Hyatt Hotels Corp

NYSE:H

Earnings Call Analysis

Strong Revenue and Group Travel Boost, Regional Variances Noted

Hyatt achieved a 4.7% increase in system-wide RevPAR, driven by robust business and group travel. Revenue from U.S. hotels rose by over 2%, while RevPAR in Canada and South America surged by approximately 9%. However, Greater China saw a 3% decline in RevPAR due to macroeconomic challenges and increased outbound travel. The company expects full-year RevPAR growth between 3% and 4%, with net rooms growth projected between 5.5% and 6%. Adjusted EBITDA is forecasted to rise by 10%, ranging from $1.135 billion to $1.175 billion. Meanwhile, the company's liquidity stands strong at $3.5 billion, supporting further investments and share repurchases.

Introduction and Welcome

The earnings call started with a welcome from Adam Rohman, Senior Vice President of Investor Relations and FP&A. He highlighted the presence of key executives, Mark Hoplamazian, CEO, and Joan Bottarini, CFO. The introduction also included a note on forward-looking statements and their inherent risks, and provided information on where to find reconciliations for non-GAAP financial measures.

Financial Performance Overview

The core of the presentation focused on Hyatt's second-quarter financial performance. The company reported a 4.7% increase in system-wide RevPAR (Revenue Per Available Room), driven mainly by group and business travel segments. Leisure transient revenue saw a slight decrease, partly due to seasonal factors and significant renovations at key resorts.

Segment Performance

Hyatt saw notable performance across various segments. The management and franchising segment's adjusted EBITDA increased by approximately 11%, primarily due to an increase in gross fees. The owned and leased segment saw a 9% increase in adjusted EBITDA when adjusted for net transactions. Business transient revenue grew by double digits, and margins for comparable hotels increased by 110 basis points.

Regional Performance

In the Americas, RevPAR excluding the United States increased by 9%, with strong performance in Canada and South America. Greater China saw a 3% decline in RevPAR, largely due to increased outbound travel and unfavorable macro conditions. However, Asia Pacific excluding Greater China saw an impressive 18% increase in RevPAR, driven by strong international inbound travel, especially from Greater China and the United States.

Impact of China

Domestic travel in China was down 9% compared to the previous year, and the impact was more pronounced in secondary and tertiary markets. Despite these challenges, Hyatt increased its RevPAR index by 3% in China, highlighting strong brand recognition. Affluent Chinese travelers are prioritizing international travel, and inbound travel to China remains less robust compared to pre-pandemic levels.

Notable Openings and Initiatives

The quarter saw the opening of several notable properties, including the Park Hyatt Changsha in Greater China and the Hyatt Vivid Grand Island in Cancun. The company also added over 700 properties to its World of Hyatt portfolio with the acquisition of Mr. & Mrs. Smith, further expanding its global footprint.

Capital Position and Share Buybacks

Hyatt reported strong liquidity with approximately $3.5 billion in total liquidity, including $2 billion in cash and short-term investments. The company repurchased $134 million worth of Class A common shares and has $1.6 billion remaining in its share repurchase authorization. Hyatt remains committed to maintaining an investment-grade profile.

Outlook for 2024

For the full year 2024, Hyatt expects RevPAR growth between 3% to 4%. The company anticipates the strongest performance to come from group and business transient segments, particularly in the third and fourth quarters. Greater China is expected to see negative RevPAR growth for the remainder of the year, while other international markets, led by Europe and Asia Pacific, are expected to perform strongly.

Guidance and Projections

Adjusted EBITDA for the full year is projected to be between $1.135 billion to $1.175 billion, a 10% increase at the midpoint compared to the previous year. Free cash flow is expected to range from $560 million to $610 million, and capital returns to shareholders are estimated to be between $800 million to $850 million, including share repurchases and dividends.

Final Remarks

Overall, the second-quarter results highlight the strength of Hyatt's asset-light business model. The company is optimistic about its growth prospects and remains focused on delivering value to shareholders through strategic investments, maintaining a strong balance sheet, and returning capital to shareholders.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Hyatt's Second Quarter 2024 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Adam Roman, Senior Vice President of Investor Relations and FP&A. Thank you. Please go ahead.

[Adam Rohman, executive]

Thank you, and welcome to Hyatt's Second Quarter 2024 Earnings Conference Call. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer.

Before we start, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to be materially different from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks on our website at hyatt.com under the Financial Reporting 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.

Please note that unless otherwise stated, references to our occupancy, average daily rate and RevPAR reflect comparable system-wide hotels on a constant currency basis. Additionally, percentage changes disclosed during the call are on a year-over-year basis, unless otherwise noted.

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

[Mark Hoplamazian, executive]

Thank you, Adam. Good morning, everyone, and thank you for joining us today. I want to start by sharing my appreciation for our colleagues around the world who live our purpose every day to care for our guests, our colleagues, owners and each other. I've been very fortunate to visit with many of you over the last quarter, and I'm continually inspired by the power of care and what differentiates Hyatt from others, our people. Our purpose and execution of our strategy are evident in our operating results, which reflect record levels of fees, role of Hyatt numbers and raising our pipeline.

This morning, we reported system-wide RevPAR growth of 4.7%, and as anticipated, group and business transient were our strongest customer segments in the quarter. Easter taking place in the first quarter of 2024 was a tailwind for group and business travel in April and a headwind to leisure travel. Leisure transient revenue decreased approximately 2% in the quarter but was up 2% when excluding the impact of Easter, significant renovations at several key U.S. resorts and our hotels in Maui, which were negatively impacted by the wildfires in Q3 of last year.

