Hyatt Hotels Corp (H) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 Hyatt Hotels Corporation's earnings conference call. My name is Mariama and I will be your operator for today.

(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, Mr. Brian Karaba, Treasurer and Senior Vice President, Investor Relations and Corporate Finance. Please proceed.

Thank you, Mariama. Good morning, everyone, and thank you for joining us for Hyatt's third-quarter 2016 earnings call. I am here in Chicago with Mark Hoplamazian, Hyatt's President and Chief Executive Officer; Pat Grismer, Hyatt's Chief Financial Officer; and Amanda Bryant, Hyatt's Director of Investor Relations.

Mark will begin today's call by providing a high-level review of our third-quarter results, before turning to a more in-depth discussion of our global loyalty program, recent group transient trends, and our asset recycling efforts. Mark will then turn the call over to Pat, who will provide details on our financial performance this quarter and an update on our full-year outlook. We will then take your questions.

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 early this morning, along with the comments on call, are made only as of today, November 3, 2016, 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 press release section of our investor relations link and in this morning's earnings release. An archive of this call will be actually on our website for 90 days per the information included in morning's release. With that, I'll turn it over to Mark to get started.

Thanks very much, Brian. Good morning, everyone, and greetings from Chicago, home of the World Champion Chicago Cubs. Our hats are off to an amazing series with an amazing team, the Cleveland Indians, but after 108 years, it's nice to celebrate the Cubs' victory.

So welcome to our third-quarter 2016 earnings call. Overall, we had another quarter of solid growth, demonstrating the strength of our brands. Despite more modest levels of RevPAR growth over the course of the year, we delivered sequential improvements in quarterly earnings growth.

After adjusting for foreign currency translation and the net impact of transaction activity, adjusted EBITDA increased approximately 12% during the quarter. This growth was fueled by the performance of our hotels in the US, coupled with effective cost management. Our recently opened Grand Hyatt Rio de Janeiro also contributed to this quarter's success.

With respect to top-line results, system-wide comparable constant dollar RevPAR increased 2.5% in the quarter, including impressive growth in the United States of 3.4% for our full service hotels and 4.6% for our select service hotels. Our owned and leased portfolio RevPAR growth was more modest, as RevPAR increased by 1% on a constant currency basis due to softness in New York, Paris, and Zurich, in particular.

According to Smith Travel Research, in the third quarter, the luxury and upper upscale segments in the US increased 1.5% and 2.5%, respectively. In that context, our US full service growth of 3.4% was very encouraging. Further, our US select service growth of 4.6% was even more impressive when considering the fact that the upscale segment in the US was up only 2% during the quarter, according to STR.

For the seventh consecutive quarter, we grew market share as measured by RevPAR index across a majority of our hotels. As an example, in New York, where market conditions remain soft, our hotels increased market share in the mid single-digit range, with all but two of our hotels in New York City gaining share during the period.

Moving now to our fee business, our management and franchise fees grew nearly 7% globally on a reported basis. Additionally, each of our three regions experienced bottom-line growth, with the Europe, Africa, Middle East, and Southwest Asia region experiencing a decline in revenue. Pat will provide more details on our performance by region later in the call.

Development continues to be an important growth driver for Hyatt. We opened 11 hotels in the third quarter, including the Park Hyatt Hangzhou, Andaz Ottawa, and the Hyatt House in Portland Oregon, which is an important new addition to our presence in that growing market. Since September 30, 2015, we've increased our base of open and operating hotels by 9%, from 594 hotels to 645 hotels. Through three quarters, we've now opened 41 new hotels for the year, and we remain on track to establish a record year of openings for our Company, as we expect to open more than 60 new hotels by year end.

The opening of Andaz Ottawa highlights the strong momentum that our Andaz brand is enjoying. By the end of 2016, we expect to open four new Andaz hotels this year in four different countries. With these openings, we will have materially increased the footprint of the brand with extremely well-located urban and resort hotels in key markets, demonstrating our focus on growing with intent. Further, as discussed during our second-quarter call we sold the Andaz 5th Avenue hotel at a solid value, while at the same time, securing a long-term management agreement with a strong owner.

Finally, we were very happy that Andaz Wailea was recently named by Conde Nast Traveler the top-rated resort in Hawaii, which is a tremendous honor. Our congratulations to the team there for this phenomenal accomplishment. We are proud of the Andaz success story and expect this momentum to continue with another nine new hotels in our base of executed contracts expected to open in 2017 and beyond.

Speaking of growth, our base of executed contracts remained at 285 hotels and 61,000 rooms at the end of the third quarter, compared to 260 hotels and 56,000 rooms at the end of the third quarter of 2015. Included in the deals we signed during the quarter was the 1,264-room Hyatt Regency Seattle, a $400 million development in downtown Seattle, which is across the street from the planned $1.6-billion expansion of the Washington State Convention Center. This new managed property will be the largest hotel in the Pacific Northwest and the fifth largest hotel in the Hyatt system. We believe our ability to grow both our base of open and operating hotels and our base of executed contracts by almost 10% concurrently over the last 12 months demonstrates how well-positioned we are to sustain the growth of our business in the future.

