Hyatt Hotels Corp Q2 FY2022 Earnings Call

Good morning and welcome to the Hyatt Second Quarter 2022 Earnings Call. 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. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Hyatt's second 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 would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our Annual Report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in this morning's earnings release. An archive of 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 and thank you to everyone for joining us today. This morning we reported our second quarter 2022 earnings results, further demonstrating the power of Hyatt's transformation into a fundamentally stronger and uniquely positioned company. The attributes that define our differentiated model include: first; our focus on the high-end traveler; second, our earnings concentration in the Americas; third, a majority of revenues derived from leisure travel; fourth, relatively higher exposure to group business; fifth, strong positive operating leverage, especially in our owned and leased hotel performance; and finally, industry-leading net rooms growth over the past five years. In the same time period, Hyatt has been transformed and, we believe, is well positioned to outperform other multi-brand companies over the years to come. Our second quarter results reflect superior performance across all of our business lines, derived entirely from the attributes I just mentioned that define our positioning. We anticipated a strong recovery in the second quarter and I'm pleased to report results that exceeded our expectations. We had a record quarter, as measured by adjusted EBITDA, plus net deferrals and net finance contracts, the strongest in the company's history by a significant margin, driven by a record level of leisure demand, along with rapidly recovering group and business transient demand. Comparable system-wide RevPAR in the second quarter exceeded 2019 levels when excluding Greater China. In addition, ALG net package RevPAR and our all-inclusive properties in the Americas managed by ALG were ahead of 2019 levels by 17%. Adjusted EBITDA for legacy Hyatt also set a new record after adjusting for currency and the net impact of transactions. Looking ahead, our outlook remains optimistic for a number of reasons. First, it is notable, our second quarter results were achieved while group and business transient demand are still in a state of recovery. Demand has yet to normalize with system-wide occupancy still down more than 1,000 basis points from 2019 levels in the second quarter, a gap entirely driven by lower levels of group and business transient demand. Momentum continues to build in these two areas and conversations with customers along with strong forward booking data provides confidence that occupancy will recover more fully in the months ahead. Second, while we are encouraged by the RevPAR recovery thus far, it's important to highlight the significant gap that exists when comparing RevPAR growth to the broader economic expansion that has occurred over the past three years. Traditional drivers of our business, such as consumer discretionary spend and nonresidential fixed investments have expanded in the mid-teens percentage range or higher, while our RevPAR in the United States only just surpassed 2019 levels in June, and on a system-wide basis in July. The RevPAR recovery still significantly lags the broader economic measures. We expect the gap to narrow as consumers pivot, prioritizing spending on services and businesses resume travel more fully. Third, we believe our customer base and higher-end chain scale concentration will remain resilient in the face of potential macroeconomic pressures. The variety of data we monitor from forward bookings to consumer sentiment surveys indicate the high-end customers are maintaining resilience and continue to prioritize travel. This is consistent with consumer behavior for higher-income groups during other periods of macroeconomic uncertainty. When looking at comparable system-wide RevPAR luxury brands in the Americas and in the Indian Southwest Asia regions, we were up 22% in the second quarter and accelerated to 28% in July when compared to 2019, respectively. This is clear evidence of a differentiator and value driver for Hyatt, as compared with the broader industry, especially during variable macroeconomic conditions. Fourth, our industry-leading net lease growth has yet to be fully reflected in our financial results. Since the start of 2019, nearly 30% of our organic growth has come through openings in Asia Pacific. Even with the strong level of growth, our Asia Pacific segment contributed only $6 million of adjusted EBITDA in the second quarter of 2022, as compared to $20 million in the second quarter of 2019. The region has grown by over 13,000 rooms or 35%. We are seeing RevPAR momentum in Asia Pacific and expect fees from the region to serve as a tailwind as it continues to recover in the months and quarters ahead. Lastly, our loyalty program World of Hyatt and overall commercial services engine, is a source of tremendous strength. The number of World of Hyatt members has grown by 65% over the past three years, which is driving a record level of direct bookings, especially through our digital channels. The performance of our Americas full-service properties in the second quarter is a great demonstration of our progress, with World of Hyatt members accounting for nearly half of room nights and revenue