Through the first 6 months of 2024, leisure transient revenue was up 2% compared to 2023 despite these temporary headwinds and we remained significantly above pre-pandemic levels. Looking ahead, transient pace for resource in the Americas is flat in the third quarter, excluding resorts under significant renovation, while pace for all-inclusive resorts is down slightly as demand in Mexico and the Caribbean reflects a return to pre-pandemic seasonality.

Group room revenue increased approximately 8% in the quarter, the strong results in most U.S. major urban markets during the months of May and June. Group pace for U.S. full service managed properties is up 7% for the second half of 2024. And we anticipate higher growth rates in the third quarter compared to the fourth quarter. This is due to Rosh Hashanah and Yom Kippur falling in October this year compared to September of last year and the U.S. elections in November.

Looking beyond 2024, pace continues to be very strong across all group customer segments. Our business transient customer segment had the largest growth rate during the quarter with revenue up approximately 14%. In the United States, revenue increased 12% and New York, Seattle, San Diego and Washington, D.C. were the top-performing markets.

Bookings for business travel over the next 2 months look very strong, led by corporate negotiated accounts. While there are signs of slowing demand in lower chain scales, we saw strength among the high-end consumer as luxury RevPAR increased 6.9% driven by hotels in Europe and Asia Pacific, excluding China. The solid quarter of group and business travel was reflected in our upper upscale brands, which produced RevPAR growth of 4.2%.

Our solid operating performance reflects the strength of our growing loyalty program. World of Hyatt membership reached a new record of approximately 48 million members at quarter end, a 21% increase over the past year. Loyalty room night penetration also increased, highlighting the strong engagement of our expanding membership base. Our growth strategy and expansion into many new markets in addition to delivering authentic and personalized experiences, has led to member growth and increased loyalty penetration.

Our expansion, of course, includes Mr & Mrs Smith, which realized significant engagement from our members after we added over 700 properties to World of Hyatt in April. 80% of these properties have received bookings from World of Hyatt members since going live, with nearly 2/3 of those bookings for paid reservations as opposed to the redemption of points. Our most active members, our Globalist, have been very engaged with Mr & Mrs Smith, accounting for over 20% of these bookings. By the end of this year, we expect to have over 1,000 Mr & Mrs Smith properties available through World of Hyatt, offering our members even more opportunities to earn and redeem points in these uniquely curated hotels.

We also recently announced an exclusive alliance with Under Canvas, where we are an experiential outdoor hospitality with 13 patients in premier destinations such as the Grand Canyon, Moab, Yellowstone and Zion. World of Hyatt members will be able to earn and redeem points at Under Canvas locations, further expanding our offerings and adding unique experiences for our members and guests. We have already seen great interest from World of Hyatt members with 60% of total bookings made at Under Canvas locations being for paid reservations since the partnership went live nearly 2 weeks ago.

A few months ago, I visited the Under Canvas ULUM resort in Moab, named the Best Resort Hotel in Utah by travel and leisure. And I'd love my overnight stay the Under Canvas North Yellowstone, Paradise Valley in Montana. Both destinations offer exceptional quality and immersive activities, which I'm really excited for our World of Hyatt members to experience first hand.

We're also proud of the recognition that World of Hyatt Hive continues to receive. WalletHub recognized the World of Hyatt as the Best Hotel Rewards Program and World of Hyatt credit card as the Best Overall Hotel Credit Card. The continued recognition of World of Hyatt is a testament to the value that our loyalty program provides to members and hotel owners.

Our focus on expanding our network effect as we grow allows us to offer more options to our members, increasing their loyalty to Hyatt and making Hyatt more attractive to prospective developers.

Turning to development. We continue to see strong demand for our brands as our pipeline reached a record of approximately 130,000 rooms. This represents a 9% increase year-over-year, and our pipeline accounts for 40% of our existing room base. Signings in the quarter were healthy across the world, led by the United States and Greater China, and we continue to see increasing interest in Hyatt Studios with the first 2 properties under construction. Our growth pipeline continues to drive expansion of our portfolio worldwide. And in the quarter, we achieved net rooms growth of 4.6%.

Notable openings include the Park Hyatt Changsha, the tenth Park Hyatt in Greater China and the Hyatt Vivid Grand Island in Cancun, our first high vivid all-inclusive property. The Hyatt Vivid Grand introduces a younger generation to a vibrant, adult-only, all-inclusive experience with a focus on meaningful connections through experiential offerings.

We opened our first Caption by Hyatt properties outside of the U.S., in Shanghai and Osaka. Finally, the Legend Resort Paracas opened in the quarter, a stunning resort on Peru Southern Coast in our first destination by Hyatt property in Peru.

Our openings this quarter strengthened the equity of our brands and open new markets for our guests and members, and we're confident that our pipeline will continue to fuel growth well into the future. The pipeline will continue to expand as we strategically enhance our brand portfolio.

On June 28, we announced the acquisition of the me and all hotels from Lindner Hotels Group, allowing us to accelerate growth of the brand. We're really excited about the growth trajectory and a great potential for me and all hotels over the decades to come for 3 key reasons. First, me and all hotels is a highly attractive lifestyle brand in the fast-growing upscale segment in Europe. The brand is well suited for adaptive reuse and conversions, facilitating growth in great locations to fill significant white space that Hyatt has across Europe.

