Hyatt Hotels Corp Q1 FY2022 Earnings Call

Good morning, and welcome to the Hyatt First Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Noah Hoppe, Senior Vice President, Investor Relations. Thank you. Please go ahead.

Thank you, Julianne. Good morning, everyone, and thank you for joining us for Hyatt's first quarter 2022 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 get started, I'd 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 this call will be available on our website for 90 days. And with that, I'll turn the call over to Mark.

Thank you, Noah. Good morning, everyone, and thank you for joining us today. Before we begin, I want to acknowledge the ongoing war in Ukraine. The devastation and growing numbers of lives lost, families separated, and millions of people displaced continue to cause us immense concern. Guided by our purpose of care, we have never wavered in our concern for our colleagues and guests impacted by the war and have focused on providing them holistic support. Even with very limited operations, Hyatt Regency Kyiv has provided supplies and food for Hyatt colleagues and their families who remain in Ukraine, as well as some guests who are staying in the hotel. For members of the Hyatt family who have left the country, we have expedited job transfers to other European properties and established a relief fund providing basic necessities and relocation support. Beyond that, the global Hyatt family has come together to send supplies to the people of Ukraine and provide refugee accommodations across Europe. World of Hyatt members are also supporting the global Red Cross relief efforts via World of Hyatt Points, and we continue to work on expanding our humanitarian efforts across the Hyatt portfolio. As a global Hyatt family, we hope for a peaceful resolution as quickly as possible. This morning, we reported our first quarter 2022 earnings results, the strongest demonstration yet of how Hyatt is evolving into a fundamentally stronger and better-positioned company. While Omicron was a headwind for us in January, the variant spiked sharply and fell rapidly in most areas of the world. The RevPAR acceleration for all areas outside of Asia Pacific has been extraordinary, with comparable RevPAR versus 2019 in our Americas and EMEA and Southwest Asia regions improving from being down 33% in January to being down only 5% in March and up almost 3% in April. The pace of recovery significantly exceeded our expectations and the progression in our results demonstrates that Hyatt is optimally positioned for several reasons: first, our portfolio is focused on the high-end traveler in each segment that we serve and significantly weighted towards luxury and leisure, with 42% of the hotels in our portfolio classified as luxury, lifestyle, or resorts. Nearly 60% of our RevPAR in the first quarter was driven by leisure transient revenue. Our customer base and portfolio concentration allow us to realize a consistent rate premium in this environment. The strongest demonstration of that was in March and April, where we achieved a system-wide average rate of $195 and $199, respectively, the two highest ADR months in Hyatt's history. Second, from a geographic standpoint, and in part as a result of our recent acquisition of ALG, we have significantly increased the concentration of our earnings from U.S.-based travelers. We estimate that on a stabilized basis, approximately 80% of our earnings are generated within the Americas. This area of the world continues to lead the recovery, which was evident in April, where we saw comparable RevPAR in the Americas up 3% compared to 2019, and ALG net package RevPAR in the Americas was up 12% as compared to 2019. Third, group business, which accounts for a sizable portion of our stabilized total revenue base, has accelerated meaningfully through March and April. We anticipate this will be an area of outside strength for us as the recovery progresses in the coming months. Compared to 2019, group revenue in our Americas managed hotels was down only 8% in April while gross group revenue booked for the same hotels was 20% higher in the first quarter, 37% higher in March alone, and 42% higher in April for stays that will take place this year. Our conversations with corporate and association customers reveal an intense focus on in-person interaction and connection as organizations prioritize nurturing their corporate culture in the coming months and years ahead. Fourth, we have a strong positive operating leverage in our business through owner REIT hotels and a higher exposure to incentive fees, including importantly our ALG platform. This positive leverage was on full display in March, where we generated an adjusted EBITDA of $102 million, plus net deferrals of $10 million and net finance contracts of $2 million, nearly 60% of that total for the quarter. The performance in March, coupled with a further strengthening of RevPAR in April and a strong booking pace for May and beyond, provides us with confidence that our performance in the second quarter will significantly strengthen from the first quarter with higher rates and higher volumes of business in all regions other than Asia Pacific. Fifth, we expect our net rooms growth, which has led the industry for five consecutive years, to significantly expand fee revenue as recent openings ramp up to more stabilized performance. 