Earnings Call
Hyatt Hotels Corp (H)
Earnings Call Transcript - H Q4 2022
Operator, Operator
Good morning. And welcome to the Hyatt Fourth Quarter and Full Year 2022 Earnings Call. After the speakers’ remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Noah Hoppe, Senior Vice President, Investor Relations. Thank you. Please go ahead.
Noah Hoppe, Senior Vice President, Investor Relations
Thank you, and good morning, everyone. Thank you for joining us for Hyatt's fourth quarter and full year 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 files. 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 Web site 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 Web site for 90 days. And with that, I'll turn the call over to Mark.
Mark Hoplamazian, President and CEO
Thank you, Noah. Good morning, everyone, and welcome to Hyatt's fourth quarter and full year 2022 earnings call. I'd like to begin today by thanking all 189,000 members of our Hyatt family for their remarkable contributions to a truly transformative year. We successfully navigated a rapid RevPAR recovery that was unlike anything we've previously experienced. We've successfully integrated Apple Leisure Group and made meaningful progress toward our asset disposition commitment. We also led the industry in organic growth for the sixth consecutive year. These achievements are a direct result of the extraordinary efforts and thoughtful execution by our Hyatt family members, and I'm honored to lead such an outstanding team who is guided by our purpose to care for people so they can be their best. Our financial results also reflect the considerable achievements of our team. We concluded the year with another record-breaking quarter, bringing our full year adjusted EBITDA to $908 million plus $94 million of net deferrals and $63 million of net finance contracts, with the sum of these three numbers more than 40% above the adjusted EBITDA we generated in 2019. The record level of earnings and free cash flow that we achieved in 2022 is primarily the result of successfully executing on two key elements of our strategy, optimizing capital deployment and investing in new growth platforms. This strategy was first outlined approximately five years ago and included a commitment to realize proceeds from the sale of owned real estate assets and prioritize the reinvestment of those proceeds into asset light growth platforms to accelerate our fee-based earnings, broaden our portfolio and enhance guest connectivity to Hyatt. The execution of this strategy has been nothing short of remarkable. Over the past five years, we realized proceeds of approximately $3.8 billion from the sale of owned hotel real estate, net of hotel acquisitions, and we invested approximately $3.6 billion to acquire three platforms: Miraval, 2 Roads Hospitality and Apple Leisure Group. And during this five-year period, we also returned $2 billion to our shareholders through common stock share repurchases and dividends. The comparison of the assets that we sold versus the platforms that we acquired is notable for a few reasons. First, the earnings contribution in 2022 from our acquisitions was nearly double the earnings that we lost from our asset dispositions. More specifically, the implied adjusted EBITDA multiple from the $3.8 billion of real estate that was sold was over 16 times, while the earnings multiple applicable to the $3.6 billion in platforms that we acquired was approximately 8 times. Second, the capital investment needed to maintain the assets that we sold compared to the platforms that we acquired is significantly different. The owned real estate that we sold was estimated to need on a run rate basis approximately $130 million in capital expenditures per year while by comparison, the three platforms that we acquired, which are predominantly asset light, collectively needed only $40 million of capital expenditures in 2022. So not only do we nearly double the earnings profile but we also reduced the run rate of our capital expenditures by approximately $90 million per year. The success of this strategy is reflected in both the transformation of our cash flow from operations and our capital expenditures, which resulted in free cash flow of $473 million, a number that is nearly 50% higher than any previous year in Hyatt's history. It's important to also note that this record free cash flow was achieved in 2022, while RevPAR was below 2019 levels and includes approximately $55 million in cash taxes paid related to our real estate dispositions. Beyond the impressive transformation and free cash flow, our strategy is also greatly accelerated both our fee-based earnings and our growth. Let me walk you through a few areas to highlight this. First, for each of the 19 hotels that we've sold in the past five years, we've maintained a long-term management or franchise agreement. As a result, we've retained approximately $40 million in run rate fees per year, representing a durable future fee stream, and this amount is not included in the asset sale multiple valuation. Second, we've been successful in integrating and scaling the platforms we acquired. As a result, these platforms are 17% larger today as compared to when we acquired them and have a significant pipeline of 18,000 rooms to fuel further growth for years to come. Third, these platforms have significantly elevated the quality of our portfolio, helping us to better serve the high-end customer. In only five years, we doubled the number of luxury rooms, tripled the number of resorts and quadrupled the number of lifestyle rooms in our portfolio. And we now have more luxury branded hotels in resort locations than any other hospitality company in the world. As a result of our transformed portfolio, which is largely due to the platforms we acquired, we've been able to drive increased loyalty from our guests as evidenced by World of Hyatt membership increasing from 10 million members to 36 million members during the past five years. Looking ahead, I'm excited about our continued momentum. We have $1.3 billion remaining under our current real estate