Second, me and all hotels deliver high margins, allowing developers to realize attractive returns that are required for lease structures, which are common in Europe. This lease friendly brand enhances operational flexibility and greatly expands our access to capital sources across Europe.

And third, it is important to note that our strategic positioning and brand mapping are designed to aggressively expand and capture market share across Europe. While we expect the brand to gain scale in Europe initially, we believe there are opportunities to grow the brand globally, providing more destinations for our members and guests to enjoy a curated lifestyle experience.

We have been and will continue to be very intentional with our organic and inorganic growth ensuring that our brand and property portfolio expansion creates opportunities for new guests to find us and join World of Hyatt while providing existing members and guests new and exciting places to enjoy great experiences.

Turning to asset sales. We completed the sales of Park Hyatt Zurich, Hyatt Regency San Antonio and Hyatt Regency Green Bay during the second quarter, as previously announced. With these sales, we have realized $1.5 billion in gross proceeds from asset sales towards our $2 billion commitment. We expect to close the sale of the property that is currently under a purchase and sale agreement by the end of August, which will put us above our $2 billion disposition commitment. We will provide more details on that transaction when the deal closes.

Before I conclude my remarks, I'm pleased to report that we recently published our annual World of Care highlights. Demonstrating progress towards our [indiscernible] goals and environmental sustainability goals, including our science-based targets. While we have more work ahead of us, I'm exceptionally proud of the progress that we made, led by our Hyatt colleagues worldwide.

In closing, we are pleased with the execution of our long-term strategy, which we highlighted at our Investor Day last year, maximizing our core business, integrating new growth platforms and optimizing capital and resource deployment. Our growth across multiple dimensions, including rooms, feeds, pipeline and loyalty membership fuels our asset-light business model leading to strong free cash flow and greater value for our shareholders. I want to thank Hyatt colleagues around the world who live our purpose every day to care for people so they can be their best, which extends to each of our stakeholders.

Joan will now provide more details on our operating results. Joan, over to you.

[Joan Bottarini, executive]

Thanks, Mark, and good morning, everyone. Systemwide RevPAR increased 4.7% led by increased business and group travel. In the United States, RevPAR increased over 2%, reflecting the timing of Easter and strong results from group and business transient travel. Large corporate accounts contributed to both group and business transient travel, benefiting hotels in major urban markets.

As Mark noted, we are lapping challenging comparisons in Maui due to the wildfires in the third quarter last year, and we have several resorts undergoing exciting transformational renovations. The Confidante is being rebranded as Andaz Miami Beach, while Hyatt Regency Scottsdale and Hyatt Regency Indian Wells will be rebranded under the Grand Hyatt brand later this year after extensive renovations.

RevPAR growth in the Americas, excluding the United States, increased approximately 9% with notable strength in Canada and South America, while our all-inclusive properties in the Americas had net package RevPAR growth of 2% for the quarter. In Greater China, RevPAR decreased by approximately 3%. As a reminder, the second quarter of last year saw a dramatic recovery for domestic travel, and RevPAR surpassed pre-pandemic levels for the first time. We expected growth rates to normalize starting in the second quarter this year. However, unfavorable macro conditions, and greater outbound Chinese travel negatively impacted results in the quarter.

Domestic travel was down 9% in the quarter compared to last year, with a notable impact on hotels in secondary and tertiary markets. While we saw a positive RevPAR growth in most major markets, this could not offset weaker demand in secondary and tertiary markets. Despite these pressures, we increased our RevPAR index by approximately 3% during the quarter, which is a testament to our strong brand recognition in China.

Although domestic travel declined, we're seeing demand for travel from affluent customers increase. However, they are prioritizing international travel, and we expect outbound travel from China to remain at elevated levels in the near term. Asia Pacific, excluding Greater China, once again produced remarkable results, with RevPAR up approximately 18% due to strong international inbound travel with notable demand coming from Greater China and the United States.

RevPAR in Japan increased 35% and RevPAR in South Korea increased 20%. In Europe, RevPAR increased approximately 11% driven by outbound travel from the United States with notable strength in Germany and Spain. Our European all-inclusive properties produced impressive net package RevPAR growth of approximately 12%, driven by high demand for our resorts in the Balearic and Canary Islands.

We reported record gross fees in the quarter of $275 million, up 12% due to a combination of our RevPAR growth, greater system size and an increase in our non-RevPAR fees. Franchise and other fees increased 32% due to the growth of our franchise footprint, the growth in our co-branded credit card fees and the contribution from UVCCs.

Base fees increased 4% and reflecting the combination of increased managed RevPAR and fees from newly opened managed hotels, offset by hotels in Greater China. Incentive fees decreased approximately 7% due to lower contribution from hotels in Greater China, hotels under renovation and hotels in Maui.

Turning to our segment results. Management and franchising segment adjusted EBITDA increased approximately 11%, driven by the increase in our gross fees. Owned and leased segment adjusted EBITDA increased by 9% when adjusted for the net impact of transactions. Business transient revenue for the portfolio increased by double digits during the quarter and the contribution from group and related food and beverage revenue was strong.

