Is Hyatt Hotels A Takeover Or Just A Short?

Summary

There are troubling signs that Hyatt is falling behind the competition in key areas.

Worse, recent moves by management have alienated the one hospitality factor that counts most: Traveler loyalty.

Something has to change for this fine hotelier to survive as an independent company.

This article is Part III of a look at the lodging/hospitality industry. Part I here I provided an overview of the industry: The difference between owners of the physical lodging properties, the management companies that actually train the staff and do the hiring, firing and maintenance, and the big “flags” like Hyatt (NYSE:H), Hilton (NYSE:HLT), Intercontinental (NYSE:IHG), Marriott (NYSE:MAR), Wyndham Worldwide (WYN) and Accor SA (ACCYY) that bring guests to the properties even though they seldom own the hotels themselves. It’s a good place to begin if you want to understand this rapidly consolidating industry.

In Part II here I discussed the latest assault on hotel profitability: The rapid growth of Airbnb (Private:AIRB), VRBO, and online travel agencies (OTAs.) I concluded that most hotel owners, managers and branders were doing the right things to stay on the green side of the grass. I also recommended a hotel property owner I think is particularly well situated to survive and grow.

In this article I’d like to circle back to a company that I do not see as keeping up with industry trends. Indeed, I see them doing a lot of things wrong. That company is the once private, then publicly-traded, then private again, and now public again Hyatt Hotels Corporation.

It pains me to reach this conclusion – Hyatt instituted its frequent guest program (“Hyatt Gold Passport”) in 1987, 30 years after Jay Pritzker began the company with a purchase of a single motel, the Hyatt House, at Los Angeles International Airport. Jay Pritzker was a legendary dealmaker and his brother Donald a fine manager and soon other purchases of lodging properties followed. I’ve been a regular guest of many Hyatts since 1987.

I was just ending my career as a road warrior that year when I chose to make Hyatt my personal first choice of flag hotels. Now retired from a Fortune 500 company and running my own business, no corporation pays for my stays. Because of their fine properties and stellar service, Hyatt has until recently simply been my go-to-first hotel company for both business and leisure travel.

The Hyatt hotels themselves are not the problem. In the US, the company’s Hyatt Regencys, Grand Hyatts and Park Hyatts compare favorably to luxury hotels anywhere. Here are just a few that many of you probably already know. If you do, I’m sure you’ll agree these are some truly stellar properties:

The Grand Hyatts in Kauai, Seattle, San Francisco, Washington DC, and New York. Internationally, the Grands in Singapore, Hong Kong. Melbourne, Berlin and the Erawan Bangkok.

The Hyatt Regencys in Sonoma Wine Country, Mission Bay San Diego, Lake Tahoe, Scottsdale, Lost Pines (near Austin TX), Hyatt Regency Hill Country (near San Antonio), Coconut Point FL, Grand Cypress Orlando, and New Orleans.

Then there are the upscale (and higher-margin) Park Hyatts, like those in Beaver Creek CO, Chicago, New York, Vienna, Paris, Hamburg and Seoul.

To give a flavor of some of these, here are just a couple photographs…

Hyatt Carmel Highlands, a stately older property with amazing views of the Big Sur coastline

Photo credit: Hyatt.com

Hyatt Regency Newport Beach, a gem of an older property a 15-minute walk to Balboa Island.

Photo credit: Hyatt.com

Park Hyatt Beaver Creek, delightful winter or summer.

Photo credit: Hyatt.com

Hyatt Regency Orlando Airport – a “special” airport hotel. After flying all day from the West Coast nothing beats taking a walkway, then an elevator to your hotel.

Photo credit: Hyatt.com

Hyatt Regency Atlanta – Portman-designed, opened in 1967, still a wonder with its 22-story atrium lobby.

Photo credit: Hyatt.com

The Churchill in London, overlooking Portman Square.

Photo credit: Hyatt.com

If I and others like these Hyatt properties so much, why do I believe the company may be a short or takeover candidate? Speaking strategically, Hyatt missed a critical opportunity at the end of 2015 when the company announced it was in talks to acquire Starwood Hotels. This wasn’t exactly Jonah swallowing the whale but Starwood was bigger than Hyatt (at the time Hyatt owned just over 600 properties and Starwood owned more than 2000).

Regrettably, Hyatt couldn’t come to terms with Starwood and let them get away. Marriott immediately stepped in. Today, Hyatt has some 750 hotels worldwide with about 70,000 rooms.

