Hyatt Hotels Corp

NYSE:H

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Hyatt Hotels Corporation Earnings Conference Call. My name is Christine, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'd 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.

[Bradley O’Bryan]

Thank you, Christine. Good morning, everyone, and thank you for joining us for Hyatt's fourth quarter 2018 earnings conference call. I'm here in Chicago with Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer.

Mark will begin our call today with an overview of our fourth quarter and full-year results and then highlight some recent developments. Following Mark's comments, Joan will provide additional details on our performance and close out our prepared remarks with a summary of our guidance for 2019. We will then take your questions.

As a reminder, we will be hosting an Investor Day on March 5, in New York, during which we will cover additional topics, including a full update on our capital strategy.

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, February 14, 2019. And we undertake no obligation to publically 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 or the information included in last night's release.

With that, I will turn the call over to Mark.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Thanks, Brad. Good morning, everyone and welcome to Hyatt's fourth quarter 2018 earnings call. Thanks for joining us this morning. We had a great finish to a great year. We reported adjusted EBITDA of $182 million for the quarter, bringing our full-year result to $777 million.

Adjusting for the year-over-year impact of real estate transactions, our fourth quarter-adjusted EBITDA increased approximately 19% and our full-year adjusted EBITDA increased 13%, both on a constant currency basis. These very strong rates of growth were primarily driven by performance in our owned hotels, strong increases in management and franchise fees across all regions, and effective SG&A management.

System-wide RevPAR increased 1.5% during the fourth quarter, weighed down by lower-than-expected growth in our Asia Pacific region and RevPAR contraction in our U.S select service hotels, as Joan will discuss shortly. This weaker than expected fourth quarter RevPAR growth resulted in full-year system-wide RevPAR growth of 3.1%, which is slightly lower than our expectations that we shared with you at the end of October.

During the fourth quarter, excluding the addition of hotels resulting from the Two Roads acquisition, we opened 25 hotels, driving full-year net rooms growth of 7.2% on a year-over-year basis. This brings us to a total of 63 new hotel openings in 2018. In addition to this industry-leading organic net rooms growth, we added 75 properties through the acquisition of Two Roads, including 65 hotels with approximately 12,000 rooms and 10 condominium ownership properties comprising approximately 1,500 units.

We have continued to focus on driving relevant growth of our brands in new markets where our guests are traveling. During 2018, we entered 38 new markets through organic hotel openings and an additional 20 new markets through the acquisition of Two Roads. For example, fourth quarter openings include the addition of the Hotel Sofia in Barcelona within our Unbound Collection. The Sofia is a 465 room luxury hotel with outstanding food and beverage outlets and serves as Hyatt's first representation in Barcelona.

I’m also excited to highlight the opening of the Hyatt Regency Seattle. This hotel was not in our previous estimates for net rooms growth in 2018, but we are thrilled to have been able to open this important hotel just prior to year-end. The Hyatt Regency Seattle is a 1,260 room hotel located in the heart of downtown and adjacent to the expansion of the Washington State Convention Center. The hotel has 52 meeting and dining venues, spanning a total of over 100,000 square feet.

As to examples of new markets from Two Roads additions, we expanded our resort offerings in Asia with four new markets in Bali, all represented by stunning Alila properties and now serves three new markets on the West Coast of the U.S in Washington, Oregon, and Northern California. These collective additions represent a meaningful expansion of our global distribution in a short period of time.

We are excited about the significant growth of our presence around the world, including the acquisition of Two Roads, which added many great hotels and outstanding brands that we believe will enhance the performance of our existing network of hotels and position us for even stronger growth in the future.

I'm very pleased to highlight that the fourth quarter marks our fifth consecutive quarter of net rooms growth of 7% or higher. And notwithstanding our record level of net rooms growth, we closed the year with a pipeline of signed deals amounting to 89,000 rooms, up from 70,000 rooms a year-ago. This includes the pipeline of executed contracts acquired through the Two Roads acquisition, amounting to approximately 5,000 rooms.

Our pipeline has increased almost 27% inclusive of the Two Roads hotels or 20% excluding them, fueled by a record year of signings in 2018. We believe that the pace of our pipeline growth is indicative of our ability to sustain high levels of net rooms growth over time.

Before turning the call over to Joan, I wanted to comment on some recent developments. During our third quarter call, I reviewed the progress we are making to drive guest engagement. And we recently announced that the World of Hyatt is welcoming an additional 56 hotels with Small Luxury Hotels of the World, or SLH, into the program under the strategic alliance we entered with SLH last year. This latest group brings us to a total of 110 SLH hotels in the program and provides World of Hyatt members access to six additional countries, including hotels in destinations such as Portugal and Finland.

Since the first group of hotels entered the World of Hyatt program late last year, member engagement has exceeded our expectations, especially among elite members who make up the majority of the bookings. Feedback has been overwhelmingly positive given the prestige and quality of the SLH properties and the elevated on-property experience consistent with what our members have come to expect from us.

We’re extremely pleased with how this partnership has come to life and expect to launch yet another group of SLH hotels within the coming month. To illustrate the guest space we are serving, the bookings of World of Hyatt members at SLH hotels have been at an average ADR of approximately $385. This both demonstrates the power of our focus on the high-end traveler as well as the quality of the SLH portfolio of hotels.

