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Hyatt Hotels Corp  (NYSE:H)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Hyatt Hotels Corporation's Earning Conference Call. My name is Tiffany and I'll be your conference operator today. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Brad O'Bryan, Treasurer and Senior Vice President, Investor Relations and Corporate Finance. Please proceed.

Bradley O'Bryan -- Treasurer and Senior Vice President, Investor Relations and Corporate Finance

Thank you, Tiffany. Good morning, everyone, and thank you for joining us for Hyatt's third quarter 2018 earnings conference call. I'm here in Chicago with Mark Hoplamazian, Hyatt's President and Chief Executive Officer; Pat Grismer, Hyatt's Chief Financial Officer; and Joan Bottarini, who will be taking over the CFO role effective November 2. Mark will begin our call today with highlights of our third quarter operating results and an update on our growth strategy. Mark will then turn the call over to Pat who will provide more detail on our financial results for the quarter as well as an update on our full year outlook for 2018 and a preview of 2019. We will then take your questions. As a reminder, all references to RevPAR results included in our discussion today are calculated on a comparable and constant dollar basis.

Before we get started, I would like to remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued late yesterday, along with comments on this call, are made only as of today, October 31, 2018, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in last night's earnings release. An archive of this call will be available on our website for 90 days per the information included in last night's release.

With that, I'll turn the call over to Mark.

Mark Hoplamazian -- President and Chief Executive Officer

Thank you, Brad. Good morning, and welcome to Hyatt's third 2018 earnings call. Before covering our quarterly results, I'd like to comment on two important announcements that we made earlier this month. On Monday, October 8, we announced that Pat Grismer will be leaving Hyatt to take a position as Chief Financial Officer at Starbucks. While we are certainly sorry to see Pat go, Starbucks is a great company and I know Pat is excited about the opportunity to put his capabilities to work there going forward. I'd like to express my deep appreciation for the value Pat has brought to Hyatt during his tenure here. He has provided exceptional leadership as we've evolved our strategy over the last couple of years and he has elevated the finance function here at Hyatt in a meaningful way.

We also announced, in the same communication, that Joan Bottarini will become our CFO effective November 2. John has been with Hyatt for 19 years and has served in a number of important financial leadership positions, most recently as the finance head of our Americas region, where she was a key and integral member of the leadership team for our largest operating region. I worked closely with Joan for many years and have great confidence in her abilities to lead our finance organization and carry on the tradition of effective finance leadership that Pat has demonstrated.

Turning now to the second important announcement. Earlier this month, we agreed to terms regarding the acquisition of Two Roads Hospitality for a base purchase price of $480 million, with the possible investment of up to an additional $120 million contingent on finalizing certain terms related to hotel management agreements and conversions. We expect to close the transaction over the coming two to three weeks and the determination of the additional consideration, if any, will be finalized within 120 days of closing.

Consistent with our capital strategy, we are utilizing proceeds from the sale of assets under our $1.5 billion sell-down of owned real estate to fund this acquisition of an asset-light growth platform and expect to be able to complete the initial funding of the transaction with available cash on hand. We are thrilled to welcome Two Roads into the Hyatt fold, expanding the Hyatt family with nearly 17,000 team members of Two Roads and adding an impressive collection of distinctive luxury and lifestyle properties to our portfolio. The acquired Two Road's portfolio encompasses approximately 14,000 hotel rooms and spans four well-established brands and a new micro lifestyle brand.

The currently opened and operating Two Roads hotels are all in the luxury or upper upscale segments and thus enhance our ability to serve our current guests and customer base with diverse offerings. With this acquisition, we will have a combined portfolio of 19 brands across more than 800 properties around the world, which we believe will enhance the value of what World of Hyatt offers our guests. Importantly, developer interest in the Two Roads brands has been high, resulting in their significant pipeline of signed deals totaling approximately 5,000 rooms with a large number of additional rooms in advanced stages of negotiation.

Based on the growth evidenced by Two Roads pipeline, as well as synergies that we expect to realize with this acquisition, we anticipate the transaction will yield an implied multiple of approximately 12 to 13 times adjusted EBITDA by 2021. This acquisition is consistent with our criteria for new growth investments and our strategy for overall capital deployment. We are effectively deploying a meaningful portion of proceeds from our permanent sell-down of owned real estate, which has been monetized at an average multiple of about 16.5 times adjusted EBITDA into a high growth, capital light hotel management platform. This will further accelerate our evolution to a higher proportion of fee-driven earnings over time. I would also point out that we're completing this meaningful growth investment in a year where we expect to return a record level of $1 billion of capital to our shareholders.

Moving onto our quarterly results, I'm pleased to say that we delivered another solid quarter with adjusted EBITDA of $175 million. Adjusting for the year-over-year impact of transactions and other non-recurring items, adjusted EBITDA increased approximately 14% on a constant currency basis, driven by another solid quarter of growth in management and franchise fees, good results from our owned and leased portfolio, and continued reductions in SG&A. Systemwide RevPAR increased 2.8%, led primarily by increases in average daily rate.

During the third quarter, we delivered net rooms growth of 7.6% on a year-over-year basis, marking four consecutive quarters of year-over-year net rooms growth of at least 7%, making Hyatt an industry leader in global growth. Notwithstanding another very strong quarter of hotel openings, our pipeline of signed deals stands at approximately 73,000 rooms, an increase of about 6% compared to the same time last year and the equivalent of nearly 40% of our existing portfolio.

Before Pat provides more detail on our third quarter results, I will spend a few minutes sharing the progress we're making in driving guest engagement, building on what I shared on our last two earnings calls regarding the acceleration of our growth in Greater China and our select service business. These three initiatives are at the heart of what we're doing to drive the growth of our core business.

I will start by defining what we mean by guest engagement. When we talk about guest engagement, we mean an intense focus on guests centricity that is characterized by our engagement with guests on their terms, not ours. Our goal is to develop direct relationships with guests over time not just during a given stay and to serve that relationship by delivering tailored experiences. We believe this approach has differentiated our brands and we'll continue to do so in ways that will allow us to strengthen guest loyalty over time.