14% of our legacy Hyatt fees in Q1 come from hotels that have opened since the beginning of 2019. Our net rooms growth in the first quarter was 18.6% or 5.2% when excluding ALG, and we maintained a strong pipeline of 113,000 rooms or approximately 40% of our current base, ensuring the capacity to drive strong incremental fee revenue from net rooms growth well into the future. Lastly, the real estate transaction market remains very strong as we continue to transition to a predominantly fee-based company. I'm pleased to announce that in April, we closed on the sale of three assets and have signed an agreement for the sale of a fourth asset with a scheduled closing in the second quarter. Combined, these four hotels will generate gross proceeds of $812 million or over 40% of our $2 billion disposition target, marking significant progress on our fee-based earnings evolution. These dispositions reflect an aggregate multiple of 15.7x 2019 EBITDA, highlighting our consistent track record of selling assets at attractive multiples in excess of what is implied by our valuation. In summary, we have reached a new phase in this recovery where actualized performance and future bookings clearly validate our confidence in the future. Hyatt is uniquely positioned to benefit from current trends given the composition of our portfolio and the operating leverage within our business. Further, as we continue to execute on our disposition program, we look forward to unlocking value in multiple dimensions as we progress toward a more agile, stronger fee-based enterprise. Diving a little deeper into our latest trends, I want to first discuss ALG as it was an important driver of outperformance for the quarter, and Joan will review the specific financial results. ALG’s highly integrated platform continues to benefit from the outsized demand for leisure and beach destinations. The performance this quarter was record-breaking with the two main lines of business, the first being AMR and AMR's membership club, UVC, and the second being ALG Vacations, both performing exceptionally well. This performance is the result of very strong underlying demand and the impact of transformative changes that the management team has implemented over the past few years. As we assess the performance of ALG, it's notable over the trailing 12 months that economic performance as measured by adjusted EBITDA, plus the increase in net deferrals and net finance contracts implies an approximate 10x multiple on our $2.7 billion acquisition price. These financial results illustrate the power of the platform and the attractive valuation at which we acquired it. Based on recent trends, we're confident that we will exceed our previous expectations of a low double-digit multiple by 2023, both in terms of timing and magnitude. It's also worth highlighting that the strong base of activity is occurring before any material benefits from integration efforts that have taken effect, but that is changing as we speak. Just yesterday, we announced that all AMResorts in the Americas are bookable through Hyatt's channels and World of Hyatt members can earn and redeem points at more than 50 AMR properties. The AMResorts in Europe will join the program later this year. These initiatives will deepen guest loyalty and reduce distribution costs. In addition, we have launched the inclusive Collection, a designation for our global portfolio of distinctive all-inclusive resort brands. Lastly, we are excited to announce that UVC members have been granted World of Hyatt status. This adds compelling value for existing UVC members and enhances the value proposition for prospective UVC members. In summary, ALG is trending significantly ahead of our expectations in every measurable dimension. We're making quick and meaningful integration progress and foresee reaching our 2023 earnings target significantly ahead of schedule. Turning to the latest business trends in our legacy Hyatt business, I'm very encouraged by the pace of recovery. After a slow start to the quarter, demand rebounded sharply in most areas of the world. While system-wide RevPAR was 25% below 2019 levels for the quarter, results varied significantly by month, with RevPAR in March down only 15%. As we look to the second quarter, system-wide RevPAR in April was down only 9%. The strengthening of rates has played a critical role in the RevPAR recovery, improving from down 5% compared to 2019 levels in January to up 10% in April. From a geographic perspective, it's notable how quickly RevPAR has recovered in many parts of the world. RevPAR in April was up 3% and 1% to 2019 levels in the Americas and Southwest Asia regions, respectively. Meanwhile, Asia Pacific experienced a worsening trend over the course of the first quarter due to travel restrictions in Greater China, with RevPAR remaining at depressed levels in April. Outside of Greater China, countries in Asia Pacific have partially or completely reopened borders, and we see improvement as restrictions ease and airline capacity ramps up, with RevPAR improving 15% from March to April. We remain optimistic that a rapid recovery will emerge in the region as it has in so many other parts of the world, although