Hyatt Hotels Corporation (NYSE:H)
Q3 2012 Earnings Call
October 31, 2012 11:30 am ET
Atish Shah – Investor Relations
Mark S. Hoplamazian – President and Chief Executive Officer
Gebhard F. Rainer – Executive Vice President and Chief Financial Officer
Good day, ladies and gentlemen, and welcome to the Q3 2012 Hyatt Hotels Corporation Earnings Conference Call. My name is Clinton and I'll be your operator for 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, this call is being recorded for replay purposes.
I'd now like to hand the call over to Atish Shah, Senior Vice President of Investor Relations. Please proceed, sir.
Thank you, Clinton. Good day, everyone, and thank you for joining us for Hyatt's third quarter 2012 earnings call. We want to thank everyone in the investment community for tuning in, particularly given the aftermath of Hurricane Sandy and the disruption on the east coast.
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 October 31, 2012, 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.
With that, I'll turn it over to Mark to get started.
Mark S. Hoplamazian
Thank you, Atish. Good morning and welcome to Hyatt's third quarter 2012 earnings call.
I'd like to start first by recognizing the impact that Hurricane Sandy had on much of the East Coast. While all of our guests and team members are safe, we know that many challenges are ahead as the recovery continues, and I want to thank all of our associates at the hotels in the East Coast and really across the U.S. for pulling together to both serve our guests and also help those in the communities in which we operate. We all hope for a speedy and safe recovery in the days and weeks ahead.
I'd also like to take a moment to welcome Gebhard Rainer to our call. Gebhard began as CFO on August 15 and I'm excited about the operational experience base that he brings to our finance function at Hyatt. Before talking about the third quarter and our outlook, I'd like to note the significant progress that we've made since our initial public offering as we're coming up on the Third anniversary of our IPO.
Over the last three years, our earnings, as measured by adjusted EBITDA, are up over 50%. Our Owned and Leased operating margins have increased over 500 basis points. We've added net over 70 new properties to our system and approximate 15% expansion in the number of our hotels in our portfolio, and approximately 40% of those properties are in new markets for Hyatt.
We've invested over $1 billion in new hotel properties and we've also sold approximately $500 million of hotel properties as we actively recycle our asset base, while retaining management or franchise agreements on each sale. We've grown the number of executed contracts for new hotels from approximately 120 hotels to 175 hotels, or in terms of rooms from approximately 25% of our system size in 2009 to about 30% of our much larger system size today, and we continue to grow market share at our hotels across our brands.
Focusing on our people, our brands and our capital base remains mission critical for us. As we think about creating value in the long-term, we recognize the importance of building our brand preference and presence in key markets around the world. Our long-term focus is more relevant today than ever, given the volatility of economies around the world and ongoing waves of uncertainty that characterize our operating environment today and that are expected to continue as we move into 2013.
As for the third quarter, some things worked well in the quarter and a few areas faced challenges. Overall, adjusted EBITDA grew about 14% as we benefited from acquisitions and owned property renovations. Our 2011 and 2012 acquisitions are all on track or ahead of pro forma. The properties we acquired from LodgeWorks and converted to our brands have experienced large increases in RevPAR index, up approximately 700 basis points since joining our system. Similarly, the three extended stay hotels that we bought in California and converted in May of 2011 to Hyatt brands are also performing ahead of expectations.
The Hotel Nikko acquisition in Mexico City which we acquired and rebranded as the Hyatt Regency Mexico City this past May is performing well. The market there continues to be strong with RevPAR growth for our competitive set of hotels up 15% year-to-date through the third quarter, and we are on track to begin renovations to this property next year.
Also on the positive side, the five owned hotels in which we executed large-scale renovations last year are progressing well compared to our expectations outside of some market specific issues in Atlanta that I'll discuss in a moment. The public space renovations to the Grand Hyatt San Francisco are expected to be completed by the end of this year bringing to close those five major renovations. Another positive relates to the adjusted SG&A expense that was lower than we anticipated, and I'll come back to that in a few moments.
Several things worked against us in the quarter and I'll detail each by business line, but the three factors are; first, comparisons to prior year. Overall results were impacted by the timing of the Jewish holidays in September of 2012 versus October of 2011. The impact to RevPAR growth for our Owned and Leased portfolio was about 75 basis points in the quarter.
In addition to operating statistics, the year-over-year comparison reflects an outside impact from some expense items. For instance, last year we received property tax refund that helped our comparable Owned and Leased margins by about 100 basis points in the third quarter of 2011. Second, renovations; renovations at some large managed properties impacted our fees, in particular, during the quarter. And third, weaker international performance; we have some weakness in international performance results due to market-specific factors and coupled with the negative impact of foreign exchange. Those had an impact on our Owned and Leased adjusted EBITDA, our joint venture adjusted EBITDA, and our management fees in the quarter.
