HOT: ANALYST DAY NOTES, PART II

HOT: ANALYST DAY NOTES, PART II

 

 

NOTES

 

Global Pipeline and Owned Portfolio

  • 72-73 hotel openings this year
  • Building owner preference to own more hotels
    • HOT booking channels generate a large % of hotel room nights- especially corporate room nights
    • Yield management system
    • HOT marketing efforts
    • Brand recognition allows them to diversify the origin base of guests for hotels
  • Pipeline
    • 5.4% CAGR in operating rooms since 2004
    • Largest relative growth potential out of their competitive set.  Their pipeline represents 28% of their existing room base.
      • HLT's pipeline is 22% of their base
      • Hyatt's is 21%
      • MAR's is 16%
    • Four Points is well positioned as a conversion brand for Western Europe and NA.  This brand is also well positioned for primary and secondary cities in emerging markets
  • Owned real estate portfolio and strategy to maximize value
    • 21,000 room/ 62 hotels
    • 85% wholly owned
    • Remain committed to asset light
    • Mostly in NA, and in urban markets which protect them from supply growth as these are higher barriers to entry markets
  • Maximizing shareholder value - owned portfolio
    • 60% don't require a lot of capex and are relatively easy to sell
      • Sheraton on the Park in Sydney (considered offers for the asset in 2009 but prices didn't meet expectations and this year will achieve peak earnings levels)
      • St. Regis San Fran
      • St. Regis Rome
      • St. Regis NY
      • Park Tower
      • The Phoenician
      • W Chicago
      • Westin Excelsior Florence
      • Westin Excelsior Rome
      • Sheraton Gateway Toronto
      • Sheraton Centre Toronto
      • Sheraton Maria Isabel
      • Sheraton BA
    • 25% need a lot of capex
      • St. Regis Aspen which was just sold is a good example- needed a renovation - sold for $70MM to an owner that was willing to invest in the asset
      • Grand Florence
      • Gritti Palace
      • W New Orleans
      • W Chicago - Lakeshore
      • Westin Gaslamp
      • Westin St. John
      • Westin Cancun
      • Sheraton Kauai
      • Sheraton Steamboat
    • 15% of hotels are very large and would meaningfully benefit from a repositioning and redevelopment - may need a partner
      • Manhattan at Times Square is a good example (was Sheraton Manhattan) - unclear that a hotel is the highest and best use for this hotel
      • Sheraton Rio
      • Westin Peachtree
      • Westin Maui

Summary and Financial Update

  • Since 2000 they have sold 110 hotels for $7.5BN
  • For 10 years, 70% of their business came from the US; now 62% of their business is international
    • Added 338 mgm'd and franchised hotels (79k rooms) since 2000, 70% (55k rooms) outside the US
    • Expect to drive 80% of profits outside the US eventually
  • Launched new brands:
    • W in 1998
    • Westin Heavenly launch 1999
    • Sheraton Revitalization (2007)
    • Launch of Aloft and Element (2008)
  • Targets of their transformations:
    • Higher growth trajectory
    • Lower cyclicality
    • Higher margins
    • Higher capital efficiency
    • Superior cash flow generation
  • 50% of their Luxury brands are located outside the US and 52% of their UUP brands are internationally located.  This is very hard to replicate.
  • WHY HOT?
    • Largest international presence
    • Huge pipeline
    • High value owned hotel portfolio
    • Best global team
    • Secular demand growth in EM
    • Low supply growth in developed market
    • Cash flow generation ability
  • Value of their owned portfolio:
    • Cap rate using average (04-08 NOI)
      • 5.5% = $5.6BN
    • Using per keys: $275k/room = $5.7BN; $325k/room = $6.7BN
    • If they sold these hotels, they could still retain ~$80MM in fees, creating another $1BN of value
    • SVO can continue to generate $150-200MM of cash flow for them assuming one note sale per year
    • Bal Harbour is their largest non-cash flow generating asset on their balance sheet
      • 307 residential units
      • Have 141 contracts in place with 20% deposits
      • On track for certificate of occupancy by Oct 2011
      • Invested $450MM by YE 2010 and expect to spend an additional $200MM
      • Cash from deposits: $60MM, expect to net $550MM through 2013 in closing and an additional $165MM in cash flow post 2013
      • Then they will still own a 210 room St. Regis
    • Have 10,125 unconsolidated JV room, with $60MM of pro-rata share EBITDA
  • Assumptions 2011-2013:
    • RevPAR: 7-9%
    • Margin improvement: 450-600bps (cumulative)
    • Earnings growth: 16-20%
    • 1% (+/-) RevPAR CAGR: -/+ $35-40MM of owned/ leased earnings through 2013
    • Base mgmt fee growth: 7-9%
    • Incentive fee growth: 10-13%
    • Franchise fee growth: 7-9%
    • Net room growth:  3-5%
    • Total fee revenue fee growth: 10-12%
    • VOI: flat originated sales and flat operating income growth
    • Timeshare capital spend: $80-100MM and cash flow: $450-600MM [cumulative]
    • Bal Harbour net cash flow: $350-400MM [cumulative]
    • SVO/Bal Harbour Net Cash Flow: $800-1BN [cumulative]
  • So they think they can get to $1.25BN -$1.375BN EBITDA by 2013 and EPS of $2.70-$3.20
  • 2010 Ending Cash flow: $500MM
    • + 3 yr estimated hotel operating CF ($2.3-2.5BN)
    • + 3 year CF from SVO/Bal Harbour ($800MM-1BN)
    • - Capex ($800-$900MM)
    • - Cash taxes & Interest ($900MM-1BN) =
    • $1.9-2.1BN of cash flow + asset sales =
    • Funds for growth/ debt reduction/ returning cash to shareholders
  • Already received $140MM of tax refund money - and expect to get the remaining $90MM before year end
  • Goal is to get to 3.0x leverage from an estimated 4.4x at 12/31/2010 - that equates to about $1.2BN of debt reduction

Q&A

  • Assumptions: 7-9% RevPAR growth with 6% coming from ADR why only 150bps of margin expansion?
    • There are inflation and cost pressure
  • Why such a low incentive fee recovery?
    • In international markets they are more tied to top line
    • In NA, F&B and other revenues lag RevPAR typically
  • In Asia, the demand for key money is a lot lower
  • Don't have to give as much key money in general now than they used to given their value proposition
  • Platinum SPGs visit 4 of their brands each year on average
  • Current transaction market?
    • Broad spectrum of buyers hasn't really returned yet
    • Think that for them a rifle shot approach to asset sales is the best approach for now.
    • They think a larger transaction is a little ways off just given the current environment. Most of the action are driven by large REITs looking for clean transactions with little required capex
    • Haven't seen the return of the leveraged transaction - but think asset values will move up a lot when and if the leverage market returns
  • Have 140 units under contract; prices are in the range of 1,000/psf.  Assume that they will not close all 140 units, but that sales will continue for a few years
  • Vast majority of hotel in the china pipeline are under construction - there is plenty of financing. In the rest of Asia - financing is also not really an issue. Owners are either high net worth or conglomerates.
  • In NA and Western Europe are where they are using more of their capital to support the pipeline. Have a lot of conversion opportunities.
  • 70% of customers in their Chinese hotels are Chinese
  • Think that any upside to their projections will come primarily from rate
  • Why no SVO growth?
    • Will only invest money where they are confident there is demand
  • With the hotels that require a large reposition (15% of rooms) they will wait until they find the right partner given the capex requirement
  • Their intent is to preserve their NOLs

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