Hoteling With Hyatt

Jan. 03, 2021 6:42 AM ETHyatt Hotels Corporation (H)MAR, HLT, DASH

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Seeking Alpha Analyst Since 2019

Independent Investment Analyst

Summary

A world class reopening trade with earning and multiple upside.
Strategic shift well underway and will expand multiple to peer group.
Underappreciated brand portfolio for luxury travelers.

Description: Hyatt is an operator of 924 owned (7% of total rooms) and managed and franchise (93%) properties across 16 upscale luxury brands, which includes two vacation brands (Hyatt Ziva and Hyatt Zilara), the recently launched full-service lifestyle brand Hyatt Centric, the soft lifestyle brand Unbound, and the wellness brand Miraval. Hyatt acquired Two Roads in November 2018. The regional breakdown as a percentage of total rooms is 67% Americas, 19% Asia-Pacific, and 14% rest of world.

Company
- Hyatt, the iconic hotel chain with many notable properties has always focused on the high end consumer and business travel through its full service and partials service properties. Over time the hotel model has shifted from company managed and owned properties to franchise and license operated properties much like that of national restaurant chains. Hyatt is focused on shifting its property mix to an asset light model with higher more predictable growth streams, elevated margins, and operational efficiency.

Covid Impact
- To say Covid has not impacted the hotel management and operator industry would be a wild understatement. Hyatt and many of tis global peers have seen room occupancy rates dip 90% year over year as a result of the pandemic. Covid has heavily impacted 2020 results and will effect 2021 results on the leisure side and the business traveler segment for many years to come. Hyatt now has reopened nearly 90% of its hotels, but revenue and all key performance indicators are still down y/y. RevPar is still down 70% y/y. Ebitda margins have been worse than the peer group because of the higher skew of owned properties and large city locations. Despite the headwinds of the lost year Hyatt is still committed to unit and room growth through new properties. In the 3Q new rooms increase 6% y/y and the pipeline for new development improved 10% y/y which is above the 5 year CAGR of pipeline growth. The recovery will vary be region as vaccine rollout occurs and lockdowns are lifted. Chinas has seen the sharpest rebound in leisure travel and there is general consensus that there is pent up travel demand on the consumer side, but the future of business travel remains uncertain.
- The company has taken the following steps to ensure business survival and operational success during the pandemic. CapEx was cut in half to 125m, a number that has already been declining due to shift to an asset lite business model. The company also lowered costs on the employment side to reflect the new demand structure the company is being faced with. Cost cuts came across the business as operations were largely shit down for months but are now being allowed to return. The company also suspended share repurchases and the dividend to ensure balance sheet control along with issuing 950m in debt at favorable terms given the lending structure and market liquidity created by FED intervention.
- Exposure to business travel and conventions is thought to be higher than the peer group given the luxury properties and large conventions held at Hyatt locations. While it is difficult to determine full exposure to business travel and conventions due to reporting information it is thought to be higher than peers M and HLT. Business travel will be slower to recover than leisure travel and likely wont return to pre Covid levels until 2023 or 2024 according to industry analysts. After the second quarter earnings call Hyatt's CEO said in an interview that 21 bookings were 40% lower than 20 booking for corporate travel and conventions at the same time in the year prior. The company also expects marginal pricing pressure in this segment as demand will be much lower but supply of rooms and centers is growing. Geographic exposure has also caused some underperformance versus peers. America RevPar has been the weakest of most regions on a y/y basis and Hyatt's larger relative exposure to peers had lowered overall RevPar on a comparable basis. While this will subside over time it will mean that Hyatt lags peers in profitability recovery.
- The industry outlook was discussed in detail at a North Star lodging conference. Tourism economists paint a gloomy picture for the industry with a multi year recovery needed to return to 2019 levels. Hotel occupancy levels are not expected to return to 19 levels until second half of 23 with RevPar not expected to return to overall levels until 24. While this will be fragmented by market segment and geographic exposure the long time frame on return levels is due to less corporate demand and possible weak consumer economic conditions that could be caused by the pandemic.

Earnings growth
- While Hyatt has attempted to grow earnings through operational efficiency and share buybacks in recent years COVID has derailed that and they are not expected to post positive EPS until FY 22, however in the period from 2016 to 2019 diluted EPS grew 134% via the combination of better performance and a shrinking share count. This along with the dividend initiated in 2018 shows high commitment to return capital to shareholders. When normalized, EPS actually declined 45% in the same time period showing the importance of cash return in the form of buybacks. Since the company began its transition to asset light growth in 2017, the first effects were seen, net income margin more than doubled from under 15% to 30% in the past two calendar years, the continued shift to asset light growth and a lower organizational expense structure should allow for continued margin expansion.

Comparable
- Hyatt competes with many other competitors, sometimes it is hard to actually tell how many hotel companies are present by viewing all of the varying names on hotel buildings. In reality their two main competitors are Hilton and Marriot. This comes due to the fact that the industry has seen mass consolidation over time with major hotel players acquiring smaller companies as well as licensing and opening properties that are managed and franchised, so non physical owned properties. Hilton operates over 1m rooms, 4.5x the number of rooms of Hyatt. Marriot is the largest with nearly 1.5m rooms. Marriot only has 10% of its rooms classified as "luxury" but over 95% of its revenues come from managed and franchised rooms.
- The YTD performance shows that H is a clear laggard to peers since the rebound began. This is due to the higher mixed shift to owned rooms, smaller exposure to APAC which has recovered better than most areas. Hitlton the superior performer has operating margins north of 15% as compared to H with margins below 4%. While H has the highest EBITDA margin these differences are due to different operating standards by the companies. HILT has 90% of its EBITDA coming from managed and franchised and 75% of total revenue. While H is behind its peers in terms of mix shift and room count it points for multiple levers for upside based on company performance to come more in line with peer multiples.
- On a forward basis Hilton and Marriot are trading at extremes multiples but this is because they are expected have positive EBITDA next year while H is likely to not have the same outcome. M and Hilton have 5 year avg EV/EBITDA multiple of 22x and 16x compared to H. If Hyatt can continue its mix shift and continue to grow rooms profitably, they should see multiple expansion more in line to the peer group.

