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Hyatt Hotels Corporation (NYSE:H)

J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum

March 08, 2013 1:30 pm ET

Executives

Atish Shah

Analysts

Joseph Greff - JP Morgan Chase & Co, Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. All right. Good morning. We're going to continue this morning with Hyatt Hotels, and with me from Hyatt is Atish Shah, Senior Vice President of Finance and Investor Relations.

Question-and-Answer Session

Joseph Greff - JP Morgan Chase & Co, Research Division

Maybe I'll start off with a very broad, open-ended question for you, Atish, and just go through some of the growth initiatives the company has right now, perhaps touching on different geographies, different brands, penetration and growth opportunities there, and then we'll delve deeper into the strategy.

Atish Shah

Yes, that's a great question, Joe. And we handed out a presentation, so hopefully you have a copy of that. For those of you on the webcast, there's a copy of this presentation that's filed. And at the beginning of the presentation, we have our standard forward-looking statement disclosure, so I'll just state that my comments should be looked at and viewed in the context of that. So with regard to the profile of growth. One of the things that's most unique about the company is we have a very strong brand name and global brand awareness. We've been in the lodging business for over 50 years. We operate in 50 different countries, approximately, with 500 hotels. But we are 1/3 to -- 1/5 to 1/3 the size of some of our competitors. So we have a relatively small footprint as compared to some of the peers and that really is the unique opportunity for us over the years ahead. If you look at our pipeline, our executed contracts base of new hotels, it represents approximately 200 hotels or 45,000 rooms. So relative to our existing size, it's a very high proportion at or better than the peer set. About 35% of our existing base is represented by those new contracts, which will open over the next several years. Now that contract base is 75% outside of the U.S. In fact, 50% of it is in China or India. So the largest markets for us in terms of future growth, in terms of that contract base are the U.S., China, India and then the rest of the world. So that gives you a little bit of perspective on future contracts, both managed and franchised contracts going forward.

Joseph Greff - JP Morgan Chase & Co, Research Division

Can you give us your views on China in terms of, I guess, what market specifically you're going after, Tier 1, Tier 2 cities fairly more penetrated than those further down the scale. What's the development mood in those markets. And maybe even touch upon India, which for a lot of companies probably has been slower than what anybody's really anticipated or really has a preferred or willingness to see?

Atish Shah

Sure, both very important markets for us going forward. As I mentioned, we've been operating hotels in each of those markets for the last several decades. China, for instance, we have approximately 20 hotels open and operating in China right now, with another approximately 40 hotels in our executed contract base. The hotels are in primary cities and secondary cities in terms of existing hotels and future hotels. Our existing hotels in China are operated under our full-service brands, so Park Hyatt, Grand Hyatt, Hyatt and the Andaz brand. Going forward, we have hotels under each of those brands in our executed contract base as well as our select service brands, so Hyatt Place and Hyatt House. So our expectation in the market is that there will be periods of time where there may be mismatches between supply and demand as new hotels come online. But over the long haul, we think our positioning in China is very strong. We continue to believe that it's going to be a great market for us over the decades ahead. As you look to India, again we've been operating in India for several decades. We've got about 10 hotels open and operating in India right now, with another 40 in our executed contract base across the range of our brands. So both full-service and select service hotels. And in India, what we're seeing right now is continued interest in all of our brands. India, as a market, is experiencing some softness from a macroeconomic point of view, and while we haven't experienced any softness in our pipeline, that's one thing we're mindful of going forward. So there are some markets in India that have lower levels of demand together with new supply. So you are seeing a few markets where RevPAR growth has been negative in the last couple of quarters. But again, we're very focused on the long term in India and continue to believe in the prospects for our development projects. In both these markets, there has been an evolution in the sense that you're seeing more intra-country travel and so we expect that to continue going forward as well.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got you. The 45,000-room pipeline, how much Hyatt-related capital or investment is associated with that? We obviously have a big one in the Park Hyatt. We have the Andaz joint venture with Starwood Capital. If you could put sort of a dollar amount or maybe highlight some of the bigger items in there, that would be helpful.