the timing remains unpredictable. From a segmentation perspective, we again experienced a strong level of leisure transient revenue during the quarter, up 4% to 2019 on a comparable system-wide basis and up 12% to 2019 in March. This trend has strengthened further in April, with leisure transient revenue up 19% over 2019 levels. We continue to see improvement in urban locations and are benefiting from a longer length of stay, specifically with extended weekends, driving higher demand on Thursday and Sunday nights. We anticipate this trend of extended weekends to continue as consumer behaviors shift post-pandemic to the adoption of blended leisure and work travel. While leisure transient continues to outperform, group is where we saw the most pronounced recovery during the quarter. System-wide group rooms revenue was down 43% to 2019 in the fourth quarter of 2021 and improved to being down 25% to 2019 in March and down only 14% to 2019 in April. The speed at which group returned was significantly ahead of our expectations. We've heard repeatedly from meeting planners how impactful it is to reconnect in person for association and corporate customers alike, a sentiment that is evident in our group booking momentum. Large group bookings driven by corporations with strong food and beverage spend are contributing significantly to our recovery. Group rooms revenue in our comparable Americas full-service managed properties was down only 8% to 2019 levels in April and group pace for the remainder of the year from May through December is down only 12% to 2019, with tentative group bookings up 60% to 2019. The continued strength in short-term bookings, the vast majority of which are corporate, gives us full conviction that group will continue to narrow the gap to 2019 levels over the course of this year. As for business transient, we've seen positive momentum as more people return to the office, with system-wide business transient at 53% of 2019 levels in April, with the Americas region reaching 59% of 2019 levels during the same period. Large national corporate accounts have improved from a 36% recovery in February to 54% recovery in April. From a future bookings perspective, business transient bookings were approximately 65% of 2019 levels in April for the Americas. Consulting companies and industries with a heavy focus on sales of products and services are leading the recovery, with some of those firms now running in excess of 2019 travel levels, and demand continues to broaden across industries with each passing week. We remain optimistic about the recovery of business transient and its continued momentum over the back half of the year as people return to the office, travel restrictions are eased, and more cross-border travel resumes. Finally, I want to provide additional details on real estate transactions before turning it over to Joan. As I mentioned, we've had a very active start to the year. In April, we closed on three transactions: the Hyatt Regency Indian Wells Resort & Spa in Palm Springs, California; The Driskill in Austin, Texas; and the Grand Hyatt San Antonio Riverwalk in Texas. In addition, we anticipate closing on the fourth property, The Confidante in Miami Beach later this quarter. In total, these four properties represent $812 million in gross proceeds at an implied multiple of 15.7x 2019 EBITDA. The sale of the Grand Hyatt San Antonio is particularly impactful to the implied EBITDA average, as this 1,000-room hotel is attached to the convention center and encumbered with a complicated ground lease and debt structure. We sold our interest in this hotel at an implied multiple of 11.9x 2019 EBITDA. The valuation represented a significant premium to our internal estimated value. When excluding the Grand Hyatt San Antonio, the sale prices of the other three assets imply an aggregate multiple of 19.7x 2019 EBITDA. It's also notable that the buyers of Hyatt Regency Indian Wells, The Driskill, and The Confidante are all planning transformative renovations in the near term, with an aggregate investment of over $145 million. This follows a similar pattern to our sales last year of Hyatt Regency Lake Tahoe and Hyatt Regency Lost Pines. Not only are we selling at strong multiples with long-term management agreements, but we are also selling to strategic buyers who believe deeply in our brands, are investing significant amounts to upgrade and reposition these great hotels, and with whom we expect to grow in the future. These additional planned investments in our properties will enhance the guest experience, be supported by Hyatt’s uniquely strong customer base, and yield strong management fee streams over the decades to come. We're extremely happy with the progress we're making in fulfilling our $2 billion disposition commitment by the year-end of 2024. Upon closing of these transactions, we will have completed over 40% of our commitment, accelerating our transformation toward greater fee-based earnings. Overall, our strong results for the quarter, coupled with the execution of our asset sales and the strong booking momentum we see for Q2 and beyond, provide the foundation for continued optimism as we look toward the remainder of this year. I'll now turn it over to Joan to provide additional details on our operating results.

