Q2 2021 Hyatt Hotels Corp Earnings Call
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Thank you Blue and good morning, everyone and thank you for joining us from Hyatt second quarter 2021 earnings Conference call. Joining me on today's call are Mark Cahill Navy Hyatt.
I didn't and Chief Executive Officer, and John Buttery, Chief Financial Officer.
Or and get started 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 on 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 any comment.
Forward looking statements and the earnings release that we issued yesterday along with the comments on this call are made only as of today and will not be updated as actual events on bolt. In addition, you can find the reconciliation of non-GAAP financial measures referred to on today's remarks on our website at Hyatt Dot com under the financial reporting section of our investor relation and Blake and and yesterday's earnings release.
An archive of this call will be available on our website for 90 days and with that.
I'll turn the call over to Mark Thanks.
Good morning, and thank you to everyone for joining us on Hyatt second quarter 2021 earnings call.
During our last call, we shared our optimism about the second quarter and while we anticipated to see marked improvement our adjusted EBITDA for the quarter significantly exceeded our expectations.
And the Swift pace of a recovery, so far and demonstrates the operating leverage within our business as we translate and improving and revpar environment into revenue growth and margin expansion.
Operating cash flow was positive for the quarter.
And our owned and leased segment adjusted EBITDA improved over $40 million from the first quarter.
We do find ourselves experiencing very different demand profile throughout the world.
Overall recovery, thus far has been much quicker than we predicted and leisure demand is at a record high and certain markets.
Yet demand remains at historic lows and many parts of the world.
Covid remains present in both areas, but it's clear and our second quarter results and when restrictions are eased and people are able to travel safely the desire to get back to travel and back and hotels is stronger than it's ever been.
I want to express my deepest gratitude and tireless efforts of every member of the Hyatt family and working to welcomed millions of travelers back into our hotels.
The labor environment has been challenging putting significant pressure on our teams to deliver a high level of service our guests expect from our brands.
We're remaining agile and how we are addressing these labor challenges by examining all aspects and how we retain.
Cash and training talent.
We're forming new recruiting relationships and sourcing more candidates from outside of our industry.
We're also increasing our pool of non traditional candidates through initiatives focused on diversity equity and inclusion.
Such as our Wifi program, which focuses on the employment of opportunity use.
As we remain focused on hiring I'm proud to say that we recently published our DTI commitment as part of the launch of World of care, our ESG platform.
And I look forward to continuing to update you on our progress to drive meaningful change within the hospitality industry and across the communities and which we operate.
So let's start with the latest trends we're seeing.
As I shared at the start we anticipated the pace of recovery would accelerate and the second quarter in conjunction with wider vaccine availability, but the quarter finished well ahead of our expectations.
We've seen growing leisure transient demand and I'll take a moment to review just how quickly. It has accelerated this year, but I'll also share how the recovery is very globally compared to our 2019 results.
Starting with sequential growth since.
And wide Revpar grew 58% and the second quarter compared to the first quarter.
Demand steadily improved since January with double digit revpar growth and each successive month compared to the prior months.
The most pronounced period of Revpar acceleration.
And with Memorial day weekend in the United States and continued through July driven.
Driven by a wave of leisure transient demand.
System wide Revpar was trending approximately 50% on 2019 levels just prior to memorial day.
And has grown to nearly 75% of 2019 levels for the month of July.
Revpar ending.
At approximately $100.
The Revpar acceleration has come through higher demand.
But also bolstered by a significant increase and race, which are nearing fully recovered levels.
Overall, the swiftness of improvement and recovery is impressive considering major travel restrictions remain throughout the world business transient and group have only partially recovered and.
And international travel remains limited.
Revpar growth and the United States was the primary driver.
The jump and system wide, revpar, improving 75% and the second quarter over the first quarter and more than double the 30% aggregate growth rate for the remainder of the world.
The United States benefited.
From widespread vaccine availability and reduced travel restrictions, which unleash significant pent up leisure demand.
From a global geographic market perspective, the rate of recovery continues to be highly on either and heavily dependent on successful vaccination, rollouts and leading to lower transmission rates with COVID-19, and ultimately the easing of travel restrictions.
Could you give a sense of the disparity.
Mid July geographic areas, such as Europe, Southeast Asia, and the Middle East are trading at less than 50% of fully recover and revpar levels, while the United States mainland, China and the Caribbean are over 80% recover.
The surge and our resorts is unlike anything we've previously experienced in January comparable U S resort Revpar was down 75% versus 2019 and.
In June just 5 months later Revpar was 11% above 2019 with strong average rate growth in June of over 25% compared to 2019 levels.
The leisure transient surge has extended well beyond our domestic resorts.
Hotels, and Mexico, and certain parts of the Caribbean or <unk>.
Also on higher Revpar levels and June relative to the same period and 2019.
