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Hyatt Hotels Corporation (NYSE:H)

Q4 2012 Earnings Call

February 13, 2013 11:30 AM ET

Executives

Atish Shah – SVP, IR

Mark Hoplamazian – President and CEO

Gebhard Rainer – EVP and CFO

Analysts

Steven Kent – Goldman Sachs

Harry Curtis – Nomura

Joe Greff – JP Morgan

Joshua Attie – Citi

Nikhil Bhalla – FBR Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four Hyatt Hotels Corporation Earnings Conference Call. My name is Carolyn and I’ll be your operator today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

And now I would like to turn the call over to Mr. Atish Shah, Senior Vice President, Investor Relations. Please go ahead.

Atish Shah

Thank you, Carolyn. Good day, everyone, and thank you for joining us for Hyatt’s fourth quarter 2012 earnings call. We want to thank everyone in the investment community for joining us.

Here with me in Chicago is Mark Hoplamazian, Hyatt’s President and Chief Executive Officer; and Gebhard Rainer, Hyatt’s Chief Financial Officer. Mark is going to start by making some brief remarks and then we are going to read and respond to questions emailed to us this morning. Finally, we will take live Q&A towards the end of the call.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued earlier this morning along with the comments on this call are made only as of today February 13, 2013, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at hyatt.com, under the press release section of our Investor Relations link and in this morning’s earnings release. An archive of this call will be available on our website for 90 days and a telephone replay of this call will be available for one week for the information included in this morning’s release.

And as a remainder we completed our realignment on October 1, 2012 and that changed our operating and reportable segments. We recast our historical segment information and posted it on our website in our IR Fact Book. The Fact Book posted today does contain historical segment, revenue information that was requested earlier this week. So please let us know if you have any questions on it. And with that, I’ll turn it over to Mark to get started.

Mark Hoplamazian

Thanks, Atish. Good morning and welcome to our fourth quarter 2012 earnings call. Today, I’d like to cover four key topics. We’ll begin with a quick remainder of the principals by which we operate Hyatt. Next, I’ll highlight fourth quarter and full-year 2012 results. Then I’ll provide a status report on investments that we’ve made over the last few years, and finally I’ll discuss our thoughts on 2013 and beyond.

I’d like to start by remainder of how we’re operating the company. First, we manage Hyatt for the long-term. We’re in a cyclical business and most attributes of the business are long-term in nature like our relationships with owners that manage new franchise hotels, the development cycles for hotels and lifespan of hotel properties.

Second, we have two primary drivers of earnings growth namely improving results from existing hotels that we own, manage and franchise, and secondly, expanding the number of hotels under our brands. These two areas of focus and form our allocation of resources overtime. Third, in terms of ailing hotels, we’re not pursuing growth for growth sake. We do it to increase preference for Hyatt. Our goal as a company is to be the most preferred brand in each segment that we serve for our associates, our guests and our owners.

Our growth must be in harmony with the development of colleagues who can take management positions in new hotels and the locations that our guests seek to travel to and also in partnership with owners with whom we have shared goals. Fourth, we believe in owning hotels also supports our overarching long-term goal of creating preference for our brands with owners and guests. Ownership gives us another tool to support our growth in particular markets and drive long-term shareholder values.

These four points are key to understanding our framework for thinking about how we’re running the company. And with that in mind, I’d like to now review 2012.

Last year was a good year of progress on initiatives that drive value overtime in the short-term, the medium term and the long-term. In the short-term, let me start by discussing the fourth quarter results. They really demonstrated strength in some areas, but also reflected the challenges in other areas as we noted on our last earnings call. The adjusted EBITDA increased 2.8% in the fourth quarter over the prior year. As we noted on our last call, U.S. elections, difficult comparisons, asset sales and lower fees from large managed hotels undergoing renovations, negatively impacted results.

RevPAR levels for our owned and leased hotels for the U.S. full-service hotels and for our U.S. select service hotels increased between approximately 6% and 9% over the quarter. This really reflects strong growth in market performance, healthy transient demand and some benefit from renovations in prior periods.

RevPAR growth outside the U.S. was more muted and more varied across markets. In particular RevPAR growth in the EAME, Southwest Asia region and the ASPAC region was approximately 1% and 3% respectively excluding the impact of currency. Market specific factors, difficult comparisons and non-recurring events such as the political transition in China, negatively impacted RevPAR growth in the quarter.

Moving onto full-year 2012, for the year we grew by adjusted – we grew adjusted EBITDA by 12.6% over 2011. Recently renovated hotels performed well in most cases over the course of the year showing good progress in RevPAR levels and market share. We added 22 hotels to our portfolio, increasing our total base of hotels by about 3.5% that’s net of hotels that left the portfolio.

Of the 22 new hotels we opened, 13 were in new markets. We acquired two properties into the course of the year, one in Mexico City which we re-branded the Hyatt Regency Mexico City and the Hyatt Regency Birmingham in the U.K. which was an existing managed property. Purchase price for both of those hotels was about $235 million in total. We also sold approximately $140 million of assets while retaining long-term management contracts over the course of the year.