Now that I've provided an overview of our third-quarter results, I want to take a moment to discuss our new global loyalty program, provide insight into recent group transient trends, and update you on our asset recycling efforts. So let's start with our new global loyalty program called World of Hyatt, which we just announced last week.

World of Hyatt will arrive March 1, 2017, and will celebrate our loyal guests by understanding the people, places, and experiences at the heart of their world. The program's three elite tiers Discoverist, Explorist, and Globalist, reflect the aspirations of the World of Hyatt community as they travel and expand their world.

Hyatt Gold Passport, our existing loyalty program, has enjoyed very strong growth in its membership base. In fact, after the Marriott-Starwood announcement last year, we ran a Hyatt Gold Passport tier match promotion to encourage Starwood preferred guest members to experience Hyatt, and we matched over 30,000 customers. Approximately 50% of the status-match customers were either new to Hyatt or increased their stay activity subsequent to the tier match.

In addition, our loyalty program continues to fuel transient growth. Over the last four years we have seen a 330-basis point increase in the percentage of eligible transient room nights occupied by Hyatt Gold Passport members.

Based on feedback from our loyalty program members and insights from guests, we've structured the World of Hyatt with more attainable rewards, introducing an additional tier to reward engagement more frequently and more meaningful benefits at every level. We fully expect World of Hyatt to build upon the success of Hyatt Gold Passport and further differentiate us from our competition.

Turning now to group and transient trends in the quarter, during the third quarter, US full service transient room revenue grew by about 2%, driven primarily by rate. Leisure transient was stronger in the quarter than business transient, a trend we see continuing into the fourth quarter.

Group room revenue in the United States was up roughly 6% for the quarter, benefiting from the shift of the Jewish holidays into October as compared to 2015. As for group bookings for future periods, the quarter was strong for us in terms of total group production, which we find encouraging. Total group production in the third quarter for all periods was up almost 8% versus last year, while total year-to-date reduction was up 4% versus the same period in 2015. The strong base of business that we booked in the quarter, however, was substantially all related to 2017 and beyond, which is consistent with the short-term booking trends that we have experienced all year.

In-the-year for-the-year business declined approximately 12% in the third quarter, and is down over 6% in the year-to-date comparison. The weaker in-the-year for-the-year numbers reflect two dynamics. First, we had constrained available meeting space to sell, as we had robust prior bookings, particularly for the third quarter. And second, the weaker in-the-year for-the-year numbers also reflect slowing demand for short-term bookings by corporate clients.

Looking forward, booking pace for the fourth quarter is down slightly versus last year, reflecting a challenging quarter that includes both the Jewish holidays and the US presidential election. 2017 group pace is up almost 5% versus last year, driven primarily by rate, and approximately two-thirds of projected group business in 2017 is already on the books. 2018 group pace is up approximately 6% year over year, with over 40% of the business on the books at this time.

With respect to our corporate transient business, our corporate rate negotiations have been encouraging, showing good year-over-year growth. As such, although many of our group and transient metrics appear to be positive as we approach 2017, we're closely monitoring the underlying dynamics in order to optimize our performance.

Before turning the call over to Pat, I also want to touch on our continued execution against our asset recycling strategy. As we discussed during our second-quarter call in July, we completed the acquisition of the 119-room Royal Palms Resort and Spa in Arizona and added it to The Unbound Collection by Hyatt. During the quarter, we also sold the 319-room Hyatt Regency Birmingham in the United Kingdom for approximately $51 million, which represents a cap rate on net operating income of approximately 8.5% and an EBITDA multiple of approximately 10 times on trailing 12-month results. We will continue to operate the hotel under a long-term management agreement.

Recall that we acquired the hotel for approximately $44 million in 2012 at 2012 exchange rates, at which time, the hotel was being marketed for sale with our management agreement at risk. We believe that the ability to achieve an IRR in the mid teens in pound sterling terms while preserving a long-term management agreement is an excellent execution of our asset recycling strategy.

With the success of this strategy, we continue to look for opportunities to reinvest proceeds from dispositions like Hyatt Regency Birmingham to create new value for our shareholders, and we believe the current market is right for this. Throughout the year, we've observed, and continue to observe, a robust hotel transaction market in which we have been an active participant and plan on continuing to be active. Our strong balance sheet is an important tool in that regard, and we remain committed to our investment-grade standing in order to sustain the strength.

During the quarter, two unconsolidated hospitality ventures in which we would or held an interest each sold a Hyatt Place hotel. We received approximately $7 million of cash combined, and as a result of these two sales, recognized a $5-million gain recorded within equity earnings. We continuously monitor our joint venture portfolio for economically attractive opportunities to sell our equity interests or acquire our partners' equity interests to simplify our ownership of hotels over time and to put us in a better position to recycle the capital we have invested in our JVs over time. We expect this activity to continue in the fourth quarter and beyond.

