Hyatt Hotels Corp (H) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Hyatt Hotels' earnings conference call.

My name is Tanya and I will be your conference moderator for today.

At this time, all participants are in listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes.

I would now like to hand the presentation over to your host for today, Atish Shah, Senior Vice President of Investor Relations.

Thank you, Tanya.

Good morning, everyone, and thank you for joining us for Hyatt's second-quarter 2011 earnings call.

Here with me in Chicago today are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Harmit Singh, Hyatt's Chief Financial Officer.

As to the format for this call, Mark and Harmit are each going to make remarks about our results for the second quarter and progress made towards creating long-term value.

After the comments, we will take questions from the call participants.

Before we get started, let me 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, our quarterly report on Form 10-Q, 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 earlier this morning, along with the comments on this call, are made only as of today, August 2, 2011, 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 available on our website for 90 days.

Additionally, a telephone replay of this call will be available for 1 week.

And with that, I will turn it over to Mark to get started.

Thanks, Atish.

Good morning, and thanks to all of you for joining our second-quarter 2011 earnings call.

During the second quarter we saw a continued increase in business levels as compared to last year.

Despite disruptions to business due to renovations at several owned hotels as well as lower demand levels in Japan and North Africa, RevPAR increased in the majority of our hotels.

At many of our hotels, average daily rate growth drove the increases in RevPAR.

Rate growth was a result of continued shift in mix of business, as well as increased pricing power due to higher levels of occupancy.

For the company overall, adjusted EBITDA grew almost 12%.

Our business results improved over last year as a result of RevPAR growth, stronger operating margins, and higher management and franchise fees.

During the quarter, we made progress towards expanding our presence by increasing the number of hotels around the world under our brands as we opened 5 hotels.

We also saw higher interests in our brands from third-party owners, evidenced by the increase in our signed contract base for future hotels, which stood at approximately 150 hotels, representing more than 35,000 rooms at the end of the second quarter.

During our last earnings call, I spent some time talking about what is happening in our select service business.

I am happy to report that we continued to make significant progress on this front during the second quarter.

In terms of performance, select service RevPAR grew almost 10% after growing almost 8% during the same period last year, resulting in a cumulative RevPAR progression that reflects continued expansion of demand for Hyatt Place and Hyatt Summerfield Suites.

In addition to the continued improvements in operating performance, we also announced 3 transactions over the last few months, namely the acquisition of 3 extended state hotels in California, the formation of a joint venture with Noble Investments, and the acquisition of assets from LodgeWorks.

I'd like to explain our thought process behind each of these transactions, including how we expect all 3 to work in conjunction to significantly boost our select service platform.

Let me briefly review our select service business.

Our 2 select service brands, Hyatt Place and Hyatt Summerfield Suites, are doing well.

The unique service model that we created for these brands has been embraced by our customers.

We see strong customer service performance at our hotels with steady improvement over time.

We're clearly building a solid base of guests devoted to these brands.

We have had solid, cumulative financial performance over the last number of quarters.

In terms of market share, many of these hotels operated significant and increasing RevPAR premiums in their respective competitive sets.

In terms of RevPAR progression, our brands continue to lead the sector.

As we talk to current third-party owners about our select service brands, some of the feedback we have received relates to their desire for greater representation across the US.

Further expansion of these brands is a primary focus for us, as we strive to have a presence in and serve relevant markets for our corporate customers and individual travelers.

More recently, there has been limited availability of construction financing for new hotel development.

The limited financing that is available is generally focused only on very strong projects in only the most desirable markets.

Even then, only the best sponsors, those with strong and lengthy track records, are having success at financing new development.

Using our own capital to grow these brands has been successful to date; not only were we able to launch the brands relatively quickly, but we continue to stimulate third-party investment into these brands, both domestically and internationally.

With that as the context, let me now describe the transactions in aggregate and then individually.

In short, the 3 transactions all serve to support the pursuit of our goal to be the most preferred brand in each segment that we serve.

3 key things to know about these deals are -- first, we're adding very high quality assets in good locations to our portfolio of properties, principally in the extended stay and core select service segments, but there are also 5 full-service properties.

Performance will ramp up over the coming years because many are newly opened, 2 are under construction, and more than 20 are being re-branded under Hyatt brands.

