Hyatt Hotels - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to the Hyatt Third Quarter 2023 Earnings Call. All participants are in a listen-only mode. After the speaker's remarks, we will have a question and answer session. To ask a question, you'll need to press star, followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Adam Rohman, Senior Vice President of Investor Relations and FP&A. Thank you. Please go ahead.

Adam Rohman (SVP of Investor Relations and FP&A)

Thank you, and welcome to Hyatt's Third Quarter 2023 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 differ materially 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 the call will be available on our website for ninety 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 will turn the call over to Mark.

Mark Hoplamazian (President and CEO)

Thanks, Adam. Good morning, everyone, and thank you for joining us. First and foremost, I'd like to take a moment to acknowledge the recent global tragedies that have deeply affected communities around the world, including the August wildfires in Maui, September earthquake in Morocco, and October hurricane in Acapulco, Mexico. We've made donations to nonprofits on the ground, and our Hyatt family has come together to help our impacted colleagues through our Hyatt Care Fund. Additionally, the world is witnessing catastrophic events in Israel and Gaza. While we do not have hotels in the affected region, the Hyatt Hotels Foundation has donated to the International Committee of the Red Cross to support the relief efforts and help those in Israel, Gaza, and the impacted region. Our hearts go out to everyone affected by these events, as well as those impacted by the ongoing war in Ukraine.

It is in times like these that our purpose, to care for people so they can be their best, increases in significance. Turning to our results, we reported our Q3 2023 earnings this morning, including another quarter of record fees for Hyatt. The transformation of our business model and expansion of our asset-light earnings mix is leading to record fee contribution and greater conversion of earnings into free cash flow. Demand for travel remains strong and was something I personally witnessed during a trip to Asia this past August, my first visit to the region since 2019. Visiting key markets like Shanghai, Suzhou, Hong Kong, and Tokyo proved insightful and inspiring as I was able to connect with many of our colleagues, owners, partners, and guests.

There's a clear uptick in travel demand in Asia, and this momentum, combined with the continued growth and excellence of our food and beverage operations in the region, are leading to strong margins for owners and fees for Hyatt. In fact, performance around the world remains strong, and I'm pleased to share that RevPAR increased 8.9% in the quarter as occupancy grew 420 basis points, along with a 2.6% increase in average daily rates. We continue to see occupancy levels recover, and the month of September underscores this positive momentum, with occupancy down only 260 basis points compared to 2019. Demand for all customer segments remains solid. Leisure transient revenue increased 4% over an exceptionally strong third quarter last year, as consumers continue to prioritize travel and experiences.

Leisure travel remains at elevated levels, 22% above Q3 of 2019, including a 30% increase over 2019 in the month of September. Moving to business transient, revenue increased 19% and has recovered to approximately 90% compared to Q3 of 2019. Although most of our corporate negotiated accounts are on a dynamic pricing model, we are about halfway through discussions for our fixed-rate accounts and expect rates to increase in the high single-digit range in 2024 compared to 2023. Lastly, group room revenue increased 10% compared to 2022 and was up 5% compared to 2019. Growth in group revenue accelerated during the quarter and finished up 13% in September compared to 2022.

We had another excellent quarter of group production for Americas full-service managed properties, booking approximately $450 million of business for all periods, a 17% increase. Looking ahead, group pace for the Americas full-service managed properties is up 7% for Q4 and 8% for the full year in 2024 compared to 2023. Turning to World of Hyatt, our loyalty program continues to see impressive growth, adding nearly eight million new members in the past twelve months.... This represents a nearly 24% increase, bringing total membership to over 42 million. Additionally, room night penetration increased nearly 100 basis points during the first nine months of 2023, compared to the same period in 2022 for Legacy Hyatt properties.

Enrollments at our ALG properties remain strong, and in October, we passed one million loyalty members enrolled on property since the launch last year. Soon, members can look forward to World of Hyatt benefits extending to the Mr & Mrs Smith platform that we acquired in June. Separately, we're excited about the introduction of Homes & Hideaways by World of Hyatt, our new residential vacation platform, allowing members to enjoy private homes and remote hideaways, ranging from beachfront locations to mountainside ski chalets. Overall, we've expanded our portfolio of properties by 70% over the past six years, which has enabled a 300% increase in the World of Hyatt loyalty program members. Adding value to our members' experience with Hyatt is a key driver of our growth strategy.

We expect to maintain industry-leading growth into the future, enabled by an 8% increase in our pipeline, reaching a new record of 123,000 rooms, representing approximately 40% of our current portfolio. Developer interest in our brands remains extremely strong, and the engagement around our new Hyatt Studios brand will support continued growth in our pipeline in Q4 and for years to come. We achieved 6.2% net rooms growth and expanded our select service footprint in both the Americas and Asia Pacific regions. With respect to UrCove, we opened seven properties during the quarter, which brings our total open portfolio to 30 properties, and we're very excited that we have reached 100 properties, including our signed pipeline. Notably, in September, we opened Andaz Macau, the world's largest Andaz branded property with 715 rooms.