The backdrop to this discussion is extremely strong growth in our membership base and their share of our total revenues. Our membership base increased by 47% over 2017 and our member's share of hotel revenues has increased by over 300 basis points in the year. We see continued momentum in both membership and spending by our members as we continue to enhance the value of membership in World of Hyatt.

The last item I would like to comment on is a recent development relating to the Grand Hyatt New York, a hotel owned by Hyatt. The hotel was originally opened in 1919 and it became the Grand Hyatt New York in 1980. Prior to 2010, it was the only Hyatt -- it was the only hotel that Hyatt had in New York. And today, we’ve 14 hotels and 2 under development. The hotel is under a long-term ground lease and sits on top of one of the most important transportation hubs in the world.

We have been engaged in discussions with TF Cornerstone and MSD Partners, the owners of the air rights of Grand Central Station, which is adjacent to the hotel. The new development that they envision involves the construction of a new tower that would include a new Grand Hyatt Hotel.

We believe participating in the redevelopment represents the highest and best use of the property for the long-term. And we are committed to working with the developers to move this project forward. There are a significant number of approvals and other steps that need to be accomplished before a redevelopment could be possible, which we believe will take more than a year to work through.

We expect site work for the redevelopment would not begin until 2021 at the earliest. Therefore, we expect to continue to own and operate the hotel through at least the end of 2020. Our current expectation is that we would ultimately sell the hotel and ground lease interest that we have to the development entity that would do the redevelopment and enter into a long-term management agreement for a new Grand Hyatt Hotel upon completion.

We welcome being part of such an important project with such experienced and accomplished developers. And we are also very excited by the prospects of a new world-class Grand Hyatt Hotel. Ours is an iconic location in the center of Manhattan and we are committed to a long-term presence in that area.

As you can imagine, this is a complicated deal given the nature and location of the property, and we are still working through details of various agreements with TF Cornerstone and MSD Partners. We will share additional details on the potential redevelopment as it evolves over time.

In conclusion, 2018 was a great year in which we drove earnings growth well in excess of our earnings model and beyond our expectations. We managed to finish the year with strong fourth quarter earnings, notwithstanding some RevPAR pressure we saw in a couple of areas during the fourth quarter. While we are attentive to economic and other indicators going forward, we remain confident in our ability to maintain sold growth and expect to deliver another year of industry-leading net rooms growth.

In 2018, we also successfully executed against our capital strategy. Having now sold over $1.1 billion of our $1.5 billion sell-down target. We deployed proceeds from those sales to both invest in the growth of our business through our acquisition of Two Roads and returned a record level of capital to shareholders.

We intend to continue to drive the evolution of our earnings to be increasingly fee-based through the growth of our managed and franchise business along with the continued execution of our capital strategy, as we will discuss further in New York during our Investor Day on March 5.

I will now turn the call over to Joan to provide additional detail on our 2018 results and our expectations for 2019. Joan, over to you.

[Joan Bottarini, Chief Financial Officer.]

Thanks, Mark, and good morning, everyone. Late yesterday, we reported fourth quarter adjusted net income attributable to Hyatt of $69 million and diluted earnings per share of $0.62 adjusted for special items. Adjusted EBITDA for the quarter was $182 million with system-wide RevPAR growth of 1.5% in constant dollars.

Our adjusted EBITDA for the quarter includes a negative $2 million impact from Two Roads, which is in line with our expectations to be flat for 2018. Excluding a $17 million impact from real estate transactions, our fourth quarter adjusted EBITDA grew at an impressive level of approximately 19% on a constant currency basis. While RevPAR results were slightly lower than we anticipated, we are very pleased with our strong finish to the year.

I will now highlight our segment results, starting with our managed and franchise business. We ended 2018 with our managed and franchise business representing 53% of adjusted EBITDA before corporate and other for the year, up from 47% in 2017. We expect this trend to continue in the year ahead as we evolve to a more fee-based earnings profile.

During the fourth quarter, we delivered 11% growth in base incentive and franchise fees on a constant currency basis compared to the fourth quarter of 2017. Total fees increased approximately 12% on a constant currency basis. We’ve now delivered 10 consecutive quarters of high single to low double-digit growth in our total fees, an excellent track record driven in part by industry-leading net rooms growth.

Next, I will provide additional perspective on each of our three lodging segments beginning with the Americas. The Americas segment delivered full service RevPAR growth of 3.4%, while select-service RevPAR declined 3.7%. Total U.S RevPAR grew 0.9%, with U.S full service up 2.6% and U.S select service down 3% for the quarter.

We experienced headwinds in our select service results compared with the fourth quarter of 2017 due to a weather-related benefit from post-hurricane demand in 2017. Excluding the acquired Two Roads hotels, net rooms growth for the Americas during Q4 was approximately 5%. Base incentive and franchise fee growth of approximately 11% led to adjusted EBITDA growth of 12% for the quarter, both on a constant currency basis.

Full-year's group rooms revenue in the U.S increased approximately 3% in the quarter with increases in both group room nights and rates. The growth of our group business in the fourth quarter came primarily from associations with strong growth in banqueting revenues. In the quarter, for-the-quarter bookings were down slightly, but we ended 2018 with total in-the-year, for-the-year bookings up 4% over last year. Fourth quarter production for all years was up approximately 3%, primarily driven by longer term bookings.

