Hyatt Hotel Earnings Preview: Watchout For Group Booking Trends In Q2

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Hyatt Hotels

Hyatt Hotels (NYSE:H) will report its Q2 2014 earnings on July 31. Earlier in the first quarter, the company saw 31% growth in EBITDA driven by higher business travel and group bookings. [1] We believe the same trend will continue in the near term and drive earnings in the second quarter. It must be noted that Hyatt derives 45% of its revenues from group bookings, which jumped 13% in Q1. [2] Group bookings are more popular in the holiday season and also boost other hotel services such as catering. We expect to learn that the company’s U.S. operations saw continued growth in Q2 due to the inclusion of Easter holidays, which fell in Q1 in the prior year. Growth in group booking will drive average daily rate (ADR) and occupancy levels for the hotel. However, it must be noted that the holiday season also reflects lower volume on the business front as corporate events are usually postponed and this could impact Hyatt’s second quarter earnings.

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Continued Growth In Owned And Leased Hotels ADR And Occupancy

Owned and leased hotels account for approximately 30% of Hyatt’s value, according to our estimates. Owned and leased hotel revenues are primarily dependent on ADR and occupancy levels at the hotel properties. The segment ADR has been on an uptrend and stood at $183 towards the end of 2013 and $192 during the first quarter of 2014. [1] We estimate this figure will grow to $197 towards the end of the year. Similarly, the occupancy level at owned and leased properties has been increasing in the past few years. It stood at 76% in 2013 and we expect it to be around 77% towards the end of the year. Most of this growth in ADR and occupancy level will be driven by the better macroeconomic situation that will boost business travel. Continued growth in tourism will further boost group bookings, translating into estimated owned and leased hotel revenues of $2.39 billion and EBITDA of over $550 million in 2014.

Higher Occupancy Will Drive Management Fees

Hyatt manages and franchises third party owned hotels and charges a fee for the same. Third party owned hotel business accounts for 70% of Hyatt’s value, according to our estimates. We generate estimates for the management and franchise fee as a percentage of room revenues for America, Asia Pacific and Europe. Hyatt currently manages and franchises 150 full service and 248 select service properties in America.  The management fee is much higher for America than all the other regions combined. Hyatt’s management fee is primarily dependent on the revenues and profits of the hotels it manages.

The estimated Americas third party hotels room revenues have increased from $3.26 billion in 2010 to $4.47 billion in 2013. [1] We expect the uptrend to continue driven by growth in the economy and higher consumer spending. Moreover, the rise in international tourism will aid the overall demand for rooms in the region. U.S. consumer spending has been on an uptrend since 2011, moving from $10,373 billion in January 2011 to 10,912 billion in January 2014. [3] Similarly, international tourism is also growing and visitation in the U.S. has increased from close to 60 million in 2010 to approximately 70 million in 2013, according to National Travel And Tourism Office. [4] Given these trends, we forecast room revenues to grow to $4.92 billion and management fees to be around $350 million in 2014. This represents 7% of Hyatt’s overall third party owned hotel room revenues in America.

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Notes:
  1. Hyatt Hotels’ SEC Filings [] [] []
  2. Hyatt Hotels Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, Apr 30, 2014 []
  3. United States Consumer Spending, Trading Economics []
  4. KEY FACTS ABOUT INTERNATIONAL TRAVEL AND TOURISM TO THE UNITED STATES, U.S. Department of Commerce International Trade Administration Industry & Analysis []