Hyatt Hotels Corp

star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Adam Roman, Senior Vice President of Investor Relations and FP&A. Thank you. Please go ahead.

Thank you, and welcome to Hyatt's second quarter 2024 earnings conference call. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer, and Joan Botterini, Hyatt's Chief Financial Officer. Before we start, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K, quarterly reports on Form 10-Q, and other SEC filings. These risks could cause our actual results to be materially different from those expressed in or implied by our comments. Forward-looking statements in the earning release Earnings released that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks on our website at hyatt.com under the financial reporting section of our investor relations link and in this morning's earnings release. An archive of this call will be available on our website for 90 days. Please note that unless otherwise stated, references to our occupancy, average daily rate, and REF PAR reflect comparable system-wide hotels on a constant currency basis. Additionally, percentage changes disclosed during the call are on a year-over-year basis unless otherwise noted. With that, I'll now turn the call over to Mark. Thank you, Adam. Good morning, everyone, and thank you for joining us today. I want to start by sharing my appreciation for our colleagues around the world who live our purpose every day to care for our guests, our colleagues, owners, and each other. I've been very fortunate to visit with many of you over the last quarter, and I'm continually inspired by the power of care and what differentiates Hyatt from others, our people. Our purpose and execution of our strategy are evident in our operating results, which reflect record levels of fees, role of Hyatt members, and rooms in our pipelines. This morning, we reported system-wide rep part growth of 4.7%, and as anticipated, group and business transient were our strongest customer segments in the quarter. Easter taking place in the first quarter of 2024 was a tailwind for group and business travel in April, and a headwind for leisure travel. Leisure transient revenue decreased approximately 2% in the quarter, but was up 2% when excluding the impact of Easter, significant renovations at several key U.S. resorts, and our hotels in Maui, which were negatively impacted by the wildfires in Q3 of last year. Through the first six months of 2024, leisure transient revenue was up 2% compared to 2023, despite these temporary headwinds, and we remain significantly above pre-pandemic levels. Looking ahead, transient pays for resorts in the Americas is flat in the third quarter, excluding resorts under significant renovation, while pace for all-inclusive resorts is down slightly as demand in Mexico and the Caribbean reflects a return to pre-pandemic seasonality. Group room revenue increased approximately 8% in the quarter, with strong results in most U.S. major urban markets during the months of May and June. Group PACE for U.S. full-service managed properties is up 7% for the second half of 2024, and we anticipate higher growth rates in the third quarter compared to the fourth quarter. This is due to Rosh Hashanah and Yom Kippur falling in October this year compared to September of last year and the U.S. elections in November. Looking beyond 2024, PACE continues to be very strong across all group customer segments. Our business transient customer segment had the largest growth rate during the quarter, with revenue up approximately 14%. In the United States, revenue increased 12%, and New York, Seattle, San Diego, and Washington, D.C. were the top performing markets. Bookings for business travel over the next two months looked very strong, led by corporate negotiated accounts. While there are signs of slowing demand in lower chain scales, we saw strength among the high-end consumer, As luxury rev par increased 6.9%, driven by hotels in Europe and Asia Pacific, excluding China. The solid quarter of group and business travel was reflected in our upper upscale brands, which produced rev par growth of 4.2%. Our solid operating performance reflects the strength of our growing loyalty program. World of Hype membership reached a new record of approximately 48 million members at quarter end, a 21% increase over the past year. Loyalty room night penetration also increased, highlighting the strong engagement of our expanding membership base. Our growth strategy and expansion into many new markets, in addition to delivering authentic and personalized experiences, has led to member growth and increased loyalty penetration. Our expansion, of course, includes Mr. and Mrs. Smith, which realized significant engagement from our members after we added over 700 properties to World of Hyatt in April. 80% of these properties have received bookings from World of Hyatt members since going live, with nearly two-thirds of those bookings for paid reservations as opposed to the redemption of points. Our most active members, our globalists, have been very engaged with Mr. and Mrs. Smith, accounting for over 20% of these bookings. By the end of this year, we expect to have over 1,000 Mr. and Mrs. Smith properties available through World of Hyatt, offering our members even more opportunities to earn and redeem points in these uniquely curated hotels. We also recently announced an exclusive alliance with Under Canvas, where we are an experiential outdoor hospitality with 13 locations and premier destinations such as the Grand Canyon, Moab, Yellowstone, and Zion. World of Hype members will be able to earn and redeem points at Under Canvas locations further expanding our offerings and adding unique experiences for our members