Hyatt Hotels Corp

NYSE:H

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Hyatt Hotels Corporation Earnings Conference Call. My name is Denise, and I'll be your operator today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Brad O'Bryan, Treasurer and Senior Vice President, Investor Relations and Corporate Finance. Please proceed.

[[0CPPRG-E Brad O'Bryan]]

Thank you, Denise. Good morning, everyone, and thank you for joining us for Hyatt's first quarter 2018 earnings conference call. I'm here in Chicago with Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Pat Grismer, Hyatt's Chief Financial Officer. Mark will begin our call today with highlights of our first quarter operating results and an update on our growth strategy. Mark will then turn the call over to Pat, who'll provide more detail on our financial results for the quarter as well as an update on our full-year outlook. We will then take your questions. As a reminder, all references to RevPAR results included in our discussion today are calculated on a comparable and constant dollar basis.

Before we get started, I would like to remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued late yesterday, along with the comments on this call, are made only as of today, May 3, 2018, 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 financial reporting section of our Investor Relations link and in last night's earnings release. An archive of this call will be available on our website for 90 days per the information included in last night's release.

With that, I'll turn the call over to Mark.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thank you, Brad. Good morning and welcome to Hyatt's first quarter 2018 earnings call. I'm happy to report that we started off the year with very strong first quarter results across our global business. We reported adjusted EBITDA of $202 million for the quarter. Adjusting for the year-over-year impact of transactions, the timing of the Easter holiday and the net impact of termination settlement amounts received in both periods, adjusted EBITDA would have increased approximately 8% on a constant-currency basis. These strong results were fueled by continued growth in management and franchise fees across all regions.

Turning to RevPAR results, system-wide RevPAR increased 4.3%, led by solid increases in occupancy and an average daily rate, excluding the timing of the Easter holiday system-wide RevPAR would have increased a very healthy 4.6%. More than half of our hotels globally increased RevPAR index as measured by Smith Travel Research for what is now 13 quarters in a row of increasing market share. During the first quarter, we achieved net rooms growth of 7.2% on a year-over-year basis, marking 12 consecutive quarters of year-over-year net rooms growth in excess of 6%. Even with our rapid rate of hotel openings, we continue to grow our pipeline of signed deals closing Q1 with a development pipeline of 73,000 rooms, an increase of over 10% compared to the same time last year. Our pipeline represents nearly 40% growth of our existing rooms base.

Before moving on, I'd also like to highlight an important disposition in the first quarter. As previously disclosed, we completed a very significant transaction with Host Hotels & Resorts, in which we sold Andaz Maui at Wailea, Grand Hyatt San Francisco, and Hyatt Regency Coconut Point for an aggregate sales price of $1 billion.

As we've indicated previously the Maui and San Francisco properties account for $800 million of proceeds, against our stated goal of a $1.5 billion reduction in owned and leased assets, bringing us to a total of approximately $1.1 billion in gross sales, under the program to-date. The three assets sold to Host Hotels & Resorts were sold at a multiple of approximately 16 times 2018 pro forma adjusted EBITDA, demonstrating the value of our owned and leased hotel portfolio.

The sale also demonstrates the demand for high-quality assets, which are in relatively limited supply at this point. With that in mind, it is possible that the sales of hotels under our ongoing asset recycling program during the year, including the Hyatt Regency Coconut Point may not be quickly replaced with acquired hotels, given our disciplined criteria for these investments. As a result, we may end up in a net seller position in 2018 under our recycling program, recognizing that this would mean we could be a net buyer in a future period as market conditions evolve. I'm very pleased with our execution on the transaction with Host and the overall discipline we're bringing to capital deployment.

Before Pat provides you with more detail on our first quarter results and our outlook for the remainder of the year, I would like to spend some time highlighting an important area of focus within our long-term growth strategy. You'll recall from our fourth quarter 2017 call in February, I discussed our three strategic levers that create value for our colleagues, customers, hotel owners and shareholders. One of those levers is maximizing our core business, which is the primary driver of our growth. Over the next three quarters, I'd like to spend some time discussing three areas of focus within that lever, those areas of focus are, the growth of our business in Greater China, the growth of our select service business globally, and the important work we are doing to drive customer engagement.

For this call, I'll focus on the Greater China region and its importance to our future growth. I'd like to start by first highlighting our history in this region, which underpins the position of strength we enjoy in the market today. We entered the Greater China region in 1969 and at the turn of the century began to increase our presence in a more significant way. Since that time, we've opened a large number of hotels including iconic properties under our Grand Hyatt brand in cities such as Shanghai, Beijing, Shenzhen, Guangzhou and Shenyang among others. We've also grown our Park Hyatt brand in cities such as Shanghai, Beijing, Hangzhou and Guangzhou.

We now have 58 hotels or approximately 19,000 rooms in Greater China, which represent approximately 10% of our system-wide base of hotel rooms today. While growing our presence in China, we've built a reputation for excellence in the experience we provide high-end travelers, including unique strength in our food and beverage offerings. Our industry-leading food and beverage operations comprise nearly half of our total full service China hotel revenue, which we consider a competitive advantage that has been established over many years. This rich history of strong operating results and guest preference has led to a high level of respect with owners and developers in China, which has contributed to both the durability of our management agreements and the growth in our pipeline of signed deals in China. For example, we recently completed the successful renewal of a long-term management agreement for our Hyatt Regency Hangzhou hotel, which is expected to be rebranded as a Grand Hyatt after completion of an extensive capital plan.