Marriott now has more than 6,200 hotels with more than 1,200,000 rooms.

By the way, there are two flags that have even more hotels than Marriott: Choice Hotels Intl (CHH) with just under 6,600 hotels (but just 500,000 rooms) and Wyndham Worldwide (WYN) with 8,200 hotels – 9,000 when they complete their acquisition of La Quinta – and 710,000 rooms – 800,000 including La Quinta.

The reason for such a disparity between the number of rooms per hotel in the case of CHH and WYN is that both specialize in economy and mid-scale brands like Choice’s Econo Lodge, Comfort Inn and Sleep Inn and Wyndham’s Days Inn, Knights Inn and Super 8. This approach is profitable, just not as profitable as the luxury flags’ offerings with their extra income from food and beverage sales, conferences and other amenities.

(For further comparison, Accor (ACCYY), Hilton (HLT) and Intercontinental (IHG) also have between five and eight times the number of hotels under their flags than Hyatt does.)

In the hotel business, size matters. Presence matters. Loyalty programs matter. Hyatt risks becoming a footnote in the hotel industry unless they can rapidly expand or join forces with another firm. They have a plan in place to grow internally by 40% over the coming couple years. That would still leave them a smaller player than even Carlson or Best Western.

Graphic credit: thepointsguy.com

Hyatt only "owns" 12% of the actual hotel properties in their portfolio. They are vulnerable on the others to encroachment by hoteliers offering more geographic diversity, more traffic from different demographic sectors and better loyalty programs. It is typical in the hotel industry for owners and managers to occasionally change flags for a better deal or a similar deal with a more forward-thinking chain. Hyatt’s non-owned hotels will still be amazing properties, albeit under some other hotelier’s nameplate if Hyatt doesn’t make some changes.

Hyatt’s failure to achieve the economy of scale of its erstwhile peers, preferring short-term profits to long-term results, has affected the bottom line, of course.

Return on invested capital is the lowest of its peer group above.

Gross margins are the lowest of the group except for Marriott, which is still digesting Starwood.

Operating margins also are the lowest of the group and net margins the worst of all except for Hilton, whose numbers may be skewed short term as a result of the spinoff of Park Hotels (NYSE:PK).

Hyatt has not been shy about taking on debt. One could argue that with rates low, why not borrow? As long as a firm is reinvesting those borrowings for a greater return that may make sense. But Hyatt is moving more slowly to put the capital to work than most of their US and global competitors.

Now, if we view the company in relation only to its own numbers, which current management seems to be doing, Hyatt is doing OK. But we cannot view a company in a competitive industry like this in a vacuum. If I’m in a marathon beating my own previous best time but everyone else has upped their game at twice this rate and are leaving me in the dust, it is time for some serious soul-searching.

To further our understanding of this insularity, let me cite some key thoughts from management via their most recent (November 2017) investor presentation:

Under “Key Investment Considerations” the company claims they are “Owner, manager and franchisor, uniquely focused on the high-end traveler.”

“Uniquely focused?” Simply not true. I have stayed at a number Conrad and Waldorf Astoria hotels (Hilton) Sofitel and Fairmonts (Accor) and Westin and Ritz-Carltons (Marriott). By Hyatt’s definition, all of these are focused on the high-end traveler – after all, that’s where the best margins are. As long as Hyatt fails to recognize that deeper-pocketed competitors with better geographic coverage also are seeking “the high-end” (read: spends more) traveler, they will dig themselves further into a cul-de-sac.

A couple slides later they talk about their 12 brands but only show 10. (Here are the other two: the Unbound Collection, a small collection of “boutique hotels” and a relationship of some sort with Oasis, which deals in private home rentals. Then there are the Hyatt Residence Clubs, a fancy term for high-priced timeshares. More on these later.)

Graphic source: here.

Subjectively, I couldn’t agree more about Park Hyatt and Grand Hyatt as luxury properties. But Andaz? I’ve stayed in three, two of which were converted to Andaz from Hyatts I previously enjoyed. They are staffed by persons in the Abercrombie & Fitch mold. Check-in consists of staff looking down their sniffly little noses in the classic “are you certain you belong at an Andaz?” look, followed by a “very well, I suppose you paid so we shall deign to give you a key” half smile. It’s supposed to be hip and trendy. Hip and trendy often comes across as expensive and snotty. It is all about execution.