booked directly through Hyatt channels, reaching nearly 74%, both improving significantly over the same period in 2019. Our brands are resonating with customers and we're delivering great results through expanded market share and lower distribution costs for our hotel owners. We're now a more agile organization, with an accelerating proportion of earnings coming from our fee-based business. We believe the key attributes of Hyatt's business in 2022 and looking forward, better positions us than ever before to continue delivering strong results as we adapt to evolving macro factors we may face in the future. Now, let's dive a bit deeper into the latest trends from the quarter. First, starting with ALG. The segment significantly exceeded our expectations once again this quarter. To provide context, through the first six months of 2022, ALG has already surpassed its full-year 2019 economic performance. Net package RevPAR for properties managed by ALG in the Americas, in both 2019 and 2022 had a strong recovery, improving from down 8% in the first quarter to up 17% in the second quarter relative to 2019. Further, non-package revenue had a significant positive impact on results as well, with a 26% increase when compared to 2019, a testament to the compelling programming at ALG's resorts and the value that our high-end customer base places on accessing great additional experiences while on property. The strong net package RevPAR environment also contributed to a record number of new unlimited vacation club contract signings and another terrific quarter for the ALG vacation distribution business. And it's worth acknowledging that these strong results were achieved when travel alternatives, such as European destinations and cruise lines had significantly more availability than in prior periods. Turning to integration efforts. May 9 marked the official date, when guests could start to earn and redeem World of Hyatt points at ALG resort properties in the Americas. It is still early, but we're thrilled with the progress so far. We've enrolled over 41,000 new World of Hyatt members at participating ALG resort properties, with a rate of enrollment that is significantly higher than what we typically see from newly opened Hyatt properties. We're also very encouraged by the level of spend of our World of Hyatt members, which is materially outpacing non-members. We expect the integration of World of Hyatt with ALG's European properties to be complete by the end of the year and we'll provide updates on our progress there. Turning to the latest trends in our legacy Hyatt business. The pace of recovery also exceeded expectations with comparable system-wide RevPAR improving from down 25% to 2019 levels in the first quarter to down only 5% in the second quarter. Excluding Greater China, system-wide RevPAR finished ahead of 2019 in the second quarter, demonstrating the broadening demand for our hotels globally, now that travel restrictions have been lifted. From a geographic perspective, RevPAR has continued to recover in many parts of the world. Looking at the Americas, RevPAR was up 3% to 2019 in the second quarter, driven by strength in our luxury brands, which actualized 20% ahead of 2019 levels, driven by rate growth of 27%. This is particularly meaningful given that we have doubled the number of luxury rooms in our system over the past five years. Many urban markets improved rapidly as the quarter progressed, driven by improved group and business transient demand. In the United States, RevPAR in urban locations was down 8% versus 2019 in the second quarter and has steadily shown month-to-month improvements being down only 4% in June and down only 2% in July as compared to 2019. In EV and Southwest Asia, the region saw a travel resurgence with RevPAR growth of 12% to 2019 in the second quarter. Cross-border travel was notably strong in the region with travelers from North America contributing 17% of rooms revenue consistent with the contribution during the same period of 2019. The overall strength of recovery in the region can be attributed to solid growth in leisure, and an increase in business transient large events, all contributing to stronger rates. Meanwhile, RevPAR in Asia Pacific remained at depressed levels, finishing down 48% versus 2019 in the second quarter driven by Greater China, which was down 62% due to lockdowns in certain key markets. Despite the difficulties in Greater China, RevPAR in the Asia Pacific region improved throughout the quarter when compared to 2019 from down 58% in April to down 35% in June. We remain confident in Asia Pacific's path to recovery with the continued ease-of-travel restrictions and improvements in airlines. We're particularly encouraged to see the recovery momentum accelerated in July with RevPAR down less than 20% versus 2019 with a very rapid improvement in Greater China, which was down only 21% in July, a significant improvement from being down 64% just two months prior. From a segmentation perspective, we experienced another record quarter of leisure transient revenue, up 19% to 2019 on a comparable system-wide basis with a contribution of 54% of total room revenue for the quarter. While resorts continue to experience strong results, the leisure recovery broadened with notable growth in urban markets as cities more fully reopened across the globe. Group room revenue showed meaningful strength, building on the momentum from the first quarter finishing down only 11% to 2019 in the second quarter with steady month-to-month