Hyatt Hotel Checks In

Hyatt Hotels has filed an S-1 and plans to go public later this year, in an offering that is sure to generate a lot of interest in the investment community. The offering will be led by Goldman Sachs and will likely top the $1 billion mark. Morningstar equity analyst Michelle Chang gives us the scoop on this high-interest IPO:

"Hyatt Hotels Corporation owns, manages, and franchises hotels through a variety of brand names including Hyatt, Hyatt Regency, Park Hyatt, Hyatt Place, and Hyatt Summerfield Suites. In 2008, 56% of the company's revenue came from owned or leased hotels, while 42% stemmed from management or franchise contracts. Hyatt skews a bit more heavily toward owned/leased properties compared with competitors like  Marriott (MAR), which have spent the past few years selling properties, signing management contracts instead. We prefer the latter structure because contracts are long-term in nature (around 20 years) and ensure a steady stream of revenue through thick and thin, while keeping properties on a third party's balance sheet.

"We expect Hyatt to continue to expand its presence in management or franchise agreements both domestically and abroad, but the company has also expressed its intent to maintain its own portfolio of properties. The company's exposure to timeshares is very small compared with its peers, accounting for less than 3% of sales in 2008. We anticipate that this will remain a minor presence for Hyatt, considering that demand for timeshares as well as financing for this business have dropped considerably in the weak macro environment.

"Like its peers, Hyatt has been negatively affected by the slowdown in the travel industry. Revenue per available room at its owned properties fell 24% in the first six months of 2009, in line with overall industry trends. Not surprisingly, the company is cutting costs and has reduced capital expenditures in response to the economic environment. Recent results have remained under pressure, and we expect this to continue over the next few quarters.

"However, we believe Hyatt is well-positioned financially to weather the storm. Total debt to adjusted EBITDA was 1.8 times at the end of 2008. The company has halved its long-term debt balance since then, with a $1.5 billion undrawn revolver as of June 2009 providing additional liquidity.

"We expect that Hyatt will primarily use capital to spruce up existing properties, as well as expand new concepts. The company's newest upscale brand called Andaz could do well in contemporary, urban markets, but we note that the industry is already crowded with a plethora of brands, so success could be muted. Given that lending for new hotel developments is nearly nonexistent, we wouldn't be surprised to see the company use acquisitions to grow its portfolio."

This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at marc.demoss@morningstar.com or +1 312 384-4052.