Currency Headwinds Will Be A Drag On Hyatt’s EBITDA In The Near Term

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Hyatt Hotels

Hyatt Hotels’ (NYSE:H) reported tepid second quarter results last week. Now that the dust has settled, we though we would take a closer look, focusing in particular on the outlook and the company’ changing business model.  Earnings in fact were below street estimates amid currency headwinds and a decline in rates in some geographies, including the Middle East, Paris and Seoul among others. On the brighter side, U.S. RevPAR (revenue per available room) saw steady growth in mid to high-single-digits. Hyatt’s group business is also pacing well in 2015, which is encouraging given that group business accounts for 45% of the U.S. room revenues. Looking forward, we believe that the company’s owned and leased hotels will do well in the near term, primarily reflecting the pickup in demand in the domestic market. However, currency will have a $25 million drag on 2015 EBITDA, according to the company’s management. [1] We currently estimate revenues of about $4.60 billion for Hyatt Hotels in 2015, with EPS of $1.20.

See our complete analysis for Hyatt Hotels

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Owned And Leased Hotels Business Will See Steady Growth But Currency A Concern In The Near Term

Owned and leased hotels is an important segment for Hyatt, despite the company’s increasingly aggressive shift towards the third-party owned hotels model. The company still generates close to 50% of its overall EBITDA from its 41 owned or leased properties. [1] Hyatt is focused on owning only those properties which are located in the most desirable markets and can offer EBITDA sufficient to justify significant capital investment.  This is the trend seen across the industry, which is moving towards this asset-light approach. This refers to hotel operators expanding into management of the third party-owned properties and have a limited exposure to owned properties, which require high capital for development and maintenance.

We estimate that owned and leased hotels account for around 40% of Hyatt’s value. The segment revenues are primarily dependent on ADR and occupancy levels at the hotel properties. The segment ADR and occupancy levels have been on an uptrend over the past few years. ADR grew from $173 in 2007 to $220 in 2014 while occupancy grew from 68% to 76% during the same period. [2] We estimate ADR will be north of $300 and occupancy to be 82% by the end of our forecast period. Most of this growth will come from a better macroeconomic conditions, which will boost business travel and convention demand. Better economic environment will also foster continued growth in tourism, especially in the U.S., where International visitor arrivals have grown at an average annual rate of 8% in the last five years. This trend is likely to continue in the coming years and the rise in international tourism will aid overall demand for rooms in the region.

The hospitality industry is closely linked to the macroeconomic environment in the region. For Hyatt, 80% of its owned and leased hotels are located in the U.S. and therefore it has a strong correlation with the economy at large (see statistical link between economy and RevPAR growth – What Factors Can Drive Hyatt’s Stock Value?). In Q2, the company saw 5% RevPAR growth at its owned properties on a constant currency basis. However, currency has surely taken a hit on the company’s EBITDA and this trend is likely to remain for rest of the year. Having said that, this will have a bigger impact on the company’s managed properties, which are much more widespread throughout the globe.

Furthermore, in a recent surprise move, China devalued its currency against the U.S. Dollar, which will have widespread effects in the near term. Continued dollar strength hurts U.S. exports and weighs on corporate profits. Now that the Fed has been looking forward to raise interest rates, this move from China is likely to push back those plans for few quarters as raising interest rates will likely further push up the dollar. Again, since the hospitality industry is closely linked with the economy, these factors may play their part on the room demand as well as pricing. It must also be noted that a stronger Dollar is a negative factor for inbound tourism in the U.S. It will be interesting to see how things unfold from here. Questions arise, including whether or not the Fed will hike the rates in September? If yes, how much more will Dollar strengthen? How will these measures impact the economy and corporate profits? This in turn will come down the impact on business travel and hotel demand. For now, we estimate the RevPAR for owned hotels to grow 5% to $176 in 2015 as compared to $172 levels seen during the second quarter. [2]

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Notes:
  1. Hyatt Hotels (H) Mark S. Hoplamazian on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 4, 2015 [] []
  2. Hyatt Hotels’ SEC Filings [] []