I will accept their “upper upscale” category as accurate, as well, but Hyatt Place as upscale lodging? “Focused on high-end travelers?” Really? These are very nice rooms and fulfill the old Holiday Inn pledge of “no surprises.” I’ve stayed at more than 130 Hyatt hotels, including scores of Hyatt Place and Hyatt Houses. Points earned there allow me to stay at some world-class Hyatt hotels gratis.

But I don’t see dining cheek-by-jowl for a nothing-special breakfast in a too-small dining area upscale. Anything that beats cold C-Rations is an uptick in my life but I’m concerned that if this is what Hyatt considers "upscale" they are wearing rose-colored glasses.

Further on, they discuss “recent activity.” I applaud their capital strategy of selling $1.5 billion of gross real estate assets (I assume in order to focus more on hotel management and marketing.) The problem is they are late in so doing. This is a trend already far along by all their competitors – see Hilton’s recent spinoff of 67 touchstone properties worth $9 billion to form Park Hotels and Resorts. As for brands, they note they acquired Miraval and exhale (that’s a hotel brand, not a verb) “including three resorts” from Miraval. Marriott is acquiring thousands of rooms, Hyatt is buying three wellness retreats.

On the same "strategy" slide they then talk about share repurchases as if that is somehow germane to their future plans. Mixing apples and oranges, they talk corporate strategy and stock price in the same breath. What are they thinking?

Which brings me to Hyatt’s real problem: Drifting. The company still enjoys a fine balance sheet, excellent credit resources, and some superb properties. But the problem is: What does Hyatt stand for these days? It was once “The Hyatt Touch.” Friendly and capable staff, well-maintained rooms, and quality touches throughout in fine locations.

The Hyatt was where, if you ran out of shave cream, they didn’t direct you to the gift shop, they brought some up. If they failed to deliver a newspaper they just said, “One moment. I’ll get one from the bell desk for you.” The little things that cost them almost nothing. The Hyatt Touch.

That is no longer in evidence at many properties. It is now about immediate profitability without a view to keeping guests for life. For instance, I expect to pay more for a Hyatt Regency than a Hyatt Place. But no more. If there is a Hyatt Regency at 85% occupancy a couple miles less convenient and a Hyatt Place at 95% occupancy where it is more convenient for most travelers, you might find the Regency at $145 and the Hyatt Place at $245. Hyatt cannot train guests to believe in their “tiered pricing structure” then violate it whenever they can make an extra buck.

With this airline pricing of rooms (whatever the traffic will bear, which all chains use to a certain degree) Hyatt is making more money in the short term but destroying both guest loyalty and traveler certainty and understanding of Hyatt’s offerings. A traveler may pay $245 per night for a Hyatt Place but they will not depart with a good sense of what Hyatt is.

Hyatt also has gotten deeply into the timeshare business. Some of our favorite old resorts that had the acreage to expand have seen the hotel on that property shrink and the timeshare (which Hyatt calls the Hyatt Residence Club) take over many of the rooms. These are typically multi-building properties or those with contiguous land available.

I understand the benefit of timeshares to the seller – you get a big chunk of cash up front and can then charge high maintenance fees, too. I understand the profit motive, and certainly Hyatt is not alone in this area. But by gaining immediate income and letting someone else effectively pay for repairs and maintenance as a business may yet come back to bite them. I own a timeshare unaffiliated with a hotel chain so if it depreciates or raises its fees I don’t like it but I don’t resent a hotelier that I may then vow never to be a guest with.

It is in this area of guest loyalty that I see Hyatt in precipitous free-fall. For 30 years, Hyatt had an award-winning loyalty program called “Gold Passport.” In 2013, 2014 and 2015 Hyatt was awarded the Freddie Award (see freddieawards.com – despite the name, hoteliers and airlines take this award very seriously) for "Best Elite Loyalty Program." When a company wins such a prestigious and frequent guest attracting award three years in a row, most would enhance it or leave it the heck alone.

Not Hyatt. They completely revamped the program. They no longer have Member, Platinum and Diamond levels that provide a reasonable frame of reference. There are now four levels, with the first above Member now “Discoverist” (not a discoverer but a new made-up word. Someone at Andaz must have dreamed this one up). Then one becomes, either by staying or by spending more money, an Explorist. Finally, by staying 60 nights per year or gaining “base points” by spending lots of money (a minimum of $20,000 per year) one becomes a Globalist.

So who won 2017’s Freddie Award? Marriott, and it wasn’t even close. Erstwhile loyal Hyatt guests voted with their feet and their non-vote.