The most powerful vehicle for us to directly engage with our guests is the World of Hyatt platform. We launched the World of Hyatt in early 2017 and have since introduced enhanced or differentiated offerings for our members in a number of areas. During our second quarter call, I discussed our recently announced exclusive alliance with small luxury hotels of the world or SLH, which includes several hundred independently owned luxury hotels around the world with a significant presence in key European markets where there are fewer Hyatt Hotels.

At the time, we indicated an intent to launch the alliance with participating hotels by the end of the year. I'm pleased to announce that by mid-November, World of Hyatt members will be able to earn and redeem World of Hyatt points for eligible bookings at participating SLH hotels, including properties in the UK, Italy, and Greece. We will continue to add more hotels in many new markets to the World of Hyatt platform in the coming months. The enhancements we made are resonating with our guests, leading to an increase in World of Hyatt member room night penetration of approximately 250 basis points on a year-to-date basis. Additionally, new member enrollments are up 45% versus prior year.

Our co-branded credit card is another important part of the World of Hyatt engagement platform and you will recall that we relaunched the card in late June of this year. Spending on the card is up over 25% this year and members who have joined since the relaunch are driving the most significant increases in spend. We also recognize the importance of digital connection with our customers. We recently strengthened our digital leadership and welcomed new members of the digital team with deep experience in the area. We are committing a significant portion of our share of proceeds from last year's sale of Avendra toward the enhancement of our digital capabilities for the benefit of our entire system of hotels. Growth in our digital direct booking channels is outpacing all other channels and we are on track to add new features and functions to our mobile platform over the next 12 months in order to drive even higher levels of digital engagement with our guests, which we expect will further enhance direct booking activity.

Another aspect of guest engagement that I'd like to highlight is wellness and well-being. As you know, this has been a key focus of ours, leveraging our acquisitions of Miraval and Exhale last year. As I've described before, our focus in this area is based on listening to our guests and responding to what they've indicated as an area of increased emphasis in their lives. We believe our unique position in this area within the hotel industry affords us the ability to engage with our guests in ways that build deep and meaningful connections that drive loyalty over time. With the recent integration of Exhale into World of Hyatt, both the Miraval and Exhale brands enhance the value of membership in World of Hyatt.

One final example of how we are broadening our engagement with our guests is the acquisition of Two Roads Hospitality. With the acquisition, we are entering more than 20 new markets and adding distinctive experiences through the compelling brands that we're buying. Many of the new additions to the Hyatt portfolio are beautiful resort hotels in a number of new locations and this significantly expands the holiday and leisure options for our guests.

I touched on a number of ways in which we are driving guest engagement as a means of building loyalty and driving direct bookings. It's an area of significant focus for us as a means of further differentiating our brands, building relevant scale, and strengthening our competitive position. I look forward to sharing future developments as we demonstrate the power of our investments and strategic alliances.

I'd like to close by saying that we are pleased with our third quarter 2018 results and expect a solid fourth quarter to close the year out and position us for another good year in 2019.

And, with that, I'll now turn the call over to Pat.

Patrick Grismer -- Chief Financial Officer

Thank you, Mark, and good morning, everyone. I will begin by providing more detail on our third quarter results and will then share an update on our full year expectations for 2018, as well as a preview of 2019. Late yesterday, we reported third quarter net income attributable to Hyatt of $237 million and earnings per share of $2.09 on a diluted basis. Adjusted EBITDA for the quarter was $175 million with systemwide RevPAR growth of 2.8%. The impact of transactions over the past 12 months resulted in a net decrease in adjusted EBITDA for the quarter of approximately $17 million compared to 2017. Excluding this unfavorable transaction impact and other non-recurring items, our adjusted EBITDA grew approximately 14% on a constant currency basis. This growth was led by net rooms growth of 7.6%, solid management and franchise operating results, strong SG&A management, and another quarter of impressive performance at our owned and leased hotels.

I'll now highlight our segment results, starting with our managed and franchise business where we delivered solid fee growth with base incentive and franchise fees increasing approximately 9% on a constant currency basis compared to the third quarter of 2017. Total fees also increased approximately 9% on a constant currency basis. After reflecting the impact of adjustments related to the new revenue recognition standard, we've now delivered nine consecutive quarters of high single to low double digit growth in our total fees, supported by solid RevPAR performance and consistently strong rooms growth.

In the third quarter, our managed and franchise business accounted for 56% of adjusted EBITDA before corporate and other, up from 51% in the third quarter of 2017 and roughly 45% in the third quarter of 2016. This is clear evidence of the deliberate steps we've taken to transform our earnings profile and we expect this evolution will continue in the years ahead, aided now by our acquisition of Two Roads high growth fee platform.

I will now share additional perspective on each of our three lodging segments, starting with the Americas, which accounted for approximately 73% of our management and franchising adjusted EBITDA in Q3. The Americas segment delivered full service RevPAR growth of 3% while select service RevPAR declined 0.7% for the quarter as US supply growth outpaced demand growth in the upscale category. Total US RevPAR grew 1.4%. Net rooms growth for the region was approximately 6%. Base incentive and franchise fee growth of approximately 2% drove adjusted EBITDA growth of about 2% for the quarter, both on a constant currency basis.

Full service group rooms revenue in the US increased approximately 5% in the quarter with solid in the quarter, for the year bookings and increases in both group room nights and rate. The growth of our group business in the third quarter stemmed primarily from associations and small groups, offsetting lower revenue from corporate groups which adversely impacted banqueting revenues for Q3 compared to Q2 levels. Our group revenue expectations for the full year are consistent with our previous expectations and remain at a low single-digit increase for the year.