Looking ahead, group booking pace for all years is positive, and 2019 is up in the low single digits. Nearly 80% of our group business of 2019 is already on the books. U.S full-service transient revenue was a little over 1% for the quarter, with decreases in room nights more than offset by solid rate increases.

I will now move on to our Asia Pacific segment where full-service RevPAR increased 2.1% in the quarter, driven by a combination of occupancy and rate. RevPAR in Greater China increased by just slightly more than overall segment RevPAR. Excluding acquired Two Roads hotels, net rooms growth for Asia Pacific was approximately 13%.

Together, RevPAR and strong rooms growth drove an increase in base incentive and franchise fees of approximately a 11% in constant dollars. Adjusted EBITDA grew approximately 5% on a constant currency basis, reflecting strong fee growth, partially offset by the impact of additional investments supporting our growth in Greater China.

Now moving to our Europe, Africa, Middle East, and Southwest Asia segment. Full-service RevPAR increased 2.7% driven by occupancy gain. All regions in the segment showed solid RevPAR growth other than the Middle East, where significant supply growth continues to have a negative impact on results.

Net rooms growth of 10% for the segment helped to drive a 9% increase in base incentive and franchise fee revenue for the quarter and an increase in adjusted EBITDA of 15%, both on a constant currency basis.

I will now review our owned and leased business, which accounted for approximately 46% of our adjusted EBITDA before corporate and other in Q4 and 47% for the full-year. Owned and leased RevPAR increased 3% in the fourth quarter. Adjusted EBITDA for this segment was down approximately 1% in constant currency, entirely due to asset sales. Excluding the net impact of these transactions, segment adjusted EBITDA in constant currency would have increased approximately 18%, an impressive performance by our owned and leased hotels.

Our comparable owned and leased margins increased 240 basis points during the quarter. About half of the margin improvement resulted from remarkable operating performance from our hotel teams, yielding improvements in rate realization, food and beverage operations, and continued productivity gain. The remainder of the margin increase came from non-recurring credits and a decline in costs in 2018 as we lapped certain one-time costs in 2017.

Lastly, I want to touch on another factor helping our consolidated results for the full-year and fourth quarter of 2018. We reported adjusted selling, general, and administrative costs $11 million lower than last year. While a portion of this decline relates to our focus on realizing efficiencies in our operating model, more than half of this reduction relates to costs incurred in 2017, including non-recurring severance, and costs related to certain marketing initiative.

In summary, we are exceedingly proud of our remarkable end to the year with strong double-digit fee growth, excellent owned and leased hotel operating margin performance, and outstanding net rooms growth, and a significant increase in our pipeline of executed management and franchise agreements.

Now that I’ve reviewed our operating performance, I would like to update you on our shareholder capital returns. We closed out 2018 with full-year share repurchases of approximately $966 million, the largest volume of annual share repurchases in our history. When combined with a total of $68 million in dividends, we delivered on our commitment to return a total of approximately $1 billion to shareholders in 2018. Additionally, during the fourth quarter, we announced a new $750 million share repurchase authorization of which approximately $614 million remains as of February 8.

Turning to 2019, we expect to return approximately $300 million in capital to shareholders this year, which includes $54 million in repurchases completed through February 8. Our return of capital to shareholders will come through a combination of share repurchases and our quarterly dividend, which we are increasing from $0.15 per share in 2018 to $0.19 per share with our first quarterly dividend of 2019 to be paid on March 11. Our expected total shareholder return of approximately $300 million does not contemplate the potential application of proceeds from asset sales that may occur during 2019.

Turning to additional guidance related to 2019, all guidance that I will be providing this morning excludes the impact of any potential 2019 transaction, including potential asset sales. We will update our full-year guidance when we complete any potential transactions, including asset sales or investments in new hotels or businesses. The guidance I provide will include the impact of our acquisition of Two Roads, but I will break Two Roads items out where appropriate.

And as a reminder, you can find details of our 2019 guidance in our earnings release filed late yesterday. We expect full-year 2019 system-wide RevPAR growth to range from 1% to 3%, consistent with the guidance we provided during our third quarter call. We continue to expect RevPAR in the U.S to be a bit lower than RevPAR growth internationally, and specifically expect some continued pressure on select-service RevPAR in the U.S.

We expect our 2019 adjusted EBITDA to range from $780 million to $800 million. It's important to point out that the net impact of real estate transactions completed during 2018 is creating a $28 million headwind on our year-over-year earnings progression. We also expect a $5 million unfavorable impact from foreign currency.

When excluding the impact of these items, we expect our adjusted EBITDA to grow by about 6% versus 2018 at the midpoint. This guidance includes the expected results from the addition of Two Roads at an adjusted EBITDA contribution of flat to $5 million, consistent with our prior guidance.

The strength of our 2018 management and franchise fee growth and hotel operating results nearly offset approximately $100 million in real estate transaction and foreign currency headwinds for the year. As we look forward to 2019, we expect to more than offset the headwinds I mentioned earlier.