We also recently executed the renewal of a long-term management agreement for our Grand Hyatt Shanghai hotel. The Grand Hyatt Shanghai is an architectural icon located in one of the first skyscrapers built in Shanghai. Our presence there allowed us to establish our brand identity in China and spurred the growth of the Grand Hyatt brand. Grand Hyatt Guangzhou just celebrated its 10th anniversary in April. And next year, we'll celebrate the 30th anniversary of Grand Hyatt Hong Kong, the first Grand Hyatt in Asia.

We recently opened a stunning Grand Hyatt in Xian, our second property in that key city and with more expected to come. For those who have not been to Xian, this city was a major trading hub and the entry point to the ancient Silk Road more than 2,000 years ago. Today, the city is assuming the same important role under China's One Belt, One Road initiative. Our pipeline of signed deals in the Greater China region now stands at over 22,000 rooms. This pipeline represents approximately 30% of our global pipeline and we will more than double our presence in this region over the next four years.

In 2017, fees from our Greater China hotels were approximately $54 million and made up just under 11% of our global fee revenue. We expect our Greater China pipeline will yield stabilized fees that will more than double our fee revenue in the region and we expect this contribution to accelerate further, based on additional investments we've begun to make locally. This is very exciting when you consider the significant tailwinds that are driving the rapid expansion of travel in China. This includes the growth of the middle class in China, combined with the expanded options and ease-of-travel for both domestic and foreign visitors.

With a population of approximately 1.4 billion, the 10 largest cities post metropolitan populations well over 10 million and at least 160 cities have populations of over 1 million. Fueled by strong GDP growth, China is a strategically important growth market for Hyatt, not only because of domestic travel, but also because of growing outbound travel by Chinese nationals. In fact, travel and tourism revenue is growing at more than twice the rate of GDP growth in China and now comprises more than 2% of China's annual GDP. The number of domestic Chinese travelers in 2017 grew almost 13% from the prior year, whereas outbound Chinese travelers in 2017, of which there were over 130 million, grew 7% from 2016. Remarkably, this number is expected to nearly double to 250 million by 2025.

So how will we better serve this market and maximize this opportunity? To start, we are elevating our focus on development and growth by investing in leadership and resources and by establishing strategic partnerships. I'm especially pleased to share that we recently appointed Stephen Ho to head our Greater China business. Stephen was previously head of Greater China for one of our largest competitors. And before that, he was head of Asia-Pacific for another large global hotel company. He brings deep and relevant experience to the company and will lead a new team focused on fueling and supporting a much larger business in this region and ensuring that we are well-positioned to serve outbound Chinese travelers on a global basis.

In addition to leveraging our reputation in the region and our strong relationships with existing owners to fuel the development of new hotels, we are very focused on developing strategic relationships with high-quality partners that we expect will accelerate our growth in China.

Recently, we executed a strategic development deal with Tianfu Minyoun Hospitality based in Chengdu. Minyoun will become an important development partner for Hyatt Place and Hyatt House brands, accessing projects outside of our current deal flow. Minyoun will also become our first approved third party owner operator for our select service brands in China, allowing us to establish a model for quality operators as we move into franchising in China.

We are also working on potential integration of World of Hyatt into Minyoun's larger suite of hotel brands. Upon signing of the strategic development agreement, we signed deals for three new hotels, which are included in our current pipeline and we expect to sign a few more in 2018. We expect to sign as many as 50 new Hyatt Place and Hyatt House hotels with Minyoun over the next five years, with none of those hotels included in our already robust pipeline.

As our new Greater China team ramps up and coordinates efforts with regional and corporate resources, they will be focused on a number of areas that will enhance our offerings to Chinese consumers. One area of focus will be enhanced localization of our offerings, including a focus on room types, food and beverage offerings, and brand standards that better cater to Chinese consumers. We will also be focused on enhancing our World of Hyatt offering for Chinese guests, with a goal to substantially increase penetration and drive loyalty with domestic and outbound travelers.

In addition, we are stepping up our efforts in the digital space, which is of a particular importance to engaging effectively with Chinese travelers. We will be enhancing existing technology platforms and pursuing strategic partnerships in this arena, while also enhancing payment options and mobile offerings and strengthening our representation within key Chinese e-commerce channels.

In summary, we are very excited about our future in China and believe the steps we are taking to invest in that future will drive significant value over time. I'd like to close by saying that we are very pleased with our quarter one 2018 results and remain cautiously optimistic about the remainder of the year.

Moreover, we're very pleased with the progress we're making in the execution of our capital strategy, which is clearly helping to unlock shareholder value and drive growth of our company by way of reinvestment of capital in new opportunities.

With that, I will now turn the call over to Pat.

[Patrick Grismer, Hyatt Hotels Corp.]

