How did Caption By Hyatt estimate the fair values of its investments classified as Level Three?
Caption_By_Hyatt Franchise · 2025 FDDAnswer from 2025 FDD Document
ns for credit losses were partially or fully offset by interest income recognized in the same periods (see Note 21).
We estimated the fair value of these HTM debt securities to be approximately $270 million and $41 million at December 31, 2024 and December 31, 2023, respectively. The fair values of our preferred equity investments, which are classified as Level Three in the fair value hierarchy, are estimated using probability-based discounted future cash flow models based on current market inputs for similar types of arrangements. The primary sensitivity in these models is the selection of appropriate discount rates and probability weighting. Fluctuations in these assumptions could result in different estimates of fair value. The remaining HTM debt securities are classified as Level Two in the fair value hierarchy due to the use and weighting of multiple market inputs being considered in the final price of the security.
Convertible Debt Security—During the year ended December 31, 2023, we invested in a $30 million convertible debt security associated with a franchised property, which is classified as AFS and recorded in other assets on our consolidated balance sheets. The investment has a contractual maturity date in 2029. The convertible debt investment is remeasured at fair value on a recurring basis and is classified as Level Three in the fair value hierarchy. We estimated the fair value of this investment to be $42 million and $39 million at December 31, 2024 and December 31, 2023, respectively. The fair value is estimated using a discounted future cash flow model, and the primary sensitivity in the model is the selection of an appropriate discount rate. Fluctuations in our assumptions could result in different estimates of fair value.
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Caption By Hyatt's 2025 Franchise Disclosure Document, the company employs different methods to estimate the fair values of its investments classified as Level Three, primarily using discounted future cash flow models. For preferred equity investments, these models are probability-based and rely on current market inputs for similar arrangements, with the selection of appropriate discount rates and probability weighting being the primary sensitivities. Fluctuations in these assumptions could lead to different fair value estimates.
For seller financing, such as the $10 million provided for Hyatt of Baja, the fair value estimation also uses a discounted future cash flow model. The key assumptions and judgments involve the discount rate and expected timing of payments. Similarly, for contingent consideration, like the $5 million receivable from Hyatt of Baja, a Monte Carlo simulation is used to model the likelihood of achieving performance-based metrics, incorporating assumptions about discount rates and operating results.
Caption By Hyatt also uses internally-developed cash flow models for unconsolidated hospitality ventures, which include assumptions and judgments regarding projected future cash flows, discount rates, and capitalization rates. For guarantees, the company uses scenario-based weighting with Monte Carlo simulations or probability-based weighting approaches, along with the 'with and without' method under the income approach, considering factors like probability weighting, discount rates, volatility, hotel operating results, hotel property sales prices, and the timing of expected cash flows. These Level Three valuations rely heavily on internal assumptions and judgments, making them more susceptible to changes in estimates based on market conditions and company performance.