Hyatt Hotels (H) Q4 2016 Results - Earnings Call Transcript

| About: Hyatt Hotels (H)

Hyatt Hotels Corp. (NYSE:H)

Q4 2016 Earnings Call

February 16, 2017 11:30 am ET


Brian Karaba - Hyatt Hotels Corp.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Patrick Grismer - Hyatt Hotels Corp.


Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Bryan A. Maher - FBR Capital Markets & Co.

Bill A. Crow - Raymond James & Associates, Inc.

Jared Shojaian - Wolfe Research LLC

Smedes Rose - Citigroup Global Markets, Inc.

Stephen Grambling - Goldman Sachs & Co.


Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2016 Hyatt Hotels Corporation Earnings Conference Call. My name is Mike, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Brian Karaba, Treasurer and Senior Vice President, Investor Relations. Please proceed.

Brian Karaba - Hyatt Hotels Corp.

Thank you, Mike. Good morning, everyone, and thank you for joining us for Hyatt's fourth quarter 2016 earnings conference call. I am here in Chicago with Mark Hoplamazian, Hyatt's President and Chief Executive Officer; Pat Grismer, Hyatt's Chief Financial Officer; and Amanda Bryant, our Director of Investor Relations.

Mark will begin today's call with a review of 2016, including a discussion of our operating results and key business highlights. He will provide some perspective on 2017 as well, including our recent acquisition of Miraval Group. Mark will then turn the call over to Pat, who will provide details on our financial performance this quarter and discuss our outlook for 2017, including our expectations for RevPAR and adjusted EBITDA. We will then take your questions.

Before we get started, I would like to 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 16, 2017, 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 under the Press Releases 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 per the information included in this morning's release.

With that, I'll turn it over to Mark to get this started.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Thanks you, Brian. Good morning everyone and welcome to Hyatt's fourth quarter 2016 earnings call. 2016 was a successful year for Hyatt strategically, operationally, and financially. As a result, we have good momentum and we believe we are well-positioned to deliver another year of solid results in 2017.

Despite modest RevPAR growth, our adjusted EBITDA for the full year grew nearly 5% to $785 million. When adjusting for foreign currency translation, adjusted EBITDA growth was approximately 6% for the year. Fourth quarter adjusted EBITDA finished at $172 million, which was down nearly 4% and down about 2% when adjusting for foreign currency.

With respect to top-line results, our system-wide comparable constant dollar RevPAR increased 2.5% for the year, including 2.6% growth in the United States for our full service hotels and 5.4% growth for our select service hotels. Based on Smith Travel Research data, during the year we grew market share, as measured by RevPAR Index, in each of our three regions and in the majority of our hotels globally.

For the fourth quarter, our system-wide comparable constant dollar RevPAR increased 2%, driven by U.S. full service growth of 2% and U.S. select service growth of 3.5%. According to Smith Travel Research, the U.S. luxury market grew 1.9% and the U.S. upper-upscale market grew 0.6% during the quarter. With that as a backdrop, we are very pleased with the 3.1% and 1.7% growth, respectively, of our luxury and upper-upscale hotels in the U.S. during the quarter.

We have now gained market share globally for eight consecutive quarters. This gives us confidence that the steps that we're taking to differentiate our brands are resonating with our guests and that our focus on operating with excellence is yielding tangible results.

Our owned and leased portfolio RevPAR grew 2.2% during 2016, despite a decline of 0.3% in the fourth quarter. This quarterly decline was driven primarily by softness in our Park Hyatt hotels in Paris and in Zurich. Excluding these two hotels, our owned and leased portfolio RevPAR grew 1% in the quarter.

With respect to group and transient trends, during the fourth quarter, we saw strength in transient travel among both business and leisure customers. However, our group results were not as strong. Group performance during the fourth quarter was down nearly 2%, which, as expected, was negatively impacted by the shift of the Jewish holidays into October. Adjusting for the Jewish holidays, group revenues would have been modestly positive in the quarter.

As for group bookings for future years, production during the fourth quarter was softer than in prior quarters in 2016. While total group production increased by approximately 8% during the third quarter, we experienced a decline in group production of a bit over 8% in the fourth quarter. Looking into 2017, our group business on the books for the year is up in the low single digits versus last year. And later in the call, Pat will discuss how that informs our view for the year in terms of top-line performance.

Let me now turn to our fee business, where we had another impressive quarter. The fourth quarter was our strongest quarter of the year. On an as reported basis, despite a relatively modest macroeconomic environment, our management and franchise fees grew approximately 8% in the fourth quarter and nearly 5% for the year. This strong performance demonstrates the momentum in our core business and reflects the significant increases in our managed and franchised hotel base.

Both the Americas region and the Asia Pacific region grew revenue and adjusted EBITDA in the fourth quarter and for the year. However, our Europe, Africa, Middle East and Southwest Asia region experienced a decline in revenue, but kept adjusted EBITDA flat for the year. Pat will provide details on our regional performance later in the call.

Now that I've provided you with an overview of our operating results, I'd like to take a moment to highlight some of our achievements during 2016. From launching The Unbound Collection by Hyatt, to announcing World of Hyatt, our new global loyalty platform, to being named one of the World's Best Multinational Workplaces by Fortune for the third consecutive year, we have a lot to celebrate.