We also returned about $136 million to shareholders via repurchases of our common stock. We recently announced exciting conversion deals in France and India that will put forward our expansion in those markets and will also accelerate management fee growth in the short and medium term. Under these two transactions, we intend to convert a total of nine hotels to our management by middle of 2013. These transactions demonstrate the demand for our brands as well as our ability to apply innovative structures when doing deals.

Our arrangements in France, brings to us four iconic hotels in high barrier entry markets of Paris, Nice and Cannes. Each will be managed under a long-term agreement. Together these hotels will substantially increase our presence in the key markets in France. We also announced the joint-venture with Host Hotels & Resorts to develop a Hyatt branded vacation ownership project in Kaanapali, adjacent to the Hyatt Regency Maui. This is a great project with a strong partner on one of the kind site.

It is our first new investment into vacation ownership in several years and is consistent with our strategy to invest in vacation ownership projects that are complementary to our lodging investment. This project provides creating exchange opportunities for existing owners that are part of our Hyatt Residence Club and also opens up an exciting new project to which we can welcome new owners. We expect to earn attractive returns on our capital investment and we will also be receiving fees associated with our marketing activities and ongoing management of this property.

During 2012, we made significant progress towards longer term growth and sustainable value creation overtime. Last year, we expanded our executed contract base for new hotels by 30 hotels followed by more than 15%. We’re anticipating several more years of growth in the current lodging cycle as well as increasing levels of interest for our property and brand in a number of important markets around the world.

In 2012, we invested approximately $150 million in non-wholly owned new hotel developments. These investments took a variety of forms especially the joint-venture equity and loans. The investments related to projects within our executing contract base that are under development and slated to open in the next several years. Looking farther out, we have significant levels of capital committed to new projects concentrated in high profile new hotels in Maui, New York, Rio de Janeiro and other markets.

Our balance sheet remains very strong, one of the strongest in the industry and we’re poised to take advantage of new opportunities to grow our presence.

So now I’d like to turn to provide you with an update on some significant investments made over the last few years. In 2010, we invested approximately $60 million in the form of preferred equity as a part of the redevelopment of the Hyatt Regency New Orleans. We anticipated earning a low-teens percentage return when we underwrote the deal. So based on the strong performance of the hotel, our current expectation is that we will earn a return higher than that in the mid to high teens.

In addition, the management fee earnings of the hotel have been strong and are expected to grow overtime as the hotel continues to ramp up and as group business returns to New Orleans. In May 2011, we acquired three extended stay hotels in California and projected reaching a 10% cash on cash return by stabilization. We’re well on our way towards that with a 2012 adjusted EBITDA yield of over 10% which we expect to increase after we renovate these three properties.

We acquired a group of hotels from LodgeWorks in the second half of 2011. At that time we expected to earn about $40 million of adjusted EBTIDA in 2012 from those acquired operations, net of overhead that we assumed. In fact we earned nearly $45 million in 2012 net of overhead. Our market share has expanded significantly as the RevPAR index for these hotels increased by over 6 points for 2012 versus 2011.

Last May we acquired and re-branded a hotel in Mexico City and indicated that we expected to earn $8 million to $10 million of adjusted EBITDA from May to December of 2012. We actually earned over $10 million of adjusted ETBIDA during the 2012 ownership period and we expect over twice that level of earnings in the full-year of 2013. We continue to plan for an expansion of meeting space and an increase in the number of suites in this hotel to further enhance its strong performance.

We acquired the Hyatt Regency Birmingham in England this past November with an expectation that we would earn $5 million of adjusted EBITDA in 2013. While we’re in still in early days based on progress of that hotel we believe we could exceed our initial expectations. In summary, we feel really good about these investments that we’ve made over the last three and a quarter years since our IPO. Each is on track thus far and we’re highly confident that we’re creating significant brand value and enterprise value through this activity.

Let’s wrap up with the discussion about the future. Looking ahead, we expect 2013 to be a year of stable growth. While we believe that the first half of the year has the potential to be somewhat choppy, we’re optimistic for the whole year based really on four primary indicators. First, 2013 group pays for full-serviced managed hotels in the U.S. is up about 4%. We’re seeing significant levels of group production. December was our busiest group production months since late 2007 and January was good as well.

While the booking window lengthening in certain cases, we’re still seeing high levels of activity for closing dates. For example, 40% of the group production in January was for the following 90 days. Second, our corporate negotiated rate discussions have yielded mid to high single-digit percentage rate increases.

Third, training and demand continues to bolster results, overall occupancy levels are at or greater than prior peaks. In fact full-year 2012 occupancy rates in our full-service comparable owned and leased hotels were approximately 400 basis points ahead of prior peak in 2007. Average daily rates are still behind prior peak levels in nominal terms, which indicate to us that there is high potential to increase rates and as a result improve margin flow through.