We expect a very busy fourth quarter of opening activity. As we have said at this time every year, we fully recognize that there are always timing issues that can impact the exact opening dates, but the momentum of our growth remains steadfast. We believe that we will continue to realize industry-leading growth in the future because of our robust expansion of our pipeline and our proven success in converting existing hotels to our brands. I'd like to make a few comments regarding the ALG businesses and the related segment results. Since acquiring ALG two years ago, we've realized remarkable growth in the business. First, the portfolio has expanded by 12%, and the pipeline has grown by 11%. This growth is particularly impressive considering it was achieved during post-pandemic recovery and a challenging financing environment.

Second, since our acquisition, Unlimited Vacation Club memberships have grown by 19%, reaching 140,000 members as of Q3. Third, ALG Vacations Adjusted EBITDA has increased tenfold since 2019 as a result of changes in market segmentation and through operating leverage, driven by significant investments we have made in automation and digital tools. And while the business has shown impressive growth and record results to date, we see many opportunities to expand at an even faster pace over the coming years. Looking forward, we see tremendously strong demand. Booking pace for our ALG luxury all-inclusive resorts in Cancun for the festive period is up 8%, and for Q1 of 2024 is up 12%. In the very short term, over the past two quarters, we experienced challenging year-over-year comparisons, as expected and as described earlier this year.

By way of reminder, this had to do with the post-Omicron compression of demand and bookings over Q2 and Q3 of 2022, and these year-over-year comparison issues are temporary. It's important to bear in mind the unusually high demand Cancun experienced in the third quarter of last year, compared to this year's return to more regular seasonal patterns. To put the magnitude of last year's unusual demand into context, adjusted EBITDA for the ALG segment in Q3 of 2022 was nearly equal to that of Q1 of 2023. This is highly unusual, as Q1 is the peak travel season for the majority of ALG destinations. Despite tempered demand in the overall Cancun market this quarter, net package RevPAR for our ALG properties still increased 1% compared to last year, an extraordinary result given the post-Omicron effect last year.

We also gained substantial market share relative to competitors, a testament to the power of ALG's vertically integrated platform. We are very optimistic about the outlook for ALG going forward based on the forward-looking pace data, and these positive trends are a testament to the strength of our ALG team and the durability of leisure demand. ALG continues to perform significantly ahead of our underwriting expectations and has accelerated our asset-light earnings mix. Based on the latest full year 2023 forecast, we expect to end this year with an implied multiple of just over 7.5x our acquisition price. And that is not the end of the story. With the growth in our system and continued expansion of our capabilities, the effect of multiple will continue to decline over the coming years. Before I conclude, we have updates on several transactions....

September, we announced the sale of our vacation residential management business, called Destination Residential Management, to an affiliate of Lowe. We are thrilled to work with a company that has expertise in this area, and as a part of this transaction and through our Homes & Hideaways platform, our World of Hyatt members will continue to enjoy the benefits of these properties in these destinations. Turning to asset sales, with respect to the two properties we've been updating you on throughout the year, we've made significant progress. For the first asset that we previously disclosed as being under a letter of intent, we have now signed a definitive purchase and sale agreement. This transaction is expected to close in Q4. For the second asset that we previously disclosed as being marketed for sale, we now have a signed letter of intent.

Assuming this results in the property being sold, the transaction should close in H1 of 2024. The completed sale of these two assets would bring our gross proceeds from asset sales, net of acquisitions, to approximately 2/3 of our $2 billion commitment. The activity level has increased around other asset sales. We have a letter of intent signed for one additional asset, with this transaction expected to close in H1 of 2024. While this is a relatively small transaction, the disposition would reduce near-term CapEx spending. We have also launched the marketing process for an additional asset, and separately, we are advancing discussions for off-market transactions relating to other properties in our portfolio.

As a reminder, we have realized $721 million of proceeds from the net disposition of real estate as of the end of Q3 of 2023. We remain highly confident that we will reach our disposition commitment by the end of 2024, while realizing attractive valuations and securing durable long-term management or franchise agreements. In closing, I'm very pleased with another quarter of record results, and I want to emphasize my confidence in the long-term outlook of our business going forward, underscored by a few important points. First, our core management and franchise business is firing on all cylinders, and we feel great about the future. Specifically, demand for travel remains strong, particularly among leisure and group customers, resulting in another quarter of record fees.

Greater China's recovery has been remarkable, and we expect this will be a continued tailwind for our management fees, net rooms growth, and pipeline expansion. We're excited about the prospects for ALG's festive and high season and expect another strong year in 2024 for that business. Second, our owned and leased earnings, despite tough year-over-year comparisons, are very strong. Comparable margins were 500 basis points higher compared to Q3 of 2019, and we are confident that as we exit this year, we will be able to continue to deliver margin growth. Third, we've made great progress on asset sales and have strong momentum towards meeting our $2 billion commitment by the end of 2024 at the latest. Fourth, our future growth, driven by our record pipeline and new openings, is very promising.

