Earnings Call Transcript - H Q1 2021

Operator, Operator

Good day, and thank you for standing by, and welcome to the Hyatt First Quarter 2021 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Noah Hoppe. Please go ahead, sir.

Noah Hoppe, Speaker

Thank you, Polly. Good morning, everyone, and thank you for joining us for Hyatt’s first quarter 2021 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 yesterday, along with 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 yesterday’s earnings release. An archive of this call will be available on our website for 90 days. With that, I’ll turn the call over to Mark.

Mark Hoplamazian, CEO

Good morning, everyone, and thank you for joining us for our first quarter 2021 earnings call. And before I get started, I want to take a moment to congratulate Noah, who you just heard from, on his newly assumed expanded position to include all Investor Relations in addition to Financial Planning and Analysis. Noah has been an essential partner in our Investor Relations effort, and now he’s formally at the head of that. So, Noah, congratulations. Thank you. And you’ll all get to know him very well in the coming months. I want to begin today by acknowledging what a difficult period it’s been since the onset of COVID-19. This global pandemic has impacted all of us in profound ways, both personally and professionally. We still see an elevated level of travel restrictions in various parts of the world as a result of new COVID-19 cases, which remain uncomfortably high, especially in areas such as India and South America. Our heart goes out to those being impacted in these hard-hit areas during this incredibly challenging period. Even in view of elevated cases, we are optimistic and believe that the road to recovery continues to become clearer and our role in that recovery is inspiring and energizing. The pent-up demand for travel is immense. And with the number of fully vaccinated potential travelers growing by the millions each day, we feel we’re at the beginning of a growing level of demand for our hotels. Personally, I can’t express how refreshing it is to see people who are now able to safely visit a loved one or travel to a location they’ve been putting off for far too long or to see business travelers who can once again connect in person with colleagues and customers, or to hear from a growing cohort of larger groups who are ready to convene again in our hotels. The environment remains dynamic, but the desire to travel and connect has not abated. We remain focused on evolving with the changing needs and expectations of travelers today. We’re listening to our guests and customers and learning how to support travel uniquely in individual markets in every geography around the globe. Our commitment is to make that first and long-awaited trip an experience that our guests can feel confident about. We spent considerable time since the onset of the pandemic, planning and positioning Hyatt for this moment and the path ahead. I will give you an update on our business and I plan to share updates on several key initiatives that are focused on the future for both our transient and group guests. I also plan to share details around our continued growth trajectory. I can confidently say that this is the most optimistic I’ve been since the onset of this pandemic. Let’s first focus on the latest trends we’re seeing. While COVID-19 continues to materially impact our business and while results vary widely by country and by purpose of visit, I’m encouraged by the sequential uptick in demand that coincides with improved travel sentiment and widening vaccine availability. Our first-quarter system-wide RevPAR declined 49% versus last year, but results varied significantly by month with RevPAR in March, finishing 54% higher than in January, roughly double the rate of growth we typically experience over this time frame in a stabilized environment. Occupancy during the first part of the quarter largely mirrored trends in the fourth quarter of last year, but we started to see elevated levels of leisure demand in February, followed by a pronounced improvement in March, driven by spring break in the United States and the easing of travel restrictions in China. While several weeks do not make a trend, we feel the spring break period in the United States provides a preview of pent-up demand for travel, which we anticipate will drive performance through our traditionally heavier leisure period in late quarter two and into quarter three. During the latter half of March, leisure transient room nights for comparable hotels surpassed levels during the same period in 2019. This was primarily driven by our resort locations, but we also experienced improvement in urban and suburban locations as well. Occupancy at our resorts in the continental United States approached 70% over a seven-day stretch in late March with significant average rate growth of 15% over 2019 levels during the same time frame. In fact, for the full month of March, our resorts in the United States experienced an increase in average rate of approximately 4% versus 2019 levels for comparable hotels. The acceleration of transient bookings for future dates also reinforces our optimism. We experienced a jump in transient bookings of over 50% for our system-wide hotels in March as compared to February, driven by significant demand for our leisure-oriented properties. Globally, transient