Additionally, we've experienced a notable improvement and our urban and suburban markets and the United States.
This trend has only accelerated further in July with leisure transient nearly 20% ahead of 2019 levels and the United States, and even stronger and mainland China.
The outsized contribution from these 2 markets are driving system wide leisure transient revenues that is now slightly above 2019 levels across all comparable hotels.
Moving on to business transient and group. These segments are lagging and leisure, but the momentum is growing and we are encouraged by the steady improvements.
Our system wide business transient Revpar and June has nearly doubled from the first quarter driven by strength in the United States and mainland China.
Notably.
Weekday revpar performance is now trending at 60% of 2019 levels at the end of June.
You had to just 40% 2 months prior.
Business transient remains approximately 40% recovered globally and demand varies significantly by market.
And the United States dense urban markets, such as New York, Washington, DC, Chicago, and San Francisco are still only 20% to 30% recovered.
While the majority of other urban markets are trending at a 50% recovery level or higher.
Regional businesses and some of our smaller corporate accounts are recovering quickest, but we're also seeing acceleration and our top accounts and continue to expect a more robust recovery and the fall.
As for group the trends are very encouraging.
More groups large and small and have been returning to our hotels and ballrooms.
Importantly, we're seeing room blocks actualized above expectations, and and just general size and mix of groups returning to more normalized levels.
We continue to expect demand to strengthen into the fall as evidenced by recent booking trends.
Revenues booked in June.
For events that will occur in 2021 has reached approximately 90% of 2019 levels and our Americas full service managed properties with the rate of cancellation diminishing to only a fraction of the levels. We experienced just a couple of months ago.
As we look to 2022, while group pace is down and the mid teens compared to 2019, our fees are tracking 30% higher which suggests that our pace deficit should improve.
Additionally, we're pleased to see group business book in the second quarter for 2022, and an average rate is 5% higher than the same period and 2019.
In summary, as we look across the world growth remains uneven.
The geographic area and sort of east restrictions and are furthest along and vaccination rates are seeing a surge in leisure demand while business transient and group are trailing and the recovery and momentum we have seen to date, coupled with forward looking indicators and conversations with our largest customers provide us confidence that the recovery of these segments will accelerate in the fall.
As we welcomed millions of travelers Bachelor hotels, I'm excited that our guests have an opportunity to visit our expanding portfolio of new properties.
Opened 100 hotels over the trailing 12 months.
On a record level of organic expansion and leading to net rooms growth of 7.1% from the second quarter.
Even with our rapid rate and hotel openings, we've maintained our pipeline of signed deals and a challenging environment closing the second quarter with a development pipeline of 100000, 101000 rooms, representing over 40% of our existing room space.
As we've highlighted in previous quarters conversions, and a key ingredient to our growth our independent.
And collection brands, including the Unbound collection by Hyatt <unk> Hyatt and destination by Hyatt accounted for all 8 conversions and the quarter and and high barrier to entry markets, such as Los Angeles, Toronto, Beijing, Sweden, and the visa strength.
Demand for all of our brands remained strong amongst our development community, but I'm, especially pleased with the integration and growth of the brands that we acquired through the acquisition of 2 roads hospitality Aliza Thompson GDP by Hyatt and destination by Hyatt.
By way of reminder, we acquired 2 roads hospitality and late 2018.
And spent much of 2019 integrated and the brands and back and technology into the Hyatt ecosystem.
We clearly define the purpose and profile of each brand alongside our existing portfolio.
We continue to be focused on scaling these brands and on our hard work is resonating with developers around the world.
As a result of the successful integration 2021 is shaping up to be a banner year of openings for all 4 brands.
Already through the first half of the year the number of hotels and these 4 brands has expanded by 20% and we expect to NV year with growth of 30% or more.
It's exciting to see how these brands have been.
So quickly adopted by our guests with the world of Hyatt program driving over 40% room nights.
Loyal member base has been a key catalyst of market share gains.
Revpar index for comparable former 2 roads hotels is up 13% versus 2019 through the first half of this year.
The successful integration of these former 2 roads brands has contributed to the broader evolution of the Hyatt portfolio as an industry leader and the luxury lifestyle space.
And the span of just 3 years, we've tripled the number of lifestyle and software and properties from approximately 50 to 150.
Accounting for nearly 40% of total hotel openings over that timeframe.
Further we significantly expanded our resort presence.
Since 2017, we've grown our resort room, count by 45% with well over 80% of that growth and luxury segment.
Ultimately as we look at the Hyatt portfolio today, and our signed pipeline.
We're excited with the positioning of our portfolio to take full advantage on the demand coming back to our hotels.
This transition to and heavier leisure driven portfolio has been very intentional and complemented with a variety of enhancements such as the launch of Hyatt prepay, which is our luxury travel advisor program and the expansion of benefits with the world within the World of Hyatt program, such as the addition of small luxury hotels properties.