Even with certain financing challenges, primarily in the US, our best-in-class brands continue to attract owners for both new build and conversion opportunities, underscoring our unique positioning. We remain highly confident in our ability to achieve the long-term growth outlook that we provided at our Investor Day this past May. I want to extend my gratitude to the entire Hyatt family. Your unwavering commitment and dedication in executing our strategy has positioned Hyatt as the preferred brand for colleagues, guests, customers, and owners. Joan will now provide more details on our operating results. Joan, over to you.

Joan Bottarini (CFO)

Thank you, Mark. For Q3, Hyatt reported net income of $68 million and diluted earnings per share of $0.63. Adjusted EBITDA was $247 million, and net deferrals plus net finance contracts totaled $35 million. Excluding the impact of real estate transactions, a significant termination fee in last year's Q3, and ALG vacation travel credits, earnings were up 2% this quarter. Adjusted EBITDA and net deferrals fell short of internal expectations, in part due to increased costs in our owned and leased portfolio and our unlimited vacation club operations, which I'll review in a minute. We achieved a historic milestone of $250 million in total management, franchise, license, and other fees, a record-breaking quarter. This reflects almost 70% growth from Q3 of 2019.

Properties added to our system over the past six years from our pipeline, conversions, and M&A contributed 38% of this quarter's fees. As a result of our expanded fee revenue, our asset-light earnings mix was approximately 80% for the quarter, fueled by exceedingly strong fee growth and industry-leading net rooms growth. Our legacy Hyatt results had strong growth in the quarter, with adjusted EBITDA of $197 million. When adjusted for currency, the net impact of real estate transactions, and a significant termination fee last year, results were up 22%. Our management and franchising businesses have benefited from our larger system size and robust RevPAR expansion, fueled by strong rates and meaningful occupancy growth. Compared to Q3 of 2019, base fees were up nearly 30%.

Franchise fees increased by 67%, and the number of hotels earning incentive fees this quarter increased by 23%. This notable growth across all fee revenue streams reinforces the breadth and depth of our successful growth strategy and the global strength of our brands. Our legacy managed and franchised businesses produced an impressive 45% increase in fees compared to 2019, underscoring the strength and recovery of travel demand. The Asia-Pacific region produced impressive growth this quarter, contributing $42 million in fees, up 40% year-over-year. Greater China led the recovery, with RevPAR up 56% compared to last year and up 20% compared to 2019. The positive momentum we are witnessing in this region fortifies our confidence that Greater China will continue to serve as a strong tailwind into next year. Meanwhile, the Americas region contributed solid fee growth, up 7%.

Specifically in the United States, RevPAR demonstrated resilience, increasing 3% in the quarter. And finally, the EAME region had fee growth of 16% compared to last year, excluding a significant termination fee from a pipeline hotel in Q3 of 2022. Europe continued its strong momentum, with RevPAR up 5%. Moving to our owned and leased segment, when adjusted for the net impact of transactions, adjusted EBITDA for the third quarter increased approximately 6% from Q3 of 2022 and increased 42% from Q3 of 2019. Recovery of group, combined with sustained leisure demand, resulted in RevPAR growth of 6%. While we anticipated more challenging year-over-year comparisons in Q3, labor costs were higher than expected.

However, we believe we continue to manage costs exceptionally well, and to put this in perspective, our owned and leased forecast for 2023 estimates hotel expenses to increase 1.2% compounded annually compared to full year 2019 actuals, which is impressive given core inflation has grown more than 4% over that same time period. The excellent cost controls are evident when looking at our Q3 comparable owned and leased margins, which increased 500 basis points compared to 2019. We expect margins will continue to remain at the higher end of our previously disclosed range of 100 basis points to 300 basis points above 2019 levels. Turning to ALG, Adjusted EBITDA was $50 million, and net deferrals plus net finance contracts totaled $35 million.

Total fees for ALG were up 2%, excluding the impact from the Mexican peso on incentive fees. UVC membership contracts increased 2.4%, bringing the total membership base to 140,000. Meanwhile, ALG Vacations realized an operating margin of approximately 18%, consistent with the full-year stabilized margin expectations we previously shared. I'd also like to provide insights into net deferrals activity related to the Unlimited Vacation Club. UVC realized certain incremental costs in two areas. One area relates to member acquisition costs, which were higher due to lower demand levels into Cancun in the quarter. A second area relates to member benefit expenses, including higher rates paid to hotels for free nights redeemed.

These benefit increases demonstrate continued strong engagement of UVC members, as well as a benefit to our owners, who rely on member room nights to drive more profit for their hotels, leading to incremental incentive fees for Hyatt. I'd now like to provide an update on our strong cash and liquidity position. As of 30 September 2023, our total liquidity of approximately $2.2 billion included $727 million 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, we reported approximately $3.06 billion of debt outstanding.