So, let me provide some additional detail for each of these points by business line. On the Owned side, let's first talk about the results in two important North American markets. In New York, which represents about 10% of our total Company adjusted EBITDA, the timing of the Jewish holidays had a significant impact on the quarter. As I mentioned, the impact of the holiday timing was 75 basis points to our Owned and Leased RevPAR growth for the whole portfolio, but the impact in New York was higher, and Owned hotels in New York RevPAR growth during the final two weeks of the quarter was about 70% lower than it was during the first 10 weeks of the quarter.
At the Hyatt Regency Atlanta, our 1,260 room convention hotel, group business was off during the quarter due to weak citywide demand. RevPAR in our comp set there declined by more than 3% during the quarter. F&B was impacted as well. Outside of North America, our international Owned and Leased hotels have been relatively weaker in a number of markets, with the exception of London, which benefited from the summer Olympics.
There were a variety of market specific factors including for example tough comparisons, particularly in Seoul where we had a very strong group demand in 2011 and in Zurich where transient demand in the third quarter of 2011 was very high. Our results were also negatively impacted by supply additions in Baku, a market where we have seen a four-fold increase in competitive supply. The negative impact in foreign exchange also affected results.
Moving ahead to our unconsolidated joint ventures, we sold our interest in two full service hotels in Seattle during the quarter, which I'll discuss further in a second. That sale together with the negative impact of foreign exchange, weak market dynamics in Mumbai, where we also have rooms renovation underway and a challenging market in Mendoza, Argentina impacted our joint venture earnings significantly.
On the fee side, we had several large hotels under renovation in North America. These included the Hyatt Regency in Washington D.C, the Hyatt Regency in Dallas and the Grand Hyatt, Santiago. In addition, some international markets are starting to soften as the market is weaker in India, partly due to new supply and partly due to economic conditions. In China, we're seeing uneven performance across markets. The timing of incentive fees and the mix of contracts contributed to lower the runaway fee growth during the quarter.
That concludes the discussion about the third quarter. Before moving ahead into this – to talk about the future I'd like to talk about progress that we've laid on four other fronts. First, we successfully completed the realignment of the Company during the third quarter. We made new appointments and consolidated a number of activities and started operating under the new organizational structure as of October 1. The realignment involves some SG&A rationalization.
As I mentioned, SG&A expense was flat in the quarter compared to last year. This is lower than our prior expectation. Half the reduction compared to our prior estimate was due to lower payroll costs and half is due to other cost reductions, lower professional fees and a refining of our estimate. For the full year 2012, we expect to realize approximately $15 million of savings relative to our prior estimate, about half of which is a reduction of run rate expenses, driven by savings from personnel and staffing changes, and about half is due to other cost savings initiatives that are more one-time in nature.
Second, I'd like to talk about capital recycling during the quarter. As I mentioned earlier, we sold our joint venture interest in two full service hotels in Seattle. We sold these interests in September for slightly over $50 million in cash proceeds. In addition, we also realized a reduction in unconsolidated debt associated with those properties of over $50 million. This transaction resulted in a $28 million gain for Hyatt. The gain will be deferred because we continue to manage the properties.
The monetization of joint venture interest is something we're focused on as part of our overall strategy to recycle our asset base. We sold these interests at an implied multiple of about 13.7 times trailing EBITDA or about 6.2% trailing 12-month cap rate. We also completed the sale of eight select service properties to Summit Hotel Properties early in the fourth quarter. We sold these hotels at an implied multiple of 11.7 times trailing EBITDA or about 7.2 times trailing 12-month cap rate.
Yesterday, we announced that we're doing another deal with Summit. We acquired an existing select service hotel in Downtown Minneapolis that we intend to renovate for $20 million and convert to a Hyatt place with over 200 rooms. Upon completion of the renovation in mid-2013, we will sell the hotel to Summit. This is an innovative transaction and one that expands our select service presence in a great urban market with a strong owner. We intend to do more with Summit over time.
To recap the sales that I mentioned, we sold at attractive prices. We will continue to manage all leased hotels under long-term agreements and these assets have strong owners who are committed to support renovations over time. In the aggregate, these deals support our continued asset recycling efforts to release funds from assets that we don't need to continue to own over the long term at attractive pricing levels. In terms of adjusted EBITDA impact from these asset sales for the full year of 2013, earnings will be reduced by about $11 million to $12 million relative to 2012 for about $15 million on a full year run rate basis.