disposition commitment, and we are intent on fulfilling this commitment by the end of 2024. Additionally, we will continue to seek out compelling asset light platforms that expand our portfolio and have embedded growth while providing unique experiences for our guests. A prime illustration of our strategy in action is our recent acquisition of Dream Hotel Group, a leading lifestyle portfolio focused on vibrant dining and nightlife experiences that we closed on February 2nd. This deal builds upon Hyatt's industry-leading portfolio of higher-end lifestyle brands, adding 12 hotels and more than 1,700 rooms and 24 signed long-term management agreements that we ultimately expect will grow Hyatt's lifestyle room count by more than 10%. This asset light acquisition broadens our reach into a younger demographic, provides a differentiated experience for our guests, and expands our presence in New York City by 30%. In summary, I'm incredibly proud of how we've executed on our strategy over the past five years and look forward to continuing this momentum into the future. Turning to our growth, I'm thrilled to report full year net rooms growth of 6.7%, which was driven by a record level of organic hotel openings. Despite a challenging supply chain and labor environment, we were able to add 120 hotels to our portfolio, 20% more than our previous record year in 2021, with luxury, lifestyle or resort properties composing 66% of the rooms that we added. We've been expanding in these areas at an impressive rate, as I mentioned a moment ago, with nearly 135,000 luxury lifestyle and resort rooms now part of our portfolio, a number that is larger than the entirety of our portfolio just a decade ago. We also feel great about our prospects for our future growth. Our pipeline ended the year at an all-time high of 117,000 rooms, bolstered by a robust year of signings that more than offset the impressive pace of openings. Moving to our latest business trends. Comparable system wide RevPAR was up 2.4% compared to 2019 levels in the fourth quarter or up 6.6% when excluding Greater China. Rates remained strong, up 14% above 2019 levels during the quarter, while occupancy continued to recover. From a segmentation perspective, we reached another milestone in our recovery with system wide group revenue fully recovered to 2019 levels in the quarter, a testament to our association and corporate customers prioritizing in-person interaction and connection. Leisure transient revenue continued to sustain strong momentum with a durable guest base that continues to place a high importance on travel, which resulted in being 14% ahead of 2019 levels in the fourth quarter, while business transient was 18% below 2019 levels but showed incremental improvement from the previous quarter. From a geographic perspective, the recovery continued to be broad with all key geographies outside of Asia Pacific trending nicely ahead of 2019 levels. Results in our EMEA and Southwest Asia region were notably strong with RevPAR 20% ahead of 2019 levels, driven in part by the World Cup in Qatar and strong leisure demand across Europe. In the Americas, RevPAR was 6% ahead of 2019 levels, driven by our luxury brands, which were 23% ahead of 2019. Lastly, Asia Pacific finished the quarter at 22% below 2019 levels, driven by a decline in performance from Greater China. Our ALG resorts had another exceptional quarter with net package RevPAR up 24% compared to 2019 levels for the same set of properties managed by ALG in the Americas. We also reached a notable integration milestone during the quarter with more than 20 ALG resorts across Europe now bookable through Hyatt channels. World of Hyatt members can now earn and redeem points at the majority of ALG resorts worldwide. As we look to 2023, both our legacy Hyatt business and ALG resorts continue to perform exceptionally well. We have yet to see signs of slowing. In fact, it's quite the contrary. In January, system wide RevPAR increased 65% compared to last year with the growth aided by easier comparisons due to Omicron last year. Additionally, net package RevPAR at our ALG resorts was up 42%. As we look at future bookings, group revenue for the full year is pacing 21% ahead of last year at our Americas full service managed properties and gross package revenue at our comparable ALG resorts for the full year is pacing 30% ahead of last year. Lastly, we are encouraged by the significant increase in actualized RevPAR and future bookings in January from our Asia Pacific region. As a reminder, in 2022, the adjusted EBITDA contribution from Asia Pacific was down more than 50% relative to 2019 despite being 30% larger in room count. As RevPAR rapidly recovers in the region, we anticipate it will serve as a significant tailwind. In summary, as we assess overall business trends, we maintain our optimistic outlook. Future bookings remain strong and performance continues to exceed expectations. Conversations with corporate customers continue to suggest further recovery is ahead for group and business transient travel and leisure transient shows no signs of slowing as evidenced by the strong bookings at our resorts. Finally, a quick update on our real estate transactions before turning it over to John. We are pleased with investor interest and engagement on the asset we have been marketing since last quarter and are happy to share that we launched the marketing process for an additional luxury asset this week. We remain focused on realizing the most attractive valuations and securing durable long-term management or franchise agreements, and we remain highly confident in achieving our $2 billion sell-down commitment by the end of 2024. In closing, I would like to again express my gratitude to the Hyatt family for their hard work and contributions to a transformative year. Our strong free cash flow and asset light earnings mix are evidence of consistent execution of our strategy. Looking ahead, I am confident in our ability to continue to drive success and deliver value to our shareholders. Joan will now provide more details on our operating results.
