Hyatt Hotel Corporation (H) plans to host its third quarter conference call on November 2, 2017. If Hyatt was able to achieve results similar to recently reported results in the luxury good and airline industries, the stock may be of interest to those who believe luxury consumers are back.
Hyatt’s operations include owning, managing, and franchising hotels under various brand names, including Andaz, Grand Hyatt and Hyatt Regency. According to the company, as of June 30, 2017, the company’s systemwide rooms could be categorized as follows:
Percentage of Systemwide Rooms
Park Hyatt, Andaz, Grand Hyatt
Hyatt Regency, the Unbound Collection, Hyatt, Hyatt Centric
Hyatt Place, Hyatt House
Hyatt Residence Club, Miraval, Hyatt Zilara/Ziva All-Inclusive Resorts
Of note is that the company characterizes 96 percent of its rooms as at least “upscale.” I doubt this can be boasted by major public competitors including Marriott International Inc. (MAR), Hilton Worldwide Holdings Inc. (H), Wyndham Worldwide Corporation (WYN) and Holiday Inn brand owner, InterContinental Hotels Group PLC (IHG).
Great Results From World’s Leading Luxury Products Group
On October 9, 2017, he world’s largest luxury brand, LVMH Moët Hennessy Louis Vuitton (OTCPK:LVMUY), reported a 14 percent year-over-year gain for its revenues for the first nine months of 2017. Its business groups, “Fashion & Leather Goods”; “Perfumes & Cosmetics”; and “Fashion & Jewelry” reported double-digit revenue gains. The laggard “Wines & Spirits” group reported 8 percent organic growth, for which the company attributed supply constraints to the single-digit growth rate.
The company’s revenues of €10.4 billion beat analyst expectations of €10.2 billion. The beat and revenue gains suggest that other leading luxury goods and services providers may have positive news when they report earnings in the near future.
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He also stated that leisure and business demand were both seeing growth.
Where are these travellers staying? Given increases in luxury good sales, presumably many of them are staying at upscale and luxury hotels.
Potential Hyatt Investors May Be Looking At Wrong Metrics
With a trailing P/E of about 30, Hyatt may initially appear to be an expensive stock to investors.
Also, with only 731 locations as of the most recently reported quarter, Hyatt may be falling under the radar of investors, compared to a company like Marriott, whose brands are visible at over 6,200 locations.
Further, the company is controlled by the Priztker family. This may make some investors question whether the company can be taken over in a consolidating hotel industry.
Controlling ownership may also discourage activist investors who believe the company may be better off divesting its significant real estate holdings. I disagree with such sentiment, as I believe that Hyatt is choosing high quality real estate locations for its owned hotels, and believe that real estate values will appreciate in desirable locations worldwide, making shares in Hyatt a compelling real estate play.
Finally, as Hyatt typically buys and sells properties in any given year, a cursory look at its income statements and net income (including hotel real estate transactions) may lead to some investors misevaluating Hyatt's annual fluctuation of net income.
Hyatt’s Real Estate
In an August 2017 investor presentation, Hyatt stated that its “illustrative gross market value” for its owned hotel rooms as of September 30, 2016 was approximately $7 billion. This is about equal to the company’s current market capitalization of $7.5 billion.
In the most recent reported quarter, the company had $1.7 billion of total debt and $781 million of cash and current investments.
In the company’s most recent 10-K, for the fiscal year ended December 31, 2016, the book value on the balance sheet of net property and equipment was about $4.3 billion.
This means that if Hyatt was somehow able to spin-off its real estate assets in a tax-free or efficient manner, that the non-owned-real estate assets may be currently valued by investors at about $1.4 billion dollars. ($7.5 billion market capitalization less $7 billion in owned real estate, plus $1.7 billion in debt, less $791 million in cash and cash equivalents, restricted cash, and current investments.) Some investors may even be valuing Hyatt's non-real estate segments at $0.5 billion, representing the difference in market capitalization and the company's valuation of the real estate in 2016.