Finally, given that Playa Hotels & Resorts publicly filed a registration statement on Form S-1 in September, I want to provide an update on our investment in Playa, as well as update on the performance of our Hyatt Ziva and Hyatt Zilara hotels, which form a part of that joint venture. As disclosed in Playa's Form S-1, we agreed to convert up to $50 million of our preferred stock into common stock. Note that as of the end of the third quarter, we had a $334-million preferred stock investment in Playa, which represents the fair value of our investment at the balance sheet date, inclusive of accrued but unpaid dividends.

In a separate transaction, Playa redeemed $41 million of our preferred stock for cash in October of 2016. Depending on the outcome of Playa's IPO efforts, we may have additional redemptions and conversions in the months ahead.

We're very pleased that the Hyatt Zilara and Hyatt Ziva brands continue to perform well in the third quarter. The Hyatt Zilara and Hyatt Ziva in Cancun have received very guest satisfaction scores, and on TripAdvisor, these two hotels are now among the top-10 hotels in Cancun. Our all-inclusive brands are resonating very well with our loyalty program members, and we've been very successful at expanding our group business at the resorts. We remain very pleased with our partnership with Playa and look forward to continuing to build on that success.

In summary, we're pleased with our third-quarter performance on multiple fronts. However, we are also mindful of the headwinds we continue to face, which include pressure on margins due to lower nominal growth in RevPAR, particularly at owned and leased hotels; weakening business transient travel; continued weakness in France, exacerbated by the impact of renovations; and ongoing concerns regarding the spread of the Zika virus. We expect these headwinds to persist into the fourth quarter.

Further, as Pat will discuss in more detail, although the impact of our net 2016 transaction activity positively impacted earnings this quarter due mainly to the impact of the Olympic games on the Grand Hyatt Rio, we expect the impact of these transactions to swing negative in the fourth quarter, in part due to the impact of our hotel dispositions. Despite these headwinds, we're making good progress on our strategies to build industry-leading brands, drive development, gain market share, and execute on our asset recycling strategy, and innovate our guest loyalty program with the launch of the World of Hyatt.

I hope to see many of you at our investor conference at the Grand Hyatt New York on November 22, where we will provide an update on our long-term growth strategies and expectations for 2017. And with that, I'll now turn the call over to Pat.

Thank you, Mark, and good morning, everyone. Today, I'll share additional color on our third-quarter results and provide an update on our full-year outlook. Earlier today, we reported third-quarter net income of $62 million, or earnings per share of $0.47 on a diluted basis. Adjusted EBIT was $192 million, up 13% from prior year on a constant currency basis, and up 12% from prior year when further adjusted for transaction impacts which I'll discuss later.

Before I cover the results of our operating segments, I'd like to highlight our 2.5% increase in comparable systemwide RevPAR growth in constant dollars for the third quarter. During the quarter, we removed Hyatt Regency Paris Etoile from our pool of comparable hotels because of its longer-than-expected renovation. This is consistent with the process we have in place to determine which hotels are truly comparable.

Due to the size of the hotel, at 950 rooms, our largest hotel in Europe, as well as the extent of the renovation, with over half of the rooms decommissioned for renovation currently, the impact to our systemwide comparable RevPAR growth was significant. Had we included Etoile in our comparable hotel group, comparable systemwide RevPAR growth we have been 2.1% for the third quarter, reflecting both the rooms that are out of service as well as the challenging market conditions in France.

Additionally, as Mark mentioned, the shift in timing of Jewish holidays favorably impacted our third-quarter results, yielding a 60-basis point benefit to RevPAR. We expect this year-over-year benefit will reverse in the fourth quarter.

Now, on to our operating segments. First, I'll cover our owned and leased business, which also includes our joint ventures, and then I'll review the results of our managed and franchised business.

Our owned and leased business, which accounted for approximately 55% of our adjusted EBITDA before corporate and other expenses in Q3, delivered modest top-line growth but strong bottom-line growth in the quarter. RevPAR at comparable owned and leased hotels underperformed our systemwide RevPAR growth, delivering growth of 1.0% in constant dollars, led by strong performance at our Hyatt Regency hotels in Orlando and Mexico City, as well as at Grand Hyatt San Antonio. However, Park Hyatt Paris, Park Hyatt Zurich, and Grand Hyatt New York delivered softer results in the quarter.

Encouragingly, our comparable owned and leased margins increased 80 basis points to 23.2% in Q3, principally due to nonoperational items, but also supported by meaningful productivity gains at many of our hotels, which helped to partially mitigate the impact of inflation in wages and benefits. I appreciate the significant efforts of our hotel operating teams to drive profitability improvements while maintaining high levels of guest service.

As has been the case throughout 2016, our joint ventures delivered strong results in Q3, with our pro rata share of JV adjusted EBITDA increasing nearly 10% in the quarter, driven by strong performance at Andaz Wailea and our Playa joint venture, which Mark discussed earlier. RevPAR at Andaz Wailea increase almost one-third versus last year, fueling a market share increase of more than 25%.