Joan Bottarini, CFO
Thanks, Mark, and good morning, everyone. My commentary today will cover key drivers of our performance, including our strong cash flow, a review of 2022 capital allocation highlights and expectations I can share for 2023. This morning, we reported fourth quarter net income attributable to Hyatt of $294 million and diluted earnings per share of $2.69. I will review the nature of the tax adjustment we recorded in the quarter, which significantly benefited our net income shortly. But first, I'd like to cover our performance this quarter. As Mark mentioned, this was a record fourth quarter with adjusted EBITDA of $232 million, net deferrals of $28 million and net finance contracts of $15 million. The fourth quarter completed a transformative year for Hyatt, and as a result, we generated a record level of fees in the quarter with total management franchise, license and other fees of $226 million, an increase of 40% from the fourth quarter of 2019, driven by the continued success of our asset light transformation. It's notable that properties that have joined our system in the last five years, including 2 Roads and ALG contributed 34% of our total fees in the quarter. Turning to our legacy Hyatt results. Adjusted EBITDA was $189 million for the quarter, which is approximately 12% higher than 2019, adjusted for currency and the net impact of transactions. Our management and franchising business has benefited from our larger system size and more fully recovered RevPAR environment. As Mark mentioned, system-wide RevPAR was 2.4% above 2019 or up 6.6% when excluding Greater China, powered by strong rates with leisure transient average rate up 19% and group average rate up 15% compared to 2019 levels. Additionally, our owned and leased segment generated $88 million in adjusted EBITDA for the quarter, down 11% to 2019 on a reported basis while up 10% to 2019 when adjusted for the net impact of transactions. Comparable owned and leased margins were 27.9% in the quarter, up 330 basis points to 2019 levels for the same set of properties, reflecting growth in average rate of 11% compared to 2019 and another quarter of strong operational execution. Turning to ALG. The performance of the segment once again exceeded our expectations. Adjusted EBITDA was $43 million, net deferrals were $28 million, and net finance contracts were $15 million. ALG adjusted EBITDA included a noncash benefit in the quarter of $23 million related to expired travel credits. Free cash flow generated by ALG continues to be strong and three key areas drive financial results. First, net package RevPAR for the same set of ALG properties in the Americas was up 24% compared to 2019, reflecting strong net package ADR growth of 30%. Total fees were $40 million in the quarter, reflecting the strong RevPAR environment. Second, approximately 8,300 membership contracts were signed for ALG's Unlimited Vacation Club in the quarter, exceeding 2019 levels by 29%. UVC now has 131,000 active members, marking another year of impressive expansion. Third, ALG Vacations continues to generate solid results driven by a transformed business model and strong unit pricing. In the quarter, there were approximately 563,000 guest departures and the business realized a margin of 13% when excluding the impact from the expired travel credits. As expected, the adjusted EBITDA contribution from ALG vacations was lower in the fourth quarter as compared to prior quarters due to typical seasonality. As we look to 2023, we are optimistic about the first quarter given the trends in January, the expected continued strength of leisure travel demand, favorable pricing environment and the airlift that remains above 2019 levels for key Americas destinations. I'd also like to provide an update on our strong cash and liquidity position. As of December 31st, our total liquidity of $2.6 billion included $1.1 billion of cash, cash equivalents and short-term investments, and approximately $1.5 billion in borrowing capacity on our resolving credit facility. It's notable that our liquidity remains similar to what we reported a year ago, even while reducing our debt by approximately $880 million and repurchasing Class A shares of $369 million during the year. These actions are clear evidence of our commitment to our investment grade profile and a testament to the strong free cash flow generation of our business in addition to the successful execution of our asset sales. Our balance sheet is strong, and we returned to a full investment grade rating with all three agencies. I want to take a moment to provide additional details on our cash flow. The success of our strategy is reflected in both the transformation of our cash flow from operations, which was $674 million in 2022, approximately 70% higher than 2019 and our capital expenditures, which were $201 million, approximately 46% lower than 2019. This resulted