Hyatt to sell $1.5b in assets, signaling strategy shift
 
Hyatt to sell $1.5b in assets, signaling strategy shift
03 NOVEMBER 2017 7:11 AM

On a Q3 earnings call with investors, Hyatt Hotels Corporation executives said the company plans to focus more on its fee-based business and sell off $1.5 billion in owned hotels over three years.

CHICAGO—In a shift from prior long-term strategy, Hyatt Hotels Corporation officials have announced plans to sell off $1.5 billion in owned hotels over the course of three years to focus more on the company’s fee-based management and franchising operations.

Speaking during the company’s third-quarter earnings call with analysts, President and CEO Mark Hoplamazian said Hyatt is opting for a more “asset-light” strategy, which he believes will “unlock shareholder value.” He said many of the assets the company will look to sell are “not fairly valued by investors.”

“The growth in our fee business will continue to drive a shift in the composition of our earnings to a more compelling financial profile with less volatility, capital responsibilities and higher returns over time,” he said.

Capital strategy
Hyatt officials already had seen a shift to a more fee-based business, albeit gradually. In recent earnings calls, Hoplamazian had noted repeatedly that the company’s management and franchise business was growing at a faster rate than earnings from owned and developed properties, and that was by design.

CFO Pat Grismer said the fee-based side of the business has been growing as an overall portion of the company’s earnings before interest, taxes, depreciation and amortization—accounting for a majority (52%) thus far in 2017—and now is expected to grow to 60% of the business by 2020. The company saw year-over-year growth of 13% in fees revenue for the quarter.

During the Q3 call, Hoplamazian noted the $1.5 billion in asset sales is expected to “accelerate the evolution of (Hyatt’s) earnings profile.”

Hyatt officials declined to provide specifics about which properties they intend to sell, the timing of expected sales beyond the projected three-year window, and what the proceeds will fund. But Hoplamazian promised the company “will continue to be disciplined in what we invest in.”

“Our first investments will be focused on expanding engagement with customers,” he said.

Analysts asked whether the infusion of capital will spur the company to buy back more shares of its own stock—something Hyatt officials have a proclivity for in recent history. The company still has $302 million available in its most recent repurchase authorization.

Hoplamazian said he wouldn’t commit to that, but it didn’t seem like an implausible scenario.

“In general, I think it’s clear that we think our own stock is an attractive investment,” he said. “We’ve been persistent and consistent (in that regard).”

Grismer said the recent sale of the Royal Palms Resort and Spa in Phoenix and the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch for a combined $305 million acts as a “20% down payment” on the company’s disposition plans. Hyatt officials said they expect one more property to be sold by the end of 2017, and several more to sell early in 2018.

Hoplamazian also noted that the company’s three-year timetable is dependent on market conditions, including the overall health of the economy and the strength of hotel real estate, to ensure the company can get attractive valuations for the properties sold.

Grismer noted the company is expected to see “tax leakage” of roughly 20% to 25% in the asset sales, but noted those numbers are rough estimates that can shift due to multiple variables.

Earlier in the month, Hyatt announced plans to sell procurement platform Avendra, which raised roughly $210 million and is not included in the $1.5 billion total.

That money could be used to fund several technology-based improvements at Hyatt properties, such as mobile room keys and more seamless integration of smartphone app-based services for guests.

Hoplamazian wouldn’t say exactly how much of the proceeds would go to tech improvements.

“We’re not going to get into specific numbers of individual line items of spend,” he said. “But our recent activity is focused on functionality in the hotel that is enabling colleagues to interact with guests and (simplifying back-of-house systems).”

Q3 performance
The company’s third-quarter performance came in stronger than expected, with Hoplamazian noting the quarter was projected to be “the weakest relative to last year.”

Systemwide revenue per available room increased 1.6% on a constant currency basis for the quarter to $139.96 as occupancy increased 1.4% to 77.9% and average daily rate increased 0.3% to $179.71.

That relatively strong performance versus expectations was enough to spur the company to increase its full-year projection for RevPAR growth to between 2.5% and 3%. The company had most recently projected 1% to 3% RevPAR growth for the year.

As of press time, Hyatt’s shares were trading at $66.63, an increase of 20.7% since the start of the year. The Baird/STR Hotel Stock Index is up 31% for the same period.

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