In the quarter, margins for comparable hotels increased 110 basis points. We expect that we'll achieve flat to moderate expansion of owned and leased margins for the full year compared to 2023. And finally, our Distribution segment adjusted EBITDA increased $9 million compared to the second quarter of 2023.

Excluding UVC, adjusted EBITDA declined by approximately $5 million, consistent with the expectations we communicated during our first quarter earnings call. We expect third quarter adjusted EBITDA for ALG Vacations to decline approximately $5 million to last year due to a combination of cancellations related to Hurricane Beryl and weaker bookings over the last few weeks due to the temporary system disruptions impact on airline bookings. However, we anticipate fourth quarter adjusted EBITDA for ALG Vacations to grow by approximately $10 million compared to last year because of improved airlift.

I'd like to now provide an update on our strong cash and liquidity position. As of June 30, 2024, our total liquidity of approximately $3.5 billion included $2 billion of cash, cash equivalents and short-term investments and approximately $1.5 billion in borrowing capacity on our revolving credit facility. At the end of the quarter, our total debt outstanding was approximately $3.9 billion. The increased levels of debt and short-term investments this quarter results from the notes we issued in June. We invested the proceeds from these notes in marketable securities and are planning to fully repay our notes maturing on October 1, 2024, at or prior to maturity.

In the second quarter, we repurchased $134 million of Class A common shares and we have approximately $1.6 billion remaining under our share repurchase authorization. We remain committed to our investment-grade profile and our balance sheet is strong.

Before I turn to our 2024 outlook, I'd like to note a change that we made to our financial reporting. We've added a new financial line item to the income statement called transaction and integration costs, which includes integration costs for recently acquired businesses and transaction costs for certain pending and completed transactions.

We now exclude transactions and integration costs from adjusted EBITDA. As we believe this better represents our core operations and provides information consistent with how our management evaluates operating performance.

Now I will cover our outlook for 2024. The full details can be found on Page 3 of our earnings release. We expect full year system-wide RevPAR growth between 3% and 4% compared to 2023 and we expect group and business transient revenue growth to outpace leisure transient for the second half of the year. We anticipate United States RevPAR growth for the full year of approximately 2% compared to 2023, led by group and business travel in the third quarter.

Our outlook assumes RevPAR growth in Greater China is negative for the last 2 quarters of this year compared to last year as domestic travel laps tougher comparisons to 2023 and outbound international travel increases. Finally, we expect RevPAR growth in other international markets to exceed the high end of our range, led by Europe and Asia Pacific, excluding Greater China.

We expect net rooms growth between 5.5% and 6%, driven by organic growth, conversions and potential portfolio transactions that may close by year-end. Gross fees are expected to be in the range of $1.085 billion to $1.115 billion, a 13% increase at the midpoint of our range compared to last year.

Our revised outlook accounts for lower incentive fee contribution in the second quarter from hotels in Greater China, weaker-than-expected demand in Maui and hotels under renovation. Our outlook also assumes lower fee contribution from hotels in Greater China during the second half of 2024 and a lower fee contribution from hotels in the United States during the fourth quarter.

Adjusted G&A is expected to be in the range of $425 million to $435 million. Adjusted EBITDA is expected to be in the range of $1.135 billion to $1.175 billion, a 10% increase at the midpoint of our range compared to last year. Our outlook accounts for the removal of about $10 million of integration costs related to the change to adjusted EBITDA I just mentioned and reflects the reduction that we have made to our RevPAR range and growth fees. Free cash flow is expected to range from $560 million to $610 million. And finally, we expect capital returns to shareholders in the range of $800 million to $850 million including share repurchases and dividends.

In closing, our second quarter results highlight the strength of our asset-light business model and our mix of asset-light earnings will increase further as we complete our asset disposition program and realize our net rooms growth expectations. We remain committed to our capital allocation strategy, which has delivered and will continue to deliver exceptional shareholder value by investing in growth, maintaining an investment-grade profile and returning capital to shareholders.

This concludes our prepared remarks, and we're now happy to answer your questions.

[Operator]

[Operator Instructions] Our first question will come from Shaun Kelley from Bank of America.

[Shaun Kelley, analyst]

I had sort of a 2-parter on just what's going on in the leisure transient area. So Mark and Joan both, I think you mentioned this kind of throughout the script around kind of what you're seeing there. But can you just elaborate a little bit across the U.S. specifically in terms of patterns and how, let's call it, de-risked you think your outlook is from here, specifically on the leisure side?

And then secondarily on that, could you comment specifically on, I think, some comment around the Caribbean and Mexico in the prepared remarks, Mark, I think you said something about return to pre-pandemic seasonality. And if we take barrel out of it. Just what are we seeing kind of on the ground in -- across ALG and the Caribbean and Mexico?

[Mark Hoplamazian, executive]

Great. Thanks, Shaun. I'll start, and I think Joan will add some additional color. I would say that we are lapping some unusual periods last year. And so the results that we're reporting are -- when I say unusual results last year, I mean, both calendar changes and also significant demand in certain parts of the year. So what we're seeing is sort of evening out of demand over time. The disruption in airline traffic due to the systems outages was a unfortunate shock to the system. And -- but that was relatively short lived. Nonetheless, it did cause a lot of disruption in terms of bookings.

And secondly, we have a few issues with respect to -- not issues, but just headwinds with respect to -- 2 major resorts under complete renovation at this point, plus the Maui issues that everyone knows about. Overall, I would say that the the general level of demand has been maintained at a very high level significantly above sort of the levels that we experienced in pre-pandemic times, and rate continues to be holding up continues to hold up and expand slightly. So I feel like we are maintaining at a high level of demand at this point.