Second, the expansion of our presence into a number of new markets will allow us to better serve our corporate customers and transient guests.

This will support better property level earnings, better performance for each brand, and better service to our guests, especially corporate customers, across all of our brands.

Third, we expect to enhance future development with these transactions.

With Noble, we're expanding our relationship and applying capital with a long-time partner.

With LodgeWorks, we're expanding our capabilities with the addition of a number of LodgeWorks executives to the Hyatt family.

These moves position us well to participate in new developments over the coming several years, both directly and in partnership with third-party developers and capital sources.

I will now walk through each transaction.

During the second quarter, we acquired, through a foreclosure process, 3 select service extended-stay hotels in California for $77 million.

These 3 hotels are in strong, desirable markets.

We have re-branded the hotels, and plan to complete a major renovation of each in short order.

Over the medium to longer term, we will look to recycle the invested capital into other opportunities, while maintaining management or franchise contracts to preserve our presence in these markets.

Second, during the quarter, we formed a joint venture with Noble Investment Group to develop newly built select service hotels.

Noble is a well-known leading developer of select service hotels, one of the few select service developers that has been active through multiple cycles, has a strong track record, and can bring forward projects that have the necessary attributes necessary to obtain financing.

We own 40% of the joint venture, and have committed to invest over $30 million of equity, which, together with Noble's investment, and with moderate levels of leverage should allow the JAD to build 6 to 8 new select service hotels over the next few years.

The first of these hotels is already under development in the Atlanta area.

We also sold 8 select service hotels to an affiliated joint venture in which Hyatt has a 40% stake and Noble a 60% stake for approximately $110 million.

This was part of the overall effort to expand our activities with Noble, and utilize a limited base of hotel assets as a means to support future development.

Third, last month, we announced a significant acquisition that we're very excited about.

We plan to acquire e portfolio of 24 hotels and related assets from LodgeWorks, a private company based in Wichita, Kansas, for approximately $800 million.

LodgeWorks is a well-known developer, owner and operator with a strong track record in extended-stay lodging, whom we have known for many years.

The opportunity to make this acquisition is unique, and one that stemmed from our ongoing discussion with LodgeWorks' leadership over a number of months.

The acquisition has several elements that will create long-term value for Hyatt.

First, let me describe in more detail what it is that we're buying.

The 24 hotels that we intend to acquire represent approximately 3500 rooms.

We would also acquire the branded management rights on these hotels.

The breakdown of the hotels is as follows -- 16 select service extended-stay hotels, which we plan to re-brand and manage; 3 select service hotels already Hyatt branded, and that we expect to manage; and, 4 full-service hotels and 1 additional property that we plan to re-brand and manage as Hyatt or Hyatt Regency properties.

The principal components of this transaction support our efforts to achieve our goals to be the most preferred brand in each segment that we serve.

The key components are -- first, the hotel assets; second, the segments;, third, enhancement of future development; fourth, enhancement of future asset recycling prospects; and, finally, earnings upside and financial returns.

As to the hotel assets, this group of assets fits well into our existing portfolio.

They are excellent hotels, with the majority located in high barrier-to-entry costal markets, including locations in California, Washington state, and several northeastern states.

The hotels are in very good condition with almost one-third less than 2 years old.

They fit into our brands with minimal expected conversion costs.

Our extended-stay presence will grow by 42% as we add these 16 hotels, several in markets that currently do not have a Hyatt extended-stay presence.

Also within the asset base are 4 full-service hotels.

These hotels have already established strong presence in the markets in which they are operating.

We expect to take their success to the next level with the application of our reservation system and exposure to our corporate customer base.

Next is the segments.

We're big believers in the extended-stay segment.

This segment of the business performed well through the last 2 lodging cycles.

Hotels in this segment generally perform well from a margin perspective.

As we looked at our brand presence, our extended-stay business is one area in which our under-representation stood out notably.

As to future development, we are bringing on 15 key LodgeWorks associates and welcoming them into the Hyatt family.

These individuals are primarily specialists in site selection, development, and construction.

The development team has built over 100 select service hotels over more than 20 years.

Extending our capabilities in this way will boost our development efforts, and help us be more successful in attracting third-party capital to grow our brands.

The timing of this transaction is important, as we plan to integrate this team and the new capabilities to fully participate in the next wave of development, which we think will accelerate over the next year or so.

