• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

In-line Q1 and guidance. 

“The outlook for the rest of the year looks promising as we view the events of the past few months as not having derailed the overall global economic recovery. For example, our group and transient bookings remain robust. As such, we remain cautiously confident for 2011 and are bullish about our long-term prospects.”

- Frits van Paasschen, CEO

HIGHLIGHTS FROM THE RELEASE

  • "During the quarter, the Company signed 29 hotel management and franchise contracts representing approximately 8,700 rooms and opened 21 hotels and resorts with approximately 5,200 rooms... Eleven properties (representing approximately 3,400 rooms) were removed from the system during the
    quarter.... At March 31, 2011, the Company had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms."
  • "Special items in the first quarter of 2011, which totaled $33 million (pre-tax), primarily relate to a charge associated with the Company’s minority investment in a hotel in Tokyo, Japan following the earthquake in March 2011. Excluding special items, the effective income tax rate in the first quarter of 2011 was 21.0%"
  • "Revenues at Starwood branded Same-Store Owned Hotels in North America increased 6.5% while costs and expenses increased 4.6% when compared to 2010. Margins at these hotels increased approximately 150 basis points."
  • "Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 8.5% (6.9% in constant dollars) while costs and expenses increased 7.4% (6.3% in constant dollars) when compared to 2010. Margins at these hotels increased approximately 90 basis points and were negatively impacted by approximately 120 basis points due to continued increase in the gap between inflation and currency devaluation at the Company’s Latin America hotels."
  • Owned hotels: "First quarter results were negatively impacted by pre-opening costs at the new leased W London Leicester Square, the effect of the earthquake at the new leased St. Regis Osaka, one renovation
    and one asset sale."
  • "Originated contract sales of vacation ownership intervals increased 6.5% primarily due to improved sales performance on existing owner channels and increased tour flow from new buyer preview packages. The number of contracts signed increased 7.8% when compared to 2010 and the average price per vacation ownership unit sold decreased 1.4% to approximately $16,500, driven by inventory mix."
  • Capex in the Q: $40MM of maintenance and $33MM of development spending. 
    • "Net investment spending on vacation ownership interest (“VOI”) and residential inventory was $16 million, primarily related to the St. Regis Bal Harbour project."
  • "On April 6, 2011, the Company completed the sale of one wholly-owned hotel for cash proceeds of approximately $110 million. This hotel was sold subject to a long-term management contract."
  • Guidance for 2Q:
    • Adjusted EBITDA of $245-255MM (consensus of $259MM)
    • EPS: $0.42-$0.46
    • WW RevPAR SS Operated Hotels: 7-9% constant dollars (+200bps for FX)
    • WW Branded SS Owned Hotels: 8-10% in constant dollars (+400bps for FX)
    • 10-12% growth in fees and income (-200bps impact from ME & Japan)
    • VOI / residential earnings: Flat YoY
    • D&A: $79MM
    • Interest expense: $58MM
    • Income from continuing ops: $82-90MM
    • Tax rate: 24%
  • FY2011 revisions from last quarter:
    • Reflect the benefit of FX/ ie weak dollar on RevPAR
    • EPS +5 cents due to lower below EBITDA line items
    • VOI earnings +5MM
    • SG&A YoY +2%
    • D&A -5MM
    • Interest expense -5MM

CONF CALL NOTES

  • Despite global turmoil, their view of the lodging recovery remains unchanged
  • Occupancies at their hotels are now above peak 2007 levels
  • For the first time, rate contributed as much to RevPAR as occupancy
  • Annualized delinquencies and defaults in VOI have returned to 2007 levels
  • Group pace for 2011 is on track to be up double digits and 2012 business is on track to be better than 2011.
    • NA booking from outside of NA grew 20%
  • Achieved high single digit growth in corporate negotiated rates
  • Mid week occupancies are approaching peak levels in gateway cities
  • While leisure demand is likely to be somewhat impacted by rising fuel prices, business travel is not really elastic
  • Their customers tell them that they plan to travel more in 2011 than 2010
  • NY suffered from a 7% increase in supply this year. Already for Q2 they are seeing occupancies build - but they also contributed to the supply growth.  NY also suffered from weather.
  • Their websites drive 3x as much bookings for them than 3rd party sites. 50% of their bookings come directly to them (call centers etc)
  • SPG members account for 47% of their stays. SPG guests are 50% of Aloft and Element guests
  • $5MM impact from Japan and ME in the quarter
  • Japan: Their St. Regis in Osaka will lose $7-8MM this year vs expectation of B/E results
    • $20-25MM impact on EBITDA
  • China RevPAR up over 20% - China is their second largest country concentration after the US
  • India- have 32 operating hotels with 4 more to open. Goal of 100 operating hotels by 2015
  • Asia ex Japan continues to be a major contributor to their growth
  • ME: have 24 hotels across the affected countries. Expected to earn 15MM in fees and now expect that to be cut in half, earning no incentive fees. They are seeing strong growth in sub Sahara Africa.
  • Booking pace in Europe was strong
  • Mexico has been negatively impacted by drug wars and violence.  However, they are bullish long term on Mexico
  • Owned margins declined as much as 400bps in Argentina
  • Gained 300bps of share across all their brands
  • In Q2, expect occupancies in the 90s in NY and large rate increases
  • WW RevPAR is still 10% below peak levels

Q&A

  • Group business comments relate to NA - obviously, they have more hotels in NA than they had a few years ago. However, most of growth in NA has been limited service not group hotels. That helps comparisons between 2006/2007 and 2011/2012
  • Most transactions are rifle shot deals
  • As they get into the middle of the cycle, they are more likely to pursue more sales of their assets or a larger transaction.  They are in the market testing asset sales.
  • Why is their SG&A guidance higher? Impact of FX - dollar is weaker and 1/3 of their SG&A is in Euros and Asian currencies
  • Weakness in Japan and ME is offset by better results in other parts of the world. NA - despite lapping some very difficult comparisons, in 2Q their RevPAR is tracking in-line with 1Q results
  • NA RevPAR is impacted by a Canadian and Mexican currency. NA would have 9.3% ex FX affects.
  • Aside from NY, London has had 3-4% supply growth. They just opened the W in Lester Square and its been one of the strongest openings. 
  • Franchise revenue growth has to do with Aloft ramp and just new hotel openings
  • Aloft is ramping faster than they expected when they launched the brand a few years ago. 
  • What percentage of their mix is still in the discount channels?
    • Their revenue management tools are giving them more insight into demand at their properties allowing them to effect mix to their benefit
    • OTA business peaked at 6-7% was about 3% in 2007
    • Government is about 3% of their business and was about 2% at their prior peak