Fourth, we’ve renovated seven of our key owned hotels over the last few years. We know that the post renovation performance of those hotels provides a solid backdrop for continuing earnings momentum and increasing market share for Hyatt overtime. While we are characterizing our outlook for the year stable growth, there would likely be quarter to quarter volatility in reported results.

The reasons are widely discussed, including uncertainty over tax and economic policy in the U.S. that can translate into challenging market conditions. The fiscal situation in Europe and economic headwinds in the Eurozone and parts of the Middle East and in India. For Hyatt, we expect certain specific guidance may negatively impact us in the first part of this year and the impact will last until the year progresses. These items would include the ongoing renovations of several large managed hotels both in the U.S. and ASPAC region, market conditions in several international markets with significant new supply growth such as Bangalore [ph] and some cities in India, lower levels of government demand in some markets, specific areas of expense pressure such as insurance costs and real estate taxes for owned and leased hotels and a contingent lag in the recovery of F&B spending as groups and banker customers limit their spending.

We expect the guidance could negatively impact us by $3 million to $6 million per quarter over the next several quarters primarily due to lower fees as a result of renovations of managed properties. We expect that this level of quarterly impact will start at the higher end of the range exasperated by the timing of Easter this year and will trend down as the year progresses.

We expect to make additional progress on asset recycling and investing in 2013. We’ve engaged brokers to investigate the potential sale of six owned full-service hotels in the U.S. These hotels in the aggregate earn about $25 million in adjusted EBTIDA in 2012. At the marketing process is just begun, we’re unable to predict that we will ultimately sell these hotels. If we do, we will maintain brand presence through long-term agreements. Each sale will be dependent on pricing, owner profile, the level of capital committed to the hotels and other market and transaction specific factors.

As we’ve discussed in the past, we remain active in looking at different ways in which we can expand institutional ownership of Hyatt branded properties, through dispositions or joint-ventures of our owned assets with special focus on our select service properties.

By the way as a remainder, we will not announce sales until they are closed. On the buy side, we’re looking at a number of potential new investments including acquisitions and investments and joint-venture of hotels both existing JV properties and new properties in the U.S., Latin America and in Europe. Yield flow was higher than its been over the last few years and we are actively looking at investments in excess of $100 million in these types of projects.

The ultimate investment amount could be significantly higher or lower depending on how venture financing, discussions with partners and acquisition opportunities evolve. Separately, we are progressing with development of several projects that are already underway including for example the Grand Hyatt in Rio de Janeiro and a new build Hyatt Place in Omaha. We expect the capital expenditures in these new development projects to be approximately $120 million in 2013.

Generally speaking, our investments had been focused on areas in which capital is required to secure opportunities in particular markets and we’ve been focused on gateway cities in which we are looking to enhance our brand presence. While it continues to be the case, we will be flexing one opportunity that appear to be high return deals in attractive markets that are also important for Hyatt in terms of our progress [ph].

The acquisition of the Hyatt Regency Birmingham in the U.K, in November of last year is a good example of this. We acquired this property for less than nine times our expectation of forward 12 month adjusted EBITDA and secured our future in an attractive market. Finally, our executed contract base continues to reflect growing interest in our brands. Our executed contract base represents over 200 hotels and 45,000 rooms as of the end of 2012. This represents over a 40% of our existing portfolio of 475 hotels which is higher than it’s ever been.

More importantly our pipeline properties are high value for us. Not only do they represent entry into the new markets for our brand, but almost half of the contracts are for full-service hotels in international markets. As we said several times over the last three years, we operate with a long-term perspective. The outlook for our company is very bright notwithstanding the specific challenges we discussed.

We continue to be very positive on the yield goal of supply and demand dynamics of the industry. We’re very happy with our brand performance and we remain highly engaged with our colleagues, our owners and our customers as we continue to drive profits and expand our credits.

With that I’ll turn it back to Atish for the Q&A.

Question-and-Answer Session

Atish Shah

Thanks Mark. That concludes our prepared remarks. For our question and answer session, we’ll start with the topic of owned margin performance as we received several questions with regards to owned margins this morning. I’ll summarize the question say, can you clarify why comparable hotel margins declined in light of the positive ADR growth, especially considering our strong RevPAR growth was? Was it from weakness in group F&B and meeting rooms spend, how much was from insurance costs and/or was it one-time in nature?

Gebhard Rainer

Good morning. We had strong RevPAR growth of 7.5% but our owned and leased margins were impacted by a number of non-operating items. These non-operating items which includes higher insurance and taxes, impacted margins by approximately 200 basis points, of which about half is expected to be non-recurring. Excluding these items, margins would have been flat. Our owned margins were also impacted by weaker international markets and relatively lower group F&B spend as groups continue to be cautious in their spend.