And I think our outlook is informed by -- what we think is going to be a somewhat tougher third quarter but a more robust fourth quarter. And that's based on the visibility that we have to schedules -- airline schedules heading into the fourth quarter and also overall demand that we're seeing in terms of bookings. The booking curve, though, really, it's like the wave curve for cruises. We really see a significant increase in October and November in terms of bookings into festive and the following year. So I think that we'll have a lot more information on the next quarterly conference call as to what those bookings are starting to look like and shape up to be.

[Joan Bottarini, executive]

Yes. And what I would add to that, with respect to your question, Shaun, on what's happening in all inclusive in the Caribbean, we had a really strong first quarter double-digit growth in net package RevPAR. And in the second quarter, we had about a 2% increase. And if you look at over the first half of the year, that averages to about 7%. So really strong.

And the first quarter, second quarter dynamic was impacted by the Easter holiday. As we look forward, Mark mentioned that in the third quarter, we certainly had those temporary disruptions in -- with the early hurricane and the system disruptions. But as we look forward into the fourth quarter, we're seeing pacing up into the festive season in the mid-single digits. So when you put that all together, we've got sustaining momentum on the leisure front in the Caribbean and our net package RevPAR and we think the full year will be about in that mid-single digit in that mid-single-digit range.

[Mark Hoplamazian, executive]

Just a quick add. It's 2% growth in the second quarter in the Americas. But if you look at the HIC portfolio, our own inclusive portfolio globally, it was up 3% because Europe continues to -- we're lapping strong results last year, but has strengthened from there. So we're really encouraged to see that as well.

[Operator]

Our next question comes from Joseph Greff from JPMorgan.

[Joseph Greff, analyst]

I have a multi-part question for you, Mark. Can you talk about what the recent trend lines are in China development and pipeline signings and construction starts? How start of a difference is there between full service and select service hotel activity there? And maybe kind of put things in perspective, how much dependency on the 5.5% to 6% net rooms growth is China-related?

[Mark Hoplamazian, executive]

Sure. So first of all, China has been -- Greater China and Asia Pacific generally speaking, have been the highest producers of open rooms and also growth in pipeline. So the Americas and China together represent the majority of we have pipeline change that we've seen and also the openings. So we are continuing to grow faster than we're opening. But what we are seeing is not just openings, we're seeing great openings. We're seeing openings of high quality.

We mentioned the Park Hyatt Changsha. We also just opened the Grand Hyatt Kunming. It's the 18th Grand Hyatt Hotel in Greater China -- I'm sorry, in Mainland China. And so we really -- we've got some remarkable network effect going on amongst the highest end brands that we have in the country. So I've been actually super encouraged to see completions. Part of that is, frankly, not surprising to us because a majority of the owners that we're dealing with our state-owned enterprises.

And I'm also -- I would just quickly point out that, the openings that we're talking about, we always say room is not a room, room is not a room. These are very high revenue hotels, it's not dominated by UrCove, even though UrCove is really healthy and continues to open at a good pace, UrCove being our upper mid-scale -- on the upper mid-scale segment in China.

With respect to the impact of China growth overall on the annual energy, we'll have to get back to you on that. I don't have that off the top of my head. By the way, the signings also spell for, I would say, continued strength and a good platform heading into the future for Chinese growth. So overall, I'm pretty encouraged. There are a lot of -- there's a lot of headlines to sort through, and there's a lot of disruptions that you can see actually going on. it is relatively more impactful at lower chain scales. That's what we're seeing in China. Although some of our luxury hotels have also -- in China have also seen some impact from the highest end Chinese consumers increasing their outbound travel.

[Joseph Greff, analyst]

Great. And then just a quick follow-up. Joan, how do you plan to use the $500 million plus of proceeds from this [indiscernible] close later this month asset sale? Obviously, you have enough liquidity and cash to take care of debt maturities end of this year to the end of '25?

[Joan Bottarini, executive]

So Joe, as Mark mentioned, we will announce any transactions when we close. And when we do that, we will update all components of our outlook that are impacted by the transaction, including shareholder returns. So stay tuned for that announcement when we're ready to do it.

[Operator]

Our next question comes from Dan Politzer from Wells Fargo.

[Daniel Politzer, analyst]

Mark, I believe you mentioned that group was pacing, I think, up 7% in the second half of this year. Can you maybe talk about how it's pacing for 2025? And in terms of this year and next year, how much is on the books at this point and maybe give some historical context with how that's compared in the past?

[Mark Hoplamazian, executive]

Absolutely. I've been really taken with how strong group has been overall. It's both short term and long term and the short term vicinity, July was extraordinarily strong in terms of total bookings. Full -- sorry, full cycle, net production in the month was up 16%. 1/3 of that was in the month for the year. So we saw third quarter actually impacted by a very strong July booking activity base. August through December pace is up 6%, ADR is up 5% in the year for the year bookings. So the bookings that we're getting are not just filling rooms at compromise rates. We are realizing great ADRs.

For '25, equally strong. ADR represents the vast majority of the plus 7.5% pace increase. Tentatives are running way ahead of anything we've ever seen at this time of the year ahead of '25. So we not only have great pace heading into next year, but we also have a swelling of tentative business that is really striking. The sales force is really taken [indiscernible].