Adding it all up, adjusted EBITDA out for our owned and leased business is increased approximately 10% in constant dollars. This included a $2-million benefit from our net year-over-year transaction activity, as the positive impact of Grand Hyatt Rio in Q3 more than offset the impact of the dispositions of Andaz 5th Avenue and Hyatt Regency Birmingham. During the Olympic games in August, occupancy at Grand Hyatt Rio was approximately 99%, and the hotel was first in its competitive set in both ADR and RevPAR. This momentum carried into the Paralympic Games in September, yielding a strong quarter for the hotel overall.

Unfortunately, conditions were more challenging at the Confidante. The Miami Beach market continued to be under pressure due to increased hotel supply and Zika concerns. As evidence of this, the RevPAR of the Confidante's competitive set has decreased nearly 15% year to date. We believe these are short-term challenges and expect that the Confidante will realize its full potential over the long term.

As Mark mentioned earlier, we expect the net year-over-year impact of transactions to turn negative in Q4 from an adjusted EBITDA perspective, as was the case for the first and second quarters of this year. This, combined with softer performance at our owned and leased hotels compared to the systemwide average, will weigh on owned and leased margins and adjusted EBITDA in the fourth quarter.

I'll now turn to our managed and franchised business. Total fee revenue in Q3 increased nearly 7% in constant dollars compared to the same quarter in 2015. Importantly, over half of the increase was driven by new hotel openings, demonstrating upward momentum with our development program. The remainder of the increase was driven by higher incentive fees, reflecting improvements in our existing hotels' profitability. As evidence of this, I'd like to highlight that while base fees increased by approximately 4%, incentive fees grew by nearly 9% in the quarter, and impressively, franchise fees increased over 12% due to the addition of new and converted hotels.

I'll now talk about each of our three regions starting, with the Americas, which accounted for over 75% of our management and franchising adjusted EBITDA in Q3. The Americas delivered a solid third quarter, with adjusted EBITDA of approximately 4% versus last year. Comparable full service RevPAR increased 3.8% in constant dollars, including an approximate 110-basis point benefit from the timing of Jewish holidays. This marked the seventh consecutive quarter that we gained share versus our comp set at our US full-service hotels. Los Angeles and Hawaii in particular experienced strong quarters, while Washington DC, Miami, and New York were under pressure.

Our select service hotels continued to perform exceptionally well, with the US RevPAR increasing 4.6%. Over 60% of our select service hotels in the Americas gained share in the quarter. Considering that comparable Americas select service RevPAR increased approximately 7% in the third quarter of 2015, our third-quarter results this year represent a two-year stack of approximately 12% for the rapidly growing Hyatt Place and Hyatt House brands.

Which brings me to development. Our select service brands are expanding at a very fast pace in the Americas region. While our total managed and franchised hotel rooms in the Americas increased 5% on a rolling 12-month basis as of the end of Q3, our Hyatt Place and Hyatt House brands increased an impressive 11% combined.

This demonstrates not only the outstanding customer appeal of these brands, but also the strong economics that these brands offer our hotel owners. We are very pleased with these results and excited about the significant growth opportunities ahead. This also demonstrates that while the US is the most heavily penetrated hotel market in the world, there remain meaningful opportunities for expansion, and our select service brands are well positioned to capitalize on this.

Moving on to our managed and franchised business in Asia-Pacific, which accounted for approximately 14% of our management and franchising adjusted EBITDA in Q3. The region delivered an increase in adjusted EBITDA of approximately 17% on a constant currency basis, driven by newly opened hotels and increased fees from existing hotels. Comparable full service RevPAR increased 1.8% for the quarter on a constant currency basis, led by increases in occupancy.

Although Southeast Asia, Hong Kong, and Korea had strong quarters, Japan's performance was adversely impacted by the strengthening yen which dented inbound tourism. Additionally the implementation of a value-added tax in China negatively impacted ASPAC's RevPAR growth by 150 basis points the third quarter.

New hotel development continued to be a source of significant growth in Asia-Pacific, with our managed and franchised base of hotel rooms up nearly 13% at the end of the third quarter compared to Q3 2015. The comparable rate of growth of hotel rooms for mainland China alone was over 30%. We're very pleased with the development momentum we have in China and believe we're just getting started as we move aggressively with our leading brands to capitalize on the rapid rise in travel and tourism there, catalyzed by the explosive growth of China's consuming class.

And finally, our managed business in Europe, Africa, the Middle East, and Southwest Asia, which accounted for approximately 8% of our management and franchising adjusted EBITDA in Q3. The region delivered an increase in Q3 adjusted EBITDA of approximately 14% on a constant currency basis, despite the fact that the region experienced a decline in comparable full service RevPAR of 7.8% on a constant currency basis. This highlights the region's efforts to control costs in a challenging environment. Note that the region's comparable full service RevPAR would have declined an additional 300 basis points had we not removed Hyatt Regency Paris Etoile from the comparable hotel group for the reasons I outlined earlier.

France, Turkey, and Africa continue to deal with significantly lower visitation due to ongoing security concerns. Based on our past experience, we expect these are temporary conditions, and we anticipate occupancies will rebound in due course. Encouragingly, India and Eastern Europe continue to be areas of regional strength.

Despite challenges on the RevPAR growth front, development in the region continued to be robust as our managed hotel room base increased nearly 6% at the end of Q3 on a rolling 12-month basis. In India alone, our room base grew by approximately 9% over the same 12-month period.

