Will Hyatt Reach New Heights?

Hotel owners and operators, such as Hyatt Hotels, are having almost as much fun as guests at their resorts because travel demand is expected to continue to rise in 2014.

Jan 6, 2014 at 4:40PM

Today we will look at the strategies employed by one of the hotel industry's leaders, Hyatt Hotels (NYSE:H), and competitors Marriott International (NASDAQ:MAR) and Wyndham Worldwide (NYSE:WYN). Each hotelier is striving to make the most of an increasingly favorable operating environment.

The hospitality industry has made a snappy recovery from the recession, and the forecast remains bright for the foreseeable future. According to TravelClick, which tracks advance bookings of hotel rooms, the one segment of the industry that had been a weak link, group business, is now starting to show strong increases in bookings.

For the 12-month period between November 2013 and October 2014, committed occupancy is 8.4% higher than the previous 12-month period. Transient occupancy is showing a 6.9% year-over-year increase, and group segment occupancy is up even more at 8.9%.

Good revenue growth, outstanding earnings growth
Hyatt Hotels' worldwide portfolio includes 535 properties in 47 countries under brands such as Hyatt, Grand Hyatt, Hyatt Regency, and a new addition, Andaz. More than two-thirds of Hyatt's properties are in the U.S., 16% in the Asia/Pacific region, and 7% in Europe and the Middle East.

For the third quarter, Hyatt reported a 5% increase in total revenue to slightly more than $1 billion compared to the same quarter last year. Direct and selling, general, and administrative expenses were down 110 basis points as a percentage of revenue. The higher revenue and tight reign on costs caused net income to more than double to $55 million.

Comparable systemwide RevPAR (occupancy multiplied by average daily room rate) rose 4.3% compared to the same quarter last year. In the U.S., comparable full-service hotels achieved an outstanding 7.6% in RevPAR, with select (limited) service properties coming in lower, a 4.5% increase.

By way of comparison, third-quarter RevPar was up almost 5% at Marriott and 3.4% for Wyndham's worldwide lodging segment. Domestic RevPAR for Wyndham rose 5.2%.

A more asset-intensive model than some other large chains
Hyatt's strategy is to be an owner, manager, and franchiser of hotel properties. This sets the company apart from competitors such as Marriott and Wyndham, which are primarily franchisers. A franchising strategy helps conserve capital and may allow for faster growth of a hotel chain's worldwide portfolio of brands.

The downside is that the brand can become diluted if all the franchisees are not equally skilled at maintaining excellent customer service.

Hyatt did say in its November 2013 investor presentation that it will "increase focus on franchising, particularly in the United States." This makes perfect sense in today's environment when hotel companies are aggressively trying to gain market share for their brands in response to growing travel demand. Currently only about 20% of Hyatt properties are franchised, with 53% under management agreements and 18% owned and leased.

Serving a wide range of customer groups
Hyatt, like a number of its competitors, has pursued a strategy of having properties that appeal to a broad spectrum of customer segments. Hyatt properties include luxury, boutique, full-service, select (limited) service, extended stay, and residence timeshare.

We tend to think of Hyatt as a primarily upscale hotel chain, but the ADR (average daily room rate charged) numbers reveal that in the third quarter, for the majority of its managed and franchised hotels, the company fits nicely in the mid- to upper-mid price point: 

  • Hyatt Place (161 properties), ADR of $103
  • Hyatt Regency (139 properties), ADR of $165

The company does participate in the luxury segment, but with fewer properties:

  • Park Hyatt (27 properties), ADR of $319
  • Andaz (eight properties), ADR of $277

Marriott properties also have a wide range of ADRs, from $309 for its Ritz-Carlton brand in the third quarter to $173 for its Marriott Hotel segment and $90 for its TownePlace Suites.

Brand diversity like this allows the hotel chain to expand its total universe of potential customers.

Is there really anything new in the hotel business?
Hyatt has made a foray into the increasingly popular all-inclusive resort segment by investing in Playa Hotels & Resorts, which spawned two new brands, Hyatt Ziva and Hyatt Zilara, an adults-only resort concept. The company has also actively pursued the boutique-hotel segment with its Andaz brand. Hyatt management has high hopes that these brands will be "a compelling platform for growth."

Andaz may be an oxymoron, a chain-operated hotel that doesn't feel like you're in a chain hotel, but Starwood Hotels & Resorts Worldwide has been very successful with its own boutique brand, W Hotels. Andaz properties are designed to fit in seamlessly with the local culture, whether it's in New York or Costa Rica. They key to this strategy is to show guests they will receive the high-quality service level they're used to at Hyatt properties but also experience something new and fresh.

Participating in the industry's global gold rush
Hyatt has 215 hotels in its development pipeline compared to just 120 in the fourth quarter of 2009. The pipeline represents nearly 40% of the company's current total number of properties. The company has only added 35 properties year to date, but one was the mammoth 1,641 room Hyatt Regency Orlando, which significantly boosts the company's presence in the group business segment.

Super strong balance sheet and a willingness to return cash to shareholders
In the 2013 investor presentation, the company pointed out it has $1.4 billion of unused borrowing capacity. This, combined with the company's ability to generate cash flow, provides the opportunity for future strategic acquisitions.

Hyatt repurchased more than 700,000 shares of its common stock during the quarter. Since May of 2011, the company has bought back 10% of its common stock.

The bottom line
Given the expectation for continued growth in the hospitality industry, Hyatt is positioned to continue to deliver RevPAR improvements and healthy increases in earnings per share. Its new brands such as Ziva, Zilara, and Andaz will allow the company to attract new customer segments and expand in the lucrative Caribbean and Mexico resort markets. That's why Hyatt's my choice in a booming hospitality industry.

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Brian Hill has no position in any stocks mentioned. The Motley Fool recommends Hyatt Hotels. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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