Thanks, Mark, and good morning, everyone. My commentary today will cover consolidated financial results, key drivers of performance, and expectations I can share for the remainder of 2022. This morning, we reported a first quarter net loss attributable to Hyatt of $73 million, and a loss per diluted share of $0.67. Adjusted EBITDA for the quarter was $169 million. Additionally, net deferral increased by $24 million and net finance contracts increased by $7 million. Almost 60% of adjusted EBITDA, net deferrals, and net finance contracts was earned in the month of March. Adjusted EBITDA for Hyatt, excluding ALG, was $113 million for the quarter and improved rapidly from $11 million in January to $70 million in March, reflecting the RevPAR acceleration Mark mentioned. System-wide March RevPAR, excluding Asia Pacific, was down less than 5% compared to 2019. It's important to note, adjusted EBITDA in March was approximately 40% better than any previous months in the last two years, a testament to the accelerating trend of the quarter and the strength in the overall recovery. As we look deeper into the strong results, the improvement in our lodging business was primarily driven by the strength in the Americas region, which contributed $85 million in adjusted EBITDA in the quarter, down only 9% to 2019. In addition, base, incentive, and franchise fees accelerated in both the Americas and Southwest Asia regions, improving collectively from January, where fees were approximately 20% below 2019 levels, to March where fees returned to 2019 levels, reflecting the quickly improving RevPAR environment and impact from our industry-leading net rooms growth. Turning to our owned and leased portfolio, the segment generated $54 million in adjusted EBITDA for the quarter with $39 million earned in March. Comparable owned and leased margins were 26.9% for the quarter, down 50 basis points to 2019 levels for the same set of properties. While margins in March were 36.1%, up 150 basis points compared to 2019. The majority of ultimate properties exceeded 2019 EBITDA in the month of March, with RevPAR down only 7% compared to 2019 levels. Over the past several quarters, as the recovery has gained momentum, we have demonstrated the positive operating leverage and inherent value in our owned and leased portfolio through strong realization and excellent flow-through. As we turn to the second quarter, the RevPAR recovery has strengthened further in April. Compared to 2019, system-wide RevPAR in April was down only 9%, with ADR growth of 10%. Our comparable owned and leased hotel RevPAR in April was up 1%, with ADR growth of 18%. Looking into May and onwards, our booking momentum remains robust, driven by ADR strength, and this provides us with confidence that we will continue to experience a strong level of recovery. The exception and clear outlier is our Asia Pacific region. We've seen results improve outside of Greater China in April and remain confident in the long-term recovery of the entire region, although the timing is uncertain. Turning to ALG, the performance of the segment significantly exceeded our expectations. Adjusted EBITDA for the quarter was $56 million, net deferrals increased $24 million, and net finance contracts increased $7 million. As a reminder, it's critical to assess performance due to some of these three items: adjusted EBITDA, net deferrals, and net finance contracts due to GAAP revenue and expense recognition requirements related to AMR's UVC business. We provided a table on Page 3 of the schedules in the earnings release for ease of reference on net deferrals and net finance contracts, as well as a supplemental presentation for ease of modeling ALG's contribution to Hyatt. I'll take a moment to cover three key areas that drove ALG's financial results: first, net package RevPAR for the same set of hotels in the Americas was down 8% to 2019 during the quarter and up 1% to 2019 in March, reflecting strong improvement in demand as the impact from Omicron quickly dissipated by mid-February. Performance drove $30 million in total AMR management franchise and other fees. Second, new contracts signed for AMR's Unlimited Vacation Club. The primary driver of performance for other revenues, net deferrals, and net finance contracts was 7,800 contracts in the quarter, exceeding 2019 by 8%. UVC contract signings continue to pace above 2019, with a strengthening average contract price exceeding 2019 by nearly 15%, driven by sales and memberships at higher tiers. UVC now has 121,000 active members, exceeding 2019 and by 33%. Third and most pronounced was the ALG Vacations business, which realized very strong results driven by the combination of a surge in demand and the positive impact of an operational transformation over the past two years. Distribution and Destination Management revenue was $246 million in the quarter, a material increase from prior quarters, driven by favorable unit pricing, which was up 16% from 2019, and a heavier mix of business to more beach destinations. The favorable revenue mix, coupled with lower overhead through automation enhancements and less marketing spend, fueled a significant expansion of margins. As a result, the first quarter demonstrated the earnings power of a transformed ALG Vacations platform. We expect performance to remain strong over the remainder of the year, but would also note that the first quarter typically generates higher seasonal results for the ALG Vacations platform. In summary, ALG posted very strong financial results in the quarter, ahead of expectations despite the headwinds faced in January. As we look ahead, our positive sentiment is reinforced by the strong leisure demand that has continued into the second quarter. Gross package revenue for all Americas resorts is pacing 37% ahead of 2019 for the second quarter. We expect our significant expansion in Europe over the past two years to contribute meaningfully over the summer months. I'd also like to provide an update on our continued strong cash and liquidity position. As of March 31, our total liquidity includes $1.3 billion of cash, cash equivalents, and short-term investments, up $118 million from the prior quarter, largely from an improvement in cash flow from operations. In addition to our cash position, we maintain approximately $1.5 billion in borrowing capacity on our revolver. At the end of the quarter, we reported approximately $3.8 billion of debt outstanding, excluding $164 million of secured debt related to the disposition of Grand Hyatt San Antonio. This secured debt was included in liabilities held for sale as of March 31 and was paid off in April upon the closing of the sale. While we have no maturities in the next 12 months, we will have an option beginning in the fourth quarter of 2022 to pay down a portion or all of the notes issued in the fourth quarter of 2021. We expect the net proceeds from the four dispositions Mark mentioned to allow us to pay down a significant portion of these notes. Furthermore, we anticipate resuming repurchases under our existing share repurchase authorization this quarter. Finally, I'd like to make a few additional comments regarding our 2022 outlook. Consistent with our estimates provided on our fourth quarter earnings call in February, we continue to expect adjusted SG&A to be in the approximate range of $460 million to $465 million, excluding any bad debt expense. As a reminder, we expect legacy Hyatt adjusted SG&A to be approximately $300 million to $305 million, which includes $25 million to $30 million of one-time integration expenses related to ALG. When excluding these one-time expenses, legacy Hyatt SG&A is expected to be approximately $275 million. We continue to expect ALG adjusted SG&A to be approximately $160 million. Turning to net rooms growth, we are reaffirming our expectation of rooms growth of approximately 6% for the full year. While we recognize that macro factors such as supply chain issues or COVID-related restrictions present a degree of uncertainty, given the activity we see in the marketplace, we remain confident that our guidance is well within reach and expect to deliver another strong year of net rooms growth. As for capital expenditures, we have revised our outlook to be approximately $210 million, down from $215 million we provided last quarter. The asset sales we commented on earlier are leading to lower capital needs and a reduction in our estimates. Legacy Hyatt capital expenditures are now expected to be approximately $185 million, and we continue to expect ALG capital expenditures of approximately $25 million. I will conclude my prepared remarks by saying that we are very pleased with our first quarter results. We believe we are uniquely positioned at this stage in the recovery, given the positive operating leverage in our business and our mix of leisure, luxury, and group business. ALG's results are significantly exceeding our underwriting, and we continue to advance our long-term strategy through unlocking value in our real estate while transitioning to a predominantly fee-based company. Thank you. And with that, I'll turn it back to Julianne for Q&A.