Thank you, Mark, and good morning, everyone. I will begin by providing more detail on our first quarter results and will then share an update on our expectations for the full year. Late yesterday, we reported first quarter net income attributable to Hyatt of $411 million and earnings per share of $3.40 on a diluted basis. Adjusted EBITDA for the quarter was $202 million with system-wide RevPAR growth of 4.3%. The timing of the Easter holiday adversely impacted our system-wide RevPAR growth by approximately 30 basis points.

Additionally, the impact of transactions over the past 12 months resulted in a net decrease in adjusted EBITDA of approximately $34 million compared to 2017. Excluding these items along with a $5 million positive net effect from termination settlements received in both periods, our adjusted EBITDA grew approximately 8% on a constant-currency basis. These results exceeded our expectations by a meaningful amount with much of the strength for the quarter materializing in the month of March, where we enjoyed strong performance at our resorts and stronger-than-expected group business resulting from in the year, for the year bookings. I would also note that the implementation of the new revenue recognition standard resulted in a $12 million reduction in adjusted EBITDA for the quarter versus what would have been recorded under prior accounting principles. On a restated basis, previously-reported first quarter 2017 adjusted EBITDA was reduced by $10 million due to the adoption of this standard.

Before moving on to discuss segment results, I want to point out that with the implementation of the new revenue recognition standard, we've made two modifications to our definition of adjusted EBITDA this quarter. First, we've excluded amortization of management and franchise agreement assets, which constitute payments to customers, including what's more commonly known as key money. This was previously recorded outside of adjusted EBITDA as amortization expense.

Under the new revenue recognition standard, these charges are now recorded as contra revenue on our GAAP financial statements. So we've already removed them from adjusted EBITDA in order to be consistent with our prior treatment and the way in which we measure business results. Second, we've excluded costs incurred on behalf of managed and franchised properties, net of revenues for the reimbursement of costs, which previously netted to a zero impact on adjusted EBITDA. Under the new accounting standard, the recognition of certain revenues differs from the recognition of related costs, creating timing differences that would otherwise impact adjusted EBITDA.

We haven't changed the way that we manage these revenues and expenses nor do we consider these timing differences to be reflective of our core operations, which is why we've excluded both in our revised definition of adjusted EBITDA. We've applied these same changes to our restated financials for prior periods and you can find a further description of these changes in our first quarter earnings release and Form 10-Q to be filed later today.

I'll now highlight our segment results. Starting with our managed and franchised business, where we once again delivered a strong quarter of fee growth, with our base incentive and franchise fees, increasing approximately 10% on a constant-currency basis, compared to the first quarter of 2017, included in that increase is another strong quarter of incentive fees driven by robust hotel operating performance as we continued to realize meaningful margin expansion at our managed hotels. Total fees increased approximately 14% on a constant-currency basis with the inclusion of a $4 million year-over-year increase in non-recurring fees. The first quarter now marks seven consecutive quarters of high single-digit to low double-digit growth in our fees, underpinned by strong RevPAR performance, margin management and rooms growth, driving solid growth in adjusted EBITDA, consistent with the earnings growth model that we outlined on our last earnings call. In fact, our managed and franchised business was the primary driver of our adjusted EBITDA growth for the quarter.

I will now share additional perspective on each of our three regions, starting with the Americas, which accounted for approximately 76% of our management and franchising adjusted EBITDA in Q1. The Americas region delivered full service RevPAR growth of 3.1% and select service RevPAR growth of 3.6%. Excluding the impact of Easter full-service RevPAR would have increased 3.7%, U.S. RevPAR grew 2.7% or 3.1% excluding the holiday impact. Net rooms growth for the region was 5.5%, led by nearly 10% growth of our select service brands. These results combined to deliver fee growth of just over 9% contributing to adjusted EBITDA growth of over 14% for the quarter, both on a constant-currency basis. Both fee growth and adjusted EBITDA growth were helped by proceeds from a termination settlement for an unopened property received during the year, partially offset by a termination settlement received in Q1 of 2017.

Group rooms revenue in the U.S. declined just over 1% in the quarter, with both group room nights and group rate unfavorably impacted by Easter timing. We still expect group revenue to be up in the low-single digits for the year. Group production was stronger-than-expected in the first quarter with production for all years up just over 9%. In the year for the year business was up approximately 4% for the quarter, notwithstanding the impact of the holiday shift with March being exceptionally strong, as I mentioned earlier.

We are well-positioned on group business for the year and optimistic based on the momentum seen in March. As we look ahead, pace for all years is up with now 53% of our targeted 2019 U.S. group business already on the books at the end of the quarter. Transient revenue increased over 5% for the quarter, driven by increases in both occupancy and rate with particular strength at our resort hotels. I'd also like to highlight that our Hyatt Place and Hyatt House hotels have now achieved 29 consecutive months of share increases as measured by Smith Travel Research.

I'll now move on to our managed and franchised business in Asia-Pacific, which accounted for about 16% of our management and franchising adjusted EBITDA in Q1. Full service RevPAR for the region increased 6.7% in the quarter, driven by occupancy gains with some increase in rate. Impressively RevPAR in China increased by more than 11% and more than offset continued weakness in South Korea. Additionally, net rooms growth for the region was approximately 11%. Together strong RevPAR and rooms growth drove an increase in fees of almost 15% and adjusted EBITDA growth of approximately 16% both on a constant-currency basis. We have outstanding business momentum in this fast-growing part of the world, and as Mark outlined earlier, we believe we are positioned to drive strong earnings expansion in this region well into the future.

