Hyatt Hotels Corp (H) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Hyatt Hotels Corporation earnings conference call.

My name is Janeta, and I will be your operator 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 is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Atish Shah, Senior Vice President of Investor Relations.

Please proceed.

Thank you, Janeta.

Good day, everyone, and thank you for joining us for Hyatt's fourth 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.

Mark and Harmit are each going to make some brief remarks about our results for the fourth quarter followed by a question-and-answer session.

At the end of the call, I will update you on a change to our call format that we're making starting next quarter.

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 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 today, along with the comments on this call are made only as of today February 16, 2012, 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, and a telephone replay of this call will be available for one week for the information included in this morning's release.

With that, I'll turn it over to Mark to get started.

Thank you, Atish.

Good morning, and welcome to Hyatt's fourth quarter 2011 earnings call.

I'd like to talk about two items, the progress we've made over the last two years since our IPO and our thoughts on the years ahead as we continue on our path to preference.

That is, to become the most preferred brand in each segment that we serve for our Associates, our guests, and our owners.

As we look back over the past two years, let's focus on our two drivers of earnings growth.

First, improvements in results from existing hotels that we own, manage, and franchise, and second, expansion of the number of hotels under our brands.

As to improved results from our existing hotels, the last few years have been very good.

We've grown our adjusted EBITDA by over 30%, with the majority of growth coming from improved performance of our existing hotels.

Our owned and leased RevPAR is up nearly 20%, and our owned and leased margins are up over 300 basis points.

Management and franchise fees are up almost 30% in the two-year period.

During this time, we've also increased market share for the majority of our existing hotels.

In terms of guest satisfaction, we've seen increases in our customer service scores in all segments and from both guests and meeting planners over the past few years.

Engagement among our Associates across the Company has increased by a significant margin, as well.

One other comment on our results from existing hotels.

As you know, we've renovated several of our large, owned full-service hotels over the last two years.

These major renovations were completed on time and on budget.

And, we're on track to complete the public space renovation of the Grand Hyatt San Francisco later this year.

The feedback regarding the renovations has been excellent.

We expect results in the renovated hotels to improve over time as guests and meeting planners experience the new facilities.

As to our second driver of growth, the expansion of the number of hotels under our brands, we benefited from great support from third-party developers and owners around the world, augmenting our own acquisitions.

Over the last two years, we've grown our overall hotel portfolio by 14% on a net basis.

We've added presence in new markets and expanded significantly in key markets, such as Shanghai, New York, and New Orleans.

As a result of this increased presence, we're being included in more corporate travel programs with our number of corporate, negotiated accounts up approximately 35%, over the past two years.

Additionally, we have a greater number of loyal guests, with the number of Gold Passport numbers up 25% over the two-year period.

And importantly, the number of Gold Passport members who have stayed with us five or more times has increased by approximately 40%.

The application of capital to certain projects and markets is an important piece of our strategy to achieve our goal of good, thoughtful growth.

Over the last two years, we've invested more than $1 billion on a variety of renovations and acquisitions, net of full service and select service assets that we sold.

Most of that investment has been in the US.

As you know, we acquired 20 hotels from LodgeWorks last year.

I'm happy to report that the acquired hotels are performing well and benefiting from having access to Hyatt's loyal guests and our revenue systems.

Going forward, you're likely to see us use our balance sheet to secure opportunities outside the US, particularly in Latin America and Europe.

Investments in new properties and capital expenditures at existing properties are helping us to expand and improve our presence in the markets that have the biggest impact on our guests' preference for Hyatt.

Now, let me talk about our future.

As we said several times over the last few years, we operate with a long-term perspective.

With this in mind, the outlook for our Company has never been brighter.

Our brand and hotel portfolio is strong, well-positioned, and high-performing.

We have significant operating leverage in our business model, and look forward to the next several years during which we expect to see increasing pricing power as new hotel supply growth in the US continues to be low.

We also expect to see a significant number of new openings in key, high-growth markets outside of the US.

Enthusiasm for our brands continues to build among third-party developers and owners.

Evidence of this is seen in the significantly increased base of executed contracts for new hotels.

Over the last two years, we've increased the number of executed contracts for new hotels by over 40%.

This is especially meaningful, given that we've opened approximately 70 hotels during the last two years.

Another way to view this is to look at our contract base as a percentage of our existing portfolio size.

Our current contract base for future hotels is approximately 35% of our existing hotel portfolio, up from 28% two years ago.

Most of these hotels will require little or no capital from us.

70% of these hotels are located outside of the US, and the majority of them are full-service properties.

This illustrates the future potential for both our brands and our fee-earning capability over time.

