Hyatt Hotels Corp. released its third-quarter earnings report, revealing lowered expectations for two major industry metrics. The adjustments came as revenue per available room stayed flat year-over-year in Q3 and adjusted earnings before interest, tax, depreciation and amortization decreased 7.3 percent (6.5 percent in constant currency) YOY.
Hyatt now predicts comparable systemwide RevPAR will increase approximately 0.5 percent in fiscal year 2019 compared to 2018. In its second-quarter report, it estimated the metric would increase 1 to 2 percent. The company also predicts its 2019 adjusted EBITDA will be approximately $730 million to $745 million, a decrease from its last forecast of $755 million to $775 million.
In a call with investors, Mark Hoplamazian, Hyatt's president/CEO, identified two causes of the company's reduced RevPAR guidance: the performance of its high-priced, select-service hotels in the United States—he expects this will improve—and weak performance in Hong Kong.
Hyatt’s Q3 results in Hong Kong were down around 36 percent, Hoplamazian said. Conditions have worsened in October, he noted, with RevPAR down more than 50 percent for the month.
“While there is uncertainty as to when the disruption in Hong Kong may end or when the trade concerns will dissipate, we continue to have great confidence in the long-term prospects in Greater China and we are excited about our growth plans there,” Hoplamazian said. “We've seen no pullback in interest from developers and our pipeline and pace of new signings in Greater China remains strong.”
Management and Franchise Fees Rise
Hyatt saw a 10.9 percent (11.6 percent in constant currency) increase in management and franchise fees. Its base management fees rose 17.8 percent, primarily in the Americas management and franchising segment due to the acquisition of Two Roads Hospitality in Q4 2018. Franchise fees rose 11.8 percent while incentive management fees decreased 1.3 percent. Hoplamazian said the company expects to end the year with approximately 57 percent of its earnings coming from Hyatt's hotel management and franchise business, an increase of roughly 400 basis points from 2018
Hoplamazian attributed the increase in management and franchise fees to the company’s 13.2 percent YOY increase in net rooms. Excluding the impact of the Two Roads acquisition, net rooms rose 7.9 percent YOY. As of Sept. 30, Hyatt had executed management of franchise contracts for approximately 460 hotels (approximately 92,000 rooms). It expects to open approximately 85 hotels in the 2019 fiscal year.
"We're pleased to see the execution of our strategy continue to drive results and demonstrate the strength of our business model today and into the future," Hoplamazian said. "Our focus on integrating value-creating strategy with disciplined and consistent execution has yielded strong results for us over time and through periods of volatility. The strength of our brands and our focus on operating excellence and efficiency have been foundational to those capabilities and have fueled our ability to drive high levels of both net rooms growth and fee growth. We continue to do this as we execute on our capital strategy and increase the percentage of our fee-based earnings."
Net Income Up
Though Hyatt’s adjusted EBITDA declined in Q3, its net income increased 25.4 percent to $296 million. Gains on sales of real estate played a notable role in this rise. During Q3, the company recognized a $272 million gain on the sale of the Hyatt Regency Atlanta and a $101 million gain on the sale of the property adjacent to the Grand Hyatt San Francisco and assignment of the related Apple store lease. By comparison, the report only notes a $240 million gain in Q3 2018 from the sale of shares of the entity which owns the Hyatt Regency Mexico City.
After accounting for these sales and other special items, Hyatt’s adjusted net income attributable to the company stood at $39 million for Q3 2019, compared to $37 million for Q3 2018. Earnings per diluted share, adjusted for special items, came in at 37 cents, compared to 33 cents last year.
Breakdown by Region
Hyatt’s Americas management and franchising segment’s adjusted EBITDA increased 11.2 percent, driven by higher management, franchise and other fees from the Two Roads acquisition and recently opened hotels. RevPAR for comparable Americas full-service hotels rose 1.5 percent, in part thanks to strength in resort locations outside of the United States and the timing of the Jewish holidays. RevPAR for comparable Americas select-service hotels decreased 2.4 percent. At comparable U.S. full-service hotels, transient rooms revenue increased 1 percent and group rooms revenue decreased 0.2 percent. The region’s net rooms increased 11.5 percent compared to the third quarter of 2018, or 5.2 percent excluding Two Roads.
In Southeast Asia, Greater China, Australia, South Korea, Japan and Micronesia, adjusted EBITDA in the management and franchising segment rose 0.9 percent (2.5 percent in constant currency). RevPAR for comparable full-service hotels decreased 2 percent, reflecting weakness in Hong Kong. Excluding Hong Kong, RevPAR would have increased 0.8 percent. Net rooms in the region grew 17.7 percent YOY, or 13.7 percent excluding the Two Roads acquisition.
In Europe, Africa, Middle East and Southwest Asia, adjusted EBITDA in Hyatt’s management and franchising segment increased 4.8 percent (7.8 percent in constant currency). RevPAR for comparable full-service hotels rose 1.6 percent, driven by strong growth in Southwest Asia and European markets like France and the United Kingdom. A tough comparable in Russia due to 2018’s FIFA World Cup partially offset this. Net rooms in the region grew 15.6 percent YOY, or 14.4 percent excluding the Two Roads acquisition.