Hyatt Reports Fourth Quarter 2018 Results

Hyatt Hotels Corporation (NYSE: H) yesterday reported fourth quarter 2018 financial results. Net income attributable to Hyatt was $44 million, or $0.40 per diluted share, in the fourth quarter of 2018, compared to $213 million, or $1.75 per diluted share, in the fourth quarter of 2017. Net income in the fourth quarter of 2017 included a $217 million gain from the sale of Avendra, LLC, an equity method investment, and $58 million of incremental tax expense attributable to recent U.S. tax reform. Adjusted net income attributable to Hyatt was $69 million, or $0.62 per diluted share, in the fourth quarter of 2018, compared to $6 million, or $0.06 per diluted share, in the fourth quarter of 2017. Refer to the table on page 4 of the schedules for a summary of special items impacting Adjusted net income and Adjusted earnings per share in the three months ended December 31, 2018.

Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation, said, "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 & leased segment, resulting from over $1.0 billion of asset sales. We successfully closed the acquisition of Two Roads Hospitality LLC, adding five new compelling brands into the Hyatt portfolio and significant future growth opportunities."

Fourth quarter 2018 financial results as compared to fourth quarter 2017 are as follows:

• Net income decreased 79.2% to $44 million.
• Adjusted EBITDA increased 5.0% to $182 million, up 6.8% in constant currency.
• Comparable system-wide RevPAR increased 1.5%, including an increase of 3.0% at comparable owned and leased hotels.
• Comparable U.S. hotel RevPAR increased 0.9%; full service and select service hotel RevPAR increased 2.6% and decreased 3.0%, respectively.
• Comparable owned and leased hotels operating margin increased 240 basis points to 25.1%.
• Adjusted EBITDA margin increased 280 basis points to 28.7% in constant currency.

Fiscal year 2018 financial results as compared to fiscal year 2017 are as follows:

• Net income increased 97.5% to $769 million.
• Adjusted EBITDA decreased 1.9% to $777 million, down 1.7% in constant currency, reflecting significant transaction activity.
• Comparable system-wide RevPAR increased 3.1%, including an increase of 3.6% at comparable owned and leased hotels.
• Comparable U.S. hotel RevPAR increased 2.0%; full service and select service hotel RevPAR increased 2.8% and 0.2%, respectively.
• Comparable owned and leased hotels operating margin increased 140 basis points to 24.1%.
• Adjusted EBITDA margin increased 190 basis points to 30.9% in constant currency.
• Net rooms growth was 13.6% in 2018, compared to growth of 7.0% in 2017. Excluding the acquisition of Two Roads Hospitality LLC ("Two Roads"), net rooms growth was 7.2%.
• As of December 31, 2018, the Company's pipeline consisted of approximately 445 hotels, or approximately 89,000 rooms. This compared to approximately 330 hotels or approximately 70,000 rooms as of December 31, 2017.
• The Company repurchased 12,723,895 shares of common stock for $966 million in 2018, compared to 12,186,308 shares for $723 million in 2017.

Mr. Hoplamazian continued, "We believe we are well-positioned to continue to execute our long-term shift to an asset-lighter business model. This is supported by a significant increase in our pipeline, which now stands at approximately 89,000 rooms, equivalent to more than 42% of our system, and our sustained net rooms growth of 7% or better."

Fourth quarter of 2018 financial results as compared to the fourth quarter of 2017 are as follows:

Owned and Leased Hotels Segment

Total owned and leased hotels segment Adjusted EBITDA decreased 2.2% (1.2% in constant currency) including a 4.6% decrease (0.2% in constant currency) in pro rata share of unconsolidated hospitality ventures Adjusted EBITDA. The decrease in total segment Adjusted EBITDA was primarily driven by transaction activity. Refer to the table on page 20 of the schedules for a detailed list of portfolio changes and the year-over-year net impact to fourth quarter owned and leased hotels segment Adjusted EBITDA. Owned and leased hotels segment revenues decreased 10.9% (10.2% in constant currency).

RevPAR for comparable owned and leased hotels increased 3.0%. Occupancy increased 100 basis points and ADR increased 1.7%.