Third, earlier this week, we announced our first multi-property conversion deal in India. Emergence in India are unusual and we are very excited to expand our presence in India with the rebranding of five high quality hotels around the country. We expect to begin management of the five hotels early next year. This represents a 50% expansion of our current hotel presence in India. The hotels are in Bangalore, Pune, Hyderabad, Ahmedabad and Amritsar and provide Hyatt with presence for the first time in each of Bangalore, Ahmedabad and Amritsar.
In addition to allowing us to expand our presence into important markets, they strengthen our overall market position across India amongst business and leisure travelers. The owners of these hotels are a part of a large organization with deep hospitality experience and we are very excited about working with them and expanding our relationship in the future.
And fourth, I'd like to update you on our share repurchase activity since the time our board authorized the repurchase of up to $200 million of stock. We've been active under this authorization repurchasing approximately $69 million of our common stock to-date and we are happy with our execution. We have approximately $131 million remaining under our authorization. We remain committed to a balanced strategy of investing in growth and also returning cash to shareholders when appropriate.
Looking ahead, we do think that there are two main factors that you should consider when thinking about our earnings profile. First, in the coming quarter and into early 2013, we're likely to see a carryover of the same type of issues that we saw in the third quarter. Second, for the following few quarters, we do think that there are some signs of a more modest overall growth trajectory. Longer term, we continue to feel very confident about the strength of our brands and about the prospects for the industry. So let me discuss each of these points in little bit more detail.
In terms of the current quarter, please remember that through the third quarter of this year, we benefitted from acquisitions that we made in the third quarter of last year. In addition, we benefitted from favorable comparisons driven by prior year renovations which were largely completed in the third quarter of 2011. These two main factors enhanced our year-over-year growth through the third quarter of 2012 and we estimate that these two factors helped our adjusted EBITDA by approximately $15 million in the third quarter of 2012 as compared with the third quarter of 2011.
In addition, as I mentioned, the properties that we recently sold had an approximate run rate of $4 million of quarterly adjusted EBITDA. So, the total year-over-year impact of the five large renovations in our owned hotels, the acquisitions in 2011, and dispositions this year is approximately $19 million when looking at the year-over-year comparison of the third quarter versus the year-over-year comparison of the fourth quarter.
Second, in terms of the current quarter, Hurricane Sandy is clearly causing disruptions. While we are still quantifying the impact, more than 25 of our full service and select service hotels experienced business disruption, power loss or minor damage. All our hotels are opened except for one full service managed hotel in Manhattan and one partially closed hotel in New Jersey. We do expect there to be an impact to reported RevPAR and other quarterly operating metrics given the size and number of our hotels in the East Coast that were affected by the storm.
In addition, the election in the U.S. next week, the Party Congress in China that begins next week, and the timing of other holidays are likely to negatively impact the fourth quarter relative to performance in the fourth quarter of 2011. Together, the disruptions due to the storm and calendar comparisons maybe more impactful to our results in the fourth quarter than was the impact of the timing of the Jewish holidays in the third quarter of this year.
Another factor impacting our view on a more modest growth trajectory is the market dynamics we've seen in several markets in which we own properties such as the international properties that I mentioned earlier. These market dynamics are leading to slower growth in the short-term and the performance challenges we experienced in the third quarter are continuing into the fourth quarter.
Lastly, fee growth will be negatively affected in the short-term by ongoing renovations at large managed hotels. Notably in the fourth quarter, we expect the Grand Hyatt San Diego, the Grand Hyatt and Hyatt Regency Hotels in Washington D.C. and the Hyatt Regency Dallas to be under renovation. As we look to next year, several of our large Grand Hyatt hotels in gateway cities in the Asia Pacific region are planning renovations. These renovations are great for our brand presence and for our guests and for the owners over the long-term, but do lead to short-term impact on RevPAR and fees.
As we've said consistently since our IPO, we are managing the Company for the long term. We are very clear that our long-term success is driven by the quality of our people, our focus on innovation and delivering great guest experiences, strong owner relations and creating value through capital and asset recycling. We are confident in our future and we look forward to years of strong growth ahead. This confidence is based on our solid market share progress and clear evidence that our brand strength is recognized and growing in key high growth markets outside the U.S.
We know that there will be short-term adjustments in given quarters in India and in China due to evolving supply and demand factors. But the longer term secular growth of those economies and the good prospects for healthy expansion in the hospitality sector in those countries are clear.
