Investment Outlook


While a second Corona wave swept the globe, equity markets reached new all-time highs last quarter. Positive sentiment resulted from the election outcome in the US, the publication of better than anticipated results in COVID 19 vaccine trails and the broad felt hope that this might all lead to some kind of normalization in 2021. Markets were further supported by the EU’s agreement on a EUR 750 bln recovery fund and a second, USD 900 bln sized round of fiscal stimulus in the United States.


Equity markets continued their recovery in the third quarter of this year. Because the worldwide ‘lockdowns’ drew large parts of the economy to a halt in the second quarter, the corporate earnings published in the third quarter were key to that recovery. The impact appeared less severe than feared. US S&P500 companies earnings were down 7% on average, their European counterparts were down 25%. 


During the second quarter of this year global stock markets have largely recovered from the crash in Q1. While European indices showed a negative year to date return of around -10% by the end of the quarter, US stock indices were almost back at January 1 levels. The Nasdaq index, less affected by the Covid-19 crisis because of its technology weighting, achieved a positive year to date return of 13%.

The main reason behind this recovery is the monetary easing of the various central banks. Since March, the ECB's balance sheet grew from EUR 4.7 trillion to EUR 5.6 trillion. At the FED, the balance grew from $ 4.2 trillion to $ 7.2 trillion.

Investment Thesis Hyatt




During 2019 we have taken a position in the Hyatt hotel chain. In recent years the hotel industry has shifted to a model where the ownership of real estate and the management of a hotel are largely separated. The three major US listed hotel chains: Hilton, Marriot and Hyatt, historically owned their hotels. Nowadays, however, they earn an increasing share of royalties and management fees on hotels owned by third parties.

In the first instance, a hotel owner pays 4-6% of its sales to Hyatt in the form of royalties. In return, it may use the name Hyatt, which will increase room rate on average by 6%. Even more important is the network that Hyatt brings with it. This includes the loyalty program with currently around 20 million members. Because of this network, more people can make a reservation directly at the hotel rather than through a website such as, which entails high costs. Also, the percentages that the hotel pays to for a reservation are negotiated by Hyatt. Because of its scale, Hyatt has a better negotiating position. This means about half the cost that an individual hotel would pay, about 12.5% of the room rate instead of 25%. This is a financially attractive proposition for the hotel owner.

There are many benefits to Hyatt as well. In the previous business model, growth in the number of hotels was expensive as the costs for the real estate and the interior came at their expense. Hyatt currently plans to add 81,000 rooms to its 219,000-room hotel chain. The total cost of this for Hyatt is estimated at USD 200m. The rest is financed by the real estate investors. At present, the number of rooms is growing by 7.5% per year. Revenue per room grows with at least the inflation level over an economic cycle, or 2%. Because Hyatt does not have to fund a large part of the growth, the current free cash flow of 6% that the company generates is available to distribute to shareholders through a dividend or through the repurchase of shares. The sum of these three sources of return, over 15%, is an attractive compensation for the risk inherent in this business.

The same case can be made for competitors Hilton and Marriott. However, we made a conscious choice for Hyatt. Hilton and Marriott have already reduced their real estate holdings through a so-called spin-off. This means that the company is split in two and the shareholders in both companies receive a share. Hyatt makes the transition more gradually and plans to sell some hotels every year. With the current high prices for real estate, they receive high fees for this, provided they do not flood the market with too many hotels at once. For Hyatt, almost half of their profits come from rooms they own as real estate. At Hilton and Marriott, this is around 10%. Hyatt will move slowly to this level.

Because Hilton and Marriott have already made the transition and Hyatt is still executing, Hilton and Marriott get rewarded by financial markets with a higher rating than Hyatt. This seems logical because the asset light model without real estate is a more attractive model. However, this leads to a situation in which Hyatt is effectively penalized for possessing valuable real estate. We estimate that the real estate is worth at least USD 7 billion while the market value of Hyatt plus their debt is USD 9.5 billion. At the time of purchase, this was only 8.5 billion. In our opinion, the share is undervalued.

Hyatt plans to sell 500 million to 1 billion in real estate each year. Hyatt can sell hotels for a higher profit multiple than the stock itself is trading on. They can then use the proceeds to buy their own shares. In an ideal situation, they can buy back a large portion of their own shares for several years before the market finds that Hyatt has a similar business model as Hilton and Marriot, after which the company could be valued at the same higher profit-to-earnings ratio. Furthermore, at each hotel sold, they receive a management contract that yields an average of three million per hotel per year. The hotel uses the same name and royalties have to be paid for this.

Hotels are a cyclical business. In historical recessions, per room revenue fell on average 10% and a maximum of 20%. These earnings per room are currently 9% above the peak of 2008. In the big cities, a correction has always been followed by rapid recovery. After 10 years in which the hospitality industry has been able to benefit from rising room revenue, this trend seems to be stagnating, causing the market to worry about the end of the cycle. However, we have confidence in the hidden value from the real estate. The "leverage effect" in the new asset light model is also less than in previous recessions, resulting in less volatility in profitability. Finally, Hyatt is the most conservatively financed, with a debt ratio of 1x net debt / EBITDA, compared to Hilton and Marriott at 3x.

Despite the cyclical nature of the hospitality industry, hotels are a fairly stable business model. 118 of the world's 1000 oldest companies are hotels. Hyatt hotels, which has existed since 1957, are controlled by the Pritzker family, leading to management with a long-term vision. In the case of Hyatt, we are happy to be a co-investor in order to benefit from the growth opportunities that Hyatt offers.