During the first 10 months of the year, we repurchased approximately $408 million of Class A common shares and have returned approximately $440 million to shareholders, inclusive of dividends. As of 31 October, we have approximately $1.2 billion remaining under our share repurchase authorization. We remain committed to our investment-grade profile, and our balance sheet is strong. I'd now like to share some additional insights into our full year 2023 outlook. We are updating our full year 2023 system-wide RevPAR growth expectations to a range of 15% to 16% compared to 2022, with the midpoint improving due to the continued recovery in Asia-Pacific and improving group and business transient demand. We are reaffirming our net rooms growth of approximately 6% for the full year of 2023.

We remain confident in our growth due to the strength of our record pipeline and our ability to execute conversion opportunities. We are updating our guidance for net income to approximately $210 million and Adjusted EBITDA and net deferrals plus net finance contracts to a range of $1.175 billion to $1.195 billion. The midpoint of the range of $1.185 billion implies over 15% growth compared to the full year of 2022. This update to our midpoint reflects the estimated impact of the following items on H2 of 2023, which we've all covered in our comments this morning.

Higher costs within our owned and leased portfolio, incremental expenses for UVC, lower than expected levels of demand into Cancun, a temporary market dynamic as pace is picking up into the high season, and the impact of the Mexican peso on ALG. We are reaffirming free cash flow of approximately $550 million for full year 2023, showing meaningful expected growth compared to 2022. We are lowering our adjusted SG&A to be in the approximate range of $480 million to $490 million in 2023, inclusive of approximately $20 million of one-time integration expenses associated with carryover projects from 2022 for ALG and the acquisition of Dream Hotel Group and Mr & Mrs Smith.

We are also lowering our expected capital expenditures to be approximately $190 million, including investments in ALG and the transformative investment in the Hyatt Regency Irvine renovation. We're pleased that the Hyatt Regency Irvine reopened in Q3, earlier than expected and on budget, and with a full grand opening expected in Q1 of 2024. Finally, our full year outlook for capital returns to shareholders remains the same at approximately $500 million, inclusive of share repurchases and dividends. I will conclude my prepared remarks by saying we are very pleased with our Q3 results, which we believe demonstrate our unique positioning and differentiated model. Our recent inclusion in the S&P MidCap 400 Index is a clear indication of the continued successful execution of our transformation and its recognition in the market.

We delivered strong RevPAR growth and drove a record level of fees, expanded our development pipeline, and delivered outsized net rooms growth. We're proud of the execution of our long-term strategy that has enabled us to accelerate our asset-light earnings mix to 80%, unlock value to the sale of our real estate, and return capital to shareholders. Thank you, and with that, I'll turn it back to our operator for Q&A.

Operator (participant)

Thank you. As a reminder to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Patrick Scholes from Truist Securities. Please go ahead. Your line is open.

C. Patrick Scholes (Managing Director, Lodging and Leisure Equity Research)

Hi. Good morning,

Mark Hoplamazian (President and CEO)

Good morning.

C. Patrick Scholes (Managing Director, Lodging and Leisure Equity Research)

Mark, Mark, given all the headlines, you know, various real estate concerns in China, and, you know, possible economic slowdown, can you give us your latest views and thoughts on hotel developments for China for you? Thank you.

Mark Hoplamazian (President and CEO)

Sure. Thank you, Patrick. Look, demand in China is extremely strong, and international travel is steadily recovering. I think Q1 was down 60% to 2019. Q2 was down 40%, Q3 was down something like 19% or 15%, something like that, mid to high teens. So, we are seeing a steady increase in international inbound, which is really encouraging. A little surprising to me, actually, because air cover and air schedules are still well below where they were before. But, the relative relevance of that is that the inbound international travelers are spending more. So there's a lot of demand. Performance in the hotels is really good.

We're seeing a very strong continuous pipeline growth, but also, new openings for UrCove, our upper mid-scale brand, and also, other projects being completed and under construction. So I feel really good about the short term. Now, there is a dichotomy between more private sector developers and those that have state-owned enterprises either backing them or controlling them. There's a big dichotomy there because those who are in the—who are private and depend on the debt markets are having a very tough time. The debt contraction, the availability contraction is still with us and will remain with us for some time. It's going to take the Chinese government a while to work through the bad bank issue that they've got with Country Garden and Evergrande.

But, in the foreseeable future, I'm actually optimistic that we're going to be able to maintain both net rooms growth, but also pipeline growth.

C. Patrick Scholes (Managing Director, Lodging and Leisure Equity Research)

Okay. Thank you.

Mark Hoplamazian (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Stephen Grambling from Morgan Stanley. Please go ahead. Your line is open.

Stephen Grambling (Senior Equity Research Analyst)

Hi, thanks. You gave a lot of puts and takes to the 2024 kind of outlook here, but I think one of the big concerns is just how quickly it seems like some things changed around UVC and to a degree, other parts of the business. I'm just wondering if you can, one, talk to how to think about UVC specifically into next year, any puts and takes there? And then just more broadly, you know, maybe trying to help level set where you think EBITDA and free cash flow should be growing next year relative to the longer-term outlook you provided?