In the U.S. the industry is expected to benefit over the coming years from relatively low levels of supply growth and we expect to benefit from the impact of recent renovations of a large proportion of our entire chain, including a large proportion of our large gateway city hotels in the U.S. Perhaps most importantly, I'm confident in the spirit and commitment of our associates around the world and I have never been more proud to be a part of the Hyatt family.
And with that, I'll turn it back to Atish for the Q&A.
Thank you, Mark. That concludes our prepared remarks. Before we start our Q&A session, I'd like to let everyone know that we will be updating our segment reporting to reflect the Company realignment that Mark just discussed. You will see this update in our next quarterly release and we hope that this update will improve your understanding of our business drivers.
So, for our Q&A session, I'll start with some questions that were submitted this morning. The first few questions come with the topic of future expectations in 2013.
First one is, can you be more specific as to the headwinds that you see weighing on near-term business, specifically which are unique to Hyatt as opposed to broad industry threat and can you quantify a portion the magnitude and timing of these headwinds so we can understand when they may dissipate.
Mark S. Hoplamazian
Sure, I'll take that, it's Mark. I guess there are few issues that we touched on already. Let me just go into them a little bit more detail. First of all, we have a different mix than looking at generalized industry statistics and I mean by that both property mix that is where we have hotels especially owned hotels around the world and customer mix. On the property side, there are individual dynamics, individual property or market dynamics that had impacted the quarter as I mentioned a few hotels by way of example. Some of those, for example, will be absorption of new supply in Baku will be ongoing in the near-term. Others are certainly impacting the third and fourth quarter of this year, but are not likely to have ongoing comparative impacts of those examples in Zurich and Seoul, for example.
Secondly, our customer mix is, we have a significant base of group business in North America and we have seen a slowdown of the rate of growth and pace on the group side, and I'll talk more about that in a second, but we will be more impacted in our current results on the quarter-over-quarter basis by group than maybe true for the industry at large.
The second major area is renovations. We certainly benefited from major renovations from five large owned hotels that we effectuated in 2011 and in the current period and in the near-term we are seeing the negative impact on the fee side with respect to large managed hotels that are under renovation. Again, short-term impacts leading to a better brand representation and frankly better experience for our guests and better results for owners over time.
Third, there are a number of calendar issues, which we've covered, and of course, the impact of the hurricane, which I think is more general and would apply across the industry.
Second question on a similar topic, what is the basis for your confidence for longer-term growth? Is it a perspective on the global economic climate and what factors specific to Hyatt are the basis for this enthusiasm?
Mark S. Hoplamazian
Well, first and foremost, I think we got real momentum. We got market share progression that reflects that we've got great brand strength that continues to punch above our weight. Second, the pipeline growth has been really significant. We absolutely – we've accelerated the expansion of our pipeline over the last few years, both in terms of absolute properties that we've signed up, but also in relative to the proportion of our – as a relative proportion of our total base of hotels. So, we've got significant positive momentum in that area.
And finally, we've certainly received great feedback from the expansion of our corporate relationships and the network effect of expanding our select service properties in North America. So, our negotiated corporate volume business is actually increasing year-over-year, and I think that that will continue to be the case as we continue to focus on the expansion of our select service presence around the country. The only other point that I would make is, we've got a portfolio of very high quality owned and JV hotels and key gateway cities around the world, and with the exception of maybe New York and Baku these are largely markets that have relatively constrained new supply in the foreseeable future. So, I think that those dynamics will tend to be positives for us over the medium-term.
And the final question was on expectations with regard to New York in 2013 given the influx of new select service supply and as our outlook for ADR growth at our full service properties of New York City changed as a result?
Mark S. Hoplamazian
New York is a unique market. First of all, let me remind everyone that we got four hotels operating in New York today, the Grand Hyatt, two Andaz properties and the Hyatt at 48Lex. We have four under development that are expected to open in the next couple of years, the Park Hyatt, New York; Union Square; Times Square; and the Hyatt Place and Midtown. New York is unusual because it's made up of a number of submarkets they are unique demand drivers in many of these markets. One of the key priorities that we established a few years ago was to expand our presence in New York and we had the opportunity to do that with specific brand penetration in specific markets and submarkets, which we believe will serve our customer base. And frankly, we continue to believe that there is significant room for future growth in New York.
The other thing I would say apart from the fact that New York is made up of number of individual markets is that New York also benefits from periods of compression, the number of periods of compression over the course of a year by virtue of the overall demand business and leisure demand for the city.
So, our long-term outlook for New York is quite positive. It is absolutely clear that for given submarkets, for given quarters there may be some absorption of new supply that we will contend with, but frankly we are not making underwriting decisions or expansion decisions on the base of what a single quarter or two quarters will look like, but rather what does it mean for our customer base and for our brand presence over number of years.