revenue at our resorts is now pacing 20% ahead of 2019 levels over the back half of the year. Leisure transient rooms revenue accounted for approximately 45% of our total revenue base for the full year of 2019 and more recently at 67% in Q1 of 2021, and we’re confident that our brands are well-positioned to outperform in this segment as the recovery unfolds. While leisure transient trends are encouraging, we are fully aware that group and business transient demand needs to improve meaningfully to reach a full RevPAR recovery. Despite rooms revenue from these segments being just over 20% of 2019 levels in March, we remain optimistic. Business transient has shown steady week-over-week improvement since January and continues to grow through April. While visibility remains low, we’re encouraged to see future bookings for business transient guests improve to approximately 35% of 2019 levels in recent weeks. Conversations with several of our top corporate clients suggest that we will continue to see moderate progress in the near term with a more pronounced uptick expected in the fall. On the group side, bookings are also headed in the right direction. New group business booked in Q1 for all future periods finished up 55% as compared to Q4 of 2020. Further, we crossed a notable inflection point in April when net group production in the month for the year was approximately $8 million, meaning gross group revenue booked was in excess of all cancellations and reduced projections for attendees over the remainder of the year. We’re also encouraged by the number of group leads we’re receiving, which are up materially since January and gaining momentum. We’re seeing increased interest from the pharma, information technology, and banking and finance segments. It’s also notable that larger in-person corporate and association events are occurring as early as June, and we’re seeing a growing number of citywide events confirming for the fall. All of this positive activity provides optimism that these segments will continue to strengthen as more of the population is fully vaccinated and travel restrictions are lifted. As we think about the pace of recovery, China continues to serve as an interesting case study for what may occur in other areas as COVID-19 disruption subsides. We noted in our last earnings call that we anticipated the recovery in China to be swift once travel restrictions were eased. This is precisely what we experienced. With occupancy in mainland China falling to the mid-30% range during the middle of February, followed by a sharp rebound throughout March and reaching a fully recovered level of over 70% in April. Importantly, RevPAR has more than 90% recovered as rates are within 10% of 2019 levels, despite virtually no higher-rated international inbound travel into China. In summary, all these data points fuel our optimism, and it is also true that this recovery will not be linear or evenly distributed. Case counts remain high in certain parts of the world and the pace of vaccine distribution is uneven. What we do know is the desire to travel and connect is fundamental, and there is clear positive change in the mindset of travelers after vaccination. And we remain agile and ready to adapt as our guests return to our hotels. Speaking of agility, I’d like to provide a brief update on three key initiatives that are responsive to shifting needs for our transient and group customers, putting us in a position to meet the needs of travelers returning to our hotels. First, with heightened guest awareness around cleanliness and survey data that shows strong cleaning and sanitization practices improve a guest’s likelihood to travel. I’m pleased with all we’ve accomplished through our global care and cleanliness commitment. As part of this commitment, nearly all of our operating hotels globally have received an independent accreditation through the Global Biorisk Advisory Council, focused on comprehensive processes for cleaning, disinfection, and infectious disease prevention. Additionally, each hotel has a trained hygiene and well-being leader responsible for the team’s adherence to protocols and training. All this provides assurance and inspires confidence in Hyatt’s unwavering commitment to providing a clean and safe environment for our colleagues and our guests. Second, on our fourth quarter conference call, I mentioned our work on a hybrid meetings solution. I’m excited to update you on our new meetings and events platform called Together by Hyatt. This is not just a hybrid solution but a holistic approach to delivering on the essential benefits of an in-person meeting while allowing meetings to be more inclusive than ever before by expanding participation to those who could only attend remotely. We know our customers are at different points on their journey to return to events. And Together by Hyatt is designed to provide support at every step of the way. After extensive research, we’re proud to announce, we’re teaming up with Swapcard to develop a robust and innovative integration of their platform with our proprietary meeting tools, one that will simplify event planning and execution, and unify in-person and virtual attendee experiences. To further support hybrid formats, we’ve introduced a dedicated team of hybrid event experts who bring deep-rooted experience in technology and events to Hyatt and will assist meeting planners