and guests. We have already seen great interest from World of Hyatt members, with 60% of total bookings made at Under Canvas locations being for paid reservations since the partnership went live nearly two weeks ago. A few months ago, I visited the Under Canvas Uloom Resort in Moab, named the best resort hotel in Utah by Travel and Leisure. And I loved my overnight stay at the undercanvas North Yellowstone Paradise Valley in Montana. Both destinations offer exceptional quality and immersive activities, which I'm really excited for our World of Hyatt members to experience firsthand. We're also proud of the recognition that World of Hyatt continues to receive. WalletHub recognized World of Hyatt as the best hotel rewards program and World of Hyatt credit card as the best overall hotel credit card. The continued recognition of World of Hyatt is a testament to the value that our loyalty program provides to members and hotel owners. Our focus on expanding our network effect as we grow allows us to offer more options to our members, increasing their loyalty to Hyatt and making Hyatt more attractive to prospective developers. Turning to development, we continue to see strong demand for our brands as our pipeline reached a record of approximately 130,000 rooms. This represents a 9% increase year over year and our pipeline accounts for 40% of our existing room base. Signings in the quarter were healthy across the world, led by the United States and Greater China, and we continue to see increasing interest in Height Studios with the first two properties under construction. Our growth pipeline continues to drive expansion of our portfolio worldwide. And in the quarter, we achieved net rooms growth of 4.6%. Notable openings include the Park High Changsha, the 10th Park Hyatt in Greater China, and the Hyatt Vivid Grand Island in Cancun, our first Hyatt Vivid all-inclusive property. The Hyatt Vivid brand introduces the younger generation to a vibrant, adult-only, all-inclusive experience with a focus on meaningful connections through experiential offerings. We opened our first captioned-by-Hyatt properties outside of the U.S. in Shanghai and Osaka. Finally, the legend resort Paracas opened in the quarter a stunning resort on Peru's southern coast and our first destination by high property in Peru. Our openings this quarter strengthened the equity of our brands and opened new markets for our guests and members. And we're confident that our pipeline will continue to fuel growth well into the future. The pipeline will continue to expand as we strategically enhance our brand portfolio. On June 28th, we announced the acquisition of the Me and All Hotels brand from Lindner Hotels Group. allowing us to accelerate growth of the brand. We're really excited about the growth trajectory and great potential for me and all hotels over the decades to come for three key reasons. First, me and all hotels is a highly attractive lifestyle brand in the fast-growing upscale segment in Europe. The brand is well-suited for adaptive reuse and conversions, facilitating growth in great locations to fill significant white space that Hyatt has across Europe. Second, mean-all hotels deliver high margins, allowing developers to realize attractive returns that are required for lease structures, which are common in Europe. This lease-friendly brand enhances operational flexibility and greatly expands our access to capital sources across Europe. And third, it is important to note that our strategic positioning and brand mapping are designed to aggressively expand and capture market share across Europe. While we expect the brand to gain scale in Europe initially, we believe there are opportunities to grow the brand globally, providing more destinations for our members and guests to enjoy a curated lifestyle experience. We have been and will continue to be very intentional with our organic and inorganic growth, ensuring that our brand and property portfolio expansion creates opportunities for new guests to find us and join World of Hyatt while providing existing members and guests new and exciting places to enjoy great experiences. Turning to asset sales, we completed the sales of Park Hyatt Zurich, Hyatt Regency San Antonio, and Hyatt Regency Green Bay during the second quarter, as previously announced. With these sales, we have realized $1.5 billion in gross proceeds from asset sales towards our $2 billion commitment. We expect to close the sale of the property that is currently under a purchase and sale agreement by the end of August, which will put us above our $2 billion disposition commitment. We will provide more details on that transaction when the deal closes. Before I conclude my remarks, I'm pleased to report that we recently published our annual World of Care Highlights, demonstrating progress towards our Change Starts Here goals and environmental sustainability goals, including our science-based targets. While we have more work ahead of us, I am exceptionally proud of the progress that we've made, led by our hired colleagues worldwide. In closing, We are pleased with the execution of our long-term strategy, which we highlighted at our investor day last year, maximizing our core business, integrating new growth platforms, and optimizing capital and resource deployment. Our growth across multiple dimensions, including rooms, fees, pipeline, and loyalty membership fuels our asset-light business model, leading to strong free cash flow and greater value for our shareholders. I want to thank high colleagues around the world who live our purpose every day to care for people so they can be their best, which extends to each of our stakeholders. Joan will now provide more details on our operating results. Joan, over to you.