As I've noted over the past two years, we expect ebbs and flows in results from quarter-to-quarter.

While the outlook for industry prospects seems to be improving over the last couple of months, there are still potential headwinds in the short-term from both Europe and a challenging Financial Services sector.

As a frame of reference, roughly 10% of our overall adjusted EBITDA comes from continental Europe including owned, leased, and managed hotels.

Most of our properties in this region are located in relatively strong city center locations in France, Germany, and Switzerland.

But given the uncertainty in Europe, it's tough to know exactly what the coming months will bring.

As to the Financial Services industry, it's the source of over 10% of our revenue, with a heavier concentration in certain markets like New York, which is an important market for us as it represents approximately 10% of our overall adjusted EBITDA, including earnings from owned, managed, and franchised hotels.

With significant cost-cutting at major financial institutions, we're paying special attention to both group and transient business from companies in the Financial Services industry.

Despite the potential headwinds, our hotels in key markets for Financial Services companies, including New York and London, are relatively new or recently renovated, so they are well-positioned versus their respective competitive hotels.

We're managing our Business in this environment by maintaining great focus on keeping costs in line with the business levels and maintaining adequate cash and a strong balance sheet to take full advantage of opportunities.

In conclusion, despite potential headwinds in the short-term, we remain confident about our future.

We've made a great deal of progress over the last two years and are excited as we continue our path to preference.

With that, I'll turn it over to Harmit to talk more about our results and 2012.

Thanks, Mark, and a warm welcome to those joining our fourth quarter 2011 earnings call.

My comments will cover three areas.

Our fourth quarter results, taxes, and capital expenditures.

Overall, we grew adjusted EBITDA by 21% for the quarter.

For the owned and leased hotel segment, RevPAR grew by 6%.

Comparable operating margins increased by 180 basis points, in part due to the lift from completed renovations.

RevPAR for comparable full-service hotels that we manage and franchise in North America increased 6.5% in the quarter.

Transient business in the quarter was strong with revenues up 13%, compared to the fourth quarter of last year.

This increase was split about 3/4 due to demand and 1/4 due to rate gains.

While it's difficult to forecast trends in business for 2012, we do know that rate increases on corporate, negotiated volume accounts in North America are up as expected in the mid-single-digit percentage range for 2012 versus 2011.

On the group side, rates increased slightly during the quarter.

Revenues were off slightly, in part, as a result of the renovation and market conditions impacting the Hyatt Regency Atlanta.

Corporate group demand was stronger than demand from Association and other groups segments.

We also continued to shift mix from lower rated groups to higher yielding transient customers.

In terms of booking activity during the quarter, we booked a lot of group business for 2012 and beyond with year-over-year production up each month during the quarter.

Bookings in the quarter for 2012 were up 8% versus last year.

As of year-end 2011, 70% of our expected group business for 2012 was already contracted at rates that are 4% higher than 2011 rates.

And overall, group rates for 2012 is ahead of last year.

Short-term bookings remained strong as well as group revenue booked in the quarter, for the quarter, was up over 12% compared to the fourth quarter of last year.

Now, let me turn to our select service hotels.

Comparable RevPAR increased 5.5% with over 50% of the gain due to higher rates.

RevPAR growth in the quarter was negatively impacted by approximately 150 basis points due to bathroom renovations at several Hyatt Place properties.

These bathroom renovations will continue through 2012, but are likely to have a lower level of impact to RevPAR from quarter-to-quarter.

Let me turn to our international business where RevPAR increased 3% in constant dollars.

RevPAR growth in Latin America and Southwest Asia was strong.

RevPAR growth was negatively impacted by declines in Japan, North Africa, and the difficult comparison resulting from the World Expo in Shanghai in 2010.

If you were to exclude Japan, North Africa, and Shanghai, RevPAR for International properties increased approximately 7%.

Incentive management fees for the Company as a whole were also lower due to the softness in the previously mentioned International markets.

Excluding Japan, North Africa, and Shanghai, incentive management fees actually increased over 3%.

Now that I've talked about our segment results, I would like to talk about two other topics, tax expenses and capital expenditures.

We reported a fourth quarter negative tax rate that resulted in a net benefit of approximately $28 million, or about $0.17 per share, driven by discrete items.

The benefit consisted of $30 million related to foreign tax credits and $11 million related to a settlement of a foreign tax issue.

This total of $41 million benefit was offset by other tax provisions.

Our full-year tax rate excluding these and previously reported discrete items was approximately 25%, consistent with what I mentioned during the last earnings call.

Further details on the discrete items will be available in our Form 10-K which we expect to file later today.