So here a note on geography international RevPAR was weak as I mentioned which resulted in the weaker GOP [ph] performance in the portfolio. However from a cost to occupied room management, this was flat and was kept in line with revenue growth. The underlying margin decrease is good profit level management for that which was offset by the non-management items.

We face also tough comparison as margins increased about 180 basis points in the fourth quarter of 2011.

Mark Hoplamazian

If I can just add to that, I think there is couple of things that we look at overtime which is we – whoever said that we remain very focused on and disciplined around how we’re actually managing costs in our properties. And if you look at cost per occupied room which is not the only measure that’s relevant, but it is one metric. It’s been flat basically since 2007.

And so we’ve actually found enough productivity measures and different approaches to providing services to the hotels maintained relatively flat cost per occupied room for full-service hotels in U.S. over that period in time. For our select service hotels, partly by virtual of some shared services initiatives we’ve actually seen a decline over that period of time in cost per occupied room. So that the first point I would make is just the focus remains very high. And on the operating side, so a very strong performance at the GOP level the – it was really after you take into account the insurance and taxes that we have the problem.

The second point that I would make is that given our portfolio, the diversity of the regions in which we operate, we will have volatility from quarter-to-quarter. I think if you just look at the year-over-year comparison, we were up 180 basis points in the fourth quarter of ‘11 and down in or flat if you take out the one-timers in the fourth quarter of 2012, that’s pretty much demonstrates that you will see volatility quarter-to-quarter. They key for us is overtime are we actually continuing to manage well. And even with those things that we don’t have a direct control over, insurance and property taxes, are we being proactive about seeing what we can do in those areas. And the answer to those questions is yes.

Atish Shah

The next topic is group, received a few questions on group business, ask each one individually. First, we have heard from others that the weakest segment is large groups, is that the same for you? How is this segment performing?

Gebhard Rainer

As Mark mentioned in the prepared remarks, group pay is up 4% for 2013, half coming from rate and half from occupancy. We’ve seen strength in the technology, retail and manufacturing sectors and we have the best December in group production since 2007.

January is up 7% in bookings relative to January 2012. The booking window is lengthening slightly but we still see strong short term bookings. Our production in the fourth quarter saw increases in short-term business and longer term business in ‘14 and ‘15.

Atish Shah

How big of a driver was Hurricane Sandy, cancellations on group event revenue, and which markets in particular were negatively impacted by Hurricane Sandy?

Gebhard Rainer

The net impact on the earnings was negligible. We had some hotels with cancellations but others with display guests or emergency teams hosted in our hotels.

Atish Shah

A question related to that is what let to low growth in non-room revenue in the U.S.?

Gebhard Rainer

This is really related to groups, more cost conscious group clientele with lower spend.

Atish Shah

Next couple of questions, have to do with our report on EAME revenues, you mentioned that EAME was impacted year-over-year by bad debt recoveries. The increase results in fiscal year 2011. Can you clarify what would have been without the bad debt and what was the bad debt recovery related to?

Gebhard Rainer

Growth without bad debt would – it was about half of the decline, so the recovery was approximately $2 million. It was related to deferred fees.

Atish Shah

Okay, great. Moving ahead, we’ve received a few questions with regard to uses of the case, so we’ll start with could you address your balance sheet significant capacity and under levered position? Is management, the Board of Directors supposed to accelerating shareholder distributions particularly in the form of dividends? Why is the dividend not part of the company’s total return policy given both the company significant, perhaps you to pay one on the company’s direction Boards view on the long-term of the business?

Mark Hoplamazian

So we think of our cash resources along with our debt capacity and our asset base really the context of our focused on utilizing our capital to grow our business. So we really focus on making investments for the growth of the company is our first objective. We have made material commitments in the past. We have commitments of over $550 million to investments in some projects to be funded in the future. So we evaluate our cash base in the context of those commitments and the environment for new potential investments because we want to maintain flexibility and be able to be opportunistic.

In the vein of return of capital, we’re only discussing additional ways to return of capital to shareholders. We’ve repurchased about $400 million of stock in 2011 and about $135 million of stock in 2012. We will of course continue to evaluate our situation and all forms of capital return to shareholders will be considered.

Atish Shah

Hyatt bought back more stock than most anticipated in the fourth quarter? Is the $100 million a good quarter, with run rate to use and what is management’s best IRR on use of cash/alternatives?

Mark Hoplamazian

Well in terms of repurchase activity, the answer to that is it’s really circumstantial, so I don’t know that we can provide something that should be used as a wall with regard to pace of repurchases. It depends on the number of factors. Secondly, with regard to IRRs on investments, I covered a number of – progress on a number of investments that we’ve made over the last several years. There are – the IRR so to speak will vary depending on what it is that we’re investing, that is what the form of the investments and in what? What’s the project, what’s the market, what’s the location?