As you know, in November, we hosted an Investor Day and our theme was Growing with Focus. In that spirit, I'd like to take some time now to demonstrate how we grew with focus in 2016. Let's start with the performance of our select service brands, which continue to resonate well with our guests and owners. Earlier this year, J.D. Power recognized Hyatt House as the brand with the highest guest satisfaction among North American upper extended stay hotel chains. Accolades such as this continue to support tangible success and momentum for our brands.

During the fourth quarter, RevPAR for the U.S. upscale hotel segment increased 1.2%. In contrast, RevPar for Hyatt's U.S. upscale hotels, namely the Hyatt Place and Hyatt House brands, increased 3.5% for the quarter. Our select service brands gained market share during every month in 2016. Furthermore, two-thirds of the hotels in our select service portfolio increased share during the year.

Our Hyatt Place and Hyatt House brands have now gained share for eight consecutive quarters. We opened 36 select service properties during 2016, with a number of notable additions to our portfolio during the fourth quarter. Hyatt Place Downtown Edmonton and Hyatt Place São José do Rio Preto represented our entry into the select service space in Canada and Brazil, respectively. Likewise, Hyatt Place Heathrow Airport represented our first franchised select service hotel in Europe. Our pipeline of Hyatt Place and Hyatt House hotels is robust and we expect another strong year of openings in 2017.

Speaking of pipeline, 2016 was a strong year for us from a growth perspective. In addition to the 36 select service properties that we opened during the year, we opened 23 full service hotels for a total of 59 openings, which is a record number of openings for us. Most notably, these new openings allowed us to extend Hyatt's presence into 30 new markets, including downtown Portland, Oregon, Ottawa and Mallorca, where we reintroduced Hyatt into Spain with the opening of our Park Hyatt there in Mallorca, and at the same time added to our resort portfolio. This increased presence is a clear demonstration of our deliberate approach to growing with focus.

2016 was also a record setting year in terms of new deal signings. During the year, our pipeline grew from 260 hotels and 56,000 rooms to 305 hotels and 66,000 rooms, even as we achieved a record number of openings during the same timeframe. Our pipeline now represents over 45% of our existing base of hotels and nearly 40% of our existing base of hotel rooms.

Approximately 75% of the rooms in our pipeline are located outside the United States. Further, about 75% of the rooms in our pipeline are comprised of third party owned properties, which will be managed by us, and over 20% of our pipeline rooms are comprised of third party owned franchise properties. Putting the numbers together, this meant that during 2016 we grew our existing hotels base by nearly 10% and our existing rooms base by more than 7%.

Meanwhile, our pipeline increased by over 17%, with broad based growth across the world and across our portfolio of brands, even as we are only beginning to ramp up development of the newest additions to our brand portfolio, like Hyatt Centric and The Unbound Collection by Hyatt. We expect this global expansion of our system to be an increasing source of fee revenue and earnings growth over the next several years.

Our pipeline is one source of growth for us. Our capital recycling strategy provides another critical source of targeted purposeful growth. During 2016, we sold Andaz 5th Avenue and the Hyatt Regency Birmingham in the UK at attractive prices and entered into long-term management agreements with strong owners at both hotels.

During the year, we acquired Thompson Miami Beach and rebranded it as The Confidante, Miami Beach. We also acquired the Royal Palms Resort and Spa in Phoenix. We added both hotels to The Unbound Collection by Hyatt, which launched in 2016. And in the fourth quarter, we acquired our partner's share in the unconsolidated hospitality venture that owns Andaz Maui Resort and Villas, recently honored by Condé Nast Traveler as the top-rated resorts in Hawaii. In addition to these acquisitions, we opened the doors of the company-developed Grand Hyatt Rio de Janeiro.

Our strong balance sheet, together with successful recycling of our existing asset base, allows us to continue to invest in targeted growth of our brands. In selected cases, we invest in growth by developing new hotels on our balance sheet.

As Pat will mention later in the call, our capital expenditures are expected to increase in 2017, which reflects the fact that we are currently executing a number of corporate development deals in key U.S. markets, in part as a catalyst of growth for the Hyatt Centric brand, as previously communicated. Although we are assuming that we will develop these hotels on our balance sheet, we expect to identify partners who will co-invest with us or buy us out of each of these projects either during construction or upon opening, which is another form of our recycling activity.

Before handing the call over to Pat, I wanted to mention one significant transaction that occurred after yearend. You will recall that during our Investor Day, we discussed our plan to extend the Hyatt brand beyond traditional hotel stays as another lever of growth. In January, we brought the strategy to life with our acquisition of the Miraval Group, a renowned provider of wellness and mindfulness experiences, for approximately $215 million. The initial transaction included the Miraval Life in Balance brand, Miraval Arizona Resort & Spa, and the Travaasa Resort in Austin, Texas. Subsequent to the initial transaction, we also acquired the Cranwell Spa & Golf Resort in Lenox, Massachusetts for approximately $20 million.

Between the expansion of the Tucson resort and the redevelopment and expansion of the Lenox and Austin resorts, we expect to invest an additional $140 million over the next two to three years. We expect these investments to be marginally accretive to adjusted EBITDA in 2017 and 2018, and achieving a cash-on-cash yield in the high single digits once we are operating the expanded redeveloped resorts.

