Hyatt Hotels Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in millions of dollars unless noted. Hyatt operated or franchised 627 hotels in 54 countries at quarter-end. Reported revenue includes substantial reimbursed managed-property costs, which are offset by corresponding expenses.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,165 | $1,112 | $2,254 | $2,166 |
| Income before taxes | $88 | $80 | $138 | $114 |
| Net income attributable to Hyatt | $67 | $40 | $101 | $62 |
| Diluted EPS | $0.49 | $0.27 | $0.74 | $0.42 |
| Adjusted EBITDA (non-GAAP) | $227 | $215 | $421 | $400 |
| Operating cash flow | Not separately shown for Q2 | $239 | $184 |
- Q2 revenue rose 4.8% as reported (5.3% excluding currency); management and franchise fees increased 2.7%. The revenue increase reflected stronger owned-hotel performance, higher franchise fees, and greater managed-property reimbursements.
- Q2 net income increased $27, while Adjusted EBITDA increased $12, or 5.6%. The six-month increases were $39 in net income and $21 in Adjusted EBITDA.
- Q2 comparable systemwide RevPAR increased 1.5% reported and 2.3% in constant currency. Americas full-service and select-service RevPAR rose 2.8% and 6.8%, respectively; ASPAC full-service was nearly flat reported; EAME/SW Asia full-service fell 11.9%.
- The filing does not provide a single consolidated operating-margin measure. Managed-property reimbursement revenue and matching costs materially affect reported revenue and expenses.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $642; short-term investments were $49. Combined cash and short-term investments were $691, versus $503 at year-end 2015.
- Consolidated debt was $1,474, up from $1,370 at year-end. Net debt, a non-GAAP measure, was $783, down from $867; net debt to total capital was 14.3%, versus 16.2%.
- Current assets were $1,347 and current liabilities $824. The revolving credit facility had no balance outstanding and approximately $1.5 billion of available capacity, net of undrawn letters of credit. Hyatt reported compliance with debt covenants.
- Six-month investing cash flow was a $23 use, including the $238 acquisition of The Confidante, $85 of capital expenditures, and approximately $240 of net proceeds from the Andaz 5th Avenue sale. Financing cash flow was a $47 use, including $131 of share repurchases.
- Hyatt issued $400 of 4.85% senior notes due 2026 and redeemed $250 principal of notes due 2016 for $254 including accrued interest and a make-whole premium. It also repaid a $64 secured term loan.
Changes, outlook and material items
- Results improved versus 2015, supported by stronger U.S. and Mexico hotel performance, new and converted franchise hotels, and higher earnings from unconsolidated ventures. The 2015 comparison included substantial losses from foreign joint ventures; Q2 2016 equity earnings from unconsolidated ventures were $19 versus a $23 loss.
- The effective tax rate fell to 24.7% for Q2 and 27.2% for the first half, from 50.0% and 45.6%, respectively. Hyatt attributed the decline mainly to global transfer-pricing changes implemented in late 2015 and the effect of certain foreign joint-venture losses not benefiting 2015.
- Management said it expected 2016 trends in EAME/SW Asia to continue weighing on results. It cited weaker demand in Paris, Istanbul, the Middle East and Africa, security concerns, increased supply and reduced government spending, Ramadan timing, and renovations. Hong Kong and Macau visitor arrivals were also weak; ASPAC results faced increased supply and changing tourism preferences.
- No quantified full-year earnings or revenue guidance is provided in the supplied filing text. Hyatt said its cash, operating cash flow, borrowing capacity and capital-market access were expected to meet funding needs and capital deployment objectives for the foreseeable future.
- Hyatt bought The Confidante (formerly Thompson Miami Beach) for approximately $238 and sold Andaz 5th Avenue for $240 net of closing costs, recording a $21 pretax loss. The Confidante seller was indirectly owned by a limited partnership affiliated with the brother of Hyatt’s Executive Chairman. Hyatt subsequently acquired Royal Palms Resort and Spa for approximately $88 on July 12, 2016.
- Performance guarantees had maximum remaining exposure of $411, including $382 related to four managed hotels in France; recorded net liabilities were $76. Maximum debt-repayment guarantees were $363, with a stated estimated maximum exposure of $255 assuming recovery arrangements with partners and third parties are successful.
- Hyatt had commitments to lend or invest up to $334, including an approximately $160 commitment to purchase a Portland hotel upon substantial completion. Other disclosed exposures include a $4 liability for a 2015 cybersecurity malware incident, and a $347 Level 3 Playa preferred-share investment whose estimated fair value is sensitive to assumptions.
- Management stated that ordinary-course litigation was not expected to have a material effect and that there had been no material changes to previously disclosed risk factors. Disclosure controls were concluded effective; no material change in internal control over financial reporting was reported.
Key investor verification points
- Assess how much of the earnings improvement reflects recurring hotel and fee performance versus lower taxes, the prior-year joint-venture losses, performance-guarantee accounting, and other unusual items.
- Review regional RevPAR and booking trends, especially persistent EAME/SW Asia weakness, and the effect of renovations and security concerns on demand.
- Verify the terms, approval process and related-party disclosures for The Confidante acquisition, along with its contribution to owned-hotel results and cash needs.
- Monitor guarantee exposure—particularly the French hotel guarantees—and the assumptions underlying recoveries from partners and third parties.
- Review the valuation assumptions and sensitivity disclosures for the Level 3 Playa preferred shares, and the funding implications of the Portland commitment and planned capital spending.
- Reconcile non-GAAP Adjusted EBITDA and net debt to GAAP measures; Hyatt changed its Adjusted EBITDA definition in 2016 to exclude stock-based compensation and recast prior-period results for comparison.