For 2012, we expect our effective tax rate to be in the low- to mid-30% range before discrete items.

Keep in mind that quarterly effective tax rates may be somewhat volatile due to the impact of discrete items.

While discrete items by nature are very difficult to predict and can have either a positive or negative overall effect on the effective tax rate, we do not presently anticipate the impact of discrete items in 2012 to be of the same magnitude that we saw in 2011.

Let me now discuss capital expenditures.

First, in 2011, we had expected to spend approximately $390 million to $400 million, but actually spent $330 million.

The variance is related to the timing of payments for renovations, as well as the timing of payment on a land purchase.

Thus, $65 million from last year was carried over to 2012, solely due to the timing of payments.

Our expectation for this year is approximately $350 million in capital expenditures.

The $350 million includes -- $65 million, which was carried over, and I just referred to it a little while ago, approximately $250 million on maintenance capital expenditures, and projects from which we expect to generate a return.

This includes conversion or renovation costs for the hotels we acquired from LodgeWorks, as well as the Extended Stay hotels we acquired last May.

And, approximately $35 million on new investments in properties that will be developed by us or in conjunction with partners over the next few years.

And with that, I'll turn it back to Atish for the Q&A.

Thank you, Harmit.

That concludes our prepared remarks.

For our question-and-answer session, please limit yourselves to one question at a time, and we will take follow-up questions as time permits.

We are happy to take your questions at this time.

Janeta, may we please have the first question?

(Operator Instructions) Josh Attie, Citi.

Mark, there was a quote in your press release about corporations being more cautious about making longer term commitments.

Can you elaborate on that comment?

And, has it manifested itself at all in your group bookings or your corporate rates?

Because I thought most of the numbers you provided in the prepared remarks sounded pretty positive.

Thanks, Josh.

Good morning.

The key issue from our perspective is not whether there's good underlying demand.

There clearly is.

Our production -- the group production in the quarter -- total production for all periods was over 12% year over year.

And, that's actually part of the point, which is that there's a lot of production in the period, for the period.

So, really the only point that I was maybe referring to from a quote perspective is the fact that there is a lot of in the period production as opposed to more visibility to future bookings.

So, underlying demand continues to be good and solid and our production actually reflects that.

But, there is a lag in terms of the forward booking curve for the bigger hotels.

So, that's really the -- hopefully, that provides you a little context for that.

Josh, just to build on it.

Let me give you some numbers that bear out our perspective for '12 and beyond.

Our pace for '12 is in the low- to mid-single-digits.

We have, as I said in the prepared remarks, 70% of the business we expect already booked at rates higher than where we end the year.

Our pace for '13 and '14 is also positive.

We, at this point, have about 40% of the expected business for '13 booked and about 25% of the business for '14 booked at rates higher than what we're booking for '12.

So, just to give you a bit of flavor of what we are expecting on the group side.

And, some of your recently renovated hotels like New York and San Francisco -- are you finding when you talk to customers that they're reluctant to book for the out years?

Or, how are the bookings trending at those properties?

Well, I guess in those particular properties, the group mix is actually relatively lower.

It's below 50% in both cases.

So, we have a circumstance there in which the principal drivers there will be transient.

But, I would say that for certain segments, you can't really generalize because you have to get into the details of which segments are actually booking forward or not.

There is a -- there's been a proclivity to push decision-making closer to the date of the events, which is clearly reflected in the in the quarter, for the quarter, production that we've seen over our past year.

And, that's kind of what we're taking into this coming year, which is a real focus on continuing to book in the quarter, for the quarter business.

Okay.

Thank you very much.

Steven Kent, Goldman Sachs.

Could you just talk a little bit more about the select service business in North America?

It seemed to decelerate in the quarter.

Was that due to LodgeWorks?

And then, also on the acquisition front, what are you seeing?

Either portfolios, the ability to acquire or to convert, and opportunities in Europe?

And finally, I've got to ask, Atish, what's the big surprise that you're going to announce?

(laughter) That will be soon.

Good morning, Steve.

Or, good afternoon, your time, I guess.

On the select service front, Atish mentioned that we experienced some occupancy impairment during the quarter because we were redoing bathrooms in selected Hyatt Place hotels.

The total difference, Atish -- Harmit, was --?

About 150 basis points.

In RevPAR.

In RevPAR.

These are 15 properties during the quarter.

So, I would say that's one of the issues that you have to just recognize.

In terms of LodgeWorks -- actually, LodgeWorks has not had a negative impact in any way.

We've seen a significant increase in market share across the hotels.

The measure of Hyatt loyal guests through Hyatt Gold Passport revenue into those health hotels has been significant.