US group production for all years was down about 4%. In the year, for the year business was up approximately 6% for the quarter, which marks the fourth consecutive quarter of increased in the year, for the year bookings . However, this was offset by lower bookings into 2020 and beyond. Looking ahead, group booking pace for all years remains up with almost 70% of our targeted 2019 US group business already on the books at the end of the quarter. US full service transient revenue was flat for the quarter, displaced by the growth in group business that I mentioned earlier, with decreases in room nights, offset by strong rate increases.

I'll now move on to our Asia Pacific segment, which accounted for about 17% of our management and franchising adjusted EBITDA in Q3. Full service RevPAR for the segment increased 2.5% in the quarter, driven by a combination of occupancy and rate. RevPAR growth in Greater China was in line with the segment average. Japan stood out in the segment with RevPAR growth in excess of 6%. Net rooms growth for the segment was approximately 12%, led by 13% net rooms growth in Greater China. Together, RevPAR and strong rooms growth, drove an increase in base incentive and franchise fees of approximately 10% in constant dollars. Adjusted EBITDA grew approximately 18% on a constant currency basis, reflecting strong fee growth with ramping hotels providing a significant boost.

Now moving to our Europe, Africa, Middle East and Southwest Asia segment, which accounted for approximately 10% of our management and franchising adjusted EBITDA during the third quarter, full service RevPAR increased 11%, driven by strong occupancy and rate increases. Net rooms growth was 9%. A continued rebound in Europe, coupled with the new hotel openings and the benefit from FIFA World Cup attendance, drove an impressive 23% increase in base incentive and franchise fee revenue for the quarter and an increase in adjusted EBITDA of 21%, both on a constant currency basis.

I'll now cover our owned and leased business, which accounted for approximately 44% of our adjusted EBITDA before corporate and other in Q3. Owned and leased RevPAR increased an impressive 5.3%. However, due to transaction activity over the past year owned and leased segment adjusted EBITDA was down approximately 12% in constant currency. Excluding the impact of these transactions, segment adjusted EBITDA in constant currency would have increased approximately 2%. Our third quarter consolidated comparable owned and leased margins increased 70 basis points versus prior year. Excluding the impact of a non-recurring business interruption settlement received during Q3 of 2017, comparable owned and leased margins would have increased approximately 100 basis points.

Before moving on to our guidance update, I'd like to briefly comment on our asset recycling activities. During the third quarter, we purchased Hyatt Regency Phoenix for $140 million and Hyatt Regency Indian Wells for $120 million. We also sold Hyatt Regency Mexico City for a total of $405 million inclusive of an investment in an unconsolidated hospitality venture and adjacent land intended for the development of a Park Hyatt Hotel. When you combine these transactions with Hyatt Regency Coconut Point, which we sold earlier this year for approximately $200 million, as well as some smaller dispositions, including the liquidation of interest in several joint ventures, you'll see that we are in a fairly sizable net seller position under our asset recycling program this year. As we've indicated previously, this could result in our being in a net buyer position from an asset recycling perspective in a future year, depending on the timing of certain investment opportunities.

Moving on to shareholder capital returns, on a year-to-date basis, through October 26, we have returned approximately $788 million to shareholders, inclusive of dividends. $147 million remains on our existing share repurchase authorization and our Board of Directors has authorized an additional $750 million in share repurchases. Given the successful execution of our capital strategy, combined with strong operating cash flows and the attractive buying opportunity that the recent market pullback provides, we are increasing our 2018 full year shareholder capital return guidance by approximately $200 million to approximately $1 billion, inclusive of quarterly dividends.

I will conclude my prepared remarks by providing an update on our outlook for the year as well as a preview of key growth drivers for 2019. In our 8-K filing on October 1, we updated our full-year guidance to reflect the sale of Hyatt Regency Mexico City and the other Q3 transactions I mentioned earlier, along with changes in our outlook for foreign currency translation. Today, we are reaffirming our previously disclosed full-year adjusted EBITDA range of $765 million to $775 million. Please note that these estimates exclude the impact of our expected acquisition of Two Roads Hospitality.

Mark discussed key elements of our Two Roads acquisition earlier and I'd like to add some color regarding our near-term cost and earnings assumptions for the transaction. We expect non-recurring integration-related costs totaling approximately $25 million to $30 million to be recorded in SG&A, likely over the next 12 to 15 months. We are refining our integration plans, which could affect the timing and amount of these expenses. However, we will update you each quarter on costs incurred to-date as we proceed with the integration. Assuming a mid-November closing, our current estimates indicate a net reduction of approximately $5 million to our 2018 adjusted EBITDA, inclusive of integration costs. For 2019, we expect the adjusted EBITDA contribution, prior to non-recurring integration-related costs, to be approximately $25 million to $30 million. After including integration costs, we expect the net contribution to 2019 adjusted EBITDA to be in the range of $10 million to $15 million. We will refine these estimates when we provide our full guidance for 2019 on our Q4 earnings call in February.

With respect to systemwide RevPAR, we are tightening our full year growth expectation for 2018 from a range of 3% to 4% to 3.25% to 3.75% given the improved visibility to where we expect to end the year. Looking ahead to next year, we expect full year 2019 systemwide RevPAR growth to be in the range of 1% to 3%. We are reaffirming our prior guidance for net rooms growth of 6.5% to 7% for 2018, but I would note that we have a large number of hotels scheduled to open near the end of the year with the possibility of openings in December that were previously scheduled for 2019.

With respect to 2019 net rooms growth, we are also reaffirming our prior indication of at least 7.5% growth. However, should previously scheduled 2019 openings accelerate into 2018, we could see a slightly higher 2018 growth rate and a slightly lower 2019 growth rate, with the combination of the two years showing exceptionally strong net rooms growth. I would like to point out that we expect a record number of signings of management and franchise agreements in 2018, supporting strong net rooms growth well into the future.

Finally, we are reducing our guidance for full-year capital expenditures to approximately $325 million, reflecting a shift of certain costs into 2019, which we expect will show higher levels of spending, given the number and nature of projects under way at that time. We'll provide full year 2019 CapEx guidance during our Q4 earnings call. You can find additional detail on our updated guidance for 2018 in our Q3 earnings release.