improvement from down 14% in April to down only 7% in June. We continue to see significant short-term group demand primarily from corporations with gross group bookings in the second quarter for stays that will occur this year at 45% above 2019 levels for our Americas full-service managed properties. It was this unprecedented level of short-term group demand that narrowed our case deficit as we progressed through the quarter. We entered the second quarter with a group pace deficit, up 16% to 2019 but actualized down only 11% as a result of strong short-term booking behavior. This trend is continuing with an acceleration in booking activity in July for 2023. As for business transient, we're very encouraged by the recovery momentum, as demand continues to broaden. System-wide business transient was down 58% to 2019 in the first quarter and improved to down 38% in the second quarter with June down only 31%. We experienced encouraging performance in certain gateway cities such as New York City, which was up 5% to 2019, with other major cities showing strength driven by the relaxing of company travel restrictions. The recovery within our large national accounts is also encouraging, improving from 54% recovered in April to 71% recovered in June. Our top 10 customers have recovered by more than 80%. As more employees return to the office, restrictions are eased and cross-border travel more fully resumes, we anticipate business transient to continue to strengthen in the months ahead. Turning to growth, we had a strong second quarter of net rooms expansion. We opened over 5,500 rooms contributing approximately 4,600 net rooms to our system. Over half of the rooms we opened during the quarter were resorts, and included incredible additions to the portfolio such as the Avila Maldives and the Secrets Moxché outside of Playa del Carmen. Additionally, we opened our first Caption by Hyatt on Beale Street in Memphis. We are excited about this innovative lifestyle select-service brand and we are thrilled to have the first one open and operating. We look forward to many more to come. Our total net rooms growth is 19% over the trailing 12-month period, which represents an increase of 40 basis points as compared to the 18.6% net room growth reported in the first quarter. The accelerated growth in our fee-based business during the second quarter was heavily driven by our ALG resorts. It's notable that ALG has already achieved net room growth of 10% since the start of the year, which is well ahead of the approximately 10% growth target we anticipated for the full year. As for the legacy Hyatt portfolio, net room growth is 4.6% over the trailing 12-month period as opening activity has slowed in part due to a lower level of openings in Greater China due to lockdowns impacting the rate of construction. However, we have exciting hotel openings scheduled over the back half of the year and compelling conversion opportunities under negotiation. As a result, we expect net rooms growth for the full year to be greater than 6%. Moving to real estate transactions, as previously disclosed, we've had a very active first half of the year which resulted in gross proceeds from asset sales of $812 million. We're currently marketing two owned hotels for sale and are pleased with the progress we are making. We're also pleased to announce that on August 3rd, we acquired the Hotel Irvine, in Irvine, California, a hotel we know very well, as it was previously the Hyatt Regency Irvine for over 20 years, before exiting our system several years ago. We purchased the 541-room hotel for $135 million, securing our brand presence in a highly sought-after location where we are underrepresented. As in the past, when we look at unique opportunities like this one, we remain highly confident in our ability to unlock value through renovating and repositioning the hotel, while seeking to identify a strategic third-party buyer to be a long-term owner of the asset. I'm proud to share that we recently announced progress made across our ESG platform World of Care, released our Diversity, Equity, and Inclusion Disclosures and shared our global reporting initiative, all of which demonstrated how Hyatt is advancing care for the planet, people, and responsible business. We are proud that our World of Care platform was named 2022 ESG Program of the Year by Radian Communications. I'd like to share a few specific key ESG highlights. First, Hyatt's Science Based Targets were approved by the Science Based Targets initiative, reflecting our focus on making significant reductions in greenhouse gas emissions. Second, I'm proud to share that we have increased representation across several groups including people of color and women, in leadership positions across our workforce. Lastly, with a focus on improving diverse vendor representation across our supply chain, Hyatt welcomes 220 new Black-owned businesses to participate as suppliers to our hotels in the Americas. I would like to thank all of the members of the Hyatt family who bring World of Care to life every day with creativity and passion. We look forward to continuing to share our progress, challenges, and solutions that are advancing us towards our ESG goals. I'll conclude my prepared remarks this morning by saying that we're very pleased with the strong results we delivered this quarter and maintain our optimism as we look toward the remainder of this year and into 2023. I'll now turn it over to Joan to provide additional details on our operating results. Joan, over to you.