As to asset recycling, we believe that our ability to recycle our asset base will be enhanced by this transaction.

We will look to recycle the investments in these hotels while keeping management or franchise agreements in place.

We see the marketplace for high-quality select service assets increasing, as acceptance of the strong RevPAR and margin potential of this asset class grows.

New relationships with potential buyers of these types of assets, broader scale of the portfolio of assets available for sale, and enhanced geographic diversity are all drivers of better recycling prospects for Hyatt going forward.

Earnings upside -- another key rational for the transaction is that we expect significant upside in the portfolio.

Our initial estimate is that 2012 adjusted EBITDA from this acquisition, net of the additional corporate expenses, will be approximately $50 million.

However, we expect earnings to grow over the subsequent few years for several reasons.

First, 21 of the 24 hotels will benefit from re-branding to one of our brands.

We expect a gradual improvement in performance due to this re-branding as our marketing and sales platform, including Gold Passport, kicks in.

We believe that expansion of occupancy, especially in well-rated segments, represents a big source of potential improved performance.

Second, as I mentioned earlier, almost one-third of the portfolio is less than 2 years old.

2 hotels are still under construction.

As such, we expect to see improvement as these hotels ramp up.

Third, our analysis of a number of markets in which these hotels are located shows strong growth potential due to fundamentals, namely strong projected levels of demand and limited levels of new supply.

Fourth, bringing the management of these hotels in-house will introduce an opportunity for us to focus a dedicated operating team on our managed extended-stay hotels across the larger system.

Finally, we expect management franchise fees from existing and new hotels to increase over time.

As noted, we believe the Noble and LodgeWorks transactions will help us better execute on new developments, given the track record, development expertise, projects under evaluation, and relationships with third parties that each organization brings to the table.

A higher level of activity under our select service brands will also support our efforts to develop with other great partners, and we're confident in our ability to capture more than our fair share of new developments in this segment in the US.

I'm very excited about these transactions, as well as our prospects for the future, and I'm confident that the hard work and commitment by each member of the Hyatt family, including the new members of the Hyatt family that we welcome from LodgeWorks, will continue to yield excellent long-term value growth.

And with that, I will turn it over to Harmit.

Thank you, Mark, and a warm welcome to those who have joined our second-quarter 2011 earnings call.

I will be discussing our performance in the second quarter, as well as recent business trends, and will conclude with information on full-year 2011.

In the second quarter, adjusted EBITDA was $151 million, an increase of almost 12% as compared to last year.

This strong increase demonstrates the operating leverage in our business, as we had solid growth, despite the impact of ongoing renovations at several of our owned hotels; the timing of the Easter holiday; the sale of several hotels, as compared to the second quarter of 2010.

Earnings per share, adjusted for special items, also grew 50% as a result of the increase to adjusted EBITDA and a lower effective tax rate.

I will now discuss our results in more detail for each of our 3 business segments.

Let me begin with our own elite hotel segment.

Excluding the impact of currency, RevPAR for our comparable owned and leased hotels increased by 3.3% in the second quarter.

Results were negatively impacted by the displacement of revenue, due to renovations, which amounted to approximately 500 basis points of RevPAR.

As you may recall, our second quarter 2010 RevPAR increased by over 9%.

So, we are comparing to strong growth in the prior year quarter.

RevPAR was driven by rate gains, which represented approximately two-thirds of the increase in RevPAR.

Operating margins at comparable owned and leased hotels also increased by 80 basis points in the second quarter.

Margins were negatively impacted by approximately 100 basis points, due to renovation activity at our owned hotels.

As a result, we estimate that margins would actually have grown about 180 basis points, adjusting for the impact of the renovations.

Increases in average daily rates and our continued focus on expense control and flow-through both helped to drive our margins, despite increases in costs due to rate inflation and occupancy increases.

Owned and leased adjusted EBITDA increased by nearly 11% during the quarter.

The displacement due to renovations adversely impacted adjusted owned and leased adjusted EBITDA by an estimated $10 million in the quarter.

In addition, we had a smaller asset base in the second quarter 2011 versus 2010, due to asset sales over the last 12 months.

(inaudible) quickly we ended the second quarter 2011 with 12 fewer owned hotels, representing approximately 3,000 rooms as compared to the second quarter 2010.