with exploring hybrid options and execution. Alongside these experts, planners will also have a dedicated support squad during the event to assist virtual speakers and attendees. Furthermore, we know wellbeing is top of mind for many right now, and we’ve incorporated the expertise of our wellness brand, Miraval, as well as Headspace into Together by Hyatt offerings providing planners with a unique opportunity to care for attendees’ wellbeing during events. Long-term, we believe hybrid formats provide an opportunity for events to be more inclusive than ever before and we look forward to collaborating with our customers on the path forward to create the most meaningful experience as possible. And third, we’ve accelerated our development of and rapidly deployed a set of digital capabilities that provide guests the ability to manage contact to a customizable level of comfort. For example, our digital check-in experience is unique in our space as it not only supports guests of ours who are not members of World of Hyatt, but among the members we serve, it recognizes their tier status and notifies elite members when they’ve been upgraded. Digital check-in also gives these members options for other room types that are available if immediate check-in is important to them. Additionally, we’re providing flexibility around guest and member housekeeping preferences. If guests prefer not to have housekeeping in their room, our digital platform makes this a simple request by way of our app. And for elite tier members, there is additional flexibility to choose between morning and afternoon housekeeping to fit their schedule and preference. It’s an example of leaning into our digital platforms to personalize the guest experience, and we will continue to build on it in the coming months to offer more purpose-suited solutions. These are just a few of the many initiatives that we have underway that respond to how the world is changing. We will remain agile and continue to put health, safety, and care at the heart of our hospitality as we welcome more and more guests back to our hotel. Turning to growth. We achieved a noteworthy milestone in Q1. We opened our 1,000th hotel, the magnificent Alila in Napa Valley and Saint Helena in California. This is an impressive milestone in our growth, as we more than doubled the number of hotels and brands in a span of about eight years. We continue to grow at an industry-leading rate with net rooms growth of 6.5% in Q1. Conversions continue to serve as a meaningful catalyst with three properties converted from other brands in Q1. Two of these conversions were into brands that more recently joined our portfolio from our Two Roads acquisition, namely JdV by Hyatt and Alila. The pace of openings has been especially swift over the past three quarters with just over 15,000 rooms entering our system during that time and consequently leaving our pipeline. We’re pleased to have kept our pipeline relatively flat at around 100,000 rooms during this period, despite the pressure of significant openings coupled with a difficult financing environment. We remain encouraged by the volume of leads and feel confident in our ability to keep our pipeline strong well into the future. One particular area that has propelled Hyatt’s industry-leading growth is the expansion of our franchise distribution. Over the past decade, our mix of franchise rooms has grown from 16% of our total rooms to over 36% today, reflecting a compound annual growth rate of 15%. As part of our long-term strategy to further maximize our growth potential, we recently launched a new global Franchise and Owner Relations organization dedicated to accelerated growth moving forward. This cross-functional team is focused on operating with excellence and revenue maximization for our franchise partners. While growth in our franchise business has been strong, we see an opportunity to accelerate this further. And as we think about resource allocation, we’re investing in our franchise business while staying highly disciplined in our overall cost profile. Finally, I want to provide a brief update on transactions before I turn it over to Joan. We are advancing negotiations for the sale of one owned hotel and actively evaluating offers for a second owned hotel. We look forward to providing details on these two transactions in the future. We’re actively evaluating potential asset acquisitions for strategic purposes. It’s important to reiterate, however, that even with potential acquisition activity, we remain steadfast and absolute in reaching our sell-down commitment of $1.5 billion by March of 2022. And for clarity, this commitment is based on net proceeds, meaning that any capital spend on acquisitions will be counted against our commitment. I’ll conclude my prepared remarks this morning by saying that we are optimistic and encouraged by strong leisure transient demand and improving sentiment around group and business travel. We continue to stay agile to be able to quickly adapt to the changing needs of our guests by staying deeply focused on cleanliness, enhancing our digital capabilities, and expanding how we support our groups coming together to meet. We are optimistic about the future and are ready to welcome all the travelers who are eager to get back to experiencing and connecting with others. I’ll now turn it over to Joan to provide additional detail on our operating results.

