Global Hyatt Ready For Action - Investment Outlook - June 2005

Quiet Makeover; Hyatt is leaving its "quiet period" with an agenda that includes new services, a new brand and more than its fair share of deals.

By Staff -- HOTELS Magazine, 6/1/2005

Hyatt leadership (l. to r.): Steve Goldman, executive vice president, Global Hyatt Corp.; Doug Geoga, CEO, Global Hyatt Corp.; Bernd Chorengel, president, Hyatt International; and Ed Rabin, president, Hyatt Hotels Corp.

Global Hyatt Corp.’s new headquarters in Chicago’s Loop reveals a lot about where this iconic brand is headed. From the wood-paneled minimalism to the glow of the celadon-hued stairs, the focus is clearly on what is ahead. It is not exactly bold or visionary; it is modern, polished and suavely handsome rather than cutting edge. There is a lot left undone in this intriguing building, whose early tenants include other powerhouses such as Goldman Sachs, tucked away in an ultra-secure compound. There is a lot left undone for Hyatt, as well. “We are proud of our history, but our best days are ahead of us,” says Douglas Geoga, Global Hyatt Corp.’s CEO. “We have all the tools we need to succeed. We have the control. We do not need to rely on anyone else to reach our goals nor do we have to rely on someone else doing badly. It is all up to us.”

The soft-spoken Geoga sees Hyatt just beginning to hit its stride. First, it has some catching up to do. Geoga and Steve Goldman, executive vice president, Global Hyatt Corp., are playing up the system’s limited 213-hotel size as an advantage. Their point to prospective owners is that Hyatt has potent brand recognition and a bona fide worldwide presence. What it does not have is a niche-blurring family of brands and a system so large that saturation is an issue. “All brands basically will do the same deal terms. An extra few dollars or an additional year’s guarantee are not going to decide who gets the management contract,” Goldman says. “Hyatt brings something extra to the overall proposition. The owner is not going to be in a market with a Hyatt and six of our other brands that are something like Hyatt within a 25-mile radius.” Programs such as the chainwide upgrading/updating of the 5-star Park Hyatts in North America further clarify the image of and market for the Hyatt brands.

Hyatt will need “something extra” if it is to reach the next level. As one industry insider says, “Hyatt is on the list, but it is not yet at the top of the list” in the battle for management contracts. Some criticize the group for having too low a profile—nothing like the days when former Chairman Darryl Hartley-Leonard (who retired in 1996) was castigated for being all too visible and far too opinionated. Detractors charge that this brand that once stood at the forefront of innovation with the roll-out of the atrium lobby and ingeniously successful restaurant concepts has fallen a step behind headline grabbers such as Starwood Hotels & Resorts with its chic W brand and its distinctive Heavenly Bed.

Frankly curious as to which companies rank above Hyatt on “the list,” Geoga acknowledges that, “To a certain extent, Hyatt has been an underutilized resource.” He does not apologize for his first-things-first management style. “You have to succeed at your core competencies. So, yes, in that sense, we do stick to our knitting,” he says. “But you can have a visionary plan that is an extension of your knitting. That means managing more intensively, growing more intensively and using our capital capabilities more intensively.”

Growth Platform
The hiring of Goldman to drive development and the January 2005 acquisition of the 143-property AmeriSuites brand demonstrate that Hyatt’s leadership sees this as the right time to turn up the volume. Goldman says the “year in, year out” development targets for the core Hyatt brands are eight to 12 hotels a year domestically; that and more internationally. “We want more than our fair share of the available deals,” Geoga adds. The prime targets will be “hotels with more room rather than less,” which Hyatt has made one of its operational specialties. Park Hyatt will continue on what Geoga terms “an explosive pace.” Six to seven hotels will be under construction this year, adding important flags in Russia, the Middle East and China. “There is no place we have to be, but there are lots of places where we want to be,” Geoga says.

This “want to” factor may not be new for Hyatt, but how it impacts dealmaking is. A recent management deal in Jacksonville, Florida, shows a flexibility and nimbleness tailored to the needs of a competitive market. Although Jacksonville was not even Hyatt’s corporate radar, the local development team saw a diamond in the rough. After canvassing meeting and function planners, Hyatt’s team showed the owners how much business the brand could deliver to the hotel. The numbers worked; the deal was done.

Like every brand, Hyatt has to be opportunistic. But it also has to look strategically to its future. That means expansion in China (it already has 10 hotels), further penetration in Europe and the Middle East and a foray into India where, Geoga says, “extremely high quality hotels are available on very attractive terms.” Since Hyatt has “virtually no debt,” according to Geoga, its investment decisions can be deal-based rather than gearing based. “We can do as many or as few deals as make sense. There is no pressure to put out money if the deal does not make sense,” he says.

Hyatt Regency O'Hare, Chicago

While Hyatt is willing to tap into its own coffers to co-invest strategically or even buy, sales and leasebacks will not be on the agenda. “I do not like them. There is too much downside,” Goldman says flatly. Although its management and real estate businesses are separate, Hyatt’s development team can bring together operations and property experts to analyze the viability of deals. Its private status and longer-term vision give it a unique perspective versus competitors who must make their quarterlies. As Goldman says, there are long-term assets for long-term markets—one reason Hyatt can afford to look at Latin America when most non-Latin brands are taking a pass and at resort projects, which have a longer ramp-up.

Geoga and Goldman also hope to parlay Hyatt’s brand recognition into a selling point with mixed-use developers. They say, and the market bears out, that a strong brand fuels residential sales. That should enable Hyatt to meet Geoga’s targets of being in “more impact resorts and more resort markets.” He likes the efficiency of “ripple out” deals, like proposals on the table in Ireland for a city center hotel and a sister resort in Kinsale or a deal that piggybacked on the long-standing success of Hyatt’s Moscow property to catalyze development of a new Park Hyatt.