Joan Bottarini (CFO)

Sure, Stephen. I'll start. You know, some of those, as you say, puts and takes that we provided relative to 2023, and as they relate to the ALG business, are, we believe, temporary. The tempering that we've seen into Cancun had some impact on the ALGV business as well as UVC. And we believe that's temporary based on what we're seeing forward-looking into festive period and into Q1 of next year. And as far as UVC is concerned, you know, I related in my prepared remarks some of the increased costs that we were experiencing. Some of those costs are related to the tempered demand in Cancun, which again, we believe is temporary and will pick up.

The member benefit expenses, these are actually, as I noted, a really great sign because as members use their benefits, and they're using them at higher rates because we're generating higher rates, those are a bit more incremental costs that the club is paying to owners, and owners are seeing more profit, and Hyatt is seeing more fees as a result of that. But what I would say is that we have the ability and the flexibility to adjust our pricing. So as we consider what those benefits cost and the rates that some of those need to be paid at because of current strength and demand into our hotels, that allows us to be able to adjust pricing.

So as we look forward, we see these items as temporary and have a lot of confidence into next year. One thing I would mention, too, is if you look at the overall ALG performance last year, we generated EBITDA, plus net deferrals, plus net finance contracts of $388 million. And that included a $27 million adjustment for travel credits, which we've gone through before. That was primarily in Q4 of last year and a little bit in Q3, a little bit of a headwind in Q3.

As we look, what our guidance suggests for 2023 is that if you exclude those travel credits, we expect the ALG business to be flat to last year overall, which is just a great outcome, considering the very strong demand that we saw in 2022, and the health of the business remains strong. As Mark mentioned, the multiple that we expect to achieve this year is 7.5x, and that is reflective of the flat to last year, excluding the credits that I just reviewed.

Mark Hoplamazian (President and CEO)

Yeah. The only other thing I would add, Stephen, is that the departures basis business for ALGV, which is a much broader our vacations business, much broader set of hotels covered and so forth, was actually up 20%, close to 20% in Q1, down 1% in Q2, down 10% in Q3. Not unexpected, exactly what we expected to see. Now, what we didn't know and didn't really appreciate is that a disproportionate number of those departures that were affected are for four-star hotels, not five-star hotels. So that actually explains why our ALG, our HIC, Hyatt Inclusive Collection hotels, have gained significant market share, because we've been able to maintain and grow our overall results.

ALG's departures have been off more dominated more by four-star weakness, well, year-over-year than five star. And I just want to reiterate what Joan said. Between you know everyone was speculating that last year was a blow-off period and an all-time peak high for leisure travel, especially into Caribbean and Mexico and so forth. Just not true. To be flat year-over-year is phenomenal with some of the rotation out of Cancun and with a huge FX headwind. It's quite remarkable, actually. And I think that with travel patterns more normalizing, and I think that our first quarter pace demonstrates that they are, that Cancun remains a very attractive destination.

You know, we're gonna continue to grow from here, and remain very, very strong. So I think we have a lot to point to that's fact-based, that really gives us tremendous confidence heading into next year.

Stephen Grambling (Senior Equity Research Analyst)

That's helpful. If I could sneak one more in. You did call out some higher expenses, I think, in the Americas segment. It did look like the allocated expense there jumped up a little bit. Is there anything that you could provide, you know, in terms of quantifying what happened there and how we should think about flow-through in some of these fee segments going forward?

Joan Bottarini (CFO)

Stephen, Stephen, those, about half of those were one time and timing related, so that's not an ongoing expense base. We also had some incremental resources for Dream Hotel Group acquisition that are embedded within the Americas.

Stephen Grambling (Senior Equity Research Analyst)

Perfect. Thank you.

Mark Hoplamazian (President and CEO)

Thanks, Stephen.

Joan Bottarini (CFO)

Thank you.

Operator (participant)

Our next question comes from Joe Greff from JP Morgan. Please go ahead. Your line is open.

Joe Greff (Managing Director)

Good morning, guys. Just maybe a quick clarification or maybe you can expand on your comments on ALG. Obviously, Mark, your comments about, you know, ending this year with a purchase price multiple of a little bit more than 7.5 implies, you know, $350 million to $360 million of adjusted economic EBITDA. When you look at that run rate this year, do you think that is a relatively normalized level, or do you think the first half of this year that's embedded in that $350 million to $360 million range includes some, I don't know, things that might be one time or the benefits of a really robust growth?

Or do you think the $350 million to $360 million has to be cut down to think of a normalized year from which you can grow over the next two to three years?

Mark Hoplamazian (President and CEO)

I think of it as a great baseline from which we can grow, and there are a couple of reasons. One, yes, it's possible that the first quarter, quote, "blow-off period," if you will, the huge increase year-over-year was more to do with the 2022 volumes than it had to do with massively outsized 2023 volumes. By the way, our pace of +12 into Cancun is just absolutely proof positive that that's true. Second, we have already experienced tremendous headwinds of the rotation away from Cancun, which really took hold in H2 of the year. And that's gonna be... I think, that's gonna be returning and adjusting back to a more normalized sort of total demand level and departures into the Cancun market.