You may have also seen the announcement in December about Playa's proposed business combination with Pace Holdings Corporation. If the transaction moves forward as planned, and if there were a full redemption of our preferred stock in the latter half of Q1, we anticipate receiving approximately $290 million of cash proceeds. On a pro forma basis, upon completion of the business combination, we estimate that our common ownership of Playa would be less than 15%. If the contemplated transaction is completed, we will continue to serve our Hyatt Ziva and Hyatt Zilara guest under long-term franchise agreements, and the proposed transaction would provide Playa with new capital to further grow its business, including future growth of our Hyatt Ziva and Hyatt Zilara brands.

The strength of our balance sheet, including our owned and leased hotel portfolio, our unconsolidated joint venture hotels and other investments, such as the preferred and common interest that we hold in Playa, allows us to pursue new investments, such as Miraval, without materially increasing our leverage or constraining our liquidity for future opportunities.

In summary, we're pleased with our overall financial performance in 2016, as well as the progress that we're making against our strategic goals. We continue to grow with focus and we have a great deal of momentum as we enter 2017, which we expect will be another solid year.

Our brands are performing well and we are growing our customer base, which in turn is leading to a record number of openings and a pipeline that is more robust than ever. Our acquisition of Miraval provides us with a new and different way to serve our guests. We will continue to explore new areas of activity apart from traditional hotel growth and look forward to evolving as our guests' tastes and preferences evolve.

So with that, I'll turn the call over to Pat.

Patrick Grismer - Hyatt Hotels Corp.

Thank you, Mark, and good morning, everyone. I'll begin by sharing additional color on our fourth quarter results, and then summarize our outlook for 2017. Earlier today, we reported fourth quarter net income of $41 million and earnings per share of $0.31 on a diluted basis.

Adjusted EBITDA for the quarter was $172 million, down approximately 2% from prior year on a constant currency basis. For the year, adjusted EBITDA increased nearly 5% to $785 million, representing annual growth of approximately 6% on a constant currency basis.

As noted in our earnings release, both our quarterly and annual results were affected by adjustments related to our co-branded credit card program, which adversely impacted adjusted EBITDA by $7 million and reduced our owned and leased margins by 170 basis points for the quarter and 40 basis points for the full year. I will cover our owned and leased segment results in more detail in a moment.

Comparable system-wide RevPAR increased 2.0% in constant dollars in the quarter, yielding a 2.5% increase for the full year. As I walk through each of our segments, I'll highlight the key drivers of our RevPAR performance, starting with our owned and leased business.

Our owned and leased segment, which accounted for more than 50% of our adjusted EBITDA before corporate and other expenses in Q4, delivered marginally positive revenue growth and relatively flat EBITDA growth both on a constant dollar basis. RevPAR at comparable owned and leased hotels underperformed our system-wide average, declining slightly in constant dollars for the quarter. Although occupancy increased 40 basis points, average daily rate declined 80 basis points.

Our owned and leased hotels in the Americas and Asia Pacific regions enjoyed RevPAR increases for the quarter. However, our owned and leased hotels in Europe brought the overall segment into slightly negative territory. Andaz Maui, Park Hyatt at New York, and our two owned hotels in Orlando all enjoyed strong quarters. However, our Park Hyatt hotels in Paris and Zurich experienced RevPAR declines.

Comparable owned and leased margins declined 230 basis points to 22.3% in Q4, principally due to the credit card program adjustments that I referenced earlier. As has been the case throughout 2016, our joint ventures were a source of strength for our owned and leased segment, with our pro rata share of unconsolidated hospitality ventures adjusted EBITDA increasing over 20% in the quarter, primarily due to the continued strong performance of our Playa joint venture.

As Mark mentioned earlier, during the fourth quarter, we purchased our partner's interest in Andaz Maui for $136 million, increasing our ownership stake from about 66% to 100%. On a full-year basis, we expect this step-up in our investment will yield an EBITDA percentage return in the high single digits on a stabilized basis, excluding any proceeds from the sale of villas at the resort.

The incremental earnings from this additional investments in Andaz Wailea partially offset the impact of our dispositions of Andaz 5th Avenue and Hyatt Regency Birmingham earlier in the year, as well as the soft results from The Confidante Miami Beach and Grand Hyatt Rio, which joined our owned and leased portfolio in the first half of the year.

Combined, these transactions yielded a net reduction of $6 million in adjusted EBITDA for the fourth quarter. Putting it all together, adjusted EBITDA for our owned and leased hotels was essentially flat to prior year in Q4 adjusted for the impact of foreign exchange.

Now I'll turn to our managed and franchised business. Total fee revenues in Q4 increased over 8% compared to the same quarter in 2015, led by franchise fee growth of nearly 30%. Almost 50% of the total fee revenue increase was driven by new or ramping hotels, demonstrating continued upward momentum with our development program, which is nearly fully dedicated to growing our high return fee business. And we were especially pleased with 7% growth in our incentive fees, driven by increased profitability of our managed hotels in Mainland China, Hong Kong, and Tokyo.