Atish Shah

Sure. With regard to that executed contract base, 45,000 rooms, as you mentioned, less than 10% of it are owned or joint venture rooms, so the majority are managed or franchised. And if you think about our total commitments into future periods, we have roughly $560 million of future commitments. Those commitments are in the form of equity, joint ventures, loans, mezzanine debt and other types of investments that we plan on making to support that pipeline. As you mentioned, there are 2 projects, in particular, that are a little chunkier, one being our investment in the Park Hyatt New York. We expect to acquire that hotel upon completion of construction mid-next year, so mid-2014. And our expectation is our 2/3 interest in that hotel will be $250 million. We have a fixed price purchase contract, although we could apply some project-level debt to that project, in which case the amount of funding could be up to $125 million less than the $250 million if you apply 50% leverage. The Andaz Wailea is another high-profile project that's within that $560 million. That hotel is under development right now. It's a joint venture with Starwood Capital. We expect to open that hotel sometime in the third quarter of this year.

Joseph Greff - JP Morgan Chase & Co, Research Division

The 45,000 rooms, is that 3 years or 4 years for that to be fully opened? How do you think about that?

Atish Shah

Yes, that's a great question. So how we think about that executed contract base in 45,000 rooms is that, on average, these hotels take about 5 years to open from the time of contract signing, which is when we include it in that executed contract base, to opening. Some of the international full-service hotels in our base will take a little bit longer than that and select service hotels will take a little bit less than that. But on average, about 5 years. And if you look at the openings we've forecast, so for this year, we expect to open approximately 30 hotels. You can see, based on the 200 hotels in the executed contract base, that they'll -- the level of opening should accelerate over the next several years.

Joseph Greff - JP Morgan Chase & Co, Research Division

When you look at your collection of brands, do you think your brand is complete? Do you need to add brands? Do you need to take existing brands and maybe modify them, whether it's trying to get into different international niche markets? How do you view your portfolio of brands?

Atish Shah

Yes, our portfolio of lodging brands, as I mentioned, we have 7 lodging brands and we operate from the upscale segment with Hyatt Place and Hyatt House to the luxury segment with Park Hyatt. In between are Andaz, Grand Hyatt, Hyatt Regency and the Hyatt brand. So we have a full brand spectrum between upscale and luxury, with the concentration of our rooms being upper upscale and luxury rooms. That represents about 75% of our room base. And our view is that each of these brands have significant room to grow. If you were to comp each brand to its principal competitors, you would see that, in many cases, we're a 1/3 to a 1/5 the size, quite frankly, in terms of number of hotels or number of rooms versus our competitors. So are lots of rooms to grow to further penetrate markets in which we are under penetrated or markets where we don't have presence. So no real strategic reason to add brands to our portfolio. And we find that our customer base really is frankly more focused on that upscale to luxury. So our customers themselves are not seeking to move outside of that base. So we don't operate in the economy or budget space or the mid-scale space nor do we find the need at the present time to grow into those areas. So I think there are lots of opportunities for us to convert properties into our existing brands. And we've announced a couple of conversion deals recently, one in India to convert 5 hotels, which were operated under a more regional brand. We expect those hotels to convert sometime in the second quarter of this year. So that's a great deal for us in that it's our first multi-property conversion deal in India, and conversion deals in India are pretty rare. And it gives us hotels, 5 hotels, that we can immediately put into our system, and a couple of those hotels are in new markets for us as well, so that's important. And then we've also announced a conversion deal in France where we're taking 4 hotels: 2 in Paris, 1 in Cannes, 1 in Nice, and converting those to several of our brands. We'll convert those hotels sometime in the second quarter of this year.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. We've talked about development-related initiatives. Can you talk about the transaction market? You have been active in the past in acquiring assets. How is the transaction market an effective vehicle for you to grow and maybe you can just share with us your broad views of the lodging transaction market in general.

