HOT: SOLID Q BUT Q2 REMAINS OUR CONCERN

The HOT Q4 was better than we predicted but not quite a blowout. Guidance was good – slightly lower than consensus for Q1 but higher for 2011 due to timeshare.  Q2 remains our concern.

Contrary to our prediction, HOT did beat the quarter and modestly raised guidance for FY11.  However, below the surface of a “blowout” quarter, things aren’t as exuberant as they appear. Likewise, the raise for FY2011 was driven by higher timeshare (partly timing of Bal Harbor revenue recognition), higher incentive fees, and lower below the belt items.

If we deconstruct the $29MM Adjusted EBITDA beat vs. consensus, 74% of the beat came from low quality items; namely, 45% came from higher incentive fees, 17% from “other fees”, and 12% from VOI.   These items account for $0.11 of the $0.13 EPS beat, with lower interest and D&A expense making up the balance.  That said, HOT still would have beat our number due to better control expenses with SG&A and CostPAR growing less than we projected as well as $4MM of better base management and franchise fees.  

Detail:

Starwood reported strong 4Q2010 results with total revenues exceeding our estimate by $13MM (2%) and unadjusted EBITDA beating our estimate by $20MM (9%).  The EBITDA beat was driven by a higher mix of high margin fees revenue, which was largely driven by higher incentive fees, better VOI margins and lower SG&A expense.

  • ­Owned room revenue of $459MM missed our estimate by $12MM ( 3%) but the revenue miss  was somewhat offset by expenses being $6MM lower as well.
    • Owned comparable RevPAR of $151 was almost $7 below our estimate, growing 8.6% vs our estimate of 12.5% (however our number isn’t same store)
    • Room revenue was the culprit of the miss while F&B and other revenues look like they grew 10% YoY
    • CostPAR only increased 2% to vs. our estimate of 6.7%.
  • Managed, franchised and other revenues of $209MM beat our number by $22MM
    • 813 (.3%) more managed and franchised rooms were added to the systems than we projected – with all of the upside coming from Luxury segment additions
    • $13MM of the beat was higher incentive fees (which the company explicitly guided to only being up single digits and ended up growing 39% YoY)
    • Other “revenues” termination / etc was $5MM higher than our number
    • Franchise and Base mgmt fees beat our number by $2MM each, respectively.
  • Timeshare sales and service revenue beat by $2MM and operating expenses were also a little better for a total operating profit beat of $3MM
    • Originated sales revenue was $1MM better and other sales and service revenue was $6MM better than our estimate. However, deferred revenues were $4MM higher.
    • Originated sales margins reached 41%, much higher than the 35% YTD margin and 30% margin in 2009
    • Other expense margin was 23.4%
  • Other stuff:
    • SG&A: $4MM lower
    • D&A: $8MMlower
    • Interest expense: $5MM lower