Hyatt Hotels Corporation (H) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Hyatt Hotels Earnings Conference Call. My name is Tanya, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to hand the presentation over to your host for today, Atish Shah, Senior Vice President of Investor Relations.

Thank you, Tanya. Good morning, everyone, and thank you for joining us for Hyatt's Second Quarter 2011 Earnings Call. Here with me in Chicago today are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Harmit Singh, Hyatt's Chief Financial Officer. As to the format for this call, Mark and Harmit are each going to make remarks about our results for the second quarter and progress made towards creating long-term value. After the comments, we will take questions from the call participants. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, our quarterly report on Form 10-Q and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, August 2, 2011, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at hyatt.com, under the Press Release section of our Investor Relations link and in this morning's earnings release. An archive of this call will be available on our website for 90 days. Additionally, a telephone replay of this call will be available for one week. And with that, I'll turn it over to Mark to get started.

Thanks, Atish. Good morning, and thanks to all of you for joining our second quarter 2011 earnings call. During the second quarter, we saw continued increase in business levels, as compared to last year. Despite disruptions to business due to renovations at several owned hotels, as well as lower demand levels in Japan and North Africa, RevPAR increased in the majority of our hotels. At many of our hotels, average daily rate growth drove the increases in RevPAR. Rate growth was a result of continued shift in mix of business, as well as increased pricing power due to higher levels of occupancy. For the company overall, adjusted EBITDA grew almost 12%. Our business results improved over last year as a result of RevPAR growth, stronger operating margins and higher management and franchise fees. During the quarter, we made progress towards expanding our presence by increasing the number of hotels around the world under our brands as we opened 5 hotels. We also saw higher interest in our brands from third-party owners, evidenced by the increase in our signed contract base for future hotels, which stood at approximately 150 hotels, representing more than 35,000 rooms at the end of the second quarter. During our last earnings call, I spent some time talking about what's happening in our select service business. I'm happy to report that we continue to make significant progress on this front during the second quarter. In terms of performance, select-service RevPAR grew almost 10% after growing almost 8% during the same period last year, resulting in a cumulative RevPAR progression that reflects continued expansion of demand for Hyatt Place and Hyatt Summerfield Suites. In addition to the continued improvements in operating performance, we also announced 3 transactions over the last few months, namely, the acquisition of 3 extended-stay hotels in California, the formation of a joint venture with Noble Investments and the acquisition of assets from LodgeWorks. I'd like to explain our thought process behind each of these transactions, including how we expect all 3 to work in conjunction to significantly boost our select-service platform. Let me briefly review our select-service business. Our 2 select-service brands, Hyatt Place and Hyatt Summerfield Suites are doing well. The unique service model that we created for these brands has been embraced by our customers. We see strong customer service performance at our hotels with steady improvement over time. We're clearly building a solid base of guests devoted to these brands. We have had solid cumulative financial performance over the last number of quarters. In terms of market share, many of these hotels operated significant and increasing RevPAR premiums in their respective competitive sets. In terms of RevPAR progression, our brands continue to lead the sector. As we talked to current third-party owners about our select-service brands, some of the feedback we've received relates to their desire for greater representation across the U.S. Further expansion of these brands is a primary focus for us as we strive to have a presence in and serve relevant markets for our corporate customers and individual travelers. More recently, there's been limited availability of construction financing for new hotel development. The limited financing that is available is generally focused only on very strong projects and only the most desirable markets. Even then, only the best sponsors, those with strong and lengthy track records, are having success at financing new development. Using our own capital to grow these brands has been successful to date. Not only were we able to launch the brands relatively quickly, but we continue to simulate third-party investment into these brands, both domestically and internationally. With that as the context, let me now describe the transactions in aggregate and then individually. In short, the 3 transactions all serve to support the pursuit of our goal to be the most preferred brand in each segment that we serve. Three key things to know about these deals are: first, we're adding high-quality assets and good locations to our portfolio of properties principally in the extended-stay and core select-service segments, but there are also 5 full-service properties. Performance will ramp up over the coming years because many are newly opened, 2 are under construction and more than 20 are being rebranded under Hyatt brands. Second, the expansion of our presence into a number of new markets will allow us to better serve our corporate customers and transient guests. This will support better property level earnings, better performance for each brand and better service to our guests, especially corporate customers, across all of our brands. Third, we expect to enhance future development with these transactions. With Noble, we're expanding our relationship and applying capital with a long-time partner. With LodgeWorks, we're expanding our capabilities with the addition of a number of LodgeWorks executives to the Hyatt family. These moves position us well to participate in new developments over the coming several years, both directly and in partnership with third-party developers and capital sources. I'll now walk through each transaction. During the second quarter, we acquired through a foreclosure process, 3 select-service, extended-stay hotels in California for $77 million. These 3 hotels are in strong desirable markets. We have rebranded the hotels and plan to complete a major renovation of each in short order. Over the medium to longer term, we will look to recycle the invested capital into other opportunities, while maintaining management and franchise contracts to preserve our presence in these markets. Second, during the quarter, we formed a joint venture with Noble Investment Group to develop newly-built