Management, Franchise and Other Fees

Total fee revenues increased 10.3% (12.0% in constant currency) to $145 million. Base management fees increased 11.7% to $58 million and incentive management fees increased 6.6% to $43 million, driven by new system-wide hotels and hotel conversions from owned to managed in the Americas management and franchising segment. Franchise fees increased 7.8% to $31 million. Other fee revenues increased 24.1% to $13 million. The fee contribution from the Two Roads acquisition was immaterial to the quarter's results.

Americas Management and Franchising Segment

Americas management and franchising segment Adjusted EBITDA increased 11.6% (12.3% in constant currency). RevPAR for comparable Americas full service hotels increased 3.4%; occupancy increased 40 basis points and ADR increased 2.9%. RevPAR for comparable Americas select service hotels decreased 3.7%; occupancy decreased 230 basis points and ADR decreased 0.6%. Revenue from management, franchise and other fees increased 8.9% (9.5% in constant currency).

Group rooms revenue at comparable U.S. full service hotels increased 2.7%; room nights increased 1.3% and ADR increased 1.4%. Transient rooms revenue at comparable U.S. full service hotels increased 1.2%; room nights decreased 2.0% and ADR increased 3.2%.

Americas net rooms increased 13.0% compared to the fourth quarter of 2017, or 5.3% excluding Two Roads.

Southeast Asia, Greater China, Australia, South Korea, Japan and Micronesia (ASPAC) Management and Franchising Segment

ASPAC management and franchising segment Adjusted EBITDA increased 1.7% (5.2% in constant currency). RevPAR for comparable ASPAC full service hotels increased 2.1%, driven by growth in Southeast Asia, Japan and Hong Kong. Occupancy increased 120 basis points and ADR increased 0.5%. Revenue from management, franchise and other fees increased 10.6% (13.4% in constant currency).

ASPAC net rooms increased 18.4% compared to the fourth quarter of 2017, or 13.2% excluding Two Roads.

Europe, Africa, Middle East and Southwest Asia (EAME/SW Asia) Management and Franchising Segment

EAME/SW Asia management and franchising segment Adjusted EBITDA increased 8.8% (15.0% in constant currency). RevPAR for comparable EAME/SW Asia full service hotels increased 2.7%, driven by growth in most European markets and partially offset by weak performance in the Middle East. Occupancy increased 220 basis points and ADR decreased 0.5%. Revenue from management, franchise and other fees increased 5.9% (10.3% in constant currency).

EAME/SW Asia net rooms increased 10.3% compared to the fourth quarter of 2017, or 9.0% excluding Two Roads.

Corporate and Other

Corporate and other Adjusted EBITDA increased 3.9% (consistent in constant currency).

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased 40.2%. Adjusted selling, general, and administrative expenses decreased 5.4%, primarily due to marketing initiatives completed during 2017, including master brand marketing. The decrease was partially offset by $6 million of selling, general, and administrative expenses, related to the Two Roads acquisition including $4 million of integration costs. Refer to the table on page 11 of the schedules for a reconciliation of selling, general, and administrative expenses to Adjusted selling, general, and administrative expenses.

OPENINGS AND FUTURE EXPANSION

The Company's net rooms were 13.6% higher in the fourth quarter of 2018, compared to the fourth quarter of 2017. Excluding the impact of the Two Roads acquisition, net rooms were 7.2% higher in the fourth quarter of 2018 compared to the fourth quarter of 2017. During the 2018 fiscal year, the Company opened 63 hotels excluding the Two Roads acquisition, representing 14,962 rooms.

As of December 31, 2018, 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, 2018, 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.

The pipeline of executed contracts represents important potential expansion into several new markets or markets in which Hyatt is under-represented. Refer to the table on page 19 of the schedules for a breakdown of the pipeline.

ACQUISITION OF TWO ROADS HOSPITALITY LLC

In November 2018, the Company completed the acquisition of Two Roads for a purchase price of $405 million. The transaction also includes potential additional consideration of up to $96 million if the sellers complete specific actions with respect to certain of the acquired management agreements within 120 days from the date of acquisition and up to $8 million in the event of the execution of certain potential new management agreements related to the development of certain potential new deals previously identified and generated by the sellers or affiliates of the sellers within one year of the closing of the transaction.

As of December 31, 2018, the acquisition of Two Roads added 65 hotel properties or approximately 12,000 rooms, along with 10 condominium ownership properties comprising approximately 1,500 units, to our portfolio, 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.

