Two Roads deal positions Hyatt for favorable Q4, 2019

Two Roads Hospitality's Terranea, A Destination Hotel in Palos Verdes, Calif. Photo credit: Two Roads Hospitality (Two Roads selects Navis to optimize direct channel revenue)

It’s been another good quarter for Hyatt Hotels Corp., which reported 5 percent RevPAR growth at its owned and leased hotels for Q3, both on a constant-currency basis. Add to that the expected closing of the $480 million Two Roads deal in Q4, and this year and next look decidedly upbeat for the company.

“Our outlook for the remainder of 2018 remains positive, including comparable systemwide RevPAR growth of 3.5 percent at the midpoint of our full-year guidance range," said Mark Hoplamazian, president and CEO of Hyatt Hotels Corporation, ahead of Wednesday's quarterly earnings call with investors.

Income and Revenue

Net income attributable to Hyatt was $237 million in Q3, aided by gains on sales of real estate, compared to $18 million in third-quarter 2017. Adjusted net income was $37 million in the quarter compared to $29 million in Q3 2017. The company also reported a 9-percent increase in management and franchise fees.

For the quarter, Hyatt’s comparable systemwide RevPAR increased 2.8 percent, including an increase of 5.3 percent at comparable owned and leased hotels. Comparable U.S. hotel RevPAR increased 1.4 percent, full-service hotel RevPAR increased 2.5 percent and select-service hotel RevPAR decreased 1.1 percent. Comparable owned and leased hotel operating margin increased 70 basis points to 21.8 percent.

Asia-Pacific accounted for about 17 percent of Hyatt’s management and franchising adjusted EBITDA in Q3. Full-service RevPAR here increased 2.5 percent in the quarter. CFO Patrick Grismer said RevPAR growth in Greater China was in line with the segment average and Japan stood out with RevPAR growth in excess of 6 percent.

Room Growth and Asset Recycling

The company reported net rooms growth of 7.6 percent. The Americas increased 6.2 percent compared to Q3 2017, while rooms in Europe, Africa, Middle East and Southwest Asia increased 9 percent.

Twelve hotels with a total of 2,608 rooms opened in third quarter and Hyatt is on pace to open approximately 60 hotels in the 2018 fiscal year.

As of September 30, the company executed management or franchise contracts for approximately 340 hotels, or approximately 73,000 rooms, consistent with expectations at the end of second quarter. This represents development pipeline growth of approximately 6 percent, compared to Q3 last year.

In July, Hyatt purchased the 693-room Hyatt Regency Phoenix, which it previously operated under a management agreement, for approximately $140 million. In August, it acquired another of its managed properties, the 530-room Hyatt Regency Indian Wells from an unrelated third party for approximately $120 million. And in late September, Hyatt sold its shares of the entity that owned the 755-room Hyatt Regency Mexico City for approximately $405 million, including an investment in an unconsolidated hospitality venture and an adjacent land parcel valued at approximately $40 million. The land parcel will be developed by the new owner as Park Hyatt Mexico City.

All three transactions are part of Hyatt's ongoing asset-recycling program. The company plans to sell approximately $1.5 billion of real estate by the end of 2020 as part of its capital strategy. To date, Hyatt has sold approximately $1.14 billion of real estate under the program including the cash proceeds from the Park Hyatt Mexico City land parcel.

The Value of Two Roads

Just days after the end of the quarter, Hyatt announced its acquisition of Two Roads Hospitality, a high-end, lifestyle management company that includes such brands as Joie de Vivre, Destination, tommie, Thompson and Alila, which it expects will expand the growth of its management and franchising business. 

The sale is expected to boost the company’s profile in niche and underserved markets. “It's a collection of very strong brands that are performing very well, but with an embedded pipeline,” said Hoplamazian during the earnings call.We believe that there is significant further growth embedded in these brands globally. I would say, in particular, the Alila brand in Asia has, with a small base to start with, generated a tremendous amount of interest amongst developers in Asia—and we have a very, very strong network in Asia amongst business travelers.” Alila will bring “significant additional representation” in Asian resorts to Hyatt’s portfolio, Hoplamazian predicted.

The brands within the Two Roads portfolio operate in the same ADR range that Hyatt’s higher-end and luxury hotels operate, he added. “And by derivation and by knowledge, we look at the customer base that they're serving and we believe that it is an enhancement to our current customer base and represents a significant measure of additional opportunities for our existing guest and customer base.”

Another reason for the deal, he continued, was the segments that Two Roads’ brands cover. “If you look at what's going on in the world, lifestyle brands and boutique brands are growing at very good pace up and down the chain segments,” said Hoplamazian. “We believe that these are very compelling brands that have already proved their mettle in terms of garnering interests from outside third-party developers.

“The final thing I would say is it fits our strategy because it's asset-light. We are buying a management platform and brands and that's what we intend to leverage going forward. So, that's really how I would frame how we're thinking about it and what we see the opportunity to be.”

Financially, Grismer said Hyatt expects Two Roads to be “immediately accretive” in the first full year of operations next year, even with the significant impact of one-time, transition-related and integration-related expenses. “We believe that from a valuation perspective, it's more appropriate to look at year three, which is 2021, by which time a lot of the growth that Mark has referred to will materialize,” he said. “And when we look at the expected earnings in year three in relation to our anticipated investment, that yields an implied multiple of 12 to 13 times.”

To make the deal, Hyatt monetized real estate assets under its permanent asset sell-down program at an average multiple of 16.5 times adjusted EBITDA. “We see this as a tremendous opportunity to create value for our shareholders while, as Mark said, accelerating the evolution of our earnings profile in a way that increases our weighting toward the high-growth fee business,” he said.

Looking Ahead

For the last quarter of 2018, Hyatt expects its net income to be approximately $726 million to $771 million, compared to previous expectation of $680 million to $729 million. Comparable systemwide RevPAR is expected to increase approximately 3.25 percent to 3.75 percent compared to previous expectation of 3 percent to 4 percent. The mid-point of the range remains unchanged.

For the full fiscal year, the number of hotel openings remains at approximately 60.

"We expect full-year 2019 systemwide RevPAR growth to be in the range of 1 percent to 3 percent," Hoplamazian said during the call. "We are reaffirming our prior guidance for net rooms growth of 6.5 percent to 7 percent for 2018. But I would note that we have a large number of hotels scheduled to open near the end of the year with the possibility of openings in December that were previously scheduled for 2019.

"With respect to 2019 net rooms growth, we are also reaffirming our prior indication of at least 7.5 percent growth. However, should previously scheduled 2019 openings accelerate into 2018, we could see a slightly higher 2018 growth rate and a slightly lower 2019 growth rate, with the combination of the two years showing exceptionally strong net-rooms growth. I would like to point out that we expect a record number of signings of management and franchise agreements in 2018, supporting strong net-rooms growth well into the future."

According to Michael Bellisario, VP/equity research senior analyst at Robert W. Baird & Co., “Amid current negative sentiment toward the sector, investors are increasingly focused on the brands' core fundamental drivers of RevPAR growth and net unit growth, and Hyatt screens favorably versus peers on both metrics. As Hyatt's portfolio continues to grow faster than peers and as it makes progress on its ‘asset-lighter’ strategy, we expect shares to continue re-rating higher on a relative basis.”