select-service hotels. Noble is a well-known leading developer of select-service hotels, one of the few select-service developers that has been active through multiple cycles, has a strong track record and can bring forward projects that have the necessary attributes necessary to obtain financing. We own 40% of the joint venture and have committed to invest over $30 million of equity, which, together with Noble's investment and with moderate levels of leverage, should allow the JV to build 6 to 8 new select-service hotels over the next few years. The first of these hotels is already in development in the Atlanta area. We also sold 8 select-service hotels to an affiliated joint venture in which Hyatt has a 40% stake and Noble a 60% stake for approximately $110 million. This was part of the overall effort to expand our activities with Noble and utilize a limited base of hotel assets as a means to support future development. Third, last month, we announced the significant acquisition that we're very excited about. We plan to acquire a portfolio of 24 hotels and related assets from LodgeWorks, a private company based in Wichita, Kansas, for approximately $800 million. LodgeWorks is a well-known developer, owner and operator with a strong track record in extended-stay lodging, whom we've known for many years. The opportunity to make this acquisition is unique and one that stems from our ongoing discussions with LodgeWorks' leadership over a number of months. The acquisition has several elements that will create long-term value for Hyatt. First, let me describe in more detail what it is that we're buying. The 24 hotels that we intend to acquire represent approximately 3,500 rooms. We would also acquire the branded management rights from these hotels. The breakdown of the hotels is as follows: 16 select-service extended-stay hotels, which we plan to rebrand and manage. Three select-service hotels already Hyatt branded and we -- that we expect to manage; and 4 full-service hotels and 1 additional property that we plan to rebrand and manage as Hyatt or Hyatt Regency properties. The principal components of this transaction support our efforts to achieve our goal to be the most preferred brand in each segment that we serve. The key components are: first, the hotel assets; second, the segment; third, enhancement of future developments; fourth, enhancement of future asset recycling prospects; and finally, earnings upside and financial returns. As to the hotel assets, this group of assets fits well into our existing portfolio. They are excellent hotels, with the majority located in high-barrier-to-entry coastal markets, including locations in California, Washington State and several Northeastern states. The hotels are in very good condition, with almost 1/3 less than 2 years old. They fit into our brands with minimal expected conversion costs. Our extended-stay presence will grow by 42% as we add these 16 hotels. Several end markets today currently do not have a Hyatt extended-stay presence. Also within the asset base are 4 full-service hotels. These hotels have already established strong presence in the markets in which they are operating. We expect to take their success to the next level with the application of our reservation system and exposure to our corporate customer base. Next is the segment. We're big believers in the extended-stay segment. This segment of the business performed well through the last 2 lodging cycles. Hotels in this segment generally perform well from a margin perspective. As we look at our brand presence, our extended-stay business is one area in which our under-representation stood out notably. As to future developments, we are bringing on 15 key LodgeWorks associates and welcoming them into the Hyatt family. These individuals are primarily specialists in site collection, development and construction. The development team has built over 100 select-service hotels over more than 20 years. Expanding our capability in this way will boost our development efforts and help us be more successful in attracting third-party capital to grow our brands. The timing of this transaction is important as we plan to integrate this team and the new capabilities to fully participate in the next wave of development, which we think will accelerate over the next year or so. At the asset recycling, we believe that our ability to recycle our asset base will be enhanced by this transaction. We will look to recycle the investment in these hotels, while keeping management or franchise agreements in place. We see the marketplace for high-quality select-service assets increasing as acceptance of the strong RevPAR and margin potential of this asset class grows. New relationships with potential buyers of these types of assets, broader scale of the portfolio of assets available-for-sale and enhanced geographic diversity are all drivers of better recycling prospects for Hyatt going forward. Earnings upside. Another key rationale for the transaction is that we expect significant upside in the portfolio. Our initial estimate is that 2012 adjusted EBITDA from this acquisition, net of the additional corporate expenses, will be approximately $50 million. However, we expect earnings to grow over the subsequent few years for several reasons. First, 21 of the 24 hotels will benefit from rebranding to one of our brands. We expect a gradual improvement in performance due to this rebranding, as our marketing and sales platform, including Gold Passport, kicks in. We believe the expansion of occupancy, especially in well-rated segments, represents a big source of potential improved performance. Second, as I mentioned earlier, almost 1/3 of the portfolio is less than 2 years old. Two hotels are still under construction. As such, we expect to see improvement as these hotels ramp up. Third, our analysis of a number of markets in which these hotels are located shows strong growth potential due to fundamentals, namely, strong projected levels of demand and limited levels of new supply. Fourth, bringing the management of these hotels in-house will introduce an opportunity for us to focus a dedicated operating team on our managed extended-stay hotels across a larger system. Finally, we expect management franchise fees from existing and new hotels to increase over time. As noted, we believe that Noble and LodgeWorks transactions will help us better execute on new developments given the track record, development expertise, project center evaluation and relationships with third parties that each organization brings to the table. Higher level of activity under our select-service brands will also support our efforts to develop with other great partners, and we are confident in our ability to capture more than our fair share of new developments in this segment in the U.S. I'm very excited about these transactions, as well as our prospects for the future. And I'm confident that the hard work and commitment by each member of the Hyatt family, including the new members of the Hyatt family that welcome come from LodgeWorks, will continue to yield excellent long-term value growth. And with that, I'll turn it over to Harmit.