And right now, we have about 60% of our total business on the books for next year. So that sort of addresses your other question. By the way, just as a quick note, pharma and tech are leading the way with respect to -- the July [indiscernible] was dominated by pharma and tech. And all of our categories in terms of both association and corporate and across a number of different segments. I would add financial services to the pharma and tech comment, are all pacing well. So we don't -- this is not like association has taken over and is pulling up on average. This is very, very well balanced and widespread.

[Daniel Politzer, analyst]

Got it. And then in terms of the incentive management fees, Joan, I think you called out China, renovation, Maui, certainly headwinds in the back half of the year. But as we think about third quarter versus fourth quarter, should we see it start to grow again in the fourth quarter as you kind of get through some of those? Or should we expect this to be down for the remainder of the year?

[Joan Bottarini, executive]

Yes. So with respect to fees overall, the change in our outlook that we provided reflects a 13% growth year-over-year. So I just wanted to reinforce that point at the outset. And the change that we made to our outlook at the midpoint, the $15 million, the breakdown between that is about 50% driven by our IMF and about 50% driven by basin incentive fee. And then also about 50% through China and what we're seeing there, the dynamic there in demand and the remaining by the U.S. and a little bit of FX that we're seeing. So it's concentrated in those 2 areas. And you saw the performance in the second quarter. So as you look at that and think about the rest of the year, we anticipate that we'll be performing better relative to last year in the second half as it relates to incentive fees.

[Mark Hoplamazian, executive]

And just to clarify, sorry, Joan, you said base in incentive, you meant base in franchise. So 50% incentive and the other 50% is the base in franchise fee based.

[Operator]

Our next question comes from Michael Bellisario from Baird.

[Michael Bellisario, analyst]

1, 2-parter on net unit growth. You did about 1% net in the first half of the year were openings below your expectations? Or did you see any outsized deletions in the quarter? And then second part on the back half, just help us understand the puts and takes to get to the low end and high end? And then could you also provide some more details on the -- I think you said potential portfolio transactions? Is that organic strategic deals or you're referring to potential brand M&A?

[Mark Hoplamazian, executive]

First of all, there were some terminations and they were not particularly outsized, but they did affect the first half. And as we look forward, we've got a pretty robust opening schedule for Q3 and Q4. But I would quickly add, in Q2, for example, our room openings were about 1/3 conversions. And we actually believe that we will end the year at closer to 50% of the total net rooms growth being conversions. And those are conversions that are known to us, but also some that are subject to completing some other transactions that we're working on right now.

Since the first quarter of this year, I've been talking about the fact that we see a robust opportunity and real opportunities, not just theoretical to do portfolio deals. And sometimes that means doing a strategic partnership like portfolio deal like the Lindner Hotels deal, where we signed franchise agreements for all of their -- all of those hotels. Sometimes they come in the form of an acquisition of a brand or a management platform like we did with [indiscernible] hotels, just as one example.

We have in the -- in sort of the hopper at this point, and we've been working on several that we feel really good about. Now it's now August -- and whether we actually have everything closed and those hotels in the system to count as NRG at December 31 or sometime in January. I can't tell you that. But I don't either -- neither do I care because the point is not to make a particular date, it's that the overall rate of growth and our momentum is actually maintained.

And so I've always said whether we have slippage into January or not is sort of irrelevant to me. You have to look at it on a smooth basis over time. And that's where we are. So we do expect more conversion activity.

I would just add one thing. I don't want to imply that this is a [indiscernible]. We've actually applied a tremendous level of data and analytics to the markets that we believe would provides the biggest network effect. We've done it by price point and by brand segment. And we have then cross-match that with a huge number of portfolios that we've identified and qualified across the globe. And we did all that work in the fourth -- third and fourth quarter of last year. That's actually proven to be extraordinarily helpful in focusing our resources and our time and attention.

And of course, we are also very focused on making sure that we understand the customer base like we always do. That's what we start with. And each of these acquisitions or partnerships that we do have embedded growth, already identified embedded growth and that they are asset light. So those are the principles that we continue to follow.

[Operator]

Our next question comes from Stephen Grambling from Morgan Stanley.

[Stephen Grambling, analyst]

You called out the lease structure in Europe is allowing for rapid expansion in the region. How should investors think about the cyclicality of the fees associated with that growth versus the U.S. And does the structure alter how we may need to think through how that market could scale or its sensitivity to things like interest rates?

[Mark Hoplamazian, executive]

So Stephen, I'm sorry, I missed the gist of the question was -- at the beginning. Just repeat the beginning part of your question, I apologize.

[Stephen Grambling, analyst]

Just understanding the cyclicality of these lease-oriented management rates in Europe and how to think about the scaling in that region?

[Mark Hoplamazian, executive]

Okay. I don't look at it as cyclical. Of course, it's dependent on then prevailing rates. But if you look at the form of ownership in the form of transactions that are done in Europe, a significant proportion of them are done through leases. We have, I think, 1 or 2 leases in our portfolio in Europe. We have not stepped into being a lessee pretty much anywhere in the world. I think we have in Grand total, certainly less than 10 or is it 5 now. We have 5 leased hotels.

