Hyatt Hotels Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless otherwise stated.
Business context and reporting period
Hyatt operates and franchises hotels and provides management, loyalty, travel distribution, destination management, and related services. At September 30, 2022, its hotel portfolio included 1,211 hotels with 294,888 rooms across 72 countries. Apple Leisure Group (ALG), acquired in November 2021, is reported as a separate segment and contributed materially to the 2022 comparison.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,541 | $851 | $4,303 | $1,952 |
| Net income (loss) attributable to Hyatt | $28 | $120 | $161 | $(193) |
| Diluted EPS | $0.25 | $1.15 | $1.44 | $(1.89) |
| Adjusted EBITDA (non-GAAP) | $252 | $110 | $676 | $145 |
| Operating cash flow | Not separately stated | Not separately stated | $403 | $209 |
| Capital expenditures | Not separately stated | Not separately stated | $142 | $65 |
Q3 revenue rose 81.2%, reflecting the continued travel recovery and $363 million of ALG segment revenue. Comparable system-wide RevPAR increased 45.9% year over year to $133; management reported improved leisure demand and stronger group and business-transient travel. Q3 net income fell despite stronger operations, principally because real-estate sale gains were $308 million lower than in Q3 2021. Nine-month results also include significant gains on 2022 property sales. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, real-estate gains, interest, taxes, and depreciation and amortization.
Revenue includes substantial reimbursements for costs incurred on managed and franchised properties: $705 million in Q3, against $697 million of related costs. These pass-through amounts materially increase reported revenue but contribute little net income.
Balance sheet, debt, and liquidity
- At September 30, cash and cash equivalents were $1,223 million, restricted cash $356 million, and short-term investments $151 million. Cash plus short-term investments totaled $1,374 million.
- Total debt was $3,804 million, including $654 million classified as current. Net consolidated debt, as defined by Hyatt, was $2,430 million, down from $2,791 million at December 31, 2021. Net debt to total capital was 33.5%, versus 37.0% at year-end.
- The $1.5 billion revolving credit facility had no borrowings and $1,496 million of borrowing capacity available at September 30, net of letters of credit.
- After quarter-end, Hyatt redeemed its $300 million floating-rate notes on October 1 for approximately $302 million and its $350 million 3.375% notes on October 28 for approximately $353 million, including accrued interest.
- Operating cash flow was $403 million for the first nine months. Investing activities provided $430 million, including proceeds from property sales; financing activities used $305 million, including $263 million of share repurchases.
Material changes and unusual items
- Management, franchise, and other fees increased 99.3% in Q3 to $224 million; net fees after contra revenue were $215 million. Distribution and destination management revenue was $244 million in Q3 and $746 million for the first nine months, primarily from ALG.
- Hyatt recognized $252 million of real-estate sale gains in the first nine months of 2022, compared with $412 million in the prior-year period. It sold The Confidante Miami Beach, The Driskill, Grand Hyatt San Antonio River Walk, and Hyatt Regency Indian Wells; long-term management agreements were entered into for the properties sold.
- Hyatt acquired Hotel Irvine for $135 million in Q3. The company reported $26 million of Q3 restructuring expense related to severance costs for redevelopment of an owned hotel, and $19 million of year-to-date intangible-asset impairment charges, including a $7 million goodwill impairment associated with the San Antonio sale.
- ALG integration and acquisition accounting remain relevant: certain acquired asset and liability valuations were preliminary, including performance-guarantee liabilities, with finalization expected in Q4 2022.
Outlook, risks, and contingencies
Management described the recovery as continuing, led by leisure travel with improving group and business-transient demand, while warning that demand may be uneven. The filing gives no specific numerical earnings or revenue guidance. Hyatt stated it expected to realize $2.0 billion of proceeds from net dispositions of owned assets by the end of 2024; it had realized $721 million as of November 3, 2022.
Risks cited include renewed COVID-19 impacts and travel restrictions, economic uncertainty, inflation, rising labor and construction costs, supply-chain constraints, foreign exchange and interest-rate movements, and the ability to integrate ALG and execute the strategy to expand management and franchising while reducing owned real estate. Hyatt also faces performance and debt guarantees, contractual commitments, and other ordinary-course claims. At September 30, commitments to lend, invest, or provide consideration under specified conditions totaled up to $307 million, net of related letters of credit. Maximum exposure on debt repayment guarantees was $234 million after estimated third-party recoveries.
A U.S. tax dispute concerning loyalty-program contributions is pending before the Tax Court. If the IRS position is upheld for assessed years, Hyatt estimates a potential payment of $229 million, including estimated interest; the company believes it has recorded an adequate uncertain tax liability. The filing also reports a potential Indian service-tax exposure not expected to exceed $18 million, for which Hyatt had not recorded a liability because it did not believe a loss was probable.
Important facts for investors to verify
- Separate underlying operating performance from ALG acquisition effects, pass-through reimbursements, marketable-security movements, and property-sale gains; compare both GAAP earnings and Hyatt’s non-GAAP Adjusted EBITDA.
- Assess the impact of the October 2022 note redemptions on cash, remaining debt maturities, and liquidity.
- Monitor the pending loyalty-program tax litigation and the potential $229 million payment, as well as the timing and possible effect of any deferred-tax valuation-allowance release.
- Review final ALG purchase-accounting valuations and the exposure from acquired and existing performance guarantees.
- Track progress toward the $2.0 billion net-disposition commitment, capital spending, and share repurchases; Hyatt had $665 million remaining under its repurchase authorization at September 30.
- Consider that management reported effective disclosure controls, while ALG integration into internal financial-reporting processes was ongoing.