Now, to add more color to our quarter, I'll discuss each of our three regions, starting with the Americas, which accounted for nearly 75% of our management and franchising adjusted EBITDA in Q4. The Americas delivered a good fourth quarter overall, with adjusted EBITDA up 7% versus last year. Comparable full service RevPAR increased 1.9% in constant dollars, ahead of industry averages. Collectively, RevPAR at our full service hotels in the top 10 U.S. markets was up over 3% for the quarter. However, all other U.S. full service markets were collectively flat. Los Angeles, Orlando, and Hawaii in particular, enjoyed strong quarters, while Chicago, New York, and Boston were more challenged.

Earlier in the call, Mark highlighted the outstanding performance of our select service hotels. RevPAR at our Americas select service hotels was up 3.2%, ahead of the category average driven entirely by rate increases, as we maintained very strong occupancy levels averaging 73% in the quarter. We are very pleased with the continued success of our select service brands, as their outperformance is also catching the attention of hotel developers.

I'll now move on to our managed and franchised business in Asia Pacific, which accounted for about 18% of our management and franchising adjusted EBITDA in Q4. The region delivered an increase of nearly 6% in adjusted EBITDA, driven by newly opened hotels and increased fees from existing hotels. Comparable full service RevPAR increased 3.6% for the quarter on a constant currency basis, with occupancy increases outpacing rate decreases.

This result is particularly impressive when you consider that a value added tax implemented in China in the second quarter negatively impacted Asia Pacific's fourth quarter RevPAR growth by 230 basis points. Mainland China, Hong Kong and Thailand, all enjoyed strong quarters, whereas Japan and Australia were relatively soft. Importantly, over half our hotels in the region increased market share during the fourth quarter.

During the year, we increased our presence in Asia Pacific by over 15%, as measured by the number of hotels. We opened 12 hotels in the region in 2016, including Hyatt Regency Sydney, Park Hyatt Hangzhou, and four select service hotels, and we expect to open a number of strategically important hotels in key markets in the region in 2017 as our strong growth trajectory continues in Asia.

Lastly, I'll turn my attention to the Europe, Africa, Middle East, and Southwest Asia region, which accounted for about 9% of our management and franchising adjusted EBITDA in the fourth quarter. The region's adjusted EBITDA declined 10% during the quarter, led by a 3.4% decline in comparable constant dollar RevPAR for full service hotels.

Although occupancy was modestly up, rate was down. France, Turkey, and the Middle East experienced continued softness in the quarter due to ongoing security concerns and relatively weak market conditions, whereas India remained a bright spot in the region, with RevPAR increasing nearly 9% for the quarter.

Encouragingly, despite a challenging year throughout much of the region, nearly 60% of our hotels in Europe, Africa, Middle East and Southwest Asia gained share during 2016, demonstrating the growing strength of the Hyatt brand in international markets. This is further reflected in our strengthening development pipeline in the region as well. In fact, 2016 was a record setting year for the region with respect to new deals signed, and we expect this development momentum will fuel earnings growth in the years ahead. During 2016, we increased our hotel and room space in the region by nearly 8%, and we expect to open nearly twice as many hotels in the region in 2017 as we did in 2016.

Before leaving Europe, I'll update you on the status of our guarantee on certain managed hotels in France. In early 2016, we communicated that total expenses related to the guarantee were expected to exceed $50 million for the year. Unfortunately, as you know, terrorist incidents continued to disrupt travel and tourism in France last year.

Adding to this, Hyatt Regency Étoile was under renovation for the entire year, with more than half of its rooms out of service since April of 2016. Additionally, extensive renovation work commenced on Grand Hyatt Cannes and Hôtel du Louvre during the fourth quarter, displacing a significant number of rooms. As a result, for the full year 2016, our guarantee expense was $64 million.

Looking forward to 2017, we anticipate our guarantee expense to be approximately $80 million due to ongoing renovations at the Étoile, Cannes, and Louvre. We fully expect 2017 to represent the peak year of our guarantee funding, barring further travel disruption to the region, as most of our renovation work will have been completed by the end of this year.

Now that I've covered the key drivers of adjusted EBITDA for the quarter, I'll turn to our balance sheet, which continues to be a source of strength and a competitive advantage for us. At year-end, we had $1.6 billion of debt on our balance sheet, had access to approximately $1.4 billion under our revolving credit facility, and had cash and other liquid assets of approximately $600 million. As such, we continued to maintain our investment-grade credit rating and be well-positioned to execute our strategy of investing for growth, as demonstrated with our acquisition of Miraval Group in January.

On the share repurchase front, we repurchased a modest number of shares in the fourth quarter, bringing our full-year total to approximately $270 million. Also during 2016, roughly $17 million Class B shares were converted on a share-for-share basis into Class A shares, reducing the shares of Class B common stock authorized and outstanding, and substantially increasing our Class A float.

And in December, our board of directors authorized the repurchase of an additional $250 million of our common stock. Between January 1 and February 10, we repurchased another approximately $20 million of Class A shares. So, as of today, we have approximately $335 million available for share repurchases under our existing authorizations. In summary, our balance sheet continues to provide us with a strong liquidity position, allowing us to drive growth through investment, while also returning meaningful capital to shareholders.

