MAR Q2 COMMENTARY

Not awful but looks like a slight slowdown in RevPAR.

Relative to whisper expectations, Q2 RevPAR and Q3 RevPAR guidance is probably a little disappointing.  As many of you know, we’ve had been anticipating a June/July RevPAR slowdown based purely on the sequential math of absolute dollar RevPAR and historical seasonality.  Admittedly, we had expected a bigger slowdown which makes us a little more positive on the stocks actually, but only after the Street absorbs the lower expectations.  Assuming our macro view doesn’t get any worse, look for us to get more constructive on some lodging names as we move into late summer.

MAR 2Q11 Review

Revenue was $2MM lower than our estimate – with fees coming in $8MM light and somewhat offset by owned,  leased corporate housing and other and timeshare coming in $3MM and $4MM better, respectively.  Lower revenues were offset by lower SG&A, taxes, and share count, resulting in an in-line EPS number.

  • System-wide rooms came up short of our estimate because they included Cosmo rooms in the base
  • Fee revenues were $8MM lower than our estimate and $1MM below the low end of company guidance. The miss was across base, franchise and incentive fees – the company blamed lower incentive fees on weak ME and Greater D.C. areas.
  • Owned, leased, corporate housing and other revenue net of expenses ($29MM) was in-line with our estimate and at the higher end of company guidance.  Margins were negatively impacted by a $4MM YoY decline in termination fees.  Branding fees weren’t disclosed.  It appears that food, beverage and other revenues declined 16% YoY – not inconsistent with the 20% decline we saw last quarter – likely as a result of higher rate driven by more giveaways (free internet, free parking, complimentary breakfast, etc)
  • Timeshare sales and services revenue, net of direct expenses of $43MM missed the low end of company guidance by $7MM.  MAR attributes the miss to lower interest income on a smaller mortgage portfolio and higher productions costs as well as a higher percentage of deferred revenue.

Other stuff:

  • G&A of $159MM was $6MM below the low end of company guidance and would have been even lower if not for several ‘one-time’ items
    • $7MM of higher legal fees
    • $5MM payment to the performance of one hotel
    • $3MM of transaction related expenses associated with the spin-off transaction
  • Interest expense of $37MM was also lower than our estimate – MAR sited higher capitalized interest as part of the reason behind the decline

EBITDA guidance for the full year was lowered by $20-35MM – driven by

  • $10MM decrease in fees
  • $10MM decrease in net timeshare sales and service revenue (deferred revenue and lower interest on smaller mortgage portfolio)
  • $5MM increase in SG&A

Somewhat offset by

  • $5MM higher net owned, leased, corporate housing and other revenue
  • Lower share count (buyback)
  • Lower tax rate
  • Lower interest expense (higher capitalized interest)