And when you combine our 2018 results with the midpoint of our 2019 guidance, after adjusting for the impact of real estate transactions and foreign currency for both periods, we expect to deliver a 2-year compounded growth rate of approximately 10% in our adjusted EBITDA. This growth rate is on the higher end of our growth model, reflecting a combination of strong growth in our fee business, excellent operating performance at our owned and leased hotels and solid SG&A leverage over the 2-year period.

Before leaving our 2019 adjusted EBITDA outlook, I'd like to note that the majority of the transaction related headwinds I mentioned earlier will weigh on our reported first quarter adjusted EBITDA.

We expect adjusted SG&A totaling $345 million in 2019. Excluding the impact of Two Roads, 2019 adjusted SG&A is expected to be $305 million, which compares to $294 million in 2018. The additional $40 million of Two Roads related SG&A in 2019 includes approximately $25 million in one-time integration costs.

Capital expenditures are expected to be approximately $375 million for the year. By way of reminder, one of the drivers of these higher capital expenditure amounts is the completion of significant redevelopment efforts at our Miraval property in Lenox, Massachusetts, with an expected opening later this year.

Additionally, significant renovation activity is planned for the Hyatt Regency Phoenix and Hyatt Regency Indian Wells properties we purchased last year, as well as a handful of other properties. We also have new hotel construction costs of approximately $60 million to $70 million during 2019.

With the continued evolution of our capital strategy, we expect levels of CapEx to decrease significantly over time. And we will discuss further at our Investor Conference on March 5.

I will briefly comment on our tax guidance for 2019. Our 19% effective tax rate in 2018 was driven lower by tax reform and one-time benefits, including a favorable outcome on a large hotel sale. Our expected effective tax rate for 2019 is in the range of 28% to 30%.

Next, I'd like to highlight our expected 2019 net unit growth, which we expect to include opening over 80 hotels with net rooms growth in the range of 7% to 7.5 %. Net rooms growth in 2018 exceeded our expectations, driven by December openings, including the Hyatt Regency Seattle that Mark mentioned earlier.

While this significant level of 2018 hotel openings elevated our inventory and represents a pull forward from our expected 2019 openings, we remain confident in our ability to deliver another exceptionally strong year of net rooms growth in 2019. The significant increase in our pipeline of signed deals is the foundation of our future growth and we believe our ability to maintain a high level of growth over time positions us well to meet the needs of our expanding base of World of Hyatt members, with expanded presence in key markets.

I will conclude my prepared remarks by saying that we are very pleased with our 2018 operating results where we delivered solid RevPAR growth, net rooms growth in excess of 7%, driving high levels of fee growth while at the same time expanding our robust development pipeline. We are proud of our execution of our capital strategy, including the successful acquisition of Two Roads and the delivery of a record level of capital return to shareholders. We expect to continue to execute against our operating and capital strategies, which include investing in the business and growing our brands to create more value for our shareholders.

As a reminder, we invite you to attend our Investor Day in New York on March 5, where we plan to expand on many of these important topics. Meanwhile, we will be happy to take any questions you have on the material we cover this morning. Thank you.

And with that, I will turn it back to Christine for Q&A.

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Jared Shojaian from Wolfe Research. Your line is open.

[Jared Shojaian, Wolfe Research LLC]

Hi, everybody. Thanks for taking my questions. So I want to go back to the 2019 guidance here for a second. You called out 6% growth, sort of core growth excluding all the one-timers. So that’s at the low end of your longer-term target and I appreciate the comments that the multiyear CAGR might be higher. But if I look at the components of your longer-term 6% to 11% target, there doesn't appear to be anything unusual in your guidance in terms of RevPAR or units. So, can you talk about that a little bit and maybe help me understand that gap?

[Joan Bottarini, Chief Financial Officer.]

Sure, Jared. As you mentioned, we have after removing the net impact of transactions in foreign exchange headwinds, our anticipated EBITDA growth is 6% at the midpoint of the range. So I want to remind you that there were other non-recurring items that helped us in 2018, as I mentioned earlier, in the owned and leased portfolio and also a one-time settlement we received in the first quarter of 2018. When you combine those two items, those two alone had a lift on our earnings growth rate of 2 points in 2018, which is a headwind we will face in 2019. So this is why it's important and instructive to look at the growth over the two years, given the non-recurring items. That 2-year growth rate, just as a reminder, from '17 to '19 midpoint is 10%. And it's on the high-end of our growth model reflecting strong growth in our fee business, our owned and leased hotels, and solid SG&A leverage over the 2-year period.

[Jared Shojaian, Wolfe Research LLC]

Okay. Thank you. And you mentioned the Grand Hyatt, I appreciate the details there. But I mean, how are you thinking about that in terms of your longer term disposition plan and allocation of capital? Would that be incremental to your $1.5 billion target? Would you consider recycling the proceeds into other hotels? And as you look at your entire portfolio of assets, are there any properties that you would consider not being available for sale, whether that’s for strategic reasons, tax reasons, or anything else that you might be considering?