By the way, my confidence in that is buttressed by a further increase in airline schedules, which we just learned about two days ago, into Cancun. We were already up, I think, in the mid-teens, and they pushed it further. So there are more scheduled carrier flights into Cancun into the first quarter of next year than we previously expected. That's proof positive because airlines get to, you know, move their aircraft around wherever there's demand, so that tells you something about the demand level. Third, 2023 is the massive ramp year for Europe. We struggled in 2022 to catch up to what turned out to be a very compressed level of demand. Our results in 2023 are fantastic. I think our third quarter was up 20% in RevPAR year-over-year in Europe.

Our five-star properties, which were really lagging badly in 2022, have really caught on, and we are seeing continuous demand. Now, yes, Europe is much smaller as a earnings contributor, but we're just getting started here. We're nowhere near run rate in Europe for our five-star properties. Our four-star properties have held up very well, and we're expanding in Europe. So I think that when you put all those things together, our confidence is extremely high because we've got facts, data, and pace, not to mention a trend line with respect to Europe, that all point in one direction. So I think you can rest assured that this level of earnings is baseline from which we intend to grow next year and the year after.

Joe Greff (Managing Director)

Great. Thank you, Mark.

Mark Hoplamazian (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Chad Beynon from Macquarie. Please go ahead. Your line is open.

Chad Beynon (Managing Director and Analyst)

Morning. Thanks for taking my question. Wanted to zone in on the luxury portfolio. It looks like a lot of the RevPAR growth in the quarter continues to come from occupancy. ADRs, it looks like it's becoming a little bit harder to push higher, maybe save kind of what you did at Park Hyatt. But just wanted to ask about some elasticity on pricing in the mature markets, maybe absent China, if you're starting to see some pushback, or do you still have the ability to raise pricing given the wealth effect and how strong that leisure traveler is towards your luxury properties? Thanks.

Mark Hoplamazian (President and CEO)

Excuse me. Thank you, Chad. I would say, we do feel very good about the pricing, capacity that we have and that, that remains. I think that, when we think about the, the progression, Asia has had a disproportionate effect, on our reported results for our- when you look at it by brand. Leisure demand remains very high. So I think what we're gonna see is a tailwind from increased international travel into China. We're gonna see continued, leisure demand. I know the... I think rumors of, the decline of leisure have been greatly exaggerated, and we are seeing strength, across the board. And, we are also have a- we have a sharper focus on how we go to market for our luxury hotels.

And we're seeing through our consortia partners a lot of high-end travel advisors some very encouraging signs with respect to level of travel next year, which implies demand, which implies pricing power. So we feel very good about it. Luxury ADR right now is running at about 25% to 26% above 2019 levels. And so, that is quite strong, and I think it's not only gonna be maintained, but will improve. And of that, it's +30% in the Americas. So I think what we're gonna start to see is an enhancement of those ADR comparisons to 2019 as we go into 2024.

Chad Beynon (Managing Director and Analyst)

... Okay, great. In terms of group, you said it's pacing 8%, up 8% for 2024. What percentage of 2024 is kind of on the books right now? And then just in terms of the mix between group BT and leisure, should this look drastically different in 2024 versus 2023, or should it be similar? Thanks.

Mark Hoplamazian (President and CEO)

So on the first question, I think we've got a bit over 70% of the business books into next year. Which is about where we would typically be at this time. Notably, the bookings—what's on the books right now is reflecting equal measures of improvement, of growth in corporate. Actually, corporate's the highest, then association, then regional and specialty groups. But they're all strong, and it's balanced. So we're not sort of riding a single customer base to have confidence in our group pacing into next year. It's quite well spread. Associations, as we've been predicting, are building in date ranges and stay patterns that guarantee them what they need. That's compressing inventory. At the same time, the...

What we've got, looking forward with respect to business transient and group is a continued blurring of the line between what means group and what means business transient. Some of the use cases have continued to move from what we used to call business transient into what we would call group, which is 10 or more rooms in a room block. So I would say the fact that we are now recovered on the business transient side by 90%, I think we just build from here, but also continue. My own take is that group will continue to lead this from a corporate, from a corporate travel perspective.

I think I've been saying this for a long time, but if I look at the total commercial base, commercial base of customers, that's whether you want to call it business transient or group in corporate, that total demand level is going to be higher and grow over time from 2019 levels. I think all of the data that we've seen year to date proves that to be true.

Joan Bottarini (CFO)

Yeah, the only thing I would add to that is Mark mentioned the strong, really strong production we saw in Q3, which was over an excellent Q2. And as we look out beyond, you know, these bookings out beyond 2024 are in the over 7% range, pace range, and a lot of that, about half of that is driven by rates. So we're still yielding really strong rates on the group side and really strong demand even further out. So as the windows book further out, we have even more enhanced ability to yield rates on that group, and then also, you know, the, the more nearer term business as we get into, future quarters. So it's all really, really great sign for, group business into the future.