Next, I will talk about the North America managed and franchise segment.

Second quarter comparable RevPAR for our full-service hotels increased approximately 5%.

On a segment basis, the timing of the Easter holiday as compared to last year negatively impacted RevPAR results by an estimated 100 basis points.

Disruptions due to renovations also negatively impacted segment results.

Our full-service hotels experienced a 3% increase in group revenues, with growth coming entirely from higher rates.

Group business was negatively impacted due to the timing of Easter.

Group revenue booked for the quarter was up over 7% as compared with the second quarter of last year, with all of the increase coming from higher rates.

Group revenue base for the year is still positive, with short-term bookings still limiting longer-term visibility.

As for our transient business in the quarter, revenues increased 6% compared to the second quarter of last year.

This increase was split evenly between demand and rate gains.

Shifts in the mix of business to more rack and corporate negotiated business continue to drive rate increases.

This quarter, for the first time in a number of quarters, we saw both an increase in food and beverage revenues and ancillary revenues, on a per-occupied-room basis at North America full-service hotels.

Outlet revenue per transient room night, banquet revenue per group room night, and other operating revenue for occupied room, all increased.

This increase in other revenues is important for us as we generate a significant portion of our revenues from these businesses.

Now, let me turn to our select service hotels under the Hyatt Place and Hyatt Summerfield Suite brands.

Comparative RevPAR at our select service hotels increased 9.6% in the second quarter of 2011, compared with the second quarter of 2010.

Overall, fee income for North America management and franchising operations increased 8%, primarily as a result of increased base management and franchise fees.

Let's now turn to our international business.

In this segment, RevPAR increased 2.5% in the quarter, excluding the impact of currency.

RevPAR growth was negatively impacted by declines in Japan and North Africa.

Also, as expected, RevPAR results from China were muted by the difficult comparison in Shanghai as a result of the 2010 World Expo.

International RevPAR growth, if you were to exclude Japan, North Africa and Shanghai, would have been approximately 11%, excluding the impact of currency.

Overall, international fees increased almost 7% in the second quarter of 2010, excluding the impact of currency.

Higher incentive management fees, as a result of higher revenues and the continued ramp-up of hotels added in prior periods, were large contributors to the increase.

Now that I have talked about our 3 segments I would like to talk about 6 other topics.

Our share repurchase during the second quarter, SG&A expenses, tax expenses, 2011 information, the impact of the transactions announced during the quarter, and renovations.

During the second quarter, we repurchased and retired approximately 9 million shares of Class B common stock for approximately $396 million, in a privately-negotiated transaction.

This was a unique transaction, and was accretive to earnings per share.

We do not have any plans for future share repurchases at this time.

Our adjusted SG&A expenses increased 9.4% in the second quarter, primarily due to higher compensation costs.

This is similar to the approximate 9% increase in adjusted SG&A that we showed in the first quarter, after adjusting for a one-time item in 2010.

Our effective tax rate in the quarter benefited from the one-time reversal of a $12 million valuation line in one of our International businesses.

As to 2011 information, first, I would note that this does not include the impact of the pending acquisition of assets from LodgeWorks.

Our information related to capital expenditures is the same as the last quarter.

Our expectation on debt depreciation and amortization expense has increased slightly, due to a fine-tuning of estimates and the transactions that closed during the quarter.

In terms of impact to earnings of the 2 transactions that we closed during the quarter, we do not expect a significant impact in 2011.

In the case of Noble transaction, the venture borrowed approximately $65 million.

Our net proceeds from this transaction were approximately $90 million.

In terms of 2000 adjusted EBITDA,, these 2 transactions offset each other and, therefore, we do not expect a significant change.

The debt raised in our joint venture with Noble contributes to an increase in our pro rata share of unconsolidated hospitality venture debt as of the end of June, 2011.

With regard to the pending acquisition of LodgeWorks assets, we expect to fund approximately $770 million in cash, assuming we close on the majority of the asset purchases in the third quarter, with the remaining amount to be funded at a later date.

I would like to conclude by providing a status update on the renovations that we have underway at 5 of our owned hotels.

The renovations are proceeding on budget and on track.

In the third quarter, we expect the renovations to have a less than 100-basis-point impact to RevPAR and a less than $5 million impact to adjusted EBITDA.