The relative risk-weighted returns for investments that we make across our portfolio vary quite a lot depending on what the asset is and where is it is. So there is no single answer to this. It is not one greater return that applies. What we’re really focused on is making sure that we’re deploying capital in projects that are good rates of return on a risk-weighted basis and also relevant and important to us in a – from a strategic perspective in terms of gaining new presence or expanding presence in key markets.

Atish Shah

Last question on use of cash, what capital commitment does Hyatt have beyond 2013 other than the Park Hyatt New York?

Mark Hoplamazian

We’ve got projects underway. If you look at projects that we are funding at the moment, I mentioned we had a $150 million of investments that we’ve made in non-wholly owned projects. We will continue to make investments in those types of projects as we move forward. Our expectation at this point is that that will be in the range of a $100 million to $120 million over the course of this coming year.

Those are mostly JV projects that would include the Andaz Wailea for example which we expect to open later this year. We also have commitments, the Park Hyatt New York is the biggest one. We also have the construction projects in Rio de Janeiro and other select service properties that are under development in the U.S. and in Latin America through JV.

Atish Shah

Okay, we received two questions on consolidated joint-ventures. One was why was the share of joint-venture EBITDA down 21% in the fourth quarter? And the second one was, what was the share of joint-venture debt, unconsolidated debt at the end of the year?

Gebhard Rainer

On the first question, one third of that relates to sales, two-thirds relates to market conditions such as Mumbai and Latin America. And with regards to second question, there is about $550 million or north of $550 million of debt at the end of the year.

Atish Shah

We received two other questions that are little bit bigger picture in nature. The first question is probably the biggest pushback we get on Hyatt both as a company and a stock, it is embedded as one like a private company that happens to be public? The perception seems to be that the companies still control through the Pritzkers who run it if they can see set [ph]. Can you explain how the super voting shares work? What information they have and don’t have access to and when and what extent – to what extent they have decision marking power at the company?

Mark Hoplamazian

Sure, I’ll try to be brief about this and recognize that there is – there are a number of documents and materials that are filed publicly that would better explain the specifics. The first point that I would make is that with regard to Class B shareholders, the Class B shares are the ones with higher voting level. They are owned both by Pritzker family interests that is in various trusts across a number Pritzker family groups and also by Goldman Sachs Capital Partners and the Madrone Capital.

So the Class B shares are not only owned by Pritzker shareholders and the Pritzker shareholders are a number of different shareholders, not a single one. The second point that I would make is we do have two Pritzker family members on our Board of Directors, Tom Pritzker is our Chairman and Penny Pritzker also serves on our Board. We have a 12 portion Board with a majority of independent directors.

There are voting arrangements – voting agreements that are in place that relate to the Class B shareholders and those voting agreements are actually explained in detail in filings that you can find through the SEC. And they essentially provide voting arrangement under which those shareholders vote in line with the Board of Directors. General principle of course in corporate governance is that Board members act in the best interest of all shareholders, not some shareholders.

So in brief, there is a diversity of shareholders. There are two Pritzkers on our Board. They have the same access to information that other directors would have. The other family groups don’t have information access other than as shareholders of any public shareholders would have. And we have a very capable and excellent Board with the majority of independents on it.

Atish Shah

Right, with the new CFO in place, what are the key things that you would like to see changed with the company, with respect to transparency of reporting investor outreach and guidance communication, what priorities have shifted and why?

Gebhard Rainer

Okay. Well as I come into this position, I’ve seen an evolution on disclosure and reporting and we will continue to do so. And you may have seen in the earnings release today that we’ve added some new schedules there. We continue to focus on SG&A costs and margin improvements, that’s really changes and the focus going forward.

Atish Shah

We’ve received a few questions on our executed contract base or pipeline and openings. Of that 30 hotels you expect to open in 2013, what’s the breakout between owned, managed, international versus U.S. that’s the first question?

Mark Hoplamazian

So with regard to openings this coming year, about half international and half within the U.S. and two-thirds of all the hotels are managed properties.

Atish Shah

Related question is the 30 hotels do you expect to open the gross number and if it is, what is the net number of openings expected?

Mark Hoplamazian

Well it is a gross number. There are properties that come out of our chain from time to time. My guess is that the recent year that’s gone by that we haven’t had some movement out of the chain for individual properties that relates to different regions could be a dispute with an owner – or change in ownership of the property, a number of things that come to pass from time to time.

So it’s a regular part of the business. It’s not been a huge number in any given – in any particular year there is it’s – there is no expectation that we got for loss of properties over the course of this year. So we’re not in an effective planning on individual properties leaving the chain to over the course of the year.

Atish Shah

And we received a question on specific opening states with regard to two projects and update on the timing of the Andaz? Why Andaz is opened and the timing of the Park Hyatt New York City opening?

Mark Hoplamazian

So we announced – at the time that we announced the Andaz Wailea project which was October 2010 I believe, our regional opening gateways estimated to be in the fourth quarter of 2012. Right now our opening date is in midsummer 2013. So we’re a bit over two quarters behind. The reason for that is primarily due to some changes in the area programming of the property. We changed the residential program. We’ve just actually began marketing residential units of that property.