The ability to use points per experiences such as lindblad expeditions and our strategic relationship with American Airlines.
Most recently during the quarter, we announced the launch of our relationship with built rewards and new rewards program with access to millions of urban renters, who are now able to earn mobile hyatt points just by paying rent.
Our portfolio of brands complemented with a best in class loyalty program and digital platform is clearly resonating.
Our base of loyalty members is the largest it's ever been and has grown 14% since the same point last year.
And our co brand credit card spend is trending well above 2019 levels and our enhancements to our digital platform are driving high dot com book revenue more than 20% higher than 2019 levels, which is outpacing OTT channels.
Our portfolio and programs and on optimally positioned to be the preferred brand for high end leisure travelers now and well into the future.
Finally, I want to provide a brief update on transactions before turning it over to channel.
During the quarter, we announced the disposition of Hyatt Regency lost clients from approximately $275 million.
On a price that was above our pre COVID-19 expectations.
We also acquired Ventana, and big sur and allele and below resort for $148 million, securing our brand presence and a highly sought after a resort destination.
With the completion of these asset transactions, we realized net proceeds of approximately $1.1 billion.
Since the time of our announcement in March of 2019.
In addition to these transactions I am pleased to note that we are in advanced stages for the disposition of 2 other assets and the aggregate amount of $500 million.
Should we successfully close these 2 transactions, we will exceed our $1.5 billion asset sell down commitment and do so well before our target date and.
And at an aggregate multiple and the high teens.
In total.
On the outset of our asset sell down strategy announcement in November of 2017.
And assuming the closing.
On the sale of 2 properties and process.
We will have sold over $3 billion and assets.
On an average EBITDA multiple of just under 17.5 times.
Demonstrating the valuations realized and our disposition efforts are materially in excess of the implied valuation the market has placed on our owned and leased business.
We look forward to updating you on the progression of these sales and future plans relative to our sell down program during our next earnings call.
I'll conclude my prepared remarks, this morning by saying that our outlook remains optimistic around the world things remain uncertain and we remain vigilant as we maintain the health and safety of our colleagues and our guests.
It is clear and it's been validated repeatedly across markets and cultures.
And when people are able to travel and reconnect the commitment to do so it drives customer behavior.
While we expect starts and stops and we remain confident we are on a path to full recovery.
I'll now turn it over to Joe and to provide additional detail on our operating results Joe over to you.
Thanks, Mark and good morning, everyone late yesterday, we reported second quarter net loss attributable to Hyatt $9 million and a diluted.
Diluted loss per share.
Adjusted EBITDA was $55 million.
Order, a sharp improvement from the adjusted EBITDA loss of $20 million and the first quarter of this year.
As Mark mentioned, the operating leverage and our business has enabled us to translate improving demand to a strong increase in earnings.
System wide Revpar was $772 second quarter, representing a 50% decline compared to the same period in 2019 on a reported basis and up 58% increase compared to the first quarter of 2021.
Both occupancy and rate contributed meaningfully to sequential revpar growth.
And at least 60% improvement coming through occupancy 40% jewelry.
Leisure transient with the key driver.
For the quarter, leading to a material increase our pace.
Franchise fees, which totaled $77 million.
Second quarter, and notable acceleration and $49 million the first quarter.
And June systemwide comparable occupancy eclipsed, 50% and as of June 30 on the 18 hotels are less and 2% of hotels remain closed.
Turning to our segment results, our management and franchising business delivered combined adjusted EBITDA of $63 million, improving over 90% 33 million net.
First quarter.
The Americas segment accounted for the vast majority of the growth led by our resort and select service portfolio, but also increasingly from our business and convention hotels, it's more city ease restrictions and this quarter.
The Asia Pacific segment experienced improved performance doubling its adjusted EBITDA first quarter hotels and.
Mainland China rebounded strongly after the easing of government restrictions.
It is important to highlight that mainland China through a combination of Revpar improvement strong operating margins and net rooms growth generated more base incentive and franchise fees and any other previous quarter on record.
As far on Europe Africa, Middle East and Southwest Asia segment, adjusted EBITDA was modestly lower than the first quarter as travel restrictions and traveling throughout the region.
However, the pace at which demand is currently improving especially in Europe and progressed through this summer and served as another proof point that when restrictions are eased equal are ready and excited to travel.
Our owned and leased hotels segment, which delivered $12 million and adjusted EBITDA for the quarter improved by more than $40 million from the first quarter of 2021 and.
Splits path back to profitability highlights the strong operating leverage within our owned and leased portfolio owned.
And and leads Revpar from $87 for the second quarter.
<unk> strong acceleration throughout the quarter with Revpar, improving from $73 and April 2 to $107 and June nearly doubling the rate of improvement of our system wide portfolio.