Starting in the fourth quarter, and into 2012, we expect to see the positive impact of the renovations in our reported owned and leased segment results.

In summary, during the second quarter we saw improved demand and higher rates at full-service hotels, continued strong growth across our select service businesses, improved results from our own portfolio, despite the significant renovations underway, and a significant commitment of capital towards expanding our select service presence in North America.

And with that, I will turn it back to Atish for question and answers.

Thank you very much, Harmit.

That concludes our prepared remarks.

For our question-and-answer session, please limit yourselves to 1 to 2 questions at a time, and we'll take follow-up questions as time permits.

We're happy to take your questions at this time.

Tanya, may we please have the first question?

(Operator Instructions) Jeff Donnelly, Wells Fargo.

I'm curious for you to talk about the returns that you are expecting on the recent investments in Noble and LodgeWorks, and how you think about that will spread to your perceived long-term cost of capital.

When you look at the assets that we will be bringing on board upon closing for LodgeWorks, and then developing with Noble and also the 3 that we purchased in California.

In all of these cases we're going to end up with expansion of earnings potential over the coming several years.

I think the points that I had covered earlier, namely, a number of the hotels are still ramping up currently, 2 are under construction in the LodgeWorks portfolio, the renovations for the Wood Fin assets in California are significant renovations and repositioning of those hotels and re-branding.

We expect that the earnings momentum for a large portion of the assets that we're talking about are going to end up escalating over the next several years.

Our outlook is that we will be able to significantly improve what those assets have been doing historically by virtue of those attributes.

With respect to the actual realized returns, that partly depends on when we actually sell the assets.

We look at these assets as available for sale in the future.

We are not anxious to do that until we have proven up the earnings momentum that I described earlier.

But it's fair to say that you think of this as something in the mid-teens for your returns over the life of your holdings?

We look at the prospects on a return on invested capital and we believe that if you begin in a framework that is sort of mid- to higher-single digit cap rates, we would like to expand that into double-digits over time on a return on gross investment.

Can you talk a little bit about how you see the depth of market opportunities out there right now?

I mean, do you think there are many of more of these opportunities available to you, either domestically or abroad, and are they more mid-scale or they tend to be more upscale?

I'm just kind of curious about the mix that you might see.

We've seen an expansion in both more select-oriented opportunities, both in the US and outside the US, as well as full-service and some luxury deals.

Few that have this number of assets.

If you look at the LodgeWorks acquisition, for example, very few opportunities that have that kind of coverage with that geographic diversity and quality of assets.

Most of them are relatively newly built assets.

I would say the direct comparison for the deals that we just talked about are fewer and far between, but the overall level of activity in the market has been growing.

Joe Greff, JPMorgan.

Good morning, guys.

2 quick questions.1 is on the development pipeline.

Of the 35,000 rooms in the pipeline, what percentage have second-half 2011 opening dates; what percentage have 2012 opening dates, and then with respect to the LodgeWorks accession, you talked about benefits being units of property, geographic diversity, are there any markets, once you factor in LodgeWorks, where you think you have over-concentration or over-exposure, and what would be those markets, if there are any?

We expect to open 15 properties this year, excluding LodgeWorks acquisition, obviously, and I'm trying to recall --

We opened about 7 so far, so about 8 balance of the year.

In the balance of the year.

We have not made any comments about 2012 openings yet and then on the portfolio overlap, we don't have any markets at this point in which we feel like we are over-concentrated.

And then the $30 million equity investment into the Noble joint venture.

Does that hit in the second quarter, or is that third or fourth quarter?

It's actually to be funded over time as drawn.

It will be funded against projects that we commit to, as opposed to funding it in up-front and then being drawn over time.

Steven Kent, Goldman Sachs.

If we go into a slower economic environment, and we're not forecasting that, we're not forecasting that for RevPAR, and I don't think you, even internally, are doing that, but if that were to happen, what levers do you still have to boost margins on a go-forward basis.

Do you think you could react a little faster to reducing some of the expenses than, maybe, the last cycle.

And then on the extended-stay business more broadly, I continue to be a little bit surprised that you'd enter into that business.

Educate me on this, but it seems like that is an area where there's always the potential for higher competition, because it's fairly easy to build, and the brands may not have as much value, because the driver of the person to the extended-stay property tends to be more locally driven, rather than an International or national traveler.

