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HHC

Hyatt Hotels Corporation “ HCC” (NYSE: H ) Adjusting Enterprise Operations Meghan Shevlin April 7, 2014. HHC. Hyatt: global hospitality company engaged in management, franchising, ownership and development of Hyatt-branded hotels, resorts, residences

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HHC

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  1. Hyatt Hotels Corporation“HCC” (NYSE: H)Adjusting Enterprise Operations Meghan ShevlinApril 7, 2014

  2. HHC • Hyatt: global hospitality company engaged in management, franchising, ownership and development of Hyatt-branded hotels, resorts, residences • Hotel industry still suffering from the recession • 61% Revenues from Room sales • Industry growth of 3.3% expected through 2018 • Trading at $54.84 as of 3/23/2014

  3. Industry Comparables • Highly competitive industry with 21M rooms available • Hyatt owns over 500 properties (147,388 rooms) in 42 countries vs HOT & MAR (>340,000) • H NEA ($5,228) vs. MAR ($1,434) • H Profit Margin (8%) vs. MAR (25%) HOT (18%) IHG (18%) may explain H’s negative RI • NI H ($207M) vs. MAR ($626M)

  4. Explains high NEA • Industry competitors franchise approximately 80%

  5. Adjusting Accounting Information • Reported numbers are a result of accounting methods determined by management • Alternative accounting methods would have yielded different reported numbers • Assumptions for forecasted sales growth, EPM & EATO may depend on observed values of past sales growth, EATO & NEA • Accounting methods may affect realized EPAT and NEA therefore altering the comparability and influencing forecasts if we rely on past figures/analysis’ in determining future inputs for forecasts

  6. Operating Leases • Operating leases: “off balance sheet financing” • Neither liability or asset is recorded on balance sheet • Leasing transactions affect both the balance sheet (LT assets/liabilities) as well as the income statement (leasing expenses are in SGA) • Reporting operating leases leads to higher EATO, NEA lower and revenues unaffected • Balance sheet measures are improved • Return appears higher

  7. Implicit Discount Rate • Rate that yields the present value computed by the company given the future capital lease payments • Guess of 10%

  8. Estimated Lease Liability • Present value of future operating lease payments using 4.12% discount rate: $354.40 • Assume that future years after 2019 will have payments equal to the 2018 magnitude until the amount Thereafter is satisfied

  9. Adjustments

  10. Stock-Based Compensation • Employee stock options are a means to compensate employees and to better align the interests of employees and shareholders • Different utilization of stock options creates a lack of comparability across companies unless we adjust for EPAT and NEA • Must recognize additional liability due to outstanding options based on difference between current market price and exercise price • Recognize additional compensation (EPAT & FEAT components) because of differences in US GAAP expense at grant date and the difference b/w market and exercise P

  11. Stock-Based Compensation

  12. Stock-Based Compensation • 1) Value of options outstanding at the beginning of the year using beginning of year share price • This is the liability for stock-based comp. Part of NFL that needs to be recognized = 2,080,183 * (39.42-48.82) = (19,553,720) • 2) Value of options exercisable at beginning of year using end year share P • Help to determine change in beg liability caused by the change in market P. Element of FEAT = 2,080,183 * (49.46-47.18) = 4,742,817

  13. Stock-Based Compensation • 3) Estimate value of exercised options = 96,414 * (44.44-27.75) = 1,609,150 • 4) Value of options cancelled during the year • Compare to average share price to estimate ESO cancelled = 19,155 * (44.44-41.23) = 61,488 • 5) Value of options exercisable at year end • ESO overhang that is part of NFL that must be recognized = 2,435,759 * (49.46-47.18) = 5,553,531

  14. Stock-Based Compensation • 6) Estimate of additional share-based compensation

  15. Conclusion • Accounting-based valuation may mislead assumptions by what has been reported • Making these adjustments to NEA, EPAT, FEAT for operating leases and share based compensation provides more reliable and relevant numbers to base forecasting assumptions on

  16. Questions?

  17. Sources • Hyatt Hotel Corporation Annual Report 2012 • Hyatt Hotel Corporation Investor Fact Book 2012 • Valuation for Financial and Accounting Professionals: A Guide to Valuation and Financial Statement Analysis, Easton, Sommers • www.nasdaq.com/symbol/h • www.yahoo.com

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