As a Diamond member, one needed 25 stays or 50 nights. Nice and simple. Distinguishing between "stays" and "nights"was a huge reason that Hyatt won all those Freddies from loyal returning guests. If you were an Accenture consultant and spent 50 nights in the same Hyatt House next to the manufacturing plant where you were consulting you may or may not have developed strong bonds to Hyatt. But by offering stays those of us with business in many different locations or retired with a wanderlust could spend a night here, three nights there and still qualify. No more. Now it is 60 nights or spend $20,000.

Under the Freddie-winning loyalty program, after achieving that level the frequent traveler received room upgrades as the staff had them available, a welcome amenity (like an appetizer or some such) breakfast for up to four persons, and a host of little favors like free newspapers, etc. Hyatt has enumerated all the "new" benefits of Globalist but its most frequent guests point out that almost all those things were always provided subject to availability. Now they are codified.

I’m reminded of the tale of two girls working in a candy shop. One was always more popular than the other even though both had the same charming personality and dealt with customers the same way – except…

Except that one girl would always over-fill the whatever size, call it a half pound, of candy, then begin removing pieces to get back to one half pound. With each piece removed, the customer felt as if something was being taken away. The other girl would always under-fill then, to the customers’ delight, and keep adding pieces. Both always sold exactly the same half-pound.

Take note, Hyatt. You took away the welcome amenity, you took away the unexpected not-confirmed-in-advance upgrades, you took away the morning paper, etc. And you replaced it with a program that rewards only those who spend one-sixth of every year in your hotel rooms or those who choose to spend on high-priced food, drink, spa treatments, etc. Present it any way you like – it is seen by the public that you now only care about the money, and this year’s money at that. Stay 59 nights next year and the guest reverts to lesser status.

I’m afraid for Hyatt’s sake that I’m not the only one who won’t give my loyalty to any company that doesn’t give loyalty in return. There was a conference call in 2017 to sell this new program. Hyatt truncated it early because of the furor the changes caused. One of management’s weak responses from taking the minimum number of nights to be a “globalist” from 28 to 60 was that, at Marriott, you need 80 nights so Hyatt was far more competitive. What the senior mucky-muck presenting the new program chose not to admit is that Marriott has nearly 10 times the locations. With Marriott, travelers can find numerous properties no matter where they are.

At Hyatt it now seems, at least for their highest tier of loyalty, they are only seeking expense-account road warriors, not families on vacation, small and medium sized business owners who travel occasionally, or retirees looking to expand their horizons. The benefits that used to accrue to all those are now reserved for those on the road regularly and spending freely.

Road warriors are indeed more profitable in that they often taxi or Uber to the hotel without tying up a shuttle bus. After all, the company is paying. They are often out on meetings or flying to their next location before breakfast is served, saving the hotel additional money. They are often too tired to seek out a fun restaurant offsite so they order room service. Ka-ching, ka-ching!

Most of the time, road warriors are not spending their own money like families, retirees and small-to-midsize business owners do Maybe that’s why those families and retirees will stay loyal if treated well– they are spending their own money!

This approach may come back to harm Hyatt. The road warriors companies have negotiated with Hyatt to offer special rates – the Corporate Travel Department is expense, not income. As long as a hotel meets their company’s standard for safety, cleanliness and convenience, they don’t really care if it is a Hyatt, Hilton, Marriott or whatever.

Hyatt and other hotels reserving the bulk of the benefit for staying with them might note that once you Pareto Principle yourself into fewer and fewer sources of income, what happens when Big Company X with 10,000 traveling employees gets a better offer from another hotel chain? Hint: you might lose 10,000 guests with no personal loyalty to you all at once.

So, to answer the question I posed in the title: Is Hyatt Hotels a takeover or just a short? Personally, I would not consider shorting the stock. I think Hyatt’s collection of fine properties, still-deserved reputation for excellence in service, and strong balance sheet instead make them a juicy target for a competitor looking to extend its high-end traveler portfolio.

To stave off such a moment, the board needs to shake things up. They have some heavy hitters in that group who run companies that have done a good job of staying competitive in their own industries, and a second- and third-generation Pritzker as well. Time for them all to engage. The best time to shake things up was yesterday. The next best time is today.

I won’t buy Hyatt at its current price and current approach to meeting competitive threats. Nor would I short it. On a decent pullback, however, thinking like an acquirer and wishing Hyatt the best, I would buy in size.

PS – If you have your own favorite hotels in desirable travel locations or business centers, or advocacy of Hyatt or another chain’s loyalty program, I’d like to hear from you!

Good investing,

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