So, we're seeing really great performance there.

LodgeWorks is clicking along very well and very much in accordance with what we expected.

So, I think as we see we've had over -- cumulatively over time a significant ramp in RevPAR progression across our select service hotels, and a significant proportion that is threat of market share gains across our select service hotels.

And so, you have to bear in mind the progression over time as to comparing period to period.

The other thing that we're focused on that we've talked about in the past is more urban representation for select service.

We have very, very little urban representation for our select service brands.

That's going to change this coming year as we start to open our select service brands -- properties, rather, that are under construction in some major cities.

It is also a key area of focus for new development activity that we're pursuing with our new colleagues from LodgeWorks and our existing team.

So, that's on the select service front.

On the --.

Can I just add, just two points.

Steve, one, the 5.5% number that you're seeing is comparable.

So, the LodgeWorks hotels will not be incorporated in that, given that we just acquired it.

And the second is just as a reminder, in 2010 quarter four, select -- comparable select RevPAR was up 9.5%.

So, we're lapping that as you bear that in mind.

On the acquisition front, we are seeing interesting opportunities -- hotels, small collections of hotels -- and some opportunities for brand acquisitions.

Those are obviously fewer and further between.

But, the hotel opportunities that we've seen -- relatively higher level of activity and has been outside of the US.

The deal activity in the second half of last year was actually relatively low.

And so, as we've looked across the globe, it's really been more outside the US than in.

And, Atish, you want to talk about --?

Why don't we just wait until the end of the call.

I'm sure we have a few more questions.

We'll take the next question, please?

Mark Strawn, Morgan Stanley.

I was wondering if you could give us a little more color on the relatively strong margin performance you saw across the hotels?

As you look at the performance of some of your recently renovated hotels with some more of your same store properties, can you give us a general sense of the breakdown of trends there?

Sure, Mark.

Our comparable margins were up 180 basis points.

Quarter four of 2010, just as a way reminder -- we had strong margin growth.

I think over 200 basis points, but 50% of that was a one-time credits we got for property tax refunds.

So, you've got to adjust for that because you're comparing year over year.

Our margins, actually after the adjustment, were up 280 basis points, because you add about 100 to the 180.

And, the way I break that up, the lift we've got from renovations that we've done is about 180 basis points to 200 basis points of the 280 basis points.

And, our base business is up 70 basis points to 80 basis points.

Our base business -- so, we clearly -- margin growth was helped by the fact that our properties that were under renovation came back, and New York and San Francisco, for example, are off to a good start.

The base business continues to trend relatively well in terms of flow-through.

Just as a pointer, if I look at the cost per occupied room for our own portfolio, that actually went down in the quarter by 2%.

And, that's despite an increase in demand in terms of room nights.

So, we continue to focus on costs, and especially when there's some uncertainty to make sure that we're able to mitigate or maximize flow-through over time.

And, to your question about renovations.

As I mentioned New York and San Francisco are off to a decent start.

Atlanta, there was still some rooms that were out of service in quarter four.

We've completed the renovation of the rooms, but the market -- Atlanta market -- as you are probably aware, had a weak quarter in quarter four.

In fact, I think it was down high in single digits, so that probably hurt us a little.

Great.

Thank you very much.

Great.

We'll take our next question, please.

David Loeb, Baird.

Harmit, this sort of relates to your last answer.

I'm trying to understand the RevPAR numbers relative to the renovations in Atlanta?

Clearly, wasn't a bounce back that you would've expected.

But I guess I want to understand, was there still some renovation impact in the fourth quarter?

A year ago it was about 400 basis points of impact, and I guess I'm wondering, was there some tail end impact?

Was it neutral relative to last year?

Or was there some bounce back that was essentially offsetting RevPAR weakness in other areas?

David, a good question.

I think our own portfolio is up 6% year over year, and you're right, renovations did hurt us in quarter four of 2010.

There were two things.

One was, I think, Atlanta as a market, with some rooms out of inventory, and the second, we referred to the select segment in terms of the bathroom renovations is largely in our own portfolio.

I think a combination of Atlanta and select impacted RevPAR by between 200 basis points and 250 basis points.

And, if you split that, what's the Atlanta factor and what's the select factor?

I'd say, two-thirds Atlanta, one-third select.

Okay.

So, not that much of a bounce then in New York or San Francisco yet?

Actually, year over year, New York and San Francisco had a great quarter.

I won't get into, specifically, the numbers.

But, RevPAR was up as expected, and close to what we underwrote.

Okay.

Thank you.

Shaun Kelley, Bank of America Merrill Lynch.

