Hyatt Hotels' Growth Holds Steady in the First Quarter

Investors have been gaining confidence in Hyatt Hotels (H 1.46%) lately as the chain benefits from healthy industry growth in key hospitality markets around the world. Financial returns are also rising as management shifts operating strategies toward collecting a higher proportion of franchise fees over owning and managing its own properties.

Hyatt's first-quarter 2019 results demonstrated how that approach can protect profitability even under modest growth conditions.

Let's take a closer look.

EPS = earnings per share. Data source: Hyatt's financial filings. 

What happened this quarter?

Hyatt's double-digit sales gain was powered by a quickly expanding base of hotels, along with rising revenue from existing locations. Earnings were supported by robust franchise and management fees, although reported profits dived due to the impact of a large group of asset sales in the prior-year period.  

Image source: Getty Images.

Key highlights of the quarter include: 

• Revenue per average room night (RevPAR) increased by 2%, or about the same rate as in the prior quarter. That expansion pace represents a slowdown from what investors saw in early 2018, but it's consistent with the 2019 outlook management issued in mid-February.
• Occupancy rates weakened slightly, due to sluggish results in the U.S. market. Hyatt offset that decline with higher room prices and increased guest spending at home and in other key markets like China and Latin America.
• Management fees rose 7% to $136 million.
• Hyatt opened 16 hotels with a total of 3,120 rooms during the quarter. That figure was lifted by the acquisition of the Two Roads lodging brands, which closed in late 2018.
• Adjusted profit margin fell to 29% of sales from 31% a year ago, mainly due to charges associated with integrating the Two Roads franchise.

What management had to say

Executives expressed confidence that the business will keep growing thanks to the combination of higher franchise fees, an expanding hotel base, and solid occupancy rates at existing locations. "We had a strong start to the year," CEO Mark Hoplamazian said in a press release, "highlighted by continued growth of management and franchising fees."

Hoplamazian added, "We expect growth in both systemwide RevPAR and hotel rooms to sustain upward momentum in our lodging fees as we continue to evolve to an asset-lighter business model."

Looking forward

That business model evolution includes a planned $1.5 billion of asset sales over the next few years, but Hyatt didn't close any real estate deals under that initiative in the first quarter. While investors might see big capital moves here at any time, it's more useful to follow core growth metrics like RevPAR and hotel room levels to judge how the business is doing.

On that score, Hyatt affirmed all of its key 2019 outlook metrics and still expects core revenue to rise by between 1% and 3% versus 3.1% last year. The chain is also on pace to add 80 new hotels representing room growth of between 7% and 7.5%. Those expansions should combine with rising management fees to deliver adjusted earnings -- which help account for volatile real estate gains and losses -- to land between $780 million and $800 million, compared with $777 million in 2018.