Now, moving to our Europe, Africa, Middle East and Southwest Asia region, which accounted for approximately 8% of our management and franchising adjusted EBITDA during the first quarter. Full service RevPAR increased 7%, primarily driven by occupancy increases. Net rooms growth was 11%, these strong results drove an almost 13% increase in fee revenue for the quarter, and an increase in adjusted EBITDA of almost 20%, both on a constant-currency basis. As with as ASPAC, we are very pleased with the upward momentum we're seeing in this part of the world.

I'll now cover our owned and leased business, which accounted for approximately 49% of our adjusted EBITDA before corporate and other expenses in Q1, down from 59% in the first quarter of 2017. Owned and leased RevPAR increased 1.6% or 2.0% excluding the impact of the Easter holiday. As expected, due to the impact of hotel dispositions, owned and leased segment adjusted EBITDA was down approximately 21% in constant currency. Excluding the impact of these transactions and the impact of the Easter holiday shift, segment adjusted EBITDA would have increased approximately 6%. Our consolidated comparable owned and leased margins increased 130 basis points after excluding a 50 basis point negative impact from the Easter shift, reflecting continued productivity gains at our owned hotels and our ability to drive meaningful earnings growth, despite relatively modest RevPAR growth for the quarter.

Having covered our operating performance, I'd like to make a few comments on capital deployment. As Mark mentioned earlier, we completed the sale of three full service hotels to Host Hotels & Resorts near the end of the quarter. In our press release dated February 22, we increased our guidance on minimum shareholder capital returns for 2018 to at least $500 million. During the first quarter, we returned approximately $113 million to shareholders, including the payment of our first quarterly dividend in late March. As of the end of the first quarter, we had $788 million remaining on our existing share repurchase authorization. And given our latest expectations for the remainder of the year including our current outlook for new investments, we now expect to return a minimum of $700 million to shareholders in 2018, including dividend payments.

I will conclude my prepared remarks by providing an update on our outlook for the year. As Mark and I mentioned this morning, we are very pleased with our better-than-expected results for the quarter and with an improved pace of group bookings in the quarter, we are confidently increasing our outlook in a few key areas. With respect to RevPAR, we are increasing our full-year growth expectation to a range of 2.0% to 3.5%. Although it's possible that we could exceed this range, we believe it's prudent to guide more conservatively at this point in the year.

Additionally, due to un-forecasted conversion activity, we are also increasing our net rooms growth expectations to a range of 6.5% to 7%, which makes us a leader among our primary competitive set with respect to net rooms growth rate. You'll recall that our prior adjusted EBITDA guidance range of $805 million to $825 million for 2018 exclude the impact of the adoption of the new revenue recognition standard and also excluded the impact of hotel dispositions in 2018. We expect the revenue recognition standard will result in a $32 million reduction in adjusted EBITDA, while the recent asset sales will further reduce adjusted EBITDA by $40 million.

Additionally, recall that we sold a number of assets in 2017, which, when combined with the $40 million impact of recent asset sales, will result in a $66 million reduction in adjusted EBITDA for the remainder of the year. Approximately half of this balance of year impact will occur in the second quarter, with Q4 having the smallest impact.

Our revised full-year adjusted EBITDA outlook of $765 million to $785 million reflects all of those decreases, partially offset by an increase of approximately $30 million relating to improved operating performance, consistent with our increased outlook for RevPAR growth. These revised full year estimates would represent adjusted EBITDA growth of approximately 10% to 12% compared to 2017, excluding the impact of transactions in foreign currency, which would be at the higher end of the earnings growth model range that we shared during our earnings call in February.

Combined with the increased guidance for return of shareholder capital that I outlined earlier, these changes reflect the primary updates to our full-year guidance. You can find a full guidance update in our Q1 earnings release.

To conclude, we are very pleased with our first quarter results, which continue to reflect the strength of our brands, with strong RevPAR results, margin management and net rooms growth driving robust fee and earnings growth. Combined with the progress we've made towards the $1.5 billion real estate sell-down target, these results are driving an evolution of our earnings base, with heavier weighting toward our high-growth, capital-light and less volatile fee business. And while it's still early in the year, we have a higher degree of confidence in the remainder of the year and expect 2018 to be another year of solid growth for Hyatt.

With that, I'll turn it back to Denise for Q&A. Thank you.

[Operator]

Your first question comes from Stephen Grambling with Goldman Sachs. Your line is open.

[Stephen Grambling, Goldman Sachs & Co. LLC]

Hey, good morning. Thanks for taking the questions. I guess at your Analyst Day over a year ago, you provided a value for your total owned portfolio, the owned real estate. As you look at the prices you received for the assets sold to-date and what you're thinking about selling, how would that compare to the value embedded provided at the Analyst Day and how does that shape your views on potentially increasing asset sales in the future?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thank you, Stephen. This is Mark. I would say that the values that we realized were consistent with or better than the values that we had embedded in our estimates at that time. The actual – our perspective on the value of our owned real estate hasn't really changed and shifted very much. We know what we have in and we understand that both the quality of the assets themselves, but also the markets in which those assets are located in the performance profile and all of that was known at the time that we established our sell-down target of $1.5 billion over the next three years. So, it doesn't materially change our perspective on what our execution plans are.