SHARE REPURCHASE/DIVIDEND

As part of the Company's commitment to return meaningful capital to shareholders, the Company is increasing its quarterly cash dividend by 26.7% to $0.19 per share from $0.15 per share, representing an annualized dividend of $0.76 per share. The first quarter dividend will be payable on March 11, 2019 to Class A and Class B shareholders on record as of February 27, 2019.

During the 2018 fiscal year, the Company repurchased a record $966 million of shares, consisting of 12,723,895 shares of common stock (10,293,241 Class A shares and 2,430,654 Class B shares). During the fourth quarter of 2018, the Company repurchased 4,163,883 shares of common stock (4,160,229 Class A shares and 3,654 Class B shares) for an aggregate purchase price of $292 million. The Company ended the fourth quarter with 39,507,817 Class A and 67,115,828 Class B shares issued and outstanding.

From January 1 through February 8, 2019, the Company repurchased 797,415 shares of Class A common stock for an aggregate purchase price of $54 million. As of February 8, 2019, the Company had approximately $614 million remaining under its share repurchase authorization.

CAPITAL STRATEGY

The Company remains on track to successfully execute plans 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.

BALANCE SHEET / OTHER ITEMS

As of December 31, 2018, the Company reported the following:

• Total debt of $1.6 billion.
• Pro rata share of unconsolidated hospitality venture debt of $528 million, substantially all of which is non-recourse to Hyatt and a portion of which Hyatt guarantees pursuant to separate agreements.
• Cash and cash equivalents, including investments in highly-rated money market funds and similar investments, of $570 million, short-term investments of $116 million and restricted cash of $33 million.
• Undrawn borrowing availability of $1.5 billion under its revolving credit facility.

2019 OUTLOOK

The Company is providing the following information for the 2019 fiscal year:

• Net income is expected to be approximately $109 million to $147 million.
• Adjusted EBITDA is expected to be approximately $780 million to $800 million. These estimates include an unfavorable impact from foreign currency of approximately $7 million (low end of the forecast) to $2 million (high end of the forecast). Refer to the table on page 3 of the schedules for a reconciliation of Net Income to Adjusted EBITDA.
• Adjusted EBITDA contribution from the Two Roads acquisition prior to non-recurring integration-related costs is estimated to be approximately $20 million to $25 million. After including integration costs, the net contribution to 2019 Adjusted EBITDA is expected to be flat to $5 million.
• Adjusted selling, general, and administrative expenses are expected to be approximately $345 million. This includes Hyatt selling, general, and administrative expenses of approximately $305 million, as well as selling, general, and administrative expenses associated with the acquisition of Two Roads, of which $20 million to $25 million is related to one-time integration costs in 2019. This excludes approximately $35 million of stock-based compensation expense and any potential impact related to benefit programs funded through rabbi trusts.
• Capital expenditures are expected to be approximately $375 million.
• Depreciation and amortization expense is expected to be approximately $347 million to $352 million.
• Interest expense is expected to be approximately $78 million to $79 million.
• Other income (loss), net is expected to be negatively impacted by approximately $40 million to $50 million related to performance guarantee expense for the four managed hotels in France.
• The effective tax rate is expected to be approximately 28% to 30%.
• The Company expects to grow units, on a net rooms basis, by approximately 7.0% to 7.5%, reflecting over 80 new hotel openings.
• The Company expects to return approximately $300 million to shareholders through a combination of cash dividends on its common stock and share repurchases.

The company is reaffirming the following information for the 2019 fiscal year:

• Comparable system-wide RevPAR is expected to increase approximately 1% to 3%, as compared to fiscal year 2018.

No disposition or acquisition activity beyond what has been completed as of the date of this release has been included in the 2019 Outlook. The Company's 2019 Outlook is based on a number of assumptions that are subject to change and many of which are outside the control of the Company. If actual results vary from these assumptions, the Company's expectations may change. There can be no assurance that Hyatt will achieve these results.

About Hyatt Hotels Corporation

Hyatt Hotels Corporation, headquartered in Chicago, is a leading global hospitality company with a portfolio of 19 premier brands. As of December 31, 2018, the Company's portfolio included more than 850 properties in 60 countries across six continents.