Thank you, Mark, and a warm welcome to those who have joined our second quarter 2011 earnings call. I will be discussing our performance in the second quarter, as well as recent business trends and we'll conclude with information on full year 2011. In the second quarter, adjusted EBITDA was $151 million, an increase of almost 12% as compared to last year. This strong increase demonstrates the operating leverage in our business as we have solid growth despite the impact of ongoing renovations at several of our owned hotels, the timing of the Easter holiday, the sale of several hotels as compared to the second quarter of 2010. Earnings per share adjusted for special items also grew 50% as a result of the increase to adjusted EBITDA and a lower effective tax rate. I will now discuss our results in more detail for each of our 3 business segments. Let me begin with our owned and leased hotels segment. Excluding the impact of currency, RevPAR for our comparable owned and leased hotels increased by 3.3% in the second quarter. Results were negatively impacted by the displacement of revenue due to renovations, which amounted to approximately 500 basis points of RevPAR. As you may recall, our second quarter 2010 RevPAR increased by over 9%, so we are comparing to strong growth in the prior year quarter. RevPAR was driven by rate gains, which represented approximately 2/3 of the increase in RevPAR. Operating margins at comparable owned and leased hotels also increased by 80 basis points in the second quarter. Margins were negatively impacted by approximately 100 basis points due to renovation activity at our own hotels. As a result, we estimate that margins would actually have grown about 180 basis points, adjusting for the impact of the renovations. Increases in average daily rates and our continued focus on expense control and flow-through both helped to drive our margins despite increases in cost due to rate inflation and occupancy increases. Owned and leased adjusted EBITDA increased by nearly 11% during the quarter. The displacement due to renovations adversely impacted owned and leased adjusted EBITDA by an estimated $10 million in the quarter. In addition, we had a smaller asset base in the second quarter 2011 versus 2010 due to asset sales over the last 12 months. Specifically, we ended the second quarter 2011 with 12 fewer owned hotels, representing approximately 3,000 rooms as compared to the second quarter 2010. Next, I'll talk about the North American managed and franchise segment. Second quarter comparable RevPAR for our full-service hotels increased approximately 5%. On a segment basis, the timing of the Easter holiday as compared to last year negatively impacted RevPAR results by an estimated 100 basis points. Disruptions due to renovations also negatively impacted segment results. Our full-service hotels experienced a 3% increase in group revenues with growth coming entirely from higher rates. Group business was negatively impacted due to the timing of Easter. Group revenue booked in the quarter -- for the quarter was up over 7% as compared with the second quarter of last year, with all the increase coming from higher rates. Group revenue pace for the year is still positive, with short-term booking still limiting longer-term visibilty. As for our transient business in the quarter, revenues increased 6% compared to the second quarter of last year. This increase was split evenly between demand and rate gains. Shift in the mix of business to more rank and corporate-negotiated business continue to drive rate increases. This quarter, for the first time in a number of quarters, we saw both an increase in food and beverage revenues and ancillary revenues on a per occupied room basis at North America full-service hotels. Other revenue for transient room night [ph], [indiscernible] revenue per group room night [ph] and other operating revenue per occupied room all increased. This increase in other revenues is important for us as we generate a significant portion of our revenues from these businesses. Now let me turn to our select-service hotels under the Hyatt Place and Hyatt Summerfield Suites