in an impressive free cash flow of $473 million for the year. Before I move to guidance, I'd like to provide an important tax update. As a reminder, in 2021, we entered into a three-year cumulative loss position for our US operations, which required us to record a $215 million noncash valuation allowance against our deferred tax assets. In the fourth quarter of 2022, the net tax benefit for income taxes in the consolidated statement of income included a $250 million adjustment representing the reversal of this previous expense now that both recent and future expected pretax US income levels provide sufficient evidence that our US deferred tax assets are likely to be realized. Lastly, and most importantly, both of these adjustments had zero cash impact. Finally, I'd like to provide a few comments on our current outlook for 2023. We expect full year 2023 system-wide RevPAR growth in the range of 10% to 15% compared to 2022 on a constant currency basis. We expect larger growth rates over the first half of the year in the mid-20% range. And while visibility into the back half of the year is limited, we expect RevPAR growth in the second half of the year to be in the mid-single digits. Continued recovery in Asia Pacific and ongoing improvements in group and business transient demand serve as key contributors to our RevPAR growth expectations over the back half of the year. We're confident that we'll see another robust year of net rooms growth, driven by a strong pipeline and our ability to execute on conversion opportunities. Our full year net rooms growth outlook for 2023 is approximately 6%. We expect adjusted SG&A to be in the approximate range of $480 million to $490 million in 2023, inclusive of approximately $15 million of one-time integration expenses associated with carryover projects from 2022 for ALG and the acquisition of Dream Hotel Group. Our SG&A guidance is inclusive of incremental run rate SG&A related to the Dream Hotel acquisition as well as other strategic investments to strengthen our competitive positioning. We expect capital expenditures to be approximately $200 million. This is inclusive of ALG as well as the transformative investment into the Hyatt Regency Irvine, which accounts for nearly one quarter of 2023 capital expenditures. As a reminder, the Hyatt Regency Irvine acquisition last year and the planned capital investment provides us strategic distribution in an important market. We look forward to welcoming guests for a spectacular reopening this fall. Lastly, by way of reminder, I want to highlight a couple of one-time items we commented on during the course of 2022 that will not reoccur in 2023. First, the adjusted EBITDA contribution of approximately $34 million from owned hotels and approximately $4 million from joint ventures sold in 2022 will not reoccur in 2023. Further details on this can be found on Schedule A11 in the earnings release, including a breakdown of the adjusted EBITDA contribution for sold hotels by quarter in 2022. Second, ALG revenue and adjusted EBITDA benefited in 2022 by approximately $4 million in the third quarter and approximately $23 million in the fourth quarter, primarily from the expiration of unredeemed pandemic-related travel credits. I will conclude my prepared remarks by saying we are very pleased with our 2022 operating and free cash flow results. We delivered RevPAR growth exceeding 2019 levels over the back half of the year, drove a record level of fees and free cash flow, expanded our development pipeline and delivered industry-leading organic net rooms growth for the sixth consecutive year. We're proud of the execution of our long-term strategy that has enabled us to accelerate our asset light growth while at the same time reducing leverage and returning capital to shareholders. As our guidance for 2023 implies, we believe our momentum is set to continue this year. Early results are off to a great start. Our Asia Pacific region is recovering quickly, and we expect it will serve as a tailwind throughout the year. Our differentiated model positions us uniquely to continue to take advantage of the recovery in travel in addition to providing a compelling value proposition for owners looking to join the Hyatt family of brands. And one final update to share. We will be hosting our Investor Day on May 11th of this year, at Secret Moshe and Secrets Impressions Moshe, two fantastic luxury all-inclusive properties in PlayaDelKarma in Mexico, where we plan to expand on many of these important topics. Further details will be shared in the coming weeks. Thank you. And with that, I'll turn it back to our operator for Q&A.
Operator, Operator
Our first question comes from Patrick Scholes from Truist Securities.
Patrick Scholes, Analyst
I’m receiving several questions from investors about why you haven't provided EPS or EBITDA guidance, especially since many of your peers have done so.