Thanks Mark and good morning, everyone. My commentary today will cover consolidated financial results, key drivers of our strong performance and expectations I can share for the remainder of 2022. This morning, we reported second quarter net income attributable to Hyatt of $206 million and diluted earnings per share of $1.85 with our results favorably impacted by gains on sale of real estate of $251 million, the acquisition of ALG and significantly improved operating performance. Adjusted EBITDA for the quarter was $255 million. Additionally, net deferrals were $25 million and net finance contracts were $15 million. As Mark mentioned, this was a record quarter. We experienced a record level of leisure demand and a rapid recovery in group and business transient demand. We translated this demand into strong rate realization, fee growth, and margin expansion through excellent execution. Adjusted EBITDA for Hyatt excluding ALG was $201 million for the quarter which is approximately 13% higher than 2019, adjusted for currency and the net impact of transactions. The improved performance of the legacy Hyatt business reflects strength in our core business and new fees generated from our industry-leading growth. We reported a record level of total management franchise and other fees which are 27% higher than any other quarter in the company's history and up 30% to 2019 in the second quarter, driven by RevPAR expansion and industry-leading networking growth. Comparable RevPAR growth was 3% to 2019 in the Americas and 12% to 2019 in EMEA and Southwest Asia in the second quarter, with our Asia Pacific region trailing. The Americas and Indian Southwest Asia Lodging segment combined resulted in an approximately 11% expansion in fees in 2019. Turning to our owned and leased portfolio, the segment generated $99 million in adjusted EBITDA for the quarter down 14% to 2019 on a reported basis, while being up 20% to 2019 when adjusted for currency and the net impact of transactions. Comparable owned and leased margins improved to 31.9% in the quarter, up 800 basis points to 2019 levels for the same set of properties, reflecting another quarter of very strong operational execution and an increase in average daily rate of 15% compared to 2019. International comparable owned and leased properties accounted for $9 million of adjusted EBITDA growth to 2019, driven by strong results in our European properties, namely the Park Hyatt Paris and the Park Hyatt Zurich. Additionally, our Miraval portfolio continued to perform exceptionally well generating an $8 million increase in adjusted EBITDA compared to 2019. Looking ahead to the third quarter, the rate of RevPAR recovery strengthened in July benefiting from strong summer leisure travel and group demand with system-wide RevPAR in July finishing 5% ahead of 2019 and ADR growth of 17% marking the first month in which system-wide RevPAR exceeded 2019 levels. Our comparable owned and leased hotel RevPAR in July was up 12% with ADR growth of 18%. On a system-wide basis, leisure revenue maintained its strength and group revenue slightly exceeded 2019 levels in July, a remarkable milestone considering group revenue was down more than 40% in the first quarter of this year and 11% in the second quarter. Looking into August and onwards, total transient bookings remained strong with comparable transient revenue approximately 1% higher than 2019 for the remainder of this year and 4% higher excluding Greater China. We also continue to see strong short-term demand for group with short-term group bookings at approximately 40% above 2019 levels for our Americas full service managed property. Overall, the trends and trajectory are very encouraging and consistent. Demand is broadening both geographically and by segment. We have confidence that the recovery in demand will continue into the latter half of this year and we're particularly encouraged by the momentum we're seeing in Asia Pacific. Turning to ALG, the performance of the segment once again significantly exceeded our expectations. Adjusted EBITDA for the quarter was $54 million, net deferrals were $25 million, and net finance contracts were $15 million. As a reminder, it's critical to assess the performance of some of these three items; adjusted EBITDA, net deferrals, and net finance contracts. Due to GAAP revenue and expense recognition requirements related to ALG's Unlimited Vacation Club business. We've provided a table on page 3 of the schedules in the earnings release for reference and net deferrals and net finance contracts as well as a supplemental presentation for modeling ALG's contribution to Hyatt. I'll take a moment to cover three areas that drove ALG's financial results. First, net package RevPAR for the same set of hotels in the Americas was up 17% to 2019 during the quarter reflecting strong net package ADR, which was up 19% in the second quarter of 2019. New hotels added to the ALG resort portfolio and significantly improved performance drove $36 million in total fee revenue in the quarter. Incentive fees were notably strong and record average rates fueled expanding operating margin growth. Second, approximately 8,500 membership contracts were signed for ALG's Unlimited Vacation Club in the quarter, the primary driver of performance for other revenues, net deferrals, and net finance contracts. This level of sales exceeds 2019 by 20% driven by sales of memberships at higher tiers. UVC now has 125,000 active members, exceeding 2019 by 30%. Third, the ALG Vacations business realized strong results with strong unit pricing, increased airlift and consumer preference for all-inclusive luxury. In the quarter, ALG Vacations reported 744,000 guest departures, which drove $256 million of distribution and destination management revenue, and $206 million of expense in the quarter reflecting approximately 20% margins on the business, significantly above 2019. The strong margin levels were aided by strong seasonal demand. On a full-year basis, we anticipate margins for the Vacation business to be in the mid to high teens. In summary, ALG posted another quarter of very strong financial results. We remain optimistic as we look into the remainder of the year for several reasons including the strength of demand, where we see no sign of softening travel restrictions that have been lifted in key ALG markets, improved airlift that is approximately 24% above 2019 levels for key Americas destinations, and a favorable pricing environment. We'd also reiterate that ALG is seasonal. While we anticipate the growth rate relative to historical periods to remain strong, the EBITDA contribution of the segment is expected to moderate relative to what was generated in the first half of the year as we enter seasonal periods of lower leisure demand and also make investments in the second half of 2022 targeted towards future growth opportunities. I'd also like to provide an update on our strong cash and liquidity position. As of June 30, our total liquidity includes nearly $2 billion of cash, cash equivalents, and short-term investments, up approximately $650 million from the prior quarter driven by cash flow from operations and net proceeds from asset sales. The increase in our liquidity is net of approximately $180 million of debt reduction, primarily related to the Grand Hyatt San Antonio sale and approximately $100 million in share repurchases during the quarter. In addition to our cash position, we maintained approximately $1.5 billion in borrowing capacity on our revolving credit facility. We entered into a new credit agreement during the second quarter with a maturity of May 2027. As of June 30, we have no debt maturities in the next 12 months. However, 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 and we expect to pay down a significant portion of these notes in keeping with our commitment to an investment-grade profile. Finally, I'd like to make a few comments regarding our 2022 outlook. While we acknowledge that long-term visibility remains challenging, especially in certain markets where travel restrictions remain in place, we expect full year 2022 system-wide RevPAR to grow between 55% and 60% to 2021 and to be down between 9% and 4% to 2019. This implies that RevPAR over the latter half of the year will be in the same approximate range as 2019 for the same set of comparable hotels adjusted for currency. Additionally, we continue to expect adjusted SG&A to be in the approximate range of $460 million to $465 million excluding any bad debt expense and continue to expect capital expenditures to be approximately $210 million. Lastly, turning to net rooms growth. While we recognize macro factors such as supply chain issues and COVID-related restrictions are impacting the timing of opening. As Mark mentioned, we are particularly encouraged by the volume of conversion opportunities in the second half of 2022 and expect net room growth for the full year to be greater than 6%. I will conclude my prepared remarks by saying that we're very pleased with our second quarter results, which demonstrate the progress we've made on our asset-light transformation and the excellent execution driving core business results by our global property and support teams. Our optimism for the future is fueled by our confidence in new teams as well as the visibility we have to continued momentum in demand. Thank you. And with that, I'll turn it back to our operator for Q&A.