brand. Comparable RevPAR at our select-service hotels increased 9.6% in the second quarter of 2011 compared with the second quarter of 2010. Overall, fee income for North American management and franchising operations increased 8%, primarily as a result of increased base, management and franchise fees. Let's now turn to our International business. In this segment, RevPAR increased 2.5% in the quarter, excluding the impact of currency. RevPAR growth was negatively impacted by declines in Japan and North Africa. Also as expected, RevPAR results from China were muted by the difficult comparison in Shanghai as a result of the 2010 World Expo. International RevPAR growth, if you were to exclude Japan, North Africa and Shanghai, would have been approximately 11%, excluding the impact of currency. Overall, international fees increased almost 7% in the second quarter of 2010, excluding the impact of currency. Higher incentive management fees as a result of higher revenues and the continued ramp up of hotels added in prior periods were large contributors to the increase. Now that I've talked about our 3 segments, I would like to talk about 6 other topics: our share repurchase during the second quarter, SG&A expenses, tax expenses, 2011 information, the impact of the transactions announced during the quarter and renovations. During the second quarter, we repurchased and retired approximately 9 million shares of Class B common stock for approximately $396 million in a privately negotiated transaction. This was a unique transaction and was accretive to earnings per share. We do not have any plans of future share repurchase at this time. Our adjusted SG&A expenses increased 9.4% in the second quarter, primarily due to higher compensation costs. This is similar to the approximate 9% increase in adjusted SG&A that we showed in the first quarter after adjusting for a onetime item in 2010. Our effective tax rate in the quarter benefited from the onetime reversal of a $12 million valuation allowance in one of our international businesses. As for 2011 information, first, I would note that this does not include the impact of the pending acquisition of assets from LodgeWorks. Our information related to capital expenditures is the same as the last quarter. Our expectation on depreciation and amortization expense has increased slightly due to a fine-tuning of estimates and the transactions that closed during the quarter. In terms of impact to earnings of the 2 transactions that we closed during the quarter, we do not expect a significant impact in 2011. In the case of Noble transaction, the venture were approximately $65 million. Our net proceeds from this transaction were approximately $90 million. In terms of 2010 adjusted EBITDA, these 2 transactions offset each other and therefore, we do not expect a significant change. The debt rate in our joint venture with Noble contributes to an increase in our pro rata share of unconsolidated hospitality venture debt as of June 2011. With regard to the pending acquisition of LodgeWorks assets, we expect to fund approximately $770 million in cash assuming we close on the majority of the asset purchases in the third quarter, with the remaining amount to be funded at a later date. I would like to conclude by providing a status update on the renovations that will be underway at 5 of our owned hotels. The renovations are proceeding on budget and on track. In the third quarter, we expect the renovations to have a less than 100 basis point impact to RevPAR and a less than $5 million impact to adjusted EBITDA. Starting in the fourth quarter and into 2012, we expect to see the positive impact of the renovations in our reported owned and leased segment results. In summary, during the second quarter, we saw improved demand and higher rate at full-service hotels, continued strong growth across our select-service businesses, improved results from our owned portfolio despite the significant renovations underway and a significant commitment of capital towards expanding our select-service presence in North America. And with that, I'll turn it back to Atish for questions and answers.

