VALUATION HIGHLIGHTS

1. Third-Party Owned Hotels constitute 58% of the Trefis price estimate for Hyatt Hotels's stock.
2. Hyatt Owned & Leased Hotel constitutes 42% of the Trefis price estimate for Hyatt Hotels's stock.

WHAT HAS CHANGED?

Hyatt's Q4 2023 Results

Hyatt Hotels saw its earnings for Q4 2023 rise to $0.64 per share, with comparable system-wide revenue per available room rising 9.1% versus the year-ago period. Growth was driven by rising occupancy levels and average room rates, led by strong international travel.

Acquisition of Apple Leisure Group

Hyatt Hotels completed the acquisition of Apple Leisure Group to expand its management & franchise business. As a part of the asset-light strategy, the company has been divesting its owned properties and entering into management service contracts. The company has extended its divestiture plan to repay the debt raised to fund this acquisition.

Nearly 80% of Hyatt's earnings will likely be contributed by the management & franchise business by 2024. Comparing this with a 67% contribution targeted for 2022 the company seems aggressive with its strategy.

The M&F segment earns fees on long-term management or franchise agreements with third-party property owners. Thus, low occupancy rates due to the pandemic pose less of a downside risk to the company's long-term valuation.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Hyatt Hotels value that present opportunities for upside or downside to the current Trefis price estimate for Hyatt Hotels:

Hyatt Hotels

• Average Daily Rates for Owned & Leased Hotels: Since 2011, ADR has risen at an average annual rate of 5% to $230 in 2018. Due to the pandemic, the ADR declined to $174 in 2021. Going forward, the uptrend will continue due to Hyatt's brand strength and ability to manage hotel operations efficiently. If the U.S. economy recovers faster than anticipated, we believe there could be a potential upside of 10% to the Trefis price estimate. This assumes that Average Daily Rates will double by the end of the Trefis forecast period. However, increased competition and higher hotel vacancy rates would act as a deterrent.
• Hyatt Hotels Management And Franchise Revenues: Hyatt Hotels management and franchise revenues have increased at an average annual rate of 5% in the past five years. There could be an upside of over 20% to the Trefis price estimate if the management and franchise revenues continue to grow at the existing pace beyond 2022. However, this segment also poses a significant downside risk as the company plans to add nearly 80,000 rooms to its portfolio in the coming years (the majority in the M&F business).

For additional details, select a driver above or a division from the interactive Trefis split for Hyatt Hotels at the top of the page.

BUSINESS SUMMARY

Hyatt Hotels is a global hospitality company that manages, franchises, owns, and develops a Hyatt portfolio of hotels, resorts, and residential and vacation ownership properties worldwide. Hyatt Hotel's worldwide portfolio comprised 974 properties (235,272 rooms and units) as of Dec 31, 2020.

Hyatt's full-service hotels and resorts operate under five established brands, Park Hyatt, Andaz, Hyatt, Grand Hyatt, and Hyatt Regency. Besides these, the company has two select service brands, Hyatt Place and Hyatt House. In 2013, the company added the Hyatt Ziva and Hyatt Zilara, all-inclusive resort brands, to its portfolio. Hyatt Hotels managed, franchised, and owned properties are also spread across 52 countries worldwide.

Hyatt Hotels derives nearly 42% of its revenue from owned and leased hotels. Each brand represents a different category of hotels, and each brand has a different set of competitors. For instance, Park Hyatt falls under the luxury segment and competes with prominent names in luxury hotels such as Four Seasons and Ritz Carlton. Similarly, Grand Hyatt falls under the upper-scale segment and competes with other brands such as Shangri-La, Mandarin Oriental, and InterContinental.

SOURCES OF VALUE

We believe that the management of third-party-owned hotels is the primary source of value for Hyatt because:

Significantly Higher Margins As Compared To Owned Hotels

The profitability of managed and franchised hotels increases significantly if we ignore reimbursement costs. Moreover, for third-party-owned hotels, the capital expenditures are borne by the property owner. On the contrary, Hyatt's owned property business is capital-intensive due to the high costs involved in developing and maintaining new properties.

Hyatt Hotels has a wide presence on the globe. It operates in 52 countries and 20 of the 25 most populous urban centers worldwide. These properties also provide a platform to expand in other markets and geographies. The management and franchising model works well for most hotel players, and they focus on expanding the same. Thus the third-party-owned hotels will continue to drive the growth for the company in the foreseeable future.

KEY TRENDS

Hotel RevPAR Is Linked To Economic Growth In The U.S.

Hotel operations are usually linked with the macroeconomic environment and tourism in the region. However, to better understand the causal relationship, we ran a regression analysis on the data from 2007 to 2014 with hotel RevPAR (revenue per available room) as the dependent variable and the U.S. personal disposable income growth and international visitors growth as independent variables. We arrived at an R-square of 0.82 for these variables, which, being on the higher side, indicates a relatively high level of correlation. To strengthen our argument, we also computed the F-significance, which defines the significance of independent variables to the response variable. In this case, the F-significance is 0.03, indicating a very strong relationship between these variables. Hence, we know that, historically, both U.S. personal disposable income growth and international visitors' growth are highly correlated with hotel RevPAR growth.

Social Media Is A Big Deal For Brands

The rapid expansion of social media has significantly enhanced the relationship between the hospitality industry and its guests. The reputation, service quality, staff, etc., are determined through various social media platforms, including online travel forums and customer-led ranking sites such as TripAdvisor.

According to a report by a leading hotel chain, brands are mentioned 3.3 billion times in 2.4 million online conversations in the U.S. daily. The report also mentioned that over 33% of the people surveyed consider comments on TripAdvisor to be of great importance in selecting a luxury hotel. This is one of the reasons why the hotel sector is investing heavily in new technologies and building an online social media strategy. InterContinental's 2014 Trends Report states that the rise of technology-led personalization helps shape and tailor guest experiences.

Rise In International Travel

The recovery in global economies and sophisticated financial markets of emerging economies will drive international visitation. The U.S., in particular, will benefit from the Discover America campaign, which will drive the average guest spend as well as the occupancy levels of the hotels. Leisure demand from other countries, such as China, will stimulate global demand for hospitality. The globalization of travel will prove to be a massive force for the hospitality industry. Hyatt Hotels will benefit from its diverse brands and properties spread across the globe.