Our owned and leased resorts were a key driver surpassing adjusted EBITDA generated in the same period and 2019.
Further the acceleration and group business throughout the quarter had a material positive and.
And this is most pronounced in June our strongest monthly per quarter.
Group room nights and accounted for 25% of the total room night mix up from just 18% and me.
And we turned towards July owned and leased Revpar continued to strengthen further preliminary revpar for the owned disease portfolio and July is approximately $135 up nearly 30% from June and nearly 85% recovery versus the same month from 2019.
Importantly, the average rate and July is above the same period and 2019.
Our comparable owned and leased operating margins improved to 13, 9% in June.
And then second quarter, with GM, and finishing above 90% and sharp improvement from the negative margins last quarter.
We continue to closely monitor the labor environment and are working hard to get additional sales to date, we have seen some pressure on wages and our general managers.
Adjustments based on competitive factors and it varies by market.
And we assess the potential impact from inflation on our business we.
We believe the increase and daily room rate or at least offset increases to wages or other costs, our revenue management practices and <unk>.
Price inventory on a continuous basis, allowing us to quickly respond to changing market share.
This is evidenced by our ability to quickly realize stronger rate.
20% and our owned and leased restore compared to 2019 and second quarter.
I would also point out that valuations and hotel asset benefit from inflationary environment and this is a positive and the exit.
And our owned and leased disposition strategy.
And also like to provide a brief update on our liquidity and cash on.
Operating cash flow, including interest payments was positive for the quarter and exceeded our expectations. We anticipate our operating cash flow will continue to improve from the second quarter level as revpar strength.
We have and will continue to invest and the growth of our brands, including capital expenditures our.
Our cash investments and this area have remained and the same.
Net range and the prior 2 quarters about $10 million to $15 million per month.
We expect monthly investment and to trend higher consistent with our expected strong year opening and signing activity.
As of June 30, our total liquidity inclusive of cash cash equivalents and short term investments and combined with borrowing capacity was approximately $3.2 billion.
With the only near term debt maturity being $250 million senior notes maturing this month.
We received a $254 million U S tax rate in July related to 2020 net operating losses carried back to prior years under the cares Act.
And we intend to use this tax refunds and pay off our senior notes upon maturity.
I'd like to make a few additional comments regarding our 2021 outlook.
Consistent with our communication and the first quarter, we continue to expect adjusted SG&A to be and the approximate range of $240 million, excluding any bad debt expense.
Further we continue to expect capital expenditures to be in the rate of $110 million.
Given our confidence and the recovery.
We are evaluating calling for and selected renovation projects and take advantage of seasonality and lower displacement and we expect to have on the future should we take this action and this may increase our capital expenditure estimate modestly and we'll update you further next quarter.
Turning to net rooms growth earlier, this quarter and connection with the pending our agreement with service properties Trust, which extended and management 17, Hyatt place hotels, and we previously forecasted to exit the system, we increased our net rooms growth projections to approximately 6% up from greater than 5%.
As previously reported and the first quarter of 2021.
And we're updating this expectation of net rooms growth to be greater than 6% for the year.
Well there is some degree of uncertainty related to supply chain issues, which could push certain opening early 2020..2 we remain very confident and our ability to deliver another exceptionally strong year on that brand strength.
And.
Finally, I'd like to briefly comment on earnings sensitivity. Our previously communicated earnings sensitivity levels illustrated and a 1% change and revpar levels using 2019, revpar from the baseline results and and impact of approximately 10 and $15 million and adjusted EBITDA.
We previously communicated that we expected that our earnings sensitivity would be at the Hyatt This range and near term due to the larger decline in revpar relative to our system wide Revpar as a result, and COVID-19.
As the relationship between owned and leased and system wide Revpar has normalized the earning sensitivity is now expected to improve towards the mid point of the $10 million to $15 million range of adjusted EBITDA, reflecting our ability to mitigate the adjusted EBITDA downside impact relative to our 2019 result.
Yes.
And we will conclude my prepared remarks by saying that we are very encouraged by the rate at which our business recovery and <unk>.
<unk> EBITDA and operating cash flow positive for the quarter and we anticipate the momentum to continue into future quarters.
Our management and franchise business reflects the quickly strengthening revpar environment and.
Coupled with industry, leading net rooms growth and accelerating meaningfully.
Our owned and leased hotels continue to exceed expectations and the segment generated positive adjusted EBITDA for the quarter.
We remain mindful that this recovery will be uneven.
Wavering confidence we are on a path to a full recovery.
Thank you and with that I'll turn it back to blue for Q&A.
Thank you as a reminder to ask a question you will need to press 1 on your telephone.
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Withdraw the question just press the pound key.
Your first question comes from the line of Stephen Grambling from Goldman Sachs. Your line is now open Steven.