Great. We received a few questions on SG&A, I'll read them all at first. Why is adjusted SG&A expense for the full year $15 million lower than previously expected, the choppiness in SG&A that you mentioned on the second quarter call, expected to continue into 2013, and what was the driver for SG&A cost guidance to be scaled back to something deferred to 2013?
Gebhard F. Rainer
I will take that. It's Gebhard. Our adjusted SG&A of $70 million for the third quarter was below our initial expectations, as we benefited from realignment savings, as well as other initiatives implemented throughout the Company. As Mark mentioned in his comments, the $15 million split into half run rate and half is due to initiatives throughout the year. We expect the realignment savings to continue into 2013, partially offset by wage and other cost inflation and the selective increase in resources as we allocate some resources towards growth initiatives.
Overall, we expect the net impact to result in sort of a flattish SG&A growth in 2013. We've noted in the past that we have committed additional resources to development, including, support services over the past 12 to 18 months, and we have also expanded our activities in new capabilities, including our innovation efforts as well as customer data analytics. We've concurrently consolidated activities as well as reallocated some funds towards these priorities, so we're able to minimize total SG&A growth as we reallocate. So, in summary, it's a little too early to know exactly the quarterly progression, but at this time we feel good about flat SG&A for 2013.
The next couple of questions were on the topic of group business. The near-term slowdown in group activity that we mentioned, are there any industries or groups in particular that are being impacted and does that mean visibility is lower? And then on group booking negotiations, our Company is leveraging the weak RevPAR trends of late to push for more favorable terms than you would like to offer?
Mark S. Hoplamazian
Let me just address the specific questions that were asked and then maybe spend a minute on Group more broadly. First of all, in the third quarter and heading into the fourth quarter, definitely a slowdown in the rate of growth in Group bookings for corporate customers, and I think a lot of that has to do with uncertainty due to the fiscal cliff, the election and the like. Government business was particularly weak. It was down in the third quarter for us significantly.
So, if you look at our third quarter results, we had a slight decline in room nights for group bookings for the quarter, more than a 100% of that decline was derived from government business. Part of that is demand and part of it was yield management decisions that we undertook to actually trade away from some of that business; so, some unusual short-term impacts from the government side. In terms of industries, tech remains quite strong and the financial services sector is a beat weaker.
The other thing as I think about group business evolution overall that I would point out is that we've really seen a more pronounced bifurcation in the third quarter than we had seen in the past between corporate and association groups and between short-term and long-term bookings. So, the short-term booking pace in the quarter, for the quarter and then the quarter for the year bookings is still dominated by corporations. And when we see the production in the third quarter, our total production in the third quarter was up significantly, up 12% year-over-year. The vast majority of that was associations booking into 2014. And we believe that the reason we're seeing that is because associations are looking out further into the future, they're seeing higher levels of overall occupancy, and are now beginning to secure dates for major meetings that they've got planned for 2014. So, we have a bit of a barbell going on in the sense of very different dynamics; short-term, among corporate groups; and longer term, among associations.
In terms of overall pace, it's still positive for '12, '13 and '14. The pace of growth or the rate of growth has actually declined a bit and rate growth continues to be positive across all the booking periods. So, I would say that there is a bit of a mixed picture here, but the key drivers that we are looking at are the segregation of group booking into which periods but also looking at rate progression that remains positive across all the period.
We received two questions on margin performance and comparisons related to portfolio changes. First, what would you attribute the weak comparable owned margin growth of 20 basis points to? Is this close to the run rate you would expect to generate over the next year?
Gebhard F. Rainer
Mark referred to in his comments to tough comparisons with regards to year-over-year comparisons. We had a property tax impact of about 100 basis points on Owned margins. But let me give you some additional factors impacting margins. As mentioned, we continue to experience some challenges in some of our international markets, which contributed about 50 basis points. We have overall lighter food and beverage coming in than expected, particularly in the high-margin banquet revenues.
We've had some large meetings and convention business with significant food and beverage business attached to it in 2011 that was not repeated in 2012, and we've had with three owned properties under renovation into third quarter. So, when you look at the margin run rate for next year, we need to keep in mind that there is a certain level of RevPAR growth that needs to be maintained in order to expect margins growth, given cost inflations. So, the mid-single-digit RevPAR growth would indicate that there is margin growth considering that there's a variety of different factors from cost inflation depending on the global distribution and the markets that we are in. It also is strongly dependent on the rate occupancy mix from RevPAR perspective.
Okay, how did the five renovated properties in the LodgeWorks portfolio do in RevPAR and EBITDA growth in the third quarter?