Before I conclude, I'd like to say that I've thoroughly enjoyed my time at Hyatt and I'm proud of what we've accomplished as a team to unlock shareholder value over the past couple of years and to position the company for even stronger and more capital efficient growth in the years ahead. And while I'm excited to started a new chapter in my career, I'm thrilled to be passing the CFO baton to an accomplished finance leader in Joan Bottarini. Joan and I have been partnering to ensure a smooth transition in recent weeks and I'd invite Joan to share a few words on this call.

Joan Bottarini -- Senior Vice President, Finance-Americas

Thank you, Pat, and good morning, everyone. I appreciate the kind words from both Mark and Pat and would like to say that I'm excited to take on the role of Chief Financial Officer and work with the management team to execute on our well-established strategy. I look forward to meeting all of you soon as I begin to get out on the road and engage with the investment community. Along those lines, I'd like to announce that we intend to host an investor conference on Tuesday, March 5, in New York, where we will further discuss our long-term growth strategy and financial outlook. I look forward to seeing all of you there.

Mark Hoplamazian -- President and Chief Executive Officer

Thank you, Joan. To conclude, we are very pleased with our third quarter results marked by solid RevPAR growth and strong net rooms growth. As we continue to successfully execute our capital strategy, including the anticipated closing of the Two Roads acquisition later this month, we are driving a continued evolution of our earnings base with heavier weighting toward our high growth asset-light, fee business. Additionally, we are pleased to be returning approximately $1 billion of capital to shareholders this year.

With that, I'll turn it back to Tiffany for Q&A . Thank you.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of David Katz with Jefferies. Your line is open.

David Katz -- Jefferies -- Analyst

Hi, good morning, everyone or good afternoon.

Mark Hoplamazian -- President and Chief Executive Officer

Good morning.

David Katz -- Jefferies -- Analyst

I wanted to -- good morning. And best of luck to all concerned. I wanted to just go back to the Two Roads acquisition, which I appreciate the color on from the context that it's bit of an -- it's somewhat unusual. How would you have us think about the streams of revenue and profits that will generate, how should we be thinking about returns on it and how should we think about the opportunities for you to grow it, specifically is there an embedded growth opportunity with it that we can talk about, please?

Mark Hoplamazian -- President and Chief Executive Officer

Thank you, David. This is Mark. I'll start and turn it back to Pat to talk about how we think about the financial profile. We're really excited about this acquisition. By way of reminder, we have not closed the acquisition yet, so what we will discuss is anticipatory. But I guess, first and foremost, you asked about growth and that is probably the primary rationale or primary point that I would make in terms of why this makes sense for us. It's a collection of very strong brands that are performing very well, but with an embedded pipeline and we believe that there is significant further growth embedded in these brands globally.

I would say, in particular, the Alila brand in Asia has, with a small base to start with, generated a tremendous amount of interest among developers in Asia, and we have a very, very strong network in Asia among business travelers. What Alila brings to us in Asia, for example, is significant additional representation in resorts and it will really round out the World of Hyatt really for us, for our guests. So we're very, very excited about the growth potential and believe that there's accelerated growth opportunity moving forward.

Secondly, based on the repositioning of the brands within the Two Roads portfolio, they operate in the same sort of average daily rate range that our higher end hotels and luxury hotels operate. And by derivation and by knowledge, we look at the customer base that they're serving and we believe that it is an enhancement to our current customer base and represents a significant measure of additional opportunities for our existing guest and customer base.

The third thing I would say is that these are attractive segments. If you look at what's going on in the world, lifestyle brands and boutique brands are growing at very good pace up and down the chain segments and we believe that these are very compelling brands that have already proved their mettle in terms of garnering interest from outside third-party developers. The final thing I would say is, it fits our strategy because it's asset-light. We are buying a management platform and brands and that's what we intend to leverage going forward. So that's really how I would frame how we're thinking about it and what we see the opportunity to be.

Patrick Grismer -- Chief Financial Officer

And David, just to build on what Mark has said, how we're thinking about it from a financial perspective is, first of all, the acquisition we expect will be immediately accretive in the first full year of operations, that is in 2019, even with the significant impact of one-time transition-related and integration-related expenses. We believe that from a valuation perspective, it's more appropriate to look at year three, which is 2021, by which time a lot of the growth that Mark has referred to will materialize. And when we look at the expected earnings in year three in relation to our anticipated investment, that yields an implied multiple of 12 to 13 times. And when you consider how we have raised funds in order to make this investment, we have monetized real estate assets under our permanent asset sell-down program at an average multiple of 16.5 times adjusted EBITDA. So we see this as a tremendous opportunity to create value for our shareholders, while as Mark said, accelerating the evolution of our earnings profile in a way that increases our weighting toward the high growth fee business.

David Katz -- Jefferies -- Analyst

Perfect. And if I can just sort of follow that up with a detail, the structure of the management contracts, are those relatively similar or garden variety to what we would see here in the United States as we think about modeling them? And then I just wanted to ask for, any color that you may have specifically on China and what you may be seeing over there since that was an area that you mentioned in your commentary. Thank you.

Mark Hoplamazian -- President and Chief Executive Officer

Okay. So there is two distinct questions. I'll cover the first one and I will turn it to Pat for the questions --

David Katz -- Jefferies -- Analyst

Sorry for that.

Mark Hoplamazian -- President and Chief Executive Officer

No, that's OK -- on China. So on the management arrangements that are in place currently, it's a fully managed portfolio. So there are management agreements and the management agreements, I would say, that are in place right now are representative of the kinds of management agreements you would see for these types of properties in the respective markets, meaning that if you look at the way in which the management agreements are structured in Asia, that differs from how they might be structured in certain markets in Latin and South America and also different to the US, but there is nothing inconsistent with what we see as the marketplace and what the management agreement portfolio looks like for these types of properties in place. So that's the answer to your first question. Let me turn it to Pat to talk about China.