Our first question comes from Shaun Kelley from Bank of America.

Sort of a two-part question. The first question would be Mark or Joan, can you give us a little bit more color on the seasonality around ALG? I think that definitely surprised everyone at how significant that was in the quarter? And maybe just if I caught the number right, I think, Mark, you said $270 million of adjusted EBITDA on a trailing basis? Or I think you said 10x on your acquisition price. Maybe just, again, help us think about how to break that up across the year? And then secondarily and sort of unrelated, the follow-up would be just any thoughts around the guardrails on capital allocation, given the asset sales.

Shaun, I'll begin with the metrics. In my prepared remarks, I highlighted some of the performance indicators we observed in the first quarter from ALG. Notably, net package RevPAR is nearing 2019 levels, resulting in approximately $30 million in fees from the AMR business. Additionally, we signed 7,800 new membership contracts in the UVC program during the quarter. These two metrics contributed to strong results for that segment within ALG. The standout performance, which exceeded our expectations, came from the vacations business, primarily driven by a surge in booking activity. Following Omicron's impact in late Q4 and early Q1, we witnessed a significant increase in demand starting in February, which drove impressive top-line results. Not only was the demand robust, but we also experienced substantial unit pricing during the quarter. While Q1 is typically a strong season for the vacations business due to Caribbean package sales, the surge led to a more favorable revenue mix and higher margins. Looking forward to the next couple of quarters, the current demand backdrop suggests we should compare upcoming results to last year, particularly because we also encountered demand surges in the second and third quarters of 2021 after the Delta variant. Therefore, as we approach Q2 and Q3 this year, we anticipate strong pacing. However, considering the seasonal trends, you can refer to the historical data we provided in our fourth quarter supplemental package for the ALG results to aid in modeling future quarters.

