Hyatt Hotels Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 16, 2012. The filing also provides unaudited quarterly results, including the fourth quarter.
Business context
Hyatt manages, franchises, owns and develops hotels and related residential and vacation-ownership properties. At year-end, its portfolio comprised 483 properties and 132,727 rooms and units in 45 countries. Its business spans owned and leased hotels, North American management and franchising, international management and franchising, and corporate activities.
Financial and operating performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $3.698 billion | $3.527 billion | +4.8% |
| Net income attributable to Hyatt | $113 million | $66 million | +71% |
| Diluted EPS attributable to Hyatt | $0.67 | $0.38 | Up $0.29 |
| Adjusted EBITDA | $538 million | $476 million | +13.0% |
| Cash from operating activities | $393 million | $450 million | Down $57 million |
| Capital expenditures | $331 million | $310 million | Up $21 million |
- Calculated net income margin was approximately 3.1% of revenue in 2011, versus 1.9% in 2010. Adjusted EBITDA margin was approximately 14.5%, versus 13.5%; Adjusted EBITDA is a non-GAAP measure and is not cash flow.
- Operating cash flow less capital expenditures was approximately $62 million in 2011, compared with $140 million in 2010.
- Revenue growth reflected stronger hotel demand and rates, higher management and franchise fees, favorable currency effects of $31 million, and a $97 million increase in reimbursed managed-property costs. The reimbursements have no added margin and do not increase profit.
- Comparable RevPAR increased across the principal hotel groups: owned and leased hotels +5.9%; North American full service +6.7%; North American select service +8.8%; and international full service +8.1%. International full-service RevPAR growth was substantially rate-driven. Management said RevPAR remained below pre-recession levels across much of the portfolio.
- Year-end cash and cash equivalents were $534 million and short-term investments were $588 million, totaling $1.122 billion, down from $1.634 billion a year earlier. Total debt, including capital lease obligations, was $1.225 billion, versus $771 million; net debt after cash and short-term investments was $103 million. Debt-to-total-capital rose to 20.3% from 13.1%.
- Hyatt had $1.4 billion of available capacity under its $1.5 billion revolving facility, which matures in September 2016; there were no revolver borrowings at year-end. The company reported compliance with debt covenants.
- Fourth-quarter revenue was $990 million versus $918 million. Net income attributable to Hyatt was $52 million versus $6 million in fourth-quarter 2010. The 2011 quarter included a $28 million income-tax benefit; the 2010 quarter included impairment charges partly offset by real-estate sale gains.
Material changes and notable transactions
- Hyatt acquired 20 LodgeWorks hotels, rights to manage four additional hotels and other assets for approximately $661 million, and acquired three Woodfin Suites hotels for approximately $77 million. The acquired operations contributed $47 million of revenue and a $4 million loss from continuing operations after acquisition.
- It issued $250 million of 3.875% senior notes due 2016 and $250 million of 5.375% notes due 2021. It also refinanced and expanded its revolving credit facility from $1.1 billion to $1.5 billion, extending maturity from 2012 to 2016.
- Hyatt repurchased and retired 8.99 million Class B shares for approximately $396 million. The repurchase contributed to the decline in cash and equity.
- Capital spending included $226 million for enhancements, $92 million for maintenance and $13 million for new facilities. Hyatt sold six Hyatt Place and two Hyatt Summerfield Suites properties to a joint venture for $110 million gross, or $90 million net of its $20 million investment; it retained franchise relationships.
- Net impairment charges attributable to Hyatt were approximately $5 million in 2011, compared with $69 million in 2010. Equity earnings from unconsolidated ventures improved to $4 million from a $40 million loss.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings, revenue or RevPAR guidance. Management described a continuing recovery in demand and emphasized growth through management and franchise agreements, select-service expansion, targeted development and selective asset sales. It cautioned that recovery pace was uncertain and performance remained below pre-recession levels.
- Key exposures include hospitality cyclicality, economic and travel disruptions, competition, labor costs and relations, foreign currency movements, and reliance on owners and franchisees to fund property maintenance and meet brand standards. Owned hotels’ relatively fixed costs can magnify profit declines when demand weakens.
- Unconsolidated hospitality venture debt of approximately $543 million was excluded from consolidated debt and was substantially non-recourse to Hyatt. Hyatt also reported $56 million of maximum exposure under loan, lease, completion and repayment guarantees, including a $25 million guarantee related to the Minneapolis hotel venture.
- Hyatt had $614 million of conditional commitments to invest or lend, including approximately $250 million for its share of a planned New York hotel purchase and up to $139 million for a Hawaii development venture. These commitments are subject to stated conditions.
- Unrecognized tax benefits were $175 million at year-end, of which $49 million would affect the effective tax rate if recognized; the company said up to $33 million could be reduced within 12 months. Separately, it disclosed potential additional taxes and penalties of up to $32 million, plus interest, for earlier federal tax years under appeal.
- Other material risks include impairment sensitivity, hotel-owner financing and receivables, potential management-agreement terminations, environmental and legal claims, and interest-rate and counterparty risk. Management said ordinary-course litigation was not expected to have a material effect. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
- Governance and share-supply risks are significant: Class B shares carry ten votes each, and Pritzker family business interests controlled approximately 76% of voting power at year-end. The company paid no common dividends and said it intended to retain future earnings.
Most important facts for investors to verify
- Reconcile the $47 million increase in net income and assess how much reflects recurring hotel and fee performance versus the $28 million fourth-quarter tax benefit and other unusual items.
- Review operating cash flow, capital spending, acquisitions and the $396 million share repurchase together; confirm how management expects to fund growth and maintain liquidity.
- Assess debt maturities, capital-lease obligations, facility availability and covenant headroom, including the extent of venture debt and guarantee exposure not included in consolidated debt.
- Track comparable RevPAR, occupancy and ADR against pre-recession levels, and distinguish underlying revenue growth from pass-through reimbursements and currency effects.
- Examine the tax audits, the $175 million of unrecognized tax benefits, the $32 million potential assessment, and assumptions supporting deferred tax assets and asset valuations.
- Consider the effects of concentrated voting control, potential sales or conversion of Class B shares, and related-party transactions on public shareholders.