Atish Shah

Yes, so I think if you look at our activity over the last several years, we've been both a buyer and seller of hotels. So we've been active in the transaction market and I would expect that to continue going forward. One of the ways that we are differentiated from some of the other folks in the industry who we compete with is that we own, manage and franchise hotels. Ownership is a big part of the equation for us. We think that owning hotels makes us a better manager and we like to have skin in the game, so to speak. We think for our size and scale it makes a lot of sense. And given our growth profile and what we want to do, it makes sense. So that gives you a little bit of context of sort of the place we occupy and how we participate in the industry. With regard to the transaction market, in specific, I think you're seeing higher levels of transaction activity in general across the lodging industry. If you look at what some of the leading brokerage houses and others are saying, they expect transaction activity the U.S., for instance, to be up at least 25% this year versus last year. So you're seeing more transaction activity, and therefore, there'll be higher ability for us to participate. Again, if you look at our activity since we've been public, we've both bought and sold hotels. On a net basis, we've been an acquirer. We've acquired over $1 billion worth of hotels. We've sold less than $500 million. So on a net basis, we've been an acquirer. Going forward, we'll take a balanced approach. We don't really manage it from the top down, it's more opportunity driven. But I can tell you, so I can't give you an answer as to whether we'll be a net buyer or seller, but we will likely see higher levels of transaction activity as we look to recycle our asset base and take advantage of more and new opportunities.

Joseph Greff - JP Morgan Chase & Co, Research Division

On the last earnings call, you talked about, I guess, engaging brokers with the potential sales of 6 owned full-service assets here in the U.S. Beyond these other 6, are there -- do you have a plan B, plan C of recycling what you might consider to be less important noncore assets?

Atish Shah

Sure. I think if you look at our asset base, so at year end we owned 103 hotels. Slight majority of those hotels were select service assets, and the remainder, full-service hotels, both domestically and internationally. And the view is really to utilize this asset base to grow our presence. So to, at opportune times, sell certain assets, maintain management or brand contracts on those assets, so maintain the presence and the fee stream on a going-forward basis, take the capital from the asset sale and redeploy that or reinvest that into other assets. So I would expect us to continue to do that. At any given time, there are assets where it may make more sense to sell on a short-term basis given market dynamics, profile of fund flows into a particular asset class or market, and that's really the prioritization that we're always conducting as we manage the portfolio. We're mindful of tax consequences and other dynamics as well. So with regard to the 6 that you mentioned, these were 6 full-service assets in the U.S. that we have taken to market and we're just in the early stages of the marketing process. And usually, these processes take anywhere from 6 to 9 months. And the view on these really is we're going to drive value not only by realization on pricing, but also the quality of the contract and the relationship with the owner going forward, potential new owner, as to whether we can do more deals with those -- with the potential new owner. So the only other thing I would add with regard to this asset sale process is that if you go back a couple of years, we took 11 hotels to market and we ended up selling about half of those assets. So we may sell these 6 assets or we may sell less than 6, just we're at the early stages of the process right now.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. Can you talk a little bit about the operating environment here in the U.S. Just looking at the Smith Travel numbers that come out on a weekly and monthly basis, the year has started off on a strong note. We look at New York City, which is a big market for your owned hotels, 20-something percent of your revenues or EBITDA based on the last disclosure, Can you talk about what you're just generally seeing, and I know you don't give guidance and I'm mindful of that, so maybe you can just talk about how, maybe internal expectations, where they are now versus, say, 3, 6 months ago? What are some of the trend changes, whether that's incrementally positive, incrementally negative or sort of a push?

Atish Shah

Yes, I think I can talk generally about that. You are correct, we don't give guidance, so...

Joseph Greff - JP Morgan Chase & Co, Research Division

You can do it here, though, if you want.

Atish Shah

Okay, fair enough. So let me talk in general about what we're seeing. If you think about our business in North America, particularly at full-service hotels, 45% to 50% of the mix is group oriented. It's group business. And on the group side, as we stated on our last earnings call, pace is up about 4%, 1/2 of that rate, 1/2 of it occupancy. So on the group side, you're seeing some diversity of performance based on the market segment. So the 2 main segments of group business are corporate group and association group. And on the corporate side, what you're seeing is low levels of visibility. So a lot of bookings for the forward 90-day period, so short-term bookings. And the bookings are tending to be a little bit smaller both in terms of number of room nights as well as duration of meetings. And I think some of that speaks to uncertainty on the part of corporations to make long-term forward commitments. So that's one of the dynamics that's playing out on the group side. And another dynamic that's playing out on the group side with regard to association is associations that have more visibility into the future are making those longer-term commitments. So you're seeing strength on the association side for future periods. So a couple of different parts to the group story.