In terms of the cautious undertone, just as a reminder, that has been our mind-set over the last couple of years.

We haven't yet shifted from the mind-set.

As a result, despite the recovery that we have seen in the economy and the fact that demand recovered, our focus on maintaining costs has remained.

You've see that in margins over the last couple of quarters, and this quarter, despite the renovation, you saw margins increase.

In terms of leverage, for example, we maintain tight focus on staffing.

At the management staffing levels at the hotel, on a managed cost basis, we saw a 2.5% increase in occupied rooms in the quarter, but our management staffing was largely flat to a year ago.

We are focused on productivity.

We measure that on a regular basis, and productivity in the managed hotels, in the quarter for full-service was up.

Staffing is going to be our constant focus without compromising quality.

We look at customer satisfaction and quality while we look at costs, and it's prudent to have cost go down and satisfaction levels increase, which is what we have seen.

So that focus is good.

In terms of other expenses, we're focused on heat, light and paper.

That is an important perspective.

We have green programs we spoke about last time around.

We're focused on educating our employees so that we reduce usage, and we maintain programs to keep our food costs in check.

For example, we have a mentoring management program in across the board, which tries to minimize or reduce spoilage and increase turnover.

So we have all these programs.

The mind-set is fairly cautious right now, given the undertone on the macroeconomics factor, especially in North America, and we have seen that in our results, both in North America and international.

A few comments on the US front and why this actually makes sense to us more broadly than just expanding in extended-stay by itself, and then secondly, I wanted to talk for a moment I want to talk for a moment about what we're thinking about outside of the US.

The business within extended-stay for Hyatt is very extensively integrated into our underlying customer base.

If you look at Gold Passport customer share of total revenues, it's actually highest amongst our high Summerfield Suite's properties.

Gold Passport penetration is significant.

We feel that is actually one big, additional benefit we can bring to properties that are not currently Hyatt branded that we will be taking on.

A lot of the business that we are actually writing and realizing in Hyatt Summerfield Suites, and in Hyatt Place, is actually managed corporate business, and what we have been able to do with the expansion of Hyatt Place and Hyatt Summerfield Suites is expand our base of business for managed corporate accounts across the entirety of Hyatt.

The expansion of these brands and the success of the service model, which I'll come to in a second, has really been driving expansion of our managed corporate travel share, and that is an important driver overall, because it's well-rated business that we have other opportunities to expand in, including group meetings.

With respect to the asset side, it is true that there are local drivers of demand for a hotel, but well-sited hotels next to locations or near locations, where there is a lot of corporate activity, which attracts longer-term consultant-like and IT-like customer base, is actually what drives demand into those properties, and those customers are coming from other corporate accounts that we're currently serving.

So site selection is quite important.

The quality of the asset and the quality of the operation is critically important, and what we found is that the service model that we have applied, both in Hyatt Place and Hyatt Summerfield Suites, which is different to the other alternatives, has been very welcome.

So we have the ability to continue to build on a dedicated, devoted customer base there.

What we are seeing outside the US, and I would say most of what I'm about to say relates to India at this point, because our expansion of our brands into other emerging markets is not yet announced.

But on the India front, we found that there are a number of towns and cities, so-called secondary cities, but I would describe them more as emerging cities, which are central business districts outside of the core historical towns, where you have got a lot of IT parks and a lot of IT activity with long-term guests in those markets.

The initial Hyatt Summerfield Suites that we've signed up for development in India are adjacent to those sorts of demand-drivers, and we feel that this whole trend of the emerging middle-class and middle-management class in India, and of course, we believe the same will be true in China, will find a significant and core customer base for extended-stay hotels.

So we do believe these brands will end up being global.

We're already on our way with Hyatt Places under construction in India and Hyatt Summerfield Suites under development there as well.

We do believe that this will end up finding a similar demand-driver in local markets for the same sort of corporate customer base that we're seeing in the US

Janet Brashear, Hyatt.

Janet Brashear with Sanford Bernstein, but thank you.

I was about to welcome you to Hyatt, Janet.

I wanted to follow up on one of the points you made earlier.

You talked about the value and the returns from these acquisitions, and you said one source of value is when you re-brand, and in the case of LodgeWorks stabilize, the new hotels.

Another source of value is when you potentially sell the real estate later.