Chad Beynon (Managing Director and Analyst)

Great. Thanks, appreciate it.

Operator (participant)

Our next question comes from Richard Clarke from Bernstein. Please go ahead. Your line is open.

Richard Clarke (Managing Director)

Hi, good morning. Thanks for my questions. I just wanted to ask a couple of questions about the property disposals. Given you've signed the purchase and sale agreement, are you in a position to tell us any more about what that property is? You know, maybe what the multiple might be. And you haven't changed the capital return guidance. Could it happen early enough this quarter to increase the capital return guidance? And then if I can think about a follow-up, I just wonder how you're thinking about future disposals. You've said you're confident in this program. Will you announce further tranches at some point, or will it move to more of an ad hoc disposal program beyond this two million tranche?

Mark Hoplamazian (President and CEO)

Thank you, Richard. We're not going to really go into the details of individual property transactions until we've closed. That's our practice, and that is by virtue of the fact that to quote a famous Yankee, Yogi Berra, "It ain't over till it's over." So but we have high confidence, given that we have a definitive purchase and sale agreement signed with a very known and credible counterparty. And we also have the LOI for the other asset, again, with a very known and capable counterparty with whom we've done many deals in the past. So we have, by virtue of the sort of qualitative aspects of who we're dealing with and how the deal processes have gone, we feel really good about those.

As to your question about whether that could affect return of capital to shareholders, our priorities remain the same, which is, first and foremost, we wanna invest in the business. I think we've proven that we've created tremendous shareholder value through a number of investments that we have made in the past, and we will continue to look for those. But absent a predictable or a foreseeable need for cash, we will continue to return capital to shareholders. In terms of the programmatic aspect of our disposition program, our practice in the past has been to complete our commitments and then provide some glide path with respect to the next phase, and we expect to do the same after we complete the current commitment.

Richard Clarke (Managing Director)

That's very clear. Thanks very much.

Operator (participant)

Our next question comes from Duane Pfennigwerth from Evercore ISI. Please go ahead. Your line is open.

Duane Pfennigwerth (Senior Managing Director, Equity Research)

Hey, thanks. Not to harp on the, LOIs, but can you just speak just high level to the capital structure change? And the EBITDA loss you would expect from these transactions, and relatedly, you know, how much of a tailwind on lower CapEx would this represent into next year?

Mark Hoplamazian (President and CEO)

Yeah, again, I think we will do two things. One, reiterate what we said before, which is that we expect to complete the program with a multiple range of somewhere between 13x and 15x, and that is where we remain. We're confident in that. And secondly, we will provide obviously specific data on individual transactions with respect to both EBITDA impact and CapEx when we have a fully closed transaction. So yes, we will provide that. We're just not going to provide it today.

Duane Pfennigwerth (Senior Managing Director, Equity Research)

Yep, sorry. Sorry to make you repeat that. Then I guess just, you would love your perspective, high level, this, this idea that like high-end leisure travelers tilted all their spend to international, you know, after having had limited options to travel long haul since pre-COVID, you know, pent-up demand for Europe, a pent-up demand for international. How, how do you think that evolves into 2024? You know, do you see that trend continuing more the same, or does domestic, leisure battle back next year in your view?

Mark Hoplamazian (President and CEO)

Yeah, I think the fact is that, you know, part of what we - the reason we had such great confidence through COVID, that we were going to fully recover, is that travel is an essential human need, you know, human connectivity and so forth. So is discovery. So I think it's not surprising at all that when able to, people decided to branch out and go and either visit again or visit for the first time other destinations. Cancun was the go-to market during during COVID, so it was not surprising that we saw a broadening of destinations. Cancun remains a remarkable, and the Caribbean remains a remarkable and great destination, and so our confidence that it's going to remain a really, really attractive place to be is extremely high.

The quality level of the experiences continues to rise, I would say, thanks in large part to what we're doing with our luxury and five-star properties. You know, the bar has gone up a lot, and I think as more and more of our members are, World of Hyatt members are experiencing that, they're coming back, and booking into the future. So we're really encouraged by all of that. It has also benefited our European hotels. I think ALG Vacations, which books across many brands, but their departures to Europe are up over 100% year-over-year. Now, Europe is not a particularly large base of business for them, but it's notable that it's doubled year-over-year. It's just another signal that there's more activity outbound.

So I think that the domestic destinations, US destinations and Mexico and the Caribbean, are going to actually benefit from the same desire to branch out and expand breadth from places like Europe. Our European base last year was down significantly, and this year it's improved over the course of this year. It was down last year, but I think it's going to improve over the course of this coming year. So there's a balance across the globe, and I think leisure demand in total remains really strong.