Now I will turn to our outlook for 2017. I'll begin by addressing RevPAR, then move to adjusted EBITDA, and close by highlighting a number of other key modeling assumptions. When thinking about RevPAR expectations for 2017, we take a number of things into consideration, including industry outlooks, our group booking pace, corporate negotiations, and unique regional characteristics.

Starting with the industry outlook, PwC anticipates 2017 U.S. RevPAR growth of 1.1% in the luxury segment, 1.3% in the upper-upscale segment, and 1.2% in the upscale segment. These segment estimates are relevant to us, since about three-quarters of our management and franchising adjusted EBITDA is derived from the Americas region, which is dominated by our U.S. business.

From a group booking perspective, you'll recall that Mark earlier mentioned that our group pace for 2017 is up in the low single digits, driven mainly by rate, and that over 75% of our expected group business for 2017 is already on the books. On the business transient front, corporate negotiations have progressed well, with rates trending up in the mid-single digits for 2017.

Moving overseas, given the unusual market softness we experienced in 2016, we expect Europe, Africa, Middle East and Southwest Asia to rebound to some degree during 2017 as we lap weak result. And in Asia Pacific, we expect RevPAR performance to be largely in line with 2016.

Putting it all together, we expect system-wide comparable constant dollar RevPAR growth to be in the 0% to 2% range during 2017, with holiday shifts accounting for relative strength in the first and fourth quarters and relative softness in the second and third quarters. RevPAR growth in this range is expected to yield adjusted EBITDA of $795 million to $830 million, which represents reported growth of approximately 1% to 6%. This adjusted EBITDA range is quoted inclusive of expected foreign exchange impacts. When removing the effect of foreign exchange, we expect our adjusted EBITDA to increase approximately 3% to 7% in 2017, which is broadly in the range of the ongoing earnings growth model that we shared at our Investor Day in November.

I'd like point out that if the announced Playa business combination occurs and our preferred shares are fully redeemed, we will no longer include in our reported results our pro rata share of Playa's adjusted EBITDA due to a reduction in our ownership interest. As a point of reference, Playa generated approximately $34 million of adjusted EBITDA for Hyatt during 2016, with more than 40% of that amount recognized in the first quarter. If and when a Playa business combination occurs and our preferred shares are redeemed, we will revise our adjusted EBITDA guidance accordingly at that time.

Turning now to adjusted selling, general, and administrative expenses, which we expect to increase to $310 million in 2017. This includes approximately $20 million of new spending related to key growth initiatives, including the launch of our World of Hyatt loyalty program. We consider much of this spending to be temporary or transitional in nature, and thus do not expect these levels of incremental SG&A to persist long term.

Note that the $310 million of adjusted SG&A excludes approximately $31 million of stock-based compensation expense and any potential expenses related to benefit programs funded through rabbi trusts.

With respect to capital expenditures, you will note that we spent approximately $210 million on CapEx during 2016. We expect this level to increase rather substantially to approximately $430 million during 2017 due to four factors.

First, the expansion and redevelopment of the three Miraval assets, consistent with last month's announcement. Second, increased corporate development activity, which Mark referenced earlier in the call. Third, leasehold improvements related to our new headquarters facility, which we will occupy starting in Q3. And fourth, a heightened level of renovation activity at our owned and leased hotels.

Like SG&A, we do not expect 2017 capital expenditures to represent a new run rate. Rather, through a combination of new growth investments, one-time expenditures, coincidental timing of hotel renovations and the ramp-up of our corporate development activity, we see a near-term spike in capital spending. Also, and importantly, as Mark outlined earlier, we are planning to reduce our investments in corporate development projects through sales and joint ventures over the next couple of years.

Before closing, I will add that we expect our effective tax rate to fall in the range of 36% to 38% during 2017. The increase in tax rate over 2016 is attributable to non-recurring discrete tax benefits in 2016, as well as unbenefited tax losses that we expect in 2017. We are, otherwise, pleased with the progress we're making on our international tax planning efforts.

To conclude, 2016 was a successful year for Hyatt on many fronts, and we ended the year with solid fourth quarter results. Our philosophy of growing with focus has generated good momentum, which we expect to build upon in 2017 and which we expect will yield tangible benefits for our guests, our hotel owners, our colleagues, and our shareholders in the years ahead.

And with that, I'll turn it back to Mike for Q&A.

Question-and-Answer Session


Your first question is from Patrick Scholes from SunTrust.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Hi. Good morning. Just some quick questions on here. I may have missed. Did you give out what your 2018 group pace currently stands at? I have my notes. It was 6% in the previous call.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Yeah. So we didn't – it's still up in the – remains up in the mid-single digits, and so we see both demand and rate progression in the bookings for 2018. About 50% group business or expected group business for 2018 is now on the books, so a pretty good representation about what we will see heading into 2018.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Okay. Thank you. And then perhaps I'm splitting hairs a little bit here. I'm being a little too precise. On 2017, did you say low single digits for group pace? Is that correct?

Mark S. Hoplamazian - Hyatt Hotels Corp.

Yes, that's correct.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Okay. In that case, it seems it has slipped a little bit. What do you attribute that to? Is that just because we have a longer booking window as we get closer, things have slipped over last couple of years?

Mark S. Hoplamazian - Hyatt Hotels Corp.