[Mark S. Hoplamazian, President and Chief Executive Officer]

Thanks, Jared. With respect to the Grand Hyatt New York and how we think about it, it is consistent with -- the steps that we are taking right now are consistent with the overall direction that we’ve taken which is to continue to move to an asset-lighter balance sheet. So we looked at that opportunity in the context of several different factors. One being that the last -- the CapEx profile for the property is driven in part by the fact that the last major renovation that we did was in 2011 at a cost of a bit over $120 million. And so we’ve got -- as we look forward, a CapEx profile that suggested this is an appropriate time for us to think about doing something different with the property. As to how we ultimately will treat the proceeds from the sale, we will make that determination as we get closer to the time of actually selling the hotel. So we've got a framing for our permit sell down commitment, which is at the $1.5 billion level that we described and talked extensively about last year. And we've also engaged in a number of recycling transactions. So I think exactly how we end up treating those proceeds will be determined when we get closer to disposition.

[Jared Shojaian, Wolfe Research LLC]

Great. Thank you.

[Operator]

Your next question comes from the line of David Katz from Jeffries. Your line is open.

[David Katz, Jefferies LLC]

Hi. Good morning, everyone. I wanted to just ask about the capital allocation framework and how your thoughts shift today. And obviously, the world has maybe changed and then changed back again, I don't know. Around the prospect of adding more brands to the portfolio through M&A and reallocating some sale proceeds that way as opposed to returning it and what your appetite might be for that?

[Mark S. Hoplamazian, President and Chief Executive Officer]

Thanks. So we've been consistent to say that our number one focus for proceeds from dispositions would be to look for growth opportunities for Hyatt. Our further color to that has been that we are not focused on transactions that would bring with it any significant amount of real estate. And if we did look at opportunities that did include hotel real estate, we’d look to have a path to divest the real estate over time. So really the idea was, it has been and remains, finding appropriate opportunities for us to actually enhance our growth rate over time. In the case of Two Roads, it's focused on a customer base that is very similar to our customer base from a ADR-level perspective and also from a demographic perspective. They have certain key attributes in the lifestyle space that are strengths of theirs, that we will bring on and use to help enhance our own performance. But most importantly, it's really a growth platform and it's entirely management fee driven. So the idea behind being able to redeploy capital has to do with ensuring that we’re continuing to expand in key areas for our customer base and doing it in a way that's going to continue to help our earnings migration -- earnings mixed migration. One example of that is we've got a very strong base of World of Hyatt members in Asia and with the Alila acquisition, we have significantly expanded our resort offerings with a significant pipeline in that brand. So we are particularly excited about the opportunity to really use that new platform to help enhance the value of the World of Hyatt membership for all of our Asian customers.

[David Katz, Jefferies LLC]

And if I can just follow that up, I appreciate the answer. Do you sort of feel more appetite among the higher end, which seems like where more of the growth has been or are there any sort of attractive elements that may be in the limited service or even lower than that?

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes, we’ve looked at potential acquisitions across all of the chain scales that we currently compete in. So everything from the upscale area through the luxury area. And that’s really -- that would be our focus. We’ve also looked at some platforms that have brand representation adjacent to upscale, but below upscale if you just look at it on a rate basis, particularly in Europe. And also looking at how we might be able to significantly expand our reach. So one of the key goals of our acquisition focus and the lens through which we're looking to look at potential acquisitions is really geography as well as segment representation. So the ability to have additional representation in key markets and within that, I would say key types of representation within those markets, and I will go back to my Alila example, really resort focused, that actually helps to really sharpen our focus on the things that we think will make the biggest difference to our network.

[David Katz, Jefferies LLC]

Got it. Thank you so much.

[Mark S. Hoplamazian, President and Chief Executive Officer]

I would just add to all of that, sorry to continue, but just one last thing. And that is we’ve been very disciplined and very driven to be deliberate about ensuring that we are maintaining a healthy return of capital to shareholders. And you can see from our behavior over the course of 2018 where we started off the year with a expectation or a guidance of returning about $300 million to shareholders and it ended up over a billion. That is the result of a mindset which is we will if we don't have clear paths to utilization of capital be returning capital to shareholders. So it is important to us. It is an area of focus for us. So, I don't want my answer to lead you to believe that we are exclusively focused on M&A and not committed to continuing our path of returning capital to shareholders.

[David Katz, Jefferies LLC]

Noted. Thank you very much.

[Operator]

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

[Thomas Allen, Morgan Stanley & Co. LLC]