Now that I've covered the key drivers of adjusted EBITDA for the quarter, I'd like to provide additional color on our guarantee on certain managed hotels in France. In the quarter we incurred a $13-million expense related to the performance guarantee for these hotels. This compares to approximately $1 million of income which we recognized from the same performance guarantee in the third quarter of 2015.

As mentioned earlier, the performance of these hotels was impacted by ongoing security concerns throughout France and the continuing renovation at the Hyatt Regency Etoile. Our full-year expectation for this guarantee expenses remains broadly in line with the disclosure in our most recent 10-K, which indicated total expenses in excess of $50 million for 2016. As a reminder, this expense is reported below adjusted EBITDA.

I will now turn to our balance sheet, which continues to be a source of strength for us. As of quarter end, we maintained $1.5 billion of debt on our balance sheet, with another approximately $1.5 billion available under our revolving credit facility. Additionally, we ended the third quarter with approximately $540 million of cash and cash equivalents. As such, we were comfortably below our stated target leverage ratio of 3 times EBITDA as defined by S& P and we remain committed to maintaining our investment-grade credit rating.

Moving now from debt to equity. In the third quarter, we supplemented our measured pace of share repurchases with an opportunistic acquisition of approximately 1.9 million class B shares. In total for the quarter, we repurchased approximately 2.6 million shares for $137 million. As of today, we have $111 million available under our existing share repurchase authorization.

In summary, our balance sheet provides us with a strong liquidity position, allowing us to pursue our growth objectives, while also returning capital to shareholders. We believe this is a key competitive advantage as we head into a period where we expect to see an increase in acquisition opportunities.

I will conclude my remarks with an update on our outlook for 2016. Based on our third-quarter results and our outlook for the remainder of the year, we reaffirm our full-year guidance of 2% to 3% RevPAR growth in constant currency. We also reaffirm our 2016 full-year guidance for adjusted selling, general, and administrative expenses of $280 million, and a full-year effective tax rate in the low 30% range. Rounding out our guidance, we are lowering our capital expenditure outlook to $250 million for the year.

In summary, we continue to be pleased with our overall operating results as well as our ability to execute against our asset recycling strategy. Our results reflect growth in RevPAR, market share, and margins, a record pace of new hotel openings, and a robust development pipeline which will fuel future growth. And with that, I'll turn it back over to our operator for Q&A. Thank you.

(Operator instructions)

Thomas Allen, Morgan Stanley

Good morning. So just on your comments around China, your peers, Hilton and Marriott, have chosen to partner with local companies there to grow out their businesses there. What's driving you to go it alone? Thank you.

Thanks. I'm not sure that the characterization is correct because we've got a lot of multi-hotel owners partners in China. Our approach to this has been to really develop strong relationships with larger enterprises that can develop and grow in multiple markets, and we've got several organizations with which we have done that.

Our focus historically has been to do that in the full service hotel and luxury hotel representation that we've got in China, but increasingly, we're turning our attention to accelerating Hyatt Place and Hyatt House expansion there. We now have Hyatt Place and Hyatt House hotels open, and we've got the beginnings of being able to look back on operating results which will help us, I think, turn to a more aggressive approach to expanding the brands because the visibility to brand performance is really one of the critical factors in being able to accelerate development. So I would say that we've got very strong relationships with very capable developers.

Okay. Thanks for the clarification. And then just on your 2% to 3% RevPAR growth, year to date RevPAR growth is up around 2.6%. Should we imply that given the holiday shifts in the fourth quarter, it likely won't accelerate from where it is today, so thinking of it that way?

Thomas, as you know, we don't guide RevPAR on a quarterly basis. We have reaffirmed our full year, which takes into account the fact that there will be some headwinds in Q4. As you mentioned, the holiday timing, which was a benefit to Q3, that will reverse in Q4. As Mark mentioned in his prepared remarks, we expected that the US election will have a dampening effect on Q4 results. And then also, we expect, consistent with trends thus far this year, lower in-the-quarter for-the-year group business.

Okay, thank you.

Stephen Grambling, Goldman Sachs

Hey, good morning. Two quick questions. First, on the RevPAR outperformance, there's a lot of moving parts there, but do you think has been the biggest contributor driving the improvement, which seems to have started about six quarters ago and been pretty consistent.

I think it's a combination of factors, but as we've mentioned in the past, we've deployed a new revenue management system that we've been working on for some time. And I think we now have enough evidence with respect to our performance, at least in the Americas, which is where we have the longest deployment in place, to be able to feel confident that the algorithms that we've established in the deployment is working well.

I think the other thing that's been true is that we've enjoyed a network effect that's I think persisted and increase over time with respect to the growth in Hyatt Place and Hyatt House. We have more markets covered, which allows us to serve more the needs of our corporate volume accounts, managed corporate travel accounts. And so I would say that it's really been disciplined around the tools that we've provided and the fact that our brands are performing very well.