[Stephen Grambling, Goldman Sachs & Co. LLC]

And then, turning to the underlying fundamentals, I mean, clearly seeing some strength across a number of categories, looks like pricing growth contribution has been pretty consistent with what you've seen so far. Is that something that could accelerate as the year progresses? And how do you think about flow-through, particularly on the owned side, if that does accelerate? Thanks.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Well, maybe I'll just take a moment to reflect on what transpired over the quarter and what we think it means, both on the group and transient side. And then, I'll let Pat address the margin story, because it's not just about pricing and flow-through. So, I'll let Pat describe that.

We had a very strong quarter, I mean, yes, our gross revenues – group revenues and group room nights were down, but we're obviously dealing with the timing of Easter. As I look at the quarter, there are really three things that stand out on the group side to me. One is short-term demand, the strength of short-term demand. The second is the strength of corporate. And the third is incentive business. On the short-term demand front, we had a very positive progression in both in the quarter for the quarter, and in the quarter – in the year for the year bookings.

And this is the second quarter in a row that we've experienced a positive progression in both of those dimensions. You have to go back to the end of 2015, the third and fourth quarter of 2015, to find two quarters in a row in which we saw strength in short-term bookings, so that's encouraging.

The other thing that I would say about the profile of the business in the quarter on the group side is that virtually all of the negative variance that we saw year-over-year was driven by associations. Corporate actually held up very, very well. It was down modestly both in terms of demand, that is room nights, and in rate, but not materially in either case. And this is a period, again, during which we had the Easter shift. And remember, we're also lapping the inauguration last year. So, when I combine those two things and I see corporate holding up as it had, I find that notable.

The third thing I would point to is that our banqueting and F&B spend per occupied group room night has continued to be robust in our resorts, in particular. And that's notable because resort group business is typically more orientated towards incentive groups. And incentive groups are very valuable groups for many reasons. The actual occasion of stay is a celebration of performance, typically, for the key employees of our most important customers. So really making sure that that goes well is critical to us, but also by virtue of the event, you see that the spend rate tends to be higher. And that's exactly what we saw on the resort side. It's substantiated or further supported by conversations I've had with CEOs of a number of our key customers. It definitely feels that incentive trip activity is improving.

Now, two quarters of progression does not a trend make, but these are all encouraging signs, for sure. On the transient side, we had a strong quarter and it builds on top of a strong quarter – in the fourth quarter of 2017. The real standout in demand though was our resorts. If you look at the – within the Americas, if you just looked at our resorts, the RevPAR growth at our resorts was more than double the average overall RevPAR growth for full service hotels in the region. So, it was really a significant quarter and really what that means is that what we've seen over the last several quarters, which is a sustained level of demand for our high-end customers with respect to their holiday spend remains alive and well.

So, I guess what I would say is, based on how we look at it, there's clear evidence on the corporate side and there's great evidence on the transient leisure side, and the last thing I would say is and we said this on the last call, if you look at the profile of our business we don't have exactly even bookings across the remainder of the year. We have a couple of areas in the second and third quarters where we have opportunity, but the places where those opportunities exists tend to be attractive date ranges and date patterns. And so we feel pretty good about being able to fill what we have open to book based on the short-term demand issue that I mentioned earlier in the corporate demand topic that I just mentioned.

So, that's what I would say in terms of like health of business and pricing power and kind of where we're seeing progression. Let me turn it to Pat for the margin discussion.

[Patrick Grismer, Hyatt Hotels Corp.]

Thank you, Mark. Certainly on the margin front, we're very pleased with the results that we've seen and the momentum that continues to build across our entire portfolio. And I would attribute it to not only very strong focus from our operations teams, but a consistent application of best practices to drive improved profitability. That includes a very disciplined asset management team responsible for working with our owned and leased hotels operators to optimize results, as well as our network of managed hotels around the world. There's a very strong process around identifying opportunities whether on the top line through enhanced revenue management or upsell techniques, as well as the middle of the P&L, where best practices encompass efficiencies and housekeeping and front desk labor, food and beverage, food cost management and efforts that we're taking even to manage laundry costs. So, I'm very pleased with the process that we have in place, the management focus. And I remain bullish in terms of our ability to realize continued strong flow-through on the revenue gains that we expect will sustain.

[Stephen Grambling, Goldman Sachs & Co. LLC]

That's all super helpful. I'll jump back in the queue. Thanks so much.

[Operator]

Your next question comes from Smedes Rose with Citi. Your line is open.

[Smedes Rose, Citigroup Global Markets, Inc.]