Joan Bottarini, CFO
Well, Patrick, I'll start by outlining how our RevPAR guidance aligns with expectations for 2023. If you consider the $1.65 billion we generated in adjusted EBITDA, after accounting for net deferrals and net demand contracts, and then subtract the one-time items mentioned in my prepared remarks, we arrive at a baseline of around $1 billion. We’ve found that the EBITDA sensitivity we discussed in 2019 remains relevant, indicating that a certain level of RevPAR growth will lead to an increase of about $10 million to $15 million in EBITDA for the legacy Hyatt business. Taking the midpoint of our RevPAR range and applying this sensitivity will help you model expectations for 2023. Regarding ALG, we saw exceptional performance from this business in 2022, reaching all-time highs in package RevPAR and pricing related to our membership club sales and package prices. For this year, we anticipate similar trends in net package RevPAR between the first and second halves, largely due to easier comparisons in the first part of the year. The second half will also see a moderated growth rate for net package RevPAR. As for the vacations business, in our second quarter earnings release last year, we pointed out the typical seasonal activity levels, which usually occur in the third and fourth quarters. The third quarter surpassed our expectations, indicating significant pent-up demand from the first half of 2022. However, we did experience a seasonal drop in contributions from this area in the fourth quarter of 2022. Looking ahead, we expect to see a return to more normal seasonal levels for vacations in the latter half of this year. Additionally, we typically need to invest in the business as we approach the high season. These insights should help clarify our thinking regarding the dynamics between the first and second halves of the year, as well as our expectations for ALG in 2023.
Mark Hoplamazian, President and CEO
I would like to mention a couple of quick points, Patrick. First, as booking windows are extending but still relatively short, we anticipate gaining much more visibility as we move through the first quarter, which will be a significant quarter compared to last year. We are seeing a strong pace, with resorts and ALG up 30%. Legacy Hyatt resorts’ bookings in January increased by 20%. Leisure shows no signs of slowing down at all. For group bookings, I noted a 21% pace moving into the year, and we are very confident in that. Last year's pick-up involved consistently exceeding booked rooms, and none of that is reflected in that base number. We are also noticing some weaknesses in three key cities: Chicago, Atlanta, and New Orleans, where citywide patterns are quite weak. However, despite this, we are maintaining a strong pace overall. Lastly, it’s important to note that the overall context is a predicted slowdown in the second half due to macroeconomic conditions. Our sentiment is that while credit spreads are compressing, rates are likely to stay relatively high for now. We are experiencing strong dynamics across our business lines, including business transient, and we expect to have significantly better visibility after Q1 as we head into Q2.
Patrick Scholes, Analyst
That's great color there, a lot to digest. Just a quick follow-up question on the Hyatt Irvine. Would you consider that hotel sort of a temporary ownership until it's sort of up and running and stabilized and that would be something you'd consider selling with a long-term franchise or management contract?
Mark Hoplamazian, President and CEO
Yes, that's the intention. When we evaluated the acquisition, we fully considered the renovation program that we are currently implementing. Our goal is to take the hotel to market as soon as we can demonstrate what we expect will be extraordinary demand.
Operator, Operator
Our next question comes from Stephen Grambling from Morgan Stanley.
Stephen Grambling, Analyst
From a strategic standpoint, you completed a number of acquisitions moving asset light. Are we in digestion mode at this point, are there still other areas that you would say you want to fill? And given some of your peers have made a bigger push down chain scales and really even doubled down, in some cases, on limited service and more franchise agreements. How are you thinking about franchise mix and limited service as a potential area of growth longer term?