Yeah. So let me provide a little context for that. Yes, it means it slipped a bit from the end of the third quarter when we were up in the sort of mid-single digit range. When you look back over 2016, what you see is a pretty consistent pressure gap in the quarter, for the quarter, and in the quarter for the year bookings pretty much in every quarter. The third quarter was particularly weak in the quarter, for the quarter bookings, but we had a very strong production quarter in the third quarter. October was a very weak production quarter for us. So we finished the – even though there has been sort of a shift in profile, we had a total increase in total production for the year, modest increase year-over-year, but that's really net of what turned out to be a relatively weak fourth quarter in terms of total production.

So that's really the – those are the key sort of dynamics that I guess I would point out in terms of profile of – what the booking profile has looked like, and also what's happened in the last couple of quarters.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Okay. That's great. Thank you very much.


The next question is from Bryan Maher from FBR & Company.

Bryan A. Maher - FBR Capital Markets & Co.

Yes, good morning. Can you drill down a little bit more – give us a little bit more color on your investment in Hyatt Centric in 2017? I think you said your capital spending is going to go from $210 million to $430 million. Roughly, what component of the $430 million would you say is Hyatt Centric? How many hotels might that be and kind of how far along are you in the process on those properties? Have they broken ground or are they breaking ground in the first half of 2017? Just a little bit more color would be helpful.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Great. So on the proportionality, Pat, I don't know if we've provided that already in detail.

Patrick Grismer - Hyatt Hotels Corp.

Yeah. What we had indicated in our earnings release as to the incremental CapEx in 2017 relative to 2016 is that about $65 million of that year-over-year increase relates to new corporate development projects that covers several brands, but certainly the Hyatt Centric brand figures prominently in that amount.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Yeah. So let me try to give you a couple of reference points. There are couple of projects that are kicking off and will end up spooling up in terms of capital investment during the course of the 2017 year. There are two Hyatt Centric projects, one in Portland, Oregon and one in Philadelphia, both of which will be under construction during the course of this year.

We have a number of other projects that are under construction currently that are primarily Hyatt Place and Hyatt House properties on the West Coast, and we have some investment in a joint venture project – a couple of joint venture projects on the East Coast. So, that's the sort of profile of what the investments are.

We have another project in Mexico City, which we will be executing with a partner, which is a development that includes a new hotel, residences, and office space. That will get kicked off and be under way towards the end of 2017. So, the Hyatt Centric piece really relates to the Portland and Philadelphia projects at this time.

Patrick Grismer - Hyatt Hotels Corp.

And, Bryan, what I would add, just to reiterate what we said earlier, is that we see this as a strategic opportunity to use our balance sheet to catalyze the development of our brands, with the full expectation that, over time, we will unwind some of this investment through outright sales and/or joint ventures.

Bryan A. Maher - FBR Capital Markets & Co.

And do you have people that you've already sold prior properties to interested or teed up in these Hyatt Centrics as take-outs close to or shortly after completion, or would they be new buyers?

Mark S. Hoplamazian - Hyatt Hotels Corp.

It's possible that they would be existing owners that we've got relationships with or new relationships. We have had experience with projects – most of the projects that we have been engaged in actually building and then selling have been Hyatt Place or Hyatt House projects, and we've got a couple of examples where we actually secured sites in key markets. We then went and entitled those sites and, in a couple of cases, sold the projects before construction began.

We've also completed some hotels and sold completed hotels. And finally, a third sort of example, we've also joint ventured in-process construction projects. In fact, there are few examples on the West Coast right now where we, during the course of our construction and development, have partnered those hotels.

So we pursue different modes depending on what the opportunity looks like. In the case of the Centric properties, we're confident that they are very attractive properties and that we'll be able to identify strong partners with whom we can either partner or then sell the projects to.

Patrick Grismer - Hyatt Hotels Corp.

And, Bryan, just one final point. I just want to make clear that this corporate development activity forms part of our overall asset recycling strategy. So the asset recycling is not limited to hotel acquisitions and dispositions, but equally it includes the opportunity we have to deploy our capital to stimulate the development of our brands, again, with the expectation that this capital will be recycled through sales and joint ventures.

Bryan A. Maher - FBR Capital Markets & Co.

Okay. Thanks. That's helpful.


The next question is from Bill Crow from Raymond James.

Bill A. Crow - Raymond James & Associates, Inc.

Hey. Good morning. I just want to follow-up on that topic, because there's certainly no shortage of new construction here in the U.S., and it seems like you're more aggressive on doing things on balance sheet than maybe your peers. Are these projects that are having a tough time penciling out to start with or why not just let the franchisee take the development risk in this case?

Mark S. Hoplamazian - Hyatt Hotels Corp.

In a lot of cases, Bill, the opportunity really begins with securing a site that we think is important for the brand and our representation in the given market. So that's a driver of it. In some cases – and I guess the current case is, in Mexico City, when we acquired what was then the Nikko Hotel, now the Hyatt Regency Mexico City, it came with adjacent land that we – it took some time for us to plan an efficient and effective use of that land.

It's in an extremely high barrier to entry, very high-rated marketplace. So the opportunity to expand there was always in our minds, but it took us a while to map out what would be the highest and best use. And so in that case, upon getting the plan put into place, we were able to secure a partner at the frontend, and we will go and execute that expansion. So it really will vary.