Gebhard F. Rainer
The five renovation properties contributed about 250 basis points in Owned and Leased RevPAR and the EBITDA contribution of renovations and the LodgeWorks acquisition was over $15 million as Mark mentioned, in his comments.
Mark S. Hoplamazian
I would just add to that. I mentioned earlier the third quarter impact of the change in the timing of the Jewish holidays in New York. One point on this topic that I'd further point out is we talked about that in the context of RevPAR. The fact is that if you look at food and beverage progression year-over-year, we actually had a very strong food and beverage quarter in New York in 2011. So, I look at the banqueting, for example, at the Grand Hyatt of New York, which is about 75% of our total FMB revenue in New York is down 8% year-over-year, while outlets, restaurants which represent about 25% of the total FMB revenue in that hotel were up 10%. So, you got both the dynamics of RevPAR impact from the change in the timing of the Jewish holidays, but also in addition to that, the F&B evolution, partly because we had a very good third quarter of last year and largely because we had a significant decline in banqueting this year.
Next couple of questions are on the impact of Hurricane Sandy; what has been the impact of the Hurricane Sandy thus far chain-wide, not just in the New York City and D.C. metro areas?
Mark S. Hoplamazian
So, it's really – first and foremost, just to reiterate, all of our guests and our associates are safe, so that is by far the most important fact in those. Honestly, it's too early for us to make a good estimate or a reasonable estimate for the impact. We do have one hotel that's shut down at the moment and another that's partially shut down. Otherwise, we're open and operating and we've got high levels of occupancy.
So, our transient business has actually improved, although we were already running relatively high occupancies in a number of these hotels. The big impact is really group business and banqueting. This results from cancellations of meetings really during the course of this week. We're seeing the impact, not just in New York, but also in Washington D.C., for example, and Boston, and a lot of that has to do with – has lots to do with the damage in those cities or to our hotels or to power availability, but rather to air travel, because a lot of the air travel disruptions are causing sort of cascade effect across a number of different markets. So, it's still too early to say for sure what the impact is going to be.
What impact, if any, is there to Hyatt from the dangling crane at 157?
Mark S. Hoplamazian
Okay. So, first, the 157 building where the famous dangling crane that's shown on CNN pretty much 24/7 is the thing that will be in which the Park Hyatt is going to be located. By way of reminder we are not actually building the building of the hotel and so we are not actually involved in the construction activity. We have a very, very strong partner who is developing that building and they've got great team on the project. So, I am confident that they are doing everything that they possibly can to rectify that. There are clearly going – possible delays in the timing of the completion of building and of the hotel but at this point it is really impossible for me to know and that's really the update as of the moment.
Okay, we received a question on international trends. Can you provide some color on which international markets were weak, which ones do you view as suffering from short-term transitory difficulties that should reverse in the near term and which ones appear to be impaired the most over the next 12 to 24 months.
Gebhard F. Rainer
While we continue to experience some challenges in some of the international market, as Mark mentioned earlier. Some is supply, some is difficult comparisons. RevPAR performance is expected to be weaker in China given the political changes. In addition Beijing has seen a drop in corporate business which has been postponed until after the elections. We've seen tightening of government spend, particularly in the south of China. Once the election is over we anticipate corporate demand will return to more normalized levels. India, RevPAR was also weak due to additional supply and the decrease in demand as a result of slowing economic growth. Most markets are not expected to see rate increases as a result of increased supply near term such as Mumbai and Delhi.
Okay, great. Next one is on pipeline and distribution. Please provide an update on Hyatt's strategic efforts to grow its distribution, has the climate for portfolio deals improved?
Mark S. Hoplamazian
No, our pipeline remains quite strong. I mentioned earlier the momentum that we got in the new properties for which we've signed contracts. The actual pipeline statistics we have now adjusted from the second quarter to this quarter. Having said that, the pipeline statistics do not include real-time transaction. So, for example, the conversion in India that I mentioned earlier is not included in the numbers, nor is the project in Minneapolis that I made reference to earlier. So, I would say that we feel very good about the progress that we made and the momentum that we've got and the continued demand for our brands.
Two questions on the realignment; can you please provide more color on the realignment cost and the potential impact in the fourth quarter? Are the realignment costs expected to continue into 2013?
Gebhard F. Rainer
Two-thirds of the realignment cost is related to severance and personnel expense and one-third is belonging to professional fees. The expectations had minimal impact in the fourth quarter from a realignment cost respective, and there are no realignment costs in 2013 as we foresee it now.