Good morning.

Just wanted to touch base real quickly on the call out for the Financial Services industry, and maybe your thoughts around New York.

Did you see something specific in the quarter that gives you caution there?

An actual slowdown?

Or, is it more just forward-looking as you are looking out for your bookings?

What was it that drove the call out there?

Thanks, Shaun.

It's definitely perspective.

We're paying attention to it as I described it.

Because we recognized in the prior significant downturn at the end of '08 going into '09, that a lot of smaller conference-like meetings and bookings like that suffered as a result of pullback.

Now, that was a much more severe circumstance, and I'm not trying to draw an analogy there.

Because the kinds of cost-cutting and layoffs that we've seen in Financial Services hasn't really -- does not look anything like it was during that period.

But, there's no question that there were both layoffs and also some cost-cutting measures at some major banks.

And so, we are looking forward and trying to identify places where we need to pay special attention.

But, certainly not retrospectively saying, yes, we've got a serious hole here driven by Financial Services.

Okay.

That's helpful.

And then, similar follow-up on the Europe continent.

I'm just more wondering your high-level thoughts on what you have seen out of some of the big -- the bigger cities?

When we get some of the data, the data is fairly choppy -- coming out of places like Paris.

And, I know you are in urban centers, but how do you think about maybe some of the places that you're specifically in as you look at this year and the specific assets that you own?

Yes.

So, I think the fact is that our presence in continental Europe is really primarily city center locations for high-end hotels.

Most of our presence on the owned side is in luxury hotels.

Our business base, our occupancy base in those hotels is global.

So, we are not principally serving local market in any way.

So, as we look at it, I think those things certainly will make a big difference in performance if you were to compare those types of hotels to the broader market.

And that has been our experience to date, we've seen demand actually sustained for our hotels in those major city center markets.

I think the bigger question is if there is systemic disruption and broader problems, of course, we would expect to be negatively impacted.

But, the form of that and the nature of it is really impossible to predict at this point.

So again, as we look into the year, we were just trying to identify for everyone that we think that there are potential issues both in this area, and I mentioned Financial Services.

It's really for us prospective and paying attention to what's on our radar screen as opposed to looking backwards and saying wow, we've seen a real falloff in those particular areas.

That's great.

Appreciate the color, Mark.

Joe Greff, JPMorgan.

Your comments on the group side?

Can you remind us on the owned and leased segment, what percentage of your revenues at least last year -- going back the last few years -- are driven by the group side?

I don't have the owned off of the top of my head, but on the North American managed, it's approximately 45% to 50%.

We can get back to you on the exact percentage for owned.

Great.

And then, if we can do a postmortem on last year's EBITDA impact from the renovation, what was that exact number?

I don't know if you get on this call.

And, if you could help us understand, given some renovations this year, what sort of impact do you expect?

I don't know if you want to talk about it from an EBITDA perspective?

Or, a percentage of RevPAR growth perspective, but understanding that would be great.

Thank you.

I think for '11, we had mentioned that the displaced EBITDA impact was, I think, in the mid-$20 million, about $25 million -- sorry?

For the first three quarters.

For the first three quarters, we definitely saw a bit of lift in quarter four.

I think from our perspective, Joe, as we think about '12, and as these hotels ramp up -- as I said, New York and San Francisco are off to a good start.

We expect over time to claw back what we lost in '11 and more over time.

Because, as I mentioned earlier, we underwrote these projects with a prospective return of anywhere in the high single-digits to the low double-digits.

Again, it varies by property because the kind of renovations that we're doing again are different by property, but that's really where we're looking at.

Carlo Santarelli, Deutsche Bank.

Good afternoon.

If you wouldn't mind, could you walk us through some of the pushes and pulls as it relates to expenses in your own portfolio for 2012?

If there's any certain areas that you'd want to highlight where costs will be going meaningfully up that we might miss it?

Thanks.

I think, if you look at our overhead for 2011, our overhead -- our SG&A was up about 7% [lower], 7% for the year.

And, for the quarter, it's 4%, but we had some bad debt recoveries which are one-time.

The 7% is largely broken up between, I would say, an increase in base business which is wage inflation and the like, and investment in resources for the long-term, which is largely to drive our expansion activities.

And, you are seeing the results in that in terms of the expanded pipeline.

I would split that 50-50 between the two.

As we think forward, I'd say the trend will probably be very similar because we're continuing to invest for the long-term.

We've built our resources in key markets -- development resources supported by legal and finance in key markets.

We are investing a little bit on innovation and technology as we try and develop strategy to meet changing consumer needs.

And, what I'll say is the mindset is borne by the fact that our mindset is continued focus on costs.