Thanks very much, Harmit. That concludes our prepared remarks. For our question-and-answer session, please limit yourselves to 1 to 2 questions at a time, and we'll take follow-up questions as time permits. We're happy to take your questions at this time. Tanya, may we please have the first question?

[Operator Instructions] Our first question comes from the line of Jeff Donnelly with Wells Fargo.

Just a question for Mark, actually. It's -- bigger picture, I'm curious for you to talk about the returns that you're expecting on the recent investments in Noble and LodgeWorks and maybe how you think about that as spread to your perceived long-term cost of capital?

The answers that -- I think in -- when you look at the assets that we will be bringing on board upon closing for LodgeWorks and then developing with Noble and also the 3 that we purchased in California, we think that in all these cases, we're going to end up with expansion of earnings potential over the coming several years. I think the points that I had covered earlier, namely, a number of hotels are still ramping up currently, 2 of them are under construction in the LodgeWorks portfolio, the renovation for the Woodfin assets in California are significant renovations and repositions of those hotels and rebranding. So we expect that the earnings momentum for a large portion of the assets that we're talking about are going to end up escalating over the next several years. So I think our outlook is that we will be able to significantly improve what those assets have been doing historically by virtue of those attributes. I think with respect to the actual realized returns, that partly depends on when we actually sell the assets. We do look at these assets as available for sale in the future. We are not anxious to do that until we've proven up the earnings momentum that I described earlier.

But it's fair to say that maybe you kind of think of this as ideally something in the mid-teens for your returns over the life of your holding?

Well, I think the -- we look at the prospects for -- on a return on invested capital, and we believe that if you begin in a framework that's sort of mid- to higher-single digit kind of cap rates, we would look to expand that into double digits over time on a return on gross investment.

Okay, just one follow-up then. Can you talk a little bit about how you see the depths of market opportunities out there right now? And do you think there's many more of these opportunities available to you either domestically or abroad? And are they more midscale or they tend to be more upscale? I'm just kind of curious about that mix, as you might see it?

We've seen an expansion, I'd say, in both more select-oriented opportunities both in the U.S. and outside U.S., as well as full-service and some luxury deals. Few that have this number of assets, if you look at the LodgeWorks acquisition, for example, very few opportunities that have that kind of coverage with that geographic diversity and also quality of assets. Most of them are relatively new assets, newly-built assets. So I would say that the direct comparison for the deals that we just talked about are fewer and far between, but the overall level of activity in the market has been growing.

Our next question comes from the line of Joe Greff with JPMorgan.

Two quick questions here. One is on the development pipeline. Of the 35,000 rooms in the pipeline, what percentage have second half 2011 opening date? What percentage have 2012 opening dates? And then with respect to the LodgeWorks acquisitions, you talked about the benefits being units, properties, geographic diversity. Are there any markets, once you factor in LodgeWorks, where maybe you think you have overconcentration or overexposure to? And what would be those markets if there are any?

Sure. On the first, we expect to open 15 properties this year, excluding LodgeWorks' acquisition, obviously. And I'm trying to recall...

We opened about -- I think we opened about 7 so far, so about 8, balance of the year.

In the balance of the year. So that's as to the first. We have not made any comments about 2012 openings yet. And then on the portfolio overlap, so to speak, we don't have any markets at this point in which we feel like we are overconcentrated.

Okay, great. And then the $30 million equity investment into the Noble joint venture, did that hit in the second quarter, or is that third or fourth quarter?

It's actually to be funded over time as drawn. So it will be funded against projects that we commit to, as opposed to funding it in upfront and then being drawn over time.

Our next question comes from the line of Steven Kent with Goldman Sachs.

Two questions. First, on -- if we go into a slower economic environment, and we're not forecasting that and we're not forecasting that for RevPAR, and I don't think you even internally are doing that. But if that were to happen, what levers do you still have to boost margins on a go-forward basis? And do you think you could react a little faster to reducing some of your expenses than maybe the last cycle? And then separately, my second question, just on the extended-stay business more broadly, I was a little -- I continue to be a little bit surprised that you'd enter into that business. And educate me on this, but it seems like that's an area where there's always the potential for higher competition because it's fairly easy to build and that the brand may not have as much value because the driver of the person to the extended-stay property tends to be more locally driven rather than a international or national traveler.