To sum up what Joan covered regarding the multiple calculation, we outlined last year's quarterly performance for ALG. We also just reported the results for the first quarter, which is a straightforward addition. The trailing 12 months are in the range of $270 million. As mentioned in the prepared remarks, we're experiencing better pacing and flow-through across all areas of the business than initially expected. Our projections did not account for the improvements we anticipate due to the World of Hyatt integration. This launch will introduce our 30 million members to our resorts for the first time, providing direct booking through our website and mobile platforms, along with earn and redeem options. For hotel owners, we expect significant growth in direct channel bookings. Currently, over 50% of revenue for Hyatt Ziva and Hyatt Zilara comes from our direct channels, while AMR Hotels currently start at 0% for direct bookings, despite already achieving over 50% in direct channels. We believe this strategy will reduce distribution costs, enhancing overall performance for owners. We went live with this initiative yesterday, which is particularly impressive given that we closed the deal only six months ago. Additionally, AMR Collection Hotels are on track for low double-digit net rig growth this year, with all resorts currently under construction, not including conversions we are actively pursuing. We anticipate strong opportunities going forward. When we closed the deal, we indicated that we would demonstrate low double-digit multiples by the end of 2023, and we have already achieved this. Our focus has shifted towards growth, aiming for a single-digit multiple based on future earnings. We are working to accelerate growth in our existing markets, considering brand portfolio enhancements, and planning expansions into the Middle East and Asia, which are already in motion. We’ve seen a positive shift in our vacation platform, moving away from lower-margin markets to higher-margin opportunities. Our package revenue has increased significantly, with mid-teens growth compared to 2019. Currently, we see all indicators suggesting upside potential. We are focusing on maximizing this activity. Regarding capital allocation, as we generate cash from asset sales and maintain positive cash flow, we expect to pay down our debt by year-end, restoring our ratios to investment-grade levels and allowing us to resume significant share repurchases this quarter.

Our next question comes from Stephen Grambling from Goldman Sachs.

Given the strength in forward bookings as well as what you saw in the quarter, and I recognize there's a lot of macro crosscurrents, but what would you need to see to reinstate EBITDA guidance? And as a related follow-up, could you help us triangulate a baseline for the core non-ALG EBITDA, given all the moving parts there with asset sales, Two Roads, integration costs, renovations of Miraval, and more?

I'll start on that, and Joan can, of course, correct me as I go. As you pointed out, we've got a lot going on. We're selling assets. We will continue to report on the net impact of the asset sales as we go. I guess as a quick reference point for your information, you could derive this from the multiples that we gave you. We made something like $54 million for the year of 2019, and the four assets that we are selling, three of which are sold and the other one is slated for the second quarter. In terms of what the first quarter was for those four assets, it was about $21 million in both 2019 and 2022. So there are some quick reference points on the earnings impact from what we've already announced. With respect to getting to a point where we can provide visibility into the future, we are still living through an upward inflection point in many different dimensions, and we are learning as we go. I think that what we have already seen relative to our expectations is that we're being surprised by the bigger and the pace of the return of bookings. So we're seeing booking activity; Joan mentioned there with respect to the vacations business, which, I mean, Omicron was a severe downturn for business transient, with a quick sharp V. It was much more extended for group, but the group is bouncing back in March and April, as I described it, and leisure didn't really get impacted too badly. We have vacations back on positive booking in January, actually. So we've seen those sorts of extensions of pent-up demand. So if we keep seeing behaviors that are supporting better results than we would have otherwise expected, given how we started the year with Omicron. So we're still learning. I think we'll have a much better handle on how we can get our hands around modeling this out, especially given our mix. Secondly, China is an issue. We're sort of operating from a fee-based perspective maybe a third of the run rate where we were pre-pandemic or where we would expect to be currently if we were to stabilize operations. We have confidence that they will sort through how they migrate from a Zero COVID policy to a more open policy, but we really don't have a good handle on time. So that creates some volatility and noise as well. Finally, I think we're still learning just how impactful some of the operational model changes that the management team at ALG put into place for vacations and for UVC and AMR. The platform is just more powerful from a profit delivery perspective and a flow-through perspective than it was two years ago. Some of that has to do with machine learning, the application of machine learning, and using bots and AI for processing; things like price changes that flow through the system and how packages are presented. Some of that has to do with a reduction in marketing spend, and some has to do with the mix of business that they're doing. So what we are learning at this point is just to understand how powerful those things taken together are in the delivery of profit on the total revenue basis, the volumes are quite high as we covered in the last call. I would say that we'll be dramatically better positioned by the fourth quarter to start to look back towards guidance. And that assumes that we see and have a more predictable future for how China is going to migrate from the Zero COVID policy to a more normalized environment.

