Hyatt Hotels Corp. released its fourth-quarter financial results, which reflected some ups and downs that were triggered by the company's acquisition and divestment moves.
The quarterly report showed that net income was $44 million, or 40 cents per diluted share, compared to $213 million, or $1.75 per diluted share, in Q4 2017.
Net income in Q4 2017 included a $217 million gain from the sale of Avendra and $58 million of incremental tax expense attributable to recent U.S. tax reform. Adjusted net income during 2018's final quarter was $69 million, or 62 cents per diluted share, compared to $6 million, or 6 cents per diluted share in the 2017 period.
“We had a very strong 2018 driven by another year of double-digit growth in management and franchising fees, nearly offsetting the earnings decline in our owned and leased segment, resulting from over $1 billion of asset sales,” Mark S. Hoplamazian, Hyatt's president/CEO, said in a statement. “We successfully closed the acquisition of Two Roads Hospitality, adding five new compelling brands into the Hyatt portfolio and significant future growth opportunities.”
Hyatt’s adjusted earnings before interest, taxes, depreciation and amortization for the quarter included a negative $2-million impact from the Two Roads deal, which CFO Joan Bottarini said is in line with the company’s expectations to be flat for 2018. “Excluding a $17 million impact from real estate transactions, our fourth quarter adjusted EBITDA grew at an impressive level of approximately 19 percent on a constant currency basis,” she said during the earnings call with investors. “While [revenue per available room] results were slightly lower than we anticipated, we are very pleased with our strong finish to the year.”
Adjusting for the year-over-year impact of real estate transactions, Hyatt's full-year adjusted EBITDA increased 13 percent on a constant currency basis. “These very strong rates of growth were primarily driven by performance in our owned hotels, strong increases in management and franchise fees across all regions, and effective [selling, general and administrative expenses] management,” Hoplamazian said on the company's earnings call with investors.
Year-Over-Year
Compared to the fourth quarter of 2017, Hyatt's net income in Q4 2018 dropped 79.2 percent to $44 million. At the same time, adjusted EBITDA increased 5 percent to $182 million, up 6.8 percent in constant currency, and comparable systemwide revenue per available room increased 1.5 percent, including an increase of 3 percent at comparable owned and leased hotels.
Comparable U.S. hotel RevPAR increased 0.9 percent; full-service and select-service hotel RevPAR increased 2.6 percent and decreased 3 percent, respectively, while comparable owned and leased hotels' operating margins increased 240 basis points to 25.1 percent. Adjusted EBITDA margin increased 280 basis points to 28.7 percent in constant currency.
For 2018 as a whole, net income increased 97.5 percent to $769 million compared to 2017, and adjusted EBITDA decreased 1.9 percent to $777 million, down 1.7 percent in constant currency, reflecting significant transaction activity. Comparable systemwide RevPAR increased 3.1 percent, including an increase of 3.6 percent at comparable owned and leased hotels. Comparable U.S. hotel RevPAR increased 2 percent; full-service and select-service hotel RevPAR increased 2.8 percent and 0.2 percent, respectively, while occupancy increased 100 basis points and ADR increased 1.7 percent..
Michael Bellisario, senior research analyst at RW Baird, noted the quarter’s RevPAR growth missed expectations, and called consensus estimates for adjusted EBITDA in 2019 of 1 percent to 2 percent too high versus the company's initial earnings guidance range. “While 4Q18 earnings topped expectations, primarily driven by better owned/leased performance (+$5 million vs. our model) and better fee revenue (+$6 million), overall RevPAR growth is disappointing, particularly within the select-service segment. For the full year, comparable systemwide RevPAR growth was 3.1 percent, which is below the low end of Hyatt's most recent 3.25 percent [to] 3.75-percent guidance range," according to the analyst.
Asset Changes
Hoplamazian focused on the company's continued moves to shed owned properties. “We believe we are well-positioned to continue to execute our long-term shift to an asset-lighter business model,” he said. “This is supported by a significant increase in our pipeline, which now stands at approximately 89,000 rooms, equivalent to more than 42 percent of our system, and our sustained net rooms growth of 7 percent or better.”
Hoplamazian also noted the recent announcement that the Hyatt-owned Grand Hyatt New York would come down to make way for a 2-million-square-foot office tower. The 100-year-old hotel became a Hyatt nearly 40 years ago, and up until 2010 was the only hotel Hyatt had in New York. “Today, we’ve 14 hotels and two under development,” he said. “We have been engaged in discussions with TF Cornerstone and MSD Partners, the owners of the air rights of Grand Central Station, which is adjacent to the [Grand Hyatt New York]. The new development that they envision involves the construction of a new tower that would include a new Grand Hyatt Hotel.”