Mark Hoplamazian, President and CEO
A couple of things. First, our integration process with ALG has gone exceptionally well. The cultural alignment between the two companies has enabled us to progress rapidly. We have largely achieved everything we set out to complete in 2022, although there are a few carryover items mainly centered on finalizing some cyber and control environment topics. We feel very positive about our current status, but we intend to conduct additional work in these areas. Additionally, much of our spending in 2023 will focus on enhancing capabilities, particularly in digital. The primary investment for our integration spending in 2023 involves digital investments aimed at improving the World of Hyatt experience for members staying at ALG properties. This is particularly relevant since we launched World of Hyatt in May. We concluded the year with a 17% room penetration for World of Hyatt members, which is remarkable in such a short period, and we registered over 315,000 new World of Hyatt members at ALG properties. The World of Hyatt performance for ALG properties is on an impressive upward trajectory, and we are just starting to capitalize on that. Strengthening this aspect further will help us improve distribution mix and reduce distribution costs. I wanted to provide you with some insight into our progress in the integration process. Dream is a new addition for us. We have brought in significant resources, including personnel and capabilities; they have an outstanding team, particularly in food and beverage planning, programming, and nightlife and entertainment. These are areas where we previously had no resources, and we are integrating their expertise. This represents an investment in our overall lifestyle portfolio, which is substantial and expanding. We believe that all of this integration work will be completed this year, and we feel confident about our integration efforts. We are not feeling burdened by ongoing integration tasks that would consume our time and focus. We will continue to seek platforms that align with our overall strategy and portfolio, which Dream perfectly exemplifies for the reasons mentioned. Additionally, we evaluate whether it strategically enhances the network effect. For instance, in the case of Lindner, a significant factor in that deal was the additional representation in Germany, the top feeder market to the Balearic Islands, as well as the two key feeder markets for the Canary Islands. We are effectively creating a much larger guest base that fosters a strong network effect across all our resorts acquired through ALG, which we view as a critical aspect. Furthermore, in every case, the platforms we have acquired have shown inherent growth potential, and we have consistently enhanced that relative to our original assessments, which is why we have gained substantial momentum in those areas. We will continue to pursue such opportunities, including portfolio deals; I would categorize Lindner as a portfolio deal rather than a brand acquisition, and we will keep focusing on that approach. Our strategy has been to cater to high-end customers and to operate at the top of every segment we serve. Presently, we are focused on expanding our portfolio to provide numerous experiences and the critical mass needed to attract high-end travelers. I believe we should remain open to the possibility of extending into other segments, but that has been our clear and deliberate strategy over the past five years, in which I feel we have made significant strides. That is our current standing.
Stephen Grambling, Analyst
And maybe as a quick follow-up. The puts and takes that were outlined on the guidance seemed to get to, call it, a $1.2 billion EBITDA range, which would mean that you're closer to 2 turns of net debt-to-EBITDA versus peers more like 3 turns or above. Is that the right math and how are you thinking about the right leverage level in this rate environment and as you move asset light down the line?
Joan Bottarini, CFO
I would say, Stephen, that we are making great progress and in part due to the great performance, our great EBITDA performance, and we've said on a growth basis that we're targeting about 3% to 3.5%. So there's different measurements for that leverage ratios that we're managing with our investment grade profile. So that is our commitment. And as we generate more cash flow, we'll have more investments to be able to make decisions about how to invest back into the business and return capital to shareholders when appropriate.
Mark Hoplamazian, President and CEO
I would just add, we talk about mix, earnings mix, and we talk about free cash flow. Just pay attention to the fact that 100% of reported adjusted EBITDA plus net deferrals plus finance contracts from ALG converts to cash. So the cash conversion effectively is 100%. There may be timing differences to working capital that carries over, but working capital is net zero over the course of any 12 month period. Secondly, our cash conversion from legacy Hyatt is rising. Our franchise proportion is increasing. We're increasing our franchise base in Europe, in particular, and finding more and more opportunities on franchising in some other markets, notably South America. So I believe that you'll see a growth in our franchise percentage over time. We still are dominantly a managed business, but I think franchise will be a grower. And thirdly, the CapEx carry for the portfolio is coming down and will continue to come down. So I think those are the key drivers to having great confidence that our cash position and cash generation has really been transformed already.
Operator, Operator
Our next question comes from Joe Greff from JPMorgan.
Joe Greff, Analyst
Two comments on how you're thinking about 2023. One, would you expect ALG to grow adjusted economic EBITDA year-over-year, given the one-time benefit of $27 million from the travel credit expirations?
Mark Hoplamazian, President and CEO
I think the short answer is no, because that was a release of a liability. While it didn't have a cash impact, it reduced the liabilities we assumed when we acquired the company. From a valuation perspective, it's relevant that this liability was released due to its expiration. Many settlements with travelers who were unable to take their holidays because of COVID were made in the form of travel credits, which have now expired. When we acquired the company, we were not only familiar with it; we also accounted for these liabilities. Consequently, we took on a liability that ended up having no associated costs. While this didn't translate to a cash benefit in the reported earnings, it did reflect a change in valuation. However, that is a one-time occurrence. Furthermore, we anticipate that the seasonality challenges mentioned earlier won't mirror those of 2022, which was an exceptional situation. We're expecting a return to more normal seasonal effects. For those reasons, I would say we wouldn’t foresee growth from the 22% level. That said, there are three points to consider. First, package RevPAR in January increased by 42%, surpassing our expectations, and ALG is projected to grow by over 30% for the year, again exceeding our forecasts. Lastly, we're expanding by adding properties. Therefore, there are mitigating factors to the structural challenges we expect might affect ALG's business. So, I’d say stay tuned. If current conditions remain as strong as they have begun, we may be wrong about our ability to grow from the levels seen in 2022, but it’s too soon to draw conclusions. The booking window is about 60 days, so I recommend staying tuned as we monitor this closely.