Steve, this is Harmit. I'll take the first and then Mark will take the second question. On your first, in terms of the cautious [indiscernible], just as a reminder, that's been our mindset over the last couple of years. So we haven't yet shifted from the mindset. As a result of which, despite the recovery that we've seen in the economy and the size of demand recover, our focus on maintaining cost has remained. You've seen that in margins over the last couple of quarters. And this quarter, despite the renovation, you saw margins increase. In terms of levers, for example, we maintain tight focus on staffing. As an example, at the management staffing level at the hotel, on the managed cost basis, we saw a 2.5% increase in occupied rooms in the quarter, but our management staffing was largely flat to a year ago. We are focused on productivity. We measure that as on a regular basis and productivity on a managed hotel, for example, in the quarter, for full-service, for example, was up. So our focus remains. Staffing is going to be of constant focus without compromising quality. So we look at customer satisfaction and quality while we look at costs, and it's a good -- it's proven to have costs go down and satisfaction levels increase, which is what we have seen. So that focus is good. In terms of other expenses, we are focused on utilizing paper, that's an important perspective. We've got green programs we spoke about last time around. We're focusing on educating our employees so that we reduce usage. And we maintain programs to keep our food costs in check. For example, we've got inventory management program across the board, which tries to minimize or reduce spoilage and increase turnover. So we've got all these programs. The mindset is fairly cautious right now given the undertone on the macroeconomic factors, especially in North America. And we have seen that in our results, both in North America and International.

It's Mark. Thanks for the question. A few comments on the U.S. front and why this actually makes sense to us more broadly than just expanding in extended stay by itself. And then secondly, I want to talk for a moment about what we're thinking about outside the U.S. The business within extended stay for Hyatt is very extensively integrated into our underlying customer base. So if you look at Gold Passport customer share of total revenues, it's actually highest amongst our Hyatt Summerfield Suites properties. So Gold Passport penetration is significant. We feel that that's actually one big additional benefit we can bring to properties that are not currently Hyatt and that we will be taking on. A lot of the business that we are actually writing and realizing in Hyatt Summerfield Suites and in Hyatt Place is actually managed corporate business. And what we've been able to do with the expansion of Hyatt Place and Hyatt Summerfield Suites is really expand our base of business for managed corporate accounts across the entirety of Hyatt. So these -- the extension of these brands and the success of the service funnel, which I'll come to in a second, has really been driving expansion of our managed corporate travel share, and that's an important driver overall because it's well-rated business that we have other opportunities to expand in, including group meetings. With respect to the asset side, it is true that there are local drivers demand for a hotel, but well-cited hotels next to locations or near locations where there's a lot of corporate activity, which attracts longer-term consultants like an IT-like customer base is actually what drives demand into those properties, and those customers are coming from other corporate accounts that we're currently serving. And so site selection is quite important. The quality of the asset and the quality of the operation is critically important, and what we found is that the service model that we've applied, both in Hyatt Place and Hyatt Summerfield Suites, which is different to the other alternatives, has really been very welcome. So we have the ability to continue to build on a dedicated, devoted customer base there. What we are seeing outside the U.S., and I would say most of what I'm about to say relates to India at this point because our expansion of our brands into other emerging markets is not yet announced. But on the India front, we found that there are a number of towns and cities, so-called secondary cities but I would describe them more as emerging cities, which are central business districts outside of the core historical towns, where you got a lot of IT parts and a lot of IT activity with long-term guests in those markets. So the initial Hyatt Summerfield Suites that we've signed up for development in India are adjacent to those sorts of demand drivers. And we feel that this whole trend of the emerging middle class and middle management class in India, and of course we believe the same will be true in China, we'll actually find a significant and core customer extended-stay hotel. So we do believe that these brands will end up being global. We're already on our way with Hyatt places under construction in India and Hyatt Summerfield Suites under development there as well. So we do believe that this will end up finding a similar demand driver in local markets for the same sort of customer -- corporate customer base that we're seeing in the U.S.

Our next question comes from the line of Janet Brashear with Sanford Bernstein.

Janet Brashear with Sanford Bernstein. So I wanted to follow-up first on one of the points you made earlier. You talked about the value -- the return -- the value on the returns from these acquisitions. And you said one source of value is when you rebrand and, in the case of LodgeWorks, stabilize the new hotels. Another source of value is when you potentially sell the real estate later. As you look at the future acquisitions you might make, I'm wondering which is going to be the driver of values? So for example, when you look at the economics of converting these units into Hyatt brands, and you balance out the investments to get them to your brand standards and, in the case of LodgeWorks, maybe it's just signage. But in the case of Woodfin, maybe it's some significant investment in addition to signage. Are your returns primarily going to come and be positive from that avenue? Or do you need the real estate sale to get where you want to be?