Hi, Thanks for taking the question I think you touched on this and the remarks, a little bit mark, but but now that you've bumped room growth to 6% plus from I think it was 6% 2 months ago, which was up 5% plus a month before that can you just elaborate on on what's driving the incremental confidence as we think about splitting it between accelerated construction.
Schedules versus outright interest and development and or changes and the financing environment and then as we think longer term how much debt.
The pipeline at 40% of your existing room base translate to room growth longer term. Thanks.
Thanks Steven.
A couple a couple of things to note.
<unk>.
Conversions have been running at or above what we would've expected in the year and that continues to be a source of strength and confidence for us.
Secondly, the terminations.
Or at a lower level than we built into our own outlook.
And as we get later in the year, our confidence interval around that is going to go up.
And third we got more time, passing and we've seen the openings continue to pace.
Opening day has moved later in the year over the course of this year and the primary driver of that and it's been supply chain disruptions. So we're paying close attention to that because.
And that we're not the supply chain isn't moving fluid be yet.
So we are wary of any other.
Negative developments, there which might push.
Some openings into the following year, but the way we look at it is we have a growth.
Room opening expectations for the remainder of the year, that's foreign excess of this 6% level.
Their balance and really what we're managing at this point is how much of the.
Estimating is how much of those how many of those projects get pushed into January and February. So I guess, what I would say is.
Because of the dynamics that I mentioned a minute ago, our confidence level is higher and that's why we're confident to say, it's going to be over 6% and.
And and the other thing that's true is that we have to report as of quarter and so we will but.
Our confidence that what's in the opening.
And schedule right now will open and weathered opens a week later or 2 weeks later than December 31.
And that's what you guys did not really that meaningful because it's really the momentum that actually matters. The most.
With respect to the pipeline.
As we've said on prior calls the theirs.
It's a tale of a few different cities and a few different narratives. The first is that select service is still under pressure, primarily because of financing constraints and the United States. That's been more than made up for by select service and full service.
Signings across the globe and.
And full service and resorts in the Americas. So our overall pipeline is maintained and we do expect to see some real progression and positive developments and the select service area.
Between now and the end of the year.
With respect to what all that translates into in terms of net rooms growth and the future you'll remember that our earnings model pre Covid suggested that we would have a net rooms growth longer term somewhere between 6.5% 7%.
And I see no reason why we shouldnt be at least in that range, if not higher long term and and the next couple of years.
It could be lower than that maybe maybe between 6 and 6.5%.
I don't think its going to drop below that we just we have too many projects that are coming through and too much momentum and the conversion side.
For that to happen.
So that's our current outlook.
Super helpful I'll, let others jump and thanks, so much.
Your next question comes from the line of Gregory Miller from Truest Securities. Your line is now open.
Thanks, very much good morning, Mark and John.
I'd like to start off with the Ventana acquisition.
And regarding the Ventana VIX or.
Could you provide some more detail on the strategy behind the acquisition, including some context behind the headline pricing.
And perhaps more broadly how you see luxury resorts valued today.
Sure.
I don't know that Ventana Big sur has a read through for anything else because it's in a market that has the benefit of being a drive to market from to the.
The most.
And the biggest markets and qualified guests for that hotel, San Francisco and Los Angeles.
Around secondly, big surge is highly constrained in terms of new development. There literally is no opportunity to build anything else index.
And frankly up and down the Pacific Coast Highway for.
On a 20 or 30 miles and both directions. So it's just it's a completely unique.
Asset and are amazing.
Natural environment, which certainly has and is.
Benefited from people decided to get back from the wilderness and get back to nature, and we will continue to be driven by that.
In terms of the economics of the place.
The acquisition.
We're having and extraordinary year this year.
It is the highest rate and highest revpar hotel on our entire system.
I think we are currently tracking at about $2000 and night on a consistent basis at very high occupancy levels and the translation of that into given the flow through levels into earnings.
And has yielded.
Effectively a low double digit kind of multiple on our acquisition for this year's earnings.
And the 2019 reference point would be higher in the high teens, but remember that 2019 was the year on which we were coming out of renovation and ramping the hotels. So we think that the economic picture was quite attractive.
And while 2021 might be a peak year because of the unique dimensions of Covid, we know that the cachet and the guest response from being in that location has been fantastic.
Finally, I know that the price per key caught some attention, but we are not so focused on the price per key for few reasons first the hotels located on a very large parcel of land and it brings with it other programming opportunities. So what the purchase price includes not just.
A key count on a tight pad, it's actually and expansive resort location.
And secondly, we we identified a number of ways in which we can enhance the programming and also expand the property because right now we're operating with about 50 keys and its entitled 459 keys.
And the way in which we add those remaining keyes will matter a lot because we think that the demand level for high and suites and that location is very high. So we see frankly, great growth opportunity in terms of revenue and earnings and as I said before it is the highest barrier to entry market I know on the terminal.