Did the prior guidance on SG&A include the $12 million of realignment cost booked in third quarter and does the updated guidance on SG&A include that $12 million.
Gebhard F. Rainer
Neither prior nor current numbers include the realignment costs. These are costs recorded in other income and losses.
Last question, were any of the shares repurchased originally Class B shares?
Mark S. Hoplamazian
So, all of the shares that we repurchased during the quarter were Class A shares. By way of reminder, upon conversion – sorry, upon sale, a Class B share automatically converts to an A share. But with respect to our activity we repurchased all A shares during the quarter.
Okay. That captures the questions we received in advance. We like to now take your questions. Please limit yourself to one question and a follow-up. And Clinton, may be please have the first question.
Mark S. Hoplamazian
Clinton, are there any questions?
The first question comes from the line of Steven Kent. Please proceed.
Could you just talk a little bit about franchising versus managing as you move forward? We've heard from some of the other hotel companies who feel that the owners want to move more towards a franchising agreement rather than a management agreement, and just wanted to hear your views on that and whether we should expect a change in those streams of earnings? And as part of that, would you encourage franchising or start to provide some form of key money or other incentive to get people to join your system?
Mark S. Hoplamazian
Thanks, Steve. It’s Mark. As I look back over time, our relative proportion of franchise properties has been quite modest. I think we have something in the range of 16% or thereabouts of our total room base around the world that are franchised and the remainder are managed. So, we are relatively early in our franchising activity base. So, a lot of that had to do with the expansion into select service. Most of the activity on the select service side in United States is through franchise arrangements, and outside the U.S. very limited franchising only a few properties franchised outside the U.S.
In terms of our pipeline, about 75% of our total pipeline is outside the U.S. and virtually all of that is for managed properties and within the U.S. it is a mix of management and more franchise to manage and mostly – and more select service than closed service in North America at least. From a corporate perspective, we recognize that key for us getting into the franchising business is really going into the franchising model with great partners. We were relatively new to it as of six years ago and we really took great effort to select great partners and really focus on the delivery of our guest experience through the franchise partners.
In terms of economic impact, the fee base is attractive in either case. So, we don't really distinguish a relatively more or less attractive fee structure for franchised or managed because we actually engage in ownership management and franchising. I would say that as we look at particular sources of capital in particular markers, we have found it very helpful to work with some of the franchise management companies that we have been working with to secure transactions along the way and we have used either key money or the forms of capital support in order to secure some of those projects. But I wouldn't describe it as relatively more than what we would engage in and try to do in the context of the managed property.
Okay. Thank you.
Mark S. Hoplamazian
Thanks. We will take our next question please.
The next question comes from the line of Josh Attie. Please proceed.
Thanks. Good morning. Can you tell us more about the G&A savings, $15 million of G&A savings, a lot to come up with in three months? For the $7 million that's recurring – can you give us more detail on where that's coming from or are you not pursing growth avenues that you thought you would be pursuing three months ago? And for what's one time, can you give us more detail on what exactly some of those items are?
Mark S. Hoplamazian
Sure. First of all, in terms of our focus on supporting growth efforts on the development side as well as customer data initiatives and analytics initiatives that we had underway that we described and discussed in the first quarter and the second quarter, those remain high priorities for us and we continue to put resources behind those initiatives. So, we have not reduced our level of effort or our spending or our staffing against those key areas. What I would say is that we – through the realignment of the Company, which was really designed to increase our agility and adaptability over time, and to push decision making down through the organization in a more affirmative way. We found number of opportunities over the course of the year as we moved towards implementing the realigned organization which took effect in October 1, found a number of opportunities to consolidate and make more efficient number of functional areas which are what I would describe as engaged and running having the company operate, that is running the trains on time, so to speak.
So, what we've been able to do is realize some savings through consolidation and efficiency efforts around those areas, and we've also reallocated resources towards the areas that I mentioned earlier; the key priority areas in innovation, customer data management, and development. And so, therefore, a lot of the run rate expense which is about half of the $15 million that we described this year relates to personnel and staffing issues.
With respect to the remainder, there are other third-party contractual – we underwent a third-party contractual review around the world, we've looked at professional fees and expenses, we also recognized that under the old organizational structure, we had a number of open positions embedded in our SG&A estimate that would no longer apply by virtue of the changes that we made structurally. So that's the nature of the evolution of what we've done.
The key area that – the key thing that I'm focused on is having more holistic regional teams who are really expected to be more responsive and faster to make changes and adapt to changing circumstances in each of the local markets in which we're operating. Each of the three regions has now reported to me directly. And the second thing I would say is across the board embedding more agility and adaptability as we move forward. And I'm happy to say that early days, it's only been a month, but it feels very good in terms of how things are working and how we as a senior executive team have come together and are now taking the Company forward.