Hey, good morning. You guys are obviously putting up really impressive unit growth. Just one thing I was -- that actually, I was very confused about was you went from 330 hotels in the pipeline and 73,000 rooms as of September to -- even if you take out Two Roads, its 410 hotels and 84,000. So were they lumpy additions or were they one-offs, or how -- it's impressive. So how are you growing so quickly? Thanks.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes, I’m thrilled to be able to address this one. We had just a remarkable year. We had been, I would say, over the past year, maybe 15 months, been really focused on looking at how we can enhance our development capabilities. And we’ve added developers and resources to help support development activity over the course of that period of time. By the way, we’ve extended that further because when we acquired Two Roads, we brought into Hyatt some really accomplished and experienced developers. So part of the "overhead", "run rate overhead" that we are bringing in with Two Roads is a fantastic development team that know the brands very, very well. So we really have been working against those -- with the new team -- new teams in place or enhanced teams in place over the course of the year. And we had a very significant measure of deals in process. Our discipline around disclosure is to only disclose deals that are fully executed and in our opinion, fully financed. So, if you look at the total activity base of our development activity, and you took into account things that were either in very advanced stages, post-LOI for sure or even signed, but in our opinion, still not included in the pipeline because we are not -- we haven't yet pushed the button on our confidence and they’re being financed. The actual pipeline is significantly larger than what report as our pipeline, but we’ve consistently reported fully signed and executed deals. And that’s partly why you see some lumpiness because as you can imagine, getting deals across the finish line and getting ink on paper can sometimes lag when the activity is done and when the deals are essentially finished. And we just had an incredibly robust fourth quarter. The things I'd say that are notable, first, significant growth across all of our brands. Second, select service in general is -- had mid 20% increase in rooms, all the percentages I will use are for rooms, whereas full service was just under 30% growth year-over-year. And that's partly why you see that our -- the composition of our pipeline is 70% managed and 27% -- actually, it's more than that, because it's 70% managed, 27% franchised, and 3% is in the O&L category, owned and leased, so really, 73% managed because virtually all the O&L properties are managed. That’s higher than our current composition, which is about 68% managed. And that is the result of a very, very significant increase in our full-service pipeline. So that’s the first thing I would point out. The second is that the balance between select service and full service is essentially identical to our current -- sorry, it's a little bit higher in select service, 36% of the pipeline roughly is select service, 64% full service. Our current base is about 28 % select service, so faster growth in some of the select service properties, that’s mostly a U.S phenomenon. So, I’d say that we are seeing significant growth pretty much across the globe. China remains the single biggest country with about 30% of the total pipeline, but the U.S and the Americas had a very strong year in terms of new development.

[Thomas Allen, Morgan Stanley & Co. LLC]

Congratulations. Just on a different topic, so on RevPAR, you called out the select service weakness in the fourth quarter because of the hurricane comps. But then, you also highlighted that 2019 U.S select service will be a little softer too. What’s driving that?

[Joan Bottarini, Chief Financial Officer.]

Sure. Let me address first what -- how we are thinking about things in '20, what happened at the end of the year in 2018 in the fourth quarter. Firstly, 2018 saw supply growth in the U.S upscale segment begin to outpace demand. So that was the first issue that impacted us. The second is when you compare the industry performance to our performance, there's a notable different in our mix, in our geographic concentration. The Hyatt Place brand is much more heavily represented in Texas and the Southeastern United States, which benefited from post-hurricane demand, as I mentioned in my prepared remarks. And lastly, I will just make a comment that we communicated previously, we've had a number of initiates under way to upgrade the programming in the Hyatt Place brand to increase the value offering for our World of Hyatt members. And we are in the process of evaluating what disruption this could have caused, and what I would say is that we are encouraged by what we are hearing from member feedback on our offering and are pleased with the growth in the World of Hyatt penetration numbers and the brand in recent months. So, in summary, on 2018, the rate of growth is primarily supply driven and impacted by those weather-related items due to our market concentration. And we don't have any evidence of a core demand problem or a macro brand issue. As you think about 2019, that supply and demand equation, we expect to continue throughout the year. And because we did so -- we have such strong performance in the first half of 2018, we will have some tough comps in the first half of 2019 as well, on the select service side.

[Thomas Allen, Morgan Stanley & Co. LLC]

Makes sense. Thank you.

[Operator]

Your next question comes the line of Stephen Grambling from Goldman Sachs. Your line is open.

[Stephen Grambling, Goldman Sachs]

Hey, good morning. It's Stephen. I guess as a follow-up to a little bit on Jared and Thomas's question on '19 guidance and kind of the EBITDA trajectory, what are the building blocks on the core owned and leased side kind of ex acquisitions? And are there any key integration milestones to consider with Two Roads as you look to pivot to an accelerating growth?

[Mark S. Hoplamazian, President and Chief Executive Officer]

I will start, Stephen, with the second question. I think the evolution of the integration plan is under way and we are on track, relative to where we expected to be with respect to Two Roads. And over the course of the year, we are going to be doing a number of things to migrate in a very thoughtful and deliberate way, with a lot of coordination with the owners of the hotels. I know that there is a lot of focus around how other integrations might have occurred previously. I think our -- we are aware of how we need to be doing this in a very deliberate way in order to be successful. And I’m thrilled to tell you that the extra effort and planning, and resources that we've put behind this are definitely yielding a great path to having, not just a really solid base of owners, but also really accelerating the growth of the brands around the globe. So we’ve already seen some great opportunities. We had one notable pickup in the first part of this year already, which is the conversation of the Parker Hotel in New York, which was neither in the property count nor in the pipeline. We were able to work very -- in a very coordinated way with our new colleagues from Two Roads with an ownership group that had a good experience with Two Roads in the past, and bring that across the finish line in a very rapid way. So some really great, early signs that the combination is going to yield some really good results. There is no question that we’ve a lot of work left to do. The amount of money that we are putting behind, the transition is significant and we are really focused on making sure that we have a really fantastic foundation for the future, which is why we are taking extra time, effort, and costs to make sure that that goes well. In terms of the O&L progression, I think we're in good shape in terms of the market representation that we’ve got as we look into this year and see how markets are performing at the top line. Maybe, Joan, you can cover the picture on the margin side because we are lapping a massive year of margin expansion.

[Joan Bottarini, Chief Financial Officer.]