Patrick Grismer -- Chief Financial Officer

Certainly. With respect to China, as I mentioned earlier, our Greater China RevPAR growth in Q3 was broadly in line with the segment average, which was 2.5%, but it's important to note that there were a number of one-off impacts in the quarter for our Greater China business. There were some large hotel renovations, there was a shift in the timing of the Mid-Autumn holiday festival and some significant storm and earthquake impacts. So when we normalize for these one-time items, Greater China RevPAR growth was actually in the strong mid single digit range, but we would acknowledge that that represents still a modest deceleration from where we were in Q2 on a normalized basis. We're not concerned about that, however, but we are monitoring the situation closely. We remain very confident in the long-term growth potential of Greater China. We like our position there today and we believe we're well positioned to capitalize on the markets enormous growth potential over the long term.

David Katz -- Jefferies -- Analyst

Perfect. Thank you very much.

Bradley O'Bryan -- Treasurer and Senior Vice President, Investor Relations and Corporate Finance

Can we move to the next question, please?

Operator

Your next question comes from the line of Jared Shojaian with Wolfe Research. Your line is open.

Jared Shojaian -- Wolfe Research -- Analyst

Hey, everybody. Thanks for taking my question. So I wanted to ask about some of the asset sales you've done in 2019 -- I'm sorry, in 2018. Just sort of the impact that's going to have on 2019 EBITDA and then, as you look at the Two Roads contribution for 2019 as well. Assuming that that might sort of offset, is there any reason as we sit here today to think that sort of the long term projections that you've outlined, that 6% to 11% EBITDA growth, can't be achieved off of the guidance that you've given this year and maybe you can just help me understand the puts and takes between the assets you've sold this year and the impact to next year?

Mark Hoplamazian -- President and Chief Executive Officer

Certainly. Thank you, Jared. When you consider all of the transactions that we've completed this year under our permanent asset sell-down program, the net impact to full-year adjusted EBITDA is on the order of $100 million. We expect the impact of those transactions next year to be on the order of $20 million with a lot of that concentrated in the first quarter, given the timing of our portfolio sale to Host. Setting aside the transaction impacts, we remain very confident in the earnings growth model that we had outlined, as you mentioned, mid single digit, low double digit growth, given the strength of our fee growth engine in particular, which has helped us overcome the earnings headwinds from our transactions.

Jared Shojaian -- Wolfe Research -- Analyst

Great, thank you. That's helpful. And I think you mentioned US production and US crude production for all years was down about 4% in the quarter. I mean, in the prior quarters I think you had been running more in a high single digit, double digit type of range. Can you just sort of elaborate a little bit on what really changed quarter-over-quarter sequentially from what you had been seeing?

Mark Hoplamazian -- President and Chief Executive Officer

Sure. I guess, first I'll just make a comment about the quarter itself in terms of group revenues. It was a profile of significant growth on the association side and some reduction in room nights on the corporate side -- corporate group side, but ADR increases on both sides of that equation. So association business, for example, was up in the low double digits for the quarter. That's realized revenue in the quarter. In terms of production, we had a very strong in the year, for the year production level in the quarter, which was really encouraging, sort of up mid single digits and while total production was down for the quarter, it was really concentrated in outyears in 2020 and 2021. So our outlook for 2019, for example, remains in low single digit range, which is consistent with what we said before, maybe strengthened a bit and 2020 remains very strong, up in the high single digit range in terms of pace at this point.

So, as we look at the profile of what we've seen on the group side, we continue to see very good lead production and also continued strength in corporate bookings for future periods. So I would say to you that we don't -- while we had a decline in total production in the third quarter, it's not anything that we see that leads us to be concerned that we're not going to see continued solid performance on the group side.

And just for clarity, I mentioned that corporate was down in the quarter and association was up significantly. If you look at it on a year-to-date basis, corporate is up year-to-date and association is down a bit in total revenue on a year-to-date basis. So again, no real evidence or cause for us to be concerned on the corporate side. In particular, we saw some significant strength in pharma and in the finance and banking sectors. Pharma was up in the double digit, low double digit range. So those are all indicators that we feel good about.

Jared Shojaian -- Wolfe Research -- Analyst

Okay, thank you very much.

Operator

Your next question comes from the line of Smedes Rose with Citi. Your line is open.

Smedes Rose -- Citi -- Analyst

Hi, thanks. I just wanted to understand a little bit better on Two Roads. How did -- so the properties that are managed now that are kind of quote, unquote, independent and are maybe under the destination management platform, I mean, I guess they have an option whether or not they want to join Hyatt and sort of how do you prevent, say, leakage in the existing platform and from the pipeline opportunity going forward? And just with that, your integration cost, at least at first blush seem kind of high relative to the first year contribution and I'm wondering maybe you could sort of talk about what some of the costs are related to. Is it technology, is it key money, like how does that maybe break down a little bit?

Mark Hoplamazian -- President and Chief Executive Officer

Thanks, Smedes. I'll start and turn it back to Pat to address the second part. With respect to the portfolio, let me be a little bit more granular and say that the four distinct and operating brands where they are open and operating hotels are Alila which is primarily in Asia, Joie de Vivre, Destination Hotels and Thompson Hotels. Those are the four currently operating brands. There is a micro lifestyle brand called tommie which has two hotels under construction at this time. We're very excited about entering that segment, but they're no open hotels at this point.

The nature of the deal is that we are acquiring the platform and with the platform comes their contract assets or their contractual asset base, which means the management agreements that they've got in place. We've said and we've disclosed the fact that there is a base purchase price and potential additional consideration and that potential additional consideration largely relates to individual circumstances in which we and the Two Roads ownership groups are working through various topics to finalize what the exact portfolio will look like that we close on. And so there is no optionality with respect to the underlying contract base and in areas in which we identified topics that we needed to spend more time with the Two Roads ownership group on, we structured a variable part of the total purchase price. So that's how we're managing together and with great visibility on exactly how we will define and close on the final portfolio.

