Hyatt Hotels Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts are in millions except per-share data and where noted. Hyatt operates, manages, franchises, and licenses hotels and related hospitality businesses; its portfolio covered 59 countries.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,133 | $1,149 | $2,242 | $2,275 |
| Income attributable to Hyatt | $77 | $103 | $488 | $158 |
| Diluted EPS | $0.66 | $0.81 | $4.12 | $1.22 |
| Adjusted EBITDA (non-GAAP) | $218 | $224 | $420 | $442 |
| Operating cash flow | Not separately provided for the quarter | $30 | $310 |
- Q2 revenue declined 1.4% year over year. Management and franchise fees increased 9.6% to $142; owned and leased hotel revenue fell $91 to $485, primarily reflecting hotel dispositions. Reimbursement revenue and related expenses largely offset one another.
- Q2 net income fell $26, largely because 2017 included $61 of gains on hotel sales versus $1 in Q2 2018. Six-month 2018 net income included a $531 pretax gain from three hotel sales; six-month 2017 included $60 of real-estate gains. These gains materially affect reported comparisons.
- Systemwide RevPAR rose 4.0% in constant currency in Q2, while comparable owned and leased hotel RevPAR increased 4.1% in constant currency. Hyatt cited improved demand and rates; group revenue benefited in part from Easter timing.
- Q2 Adjusted EBITDA declined $6. For the first half, it declined $22; owned and leased hotels fell $45, partly offset by growth in the three management and franchising regions. These are non-GAAP measures defined by Hyatt.
- Operating cash flow was $30 for the first half, down from $310, reflecting higher tax payments and the prior-year receipt of $94 of interest income related to Playa preferred shares. Capital expenditures were $121; operating cash flow less capital expenditures was negative $91.
- At June 30, cash and cash equivalents were $628, restricted cash $254, and short-term investments $154. Long-term debt was $1,429, with $11 current maturities. Hyatt reported $1,440 of consolidated debt and $658 net debt under its definition, which subtracts cash and short-term investments but excludes restricted cash.
- Total debt to total capital was 28.0%; net debt to total capital was 12.8%. Hyatt had no revolving-credit-facility borrowings and approximately $1.5 billion of available capacity. The $1.5 billion unsecured revolver was refinanced with maturity extended to January 2023.
Material changes and capital allocation
- Hyatt sold Grand Hyatt San Francisco, Andaz Maui at Wailea, and Hyatt Regency Coconut Point for approximately $992 net proceeds and recorded a $531 pretax gain. Each property returned to Hyatt under a long-term management agreement. $221 of proceeds was restricted for a potential like-kind exchange.
- Hyatt repurchased $588 of common stock in the first half, including approximately 7.7 million shares, and paid $35 in dividends. $276 remained under the repurchase authorization at June 30. The company also acquired Hyatt Regency Phoenix for approximately $140 on July 19, 2018.
- The effective tax rate was 24.3% for Q2 and 26.4% for the first half, versus 34.2% and 35.5%, respectively, in 2017, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Act.
Outlook, risks, contingencies, and unusual items
- Hyatt said cash, operating cash flow, revolver capacity, and capital-market access should be adequate for foreseeable funding needs. It discussed continued capital recycling and a strategy to reduce its owned real-estate base, but this filing provides no specific earnings or RevPAR guidance.
- Management cited improved hotel demand, transient ADR, and group business across regions. It also noted regional weaknesses, including soft demand in South Korea, and the potential for travel demand, occupancy, rates, costs, currency, interest rates, and economic conditions to affect results.
- Performance guarantees had a remaining maximum exposure of $319, including $270 related to four managed hotels in France; recorded net guarantee liabilities were $41. Separate debt-repayment guarantees had $778 maximum potential payments, with $391 maximum exposure net of stated recoveries. Hyatt said it knew of no guaranteed borrowers delinquent on debt service.
- A pending IRS dispute concerning the tax treatment of loyalty-program contributions could result in a $120 liability, including estimated interest, partly offset by a deferred tax asset; Hyatt believes its recorded liability is adequate. An Indian service-tax assessment has a stated maximum exposure of $17; Hyatt plans to appeal and had not accrued a liability because it did not consider a loss probable.
- Hyatt recorded a $22 impairment of an equity investment and a $16 impairment charge related to unconsolidated ventures in Brazil during the first half. Its loyalty-program deferred revenue liability was $581; management estimated that a 10% decrease in the breakage assumption would increase the liability by approximately $30 on a full-year basis.
- Hyatt adopted the new revenue standard retrospectively, affecting revenue timing and classification, including loyalty-program accounting. It said the forthcoming lease standard could materially affect its financial statements. The filing reported effective disclosure controls and no material change in internal control.
- The filing disclosed a putative hotel-industry antitrust class action filed in March 2018; Hyatt disputes the allegations and did not expect a material effect. It reported no material change to the risk factors in its 2017 Form 10-K.
Most important facts for investors to verify
- Separate recurring operating performance from the $531 hotel-sale gain when assessing first-half earnings and EPS.
- Track operating cash generation, taxes paid, capital expenditures, and working-capital movements after the first-half cash-flow decline.
- Monitor the impact of hotel dispositions on owned-hotel revenue and EBITDA against growth in management and franchise fees and systemwide RevPAR.
- Assess share repurchases and dividends against liquidity needs, debt maturities, and the stated real-estate-reduction strategy.
- Follow guarantee exposures, the IRS loyalty-program dispute, the India tax assessment, investment impairments, and loyalty-liability assumptions.