That's all very very helpful. So I appreciate all that mark.
As a brief follow up since you are you are seeing it's about the outdoors and just a moment ago.
Like to shift gears and ask about the nerve all berkshares and if you could speak to your initial expectations for that property.
And maybe some detail if you can about how the other.
And there are all properties are performing today.
Yes. Thank you.
Not surprisingly mirror of all it is.
And is booming.
And in many ways and in other ways, it's very constrained so just as a reference point to start with the numbers.
Second quarter in the second quarter and the 3 properties that is Tucson, Austin and the Berkshares generated about $7 million of EBITDA and.
And that is inclusive of <unk>.
Significant capacity constraints, where we limited occupancy to below 50% and all 3 resorts for April and May.
And in the Berkshires continue to operating at something like 30%, 40% occupancy level and it's all driven by availability of therapists and.
And.
Training personnel, who can actually run the programs for us.
Having said that.
On Revpar has.
And this business Revpar is interesting, but not actually the biggest issue. The biggest issue is the total revenue per occupied group because the vast majority of the revenues of these properties happens on property, but outside that room rate. So while room rates are in and around $300 a night and the total revenue per occupied room.
<unk> was over $700.
And that's up more than 25%.
Versus 2019.
So the way we look at the investment that we've got in the real estate, which aggregates to a bit over $300 million exclude.
Excluding the brand value that we paid for.
On the as we look at just the second quarter of this year at those highly constrained occupancy levels.
We're already running something approaching $30 million on a run rate basis. So we're in the middle of a renovation and Tucson that will be complete rooms, part will largely be completed by September the remaining will be largely completed by November. So we're going to continue to build and as we are able to re staff at a better level over the <unk>.
The remainder of this year we have.
We have very high expectations for the earnings potential and towards the mirror evolves going forward.
Terrific. That's also on very promising thank you very much.
Your next question comes from Thomas Allen from Morgan Stanley. Your line is now open.
Thank you good.
Good morning can you just give us an update on your capital allocation thoughts both in terms of capital return and your thoughts around <unk>.
And just scale M&A beyond <unk>.
Single assets.
Thanks Thomas.
In terms of capital allocation, obviously, we deployed some capital to acquire Ventana.
And my prior response I forgot to mention the most important driver of our interest and buying Ventana and that is that our management agreement with terminable on sale and so we wanted to secure our presence there from long term. It has become an integral part of our Lela network on the West coast, including Napa Valley, and Encinitas and Maria Beach hotels.
It's also.
A key addition to our <unk>.
Resort that serves a very high and customer base, including our world of Hyatt members. So.
I failed to mention that.
A key driver of why we acquired it to begin with.
So, we obviously acquired debt, but that's actually not that material.
We benefited from this tax refund that we received.
$254 million, and we will turn around and use those proceeds from our tax refund to repay the $250 million.
Maturities and August and we do have a very strong cash position and it's also true that we got.
We raised $750 million in August of last year and floating rate bonds that are due over the next couple of years. So we're paying attention to those maturities as well.
We feel that we've come through the pandemic and now into recovery mode and.
And a very healthy clip with respect to earnings and cash flow positive operating cash flow and the second quarter, which we expected.
Growth overtime. So as we think about deployment of capital we are starting to turn our attention to.
I would say back to the things that we were trying to do and identify before COVID-19 hit which is more and more opportunities to grow and Europe.
And we are paying close attention to.
Smaller brands and.
Groupings of hotels there.
While the deal volume there has been slow to date.
We are tracking a number of different potential opportunities.
In the hopes that we will see some things free up over the coming year and also we talked a lot about I talked a lot on my prepared remarks about the expansion of our resort portfolio over the last several years again thats been deliberate because we've intentionally wanted to grow and lifestyle and the leisure segment, so and we're going to come.
And you to focus on that.
And as always.
Growing the company and a very deliberate strategic way is our top priority but.
It is also true that we moving back to.
We are essentially back to a strong balance sheet already and we'll be back to material operating cash flow. So we.
We will take.
Take up the question about returning capital to shareholders in 2022.
Although a very helpful. Thank you.
Your next question comes from the line of Smedes Rose from Citi. Your line is now open.
Hi, Thanks.
And I just wanted to go back and ask you a question on the group Statistics that you mentioned in your opening remarks, I just want to make sure I understood rate did you say that you've got.
90% of room for volume that you did and 19 on the books for 'twenty, 2 and those rooms are at a 5% higher rate is that is that correct.
No.
Right now alright.
No.
Yes, let me clarify the 90% figure I cited was the bookings that we saw on June.
And they were in the month for the quarter sorry for the year.
And our 2021, so the total amount that we book and June 4 dates within 2021 is it roughly 90% level 90 per cent of the 2019 level.
On June for the remainder of the year just to give you a sense for sort of a current rate of booking activity.