We’re excited to see a lot of great interest in it. And also we changed the composition of the rooms and suites as well as some other facilities. So that’s really what caused the delay in really getting started. On the Park Hyatt New York project, our best estimate is that the opening will be in the second quarter of next year. There are a number of side logistical issues that are impacting our current estimates, but that looks like a good estimate at this time.

Atish Shah

The next question is on fees. Why were incentive management fees down year-over-year in the fourth quarter and how should we think about them trending in 2013?

Gebhard Rainer

The major impacts to our key growth including weaker results in some international market, as well as our previously discussed renovations in our managed portfolio. So for 2013, where we see a continuation of some choppiness as Mark mentioned in his prepared remarks there.

Atish Shah

Next question is on renovations, for first quarter of 2013, do you see renovation impact being a net positive or negative for both owned hotels and fee-based hotels relative to first quarter 2012?

Gebhard Rainer

So the owned hotels, every hotel has some measure of capital activity underway at every point in time but in terms of major renovations, really no significant major renovations at any owned properties as we sit here today. So yes, maintenance and small projects but nothing major. We do have some repositioning work on the Hyatt Regency Mexico City that we will do, but we’re in planning stages at this time so that’s not going to be a short-term initiative.

Mark Hoplamazian

And then I would say that the most significant impact I mentioned in my prepared remarks that the most significant impact that we see from renovation activity have to do with major – renovations at major hotels in key cities. So we had some activity in the U.S. which some of which is stored underway in Washington D.C. and San Diego, large hotels that were undergoing major renovations. And in Asia – in the ASPAC region we’ve got a number of gateway cities grand Hyatt properties which are large properties with significant revenue bases and also significant fee earners for us that are going to be undergoing renovations – are undergoing renovations at this time.

Excuse me that’s really the primary impact of the renovations over the course of this year.

Atish Shah

The next question is on capital expenditures. Capital expenditure guidance for 2013 implied either a significant slowdown in spending or enhancing existing properties or maintenance CapEx which one is it and why? And secondly in addition you spent about $40 million less than you expected in fourth quarter, what drove that?

Gebhard Rainer

The slow running CapEx is partially attributed with the fact that our large owned renovations are substantially complete and we’ve commented of that before. Thus the less enhancements in existing properties. Maintenance CapEx remains relatively steady at approximately 5% of all revenues and timing on spend and the coolers impacted CapEx in 2012.

Atish Shah

Next question is on our acquisition of agency in Hyatt Regency Birmingham, could you explain your rationale for the deal?

Mark Hoplamazian

Sure. So Birmingham is an interesting story. The hotel ended up in a form of receivership and we had an opportunity to acquire the hotel really off-market. The purchase price was very attractive. We bothered at something like half of replacement costs and Birmingham is an important market. It’s the second most important market beyond London in the U.K. We only have three properties in all of England, so maintaining presence here was important for us and there is a lot of group activity in that market. So the hotel was located near large group facility, (inaudible) facility and we really wanted to control our presence in that market. So we bought the hotel at what we thought was a very attractive price and we expect during a good risk-weighted return on it, but it was also really to pitfall our presence in that market going forward.

Atish Shah

And the last question we’ve received in advance is with regard to managed room count. Why is managed room count declining in North America and Asia-Pacific?

Mark Hoplamazian

Really it’s properties leaving the chain. So managed room count will change for one of two reasons, one is, that is it will decline for one of the two reasons, one is a hotel leading the chain for the second hotel converting from a managed to franchise property. So in this case we have three properties that love to chain the Americas and one in ASPAC.

Atish Shah

So that captures the questions we received in advance. We’d now like to take your questions. Please limit yourselves to one question at a time and we’ll take follow-up questions as time permits. Carolyn, could we please have the first question.

Question-and-Answer Session

Operator

Thank you Atish. (Operator Instructions) And the first question which comes from the line of Steven Kent.

Steven Kent – Goldman Sachs

Hi good morning. I think the reason why you got so many questions on the capital allocation side is the fluid is already so modest so why not do a dividend or a special dividend. And then I don’t know if you’ve actually mentioned yet which markets which you referenced in the press release, you were really seeing or expecting headwinds. Which was the specific ones that you were concerned about?

Mark Hoplamazian

So thanks Steve, it’s Mark. The answer on the form of capital return to shareholders is active topic. So the fact is that this past year we found – we evaluated the circumstances and felt that a share repurchase was most appropriate, in part because of the – what we thought was an attractive buying opportunity given the long-term – our view of long term value of the stock. So that was a driver there.

There has been movements in the total float overtime in part because there have been some Class B shares that have converted into Class A shares as has been reported through public filings. So we’re mindful of the float and we’re also mindful of the trading levels, that is trading activity in the stock. And as I said earlier, we’re going to continue evaluate what we do going forward and we’ll consider all forms of returning capital.

