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In-line quarter, so so guidance


Adjusted for $6MM of acquisition related expenses, HST would have reported $296MM of Adjusted EBITDA, in-line with consensus estimates.  Adjusted EBITDA guidance for 2011 was also in-line with consensus... not very exciting.

HIGHLIGHTS FROM THE RELEASE

  • "Comparable hotel RevPAR increased 6.2%"
  • "The Company recently entered into an agreement to acquire the 1,625-room Manchester Grand Hyatt San Diego Hotel for $570 million. The transaction will be comprised of a combination of cash, including the repayment of existing loans, and the issuance by the Company of common and preferred operating partnership units. The transaction is expected to close in March 2011, and is subject to various closing conditions, including approval by the San Diego Unified Port District."
  • "The Company also expects to complete the acquisition of a portfolio of seven midscale and upscale hotels in New Zealand in February for approximately $145 million, including $80million of mortgage debt. The properties are located in cities that represent New Zealand's main commercial, political and tourist centers: Auckland, Queenstown, Christchurch and Wellington. The hotels will be operated by Accor under the ibis and Novotel brands."
  • During 2010, HST completed $114MM of repositioning and ROI expenditures:
    • "San Diego Marriott Hotel & Marina - an extensive, multi-year $190 million project to reposition and renovate the hotel including all 1,360 guest rooms, the pool and fitness center, as well as the expansion and development of new meeting space and an exhibit hall
    • Westin Kierland Resort & Spa - the development of a new 21,500 square foot ballroom and 4,500 square foot outdoor venue space
    • Miami Marriott Biscayne Bay - the renovation of the lobby and development of a three-meal restaurant, as well as the conversion of underutilized restaurant space into 3,900 square feet of meeting space."
  • Maintenance capex in 2010 totaled $195MM
  • 2011 expected investment in ROI and repositioning expenditures of approximately $290MM to $310MM, including $190MM of projects at the following properties:
    • "Sheraton New York Hotel & Towers - the complete renovation of all 1,756 rooms, as well as major mechanical upgrades to the heating and cooling system;
      • will convert some rooms to rental apartments
    • Atlanta Marriott Perimeter Center - complete repositioning of the hotel including rooms renovation, lobby enhancements, mechanical systems upgrades, parking garage and exterior enhancements;
      • room count reduction is necessitated by a condo nation proceeding which generated more than $11 million and which will be deployed to fund a material part of the renovation.
    • Chicago Marriott O'Hare - complete repositioning of the hotel including rooms renovation, new meeting space and the creation of a new great room, food and beverage platform and lobby;
    • San Diego Marriott Hotel & Marina - continuation of the extensive renovation and repositioning project begun in 2010; and,
    • Sheraton Indianapolis - renovation of rooms, lobby, fitness center, bar and restaurant, as well as the conversion of an existing tower into 129 managed apartments."
  • 2011 guidance:
    • comparable RevPAR: 6-8%
    • Operating profit margin expansion of 220-280bps
    • Comparable hotel adjusted operating profit margin expansion of 100-140bps
    • Net Income: $19-57MM
    • FFO $0.87 to $0.92 below consensus of $0.96
    • Adjusted EBITDA of $1,000MM-$1,035MM compared to consensus of $1,022MM

