 and $125 million year to date, improved equity earnings from unconsolidated ventures, and, for the nine-month period, a $29 million artwork-sale gain. These items make reported profit growth less representative of recurring hotel operations. Adjusted EBITDA, a company-defined non-GAAP measure, increased 3% in Q3 and 9% year to date.
Q3 comparable RevPAR increased 6.0% at owned and leased hotels, 7.3% at Americas full-service managed/franchised hotels and 4.5% at Americas select-service hotels. ASPAC RevPAR declined 3.0% (up 2.1% excluding currency); EAME/SW Asia RevPAR increased 1.2% (up 2.4% excluding currency). The filing does not provide a consolidated operating margin measure; managed-property reimbursement revenue and matching expenses are reported gross and do not add margin.
Financial position, cash flow and capital allocation
- At September 30, cash and cash equivalents were $774 million, restricted cash $434 million, and short-term investments $38 million. Cash plus short-term investments totaled $812 million, down from $927 million at year-end 2012.
- Total debt was $1.306 billion, versus $1.233 billion at year-end. Net debt, after cash and short-term investments, was $494 million, compared with $306 million. Debt-to-capital was 21.6% (20.4% at year-end); net debt-to-capital was 8.2% (5.1%). Figures exclude Hyatt’s share of unconsolidated venture debt, largely non-recourse, of $737 million.
- Operating cash flow was $356 million versus $366 million for the first nine months of 2012. Investing activities provided $178 million, compared with $419 million used in 2012, reflecting asset sales, investment proceeds and financing-receivable collections, partly offset by investments and acquisitions. Financing activities used $173 million, including $252 million of share repurchases.
- The $1.5 billion revolving credit facility had no borrowings outstanding; approximately $1.4 billion was available after letters of credit. The facility expires in September 2016. Hyatt reported compliance with applicable debt and facility covenants.
- Capital expenditures were $150 million for nine months, down from $210 million. Hyatt repurchased 6.1 million shares for $252 million, with $11 million remaining under the then-current authorization at quarter-end.
Material changes, outlook and risks
- Operating drivers: U.S. hotel demand, rates and RevPAR generally improved. Management cited stronger base and incentive fees from recently converted hotels, particularly in EAME/SW Asia, and new or converted franchise properties in the Americas. Owned-hotel EBITDA was lower in Q3, partly due to non-comparable properties and higher labor, rent and property-tax costs.
- Regional pressure: ASPAC results faced renovation-related displacement, weaker Asian conditions, increased supply in China and occupancy declines associated with Chinese government austerity measures. EAME/SW Asia benefited from converted hotels; U.K. comparisons were affected by the 2012 Olympics.
- Portfolio actions: Hyatt invested $325 million in Playa Hotels & Resorts, including a 21.8% common-equity interest and $225 million of preferred shares, and obtained franchise agreements for six resorts. During the period, it sold several hotels while retaining long-term management or franchise agreements. The $717 million acquisition of the former Peabody Orlando closed October 1, 2013 and was funded through a like-kind exchange.
- Debt and unusual items: Hyatt issued $350 million of 3.375% notes due 2023, redeemed $250 million of 2015 notes for $278 million, and repurchased $54 million principal of 2019 notes for $66 million. Nine-month other income included $35 million of debt-settlement costs and a $20 million charitable contribution; the artwork sale contributed $29 million. Nine-month asset impairments were $11 million.
- Guarantees and commitments: Maximum remaining performance-guarantee payments were $541 million, with $124 million recorded as a liability. A guarantee for four hotels in France has no annual cap; its stated maximum was about $509 million. Hyatt also had $272 million of maximum debt-repayment guarantee exposure, with $9 million recorded; exposure would be about $146 million assuming partners meet their pro-rata obligations. Commitments to lend or invest were up to $444 million, including an approximately $250 million share of a New York hotel purchase commitment.
- Accounting correction: Hyatt identified a foreign-currency translation error affecting an equity-method venture. At December 31, 2012, the cumulative effect decreased investments and equity by $10 million, including a $9 million increase to beginning retained earnings and a $19 million decrease to accumulated other comprehensive loss. The company said it expected to correct previously presented historical statements in future filings.
- Outlook and risks: No specific numerical earnings or RevPAR guidance is provided in the supplied filing text. Management said cash, operating cash flow, revolver capacity and capital-market access should meet funding needs and capital objectives for the foreseeable future, and stated that a significant payment under the French performance guarantee was unlikely in 2013. Risks include global economic and travel demand, occupancy and rates, group-booking visibility, owner and partner financing, guarantee performance, labor costs, currency and interest-rate movements, acquisitions and dispositions, competition, disasters, technology and cybersecurity, tax matters and litigation.
Important facts for investors to verify
- How much of earnings growth is recurring, given real-estate and artwork gains, venture results, impairments, debt-settlement costs and tax-rate changes?
- Whether the foreign-currency translation correction changes comparative results, and the final restated amounts in subsequent filings.
- Cash availability and use of restricted sale proceeds, including funding and returns from the Playa investment and the Orlando acquisition.
- Potential exposure, assumptions and performance of the uncapped French hotel guarantee and other performance and debt-repayment guarantees.
- Whether ASPAC operating weakness persists and whether improvements in Americas and EAME/SW Asia fees and RevPAR continue.
- Future debt, repurchase and investment decisions, including the additional $200 million buyback authorization approved in October 2013.