Well, we -- first of all, with respect to the LodgeWorks assets, I would say that they are, at this point, largely Hyatt-brand standard. There is signage and some modest conversion costs, but it is modest. So one big benefit is that from asset quality and a property quality perspective, we really don't have any major work to do there. The 3 assets that we acquired in California do have a larger investment required. So that's actually part of the opportunity because we believe that we'll end up repositioning the -- these hotels and their respective competitors, not to mention the branding. We do think that the expansion of what we can do through our reservation system, Gold Passport and our corporate customer base will drive current returns -- current earnings and current returns, and we will end up really enjoying that as the principal driver of value creation over time. That's really what we think will end up driving value for us, both while we own the properties, as well as upon a sale. The only other thing I would note is that our intention would be upon any sale to retain management or franchise arrangement on a long-term basis. And so we would, in every case, intend to keep our presence in those markets post sale.

And just a related follow-up. You said that you're getting some expertise from the LodgeWorks acquisition with your 15 new development executives. And you also noted that it's a very difficult development environment for your partners to raise the capital and find the site. So as your new executive find sites for limited service, does this mean that you may be more willing to finance the development on your own balance sheet and then, obviously, retain the management contracts?

Sure. A couple of things. One is the -- I know you just asked about LodgeWorks, but one point that I would make is that the purpose of the development JV with Noble is to actually help to fund development of new properties. So that is going to be one avenue that we do pursue and we're putting some capital into that, along with Noble. With respect to the LodgeWorks activities, while the team has a very... [Technical Difficulty] So with respect to the LodgeWorks activity, the development activity among the LodgeWorks team in conjunction with our development team, they have a long track record in history of raising third-party capital for their development. So they've got existing relationships that we also hope we will be able to employ. We will likely participate in some new developments, but our principal focus and intention is to utilize the new capabilities to identify new development opportunities to bring them along and to be able to put together deals to fund them with third-party capital over time. So that's the real intention and focus.

Our next question comes from the line of Joshua Attie with Citigroup.

Given the concerns about broader economics slowing, can you talk about what you're seeing in the business today and what you have seen over the summer in terms of reservation volume, the willingness of customers to book longer-term bookings and what their price sensitivity might be?

Sure, Josh. Overall, let me start with the group side and then we can talk about other trend. On the group side, overall trends are good. Our group business was up 3%, largely driven by rates. So I would say on the positive, rates are getting from -- if you --and some evidence against that the rates for the business booked in the quarter for the quarter was up 13%. The business we booked in the quarter for the year was up 8%. And the business that we had on our books for 2012, the rates are about 8% higher than where we think we'll end in terms of areas for the group business at the end of '11. We also saw that our corporate and association business on the group side, which is about 70% of the group side, was up in terms of revenue in the low-double digit combination of demand and rate. And having said all that, given the uncertainty in the macroeconomic environment, there is some cause to pause. Bookings are a little tentative. The windows continue to be sharp. That hasn't changed, and we expect that to continue until there's a complete [indiscernible] around the environment. But the business that we're booking, we're able to book at reasonable rates. So that's the general -- our general sense on the group side. Internationally, outside the 3 markets we talked about, the 3 unusual items, the fallout at Tokyo, the situation in the Middle East and the unusual factor we have in -- because of the World Expo, business continues to be strong. China x Shanghai is up in the mid-teens, which is good. Our business in Latin America continues to be strong. Business in India is picking up. Europe is a mixed bag, follows the U.S. to an extent. So overall, we still feel internationally, businesses will tend to grow as economies grow. Our transient business had a good quarter. We had 6%, largely a combination of demand and rates. Again, our top corporate account, which is our top 50 account, had a strong quarter. The leisure business, which is about anywhere within 10% to 15% of our North America business, ended the quarter on a strong note. June was up 10%. The summer is around the quarter we haven't seen too much of an impact because of gas prices. That was a question a couple of months ago. So overall, I think the trends are reasonable and, we are cautiously up -- that's been our mindset, being cautious. And that's how we're planning the rest of the year and the year ahead.

It sounds like most of those data points are for the second quarter, which sounds like was very strong. Can you give us any data points on what business was like in -- or what business has been like in July and August, or even just anecdotally how it feels?

Josh, that's difficult given our guidance principles. But I'd say that macroeconomic factors are a concern, especially in North America. And we manage the business accordingly.