Thanks, Mark, and good morning, everyone. System-wide RESPAR increased 4.7% led by increased business and group travel. In the United States, RESPAR increased over 2%. reflecting the timing of Easter and strong results from group and business transient travel. Large corporate accounts contributed to both group and business transient travel, benefiting hotels and major urban markets. As Mark noted, we are lapping challenging comparisons in Maui due to the wildfires in the third quarter last year, and we have several resorts undergoing exciting transformational renovations. The confidant is being rebranded as Andaz Miami Beach, while Hyatt Regency Scottsdale and Hyatt Regency Indian Wells will be rebranded under the Grand Hyatt brand later this year after extensive renovations. RESPAR growth in the Americas, excluding the United States, increased approximately 9%, with notable strength in Canada and South America, while our all-inclusive properties in the Americas had net package RESPAR growth of 2% for the quarter. In Greater China, RevPAR decreased by approximately 3%. As a reminder, the second quarter of last year saw a dramatic recovery for domestic travel, and RevPAR surpassed pre-pandemic levels for the first time. We expected growth rates to normalize starting in the second quarter this year. However, unfavorable macro conditions and greater outbound Chinese travel negatively impacted results in the quarter. Domestic travel was down 9% in the quarter compared to last year, with a notable impact on hotels and secondary and tertiary markets. While we saw positive REVPAR growth in most major markets, this could not offset weaker demand in secondary and tertiary markets. Despite these pressures, we increased our REVPAR index by approximately 3% during the quarter, which is a testament to our strong brand recognition in China. Although domestic travel declined, we're seeing demand for travel from affluent customers increase. However, they are prioritizing international travel, and we expect outbound travel from China to remain at elevated levels in the near term. Asia Pacific, excluding Greater China, once again produced remarkable results, with RESPAR up approximately 18% due to strong international inbound travel with notable demand coming from Greater China and the United States. RevPAR in Japan increased 35% and RevPAR in South Korea increased 20%. In Europe, RevPAR increased approximately 11% driven by outbound travel from the United States with notable strength in Germany and Spain. Our European all-inclusive properties produced impressive net package RevPAR growth of approximately 12% driven by high demand for our resorts in the Balearic and Canary Islands. We reported record growth fees in the quarter of $275 million, up 12%, due to a combination of our REVPAR growth, greater system size, and an increase in our non-REVPAR fees. Franchise and other fees increased 32% due to the growth of our franchise footprint, the growth in our co-branded credit card fees, and the contribution from UVC fees. Base fees increased 4%, reflecting the combination of increased managed REVPAR and fees from newly opened managed hotels offset by hotels in Greater China. Incentive fees decreased approximately 7% due to lower contribution from hotels in Greater China, hotels under renovation, and hotels in Maui. Turning to our segment results, management and franchising segment adjusted EBITDA increased approximately 11% driven by the increase in our gross fees. Owned and lease segment adjusted EBITDA increased by 9% when adjusted for the net impact of transactions. Business transient revenue for the portfolio increased by double digits during the quarter, and the contribution from group and related food and beverage revenue was strong. In the quarter, margins for comparable hotels increased 110 basis points. We expect that we'll achieve flat to moderate expansion of owned and leased margins for the full year compared to 2023. And finally, for distribution segments, adjusted EBITDA increased $9 million compared to the second quarter of 2023. Excluding UBC, adjusted EBITDA declined by approximately $5 million, consistent with the expectations we communicated during our first quarter earnings call. We expect third quarter adjusted EBITDA for ALG vacations to decline approximately $5 million to last year due to a combination of cancellations related to Hurricane Beryl and weaker bookings over the last few weeks due to the temporary system disruptions impact on airline bookings. However, we anticipate fourth quarter adjusted EBITDA for ALG vacations to grow by approximately $10 million compared to last year because of improved airlift. I'd like to now provide an update on our strong cash and liquidity position. As of June 30, 2024, our total liquidity of approximately $3.5 billion included $2 billion of cash, cash equivalents in short-term investments, and approximately $1.5 billion in borrowing capacity on our revolving credit facility. At the end of the quarter, our total debt outstanding was approximately $3.9 billion. The increased levels of debt and short-term investments this quarter result from the notes we issued in June. We invested the proceeds from these notes in marketable securities and are planning to fully repay our notes maturing on October 1st, 2024, at or prior to maturity. In the second quarter, we repurchased $134 million of Class A common shares and we have approximately $1.6 billion remaining under our share repurchase authorization. We remain committed to our investment grade profile and our balance sheet is strong. Before I turn to our 2024 outlook, I'd like to note a change that we made to our financial reporting. We've added a new financial line item to the income statement called transaction and integration costs, which includes integration costs for recently acquired businesses and transaction costs for certain pending and completed transactions. We now exclude transactions and integration costs from adjusted EBITDA, as we believe this better represents our core operations and provides information consistent with how our management evaluates operating performance. Now, I will cover our outlook for 2024. The full details can be found on page three of our earnings release. We expect full-year system-wide REVPAR growth between 3 and 4% compared to 2023, and expect group and business transient revenue growth to outpace leisure transient for the second half of the year. We anticipate United States REVPAR growth for the full year of approximately 2% compared to 2023, led by group and business travel in the third quarter. Our outlook assumes RevPAR growth in Greater China is negative for the last two quarters of this year compared to last year as domestic travel lapsed tougher comparisons to 2023 and outbound international travel increases. Finally, we expect RevPAR growth in other international markets to exceed the high end of our range, led by Europe and Asia Pacific, excluding Greater China. We expect net rooms growth between 5.5 and 6% driven by organic growth, conversions, and potential portfolio transactions that may close by year end. Growth fees are expected to be in the range of $1.085 to $1.115 billion, a 13% increase at the midpoint of our range compared to last year. Our revised outlook accounts for lower incentive fee contribution in the second quarter from hotels in greater China, weaker than expected demand in Maui, and hotels under renovation. Our outlook also assumes lower fee contribution from hotels in greater China during the second half of 2024, and a lower fee contribution from hotels in the United States during the fourth quarter. Adjusted G&A is expected to be in the range of $425 to $435 million. Adjusted EBITDA is expected to be in the range of $1.135 to $1.175 billion, a 10% increase at the midpoint of our range compared to last year. Our outlook accounts for the removal of about $10 million of integration costs related to the change to adjusted EBITDA I just mentioned and reflects the reduction that we have made to our RESPAR range and gross fees. Free cash flow is expected to range from $560 to $610 million. And finally, we expect capital returns to shareholders in the range of $800 to $850 million, including share repurchases and dividends. In closing, our second quarter results highlight the strength of our asset light business model and our mix of asset light earnings will increase further as we complete our asset disposition program and realize our net room's growth expectations. We remain committed to our capital allocation strategy, which has delivered and will continue to deliver exceptional shareholder value by investing in growth, maintaining an investment grade profile, and returning capital to shareholders. This concludes our prepared remarks, and we're now happy to answer your questions.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. In the interest of time, we ask that you please limit yourself to one question and one follow-up question. Thank you. Our first question will come from Sean Kelly from Bank of America. Please go ahead. Your line is open.