Thanks, Harmit.

Smedes Rose, Keefe, Bruyette, & Woods.

Hi.

Wanted to ask you two quick questions.

One, you bought some land in Rio a while back.

Just wondering, you mentioned focusing investment outside of the US.

Are there any plans specifically on that piece?

In light of, they have Olympics coming up at some point?

And then also, for the $661 million you spent on LodgeWorks.

What was the incremental amount for any renovation or conversion costs in addition to the purchase costs?

Thanks.

So, on the Rio front, we have been actively engaged in a lot of work around design and securing all the various entitlements that we needed to be able to proceed with the project.

We are proceeding down the path of doing that development in that manner, and we are in discussions with a number of potential sources of financing -- both potential partners, but also potential debt financing.

So, we continue to work on that.

That will be an area of activity for us during the course of this year.

And yes, our current plan is to be able to complete that project well ahead of the Olympics so that we are there and ready to serve those guests coming into the city.

With respect to the LodgeWorks side, I'll turn that over to Harmit to actually address.

Right.

The conversion costs -- again, these are brand conversion costs, which we will be spending this year -- for the LodgeWorks hotels is between $15 million and $20 million.

And, that's expected to be spent in 2012.

On top of that, if you recall, we bought a couple of [Woodfern] hotels in the early -- in the middle part of last year, and we expect to convert those hotels to our brands, too.

The range of those numbers are also in the $15 million range.

And, that's included in the $250 million number that I mentioned in my prepared remarks.

That included both maintenance costs as well as costs for renovating some of our own properties.

Great.

Thank you.

Jeffrey Donnelly, Wells Fargo.

Mark, how do you think about -- more broadly about capital allocation between real estate acquisitions and brand acquisition at this time?

And then, maybe as a follow-up.

Considering that there's a pretty heady volume of hotel mortgage maturities in the next 12 to 24 months, is it unrealistic to expect that you could become more acquisitive in that world?

Or, do you think you'll hold off at this time?

Well, Jeff, the answer is we've been active in looking at a number of opportunities constantly.

So, it's a regular part of what we're doing.

We are admittedly very focused on gateway city -- key city and key gateway city representation because we still have either no or limited representation in some large markets.

And so, that's really how we've been thinking about allocating our time and attention from a pursuit perspective.

In the US, we've obviously put capital behind our select service brands and with the launch of the Hyatt House brand this past year, and the expansion of our team to include former LodgeWorks colleagues now currently Hyatt colleagues, we are very much focused on continuing to pursue developments there.

Not so much to have them permanently on our balance sheet but to be able to get them going.

And, to be able to partner or invite other third parties to come in to develop and own those hotels longer term.

Now, as we look forward in terms of total capital allocation which is really your question, the answer is we expect to be active on both the purchase and the sales side.

So, we expect to do that on a regular basis, and as we look forward over the next couple of years, we do expect transactional activity to grow.

I think the comments that the Federal Reserve made with respect to the interest rate environment going forward and their philosophy around that should provide some foundational element to cost of debt and so, I think that that will end up supporting more activity over time.

So, I would tell you that we expect to be active on both sides, and frankly, as we've described many times, our core philosophy and our thinking about capital allocation really is driven by recycling.

So, we want to take the assets that we've got on our balance sheet and put that capital to more work, more aggressively over the next couple of years.

So, I think the answer is we will be pursuing new investments, but we will also be pursuing sales that will help to fund those new investments as well.

Great.

Thanks.

Ben Wagner, [Pollock] Investment.

I just wanted to ask about the capital structure.

It looks like you're ending the year here with almost zero net debt.

And, obviously cash flows are very good.

Could you talk about the way you think about leverage for Hyatt when you look across at your competitors who are levered, and the amount of levers that you can maintain and have an investment grade rating?

Just, how you think about that?

Thanks.

Sure, Ben.

This is Harmit.

We think of us being an investment grade Company in the long-term.

We had been during the crisis.

We are today, and we expect to be one both today and over time.

In terms of leverage, we measure that as being or having a leverage of 3.5 times adjusted EBITDA.

That's the benchmark, and that's the benchmark S&P uses for us.

And, that's the benchmark we use internally.

You're right.

We have net debt which is very, very marginal.

The 3.5 leverage is really based on gross debt, not net debt.

That's how most rating agencies look at it, and that's how we measure ourselves.

And so, you just view the cash that you have on the balance sheet as just sort of there in case you're going to acquire something?

I'm trying to understand why it makes sense to have $1 billion on your balance sheet?

Sure.

Ben, we do have some forward commitments that we reported in our 10-K.