Joe Greff, Analyst
And then finally, could you break down the rooms growth between ALG and Hyatt's non-ALG portfolio for '23, the delta in '23.
Mark Hoplamazian, President and CEO
In 2023, I believe ALG will see a growth of 12%. This growth is expected to exceed that of legacy Hyatt. The discussion around this is due to our assumptions regarding conversions, which accounted for about 35% of our overall growth last year. It’s important to note that close to 40% of our pipeline is currently under construction, and most of our anticipated openings for this year, totaling over 8,400 rooms, have been delayed into 2023. We also expect a significant number to be pushed into 2024. Essentially, the entire construction timeline has been extended. However, ALG properties are less affected by this trend due to the favorable markets in which they are being developed, providing us with more certainty regarding timely openings and construction completions. The most pronounced example of this delay is in China, where shifts have been substantial and will likely continue into 2024 as the real estate sector needs time to recover. This situation is a short-term challenge related to our construction schedule and does not pose a long-term risk to brand health or growth. In 2022, we saw noteworthy conversions, and we anticipate completing a significant number in 2023 as well, potentially exceeding our historical range of 20% to 25%, though possibly not reaching the 35% from 2022. Concurrently, we are exploring some portfolio transactions related to ALG growth, contributing to its relatively higher growth rate compared to legacy Hyatt.
Operator, Operator
Our next question comes from Shaun Kelley from Bank of America.
Shaun Kelley, Analyst
I would like to get more insight into the margins for owned and leased properties. You've managed to effectively bridge the gap with some asset sales. If I recall correctly, you mentioned that in the fourth quarter, margins on a comparable basis increased by about 330 basis points compared to 2019. As we move towards a more normalized environment, inflation has been a significant cost over the past four to five years, and we're beginning to hear hotel owners discussing these pressures. What are the expectations for maintaining some of these margin gains in 2023 and beyond?
Joan Bottarini, CFO
So Shaun, I'd be happy to answer that. The expectation that we have shared consistently is that we expect to be 100 to 300 basis points above pre-COVID levels. And that's really driven by permanent improvements that our teams in the field have made with respect to digital capabilities and a very, very disciplined focus on productivity. So some of that is helping to minimize the wage inflation, wage rate growth that we've seen in the quarter. In the fourth quarter, we had an excellent result of 330 basis points; that's on a comparable basis. You mentioned a change in the portfolio. So that is the same set of properties to 2019. That is helped by rate right now being up about 11%. And we also have a lower mix of SMB as a proportion of total revenue, which is a bit lower on the margin side. But I would just reiterate that we continue to expect that range of 100 to 300 basis points into the future.
Shaun Kelley, Analyst
As a follow-up, Mark, you shared your expectations for net unit growth across various segments for 2023. Can you help us understand the possibility of returning to your longer-term growth rates, which have reached 5% to 7% organically in the past and have positioned you as a leader in the industry? Do you foresee any obstacles that might prevent us from achieving those growth rates once the development environment stabilizes, especially considering the current delays in China and potentially in the US as well? Looking ahead to a more normalized situation, is there any reason we can't aim for 5% to 7% growth in the medium to long term?
Mark Hoplamazian, President and CEO
There is no reason we can't return to those levels, and we expect to. There are several factors contributing to this. Our brand performance continues to grow and improve, and we've seen significant market share gains. The Urban segment has exceeded expectations, and we are capturing substantial share within it. Our transient profile for the fourth quarter was 18% below 2019 levels, but January started off much better and ended at 17%, with the first two weeks of February down to 12%. We are seeing improvements there. Additionally, the volume of account activity will result in high single-digit increases in Average Daily Rate. The expansion of our leisure and lifestyle portfolio is enhancing the value of the World of Hyatt proposition, driving higher penetration rates. To give some context, our Americas full-service hotels ended 2022 with around 50% World of Hyatt penetration, while the overall system-wide penetration exceeded 42%. These are significant increases, indicating that the World of Hyatt program is gaining traction. Our membership has grown to over 36 million, and we have seen a significant increase in our credit card holder base and spending rates. This network effect will continue to drive performance and demand for our brands. I am very optimistic about this, especially since we ended the year with a record-high pipeline of 117,000 rooms. I don't foresee any reasons we won't return to those levels of organic growth; in fact, I would be surprised if we don't.
