Hyatt Executive Insights: Mexico City, Andaz

On Thursday, Hyatt Hotels Corporation (NYSE:H) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Mexico City Property

Harmit J. Singh – CFO: Thanks Atish and good morning to everybody on the call. Let me start with the overall color. Our SG&A costs were higher in quarter one when you compared to a year ago, but broadly in line with our internal expectation. Because we don’t necessarily guide, it’s difficult for us to indicate line-by-line what cost of revenues are. But I just want to make sure that everybody understands that broadly in line with our internal expectations. The first half of the year which is 2012 relative to last year, our expectation in terms of SG&A cost increases will be higher than the second half, primarily driven by two reasons. One, as we expand our presence globally, we recruited both in development, real estate, finance and legal. We recruited folks in the second half of last year, so the impact of that on an annualize basis will impact the first half of 2012. The second is a one-time, which I’ll just get into which we just experienced in quarter one. The way to look at this is cost for the quarter. I’ll split into three buckets. A third is one-timers which I’ll just explain. A third costs related to expanding our presence globally and a third of what I call basic baseline costs. One-timers in quarter one which is approximately, I would say a $7 million – $6 million to $7 million, basically relate to a couple of things. As you know, we’re relaunching and converting our extended-stay properties to HYATT House, so the signage and conversion costs as related to that. We reserved some bad debts for – basically two properties, again, small in terms of number of properties, so that impacted the first quarter. Then there were legal fees that relate to the termination of one hotel outside the U.S. So, that’s broadly explaining the third. The remaining costs as I said were equally split between expanding for the future and base line costs. The second question is related to what’s the expectation as we think through the year. I’d say, we are looking at potentially SG&A costs increasing in the low double-digit to low teens on a fully year analyzed basis and that would incorporate costs that were impacting quarter one on a one-time basis. The only thing I would say in summary is, as Mark mentioned about an organization realignment, these costs do not include any costs related to the realignment. We are in the process of quantifying that and will advise all of you over the next coming quarters.

A Closer Look: Hyatt Earnings Cheat Sheet>>

Atish Shah – SVP, IR: We had two questions related to SG&A, in particular, the call out on Hyatt House, they are as follows; are there any additional brand initiatives forthcoming for some of your more mature concepts? And two, how much do you expect to spend on brand development this year?

Harmit J. Singh – CFO: In terms of, we established an innovation team last year and we are looking on a regular basis about innovating and meeting customer needs as they change over time, and that’s included in the numbers that I talked to you or mentioned to you in terms of the outlook for 2012.

Atish Shah – SVP, IR: Shifting gears a bit, concentrating on Mexico, what’s the strategic rationale for the deal? What did the new property do in EBITDA last year? What’s the forecast for this year?

Mark S. Hoplamazian – President and CEO: The strategic rationale, this is Mark, for the Mexico City deal was really to establish a key presence in a large gateway city. Mexico City is a top global market. We don’t have a current presence in Mexico City. This particular property is extremely well located. It’s in a Blanca area, and it overlooks the Chapultepec Park, and is actually in a hotel zone with a lot of other first class hotels. It is a large hotel which will allow us to establish a significant presence. It’s currently situated with 756 rooms, but post-renovation will have 734 rooms. And the forecast outlook for the year, we expect to close transaction in May and we would expect EBITDA level earnings in the range of $8 million to $10 million for the remainder of the year. If you look at the overall market and travel patterns, the travel to Mexico has actually been quite strong, especially from the U.S., both leisure and business travel. And when you look at the prospects for this hotel, there are several things going on. First is, it will be rebranded and I think that the high branding will make a significant difference to the volume that we can bring through – travel base that we can bring to the hotel. Secondly, the renovation which we currently estimate to be about a $40 million investment will include the expansion of the meeting space at the hotel as well. The hotel currently has roughly a 15% group mix and we expect that to expand over time, both because of our revenue management and our group base of business, but also because we’re doing some reprogramming within that hotel. Overall, we looked at this transaction and concluded that it was really attractive on a standalone basis. If you just look at the economics of the deal itself, but clearly from a strategic perspective, we do have further plans to – and we are focused on growing our presence in Mexico business and leisure locations and having a significant good presence, prominent presence in Mexico City is the key to that initiative. Now the last thing I would say is that this is consistent with our approach to using our balance sheet and we do expect that over time, we will look to recycle this asset that is disposable but retain a long-term management contract upon any sale.

Atish Shah – SVP, IR: Next question was can you talk about where the Mexico City property was in the prior cycle and where you think you can get to post conversion say in three to five years?

Mark S. Hoplamazian – President and CEO: I can’t really go back into historical detail to give you a sense for where it is. It’s clearly below peak but the comparability of that to — their operation of the hotel under our management is really difficult to establish, especially in lieu of the fact that we do expect to change the mix of business in the hotel. We really expect that there will be a lift from the branding as well as the renovation, which we expect to execute over the next 2.5 to 3 years.

Atish Shah – SVP, IR: Should we assume Hyatt will continue to look for real estate in this region? Similarly the company interested in buying real estate in Europe?