So, with that, let me turn it back to Pat for the rest.

Patrick Grismer -- Chief Financial Officer

Thank you, Mark. So, Smedes, with respect to the $25 million to $30 million that I referenced in relation to integration-related costs, I would say there are four primary buckets. The first would be reorganization costs, which would encompass both severance and relocation associated with the restructuring of the organization as we integrate it into Hyatt. Second would be transition services from the existing team to bridge us to the integration and to provide a seamless transition into Hyatt. The third would be, as you mentioned, IT-related costs as we look to bring Two Roads Hotels onto our systems so that they can fully derive the benefits associated with the Hyatt affiliation. And the third would be some selected brand conversion costs. So there are a number of buckets there that are fundamental to our ability to realize full value in terms of the synergies that we gain with the integration of this company.

Mark Hoplamazian -- President and Chief Executive Officer

So let me just clarify one thing based on what Pat -- how Pat just described it, our current plan is to continue to operate these four -- actually five brands. So we are not retiring any brands, we're not consolidating brands at this point. So we have no plans to do that. We are working through how we are going to organize the brands and we are moving toward establishing a lifestyle management division within the company to focus on the segment and support the development efforts going forward as well. So we'll have more to say about that in the future and first we need to close and we will be describing that in more detail as we move forward. So I wanted to just be clear about the intention to retain the brands.

Smedes Rose -- Citi -- Analyst

Okay, I appreciate that. I just wanted to ask you too, on your decision to buy Phoenix and Indian Wells kind of highly seasonal markets. Was there any particular underlying motivator there? Were there contracts coming due and this is the way to lock down the brand, was the pricing particularly attractive in your view? I was just sort of interested that those would be the markets that you expect to recycle into with some maybe --

Mark Hoplamazian -- President and Chief Executive Officer

Well, you're bating a thousand, Smedes. I think, first, there were contract term issues that we were facing. Second, we believe that they are -- each of the two hotels is a strong performer in their respective markets with additional opportunity with some application of additional capital by way of renovation in the case of Phoenix and some changes to the area programing in Indian Wells that we believe will further enhance our ability to maximize the potential of those properties, especially as it relates to group business in those markets. So it was a combination of a contract term issue combined with reasonable pricing and future opportunity to enhance value. And I would just add that, these are the types of things that we fully expect -- types of properties that we would fully expect to recycle over time. So these are not bought by way of thinking about a permanent addition to our real estate base. So they will be available for recycling once we get through the capital projects that we are planning for those properties.

Patrick Grismer -- Chief Financial Officer

And, Smedes, what I would add to what Mark has said is that the existing management agreements at those two properties also had development restrictions that impeded our ability to capitalize on new growth opportunities. So as we purchased those hotels, those restrictions are now gone, clearing the path for us to take advantage of those opportunities.

Smedes Rose -- Citi -- Analyst

All right, thanks. And, Pat, best of luck to you in your new gig.

Patrick Grismer -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Patrick Scholes with SunTrust. Your line is open.

Patrick Scholes -- SunTrust -- Analyst

Hi, good morning.

Mark Hoplamazian -- President and Chief Executive Officer

Good morning.

Patrick Scholes -- SunTrust -- Analyst

Good morning. Two questions. The first is on your own margins. You said 70 basis points on the global 5% RevPAR, roughly 100 split into one-time comp issues. How were those margins specifically of your domestic hotels in the quarter?

Mark Hoplamazian -- President and Chief Executive Officer

I'm sorry, Patrick, I didn't catch the last part of your question. How did those hotels perform in relation to?

Patrick Scholes -- SunTrust -- Analyst

No. Sorry if I'm breaking up here. How did you -- what was the owned hotel margin growth for the domestic hotels in the third quarter?

Patrick Grismer -- Chief Financial Officer

So, you're asking US versus non-US properties. Is that right?

Patrick Scholes -- SunTrust -- Analyst

Yes, correct.

Mark Hoplamazian -- President and Chief Executive Officer

Sorry, it's just a little tough to hear you, so that's why we are asking for clarification.

Patrick Grismer -- Chief Financial Officer

Patrick, thank you for the question. Normally, we don't break out the performance of US versus international within our owned and leased portfolio. What I will say is that the portfolio is dominated by US properties and so what you're seeing is largely a reflection of what happened in the US. What I would highlight and I believe we disclosed this in our earnings release is that we did see better performance out of our international owned and leased properties from a RevPAR growth perspective than we did for our US based owned and leased hotels. And so as a consequence, we would have seen better margin performance at those hotels as well.

Patrick Scholes -- SunTrust -- Analyst

Okay. And then my follow-up question, please. I'm actually on a cellphone, please let me know if you cannot hear me. As we think about your 1% to 3% RevPAR guidance next year in relation to the approximately 100% -- 100 basis points of margin growth this year on 5% RevPAR in the third quarter, is it fair to think flat owned margins next year, flat maybe slightly up, slightly down, is that a reasonable assumption?

Patrick Grismer -- Chief Financial Officer

I would say that's a reasonable assumption at this stage. As we've said before, we typically target around 3% RevPAR growth in order to hold our margins flat. However, we've also benefited from significant productivity initiatives that have been launched in the last couple of years. We see those initiatives sustaining into the next few years here. So even though we are guiding conservatively to a RevPAR growth range of 1% to 3% across the entire state, not breaking out specifically what is owned and leased, we do anticipate that margins next year would be at least flat, but we'll provide further guidance, in fact full guidance for 2019 on our Q4 earnings call in February.

Patrick Scholes -- SunTrust -- Analyst

Okay. Very good. Thank you.

Patrick Grismer -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Thomas Allen with Morgan Stanley. Your line is open.

