Hyatt Hotels Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts are in millions of dollars, except per-share and hotel operating data.
Business context
Hyatt manages, franchises, owns and develops hotels and related properties worldwide. At June 30, 2014, its portfolio included 563 properties with 149,640 rooms and units across 48 countries. Hyatt reported through owned and leased hotels, Americas management and franchising, ASPAC management and franchising, EAME/SW Asia management, and corporate and other.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,158 | $1,092 | $2,232 | $2,067 |
| Income before taxes | $121 | $167 | $201 | $170 |
| Net income attributable to Hyatt | $74 | $112 | $130 | $120 |
| Diluted EPS attributable to Hyatt | $0.48 | $0.70 | $0.83 | $0.75 |
| Adjusted EBITDA | $231 | $212 | $403 | $343 |
Q2 revenue increased 6%; six-month revenue rose 8%. Adjusted EBITDA increased 9% in Q2 and 17.5% for the six months. Q2 net income fell 34%, primarily reflecting the prior-year period’s $99 million real-estate sale gains; six-month net income increased 8%. Q2 comparable RevPAR rose 4.8% at owned and leased hotels, 5.6% at Americas full-service managed/franchised hotels, 8.4% at Americas select-service hotels, 3.6% in ASPAC and 3.8% in EAME/SW Asia.
Cash flow and liquidity: Six-month operating cash flow was $253, up from $162; investing cash flow provided $201 versus $312; financing used $337 versus $175. Cash and cash equivalents were $553 at June 30, up from $454 at year-end; short-term investments were $30. Hyatt reported $1,303 of consolidated debt, net debt of $720 and a total-debt-to-capital ratio of 21.5% (23.7% at year-end). The $1.5 billion revolving facility, extended to January 2019, had no borrowings and approximately $1.4 billion available after facility letters of credit.
Margins and operating costs: Consolidated Adjusted EBITDA was $231 in Q2 and $403 for the first half. The filing does not present a consolidated GAAP operating-margin measure. Owned-hotel costs and SG&A increased year over year; managed-property reimbursements increase reported revenue and expenses by similar amounts without added margin.
Material changes versus prior periods
- Q2 Americas management and franchising Adjusted EBITDA increased $17 to $79; owned and leased hotels increased $12 to $157. These gains were partly offset by decreases of $10 in EAME/SW Asia and $3 in ASPAC.
- Six-month real-estate gains were $62 versus $99 in 2013. Hyatt sold nine select-service and one full-service hotel for $311 net of closing costs, recognizing a $62 gain; the hotels remain Hyatt-branded under long-term agreements.
- Q2 equity earnings from unconsolidated ventures were $23 versus a $5 loss, including a $20 gain recognized by a venture on a hotel sale. Interest expense rose to $18 from $16 in Q2, partly due to bonds associated with Grand Hyatt San Antonio.
- Hyatt repurchased $150 of stock in the first half and authorized an additional $300 of repurchases; $338 remained under authorization at June 30.
Outlook, commentary, risks and unusual items
- Management described stronger transient rates and group demand in the Americas, with RevPAR growth across regions. It provided no specific consolidated revenue, earnings or Adjusted EBITDA guidance in the supplied filing text.
- Hyatt expected to pay approximately €15 million net under performance guarantees for four hotels in France in 2014, while reporting maximum potential payments of $543. The guarantee liability recorded was $119; the agreement has no annual cap.
- Hyatt had a definitive agreement to sell Hyatt Residential Group for approximately $190 and its Maui vacation-ownership joint-venture interest for approximately $35, with closing expected in 2014. Related assets of $175 and liabilities of $31 were classified as held for sale.
- Through a venture, Hyatt was committed to fund approximately $254 of a planned New York City hotel purchase, subject to contractual milestones; it was negotiating to acquire its partner’s interest.
- Other notable items included a $7 property impairment, $6 of management realignment costs and $3 of transaction costs related to the residential-business sale in the first half. The Playa preferred-share investment was valued at $271 using Level 3 inputs and had a $7 unrealized loss in other comprehensive income.
- Disclosed risks include hotel demand, occupancy and rate changes; guarantee performance; labor and operating costs; foreign exchange and interest rates; third-party owner and partner financial condition; political instability in Eastern Europe; and execution of acquisitions, dispositions and repurchases. Management said it did not expect ordinary-course claims and litigation to have a material financial effect. No material change to previously disclosed risk factors was reported.
Investor verification priorities
- Reconcile the Q2 earnings decline with the $99 prior-year real-estate gains and compare GAAP results with Adjusted EBITDA.
- Review the French hotel guarantee’s payment assumptions, maximum exposure and recorded liability.
- Confirm the timing, proceeds and continuing license-fee arrangements for the residential and Maui sales.
- Assess funding and completion conditions for the New York hotel commitment and planned capital expenditures.
- Check debt maturities, revolver availability, buyback pace and the valuation assumptions underlying the Level 3 Playa investment.