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Hyatt Sees Softer 3rd Quarter; Will Expand through Franchising

Hyatt Louisville recently sold to franchisee
Company-owned Hyatt Regency Louisville was sold last month to a franchisee for $50M (photo/d sniegowski)

On Thursday Hyatt Hotels Corporation (NYSE:H) reported a long list of issues to shareholders that are also of interest to franchise owners — from resolution of its online travel agency (OTA) fight, expansion through franchising, to a softness in room revenue in the second half of the year.

Hyatt itself reported stronger financial results than expected for its second quarter of 2017, with good news for Hyatt-branded hotel owners. Comparable RevPAR (hotel revenue per available room) in the quarter increased 1.4 percent over the same quarter last year for its U.S. hotels, while full service and select service hotel RevPAR increased 1.3 percent and 1.5 percent, respectively.

Hyatt earns money through its company-owned hotels, by selling franchise owning rights to buyers, and from collecting fees for providing hotel management services to hotel owners. During the last quarter Hyatt added fourteen hotel properties to its portfolio in its Americas region, all franchised. Thirteen of those newly opened hotel properties were in the United States.

Is Hyatt pursuing more of an asset-light franchising model?

“We're well positioned to continue the strong growth of our managed and franchised footprint into the future,” said Hyatt’s president and chief executive officer Mark S. Hoplamazian in an earnings call* with stock analysts. He added, “We are evolving our core business with a focus on the growth of our global base of managed and franchised hotels, which is allowing us to become more fee-based over time.”

That prompted an analyst to ask if Hyatt was changing strategy. In the past the franchisor had explained its need to have its own hotel properties to best understand, push and pioneer the business of running hotels. Was Hyatt now switching the 731 properties under its brands to a more asset-light franchising model where it refranchises its own hotel properties to franchisees and just collects fees from an almost pure franchise system such as some of its competitors have?

“You’re reading a little too much into it,” replied the CEO. He explained that the firm would invest its own money in markets, key destinations and gateway cities where it thinks the brand needs to obtain a better toehold. But he then commented about the benefits of using franchise investors’ money as opposed to Hyatt’s own: “One of the reasons why our CapEx [capital expenditure] outlook keeps coming down is because we're finding that those sites are really desirable to third-party developers, and we're partnering with them or selling them some of those projects, again releasing capital.”

Hoplamazian then came around to reaffirming Hyatt’s commitment to owning and running its own hotels: “If we find something that we find is meaningful and will have a big impact on our customer proposition and the portfolio, we will be aggressive about pursuing it, but we will self-fund.”

Second quarter’s solid results

The franchising firm’s net income increased by 30.5 percent for the quarter to $87 million and was up 56 percent for the first six months of the year.

”Our second quarter results reflect the strength of the Hyatt brands, demonstrating continued, upward momentum in our business,” said Mark S. Hoplamazian. “In the first six months of the year, net income increased 56 percent and adjusted EBITDA grew 9 percent, driven by comparable RevPAR growth of nearly 4 percent and the ongoing expansion of our portfolio. We continue to expand at a rapid pace, with hotel rooms up 7 percent versus prior year and a pipeline of signed deals representing 37 percent of our current rooms inventory.”

Hyatt also pointed out that comparable operating margins of its owned and leased Hyatt hotels decreased 120 basis points to 26.2 percent.

Hoplamazian continued, "With the second quarter sales of Hyatt Regency Grand Cypress and Hyatt Regency Louisville subject to long-term management and franchise agreements, respectively, we have made good progress toward our goal of being a net seller of assets in 2017 while sustaining solid earnings growth and returning meaningful capital to our shareholders. Given the strength of our first half operating results, we have increased our full-year outlook for RevPAR and Adjusted EBITDA. We remain focused on super-serving the needs of high-end travelers and are confident that we are taking the right steps to create long-term value for our customers and shareholders.”

The future — RevPar, guest cancellation policies & OTAs

No mandated cancelation fee: When asked whether the company will issue a guideline similar to the new Marriott policy in which late room cancelations, those under 48 hours, will not be refunded or will cost guests, Hoplamazian replied Hyatt’s is to not have a general policy for the whole system, but to leave that decision up to hotel owners. He said that cancelation policies were managed at the hotel level “with input from corporate.. but they have a final call.”

Relationship with Expedia: In June it was reported that Hyatt had threatened to opt out of using online travel agent Expedia. It was not happy with the hefty fees of OTAs. Hyatt’s CEO yesterday confirmed that it has worked things out with booking.com and Expedia.

“We recently agreed to build on our existing relationship with Booking.com by implementing new initiatives intended to increase efficiency and flexibility, while driving demand,” said Hoplamazian. “We expect that Hyatt Hotels will continue to be distributed on Expedia platforms without disruption while we finalize our agreement. We value these key partnerships with Expedia and Booking.com, and we remain focused on providing the best guest experience while we optimize outcomes for our hotel owners.”

RevPar for 2017: Although for the first six months of this year RevPar for Hyatt hotels has been 4 percent, the company revised its projection down to be within 1 to 3 percent for the entire year. The third quarter is expected to be soft. When asked by a stock analyst if the comparable RevPAR figure would be negative in the third quarter, Hyatt’s CEO answered: “We are expecting [company-] owned and leased [hotels] to be weaker than system-wide, but not necessarily negative.”


*August 3, 2017 Earnings Call transcript provided by SeekingAlpha.com

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