Hyatt offloads assets to drive focus toward fee-based earnings

Hyatt sold the Hyatt Regency Scottsdale to Orlando-based REIT Xenia Hotels & Resorts. (Hyatt Regency Scottsdale)

Back in July, during the company's second-quarter earnings call, Hyatt Hotels Corp. President and CEO Mark Hoplamazian said that the company "fully expect[s] to be a net seller of assets for the year." 

The expectation was met, and recent sales have earned Hyatt enough money that the company now plans to continue offloading assets as a way of driving revenue in 2018 and beyond. To accelerate a shift toward fee-based earnings, Hoplamazian said during this week's Q3 earnings call, Hyatt now plans to supplement its asset recycling program with a targeted reduction in its owned real estate portfolio that is expected to generate approximately $1.5 billion in gross cash proceeds over the next three years.

Divesting Assets

The plan to offload assets follows on successful sales during the second quarter of the year. Hyatt sold the Hyatt Regency Grand Cypress in Orlando for approximately $206 million in May and the  Hyatt Regency Louisville for approximately $66 million in June. Hyatt also liquidated its preferred investment in Playa Hotels & Resorts, and indicated that it had four additional hotels on the market that it hoped to sell by the end of the year. "While we still expect to sell at least one of those hotels during the fourth quarter, we've experienced some delays in the other transactions and they may not close until sometime in 2018," Hoplamazian said.

Most recently, Hyatt sold the Hyatt Regency Scottsdale and Royal Palms Resort and Spa to Orlando-based REIT Xenia Hotels & Resorts for $305 million, or about $498,000 per room. Combined with the prior hotel sales and the liquidation of the Playa stock, the transactions amount to more than $850 billion in proceeds to date in 2017. "Our level of dispositions this year is well in excess of the aggregate investments we made in Miraval, Oasis and exhale during the year," Hoplamazian said. "We remain focused on closing the pending asset sales within the coming months."

Managed & Franchised Hotels

Hyatt's core business is increasingly focused on its growing base of management and franchised hotels, Hoplamazian said. "This is an important strategic focus for us as it is a key vehicle through which we can expand to new locations where our guests are traveling. We have seen powerful growth in our management and franchising business, with year-to-date fee growth of approximately 13 percent.

"Fueled by consistently strong net rooms growth in the 6- to 7-percent range, and particularly strong operating results from our managed and franchised business around the world, the growth in our fee business is continuing to drive a shift in the composition of our earnings which is yielding a more compelling financial profile for our company, one with less earnings volatility, less capital intensity, and higher total returns on assets over time."

Looking to generate $1.5 billion in gross cash proceeds over the next three years, Hoplamazian acknowledged that the targeted amount and the timeframe assume that the economy and capital market conditions are stable and that industry conditions are healthy. "We believe this asset disposition program will unlock shareholder value, first by monetizing lower yield higher multiple assets, whose cash flows are not fairly valued by investors; second, by providing substantial funds for future growth investments and return of capital to shareholders; and third, by accelerating the evolution of Hyatt's earnings profile towards more fee-based earnings." 

The size of the asset disposition program will achieve a "meaningful reduction" in Hyatt's owned real estate portfolio, he said, while preserving balance sheet capacity to fuel ongoing growth through disciplined asset recycling efforts. "While the asset disposition program is incremental to our ongoing asset recycling, we will be managing our tax exposures across all of our transaction activity."

Future Development

Hoplamazian said that he expects "continued positive momentum" in growing Hyatt's base of executed contracts for new hotels. "With these expectations in mind, we believe we are well-positioned to deliver solid results and grow the business in 2018 and beyond," he said. "We are also developing new engines of growth by making targeted investments in new lines of business, that appeal to our high-end customer base including wellness and alternative accommodations." 

These new lines of business will drive the evolution of Hyatt's capital strategy. "As we plan for and execute on our growth strategies, we've consistently indicated that we look to our asset base, as a source of capital to fund new growth investments. And on our last two earnings calls, we affirmed our commitment to be a net seller of assets in 2017 as an offset to investments made in 2015 and 2016."