And we just don't -- leases are not really an easily managed sort of class of ownership for us. Having said that, there are a large number of developers in Europe and owners who are both very experienced in leases, but also won't do a deal in any of the form. And that's a capital base that we have historically not actually focused our time and attention on -- and we are now enabled to do that through the me and all hotels acquisition, but also now as we develop those relationships, we can extend that to some of our other brands, mostly in the select and upscale and upper midscale.

So for that purpose, I am excited about it, and I am excited that we -- that's a very, very large capital base. Some of the institutions are huge and have even come to the United States, with deals to be the lessor for hotels. Again, this is not a form in format that we prefer. And therefore, we do really -- we're not underwriting anything that I can think of across the globe right now in which we would be a lessee. So it's just not something we do. But working with lessee to become the manager of the hotel or the franchisor, that is something that has got a significant new chapter growth opportunity for us in Europe, especially.

[Stephen Grambling, analyst]

So that all makes sense. I guess, as I clarification, are these management fee structures or franchise fee structures unique or different relative to the U.S. or other markets, just given the unique ownership structure being leased?

[Mark Hoplamazian, executive]

No. They're quite typical, actually. So I mean rates might vary -- royalty rates might vary or the rent might look [indiscernible] whatever there are certain bespoke issues. But generally speaking, and we have -- the vast majority of the Lindner portfolio actually is leased in by the Lindner group. So they are the lessee and we are the franchise [indiscernible] -- they are the lesse and the manager, by the way. And we -- our deal with them as arrangement. So -- and those franchise deal terms are not different than what you would see in a normal franchise deal that you would do with an owner as opposed to a lessee.

[Operator]

Our next question comes from Richard Clarke from Bernstein.

[Richard Clarke, analyst]

I just want to -- now we've got revised full year guidance. I just wanted to call back to the Analyst Day you did last year. If I do the math correctly, it looks like in 2025 to hit those targets, you'll have to grow EBITDA about 14% free cash flow about 28%. And all while taking CapEx down by about 41%. So just your confidence in hitting those 2025 targets based on where we are now in 2024?

[Mark Hoplamazian, executive]

Richard, I would say the outlook really is dependent a bit on what the overall economy and how macro factors impact. Having said that, there are certain dynamics, and I don't want to tilt too far into interpreting and extrapolating macro indicators from a very short-term to highly disruptive period, which is what we're living through right now into the future.

The underlying issue that we focus on is the general economic health and growth rate for the key markets that we are participating in. And yes, it is true that the public markets have been extraordinarily disrupted. It is not true that, that is reflective of a massive disruption in the U.S. economic outlook or otherwise.

Secondly, the rates have come down. Fixed rates have come down variously between 40 and 50 basis points -- excuse me, over the last 5 or 6 days. The floating rate market is actually quite stable at this point, spreads have widened out a bit, but not materially on the fixed rate side, not so much on the floating rate side.

So I'm looking at a situation in which -- we do expect that the backdrop for openings and our net rooms growth is set up to be able to expand, assuming that we see rate adjustments in the future, and we see the overall economic -- sorry, financial market environment, the capital market environment improving.

Secondly, CapEx has been dropping. I was thrilled to see the outlook that we've got currently and it's going to be lower than that next year. So we are on path with respect to the drop in CapEx and the further expansion of conversion from EBITDA to free cash flow by virtue of our asset-light trajectory.

So if you put all that together, I feel pretty good about our outlook at this point. We are obviously tracking below the 6% to 7% NRG that we had put out at Investor Day, I do think that, that's temporal. And whether we get fully recovered to what we know we can sustain over the long term by next year or whether it takes 1.5 years, I can't really predict at this point. But I would say the general direction of travel is consistent with what we set out in the Investor Day.

[Richard Clarke, analyst]

Okay. Makes sense. Maybe just as a follow-up, you've changed the definition of EBITDA, you've moved the transactional cost out of that. I guess in my experience, companies often do that when they know they've got a big cost coming up. So maybe what was the thesis behind making that definitional change to adjusted EBITDA?

[Joan Bottarini, executive]

Sure. Richard, the rationale was pretty simple. These are onetime costs that we experience in relation to our integration activity and also our transaction activity. And so as we consider true core earnings we felt as though it was a better representation to remove these and also provide the visibility to all of you with respect to what those costs are outside of adjusted EBITDA.

Integration costs, you will have seen that we've put on a separate line, and you'll see all of that through 2023. And recast that we did in the first quarter. And then transaction costs for last year we assumed about $10 million within the 2023 annual year. And what I would say is with transaction costs, they can be variable, very variable from quarter-to-quarter. And we have very few, call it, dead deal or abandoned costs.

So when we close on asset sales, -- they -- as we're working on transactions and asset sale transactions, they run through our G&A, and then they get re-reported into a gain and loss on the sale of an asset. And when we acquire a company or undertake a transaction like we did with UVC, they get recorded into the asset base. So this is why made the change, the onetime nature and the variable nature we are looking at our operating core performance without these 2 items. So now they're on a separate line item going forward.

[Mark Hoplamazian, executive]

I would also just point out, Richard, I caught your implication that this might have to do with an outlook that includes some disruption because of the line item, that's not the case. If we were able to predict with precision what the transactional activity and exactly how that fell over a given quarter, we would probably be making a lot of other prognostications and be magical in some fashion. So it's sufficiently uncertain that we could never plan around something like that, just to be clear.

[Operator]

Our next question comes from Patrick Scholes from Truist.