The last thing I would just but say by way of reminder is that our philosophy has been to make sure that we provide data and analytics and tools to our hotel teams. But our philosophy is not to price from the center, but to ask the hotel teams to be responsive real-time to their local market conditions. And we think that's the best way we can both care for our colleagues who need to manage their hotels on a real-time basis, as well as our owners, so that we can be very responsive and make decisions quickly.

That's helpful. My second question is just on expense control. You mentioned the improved efficiencies in the owned hotel segment. Can you just walk us through some of the changes you've made there and how we should be thinking about the leverage point on RevPAR going forward?

Certainly, Stephen. With respect to that leverage point, typically, for our owned and leased hotels, we need to achieve about 3% comparable RevPAR growth in order to hold margins flat.

What happened in Q3 was that, as I mentioned in my prepared remarks, we had very good productivity gains at our owned and leased hotels, which helped to offset or help partially mitigate the inflation that we're seeing in wages and benefits. But then we also had some upside from what we've described as nonoperational items, rent and property tax, which may not necessarily recur, and so that contributed to our improvement in comparable owned and leased hotel margins.

I would also highlight that we had some significant variability across our regions with respect to our owned and leased hotels. So as you would expect would be the case in [EMEA], in our Europe, Africa, Middle East, Southwest Asia region, which was experiencing a decline in RevPAR growth, their margins were hit very significantly. Margins were up a bit in ASPAC, but really where I would say our owned and leased hotels delivered very nicely was in the Americas, where they were up by nearly 200 basis points.

Okay, so there wasn't a specific action plan or anything that was put into place that would have driven down that leverage point or that should sustain it?

We do have a systematic program underway -- I believe we've talked about it before on previous earnings calls -- where we essentially send a SWAT team out to our hotels to work with the local teams to identify opportunities to drive productivity, to enhance revenue, and we're seeing that gain momentum nicely across our system. I would say typically, the opportunities they focus on are around labor deployment where we can do a better job of forecasting our business and scheduling our labor to best meet the needs of our guests, while at the same time, implementing improved sales practices at the hotel. So we're beginning to see those efforts gain momentum as well.

Great.

I would just add to that, that since that program that Pat referred to does include, importantly, top-line initiatives, I think that is also a help to support our market share gains.

Joseph Greff, JPMorgan

Good morning, guys.

Hi, Joe.

Mark, when I heard your earlier comments, I thought you sounded maybe a little bit more optimistic about current trends in growth prospects than maybe some of your peers on these conference calls this earnings season, and I know you all at least pay some attention to what others are saying. When you look at your business, do you look at the trends in your business differently than maybe how you assess others and how they are communicating that? Or am I just interpreting you're getting this from last night's World Series victory? (Laughter)

I think without trying to compare and contrast tone, which I think is really hard to do, what I would say is, look, it's an unambiguous we had a very strong quarter, and we've actually seen improvement in earnings pace over the course of the year, no matter that there's been relative deceleration on the RevPAR growth front. But as we look at what's going on, I think there are some really fundamental things that are happening at Hyatt that give us confidence about how we're going to be able to perform on a relative basis.

I think our focus around the single purpose as a Company, around caring for people so they can be their best, has translated into not just the soft aspects of how you might think about guest service and those kinds of things, but also, really, it's caring for all people, including our hotel owners and including our colleagues. And as we have turned to a number of initiatives, whether that's new technology platforms to help facilitate operations, which tends to allow us to redeploy people in constructive ways and also elevate guest satisfaction at the same time, it has turned out to also allow us to more efficiently operate because turnover in some key positions is costly because training tends to be very high. But we've simplified a lot of processes, and that friction has been reduced.

So we're basically turning this idea of focusing on purpose into a platform for improvements across the Company. So I am optimistic because of how we think about the application of that broadly in our business.

The growth on the hotel side in the development world has been very notable, and I think it's -- we're obviously having a tremendously good year and a lot of momentum there, which we absolutely expect to continue. So that's another source of optimism.

Now, in the face of that, we've got clear data that says that short-term corporate bookings are weak or weakening. We have had, in-the-quarter for-the-quarter booking patterns that we've seen this year have been significantly lower than they were run rate last year. Part of that is due to the fact that we are sold out in many of our key group hotels from a meeting space perspective, so we crowded out some of the in-the-quarter for-the-quarter opportunity, but it's also true that when you look at where group is trending up or down, it's really the shorter-term corporate segment that's been under pressure, whereas association has been relatively higher.

I would also say that if you look at performance by segment, year to date, we've had -- the tech and electronic world has been relatively flat on a year-to-date basis, although the third quarter was week. Pharma has been positive, but banking and manufacturing has been negative. So maybe those sectors don't surprise you to hear that they are coming under some more pressure.

And then the last thing I would say on demand side that I'm focused on is corporate business transient travel, which has been weaker, has been trending down, I would say, over the course of the year. Leisure transient has maintained great strength throughout, and that's maybe consistent with some of the short-term corporate trends that we've seen.

So one of the things I said is while all these fundamentals that we're building for the long term are absolutely demonstrating positive impact, we also recognize that there are some uncertainties as we head into 2017, and that's why we are hyper focused and very vigilant on keeping a very close tab on what's going on so that we can pivot and be responsive to what we're seeing.