Backing Out The Real Estate May Value Hyatt Less Than Choice Hotels
Once we exclude Hyatt’s owned real estate, Hyatt’s leased, managed, partially-owned, and franchised hotels may be collectively valued by the market less than Choice Hotels International, Inc. (CHH), which currently has a $3.8 billion market capitalization and $4.25 billion enterprise value.
Choice owns brands such as Comfort Inn, Quality Inn and Econo Lodge. As Choice only franchises hotels (according to its most recent 10-K), based on the above valuations, it appears the market values Choice’s brands more than Hyatt’s brands.
In a market with increased luxury good spending and business and leisure travel, I believe Hyatt’s strong brands are significantly undervalued relative to its budget-oriented competitor. While Hyatt has stated its goal is acquiring real estate to control its brands in the best locations, I don’t believe that Choice has any economic moat and deserves a higher valuation than Hyatt on any metric.
Hyatt’s Real Estate Gives It An Advantage During Strong Travel Cycles
Hyatt describes the advantage it believes it has during times of increasing demand in its most recent 10-K:
Ownership of hotels allows us to capture the full benefit of increases in operating profits during periods of increasing demand and room rates. The cost structure of a typical hotel is more fixed than variable, so as demand and room rates increase over time, the pace of increase in operating profits typically is higher than the pace of increase of revenues.
If Hyatt is correct on this point, and we are in a period of increasing demand for luxury and upscale hotel rooms, this further supports my earlier point that the difficulty of activist investors to influence Hyatt is a positive. In other words, I think it is a good thing that activists are not pressuring Hyatt to sell or spin-off its real estate, as we have seen with other hospitality industry companies.
Hyatt’s Earnings and Growth
On August 3, 2017, Hyatt increased its outlook for fiscal 2017 of "Revenue Per Available Room" (RevPAR) by 1 to 3 percent from previous guidance of 0 to 2 percent. It also raised its outlook for net income to $173 to $201 million.
Again, with a market capitalization of about $7.5 billion, this may at first glance appear expensive with a 37 P/E at the high end of the guidance.
However, if we back out $7 billion of real estate from the market capitalization, this leaves $0.5 billion of market cap.
In fiscal 2016, the company reported management and franchise fees and other revenues of $488 million.
If Hyatt is able to achieve similar results in fiscal 2017, one could consider that extra $0.5 billion of market cap equal to a multiple of one time management and franchise fees, and other sales revenues.
As of August 3, 2017, the company expected to open 60 hotels this fiscal year. At the end of last fiscal year the company had 657 hotels. Sixty new hotels would equal a nine percent growth rate, other things equal. If either real estate values appreciate or this growth rate continues, it is easy to forecast that Hyatt’s real estate value may surpass its current market capitalization. It is also easy to see that its revenues from franchise fees and its other segments ought to benefit from hotel growth.
Further, the company’s margins (based on its own 10-K commentary) will improve if room demand improves.
In its most recent quarter, Delta Airlines reported a 3.8% increase in "Revenue Per Available Seat Mile." As available seat miles only increased 1.6%, this means passengers were willing to pay more per seat mile. Whether these passengers were travelling for business or leisure, I would expect that these passengers were willing to spend more on hotel accommodations. As Hyatt’s high-end of guidance expected a 3 percent increase of RevPAR, I would not be surprised if Hyatt raises guidance again in its next earnings call.
A 14 percent increase in revenue at LVMH suggests to me that luxury spending may also lead to luxury hotel operators beating expectations.
Given the recent trends of increasing luxury and travel spending, investors who believe these trends will continue may want to take a look at Hyatt before its November 2, 2017 earnings call. Even if these trends take a pause, Hyatt's potential real estate value may be a sufficiently-impressive reason to consider the stock.
Disclosure: I am/we are long H, LVMH ON THE PARIS STOCK EXCHANGE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.