Mark S. Hoplamazian – President and CEO: As to real estate acquisition in the region, the answer is that many transactions in different parts of Latin America would do require capital in different ways and we have looked at other opportunities and we will continue to. Again consistent with our approach, which is establishing presence in key gateway cities looking to expand our resort presence and also supporting our Group business, these are the three areas that we talked about historically as being important to us. We also believe that there’s a significant opportunity for select service development in Latin America in general and we’ve been applying a lot of resources to that. In fact, we have our first Hyatt places that are opening up outside of the U.S. include one hotel this year in Latin America. In terms of Europe, yes we certainly are paying attention to and looking for opportunities there. It certainly hasn’t generated any of the tumult in the markets, it’s not generated any opportunities for us yet, but we continue to look for opportunities, especially because our presence in Europe remains relatively modest and there are a lot of attractive markets into which we would like to further expand.

Atish Shah – SVP, IR: We’ve received one related question about updates that we could share regarding our development site in Rio?

Mark S. Hoplamazian – President and CEO: Yes, so we completed the acquisition of a site in Rio and we continue to refine the design plans and the construction estimates for the project. So at this point, it’s predevelopment costs that we are incurring to move the project along, which we will continue to do. We are looking forward in time to the Olympics in 2016 and ensuring that we put ourselves on a path to have the hotel open and ready prior to that and we will over time engage with potential partners and look to establish a partnership or JV or some kind in taking that project forward. Shifting gears a bit we received a few questions on Group business, pricing, bookings for the remainder of the year and pace?

Harmit J. Singh – CFO: Sure. Let me start by saying in our Group business in the quarter was strong. Our revenue was up 9%, primarily driven by demand. Pace for the year is up 4%, again primarily driven by demand two-third demand, a third rate. Our bookings in the quarter for the quarter were fairly strong, they were up 20% and they were equally distributed between rate increases and demand increases. In the quarter, for the year bookings were up 13% and that was really driven by rates. Rates were up about 6%. So overall the strength we saw in the Group business in the quarter primarily came from corporates, and in terms of sectors they were largely driven by consulting, technology and IT, were the sectors that were the primary drivers of — the Group business growth that we saw in the quarter. In terms of windows, still fairly short. Many meetings being booked within 90 days. So overall, I think that probably addresses most of the questions Atish.

Atish Shah – SVP, IR: One of Joe’s question, which corporate segments have seen the most and least relative strength to-date in 2012 and what are your early thoughts for 2013 corporate rates?

Harmit J. Singh – CFO: In terms of the sectors as I mentioned is really consulting, technology and IT being strong. In terms of least strong or less strong, is really the pharma and the financial sector. In terms of the question about ’13 rates, it’s too early to tell at this point of time and over time we’ll get a better sense of that. Having said that, I would say as I think about the bookings for ’13 and ’14 continue to grow. For ’13, I think we’ve probably have about 45% of the business on our books and ’14 we probably had 30% of the business in our books and rates are picking up. I mean rates are up 2% when you compare this for the bookings this time last year. So, I think overall trends are looking decent.

Andaz Development

Atish Shah – SVP, IR: Can you give us a sense of how the development of Andaz is tracking versus your expectations? What does your future pipeline look like for the band particularly across North America?

Mark S. Hoplamazian – President and CEO: So, Andaz evolution has been really encouraging and exciting to watch. We are seeing an increasing base of customers who are identifying with the brand and seeking it out that’s reflected in the performance that we need in individual hotels. We have eight Andaz hotels opened and operating currently and we’ve converted two full service hotels to Andaz hotels in the first quarter. We have about half a dozen in the pipeline at this point mostly outside of the U.S. and in some really attractive and important cities both for the Andaz customer base but also for Hyatt overall. We’re less than five years into the roll out of the brand post launch. I think the traction has been very good and I think that the – there’s been a positive impact to the rest of the portfolio as Gold Passport members are discovering Andaz. So, it remains a significant brand in the dialogue with developers that we’re already doing business with in China and India and in other markets.

Atish Shah – SVP, IR: What type of performance does the Company expect out of the LodgeWorks portfolio and how much does management expect it to contribute to margins, and how was the initial integration process been tracking?

Mark S. Hoplamazian – President and CEO: I’ll address some of that. The results that we’re seeing are tracking slightly ahead of what we actually expected. We had looked forward into 2012 – last year after we completed the acquisition, looked forward to 2012, and estimated that the LodgeWorks portfolio would contribute about $40 million of net EBITDA. And as I said, we’re tracking slightly ahead of that at this stage. The RevPAR progression has been very solid, and part of that has to do with the expansion of the high customer base into those properties as well as managed corporate travel. We’ve been able to secure more volume account business for the hotels relative to their prior branding. The integration has been superb. The LodgeWorks team to a person has really been a joy to welcome him into the Hyatt family, both on the operations side, but also on the development side, we’ve really identified and are pursuing a number of opportunities for new developments, which really came with the team from LodgeWorks, and they take many different forms. We are certainly pursuing them with the idea that to the extent that we end up developing them ourselves, that we do it with partners, we look for potential buyers for those properties over time, we don’t expect to engage in a extensive development program on our own balance sheet, but we will apply capital to get projects moving and to seek out good partnerships, and I’m very encouraged by the flow that I’ve seen to-date. In terms of some specifics, LodgeWorks earnings as well as margin, I’d say in the quarter about $10 million of incremental EBITDA connects to a LodgeWorks which we are happy with. In term of margins, because LodgeWorks is not truly comparable with the acquisition in last year, our comparable margins will not include the LodgeWorks margins, but if you look at the difference between total margins and comparable margins, totally margins is up I think about 270 basis points and comparable margins up 120. The difference is primary driven by LodgeWorks and the Woodfin acquisition.