Shift to franchise base
- Hyatt has undergone a shift to divesting properties to move more to a franchise model which follows similar moves by the peer group. In 2019 H announced plans to divest an additional 1.5B in real estate to bring the total to over 3B by 2022. Hyatt still owns roughly 7% of its properties at 36 while peer Marriot owns less than 1% of its portfolio of available hotels. The strategy is much more asset light and frees up capital to enhance growth. Along with this announcement management laid out plans to personalize the guest experience and get to 70% management and franchise revenue by 2022. The company has also rolled out a new app to enhance the digital experience as well as enhance "wellness" opportunities for guests. The World of Hyatt program was seeing strong y/y growth through the pandemic with customer accounts increasing 50% in 2019. These guest book directly through the hotel and spend on average 25% more. The companies smaller base than peers has led management to conclude that they are underpenetrated in most global markets, but they see this as an opportunity for room and unit growth in the asset light manor that is most profitable. While the company was committed to divestment for asset light growth the company also aimed to use available capital for share buybacks.
- The focus on growth has been underway since the company came public in 2009. In the first five years room growth was 3.5% but since 2013 the room growth CAGR has more than doubled to 7.7%. While room growth has accelerated fee and revenue growth has accelerated at a faster pace, showing operating leverage by revenue type. Hyatt is proud of its growth compared to peers but it is important to note is off a much smaller base, but they do post higher average daily rates due to customer sku to higher end properties and locations.
- - Pipeline growth of all types has been strong with 2019's pipeline of new rooms coming online being above 40% of current available rooms and the company estimates that it will add an additional 250M of franchise and license fees. The pipeline by room type is heavily skewed toward managed at 68% followed by franchised at 30%. The largest growth will come in the APAC region at over 40% of new rooms in the pipeline.
  - The mix shift to managed and franchise is a profit driver and has increased EBITDA margins since 2009. moving from 37% of rooms in 2009 to 57% of 2019 EBITDA margins increased by over 20%. With at least 10% mix shift to go as committed by management by 2022 this implies more room to the upside on EBITDA margin growth. Notably a large amount of the improvement has come since 2016 with 14% EBITDA margin expansion in mix shift from 43% to 57%.
  - The spelldown of assets has also been profitable. The remaining 1.5B in divestment is expected to come at 13-15x property EBITDA multiples. On average H has traded at 10x EBITDA as a company this implies good pricing in the market for these properties. 2019 was a very successful year for this strategy with nearly 1B in divestment at an average EBITDA multiple of 21.5x. While Covid may dent the price availability for future asset divestment as the travel industry will ebb and flow based on COVID developments future sales will likely come at above average historical trading multiples for the company. Hyatt's portfolio of unsold properties at this point remains a major swing factor in future capital returns. Prior to the pandemic BAML estimated the value of Hyatt's owned and leased properties to be worth north of 5.5B after the announced sell offs in 2019. While it is unlikely that all of these properties will be sold especially given current market conditions and uncertainty of smaller hotel operators. If Hyatt can sell down an additional billion of properties in the next 5 years to other operators it has the opportunity to further boost EBITDA margins to 35% in a normalized travel environment based on the trend in EBITDA margin expansion as seen by past asset sell offs.
  - Despite the Covid impact Hyatt is still looking to add to its international portfolio, and in many ways has taken advantage of the pandemics effect on independent hotel operators. Hyatt has the opportunity along with other large hotel chains to gain deals with large hotel operators that are distressed due to lack of access to public market funding. Hyatt management stated that they are seeking possible deals with large iconic hotels in top of line luxury markets in Europe and the Asian market. While the properties may be under distress due to Covid, by providing these properties the needed liquidity to survive the future value of these deals could result in more high margin revenues which should further contribute to margin expansion and capital return.
  - Hyatt's focus on wellness could also help them draw in high end customers who will have many options following the lifting of lockdown measures and vaccine distributions. Consumers have many choices and while it does appear that Hyatt has the best exposure to high end travel as compared to peers via portfolio offerings, they are not the only player in the space. With people looking to travel again deals will have to be aggressive to win customers and take market share. Any additional wellness offering that can be added onto the customer loyalty platforms while on trips could give them an edge over the competition.
  - Valuation
    - 5 year Ev/EBITDA exit
      - 5b rev in 23, 5.3B rev 24
      - 25% EBITDA margin in 23 and 24 (high of 29% in 19)
      - 250m in Capex 21-24
      - 8% D&A
      - 25% tax rate
      - 14% discount rate
      - 97$ PT reflects 12x EV/EBITDA CY 24.
        
        Hyatt previously traded at high of 14x EV to EBITDA
        
        MAR and HLT have 16x and 19x 3 year EV/EBITDA avg multiple to reflect better exposure and asset light model. H shift and asset light growth deserve a higher average multiple relative to its historic multiple to be more in line with peers, but a discount to peer group due to exposure as well as ongoing strategy change and execution risks.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in H over the next 72 hours.

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Summary

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