Chad Beynon, Macquarie

Hi, thanks for taking my questions. You mentioned in the prepared remarks that your select service RevPAR index continues to improve. With the backdrop of a very healthy executed contract base, do these higher RPIs give you more confidence that this growth could actually accelerate, and then also, given the returns, that this would give your owners -- do you have the ability to potentially increase fees, and would you consider doing that given the volatility in the lodging cycle right now? Thanks.

Look, I think the answer to the first question is yes. We're seeing an increased demand by developers for Hyatt Place and Hyatt House hotels. We are, I think, extremely well-positioned for the growth that we have ahead of us because we really only began to open urban-based, city-based, urban-located Hyatt Place and Hyatt House hotels a few years ago, so even though the brand had been performing well for several years running, we're only beginning our urban expansion. And that's really where a lot of the further success, the building momentum, has come from.

And it's a very attractive -- if you can call it an asset class, urban select service -- it's a very attractive asset class. The returns available tend to be very high. It's a very efficient operation, and there's more demand for diversity in price points in most major markets. So I think we're not only positioned to accelerate growth for Hyatt Place and Hyatt House, but we're already seeing that happen.

With respect to the fee structures, we remain in a competitive environment, so in many ways, I think our approach to how we improve economics for us and for our owners has to do with finding great opportunities, and we are in the business of identifying great sites and being able to partner with, or even sell, those development opportunities to partners. We believe that that's a very different approach to our very targeted development effort than some of our competitors are following.

In some cases we've gone ahead and actually gone down the path of building those hotels, but in many cases, we've either partnered with a developer or sold the project to a developer. So we believe that will actually enhance both their returns, because we've taken great care to identify the best locations and match the brand to it, and our returns, because we're able to deliver a project without necessarily having to compete for a franchise agreement in that particular case. So that's actually served us very well.

Thanks. And then maybe to add on to that from a capital allocation standpoint, Pat, at the end of your prepared remarks, you talked about maybe being a little bit more aggressive on the recycling strategy. You guys also talked about some multiples from a cap rate and EBITDA standpoint

So two-parter on recycling strategy. One, has anything really changed in terms of geographies or segments of what you're focusing on? And then secondly, how are you thinking about pricing? Thanks.

I'll take the first comment on this and then Pat can add his commentary. But in terms of focus on markets and types of hotels that we are seeking, the answer is we haven't changed our focus. We continue to find interesting opportunities on the resort front, which we will continue to pursue because increasing our resort presence allows us to provide richer and deeper experiences to especially our loyalty members, and so we're really looking to expand our opportunities on the resort front.

Gateway city focus remains high. We have a roadmap for each of our brands on a global basis, so we've got specific cities identified. In the past, we've talked about our need to expand in places like Los Angeles, Miami, and London, and that remains true. That's across most of our brand portfolio.

And then I would say the select service focus that I mentioned earlier, it remains high. And finally, on the group side, we have been very focused on adding in a very deliberate and focused way, in a very particular deliberate way, group capacity in key group markets. And we are thrilled about the Hyatt Regency Seattle opportunity which will really, I think, significantly enhance Seattle as a group destination market with the newest, biggest hotel in the marketplace adjacent to this new expanded convention center.

So all of that is really the result of a lot of focus. We are not trying to blanket the world with as many flags as we can possibly sign up. We're really focused on quality growth in a very deliberate way.

In terms of pricing, it varies a lot by type of hotel that you're talking about. But in the markets in which we're focusing our time and attention, and for the quality of the assets that we're talking about, we haven't seen material changes in pricing. The cap rate and multiple references that I provided to you, we believe are appropriate and relevant to the Birmingham market in the UK, so that's not really meant to be a commentary on valuation and pricing across many different markets.

And what I would add it to Mark's comments is that as it relates to our asset recycling strategy, while we do expect to see some interesting acquisition opportunities in the months ahead, that's not to suggest that we are going to increase the overall size of our owned and leased portfolio because equally, we're constantly identifying where there are opportunities to dispose of some of our existing owned and leased hotels to provide the capital to help drive this recycling activity, which, as you know, over time, has stimulated the growth of our system.

Thank you both very much.

Thanks.

Shaun Kelley, Bank of America

Hi, good morning. Thanks for taking my question. I just wanted to revisit the margin commentary, and I appreciate you guys already giving color on this.

But just trying to think through owned and leased margin potential for next year, and as we look at, I think, in the year-to-date period, margins are up slightly across the owned and leased segment. So my question is, as we head into next year, can margins continue to expand in a low-single-digit RevPAR environment just given some of the unique things that Hyatt -- might be going on in your portfolio with assets ramping up, acquisitions, and dispositions?

Thank you, Sean. We're certainly not going to give an outlook for next year at this stage, but I am happy to perhaps provide a bit more insight as to our margin performance this quarter and how that might help you understand how these things come together because I think there are a number of different dots that can be connected here.