As a company, Hoplamazian said that Hyatt is committed to working with the developers to move the project forward. “There are a significant number of approvals and other steps that need to be accomplished before a redevelopment could be possible, which we believe will take more than a year to work through,” he said. “We expect site work for the redevelopment would not begin until 2021 at the earliest. Therefore, we expect to continue to own and operate the hotel through at least the end of 2020. Our current expectation is that we would ultimately sell the hotel and ground lease interest that we have to the development entity that would do the redevelopment and enter into a long-term management agreement for a new Grand Hyatt Hotel upon completion.”
Two Roads Hospitality Acquisition
In November, the company completed the acquisition of Two Roads Hospitality for $405 million.
As of Dec. 31, the acquisition added 65 hotel properties and approximately 12,000 rooms, along with 10 condominium ownership properties comprising approximately 1,500 units, to the company’s portfolio. The deal also comes with a pipeline of approximately 5,000 rooms and the addition of five new brands. The condominium ownership properties operate under the Destination Residential Management business.
Rooms Growth and Earnings
Net rooms growth was 13.6 percent in 2018, compared to growth of 7 percent in 2017. Excluding the acquisition of Two Roads, net rooms growth was 7.2 percent.
“We have continued to focus on driving relevant growth of our brands in new markets where our guests are traveling,” Hoplamazian said during the call. “During 2018, we entered 38 new markets through organic hotel openings and an additional 20 new markets through the acquisition of Two Roads. For example, fourth-quarter openings include the addition of the Hotel Sofia in Barcelona [Spain] within our Unbound Collection.” The 465-room Sofia is Hyatt's first property in Barcelona. Hoplamazian also highlighted the opening of the 1,260-room Hyatt Regency Seattle, which was not in Hyatt’s previous estimates for net rooms growth in 2018.
As to examples of new markets from Two Roads additions, Hyatt expanded its resort offerings in Asia with four new markets in Bali, along with three new markets on the West Coast of the U.S.: Washington, Oregon and Northern California. “These collective additions represent a meaningful expansion of our global distribution in a short period of time,” he said.
Americas net rooms increased 13 percent compared to Q4 2017, or 5.3 percent excluding the additions from Two Roads.
In the Southeast Asia, Greater China, Australia, South Korea, Japan and Micronesia market, RevPAR for comparable full-service hotels in the region increased 2.1 percent, driven by growth in Southeast Asia, Japan and Hong Kong. Occupancy increased 120 basis points and ADR increased 0.5 percent. The region's net rooms increased 18.4 percent compared to Q4 2017, or 13.2 percent excluding Two Roads.
Europe, Africa, Middle East and Southwest Asia RevPAR for comparable full-service hotels increased 2.7 percent, driven by growth in most European markets and partially offset by weak performance in the Middle East. Occupancy increased 220 basis points and average daily rate decreased 0.5 percent. EAME/SW Asia net rooms increased 10.3 percent compared to Q4 2017, or 9 percent excluding Two Roads.
Openings and the Pipeline
The company's net rooms were 13.6 percent higher in the fourth quarter compared to Q4 2017. Excluding the impact of the Two Roads acquisition, net rooms were 7.2 percent higher compared to Q4 2017. During the 2018 fiscal year, the company opened 63 hotels—again, excluding the Two Roads acquisition—representing 14,962 rooms.
As of Dec. 31, the company had executed management or franchise contracts for approximately 445 hotels (approximately 89,000 rooms), compared to the expectation for 340 hotels and 73,000 rooms as of September 30, and compared to approximately 330 hotels (approximately 70,000 rooms) at December 31, 2017. The pipeline of executed contracts includes approximately 35 hotels and approximately 5,000 rooms represented by the five brands acquired in the Two Roads acquisition.
Hyatt’s pipeline has increased almost 27 percent inclusive of the Two Roads hotels or 20 percent excluding them, fueled by a record year of signings in 2018, Hoplamazian said. “We believe that the pace of our pipeline growth is indicative of our ability to sustain high levels of net rooms growth over time.”
During the call, Bottarini said the company is poised to open more than 80 hotels with net rooms growth in the range of 7 percent to 7.5 percent.
Future Profits
Looking ahead, Hyatt expects net income to be approximately $109 million to $147 million, and remains on track to sell approximately $1.5 billion of real estate by the end of 2020 as part of its capital strategy. To date, the company has sold approximately $1.1 billion of real estate under the program.
Comparable systemwide RevPAR is expected to increase approximately 1 percent to 3 percent in 2019 compared to fiscal year 2018.