Thank you. The first question comes from Joe Greff with JPMorgan. Please go ahead.

Good morning everybody. Nice results.

Hey Joe.

Mark, I was hoping if you could talk a little bit in detail about the environment for divesting hotels right now compared to buyer appetite and pricing versus six months ago? How wide is the bid/ask? To what extent does the buyer universe tend out or has shifted in buyer characteristics?

Thank you, Joe. The main difference over that time relates to interest rates and the availability of debt for acquisitions, which affects private equity more than it does other buyers. We've found that this situation can favor all-cash buyers. We benefitted from this when dealing with the Irvine company to purchase Hotel Irvine, which was crucial in securing the hotel at what we believe is an excellent value. Our ability to close was guaranteed because we were a cash buyer, making this the key issue. It's difficult to claim it had a direct effect on realized values. Yes, in a year from now, if interest rates remain at these levels or rise, along with decreased availability, it might have an effect, as it pertains to a segment of buyers who rely heavily on leverage. We have several unique assets within our portfolio of considerable value, like the Hyatt Regency in Orlando, a high-performing hotel near the Orange County Convention Center. Our trophy assets in Europe and the Miraval portfolio are also performing exceptionally well. The buyer pool for many of these properties doesn't align with what I would define as the market, so we have no specific concerns. We are completely confident that we will reach and likely exceed the $2 billion target we set for the end of 2024.

Great. And then my second question for you guys is with respect to your target for this year to grow net rooms by greater than 6%. Obviously, ALG is experiencing stronger than expected room growth as you guys talked about. How do you think about Hyatt legacy management franchise footprint growth within that greater than 6% target? Can it accelerate from the 4.6% that you achieved in the second quarter? And that's all for me.

Yes, that is our expectation. The proportion of our growth to date and looking ahead from conversions is higher than what we have seen historically. Typically, we were in the mid-20s, but now we are over 1,000 basis points above that this year. This trend is likely to continue. Our outlook includes significant conversion activity that is currently happening. The main challenges related to Hyatt legacy growth are primarily in China, which experienced a three to four month shutdown, halting construction and completion rates during the lockdowns. About 51% of the hotels we anticipated opening on time at the beginning of the year have faced delays. A notable portion of the delay that occurred in the second quarter is attributed to China, along with issues related to COVID and supply chain disruptions. However, these challenges are temporary. We observed a substantial RevPAR recovery in China by July, which rose to about 80% from just 35% in April. This rapid change indicates that there will be fluctuations in China as other markets may face similar constraints and restrictions. Ultimately, whether we can open our scheduled hotels in China this year or in the first quarter of next year is less crucial than having a solid backlog, which we do have. We are confident in our expectation of more than 6% growth for the year, mainly due to other opportunities we have been able to pursue within the rest of the portfolio.

