It’s a well-known fact that in today’s highly competitive and increasingly consolidated hospitality industry that relatively smaller public hotel companies like Hyatt are seeking ways to add more scale.
So with just 750 hotels in its global portfolio, Hyatt’s proposed purchase of Two Roads Hospitality on October 8 wasn’t really a surprise within the industry or that it wanted to add to its portfolio. By comparison, Marriott International has more than 6,700 hotels and Hilton has more than 5,500 hotels.
On a conference call to discuss third quarter earnings on Wednesday, Hyatt CEO Mark Hoplamazian and outgoing chief financial officer Patrick Grismer offered more details and insights into Hyatt’s reasoning for buying Two Roads, and what it intends to do with its brands.
More Details on the Two Roads Deal
Hyatt said it intends to formally close its acquisition of Two Roads for a base price of $480 million within the next two to three weeks, with the option of investing up to an additional $120 million related to hotel management contracts and conversions.
Hyatt is financing this acquisition with the proceeds of the sale of a number of real estate assets from the past year, allowing it to fund the initial transaction in cash.
Two Roads will eventually add nearly 17,000 employees, 14,000 hotel rooms, and a total of five new luxury and lifestyle brands to Hyatt, giving Hyatt an eventual portfolio of 19 brands and more than 800 properties. It will also add 20 new markets for Hyatt, and CEO Hoplamazian reiterated that Hyatt has no plans to remove or consolidate any of Two Roads’ brands.
Within three years after the deal close, by 2021, Hyatt expects that the purchase of Two Roads will yield an implied multiple of approximately 12 to 13 times adjusted earnings before interest, taxes, depreciation, and amortization.
Hyatt anticipates spending anywhere from $25 million to $30 million in transaction related integration costs that will cover reorganization (relocating employees and paying severance); transitional services; information-technology related costs for bringing Two Roads properties onto Hyatt’s systems; and some selected brand conversion costs.
Hoplamazian also noted that Hyatt’s acquisition of Two Roads includes all of Two Roads’ existing management agreements with various hotel owners and that the additional $120 million price consideration “largely relates to individual circumstances in which we and the Two Roads ownership groups are working through various topics to finalize with the exact portfolio will look like that we close on.”
In other words, there’s a chance there may be some unhappy Two Roads hotel owners who may not want to be a part of the Hyatt portfolio, or whose properties may be converted to other brands. However, Hoplamazian stressed that those owners will be able to “leverage our sales organization, revenue management systems,” as well as benefit from the World of Hyatt loyalty program, and the fact that both companies share a similar customer base. The added scale of both companies combined will also help those owners benefit from lower online travel agency commission costs and, hopefully, see more direct bookings.
Relatedly, Hoplamazian said that the number of World of Hyatt members booking room nights increased 250 basis points on a year-to-date basis, or approximately 37 percent. New member enrollments in the program are also up 35 percent over 2017.
The loyalty program partnership between Hyatt and Small Luxury Hotels of the World (SLH), a marketing consortium of independent luxury properties, will also officially launch in mid-November, allowing World of Hyatt members to earn and redeem points at participating SLH properties.
Looking ahead, Two Roads is just one of many acquisitions or investments we can expect to see from Hyatt. Prior to Two Roads, Hyatt purchase two wellness and well being companies — Miraval Group and Exhale — and it invested in, and then sold off its stake, in homesharing platform, Oasis.
“Regarding Hyatt’s appetite for future brand acquisitions, that remains something that we are focusing on,” said Grismer. “We’re very excited about the acquisition opportunity with Two Roads and there’ll be tremendous focus on the successful integration over the next several months here. But the company continues to look at other opportunities like Two Roads that would involve the integration of brands that are complementary to our existing portfolio while bringing in a new management fee platform.”
The Third Quarter by the Numbers
Hyatt had a relatively strong third quarter that either beat or met most analysts’ estimates.
The company reported net income of $237 million, or approximately $2.09 per diluted share, compared to $18 million, or 14 cents per diluted share in the same period last year.
The boost in net income was driven by the company’s property sales, part of its larger “asset lighter” strategy to own less real estate but maintain Hyatt’s traditional asset recycling plans.
Adjusted net income for the third quarter was $37 million, compared to last year’s $29 million.
Revenue per available room (RevPAR) was up 2.8 percent across the entire Hyatt portfolio. In the U.S., RevPAR was up 1.4 percent, with full-service properties seeing a jump of 2.5 percent and select service hotels seeing a decrease of 1.1 percent.
Net room growth was 7.6 percent in the third quarter.
Shares of Hyatt were trading up in the hours following its third quarter earnings call by approximately $3 a share.