Right. So for the first -- for the fourth quarter, we had an extraordinary headline on our margin expansion of 240 basis points. And I covered the fact that half of that was operational, and half of that was non-recurring items. For the full-year, we expanded margins at 140 basis points as well. So we had a very strong year and driven by the strong focus from our operations teams and a lot of good results coming out, both on the top line and in productivity to drive those margins. Our teams going into next year will be working hard to identify opportunities to continue to drive margins. But I would say that the continued expansion of margins at these expected revenue levels will be challenging. In the past, we stated that we are targeting about 3% RevPAR growth to yield flat margins and cover inflationary costs. So it will be -- continue to be challenging at these low single-digit RevPAR rates that we are expecting.

[Stephen Grambling, Goldman Sachs]

Thanks. And maybe one unrelated follow-up, as you see the momentum in spend and sign ups associated with the loyalty program, how much of the growth has been domestic versus overseas? Are you seeing any difference in the frequency or spend by region? Thanks.

[Mark S. Hoplamazian, President and Chief Executive Officer]

We’ve seen growth across the globe, and we think that the addition of Alila in Asia will also enhance the value proposition there. One of the -- one growth driver for new membership and also increased penetration over the course of the year was some changes that we made in the model for Hyatt Place. We transitioned both the physical plant, the physical model on the area programming for our new hotels. That was really done in close coordination with our current owners and developers to make it a more efficient build. So we were able to take costs out and take space out of the new Hyatt Place model. And in order to also enhance -- excuse me, margin performance, we converted and transitioned to a new food and beverage program in which the breakfast offering is free to members, but paid for otherwise which is a change from what we used to do, which was -- it was a free breakfast included in room rate. And that has spurred a lot of sign ups and penetration and we’re tracking durability and share of wallet over time. But we significantly enhanced and changed the breakfast offering at the same time. So we’ve increased and elevated the experience and also really used the opportunity to drive membership. No question that in that transition, which occurred in the fourth quarter, we had some disruption in terms of how hotels were represented from a rate and offering perspective, something that we are continuing to evaluate as we move into January and February of this year. But, overall, the member feedback and the owner feedback has been very, very positive. So we are really excited about that. The only other thing I'd say is we also saw an inflection point on the full-service sign ups as well. And I think part of that has to do with focus and attention by our hotel teams, but also we've really taken some significant steps over the course of the year to enhance the value proposition for World of Hyatt. And as we add more and more SLH hotels to the offering, we are going to be tracking our membership base in Europe closely because it really is a material change in what’s available through the program to our guests.

[Stephen Grambling, Goldman Sachs]

Thanks for the color. I look forward to the Investor Day.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Thanks.

[Operator]

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

[Smedes]

Hi. Thanks. I was just wondering if you could talk a little bit more about, for the capital return that you’ve targeted this year, the decision to increase the dividend versus more share repurchases?

[Joan Bottarini, Chief Financial Officer.]

So our share -- our capital return guidance for the year is $300 million. And I just want to point out that we had also came out at the same time last year with the same guidance of $300 million and we ended up the year at a billion in shareholder returns to investors. And that was driven largely by asset sales. As we look at going into the year, the $300 million that we just guided is before taking into consideration any asset sales and includes, as you pointed out, the increase in our quarterly dividend. So, we will update you over the course of the year if any of our estimates change. And with respect to our dividend, we don’t have a firm policy, but we’ve stated that we will revisit it annually. This is a 27% increase, which makes sense giving our -- given our earnings growth. And we took that decision to increase it for this year and increase those shareholder return.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes, I'd say one factor, as we think about it, is payout ratio, which we pay attention to, but also we -- it's reflective of our cash flow strength. We’ve got significant operating cash flow, increasing levels of free cash flow over time. So part of this is in anticipation that you will see, as we go into a much more asset-lighter earnings mix over time, that free cash flow attributes will also increase not just because we are growing fees at such a significant pace, but also because our CapEx will decline over time. So it's in part a change that is in anticipation of what our profile evolution looks like.

[Smedes]

I mean, I guess -- I understand that. I guess, it seems like for companies that are moving to more asset-light strategies, as you are, the investors value share repurchase more than dividend increases. So I’m just wondering what the sort of thought is maybe going forward. Would you expect to increase your dividend at this kind of rate or is there kind of a thought about the ratio between dividends versus share repurchase or -- it was just a little surprising to me given you trade below your peers and you chose to push up the dividend.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes, I mean, when you really go through the numbers, though, the total dollar change year-over-year is not material relative to the level of share repurchases that we're talking about. So, we don't see this as a significant trade-off. And we set -- when we set the initial dividend a year-ago, we indicated that we were setting it at a -- what we considered to be a sort of a conservative level, and that we anticipated that we would find opportunities to increase it over time. But I think most importantly, just in terms of a total dollar -- consumption of total dollars, it's not going to have a material impact on our share repurchases. When you just go through the numbers, it's not a material amount of incremental cash that’s being dedicated to dividends relative to the hundreds of millions that we are spending on share repurchase.

[Smedes]

Okay. Fair enough. The other thing I just wanted to ask you about, you called out the expected losses for the guarantees in France this year, which narrow. I was just wondering are those losses greater than you would have expected, given the unrest in France? Is that impacting those hotels at all? And can you just remind us when that -- when those contracts burn off, or the guarantees burn off?