Our next question comes from the line of Shaun Kelley with Bank of America. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. I wanted to explore ALG a bit more. We're getting a lot of inquiries about the Leisure business and are curious not only about its strength but also about how we can maintain the levels of demand we've seen so far. Could you help us understand this business line in terms of structural versus cyclical factors? Specifically, how much of our growth is attributable to the new rooms added since 2019 and the expansion of the Unlimited Vacation Club compared to the RevPAR component? I realize this might be a bit detailed, but insights into these two areas would help us gauge how much of that growth we can sustain if demand normalizes somewhat.

Yes. I will start by addressing the seasonality question you raised. We experienced exceptional demand across all Leisure-oriented businesses within ALG in the first half of the year. Typically, during the latter part of the third quarter and the beginning of the fourth quarter, we see some seasonal changes in leisure demand. However, we are still learning about the business. We have noticed some advantages due to reduced restrictions on travel to the Caribbean and Latin America returning to the US, which supports our growth. The increase in new unit growth is also helping to address areas that may have been slower. This is a learning process for us. The momentum is very strong. Looking ahead to the holiday season, we are significantly up during this festive period, and there is also strong momentum heading into the first quarter of 2023. Before handing it over to Mark, I want to mention we achieved record levels of fees this quarter, with ALG contributing about 20% of those fees, and around 50% of that coming from incentive fees. ALG plays a significant role in generating incentive fees, and as we continue to see new unit growth, it will further support our momentum as these hotels open and ramp up in the future.

Yes, there are a few additional points I would like to mention. In July, gross package revenue was approximately 74% higher compared to the same time in 2019, which is an impressive figure. Much of this growth is due to the organic expansion of our portfolio. Our enterprise and network are now more than 50% larger than they were three years ago. The momentum mentioned by Joan is noteworthy, as we are seeing Q3 business increased by over 35%, with July's pace for the rest of the year close to 40% or even slightly higher compared to 2019. We are benefiting from both system growth and pacing data for comparable ALG resorts. Additionally, Europe was quite disrupted last year due to the ongoing Omicron concerns late into the summer, preventing a full season; however, this year we expect to capture the majority of the season. For the upcoming first quarter, Joan pointed out that we are tracking mid-teens year-over-year increases in average daily rates, with about a quarter of the business already booked. This trend is not a short-term fluctuation, and there is a common misperception that it is entirely volatile, which is not true. We are observing clear trend lines. With a significant increase in lift to key markets in the Americas, we are effectively able to transport passengers to our resources, which is crucial. Regarding the UVC question, when we acquired the company, our growth model aimed to maintain the historical metrics of UVC, including the number of guests introduced to the UVC product and the conversion rates from inquiries to purchases. We have not factored in any significant changes to these rates in our forecasts. Much of our growth is attributed to net room increases. Currently, our UVC member base accounts for only 13% of our total room revenue at ALG, indicating substantial potential for growth. Lastly, the vacation sector has transformed dramatically since 2019, fundamentally altering the cost model. We have integrated a lot of machine learning and AI into our processes. The software platform now operates with software margins, and the destination management company Amstar maintains healthy margins with solid attachment rates of about 75% for vacation bookings. While we are experiencing a decrease in the total number of passengers in the vacation sector, the focus is now on higher-margin markets, and the profit margins of the business have changed significantly. As we look ahead to the latter part of the year, we plan to make substantial investments in our B2C platform. Some of our SG&A expenditures in the second half of the year will be aimed at enhancing our B2C efforts and promotional activities related to our resorts in Europe and the Americas, as we believe we are well-positioned to capitalize on current strengths.

Thank you for all the detail. And maybe just as a follow-up and just really sticking with the same theme. Obviously, the business has changed pretty dramatically when we factor in ALG. And when we just think about the enterprise-wide, let's call it, EBITDA or operating income. Can you help us just think about how typical seasonality should progress maybe a little bit for modeling purposes just so we can not get too far out over our skis or umbrellas?

It’s a bit challenging to provide a specific answer because the first half of the year is significantly stronger than the second half in terms of earnings for a business like ALG. That said, the trends we observed in July have continued from the second quarter. I just shared the pacing numbers for the third quarter and the rest of the year. There is indeed seasonality to consider. We must remember that we operate in a seasonal business, and it’s important not to overlook that. Therefore, we do not expect the same consistent earnings levels for the remainder of the year. However, we are optimistic about the ongoing demand that will remain. Our focus now is to optimize our efforts and promote World of Hyatt more aggressively. So far, the beginning of that has been exceptional. I believe this will result in more direct channel and group business, as we are starting to sell group offerings into the ALG portfolio and vice versa. We have received positive referrals from ALG to the legacy high portfolio. I would note that the second half will see lower earnings partly due to some of the investments I previously mentioned. These are not ongoing investments; they are specifically targeted to strengthen certain areas, which we believe will enhance our capacity to generate more direct business across the entire system.