And I know you don't give quarterly guidance, but I guess do you expect to see a moderation of RevPAR growth over the summer, excluding the renovation impact versus what it was in the second quarter? A lot of companies have reported or kind of guiding to a deceleration in the summer and then a re-acceleration in the fourth quarter. I guess without giving specific guidance, do you see that trend for your portfolio?

Josh, I think a couple of things. One is I -- Harmit commented on the renovation profile, so I think you've got some sense for how that's unfolding for us. But overall, I think the fact is that as we said in prior quarters, we've been very focused on employment and housing prices and general confidence levels in the economy. And that really remains our focus. And I think that is going to ultimately drive corporate confidence. And either -- if those macro indicators tend to improve over time, it will tend to buttress the business, and if they don't, it won't. So that really remains the key issue. And as we sit here today after the week or 2 that we've had, it's just brought to bear that confidence is a critical factor, and not just in our business, but in the markets overall. So that's about what we can say on our outlook.

And if I can ask just one more question. Now that you've put a lot of your cash to work, where do you see the financial capacity of the company being? And where could you ultimately take the leverage? It seems like most of the cash has been put to work, so incremental financial capacity will have come from more debt.

Josh, we'll give -- we maintained what we said earlier, which is we like to be investment-grade that based on some -- based on rating agencies, that's about 3.5x leverage. We have the balance sheet capacity, and we keep a constant eye on what's happening around the market. We have a revolver that matures, for example, less than a year from now. We are in the process of renewing that. So again, given the risk capacity and given that the -- we have used a little bit of cash, we have an eye on what's happening around the market.

Our next question comes from the line of Harry Curtis with Nomura.

Quick question on share repurchase. The transaction, if you could explain why it was done, and you mentioned you don't really have any plans to -- no future plans to continue repurchasing shares, yet your share price is actually a lower stock price. So I'm just interested in the strategy behind it.

Harry, it's Mark. The answer is that it was an opportunity that was presented to us, basically, by some members of the Pritzker family, and when we were approached about it and an inquiry was made, we evaluated it at that time. The board evaluated it. They formed an independent committee, a special committee to consider it. And so from a financial perspective and from a -- the perspective of looking to address some of the overhang, the perceived overhang in the stock, I think there was a general belief that it was a sensible transaction. And that's really the conclusion that was drawn at that time. There is no underlying plan with respect to stock repurchases. So it's not part of an overall strategy, so to speak.

Just wondering if the Pritzkers have an additional block to sell, do you get the -- do have the sense that you're the buyer of first resort, if you will?

Really can't say. I think the fact is that, as we said before, we would evaluate any inquiries made of us at whatever time it came in. But I really can't comment on how individual family members may be thinking about their own plans.

Our final question will come from the line of Smedes Rose with KBW.

I was just wondering if you could give any thoughts on your effective tax rate through the balance of the year, since it obviously moves around quite a bit. And then also just on your last call, you just talked about the decline in fees from Asia and the Middle East, and I was just wondering if a little bit more -- a few more months under your belt, if there's any kind of update there. I think you had seen them down around 30%, and does that still hold or is it maybe a little bit worse on the margin?

Yes, in terms of the effective tax rate, Smedes, it's been -- you're right. The tax rate has been up-and-down, and that's just the nature of our tax strategies. This quarter, we reversed the valuation allowance based on the fact that we are comfortable with the fact we could set up a carryforward loss. Again, the improving performance of [indiscernible] Hotels internationally. And as we have said, I think from our perspective, the best way to model our tax rate is 35% on our U.S. income and 20% on our international income. If you adjust for the reversal in this quarter, tax rate varies from anywhere from 35% to 40%. So I think that will be a good indication of the tax rate that you can project. Again, the only thing I would say is we have tax strategies, and these tax strategies bring in benefits as and when we can effectuate that. So that happens over time. Relating to your second question, please, can you just remind me?

Those fees from Japan.

Yes, so going back to your question on fees from the impact in Japan. Quarter 2, the impact was about $1.7 million, a little less than $2 million. Again, it was largely evenly split between the Middle East and Japan. We still believe that the full year downside, because of this, will be in the region of about approximately $5 million. And again that's an even split between Middle East and Japan.

Well, Tanya, that's our last question. So we appreciate everyone joining us this morning, and we look forward to talking to you in the future. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.