Our next question comes from Patrick Scholes from Truist Securities.

You talked quite a bit about encouraging revenues from the ALG segment. In the quarter you had very strong margins in the distribution and destination management component. I guess for modeling purposes, how should we think about those margins going forward? Are these sustainable seasonality, etc. with that?

Yes, Patrick, I would say that Mark just discussed some of the operational changes implemented by the team over the past couple of years, which I referenced in my prepared remarks. When considering the top line, this first quarter was significantly boosted by an increase in booking activity, which remains strong. It’s useful to reference the second and third quarter performance of last year as a benchmark, and we are definitely experiencing improved pricing power related to the packages sold through our platform. Pricing for elevators is expected to maintain its upward trend, and the margins seen in the second and third quarters of last year indicate a positive flow-through from that business. A margin of 20% in the first quarter is solid and strong, partly due to this surge. A reasonable expectation would be the mid-teens margins we shared in our supplemental package for the second and third quarters of 2021.

Our next question comes from Smedes Rose from Citi.

I guess I was curious; maybe you could talk a little bit about how you think about sort of the sustainability of the higher prices you're seeing in the all-inclusive business. I think there's sort of growing concern that these very strong on the excess savings, credit card debt is going up. So just is ALG maybe changing the way they run the business to emphasize higher rates maybe at the expense of lower occupancy? Or how do you sort of think about that going forward?

Sure. It's challenging for me to contain my excitement because the data clearly supports it. The average daily rate in our Q2 bookings for the AMResorts business is up 22% compared to 2019 levels. In the Americas, outside of ALG for Hyatt, our leisure-focused business has seen rates increase by 38% in Q2 bookings. We're not only observing sustained demand but also stronger price realization moving forward. I want to emphasize that while growth cannot continue indefinitely at a 38% rate, it's important to remember who our customer base is. We cater to high-end travelers, and 30% of our total global portfolio falls within the luxury chain scale, which comes with higher rates and an appropriate customer base. Additionally, a recent research report from Morgan Stanley highlighted that in the categories of domestic leisure travel, business-related travel, international leisure travel, and leisure entertainment activities, our customers, who primarily fall into the highest income bracket of $150,000 or more, continue to show strong spending potential. Specifically, the expectations for the next six months indicate a more than 20% increase in domestic leisure travel spending, a 25% rise in work-related travel, and high teens growth in international leisure travel. This is a survey, so action speaks louder than words; however, people are following through on their intentions with even greater enthusiasm than we had anticipated. We don’t see signs of a slowdown in booking pace; in fact, it’s increasing across all our segments. Business transient bookings in April are 27% higher than in 2019, and I have previously detailed the significant growth in group bookings, which mirrors the strength we're seeing in leisure. On the group side, while the booking pace for the rest of the year is down 12% compared to 2019, it translates to an $85 million revenue gap. However, as of April 1, our bookings were 42% above 2019 figures, resulting in an additional $12 million in revenue booked in April compared to 2019. I'll leave the calculations to you.

Our next question comes from Vince Ciepiel from Cleveland Research Company.

I just want to talk about the owned business a little bit, just in light of significant growth in leisure, progress with ADR, your comments on the recovery in group and business transient. When you put all that together and think about how that might impact owned margins, I think historically, you kind of would see a build quarter-over-quarter into the second quarter when you would lose a lot of that group business. That was kind of the old pre-COVID business. I'm curious how you envision kind of the path for owned margins in the new world that we're living in?

