Hyatt Hotels Corporation — Q3 2017 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and nine months ended September 30, 2017. Hyatt operates, manages, franchises and licenses hotels and related hospitality businesses worldwide; its portfolio spanned 57 countries. Unless noted, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,119 | $1,088 | $3,501 | $3,342 |
| Net income attributable to Hyatt | $16 | $62 | $173 | $163 |
| Diluted EPS attributable to Hyatt | $0.13 | $0.47 | $1.36 | $1.21 |
| Adjusted EBITDA (non-GAAP) | $180 | $192 | $637 | $613 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $450 | $351 |
- Q3 systemwide comparable RevPAR increased 1.7% (1.6% at constant currency). Management and franchise fees rose 12.2% to $122 million.
- Q3 net income attributable to Hyatt fell $46 million year over year, while revenue grew 2.8% and Adjusted EBITDA declined 6.2%. For the first nine months, Adjusted EBITDA increased 3.9%.
- Nine-month operating cash flow improved $99 million, primarily reflecting $94 million of interest income received on redemption of Playa preferred shares. Investing activities used $228 million and financing activities used $321 million.
- At September 30, cash and cash equivalents were $383 million, restricted cash $224 million, and short-term investments $56 million. Current assets were $1,268 million versus current liabilities of $1,200 million.
- Debt was $1,796 million; net debt, as defined by Hyatt, was $1,357 million, up from $1,026 million at year-end 2016. The revolving facility had $340 million drawn and approximately $1.2 billion available. Hyatt reported compliance with debt covenants.
- Capital expenditures were $212 million for the nine-month period, versus $140 million a year earlier. Hyatt repurchased $535 million of shares, and approximately $302 million remained under its authorization at quarter-end.
Material changes and operating drivers
- Management and franchise fees increased $12 million in Q3 and $42 million for the nine-month period, supported by higher incentive and franchise fees and new hotels. Americas and ASPAC management and franchising Adjusted EBITDA increased; owned and leased hotels Adjusted EBITDA declined $16 million in Q3.
- Q3 owned-hotel performance was affected by weaker group demand, the timing of Jewish holidays, hurricanes in Florida and Texas, and an earthquake in Mexico. A prior-year business-interruption settlement partly offset the U.S. impact. International RevPAR generally strengthened in ASPAC and EAME/SW Asia.
- Equity earnings from unconsolidated hospitality ventures were $1 million in Q3 versus $25 million in Q3 2016, and a loss of $1 million for nine months versus earnings of $46 million. Prior-year comparisons included venture refinancing distributions and other items.
- Hyatt acquired Miraval for $237 million and exhale for $16 million, net of cash acquired. It sold Hyatt Regency Louisville for $65 million, recognizing a $35 million pretax gain; the $202 million Grand Cypress sale gain was deferred and is being recognized over its management agreement.
- After quarter-end, Hyatt sold Hyatt Regency Scottsdale Resort & Spa and Royal Palms Resort and Spa as a portfolio for $305 million and entered long-term management agreements. Hyatt also expected approximately $210 million of net proceeds from the proposed Avendra venture sale, which was expected to close in Q4 2017.
Outlook, commentary and risks
- No specific financial guidance or quantified forward outlook is provided in the filing. Management said cash, operating cash flow, revolving-credit availability and access to capital markets should be adequate for foreseeable funding needs.
- Q3 other income included a $21 million cease-use liability associated with relocating corporate headquarters. Nine-month results included $94 million of Playa preferred-share interest income and $40 million of related realized losses. Hyatt said the Q3 decrease in net income primarily reflected lower venture earnings and the headquarters charge.
- Hyatt cited exposure to economic and travel demand changes, occupancy and rate declines, disasters, labor costs and disputes, currency and interest-rate movements, competition, technology and cyber incidents, owner and franchisee financial health, and execution of its real-estate disposition strategy. It warned that a 4% change in assumptions could potentially result in up to $17 million of goodwill impairment; no impairment was recorded in the nine months.
- Contingencies include a maximum remaining performance-guarantee exposure of $391 million, with $66 million of net liabilities recorded, and debt repayment guarantees with $580 million of maximum potential payments and $276 million maximum exposure net of recoveries. Hyatt also had commitments to lend or invest up to $417 million.
- The IRS asserted a $117 million tax liability, including estimated interest, for 2009–2011 over the treatment of loyalty-program contributions. Hyatt challenged the assessment, said most would be offset by a deferred tax asset, and stated it believed reserves were adequate.
- Hyatt expected to adopt the new revenue standard using full retrospective transition in 2018 and was evaluating its effects. It said the new lease standard, effective in 2019, may materially affect its financial statements.
Important facts for investors to verify
- Whether the Q3 earnings decline is predominantly due to identified unusual items and lower venture earnings, or reflects a continuing deterioration in underlying hotel operations.
- How RevPAR, group bookings and segment Adjusted EBITDA trend after the quarter, particularly in the Americas and at owned hotels.
- Cash availability and debt levels after acquisitions, capital spending, share repurchases, property sales and the expected Avendra transaction.
- Potential cash and earnings exposure from performance and debt guarantees, the IRS dispute, and other commitments or contingencies.
- Whether the Scottsdale/Royal Palms and Avendra transactions closed on expected terms, and the eventual accounting and use of proceeds.