[Joan Bottarini, Chief Financial Officer.]

So, the guarantee burns off in May of 2020. And this -- we expect our expense to decelerate from last year, that obligation. And we don’t see any impact from -- a very minimal impact from the unrest in France recently.

[Smedes]

Okay. Thank you.

[Operator]

Your next question comes from the line of Shaun Kelley from Bank of America. Your line is open.

[Shaun Kelley, Bank of America Merrill Lynch]

Hi. Good morning, everyone. Just a couple clarifications. Most of my questions have been asked and answered, but just to go back to the whole capital recycling plan as we kind of before we get the full update on the Analyst Day, Mark, can you just remind us of exactly how much you’ve remaining on sort of the stated kind of $1.5 billion goal to sell for this program as you’ve outlined it so far?

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes. Its -- I don't know what the precise number is, but it's in the range of $350 million.

[Shaun Kelley, Bank of America Merrill Lynch]

Okay. And the only thing sold in the fourth quarter was the -- I think one Hyatt House asset, right?

[Mark S. Hoplamazian, President and Chief Executive Officer]

No. We actually ended up -- there was another disposition, which was a JV interest that we had in the Hyatt Regency in Minneapolis, which is a sizable hotel. And we also have, at this time, we’ve an asset being marketed for sale, at which we -- in our practices that we will update when there is more to report like a signed deal, but that’s where we stand right now.

[Shaun Kelley, Bank of America Merrill Lynch]

Excellent. Great. And then, just one other clarification was around the New York asset. And, again, appreciate the color that you did give us on that because I think we saw that in some of the New York real estate circles. So, the question I have on that is I think you mentioned -- it is a ground lease asset, but then I think you also said that you may have some interest in the ground lease. So could you just give us a little bit more color because, I mean, more on the dollar, you can be trying to think about value there? And it will depend a lot on whether or not it's ground leased or how much of the ground lease you own.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Okay. So, excuse me. Given the transportation on which that property sits, all the land is owned by government entities and we are the lessee of the land and owner of the improvements. So that's the status that we’ve in that property. And our intention would be to sell the property, therefore inclusive of the ground lease interests to the development group that’s been formed to pursue this new redevelopment on the site. The adjacency of our site with -- it's contiguous with the Grand Central Station parcel has allowed the development group to take advantage of certain opportunities to make that total redevelopment and opportunity more efficient and effective than it might otherwise be. So it's a bit of a special opportunity with this group that owns the air rights at Grand Central.

[Shaun Kelley, Bank of America Merrill Lynch]

Right, because you can only use them if it's contiguous. I think it's one of the key rules around air rights.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Well, there are some transfer abilities. It's not as powerful though as might exist if you are contiguous.

[Shaun Kelley, Bank of America Merrill Lynch]

Okay, great. Appreciate the color there and look forward to hearing more about that.

[Mark S. Hoplamazian, President and Chief Executive Officer]

Okay.

[Bradley O’Bryan]

Christine, this is Brad. We will take our last question now.

[Operator]

Your last question comes from the line of Patrick Scholes from SunTrust. Your line is open.

[Patrick Scholes, SunTrust Robinson Humphrey, Inc.]

Hi. Good morning. Just a question on the Two Roads EBITDA impact for 2020 and how should we think about that as we work on our models? Thank you.

[Mark S. Hoplamazian, President and Chief Executive Officer]

In terms of earnings profile going forward?

[Patrick Scholes, SunTrust Robinson Humphrey, Inc.]

Yes, yes. You gave color on '19, but looking out to 2020 how do we take opportunity -- how should we think about that?

[Mark S. Hoplamazian, President and Chief Executive Officer]

Yes, I will just remind you what we said when we closed the deal. And then, I will ask Joan to just go through the numbers, how they work in 2019. What we indicated is that we thought that it would take until 2021, effectively to get stabilized and also realize some of the embedded growth that was in the near-term opening profile for the pipeline that we acquired and that our 2021 earnings base would yield, effectively, something in the range of about a 12% multiple on our purchase price. And that underwriting remains correct in our view. And as we think about the opportunity between now and then, it comes in the form of some conversions and also -- excuse me, accelerating new development opportunities on which we are fully working at the moment. So that’s the near-term profile, but, Joan, you might want to just recover what the -- how the numbers actually work in 2019.

[Joan Bottarini, Chief Financial Officer.]

Sure. As a reminder on what we expect for 2019, we’ve stated 0 to $5 million net impact of adjusted EBITDA and a $40 million cost base, SG&A, inclusive of $25 million of one-time transition costs. We expect to be fully transitioned by the end of this year. So that $25 million -- the substance of that is technology conversions to bring the properties to our platform, so that they could fully derive the benefits associated with our systems and other transition services that we are engaging with from the seller side to ensure a smooth transition and to have this all completed before the end of the year of '19.

[Patrick Scholes, SunTrust Robinson Humphrey, Inc.]

Okay. Thank you very much.

[Operator]

At this time, I return the call over to Mr. Brad O’Bryan. I now turn the call back over to you.

[Bradley O’Bryan]

Thank you, Christine, and thank you everyone for joining us today. And we look forward to seeing you in New York on March 5.

[Operator]

This concludes the conference call. You may now disconnect.