As you look at future acquisitions you might make, I'm wondering which is going to be the driver of value?

When you look at the economies of converting these units to Hyatt brands, and you balance out the investment to get them to your brand standards, and in the case of LodgeWorks maybe it's just signage, but in the case of Wood Fin maybe it's some significant investment in addition to signage.

Are your returns primarily going to come and be positive from that avenue, or do you need the real estate sale to get to where you want to be?

With respect to the LodgeWorks assets, I would say that they are at this point largely Hyatt brand standard.

There is signage and some modest conversion costs, but it is modest.

One big benefit is that from an asset quality and a property quality prospective, we really don't have any major work to do there.

The 3 assets that we acquired in California do have a larger investment required.

That is actually part of the opportunity, because we believe that we'll end up repositioning those hotels in their respective competitive sets, not to mention the branding.

We do think that the expansion of what we can do through our reservation system, Gold Passport, and our corporate customer base will drive current earnings and current returns, and we will end up really enjoying that as the principal driver of value creation over time.

That is really what we think will end up driving value for, both while we own the properties, as well as upon a sale.

The only other thing would note is that our intention would be, upon any sale, to retain management or franchise arrangement on a long-term basis, so we would, in every case, intend to keep our presence in those markets post-sale.

You said you getting some expertise from the LodgeWorks acquisition with your 15 new development executives, and you also noted that it is a very difficult develop environment for your partners to raise the capital and find the sites.

As your new executives find sites for limited service, does this mean you may be more willing to finance the development on your own balance sheet and then retain the management contracts?

I know you just asked about LodgeWorks, but one point I would make is the purpose of the development JV with Noble is to actually help to fund development of new properties.

So That is going to be one avenue that we do pursue, and we're putting some capital into this, along with Noble.

With respect to the LodgeWorks activities, while the team has a very long history.

(technical difficulty)

It looks like Janet's line went out.

We'll answer her question just in case she is listening in another way.

With respect to the development activity among the LodgeWorks team in conjunction with our team, they have a long track record and history of raising third-party capital to for their developments.

So they have got existing relationships that we also hope we will be able to employ.

We will likely participate in some new developments, but our principal focus and intention is to utilize the new capabilities to identifying new development opportunities, to bring them along, and to be able to put together deals to fund them with third-party capital over time.

So that is the real intention and focus.

Josh Attie.

Citigroup.

Given the concerns about broader economic slowing, can you talk about what you are seeing in business today, and what you have seen over the summer in terms of reservation volume, the willingness of customers to book longer-term group bookings, and what their price sensitivity might be?

On the group side, overall trends are good.

Our group business is up 3%, largely driven by rates.

So I would say on the positive, rates are getting firmer, and some evidence against that, the rates for the business you booked in the quarter for the quarter was up 13%.

The business we booked in the quarter for the year was up 8%, and the business that we have on our books are booked for 2012, the rates are about 8% higher than where we think we will end in terms of alia for the group business at the end of '11.

We also saw our corporate and association business on the group side, which is like 70% of the group side, was up in terms of revenue in the low double-digit combination of demand and rate.

Having said all of that, given the uncertainty in the macroeconomic environment, there is some cause to pause.

Bookings are a little tentative.

The windows continue to be short; that hasn't changed.

We expect that to continue until there is complete certainty around the environment, but the business of your booking, we're able to book at reasonable rates.

So that's our general sense on the group side.

Internationally, outside the 3 markets we talked about, our 3 unusual items, the fallout of Tokyo, the situation in the Middle East, and the unusual factor we have because of the World Expo, business continues to be strong.

China, ex-Shanghai is up in the mid-teens, which is good.

Our business in Latin America continues to be strong.

Business in India is picking up.

Europe is a mixed bag.

It follows the US to an extent.

Overall, we still feel internationally businesses will tend to grow as the economies grow.

Our transient business had a good quarter.

We are up 6%, largely a combination of demand and rates.

Our top corporate accounts, our top 50 accounts, had a strong quarter.

The leisure business, which is anywhere from 10% to 15% of our North America business, ended the quarter on a strong note.

June was up 10%.

The summer is around the corner.

We haven't seen too much of an impact because of gas prices.

That was a question a couple of months ago.

