ALG seasonality drags down Hyatt’s earnings

CHICAGO – While many of the major hotel companies reported 2Q23 beats and increased guidance, Hyatt Hotels Corp. reported lower than expected adjusted EBITDA and missed Street forecasts by 5% to 6%, which analysts said was driven by weaker owned/leased earnings, as well as lower Apple Leisure Group (ALG) adjusted EBITDA and net package RevPAR growth.

“Our outlook remains optimistic, fueled by strong group booking activity during the quarter, resulting in 2024 group pace up 10%. We believe our increasing asset-light earnings mix and free cash flow define a clear path for continued success and enhanced shareholder value into the future,” Hyatt President and CEO Mark Hoplamazian, who added that the company should finish 2023 with close to a 300-basis-point increase in profit margins.

Chief Financial Officer Joan Bottarini added, “Our optimism is fueled by several factors – further recovery in Asia, continued strength of leisure travel, forward bookings for group business, and a record pipeline. We are excited for the future growth opportunities that build upon our successful transformation, unlock value to the sale of our real estate, and continue to deliver shareholder value through an expansion of our asset light earnings mix and free cash flow.”

As for the shortfall with ALG, Hoplamazian added, “We have been now talking about experiencing more normalized demand patterns in the ALG business. So, as we look at that segment and the normalized pattern of seasonality, the first quarter is typically the strongest quarter. We had very strong results in the first quarter with exceptional pricing and flowthrough. In the second quarter, we saw some normalized demand patterns, but still very strong top line.”

Hoplamazian and Bottarini also cited visitation to markets like Cancun and Riviera Maya in Mexico showing negative year over year growth and currency exchange issues eating into profits.

Offsetting the challenges in Mexico are visitation increases in the Dominican Republic (+16%), Jamaica (+11%) and a 600-basis point increase U.S. outbound travel to Europe. Hoplamazian said Americans at Hyatt hotels in Europe have hit 27% versus 21% last year. “The good news is with respect to our all-inclusive hotels, we cover Jamaica, Dominican Republic, the West Coast of Mexico, and Europe, which has been on fire,” he said. “Europe has been leading both business transient and leisure for the last couple of quarters.”

Echoing Hoplamazian, Bottarini added, “We feel really good about the rest of the year given the sustained leisure travel demand that we’re seeing, and the group business that Mark had mentioned earlier really being strong into the second half of the year.”

Hyatt's updated guidance calls for 14% to 16% RevPAR growth; expectations for adjusted EBITDA and ALG working capital adjustments are unchanged at $1.02-$1.07 billion and $180 million, respectively. Adjusted SG&A is +$5 million on higher integration costs, but all other outlook details are unchanged.

Hyatt reported net income of $68 million in the second quarter compared to $206 million in the second quarter of 2022. Adjusted net income was $88 million compared to $51 million in the second quarter of 2022. Net income in the second quarter of 2022 included $251 million of gains recognized on the sales of real estate.

Diluted EPS was $0.63 in the second quarter compared to $1.85 in the second quarter of 2022. Adjusted Diluted EPS was $0.82 in the second quarter of 2023 compared to $0.46 in the second quarter of 2022.

Adjusted EBITDA was $273 million versus the Street estimate at $288 million. The miss was due to shortfalls in the owned/leased and ALG segments, wrote R.W. Baird’s Michael Bellisario.

Comparable systemwide RevPAR increased 15% compared to 2Q22. Comparable owned and leased hotels RevPAR increased 10.1% in the second quarter of 2023 compared to 2022. Comparable owned and leased hotels operating margins were 26.2% in the second quarter of 2023.

Net rooms growth was approximately 6.9% in 2Q23 and the pipeline of executed management or franchise contracts was approximately 119,000 rooms, representing approximately 40% of Hyatt’s existing portfolio. The pipeline increased to 585 hotels (+5), and Hyatt opened 24 hotels with 5,900 rooms in 2Q23.

Hoplamazian added that the first Hyatt Studios is expected to break ground in the next 60 days and not unlike the other major players they are seeing availability of capital for well-sponsored deals coming from local banks.

Hoplamazian also said Hyatt is actively marketing two owned assets and expects to sell $2 billion in assets by the end of 2024.

Shares repurchased was approximately 969 thousand shares for $108 million in the second quarter of 2023.