Hi, thank you. Mark, in your opening remarks you talked about potentially being a net buyer in 2019 and a net seller in 2018. And I guess I just sort of have just a general strategy question. When you guys got a little more aggressive on moving towards more "asset-light and concurrent return of capital." Shares have been – have reacted well to that. And I'm just wondering why wouldn't you intend to go down that road more so rather than moving back into being a net buyer of properties? And why is that better than paying key money essentially to get management contracts?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thanks for that Smedes. I guess let me clarify, because I think it's really important that this is clear. When we – when I mentioned that we might end up being a net seller this year as we were last year and that that might imply that we are net buyer next year. That was all and that was strictly and all within the context of asset recycling that is not a commentary about our desire or plan to expand our real estate portfolio. In fact, I just want to make a very explicit statement that we do not plan to do that. That is not what how we are managing our capital deployment. So our commitment that we made, specific commitment was to sell down $1.5 billion of real estate over the next three years, that commitment was last – the fourth quarter of last year. And we elected to do that and we size that in a way that gave us confidence that it was a material reduction in our overall real estate base and that it was something that we could execute with confidence over that period of time.

And we know our real estate portfolio well and we know what the demand looks like for the – for – in the various markets although, that shifts and changes over time. So we're paying attention to it. We did not plan to abandon the idea of recycling assets. So we do plan to sell existing assets and utilize proceeds to buy other assets. Those acquisitions historically have allowed us to expand in some key markets and to acquire some really important hotels over time.

So it was a key part of our activity base in terms of growth, not just growth in room count, but really strategic properties and by segment, so really important group properties, really important resort properties and some of those have actually already been recycled out of the portfolio.

So we very – we absolutely expect to continue that activity but that is not and – I want to be really clear about this. That does not mean that we have any intention of expanding the real estate portfolio because we don't.

[Smedes Rose, Citigroup Global Markets, Inc.]

Okay. I appreciate that color. I wanted just ask you too, you noted that you're about 10% of your rooms exposure, I think it's in China. And just wondering and you may have said that, I'm sorry if I missed it, but where do you see that going over the next couple of years given the current, what's in your pipeline now?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Right, so the pipeline there is quite robust. We expect to double our total room base there over the next four years and that does translate into a doubling of our fee base coming out of that region as well. And I would say, given all of the initiatives that we have underway and the new leadership team that is being built there right now under Stephen Ho's leadership, we expect to actually have an opportunity to accelerate that growth over this period of time.

The strategic development arrangement that we just entered into with Minyoun Group is – our expectation is that we will sign additional hotels under that development agreement that is not included in our current pipeline and our target with them is 50 Hyatt Place and Hyatt House hotels over the next five years. But, even apart from that, given our performance, the reputation of the brand and the excellence that we've had and reputationally in food and beverage, we continue to see great demand for our core brands. So, we expect to continue to expand the pipeline over time.

[Smedes Rose, Citigroup Global Markets, Inc.]

All right. Thanks. Thanks a lot.

[Operator]

Your next question comes from Shaun Kelley with Bank of America Merrill Lynch. Your line is open.

[Unknown Speaker]

Hi, guys. This is (43:00) on for Shaun. Thanks for taking my question. Mark, as you think about growing your select service presence globally as you mentioned in your prepared remarks, I know you considered M&A in your use of capital, looking back at your LodgeWorks acquisition in 2011, where you reflagged their brands and ultimately sold the underlying properties, is that type of the strategy a good framework for your current thinking, should you ultimately choose to go down the M&A route. And if it is, do you think you have the flexibility now to go into deals with a partner and potentially streamline the process? Thanks.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thanks for that Shaun (43:31). The answer is yes to both of those questions. We do see that that might be a productive avenue and yes we would be not just open to but interested in working with a partner. The one thing I would say is that our mandate that has been clearly articulated. But let me say it again is that we do not intend to expand our real estate portfolio. So, if we were to find an opportunity, an M&A opportunity that included assets, included hotels, we would execute that if and only if we had a plan to be able to exit the real estate side of the equation.

It may not be immediate, but we'd have to have a high degree of confidence that we could sell the real estate portion and therefore not end up with an extended or expanded real estate portfolio over any material amount of time. So, I guess what I would say to you is, yes we're open to it, because as you probably know many brand opportunities around the world come with real estate. They are built on the back of real estate investments. And so oftentimes in order to achieve an acquisition of a brand or a platform, you have to acquire real estate with it. But our commitment would be to sell down the real estate as quickly as we could.

[Unknown Speaker]

Great. Thanks very much for the question.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Sure.

[Operator]

Your next question comes from Patrick Scholes with SunTrust. Your line is open.

[Patrick Scholes, SunTrust Robinson Humphrey, Inc.]

Good morning and thank you. First question for you on the good margin performance in light of your 1.6% RevPAR, we typically think, rule of thumb, you got to do 2.5% RevPAR to breakeven on the margins. You know is it fair to think the rest of the year that – so your breakeven might be closer to say 1% or was there perhaps something an anomaly maybe in total RevPAR or food and beverage in 1Q that made it not quite reflective of the rest of the year?

[Patrick Grismer, Hyatt Hotels Corp.]

Yeah. Patrick, this is Pat. You're right. We had a wonderful margin performance in Q1 contributing not only to improved margins for our comparable owned and leased hotels, but also contributing significantly to our growth in incentive fees. And as I mentioned before, we have a very good process and discipline amongst our operations teams to drive improved productivity without impairing the customer experience.