CONF CALL NOTES

  •  History tells us that early cycle acquisitions are good investments
  • Reached an agreement to develop seven hotels in three major cities in India, through our Asia joint venture. We also purchased the junior tranches with the par value of approximately 64 million of a mortgage loan secured by a 1,900 room portfolio of hotels in Europe.The notes were purchased at a meaningful discount. The underlying assets are performing above expectations.
  • Banquet revenues increased over 7% as groups upgraded their spend
  • FFO would have exceeded the high end of their guidance adjusting for successful acquisition costs
  • There have been actual ADR increases and better mix with more transient room nights.  Premium and corporate rates increased 7%. 
  • Discount room nights declined by 3% in 2010
  • Full year transient demand matched 2007 but rates were 16% below peak
  • Group room nights were up more than 6%. Average rate was up slightly. Group revenues were up 6.2%. Recovery in luxury room nights leads the way.  Compared to 2007, group revenues are down 19% and corporate revenues are down 33%.
  • Still 4 points below their peak occupancy levels, although they expect going forward, ADR will be a meaningful % of RevPAR increases
  • Average rate for group bookings exceeds 2010 levels across all categories
  • Expect revenue and expense synergies on the San Diego acquisition
  • EBITDA at the Helmsely will only be in the $5MM range for 2011 during the renovation period, but once renovations are completed they expect that EBITDA will improve to low to mid $30MM range
  • 2011 guidance doesn't assume any additional acquisition not already announced
  • Expect the volume of asset sales to be light in 2011 - back half loaded but guidance doesn't assume any sales
  • FY 2011 dividend of 10-11 cents per share
  • Believe that they are in the early stages of the lodging recovery and that business travel will continue to recovery
  • Expect Atlanta RevPAR to underperform in 2011.
  • San Diego - RevPAR +16.8%. 2011 is expected to outperform
  • Chicago: 12.1% RevPAR growth despite citywide events flat YoY. ADR +5%, benefiting from positive shift in transient. Expect these hotels to outperform in 2011
  • San Fran: 11.5% RevPAR increase. Group and transient was strong. Expect this market to perform in-line with their portfolio in 2011
  • San Antonio: Expect that 2011 will outperform the portfolio
  • Hawaii: +5.2% RevPAR - more impact from renovations as ADR dropped 9%. Airline capacity continues to increase. Expect Hawaii to be one of their best markets in 2011.
  • Boston: +2.3% only due to a decrease in citywide demand and are expected to underperform in 2011
  • Phoenix: up slightly in 4Q, but is expected to outperform in 2011
  • Philadelphia: RevPAR fell 7.2%, renovation will cause them to underperform in 2011
  • Orlando had negative 2% RevPAR, expected to slightly underperform in 2011
  • European constant Euro RevPAR was up 13%, expect European JV portfolio to have 5-7% RevPAR growth in 2011
  • Unallocated costs increased 4.7% for the quarter. This increase was primarily driven by expense that are variable with revenues including credit card commissions, reward programs and cluster and shared service allocations. Utility cost increased only 1.4% and property taxes declined 8.4%.
  • RevPAR to be driven by more rate than occupancy. Expect some increase in group demand and higher quality groups. Expect unallocated costs to increase above inflation (utility and property level costs)
  • Raised $245MM under their continuous equity issuance program
  • Have the right to extend their R/C to 2012 as long as leverage is below specified levels -they are confident they will be below those levels
  • 2011 income tax levels- projecting a tax provision equivalent to a 4 cent provision. 
  • Prior to 2009 they were allowed to capitalize acquisition costs now they must expense those costs. Going forward they will not adjust EBITDA for successful acquisition costs.

Q&A

  • Guidance has taken into account their renovation work and any associated disruption. They were a little surprised by the level of disruption they incurred in 4Q2010. However, they believe that the renovations will impact less in 2011
  • Delta between comparable RevPAR and total RevPAR
    • The 4 properties that they acquired are performing better than the comparable portfolio
  • San Diego Hyatt - capex plan?
    • They are still in the process of developing that. One of the towers is in need of significant renovations (completed in 1992). The other tower was completed in 2003 and doesn't need that much capex. No where as much capex as the Helmsley though
    • Think that the deal was completed at 14x EBITDA multiple on 2010 - this hotel's EBITDA did fall meaningfully from peak. On peak EBITDA, the price is sub 10x.
    • The hotel has been on the block for a while. There were a lot of interested buyers. They had looked at the hotel on and off for several years. 20% discount to replacement and the price they paid was the lowest price they've seen for the hotel over the years. Asset rallied strongly in 4Q2010 - performance wise.
  • Actual amount of their debt and equity issuance will depend on how active they are in the transaction market
  • Look for primarily UUP & Luxury in Europe and the US. Think that mid-market is a better opportunity in Asia - since that's where they believe the bulk of the demand will come from. New Zealand will be fully consolidated
  • Starwood did give them some key money for the Helmsley
  • Haven't seen any expense trends over the last 90-120 days to think differently about expenses than they have in the past
  • EBITDA from acquisition
    • Helmsley : $5MM
    • Hyatt: $30MM
    • New Zealand: $18MM
    • Hate to point out that they would have missed expectations without these acquisitions
  • They are comfortable with $200MM of cash on hand - had higher levels of cash in the past given the better access to capital now. No need to hoard cash on the balance sheet.
  • Feel fairly good about their representation in NY post acquisition - so the Intercon on the market isn't a huge priority
  • Key money isn't the only negotiating term- they also care about the ability to terminate the management contract or convert it to a franchise agreement, length of contract, structure of fees and incentives
  • Think that there are efficiencies to owning the Hyatt and the Marriott in San Diego. Think that they may be able to get better pricing, and more of the opportunities are on the revenue side
    • ie less competition...
  • Trying to reduce their representation in Atlanta or San Antonio