I think they were about $600 million.

The business generates -- in 2011 for example -- pre-CapEx, we generated close to $400 million, and we spent $330 million in CapEx.

The good news is the business generated enough cash to fund CapEx.

The way I look at it, given the recovery, and the fact that we just renovated some hotels and the fact that there's ramp up associated with the renovated hotels and the LodgeWorks acquisitions, the cash generated by the business over time should increase.

CapEx should probably come down largely because we've had some big projects.

We are completing that.

Most of our existing portfolio is largely fresh.

So, over time, the net cash the business generates will also increase.

What we have stated in the past, and I think we still stick by it is our intent is to use the cash that the business generates and the cash we have on our balance sheet to first use that to grow the business on a global basis.

And then, over time, we can look at returning things back -- returning cash back to the shareholders.

But, at this time, our first objective is to grow the business and use the cash that we have with that perspective.

The only other comment I would make in this regard is that opportunities in our industry, when they come, they come often times in lumpy or larger scale purchase prices.

So, having flexibility in terms of capital available to us to be able to act and act both definitively but with some rapidity is important to us.

So, it's not a matter of needing to keep a lot of excess cash on the books forever, but rather to recognize that we have been and are continuing to focus on using capital to help us expand in the exact areas in which we think it will make the biggest difference to our guests.

Okay.

And then, could I just ask one follow-up to that?

Just on the way you look at valuation when you are doing acquisitions?

Obviously, LodgeWorks, you did about 16.5 times forward EBITDA.

You don't trade anywhere close to that.

How do you reconcile -- how do you think about growing the business through an acquisition at something that is not even close to accretive versus doing very accretive buybacks?

Yes.

So, the answer is that these are not trades.

So, what we're doing is really building our presence in some key markets, and it is inevitable that it takes time to actually realize value for projects where you're buying something, applying your brand to it, and then using it as a platform for further growth which is really how we thought about and how we do think about the LodgeWorks acquisition.

It was a significant incremental representation in our extended stay segment, through Hyatt House, and came on the back of -- or came concurrently really with the launch of the new brand.

So, we don't really think about it as a point estimate trading multiple analysis.

We look at it -- we look at what the impact will be over time, and what it will do with respect to our overall performance as a Company.

So, in particular, I mentioned, for example, in my prepared remarks that the number of our managed corporate travel accounts has expanded significantly and our proportion of business with those customers is expanding.

That is, in part, driven by the fact that we have -- we are able to serve more corporate guests in more markets today than we were several years ago.

And, one of the key ways in which we are able to serve more corporate guests and more markets is through our select service presence, and it also provides a different price point to serve those corporate customers.

So, it's really a holistic enterprise impact that we expect to be able to garner from that.

The only thing I would add is the multiple that you referred to was impacted by corporate level's G&A as well as the brand and management costs that we picked up.

So, if you looked at a property level multiple, it would be lower than the number you mentioned.

Ian Wiseman, ISI.

Just a quick question on return hurdles for owned real estate.

With the Fed's commitment to keeping rates low indefinitely, it feels like.

What is your view of unlevered IRRs?

Do you feel like investors have compressed return hurdles we've seen in other property types?

Just curious about your thoughts on hotels?

Well, I don't know that you can really look at current market activity and draw a lot of conclusions from it.

There is probably not enough data points to know.

That is, especially if you look at subsequent to the time that the Fed made their announcements.

I think that over time it's inevitable the access to debt capital -- both knowing that there's going to be access to it, and secondly, what the cost of it is will have an impact on asset values.

Our view -- the way we underwrite and the way we actually analyze our property portfolio is not as a portfolio, but rather, individual properties in individual circumstances.

So, a quick reminder.

When we sold six full-service properties in 2010 and 2011, and last year we contributed eight select service properties to a joint venture with Noble Investments.

And in those cases, purchase price and yield -- implied yield was certainly a part of the equation, but we also looked at who the prospective owners were going to be.

We looked at what capital commitment those owners were going to make to our properties.

Because in many cases, the properties that we sold over that period of time required CapEx.

And, the third is that we look at the tenor and terms and conditions of the management arrangements -- or franchise arrangements that we put into place when we sell properties.

So, we look at it holistically as to the value equation for us, and the underlying values and return hurdles and expectations, frankly, will vary significantly by market.

So, suburban Chicago property will attract a different return level than Midtown Manhattan.

We do these one by each as opposed to thinking about it as a portfolio.

Where would you put -- let's just look at a gateway city like New York or San Francisco, where would you think unlevered IRRs are today for full-service, high-quality assets in gateway cities?

