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Morningstar | Hyatt's Strong Development Supports Its Brand Advantage Amid Some Economic Concerns

We don't expect to materially change our $75 valuation for narrow-moat Hyatt after the company's reported fourth-quarter and 2019 outlook was near our forecasts and recent results of peers. We maintain our long-held view that Hyatt's brand advantage is strengthening, witnessed by its 2018 7.2% unit growth. That said, we view shares as fairly valued and see narrow-moat Wyndham with a more attractive margin of safety.

Hyatt's fourth-quarter revPAR growth of 1.5% was slightly below the 2% reported by Hilton and Wyndham, resulting in 2018 revPAR lift of 3.1%, just slightly below our 3.3% estimate. Meanwhile, 2019 guidance for the metric was maintained at 1%-3%, in line with Hilton's range and our 2% estimate. As seen with Hilton, U.S. revPAR growth lagged in the quarter, rising just 0.9% (versus Hilton's 1.1% increase), as we believe that uncertainty around global tariffs might be creating some pause in U.S. corporate travel. Elsewhere, revPAR growth was stronger with the ASPAC and EAME/SW Asia regions increasing 2.1% and 2.7%, respectively. RevPAR across key brands was mixed, with Andaz, Centric, and Unbound up 9%, 2.8%, and 5.2% in the quarter, respectively, while House and Place fell 4.8% and 0.3%, respectively, as they faced tough weather comparisons and higher industry select-service supply.

Hyatt's development growth remains impressive, supporting our stance that its brand advantage is strengthening. The pipeline reached 89,000 rooms, up 20% organically (versus 6% for both Wyndham and Hilton), and representing 42% of its existing room base (versus the 22% and 40% at Wyndham and Hilton, respectively). This in turn is driving strong unit growth, which increased 7.2% in 2018 (versus our 6.6% estimate) and is guided to lift another 7%-7.5% in 2019 (versus our 7.3%). Importantly, key brands House and Place continued to see strong combined unit 9.4% unit growth in 2018, calming some concerns over recently weaker revPAR.

Hyatt remains on track with its target to sell $1.5 billion in assets by the end of 2020, having sold $1.1 billion thus far. We continue to view the move toward an asset-light model positively, as it drives higher ROIC. To this point, Hyatt received 53% of its EBITDA (before corporate expense) from asset-light properties in 2018, up from 47% in 2017. Hyatt looks to recycle proceeds from asset sales through shareholder returns (2018's $966 million in buybacks represented the highest annual amount on record) and acquisitions like Two Roads that closed in November 2018 and added 12,000 and 5,000 opened and pipeline rooms, respectively.