Cerebral and controlled, Geoga is emphatic about the kinds of deals Hyatt will do. Would he do a deal that only made sense on the management income side? “No. If I see a deal that only works on a management basis (rather than a total project basis), I would not do it. It has to work for the owner and for us. Doing bad deals becomes a heartache for future opportunities. It impacts your reputation. The only deals we will do are deals that make sense in the long run,” he says.

Diversifying The Base
One place Hyatt plans to play harder is in the limited service all-suites sector with its AmeriSuites. Watch for a new look and a new name—the latter scheduled for a rollout before 2006.

Goldman likes being a late entrant into this particular field. He sees substantial potential for a new construction concept that can sell against aging product and a spate of conversions. What he sees as being needed now is a brand that can differentiate itself. For AmeriSuites, it will mean innovations ranging from “industry-leading technology for booking meetings” to “delivering the design experience people are looking for at a lower price.”

“You have to look for improvements that will translate into a premium for the owner,” Goldman says. That is a mantra for every franchisor, but Goldman uses Hyatt’s numbers to back up the promise. The US$500 million earmarked for chainwide renovation that began last year is on track to generate 15% IRR returns. “If demand goes up, you get the rate,” Goldman adds. Upgrades are test-marketed to measure their worth. In one case, a single change translated to a rate gain of more than US$40.

IPO Or No?
Hyatt clearly is doing a lot of fine-tuning. The rumor mill about an IPO continues to churn. “It is true that one of the things we are doing internally is fashioning ourselves to work as if we are public company. But, we are doing that without any time reference to becoming a public company,” Geoga says.

Practicing being public has created a series of benefits. That includes the separation of bricks and brains; a resulting structure that has created a larger, better capitalized company with easier access to debt; more flexibility in managing a pure play hospitality business; and high liquidity with very little debt. Some industry watchers, especially in Europe, say Hyatt’s on-again, off-again approach to an IPO does not set well with conservative investors who value consistency. Nor did an ugly lawsuit questioning inheritance distributions, which involved Hyatt’s owners, the Pritzker family heirs.

Geoga does not see either as a problem. “Most large hotel brands are publicly traded. The worst anyone can say about us is that we will end up publicly traded like everyone else. If there were a public offering, the Pritzkers likely would be the majority investors. That makes it easier to evaluate consistency and stability,” he says. “As for the lawsuit, there is a difference between the business of the Pritzker family and the business of Hyatt. That lawsuit has since been settled in a reasonable, consensual way with no impact on us. If there is skittishness on the part of owners anywhere in the world, we have not felt it.”

Nor have owners such as Sébastien Bazin, Paris-based CEO of Colony Capital European division and head of Colyzeo, its European fund. “Hyatt is a powerful brand. People know what they are getting. It is very credible in terms of positioning. Its managers are financially minded; there is no equivocating,” he says. “I like the security of the brand.”

Moving Forward
Hyatt is not resting on its laurels to keep that brand secure. Being distinctive is important, in Geoga’s view. “Being distinctive does not mean just unusual design and architecture. It can be unique food and beverage concepts, updated loyalty clubs or productivity assistance,” he says.

Hyatt is known for its successful F&B concepts.

That thinking resonates with owners. It should serve Hyatt in good stead with its expansion plans. “In Asia Pacific, Hyatt has a reputation as one of the most creative managers—particularly in their proven ability to create and launch restaurant and bar concepts that have been enormously popular in the local communities,” says Robert B. Stiles, managing director and principal, Sonnenblick-Goldman, San Francisco. “This has led to a leading position in the banquet and catering business in many of their markets. This has proven to be of real value in Asia, where food and beverage revenues often exceed rooms revenues.”

Successful brand launches have not hurt either, Stiles says. “The brilliant Park Hyatt in Tokyo and the Grand Hyatt in Hong Kong, among others, helped set the bar for other developers and ensured a strong regional interest in developing similarly luxurious Hyatt hotels. It helped reinforce the brand value in Asia, which has lead to what is, perhaps, a stronger negotiating position and less flexibility in management contract terms than the position typically associated with a number of other global brands,” Stiles adds.

Europe is more of an uphill battle, but Hyatt is not without its weapons. “Hyatt’s expansion has been largely opportunistic in the past, and appeared to be rather slow,” says Trevor Ward, managing director, TRI Hospitality Consulting, Lagos. “At the same time, Hyatt is one of the few brands that has good consistency in the quality of the brand. Outside of the United States, a Hyatt is always a luxury hotel.”

Consultants such as Colin Grimsell, founder and head of Hotel Performance Consultants, Rivonia, South Africa, credit Hyatt with the ability to make a big impact with a small presence. “Hyatt has a good presence in Rosebank, at the southern point of Johannesburg’s booming affluent North Suburbs, which include Sandton. The 244-room, 5-star Park Hyatt is very popular with the emerging wealthy black executives and managers, particular the younger ones. Deals are made here, and at Legacy’s Michelangelo in Sandton,” Grimsell says.

On its home turf, Hyatt should be able to parlay what Pricewaterhouse-Coopers’ Bjorn Hanson, global industry leader, hospitality and leisure practice, calls “good organizational and operational skills” into a growing management portfolio. A 2,700-room hotel/condo complex will be coming online in Las Vegas in 2008, expanding its casino resort stable. Further diversification will come through the Hyatt Vacation Ownership division, still in its infancy.

Other items on Geoga’s agenda including continuing to cull Hyatt’s real estate portfolio as long as the property market remains bullish and achieving its growth goals. “We are at a point at which Hyatt’s opportunities are unique. We have lots of powder, and the power to determine where we go from here,” Geoga says.