The Regency Club at the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch, Arizona. Hyatt sold the resort this year as part of its newly formalized asset-light business strategy. Hyatt Hotels
Hyatt Hotels has traditionally been known for its “asset-recycling” strategy where it sells properties to reinvest that money into buying other hotels in markets where the real estate isn’t as expensive.
Now, however, there is a clear indication that the Chicago-based company is moving away from that approach in pursuit of a strategy that the majority of publicly traded hotel companies prefer: asset light.
Over the next three years, Hyatt intends to sell $1.5 billion worth of real estate in what CEO Mark Hoplamazian described as an “evolution of our capital strategy” as it “shifts to a more fee-driven business model.” The company intends to keep any sold real estate in the Hyatt family with long-term management or franchise agreements.
In other words, Hyatt is becoming a lot more like its peers, such as Marriott, Hilton, and InterContinental Hotels Group, in choosing to not spend as much money on real estate, and applying that money toward investments in technology and loyalty. It would also earn more money from management fees.
Hoplamazian said this new strategy is already in play with the sale of two hotels this year for a total of $305 million.
“This was the first step in our staged disposition efforts,” he said, referring to the sales of the Royal Palms Resort & Spa in Phoenix and the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch, Arizona. Hoplamazian added that the company has four more hotel properties that it intends to sell — one to be sold by the end of the year, and the other three to be sold in 2018.
Hyatt is already seeing the possible benefits of going easy on owning real estate. In the third quarter, total fee revenue grew 12.2 percent to $122 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell 13.8 percent in the quarter for Hyatt’s owned and leased hotels. That was driven by what Hyatt cited in its third quarter earnings release as “the lapping of the 2016 Olympic Games, transaction activity, natural disasters, and the shift in the timing of certain Jewish holidays to the third quarter in 2017.”
However, Hoplamazian also noted that the company isn’t planning to abandon its asset-recycling strategy in its entirety. “[The$1.5 billion goal] preserves the level of assets that allows us to maintain asset-recycling activity,” he said.
What Hyatt Plans to Do With That Extra Money
Most hotel companies that choose to go asset-light find that doing so frees them up to invest in technology, loyalty, and to buy up other organizations — and Hyatt is no different in its approach.
Hoplamazian said that while he wouldn’t “get into specific numbers with specific types of spend,” he did note that “recent activities have focused on functionality at the hotel that is enabling colleagues to better engage with guests and simplify interactions with hotel systems.”
That includes investments in Hyatt’s mobile app. He said the company is currently running pilots for keyless entry via its mobile app, even though “penetration across the industry, and usage across the industry is very low.”
Hoplamazian also noted that the company is paying close attention to its World of Hyatt loyalty program, recently bringing on two former Starwood Preferred Guest veterans — Mark Vondrasek and Amy Weinberg — to lead the company’s loyalty efforts.
“They both bring tremendous depth of experience in taking consumer info and data and translating that into initiatives that really add value to the program. You can expect to see some changes over the next year as they spool up their efforts.”
He added, “We’re expanding engagement with our customers and increasing share wallet with them.”
The plan is that Hyatt will continue to make more wellness- and alternative accommodations-related investments. Earlier this year, Hyatt bought Miraval for $375 million and most recently purchased Exhale. It also led an investment round in alternative accommodations platform Oasis.
“Our focus will be on capital-light businesses,” he said, and that “may include hard assets like hotels but if they do, we may look to sell down those assets and focus on growing our fee-based businesses or capital-light earnings streams.”
Investors, likewise, tend to prefer asset-light hotel companies versus asset-heavy ones.
Michael Bellisario, senior research analyst for R.W. Baird, wrote in an investor’s note: “We expect shares to react favorably to this quarter’s earnings report given that results were ahead of expectations and, more importantly, in our view, because of Hyatt’s announcement that it plans to sell another $1.5 billion of real estate over the next three years, which builds on last quarter’s commentary (and investor optimism) about Hyatt gradually shifting its focus to more of a fee-driven business model.”
He ended the note by saying, “Hyatt remains our top hotel brand pick.”
Third Quarter Earnings
Hyatt beat Wall Street expectations for the third quarter but, as the company anticipated, it did see a softer third quarter in comparison to the first half of the year.
“We’re pleased to report that, despite facing some headwinds, we produced solid operating results building on a very strong first half of the year,” Hoplamazian said. “We expected the third quarter to be the weakest of the year compared to last year.”
The company’s earning decreased 73.4 percent to $16 million in the third quarter compared with the same period last year. Comparable system-wide revenue per available room (RevPAR) was up 1.6 percent. Excluding impact from a shift in the Jewish holidays and natural disasters in the third quarter, domestic RevPAR was up 1.3 percent.
Hyatt raised its outlook for the rest of the year, increasing its guidance range for comparable system-wide RevPAR from 1 to 2 percent to 2.5 to 3 percent. The company also expects net income for 2017 to fall between $193 to $210 million.