[Charles Scholes, analyst]

Just a couple of questions on China and incentive management fees. Currently, right now, what percentage of your incentive management fees do come from China? And how does that historically compare? And then my follow-up question is, what is your visibility into RevPAR or bookings in China, basically, what is the booking window for your Chinese business?

[Joan Bottarini, executive]

Let me make sure I have all of those elements, Patrick. As far as the composition of the China incentive fees as a percent of total, what I can -- what I have off the top of my head is, total fees for Greater China relative to our overall base is about high single-digit composition. So that's Greater China as a percentage of our total. We are earning incentive fees in our Greater China hotels, over 90% of our hotels are earning incentive fees. It's the structure there where we're earning fees on the first dollar of GOP that we earn. And that has actually remained pretty consistent period-over-period because of the nature of the structure, maybe a point or 2 lower than we were last year.

As we consider what's happening in the operating environment, yes, RevPAR was negative in the quarter and the demand expectations that we have going forward. Given what we're seeing around travel outside the outbound China, other regions in Asia Pacific and the decline in domestic travel, we expect that, that will continue in the second half of the year. So that's impacting top line rev. It's also impacting total revenue as you look at China total -- Greater China total revenue.

So that dynamic is certainly impacting a negative growth rate at RevPAR and then an impact on total revenue is impacting GOP margins. So it's just lesser fees that we're earning in Greater China in the quarter, certainly more than we had expected, and that's what's captured into our full year outlook, the impact of [indiscernible] into the revised RevPAR outlook. And the IMS is about 3% of our gross fees on a global basis.

[Mark Hoplamazian, executive]

He also asked about booking curve.

[Joan Bottarini, executive]

And the booking curves. Yes, the window, it's always been very short in Greater China. Relative to other regions of the world, it's -- one of the primary drivers of that is the group business. So in the U.S., our group business is 30-plus percent. And so we obviously have more visibility to group for longer periods into the future. In China, it's closer to 10%. So that's part of the visibility. But in China, it can be days in many markets where the booking windows fit. And right now, we're seeing very short windows consistent with what we typically experience.

[Mark Hoplamazian, executive]

I would also just add quickly that the level of outbound travel is significant, probably higher than we would have otherwise thought. And we have said for a couple of quarters now, that we do -- we embedded in our outlook, we believe that inbound traffic -- sorry, inbound lift -- airline lift into China will improve in the fourth quarter or towards the end of the year. We have not had that offset in China to date. So if you go to pre pandemic levels, there were plenty of outbound travel. Everyone talked about the outbound travel from China being a major driver world. global travel demand. And if that was true then and it's beginning to be true again. But what was balanced then is an equal measure of high-rated business coming into China, that's not present currently.

[Operator]

Our next question comes from Chad Beynon from Macquarie.

[Chad Beynon, analyst]

With respect to the RevPAR guidance, has anything -- or could you just kind of talk about what changed regarding the 2 components, ADR or occupancy? And yes, I guess, just kind of broadly, as you look out beyond '24, if you think the gains are going to be more from ADR, if there's still occupancy opportunities?

[Joan Bottarini, executive]

Yes. The composition, Chad, is about split the way we're looking at our forecast for the remainder of the year. We do have a strong group in the second half group on the books. You heard our pacing numbers at 7% and a healthy portion of that is rate growth. So maybe a little bit more skewed towards rate. And we definitely still have opportunity on the occupancy front. We've realized greater demand in the first half from business transient, which has been lagging for us and those occupancy rates in our convention and business hotels are much closer to kind of pre-pandemic levels. So -- but there's still some room to grow on the occupancy side. As we look forward, our group bookings are nicely split between occupancy and rate. So we have opportunity on both fronts.

[Chad Beynon, analyst]

And then with regard to rooms under construction, how is that pacing against the pipeline? And what do you think the biggest catalyst would be to get more of these pipeline rooms kind of shovel-ready?

[Mark Hoplamazian, executive]

Yes. Thank you. So over the course of the last several years, we've moved from percentage of our pipeline under construction from the high 30s to the low 30s, which is where we are now. So we have roughly 40,000 rooms under construction at the moment, that's about a 2% to 2.5% decline year-over-year in terms of rooms under construction, not surprising given the environment that everyone is talking about, but that's the -- those are the facts that are associated with that.

China overall is a bit lower than that in terms of the proportion of the pipeline that's under construction. Part of that has to do with the fact that, we've actually executed quite a few or we have entered into agreements to execute some conversions in China and that actually also inflates the pipeline that ends up in production earlier. But -- so it's not under construction, it may be under renovation or something else, but not technically under construction. The pipeline itself, I think the dynamics that would significantly change what we're seeing currently is availability of capital for new starts in the United States. That's probably #1. And #2 would be a more favorable lending environment in China. We haven't been significantly hurt by that because most of our hotels are signed with state-owned enterprises. But it still has a marginal impact with respect to private developers who do depend on the debt markets in China to fund their projects.

[Operator]

We have no further -- we are just out of time for questions. I'll turn it back over to Mark Hoplamazian for closing remarks.

[Mark Hoplamazian, executive]

Thanks. I just want to thank all of you for your time this morning, and we continue to appreciate your continued interest in Hyatt and look forward to welcoming you to our hotels so that you can help our RevPAR outlook and other lines, but mostly the experience and power of care as delivered by the Hyatt family. So we wish you all a great day ahead. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating, and have a wonderful day. You may all disconnect.