Thomas Allen -- Morgan Stanley -- Analyst

Hey, good morning. Just on the Americas in the US segment, can you just talk high-level how you're thinking about kind of the current state or kind of backdrop of RevPAR trends? Obviously, you had strong full service RevPAR growth but select service was declined and is that a function of just the hurricane comps, is it a function of supply growth that you highlighted in your prepared remarks? I mean, how are you thinking about the general backdrop here in the US in Americas? Thanks.

Patrick Grismer -- Chief Financial Officer

Thanks, Thomas. I would say, overall, we're feeling good about demand levels really across transient end group. If we dig into that a little further, we look at our managed corporate account business in the third quarter, which was very strong, sort of up in the mid to high single digits. And so we think that the health of the business traveler is good. We're looking at, based on some selected resort results over the course of the third quarter, we continue to see good demand into resorts and as we've said previously, we really think that this is a reflection of our customer base, which is a relatively higher end traveler, the ADR levels in our resorts tend to run higher in the other -- the rest of the portfolio. And so we believe there is -- they are derived from the continued health of that segment. So I think -- we feel good about demand. On the select service side, in particular, 2018 is a significant year of growth in supply and it is a year in which supply is exceeding demand growth. We do see supply growth tapering in 2019 and I think that most of what we're seeing across the market is primarily supply driven at this point.

Thomas Allen -- Morgan Stanley -- Analyst

Perfect. Helpful. Thank you. And then, you highlighted in your prepared remarks how you could be a net buyer next year. Do you think -- I assume, you're talking more about single property transactions and physical asset transactions, but how are you thinking about more brand M&A? And just a clarification, can you use kind of -- are there tax benefits buying other brands or is that only hard asset for hard asset? Thanks.

Mark Hoplamazian -- President and Chief Executive Officer

Okay, thanks. First of all, when Pat referenced the potential for us to be a net buyer in future periods, he was talking about as part of the recycling bucket of asset transactions and therefore, yes, more focused on single assets. With respect to tax profile, the 1031 exchange opportunity, which is a like-for-like exchange, only applies to real estate asset to real estate asset. It doesn't apply to real estate assets being sold and then redeploying in other investments.

Patrick Grismer -- Chief Financial Officer

And then, Thomas, as to your question regarding Hyatt's appetite for future brand acquisitions, that remains something that we are focusing on. We're very excited about the acquisition opportunity with Two Roads and there will be tremendous focus on the successful integration of the next several months here, but the company continues to look at other opportunities like Two Roads that would involve the integration of brands that are complementary to our existing portfolio, while bringing in a new management fee platform.

Thomas Allen -- Morgan Stanley -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Shaun Kelley with Bank of America. Your line is open.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, everyone, or good afternoon, I guess. So just wanted to touch on sort of the 2019 outlook a little bit closer. In terms of the 1% to 3%, could you give us your high level thinking about how you think international trends kind of compare to domestic trends? Appreciate that you probably don't want to break it out in too much detail, but just sort of what your kind of baseline thinking is for that.

Patrick Grismer -- Chief Financial Officer

Absolutely. Thank you, Shaun. We are anticipating that the international business will be relatively stronger and the US business relatively softer within that range of 1% to 3%, but we believe that it's appropriate at this point in time to guide relatively conservatively, just given the uncertain business environment and the fact that we have a full year ahead of us. But what I would also say to reinforce this range of 1% to 3% is that our group revenue pace is up in the low single digits currently and our corporate rate negotiations we expect will deliver 2% to 3% rate growth. So we feel very comfortable with that outlook, again recognizing that the US will be a bit softer and our international markets will be a bit stronger.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for that, Pat. And then, second thing was just a couple of clarifications on Two Roads. The main area was, I think this is really building off of a question earlier, but these types of contracts often can be terminated by the owner at -- sort of at will or in certain circumstances. So I guess, the question that I have is simply, is built into the contingent consideration, I guess, the $120 million, Mark, that you referenced, is that -- does that include a baseline assumption around some kind of properties that may stay in and others that may terminate? So is there some churn that's built directly into that $120 million, is that really what you're trying to say?

Mark Hoplamazian -- President and Chief Executive Officer

We can't really go into details about the composition of what's being worked through at this point that relates to the potential additional consideration. What I will say is that, we believe that based on how we have assessed the current portfolio, and how it's performing, first of all, the hotels are doing well, and so the brands are working which is important. We look at the ability to leverage our sales organization, revenue management, systems, and also processes. We believe that the application of World of Hyatt will have a significant impact and our customer base similarity is such that we can -- we feel we can make an immediate impact. We also have centralized service benefits in reservations and purchasing. And finally, on the distribution channel front, we believe that we can both improve mix and the commission structure, and we think that a number of these things can be implemented rapidly.

And so our feeling, sentiment about this in our plan is that we will be able to -- with appropriate planning and migration, with as much stability and seamlessness as we can muster, which means that we are not going to rush through it, we're going to do it the right way, we believe that we will be in a very solid position to continue have the existing property portfolio that we finally close with in place for an extended period of time and also accelerate the growth for the brands. So that's about all I can say and I am not prepared to go into more detail about the mechanics of the additional consideration.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

That's plenty. And just one clarification for everyone, but the $25 million to $30 million of integration costs, is that going to be included in your definition of both SG&A and adjusted EBITDA and guidance or is that something that's going to be stripped out or called out?

Patrick Grismer -- Chief Financial Officer

Well, it will definitely be called out. Each quarter, that number will be called out, but the integration costs we anticipate will be recorded as part of our adjusted SG&A and therefore will be part of our adjusted EBITDA, but those numbers will be called out separately. I would also mention that there will be some transaction-related costs that will sit below adjusted EBITDA and therefore, will impact net income and those will likely be characterized as special items.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Joe Greff with JPMorgan. Your line is open.

Joseph Greff -- JPMorgan -- Analyst

Thank you, guys. First off, congratulations to Pat and Joan as well. Best wishes to both of you.