Joan Bottarini, CFO

Thank you, Mark, and good morning, everyone. Late yesterday, we reported a first quarter net loss attributable to Hyatt of $304 million and a diluted loss per share of $2.99. Adjusted EBITDA for the quarter was negative $20 million, with a reported system-wide RevPAR decline of approximately 49% in constant dollars compared to the first quarter of 2020 and a decline of approximately 65% compared to the first quarter of 2019 on a reported basis. In a moment, I will review the nature of the tax valuation allowance we recorded in the quarter, which significantly impacted our net loss. But first, I would like to cover our operating performance. As of March 31st, 96% of our hotels or 94% of our rooms were open. While hotel closures continue to weigh on our results, the impact is diminishing with a 160 basis-point negative impact on system-wide RevPAR as compared to 2019 reported results. System-wide comparable RevPAR was approximately $46 for the quarter and accelerated over the course of the quarter with a RevPAR of $57 in March compared to only $37 in January. The improved demand led to positive consolidated adjusted EBITDA in March as we increased fee revenue from our managed and franchised business while narrowing losses from our owned and leased hotels. Our management and franchising business continued to lead the way on our path back toward profitability with a combined adjusted EBITDA of $33 million for the quarter, with over 50% of that amount attributable to the month of March. The United States, Greater China, and the Middle East combined to generate approximately 80% of our base incentive and franchise fees for the quarter, with notable acceleration from leisure-oriented destinations in the United States during the latter half of the quarter. We are seeing continued strength in the United States and Greater China through April. The momentum we experienced in March is continuing into Q2. Having said that, certain markets are still facing travel restrictions and the timing of the full opening of borders is uncertain in many countries around the world. As for hotel margins, approximately 60% of our global managed hotels achieved positive gross operating profit during the quarter, which is largely consistent with Q4 as more full-service hotels in the United States reached profitable levels, offset by fewer hotels in Greater China due to lockdowns in January and February. Gross operating profit margins were notably strong in our resorts due to the combination of business mix and the ability to yield strong rates in those hotels. We’ve also experienced a pronounced need for incremental staffing coinciding with an inability to quickly fill those staffing needs, especially in markets where demand for room nights is high. In certain circumstances, margins were higher due to the inability to reach needed staffing levels. And when the employment situation stabilizes, we expect to see solid and sustainable productivity results. Turning to our owned and leased hotels segment. RevPAR decreased 64% compared to 2020 in constant dollars and 73% compared to 2019 in reported dollars. When excluding the impact of closed hotels, owned and leased RevPAR decreased 70% compared to 2019 in reported dollars. As with the system-wide performance, owned and leased results strengthened considerably over the quarter with comparable RevPAR improving to $63 in March from $34 in January, driven by increased leisure transient demand. Importantly, similar to Q4, our operational efforts to maximize efficiency have contributed significantly to improved margins. And as a result, we significantly narrowed the owned and leased segment adjusted EBITDA loss to $29 million in Q1 of 2021 as compared to a loss of $48 million in Q4 of 2020. In addition to improved efficiency, certain owned and leased hotels were not immediately able to fill open positions, as I touched upon earlier. We expect the employment situation to stabilize, allowing for improved staffing levels in the future and healthy productivity results. Furthermore, as we look to future quarters, I would also note the impact of the remaining closed hotels. As of March 31st, there were six owned and leased hotels, representing 17% of our owned and leased room count that remain closed. We’ve since opened two hotels in April and anticipate nearly all owned and leased hotels to be opened in the coming weeks. Majority of hotels reopening during the second quarter require higher RevPAR levels to generate incrementally better results than remaining in suspended operations. Therefore, we can continue to expect improvement in our owned and leased segment adjusted EBITDA but the rate of flow-through will be impacted as these hotels reopen and ramp up in the coming months. I want to be very clear that we expect positive lasting impacts from our operational initiatives, which we expect to improve productivity and drive expanded stabilized margins. However, results are not expected to be at the 100% or greater flow-through we experienced in the last two quarters. I’d now like to provide an update on our liquidity and cash utilization. During the first quarter, our average monthly cash utilization, excluding severance payments and other one-time costs, materially improved to $42 million per month versus an expectation of $55 million to $60 million per month based on Q4 demand levels. The improvement is largely due to stronger owned and leased results during the quarter. As a reminder, our cash utilization is primarily driven by two areas, operating and investing. Our average operating cash utilization, including interest costs, amounted to less than $30 million per month and represents a decrease of over 30% versus Q4. We anticipate our operating cash utilization will steadily improve as RevPAR strengthens. Our investing cash utilization, which fuels the growth of our brands and includes capital expenditures, remained flat versus fourth quarter spend and was lower than anticipated due to the timing of certain investments. We expect monthly investment spend to trend higher, consistent with our expected strong year of openings and increased deal activity. We anticipate average spending in this area could be double first quarter levels of about $10 million to $15 million per month for the remainder of the year. As of March 31st, our total liquidity, inclusive of cash, cash equivalents and short-term investments combined with borrowing capacity was approximately $3.1 billion, with the only near-term debt maturity being $250 million of senior notes due in the third quarter of 2021. In March, we also successfully amended our revolving credit facility to provide a waiver extension and additional flexibility, including a one-year extension option. Next, I’d like to provide a couple of important tax updates. First, we filed our 2020 U.S. tax refund claim this quarter, and we expect to receive a tax refund of approximately $250 million later this year in connection with 2020 net operating losses carried back to prior years. And second, and entirely unrelated, we recorded a $193 million non-cash valuation allowance on deferred tax assets in the first quarter. This valuation allowance was based on an accounting assessment as required by U.S. GAAP, which places significant weight on our recent pretax book losses, resulting from the impact of COVID-19 on our business and does not factor in our outlook or forward-looking projections. Furthermore, the valuation allowance we recorded has no impact on cash flows and does not limit our ability to utilize current year losses and deferred tax assets on future tax filings. In an environment of normalized pretax income levels, we anticipate these allowances will reverse, resulting in an increase to reported net income at that time. Finally, I’d like to just make a few additional comments regarding our 2021 outlook. We continue to expect adjusted SG&A to be approximately $240 million, excluding any bad debt expense. Our adjusted SG&A guidance is inclusive of the investments in our global Franchise and Owner Relations organization that Mark touched upon earlier. Additionally, we continue to expect capital expenditures to be approximately $110 million for 2021 and have updated our net rooms growth guidance to be greater than 5% for the year. I will conclude my prepared remarks by saying that we are pleased with the improved levels of demand that have enabled us to significantly narrow our adjusted EBITDA loss and improve our operating cash utilization. Our management and franchise business continues to power us closer to adjusted EBITDA breakeven levels, while highly disciplined operational execution has fueled excellent owned and leased hotel flow-through. We remain in a strong cash position. We’re on pace for another solid year of net rooms growth and believe we are well-positioned to maximize performance during recovery and beyond. Thank you. And with that, I’ll turn it back to Polly for Q&A.