In some cases also, these are projects where you've got counterparties that are developing, and this is the case in both Portland and in Philadelphia. We've got counterparties, either the seller of the land in one case or a developer of a mixed use portion of a project of which the hotel will be a part, where the requirement was for a creditworthy counterparty to be involved in the transaction.

And by the way, this is now – I guess, I can count off the top of my head a few different examples of this one other one in California and another one in Boston, where the developer or the landowner seller said, we're prepared to do this, but we need someone with a balance sheet on the other side of it, not a stand-alone development opportunity where a local development group might come in.

So, we end up stepping in to be able to secure the opportunity, and then, over time, bring partners on and then, finally, sell. So that really characterizes what has actually applied in the examples that I'm referring to.

Bill A. Crow - Raymond James & Associates, Inc.

Okay. Fair enough. Mark, how difficult is development today with the inflation in the cost to build and the lack of inflation, if you will, in property-level NOI? I mean, are we getting to the point where supply growth almost needs to slow down, because trying to get the numbers to work a year or two out just doesn't make sense anymore?

Mark S. Hoplamazian - Hyatt Hotels Corp.

Well, I think you left one factor off of your list, which I would put on the list, which is a change in the financing environment. I think the financing for developments has become clearly more challenging. And so advance rates are under pressure dropping and costs are going up, and I think that that's actually another factor that will create some measure of buffer, I guess, or maybe a limiter on how much new development occurs. And you also see a real maybe bifurcation of type of financing, where you've got local – very local banks in non-key markets that are still involved in making loans against these kinds of projects. But for a lot of projects, banks have taken a more measured approach to providing financing.

So, I would say to you that in no case that I can think of do developers really think of what they're doing as trying to hit a narrow period of time where it's a trade, where they're going to execute something, they're going to hit exactly the right time in the market, and then they're going to flip out of it. I think most developers go in recognizing that things will change during the pendency of the development.

You have to make sure that the underlying underwriting is good market, appropriate brand, right execution, and a brand that can deliver. And when you've got those factors in place, then your ability to actually recycle over time is secured. So it may not be so much a trade mentality, but rather a recognition that these things can take some time to evolve and develop.

Bill A. Crow - Raymond James & Associates, Inc.

Okay. Thanks for the color. Appreciate it.

Mark S. Hoplamazian - Hyatt Hotels Corp.



The next question is from Jared Shojaian from Wolfe Research.

Jared Shojaian - Wolfe Research LLC

Hi. Good morning. Thanks for taking my question. So just a high-level question here. After seeing what La Quinta is doing to split up their company, curious why you guys wouldn't pursue a similar transaction? I mean, if you really believe that your owned assets are worth $7 billion, I guess, what prohibits you from doing something? Is it simply not enough support at the board level from controlling shareholders, or maybe is there something else that I'm just not appreciating? Thank you.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Thanks, Jared. This is Mark. Our philosophy and our strategy from – actually over a very long period of time, not just since we've been public, has been that we view our ownership in hotel real estate as a part of our business, in that we believe that it makes us better owners. We eat our own cooking – better managers rather. We eat our own cooking every day.

But secondly, we've used our asset base through a very proactive recycling effort to create new opportunities for us. So the idea that we can utilize that asset base to fund investments in markets in which we want to grow has yielded a tremendous level of opportunity and benefit for us over time. And has allowed us to really expand in some key markets, in key convention hotels, in key resort areas, gateway cities, and it's allowed us – actually it is the key thing, that's allowed us to build such a strong base in our select service brands. And you can see the results of the way in which we've gone about building those brands and what that's yielded.

So our approach has been based on an active utilization of the asset base as opposed to a static portfolio. And therefore, when you've got that embedded, we've done well over $5 billion in transactions over the last four or five years and that just – it just demonstrates how active we've been. But when you're that active, having full control over the asset base and being able to use it to spur growth is really why we think that this makes sense for us.

Patrick Grismer - Hyatt Hotels Corp.

And just to build on what Mark has said, Jared. We are actively in the market now marketing properties that we believe are ripe for disposition, that will provide us with proceeds to continue to make investments behind new growth opportunities, whether hotels in gateway cities and key markets that we believe will provide an opportunity to expand the reach and the presence of the Hyatt brand or to make investments, as we did with Miraval, that take our business into new growth areas beyond traditional hotel stays.

Jared Shojaian - Wolfe Research LLC

Okay. Thank you. And then, Mark, in the past, I know you've talked about status matching SPG members after the Marriott deal. Can you just talk about what you've seen with these specific travelers over the last few months, and do you think you've seen any share shift, or do you expect to see any share shift going forward?

Mark S. Hoplamazian - Hyatt Hotels Corp.

Well, I can tell you that the activity that we've had under way to launch World of Hyatt, which launches on March 1, has been at a peak level. So there's been a lot of engagement with the marketplace. And the fact is that there will be further shakeout or dynamics, if you will, of changes in how people approach their loyalty customers.

Our philosophy has been to focus on building a platform of experiences which is resonant to our high-end customer base, because we're focused on the high-end customer. We have had success in welcoming a number of high-rated SPG platinum members who have grown with us in terms of their stay patterns and behaviors over time.