We have nice momentum there and the work is not done, it's hard to say exactly how that will flow through balance of year in relation to any particular quarter's RevPAR growth. But what we do know is that the work is not done. We have nice momentum and we're really pleased with the results. And as I said earlier, I remain bullish on our ability to achieve strong flow through on revenue gains.

[Patrick Scholes, SunTrust Robinson Humphrey, Inc.]

Okay. Keep it up. Good luck. Thank you.

[Patrick Grismer, Hyatt Hotels Corp.]

Thank you.

[Operator]

Your next question comes from Michael Bellisario with Baird. Your line is open.

[Michael J. Bellisario, Robert W. Baird & Co., Inc.]

Good morning, everyone.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Good morning.

[Michael J. Bellisario, Robert W. Baird & Co., Inc.]

Just wanted to circle back to your capital recycling comments, it's kind of a two part question here. One, are you more confident that you'll sell more hotels this year? And the second part is are you also not seeing reinvestment opportunities into new adjacent spaces or other brands as well not just on the asset acquisition side?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Yeah. So let me just make a couple of comments on the marketplace overall. First of all, I think as we have bid in the market we've – my expression historically has been we're always in the market on the buy-side and the sell side because it is the best way to stay current and be able to be responsive. And yes, we see demand for some of our assets. So, I guess what I would say is, we are actively engaged and we don't have anything to report or comment on at this time. But it is an environment in which we could see additional disposition opportunities arise.

On the acquisition side, I would say it's been a period of more modest opportunity on the individual hotel front. And when I say individual hotel front, I mean individual hotels that we could rebrand. Obviously, that's the only thing that we could do or we would be interested in doing. Having said that, we are actively looking at a number of opportunities. None of them are advanced to a point where I could say that I believe they've moved into the likely category, but we're definitely actively looking at a few high-quality opportunities. And we're actively looking at some M&A opportunities. And, again, it's really too early to say. But overall, I would say that, as I've talked to brokers and looked at the marketplace and been actively engaged in looking, it's been – it's a relatively, I guess, more modest period in terms of availability of assets that we could buy.

[Michael J. Bellisario, Robert W. Baird & Co., Inc.]

And just to clarify, when you said M&A, that's referring to assets or that's also brands and the adjacent spaces you'd look at, too?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Yeah. So the M&A that I'm referring to right now is primarily focused on hotel brands.

[Michael J. Bellisario, Robert W. Baird & Co., Inc.]

Got it. That's helpful. Thank you for that.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Okay.

[Operator]

Your next question comes from Thomas Allen with Morgan Stanley. Your line is open.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

Hey. So, congrats on the strong unit growth and the acceleration there. Could we just dive in a little bit more on it? I noticed that in the quarter, if we look sequentially, it looked like managed and franchised unit growth actually expanded more than franchised growth and franchised growth has been stronger historically. So is that a change in trend or is that just – you touched on conversions so maybe that's it, just any more color would be helpful. Thank you.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

I'll take an initial shot at this and Pat can add color. But as I look at the profile of our pipeline evolution and openings, we had expected that 2018 might be off of our prior trend line with respect to our total net rooms growth during the period. And that had more to do with just timing and sequencing of the opening of hotels, especially the select service properties. So, if you're seeing anything that doesn't look like a smooth curve, it might be related to the same dynamics that we reported on last quarter.

I would say that the demand that we have seen, good activity in both management and franchise opportunities, it does not reflect a change or a shift in our philosophy or our strategy, that is to say we're pursuing both. And increasingly, we're pursuing both globally. Historically, if you looked at our franchising activities, it was really concentrated in the United States. But over the past several quarters, we've seen more opportunities arise in Europe, in South America, where we're about to open two magnificent Hyatt Centric properties in Lima and in Santiago with a group. These are franchised opportunities. And there are others that we are in contact with at this point for further growth there.

And also in China, it's our first foray into franchising in China with Minyoun. So, I would say our commitment and our philosophy with respect to growth, that is both managed growth and franchised growth, remains that we are trying to identify great partners and great opportunities and grow that way.

So really no shift and no significant inflection point, I think the demand that we've seen over the course of this year has led us to increase our guidance. And part of that has to do with the fact that we've had some conversion opportunities already present themselves, but also additional conversion opportunities on which we're working, which have not been signed yet, so they are not technically in our pipeline, but they do factor into how we think about net rooms growth and our pipeline growth over the course of the year.

[Patrick Grismer, Hyatt Hotels Corp.]

And to add to what Mark has said, definitely no change in development strategy, but certainly as we think about the composition of our pipeline today and how that is going to evolve going forward, that pipeline will be more heavily weighted toward select service, more heavily weighted to international and more heavily weighted to franchised.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

Helpful. Thank you. And then, are you prepared to say how quarter to-date or April RevPAR has been going?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

No. I don't think we'll make any commentary about that at this point, but like I said, I think if you look back the two quarter run that I described earlier with respect to group activity was really encouraging to us. So, but we're not going to really make any commentary with respect to the current quarter.

[Patrick Grismer, Hyatt Hotels Corp.]