The pace into 2022.
Is down relative to 2019 levels.
And around in the mid teens level. So it means that we're tracking.
Along.
The booking pace that we saw in 2019 between and ended the first quarter and the end of the second quarter, we're tracking debt that booking level increase pretty pretty closely to 2019 levels that which means the activity level over the last quarter was in growth terms. The same as it was in 2019, that's very encouraging.
<unk>, Okay, because we maintained that down to down and the mid teens territory and the pace number between the end of the first quarter and the and the second quarter as we look forward.
We have.
Something in excess of $760 million on the books for next year.
And that compares to something in the range of 900 and at the same point in 2019 on the books for the following year.
<unk> the way we look at this is if you think about the fact that we're sort of trending and tracking to down 15% from 2019 levels.
We have 2 dynamics that we think are things that we need to pay special attention to it.
First is the candidates.
And leads are tracking dramatically higher than where we were in 2019.
And we think that that should lead us to close that gap.
To that deficit in terms of pace between now and maybe through the first quarter of 2002 the.
The biggest gap that we've got in terms of near term bookings and the first quarter of 2022.
But what we're seeing in progressing from Q3 to Q4. This year is a significant increase in the size of groups. So the biggest area of growth is and groups that are between 100.250 participants and we're encouraged by citywide.
And so we've got citywide is coming back.
Pretty significantly so something in the range of a quarter of the business on the books relates to citywide, 70% and both city Wides are in the first half of next year and.
And are firming up at this point.
The second dynamic I would note is that not surprisingly about 2 thirds of our of our Q3 bookings corporate.
On with association and very low levels and in Q4, it's about 60% corporate and association is starting to come back now so as we look into 2022.
I think the biggest deficit, we've got and the first half is corporate bookings not surprising because it's on a shorter time horizon for booking and associations are strengthening over the course of the year next year, what does that mean and the aggregate. It feels to me like right now if I. If you force me to say what does that mean from a as a point estimate into next year.
And kind of feels like.
Group business could be at.
Realizing your actualizing and something like 85% of 2019 levels.
Is there downside potential sure there are restrictions that could come about but there's a ton of very acute demand, especially among corporates to get back together the upside potential is that those tenanted and leased that I mentioned to you start to actualize in which case, we could be higher than that.
So we.
We still have a long way to go and a lot more business to book, including the <unk> and the year for the year bookings for next year, but right now our point estimate is as I described it and then if you look a little further into the future 2023 is down and the high teens relative to 2019 levels.
Right as the rate is maintained or higher and it's really volume. So I think as things start to firm up as we head into 2022, and we will start to see a pace improvement there as well.
Okay. That's all I really appreciate the detail I just wanted to ask you too you mentioned that the acquisition of big share was driven by.
The contract being terminable on sale are there other.
Properties, where you feel like you might have to put your balance sheet to work in order to lock in and debt.
Your your management, there and what do you see these as potentially a long term.
Dispositions are you happy to own that asset longer term.
On 2 different questions. So on the first question.
Our core management and franchise base contract base.
We have a de minimis number of.
Of contracts and which we have termination on sales provisions.
The place, where we acquired of more contracts that had some of those provisions and then more the mature portfolio and this property within the tumor its portfolio.
But even there.
Whittled down to a pretty low number so we don't really have.
Any other.
And I can't think of any at this point that we don't feel are both stable and and where we're performing really well so really nothing else on the horizon that I can speak to.
And secondly, I believe for the reasons that I cited earlier and Thats Ventana is a unique and highly attractive property.
So.
And I believe that there would be tremendous interest by other buyers to ultimately be interested in buying it.
We did not buy it as a whole from the long term in fact, I would consider everything that we've got as subject to being a part of our disposition strategy at some point in time anyway. So we did not buy and hold it.
Thank you. Thank you very much.
Your next question comes from the line of Florida Teston from Wells Fargo. Your line is now open.
Thanks, Good morning, everyone.
And assuming the 2 hotels you mentioned do sell as expected and you complete the current net business and program will you expect to move forward with and with another program or as you sit here today would you prefer and take a less pragmatic approach.
No I think we have.
We deliberately set some goalposts back in 2017, and we did it because we felt that clarity to the investment community was essential.
And it was also true and remains the case debt.
Wall Street.
Somehow has chosen to value our own per state at low multiple levels and I think Joan laid out a very very clear case for why that's wrong minded and when you look at the operating leverage that we have created through I think remarkable.
And and disciplined approach to revenue management, because we gained revenue share significant revenue share like 5.
500 points 500 basis points of revenue share on our owned and leased portfolio over the last quarter.
These are remarkable results and we are committed to.
To demonstrate the value and our own portfolio.
Way of setting programs in place that we have now I think we will exceed both in terms of our time of execution and our valuations of execution and we're going to continue to do that.
Okay. Thanks Mark.