In the first quarter, we generated 70% of our EBITDA in March, which showed a 150 basis point improvement over 2019 for our portfolio. It's important to consider the portfolio's mix, as we have various types of properties including leisure, group and business-oriented, and high-end luxury properties in urban areas, along with our owned Miraval properties. Each property type will benefit from demand in different quarters, and our managers have been effectively adjusting the mix at each location. We have noted in previous earnings calls how some of our legacy group hotels have transformed into leisure hotels in the South market, adapting their spaces to appeal to leisure guests instead of groups. We are finding new ways to drive business due to the high quality of our assets and the customer demand profile observed over the past two years. Our results continue to surpass 2019 levels for the past three quarters, with remarkable performance in March once Omicron was behind us. Mark, you had a comment about Miraval.

Yes. I want to emphasize that our O&L results include Miraval properties. Given the strong emphasis on wellbeing, particularly mental wellbeing, Miraval is experiencing impressive results and bookings. This year, the three Miraval properties that are fully operational for the first time since our acquisition are expected to generate around $40 million in EBITDA, representing a 30% margin on revenues. After management fees, this would amount to about $35 million with a 26% margin. The financial performance is remarkable, with total revenue per available room tracking over $1,500. We have shown that we can replicate this successful model. The Austin property is performing similarly to Tucson, which has been in operation for 40 years. We were concerned about our ability to replicate this unique operating model, but we now have the answer, which is crucial as we have new developments in progress for Miraval through third-party owners. This small but impactful business is positively influencing our margins as we look ahead.

And we've disclosed that we expect on a stabilized basis that we will expand margins by 100 basis points to 300 basis points above pre-COVID levels. So we still have that expectation, given what we've seen our managers do in driving productivity gains and sell-through.

Last question will come from David Katz from Jefferies.

I just wanted to ask about property sales and asset sales. It may not be the top of mind issue today, but has anything changed or evolved over the past few weeks in terms of your ability or engagement in terms of thinking about asset sales going forward?

As you can imagine, while we are proud of the more than $800 million we expect to generate in the first four months of this year, we announced a $2 billion commitment. We have thoroughly explored all our options and are strategizing on how to implement them. The interest level for our properties has been extremely high. I mentioned that the owners of three properties we are selling are investing $145 million in new capital to reposition one asset and elevate its brand, along with significant renovations for the others. We are experiencing a strong interest from financially solid owners who believe in our brands and are willing to invest heavily in our hotels. The same was true for Tahoe and Lost Pines last year. Considering the quality of the properties we have and the caliber of the owners we are working with, we are very confident that access to capital will not be an issue. There is plenty of equity available. However, the landscape has shifted slightly, as the 10-year yield is now in the 3% range, increasing by 150 basis points since the year began. With rising rates, it means higher costs for debt and subsequently lower yields for equity. Sellers may need to support this by providing some capital or participation, and we can explore that if it makes sense. But currently, the demand for our properties and what remains in our inventory is very strong. We have various options available. Additionally, we have several joint venture deals in progress, including plans to sell our interests in some hotels, with a couple of deals already signed, though not yet finalized due to pending conditions. The Grand Hyatt New York and the Andaz in London are both under contract, but they are subject to significant redevelopment and entitlement processes currently taking place in those cities. I believe the market will become tighter due to the impact of debt yields on financing costs, but I don't anticipate this significantly affecting our ability to move forward with our plans.

Understood. And if I can ask one just detailed question. I apologize if you discussed this already, but there was a $31 million loss from interest income and marketable securities. Did you discuss where that came from and what that's about?

No. But – well – it’s either held for World of Hyatt or possibly for the roundup term. Yes. I don’t know the answer, so I’m not going to speculate. Securities, values in general have come down; obviously, the market is down. If you've been holding anything that looks like a fixed income instrument, your price is down, yields are up. That’s my macro response. But beyond that, I’m not going to comment. I’m not sure. We can follow up on that. Probably, it’s also very possible that that is not a realized loss.

We have no further questions. I'd like to turn the call back over to Noah Hoppe for any closing remarks.

Thank you, everyone, for joining us today. Take care, and we look forward to speaking with you again soon.

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