Our next question comes from Michael Bellisario with Baird. Please go ahead.

Thank you. Good morning everyone.

Good morning.

Good morning.

Mark big picture question before I talk about next steps for the company. ALG is performing well. You just explained that asset sales are progressing. So kind of how do you think about the next drivers if it's not premature to do so? And maybe how do you think about the white space within the portfolio today as it sits?

I believe we are in an excellent position. We achieved remarkable results in the second quarter with a substantial increase in occupancy compared to 2019, largely driven by group and transient bookings. Currently, we are almost at 2019 levels, and we even surpassed them in July. Our group segment has returned to 2019 occupancy in July. While this is encouraging, it’s essential to acknowledge that the broader economic backdrop includes a 17% rise in GDP over the last three years, a 19% increase in personal consumption, and a significant uptick in non-residential fixed investments, along with a recovery in RevPAR. However, the consumer's travel spending share is still below pre-pandemic levels. In light of economic uncertainties, it's hard to predict potential challenges for the overall economy. There are various opposing factors to consider. Nevertheless, our customer base remains strong, and forward-looking data demonstrates that our top 10 customers are now 80% recovered in business transient and are on an upward trend. This indicates that we expect to maintain our performance across our portfolio and enhance loyalty penetration, which is nearing 50% of our total room revenue. Additionally, our direct channel is approaching 75% of our total production, leading to a decrease in OTA penetration. This positive trend is beneficial for our owners. The upcoming year and beyond will focus on executing our strategy. Since our commitment to reducing our real estate holdings in 2017, we have sold $3.7 billion in real estate at over 17 times earnings and invested about $3.5 billion in transformative platforms like Miraval, Two Roads, and ALG, which promise significant growth potential. This strategy has created value that some may not fully appreciate. It’s important to highlight that our approach was intentional; we wanted the capability to invest $3.5 billion in transformative acquisitions. By promptly selling our real estate portfolio and distributing cash to shareholders, we positioned ourselves to avoid issuing new stock during uncertain times. I believe we are performing exceptionally well. Regarding Irvine, we have successfully demonstrated our ability to acquire, renovate, reposition, and sell assets quickly, as illustrated by our projects in Mexico City, the Hyatt Regency Indian Wells, and Ventana. Looking back, this hotel became independent in 2014 and was closed from 2020 to 2022. Our acquisition multiple for independent hotels is about 15 times, but after a significant renovation, we foresee positioning this asset in the high single-digit range, even considering a potential renovation cost of $40 million. Adding this to the $135 million purchase price brings the cost to approximately $323,000 per key, which is exceptional for a full-service hotel in the Irvine market. Over this period, surrounding office spaces have been filled by companies that are among our top clients. This location is ideal for us and aligns perfectly with our target audience. The evolution of our company is becoming clearer, as people recognize our earnings potential; we have made substantial progress towards an asset-light model, which we will continue. The fee generation from ALG enhances this model, and our projected growth will remain the highest in the industry. ALG is gaining momentum. There are numerous initiatives in place that we will continue to pursue. We are also exploring other potential acquisitions that align with our growth strategy and strengthen our position in the high-end travel sector. We now have the highest concentration of luxury, lifestyle, and resort offerings, with over 50% of our revenue coming from leisure travelers. We are exceptionally well-prepared as we approach the upcoming year.

Got it. Very helpful. Thanks. And just one very quick follow-up on net unit growth. You mentioned delays with openings and starts, any impact on signings and where our signings at today versus 2019 levels?

We have maintained our pipeline, but signing has definitely slowed in China. People have put down their pens for now. I would also say that the signing rate for upscale and mid-scale hotels in the US has diminished mainly due to financing issues. To clarify, signings haven't necessarily been consistent. For a deal to be included in our pipeline, they must be fully financed. Our signing and letter of intent activity remains strong but is not reflected in the pipeline yet because they are not fully financed. We take a conservative approach in determining what is included in our pipeline.

Our next question comes from the line of Patrick Scholes with Truist Securities. Please go ahead.

Hi, guys. Good morning everyone. I believe you talked previously about low double-digit unit growth for your ALG pipeline. I'm wondering how does that compare versus the market? What is the overall competitive supply growth in those markets right now?