Your next question comes from the line of David Katz from Jefferies. Your line is now open.
David Your line is now open.
Moving on to the next questioner.
The next question comes from the line of Chad Beynon from Macquarie. Your line is now open.
Hi, Good morning, Thanks for taking my question Mark you briefly just touched on this and Joan and your sensitivity work I think it and kind of as it's flowing through this but I wanted to revisit the owned business, particularly the long term margins you.
You mentioned that you've been able to push through some of the labor inflation to the consumer with higher prices and I believe previously you've talked about getting back to those prior revenues margins could be 100, or 300 basis points higher I was wondering how you're thinking about long term margins for this business and if that still stands true. Thanks.
Yes. Thank you for the question, yes, we still expect long term margins to be and the range of 100 to 300 basis points.
Greater than on a stabilized basis kind of pre COVID-19 levels, but let me, let me respond and expand on.
Your question with respect to the owned and leased portfolio because it actually follows up with.
And what Mark was just alluding to that the acceleration of the recovery has led to really strong results and.
Quarter, and our owned and leased portfolio and Thats continued into July and.
And we've talked in the past about our continued focus on profitability initiatives.
And they lead and been leading and continue to lead to strong flow through at our hotels, including the work that we're doing with our SMB initiatives.
And is and making sure that we're tailoring offerings to be both.
And most profitable offerings and also meeting current consumer demand. We also have a number of digital initiatives and are also leading to productivity improvements.
But importantly, what.
<unk> seen our managers demonstrating is really invented approaches to revenue management and marketing strategies, where they are driving market share and repositioning what would be the traditional demand profile and our hotels to meet current demand.
On.
And that they're seeing in their markets Revpar at our owned and leased Revpar index at our owned and leased hotels was up 9% and the quarter and I'll. Just I'll give you. An example of property and Thats really demonstrated what I'm talking about the Hyatt Regency Orlando.
Which is a 600 room convention hotel and and it's stabilized here. So in 2019. This hotel it typically fill it through with 70% to 80% group room nights.
And in the second quarter Revpar for hotels was down about 50% and June they were down about 30 and in July and they were down about 7%.
And based on these market strategies that they've employed.
Demand and Thats the acceleration has.
Happened and their market they've captured leisure demand. So those numbers and I just provided for June and July they are filling their hotel with about 50% of their room nights stoping from leisure demand and months of June and July.
In summary, we are successfully evolving the waste and which we managed each hotel and.
And again going to where the demand is and repositioning the hotels really smartly. So.
And it's an execution successful execution by our managers both on the top line and through the profitability initiatives as well.
Thank you very much I appreciate it.
Net blue we will take our last question. Please.
Your last question comes from the line of Michael Bellisario from Baird.
Thanks, Good morning, everyone.
Just wanted to go back to the development pipeline and maybe.
How does the quality compared to a few years ago and just trying to think about the mix of higher earning managed hotels is the contract length longer and then and how.
And do you think about the stabilized earnings each room and the pipeline versus simply just the room counts, which is which is what we see are reported every quarter and any thoughts there would be helpful.
And.
Thank you Michael.
I would say that the.
The quality I guess of the.
The pipeline itself is higher than where it was.
A couple of years ago, and what I mean by that is we have had over this period of time last year.
A effectively replacing the pace that we had enjoyed on select service signings with.
More full service and lifestyle hotels globally.
And the contract terms internationally are.
And quite stable at this point and require less capital through weighted by way of either key money or other other financial support so the capital intensity is lower for these signings we've more than replaced the.
And the lull in select service signings over the last year with these higher rated.
And full service properties. So if you think about the embedded.
Fee generated power per key and the fact that we've gone gone up over this past year.
I am happy to say that we continue to find opportunities with existing owners, but it's also true that we've expanded.
Our <unk>.
Relationships with a number of new ownership groups.
And you might remember that we announced last quarter that we have.
Expanded our franchise team.
Franchise and on our relations team to really lean on accelerating franchise growth.
Come to light most and.
The most.
And significant way in Europe, so far we.
We do expect that to translate into a higher pace of franchise growth here and the U S and in Europe. So in summary.
We had some substitution and our pipeline.
<unk>.
Very robustly underwritten deals that we have value 1 by each these are deals that are fully signed and in our opinion financed we're able to be financed.
And.
We're very stable contract terms were not seeing any degradation and our contract terms over time.
And finally, I do expect that our franchise fee base will grow at a faster pace going forward and represent a bigger proportion of our total fee base as time unfolds here in the next 3 to 5 years. So for all those reasons I think we're actually.
Sort of have a higher from a fee generative prescriptive perspective on higher quality and and more stable and more predictable.
On level of fees.
Seasons of the future.
Helpful. Thanks for that.
Thank you everyone for taking the time to join US today take care of and we look forward to speaking with you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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