Operator, Operator

Your first question comes from Stephen Grambling with Goldman Sachs.

Stephen Grambling, Analyst

I was hoping that perhaps you could frame the productivity impacts on owned and leased hotels, perhaps where demand might need to get back to recover to prior levels of EBITDA. And within that, can you just remind us of maybe some of the puts and takes and/or headwinds from Miraval that impacted your 2019 EBITDA, and what trends look like in some of those assets within the context of this strong leisure environment? Thanks.

Joan Bottarini, CFO

Sure, Stephen. Let me start. Definitely exceptional owned and lease flow-through over the past couple of quarters, led by some of the what I would call contingency measures that we put in place, but also actions that have long-lasting impacts into the future. So, we’ve gone through some of those, but efficiency measures that we’ve taken, enhanced digital capabilities, leaning into our F&B options that are the most profitable and importantly meeting customer needs at this time. Headwinds, you mentioned headwinds over the next several quarters, and as I mentioned in my prepared remarks, with respect to expectations for flow-through. The labor situation, we expect will improve and we’ll get back to more sustainable productivity measures. Properties that require higher RevPAR levels to breakeven have recently opened or are opening up shortly. And that would be specifically properties in our European and urban markets. So, those will be ramping up, and those will be some of the headwinds that we’ll experience. And we also have continued to receive some subsidies in international markets as well. So, that’s helped us in the current quarter and some of the headwinds that we’ll see into the future. But, we remain confident that we’ll achieve margin expansion as top line stabilizes over time. And a good portion of our efficiency measures will lead to sustainable improvements into the future. We would estimate that that could relate to about 100 to 300 basis points higher based on our modeling of those efficiencies into the future on a stabilized basis.