Gebhard Rainer

With regard to the question on markets and expected headwinds. It’s really predominantly related to international markets from an owned perspective, we will continue to see the issues in backhoe, we have an oversupply of hotel rooms. We also expect continuing issues in India with regards to the economical challenge they have their in some government policies.

For some markets in China, but we see some short-term supply impacts, but those will in the medium to long-term regulate itself to (inaudible) our belief in the major markets there.

And some headwinds are going to be created by the renovations in key universities in Asia as Mark alluded to earlier.

Steven Kent – Goldman Sachs

Okay, thanks.

Atish Shah

Thank you. We’ll take the next question please.

Operator

Thank you. The next question comes from the line of Harry Curtis. Please proceed.

Harry Curtis – Nomura

Hi guys. Quick follow-up question on group ADR. You mentioned about half of your expected 4% increase in group revenue was (inaudible). That still seems a little bit – it seems to be lagging the ability to price up on a transient side and I am just trying to get a better sense of what’s holding that back and going back to the – I think that you mentioned there was a question about, is it the large groups that are the weakest segment, I am not sure we got an answer on that. It’d be useful to get an answer on that?

Gebhard Rainer

I’ll take an initial shot at it. I think the fact is that as we start to see more availability issues come to past that is to say corporations in particular looking for meeting space and room blocks for meetings where they can’t fulfill, at the end their timeframes that they become accustomed to. That’s why we wind up starting to drive first of all a move out in terms of forward looking but also a base that will allow better or more of proactive yield management overtime.

We do have, I described on the last call that we’re seeing a bit more of a sort of barbell, a bimodal distribution if you will. There is a lot of activity on a short end and that’s largely all the customers and there is now increasing activity further out, the year and two out and that’s largely associations. So and there are different dynamics so associations are looking for specific dates in specific places with specific capacity because it’s critical to their economics. They run annual meetings and that tends to be the vast majority of their revenue for the year.

So we need – we’re seeing that dynamic and I think that our expectation – this has been lagging, there is no question you’re correct. The transient side that as we see more and more capacity being taken out that will end up driving rates and some lengthening of the booking curve. With respect to the second question, we sort of addressed that the fact is that the – when we look at group room revenue, the strength has to be in the small room block and smaller medium size meetings.

So I would say that the largest meetings are lagging – there is so positive in progression but they are lagging the progress and the rate of increase in the smaller meeting segment, i.e., there are many potential reasons for this and it’s a myriad of different types of boost that we’re talking about so it’s very dangerous to generalize, but that’s been our experience at least though the fourth quarter of last year.

Harry Curtis – Nomura

Thanks Gerry.

Atish Shah

We’ll take our next question please.

Operator

Thank you. The next question we have comes from line of Joe Greff.

Joe Greff – JP Morgan

Hi good morning everybody.

Mark Hoplamazian

Hi Joe.

Joe Greff – JP Morgan

New York City obviously is a big market for your 11% of owned to least adjusted EBTIDA looking at last year’s results. How do you see the New York City market performing in 2013 relative to your U.S. performance overall?

Mark Hoplamazian

New York is actually – no matter the Sandy impact, New York is held up relatively well as a market. And I believe that while there will be some new supply coming into the market, some of which will be ours by the way, that demand seems to be holding up quite well again more dominated by transient business than ours. So I am sure that there will be periods where RevPAR growth if you want to take that metric will lag broader measures across the U.S. or even super regional measures.

But I would say overall from the year I think demand level seems to be holding up. I think the one thing that we did see that was quite pronounced in the fourth quarter is non-room revenue, I mean F&B lagging. A lot of that have to do with our group events, cancellations of group activity around Sandy.

Well take attention to that. I think we are making sure that to the extent that there are gaps and backward opportunities for more local business that we’re taking advantage of those, but I would say that, we’re still perceiving what the outlook for 2013 is going to look like. If I can take you away from New York for a second and go to China, one comment I would make about that is that we yes, January started off very well in China. Of course a lot of that had to do with the fact that Chinese New Year fell on February this year not in January but putting that aside there is effectively an austerity program underway where the government is really looking to limit the amount of entertainment that’s going on both that they pay for and also done on their behalf.

So that we expect will have a similar impact as we just described on the F&B side in the U.S. so we’re paying a lot of attention to those dynamics.

Joe Greff – JP Morgan

Thank you.

Atish Shah

Thanks Joe. We’ll take our next question please.

Operator

Thank you. The next question we have comes from the line of Joshua Attie. Please go ahead.

Joshua Attie – Citi

Thank you. Can you describe in more detail what the non-recurring insurance and tax items were that impacted owned hotel margins in the fourth quarter?

Gebhard Rainer

I guess the bulk of it was property tax increases and insurance, I should say maybe those two things represented the majority of the impact. I would guess it’s roughly a 50/50 split between those two items as an impact matter. We had some – the nature of some of the insurance programs and workers comp programs that are operated are such that you end up with different points [ph] in time which reads to some lumpiness and frankly that was a significant drivers of the lumpiness that we saw in the quarter.

The underlying dynamics there are not surprising. You’ve got property values that are being reassessed upwards and you got municipalities who are highly focused on revenue. So I think that we will have a look for work Hyatt [ph] force on the property tax fronts going forward. On the insurance front, no particular issues that relate to Hyatt in particular, I think the only point that I would make is that given the way that the property casualty insurance markets work, given the Sandy claims that will become true. My guess is that the premiums will rise.

Now more capital flowing into the insurance so by how much I don’t know. It’s a bit difficult to see how those are going to play out, but I don’t think we’re in any different posture than anyone else.

Joshua Attie – Citi

And so what – I am sorry on the taxes what portion was one-time and was it a true up related to higher property guidance?

Gebhard Rainer

No, sorry that the insurance amounts – there was a trough there and year-over-year comparison issue on the insurance front, that’s the principal driver of the one-timers.

Joshua Attie – Citi

Okay, and then from a disclosure perspective, I guess I am curious why you wanted these talked about at all in the last November’s conference call, to the extent that you knew that they were coming, I would have thought with the issues around have G&A was communicated in early 2012 and the frustration that caused among a lot of the investors that you wouldn’t need more of an effort to extend, you know about these to reduce volatility around those some of these items relative to estimates?

Gebhard Rainer

Thanks for the feedback. We’ll take care of it to make sure that we do, do that. I think we took extraordinary measures in the fourth quarter – in the third quarter call rather to make sure that we were identifying all the major things that we saw. The fact is that when you look at operating margin performance, we were quite pleased with what we saw at that time and in fact frankly we ended the quarter I think our U.S. properties for example on the GOP line were up almost 200 basis points.

So we were quite happy with the operating margin performance. I think these items in some measure are not – able to be predicted with great precision until you complete actuarial analysis and also have thorough kind of issuance of property tax amounts, some of which is out of our control.

So but point taken, I think what we’re trying to do is make sure that we expect that we can identify things that we have reasonable visibility to and it’s somewhat predictable that we’re communicating that more and more. Of course we can always do better, so we appreciate the feedback.

Joshua Attie – Citi

Thank you.

Atish Shah

We’ll take our next question please.

Operator

Thank you. The next question we have comes from the line of Nikhil Bhalla. Please go ahead.

Nikhil Bhalla – FBR Capital Markets

Yes, hi good morning. When you talk about your group base being up 4% for 2013, how is that compared to what you saw maybe a quarter ago?

Gebhard Rainer

It’s a good question. So when we had our call in early November what we were seeing at that time was and we describe it as deceleration of growth in the group side. And it was November turned out to be a truly terrible month. And so we were at the front end of that. We didn’t know how it would end, but we didn’t see any good signs at that time which is why we communicated what we did.

It turns out that the December was as we described it earlier on the best Decembers we had since 2007 I think. So I would say our sentiment about group was a glass half empty as we were sitting here in November of last year. And right now while it’s not evenly dispersed over the course of the year and the second half looks a little bit better than the first half from a pace perspective and things like that I would say it feels more like a glass half full.

Nikhil Bhalla – FBR Capital Markets

Got it. And just in terms of – actually in terms of is the pace overall the same as what you saw in third quarter with some near-term bookings improving or was the pace actually much lower at that particular point in time?

Gebhard Rainer

Pace was lower than were – the pace improvement was lower than where we are today. In terms of the profile, I would say the book incurred has moved out a bit. So if you do it by averages which I think is misleading and maybe dangerous, I would say it has lengthened out a bit. There is no question though that we see – we still significant activities, booking activities for the near term. So the coming 90 day period for example is still a significant amount of what we ended up booking in the most recent month let’s say.

Mark Hoplamazian

This was up in the very low single digits in the third quarter and as we said it’s up 4% [ph] now.

Nikhil Bhalla – FBR Capital Markets

Got it. And then just a follow-up question on the government segment that you talked about earlier. If you could just give us a little bit more color on what you’re observing in terms of government demand. Is it more on the transient side because of per diems or is it more on the gross side? Thank you.

Gebhard Rainer

The comments that we made earlier related to group activity, not the transient. Of course there are austerity measures that have been put into place and there are some per diem issues. So I would say we’ve had a similar evolution of decline in government business both on the transient and the group sides. It’s been more pronounced on the group side.

Nikhil Bhalla – FBR Capital Markets

Great. Thank you.

Atish Shah

Thank you. Carolyn we’ll take our last question please.

Operator

There is no further questions in the queue, Atish.

Atish Shah

Great. And thank you very much Carolyn. With that I’d like to thank everyone for joining us today. We look forward to talking to you soon. Thank you and goodbye.

Operator

Thank you, Atish. Thank you for joining the call today. That concludes the presentation. You may now disconnect. Have a good day.

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