Thanks. That’s helpful. And on the 57th Street development project, do you have any – I know you have a fixed price to buy the asset at when it's completed, but do you have any financial exposure if it costs them more to build it or if there is any damage along the way because of the hurricane?
Mark S. Hoplamazian
Under our contract, our participation in this is with our partner to acquire the hotel upon completion and it is at a fixed cost; so the answer is no, we don't have any financial exposure.
Okay. Thank you very much.
Thank you. The next question comes from the line of David Loeb. Please go ahead, you are live on the call.
Mark, you gave a technical answer about buybacks, but can you give us a substantive answer; were the shares you bought back previously Class B shares? In other words, did you buy back from family members or other insiders or was this for these unrelated sellers?
Mark S. Hoplamazian
Well, all of the buybacks that we did were effected in the market, so the answer is, whether an individual share – so if you imagine a certificated share and it happened to previously been a B share that got converted to an A share or not is really impossible for me to say. Shares are fungible once they are A shares, so…
Yeah but I guess what you do know is – and this is my follow-up I guess, but what you do know is whether you bought those in individually-negotiated transaction or you bought them on the open market, that would certainly be…?
Yeah, we just said open market. We bought them on the open market.
Okay. Thank you.
The next question comes from the line of Nikhil Bhal. Please go ahead.
Hi, good morning. Just a follow-up question, Mark, on the group segment demand issues that you alluded to before, are you able to collect any attrition and cancellation fees because of these group cancellations, or just given what's happened with Hurricane Sandy, there are clauses in place which restrict Hyatt or most of the lodging companies to basically collect attrition and cancellation revenues? Thank you.
Mark S. Hoplamazian
So, I guess if you're asking specifically with respect to the hurricane, my answer is that we engage with each customer really one by each. The primary activity that you engage in when you've got something like this that occurs is to look for how to accommodate that customer's needs in a different time slot or in a different property. So the number one thing that you immediately turn to is can we actually serve you in a different property or in a different timeframe?
And so the answer is that, we are actively working with a lot of customers at this time who have cancelled quite a few events at our hotels up and down the Eastern Seaboard. And so, we will certainly be working with them in a very proactive way, which may include the waiver of some cancellation fees or the restructuring of the arrangement that we've got with that corporate customer or that other group customer for a future meeting.
Got it. Thank you very much.
Great. We will take the next question please.
Thank you. The next question comes from the line of Smedes Rose. Please go ahead.
Thanks. I just wanted to get a little more color on your strategy for your owned select service hotels. You sold eight of them. Would you expect to continue selling? I guess you still own a lot relative to other brands. And then also, do you – can you just say what about those eight were picked for sale to Summit versus say other ones in your portfolio?
Mark S. Hoplamazian
Thanks for the question. We’ve talked previously about really looking to utilize our asset base, our own select service asset base to accomplish a few goals. One key goal was to expand ownership of our select service brands by solid institutional owners, and I think that the transaction with Summit absolutely serves that initiative and that goal that we had. They are also committed to investing in the properties over time, and it was a very good way for us to expand ownership; different outlets for developers who are currently developing or currently own Hyatt Place properties is one of our key areas of focus.
Since we do have a large portfolio of select service properties, we will continue to look at different ways in which we can utilize that asset base through sales or in some cases JVs. So, we contributed – I think it was eight hotels to a JV with Noble last year or possibly the year before – I'm losing track of the timing – and the purpose of that was to really serve as a capital base for new developments of new properties over time. So, we really look to utilizing our assets in both of those cases to serve purposes other than just realizing good value for the asset themselves.
In terms of the discussion with Summit, we engaged in dialog with them about their interests in expanding their ownership in select service properties, and in particular Hyatt brands. And through the discussion, we identified markets that they were interested in, that we were also interested in pursuing a sale of properties, and some of those were actually, I think virtually all of them were part of the original AmeriSuites acquisition that we made in 2005, and it was really a dialog directly with Summit on a really focused basis because goal that they wanted to achieve and satisfy and goals that we wanted to achieve satisfy.
So, we will continue to pursue transactions for both full service and select service properties, but on the select service side, we've been highly focused on trying to find new and different ways to expand our ownership and end up with good owners long-term for our properties.
We will take the next question please.
We currently have no questions left in the queue. I’d like to now turn the call back over to Atish for closing remarks.
Okay, thank you very much. We'd like to thank everyone for joining us this afternoon. We look forward to speaking with you soon. Thank you very much and good bye.
Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Good day.
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