Hi, good morning, everyone. Thanks for taking my question. I had sort of a two-parter on just what's going on in the leisure transient area. So, you know, Mark and Joan both, I think you mentioned this kind of throughout the script around, you know, kind of what you're seeing there. But could you just elaborate a little bit, you know, across the U.S. specifically in terms of, you know, patterns and how, let's call it, de-risked you think your outlook is from here specifically on the leisure side? And then, Secondarily on that, could you comment specifically on, I think, some comment around the Caribbean and Mexico in the prepared remarks, Mark? I think you said something about return to pre-pandemic seasonality, and if we take barrel out of it, just what are we seeing kind of on the ground across ALG and the Caribbean and Mexico? Thanks.

Great. Thanks, Sean. I'll start, and I think Joan will add some additional color. I would say that we are lapping some unusual periods last year, and so the results that we're reporting are, when I say unusual results last year, I mean both calendar changes and also significant demand in certain parts of the year. So what we're seeing is sort of an evening out of demand over time. The disruption in airline traffic due to the systems outages was an unfortunate shocked the system, but that was relatively short-lived. Nonetheless, it did cause a lot of disruption in terms of bookings. And secondly, we have a few issues with respect to, not issues, but just headwinds with respect to two major resorts under complete renovation at this point, plus the Maui issues that everyone knows about. Overall, I would say that the general level of demand has been maintained at a very high level, significantly above sort of the levels that we experienced in pre-pandemic times. And rate continues to be holding up, continues to hold up and expand slightly. So I feel like we are maintaining at a high level of demand at this point. And I think our outlook is informed by what we think is going to be somewhat tougher third quarter, but a more robust fourth quarter. And that's based on the visibility that we have to schedules, airline schedules heading into the fourth quarter, and also overall demand that we're seeing in terms of bookings. The booking curve, though, really, it's like the wave curve. for for cruises, we really see a significant increase in October and November in terms of bookings into festive and the following year. So I think that we'll have a lot more information on the next quarterly conference call as to what those bookings are starting to look like and shape up to be.

Yeah. And what I would add to that with respect to your question, Sean, on what's happening in all inclusive in the Caribbean, We had a really strong first quarter double-digit growth in that package, REVPAR. And in the second quarter, we had about a 2% increase. And if you look at over the first half of the year, that averages to about 7%, so really strong. And the first quarter, second quarter dynamic was impacted by the Easter holiday. As we look forward, Mark mentioned that in the third quarter, we certainly had those temporary disruptions with the early hurricane and the system disruptions. But as we look forward into the fourth quarter, we're seeing pacing up into the festive season in the mid-single digits. So when you put that all together, we've got sustaining momentum on the leisure front in the Caribbean in our net package REVPAR. And we think the full year will be about in that mid-single-digit range.

Just a quick add. It's 2% growth in the second quarter in the Americas. But if you look at the HIC portfolio, our all-inclusive portfolio globally, it was up three because Europe continues to – we're lapping strong results last year, but it has strengthened from there. So we're really encouraged to see that as well.

Thanks so much.