I don't know that that's an easy question to answer.

I would say that the cap rate environment -- if you look at it over a longer period of time has been -- for a very high-quality property in a great location in the mid-single-digits, five, six, something in that range.

As opposed to something that you would see that would be in the high single-digits or low double-digits in a secondary location or in a secondary city.

So, in terms of a cap rate environment, that's what it's look like over time.

In Europe, you also have the same dynamic.

With even beyond that, the cap rates can even go below that depending on how unique the property is and whether it's freehold or leasehold.

There are other factors that you have to take into account, but the compression and yields for those key city center, great location, high-quality assets -- it's not compression so much as just level -- tend to be very low.

Okay.

Thank you.

David Loeb, Baird.

Thanks for coming back around to me.

Just wanted a little more thought on New York.

Not so much on cap rate, Mark, but on what you see as the fundamental outlook?

Clearly, you've got a big investment there, 10% of EBITDA and a lot in the pipeline coming, including the stuff that you're building.

What do you think about the supply dynamics?

The supply demand dynamics in that market?

And, how do you view longer term growth in that market?

Well, New York is a wonderful market.

New York has got demand drivers from everywhere around the world and across so many different businesses, and governments.

We're very enthusiastic about the long-term prospects for New York.

That's partly why we were so focused on getting moving on this.

When we started this journey, I think we had a single hotel opened and operating in New York, and we've got four open and operating in, and another -- we'll end up doubling that in terms of our presence in New York over the next couple years.

We've obviously put a lot of effort, and I'm happy to say, successfully, behind expanding our presence there.

So, my outlook for New York long-term is very bullish.

I recognize that there is more supply coming into New York than in most markets around the country.

And, I guess, I would say two things.

One is, you have to pay a lot of attention to what it is and where it is.

New York is a wonderful place because it's made up of a number of individual markets.

It's not monolithic.

So, demand drivers and rate levels around the city will vary significantly.

And the second thing I would say is, that even if you're in a situation where you're building or opening a hotel, which is surrounded by some other new builds or other supply coming on board, you may experience some lag in really getting some traction.

But, we would never expect that to be persistent over a very long period of time.

What's a long period of time?

Like a cycle.

Because the demand increases and the absorption is such that we really believe that you'll end up seeing those hotels being able to ramp up and get to good operating statistics relatively quickly.

So, what we tend to do is make underwriting decisions based on what the long-term outlook is because we're not trading.

This is not a trading operating operation.

We're actually investing and looking at how we can build these assets and build our business over time.

But we also recognize, as I mentioned in my remarks.

We do recognize that there's going to be absorption, and there may be short-term impacts.

But, those will not color our enthusiasm for a market that's got good dynamics.

Very helpful.

Thank you.

At this time, we have no further questions.

I would now like to turn the call back to Mr.

Atish Shah for closing remarks.

Great, thanks.

Harmit, did you have one other point?

This is in response to Joe's question.

The group component of our own portfolio is a little lower than 40%.

45% number I gave you is from managed portfolio in North America and for the owned piece is a little lower than that.

And with that, before we end the call, I'd like to cover one final item.

Sorry to have made you wait.

We want you to know that we are modifying the format of our earnings call starting next quarter.

We will be moving to a predominantly question-and-answer format.

Consistent with current practice, we intend to issued our earnings release before the market opens.

We will ask that questions be submitted to us via e-mail by approximately 8.30 AM Central Time.

We will conduct a conference call shortly thereafter.

The conference call will consist of brief introductory remarks after which we will read and respond to questions received.

We will not screen or edit questions, but we will group them into categories by topic and try to respond to every question.

The identity of the person who submitted the question will not be disclosed.

Then, toward the end of the call, we will take follow-up questions via a live Q&A.

Overall, between the e-mailed and live Q&A, we expect to devote the majority of the call to answering your questions.

So, those are the basic ground rules.

We want to give you a heads-up at this time.

We will include additional details such as the appropriate e-mail address in the press release that announces the date of first quarter earnings.

As to rationale, we're making this change in response to analyst and investor feedback which indicated a preference to have more time for the question-and-answer session.

This approach has been utilized by companies outside of our industry.

Analysts and investors of those companies have commented favorably on the efficiency of the format and because it gets to the subject matter of most interest more quickly.

We think this format change will work better for all members of the investment community -- analysts, institutional, and individual investors.

Each of whom is invited to e-mail questions to us, and we look forward to your participation.

And with that, I'd like to thank everyone for joining us today.

We appreciate your interest in Hyatt.

We wish you a nice, upcoming long weekend, and we look forward to talking to you soon.

Thank you, and goodbye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.