Joan Bottarini (CFO)

Yeah, I would just add a couple of data points. We, we went through the pace that we're seeing into Cancun for festive in the first quarter. As far as our legacy properties, and that is, you know, in, in the US, and primarily the US consumer, our legacy non-resort leisure properties are looking at a festive pace of about 20%. And our resort hotels into the first quarter are also looking at a pace of about 20%. So the health of the US consumer into our US, leisure and resort destinations is extremely strong. So we continue to see that strength, as Mark mentioned, and customers, you know, really pri-- our, our customer base, really prioritizing leisure travel.

Duane Pfennigwerth (Senior Managing Director, Equity Research)

Thank you.

Operator (participant)

Our next question comes from Conor Cunningham from Melius Research. Please go ahead. Your line is open.

Conor Cunningham (Director, Travel and Transports Analyst)

Hi, everyone. Thank you. Just on distribution, you've talked about significant growth in the loyalty program. I'm just curious on how that's translated to direct distribution. You know, we've heard a lot of travel companies talk about loyalty program growth, but, you know, there hasn't been a material change in just distribution in general. Is there a maturation period as you sign up new people before they start to book more direct than they have in the past? Just curious there. Thank you.

Mark Hoplamazian (President and CEO)

Yeah, I think there are two. Thank you for the question, Conor. There are two dimensions to this. The first is loyalty program, and yes, there is a ramping period, if you will, a maturation, as you described it, that will occur. Our penetration, World of Hyatt penetration has grown 100 basis points year-over-year. I think we're well above 40 at this point, into the low to mid-forties, in terms of total penetration, which is up something like 800 or a thousand basis points over the last several years. So we've continued to see that growth. And the second dimension is the improvement of the other digital resources.

We have re-skinned, if you will, and re-enabled our Hyatt.com presence for all of our functionality, website functionality, site functionality for all of our hotel brands. The program is rolling out by brand at this point, and our app and our web page, our .com, our Brand.com page won a lot of accolade and recognition recently as being best in class with respect to travel and leisure businesses. So we've invested a lot. We're not done with the application of the rollout of the capabilities, but that's actually improving things like conversion. Our drop rates have declined. We actually have hard data to show that the changes that we've made are having a commercial impact.

Our total direct is in the range of 70%, and if you look at, you know, the accepted wisdom, if you will, is size was everything. But one of our biggest competitors is at 75%. So if we can be at 70%... If we're within 500 basis points of one of the biggest, if not the biggest, leisure company or, sorry, hospitality company in the world, it just proves that you can do it differently and be equally effective. And so we have every expectation that we're going to see growth in penetration and growth in direct channel over time. And I think one of the other dynamics is that we have continued to pay special attention to our travel advisors.

We are using them differentially in our luxury division to make sure that we have real focus on the very highest-rated guests. So those are a few data points for you to go on.

Conor Cunningham (Director, Travel and Transports Analyst)

Appreciate the thoughts. I'll keep it at one. Thank you.

Operator (participant)

Our last question today will come from Smedes Rose from Citi. Please go ahead, your line is open.

Smedes Rose (Director)

Hi, thanks for squeezing me in. I just wanted to ask you, you mentioned higher than expected labor costs in Q3. I think it's your own portfolio, and I'm just wondering how you're thinking about the pace of wage and benefit increases into next year. And then, Mark, you mentioned the loyalty penetration increased 100 basis points year-over-year, and I'm just wondering, you know, where, so where did that stand in the quarter as a % of occupancy?

Joan Bottarini (CFO)

So Smedes, maybe I'll just take on the owned labor cost. Yes, we have seen incremental labor costs over the past, really past 18 months, varying by market. And, you know, the impact to the owned portfolio that I reviewed and went through as far as what our compounded growth rate has been, we are really proud of how our teams have been managing those costs and productivity, the productivity at strong levels in relation to what we're seeing on the wage inflation side. Just to add a little bit more color as far as the labor cost, what we saw in the owned portfolio is we saw a very high increase in volume.

So if you look at the total revenue base compared to RevPAR, our non-room revenue, our food and beverage revenue, grew by twice as much as RevPAR. So that's a lot of incremental volume into our outlets and into our banquet services. And also, our occupancy as a percentage of our RevPAR growth in the owned portfolio was significant as well. So that incremental volume leads to incremental labor needs, and frankly, it gives us an opportunity as we look forward, to manage the productivity as we have been doing. So we will continue to focus our efforts there. The teams have been doing a great job, but as we return to 2019 demand levels in those hotels, we have opportunities to continue to focus on the productivity side.

And I would just reiterate that our 100 basis points to 300 basis points expectation relative to 2019 stands. We're up over 500 basis points in the quarter, and we expect to end up in the full year, well at the high end of the range of our expectation to 2019.

Mark Hoplamazian (President and CEO)

With respect to the World of Hyatt penetration, we're in the mid-40s, about 45% penetration at this point.

Smedes Rose (Director)

Great. All right, thank you, guys. Appreciate it.

Operator (participant)

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