Our next question comes from Joseph Gref from JP Morgan. Please go ahead. Your line is open.

Good morning, everybody. Thanks for taking my questions. I have a multi-part question for you, Mark. Can you talk about what the recent trend lines are in China development and pipeline signing and construction starts? You know, how stark of a difference is there between full service and select service hotel activity there?

and maybe kind of put things in perspective how how much dependency on the five and a half to six percent net rooms growth is china related sure so first of all um china has been greater china and asia pacific generally speaking have been um the highest uh producers of open rooms and also growth and pipelines so the americas and china together represent the majority of the pipeline change that we've seen and also the openings. So we are continuing to grow faster than we're opening. But what we are seeing is not just openings. We're seeing great openings. We're seeing openings of high quality. We mentioned the Park High Changsha. We also just opened the Grand Hyatt Kunming. It's the 18th Grand Hyatt Hotel in Greater China. I'm sorry, in mainland China. And so we've got some remarkable network effect going on amongst the highest end brands that we have in the country. So I've been actually super encouraged to see completions. Part of that is frankly not surprising to us because a majority of the owners that we're dealing with are state-owned enterprises. And I'm also, I would just quickly point out that the openings that we're talking about, you know, we always say a room is not a room is not a room. These are very high revenue hotels. It's not dominated by Yurkov, even though Yurkov is really healthy and continues to open at a good pace, Yurkov being our upper mid-scale on the upper mid-scale segment in China. With respect to the impact of China growth overall on the annual NRG. We'll have to get back to you on that. I don't have that off the top of my head. By the way, the signings also spell for, I would say, continued strength and a good platform heading into the future for Chinese growth. So overall, I'm pretty encouraged. There's a lot of headlines to sort through, and there's a lot of disruptions that you can see actually going on. It is relatively more impactful at lower chain scales. That's what we're seeing in China. Although some of our luxury hotels in China have also seen some impact from the highest end Chinese consumers increasing their outbound travel.

Great. Thank you. And then just a quick follow up, Joan. How do you plan to use the $500 million plus of proceeds from this to close later this month's asset sale? Obviously, you have enough liquidity and cash to take care of debt maturities end of this year to the end of 26.

So, Joe, as Mark mentioned, we will announce any transactions when we close. And when we do that, we will update all components of our outlook that are impacted by the transaction, including shareholder returns. So stay tuned for that announcement when we're ready to do it.

Thank you, guys.

Thank you. Thank you.

Our next question comes from Dan Pulitzer from Wells Fargo. Please go ahead. Your line is open.

Hey, good morning, everyone. Mark, I believe you mentioned that group was pacing, I think, up 7% in the second half this year. Can you maybe talk about how it's pacing for 2025 and in terms of this year and next year, how much is on the books at this point and maybe give some historical context with how that's compared in the past?

Absolutely. I've been really taken with how strong group has been overall. It's both short-term and long-term. In the short-term vicinity, July was extraordinarily strong in terms of total bookings, full circle Sorry, full cycle net production in the month was up 16%. A third of that was in the month for the year. So we saw third quarter actually impacted by a very strong July booking activity base. August through December pace is up 6%. ADR is up 5% in the year for the year bookings. So the bookings that we're getting are not just filling rooms at compromised rates. We are realizing great ADRs. For 25, equally strong. ADR represents the vast majority of the plus 7.5% pace increase. Tentatives are running way ahead of anything we've ever seen at this time of the year ahead of 25. So we not only have great pay setting in the next year, but we also have a swelling of tentative business that is really striking. The sales force is really taken with it. And right now we have about 60% of our total business on the books for next year. So that sort of addresses your other question. By the way, just as a quick note, pharma and tech, are leading the way with respect to the July 12th was dominated by pharma and tech. And all of our categories in terms of both association and corporate and across a number of different segments, I would add financial services to the pharma and tech comment, are all pacing well. So we don't, this is not like, association has taken over and is pulling up an average. This is very, very well balanced and widespread.

Got it. Thanks for the detail. And then in terms of the incentive management fees, Joan, I think you called out China, renovation, Maui, certainly headwinds in the back half of the year. But as we think about third quarter versus fourth quarter, should we see it start to grow again in the fourth quarter as you you kind of get through some of those, or do we, should we expect this to be down, you know, for the remainder of the year?

Yeah. So with respect to fees overall, the, the change in our outlook that we provided reflects a 13% growth year over year. So I just wanted to reinforce that point at, at, at the outset and the, the, change that we made to our outlook at the midpoint, the 15 million, the breakdown between that is about 50% driven by our IMF and about 50% driven by base incentive fees. And then also about 50% to China and what we're seeing there, the dynamic there in demand and the remaining by the U.S. and a little bit of FX that we're seeing. So, you know, it's concentrated in those two areas. And you saw the performance in the second quarter. So as you look at that and think about the rest of the year, we anticipate that we'll be performing better relative to last year in the second half as it relates to incentive fees.