And we are not just focused on that customer cohort, but rather the whole customer segment that is the high-end traveler that's looking for unique experiences. So that's really the new platform, which is World of Hyatt, and that's the philosophy that we're following.

Jared Shojaian - Wolfe Research LLC

Okay. Thank you for the time.


The next question is from Smedes Rose from Citi.

Smedes Rose - Citigroup Global Markets, Inc.

Hi. Thank you. I wanted to just follow-up, because you're actively marketing some properties now, and I was just curious if you could just speak to the level of interest from buyers. Are they domestic or foreign and kind of what are you seeing sort of in pricing, say, versus a year ago?

Mark S. Hoplamazian - Hyatt Hotels Corp.

It's a bit early for us to be able to comment specifically on that. So, a couple of comments. First, we – historically, and this is consistent with how we think about it now, when we take out a given property to the market, we do it in a way that's maybe a little untraditional in the marketplace. We are in the process of price discovery.

We have, in the past, taken properties out for price discovery purposes to investigate whether it's an opportune time to sell, and then not sold, because our criteria are quite clear. We want a strong owner, we want a strong contract, we want to know that if it's an owner that we can grow with over time, we want to understand what they're going to put into the property and, of course, price matters a lot.

So, I would say that that approach and our conditions – or our criteria have not changed at all. Secondly, while it's a little early to say much about price levels or interest, I would say that there's relatively broad interest from both U.S. and non-U.S. potential buyers at this point.

Brian Karaba - Hyatt Hotels Corp.

And, Mike, we'll take our last question now.


The last question is from Stephen Grambling from Goldman Sachs.

Stephen Grambling - Goldman Sachs & Co.

Hey, thanks for taking the question. I appreciate the advantages from using your assets and balance sheet to spur growth, but maybe you could help clarify, as you look at expanding into tangential industries, what will ultimately be viewed as something that is more of a near-term opportunistic investment versus what could be folded into a core strategy? Thanks.

Mark S. Hoplamazian - Hyatt Hotels Corp.

Well, I guess the answer ultimately is going to be derived from our customer base. So, the way we are approaching how we operate going forward is to focus on the fact that we have a very strong high-end customer base, high spending, high traveling customer base. And what we've been doing and will continue to do is get closer and closer to them in terms of understanding what their desires are and what they're thinking about, what they like, and then being responsive to them.

And in some cases, that is able to be satisfied through hotel offerings that we've gotten out of the cases. It will extend beyond that. In some ways, even though our all-inclusive business is a hotel business, getting into the all-inclusive segment was really a call that we made about higher end travelers who are interested in that format of travel. And that's why we launched two new brands and we're able to do through the investment that we made in Playa.

So if you just extend the Playa example, we made $325 million investment in that company to really secure our ability to deliver a Hyatt experience in the all-inclusive market with a great partner. And as we were describing earlier on the call, we expect to release most of that capital assuming that these contemplated transactions close, while now having established brand with some growth potential. So that's an example where we've utilized capital on a temporal basis in order to enter a new market, and expand and extend.

If you look at Miraval, based on a lot of work that we've done over the last year, wellness is among the most compelling of the areas of interest for our customer base. And it's not just the transient leisure customer base, and this is a critical point. It's also amongst corporate customers. So our corporate clients, there are a number of large corporations that we serve in our hotel business today that are dedicating increasing levels of time and resources to their own wellness programming within their workplaces. They want to also bring these practices into their meetings, for example. So while we have great confidence that we can expand the Miraval business way beyond the few resorts that we start with, because we didn't buy the brand just to end up with three resorts here, this is a platform and a very leverageable brand on a global basis.

So we believe that we'll be able to extend and expand the brand in destination wellness resorts, in standalone spas. There's Life in Balance – one Life in Balance Spa, that's at a hotel in Monarch Beach. We believe that there will be many other opportunities there. But we think also some of the most impactful extensions of the brand will be what we can actually bring into our hotel business through how we operate for our group customers, how we bring some of this programming around mindfulness, and being present into how we can help add value to meetings, corporate meetings that we're running in our hotels, but also wellness practices within our hotels.

So we view this very much as a wellness platform that we will extend to destination resorts into Hyatt Hotels, and ultimately to get closer and closer to corporate customers. So if you take those two examples, we believe that these platforms, and there are others that we're pursuing, that you'll hear more about when we have more specific things to talk to you about, will be upfront investments and leveraging the capabilities that we're investing in across our existing business, but very importantly, building things that are unique experiences outside of our traditional hotel business. And the World of Hyatt platform will be a key vehicle for us to actually keep contact with and extend these experiences to our customers. So that's the philosophy.

Stephen Grambling - Goldman Sachs & Co.

That's great. Thanks for all the extra color.

Mark S. Hoplamazian - Hyatt Hotels Corp.



I will now...

Brian Karaba - Hyatt Hotels Corp.

Thanks, Mike. Go ahead, Mike.


I will now turn the call back over to Brian Karaba for closing remarks.

Brian Karaba - Hyatt Hotels Corp.

Thanks, Mike, and thank you, everyone, for joining us today, and we look forward to talking to you soon. Goodbye.


This concludes today's conference call. You may now disconnect.

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