The only thing I would say is that we do expect, I think as you would expect, that the Easter timing headwind that impacted Q1 becomes a tailwind in Q2.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

Perfect. I thought it was worth a shot. Thank you.

[Operator]

Your next question comes from Carlo Santarelli with Deutsche bank. Your line is open.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

Hey, guys. Thank you. If you could, in terms of your RevPAR guidance, looks like 75 basis points obviously midpoint to midpoint was the improvement, but based on the comments earlier and assuming the midpoint of your prior guidance, you can get closer to 150 basis points of kind of RevPAR favorable revisions. How much of that revision is kind of the in the year for the year group that you spoke about earlier, the 1Q upside and the transient impact, if you could kind of compartmentalize each of those three pieces and talk about like how each maybe influenced the RevPAR boost?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Yeah, thank you, Carlo. It's really difficult to parse the increase in that fashion. Certainly everything you've mentioned has contributed to our confidence that we will deliver a better full-year result than we had originally guided. However, as I mentioned in my prepared remarks, notwithstanding our optimism, our cautious optimism, for the year, we believe that it's prudent to be conservative with our guidance, given that we have nine months to go.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

Understood. And then if I could just one quick follow up. If you think about 2018 and we think about the midpoint of your 2018 EBITDA guidance, what percentage at that point in the year do you anticipate will come from management franchise fees?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

It's really tough to parse it that way. The way we've thought about it is that, we had a strong Q1, we believe those results account for roughly two thirds of the increase in the full-year midpoint with the other third coming from the improved RevPAR over the balance of the year. I would say a majority of that would be through fees, but I wouldn't be any more precise than that.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

That's helpful. Thank you.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thank you.

[Operator]

Your next question comes from Bill Crow with Raymond James. Your line is open.

[Bill A. Crow, Raymond James & Associates, Inc.]

Thanks. Good morning, Mark and Pat. Most of my questions have been answered, but let me touch one more time on the capital deployment. You've had 75% of your $1.5 billion three-year target, disposition environment seems really favorable right now, I'm not sure it gets much better with the interest rate environment. How tempted are you or maybe The Street is certainly looking for an increase to that $1.5 billion target, is that something you can think about?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Thanks, Bill. As I said earlier and as we said in the prior calls, I think the – and we just want to remind everyone that we set the target where it is for some specific reasons. First, it's a meaningful reduction of the real estate base. Second, it is an opportunity to free up capital for investment and other opportunities, and therefore help us accelerate growth over time in the right ways. And third is something that we have high confidence we can execute in the timeframe. So, at this point, we don't have any plans to change the target.

[Bill A. Crow, Raymond James & Associates, Inc.]

Okay.

[Patrick Grismer, Hyatt Hotels Corp.]

The other thing I would say Bill is that an important – excuse me, an important governor in our thinking is the availability of reinvestment opportunities and what we – until we have better visibility to those opportunities, I would say we would hesitate to bring forward asset dispositions that would form part of that sell-down program. Because what we don't want to do is find ourselves with a lot of cash that we can't deploy toward growth opportunities, recognizing that as to use of proceeds, we're thinking about reinvestment in the growth of the business as well as return of capital to shareholders.

[Bill A. Crow, Raymond James & Associates, Inc.]

Okay. Thanks, Pat. Let me just ask a question about China if I could, which is, you spent a lot of time in talking about your China strategy and growth and I think the lodging companies all sold off when we started talking about trade wars and tariffs and that sort of thing. How do you assess the risks of operating in China in today's environment? Is there any sense of nationalism over there that might take Chinese residents away from U.S. based brands? I mean, just give us a little flavor for the dynamics that you're thinking about and seeing over there?

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Well, thanks for that. I think the fact is that a lot of what we do in China is in segments that are not proliferated by local Chinese brands. If you go down the chain scale, you'd find a lot more competition at the mid-scale level and below that. We're with directly head-to-head with Chinese brands; that is where you'd see a lot of additional competitive companies that are Chinese domicile companies. So part of that dynamic is that we are a reputable and a good operator within the country. We've had a long history in the country, a very long history in the country and we've got a very, very strong group of partners that is developers and owners that in some cases are state-owned enterprises and/or companies that have significant investments in them from the government. So, I would say that we're well-positioned with respect to both our developer base, our reputation and our position.

And as we look forward in terms of the segments that we're currently in, we believe that we have a real sweet spot in our select service portfolio, because the reputation and cache that the Hyatt brand is associated with gives us some pricing power. In hotel developments where I'm talking about ADR pricing power, the hotel developments that are at a more modest level than a lot of the luxury and full service hotels that we have built in in the past. So, I really feel like we've got a big significant opportunity there, but it's not head-to-head with a very proliferated extremely competitive mid-scale and economy segment.

[Bill A. Crow, Raymond James & Associates, Inc.]

All right. Thank you.

[Mark S. Hoplamazian, Hyatt Hotels Corp.]

Okay.

[Operator]

At this time, I'll turn the call over to Mr. O'Bryan.

[[0CPPRG-E Brad O'Bryan]]

Great, thank you, Denise. And thank you to everybody for joining us today and we look forward to talking to you soon. Goodbye.

[Operator]

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