Overall, I think the trends are reasonable, and we are cautiously, that has been our mind-set, being cautious, and that is how we're planning the rest of the year and the year ahead.

It sounds like most of those data points are for the second quarter, which sounds like was very strong.

Can you give us any data points on what business was like, or what business has been like, in July and August, or even just anecdotally, how it feels?

Josh, that's difficult, given our guidance principals, but I would say that macroeconomic factors are a concern, especially in North America, and we manage the business accordingly.

I know you don't give quarterly guidance, but do you expect to see a moderation of RevPAR growth over the summer, excluding the renovation impact, versus what it was in the second quarter?

A lot of companies that have reported are kind of guiding to a deceleration in the summer and then a re-acceleration in the fourth quarter.

Without giving specific guidance, do you see that trend for your portfolio?

Harmit commented on the renovation profiles, so you have some sense for how that is unfolding for us, but overall, the fact is that, as we said in prior quarters, we have been very focused on employment and housing prices and general confidence levels in the economy, and that really remains ours focus.

And I think that is going to ultimately drive corporate confidence if those macro indicators tend to improve over time, it will tend to buttress the business; if they don't, it won't.

That remains the key issue, and as we sit here today after the week or 2 that we have had, it's just brought to bear that confidence is a critical factor, not just in our business, but in the markets overall.

That is what we can say on our outlook.

Now that you have put a lot of your cash to work, what do you see the financial capacity of the company being, and where could you ultimately take the leverage?

It seems like most of the cash has been put to work, so incremental financial capacity would have to come from more debt.

We maintain what we said earlier, we like to be investment grade.

That, based on rating agencies, that is about 3.5 times leverage.

We have the balance sheet capacity, and we keep a constant eye on what is happening around the market.

We have a revolver that matures, less than a year from now.

We're in the process of renewing that.

Given that there is capacity and that we have used a little bit of cash, we have an eye on what is happening around the market.

Harry Curtis, Nomura.

Quick question on share repurchase, the transaction, if you could explain why it was done.

And you mentioned you don't really have any future plans to continue re-purchasing shares, yet your share price is actually at a lower stock price.

I'm just interested in the strategy behind it.

It was an opportunity that was presented to us, basically, by some members of the Pritzker family, and when we were approached about it, and inquiry we've made, we evaluated it at that time.

The Board evaluated it; they formed an independent committee, a special committee to consider it, so from a financial perspective, and from the perspective of looking to address some of the perceived overhang in the stock, I think there was a general belief that it was a sensible transaction, and that is the conclusion that was drawn at that time.

There is no underlying plan with respect to stock repurchases.

It's not part of an overall strategy, so to speak.

Just wondering if the Pritzkers have an additional block to sell.

Do you have the sense that you are the buyer of first resort, if you will?

We can't say.

I think the fact is that we would evaluate any inquiries made of us at whatever time it came in, but I really can't comment on how individual family members may be thinking about their own plans.

Smedes Rose, KBW.

I was just wondering if you could give any thoughts on your effective tax rate through the balance of the year, since it obviously moves around quite a bit.

And then on your last call you just talked about the decline in fees from Asia and the Middle East, and I was just wondering if a few more months under your belt, if there was any kind update there.

I think you had seen them down around 30%, and does that still hold, or is it maybe a little bit worse on the margin?

In terms of effective tax rate, you are right.

The tax rate has been up and down, and that is just the nature of our tax strategies.

This quarter, we reversed evaluation allowance based on the fact that we're comfortable, and with the fact we could set up a carry-forward loss, again, the performances, improving performance of one of our hotels internationally.

From our perspective, the best way to model our tax rate is 35% on our US income and 20% on our international income.

If you adjust for the reversal in this quarter, tax rate varies anywhere from 35 to 40%.

So I think that would be a good indication of the tax rate that you can project.

Again, the only thing I would say, is that we have tax strategies, and these tax strategies bring in benefits, as and when we can effectuate that.

Going back to your question on fees from the impact in Japan.

Quarter 2, the impact was about $1.7 million, a little less than $2 million.

It was largely evenly split between the Middle East and Japan.

We still believe that a full-year downside, because of this, will be in the region of approximately $5 million.

That is an even spread between the Middle East and Japan.

We appreciate everyone joining us this morning, and we look forward to talking to you in the future.

Thank you.

Thank you for attending today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.