Hyatt Hotels Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the same 2010 periods. Amounts are in millions of dollars unless noted.
Business context
Hyatt manages, franchises, owns and leases hotels and operates related vacation ownership and residential businesses. At September 30, 2011, its portfolio included 478 properties with 130,857 rooms and units. The company attributed improved quarterly operating performance to higher RevPAR at comparable hotels and the LodgeWorks acquisition.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $897 | $879 | $2,708 | $2,609 |
| Income before taxes | $8 | $46 | $59 | $89 |
| Income from continuing operations | $13 | $29 | $59 | $55 |
| Net income attributable to Hyatt | $14 | $30 | $61 | $60 |
| Diluted EPS attributable to Hyatt | $0.08 | $0.17 | $0.36 | $0.34 |
| Adjusted EBITDA (non-GAAP) | $135 | $111 | $395 | $358 |
| Cash from continuing operations | — | $338 | $300 |
Q3 revenue rose 2% (0.8% excluding currency effects), while Hyatt-attributable net income fell 53%. Nine-month revenue increased 4% and attributable net income increased 2%. Adjusted EBITDA rose 21.6% for Q3 and 10.3% for the nine months. Comparable owned-and-leased hotel RevPAR increased 9.2% in Q3, with occupancy up 3.0 percentage points and ADR up 5.0%.
- Q3 owned-and-leased hotel Adjusted EBITDA increased $22 to $106; North American management and franchising rose $3 to $40; international management and franchising was flat at $17.
- Q3 management and franchise fee revenue increased $5. Base management fees rose 9%; incentive fees declined 5%.
- Q3 pre-tax income was pressured by a $67 adverse year-over-year swing in other income (loss), net, including a $35 prior-year debt-extinguishment gain with no 2011 equivalent and weaker marketable-securities results. Q3 2011 also included $4 of LodgeWorks transaction costs.
- The reported Q3 tax benefit was $5, versus tax expense of $17 in Q3 2010. Nine-month 2011 tax expense was negligible, including a $12 benefit from releasing a valuation allowance on certain foreign tax losses; management cautioned that effective tax rates may remain volatile.
Cash, debt and investment
- At September 30, cash and cash equivalents were $690, short-term investments $506, and restricted cash $60. Cash plus short-term investments totaled $1,196, down from $1,634 at year-end 2010.
- Long-term debt was $1,221 and current maturities $4, compared with total debt of $771 at December 31, 2010. Net consolidated debt, after cash and short-term investments, was $29; debt to total capital was 20.4% versus 13.1% at year-end.
- Hyatt issued $500 of senior notes in August: $250 at 3.875% due 2016 and $250 at 5.375% due 2021, receiving approximately $494 net proceeds. It also prepaid a $51 mortgage carrying a 9.26% rate.
- The amended unsecured revolving facility increased to $1.5 billion and now matures in September 2016. There were no borrowings outstanding; reported undrawn availability was approximately $1.4 billion. Letters of credit reduced facility availability by $58.
- Nine-month cash flow included $805 used in investing and $56 provided by financing; cash declined $420. Investing included $688 for acquisitions and $216 of capital expenditures. Financing included $494 net note proceeds and a $396 share repurchase.
Material developments, outlook and risks
- Hyatt acquired 19 LodgeWorks hotels and rights to manage four additional hotels for approximately $632; a further hotel purchase of about $29 closed in Q4, bringing the announced aggregate purchase to approximately $661. It also acquired three Woodfin Suites hotels for approximately $77.
- Hyatt sold eight select-service hotels to a newly formed joint venture for $110, including a $20 contribution to the venture, and entered long-term franchise agreements for the properties. It also contributed the Hyatt Regency Minneapolis to a joint venture, retained a management contract and guaranteed a $25 loan.
- Management cited improved transient demand and ADRs, but emphasized uncertainty in global economic conditions and limited visibility into future industry demand. It said it would maintain cost discipline and flexibility; no specific quantitative financial guidance was provided.
- Management announced plans to rebrand Hyatt Summerfield Suites and Hotel Sierra as Hyatt House over the following year, and reported Hyatt Place and Hyatt House management agreements in Shanghai.
- Key exposures include demand and occupancy/ADR declines, economic and capital-market volatility, currency and interest-rate changes, labor costs, natural disasters and political unrest. International results were affected by unrest in Egypt and Amman and by Japan’s recovery from the March 2011 disasters; Shanghai faced difficult comparisons with the 2010 World Expo.
- Hyatt reported up to $693 in conditional loan and investment commitments, including a $250 share of a proposed New York hotel purchase, up to $147 for a Hawaii joint venture, and $32 for select-service development. Maximum remaining potential payments under hotel profitability guarantees were $32; maximum exposure under loan, lease-completion and repayment guarantees was $56 before partner-sharing arrangements. Hyatt said ordinary-course claims and litigation were not expected to have a material effect.
Important facts for investors to verify
- How much of earnings improvement in operating segments translates into recurring GAAP profit, given Q3 lower pre-tax income and unusual marketable-securities and prior-year comparison effects.
- Whether LodgeWorks and Woodfin properties achieve expected profitability, and the effect of acquisition costs, integration and higher depreciation on returns.
- Liquidity after acquisitions, capital spending and the $396 share repurchase, including the timing and funding of the disclosed commitments and the New York hotel purchase.
- Credit quality of hotel-owner financing: financing receivables totaled $459 with an $88 allowance; $119 was on non-accrual status, including $78 of unsecured owner financing.
- Exposure to variable rates, foreign exchange and marketable-securities volatility, as well as potential tax-reserve changes; reported unrecognized tax benefits were $83.