And just to clarify, sorry, Joan. You said base and incentive. You meant base and franchise. So 50% incentive and the other 50% is the base and franchise fee base.

Understood. Thank you so much. Thank you. Thank you.

Our next question comes from Michael Bellisario from Baird. Please go ahead. Your line is open.

Thanks. Good morning, everyone. Morning. Good morning. two-parter on net unit growth. You did about 1% net in the first half of the year. Were openings below your expectations, or did you see any outsized deletions in the quarter? And then second part on the back half, just help us understand the puts and takes to get to the low ends and high ends. And then could you also provide some more details on the, I think you said, potential portfolio transactions? Is that organic strategic deals or You were referring to potential brand M&A. Thanks.

Great. Thanks. First of all, there were some terminations, and they were not particularly outsized, but they did affect the first half. And as we look forward, we've got a pretty robust opening schedule for Q3 and Q4, but I would quickly add in Q2, for example, our room openings were about a third conversions, and we actually believe that we will end the year at closer to 50% of the total net rooms growth being conversions. And those are conversions that are known to us, but also some that are subject to completing some other transactions that we're working on right now. Since the first quarter of this year, I've been talking about the fact that we see a robust opportunity and real opportunities, not just theoretical Um, to do portfolio deals. And sometimes that, that means, uh, doing a strategic, uh, partnership, like, uh, portfolio deal, like the Lindner hotels deal, where we sign franchise agreements for all of their, uh, all of those hotels. Uh, sometimes, uh, they, they come in the form of an acquisition of a brand or a, um, management platform, like we did with green hotels, just as one example. We have both in sort of the hopper at this point, and we've been working on several that we feel really good about. Now, it's now August 6th, and whether we actually have everything closed and those hotels in the system to count as NRG at December 31st or sometime in January, I can't tell you that, but neither do I care because The point is not to make a particular date. It's that the overall rate of growth and our momentum is actually maintained. And so I've always said whether we have slippage into January or not is sort of irrelevant to me. You have to look at it on a smooth basis over time. And that's where we are. So we do expect more conversion activity. I would just add one thing. I don't want to imply that this is a hope and a prayer. We've actually applied a tremendous level of data and analytics to the markets that we believe would provide the biggest network effect. We've done it by price point and by brand segment. And we have then cross-matched that with a huge number of portfolios that we've identified and qualified across the globe. And we did all that work in the third and fourth quarter of last year. That's actually proven to be extraordinarily helpful in focusing our resources and our time and attention. And, of course, we are also very focused on making sure that we understand the customer base like we always do. That's what we start with. And that each of these acquisitions or partnerships that we do have embedded growth. already identified embedded growth and that they are asset light. So those are the principles that we continue to follow.

That's helpful. That was going to be my follow-up. Thank you.

Our next question comes from Steven Grambling from Morgan Stanley. Please go ahead. Your line is open.

Hi, thanks. You called out the lease structure in Europe is allowing for rapid expansion in the region. How should investors think about the cyclicality of the fees associated with that growth versus the U.S.? And does the structure alter how we may need to think through how that market could scale or its sensitivity to things like interest rates?

So, Stephen, I'm sorry, I missed the gist of the question was, At the beginning, just repeat the beginning part of your question. I apologize.

Just understanding the cyclicality of these, you know, lease-oriented management rates in Europe and how to think about the scaling in that region.

Okay. I don't look at it as cyclical. Of course, it's dependent on then prevailing rates. But if you look at the form of ownership and the form of transactions that are done in Europe, a significant proportion of them are done through leases. We have, I think, one or two leases in our portfolio in Europe. We have not stepped into being a lessee pretty much anywhere in the world. I think we have a grand total, certainly less than 10, or is it five now? We have five leased hotels. And we just don't, leases are not really an easily managed, uh sort of class of ownership for us having said that there are a large number of developers in europe who and owners who are both very experienced in leases but also won't do a deal in any other form and that's a capital base that we have historically not actually focused our time and attention on um and we are now you know enabled to do that through the me and all hotels acquisition, but also now as we develop those relationships, we can extend that to some of our other brands, mostly in the select and upscale, you know, upscale and upper mid scale. So for that purpose, I am excited about it and I am excited that we that's a very, very large capital base. Some of the institutions are huge and have even come to the United States with deals to be the lessor for hotels again. This is not a form and format that we prefer, and therefore we do, we do really, we're not underwriting anything that I can think of across the globe right now in which we would be a lessee. So it's just not something we do. But working with a lessee to become the manager of the hotel or the franchisor, that is something that is got a significant new chapter of growth opportunity for us in Europe, especially.

So that all makes sense. I guess as a clarification, are these management fee structures or franchise fee structures unique or different relative to the U.S. or other markets, just given the unique ownership structure being leased?

No, they're quite typical, actually. So, I mean, rates might vary, royalty rates might vary, or the rent might look different, or whatever, you know, there are certain bespoke issues, but generally speaking, and we have, uh, the vast majority of the lender portfolio actually is leased in by the lender group. Um, so they are the lessee and we are the franchisor to the less, they are the lessee and manager, by the way. And we, um, our deal with them is, uh, as arrangement. Um, so. And those franchise deal terms are not different than what you would see in a normal franchise deal that you would do with an owner as opposed to a lessee.

Great. That's helpful. Thanks so much. I'll jump back in the queue.

Our next question comes from Richard Clark from Bernstein. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking my questions. I just want to, now we've got revised four-year guidance, I just want to call back to the analyst there you did last year. If I do the maths correctly, it looks like in 2025 to hit those targets, you'll have to grow EBITDA about 14%, free cash flow about 28%, and all while taking CapEx down by about 41%. So just your confidence in hitting those 2025 targets you know, based on where we are now in 2024.

Thank you, and good afternoon, Richard. I would say the outlook really is dependent a bit on what the overall economy and how macro factors impact. Having said that, there are certain dynamics, and I don't want to tilt too far into interpreting and extrapolating macro indicators from a very short-term to highly disrupted period, which is what we're living through right now, into the future. The underlying issue that we focus on is the general economic health and growth rate for the key markets that we are participating in. And yes, it is true that the that the public markets have been extraordinarily disrupted. It is not true that that is reflective of a massive disruption in the U.S. economic outlook or otherwise. Secondly, the rates have come down, fixed rates have come down variously between 40 and 50 basis points, excuse me, over the last five or six days. The floating rate market is actually quite stable at this point. Spreads have widened out a bit, but not materially on the fixed rate side. Not so much on the floating rate side. So I'm looking at a situation in which we do expect that the backdrop for openings and our net rooms growth is set up to be able to expand. assuming that we see rate adjustments in the future and we see the overall economic, sorry, financial market environment, the capital market environment improving. Secondly, CapEx has been dropping. I was thrilled to see the outlook that we've got currently, and it's going to be lower than that next year. So we are on path with respect to the drop in CapEx. and the further expansion of conversion from ebitda to free cash flow by virtue of our asset light trajectory so if you put all that together uh i feel pretty good about uh our outlook at this point um we are obviously tracking below the six to seven percent nrg uh that we had put out at investor day um i do think that that's temporal and Whether we get fully recovered to what we know we can sustain over the long term by next year or whether it takes a year and a half, I can't really predict at this point. But I would say the general direction of travel is consistent with what we set out in the investor day.

Okay, it makes sense. Maybe just as a follow-up, you've changed the definition of EBITDA. You've moved the transactional cost out of that. I guess in my experience, companies often do that when they know they've got a big cost coming up. So maybe what was the thesis behind making that definitional change to adjusted EBITDA?

Sure, Richard. The rationale was pretty simple. These are one-time costs that we experience in relation to our integration activity and also our transaction activity. And so As we consider true core earnings in EBITDA, we felt as though it was a better representation to remove these and also, you know, provide the visibility to all of you with respect to what those costs are outside of adjusted EBITDA. Integration costs, you will have seen that we've put on a separate line, and you'll see all of that through 2023 recast that we did in the first quarter. And then transaction costs for last year, we assumed about 10 million within to the 2023 annual year. And what I would say is with transaction costs, they can be variable, very variable from quarter to quarter. And we have very few, call it dead deal or abandoned costs. So when we closed on asset sales, they, they, or as we were working on transactions and asset sale transactions, they run through our GNA and then they get re-reported into a gain and loss on, on a sale of an asset. And when we acquire a company or undertake a transaction, like we did with UBC, they get recorded into the asset base. So, you know, this, this is why made the change the one-time nature and the variable nature. we are looking at our operating core performance without these two items. So now they're on a separate line item going forward.

I would also just point out, Richard, you know, I caught your implication that this might have to do with an outlook that includes some disruption because of this line item. That's not the case. If we were able to predict with precision what the transactional activity and exactly how that fell over a given quarter, we would probably be making a lot of other prognostications and be magical in some fashion. So it's sufficiently uncertain that we could never plan around something like that, just to be clear.

Okay. Makes sense. Thank you.

Our next question comes from Patrick Scholes from Truist. Please go ahead. Your line is open.

Hi, good morning. Just a couple of questions on China and incentive management fees. You know, currently right now, what percentage of your incentive management fees do come from China and how does that historically compare? And then my follow up question is, what is your visibility into REVPAR? for bookings in China? Basically, what is the booking window for your Chinese business? Thank you.