Mark Hoplamazian, CEO

And so, Stephen, thanks for the questions. As to Miraval, the dynamics in Miraval were impacted last year by the conclusion of the renovation and construction of Miraval Berkshires, which opened in the second quarter of last year. It was overall a challenging year last year for all of our hotels, including Miraval, primarily due to travel restrictions and also social distancing issues. In the first quarter, we likewise had a number of restrictions that were imposed by local law with respect to social distancing and travel restrictions as well out of certain feeder markets that did impact our overall results. By way of reminder, a majority of the revenues at our Miraval resorts come from programming revenue. That is treatments and other programs that people experience on property. So, the fact that that was the dimension of the business that was impacted meant a significant impact in the first quarter. We’ve seen those restrictions start to be loosened up. The bookings that we’re seeing into the summer are extremely strong, and we think that we will see a significant pickup over the summer months into the fall. And assuming that we continue to go down the path of elevated levels of vaccination and easing of those other travel restrictions or capacity constraints, we expect to finish the year very strong. We’re well-positioned through the three resorts that we’ve got, one in Tucson, as you know, in Austin, and in the Berkshires in Lenox, Massachusetts. The only other point that I would add with respect to first quarter dynamics is that, as you’ll remember, the state of Texas essentially shut down for some period of time because of their electrical grid going down. And that, of course, affected our resort in Austin, primarily because people literally could not get there over the roads that were blocked or too icy to drive on, and of course, the electricity needed to be restored. So, those are some factors that I would point to that maybe help to contextualize what happened last year into this year.

Stephen Grambling, Analyst

That’s helpful, and perhaps as a follow-up, you mentioned some strategic asset acquisitions that you might be considering. Can you help us understand where you're looking, if there are any gaps in the portfolio, and how you plan to deploy capital strategically?

Mark Hoplamazian, CEO

Yes. If we go back to late 2018 when we acquired Two Roads, it's worth noting that Hyatt's business was approximately a two-thirds to one-third mix of business and leisure travel, primarily in the U.S. Globally, about 45% of our total revenue in 2018 and 2019 came from leisure transient travel. By contrast, Two Roads had a two-thirds leisure guest base, which significantly advanced our focus on the leisure and vacation segment. As we explore meaningful opportunities, we aim to offer compelling resort alternatives for our guests, which is crucial not only for benefits in the World of Hyatt but also because our higher-end customer base is consistently eager to travel more frequently. Recent booking data supports this. We believe we are in a position to focus on this potential opportunity for capital deployment while staying committed to generating our net proceeds. Additionally, any future acquisitions we pursue will prioritize arrangements that allow for long-term management or franchise opportunities.

Operator, Operator

And your next question comes from the line of Thomas Allen with Morgan Stanley.

Thomas Allen, Analyst

Hey. So, one of your peers suggested this morning that they saw a path to getting back to about 70% of 2019 RevPAR by year-end. Do you think that’s a fair assessment? Or any more color would be helpful.

Mark Hoplamazian, CEO

Yes. I would really like to know where to find that crystal ball, so if you come across any information, please share it with us. What I can tell you is that we are observing steady improvement month over month, which has been particularly noticeable in March and April, as mentioned earlier. It’s theoretically possible to achieve certain outcomes, but it's unlikely because international inbound travel affecting major cities will still be a factor. The timing of when international travel restrictions are lifted is crucial. Moreover, there are indications that some companies plan to have their employees return to the office soon, which will impact business travel. These are the main factors to consider. Based on our current projections, I can say that we expect to see a significant increase in our expected RevPAR levels by the end of the year, assuming no major case surges arise. While I can't guarantee it will reach 70% or more, it will certainly be much higher than our current situation.

Operator, Operator

And your next question comes from the line of Shaun Kelley with Bank of America.

Shaun Kelley, Analyst

Mark, I think, in the prepared remarks, you mentioned a little bit about, obviously, you’re looking on the acquisition trail, but you’re also mentioned sort of going back to the capital recycling plan a little bit. Could you just talk about some of the criteria within the portfolio that you’re looking for? And just the broader environment right now on the disposition side, what might make it attractive, what do you think is going to work for potential buyers out there?