Joseph Greff - JP Morgan Chase & Co, Research Division

You said 50% of your North American-owned hotels are group oriented?

Atish Shah

It's actually 45% to 50% of the mix at North America full-service hotels is group business.

Joseph Greff - JP Morgan Chase & Co, Research Division

And corporate group versus association group, that mix there?

Atish Shah

That's about equal. The other piece of the group equation is specialty group, so that'd be social-type events and some other smaller-type group business. So there's really 3 parts. But the major parts are association and corporate. So that's the group side of the story. On the transient side, and transient has really been the driver of this recovery over the last couple of years, markets and hotels that have been more transient oriented have outperformed. So on the transient side, of course, visibility is lower. Generally, folks don't make their transient room commitments until a few weeks before their travel date. So we have less visibility on that piece of the business, but strength continues to be positive. There are differences, obviously, between the regions and the cities. And as you mentioned, New York is a big market for us. It's not quite 20%, it's more like 10% of our company's overall earnings in the aggregate, and earnings -- by earnings, I mean adjusted EBITDA. So if you looked at New York as a market, it is a more transient-oriented market, but with a lot of diverse demand generators in the market, both on the leisure side, different industry groups on the corporate side and a significant portion of international demand, in particular seasons, particularly the summer season. So we're seeing a lot of potential strength in New York, that's continuing. I think New York does have a little bit of new supply coming on. Some supply came on last year. Some continued supply this year, some of which is frankly going to be operated by us or branded by Hyatt. So we're a beneficiary on one hand of that new supply, but that is one of the dynamics that's playing out in New York right now. But continued strength in New York because of the diversity of demand and the multiple demand generators, as well as the different sub-pockets or submarkets within New York.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. I'll now turn it over to you guys in the audience to see if you guys have any questions. I'll continue. One of the differentiating factors, I think, for Hyatt relative to your peers is your balance sheet strength and low leverage, high cash balance. Given the significant balance sheet capacity, I guess what are your priorities, if there are priorities for returning capital to shareholders?

Atish Shah

Yes. I mean, speaking about balance sheet capacity and the cash balance of the company, I think it's important to remember kind of our place in the industry and what we're trying to accomplish from a strategic point of view, and really we are trying to grow the platform and expand our presence to drive preference to our brands. And we view the balance sheet and the asset base, as I discussed earlier, as tools to achieve that goal. So for us, this capital base, first and foremost, is focused on growing the business, growing the platform. We think that's the highest and best return for us. And you've seen us make strategic acquisitions over the last few years whether it was buying the collection of hotels from LodgeWorks for $660 million, buying a hotel in Mexico City that we rebranded the Hyatt Regency Mexico City for $190 million and other investments and the projects -- redevelopment project in New Orleans as well as other hotel investments. So the focus on the capital base is really building out the platform. That's first and foremost. I think in the context of that, we do recognize that we can create value by return of capital as well, and we have, in the past, returned capital to shareholders in the form of share repurchases. So we bought back about $400 million of stock in 2011. And then last year in the summer, our board authorized the repurchase of up to $200 million of stock. In the third and fourth quarter, we expended about $135 million repurchasing stock. So that has been a part of the story in terms of value creation over the last couple of years, and we still have capacity left under that $200 million authorization. So those are couple of the dynamics. I think, we do have approximately, at year end, about $900 million of cash. So there's ample liquidity to take advantage of opportunities as they come up. And frankly, that gives us a strategic advantage when it comes to finding opportunities and taking advantage of them. That was the case with Mexico City. And earlier today, we announced an acquisition of a hotel in Austin, Texas, the Driskill Hotel. And so having a strong capital base afforded us the opportunity to participate in that process and take advantage of that acquisition.

Joseph Greff - JP Morgan Chase & Co, Research Division

A lot of the companies at this conference last year either increased or initiated dividends and those activities have been well received. To what extent has the board given much consideration to a dividend, particularly considering there's a high ownership stake by the Pritzker family and a couple of other major investors?