Patrick Grismer -- Chief Financial Officer

Thank you.

Joseph Greff -- JPMorgan -- Analyst

With respect to Two Roads, can you just talk about the background of the transaction or the deal? How was that sourced, was it through competitive process with other competing bids? And then, with regards to your comment about this should generate -- created multiple of 12 to 13 times on 2021 or an 8% EBITDA yield, is that on the $480 million or the $600 million and do you include that $25 million to $30 million of integration costs. And when you look at systemwide RevPAR dollars for Two Roads, how does that compare to your existing portfolio on a managed and franchise basis. Is it a premium or a discount? Thank you.

Mark Hoplamazian -- President and Chief Executive Officer

Okay, I'll cover the first and third points and leave to Pat to answer the second. With respect to the deal process, the owners of the company ran a process. They had a financial advisor as did we, and it was a competitive process. And I think not much more to say about that. On the RevPAR front, I mentioned earlier that the ADR level that the hotels operate at under the Two Roads brand are in very similar ranges to our upper upscale and luxury hotel base by region. So if you break it out by region or by country, they look very similar to where we are as an ADR matter. As a RevPAR matter, it depends on the brand. Some of the brands are at/or around our levels, the Hyatt branded levels and others have somewhat lower occupancy. And so the RevPAR profile might vary just depending on location of individual assets or by brand.

With respect to how we're thinking about yield, I'll leave Pat to describe that.

Patrick Grismer -- Chief Financial Officer

Joe, so to clarify, the 12 to 13 times EBITDA for year 2021, that would not include or give effect to the one-time transition related and transaction costs. So we are strictly looking at the anticipated incremental adjusted EBITDA in relation to our investment, which will range from $480 million to $600 million.

Mark Hoplamazian -- President and Chief Executive Officer

And your question was, is it based on $480 million or $600 million, the answer is, our expectation generally is that it will slide. The answer doesn't change, depending on where we end up in our minds, between $480 million and $600 million based on how we structure the transaction.

Joseph Greff -- JPMorgan -- Analyst

Thank you.

Bradley O'Bryan -- Treasurer and Senior Vice President, Investor Relations and Corporate Finance

Tiffany, I think we'll take our last question now.

Operator

Your last question comes from the line of Michael Bellisario with Baird. Your line is open.

Michael Bellisario -- Robert W. Baird -- Analyst

Good morning.

Mark Hoplamazian -- President and Chief Executive Officer

Good morning, Michael.

Michael Bellisario -- Robert W. Baird -- Analyst

You guys mentioned I guess 250 basis points of increased penetration from the World of Hyatt guests. Are we still in the low-30% range there? And then, what's the run rate that you guys see for that number to move higher and eventually get closer to where a few of your peers are at today?

Mark Hoplamazian -- President and Chief Executive Officer

Michael, so right now the way we track room night penetration, it leaves us in a range of about a bit over 37%. And if you think about how you might relate that back to what we had disclosed at the beginning of this year in our 10-K, the basis on which we are measuring our room night penetration figures has changed to conform to how other major hospitality companies are doing it. We've got -- we received additional information and we've changed the basis on which we are going to be measuring going forward. We will provide more detail on that in our next 10-K filing. But right now, I would say on a more comparable basis than we have been measuring in the past, we are running a bit over 37%.

And then, with respect to progression, the ongoing work that's been done to enhance the value proposition for World of Hyatt continues to provide growth, solid growth over time. And so we absolutely do believe that we will continue this path going forward. And we've got other initiatives that we continue to work on which we will provide updates on when appropriate. So we have a high degree of confidence that we have got significant positive momentum now and we will be able to actually leverage that further.

It is true that structurally, by virtue of the fact that we have such a strong and sizable group business, larger in proportion than some of our competitors who are looking at penetration levels with a higher transient mix, that we are structurally -- we have lower eligible room night base from which to measure penetration simply by virtue of the fact that we have more group business. And of course, we've talked about the fact that we think that that group business is critical to us and really important to us in terms of how we perform and compete over time for business travelers who are also ultimately going to be members of World of Hyatt and stay during leisure occasions. So -- but structurally, there are some differences that you would need to take into account as you think about penetration levels.

Patrick Grismer -- Chief Financial Officer

And, Michael, to build on what Mark has said, one of the things I like to highlight is that when you think about where we're at from a room night penetration perspective today or where we have been in recent years with our loyalty program, and you consider the amount of headroom that we have with all of the improvements we're making to the program itself through new partnerships and alliances like small luxury hotels of the world and other things that we have in the pipeline, as Mark mentions, and you consider that even with the program that we have, we have consistently outperformed our key peers from a RevPAR growth perspective and we've outperformed on a net rooms growth rate basis, I'm very excited about how all of these improvements and enhancements will help to sustain our continued out performance. So I think great progress to-date, more coming down the pike, and a lot of excitement for the future and how this improved loyalty program is going to enhance our ability to continue to win.

Michael Bellisario -- Robert W. Baird -- Analyst

Thanks. That's very helpful.

Operator

I will now turn the conference back over to our presenters.

Bradley O'Bryan -- Treasurer and Senior Vice President, Investor Relations and Corporate Finance

Thank you, Tiffany. And thank you to everybody for joining our call today. We look forward to talking to you soon.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 66 minutes

Call participants:

Bradley O'Bryan -- Treasurer and Senior Vice President, Investor Relations and Corporate Finance

Mark Hoplamazian -- President and Chief Executive Officer

Patrick Grismer -- Chief Financial Officer

Joan Bottarini -- Senior Vice President, Finance-Americas

David Katz -- Jefferies -- Analyst

Jared Shojaian -- Wolfe Research -- Analyst

Smedes Rose -- Citi -- Analyst

Patrick Scholes -- SunTrust -- Analyst

Thomas Allen -- Morgan Stanley -- Analyst

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Joseph Greff -- JPMorgan -- Analyst

Michael Bellisario -- Robert W. Baird -- Analyst

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