Mark Hoplamazian, CEO

Yes, I want to share that we are currently evaluating two hotel deals that are progressing. They’re not ready for a detailed update at this time. However, they are located in attractive resort destinations, and the valuations we’re seeing through interest and negotiations are at or above our pre-pandemic estimates, which is encouraging. These specific assets have unique attributes and present opportunities for us to generate proceeds from their sale. Additionally, a new owner could invest further in these properties, which include developable land, potentially expanding operations and enhancing our fee base in the future. Overall, I’m optimistic as I see an increasing interest in asset deals, meaning we’re considering selling additional assets and are actively looking into what might come next. The valuations look positive, and while the financing market for construction remains challenging, interest rates are still low. Thus, the types of assets we pursue will likely follow the recovery path, making it understandable that resorts are currently at the forefront.

Operator, Operator

And your next question comes from the line of Michael Bellisario with Baird.

Michael Bellisario, Analyst

I have a question about the development pipeline. Are you currently willing to invest more key money into deals? Are any of your development partners approaching you to become joint venture partners to help complete a project?

Mark Hoplamazian, CEO

Yes. We do use key money investments in relation to development in general. This has been true in the past, is true now, and will continue to be in the future. Regarding capital formation, we are beginning to see initial signs of regional banks, not just major money center banks, making proposals that may align more closely with a debt structure suitable for developers. This has significantly affected the select service segment and related sectors. The main impact for us is within select service development in the United States, stemming from the challenge of securing sufficient senior debt at a reasonable rate to make the capital stack feasible for developers. We are exploring ways to support this. We have been effective in providing tailored and innovative financing solutions, sometimes as mezzanine debt or preferred capital. Over the past two years, we have offered preferred capital to some of our partners who developed Hyatt Place and Hyatt House hotels. We are considering how to create opportunities that involve more leverage—not financial leverage, but impactful collaboration—potentially bringing together capital with third parties to offer additional short-term construction financing, especially since we have a considerable number of projects at the LOI stage or signed, which we do not include in our pipeline due to the lack of financing to commence construction. I think this situation will improve over the summer, but we are not quite there yet. We are closely monitoring this issue as it is more related to the debt capital stack than equity. The equity is available; the challenge lies in establishing a debt stack that makes it viable for developers to begin construction.

Operator, Operator

Your next question comes from the line of Chad Beynon with Macquarie.

Chad Beynon, Analyst

Mark, last quarter, you talked a lot about this hybrid meeting solution that you are coming up with, which I think could differentiate you guys from some of your competitors in urban markets. And I’m just wondering how city planners and some of your partners have reacted to that, and if you still believe, based on everything you're collecting from your conversations with corporates, if this is still going to be a meaningful part of your strategy in the next couple of years?

Mark Hoplamazian, CEO

Yes, it’s going to be a significant aspect of our group strategy. I’m excited to share that we have two major meetings scheduled, one in June and another in July, both with different pharmaceutical clients. These meetings involve approximately 800 to 1,000 participants, depending on the specific event. The participants will be spread across different hotels; one event will use 10 of our hotels, while the other will include up to 27 hotels nationwide. They are organizing a linked multi-local hybrid event, with around 30 attendees at each hotel and additional remote participants joining digitally. I believe this format will effectively facilitate in-person connection for those able to attend. I spoke with the lead partner of a professional services firm yesterday about this model, and they are considering hosting a partner meeting for 1,500 people in the fourth quarter. They had not thought of using such a format before, and this may lead to further opportunities. I’ll need to discuss potential commissions with our sales team, but the key takeaway is that we’re encouraging a different mindset on how to hold meetings that allow a significant number of participants to attend in person. Additionally, the feedback on our well-being practices has been extremely positive. The stress and pressure of bringing employees back to the office is considerable, and many companies are reluctant to make those decisions. They want to foster culture and connectivity within their firms, and initiatives that support the mental well-being of their employees are very important to them. I believe this integrated approach will bring significant benefits. We’ve just launched Together by Hyatt a week ago, and the initial conversations with our corporate customers have been very encouraging.

Operator, Operator

And your next question comes from the line of David Katz with Jefferies.

David Katz, Analyst

I wanted to go back to the notion of above hotel costs and fees. It was a point of discussion much earlier. Obviously, there’s been some flexibility and so forth. Where are you with respect to that? And should we expect you to come out of this changed in some way?