Thanks for the question. First of all we had said that we would – we expected low double-digit growth for the year. We've already met that in the first half of the year with a lot of activity underway. So I think once again, ALG is proving to be really effective at translating their integrated platform into a differentiated position when it comes to competing for new properties, including conversions. More than 50% of the total conversions we've had year-to-date are in the ALG portfolio. With respect to the marketplace, the market, frankly, is if you look at just rooms, it's dominated exclusively by owner-operators, the Spanish companies and some others that primarily operate with building and operating their own hotels. The pace of growth there is necessarily limited by both the financial capacity and the organizational capacity to continue to build hotels and to find sites that are attractive. ALG, on the other hand, is really the only scaled brand management company, which is strictly management in its business model in the world. So we feel like we've got the opportunity to do innovative deals for conversions, either single or collections of properties, where families invested in resorts but are not prepared to continue to invest behind the platform that's required to continue to be a great operator. That’s really where the opportunity set lies. We have a global footprint with a growing level of activity across our other regions, that is the Middle East and in Asia Pacific, where our teams are now spending more time together. One interesting development since we were last on the phone with you all is that we announced that an ALG executive, Javier Aguila, who was the founder of the Alua brand and ran ALG's European operations will become the new Group President for our EMEA and Southwest Asia region part, and that will take effect in a couple of months' time. There’s a lot there; Javier is an extraordinary leader, but he also understands the deal market in Europe extraordinarily well, having worked in private equity before he got into the hotel business, and he knows the all-inclusive market extraordinarily well. So, we have a remarkable benefit of having two organizations that are working well together. I think that’s just going to continue to support further growth not just in Europe and in the Americas but globally.

Our last question comes from Dori Kesten with Wells Fargo. Please go ahead.

Thanks. Good morning. Just two follow-up questions on ALG. Can you give the relationship between gross booking pace heading into a month or quarter versus the actual net package RevPAR that you achieved? I'm just trying to translate 44% pace into RevPAR?

It would be roughly the same. However, we did mention that non-pack revenue is actually growing at a higher rate than package revenue and package RevPAR. I would say that it's roughly the same with some upside from non-package revenue, that's not embedded in the net package revenue.

Similar to the total RevPAR pace that we provide and on group for example, and the translation to total revenue, which includes all of the SMB, the legacy Hyatt portfolio.

That’s an important reminder. Let me take a moment to elaborate. In the second quarter, when we examine banquet spending specifically for legacy Hyatt, banquet revenue in US managed hotels accounted for 46% of our total revenue during that period. While we often discuss RevPAR growth and rooms, there is this entire other segment that has been performing at a revenue level, with banquet spending per occupied guest room currently 4% above 2019 levels, contributing to margins exceeding 50%. Half of our total revenue, and consequently our fee-based revenue, is now driven by banquet spending. For the pace of banquets and group events from July through December, we are at 98% of 2019 levels. As a reminder, our pace into the remainder of the year at the end of July stands at 93%. Local events are at 70%, but the pace for group events is at 98%. Overall, it averages around 90%. This is a significant accomplishment, and it’s crucial to recognize that banqueting and food and beverage services are vital components of our business, and they serve as a differentiator for us and for ALG. This figure pertains specifically to groups, as the banquet dining revenue I mentioned is exclusive to group events, not including outlets and other food and beverage revenue. I would suggest it maintains a similar trend. The success of non-package revenue at ALG resorts is something we are beginning to leverage. We are assembling a team to incorporate some of their food and beverage offerings and programming across Hyatt properties. Simultaneously, we are expanding Hyatt’s well-being programming throughout our portfolio and integrating it into ALG. We believe the potential for revenue growth that is not driven by RevPAR is likely greater than our RevPAR expectations for any given period, as we continue to offer genuinely compelling experiences that our guests are willing to pay for.

Got you. Thanks. And then my last one is, now that you've owned the business for about 10 months, do you have any different views on whether distribution needs to remain part of team UVC to achieve the best results across the three businesses?

I would say that so far, we are still in a learning phase regarding Vacations, focusing on learning and appreciation. The plan they developed three years ago to transform that business has been executed very well. The margin improvements have exceeded expectations. Many of the decisions they made have proven beneficial. I have great respect for that team and recognize that our integrated approach is significant for our owners. However, I would note that this business has different characteristics than our core operations. Currently, both legacy Hyatt Hotels and the ALG portfolio have gained from our insights and are exploring ways to utilize the Vacations platform more effectively. Our goal is to continue learning and ensure we maximize the opportunities we can identify for increasing value, with no plans at this time for any non-organic transactions.

All right. Well, thank you to everyone for taking the time to join us today. Take care. 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 now disconnect.