Operator, Operator
Our next question comes from Dori Kesten from Wells Fargo.
Dori Kesten, Analyst
How do you see the unit growth of AMR over the next few years change your regional exposure? I guess what I'm trying to figure out is that there's greater exposure in Europe. Does that increase your likelihood of more brand acquisitions over there?
Mark Hoplamazian, President and CEO
So the growth for AMR is pretty balanced right now. The resorts in Europe tend to be somewhat smaller in room count than the ones in the Americas. We have a larger pipeline and rooms in the Americas than we do in Europe. We would like to extend and expand in Europe further, so we are focusing on that. But I don't think it's going to materially shift the mix.
Dori Kesten, Analyst
And within your legacy system, can you remind us what the typical difference is in spend for a World of Hyatt guest versus non-loyalty guests, and just how that's changed over time?
Mark Hoplamazian, President and CEO
So first of all, World of Hyatt members are, in general, paying higher ADRs. And the total spend for World of Hyatt members tends to run mid-teens to 20% higher than non-World of Hyatt members, and that's been consistent. We're seeing that same dynamic, by the way, for World of Hyatt members staying at our all-inclusive resorts as well. We're just starting. I mean I'm actually extraordinarily encouraged to see 17% room night penetration by the end of the year for World of Hyatt members. This is a significant expansion of the number of all-inclusive resorts that we've got. And the World of Hyatt members are discovering that resort experience at a pace, which is remarkable. And so I have increased enthusiasm and confidence that we're going to see a growing level of World of Hyatt engagement and penetration over time.
Dori Kesten, Analyst
I may have missed this. But have you said what percentage do you think it could grow to over time?
Mark Hoplamazian, President and CEO
Currently, looking at our Ziva and Zilara hotels, which do not benefit from a captive wholesale platform like ALG vacations or a membership program such as UVC, we have achieved over 50% penetration from Hyatt channels into those hotels. This includes Hyatt.com, direct digital channels, mobile web, app access, the World of Hyatt program, and group business. I recently spoke with our Global Sales Head about the outlook for selling group business into the AMR portfolio this year, and he is very optimistic. Therefore, I believe the direct channel will continue to grow, with the Ziva and Zilara experience being a reference point, as Hyatt comprises more than 50% of the traffic to those hotels.
Operator, Operator
Our last question will come from Smedes Rose from Citigroup.
Smedes Rose, Analyst
I wanted to ask about China. Could you remind us what percentage of your pipeline is currently in China and what you are seeing in terms of development? Is that starting to pick up again along with overall operations?
Mark Hoplamazian, President and CEO
China is performing as we had anticipated, experiencing a significant rebound once restrictions were lifted. January saw exceptional performance, and to highlight the extraordinary traffic volume, we had higher occupancy levels in our Chinese locations compared to the United States during the first weeks of February. This has been an impressive and immediate recovery. We entered the year with a conservative outlook, anticipating a gradual increase in the first half. January's results were greatly influenced by extensive holiday travel, especially with Lunar New Year occurring then. We observed a 15% increase over our previous peak during that period, characterized predominantly by leisure demand, which is what we had expected. Business travel is also on the rise, particularly evident at our Eurco by Hyatt properties in urban areas, which are primarily business-oriented, showing strong performance. Regarding our development pipeline, approximately 40% is situated in China, indicating significant growth opportunities. We plan to open 24 hotels in China this year, despite some construction delays. The majority of the new room count, potentially as much as 75%, will consist of legacy Hyatt brands, while Eurco by Hyatt will make up the remainder. While construction prospects this year are mixed due to lifted restrictions, some private developers are still facing challenges from previous debt issues and are adjusting to government-targeted investments in residential development to support ongoing projects. The government aims to ensure a smooth transition for residential real estate, a vital investment for many citizens. By the end of this year, we expect the usual pace of hotel construction to return moving into the first quarter of next year. We anticipate this year will be somewhat irregular as we navigate these complexities. However, I remain optimistic about the overall growth in the market and the strength of our development partners in China, which gives us confidence about medium to long-term prospects.
Operator, Operator
This will conclude today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.