Joan Bottarini, CFO

Yes, David. Last year, we decided to incur certain costs that we opted not to pass on to our owners due to the significant disruption they faced. This year, as we focus on recovery, our goal has always been to keep track of the costs we've incurred and ensure we can fully recover those from our owners. That's our current position. You might notice some discrepancies in timing from quarter to quarter regarding the expenses we incur and the revenue we receive in reimbursement. However, we fully intend to recover all the costs we are currently facing from our owners in the future.

David Katz, Analyst

If I can just follow that up from a strategic perspective, in terms of structuring these differently or perhaps with greater flexibility or specificity going forward. Have there been any initiatives to that end?

Mark Hoplamazian, CEO

Absolutely, David. We launched a significant initiative last year to completely revamp our cost recovery structure in a record amount of time. We informed all of our owners about this and implemented it on January 1st of this year. This model pertains to our above property hotel services. The key change was shifting several fixed charges in the past to variable charges moving forward. This structural shift reflected the economics we experienced last year since we made strategic spending decisions for our owners' benefit, which resulted in a $45 million charge in the fourth quarter. We see an opportunity to recover costs more effectively in alignment with our owners' interests. Additionally, we’ve pinpointed areas in the digital space to implement a pay-for-performance structure, which has shown promising results since the beginning of this year. We believe this will help us enhance our digital efforts through new fees in the revised structure. We collaborated extensively with our owners on this initiative, working closely with several of our largest owners to design it over a period of about 12 weeks last year. It was a significant effort, but we are confident in our current position and do not anticipate needing to make any substantial changes soon.

Operator, Operator

And your final question comes from the line of Vince Ciepiel with Cleveland Research.

Vince Ciepiel, Analyst

It sounded like you mentioned some positive trends on group bookings earlier in the call. I’m curious if you could provide updated pace for the second half and for 2022 and how you think those are coming together?

Mark Hoplamazian, CEO

Sure. To start, group revenue for the first quarter that we reported was almost 90% lower than 2019 levels for the Americas hotels we manage. When looking globally, it is likely around 80% off. The main difference is in group business in China, which was affected by lockdowns but is now vibrant and robust as corporations have been actively holding meetings. The pace for the rest of the year is around 60% down for our managed Americas hotels. As we look to next year, we are tracking in the mid-teens, with about 50% of our revenue booked so far. We are witnessing a significant increase in lead generation, which has accelerated greatly over the past five to six weeks. We're beginning to see this increase and are focused on how much of it will convert into actual revenue. In my prepared remarks, I noted that we reached a turning point in April when gross bookings surpassed cancellations and lowered attendee expectations for the remainder of this year. This is significant because many pace figures from the previous year are now irrelevant or misleading, as accurate tracking requires understanding future cancellations or attendance reductions. We are reaching a point where we can provide more reliable pace estimates moving forward, coinciding with exceptionally strong lead generation.

Vince Ciepiel, Analyst

That’s helpful. And as a follow-up to that, I know food and beverage is a large chunk of the business and a focus for you guys over the years. Curious how that is developing for the second half and into next year, how much of that’s levered to recovery in group? And I think you alluded to some changes in F&B to help improve profitability. Curious kind of what specifically those were?

Mark Hoplamazian, CEO

Yes. The changes we mentioned primarily involved restaurants that we either closed or significantly modified. We shifted towards a self-service model for our high-end markets, food markets, and hotels that sometimes offer breakfast. Instead of having a full a la carte breakfast menu in many hotels, we are transitioning to a grab-and-go operation, allowing guests to finish cooking options like breakfast burritos or muffins on site. Our oven provides a great platform for delivering high-quality breakfast items. This contributes to the savings we discussed. In China, we are experiencing strong demand for restaurants, as people are eager to return to entertaining and hosting banquets. We are also seeing substantial corporate demand for meetings and high-end events. The pace of our events for the remainder of the year aligns with room bookings. However, we expect that the ability to serve large groups on our properties will increase from the end of this year into next year. Therefore, we might not fully capitalize on the food and beverage revenue opportunity until next year, mainly due to a lower number of attendees on-site at times. There may still be some lingering spacing and capacity requirements in indoor settings that could persist through the end of the year. This is our perspective on the situation.

Operator, Operator

And there are no further audio questions. Are there any closing remarks?

Mark Hoplamazian, CEO

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

Operator, Operator

Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect.