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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-34521
HYATT HOTELS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-1480589 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) | |
| 71 South Wacker Drive, 12th Floor, Chicago, Illinois |
60606 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (312) 750-1234
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Class A Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of June 30, 2010, the aggregate market value of the registrant’s Class A common stock, $0.01 par value, held by non-affiliates of the registrant was approximately $1,619.9 million (based upon the closing sale price of the Class A common stock on that date on The New York Stock Exchange). The market value of the registrant’s Class B common stock is not included in the above value as there is no active market for such stock.
As of January 31, 2011, there were 44,502,196 shares of the registrant’s Class A common stock, $0.01 par value, outstanding and 129,466,000 shares of the registrant’s Class B common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2011 Annual Meeting of Stockholders to be held on June 15, 2011.
Table of Contents
HYATT HOTELS CORPORATION
FISCAL YEAR ENDED DECEMBER 31, 2010
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Disclosure Regarding Forward-Looking Statements
This annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements about the Company’s plans, strategies, financial performance, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
| • | the factors discussed in this annual report set forth under the sections titled “Risk Factors” in Part I, Item 1A, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7; |
| • | the rate and the pace of economic recovery following the economic downturn; |
| • | levels of spending in business and leisure segments as well as consumer confidence; |
| • | declines in occupancy and average daily rate; |
| • | hostilities, including future terrorist attacks, or fear of hostilities that affect travel; |
| • | travel-related accidents; |
| • | natural or man-made disasters such as earthquakes, tsunamis, tornados, hurricanes, floods and oil spills; |
| • | the seasonal and cyclical nature of the real estate and hospitality businesses; |
| • | changes in distribution arrangements, such as through internet travel intermediaries; |
| • | changes in the tastes and preferences of our customers; |
| • | relationships with associates and labor unions and changes in labor law; |
| • | financial condition of, and our relationships with, third-party property owners, franchisees and hospitality venture partners; |
| • | risk associated with potential acquisitions and dispositions and the introduction of new brand concepts; |
| • | changes in federal, state, local or foreign tax law; |
| • | increases in interest rates and operating costs; |
| • | fluctuations in currency exchange rates; |
| • | lack of acceptance of new brands or innovation; |
| • | general volatility of the capital markets and our ability to access the capital markets; |
| • | changes in the competitive environment in our industry and the markets where we operate; |
| • | outcomes of legal proceedings; and |
| • | violations of regulations or laws related to our franchising business. |
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements
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attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Terms Used in this Annual Report
Unless otherwise specified or the context otherwise requires, references in this annual report to “we,” “our,” “us,” “Hyatt,” “HHC,” and the “Company” refer to Hyatt Hotels Corporation and its consolidated subsidiaries.
As used in this annual report, the term “Pritzker family business interests” means (1) various lineal descendants of Nicholas J. Pritzker (deceased) and spouses and adopted children of such descendants; (2) various trusts for the benefit of the individuals described in clause (1) and trustees thereof; and (3) various entities owned and/or controlled, directly and/or indirectly, by the individuals and trusts described in (1) and (2).
As used in this annual report, the term “properties” refers to hotels that we manage, franchise, own or lease and our residential and vacation ownership units that we develop, sell and manage. “Hyatt-branded” refers to properties operated under our brands, including Park Hyatt, Andaz (our newest full service brand), Grand Hyatt, Hyatt Regency, Hyatt, Hyatt Place and Hyatt Summerfield Suites. Residential ownership units refers to residential units that we manage, provide services to or license our trademarks with respect to (such as serviced apartments and Hyatt-branded residential units), some of which we own, that are part of mixed-use projects and are often adjacent to a Hyatt-branded full service hotel. Vacation ownership units refers to the fractional and timeshare units that we develop, sell or manage that are part of the Hyatt Vacation Club, which is in the process of changing its name to Hyatt Residence Club. Hospitality ventures refer to entities in which we own less than a 100% equity interest.
As used in this annual report, the term “associates” refers to the more than 85,000 individuals working at our corporate and regional offices and our managed, franchised and owned properties. Of these 85,000 associates, we directly employ approximately 45,000. The remaining associates are employed by certain third-party owners and franchisees of our hotels.
Hyatt®, Park Hyatt®, Andaz®, Grand Hyatt®, Hyatt Regency®, Hyatt Place®, Hyatt Summerfield Suites®, Hyatt Vacation Club®, Hyatt Residence Club™, Hyatt Gold Passport®, Hyatt Resorts™ and related trademarks, logos, trade names and service marks appearing in this annual report are the property of Hyatt Corporation, a wholly owned subsidiary of Hyatt Hotels Corporation. All other trademarks, trade names or service marks appearing in this annual report are the property of their respective owners.
Reverse Stock Split and Reclassification of Common Stock
Except as otherwise indicated, information in this annual report:
| • | reflects the one-for-two reverse stock split of our common stock effected on October 14, 2009; and |
| • | reflects the reclassification of (i) 34,407 shares of common stock into 34,407 shares of Class A common stock and (ii) 168,005,588 shares of common stock into 168,005,588 shares of Class B common stock (and subsequent conversion of 38,000,000 of such shares into 38,000,000 shares of Class A common stock at the time such shares were sold by the selling stockholders in our initial public offering), effected on November 4, 2009 in connection with the filing of our amended and restated certificate of incorporation. |
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| Item 1. | Business. |
Our History
Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed by Pritzker family business interests and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.
Prior to June 30, 2004, Hyatt Corporation, which primarily consisted of the North American hotel management and franchise companies, was owned by HG, Inc. (HG). H Group Holding, Inc. (H Group), which is owned by Pritzker family business interests, owns HG. In addition to owning Hyatt Corporation, HG owned various other North American hospitality related businesses (primarily consisting of hotel properties and the vacation ownership business) and on June 30, 2004 contributed these hospitality related businesses to Hyatt Corporation. Following such contribution, the stock of Hyatt Corporation was distributed to the Pritzker family business interests that owned H Group. We refer to this transaction as the “June 2004 Transaction.”
Following the June 2004 Transaction, substantially all of the hospitality assets owned by Pritzker family business interests, including Hyatt Corporation and Hyatt International Corporation, were consolidated under a single entity. On August 4, 2004, Global Hyatt, Inc. was incorporated in Delaware and subsequently changed its name to Global Hyatt Corporation. On December 31, 2004, pursuant to a Master Contribution Agreement, the stock of Hyatt Corporation and the stock of AIC Holding Co. (AIC), the owner of Hyatt International Corporation and other international hospitality related assets and operations, as well as hospitality related assets and operations held by certain other entities owned by Pritzker family business interests, were contributed to Global Hyatt Corporation by their respective owners in exchange for shares of Global Hyatt Corporation common stock. As a result of this transaction, Hyatt Corporation, AIC and Hyatt International Corporation became wholly-owned subsidiaries of Global Hyatt Corporation. The contribution was reflected as a transaction between entities under common control as of January 1, 2004. On June 30, 2009, Global Hyatt Corporation changed its name to Hyatt Hotels Corporation.
On November 10, 2009, we completed an initial public offering of 43,700,000 shares of our Class A common stock, of which selling stockholders sold 38,000,000 shares and we sold 5,700,000 in connection with the underwriters’ exercise of their option to purchase additional shares. In connection with the offering, our Class A common stock began trading publicly on the New York Stock Exchange under the symbol “H” on November 5, 2009.
Overview
Hyatt Hotels Corporation is a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history. Our mission is to provide authentic hospitality by making a difference in the lives of the people we touch every day. We focus on this mission in pursuit of our goal of becoming the most preferred brand in each customer segment that we serve for our associates, guests and owners. We support our mission and goal by adhering to a set of core values that characterize our culture. We believe that our mission, goal and values, together with the strength of our brands, strong capital and asset base and opportunities for expansion, provide us with a platform for long-term value creation.
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We manage, franchise, own and develop Hyatt-branded hotels, resorts and residential and vacation ownership properties around the world. As of December 31, 2010, our worldwide portfolio consisted of 453 Hyatt-branded properties (127,507 rooms and units), including:
| • | 177 managed properties (68,239 rooms), all of which we operate under management agreements with third-party property owners; |
| • | 132 franchised properties (20,249 rooms), all of which are owned by third parties that have franchise agreements with us and are operated by third parties; |
| • | 90 owned properties (including 3 consolidated hospitality ventures) (23,637 rooms) and 6 leased properties (2,851 rooms), all of which we manage; |
| • | 24 managed properties owned or leased by unconsolidated hospitality ventures (10,330 rooms); |
| • | 15 vacation ownership properties (962 units), all of which we manage; and |
| • | 9 residential properties (1,239 units), all of which we manage and some of which we own. |
Our full service hotels and resorts operate under five world-recognized brands, Park Hyatt, Andaz, Grand Hyatt, Hyatt Regency and Hyatt. Our two select service brands are Hyatt Place and Hyatt Summerfield Suites (an extended stay brand). We develop, sell or manage vacation ownership properties in select locations as part of the Hyatt Vacation Club, which is in the process of changing its name to Hyatt Residence Club. We also manage, provide services to or license our trademarks with respect to residential ownership units that are often adjacent to a Hyatt-branded full service hotel. We consult with third parties in the design and development of such mixed-use projects based on our expertise as a manager and owner of vacation ownership properties, residential properties and hotels.
Our associates, whom we also refer to as members of the Hyatt family, are more than 85,000 individuals working at our corporate and regional offices and our managed, franchised and owned properties in 45 countries around the world. Substantially all of our hotel general managers are trained professionals in the hospitality industry with extensive hospitality experience in their local markets and host countries. The general managers of our managed properties are empowered to manage their properties on an independent basis based on their market knowledge, management experience and understanding of our brands. Our associates and hotel general managers are supported by our divisional management teams located in cities around the world and our executive management team, headquartered in Chicago.
We primarily derive our revenues from hotel operations, management and franchise fees, other revenues from managed properties and sales of vacation ownership properties. For the years ended December 31, 2010 and 2009, revenues totaled $3.5 billion and $3.3 billion, respectively, net income (loss) attributable to Hyatt Hotels Corporation totaled $66 million and $(43) million, respectively, and Adjusted EBITDA totaled $476 million and $406 million, respectively. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Business Metrics Evaluated by Management – Adjusted EBITDA” for our definition of Adjusted EBITDA, why we present it and for a reconciliation of our consolidated Adjusted EBITDA to net income (loss) attributable to Hyatt Hotels Corporation for the periods presented. For the years ended December 31, 2010 and 2009, 79.4% and 80.4% of our revenues were derived from operations in the United States, respectively. As of December 31, 2010, 74.3% of our long-lived assets were located in the United States. As of December 31, 2010, we had total debt of $771 million, cash and cash equivalents of $1.1 billion and short-term investments of $524 million. As of December 31, 2010, we had available borrowing capacity of $1.1 billion under our revolving credit facility. These sources provide us with significant liquidity and resources for future growth.
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Our Mission, Goal and Values
Our Mission
Our mission is to provide authentic hospitality by making a difference in the lives of the people we touch every day, including our associates, guests and owners.
Our Goal
Our goal is to be the most preferred brand in each customer segment that we serve for our associates, guests and owners.
Our Values
We aim to foster a common purpose and culture within the Hyatt family through shared core values of mutual respect, intellectual honesty and integrity, humility, fun, creativity and innovation.
Our mission, goal and values are interdependent, and we refer to this interdependence as the “Hyatt value chain.” The Hyatt value chain begins with our associates. We believe that our efforts to engage our associates in planning for how we can better serve our fellow associates, guests and owners contributes to their commitment to genuine service, which is the first step to achieving high levels of guest satisfaction. In our view, motivating our associates to become personally involved in serving and demonstrating loyalty to our guests is central to fulfilling our mission. We rely upon the management teams at each of our managed properties to lead by example and we provide them with the appropriate autonomy to make operational decisions in the best interest of the hotel and brand. We believe the managers of our franchised properties are experienced operators with high standards and have demonstrated commitment to our values and our approach to guest service that is designed to enhance guest satisfaction. High levels of guest satisfaction lead to increased guest preference for our brands, which we believe results in a strengthened revenue base over the long term. We also believe that engaged associates will enhance efficient operation of our properties, resulting in improved financial results for our property owners. Sustained adherence to these principles is a basis for our brand reputation and is one of the principal factors behind the decisions by our diverse group of hotel owners and developers to invest in Hyatt-branded properties around the world. We work with existing and prospective hotel owners and developers to increase our presence around the world, which we expect will lead to new channels for professional growth for our associates, guest satisfaction and brand preference and completing the Hyatt value chain.
Our Competitive Strengths
We have significant competitive strengths that support our goal of being the most preferred brand for our associates, guests and owners.
| • | World Class Brands. We believe that our widely recognized, industry leading brands provide us with a competitive advantage in attracting and driving preference for our associates, guests and owners. We have consistently received top rankings, awards and accolades for service and guest experience from independent publications and surveys, including Condé Nast Traveler, Travel and Leisure, Mobil and AAA. As an example, 59 properties across our Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt Vacation Club brands received the AAA four diamond lodging award in 2010. Our brand recognition and strength is key to our ability to drive preference for our brands among our associates, guests and owners. |
| • | Global Platform with Compelling Growth Potential. Our existing global presence is widely distributed and we operate in 21 of the 25 most populous urban centers around the globe based on demographic research. We believe that our existing hotels around the world provide us with a strong platform from which to selectively pursue new growth opportunities in markets where we are under-represented. We have a long history of executing on growth opportunities. Our dedicated global development executives in offices around the world apply their experience, judgment and knowledge to ensure that new Hyatt branded hotels enhance preference for our brands. An important aspect of our |
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| compelling growth potential is our strong brand presence in higher growth markets around the world such as India, China, Russia, the Middle East and Brazil. The combination of our existing presence and brands, experienced development team, established third-party relationships and significant access to capital provides us with a strong foundation for future growth and long-term value creation. |
| • | Deep Culture and Experienced Management Teams. Hyatt has a strong culture rooted in values that have supported our past and form the foundation for our future. The members of the Hyatt family are united by shared values, a common mission and a common goal. The associates at our properties are led by an experienced group of general managers. For example, the general managers at our full service owned and managed hotels have an average tenure of more than 22 years at Hyatt. Regional and divisional management teams located around the world support our hotel general managers by providing corporate resources, mentorship and coaching, owner support and other assistance necessary to help them achieve their goals. Senior operating management has an average of 29 years of experience in the industry. Our experienced executive management team sets overall policies for our company, supports our regional and divisional teams and our associates around the world, provides strategic direction and leads our growth initiatives worldwide. |
| • | Strong Capital Base and Disciplined Financial Approach. Our approach is to maintain appropriate levels of financial leverage and liquidity through industry cycles and economic downturns. As of December 31, 2010, we had cash and cash equivalents of $1.1 billion, short-term investments of $524 million and available borrowing capacity of $1.1 billion. We have no significant debt maturities through 2013. We believe that as a result of our balance sheet strength, we are uniquely positioned to take advantage of strategic opportunities to develop or acquire properties and brands. We adhere to a formal investment process in evaluating such opportunities with input from various groups within our global organization. |
| • | Diverse Exposure to Hotel Management, Franchising and Ownership. We believe that our experience as a multi-brand manager, franchisor and owner of hotels makes us one of the best positioned lodging companies in the world. Our mix of managed, franchised and owned hotels provides a broad and diverse base of revenues, profits and cash flows and gives us flexibility to evaluate growth opportunities across these three lines of business. |
| • | High Quality Owned Hotels Located in Desirable Markets. As of December 31, 2010, we own and operate a high quality portfolio of 90 owned properties and 24 managed properties owned or leased by unconsolidated hospitality ventures, consisting of luxury and upper-upscale full service and select service hotels in key markets. Our owned full service hotels are located primarily in key markets, including major business centers and leisure destinations, with strong growth potential, such as Chicago, London, New York, Paris, San Francisco, Seoul and Zurich. Our hospitality ventures include 50% ownership interests in properties in Mumbai and São Paulo. A number of these hotels are unique assets with high recognition and a strong position in their local markets. All of our owned select service hotels were renovated in 2007 and 2006 and are typically located near business districts, airports or attractions. As a significant owner of hotel assets, we believe we are well-positioned for a recovery of demand as we expect earnings growth from owned properties to outpace growth in revenues due to the fixed cost structure of these assets. This benefit can be achieved either through increased earnings from our owned assets or through value realized from selected asset sales. |
| • | A Track Record of Innovation. Successful innovation has been a hallmark of Hyatt since its founding. More than forty years ago, we opened the Hyatt Regency Atlanta, which was the first ever large-scale atrium lobby hotel. This was both an architectural icon as well as a highly functional hotel property that provided us an entry into the large-scale convention market. We also have a long track record of creative approaches to food and beverage outlets at our hotels throughout the world, which have led to highly profitable venues that create demand for our hotel properties, particularly in Asian markets. In addition, we successfully introduced new service models to the industry. We launched our Hyatt Place brand in 2006 and our Andaz brand in 2007, each of which features a unique internally developed service model that eliminates a number of de-personalized aspects of the hotel experience. |
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Our Business Strategy
Our goal is to be the most preferred brand in each customer segment that we serve for our associates, guests and owners. In order to achieve this goal, we enhance brand preference by understanding who our customers are and by focusing on what they need and want and how we can deliver value to them. This understanding and focus informs our strategy for improving the performance of our existing hotels and expanding the presence of the Hyatt brand in markets worldwide.
| • | Focus on Improvement in the Performance of Existing Hotels |
A key component of our strategy is to maximize revenues and manage costs at existing hotel properties. We strive to enhance revenues by focusing on increasing our share of hotel stays by our existing guests and increasing the number of new guests we serve on a regular basis, with the ultimate goal of establishing and increasing guest loyalty to our brands. We manage costs by setting performance goals for our hotel management teams, basing a portion of hotel management team compensation on whether performance goals are met, and granting our general managers operational autonomy. Managing costs is one way to improve hotel performance, and we believe that providing incentives to general managers to improve hotel performance leads to improved efficiency in ways appropriate for their respective properties. We support these efforts by assisting them with tools and analytics provided by our regional and corporate offices and by compensating our hotel management teams based on property performance.
| o | Increase Share of Hotel Stays. We intend to expand Hyatt’s share of hotel stays by continuously striving to provide genuine guest service and delivering value to our guests. Our existing customer base is diverse with different needs and preferences. We aim to provide differentiated service and product offerings targeted at each customer segment within each of our brands, such as meeting planners and convention guests, leisure guests and business travelers, in order to satisfy our customers’ specific needs. To provide our customers with the level of service and authentic hospitality that our customers have come to expect, we are committed to maintaining and renovating our properties over time, and have recently begun broad-scope renovation projects at five of our owned properties. Our Hyatt Gold Passport guest loyalty program is designed to attract new guests and to demonstrate our loyalty to our best guests. In the year ended December 31, 2010, new membership enrollment in our Hyatt Gold Passport program has increased by 13.6% compared to new members enrolled during the same period last year. Gold Passport members represented 25.1% of total room nights for 2010. Hyatt Gold Passport was recently honored with the Colloquy Award for Loyalty Innovation in Travel/Hospitality and with three awards from the Frequent Traveler Awards. In September 2010, we and Chase Card Services launched the Hyatt Card, a co-branded Visa® credit card. The Hyatt Card offers additional benefits to our guests by rewarding them with, among other benefits, two free nights at any Hyatt hotel when they first use their card and Hyatt Gold Passport points for hotel stays and other card purchases, and is another way to deepen our relationships with our guests and welcome new travelers to Hyatt hotels. |
| o | Emphasize Associate Engagement. Our brands are defined, in large part, by the authentic hospitality that is delivered to our guests by our associates. We believe that while a great product is necessary for success, a service model that promotes genuine service for our guests and that is focused on our customers’ particular needs is the key to a sustainable long-term advantage. Therefore, we strive to involve our associates in deciding how we serve our guests and what we can do to improve guest satisfaction. We align our associates’ interests with our goal of becoming the most preferred brand in each segment that we serve. We rely on our hotel general managers to lead by example and foster associate engagement. We believe that associate engagement results in higher levels of customer satisfaction and improves the performance of our properties. To assist in this process, we aim to ensure that talented management teams are in place worldwide and also reward those teams that achieve higher levels of employee engagement, guest satisfaction and hotel financial performance. |
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| o | Enhance Operational Efficiency. We strive to align our staffing levels and expenses with demand without compromising our commitment to authentic hospitality and high levels of guest satisfaction. During periods of declining demand for hospitality products and services we make significant changes in operations, including staff reductions at many of our hotels, outsourcing of certain services, renegotiation of contracts to improve pricing and modification of certain product standards to reduce costs without significantly impacting quality. As demand improves, we remain focused on actively managing expenses. We continue to incentivize and assist our hotel general managers as they proactively manage both the customer experience and the operating costs at each of their properties. |
| • | Expanding Our Presence in Attractive Markets |
We intend to drive brand preference by expanding the presence of all of our brands in attractive markets worldwide. We believe that the scale of our presence around the world is small relative to the recognition of our brands and our excellent reputation for service and, therefore, we have a unique opportunity to expand. We believe that our mission, goal and values, together with the strength of our brands, people, strong capital and asset base and opportunities for expansion provide us with a platform for long-term value creation.
| o | Increase Market Presence. We will focus our expansion efforts on under-penetrated markets where we already have an established presence and locations where our guests are traveling but where we do not have a presence. We will expand our presence by increasing the number of hotels under Hyatt brand affiliation, primarily by entering into new management and franchising agreements. We believe our extensive focus on the different customer groups that we serve and our understanding of how we can serve them in new locations will facilitate our growth. We have made significant progress in expanding our presence in 2010 through development of new hotels and conversion of existing hotels. In New York City, the opening of our two Andaz properties in 2010 and contract signings for new properties will expand our presence to six hotels. In 2010, we announced five conversions of existing hotels in North America to four different Hyatt brands. We continue to grow our presence in India and in 2010 announced development plans to expand into 15 new Indian markets over the next five years. In China, we recently announced that we have entered into long-term management agreements for 11 new Hyatt-branded hotels in emerging cities and resort destinations, giving us a total of 22 properties under development in China across all of our full service brands. |
| o | Expand our Select Service Presence. We intend to establish and expand Hyatt Place and Hyatt Summerfield Suites worldwide, which we believe will support our overall growth and enhance the performance of all of our brands. We intend to grow our select service presence through construction of new franchised properties by third-party developers, conversion and renovation of existing non-Hyatt properties, and, in certain cases participation in the development of properties that would be managed by us. To pursue this strategy, we have a dedicated select service development team. We believe that the opportunity for properties that provide a select offering of services at a lower price point than full service hotel alternatives is particularly compelling in certain emerging markets, such as Brazil, India, China and the Middle East where there is a large and growing middle class along with a meaningful number of local business travelers. During the year ended December 31, 2010, we opened 16 new Hyatt Place hotels and 4 new Hyatt Summerfield Suites hotels in North America, most of which were franchised properties. We also announced 15 Hyatt Place hotels under development in India and Panama. |
| o | Increase Focus on Franchising. We intend to increase our franchised hotel presence, primarily in North America, for our select service brands and our Hyatt and Hyatt Regency brands. By increasing our focus on franchising, we believe that we will gain access to capital from developers and property owners that specifically target franchising business opportunities. To pursue this strategy, we have established an internal team dedicated to supporting our franchise owners and to |
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| driving the expansion of our franchised hotel presence. We plan to expand existing relationships and develop new relationships with franchisees who demonstrate an ability to provide excellent customer service while maintaining our brand standards. In 2010, the number of our franchised hotels has increased from 109 to 132. Four of these hotels were previously managed by us. |
| o | Utilize our Capital and Asset Base for Targeted Growth. The combination of our significant liquidity and strong capital position coupled with our large, high quality asset base provides a unique platform to support our growth strategy. We intend to use our liquidity and strong capital base along with selected asset dispositions to redeploy capital to opportunities that will allow us to strengthen our management presence in key markets worldwide. In order to maximize long-term shareholder value we intend to selectively dispose of hotel properties and use the proceeds to expand our presence in markets as described above under “—Increase Market Presence” and “—Expand our Select Service Presence.” The form of our capital deployment will vary depending on the opportunity. We will assess and balance liquidity, value and strategic importance as we seek to expand our presence through investment. We also will continue to commit capital to fund the renovation of certain assets in our existing owned portfolio. While we may selectively dispose of hotel properties, given our focus and expertise as an owner, we expect to maintain significant ownership of hotel properties over time. During 2010, we invested capital to facilitate the redevelopment of the Hyatt Regency New Orleans and to purchase two parcels of land for hotel developments in Latin America. We committed to invest capital for the acquisition and redevelopment of a resort in Hawaii and the development of a Park Hyatt in New York. We also sold six properties during 2010 as we continue to execute our strategy of asset recycling. We sold these properties, but continue to manage or franchise each one for owners who have committed to invest in the property to improve the assets. |
| o | Pursue Strategic Acquisitions and Alliances. We expect to evaluate potential acquisitions of other brands or hospitality management or franchising companies as a part of our efforts to expand our presence. These acquisitions may include hotel real estate. We expect to focus on acquisitions that complement our ability to serve our existing customer base and enhance customer preference by providing a greater selection of locations, properties and services. Furthermore, we may pursue these opportunities in alliance with existing or prospective owners of managed or franchised properties to strengthen our brand presence. |
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Description of Our Brands
| Brand |
Segment | Customer Base |
December 31, 2010 % of our Total Rooms/Units |
December 31, 2010 Rooms/Units |
Selected Competitors |
Key Locations | ||||||||
| North America |
Intl | |||||||||||||
|
Full Luxury |
Individual business and leisure travelers; small meetings |
4% | 1,279 | 3,770 | Four Seasons, Ritz-Carlton, |
Buenos Aires, Paris, Shanghai, Sydney, Washington D.C. | |||||||
|
Full Service/ Upper Upscale |
Individual business and leisure travelers; small meetings |
<1% | 829 | 267 | W, Mondrian, The Standard |
New York, London, Los Angeles, San Diego | |||||||
|
Full Service/ Upper Upscale |
Individual business and leisure travelers; large and small meetings, social events |
17% | 8,237 | 13,331 | Mandarin Oriental, Shangri-La, InterContinental, Fairmont |
Beijing, Berlin, Dubai, Hong Kong, New York, Tokyo | |||||||
|
Full Service/ Upper Upscale |
Conventions, business and leisure travelers; large and small meetings, social events; associations |
53% | 48,976 | 18,139 |
Marriott, Sheraton, Renaissance, |
Boston, Delhi, London, Los Angeles, San Francisco | |||||||
|
Full Service/ Upper Upscale |
Business and leisure travelers; small meetings |
4% | 5,462 | 0 | Marriott, Hilton, InterContinental, independent and |
Seattle, Suburban Los Angeles, San Francisco, Key West | |||||||
|
Select Service/ Upscale |
Individual business and leisure travelers; small meetings |
16% | 20,434 | 0 | Courtyard by Marriott, Hilton Garden Inn |
Atlanta, Dallas, Houston, Miami, Phoenix | |||||||
|
Select Service/ Extended Stay |
Extended stay guests; individual business and leisure travelers; |
4% | 4,582 | 0 | Residence Inn by
Marriott, Suites |
Austin, Boston, Dallas, Miami, San Francisco, | |||||||
|
Vacation Ownership/ Branded |
Owners of vacation units, repeat Hyatt business and leisure guests |
2% | 962 | 1,239 |
Hilton Vacation |
Aspen, Beaver Creek, Carmel, Key West, Siesta Key Dubai, Fukuoka, | |||||||
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Park Hyatt
Park Hyatt provides discerning, affluent individual business and leisure guests with elegant and luxurious accommodations. Guests of Park Hyatt receive highly attentive personal service in an intimate environment. Located in many of the world’s premier destinations, each Park Hyatt is custom designed to combine sophistication with distinctive regional character. Park Hyatt features well-appointed guestrooms, meeting and special event spaces for smaller groups, critically acclaimed art programs and signature restaurants featuring award-winning chefs.
Andaz
Andaz is a hotel where our guests experience a vibrant yet relaxed atmosphere geared towards today’s individual business and leisure travelers. Each hotel is designed to reflect the unique cultural scene and spirit of the surrounding neighborhood. The hotels also feature a unique service model that removes a number of de-personalized aspects of a typical hotel experience. For example, each hotel allows guests to check-in to the hotel more efficiently through innovative techniques that include the use by our associates of a hand-held device for check-in. In addition, a laptop is available in the lobby area, known as the Andaz Lounge, upon arrival that allows the guest to check themselves into the hotel. During this check-in process and throughout a guest’s stay, complimentary beverages remain available in the Lounge. We have also simplified pricing for our guests as the room rate includes internet access, local phone calls and non-alcoholic beverages and snacks in the room.
Grand Hyatt
Grand Hyatt features large-scale, distinctive hotels in major gateway cities and resort destinations. With presence around the world and critical mass in Asia, Grand Hyatt hotels provide sophisticated global business and leisure travelers with upscale accommodations. Signature elements of the Grand Hyatt include dramatic architecture, innovative dining options, state of the art technology, spa and fitness centers and comprehensive business and meeting facilities appropriate for corporate meetings and social gatherings of all sizes.
Hyatt Regency
Hyatt Regency offers a full range of services and facilities tailored to serve the needs of meeting planners, business travelers and leisure guests. Properties generally range in size from 200 to over 2,000 rooms and are conveniently located in urban, suburban, airport, convention and resort destinations around the world. Hyatt Regency convention hotels feature spacious meeting and conference facilities designed to provide a productive environment. Hyatt Regency hotels in resort locations cater to couples seeking a getaway, families enjoying a vacation together and corporate groups seeking a relaxed atmosphere in which to conduct business and meetings.
Hyatt
Hyatt hotels are smaller-sized properties conveniently located in proximity to diverse business and leisure areas. With hotels typically ranging from 150 to 350 rooms, Hyatt hotels offer guests the opportunity to experience our signature service and hospitality in a vibrant environment. Customers include individual business and leisure travelers, and Hyatt hotels can accommodate smaller scale business meetings and social gatherings.
Hyatt Place
Hyatt Place is designed for the busy lifestyle of today’s multi-tasking business traveler and features a selected range of services aimed at providing casual hospitality in a well-designed, high-tech and contemporary environment. Property sizes typically range from 125 to 200 rooms and are located in urban, airport and suburban areas. Signature features of Hyatt Place include The Gallery, which offers a coffee and wine bar, a 24 hours per day, seven days per week guest kitchen with freshly prepared snacks and entrees, and daily complimentary continental breakfast. Hyatt Place guests are business travelers as well as families. Hyatt Place properties are also well suited to serve small corporate meetings.
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Hyatt Summerfield Suites
Hyatt Summerfield Suites is an extended-stay, residential-style hotel that aims to provide individual and family travelers with the feel of a modern condominium. The all-suite properties, typically 125 to 200 rooms, offer comforts of home such as fully equipped kitchens, flat panel HDTVs and free high-speed internet access. The public space features facilities such as a pool, a fitness center and a business center. A full breakfast every morning and an evening social on weekday evenings are complimentary to guests. Hyatt Summerfield Suites are located in urban, airport and suburban locations and can accommodate small corporate meetings and corporate clients seeking to place their employees on extended assignment.
Hyatt Residence Club
Hyatt Residence Club, which is changing its name from Hyatt Vacation Club, provides members with vacation ownership opportunities in regionally inspired and designed residential-style properties with the quality of the Hyatt brand. Members pre-purchase time at a Hyatt Residence Club property and have the flexibility of usage, exchange and rental. Hyatt Residence Club members can choose to occupy their vacation home, to exchange time among 15 Hyatt Residence Clubs, to trade their time for Gold Passport points or to travel within the Hyatt system. Alternatively, members can exchange their time for time at properties participating within Interval International’s program, a third-party company with over 2,500 resorts in its exchange network worldwide.
Residential Ownership Units
Residential ownership units consist of serviced apartments and Hyatt-branded residential units in, adjacent to, or near, certain of our Hyatt-branded full service hotels. These units are designed consistent with the brand standards of the Hyatt hotel with which they are associated or near which they are operated. Units typically feature a kitchenette and sitting area, and residents are provided with or can request various Hyatt hotel services.
Our Community Commitment
At Hyatt, we are committed to making a positive and lasting impact in every community in which we operate. We do this by demonstrating a strong commitment to preserving our natural environment through Hyatt Earth, by giving back to the local communities in which we operate through Hyatt Community, and with the volunteer services of our associates through Hyatt’s Family of Responsible and Caring Employees (F.O.R.C.E.).
| • | Hyatt Earth—Our global sustainability program with measurable results that promotes a culture of environmental awareness and rewards initiatives with positive environmental impact. |
| • | Hyatt Community—A philanthropic program that awards grants to nonprofit groups that support youth development and education or improve the environment in which the Hyatt family lives and works. |
| • | F.O.R.C.E.—A volunteer program that allows Hyatt associates worldwide to participate in local community outreach and volunteer efforts on paid company time. |
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Management Agreements
Pursuant to management agreements, we manage hotels and residential properties worldwide.
Fees
Our management agreements typically provide for a two-tiered fee structure that compensates us both for the volume of business we generate for the property as well as for the profitability of hotel operations. In these two-tier fee structures, our base compensation is a base fee that is usually an agreed upon percentage of gross revenues from hotel operations. In addition, we are incentivized to improve hotel profitability through an incentive fee that is typically calculated as a percentage of a hotel profitability measure, such as gross operating profit, adjusted profit or the amount by which gross operating profit or adjusted profit exceeds a fixed threshold. Outside of the United States our fees are often more dependent on hotel profitability measures either through a single management fee structure where the entire fee is based on a profitability measure, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee.
Terms and Renewals
The average remaining term of our management agreements with third party owners and unconsolidated hospitality ventures for full service hotels (other than those in development) is approximately 13 years, assuming no renewal options are exercised by either party. The average remaining term of our management agreements with third-party owners and unconsolidated hospitality ventures for select service hotels (other than those in development) is approximately 20 years, assuming no renewal options are exercised by either party.
Certain of our management agreements allow for extensions of the contract term by mutual agreement, or at the discretion of one of the parties. Including exercise of extension options that are in Hyatt’s sole discretion and assuming in certain cases that specific performance tests have been met, the average remaining term of our management agreements is approximately 20 years for our full service hotels located in the United States, Canada and the Caribbean, approximately 17 years for our full service hotels located throughout the rest of the world and approximately 46 years for our select service hotels. Twenty-two select service hotels are governed under the same management agreement, which has a remaining base term of approximately 20 years. Hyatt may elect to extend the term of this agreement for two additional fifteen-year terms.
Some of our management agreements grant early termination rights to owners of the hotels we manage upon the occurrence of a stated event, such as the sale of the hotel or our failure to meet a specified performance test. Generally, termination rights under performance tests are based upon the property’s individual performance or its performance when compared to a specified set of competitive hotels branded by other hotel operators, or both. These termination rights are usually triggered if we do not meet the performance tests over multiple years. We generally have the option to cure performance failures by paying an amount equal to the short fall but in some cases our cure rights may be limited and the result of our failure to meet a performance test may be the termination of our management agreement.
Many of our management agreements are subordinated to mortgages or other secured indebtedness of the owners. In North America, in the event lenders take possession of the hotel property through foreclosure or similar means, most lenders have agreed to recognize our right to continue to manage the hotels under the terms set forth in the management agreements.
Franchise Agreements
Pursuant to franchise agreements, we grant our franchisees the limited right to use our name, marks and system in the operation of franchised Hyatt, Hyatt Regency, Hyatt Place and Hyatt Summerfield Suites hotels. We do not directly participate in the management of our franchised hotels. However, franchisees are required to operate franchised hotels consistent with our brand standards. We approve the plans for, and the location of, franchised hotels and review the operation of these hotels to ensure that our standards are maintained. We
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provide support to and advice with respect to certain aspects of hotel operations for the benefit of our franchise owners and operators through our Franchise and Owner Relations Group.
Fees
In general, our franchisees pay us an initial application fee and ongoing royalty fees, the amount of which depends on whether the franchised property is a select or full service hotel. We franchise full service hotels under the Hyatt and Hyatt Regency brands. We franchise select service hotels under our Hyatt Place and Hyatt Summerfield Suites brands. Application fees are typically $60,000 for our Hyatt Place hotels, $50,000 for our Hyatt Summerfield Suites hotels and the greater of $100,000 or $300 per guest room for our full service hotels. Select service franchisees pay continuing royalty fees calculated as a percentage of gross room revenues which typically are 3% in the first year of operations, 4% in the second year and 5% through the remainder of the term. Our full service franchisees typically pay us royalty fees calculated as 6% of gross room revenues and 3% of gross food and beverage revenues, although in some circumstances we have negotiated other fee arrangements.
In addition to our franchise fees, we charge full service franchisees for certain services arranged and provided by us. These activities include centralized reservation functions, certain sales functions, information technology, national advertising, marketing and promotional services, as well as various accounting and insurance procurement services. We also charge select service franchisees for marketing, central reservations and technology services.
Terms and Renewals
The standard term of our franchise agreements is 20 years, with one 10 year renewal option exercisable by the franchisee, assuming the franchisee has complied with franchise agreement requirements and standards. We have the right to terminate franchise agreements upon specified events of default, including non-payment of fees and non-compliance with brand standards. In the event of early termination for any reason, our franchise agreements set forth liquidated damages that our franchisees must pay to us upon termination. The bankruptcy of a franchisee or lender foreclosure could result in the termination of the franchise agreement. The average remaining base term of our franchise agreements for our select service and full service hotels (other than those in development) is approximately 17 years.
Business Segment, Revenues and Geographical Information
For information regarding our three reportable business segments, revenues and geographical information, see Note 20 to our consolidated financial statements included in this annual report.
Sales, Marketing and Reservations
Sales
Our global sales organization is focused on growing market share with key accounts, identifying new business opportunities and maximizing our local customer base.
Our worldwide customers consist of: major corporations; national, state and regional associations; specialty market accounts (social, government, military, educational, religious and fraternal); travel organizations; and a broad and diverse group of individual consumers. Our worldwide sales force targets multiple brands to key customer accounts within these groups. No one customer is material to our business. Our global team consists of over 100 associates focused on group business, business and leisure traveler accounts and travel agencies. We also deploy approximately 25 associates to target the acquisition of new business with the goal of establishing new worldwide accounts.
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We also have regional sales offices throughout the world, including in New York, Chicago, Los Angeles, Washington D.C., London, Hong Kong, Mainz, Mumbai, Shanghai, Beijing, Tokyo, Mexico City, Cairo, Singapore, Saudi Arabia and Melbourne.
Our associates in our worldwide sales force and in our North American full service hotels use Envision, our proprietary sales tool, to manage the group rooms forecast, maintain an inventory of definite and tentative group rooms booked each day, streamline the process of checking guest room availability and rate quotes and determine meeting room availability.
In conjunction with our worldwide sales force, each hotel has an in-house team of sales associates. The in-house sales associates are focused on local and regional business opportunities, as well as securing the business generated from our worldwide accounts.
Hyatt seeks to maximize revenues in each hotel through a team of revenue management professionals. The goal of revenue management is to secure the right customers, on the right date, at the right price. Business opportunities are reviewed and agreed upon by the hotel’s revenue management team.
Marketing
Our marketing strategy is designed to maintain and build brand value and awareness while meeting the specific business needs of hotel operations. Building and differentiating each of our brands is critical to increasing Hyatt’s brand preference. We are focused on targeting the distinct guest segments that each of our brands serves and supporting the needs of the hotels by thorough analysis and application of data and analytics. Hyatt Gold Passport and Hyatt.com are the key components of our marketing strategy. Hyatt Gold Passport is a service and loyalty program with focus on driving guest satisfaction, recognition and differential services for our most loyal guests. Hyatt.com is our primary online distribution channel providing customers with an efficient source of information about our hotels and an effective booking experience.
Reservations
We have a central reservation system that provides a comprehensive view of inventory, while allowing for local management of rates based on demand. Through this system, we are able to allow bookings by hotels directly, via telephone through our call centers, by travel agents and online through Hyatt.com.
We have eight call centers that service our global guest base 24 hours per day, seven days per week and provide reservation services in over 25 languages. While we continue to provide full reservations services via telephone through our call centers, we have also invested significant amounts in internet booking capabilities on Hyatt.com and through online booking partners.
In addition, some of our hotel rooms at hotels and resorts we manage or franchise are booked through internet travel intermediaries and partners and online travel service providers. We also engage third-party intermediaries who collect fees by charging our hotels and resorts a commission on room revenues, including travel agencies and meeting and event management companies.
Hyatt Gold Passport
We operate a guest loyalty program, Hyatt Gold Passport. This program generates substantial repeat guest business by rewarding frequent stays with points toward free hotel nights and other rewards.
Hyatt Gold Passport members earn points based on their spending at our hotels or in connection with spending on the Hyatt Card. Hyatt Gold Passport points can be redeemed at all hotels across our brands and can also be converted into airline miles with more than 30 participating airlines.
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The Hyatt Gold Passport program is funded through a contribution from eligible revenues generated from Hyatt Gold Passport members. These funds are applied to reimburse hotels for room nights where guests redeem Hyatt Gold Passport points and to pay for administrative expenses and marketing initiatives to support the program.
As of December 31, 2010, the Hyatt Gold Passport program had over 10 million members, and during 2010, Hyatt Gold Passport members represented 25.1% of total room nights. We expect our Hyatt Gold Passport program to continue to have a positive impact on our brands.
Competition
There is intense competition in all areas of the hospitality industry in which we operate. Competition exists for hotel guests, management agreements and franchise agreements and sales of vacation ownership properties and branded residential properties. Our principal competitors are other operators of full service, select service and extended stay properties, including other major hospitality chains with well established and recognized brands. We also compete against small chains and independent and local owners and operators.
We compete for guests based primarily on brand name recognition and reputation, location, customer satisfaction, room rates, quality of service, amenities, quality of accommodations, security and the ability to earn and redeem loyalty program points.
We compete for management agreements based primarily on the value and quality of our management services, our brand name recognition and reputation, our ability and willingness to invest our capital in third-party owned or hospitality venture projects, the level of our management fees and the economic advantages to the property owner of retaining our management services and using our brand name. We compete for franchise agreements based primarily on brand name recognition and reputation, the room rate that can be realized and total revenues we can deliver to the properties. Other competitive factors for management and franchise agreements include relationships with property owners and investors, including institutional owners of multiple properties, marketing support, reservation and e-commerce system capacity and efficiency and the ability to make investments that may be necessary to obtain management and franchise agreements.
We compete for sales of our vacation ownership properties based principally on location, quality of accommodations, price, financing terms, quality of service, flexibility of usage, opportunity to exchange into other vacation properties and brand name recognition and reputation. In addition to competing with other hotel and resort properties, our vacation ownership properties compete with national and independent vacation ownership club operators as well as with owners reselling their interests in these properties. Our ability to attract and retain purchasers of our vacation ownership properties depends on our success in distinguishing the quality and value of our vacation ownership products and services from those offered by others.
The universe of branded lodging operators with a global reach and depth of product and offerings similar to us is limited. We believe that our strong customer base, prominent brand recognition, strategic property locations and global development team will enable us to compete effectively. For additional information, see Part I, Item 1A, “Risk Factors—Risks Related to Our Business—Because we operate in a highly competitive industry, our revenues, profits or market share could be harmed if we are unable to compete effectively.”
Seasonality
The hospitality industry is seasonal in nature. The periods during which our lodging properties experience higher revenues vary from property to property, depending principally upon location and the customer base served. Based upon historical results, our North American properties typically generate the highest revenues in the second quarter and our international properties generally experience the highest revenues during the fourth quarter of each year. We generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters.
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Cyclicality
The hospitality industry is cyclical and generally follows, on a lagged basis, the general economy. There is a history of increases and decreases in demand for hotel rooms, in occupancy levels and in rates realized by owners of hotels through economic cycles. Variability of results through some of the cycles in the past has been more severe due to changes in the supply of hotel rooms in given markets or in given categories of hotels. The combination of changes in economic conditions and in the supply of hotel rooms can result in significant volatility in results for owners and managers of hotel properties. The costs of running a hotel tend to be more fixed than variable. Because of this, in an environment of declining revenues the rate of decline in earnings will be higher than the rate of decline in revenues. Conversely, in an environment of increasing demand and room rates, the rate of increase in earnings is typically higher than the rate of increase in revenues. The vacation ownership business is also cyclical. The demand for vacation ownership units is affected by the availability and cost of financing for purchases of vacation ownership units as well as general economic conditions and the relative health of the housing market.
Intellectual Property
In the highly competitive hospitality industry in which we operate, trademarks, service marks, trade names and logos are very important in the sales and marketing of our hotels, residential and vacation ownership properties and services. We have a significant number of trademarks, service marks, trade names, logos and pending registrations, and significant resources are expended each year on surveillance, registration and protection of our trademarks, service marks, trade names and logos, which we believe have become synonymous in the hospitality industry with a reputation for excellence in service and authentic hospitality.
Government Regulation
We are subject to numerous federal, foreign, state and local government laws and regulations, including those relating to the preparation and sale of food and beverages, building and zoning requirements, data privacy and general business license and permit requirements, in the various jurisdictions in which we manage, franchise and own hotels. Our ability to develop new hotel properties and to remodel, refurbish or add to existing properties is also dependent on obtaining permits from local authorities. We are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions, hiring and firing, non-discrimination for disabilities and other individual characteristics, work permits and benefit offerings. Federal, state and provincial laws and regulations also require certain registration, disclosure statements, compliance with specific standards of conduct and other practices with respect to the franchising of hotels. Additionally, the vacation ownership properties we operate are subject to local, state and federal requirements regarding the licensing of sales agents, compliance of marketing materials and numerous other requirements regarding the sale and management of vacation ownership properties. Compliance with these various laws and regulations can affect the revenues and profits of properties managed, franchised or owned and of our vacation ownership business and could adversely affect our operations. We believe that our businesses are conducted in substantial compliance with applicable laws and regulations.
We manage and own hotels with casino gaming operations as part of or adjacent to the hotels. However, with the exception of the Hyatt Regency Aruba, third parties manage and operate the casinos. We do hold and maintain the casino gaming license and manage the casino located at the Hyatt Regency Aruba. As a result, our business operations at the Hyatt Regency Aruba are subject to the licensing and regulatory control of the Departamento pa Asuntonan di Casino (D.A.C.), the regulatory agency responsible for gaming licenses and operations in Aruba. The gaming operations at the Hyatt Regency Aruba are also regulated by the Nevada Gaming Commission and the Nevada State Gaming Control Board because a provider of services at the Hyatt Regency Aruba also operates casinos in Nevada.
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Employees
As of December 31, 2010, we had approximately 45,000 employees at our corporate offices, divisional offices, owned and managed hotels and residential and vacation ownership properties. Approximately 25% of those employees were either represented by a labor union or had terms of employment that were determined under a labor agreement. Some of our more than 85,000 associates are employed by certain third-party owners and franchisees of our hotels and are not included in the 45,000 figure above because we do not directly employ them. We believe relations with our employees and associates are good.
Environmental Matters
In connection with our ownership and management of hotels and development of other real properties, we are subject to various foreign, federal, state and local laws, ordinances and regulations relating to environmental protection. Under some of these laws, a current or former owner or operator of real property may be held liable for the costs of investigating or remediating hazardous or toxic substances or wastes on, under or in such real property, as well as third-party sites where the owner or operator sent wastes for disposal. Such laws may impose liability without regard to whether the owner or operator knew, or was at fault in connection with, the presence or release of such hazardous substances or wastes. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. Although we are not aware of any current material obligations for investigating or remediating hazardous substances or wastes at our owned properties, the future discovery of substances or wastes at any of our owned properties, or the failure to remediate such contaminated property properly, could adversely affect our ability to develop or sell such real estate, or to borrow using such real estate as collateral. In addition, the costs of investigating or remediating contamination, at our properties or at properties where we sent substances or wastes for disposal, may be substantial.
We are also subject to various requirements, including those contained in environmental permits required for our operations, governing air emissions, effluent discharges, the use, management and disposal of hazardous substances and wastes and health and safety. From time to time, we may be required to manage, abate or remove mold, lead or asbestos-containing materials at our properties. We believe that our properties and operations are in compliance, in all material respects, with all foreign, federal, state and local environmental laws and ordinances. However, additional operating costs and capital expenditures could be incurred if additional or more stringent requirements are enacted in the future.
Insurance
We maintain insurance coverage for general liability, property, workers’ compensation and other risks with respect to our business. Our general liability insurance provides coverage for any claim, including terrorism, resulting from our operations, goods and services and automobiles. All owned hotels are covered by Hyatt’s insurance program. Hotels managed by Hyatt are permitted to participate in Hyatt’s insurance programs by mutual agreement with our hotel owners. Our management agreements require managed hotels that do not participate in our property insurance program, and our franchise agreements require that all franchised hotels, be insured at coverage levels generally consistent with the coverage levels under our insurance programs, including liability, property coverage, business interruption coverage and workers’ compensation insurance. We are typically covered under these insurance policies to the extent necessary and reasonable. We believe our insurance policies are adequate for foreseeable losses and on terms and conditions that are reasonable and customary with solvent insurance carriers.
Stockholder Agreements
The following is a summary of the provisions of the Amended and Restated Global Hyatt Agreement, Amended and Restated Foreign Global Hyatt Agreement, Amended and Restated Agreement Relating to Stock and 2007 Stockholders’ Agreement. The following descriptions of these agreements do not purport to be
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complete and are subject to, and qualified in their entirety by, the Amended and Restated Global Hyatt Agreement, Amended and Restated Foreign Global Hyatt Agreement, Amended and Restated Agreement Relating to Stock and 2007 Stockholders’ Agreement, copies of which have been filed with the SEC and are incorporated by reference herein. For additional information regarding these agreements, please also refer to Part I, Item 1A, “Risk Factors – Risks Related to Share Ownership and Stockholder Matters.”
Amended and Restated Global Hyatt Agreement
Mr. Thomas J. Pritzker, Mr. Marshall E. Eisenberg and Mr. Karl J. Breyer, solely in their capacity as co-trustees of the U.S. situs trusts for the benefit of certain lineal descendants of Nicholas J. Pritzker, deceased, that own, directly or indirectly, shares of our common stock, and the adult beneficiaries of such trusts, including Mr. Thomas J. Pritzker, our executive chairman, and Ms. Penny Pritzker, one of our directors, have entered into the Amended and Restated Global Hyatt Agreement pursuant to which they have agreed to, among other things, certain voting agreements and limitations on the sale of shares of our common stock. Pritzker family business interests own, directly or indirectly, 104,365,554 shares, or 60%, of our total outstanding common stock and control approximately 77.9% of our total voting power. Specifically, such parties have agreed that until the later to occur of (i) January 1, 2015 and (ii) the date upon which more than 75% of the Company’s fully diluted shares of common stock is owned by persons other than Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of Pritzker family members and spouses), all Pritzkers (and their successors in interest, if applicable), but not the transferees by sale (other than Pritzkers who purchase directly from other Pritzkers), will vote all of their voting securities consistent with the recommendations of our board of directors with respect to all matters assuming agreement as to any such matter by a majority of a minimum of three independent directors (excluding for such purposes any Pritzker) or, in the case of transactions involving us and an affiliate, assuming agreement of all of such minimum of three independent directors (excluding for such purposes any Pritzker). All Pritzkers have agreed to cast and submit by proxy to us their votes in a manner consistent with the foregoing voting agreement at least five business days prior to the scheduled date of any annual or special meeting of stockholders.
In addition, such parties have agreed that until the later to occur of (i) January 1, 2015 and (ii) the date upon which more than 75% of the Company’s fully diluted shares of common stock is owned by persons other than Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses), all Pritzker family members and spouses (including U.S. and non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses or affiliates of any thereof) in a “beneficiary group” (including trusts only to the extent of the then current benefit of members of such beneficiary group) may sell up to 25% of their aggregate holdings of our common stock, measured as of November 4, 2009, the date of effectiveness of the registration statement on Form S-1 (File No. 333-161068) relating to our initial public offering of our Class A common stock, in each 12-month period following the date of effectiveness of such registration statement (without carry-overs), and shall not sell more than such amount during any such period. Upon the unanimous affirmative vote of our independent directors (excluding for such purposes any Pritzker), such 25% limitation may, with respect to each such 12 month period, be increased to a higher percentage or waived entirely. Sales of our common stock, including Class A common stock and Class B common stock, between and among Pritzkers is permitted without regard to the sale restrictions described above and such sales are not counted against the 25% sale limitation.
All shares of our common stock owned by each beneficiary group (including trusts only to the extent of the then current benefit of members of such beneficiary group) are freely pledgeable to an institutional lender and such institutional lender will not be subject to the sale restrictions described above upon default and foreclosure. Pursuant to the terms of the Amended and Restated Global Hyatt Agreement, the co-trustees of the Pritzker family U.S. situs trusts agreed that it is in the best interests of the adult beneficiaries of such trusts to distribute Hyatt stock from such trusts in consultation with the adult beneficiaries as soon as practicable following November 4, 2009, the date of effectiveness of the registration statement relating to our initial public offering of
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our Class A common stock. The distribution of Hyatt stock from the Pritzker family U.S. situs trusts occurred on August 17, 2010. In connection with such distribution, the trustees of the recipient personal trusts became party to the Amended and Restated Global Hyatt Agreement.
The Amended and Restated Global Hyatt Agreement may be amended, modified, supplemented or restated by the written agreement of the co-trustees of the Pritzker family U.S. situs trusts, 75% of the adult beneficiaries named below and a majority of the other adult beneficiaries party to the agreement. Each of Thomas J. Pritzker, Nicholas J. Pritzker, James N. Pritzker, John A. Pritzker, Linda Pritzker, Karen L. Pritzker, Penny Pritzker, Daniel F. Pritzker, Anthony N. Pritzker, Gigi Pritzker Pucker and Jay Robert Pritzker, and their respective lineal descendants and current spouse, if relevant, make up a “beneficiary group.”
Disputes that relate to the subject matter of the Amended and Restated Global Hyatt Agreement are subject to arbitration pursuant to the terms of the agreement. The exclusive requirement to arbitrate under the Amended and Restated Global Hyatt Agreement shall not apply with respect to the manner in which Hyatt’s operations are conducted to the extent the parties (in their capacities as stockholders) and non-Pritzker public stockholders are affected comparably; provided, however, that a party may participate in and benefit from any shareholder litigation initiated by a non-party to the agreement. A party to the agreement may not solicit others to initiate or be a named plaintiff in such litigation (i) unless two thirds of the independent directors (excluding for such purposes any Pritzker) on our board of directors (consisting of at least three independent directors) do not vote in favor of the matter that is the subject of the litigation or (ii) in the case of affiliated transactions reviewed by our board of directors, unless at least one independent director (excluding for such purposes any Pritzker) did not approve the transaction.
Amended and Restated Foreign Global Hyatt Agreement
The adult beneficiaries of the non-U.S. situs trusts for the benefit of certain lineal descendants of Nicholas J. Pritzker, deceased, including Mr. Thomas J. Pritzker and Ms. Penny Pritzker, have entered into the Amended and Restated Foreign Global Hyatt Agreement pursuant to which they have agreed to, among other things, certain voting agreements and limitations on the sale of shares of our common stock. The adult beneficiaries have informed CIBC Trust Company (Bahamas) Limited, in its capacity as trustee of such non-U.S. situs trusts, of their agreement and expressed their desire that the trustee act in accordance with the provisions of the Amended and Restated Foreign Global Hyatt Agreement. CIBC, as trustee, has joined the Amended and Restated Foreign Global Hyatt Agreement. Pritzker family business interests own, directly or indirectly, 104,365,554 shares, or 60%, of our total outstanding common stock and control approximately 77.9% of our total voting power. Specifically, such parties have agreed that until the later to occur of (i) January 1, 2015 and (ii) the date upon which more than 75% of the Company’s fully diluted shares of common stock is owned by persons other than Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses), all Pritzkers (and their successors in interest, if applicable), but not the transferees by sale (other than Pritzkers who purchase directly from other Pritzkers), will vote (or cause to be voted) all of the voting securities held directly or indirectly by them consistent with the recommendations of our board of directors with respect to all matters assuming agreement as to any such matter by a majority of a minimum of three independent directors (excluding for such purposes any Pritzker) or, in the case of transactions involving us and an affiliate, assuming agreement of all of such minimum of three independent directors (excluding for such purposes any Pritzker). All Pritzkers have agreed to cast and submit by proxy to us their votes in a manner consistent with the foregoing voting agreement at least five business days prior to the scheduled date of any annual or special meeting of stockholders.
In addition, such parties have agreed that until the later to occur of (i) January 1, 2015 and (ii) the date upon which more than 75% of the Company’s fully diluted shares of common stock is owned by persons other than Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses), all Pritzker family members and spouses (including U.S. and non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses and/or affiliates of any thereof) in a
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“beneficiary group” (including trusts only to the extent of the then current benefit of members of such beneficiary group) may sell up to 25% of their aggregate holdings of our common stock, measured as of November 4, 2009, the date of effectiveness of the registration statement on Form S-1 (File No. 333-161068) relating to our initial public offering of our Class A common stock, in each 12-month period following the date of effectiveness of such registration statement (without carry-overs), and shall not sell more than such amount during any such period. Upon the unanimous affirmative vote of our independent directors (excluding for such purposes any Pritzker), such 25% limitation may, with respect to each such 12 month period, be increased to a higher percentage or waived entirely. Sales of our common stock, including Class A common stock and Class B common stock, between and among Pritzkers is permitted without regard to the sale restrictions described above and such sales are not counted against the 25% sale limitation.
All shares of our common stock owned directly or indirectly by each beneficiary group (including trusts only to the extent of the then current benefit of members of such beneficiary group) are freely pledgeable to an institutional lender and such institutional lender will not be subject to the sale restrictions described above upon default and foreclosure. Pursuant to the terms of the Foreign Amended and Restated Global Hyatt Agreement, the adult beneficiaries agreed that it is in their best interests for, and informed CIBC Trust Company (Bahamas) Limited, as trustee of the Pritzker family non-U.S. situs trusts, and the directors if IHE, INC. and its subsidiaries that it is the adult beneficiaries’ desire that CIBC and the directors of IHE, INC. and its subsidiaries distribute Hyatt stock from IHE, INC. and such non-U.S. situs trusts in consultation with the adult beneficiaries as soon as practicable following November 4, 2009, the date of effectiveness of the registration statement relating to our initial public offering of our Class A common stock, subject to the 180-day lock-up period agreed to with the underwriters. The distribution of Hyatt stock from the Pritzker family non-U.S. situs trusts and IHE, INC. occurred on August 17, 2010. In connection with such distribution, the trustees of the recipient personal trusts became party to the Amended and Restated Foreign Global Hyatt Agreement.
The Amended and Restated Foreign Global Hyatt Agreement may be amended, modified, supplemented or restated by the written agreement of 75% of the adult beneficiaries named below and a majority of the other adult beneficiaries party to the agreement. Each of Thomas J. Pritzker, Nicholas J. Pritzker, James N. Pritzker, John A. Pritzker, Linda Pritzker, Karen L. Pritzker, Penny Pritzker, Daniel F. Pritzker, Anthony N. Pritzker, Gigi Pritzker Pucker and Jay Robert Pritzker, and their respective lineal descendants and current spouse, if relevant, make up a “beneficiary group.”
Disputes that relate to the subject matter of the Amended and Restated Foreign Global Hyatt Agreement are subject to arbitration pursuant to the terms of the agreement. The exclusive requirement to arbitrate under the Amended and Restated Foreign Global Hyatt Agreement shall not apply with respect to the manner in which Hyatt’s operations are conducted to the extent the parties (in their capacities as stockholders) and non-Pritzker public stockholders are affected comparably; provided, however, that a party may participate in and benefit from any shareholder litigation initiated by a non-party to the agreement. A party to the agreement may not solicit others to initiate or be a named plaintiff in such litigation (i) unless two thirds of the independent directors (excluding for such purposes any Pritzker) on our board of directors (consisting of at least three independent directors) do not vote in favor of the matter that is the subject of the litigation or (ii) in the case of affiliated transactions reviewed by our board of directors, unless at least one independent director (excluding for such purposes any Pritzker) did not approve the transaction.
Amended and Restated Agreement Relating to Stock
In addition to the Amended and Restated Global Hyatt Agreement, Mr. Thomas J. Pritzker, Mr. Marshall E. Eisenberg and Mr. Karl J. Breyer, solely in their capacity as co-trustees of U.S. situs trusts for the benefit of Mr. Thomas J. Pritzker, Ms. Penny Pritzker and Ms. Gigi Pritzker Pucker and their lineal descendants, that own, directly or indirectly, shares of our common stock and Mr. Thomas J. Pritzker, Ms. Penny Pritzker and Ms. Gigi Pritzker Pucker and their respective adult lineal descendants have entered into an Amended and Restated Agreement Relating to Stock whereby such parties have agreed to further restrict their ability to transfer an aggregate of 32,882,585 shares of our common stock. Subject to limited permitted transfers described in the
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agreement, and subject to the terms of the Amended and Restated Global Hyatt Agreement and Amended and Restated Foreign Global Hyatt Agreement described above, the parties have agreed that each stockholder party to the Amended and Restated Agreement Relating to Stock may transfer up to one-third of its common stock held as of August 28, 2007 (or deemed to be held as of such date) to unaffiliated third parties during each 365-day period beginning on the dates that are three and one-half, four and one-half and five and one-half years following November 10, 2009, the closing date of our initial public offering; provided that such transfers are accomplished by way of a broad distribution sale. In addition, subject to the terms of the Amended and Restated Global Hyatt Agreement and Amended and Restated Foreign Global Hyatt Agreement, each of such stockholders may transfer up to one-third of its common stock held as of August 28, 2007 (or deemed to be held as of such date) to unaffiliated third parties (1) at any time following the end of the first calendar year during which the “existing stockholders” (as described below) owned less than 25% of our common stock at any time during such year or (2) at any time following both (a) August 28, 2007 and (b) December 23, 2010, the first date on which the applicable market value of our Class A common stock exceeded 165% of the gross price per share at which the Class A common stock was first traded in connection with our initial public offering; provided that such transfers are accomplished by way of an underwritten public offering or in an otherwise broad distribution sale. The term “existing stockholders” is defined in the agreement to mean (i) members of the Pritzker family who are lineal descendants of Nicholas J. Pritzker, deceased, and their spouses, (ii) trusts for the benefit of such persons, or (iii) affiliates of any such persons listed in clauses (i) and (ii). In addition, no stockholder party to the Amended and Restated Agreement Relating to Stock may transfer (1) the legal or beneficial ownership of any common stock held by such stockholder unless such acquiring person’s ownership of common stock is not reasonably likely to jeopardize any licensing from a governmental authority, (2) any common stock to a competitor of ours engaged in one or more of the hospitality, lodging or gaming industries, (3) any common stock to an aggregator (i.e., a person who is required to file a Schedule 13D (or successor form) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), disclosing an intent other than for investment) or (4) any common stock that would cause a stockholder to violate any provision of the Amended and Restated Agreement Relating to Stock. Such restrictions are qualified by the “actual knowledge” of the transferring stockholder in the case of transfers pursuant to an underwritten public offering or a broad distribution sale.
The transfer restrictions set forth in the Amended and Restated Agreement Relating to Stock expire at 11:59 p.m. (Central time) on the earlier of the day after the date that is five and one-half years following November 10, 2009 (the closing date of our initial public offering) or the date on which the stockholders party to the 2007 Stockholders’ Agreement are released from the transfer restrictions set forth therein. The Amended and Restated Agreement Relating to Stock may be amended by the holders of a majority of the restricted stock held by the stockholders party to the agreement and each of Thomas J. Pritzker, Penny Pritzker and Gigi Pritzker Pucker, and may be terminated by the written agreement of each of the parties thereto. Disputes that relate to the subject matter of the Agreement Relating to Stock are subject to arbitration.
2007 Stockholders’ Agreement
In connection with the issuance and sale of 100,000 shares of our Series A Convertible Preferred Stock to GS Sunray Holdings, L.L.C. (“GSSH”) and GS Sunray Holdings Parallel, L.L.C. (“GSSHP” and collectively, the “Goldman Sachs Funds”), affiliates of Goldman Sachs & Co., and the execution of a Subscription Agreement in August 2007, we entered into the 2007 Stockholders’ Agreement with Madrone, the Goldman Sachs Funds and an additional investor that provides for certain rights and obligations of these stockholders, including the following:
Transfer Restrictions
Other than with respect to the 6,118,275 shares of common stock received by such stockholders in the May 2009 private placement transaction (which, upon the filing of our Amended and Restated Certificate of Incorporation on November 4, 2009, were reclassified into an equal number of shares of Class B common stock), these stockholders are restricted from transferring any shares of our common stock held by them, except to us,
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their affiliates (with the prior written consent of our board of directors), in limited amounts over specified time periods as described below and as otherwise permitted pursuant to the terms of the agreement. Subject to the rights of first refusal and “drag along” rights described below and provided that such transfers are accomplished by way of a broad distribution sale, following the consummation of our initial public offering on November 10, 2009, each stockholder party to the 2007 Stockholders’ Agreement may transfer up to one-third of its common stock acquired under the Subscription Agreement or upon conversion of Series A Convertible Preferred Stock to unaffiliated third parties during each 365-day period beginning on the three and one-half, four and one-half and five and one-half year anniversaries of November 10, 2009, the closing date of our initial public offering. In addition, subject to the rights of first refusal and “drag along” rights described below, each of such stockholders may transfer up to one-third of its common stock acquired under the Subscription Agreement or upon conversion of Series A Convertible Preferred Stock to unaffiliated third parties (1) at any time following the end of the first calendar year during which the “existing stockholders” (as described below) owned less than 25% of our common stock at any time during such year or (2) at any time following both (a) May 13, 2011, the second anniversary of the issuance of common stock to the relevant stockholders under the Subscription Agreement or the issuance of common stock upon conversion of the Series A Convertible Preferred Stock and (b) December 23, 2010, the first date on which the applicable market value exceeds 165% of the gross price per share at which the Class A common stock was first traded in connection with our initial public offering; provided that such transfers are accomplished by way of an underwritten public offering or in an otherwise broad distribution sale. The term “existing stockholders” is defined in the agreement to mean (i) members of the Pritzker family who are lineal descendants of Nicholas J. Pritzker, deceased, and their spouses, (ii) trusts for the benefit of such persons and/or (iii) affiliates of any such persons listed in clauses (i) and (ii). Subject to the rights of first refusal and “drag along” rights described below, the transfer restrictions set forth in the 2007 Stockholders’ Agreement expire at 11:59 p.m. (Central time) on the day after the date that is five and one-half years following November 10, 2009, the closing date of our initial public offering.
Notwithstanding the foregoing, and subject to the rights of first refusal and “drag along” rights described below, in the event that any “initial holder” (as described below) transfers all or any portion of the shares of common stock held by such initial holder as of August 28, 2007 (other than pursuant to certain permitted transfers), each stockholder party to the 2007 Stockholders’ Agreement may transfer up to a pro rata portion of such stockholder’s common stock; provided, however, that in any 365-day period or calendar year in which such stockholder is permitted to transfer shares of common stock pursuant to the terms described in the preceding paragraph, such stockholder’s right to transfer a pro rata portion of its common stock shall apply only to the extent that the aggregate number of shares of common stock held by initial holders as of August 28, 2007 held at the commencement of such 365-day period or calendar year by initial holders and transferred by initial holders in such 365-day period or calendar year, as a percentage of the aggregate number of shares of common stock held by the initial holders as of August 28, 2007 at the commencement of such 365-day period or calendar year, exceeds the maximum percentage of such stockholder’s shares of common stock that such stockholder is permitted to sell in such 365-day period or calendar year (as described in the preceding paragraph), with the result that only such excess number of shares of common stock held by the initial holders as of August 28, 2007 and transferred by the initial holders will be taken into account in determining such stockholder’s pro rata portion eligible for transfer. The rights described in this paragraph expire at 11:59 p.m. (Central time) on the day after the date that is five and one-half years following November 10, 2009, the closing date of our initial public offering. The term “initial holder” is defined in the agreement to mean (i) any of Mr. Thomas J. Pritzker, Ms. Penny Pritzker and/or Ms. Gigi Pritzker Pucker or (ii) trusts for the benefit of these individuals and/or for the benefit of their respective spouses and/or lineal descendants.
In addition, no stockholder party to the 2007 Stockholders’ Agreement may transfer (1) the legal or beneficial ownership of any common stock held by such stockholder unless such acquiring person’s ownership of common stock is not reasonably likely to jeopardize any licensing from a governmental authority, as determined by our board of directors in its reasonable discretion, (2) any common stock to an aggregator (meaning a person who is required to file a Schedule 13D under the Exchange Act disclosing an interest other than for investment), (3) any common stock to a competitor of ours engaged in one or more of the hospitality, lodging and/or gaming
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industries or (4) any common stock that would cause a stockholder to violate any provision of the agreement. Such restrictions are qualified by the “actual knowledge” of the transferring stockholder in the case of transfers pursuant to an underwritten public offering or a broad distribution sale.
Right of First Refusal
In the event that the number of shares of common stock proposed to be transferred by a stockholder party to the 2007 Stockholders’ Agreement and its affiliates together with any shares of common stock then proposed to be transferred by the other stockholders party to the 2007 Stockholders’ Agreement and their affiliates exceeds 2% of the then outstanding shares of common stock, then prior to consummating the sale of common stock to a third-party purchaser, such stockholder or stockholders shall offer to transfer the common stock to us at the applicable market value (as defined in the 2007 Stockholders’ Agreement). If we do not accept the offer within a specified period of time, such stockholder or stockholders may transfer the shares of common stock to the third-party purchaser as long as such transfer occurs within the time periods specified in the 2007 Stockholders’ Agreement and on terms and conditions no more favorable in the aggregate than offered to us.
“Drag-Along” Right
In connection with a “change of control” (as defined in the 2007 Stockholders’ Agreement) transaction, we have the right to require each stockholder party to the 2007 Stockholders’ Agreement to participate in such change of control transaction on the same terms, conditions and price per share of common stock as those applicable to the other holders of our common stock. In addition, upon our request, the stockholders party to the 2007 Stockholders’ Agreement have agreed to vote in favor of such change of control transaction or similar transaction, and we have the right to require each stockholder party to the 2007 Stockholders’ Agreement to vote for, consent to and raise no objection to any such transaction.
“Tag-Along” Right
Subject to the fiduciary duties of our board of directors, we have agreed that we will not agree to consummate a change of control transaction with respect to which the stockholders party to the 2007 Stockholders’ Agreement are not given the right to participate on the same terms, conditions and price per share of common stock as those applicable to the other holders of our common stock.
Preemptive Rights
Each stockholder party to the 2007 Stockholders’ Agreement has the right to purchase such stockholder’s pro rata share of any new shares of common stock, or any other equity securities, that we may propose to sell and issue on comparable terms by making an election within the time periods specified in the 2007 Stockholders’ Agreement, subject to certain excluded securities issuances described in the 2007 Stockholders’ Agreement, including shares issued pursuant to equity compensation plans adopted by our board of directors and the issuance of shares of our common stock in a public offering. If not all stockholders elect to purchase their full preemptive allocation of new securities, then we will notify the fully-participating stockholder of such an offer them the right to purchase the unsubscribed new securities.
Voting Agreement
Until the later of (1) December 31, 2013 and (2) the date that Mr. Thomas J. Pritzker is no longer our chairman, each stockholder party to the 2007 Stockholders’ Agreement has agreed to vote all of their shares of common stock consistent with the recommendations of a majority of our board of directors with respect to all matters. The stockholders party to the 2007 Stockholders’ Agreement own in the aggregate 25,112,086 shares of Class B common stock, or approximately 14.4% of the outstanding shares of our common stock and approximately 18.8% of the total voting power of our outstanding common stock.
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Access to Information
For so long as GS Sunray Holdings Parallel, L.L.C. owns any shares of common stock, we have agreed that GS Capital Partners VI Parallel, L.P. or its representatives may examine our books and records and visit and inspect our facilities and may reasonably request information at reasonable time and intervals concerning the general status of our financial condition and operations. Additionally, on reasonable prior notice, GS Capital Partners VI Parallel, L.P. or its representatives may discuss our business operations, properties and financial and other conditions with our management, independent accountants and investment bankers. In no event shall we be required to provide access to any information that we reasonably believe would constitute attorney/client privileged communications or would violate any securities laws.
Standstill
Under the 2007 Stockholders’ Agreement, each stockholder party to the 2007 Stockholders’ Agreement agreed that, subject to certain limited exceptions, so long as such stockholder owns shares of common stock, neither such stockholder nor any of its related persons will in any manner, directly or indirectly:
| • | effect or seek, offer or propose (whether publicly or otherwise) to effect, or announce any intention to effect or cause or participate in or in any way assist, facilitate or encourage any other person to effect or seek, offer or propose (whether publicly or otherwise) to effect or participate in, (a) any acquisition of any of our or our subsidiaries’ securities (or beneficial ownership thereof) (except through the proper exercise of preemptive rights granted under the 2007 Stockholders’ Agreement), or rights or options to acquire any of our or our subsidiaries’ securities (or beneficial ownership thereof), or any of our or our subsidiaries’ or affiliates’ assets, indebtedness or businesses, (b) any tender or exchange offer, merger or other business combination involving us or any of our subsidiaries or affiliates or any assets constituting a significant portion of our consolidated assets, (c) any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to us or any of our subsidiaries or affiliates, or (d) any “solicitation” of “proxies” (as such terms are used in the proxy rules under the Exchange Act) or written consents with respect to any of our or our affiliates’ voting securities. For this purpose, the term “affiliates” means our affiliates primarily engaged in the hospitality, lodging and/or gaming industries; |
| • | form, join or in any way participate in a “group” (within the meaning of Section 13(d) of the Exchange Act) with respect to us where such group seeks to acquire any of our equity securities; |
| • | otherwise act, alone or in concert with others, to seek representation on or to control or influence our or our subsidiaries’ management, board of directors or policies; |
| • | take any action which would or would reasonably be expected to force us to make a public announcement regarding any of the types of matters set forth in the first bullet point above; |
| • | own more than 12% of the issued and outstanding common stock, unless such ownership arises as a result of any action not taken by or on behalf of such stockholder or a related person of such stockholder; or |
| • | request that we or any of our representatives, directly or indirectly, amend or waive any of the foregoing provisions. |
Each stockholder party to the 2007 Stockholders’ Agreement has also agreed that, if at any time during the period such stockholder is subject to the foregoing provisions, such stockholder is approached by any third party concerning its participation in any transaction or proposed transaction involving the acquisition of all or any portion of the assets, indebtedness or securities of, or any business of, ours or any of our subsidiaries, such stockholder will promptly inform us of the nature of such transaction and the parties involved.
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Termination
The 2007 Stockholders’ Agreement terminates (1) with respect to any individual stockholder, on the first date when such stockholder no longer holds any shares of common stock and (2) in its entirety, upon the first to occur of all of our equity securities being owned by a single person or the agreement in writing by us and each stockholder party to the 2007 Stockholders’ Agreement.
Our Website and Availability of SEC Reports and Other Information
The Company maintains a website at the following address: www.hyatt.com. The information on the Company’s website is not incorporated by reference in this annual report.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
| Item 1A. | Risk Factors. |
In addition to the other information set forth in this annual report, you should consider carefully the risks and uncertainties described below, which could materially adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to the Hospitality Industry
The hospitality industry is cyclical, and macroeconomic and other factors beyond our control can adversely affect and reduce demand for our hospitality products and services.
The hospitality industry is cyclical. For example, the last two completed business cycles in the hospitality industry, which we define as the period starting with the first calendar year of negative revenue per available room (RevPAR) growth and ending with the last calendar year of positive RevPAR growth, took place from 1991 to 2000 and 2001 to 2007. During the declining stages of these two business cycles, RevPAR growth was negative for one calendar year (1991) and two calendar years (2001 and 2002), respectively.
Macroeconomic and other factors beyond our control can reduce demand for hospitality products and services, including demand for rooms at properties that we manage, franchise, own and develop and for sales of vacation ownership properties. These factors include:
| • | changes and volatility in general economic conditions, including the severity and duration of any downturn in the U.S. or global economy and financial markets; |
| • | war, terrorist activities (such as the terrorist attacks in Jakarta, Indonesia and Mumbai, India) or threats and heightened travel security measures instituted in response to these events; |
| • | outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine) flu; |
| • | natural or man-made disasters, such as earthquakes, tsunamis, tornados, hurricanes, floods and oil spills; |
| • | changes in the desirability of particular locations or travel patterns of customers; |
| • | decreased corporate budgets and spending and cancellations, deferrals or renegotiations of group business (e.g., industry conventions); |
| • | low consumer confidence and high levels of unemployment; |
| • | depressed housing prices; |
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| • | the financial condition of the airline, automotive and other transportation-related industries and its impact on travel; |
| • | decreased airline capacities and routes; |
| • | travel-related accidents; |
| • | oil prices and travel costs; |
| • | statements, actions or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities; |
| • | domestic and international political and geo-political conditions; |
| • | cyclical over-building in the hotel and vacation ownership industries; and |
| • | organized labor activities, which could cause a diversion of business from hotels involved in labor negotiations and loss of group business. |
These factors can adversely affect, and from time to time have adversely affected, individual properties, particular regions or our business as a whole. In particular, lower consumer demand resulting from the economic downturn resulted in a decline in RevPAR for the fourth quarter of 2008 and some of the most significant RevPAR declines we have experienced in recent history during 2009. Our RevPAR declines in the current business cycle have been more severe compared to those of the last two business cycles, and have had a greater negative impact on our profitability. See “—A worsening of global economic conditions could cause our revenues and profitability to decline” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Principal Factors Affecting Our Results of Operations—Revenues.” How we manage any one or more of these factors, or any crisis, could limit or reduce the demand, or the rates our properties are able to charge for rooms or services or the prices at which we are able to sell our vacation ownership properties, which could adversely affect our business, results of operations and financial condition.
A worsening of global economic conditions could cause our revenues and profitability to decline.
Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and high unemployment or adverse political conditions can lower the revenues and profitability of our owned properties and the amount of management and franchising fee revenues we are able to generate from our managed and franchised properties. Declines in hotel profitability during an economic downturn directly impact the incentive portion of our management fees, which is based on hotel profit measures. Outside of the United States, our fees are often more dependent on hotel profitability measures, either through a single management fee that is based on a profitability measure, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee. Because RevPAR is a measure of achieved average daily rate (ADR) and occupancy, declines in ADR and occupancy relating to declines in consumer demand will lower RevPAR. For additional information regarding RevPAR and ADR, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics Evaluated by Management.” Our vacation ownership business is also linked to cycles in the general economy and consumer discretionary spending. As a result, changes in consumer demand and general business cycles can subject and have subjected our revenues to significant volatility.
The recent global economic downturn led to a significant decline in demand for hospitality products and services, lower occupancy levels and significantly reduced room rates, all of which has lowered our revenues and negatively affected our profitability. For example, our revenues decreased by $505 million driven by an 18.7% decline in RevPAR at comparable systemwide properties in the year ended December 31, 2009, compared to the year ended December 31, 2008. See Part II, Item 7, “Management’s Discussion and Analysis of Results of Operations—Principal Factors Affecting Our Results of Operations—Revenues.”
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Generally, the recovery of demand for hospitality products and services lags an improvement in economic conditions. While our 2010 results reflect an increase in RevPAR levels at comparable systemwide properties, they have not increased at the same rate at which they declined. We cannot predict the rate and pace of any such recovery and any such recovery may impact different regions of the world on varying bases. Additionally, if an extended period of economic weakness were to continue, it would likely have an adverse impact on our revenues and negatively affect our profitability.
We are subject to the business, financial and operating risks inherent to the hospitality industry, any of which could reduce our profits and limit our opportunities for growth.
Our business is subject to a number of business, financial and operating risks inherent to the hospitality industry, including:
| • | changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs; |
| • | the costs and administrative burdens associated with complying with applicable laws and regulations; |
| • | the costs or desirability of complying with local practices and customs; |
| • | the availability and cost of capital necessary for us and potential hotel owners to fund investments, capital expenditures and service debt obligations; |
| • | delays in or cancellations of planned or future development projects; |
| • | foreign exchange rate fluctuations; |
| • | changes in operating costs, including, but not limited to, energy, food, workers’ compensation, benefits, insurance and unanticipated costs resulting from force majeure events; |
| • | significant increases in cost for healthcare coverage for employees and potential government regulation in respect of health coverage; |
| • | shortages of labor or labor disruptions; |
| • | shortages of desirable locations for development; |
| • | the financial condition of third-party property owners, franchisees, developers and hospitality venture partners, which may impact our ability to recover payments owed to us or their ability to fund operational costs, perform under management, franchise, development and hospitality venture agreements or satisfy other contractual commitments and obligations that may impact us; |
| • | relationships with our third-party property owners, franchisees and hospitality venture partners; and |
| • | the ability of third-party internet travel intermediaries to attract and retain customers. |
Any of these factors could limit or reduce the prices we charge for our hospitality products or services, including the rates our properties charge for rooms or the prices for which we are able to sell our vacation ownership properties. These factors can also increase our costs or affect our ability to develop new properties or maintain and operate our existing properties. As a result, any of these factors can reduce our profits and limit our opportunities for growth.
Risks Related to Our Business
Because we operate in a highly competitive industry, our revenues, profits or market share could be harmed if we are unable to compete effectively.
The segments of the hospitality industry in which we operate are subject to intense competition. Our principal competitors are other operators of full service and select service properties, including other major
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hospitality chains with well established and recognized brands. We also compete against smaller hotel chains and independent and local hotel owners and operators. If we are unable to compete successfully, our revenues or profits may decline or our ability to maintain or increase our market share may be diminished.
Competition for Guests
We compete for guests based primarily on brand name recognition and reputation, location, customer satisfaction, room rates, quality of service, amenities, quality of accommodations, security and the ability to earn and redeem loyalty program points. Some of our competitors are larger than we are based on the number of properties they manage, franchise or own or based on the number of rooms or geographic locations where they operate. Some of our competitors also have significantly more members participating in their guest loyalty programs which may enable them to attract more customers and more effectively retain such guests. Our competitors may also have greater financial and marketing resources than we do, which could allow them to improve their properties and expand and improve their marketing efforts in ways that could affect our ability to compete for guests effectively. In addition, industry consolidation may exacerbate these risks.
Competition for Management and Franchise Agreements
We compete for management agreements based primarily on the value and quality of our management services, our brand name recognition and reputation, our ability and willingness to invest our capital in third-party owned or hospitality venture projects, the level of our management fees, the terms of our management agreements and the economic advantages to the property owner of retaining our management services and using our brand name. We compete for franchise agreements based primarily on brand name recognition and reputation, the room rate that can be realized and royalty fees charged. Other competitive factors for management and franchise agreements include relationships with property owners and investors, including institutional owners of multiple properties, marketing support, reservation and e-commerce system capacity and efficiency and the ability to make investments that may be necessary to obtain management and franchise agreements.
We believe that our ability to compete for management and franchise agreements primarily depends on the success of the properties that we currently manage or franchise. The terms of any new management or franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the availability of suitable locations for new properties decreases, planning or other local regulations change or the availability or affordability of financing is limited, the supply of suitable properties for our management or franchising could be diminished. We may also be required to agree to limitations on the expansion of one or more of our brands in certain geographic areas in order to obtain a management agreement for a property under development. We may be prohibited from managing, franchising or owning properties in areas where opportunities exist due to these restrictions. If the properties that we manage or franchise perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors or if the availability of suitable properties is limited, our ability to compete effectively for new management or franchise agreements could be reduced.
Competition for Sales of Vacation Ownership Properties
We compete for sales of our vacation ownership properties based principally on location, quality of accommodations, price, financing terms, quality of service, terms of property use, opportunity to exchange into time at other vacation properties and brand name recognition and reputation. In addition to competing with other hotel and resort properties, our vacation ownership properties compete with national and independent vacation ownership club operators as well as with owners reselling their interests in these properties. Our ability to attract and retain purchasers of our vacation ownership properties depends on our success in distinguishing the quality and value of our vacation ownership products and services from those offered by others. If we are unable to do so, our ability to compete effectively for sales of vacation ownership properties could be adversely affected.
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If third-party property owners or franchisees of the properties we manage or franchise fail to make investments necessary to maintain or improve their properties, preference for our brands and our reputation could suffer or our management or franchise agreements with those parties could terminate.
We manage and franchise properties owned by third parties under the terms of management and franchise agreements. Substantially all of these agreements require third-party property owners to comply with standards that are essential to maintaining our brand integrity and reputation. We depend on third-party property owners to comply with these requirements by maintaining and improving properties through investments, including investments in furniture, fixtures, amenities and personnel.
Third-party property owners or franchisees may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our management or franchise agreements. If our third-party property owners or franchisees fail to make investments necessary to maintain or improve the properties we manage or franchise, our brand preference and reputation could suffer. In addition, if third-party property owners or franchisees breach the terms of our agreements with them, we may elect to exercise our termination rights, which would eliminate our revenues from these properties and cause us to incur expenses related to terminating these relationships. These risks become more pronounced during economic downturns.
If our management or franchise agreements terminate prematurely or we elect to make cure payments due to failures to meet performance tests, at the request of third parties or upon the occurrence of other stated events, our revenues could decrease and our costs could increase.
Our management and franchise agreements may terminate prematurely in certain cases. Some of our management agreements provide early termination rights to owners of the hotels we manage upon the occurrence of a stated event, such as the sale of the hotel or our failure to meet a specified performance test.
Generally, termination rights under performance tests are based upon the property’s individual performance, its performance when compared to a specified set of competitive hotels branded by other hotel operators, or both. Some agreements require a failure of one test, and other agreements require a failure of more than one test, before termination rights are triggered. These termination rights are usually triggered if we do not meet the performance tests over multiple years. Generally, we have the option to cure performance failures by making an agreed upon cure payment. However, our cure rights may be limited in some cases and the failure to meet the performance tests may result in the termination of our management agreement. In the past we have (1) failed performance tests, received notices of termination and elected to make cure payments and (2) failed performance tests and negotiated an alternative resolution. When any termination notice is received, we evaluate all relevant facts and circumstances at the time in deciding whether to cure or allow termination.
In addition, some of our management agreements give third-party property owners the right to terminate upon payment of a termination fee to us after a certain period of time or upon sale of the property or another stated event. Our franchise agreements typically require franchisees to pay a fee to us before terminating. In addition, if an owner files for bankruptcy, our management and franchise agreements may be terminable under applicable law. If a management or franchise agreement terminates, we could lose the revenues we derive from that agreement or incur costs related to ending our relationship with the third party and exiting the property.
If we are unable to maintain good relationships with third-party property owners and franchisees, our revenues could decrease and we may be unable to expand our presence.
We earn fees for managing and franchising hotels and other properties. The viability of our management and franchising business depends on our ability to establish and maintain good relationships with third-party property owners and franchisees. Third-party developers, property owners and franchisees are focused on maximizing the value of their investment and working with a management company or franchisor that can help them be successful. The effectiveness of our management, the value of our brands and the rapport that we maintain with our third-party property owners and franchisees impact renewals and are all important factors for new third-party
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property owners or franchisees considering doing business with us. Our relationships with these third parties generate additional property development opportunities that support our growth. If we are unable to maintain good relationships with our third-party property owners and franchisees, we may be unable to renew existing agreements or expand our relationships with these owners. Additionally, our opportunities for developing new relationships with additional third parties may be adversely impacted.
Contractual and other disagreements with third-party property owners or franchisees could make us liable to them or result in litigation costs or other expenses, which could lower our profits.
Our management and franchise agreements require us and third-party property owners or franchisees to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. Additionally, some courts have applied principles of agency law and related fiduciary standards to managers of third-party hotel properties such as us, which means, among other things, that property owners may assert the right to terminate management agreements even where the agreements do not expressly provide for termination. In the event of any such termination, we may need to negotiate or enforce our right to a termination payment that may not equal expected profitability over the term of the agreement.
We generally seek to resolve any disagreements with our third-party property owners or franchisees amicably. Formal dispute resolution occurs through arbitration, if provided under the applicable management or franchise agreement, or through litigation. We cannot predict the outcome of any such arbitration or litigation, the effect of any adverse judgment of a court or arbitrator against us or the amount of any settlement that we may enter into with any third party.
We are exposed to the risks resulting from significant investments in owned and leased real estate, which could increase our costs, reduce our profits, limit our ability to respond to market conditions or restrict our growth strategy.
Our proportion of owned properties, as compared to the number of properties that we manage or franchise for third-party owners, is larger than that of some of our competitors. Real estate ownership and leasing is subject to risks not applicable to managed or franchised properties, including:
| • | governmental regulations relating to real estate ownership; |
| • | real estate, insurance, zoning, tax, environmental and eminent domain laws; |
| • | the ongoing need for owner funded capital improvements and expenditures to maintain or upgrade properties; |
| • | risks associated with mortgage debt, including the possibility of default, fluctuating interest rate levels and the availability of replacement financing; |
| • | fluctuations in real estate values or potential impairments in the value of our assets; and |
| • | the relative illiquidity of real estate compared to other assets. |
The negative impact on profitability and cash flow generation from a decline in revenues is more pronounced in owned properties because we, as the owner, bear the risk of their high fixed-cost structure. The need to maintain and renovate owned properties can present challenges, especially when cash generated from operations has declined. The effectiveness of any cost-cutting efforts is limited by the fixed-cost nature of our business. As a result, we may not be able to offset revenue reductions through cost cutting, which could further reduce our margins. During times of economic distress, declining demand and declining earnings often result in declining asset values.
In an unfavorable market, we may not be able to sell properties in the short term. Accordingly, we may not be able to adjust our portfolio promptly in response to economic or other conditions. In addition, because our strategy to use proceeds from sales of real property to support our growth depends in part on our ability to sell selected properties, any inability to do so could impair our growth strategy.
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Economic and other conditions may adversely impact the valuation of our assets resulting in impairment charges that could have a material adverse impact on our results of operations and earnings.
We hold significant amounts of goodwill, intangible assets, long-lived assets and equity method investments. On a regular basis, we evaluate our assets for impairment based on various triggers, including actual operating losses and trends of expected demand and profitability, as described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.” These evaluations have, in the past, resulted in impairment charges for certain of these assets based on the specific facts and circumstances surrounding those assets. Our operating results for the year ended December 31, 2010 included $69 million of impairment charges related primarily to our interests in unconsolidated hospitality ventures, vacation ownership properties and certain owned hotels. We may incur additional impairment charges, which could be material and negatively affect our results of operations and earnings.
We have a limited ability to manage third-party risks associated with our hospitality venture investments, which could reduce our revenues, increase our costs and lower our profits.
We participate in hospitality ventures with third parties. In the future, we may also buy and develop properties in hospitality ventures with the sellers of the properties, affiliates of the sellers, developers or other third parties. Our hospitality venture partners may have shared or majority control over the operations of our hospitality ventures. As a result, our investments in hospitality ventures involve risks that are different from the risks involved in investing in real estate independently. These risks include the possibility that our hospitality ventures or our partners:
| • | go bankrupt or otherwise are unable to meet their capital contribution obligations; |
| • | have economic or business interests or goals that are or become inconsistent with our business interests or goals; |
| • | are in a position to take action contrary to our instructions, requests, policies or objectives; |
| • | subject the property to liabilities exceeding those contemplated; |
| • | take actions that reduce our return on investment; or |
| • | take actions that harm our reputation or restrict our ability to run our business. |
For these and other reasons, it could be more difficult for us to sell our interest in any hospitality venture or to pursue the venture’s activities, which could reduce our ability to address any problems we may have with those properties or respond to market conditions in the future and could lead to impairments of such ventures. As a result, our investments in hospitality ventures could lead to impasses with our partners or situations that could harm the hospitality venture, which could reduce our revenues, increase our costs and lower our profits.
If our hospitality ventures fail to provide information that is required to be included in our financial statements, we may be unable to accurately report our financial results.
Preparing our financial statements requires us to have access to information regarding the results of operations, financial position and cash flows of our hospitality ventures. Any deficiencies in our hospitality ventures’ internal controls over financial reporting may affect our ability to report our financial results accurately or prevent fraud. Such deficiencies could also result in restatements of, or other adjustments to, our previously reported or announced operating results, which could diminish investor confidence and reduce the market price for our shares. Additionally, if our hospitality ventures are unable to provide this information for any meaningful period or fail to meet expected deadlines, we may be unable to satisfy our financial reporting obligations or timely file our periodic reports.
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Cash distributions from our hospitality ventures could be limited by factors outside our control that could reduce our return on investment and our ability to generate liquidity from these hospitality ventures.
Although our hospitality ventures may generate positive cash flow, in some cases these hospitality ventures may be unable to distribute that cash to the hospitality venture partners. Additionally, in some cases our hospitality venture partners control distributions, and may choose to leave capital in the hospitality venture rather than distribute it. Because our ability to generate liquidity from our hospitality ventures depends on the hospitality ventures’ ability to distribute capital to us, tax restrictions or decisions of our hospitality venture partners could reduce our return on these investments. We include our pro rata share of Adjusted EBITDA attributable to our unconsolidated hospitality ventures in our owned and leased hotels segment Adjusted EBITDA and our consolidated Adjusted EBITDA regardless of whether the cash flow of those ventures is, or can be, distributed to us.
We may seek to expand through acquisitions of and investments in other businesses and properties, or through alliances; and we may also seek to divest some of our properties and other assets, any of which may be unsuccessful or divert our management’s attention.
We intend to consider strategic and complementary acquisitions of and investments in other businesses, properties, brands or other assets. Furthermore, we may pursue these opportunities in alliance with existing or prospective owners of managed or franchised properties. In many cases, we will be competing for these opportunities with third parties that may have substantially greater financial resources than we do. Acquisitions or investments in businesses, properties, brands or assets as well as these alliances are subject to risks that could affect our business, including risks related to:
| • | issuing shares of stock that could dilute the interests of our existing stockholders; |
| • | spending cash and incurring debt; |
| • | assuming contingent liabilities; |
| • | contributing properties or related assets to hospitality ventures that could result in recognition of losses; or |
| • | creating additional expenses. |
We cannot assure you that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such acquisitions, investments or alliances. There may be high barriers to entry in many key markets and scarcity of available development and investment opportunities. Similarly, we cannot assure you that we will be able to obtain financing for acquisitions or investments on attractive terms or at all, or that the ability to obtain financing will not be restricted by the terms of our revolving credit facility or other indebtedness we may incur.
The success of any such acquisitions or investments will also depend, in part, on our ability to integrate the acquisition or investment with our existing operations. We may experience difficulty with integrating acquired businesses, properties or other assets, including difficulties relating to:
| • | coordinating sales, distribution and marketing functions; |
| • | integrating technology information systems; and |
| • | preserving the important licensing, distribution, marketing, customer, labor and other relationships of the acquired assets. |
Divestment of some of our properties or assets may yield returns below our investment criteria. In some circumstances, sales of properties or other assets may result in losses.
In addition, any such acquisitions, investments, dispositions or alliances could demand significant attention from our management that would otherwise be available for our regular business operations, which could harm our business.
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We may not be successful in executing our strategy of disposing of selected assets, which could hinder our ability to expand our presence in markets that will enhance and expand our brand preference.
We regularly review our business to identify properties or other assets that we believe are in markets or of a property type that may not benefit us as much as other markets or property types. One of our strategies is to selectively dispose of hotel properties and use sale proceeds to fund our growth in markets that will enhance and expand our brand presence. We cannot assure you that we will be able to consummate any such sales on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such sales. Dispositions of real estate assets are particularly difficult in the current economic environment, as financing alternatives are limited for potential buyers. The current economic environment and recent credit crisis have adversely affected the real estate market and caused a reduction in sales of hotel properties. Our inability to sell assets, or to sell such assets at attractive prices, could have an adverse impact on our ability to realize proceeds for reinvestment and hinder our ability to expand our business. In addition, even if we are successful in consummating sales of selected properties, such dispositions may yield returns below our investment criteria and result in losses, which could negatively affect operating results for the period in which such sales occur. Moreover, from time to time, we may market and evaluate the potential sale of non-strategic assets without committing to the consummation of such sale for various reasons, including a lack of acceptable purchasers, undesirable market conditions or other factors. Our affirmative decision not to proceed with any such sale transaction may be perceived as an inability to execute our strategy.
Timing, budgeting and other risks could delay our efforts to develop, redevelop or renovate the properties that we own, or vacation ownership developments that we undertake, or make these activities more expensive, which could reduce our profits or impair our ability to compete effectively.
We must maintain and renovate the properties that we own in order to remain competitive, maintain the value and brand standards of our properties and comply with applicable laws and regulations. We also undertake vacation ownership developments which may span multiple phases and often take years to complete. These efforts are subject to a number of risks, including:
| • | construction delays or cost overruns (including labor and materials) that may increase project costs; |
| • | obtaining zoning, occupancy and other required permits or authorizations; |
| • | changes in economic conditions that may result in weakened or lack of demand or negative project returns; |
| • | governmental restrictions on the size or kind of development; |
| • | force majeure events, including earthquakes, tornados, hurricanes, floods or tsunamis; and |
| • | design defects that could increase costs. |
Developing new properties typically involves lengthy development periods during which significant amounts of capital must be funded before the properties can begin to operate. If the cost of funding these developments or renovations exceeds budgeted amounts, profits could be reduced. Further, due to the lengthy development cycle, adverse economic conditions may alter or impede our development plans, thereby resulting in incremental costs to us or potential impairment charges. Moreover, during the early stages of operations, charges related to interest expense and depreciation may substantially detract from, or even outweigh, the profitability of certain new property investments.
Similarly, the timing of capital improvements can affect property performance, including occupancy and average daily rate, particularly if we need to close a significant number of rooms or other facilities, such as ballrooms, meeting spaces or restaurants. For example, we recently began broad-scope renovation projects at five owned properties. The displacement caused by these renovations negatively impacted owned and leased segment results for the fourth quarter of 2010 and we expect that the displacement caused by these renovations will continue to negatively impact owned and leased segment results through the third quarter of 2011. The impact
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will vary from quarter to quarter, depending on the particular phase underway at each of the five projects. Moreover, the investments that we make may fail to improve the performance of the properties in the manner that we expect.
If we are not able to begin operating properties under development or renovation as scheduled, or if renovation investments adversely affect or fail to improve performance, our ability to compete effectively could be diminished and our revenues could be reduced.
If we or our third-party property owners, including our hospitality venture partners, are unable to repay or refinance loans secured by the mortgaged properties, our revenues, profits and capital resources could be reduced and our business could be harmed.
Many of the properties that our third-party property owners and our hospitality venture partners own, and a limited number of the properties that we own, are pledged as collateral for mortgage loans entered into when such properties were purchased or refinanced. If we, our third-party property owners or our hospitality venture partners are unable to repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt and repossess the property. In the current economic environment, a number of property owners are experiencing financial difficulties and the properties they own are vulnerable to financial stress. Debt defaults could lead third-party property owners or our hospitality venture partners to sell the property on unfavorable terms or, in the case of secured debt, to convey the mortgaged property to the lender. For example, during the second quarter of 2010, the consolidated venture that owned the Hyatt Regency Princeton did not have sufficient cash flow to meet debt service requirements under its mortgage loan. The assets and operations of the Hyatt Regency Princeton secured this mortgage. In September 2010, the ownership interest in the Hyatt Regency Princeton was transferred to its lender through a deed in lieu of foreclosure transaction. While we continue to manage the property, the lender has the option to terminate the management agreement within one year of such transfer. Any similar sales or repossessions could, in certain cases, result in the termination of our management agreements or eliminate any anticipated income and cash flows from, and, if applicable, our invested capital in, such property, which could harm our business.
If we or our third-party owners, franchisees or development partners are unable to access the capital necessary to fund current operations or implement our plans for growth, our profits could be reduced and our ability to compete effectively could be diminished.
The hospitality industry is a capital intensive business that requires significant capital expenditures to develop, operate, maintain and renovate properties. Access to the capital that we or our third-party owners, franchisees or development partners need to finance the construction of new properties or to maintain and renovate existing properties is critical to the continued growth of our business and our revenues.
The availability of capital or the conditions under which we or our third-party owners, franchisees or development partners can obtain capital can have a significant impact on the overall level, cost and pace of future development and therefore the ability to grow our revenues. The credit markets have experienced significant disruption severely reducing liquidity and credit availability. Such disruptions may diminish the ability and desire of existing and potential development partners to access capital necessary to develop properties. Our ability to access additional capital could also be limited by the terms of our revolving credit facility, which restricts our ability to incur debt under certain circumstances. Additionally, if one or more of the financial institutions that support our revolving credit facility fails, we may not be able to find a replacement, which would reduce the availability of funds that we can borrow under the facility.
If we are forced to spend larger amounts of cash from operating activities than anticipated to operate, maintain or renovate existing properties, then our ability to use cash for other purposes, including acquisition or development of properties, could be limited and our profits could be reduced. Similarly, if we cannot access the capital we need to fund our operations or implement our growth strategy, we may need to postpone or cancel planned renovations or developments, which could impair our ability to compete effectively and harm our business.
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If we fail to meet performance standards under a contractual performance obligation, our profits could be reduced.
In connection with the acquisition of the AmeriSuites brand in 2005, we assumed obligations under a management agreement with a third-party owner of multiple properties to make payments based on specified thresholds for those properties. As a result of the removal of rooms from inventory during renovation of the subject properties upon conversion to the Hyatt Place brand and due to the decline in demand for lodging products and services as a result of the economic downturn, we are obligated to make payments in certain circumstances under this agreement up to a maximum of $50 million (of which $24 million has been paid over the life of the agreement through December 31, 2010). These payments could lower our profits and reduce our cash flows.
If we become liable for losses related to loans we have provided or guaranteed to third parties, our profits could be reduced.
When we enter into management or franchise agreements with third parties, including hospitality ventures, from time to time we make loans for hotel development expenditures. In certain circumstances we may also provide senior secured financing or subordinated forms of financing (also referred to as mezzanine financing) to third-party owners. For example, in 2008, we made a $278 million loan to an unconsolidated hospitality venture in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa.
We could suffer losses if third-party property owners or franchisees default on loans that we provide. In 2008 we wrote off a $61 million mezzanine loan that was fully reserved for in 2007.
To secure financing for four of our unconsolidated hospitality ventures, we have provided to third-party lenders financial guarantees related to the timely repayment of all or a portion of the associated debt. The guarantees are limited to our share of the underlying obligation. As of December 31, 2010 our maximum contingent liability was $22 million.
If we are liable for losses related to loans we have provided or guaranteed to third parties, our costs could increase and our profits could fall.
In any particular period, our expenses may not decrease at the same rate that our revenues may decrease, which could have an adverse effect on our net cash flows, margins and profits.
Many of the expenses associated with managing, franchising or owning hotels and residential and vacation ownership properties are relatively fixed. These expenses include:
| • | personnel costs; |
| • | interest; |
| • | rent; |
| • | property taxes; |
| • | insurance; and |
| • | utilities. |
If we are unable to decrease these costs significantly or rapidly when demand for our hotels and other properties decreases, the decline in our revenues can have a particularly adverse impact on our net cash flows and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth, such as the recent economic recession. Economic downturns generally affect the results derived from owned property more significantly than those derived by managers and franchisors given the greater exposure that the owners have to the properties’ performance. During the recent economic downturn, our revenues declined at a greater rate than our costs. For example, during the year ended December 31, 2009, our
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consolidated revenues declined by 13.2% while our direct and selling, general and administrative expenses declined by 5.4%, compared to the same period in 2008. During the year ended December 31, 2009, the revenues of our owned and leased hotels declined by 16.7%, while corresponding owned and leased hotel expenses declined by 7.7%, compared to the same period in 2008. Where cost-cutting efforts are insufficient to offset declines in revenues, we could experience a material decline in margins and potentially negative cash flows.
If we are unable to establish and maintain key distribution arrangements for our properties, the demand for our rooms and our revenues could fall.
Some of the rooms at hotels and resorts that we manage, franchise or own are booked through third-party internet travel intermediaries and online travel service providers. We also engage third-party intermediaries who collect fees by charging our hotels and resorts a commission on room revenues, including travel agencies and meeting and event management companies. A failure by our distributors to attract or retain their customer bases would lower demand for hotel rooms and, in turn, reduce our revenues.
If bookings by these third-party intermediaries increase, these intermediaries may be able to obtain higher commissions or other significant contract concessions from us, increasing the overall cost of these third-party distribution channels. Some of our distribution agreements are not exclusive, have a short term, are terminable at will, or are subject to early termination provisions. The loss of distributors, increased distribution costs, or the renewal of distribution agreements on significantly less favorable terms could adversely impact our business.
If the volume of sales made through third-party internet travel intermediaries increases significantly, consumer loyalty to our brand could decrease and our revenues could fall.
We expect to derive most of our business from traditional channels of distribution and our website. However, consumers now use internet travel intermediaries regularly. Some of these intermediaries are attempting to increase the importance of price and general indicators of quality (such as “four-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservation system rather than to our brands. If the volume of sales made through internet travel intermediaries increases significantly and consumers develop stronger loyalties to these intermediaries rather than to our brands, our business and revenues could be harmed.
If we are not able to develop new initiatives, including new brands, successfully, our business and profitability could be harmed.
We often develop and launch new initiatives, including new brands or marketing programs, which can be a time-consuming and expensive process. For example, we launched our Andaz brand in 2007. Since then, we have invested capital and resources in owned real estate, property development, brand development and brand promotion. If such initiatives are not well received by our associates, guests and owners, they may not have the intended effect. We may not be able to recover the costs incurred in developing Andaz or other initiatives or to realize their intended or projected benefits, which could lower our profits.
Labor shortages could restrict our ability to operate our properties or grow our business or result in increased labor costs that could reduce our profits.
Our success depends in large part on our ability to attract, retain, train, manage and engage our associates. Our properties are staffed 24 hours a day, seven days a week by thousands of associates around the world. If we and our franchisees are unable to attract, retain, train and engage skilled associates, our ability to manage and staff our properties adequately could be impaired, which could reduce customer satisfaction. Staffing shortages could also hinder our ability to grow and expand our business. Because payroll costs are a major component of the operating expenses at our properties, a shortage of skilled labor could also require higher wages that would increase our labor costs, which could reduce our profits and the profits of our third-party owners.
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Negotiations of collective bargaining agreements, or changes in labor legislation, could disrupt our operations, increase our labor costs or interfere with the ability of our management to focus on executing our business strategies.
Certain of our properties are subject to collective bargaining agreements, similar agreements or regulations enforced by governmental authorities. If relationships with our associates, other field personnel or the unions that represent them become adverse, the properties we manage, franchise or own could experience labor disruptions such as strikes, lockouts and public demonstrations. Labor disruptions, which are generally more likely when collective bargaining agreements are being renegotiated, could harm our relationship with our associates or cause us to lose guests. Additionally, labor regulation could lead to higher wage and benefit costs, changes in work rules that raise operating expenses, legal costs and limitations on our ability or the ability of our third-party property owners and franchisees to take cost saving measures during economic downturns. We do not have the ability to control the negotiations of collective bargaining agreements covering unionized labor employed by third-party property owners and franchisees.
We and our third-party property owners and franchisees may also become subject to additional collective bargaining agreements in the future. Proposed legislation in Congress known as the Employee Free Choice Act could increase the likelihood of a union obtaining recognition by increasing the use of card check authorization and avoiding a secret ballot election. This legislation could also give third-party arbitrators the ability to impose collective bargaining agreement terms on us or our third-party property owners and franchisees, and our associates, if we, our third-party property owners or franchisees and a labor union are unable to agree upon a collective bargaining agreement. If this legislation or similar laws are passed, more of our associates or other field personnel could be subject to increased organizational efforts, which could potentially lead to disruptions or require more of our management’s time to address unionization issues. These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our associates due to prescribed work rules and job classifications, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.
The loss of our senior executives or key field personnel, such as our general managers, could significantly harm our business.
Our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior executives. We have entered into employment letter agreements with certain of our senior executives. However, we cannot guarantee that these individuals will remain with us. Finding suitable replacements for our senior executives could be difficult. We currently do not have a life insurance policy or key person insurance policy with respect to any of our senior executives. Losing the services of one or more of these senior executives could adversely affect our strategic relationships, including relationships with our third-party property owners, franchisees, hospitality venture partners and vendors, and limit our ability to execute our business strategies.
We also rely on the general managers at each of our owned and managed properties to run daily operations and oversee our associates. These general managers are trained professionals in the hospitality industry and have extensive experience in many markets worldwide. The failure to retain, train or successfully manage our general managers for our properties could negatively affect our operations.
Because we derive a portion of our revenues from operations outside the United States, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.
We currently manage, franchise or own hotels and resorts in 45 countries located on six continents around the world. Our operations outside the United States represented approximately 20% of our revenues for the year ended December 31, 2010. We expect that revenues from our international operations will continue to account for an increasing portion of our total revenues.
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As a result, we are subject to the risks of doing business outside the United States, including:
| • | the laws, regulations and policies of foreign governments relating to investments and operations, as well as U.S. laws affecting the activities of U.S. companies abroad; |
| • | limitations/penalties on the repatriation of non-U.S. earnings; |
| • | changes in regulatory requirements, including imposition of tariffs or embargoes, export controls and other trade restrictions; |
| • | political and economic instability; |
| • | the difficulty of managing an organization doing business in many jurisdictions; |
| • | import and export licensing requirements and regulations, as well as unforeseen changes in export regulations; |
| • | potential negative consequences from changes in taxation policies and currency exchange rate fluctuations; |
| • | uncertainties as to local laws and enforcement of contract and intellectual property rights and occasional requirements for onerous contract clauses; and |
| • | rapid changes in government, economic and political policies, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation. |
While these factors and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business.
Exchange rate fluctuations could result in significant foreign currency gains and losses or lead to costs and risks related to exchange rate hedging activities.
Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our financial results. We translate the value of foreign currency-denominated amounts into U.S. dollars and we report our consolidated financial results of operations in U.S. dollars. Because the value of the U.S. dollar fluctuates relative to other currencies, revenues that we generate or expenses that we incur in other currencies could significantly increase or decrease our revenues or expenses as reported in U.S. dollars. Our exposure to foreign currency exchange rate fluctuations will continue to grow if the relative contribution of our operations outside the United States increases.
We enter into foreign exchange agreements with financial institutions to reduce our exposure to fluctuations in currency exchange rates referred to as hedging activities. However, these hedging activities may not eliminate foreign currency risk entirely and involve costs and risks of their own, such as ongoing management time and expertise and external costs related to executing hedging activities.
If purchasers default on the loans we provide to finance their purchases of our vacation ownership properties, the revenues and profits we derive from our vacation ownership business could be reduced.
We provide secured financing to some of the purchasers of our vacation ownership properties in respect of which we are subject to the risk of purchaser default. If a purchaser defaults under the financing we provide, we could be forced to write off the loan and reclaim ownership of the property. If the property has declined in value, we may incur impairment charges or losses as a result. In addition, we may be unable to resell the property in a timely manner or at the same price. As of December 31, 2010, we had $45 million of mortgage receivables, net of allowances associated with these activities. In addition, if a purchaser of a vacation ownership property defaults on the related loan during the early part of the amortization period, we may not have recovered the marketing, selling and general and administrative costs associated with the sale of such vacation ownership
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property. If we are unable to recover any of the principal amount of the loan from a defaulting purchaser, or if our allowances for losses from such defaults are inadequate, the profits we derive from our vacation ownership business could be reduced.
Private resales of our vacation ownership interests could lower the demand or prices for our vacation ownership properties, which could reduce our revenues and our profits.
We develop, sell or manage vacation ownership properties in select locations as part of the Hyatt Vacation Club, which is in the process of changing its name to Hyatt Residence Club. Private resales by owners of these vacation ownership interests in the secondary market could reduce demand or prices for new vacation ownership interests, particularly if the owners sell their interests at a significant discount. Lower demand or prices for our vacation ownership interests could reduce our revenues and our profits.
Our failure to comply with applicable laws and regulations may increase our costs, reduce our profits or limit our growth.
Our business, properties and associates are subject to a variety of laws and regulations. Generally, these laws and regulations address our sales and marketing efforts, our handling of privacy issues and customer data, our ability to obtain licenses for business operations such as sales of food and liquor, immigration matters, environmental, health and safety, gaming, competition and trade laws, among other things.
Our franchising and vacation ownership businesses and our operations outside the United States are also subject to laws and regulations affecting those businesses.
Franchising
Our franchising business is subject to various state laws as well as to regulations enacted by the Federal Trade Commission (FTC). A number of states require franchisors to register with the state or to make extensive disclosures to potential franchisees in connection with offers and sales in those states. The FTC also regulates the manner and substance of our disclosures to prospective franchisees. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of those agreements.
Vacation Ownership
Our vacation ownership properties are subject to extensive state regulation in both the state in which the property is located and the states in which the property is marketed and sold. Our marketing for these properties is also subject to federal regulation of certain marketing practices, including federal telemarketing regulations. In addition, the laws of most states in which we sell vacation ownership interests give the purchaser the right to rescind the purchase contract within a specified time period.
International Operations
Our business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (FCPA) as well as trade sanctions administered by the Office of Foreign Assets Control (OFAC) and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies’ transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals.
If we, or our hospitality ventures, fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our
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operation or ownership of hotels and other properties, including the termination of our management, franchise and ownership rights. These restrictions could increase our costs of operations, reduce our profits or cause us to forgo development opportunities that would otherwise support our growth.
The extensive environmental requirements to which we are subject could increase our environmental costs and liabilities, reduce our profits or limit our ability to run our business.
Our operations and the properties we manage, own and develop are subject to extensive environmental laws and regulations of various federal, state, local and foreign governments, including requirements addressing:
| • | health and safety; |
| • | the use, management and disposal of hazardous substances and wastes; |
| • | discharges of waste materials into the environment, such as refuse or sewage; and |
| • | air emissions. |
We could be subject to liability under some of these laws for the costs of investigating or remediating hazardous substances or wastes on, under, or in real property we currently or formerly manage, own or develop, or third-party sites where we sent hazardous substances or wastes for disposal. We could be held liable under these laws regardless of whether we knew of, or were at fault in connection with, the presence or release of any such hazardous or toxic substances or wastes. Some of these laws make each covered person responsible for all of the costs involved, even if more than one person may have been responsible for the contamination. Furthermore, a person who arranges for hazardous substances or wastes to be transported, disposed of or treated offsite, such as at disposal or treatment facilities, may be liable for the costs of removal or remediation if those substances are released into the environment by third parties at such disposal or treatment facilities. The presence or release of hazardous or toxic substances or wastes, or the failure to properly clean up such materials, could cause us to incur significant costs, or jeopardize our ability to develop, use, sell or rent real property we own or operate or to borrow using such property as collateral.
Other laws and regulations require us to manage, abate or remove materials containing hazardous substances such as mold, lead or asbestos during demolitions, renovations or remodeling at properties that we manage, own or develop or to obtain permits for certain of our equipment or operations. The costs of such management, abatement, removal or permitting could be substantial. Complying with these laws and regulations, or addressing violations arising under them, could increase our environmental costs and liabilities, reduce our profits or limit our ability to run our business. Existing environmental laws and regulations may be revised or new laws and regulations related to global climate change, air quality, or other environmental and health concerns may be adopted or become applicable to us. The identification of new areas of contamination, a change in the extent or known scope of contamination or changes in cleanup requirements, or the adoption of new requirements governing our operations could have a material adverse effect on our results or operations, financial condition and business.
If the insurance that we carry does not sufficiently cover damage or other potential losses involving properties that we manage or own, our profits could be reduced.
We carry insurance from solvent insurance carriers that we believe is adequate for foreseeable losses and with terms and conditions that are reasonable and customary. Nevertheless, market forces beyond our control could limit the scope of the insurance coverage that we can obtain or restrict our ability to buy insurance coverage at reasonable rates. In the event of a substantial loss, the insurance coverage that we carry may not be sufficient to pay the full value of our financial obligations or the replacement cost of any lost investment. Because certain types of losses are significantly uncertain, they can be uninsurable or too expensive to insure. In some cases, these factors could result in certain losses being completely uninsured. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future revenues from the property, we could remain obligated for performance guarantees in favor of third-party property owners or for
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their debt or other financial obligations and we may not have sufficient insurance to cover awards of damages resulting from our liabilities. If the insurance that we carry does not sufficiently cover damages or other losses, our profits could be adversely affected.
Any failure to protect our trademarks and intellectual property could reduce the value of our brand names and harm our business.
The reputation and perception of our brands is critical to our success in the hospitality industry. If our trademarks or intellectual property are copied or used without authorization, the value of our brands, their reputation, our competitive advantages and our goodwill could be harmed. We regularly apply to register our trademarks in the United States and other countries. However, we cannot assure you that those trademark registrations will be granted or that the steps we take to protect our trademarks or intellectual property in the United States and other countries will be adequate to prevent others, including third parties or former employees, from copying or using our trademarks or intellectual property without authorization. Our intellectual property is also vulnerable to unauthorized use in some countries outside the United States, where we may not be adequately protected by local law.
Monitoring the unauthorized use of our intellectual property is difficult. As we have in the past, we may need to resort to litigation to enforce our intellectual property rights. Litigation of this type could be costly, force us to divert our resources, lead to counterclaims or other claims against us or otherwise harm our business. Any failure to maintain and protect our trademarks and other intellectual property could reduce the value of our brands and harm our business.
Third-party claims that we infringe their intellectual property rights could subject us to damages and other costs and expenses.
Third parties may make claims against us for infringing their intellectual property rights. Any such claims, even those without merit, could:
| • | be expensive and time consuming to defend; |
| • | force us to stop providing products or services that use the intellectual property that is being challenged; |
| • | force us to redesign or rebrand our products or services; |
| • | divert our management’s attention and resources; |
| • | force us to enter into royalty or licensing agreements to obtain the right to use a third party’s intellectual property; or |
| • | force us to pay significant damages. |
In addition, we may be required to indemnify third-party owners of the hotels we manage or franchisees for any losses they incur as a result of any such infringement claims. Any necessary royalty or licensing agreements may not be available to us on acceptable terms. Any costs, lost revenues, changes to our business or management attention related to intellectual property claims against us, whether successful or not, could impact our business.
Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit our ability to operate our business.
In the normal course of our business, we are often involved in various legal proceedings. The outcome of these proceedings cannot be predicted. If any of these proceedings were to be determined adversely to us or a settlement involving a payment of a material sum of money were to occur, there could be a material adverse effect on our financial condition and results of operations. Additionally, we could become the subject of future
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claims by third parties, including current or former third-party property owners, guests who use our properties, our employees, our investors or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business.
Information technology system failures, delays in the operation of our information technology systems or system enhancement failures could reduce our revenues and profits and harm the reputation of our brands and our business.
Our success depends on the efficient and uninterrupted operation of our information technology systems. For example, we depend on our central reservation system, which allows bookings by hotels directly, via telephone through our call centers, by travel agents, online through our website www.hyatt.com, and through our online reservations partners. In addition, we depend on information technology to run our day-to-day operations, including, among others, hotel services and amenities such as guest check-in and check-out, housekeeping and room service and systems for tracking and reporting our financial results and the financial results of our hotels.
Our information technology systems are vulnerable to damage or interruption from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events. The occurrence of any of these natural disasters or unanticipated problems at any of our information technology facilities or any of our call centers could cause interruptions or delays in our business or loss of data, or render us unable to process reservations.
In addition, if our information technology systems are unable to provide the information communications capacity that we need, or if our information technology systems suffer problems caused by installing system enhancements, we could experience similar failures or interruptions. If our information technology systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our property and business interruption insurance does not sufficiently compensate us for any losses that we may incur, our revenues and profits could be reduced and the reputation of our brands and our business could be harmed.
Failure to maintain the integrity of internal or customer data could result in faulty business decisions, harm to our reputation or subject us to costs, fines or lawsuits.
We are required to collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information as our various information technology systems enter, process, summarize and report such data. We also maintain personally identifiable information about our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers expect that we will adequately protect their personal information, and the regulations applicable to security and privacy are increasingly demanding, both in the United States and in other jurisdictions where we operate. A theft, loss, fraudulent or unlawful use of customer, employee or company data could harm our reputation or result in remedial and other costs, fines or lawsuits.
If we fail to stay current with developments in technology necessary for our business, our operations could be harmed and our ability to compete effectively could be diminished.
Sophisticated information technology and other systems are instrumental for the hospitality industry, including systems used for our central reservations, revenue management, property management and our Hyatt Gold Passport program, as well as technology systems that we make available to our guests. These information technology and other systems must be refined, updated, or replaced with more advanced systems on a regular basis. Developing and maintaining these systems may require significant capital. If we are unable to replace or introduce information technology and other systems as quickly as our competitors or within budgeted costs or schedules when these systems become outdated or need replacing, or if we are unable to achieve the intended benefits of any new information technology or other systems, our operations could be harmed and our ability to compete effectively could be diminished.
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We may be liable for proposed tax liabilities and the final amount of taxes paid may exceed the amount of applicable reserves, which could reduce our profits.
The Internal Revenue Service (IRS) has completed its examinations of the originally filed consolidated federal income tax returns of Hyatt Hotels Corporation, Hyatt Corporation, AIC and H Group for the taxable years ended December 31, 2003, 2004 and 2005. Based on these examinations (and on examination adjustments for the taxable year ended January 31, 2001), we could be liable for up to $42 million of additional taxes and penalties (plus accrued interest). We and our affiliates have filed protests with the IRS Appeals Office contesting these proposed tax liabilities. Our consolidated federal income tax returns for the taxable years ended December 31, 2006, 2007 and 2008 (and the amended return for the taxable year ended December 31, 2005) are currently under examination, and we are also subject to ongoing tax audits and disputes in various state, local and foreign jurisdictions. We believe we have established adequate reserves for potential tax liabilities, but the final amount of taxes assessed and paid could exceed the amount of such reserves, which could reduce our profits.
Changes in federal, state, local or foreign tax law, interpretations of existing tax law or agreements with tax authorities could affect our profitability and financial condition by increasing our tax costs.
We are subject to taxation at the federal, state or provincial and local levels in the United States and various other countries and jurisdictions. Our future tax rates could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time the U.S. federal, state, local and foreign governments make substantive changes to tax rules and the application thereof, which could result in materially higher corporate taxes than would be incurred under existing tax law or interpretation and could adversely impact profitability. The current U.S. administration has put forth several revenue raising proposals, some of which target tax provisions that benefit us, including proposals to limit the ability of U.S. companies to continue to defer U.S. taxes on foreign income. State and local tax authorities have also increased their efforts to increase revenues through changes in tax law and audits. The State of Illinois, for example, recently increased its corporate income tax rate. Such changes and proposals, if enacted, could increase our future effective income tax rates.
We are a party to certain agreements with foreign tax authorities that reduce or defer the amount of tax we pay. The expiration of such agreements, or changes in circumstances or in interpretation of such agreements, could increase our tax costs.
The terms of our revolving credit facility and the indenture governing our senior notes place restrictions on us and certain of our subsidiaries, reducing operational flexibility and creating default risks.
The terms of our revolving credit facility and the indenture governing our senior notes contain covenants that place restrictions on us and certain of our subsidiaries. The covenants under our revolving credit facility restrict, among other things, our ability to:
| • | incur additional debt, due to a requirement that we satisfy a maximum leverage ratio test, a minimum interest coverage ratio test and a maximum secured debt ratio test; |
| • | engage in other business activities or engage in certain transactions with affiliates; and |
| • | change our fiscal year or change our organizational documents. |
Similarly, the covenants under our revolving credit facility and the indenture governing our senior notes restrict, among other things, our ability to:
| • | create any liens on certain assets to secure debt; |
| • | enter into certain sale and leaseback transactions; or |
| • | enter into mergers or consolidations or transfer all or substantially all of our assets. |
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Failure to comply with these restrictive covenants could result in an event of default that, if not waived or cured, if applicable, could result in the acceleration of all or a substantial portion of our outstanding debt under our revolving credit facility and our senior notes.
An increase in interest rates would increase interest costs on our revolving credit facility and any variable rate debt we incur, which could adversely impact our ability to refinance existing debt or acquire assets.
Borrowings under our revolving credit facility bear interest at the London Interbank Offered Rate (LIBOR) or an alternative base rate (defined as the greatest of (a) the federal funds rate plus 0.5%, (b) the prime rate and (c) one-month LIBOR plus 1.0%) plus an additional margin that is based on our credit ratings. To the extent we borrow under the revolving credit facility, any increase in the interest rate applicable to such borrowings will reduce our cash flows available for other corporate purposes including investments in our portfolio. Further, rising interest rates could limit our ability to refinance existing debt when it matures and increase interest costs on any debt that is refinanced. We may from time to time enter into agreements such as interest rate swaps or other interest rate hedging contracts. While these agreements may lessen the impact of rising interest rates, they also expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to dispose of assets as part of our business strategy. Our revolving credit facility also imposes an additional fee paid to revolving lenders whose loans mature on June 29, 2012 if the calculation of LIBOR falls below 1.00% in the case of LIBOR-based borrowings (including alternative base rate borrowings based on the one-month LIBOR).
Rating agency downgrades may increase our cost of capital.
The interest rate of borrowings and the facility fee under our revolving credit facility are determined by a pricing grid which is dependent on our credit ratings by Standard & Poor’s Rating Group and Moody’s Investors Service, Inc. Lower ratings result in a higher cost of funds. Therefore, if these independent rating agencies were to downgrade our credit ratings or if we no longer have a credit rating from either agency, the cost of our borrowing and the amount of the facility fee under our revolving credit facility will increase as specified in the pricing grid. Additionally, any future downgrade of our credit ratings by the rating agencies could reduce or limit our access to capital and increase our cost of capital. We and a number of our competitors have had either a rating or outlook downgrade by the rating agencies as a result of the recent economic downturn and decreased demand for hospitality products and services. Given the cyclical nature of the hospitality industry and its dependence on the underlying health of the economy, we could be subject to frequent changes in our credit rating. As the economic recovery is expected to be slow in the near term there is a continuing risk of our credit ratings being revised downward.
We have a large amount of cash and cash equivalents and short-term investments and are exposed to counterparty risk with respect to these deposits.
All of our cash that is not required to fund our daily operating activities is invested in interest bearing investments with a greater focus placed on capital preservation than on investment return. The majority of our cash balances are held on deposit with high quality financial institutions that hold long-term ratings of at least A or A2 from Standard & Poor’s Rating Group or Moody’s Investor Service, Inc., respectively, and in AAA-rated money market funds. As such, we are exposed to counterparty risk on our $1.1 billion of cash and cash equivalents as of December 31, 2010. During 2010 we established an investment account for purposes of investing a portion of our cash resources. In 2010, we began transferring cash and cash equivalent balances to the account for investment in corporate notes and bonds and U.S. treasuries and agencies. As such, we are exposed to counterparty risk on our $524 million of short-term investments as of December 31, 2010.
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As a result of becoming a public company, we have incurred and will continue to incur increased costs and become subject to additional regulations and requirements, which could lower our profits or make it more difficult to run our business.
As a newly public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the SEC and the New York Stock Exchange, and expect to incur costs associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted on July 21, 2010. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.
Risks Related to Share Ownership and Stockholder Matters
Our stock price is likely to be volatile, and you may not be able to resell shares of your Class A common stock at or above the price you paid.
The stock market in general, and hospitality companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the underlying businesses. Given that we are a newly public company, these fluctuations may be even more pronounced in the trading market for our stock. In addition, the financial services industry recently experienced a period of significant disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, which led to increased volatility in securities prices and a significant level of intervention from the U.S. and other governments in securities markets. These broad market and industry factors may seriously harm the market price of our Class A common stock, regardless of our actual operating performance.
In addition to the risks described in this section, several factors that could cause the price of our Class A common stock in the public market to fluctuate significantly include, among others, the following:
| • | quarterly variations in our operating results compared to market expectations; |
| • | announcements of acquisitions of or investments in other businesses and properties or dispositions; |
| • | announcements of new services or products or significant price reductions by us or our competitors; |
| • | size of the public float; |
| • | future conversions to and sales of our Class A common stock by current holders of Class B common stock in the public market, or the perception in the market that the holders of a large number of shares of Class B common stock intend to sell shares; |
| • | stock price performance of our competitors; |
| • | fluctuations in stock market prices and volumes; |
| • | default on our indebtedness or foreclosure of our properties; |
| • | changes in senior management or key personnel; |
| • | changes in financial estimates by securities analysts; |
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| • | negative earnings or other announcements by us or other hospitality companies; |
| • | downgrades in our credit ratings or the credit ratings of our competitors; |
| • | issuances or repurchases of equity or debt securities; and |
| • | global economic, legal and regulatory factors unrelated to our performance. |
Volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the price at which you purchased the stock. As a result, you may suffer a loss on your investment.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, reduce our profits, divert our management’s attention and resources and harm our business.
Pritzker family business interests have substantial control over us and have the ability to control the election of directors and other matters submitted to stockholders for approval, which will limit your ability to influence corporate matters or result in actions that you do not believe to be in our interests or your interests.
Our Class B common stock is entitled to ten votes per share and our Class A common stock is entitled to one vote per share. Pritzker family business interests beneficially own, in the aggregate, 104,365,554 shares, or approximately 80.6%, of our Class B common stock, representing approximately 60.0% of the outstanding shares of our common stock and approximately 77.9% of the total voting power of our outstanding common stock. As a result, consistent with the voting agreements contained in the Amended and Restated Global Hyatt Agreement and the Amended and Restated Foreign Global Hyatt Agreement, Pritzker family business interests will be able to exert a significant degree of influence or actual control over our management and affairs and over matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and any other significant transaction. While the voting agreements are in effect, they may provide our board of directors with the effective control over matters requiring stockholder approval. Because of our dual class ownership structure, Pritzker family business interests will continue to exert a significant degree of influence or actual control over matters requiring stockholder approval, even if they own less than 50% of the outstanding shares of our common stock. This concentrated control will limit your ability to influence corporate matters, and the interests of Pritzker family business interests may not coincide with our interests or your interests. As a result, we may take actions that you do not believe to be in our interests or your interests and that could depress our stock price. See also “ —Voting agreements entered into with or among our major stockholders, including Pritzker family business interests, will result in a substantial number of our shares being voted consistent with the recommendation of our board of directors, and may limit your ability to influence the election of directors and other matters submitted to stockholders for approval.”
In addition, the difference in the voting rights between our Class A common stock and Class B common stock could diminish the value of the Class A common stock to the extent that investors or any potential future purchasers of our common stock ascribe value to the superior voting rights of the Class B common stock.
Disputes among Pritzker family members and among Pritzker family members and the trustees of the Pritzker family trusts may result in significant distractions to our management, disrupt our business, have a negative effect on the trading price of our Class A common stock and/or generate negative publicity about Hyatt and the Pritzker family.
In the past, disputes have arisen between and among certain Pritzker family members, and between and among beneficiaries of the Pritzker family trusts and the trustees of such trusts, with respect to, among other things, the ownership, operation, governance, and management of certain Pritzker family business interests. In connection with certain of these disputes, claims were alleged, and in certain cases, proceedings were initiated, against certain Pritzker family members, including Thomas J. Pritzker, our executive chairman, and other
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Pritzker family members, some of whom have been or are our directors, and against the trustees, including Thomas J. Pritzker in his capacity as a co-trustee of the Pritzker family U.S. situs trusts. Such past allegations related to, among others, trust management and administration, and violations of certain trustee duties, including fiduciary duties. Some of these disputes led to significant negative publicity for the Pritzker family. These disputes have been resolved with no admissions or finding of any misconduct.
With respect to Hyatt, disputes arose between and among certain Pritzker family members and the trustees of trusts with respect to, among other things, our dual class structure, which became effective prior to the completion of our initial public offering. In particular, certain beneficiaries of Pritzker family trusts expressed concern that there could be a value differential between our Class A and Class B common stock based on the difference in voting rights between those two classes of stock. Additionally, certain beneficiaries of Pritzker family trusts noted that the dual class structure had the effect of extending the duration of the voting and lock-up restrictions under the Global Hyatt Agreement and Foreign Global Hyatt Agreement due to the fact that the duration of those restrictions, as originally drafted, was based, in part, on voting power of the outstanding shares of our stock owned by Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses) rather than on the percentage of the outstanding shares of our stock owned by them.
In connection with these disputes, the Global Hyatt Agreement and the Foreign Global Hyatt Agreement were amended and restated in three important respects, as described under Part I, Item 1, “Business—Stockholder Agreements.” First, the agreements were amended and restated to measure the duration of the voting and lock-up restrictions under the Global Hyatt Agreement and Foreign Global Hyatt Agreement on the percentage of outstanding shares, not voting power of shares, of our stock owned by Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses). Second, the agreements were amended and restated to permit Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses) to sell up to 25% of their aggregate holdings of our common stock, measured as of November 4, 2009 (the date of effectiveness of our registration statement on Form S-1 (File No. 333-161068) relating to our initial public offering of our Class A common stock), during each 12-month period following the date of effectiveness of such registration statement (without carry-overs), rather than 20% measured on a similar basis (though shares sold in the initial public offering counted toward the first 12-month period’s limit). Additionally, the prohibition on selling shares to any aggregator (i.e., a person who is required to file a Schedule 13D under the Exchange Act, disclosing an intent other than for investment) was removed. Third, the amended and restated agreements provided for the distribution of Hyatt stock from U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses in consultation with the adult beneficiaries of such trusts as soon as practicable following November 4, 2009, the date of effectiveness of the registration statement relating to our initial public offering of our Class A common stock, subject to the Amended and Restated Global Hyatt Agreement and the Amended and Restated Foreign Global Hyatt Agreement. The distribution of Hyatt stock from the Pritzker family U.S. and non-U.S. situs trusts occurred on August 17, 2010. In connection with such distribution, the trustees of the recipient personal trusts became party to the Amended and Restated Global Hyatt Agreement and Amended and Restated Foreign Global Hyatt Agreement, as applicable.
As a result of such changes to the agreements, Pritzker family members and spouses (including any U.S. or non-U.S. situs trusts for the current or future, direct or indirect, vested or contingent, benefit of any Pritzker family members and spouses), other than those who are party to the Agreement Relating to Stock, may now sell up to 100% of their common stock over a shorter period of time. See Part I, Item 1, “Business—Stockholder Agreements” and “—A significant number of shares of Class A common stock issuable upon conversion of Class B common stock could be sold into the market, which could depress our stock price even if our business is doing well.” As part of these discussions, we agreed to provide, in the 2009 Registration Rights Agreement, for a shelf registration in order to facilitate sales of common stock by domestic and foreign Pritzker stockholders.
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Disputes among Pritzker family members, and between and among beneficiaries of the Pritzker family trusts and the trustees of such trusts, including with respect to Hyatt, may arise or continue in the future. If such disputes occur, they may result in significant distractions to our management, disrupt our business, have a negative effect on the trading price of our Class A common stock and/or generate negative publicity about Hyatt and Pritzker family members, including Pritzker family members involved with Hyatt.
Voting agreements entered into with or among our major stockholders, including Pritzker family business interests, will result in a substantial number of our shares being voted consistent with the recommendation of our board of directors, and may limit your ability to influence the election of directors and other matters submitted to stockholders for approval.
Pritzker family business interests have entered into a voting agreement with respect to all shares of common stock beneficially owned by Pritzker family business interests. During the term of the voting agreement, which expires on the later to occur of January 1, 2015, and the date upon which more than 75% of the Company’s fully diluted shares of common stock is owned by non-Pritzker family business interests, Pritzker family business interests have agreed to vote their shares of our common stock consistent with the recommendation of our board of directors with respect to all matters (assuming agreement as to any such matter by a majority of a minimum of three independent directors (excluding for such purposes any Pritzker)) or, in the case of transactions involving us and an affiliate, assuming agreement of all of such minimum of three independent directors (excluding for such purposes any Pritzker). In addition, other existing stockholders, including entities affiliated with Goldman Sachs & Co. and Madrone GHC, beneficially own, in the aggregate, approximately 19.4% of our outstanding Class B common stock, representing approximately 14.4% of the outstanding shares of our common stock and approximately 18.8% of the total voting power of our outstanding common stock. These entities have entered into a voting agreement with us, with respect to the shares of Class B common stock that they beneficially own, and have agreed to vote their shares of Class B common stock consistent with the recommendation of our board of directors, without any separate requirement that our independent directors agree with the recommendation. These voting agreements expire on the later to occur of December 31, 2013 and the date that Thomas J. Pritzker is no longer chairman of our board of directors. See Part I, Item 1, “Business—Stockholder Agreements.”
While the voting agreements are in effect, they may provide our board of directors with effective control over matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and any other significant transaction. This is because the number of our shares that are required by the voting agreements to be voted consistent with the recommendation of our board of directors will be sufficient to determine the outcome of the election of directors and other matters submitted to stockholders for approval. This will limit your ability to influence the election of directors and other matters submitted to stockholders for approval, even if you do not believe those actions to be in our interests or your interests. For instance, the voting agreements may have the effect of delaying or preventing a transaction that would result in a change of control, if our board of directors does not recommend that our stockholders vote in favor of the transaction, even if you or some or all of our major stockholders believe that the transaction is in our interests or your interests. On the other hand, the voting agreements may result in our stockholders approving a transaction that would result in a change of control, if our board of directors recommends that our stockholders vote in favor of the transaction, even if you or some or all of our major stockholders believe that the transaction is not in our interests or your interests.
A significant number of shares of Class A common stock issuable upon conversion of Class B common stock could be sold into the market, which could depress our stock price even if our business is doing well.
Future sales of Class A common stock issuable upon conversion of Class B common stock in the public market, or the perception in the market that the holders of a large number of shares of Class B common stock intend to sell shares, could reduce the market price of our Class A common stock. As of January 31, 2011 we had 44,502,196 shares of Class A common stock outstanding and 129,466,000 shares of Class B common stock outstanding.
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Of the outstanding shares, 44,437,511 shares of Class A common stock are freely tradable in the public market without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”) unless these shares are held by any of our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining 25,081 outstanding shares of Class A common stock and 129,466,000 outstanding shares of Class B common stock are deemed “restricted securities,” as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if they are registered under the Securities Act or they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act.
Substantially all of these restricted securities are subject to contractual lock-up and certain other restrictions contained in the Amended and Restated Global Hyatt Agreement, Amended and Restated Foreign Global Hyatt Agreement, Amended and Restated Agreement Relating to Stock or the 2007 Stockholders’ Agreement as described in Part I, Item 1, “Business—Stockholder Agreements.” These additional restrictions may be amended, waived or terminated by the parties to those lock-up agreements in accordance with the terms of those agreements without our consent and without notice or, with respect to the Amended and Restated Global Hyatt Agreement and the Amended and Restated Foreign Global Hyatt Agreement, the 25% limitation on sales of our common stock may, with respect to each 12 month period, be increased to a higher percentage or waived entirely by the unanimous affirmative vote of our independent directors (excluding for such purposes any Pritzker). All shares of Class A common stock, including shares of Class A common stock issuable upon conversion of shares of Class B common stock, will be eligible for resale in compliance with Rule 144 or Rule 701 to the extent the lock-up restrictions contained in the Amended and Restated Global Hyatt Agreement, Amended and Restated Foreign Global Hyatt Agreement, Amended and Restated Agreement Relating to Stock or 2007 Stockholders’ Agreement, as applicable, are waived or terminated with respect to such shares.
Assuming the lock-up restrictions contained in the Amended and Restated Global Hyatt Agreement, Amended and Restated Foreign Global Hyatt Agreement, Amended and Restated Agreement Relating to Stock and the 2007 Stockholders’ Agreement are not amended, waived or terminated and assuming the parties to these agreements sell the maximum amount permitted to be sold during the first time period that such shares are eligible to be sold, and subject to any applicable restrictions contained in such agreements (such as requirements that any such sales be made by way of an underwritten public offering or in an otherwise broad distribution sale and rights of first refusal) and the provisions of Rule 144 and/or Rule 701 under the Securities Act, these restricted securities will be available for sale in the public market as follows:
| Number of Shares |
Time Period | |
| 7,204,303 |
At any time. | |
| 27,636,937 |
After 12 months and up to 24 months from November 4, 2009. | |
| 2,851,522 |
After December 23, 2010 and up to 24 months from November 4, 2009*. | |
| 6,331,270 |
After May 13, 2011**. | |
| 26,744,926 |
After 24 months and up to 36 months from November 4, 2009. | |
| 22,232,509 |
After 36 months and up to 42 months (3 1/2 years) from November 4, 2009. | |
| 9,661,522 |
After 42 months (3 1/2 years) and up to 48 months from November 4, 2009. | |
| 8,058,515 |
After 48 months and up to 54 months (4 1/2 years) from November 4, 2009. | |
| 7,938,307 |
After 54 months (4 1/2 years) and up to 60 months from November 4, 2009. | |
| 6,419,886 |
After 60 months and up to 66 months (5 1/2 years) from November 4, 2009. | |
| 4,961,921 |
After 72 months from November 4, 2009. |
| * | On December 23, 2010, the “applicable market value” (as defined in the Amended and Restated Agreement Relating to Stock) of our Class A common stock exceeded 165% of the gross price per share at which the Class A common stock was first traded in connection with our initial public offering. Under the terms of the Amended and Restated Agreement Relating to Stock, following such date, each stockholder party to the agreement may transfer up to one-third of its common stock held as of August 28, 2007 (or deemed to be held as of such date) to unaffiliated third parties; provided that such transfers are accomplished by way of an |
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| underwritten public offering or in an otherwise broad distribution sale. Such stockholders’ shares continue to remain, however, subject to the lock-up restrictions contained in the Amended and Restated Global Hyatt Agreement and Amended and Restated Foreign Global Hyatt Agreement. See Part I, Item 1, “Business – Stockholder Agreements – Amended and Restated Global Hyatt Agreement,” “—Amended and Restated Foreign Global Hyatt Agreement” and “—Amended and Restated Agreement Relating to Stock.” |
| ** | Under the terms of the 2007 Stockholders’ Agreement, subject to the rights of first refusal and “drag along” rights and other restrictions contained in such agreement, each stockholder party to the agreement may transfer up to one-third of its common stock acquired under the Subscription Agreement or upon conversion of Series A Convertible Preferred Stock to unaffiliated third parties at any time following both (a) December 23, 2010, the first date on which the “applicable market value” exceeded 165% of the gross price per share at which the Class A common stock was first traded in connection with our initial public offering and (b) May 13, 2011; provided that such transfers are accomplished by way of an underwritten public offering or in an otherwise broad distribution sale. See Part I, Item 1, “Business – Stockholder Agreements – 2007 Stockholders’ Agreement.” |
In addition, as of December 31, 2010, 9,246,977 shares of our Class A common stock are reserved for issuance under the Amended and Restated Hyatt Hotels Corporation Long-Term Incentive Plan (the “LTIP”). These shares of Class A common stock will become eligible for sale in the public market once those shares are issued or awarded under our LTIP, subject to provisions of various award agreements and Rule 144, as applicable. In addition, 968,865 shares of our Class A common stock are reserved for issuance under the Hyatt Hotels Corporation Employee Stock Purchase Plan (the “ESPP”), 1,169,195 shares of our Class A common stock remain available for issuance pursuant to the Amended and Restated Hyatt Corporation Deferred Compensation Plan (the “DCP”) and 300,000 shares of Class A common stock remain available for issuance pursuant to the Hyatt International Hotels Retirement Plan (commonly known as the Field Retirement Plan) (the “FRP”).
If any of these holders causes a large number of securities to be sold in the public market, the sales could reduce the trading price of our Class A common stock. These sales also could impede our ability to raise future capital. See also “—If holders of shares of our Class B common stock convert their shares of Class B common stock into shares of Class A common stock and exercise their registration rights, a significant number of shares of our Class A common stock could be sold into the market, which could reduce the trading price of our Class A common stock and impede our ability to raise future capital.”
We also may issue shares of our Class A common stock from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant.
If holders of shares of our Class B common stock convert their shares of Class B common stock into shares of Class A common stock and exercise their registration rights, a significant number of shares of our Class A common stock could be sold into the market, which could reduce the trading price of our Class A common stock and impede our ability to raise future capital.
Holders of 129,466,000 shares of our Class B common stock (or 74.4% of our total outstanding shares of common stock), including Pritzker family business interests and entities affiliated with Goldman Sachs and Madrone GHC, have rights, subject to certain conditions, to require us to file registration statements registering sales of shares of Class A common stock acquired upon conversion of such Class B common stock or to include sales of such shares of Class A common stock in registration statements that we may file for ourselves or other stockholders. In order to exercise such registration rights, the holder must be permitted to sell shares of its common stock under applicable lock-up restrictions. See Part I, Item 1, “Business—Stockholder Agreements” for additional information with respect to these lock-up provisions. Subject to compliance with applicable lock-up agreements, shares of Class A common stock sold under these registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of Class A common stock issuable upon conversion of shares of Class B common stock are sold in the public market, such sales could reduce the trading price of our Class A common stock. These sales also could impede our ability to raise future capital. Additionally, we will bear all expenses in connection with any such registrations (other than underwriting discounts).
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Certain Pritzker family stockholders have exercised their rights to require the Company to register an aggregate of 12,833,046 shares of Class A common stock issuable upon conversion of such stockholders’ shares of Class B common stock on a shelf registration statement on Form S-3 pursuant to Rule 415 of the Securities Act. The 12,833,046 shares requested to be registered are eligible to be sold under the applicable lock-up provisions contained in the Amended and Restated Global Hyatt Agreement and Amended and Restated Foreign Global Hyatt Agreement. Under the registration rights agreement and applicable lock-up restrictions, the other stockholders party to the agreements are entitled to “piggyback” registration rights and may elect to include up to an aggregate of 24,294,275 shares of their Class A common stock acquired upon conversion of shares of Class B common stock on such registration statement. To date, holders of 16,702,887 of these shares, including trustees of trusts for the benefit of Thomas J. Pritzker and Penny Pritzker and their respective lineal descendants, entities affiliated with Goldman, Sachs & Co. and entities affiliated with Madrone Capital, LLC, have elected not to exercise their piggyback registration rights. We cannot assure you whether stockholders holding the remaining 7,591,388 eligible shares will elect to exercise their piggyback registration rights and register all or a portion of their shares of Class A common stock eligible to be registered and sold under applicable lock-up agreements on such shelf registration statement. In accordance with the terms of the Registration Rights Agreement, dated as of October 12, 2009, the Company intends to file a shelf registration statement with the SEC as soon as practicable to register the 12,833,046 shares of Class A common stock plus any additional shares required to be registered pursuant to exercised piggyback registration rights. The filing of such shelf registration statement, the sale of shares registered under the registration statement in the public market, or the perception that such sales may occur could reduce the trading price of our Class A common stock or impede our ability to raise future capital.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our stock price and trading volume.
Securities research analysts have established and publish their own quarterly projections for our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could decline.
Anti-takeover provisions in our organizational documents and Delaware law, as well as agreements with our major stockholders, may discourage or prevent a change of control, even if a sale of Hyatt would be beneficial to our stockholders, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current board of directors or management.
Our amended and restated certificate of incorporation and bylaws, as well as agreements with our major stockholders, contain provisions that may make it difficult to remove our board of directors and management and may discourage or delay “change of control” transactions that certain stockholders may view as beneficial or could involve the payment of a premium over prevailing market prices for our Class A common stock. These provisions include, among others:
| • | Our amended and restated certificate of incorporation provides for a dual class ownership structure, in which our Class B common stock is entitled to ten votes per share and our Class A common stock is entitled to one vote per share. As a result of this structure, our major stockholders have significant influence or actual control over matters requiring stockholder approval. |
| • | Voting agreements entered into with or among our major stockholders require these stockholders to vote their shares consistent with the recommendation of our board of directors, assuming in certain instances that a majority of a minimum of three independent directors (excluding for such purposes any Pritzker) or, in the case of transactions involving us and an affiliate, all of such minimum of three independent directors (excluding for such purposes any Pritzker) agree with the recommendation. While the voting agreements are in effect, they may provide our board of directors with effective control over matters requiring stockholder approval. |
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| • | Lock-up agreements entered into with stockholders party to our 2007 Stockholders’ Agreement limit the ability of these stockholders to sell their shares to any person who would be required to file a Schedule 13D with the SEC disclosing an intent to acquire the shares other than for investment purposes and, in certain instances, to competitors of ours in the hospitality, lodging or gaming industries. |
| • | Stockholders party to our 2007 Stockholders’ Agreement have agreed, subject to certain limited exceptions, to “standstill” provisions that prevent the stockholders from acquiring additional shares of our common stock, making or participating in acquisition proposals for us or soliciting proxies in connection with meetings of our stockholders, unless the stockholders are invited to do so by our board of directors. |
| • | Our board of directors is divided into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at an annual meeting. |
| • | Our directors may be removed only for cause, which prevents stockholders from being able to remove directors without cause other than those directors who are being elected at an annual meeting. |
| • | Our amended and restated certificate of incorporation does not provide for cumulative voting in the election of directors. As a result, holders of our Class B common stock will control the election of directors and the ability of holders of our Class A common stock to elect director candidates will be limited. |
| • | Vacancies on our board of directors, and any newly created director positions created by the expansion of the board of directors, may be filled only by a majority of remaining directors then in office. |
| • | Actions to be taken by our stockholders may only be effected at an annual or special meeting of our stockholders and not by written consent. |
| • | Special meetings of our stockholders can be called only by the Chairman of the Board or by our corporate secretary at the direction of our board of directors. |
| • | Advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company. |
| • | Our board of directors may, without stockholder approval, issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control. |
| • | An affirmative vote of the holders of at least 80% of the voting power of our outstanding capital stock entitled to vote is required to amend any provision of our certificate of incorporation or bylaws. |
We do not currently pay dividends on our Class A common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our Class A common stock appreciates.
We have never declared or paid cash dividends on our common stock. In addition, we must comply with the covenants in our revolving credit facility if we want to pay cash dividends. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant.
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Non-U.S. holders who own more than 5% of our Class A common stock or substantial amounts of our Class B common stock may be subject to U.S. federal income tax on gain realized on the disposition of such stock.
Because we have significant U.S. real estate holdings, we may be a “United States real property holding corporation” (USRPHC) for U.S. federal income tax purposes, but we have made no determination to that effect. There can be no assurance that we do not currently constitute or will not become a USRPHC. As a result, a “non-U.S. holder” may be subject to U.S. federal income tax on gain realized on a disposition of our Class A common stock if such non-U.S. holder has owned, actually or constructively, more than 5% of our Class A common stock at any time during the shorter of (a) the five-year period ending on the date of disposition and (b) the non-U.S. holder’s holding period in such stock.
If we were or were to become a USRPHC, a non-U.S. holder may be subject to U.S. federal income tax on gain realized on the disposition of our Class B common stock if on the date such non-U.S. holder actually or constructively acquired Class B common stock, and on any date on which such non-U.S. holder makes subsequent acquisitions of Class B common stock, the aggregate fair market of its Class B common stock is greater than 5% of the fair market value of our Class A common stock on such date. Certain dispositions of substantial amounts of Class B common stock by non-U.S. holders may also be subject to withholding under section 1445(a) of the Code.
| Item 1B. | Unresolved Staff Comments. |
None.
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| Item 2. | Properties. |
The following table sets forth a description of each owned or leased Hyatt-branded hotel property as of December 31, 2010.
| Property |
Location | Rooms | Ownership (1) | |||||||||
| Full Service |
||||||||||||
| United States, Canada and the Caribbean: |
||||||||||||
| Andaz 5th Avenue |
New York, NY | 184 | 100 | % | ||||||||
| Andaz West Hollywood (2)(3) |
West Hollywood, CA | 238 | 0 | % | ||||||||
| Grand Hyatt New York (4) |
New York, NY | 1311 | 100 | % | ||||||||
| Grand Hyatt San Antonio (4) |
San Antonio, TX | 1003 | 30 | % | ||||||||
| Grand Hyatt San Francisco |
San Francisco, CA | 685 | 100 | % | ||||||||
| Grand Hyatt Seattle |
Seattle, WA | 425 | 50 | % | ||||||||
| Hotel Mar Monte, Managed by Hyatt |
Santa Barbara, CA | 197 | 99 | % | ||||||||
| Hyatt at Fisherman's Wharf |
San Francisco, CA | 313 | 100 | % | ||||||||
| Hyatt at Olive 8 |
Seattle, WA | 346 | 50 | % | ||||||||
| Hyatt at The Bellevue |
Philadelphia, PA | 172 | 50 | % | ||||||||
| Hyatt Key West Resort and Spa |
Key West, FL | 118 | 100 | % | ||||||||
| Hyatt on Capitol Square (2) |
Columbus, OH | 400 | 0 | % | ||||||||
| Hyatt Regency Aruba Resort and Casino (4) |
|
Palm Beach, Aruba, Dutch Carribean |
|
357 | 100 | % | ||||||
| Hyatt Regency Atlanta |
Atlanta, GA | 1260 | 100 | % | ||||||||
| Hyatt Regency Baltimore (4) |
Baltimore, MD | 488 | 100 | % | ||||||||
| Hyatt Regency Cleveland at The Arcade (5) |
Cleveland, OH | 293 | 50 | % | ||||||||
| Hyatt Regency Coconut Point Resort and Spa |
Bonita Springs, FL | 454 | 100 | % | ||||||||
| Hyatt Regency Columbus (4) |
Columbus, OH | 633 | 24 | % | ||||||||
| Hyatt Regency Crown Center (2) |
Kansas City, MO | 733 | 0 | % | ||||||||
| Hyatt Regency Crystal City at Reagan National Airport |
Arlington, VA | 686 | 50 | % | ||||||||
| Hyatt Regency Denver Tech Center |
Denver, CO | 451 | 100 | % | ||||||||
| Hyatt Regency DFW (4) |
DFW Airport, TX | 811 | 50 | % | ||||||||
| Hyatt Regency Grand Cypress (2)(3) |
Orlando, FL | 815 | 0 | % | ||||||||
| Hyatt Regency Greenwich |
Old Greenwich, CT | 373 | 100 | % | ||||||||
| Hyatt Regency Huntington Beach Resort and Spa (4) |
Huntington Beach, CA | 517 | 40 | % | ||||||||
| Hyatt Regency Indianapolis |
Indianapolis, IN | 497 | 100 | % | ||||||||
| Hyatt Regency Jersey City on the Hudson |
Jersey City, NJ | 351 | 50 | % | ||||||||
| Hyatt Regency Lake Tahoe Resort, Spa and Casino |
Incline Village, NV | 422 | 100 | % | ||||||||
| Hyatt Regency Long Beach (4) |
Long Beach, CA | 528 | 100 | % | ||||||||
| Hyatt Regency Lost Pines Resort and Spa |
Lost Pines, TX | 491 | 8 | % | ||||||||
| Hyatt Regency Louisville (4) |
Louisville, KY | 393 | 96 | % | ||||||||
| Hyatt Regency Miami (4) |
Miami, FL | 612 | 100 | % | ||||||||
| Hyatt Regency Minneapolis |
Minneapolis, MN | 533 | 100 | % | ||||||||
| Hyatt Regency Monterey Hotel & Spa on Del Monte Golf Course (4) |
Monterey, CA | 550 | 100 | % | ||||||||
| Hyatt Regency O'Hare |
Rosemont, IL | 1096 | 100 | % | ||||||||
| Hyatt Regency San Antonio |
San Antonio, TX | 632 | 100 | % | ||||||||
| Hyatt Regency San Francisco (2) |
San Francisco, CA | 802 | 0 | % | ||||||||
| Hyatt Regency Santa Clara (4) |
Santa Clara, CA | 501 | 100 | % | ||||||||
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| Property |
Location | Rooms | Ownership (1) | |||||||||
| Hyatt Regency Scottsdale Resort and Spa at Grainey Ranch |
Scottsdale, AZ | 493 | 100 | % | ||||||||
| Hyatt Regency Vancouver |
|
Vancouver, British Columbia, Canada |
|
644 | 100 | % | ||||||
| Hyatt Regency Waikiki Beach Resort and Spa (4) |
Honolulu, HI | 1229 | 10 | % | ||||||||
| Park Hyatt Chicago |
Chicago, IL | 198 | 100 | % | ||||||||
| Park Hyatt Toronto |
|
Toronto, Ontario, Canada |
|
346 | 100 | % | ||||||
| Park Hyatt Washington |
Washington, DC | 216 | 100 | % | ||||||||
| Europe, Africa and the Middle East: |
||||||||||||
| Andaz Liverpool Street (4) |
London, England | 267 | 100 | % | ||||||||
| Grand Hyatt Berlin (2)(7) |
Berlin, Germany | 342 | 0 | % | ||||||||
| Hyatt Regency Baku |
Baku, Azerbaijan | 182 | 100 | % | ||||||||
| Hyatt Regency Bishkek (4) |
|
Bishkek, Kyrgyz Republic |
|
178 | 89 | % | ||||||
| Hyatt Regency Cologne (2) |
Cologne, Germany | 306 | 0 | % | ||||||||
| Hyatt Regency Mainz (2) |
Mainz, Germany | 268 | 0 | % | ||||||||
| Park Hyatt Baku |
Baku, Azerbaijan | 159 | 100 | % | ||||||||
| Park Hyatt Hamburg (2)(6) |
Hamburg, Germany | 252 | 50 | % | ||||||||
| Park Hyatt Jeddah (4) |
Jeddah, Saudia Arabia | 142 | 8 | % | ||||||||
| Park Hyatt Milan |
Milan, Italy | 108 | 30 | % | ||||||||
| Park Hyatt Zurich (4) |
Zurich, Switzerland | 142 | 100 | % | ||||||||
| Park Hyatt Paris-Vendome |
Paris, France | 162 | 100 | % | ||||||||
| Asia Pacific: |
||||||||||||
| Bali Hyatt |
Bali, Indonesia | 386 | 10 | % | ||||||||
| Grand Hyatt Bali |
Bali, Indonesia | 648 | 10 | % | ||||||||
| Grand Hyatt Mumbai |
Mumbai, India | 547 | 50 | % | ||||||||
| Grand Hyatt Seoul |
Seoul, South Korea | 601 | 100 | % | ||||||||
| Hyatt Regency Kyoto |
Kyoto, Japan | 189 | 20 | % | ||||||||
| Latin America: |
||||||||||||
| Grand Hyatt Sao Paulo |
Sao Paulo, Brazil | 466 | 50 | % | ||||||||
| Park Hyatt Mendoza, Hotel Casino and Spa |
Mendoza, Argentina | 186 | 50 | % | ||||||||
| Select Service |
||||||||||||
| Hyatt Place Dallas/Arlington |
Arlington, TX | 127 | 100 | % | ||||||||
| Hyatt Place Fort Worth/Cityview |
Fort Worth, TX | 127 | 100 | % | ||||||||
| Hyatt Place Fort Worth/Hurst |
Hurst, TX | 127 | 100 | % | ||||||||
| Hyatt Place Dallas/Plano |
Plano, TX | 127 | 100 | % | ||||||||
| Hyatt Place San Antonio-Northwest/Medical Center |
San Antonio, TX | 126 | 100 | % | ||||||||
| Hyatt Place Birmingham/Inverness |
Birmingham, AL | 126 | 100 | % | ||||||||
| Hyatt Place Sacramento/Rancho Cordova |
Rancho Cordova, CA | 127 | 100 | % | ||||||||
| Hyatt Place Denver Airport |
Aurora, CO | 126 | 100 | % | ||||||||
| Hyatt Place Denver-South/Park Meadows |
Lone Tree, CO | 127 | 100 | % | ||||||||
| Hyatt Place Denver Tech Center |
Englewood, CO | 126 | 100 | % | ||||||||
| Hyatt Place Orlando/Convention Center |
Orlando, FL | 149 | 100 | % | ||||||||
| Hyatt Place Orlando/Universal |
Orlando, FL | 151 | 100 | % | ||||||||
| Hyatt Place Tampa/Busch Gardens |
Tampa, FL | 126 | 100 | % | ||||||||
| Hyatt Place Atlanta/Perimeter Center |
Atlanta, GA | 150 | 100 | % | ||||||||
| Hyatt Place Atlanta/Buckhead (2)(3) |
Atlanta, GA | 171 | 100 | % | ||||||||
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| Property |
Location | Rooms | Ownership (1) | |||||||
| Hyatt Place Atlanta/Norcross/Peachtree |
Norcross, GA | 126 | 100 | % | ||||||
| Hyatt Place Atlanta/Alpharetta/Windward Parkway |
Alpharetta, GA | 127 | 100 | % | ||||||
| Hyatt Place Cincinnati Airport/Florence |
Florence, KY | 127 | 100 | % | ||||||
| Hyatt Place Louisville-East |
Louisville, KY | 121 | 100 | % | ||||||
| Hyatt Place Baltimore/Owings Mills |
Owings Mills, MD | 123 | 100 | % | ||||||
| Hyatt Place Detroit/Auburn Hills |
Auburn Hills, MI | 127 | 100 | % | ||||||
| Hyatt Place Detroit/Livonia |
Livonia, MI | 127 | 100 | % | ||||||
| Hyatt Place Minneapolis/Eden Prairie |
Eden Prairie, MN | 126 | 100 | % | ||||||
| Hyatt Place Charlotte Airport/Tyvola Road |
Charlotte, NC | 127 | 100 | % | ||||||
| Hyatt Place Greensboro |
Greensboro, NC | 124 | 100 | % | ||||||
| Hyatt Place Raleigh-North |
Raleigh, NC | 127 | 100 | % | ||||||
| Hyatt Place Fair Lawn/Paramus |
Fair Lawn, NJ | 143 | 100 | % | ||||||
| Hyatt Place Princeton |
Princeton, NJ | 122 | 100 | % | ||||||
| Hyatt Place Secaucus/Meadowlands (4) |
Seacaucus, NJ | 159 | 100 | % | ||||||
| Hyatt Place Cincinnati-Northeast |
Mason, OH | 127 | 100 | % | ||||||
| Hyatt Place Cleveland/Independence |
Independence, OH | 127 | 100 | % | ||||||
| Hyatt Place Houston/Sugar Land |
Sugar Land, TX | 214 | 50 | % | ||||||
| Hyatt Place Oaklahoma City Airport |
Oaklahoma City, OK | 126 | 100 | % | ||||||
| Hyatt Place Pittsburgh/Cranberry |
Cranberry Township, PA | 127 | 100 | % | ||||||
| Hyatt Place Pittsburgh Airport |
Pittsburgh, PA | 127 | 100 | % | ||||||
| Hyatt Place Columbia/Harbison |
Irmo, SC | 127 | 100 | % | ||||||
| Hyatt Place Nashville/Brentwood |
Brentwood, TN | 124 | 100 | % | ||||||
| Hyatt Place Memphis Primacy Parkway |
Memphis, TN | 126 | 100 | % | ||||||
| Hyatt Place Nashville/Opryland |
Nashville, TN | 123 | 100 | % | ||||||
| Hyatt Place Richmond/Arboretum |
Richmond, VA | 127 | 100 | % | ||||||
| Hyatt Place Lakeland Center (4) |
Lakeland, FL | 127 | 100 | % | ||||||
| Hyatt Place Fremont/Silicon Valley |
Fremont, CA | 151 | 100 | % | ||||||
| Hyatt Place Phoenix-North |
Phoenix, AZ | 127 | 100 | % | ||||||
| Hyatt Place Scottsdale/Old Town |
Scottsdale, AZ | 127 | 100 | % | ||||||
| Hyatt Place Mystic |
Mystic, CT | 79 | 100 | % | ||||||
| Hyatt Place Boise/Towne Square |
Boise, ID | 127 | 100 | % | ||||||
| Hyatt Place Chicago/Hoffman Estates |
Hoffman Estates, IL | 126 | 100 | % | ||||||
| Hyatt Place Chicago/Itasca |
Itasca, IL | 126 | 100 | % | ||||||
| Hyatt Place Chicago/Lombard/Oak Brook |
Lombard, IL | 151 | 100 | % | ||||||
| Hyatt Place Albuquerque Airport |
Albuquerque, NM | 127 | 100 | % | ||||||
| Hyatt Place Coconut Point |
Estero, FL | 108 | 50 | % | ||||||
| Hyatt Place Phoenix/Gilbert |
Gilbert, AZ | 127 | 50 | % | ||||||
| Hyatt Summerfield Suites Denver Tech Center |
Englewood, CO | 135 | 100 | % | ||||||
| Hyatt Summerfield Suites Miami Airport |
Miami, FL | 156 | 100 | % | ||||||
| Hyatt Summerfield Suites Boston/Waltham |
Waltham, MA | 135 | 100 | % | ||||||
| Hyatt Summerfield Suites Parsippany/Whippany |
Whippany, NJ | 135 | 100 | % | ||||||
| Hyatt Summerfield Suites Morristown |
Morristown, NJ | 132 | 100 | % | ||||||
| (1) | Unless otherwise indicated, ownership percentages include both the property and underlying land. |
| (2) | Property is accounted for as a capital or an operating lease. |
| (3) | Hotel is included in our portfolio of 90 owned hotels. |
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| (4) | Our ownership interest in the property is subject to a third-party ground lease on the land. |
| (5) | A foreclosure action was initiated by the mortgage lender on this property in April 2009. The proceedings are pending. |
| (6) | We own a 50% interest in the entity that is the operating lessee. |
| (7) | We own an 100% interest in the entity that is the operating lessee. |
Below is a summary of our Hyatt managed, franchised and owned and leased hotels and residential and vacation ownership properties by segment for all periods presented.
| December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||
| Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | |||||||||||||||||||||||||
| North America Management and Franchising |
||||||||||||||||||||||||||||||||
| Full Service Hotels |
||||||||||||||||||||||||||||||||
| Managed |
114 | 60,016 | 110 | 59,225 | 110 | 58,921 | 109 | 56,830 | ||||||||||||||||||||||||
| Franchised |
16 | 4,767 | 11 | 3,401 | 10 | 3,212 | 7 | 2,425 | ||||||||||||||||||||||||
| Full Service Managed and Franchised |
130 | 64,783 | 121 | 62,626 | 120 | 62,133 | 116 | 59,255 | ||||||||||||||||||||||||
| Select Service Hotels |
||||||||||||||||||||||||||||||||
| Managed |
81 | 10,522 | 80 | 10,285 | 94 | 12,064 | 99 | 12,651 | ||||||||||||||||||||||||
| Franchised |
114 | 14,494 | 96 | 12,218 | 65 | 8,014 | 48 | 5,885 | ||||||||||||||||||||||||
| Select Service Managed and Franchised |
195 | 25,016 | 176 | 22,503 | 159 | 20,078 | 147 | 18,536 | ||||||||||||||||||||||||
| International Management and Franchising |
||||||||||||||||||||||||||||||||
| Managed |
102 | 34,519 | 100 | 33,914 | 96 | 32,631 | 95 | 32,337 | ||||||||||||||||||||||||
| Franchised |
2 | 988 | 2 | 988 | 2 | 992 | 2 | 992 | ||||||||||||||||||||||||
| Managed and Franchised |
104 | 35,507 | 102 | 34,902 | 98 | 33,623 | 97 | 33,329 | ||||||||||||||||||||||||
| Total Managed and Franchised |
429 | 125,306 | 399 | 120,031 | 377 | 115,834 | 360 | 111,120 | ||||||||||||||||||||||||
| Vacation Ownership Properties |
15 | 962 | 15 | 962 | 14 | 918 | 13 | 885 | ||||||||||||||||||||||||
| Residences |
9 | 1,239 | 10 | 1,324 | 8 | 1,225 | 8 | 1,225 | ||||||||||||||||||||||||
| Grand Total Portfolio |
453 | 127,507 | 424 | 122,317 | 399 | 117,977 | 381 | 113,230 | ||||||||||||||||||||||||
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Included in the summary above, are the following owned and leased properties:
| December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||
| Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | |||||||||||||||||||||||||
| Owned and Leased |
||||||||||||||||||||||||||||||||
| Full Service Owned and Leased |
42 | 19,447 | 47 | 21,447 | 46 | 20,967 | 45 | 20,724 | ||||||||||||||||||||||||
| Select Service Owned and Leased |
54 | 7,041 | 55 | 7,169 | 55 | 7,169 | 55 | 7,169 | ||||||||||||||||||||||||
| Total Owned and Leased |
96 | 26,488 | 102 | 28,616 | 101 | 28,136 | 100 | 27,893 | ||||||||||||||||||||||||
Corporate Headquarters and Divisional Offices
Our corporate headquarters are located at 71 South Wacker Drive, 12th Floor, Chicago, Illinois. These offices consist of approximately 196,131 square feet (net of subleased space). The lease for this property initially expires on February 29, 2020, with an option to renew and increase the rentable square feet. We also lease 74,067 square feet of office space at 200 West Monroe Street, Chicago, Illinois. The lease for this property initially expires on March 31, 2016 with an option to renew and increase the rentable square feet.
In addition to our corporate headquarters, we lease space for our divisional offices, service centers and sales offices in multiple locations, including Beijing and Hong Kong, People’s Republic of China; Dubai, United Arab Emirates; Gurgaon (NCR) and Mumbai, India; London, United Kingdom; Mainz, Germany; Marion, Illinois; Melbourne, Australia; Mexico City, Mexico; Moore, Oklahoma; Omaha, Nebraska; St. Petersburg, Florida; Tokyo, Japan; and Zurich, Switzerland.
We believe that our existing office properties are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.
| Item 3. | Legal Proceedings. |
We are involved in various claims and lawsuits arising in the normal course of business, including proceedings involving tort and other general liability claims, workers’ compensation and other employee claims, intellectual property claims and claims related to our management of certain hotel properties. Most occurrences involving liability, claims of negligence and employees are covered by insurance with solvent insurance carriers. For those matters not covered by insurance, which includes commercial matters, we recognize a liability when we believe the loss is probable and reasonably estimable. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or liquidity.
| Item 4. | (Removed and Reserved). |
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Executive Officers of the Registrant.
The following chart names each of the Company’s executive officers and their ages and positions as of February 16, 2011. Also included below is biographical information relating to each of the Company’s executive officers. Each of the executive officers is elected by and serves at the pleasure of the board of directors.
| Name |
Age | Position | ||||
| Thomas J. Pritzker |
60 | Executive Chairman of the Board | ||||
| Mark S. Hoplamazian |
47 | President, Chief Executive Officer and Director | ||||
| Harmit J. Singh |
47 | Executive Vice President, Chief Financial Officer | ||||
| Stephen G. Haggerty |
43 | Executive Vice President, Global Head of Real Estate and Development | ||||
| Rakesh Sarna |
53 | Executive Vice President, Chief Operating Officer—International | ||||
| H. Charles Floyd |
51 | Executive Vice President, Chief Operating Officer—North America | ||||
| Rena Hozore Reiss |
51 | Executive Vice President, General Counsel and Secretary | ||||
| Robert W. K. Webb |
54 | Senior Vice President, Chief Human Resources Officer | ||||
| John Wallis |
58 | Senior Vice President, Global Head of Marketing and Brand Strategy | ||||
Thomas J. Pritzker has been a member of our board of directors since August 2004 and our Executive Chairman since August 2004. Mr. Pritzker served as our Chief Executive Officer from August 2004 to December 2006. Mr. Pritzker was appointed President of Hyatt Corporation in 1980 and served as Chairman and Chief Executive Officer of Hyatt Corporation from 1999 to December 2006. Mr. Pritzker is Chairman and Chief Executive Officer of The Pritzker Organization, LLC, the principal financial and investment advisor to various Pritzker family business interests. Mr. Pritzker is Chairman of Marmon Holdings, Inc. and also serves as a Director of Royal Caribbean Cruises Ltd. Mr. Pritzker is a Director and Vice President of The Pritzker Foundation, a charitable foundation; Director and President of the Pritzker Family Philanthropic Fund, a charitable organization; and Chairman and President of The Hyatt Foundation, a charitable foundation which established The Pritzker Architecture Prize. Mr. Pritzker is a first cousin of Ms. Penny Pritzker, who is also a member of our board of directors.
Mark S. Hoplamazian has been a member of our board of directors since November 2006. He has served as our President and Chief Executive Officer since December 2006, as interim President from July 2006 to December 2006 and Vice President from August 2004 to December 2004. From August 2009 to December 2010, Mr. Hoplamazian was a Vice President of The Pritzker Organization, LLC (TPO), the principal financial and investment advisor to various Pritzker family business interests. From April 2004 to August 2009, Mr. Hoplamazian served as President and Director of TPO and has served in various capacities with TPO and its predecessors since its formation in 1997, including managing its merchant banking and investment activities. Mr. Hoplamazian currently serves on the Board of Trustees of The Latin School of Chicago. He is a member of the Discovery Class of the Henry Crown Fellowship at the Aspen Institute.
Harmit J. Singh has served as our Chief Financial Officer since August 2008. Mr. Singh leads our finance, accounting, treasury, strategic financial planning and analysis, tax, risk, investor relations and information technology functions worldwide. Mr. Singh has over 26 years of financial experience in the travel, financial services, restaurant and hospitality industries. He joined Hyatt after spending 14 years at Yum! Brands, Inc., a restaurant company. Mr. Singh most recently served as Senior Vice President and Chief Financial Officer for Yum!, International from December 2005 to July 2008. Prior to this position, Mr. Singh served in several senior financial roles, including Senior Vice President and Chief Financial Officer for Pizza Hut—United States, Vice President Finance—Yum!, International, Chief Financial Officer—India and Chief Financial Officer—Asia. Prior to joining Yum! in 1994, Mr. Singh worked in various financial capacities for American Express India, a worldwide travel, financial and network services company. Mr. Singh serves on the board of directors and is also the Audit Committee Chair of Avendra, LLC.
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Stephen G. Haggerty has served as our Global Head of Real Estate and Development since August 2007 and our Executive Vice President—Real Estate and Development from June 2007 to August 2007. Mr. Haggerty has responsibility for our global development team, our global feasibility and development finance team, our corporate transactions group, and our global asset management team that oversees all of our owned hotel properties and development of hotels and vacation ownership properties in which we have ownership. Prior to joining us, Mr. Haggerty spent 13 years serving in several positions of increasing responsibility with Marriott International, Inc., a lodging company, most recently in London as Senior Vice President, International Project Finance and Asset Management for Europe, Africa and the Middle East from 2005 to 2007. Prior to this position, from 2003 to 2005, Mr. Haggerty served as Marriott’s Senior Vice President of Global Asset Management and Development Finance and previously lived in Asia for nine years holding a variety of roles relating to development at Marriott.
Rakesh Sarna has served as our Chief Operating Officer—International since August 2007. Mr. Sarna has been with us since 1979. Mr. Sarna is responsible for management of our full service hotels and resorts outside of the United States, Canada and the Caribbean. He also oversees the operations of our Divisional offices in Zurich, Switzerland, Hong Kong, Dubai, UAE and Mexico City and oversees various corporate functions in Chicago, IL. Since June 2007, Mr. Sarna has served as the Chief Operating Officer for Hyatt International Corporation. From September 2006 to June 2007, he served as Senior Vice President for Hyatt International Corporation. Prior to that, from April 2001 to September 2006, Mr. Sarna served as our Vice President of Operations for Europe, Africa and the Middle East, and from September 1999 to April 2001 as Director of Operations for Europe, Africa and the Middle East. Prior to that, from January 1997 to September 1999, he served as regional director for South Asia. Mr. Sarna joined Hyatt in 1979 and has held a variety of senior management food and beverage positions and served as General Manager for Hyatt Regency Belgrade, Park Hyatt UN Plaza, New York and Hyatt Regency Macau.
H. Charles Floyd has served as our Chief Operating Officer—North America since January 2006. Mr. Floyd has been with us since 1981. Mr. Floyd is responsible for management of our full service hotels and resorts as well as Hyatt Place and Summerfield Suites brands in the United States, Canada and the Caribbean. In addition, he oversees Hyatt Residential Group, Inc. (formerly known as Hyatt Vacation Ownership, Inc. (HVOI)) and the Franchise Owner Relations Group, which supports both full service and select service and extended stay franchisees. He also oversees various corporate functions for North America, including sales, human resources, product and design, rooms, food and beverage and engineering. Prior to assuming his current position, Mr. Floyd served in a number of senior positions at Hyatt, including Executive Vice President—North America Operations and Senior Vice President of Sales, as well as various managing director and general manager roles at Hyatt.
Rena Hozore Reiss has served as our Executive Vice President, General Counsel and Secretary since August 2010. Ms. Reiss joined Hyatt after spending 10 years at Marriott International, Inc. where she most recently served as Senior Vice President and Associate General Counsel, overseeing a legal team responsible for supporting the company’s development activities in the Americas. From 2000 to 2007, Ms. Reiss held a series of increasingly responsible positions at Marriott, including serving as Senior Counsel and Vice President and Assistant General Counsel. Prior to entering the hospitality industry, Ms. Reiss practiced law at Thomson Muraro Razook & Hart in Miami, Florida, served as an Associate General Counsel for the Miami Herald Publishing Company, and was a Partner with Counts & Kanne, Chartered in Washington, DC.
Robert W. K. Webb has served as our Chief Human Resources Officer since August 2007. Prior to joining Hyatt, Mr. Webb served as Head of Global Service Delivery for Citi Employee Services at Citigroup Inc., a global financial services company. During his 19-year tenure at Citigroup and two predecessor companies, Mr. Webb served as Chief Administrative Officer for a global business unit and held several senior human resources roles in North America and international operations. Mr. Webb serves as a Director of Chicago Children’s Museum and is a member of the Advisory Board of the School of Hospitality at Boston University and the Hospitality Program at DePaul University.
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John Wallis has served as our Global Head of Marketing and Brand Strategy since November 2008. Mr. Wallis’ career with Hyatt began in 1981. Prior to his current role, Mr. Wallis served as Senior Vice President, Product and Brand Development since August 2007. From 2004 through 2007, Mr. Wallis served as our Senior Vice President, Global Asset Management, where he was responsible for the management of more than 40 Hyatt-owned properties across North America, Latin America, Europe and Asia. He has also served in a variety of other management positions, including Senior Vice President—Global Asset Management, Senior Vice President—Product and Brand Development, Senior Vice President of Marketing and Sales, and Vice President of Marketing for Hyatt International Corporation, General Manager and Regional Vice President-Gulf States for Hyatt Regency Dubai, Executive Assistant Manager Food and Beverage for Hyatt Regency Kuwait, Hyatt Regency Fiji and Hyatt Kingsgate Sydney and various other food and beverage management positions.
Pursuant to our employment letter with Mr. Thomas J. Pritzker, we have agreed that so long as he is a member of our board of directors we will use our commercially reasonable efforts to appoint him as our executive chairman as long as he is willing and able to serve in that office. If he is not re-appointed as executive chairman, he will be entitled to terminate his employment with the rights and entitlements available to him under our severance policies as if his employment was terminated by us without cause.
Pursuant to our employment letter with Mr. Mark S. Hoplamazian, we have agreed that so long as he is the president and chief executive officer of Hyatt, we will use our commercially reasonable efforts to nominate him for re-election as a director prior to the end of his term. If he is not re-elected to the board of directors, he will be entitled to terminate his employment with the rights and entitlements available to him under our severance policies as if his employment was terminated by us without cause.
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our Class A common stock began trading publicly on the New York Stock Exchange under the symbol “H” on November 5, 2009. Prior to that time, there was no public market for our Class A common stock. As of January 31, 2011, our Class A common stock was held by approximately 26 stockholders of record and there were 44,502,196 shares of Class A common stock outstanding. This stockholder figure does not include a substantially greater number of “street name” holders or beneficial holders of our Class A common stock whose shares are held of record by banks, brokers and other financial institutions. The following table sets forth, for the period indicated, the high and low sale prices of our Class A common stock as reported by the New York Stock Exchange since our initial public offering.
| Fiscal Year end December 31, 2009 |
High | Low | ||||||
| Fourth Quarter (beginning November 5, 2009) |
$ | 30.70 | $ | 27.75 | ||||
| Fiscal Year end December 31, 2010 |
||||||||
| First Quarter |
$ | 40.00 | $ | 28.16 | ||||
| Second Quarter |
$ | 43.88 | $ | 36.00 | ||||
| Third Quarter |
$ | 40.55 | $ | 34.19 | ||||
| Fourth Quarter |
$ | 46.25 | $ | 36.84 | ||||
On February 15, 2011, the closing stock price of our Class A common stock was $49.20.
There is no established public trading market for our Class B common stock. As of January 31, 2011, our Class B common stock was held by 478 shareholders and there were 129,466,000 shares of Class B common stock outstanding.
Dividends
We have never declared or paid cash dividends on our common stock. In addition, we must comply with the covenants in our revolving credit facility if we want to pay cash dividends. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant.
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Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total stockholder return since November 5, 2009, the date our Class A common stock began trading on the New York Stock Exchange, with the S&P 500 Index (“S&P 500”) and the Russell 1000 Hotel/Motel Index (the “Russell 1000 Hotel”). The graph assumes that the value of the investment in our Class A common stock and each index was $100 on November 5, 2009 and that all dividends and other distributions were reinvested.
| 11/5/2009 | 12/31/2009 | 12/31/2010 | ||||||||||
| Hyatt Hotels Corporation |
100.0 | 106.5 | 159.2 | |||||||||
| S&P 500 |
100.0 | 104.9 | 117.3 | |||||||||
| Russell 1000 Hotel |
100.0 | 109.3 | 171.2 | |||||||||
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
On November 4, 2009, a registration statement on Form S-1 (File No. 333-161068) relating to our initial public offering of our Class A common stock was declared effective by the SEC. An aggregate of 43,700,000 shares of our Class A common stock (including 5,700,000 shares of Class A common stock subject to the underwriters’ option to purchase additional shares) were registered under the registration statement, of which selling stockholders identified in the registration statement sold 38,000,000 shares and we sold 5,700,000 in connection with the underwriters’ exercise of their option to purchase additional shares, at an initial public offering price of $25.00 per share. The aggregate offering price for the shares registered and sold by the selling stockholders was $950 million and the aggregate offering price for the shares registered and sold by us was $142 million. The initial public offering closed on November 10, 2009 and, as a result, we received net proceeds of
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approximately $127 million, after deducting the underwriting discount of approximately $7 million and total offering expenses of approximately $8 million, and the selling stockholders received net proceeds of approximately $901 million, after deducting the underwriting discount of approximately $49 million. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The offering did not terminate until after the sale of all of the shares of Class A common stock registered on the registration statement. The sole bookrunning manager and lead managing representative of the offering was Goldman, Sachs & Co, with Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc. acting as joint lead managers.
No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
During the fourth quarter of 2010 we used approximately $32 million of the proceeds to pay off a 10.07% fixed rate mortgage loan with a maturity of September 30, 2011. We intend to use the remaining portion of the net proceeds for the acquisition of, or investment in, new properties or businesses that complement our business. Pending the full application of the net proceeds as described above, we have invested unused proceeds in short-term, investment grade, interest-bearing securities. There has been no material change in the planned use of proceeds from our initial public offering from that described in the final prospectus dated November 4, 2009 filed by us with the SEC pursuant to Rule 424(b).
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
| Item 6. | Selected Financial Data. |
We derived the selected consolidated statements of income (loss) data for the years ended December 31, 2010, 2009 and 2008 and the selected consolidated balance sheet data as of December 31, 2010 and 2009 from our audited consolidated financial statements included in this annual report. We derived the selected consolidated statements of income (loss) data for the years ended December 31, 2007 and 2006 and the selected consolidated balance sheet data as of December 31, 2008, 2007 and 2006 from our audited consolidated financial statements which are not included in this annual report. Our historical results are not necessarily indicative of the results expected for any future period.
You should read the selected historical financial data together with the consolidated financial statements and related notes appearing in this annual report, as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this annual report.
| (in millions, except per share data) | Year Ended December 31, | |||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated statements of income (loss) data: |
||||||||||||||||||||
| Owned and leased hotel revenues |
$ | 1,859 | $ | 1,780 | $ | 2,137 | $ | 2,036 | $ | 1,856 | ||||||||||
| Management and franchise fee revenues |
255 | 223 | 290 | 315 | 294 | |||||||||||||||
| Other revenues |
45 | 49 | 83 | 103 | 110 | |||||||||||||||
| Other revenues from managed properties (1) |
1,368 | 1,278 | 1,325 | 1,281 | 1,207 | |||||||||||||||
| Total revenues |
3,527 | 3,330 | 3,835 | 3,735 | 3,467 | |||||||||||||||
| Direct and selling, general, and administrative expenses |
3,419 | 3,281 | 3,470 | 3,350 | 3,115 | |||||||||||||||
| Income (loss) from continuing operations |
51 | (43 | ) | 115 | 266 | 331 | ||||||||||||||
| Net loss (income) attributable to noncontrolling interests |
11 | 3 | (2 | ) | (1 | ) | (14 | ) | ||||||||||||
| Net income (loss) attributable to Hyatt Hotels Corporation |
66 | (43 | ) | 168 | 270 | 315 | ||||||||||||||
| Income (loss) from continuing operations per common share, basic and diluted (2) |
$ | 0.29 | $ | (0.28 | ) | $ | 0.90 | $ | 1.98 | $ | 2.41 | |||||||||
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| (in millions) |
As of December 31, | |||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated balance sheet data: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 1,110 | $ | 1,327 | $ | 428 | $ | 409 | $ | 801 | ||||||||||
| Total current assets |
2,165 | 2,009 | 1,081 | 1,089 | 1,527 | |||||||||||||||
| Property and equipment, net |
3,453 | 3,585 | 3,471 | 3,494 | 2,743 | |||||||||||||||
| Intangibles, net |
280 | 284 | 256 | 359 | 154 | |||||||||||||||
| Total assets |
7,243 | 7,155 | 6,119 | 6,248 | 5,522 | |||||||||||||||
| Total current liabilities |
596 | 495 | 653 | 697 | 1,001 | |||||||||||||||
| Long-term debt |
714 | 840 | 1,209 | 1,288 | 173 | |||||||||||||||
| Other long-term liabilities |
802 | 780 | 665 | 794 | 588 | |||||||||||||||
| Total liabilities |
2,112 | 2,115 | 2,527 | 2,779 | 1,762 | |||||||||||||||
| Total stockholders’ equity |
5,118 | 5,016 | 3,564 | 3,434 | 3,731 | |||||||||||||||
| Total liabilities and equity |
$ | 7,243 | $ | 7,155 | $ | 6,119 | $ | 6,248 | $ | 5,522 | ||||||||||
| (1) | Represents revenues that we receive from third-party property owners who reimburse us for costs that we incur on their behalf, with no added margin. These costs relate primarily to payroll at managed properties where we are the employer. As a result, these revenues have no effect on our profit, although they do increase our total revenues and the corresponding costs increase our total expenses. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Principal Factors Affecting Our Results of Operations—Revenues.” |
| (2) | All per share amounts reflect a one-for-two reverse split of our common stock effected on October 14, 2009. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part II, Item 6, “Selected Financial Data” and our consolidated financial statements included in this annual report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in “Disclosure Regarding Forward-Looking Statements” and Item I, Part 1A, “Risk Factors” included elsewhere in this annual report.
Overview
We are a global hospitality company engaged in the management, franchising, ownership and development of Hyatt-branded hotels, resorts and residential and vacation ownership properties around the world. As of December 31, 2010, our worldwide portfolio consisted of 453 Hyatt-branded properties (127,507 rooms and units), including:
| • | 177 managed properties (68,239 rooms), all of which we operate under management agreements with third-party property owners; |
| • | 132 franchised properties (20,249 rooms), all of which are owned by third parties that have franchise agreements with us and are operated by third parties; |
| • | 90 owned properties (including 3 consolidated hospitality ventures) (23,637 rooms) and 6 leased properties (2,851 rooms), all of which we manage; |
| • | 24 managed properties owned or leased by unconsolidated hospitality ventures (10,330 rooms); |
| • | 15 vacation ownership properties (962 units), all of which we manage; and |
| • | 9 residential properties (1,239 units), all of which we manage and some of which we own. |
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Our full service hotels and resorts operate under five world-recognized brands, Park Hyatt, Andaz (our newest full service brand) Grand Hyatt, Hyatt Regency and Hyatt. In addition, we own, operate and franchise hotels under two select service brands, Hyatt Place and Hyatt Summerfield Suites. Our select service hotels provide guests with many of the amenities available at full service hotels but on a smaller scale. Compared to our full service hotels, our select service hotels have limited food and beverage outlets and do not offer comprehensive business or banquet facilities but rather are suited to serve smaller business meetings. We develop, sell or manage vacation ownership properties in select locations as part of the Hyatt Vacation Club, which is in the process of changing its name to Hyatt Residence Club. We also manage, provide services to or license our trademarks with respect to residential ownership units that are often adjacent to a Hyatt-branded full service hotel. We consult with third parties in the design and development of such mixed-use projects based on our expertise as a manager and owner of vacation ownership properties, residential properties and hotels.
We have adopted a business model that entails both ownership of properties and management and franchising of third-party owned properties in order to pursue more diversified revenue and income streams that balance both the advantages and risks associated with these lines of business. Our expertise and experience in each of these areas gives us the flexibility to evaluate growth opportunities across these lines of business. Growth in the number of management and franchise agreements and earnings there from typically results in higher overall returns on invested capital because the capital investment under a typical management or franchise agreement is not significant. The capital required to build and maintain hotels that we manage for third-party owners, or franchise, is typically provided by the owner of the respective property with minimal capital required by us as the manager or franchisor. During periods of increasing demand we do not share fully in the incremental profits of hotel operations for hotels that we manage for third-party owners as our fee arrangements generally include a base amount calculated using the revenue from the subject hotel and an incentive fee that is, typically, a percentage of hotel profits that is usually less than 20%, with the actual level depending on the structure and terms of the management agreement. We do not share in the benefits of increases in profits from franchised properties because franchisees pay us an initial application fee and ongoing royalty fees that are calculated as a percentage of gross room revenues with no fees based on profits. Disputes or disruptions may arise with third-party owners of hotels we manage or franchise and these disputes can result in termination of the relevant agreement. With respect to property ownership, we believe that ownership of selected hotels in key markets enhances our ability to control our brand presence in these markets. Ownership of hotels allows us to capture the full benefit of increases in operating profits during periods of increasing demand and room rates. The cost structure of a typical hotel is more fixed than variable, so as demand and room rates increase over time, the pace of increase in operating profits typically is higher than the pace of increase of revenues. Hotel ownership is, however, more capital intensive than managing hotels for third-party owners, as we are responsible for the costs and all capital expenditures for our owned hotels. The profits realized in our owned and leased hotel segment are generally more significantly affected by economic downturns and declines in revenues than the results of our management and franchising segments. This is because we absorb the full impact of declining profits in our owned and leased hotels whereas our management and franchise fees do not have the same level of downside exposure to declining hotel profitability. See also “—Principal Factors Affecting Our Results of Operations—Factors Affecting Our Costs and Expenses—Fixed nature of expenses” and Part I, Item 1A, “Risk Factors—Risks Related to Our Business—We are exposed to the risks resulting from significant investments in owned and leased real estate, which could increase our costs, reduce our profits, limit our ability to respond to market conditions or restrict our growth strategy.”
For the years ended December 31, 2010, 2009 and 2008, 79.4%, 80.4%, and 79.9% of our revenues were derived from operations in the United States, respectively. As of December 31, 2010 and 2009, 74.3% and 76.6% of our long-lived assets were located in the United States, respectively.
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We report our consolidated operations in U.S. dollars and manage our business within three reportable segments as described below:
| • | Owned and leased hotels, which consists of our owned and leased full service and select service hotels and, for purposes of segment Adjusted EBITDA, our pro rata share of the Adjusted EBITDA of our unconsolidated hospitality ventures, based on our ownership percentage of each venture. |
| • | North American management and franchising, which consists of our management and franchising of properties located in the United States, Canada and the Caribbean. |
| • | International management and franchising, which consists of our management and franchising of properties located outside of the United States, Canada and the Caribbean. |
In addition to our three reportable segments, Corporate and other includes the results of our vacation ownership business and unallocated corporate expenses.
Key Business Metrics Evaluated by Management
Revenues
We primarily derive our revenues from hotel operations, management and franchise fees, other revenues from managed properties and vacation ownership properties. Management uses revenues to assess the overall performance of our business and analyze trends such as consumer demand, brand preference and competition. For a detailed discussion of the factors that affect our revenues, see “—Principal Factors Affecting Our Results of Operations.”
Net Income Attributable to Hyatt Hotels Corporation
Net income attributable to Hyatt Hotels Corporation represents the total earnings or profits generated by our business. Management uses net income to analyze the performance of our business on a consolidated basis.
Adjusted EBITDA
We use the term Adjusted EBITDA throughout this annual report. Adjusted EBITDA, as we define it, is a non-GAAP measure. We define consolidated Adjusted EBITDA as net income (loss) attributable to Hyatt Hotels Corporation plus our pro-rata share of unconsolidated hospitality ventures Adjusted EBITDA based on our ownership percentage of each venture, adjusted to exclude the following items:
| • | equity earnings (losses) from unconsolidated hospitality ventures; |
| • | gains on sales of real estate; |
| • | asset impairments; |
| • | a 2008 charge resulting from the termination of our supplemental executive defined benefit plans; |
| • | other income (loss), net; |
| • | discontinued operations and changes in accounting principles, net of tax; |
| • | net loss (income) attributable to noncontrolling interests; |
| • | depreciation and amortization; |
| • | interest expense; and |
| • | (provision) benefit for income taxes. |
We calculate consolidated Adjusted EBITDA by adding the Adjusted EBITDA of each of our reportable segments to corporate and other Adjusted EBITDA. See “—Results of Operations.”
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Our board of directors and executive management team focus on Adjusted EBITDA as a key performance and compensation measure both on a segment and on a consolidated basis. Adjusted EBITDA assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance both on a segment and on a consolidated basis. Our President and Chief Executive Officer, who is our chief operating decision maker, also evaluates the performance of each of our reportable segments and determines how to allocate resources to those segments, in significant part, by assessing the Adjusted EBITDA of each segment. In addition, the compensation committee of our board of directors determines the annual variable compensation for certain members of our management based in part on consolidated Adjusted EBITDA, segment Adjusted EBITDA or some combination of both.
We believe Adjusted EBITDA is useful to investors because it provides investors the same information that we use internally for purposes of assessing our operating performance and making compensation decisions.
Adjusted EBITDA is not a substitute for net income (loss) attributable to Hyatt Hotels Corporation, income (loss) from continuing operations, cash flows from operating activities or any other measure prescribed by GAAP. There are limitations to using non-GAAP measures such as Adjusted EBITDA. Although we believe that Adjusted EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to our performance. Because of these limitations, Adjusted EBITDA should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. Our management compensates for these limitations by reference to our GAAP results and using Adjusted EBITDA supplementally. See our consolidated statements of income (loss) and consolidated statements of cash flows in our consolidated financial statements included in this annual report.
For a reconciliation of consolidated Adjusted EBITDA to EBITDA and a reconciliation of EBITDA to its most directly comparable GAAP measure, net income (loss) attributable to Hyatt Hotels Corporation, see “—Results of Operations.”
Revenue per Available Room (RevPAR)
RevPAR is the product of the average daily rate and the average daily occupancy percentage. RevPAR does not include non-room revenues, which consist of ancillary revenues generated by a hotel property, such as food and beverage, parking, telephone and other guest service revenues. Our management uses RevPAR to identify trend information with respect to room revenues from comparable properties and to evaluate hotel performance on a regional and segment basis. RevPAR is a commonly used performance measure in the industry.
RevPAR changes that are driven predominately by changes in occupancy have different implications for overall revenue levels and incremental profitability than do changes that are driven predominately by changes in average room rates. For example, increases in occupancy at a hotel would lead to increases in room revenues and additional variable operating costs (including housekeeping services, utilities and room amenity costs), and could also result in increased ancillary revenues (including food and beverage). In contrast, changes in average room rates typically have a greater impact on margins and profitability as there is no substantial effect on variable costs.
Average Daily Rate (ADR)
ADR represents hotel room revenues, divided by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used
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performance measure in the industry, and we use ADR to assess the pricing levels that we are able to generate by customer group, as changes in rates have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.
Occupancy
Occupancy represents the total number of rooms sold divided by the total number of rooms available at a hotel or group of hotels. Occupancy measures the utilization of our hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for hotel rooms increases or decreases.
Comparable Hotels
“Comparable systemwide hotels” represents all properties we manage or franchise (including owned and leased properties) and that are operated for the entirety of the periods being compared and that have not sustained substantial damage, business interruption or undergone large scale renovations during the periods being compared or for which comparable results are not available. We may use variations of comparable systemwide hotels to specifically refer to comparable systemwide North American full service or select service hotels or comparable systemwide international full service hotels for those properties that we manage or franchise within the North American and international management and franchising segments, respectively. “Comparable operated hotels” is defined the same as “Comparable systemwide hotels” with the exception that it is limited to only those hotels we manage or operate and excludes hotels we franchise. “Comparable owned and leased hotels” represents all properties we own or lease and that are operated and consolidated for the entirety of the periods being compared and have not sustained substantial damage, business interruption or undergone large scale renovations during the periods being compared or for which comparable results are not available. Comparable systemwide hotels and comparable owned and leased hotels are commonly used as a basis of measurement in the industry. “Non-comparable systemwide hotels” or “Non-comparable owned and leased hotels” represent all hotels that do not meet the respective definition of “comparable” as defined above.
Principal Factors Affecting Our Results of Operations
Revenues
Principal Components
We primarily derive our revenues from the following sources:
Revenues from hotel operations. Represents revenues derived from hotel operations, including room rentals and food and beverage sales and other ancillary revenues at our owned and leased properties. Revenues from the majority of our hotel operations depend heavily on demand from group and transient travelers, as discussed below. Revenues from our owned and leased hotels segment are primarily derived from hotel operations.
Revenues from room rentals and ancillary revenues are primarily derived from three categories of customers: transient, group and contract. Transient guests are individual travelers who are traveling for business or leisure. Our group guests are traveling for group events that reserve a minimum of 10 rooms for meetings or social functions sponsored by associations, corporate, social, military, educational, religious or other organizations. Group business usually includes a block of room accommodations as well as other ancillary services, such as catering and banquet services. Our contract guests are traveling under a contract negotiated for a block of rooms for more than 30 days in duration at agreed-upon rates. Airline crews are typical generators of contract demand for our hotels.
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Management and franchise fees. Represents revenues derived from fees earned from hotels and residential properties managed worldwide (usually under long-term management agreements), franchise fees received in connection with the franchising of our brands (usually under long-term franchise agreements), termination fees and the amortization of deferred gains related to sold properties for which we have significant continuing involvement.
| • | Our management agreements typically provide for a two-tiered fee structure that compensates us both for the volume of business we generate for the property as well as for the profitability of hotel operations. In these two-tier fee structures, our base compensation is a base fee that is usually an agreed upon percentage of gross revenues from hotel operations. In addition, we are paid an incentive fee that is typically calculated as a percentage of a hotel profitability measure, as defined in the applicable agreement. Outside of the United States, our fees are often more dependent on hotel profitability measures, either through a single management fee structure where the entire fee is based on a profitability measure, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee. |
| • | Franchise fees generally consist of an initial application fee and continuing royalty fees calculated as a percentage of gross room revenues. Royalty fees for our full service brands also include a percentage of gross food and beverage revenues and gross spa revenues, where applicable. |
Other revenues from managed properties. Represents revenues related primarily to payroll costs at managed properties where we are the employer and are fully reimbursed by the third-party property owner based on the costs incurred, with no added margin. As a result, these revenues have no effect on our profit, although they do increase our total revenues and the corresponding costs increase our total expenses. We record these revenues in “Other revenues from managed properties” and the corresponding costs in “Other costs from managed properties” in our consolidated statements of income (loss).
Intersegment eliminations. We evaluate our reportable segments with intersegment revenues and expenses included in their results. These intersegment revenues and expenses represent management fees earned by our North American and international management and franchising segments for managing our owned and leased hotels. As presented throughout this annual report, the individual segment results for the management and franchising businesses include the intersegment fee revenues and our owned and leased hotels include the intersegment fee expenses. Both the intersegment fee revenues and expenses are eliminated in consolidation.
Factors Affecting Our Revenues
The following factors affect the revenues we derive from our operations. For other factors affecting our revenues, see Part I, Item 1A, “Risk Factors—Risks Related to Our Business.”
Consumer demand and global economic conditions. Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the revenues and profitability of our owned hotel operations and the amount of management and franchising fee revenues we are able to generate from our managed and franchised properties. Also, declines in hotel profitability during an economic downturn directly impact the incentive portion of our management fees, since it is based on hotel profit measures. Our vacation ownership business is also linked to cycles in the general economy and consumer discretionary spending. As a result, changes in consumer demand and general business cycles can subject and have subjected our revenues to significant volatility. See Part I, Item 1A, “Risk Factors—Risks Related to the Hospitality Industry.”
During the second half of 2008 and all of 2009, the global economic recession and its negative effect on demand by transient business and leisure travelers and associations and other group customers depressed demand
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throughout the hospitality industry. These conditions resulted in a decline in RevPAR for the fourth quarter of 2008 and some of the most significant RevPAR declines we have experienced in recent history throughout 2009. This reduced demand resulted in decreases in occupancy levels and ADR.
In 2010, we started experiencing signs of recovery. Each of our three operating segments experienced increased RevPAR levels and contributed to improved performance in our consolidated revenues and Adjusted EBITDA. In North America, the recovery of group business helped drive our revenue growth in 2010 as compared to 2009. Our international management and franchising business experienced significant RevPAR improvement in all regions, with Asia Pacific showing the most significant growth. Additionally, in the second half of 2010, our North America properties experienced overall improvement in ADR. In 2011, we expect group business and ADR to continue the recovery that began in 2010. While our results reflect signs of improvement, they are based on RevPAR that is still well below our pre-recession levels.
Competition. The global lodging industry is highly competitive. During periods of decreased demand for hospitality products and services, as experienced in the recent economic recession, competition in the industry becomes increasingly fierce. While we generally try to maintain rates under such circumstances whenever possible, the overall reduction in business travel during the recent recession placed significant pressure on occupancy levels at our properties as well as those of our competitors. Accordingly, in 2009 and to a lesser extent in 2010 we increased the number of promotional offers and expanded individual hotels’ use of internet distribution channels, which offer different customer price points, in an effort to expose more customers to our products and services and to attract guests. Internet distribution channels are online sites that sell hospitality related products and services of multiple brands. While occupancy levels have increased to pre-recession levels, room rates are still less than pre-recession highs. We believe that our brand strength and ability to manage our operations in an efficient manner will help us to compete successfully within the global hospitality industry.
Agreements with third-party owners and franchisees and relationships with developers. We depend on our long-term management and franchise agreements with third-party owners and franchisees for a significant portion of our management and franchising fee revenues. The success and sustainability of our management and franchising business depends on our ability to perform under our management and franchising agreements and maintain good relationships with third-party owners and franchisees. Our relationships with these third-parties also generate new relationships with developers and opportunities for property development that can support our growth. We believe that we have good relationships with our third-party owners, franchisees and developers and are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of owners, franchisees and developers and are not heavily concentrated with any particular third-party.
Access to capital. The hospitality industry is a capital intensive business that requires significant amounts of capital expenditures to develop, maintain and renovate properties. Third-party owners are required to fund these capital expenditures for the properties they own in accordance with the terms of the applicable management or franchise agreement. Access to the capital that we or our third-party owners, franchisees or development partners need to finance the construction of new properties or to maintain and renovate existing properties is critical to the continued growth of our business and our revenues. The availability of capital or the conditions under which we or our third-party owners, franchisees or development partners can obtain capital can have a significant impact on the overall level and pace of future development and therefore the ability to grow our revenues. We believe that a continued normalization of credit markets as well as improvements in the global economy and overall business environment will be necessary before we see a material increase in development activity with third-parties.
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Expenses
Principal Components
We primarily incur the following expenses:
Owned and leased hotel expenses. Owned and leased hotel expenses comprise the largest portion of our total direct and selling, general and administrative expenses and reflect the expenses of our consolidated owned and leased hotels. Expenses to operate our hotels include room expense, food and beverage costs, other support costs and property expenses. Room expense includes compensation costs for housekeeping, laundry and front desk staff and supply costs for guest room amenities and laundry. Food and beverage costs include costs for wait and kitchen staff and food and beverage products. Other support expenses consist of costs associated with property-level management (including deferred compensation plans for certain employees that are funded through contributions to rabbi trusts), utilities, sales and marketing, operating hotel spas, telephones, parking and other guest recreation, entertainment and services. Property expenses include property taxes, repairs and maintenance, rent and insurance.
Depreciation and amortization expense. These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our consolidated owned and leased hotels. Amortization expense primarily consists of amortization of management agreement acquisition costs and franchise and brand intangibles, which are amortized over their estimated useful lives.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expense, including deferred compensation plans for certain employees that are funded through contributions to rabbi trusts, for our corporate staff and personnel supporting our business segments (including divisional offices that support our management and franchising segments), professional fees (including consulting, audit and legal fees), travel and entertainment expenses, bad debt expenses, contractual performance obligations and office administrative and related expenses.
Other costs from managed properties. Represents costs related primarily to payroll expenses at managed properties where we are the employer. These costs are reimbursed to us with no added margin. As a result, these costs have no effect on our profit, although they do increase our total expenses and the corresponding reimbursements increase our total revenues. We record these costs in “Other costs from managed properties” and the corresponding revenues in “Other revenues from managed properties” in our consolidated statements of income (loss).
Factors Affecting Our Costs and Expenses
The following are several principal factors that affect the costs and expenses we incur in the course of our operations. For other factors affecting our costs and expenses, see Part I, Item 1A, “Risk Factors—Risks Related to Our Business.”
Fixed nature of expenses. Many of the expenses associated with managing, franchising, owning and developing hotels and residential and vacation ownership properties are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. If we are unable to decrease these costs significantly or rapidly when demand for our hotels and other properties decreases, the resulting decline in our revenues can have a particularly adverse effect on our net cash flow, margins and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth. Economic downturns generally affect the results of our owned and leased hotel segment more significantly than the results of our management and franchising segments due to the high fixed costs associated with operating an owned or leased property. The effectiveness of any cost-cutting efforts is limited by the fixed-cost nature of our business. As a result, we may not always be able to offset reductions in revenue through cost cutting. Employees at some of our owned hotels are parties to collective bargaining agreements that may also limit our ability to make timely staffing or labor changes in response to declining revenues. In addition, efforts to reduce costs, or to defer or cancel capital
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improvements, could adversely affect the economic value of our properties and brands. We intend to manage our cost structure at levels appropriate for the degree of demand and revenue generated at our hotels.
Changes in depreciation expenses. Changes in depreciation expenses may be driven by renovations of existing properties, acquisition or development of new properties or the disposition of existing properties through sale or closure. We intend to consider strategic and complementary acquisitions of and investments in businesses, properties or other assets. If we consummate any asset acquisitions, we would likely add depreciable assets, which would result in an increase in depreciation expense.
Demand for vacation ownership properties. The recent economic downturn severely reduced consumer demand for vacation ownership properties. A significant portion of our costs to support our vacation ownership business relates to direct sales and marketing of these properties. Accordingly, we have significantly reduced these costs as a response to lower demand. During 2010, we received an $8 million favorable settlement with respect to a construction dispute at one of our vacation ownership properties, which was recorded as a reduction to our direct costs. Our vacation ownership business recorded a total of $45 million in impairment charges in 2010, which included a $30 million charge in asset impairments due to a change in management’s plans for future development of two multi-phase vacation ownership properties, which had multi-phase development. In one of these vacation ownership properties, our ownership interest is less than 100%. As a result, $9 million of this impairment charge is attributable to our partner and is reflected in net loss (income) attributable to noncontrolling interests. As a result, the net total impairment charge attributable to Hyatt Hotels Corporation is $21 million. Additionally, we recorded impairment charges for our interests in vacation ownership properties of $15 million in equity losses from unconsolidated hospitality ventures.
Other Items
Asset impairments
We hold significant amounts of goodwill, intangible assets, long-lived assets and equity method investments. We evaluate these assets on a quarterly basis for impairment as further discussed in “—Critical Accounting Policies and Estimates.” These evaluations have, in the past, resulted in impairment charges for certain of these assets based on the specific facts and circumstances surrounding those assets. We may be required to take additional impairment charges to reflect further declines in our asset and/or investment values.
Acquisitions, investments, divestitures and significant renovations
We periodically acquire, divest of or undertake significant renovations in hotel properties. The results of operations derived from these properties do not, therefore, meet the definition of “comparable hotels” as defined in “—Key Business Metrics Evaluated by Management.” The results of operations from these properties, however, may have a material effect on changes in our results from period to period and are, therefore, discussed separately in our discussion on results of operations when material.
In 2010, we entered into the following transactions:
| • | formed a hospitality venture to purchase a hotel within a to-be constructed building in New York City for a total purchase price of $375 million. The hospitality venture will be funded upon the purchase of the hotel and our share of the purchase price commitment is 66.67%; |
| • | committed to invest in a joint venture in order to develop, own and operate a hotel property in the State of Hawaii. Contingent upon the amount of debt financing placed on the project, the maximum commitment under the agreement at December 31, 2010 is $123 million; |
| • | acquired two parcels of land in Latin America for a net purchase price of $85 million with the purpose of developing these properties into new hotels; |
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| • | entered into an agreement with a third party to acquire an interest in a hospitality venture that owns the Hyatt Regency New Orleans. We contributed cash of $60 million for a preferred equity interest in this venture, which plans to complete the renovation and reopening of the Hyatt Regency New Orleans in late 2011, which has been closed since September 2005 due to damage from Hurricane Katrina; and |
| • | sold six Hyatt-branded hotels, consisting of: (1) Grand Hyatt Tampa Bay, for $56 million, net of closing costs, (2) Hyatt Lisle, Hyatt Deerfield and Hyatt Rosemont, for a combined net sale price of $49 million, (3) Hyatt Regency Greenville, for a sale price of $15 million, net of closing costs, and (4) Hyatt Regency Boston, for net proceeds of $113 million. Additionally, the ownership interest in the Hyatt Regency Princeton was transferred to the lender through a deed in lieu of foreclosure transaction. A pre-tax gain of $35 million was realized on extinguishment of the $45 million secured mortgage debt on this property. |
In the year ended December 31, 2009, we acquired the Hyatt Regency Boston property for a purchase price of $110 million.
Effect of foreign currency exchange rate fluctuations
A significant portion of our operations are conducted in functional currencies other than our reporting currency which is the U.S. dollar. As a result, we are required to translate those results from the functional currency into U.S. dollars at market based average exchange rates during the period reported. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expense that are derived from fluctuations in exchange rates experienced between those periods.
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Results of Operations
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Consolidated Results
| (In millions, except percentages) |
Year Ended December 31, | |||||||||||||||
| 2010 | 2009 | Better / (Worse) | ||||||||||||||
| REVENUES: |
||||||||||||||||
| Total revenues |
$ | 3,527 | $ | 3,330 | $ | 197 | 6 | % | ||||||||
| DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES: |
||||||||||||||||
| Owned and leased hotels |
1,493 | 1,460 | (33 | ) | (2 | )% | ||||||||||
| Depreciation and amortization |
279 | 269 | (10 | ) | (4 | )% | ||||||||||
| Other direct costs |
3 | 13 | 10 | 77 | % | |||||||||||
| Selling, general, and administrative |
276 | 261 | (15 | ) | (6 | )% | ||||||||||
| Other costs from managed properties |
1,368 | 1,278 | (90 | ) | (7 | )% | ||||||||||
| Direct and selling, general, and administrative expenses |
3,419 | 3,281 | (138 | ) | (4 | )% | ||||||||||
| Net gains and interest income from marketable securities held to fund operating programs |
21 | 29 | (8 | ) | (28 | )% | ||||||||||
| Equity losses from unconsolidated hospitality ventures |
(40 | ) | (13 | ) | (27 | ) | (208 | )% | ||||||||
| Interest expense |
(54 | ) | (56 | ) | 2 | 4 | % | |||||||||
| Gains on sales of real estate |
26 | — | 26 | 100 | % | |||||||||||
| Asset impairments |
(44 | ) | (12 | ) | (32 | ) | (267 | )% | ||||||||
| Other income (loss), net |
71 | (48 | ) | 119 | 248 | % | ||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES |
88 | (51 | ) | 139 | 273 | % | ||||||||||
| (PROVISION) BENEFIT FOR INCOME TAXES |
(37 | ) | 8 | (45 | ) | (563 | )% | |||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS |
51 | (43 | ) | 94 | 219 | % | ||||||||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
4 | (3 | ) | 7 | 233 | % | ||||||||||
| NET INCOME (LOSS) |
55 | (46 | ) | 101 | 220 | % | ||||||||||
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
11 | 3 | 8 | 267 | % | |||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO HYATT HOTELS CORPORATION |
$ | 66 | $ | (43 | ) | $ | 109 | 253 | % | |||||||
Revenues. Consolidated revenues in the year ended December 31, 2010 increased $197 million, or 6%, compared to the year ended December 31, 2009, including $14 million in net favorable currency effects and a $90 million increase in other revenues from managed properties. The increase in other revenues from managed properties was due to higher costs reimbursed by managed properties, driven by higher occupancy levels and revenues. Included in other revenues from managed properties is a decrease of $7 million in benefits costs resulting from decreased performance of the underlying assets for benefit programs funded through rabbi trusts. These expenses are offset in other costs from managed properties, thus having no net impact to our earnings. Excluding this amount, other revenues from managed properties increased $97 million, or 8%, in the year ended December 31, 2010 compared to the year ended December 31, 2009. Comparable owned and leased hotel revenue increased $107 million over the same period, which includes net favorable currency effects of $10 million. Non-comparable owned and leased hotel revenue decreased $28 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. This decrease reflected the sales of six hotels in 2010, with the largest impact attributable to the Hyatt Regency Boston in the first quarter of 2010 partially offset by increases in revenues for a hotel opened in 2010. The remaining increase in revenues related
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primarily to increased management and franchise fees of $32 million in our management and franchising segments. Included in consolidated management fees for the year ended December 31, 2010 were base management fees of $132 million, a 12% increase from 2009, and incentive management fees of $93 million, an 18% increase from 2009. These increases in hotel revenue and management fees were primarily driven by an increase in demand which was reflected in higher occupancy levels particularly from group business in North America and higher transient demand in international markets. Incentive management fees increased due to higher hotel operating profits at comparable hotels, fees generated at hotels opened in 2010 and improved performance at hotels opened in 2009. Corporate and other revenues represent the revenues of our vacation ownership business, which decreased $5 million or 7.5% as a result of a decrease in revenue recognized for sales contracts written in prior periods. The table below provides a breakdown of revenues by segment for the years ended December 31, 2010 and 2009. For further discussion of segment revenues for the periods presented, please refer to “—Segment Results.”
| (in millions, except percentages) | Year Ended December 31, | |||||||||||||||
| 2010 | 2009 | Better / (Worse) | ||||||||||||||
| Owned and leased hotels |
$ | 1,859 | $ | 1,780 | $ | 79 | 4.4 | % | ||||||||
| North American management and franchising |
1,476 | 1,387 | 89 | 6.4 | % | |||||||||||
| International management and franchising |
210 | 176 | 34 | 19.3 | % | |||||||||||
| Corporate and other |
62 | 67 | (5 | ) | (7.5 | )% | ||||||||||
| Eliminations |
(80 | ) | (80 | ) | — | — | % | |||||||||
| Consolidated revenues |
$ | 3,527 | $ | 3,330 | $ | 197 | 5.9 | % | ||||||||
Owned and leased hotels expense. Expenses for owned and leased hotels increased by $33 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. Expenses recognized with respect to our employee benefit programs funded through rabbi trusts decreased $5 million driven by the performance of the underlying invested assets during the year ended December 31, 2010 as compared to the year ended December 31, 2009. These expenses are fully offset by corresponding net gains and interest income from marketable securities held to fund operating programs, thus having no net impact to our earnings. Excluding this impact, owned and leased hotel expenses increased $38 million in the year ended December 31, 2010 as compared to December 31, 2009. The increase was driven primarily by our comparable owned and leased hotels, which had additional expense of $55 million for the period, primarily attributable to higher compensation and related costs, food costs and other variable operating expenses. The increased costs were largely as a result of increased hotel occupancy in 2010 as compared to 2009 as a result of improved economic and industry conditions. Partially offsetting these increases were non-comparable owned and leased hotels which represented $17 million of decreased expenses, due primarily to the sale of the Hyatt Regency Boston property in the first quarter of 2010 and five other properties later in the year, partially offset by increased expenses for a hotel that opened in 2010.
Depreciation and amortization expense. Depreciation and amortization expense increased by $10 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. Comparable owned and leased hotels depreciation expense increased $7 million compared to the prior period reflecting depreciation associated with renovated assets. We also recorded $3 million in increased accelerated depreciation at properties undergoing renovations in the year ended December 31, 2010 when compared to the year ended December 31, 2009. Additionally, we experienced a $1 million increase from non-comparable owned and leased hotels, as the expense from the six hotels sold in 2010 largely offset the increased depreciation for the hotel we opened in 2010.
Other direct costs. Other direct costs represent costs associated with our vacation ownership operations. These costs decreased by $10 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. During the first quarter of 2010, we received a favorable settlement of approximately $8 million related to a construction dispute at one of our vacation ownership properties.
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Selling, general and administrative expenses. Selling, general and administrative costs increased by $15 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. Included in selling, general and administrative expenses is a decrease of $4 million in benefits costs resulting from reduced performance gains for the underlying assets for benefit programs funded through rabbi trusts. These expenses are offset in net gains and interest income from marketable securities held to fund operating programs, thus having no net impact to our earnings. Excluding this amount, selling, general and administrative costs increased $19 million, or 8%, in the year ended December 31, 2010 compared to the year ended December 31, 2009. This increase was due to higher compensation and related costs of $15 million, primarily driven by incentive compensation, and increased travel and entertainment costs of $5 million as a result of increased business development activities.
Net gains and interest income from marketable securities held to fund operating programs. Marketable securities held to fund our benefit programs funded through rabbi trusts resulted in a net gain of $16 million in the year ended December 31, 2010, compared to the net gain of $25 million in the year ended December 31, 2009 due to reduced performance gains in the underlying securities. The gains and losses on securities held in the rabbi trusts are offset by expenses in our owned and leased hotels expense and in selling, general and administrative expenses for our managed and franchised hotels, having no net impact on our earnings. Of the $9 million reduction in returns in the underlying securities, $4 million was offset in selling, general and administrative expenses and $5 million was offset in owned and leased hotel expenses. Marketable securities held to fund our Gold Passport program generated a net gain of $5 million in the year ended December 31, 2010, compared to a net gain of $4 million for the year ended December 31, 2009. The gains and losses on securities held to fund our Gold Passport program are offset by corresponding changes to our owned and leased hotel revenues, thus having no net impact on our earnings.
Equity losses from unconsolidated hospitality ventures. Equity losses from unconsolidated hospitality ventures were $40 million in the year ended December 31, 2010, compared to $13 million for the year ended December 31, 2009. In 2010, we recorded impairment charges of $31 million, which included impairment of interests in hospitality venture properties of $16 million and vacation ownership properties of $15 million. In 2009, we also recorded impairment charges of $14 million, which included impairment of interests in hospitality venture properties of $11 million and a vacation ownership property of $3 million. There was a $5 million decline attributable to lower earnings generated by the underlying hotels, of which the majority was related to newly opened hotels. Additionally, we had a $4 million reduction in foreign currency gains on one of our unconsolidated hospitality ventures.
Interest expense. Interest expense decreased by $2 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. There was a $13 million reduction in interest expense relating to the repayment of $600 million of senior subordinated notes in May 2009. There was also a $12 million reduction in interest expense due to the repayment of two hotel loans during 2009. This reduction was partially offset by an $18 million increase in interest expense in 2010 related to the issuance of the senior notes in August 2009, as well as a $4 million increase in 2010 for facility fees related to our amended revolving credit facility. For further information on these transactions refer to Note 10 of the consolidated financial statements included in this annual report.
Gains on sales of real estate. During 2010, we sold the Hyatt Regency Greenville, Hyatt Lisle, Hyatt Deerfield, and Hyatt Rosemont for a combined $64 million, net of closing costs, to an unrelated third party, resulting in a pre-tax gain of $26 million. We entered into long-term franchise agreements for each of these properties, and therefore recognized the full gain on sale of real estate in our consolidated statements of income (loss).
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Asset impairments. Asset impairments, which are recorded, as necessary, based on our regular evaluation of assets for impairment, were $44 million and $12 million for the years ended December 31, 2010 and 2009, respectively. The $44 million in impairment charges in 2010 included:
| • | an impairment charge of $30 million due to a change in management’s plans for future development of two multi-phase vacation ownership properties. In one of these vacation ownership properties, our ownership interest is less than 100%. As a result, $9 million of this impairment charge is attributable to our partner and is reflected in net loss (income) attributable to noncontrolling interests. As a result the net total impairment charge attributable to Hyatt Hotels Corporation is $21 million; |
| • | a $10 million impairment charge based on an estimate of net realizable value in connection with a planned sale of a Company owned airplane; and |
| • | a $3 million impairment of property and equipment in our owned and leased hotel segment. |
The $12 million impairment charge in 2009 included a $7 million charge related to goodwill impairment on a hotel. Additionally, we had a $5 million charge for the full impairment of an intangible asset relating to a management agreement covering certain select service hotels in our North American management and franchising segment.
Other income (loss), net. Other income (loss), net, improved by $119 million in the year ended December 31, 2010 compared to the year ended December 31, 2009, primarily due to $93 million of debt settlement costs in 2009, combined with a $35 million gain recognized on extinguishment of debt in 2010. Further information on these transactions is discussed in “—Liquidity and Capital Resources.” Additionally, we experienced an increase of $9 million in gains on other marketable securities and an increase of $8 million related to reduced provisions on hotel loans. These improvements were partially offset by the decrease in cash distributions from cost method investments of $22 million and decreased foreign currency gains (losses) of $8 million. The table below provides a breakdown of other income (loss), net for the years ended December 31, 2010 and 2009:
| (in millions except percentages) | Year Ended December 31, | |||||||||||||||
| 2010 | 2009 | Better / (Worse) | ||||||||||||||
| Interest income |
$ | 21 | $ | 21 | $ | — | — | % | ||||||||
| Gains on other marketable securities |
19 | 10 | 9 | 90.0 | % | |||||||||||
| Income from cost method investments (1) |
— | 22 | (22 | ) | (100.0 | )% | ||||||||||
| Foreign currency gains (losses) |
(3 | ) | 5 | (8 | ) | (160.0 | )% | |||||||||
| Debt settlement costs (2) |
— | (93 | ) | 93 | 100.0 | % | ||||||||||
| Provisions on hotel loans (3) |
(1 | ) | (9 | ) | 8 | 88.9 | % | |||||||||
| Gain on extinguishment of debt (4) |
35 | — | 35 | 100.0 | % | |||||||||||
| Other (5) |
— | (4 | ) | 4 | 100.0 | % | ||||||||||
| Other income (loss), net |
$ | 71 | $ | (48 | ) | $ | 119 | 247.9 | % | |||||||
| (1) | Income from cost method investments for the year ended December 31, 2009 included $22 million in cash distributions from certain non—hospitality real estate partnerships. |
| (2) | Amount relates to costs associated with the repurchase of senior subordinated notes and early settlement of a subscription agreement. The costs include $88 million of make-whole interest payments and early settlement premiums and a $5 million write-off of deferred financing costs. |
| (3) | In 2010 we recorded $2 million in provisions related to certain hotel developer loans based on our assessment of their collectability. Additionally, during 2010, we received $1 million of a recovery on an amount previously reserved. |
| (4) | During 2010, we extinguished $45 million of mortgage debt for a majority owned property, as a result of executing a deed in lieu of foreclosure transaction with the lender. The deed was transferred to the lender on September 30, 2010 and at that time a gain on extinguishment of debt of $35 million was recorded. See Note 8 to our consolidated financial statements included in this annual report for further detail. |
| (5) | Includes gains (losses) on asset retirements for each period presented. |
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(Provision) benefit for income taxes. Income taxes for the years ended December 31, 2010 and 2009 was a provision of $37 million and a benefit of $8 million, respectively, which resulted in effective income tax rates of 42.0% for 2010 and 16.6 % for 2009.
The effective tax rate for 2010 of 42.0% differed from the U.S statutory federal income tax rate of 35% due to the mix of U.S. operating losses with earnings from our foreign-based operations. The tax benefit from U.S. losses and losses in certain foreign jurisdictions were offset by taxes against income earned by our foreign-based operations, an increase in unrecognized tax benefits totaling $11 million and an increase in nondeductible deferred compensation of $6 million.
The effective tax rate for 2009 of 16.6% differed from the U.S. statutory federal income tax rate of 35% primarily due to the mix of U.S. operating losses with earnings from our foreign-based operations. The tax benefit from U.S. losses and losses in certain foreign jurisdictions were partially offset by taxes against income earned by our foreign-based operations, an increase in unrecognized tax benefits totaling $11 million and valuation allowances primarily related to foreign losses of $31 million.
Discontinued operations. During 2010, we sold a residential property for a gain of $6 million, net of taxes. We also sold a non-Hyatt branded hotel for a gain of $1 million, net of taxes. We have recognized $3 million of a net loss from discontinued operations for both the years ended December 31, 2010 and 2009, respectively, which was primarily driven by impairment charges in both periods related to the non-Hyatt branded hotel. We have no continuing involvement with either property.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests increased by $8 million compared to 2009, primarily due to the portion of an impairment charge attributable to the noncontrolling interest in one of our consolidated vacation ownership properties, which is included in Corporate and other.
Segment Results
We evaluate segment operating performance using segment revenue and segment Adjusted EBITDA, as described in Note 20 to our consolidated financial statements included in this annual report. See “—Key Business Metrics Evaluated by Management” for a discussion of our definition of Adjusted EBITDA, how we use it, why we present it and material limitations on its usefulness. The segment results presented below are presented before intersegment eliminations.
Owned and Leased Hotels. Revenues increased by $79 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. Included in this increase was $10 million of net favorable currency effects. Comparable owned and leased hotel revenues increased $107 million, and were driven by a RevPAR increase of 7.8%. The improvements in RevPAR were driven primarily by increased transient and group occupancy for the full year 2010 as compared to 2009. Group occupancy continued to trend higher over the course of 2010, which resulted in increased room revenue and food and beverage revenues as compared to last year. Transient rates at our full service hotels trended higher over the course of 2010 and finished the year slightly up versus last year. Significant renovations across our owned portfolio reduced our RevPAR by approximately 400 basis points and increased group occupancy reduced available transient room supply over the course of the year. We continue to see improvements across our portfolio, despite having five owned hotels undergoing large renovations, which have impacted their occupancy and average daily rates. Non-comparable owned and leased hotel revenues decreased $28 million primarily due to the sale of the Hyatt Regency Boston and five other properties during 2010, partially offset by a new hotel that opened in 2010.
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| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| RevPAR | Occupancy | ADR | ||||||||||||||||||||||||||||||||||
| (Comparable Owned and Leased Hotels) | 2010 | 2009 | Better / (Worse) |
2010 | 2009 | Change in Occ % pts |
2010 | 2009 | Better / (Worse) |
|||||||||||||||||||||||||||
| Full Service |
$ | 128 | $ | 118 | 7.8 | % | 69.2 | % | 65.2 | % | 4.0 | % | $ | 184 | $ | 181 | 1.6 | % | ||||||||||||||||||
| Select Service |
67 | 62 | 7.6 | % | 75.3 | % | 67.1 | % | 8.2 | % | 89 | 93 | (4.1 | )% | ||||||||||||||||||||||
| Total Owned and Leased Hotels |
$ | 111 | $ | 103 | 7.8 | % | 70.9 | % | 65.7 | % | 5.2 | % | $ | 157 | $ | 157 | 0.0 | % | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| (in millions except percentages) | 2010 | 2009 | Better / (Worse) | |||||||||||||
| Segment Revenues |
$ | 1,859 | $ | 1,780 | $ | 79 | 4.4 | % | ||||||||
| Segment Adjusted EBITDA |
$ | 356 | $ | 302 | $ | 54 | 17.9 | % | ||||||||
Adjusted EBITDA increased by $54 million in the year ended December 31, 2010 compared to the year ended December 31, 2009, including $3 million in favorable currency effects. Comparable owned and leased hotel performance increased by $53 million primarily due to revenue growth partially offset by increased operating costs from incentive compensation and other variable costs related to higher occupancy. Additionally, Adjusted EBITDA increased $9 million due to improved operating performance at our unconsolidated hospitality ventures. These improvements are partially offset by decreases at our non-comparable owned and leased hotels of $8 million, which is largely due to the sale of the Hyatt Regency Boston.
North American management and franchising. North American management and franchising revenues increased by $89 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. Other revenues from managed properties increased $77 million for the year ended December 31, 2010 compared to the year ended December 31, 2009 due to increased cost reimbursements from our managed properties, which grew as higher occupancy increased variable costs. Management and franchise fees increased $12 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. Improvements in base fees were primarily driven by the effects of a 4.1% increase in comparable systemwide North American full service RevPAR. The increase in base fees was partially offset by declines in incentive fees largely due to significant renovations at full service properties, which reduced the profitability at these hotels. Franchise and other fees increased due to improved profitability across our select service portfolio combined with an increase in the number of franchised hotels in 2010 as compared to 2009. RevPAR at our select service hotels in the year ended December 31, 2010 increased by 7.3% compared to the year ended December 31, 2009.
| (Comparable Systemwide Hotels) |
Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| RevPAR | Occupancy | ADR | ||||||||||||||||||||||||||||||||||
| 2010 | 2009 | Better / (Worse) |
2010 | 2009 | Change in Occ % pts |
2010 | 2009 | Better / (Worse) |
||||||||||||||||||||||||||||
| North American Full Service |
$ | 108 | $ | 104 | 4.1 | % | 69.0 | % | 65.6 | % | 3.4 | % | $ | 156 | $ | 158 | (1.0 | )% | ||||||||||||||||||
| North American Select Service |
66 | 62 | 7.3 | % | 71.9 | % | 64.8 | % | 7.1 | % | 92 | 96 | (3.3 | )% | ||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| (in millions except percentages) | 2010 | 2009 | Better / (Worse) | |||||||||||||
| Segment Revenues |
||||||||||||||||
| Management, Franchise and Other Fees |
$ | 193 | $ | 181 | $ | 12 | 6.6 | % | ||||||||
| Other Revenues from Managed Properties |
1,283 | 1,206 | 77 | 6.4 | % | |||||||||||
| Total Segment Revenues |
$ | 1,476 | $ | 1,387 | $ | 89 | 6.4 | % | ||||||||
| Segment Adjusted EBITDA |
$ | 145 | $ | 121 | $ | 24 | 19.8 | % | ||||||||
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Adjusted EBITDA improved by $24 million in the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to a $12 million increase in management and franchise fees. The remaining improvement is due to a decline in professional fees of $5 million, reduced marketing support for the select service brands of $4 million and a decrease in bad debt expenses of $2 million.
International management and franchising. International management and franchising revenues increased by $34 million in the year ended December 31, 2010 compared to the year ended December 31, 2009 and included $4 million in net favorable currency impact. The $20 million increase in fees was driven by comparable systemwide international full service hotels due to a 16.9% increase (or 12.6% increase, excluding the favorable currency impact) in RevPAR during the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase resulted from occupancy and rate growth with particularly strong RevPAR results from our hotels in Asia, especially China.
| (Comparable Systemwide Hotels) |
Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| RevPAR | Occupancy | ADR | ||||||||||||||||||||||||||||||||||
| 2010 | 2009 | Better / (Worse) |
2010 | 2009 | Change in Occ % pts |
2010 | 2009 | Better / (Worse) |
||||||||||||||||||||||||||||
| International Full Service |
$ | 143 | $ | 122 | 16.9 | % | 65.6 | % | 59.2 | % | 6.4 | % | $ | 218 | $ | 206 | 5.6 | % | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| (in millions except percentages) | 2010 | 2009 | Better / (Worse) | |||||||||||||
| Segment Revenues |
||||||||||||||||
| Management, Franchise and Other Fees |
$ | 142 | $ | 122 | $ | 20 | 16.4 | % | ||||||||
| Other Revenues from Managed Properties |
68 | 54 | 14 | 25.9 | % | |||||||||||
| Total Segment Revenues |
$ | 210 | $ | 176 | $ | 34 | 19.3 | % | ||||||||
| Segment Adjusted EBITDA |
$ | 76 | $ | 62 | $ | 14 | 22.6 | % | ||||||||
Adjusted EBITDA increased by $14 million in the year ended December 31, 2010 compared to the year ended December 31, 2009 largely due to increased management and franchise fees of $20 million, including $2 million in favorable currency impact. These fee increases were partially offset by a $3 million increase in compensation and related costs and a $3 million increase in bad debt expenses.
Corporate and other. Corporate and other includes unallocated corporate expenses and the results of our vacation ownership business. Revenues declined by $5 million in the year ended December 31, 2010 compared to the year ended December 31, 2009 due to decreases in demand for vacation ownership units as a result of weakened economic conditions.
| (in millions except percentages) |
Year Ended December 31, | |||||||||||||||
| 2010 | 2009 | Better / (Worse) | ||||||||||||||
| Corporate and other Revenues |
$ | 62 | $ | 67 | $ | (5 | ) | (7.5 | )% | |||||||
| Corporate and other Adjusted EBITDA |
$ | (101 | ) | $ | (79 | ) | $ | (22 | ) | (27.8 | )% | |||||
Adjusted EBITDA declined $22 million in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in corporate expenses was due to higher compensation and related expenses of $11 million and increased professional fees and travel and entertainment costs of $7 million and $3 million, respectively, associated with increased business development activity and transaction costs. Lower vacation ownership revenues were entirely offset by reduced vacation ownership expenses, which included a favorable $8 million settlement for a construction dispute at one of our vacation ownership properties that was recorded as a reduction to our direct costs.
Eliminations. Eliminations of $80 million and $80 million for the year ended December 31, 2010 and 2009, respectively, primarily represent fees charged by our management and franchising segments to our owned and leased hotels for managing their operations.
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Non-GAAP Measure Reconciliation
The following table sets forth Adjusted EBITDA by segment for the years ended December 31, 2010 and 2009. For a discussion of our definition of Adjusted EBITDA, how we use it, why we present it and material limitations on its usefulness, see “—Key Business Metrics Evaluated by Management.”
| (in millions, except percentages) |
Year Ended December 31, | |||||||||||||||
| 2010 | 2009 | Better / (Worse) | ||||||||||||||
| Owned and leased hotels |
$ | 356 | $ | 302 | $ | 54 | 17.9 | % | ||||||||
| North American management and franchising |
145 | 121 | 24 | 19.8 | % | |||||||||||
| International management and franchising |
76 | 62 | 14 | 22.6 | % | |||||||||||
| Corporate and other |
(101 | ) | (79 | ) | (22 | ) | (2 | |||||||||