Let me make sure I have all of the elements, Patrick. As far as the composition of the China incentive fees as a percent of total, what I have off the top of my head is total fees for Greater China relative to our overall base is about high single digit composition. So that's Greater China as a percentage of our total. We are earning incentive fees in our Greater China hotels. Over 90% of our hotels are earning incentive fees. It's the structure there where we're earning fees on the first dollar of GOP that we earn. And that has actually remained pretty consistent period over period because of the nature of the structure, maybe a point or two lower than we were last year. As we consider what's happening in the operating environment, yes, REVPAR was negative in the quarter, and the demand expectations that we have going forward, given what we're seeing around travel outside the outbound China and other regions in Asia Pacific and the decline in domestic travel, we expect that that will continue in the second half of the year. So that's impacting top-line REVPAR. It's also impacting total revenue as you look at China total, greater China total revenue. So that dynamic is certainly impacting a negative growth rate at rev par and then an impact on total revenue is impacting GOP margins. So it's just lesser fees that we're earning in greater China in the quarter, certainly more than we had expected. And that's what's captured into our full year outlook, the impact of all. into the revised rev par outlook. Okay. And the IMF is about 3% of our gross fees on a global basis.

He also asked about booking curves.

And the booking curves. Yeah, you know, or the window. It's always been very short in greater China. Relative to other regions of the world, one of the primary drivers of that is the group business. So in the US, our group business is 30 plus percent. And so we obviously have more visibility to group for longer periods into the future. In China, it's closer to 10%. So that's part of the visibility. But in China, it can be days in many markets where the booking windows sit. And right now, we're seeing very short windows consistent with what we what we typically experience.

I would also just add quickly that the level of outbound travel is significant, probably higher than we would have otherwise thought. And we have said for a couple of quarters now that we do, embedded in our outlook, we believe that inbound traffic, sorry, inbound lift, airline lift into China will improve in the fourth quarter or towards the end of the year. We have not had that offset in China to date. So if you go to pre-pandemic levels, there was plenty of outbound travel. Everyone talked about the outbound travel from China being a major driver of world global travel demand. And that was true then, and it's beginning to be true again. But what was balanced then is an equal measure of high-rated business coming into China. That's not present currently.

Okay. Thank you for the color on all of that. I'm all set.

Sure. Our next question comes from Chad Bannon from Macquarie. Please go ahead. Your line is open.

Morning. Thanks for taking my question. With respect to the REVPAR guidance, has anything, or could you just kind of talk about what changed regarding the two components, ADR or occupancy? And, yeah, I guess just kind of broadly as you look out beyond 24, if you think the gains are going to be more from ADR or if there's still occupancy opportunities. Thanks.

Yes, the composition, Chad, is about split the way we're looking at our forecast for the remainder of the year. We do have a strong group in the second half, group on the books. You heard our pacing numbers at 7%. a healthy portion of that is rate growth, so maybe a little bit more skewed towards rate. And we definitely still have opportunity on the occupancy front. We've realized greater demand in the first half from business transient, which has been, you know, lagging for us, and those occupancy rates in our convention and business hotels are much closer to kind of pre-pandemic levels. But there's still some room to grow in the occupancy side. As we look forward, our group bookings are nicely split between occupancy and rate. So we have opportunity on both fronts.

Thank you, Joan. And then with regard to rooms under construction, how is that pacing against the pipeline and what do you think the biggest catalyst would be to get more of these pipeline rooms kind of shovel ready? Thanks.

Yeah, thank you. So, you know, over the course of the last several years, we've moved from percentage of our pipeline under construction from the high 30s to the low 30s, which is where we are now. So we have we have roughly 40,000 rooms under construction at the moment. That's about a two to two and a half percent decline year over year in terms of rooms under construction. Not surprising given the environment that everyone's talking about, but those are the facts that are associated with that. China overall is a bit lower than that in terms of the proportion of the pipeline that's under construction. Part of that has to do with the fact that we've actually executed quite a few or we've we have entered into agreements to execute some conversions in China, and that actually also inflates the pipeline that ends up in production earlier. But so it's not under construction. It may be under renovation or something else, but not technically under construction. The pipeline itself, I think the dynamics that would significantly change the what we're seeing currently is availability of capital for new starts in the United States. That's probably the number one. And number two would be a more favorable lending environment in China. We haven't been significantly hurt by that because most of our hotels are signed with state-owned enterprises, but it still has a marginal impact with respect to private developers who do depend on the debt markets in China to fund their projects.

Great. Thank you very much.

Sorry, go ahead.

We are just out of time for questions. I'll turn it back over to Mark Hoplamazian for closing remarks.

Thanks. I just want to thank all of you for your time this morning, and we continue to appreciate your continued interest in Hyatt and look forward to welcoming you to our hotels so that you can help our RevPAR outlook and otherwise, but mostly to experience the power of care as delivered by the Hyatt family. So we wish you all a great day ahead. Thank you.

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