Atish Shah

Yes, I think the board looks at this from time-to-time on behalf of all shareholders. And again, the view really has been grow the business; utilize the capital base to do that; be investment grade through the cycle, which for us is 3.25x to 3.5x debt-to-EBITDA. And if you take the cash out, we're running a little bit below 3x right now. So we want to be investment grade through the cycle to take advantage of opportunities. That's first and foremost. I think return of capital as a concept is something that our board visits from time-to-time. And based on the facts and circumstances, their belief and our belief was return of capital through share repurchases made more sense for us. The way we view dividends is if you look at operating cash flow less CapEx, what's remaining, and is that, what's remaining, significant enough to pay a meaningful dividend. And frankly, if you look at our history over the last few years, operating cash flow has been recovering and we have been spending quite a lot of money on CapEx, particularly with regard to improvements at some of our owned hotels. Now, we're past most of that outsized spending, at least with regard to improvements at owned hotels at this point, but that's been a relatively recent occurrence, where operating cash flow less CapEx is significant enough to pay a meaningful dividend. So I think from time-to-time the board will revisit that. So I wouldn't say it's off the table, but I would say it's not something that we're looking at implementing in the short term.

Joseph Greff - JP Morgan Chase & Co, Research Division

Any questions from the audience?

Unknown Analyst

[indiscernible]

Atish Shah

The question was in all our properties, do we operate any with a casino, and I think the answer on that is no. We may have amenity casinos in some of our properties, very small in nature, but generally we would not be the operator in those.

Joseph Greff - JP Morgan Chase & Co, Research Division

Last year, reporting earnings in the second quarter, you incurred some expenses to affect a realignment in how the business is managed internally. Can you talk about how some of those changes are causing you to do business a little bit differently?

Atish Shah

Yes, that's a great question. So we did implement a realignment last year. We did incur some costs for that realignment. We're past that right now, and the realignment was fully effective as of October 1. The focus of the realignment was to increase agility and speed to market. One of the things that's true about Hyatt is we're trying to operate the company in a decentralized manner. That's been our history and it will continue to be that way into the future. And by that, I mean we try to push decision making closer to the customers and closer to the hotels as opposed to at center in Chicago. And part of the realignment was really to make that more seamless, increase the speed to market and the agility of the company in doing that. So we made several changes, and I don't want to go through all of them, but I will say that one of the things we did was orient our business around 3 main regions of the world, so the Americas region, which includes North, South and Central America; the Europe, Middle East, Africa and Southwest Asia region, which spans from the U.K. to South Asia including India; and the Asia Pacific region, which includes China, Japan and Australia. So that regional structure is new for us. And within each of those regions, we have both development and operations activities taking place side-by-side in a seamless fashion. So that's a little different from how we were organized before. And that is working well from an operations perspective and from an owner relations perspective as well as sourcing and getting hotels opened.

Joseph Greff - JP Morgan Chase & Co, Research Division

Any additional questions? Yes?

Unknown Analyst

[indiscernible]

Atish Shah

The branding of the hotels. So our brand structure right now, we have these 7 lodging brands. And the design of the brands is done centrally, although we're very focused on making sure that the brands are relevant to the customer base in a particular market. So for instance, if you looked at our Hyatt Place brand, which, to date, has been primarily a U.S.-centered brand. We've got a couple of Hyatt Place hotels that have recently opened outside of the U.S. Our prototype for that brand does have local relevance based on the particular market. So in some markets, for instance, in a market like India, we've included more food and beverage offerings within the Hyatt Place, and we've made certain modifications to the room design and layout to match for the traveling population in those markets. As I mentioned earlier, you're seeing more intra-country travel or intra-region travel as opposed to travel to a particular market from Western Europe or from the U.S. And so with those changes in the customer base, we're cognizant of making sure the brands are relevant for the people that are actually staying at the hotels. And the best way to do that is really to be in close touch with your customers and to have the folks in the regions really participate in the definition of the brands and the design of the brands. So hopefully, that answered your question as to how our brands are created and distributed around the world.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. Thank you, Atish.

Atish Shah

Thank you.

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