The first is that our owned and leased RevPAR growth performance for Q3 was 1%. And as I mentioned earlier, we need to achieve about 3% growth and comparable RevPAR in order to hold margins flat. So that gives you a sense for the types of productivity gains that we saw at our owned or leased hotels primarily in the Americas during the third quarter.

Also as I mentioned, there was significant variability in our portfolio, our owned and leased portfolio, for the third quarter, with much stronger performance in RevPAR growth at the Americas and ASPAC compared to our Europe, Africa, Middle East business, which was under pressure. So that explains why, then, there were significant differences in comparable owned and leased hotel margin performance. It really is the totality of these and how they come together that explains where we landed for the quarter.

But then again, as I mentioned before, we did have some nonoperational items, rent and property tax, which delivered upside to our owned and leased margins in the quarter. Not all of that would be recurring.

Okay. (Multiple Speakers)

And Shaun, I'm sorry, the last thing I would say is that we absolutely do expect that the efforts that have been underway for some time to drive revenue and productivity enhancements at our hotels will continue. We're gaining nice momentum. The team has done a great job of identifying best practices at specific hotels and then broadcasting those to the system so that we don't have hotels waiting for our teams to arrive to help identify those opportunities, but all hotels can begin to capitalize on those insights and drive the improved productivity that is essential to expanding margins over time.

I think it is fair to say that our margins do have room for improvement. And certainly, that is our goal going forward as we grow revenue and as we drive further efficiency. But we're not at this time giving guidance on what that might look like for 2017.

Okay. Understood, Pat, and that's actually really helpful and clear. Just to dig in one layer further, then, where I was really going with it was trying to say, okay, you've sold the Andaz 5th Avenue, you've added in Rio. As we think about some of the puts and takes in the actual portfolio itself, is there anything that itself, as you think about single assets or pluses and minuses, that would be a net tailwind or headwind across the portfolio?

Nothing at this stage to highlight.

Okay, great. Thank you very much.

We'll take our last question.

Bill Crow, Raymond James

Good morning, Mark and Pat. Appreciate you taking the questions. It's good to hear the color on the Birmingham asset, and I think you said the IRR was 17%. What was the IRR on Andaz 5th Avenue?

Let me just clarify. I think I said mid teens, just to be clear. I don't have an IRR for Andaz 5th Avenue handy. We can probably revisit that in the future, but we don't have the ability to give you an answer on the phone.

Okay. Positive? Negative?

I think it would be modest IRR in either direction. That's a guess off the top of my head just by virtue of the fact that we obviously had ramping earnings over that period of time plus the fee base of the hotel. But we can further clarify that

Great. The pipeline of the units are static from last quarter at 61,000 rooms, and it seems like that might be the first time that it failed to grow in recent years. Anything -- is that just a one-quarter anomaly, or are we starting to see some of the impact from what we're hearing is tougher lending standards out there?

No, actually, just to clarify, it's not really the first time that we've reported a static or a carryover from the prior quarter. That was true at the end of last year into the first half of this year. And our development activity is varied and diverse across the globe.

The pace of signings -- I just want to make sure that everyone remembers that what we report is actually fully executed contracts. We don't report stuff that's in the hopper, LOI's, hope and prayers. That's not what we do. So we are tracking actual contracts, signed, and in our judgment, able to be built. That is, these are financed projects. So we have a screen that we use to ensure that not only do have a signed piece of paper in the drawer, but we also have, in our judgment, a live project that's going get done.

So the timing of when we actually realize those signings and add them to the executed contract base, they vary over the course of the year. It will maybe not surprise you to hear that the fourth quarter is always a very, very active quarter because that is the quarter by which the annual [polls] that have been established for the developers end up getting measured, and it's also the cadence in some key markets that we cover.

So I would say it's really a byproduct. The ebb and flow are the profile of our executed contract basis is really the result of the individual activity.

And I'll just add on -- this is Brian -- I think it's important to note that we've increased our existing hotel base by 9% over the past year. We've also grown our pipeline by 10% over the last year, and this is during a year of record-breaking openings for the Company. So the fact that we can continue to grow our pipeline and continue to grow our existing room base is impressive.

One clarification. If Playa is successful and they redeem your preferred, A, what is your plan for the capital? Could we see a surge in repurchase activity?

B, what would that do to earnings next year? What line item is that captured in? Thanks.

I'll cover the first piece, and Pat can cover the second. With respect to any cash that we might receive, our priorities remain, as they always have been, which is first and foremost to grow the business and consistently provide a return of capital to shareholders, and we've done both. So those priorities remain in place, and they won't change depending on -- no matter what the outcome with respect to the Playa IPO might be.

And with respect to what the impact might be to our reported earnings, it really depends on both the magnitude of the Playa IPO and the amount of our common stock ownership post IPO. That will determine whether or not we continue to account for that investment under the equity method. If we don't account for the investment under the equity method, then our share of earnings would no longer be included as part of our adjusted EBITDA.

How much was that this year, Pat?

It accounts for about one-third of our total JV share of adjusted EBITDA.

Perfect. Thank you, guys.

Thanks, Mariama, and thank you, everyone, for joining us today, and we look forward to talking to you soon. Goodbye.

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