Our notes from the call that just ended.
HIGHLIGHTS FROM THE RELEASE
- "Comparable hotel RevPAR increased 6.7%"
- "During the quarter, eleven of the Company's comparable hotels were undergoing significant renovation projects, including two of the Company's larger properties, the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown."
- "On July 14, 2011, the Company reached an agreement to acquire the 888-room Grand Hyatt Washington, D.C. for $442 million, which may include the assumption of a $166 million mortgage loan."
- "On June 27, 2011, the Company signed an amendment to the partnership agreement to expand its investment in the European joint venture through the establishment of a new fund (the "Euro JV Fund II")."
- Target size of euro 450 million of new equity/target investment of~ euro 1 billion with leverage
- Current partners in the European joint venture owns a 33.3% LP interest
- June 28, 2011: HST transferred the Le Meridien Piccadilly to the Euro JV Fund II for a transfer price of GBP 64MM, including the assumption of the 32MM pounds mortgage loan. Cash received in the transfer was used to repay $41MM of HST's credit facility.
- "July 6, 2011, the Euro JV Fund II reached an agreement to acquire the 396-room Pullman Bercy in Paris for approximately euro 96 million."
- Capex in 2Q:
- $75MM in capital improvement projects and $71MM in renewal and maintenance projects
- "Major ROI projects substantially completed during the second quarter include: the first phase of our re-development project at the 1,756-room Sheraton New York Hotel & Towers and the expansion and renovation of 21,000 square feet of meeting space at the St. Regis Hotel, Houston."
- "Major renewal and replacement projects substantially completed during the second quarter include phase one of the renovation at the New York Marriott Marquis, which included 991 of its guest rooms, and the renovation of the meeting space and the 1,200 rooms in the main tower of the Philadelphia Marriott Downtown."
- "Investment in ROI expenditures for 2011 will total approximately $220 million to $240 million" and "expects that renewal and replacement expenditures for 2011 will total approximately $320 million to $345 million"
- ROI capex guidance lowered by $10MM and renewal and replacement capex was increased by $30-35MM
- During 2Q11 HST issued 11 million shares at an average price of $17.29 per share, for net proceeds of $189MM.
- "Subsequent to the contribution of the Le Meridien Piccadilly to the Euro JV Fund II, and the partial redemption of the 3.25% Exchangeable Senior Debentures, the Company has total debt outstanding of $5.6 billion and approximately $479 million of available capacity under its credit facility."
- "Based on the current guidance for 2011, the Company intends to declare, subject to approval by the Company's board of directors, an aggregate annual dividend for 2011 of between $0.14 and $0.15 per share."
- Outlook for 2011:
- Comparable RevPAR: +6-7.5%
- Prior guidance of 6-8%
- Operating profit margins +150-200bps
- Prior guidance of 210-260bps
- Comparable hotel adjusted operating profit margins: 90-120bps
- Prior guidance of 100-140bps
- EPS: -$.04 to $0.00/ Net income: -$25MM to $4MM
- FFO: $0.87 to $0.91 (includes $0.03 debt extinguishment costs, pursuit costs for completed acquisitions and non-cash impairments)
- Prior guidance of $0.88-$0.91 which included 1 penny of unusual expenses
- Adjusted EBITDA: $1.02-$1.05BN
- Prior guidance of $1.01-$1.045BN
CONF CALL NOTES
- RevPAR would have increased 7.6% if not for renovations. The Comp RevPAR doesn't include the 18% RevPAR growth experienced by newly acquired hotels
- 1 penny impact of acquisition expenses, non-cash expenses and debt extinguishments costs on FFO and 2 cents YTD
- Saw strong demand increases from higher rated business segments - especially on the transient side. 7.5% increase in special corporate demand. Discount room nights increased 1%. Transient revenue grew 8%.
- Group demand was flat with higher priced segments offset by lower business from discount groups. Group rate increased 4.7% and revenues increased by 4.5% due to mix shift.
- Group bookings: 3Q pace up 3% and 4Q up 2%. 2012 pace is up materially YoY
- Guidance doesn't include any additional acquisitions aside from what was already announced
- Performance in the second quarter was consistent with their expectations and expect 2H11 results will be better due to less disruptions from renovations and improving economic outlook
- Transient demand has returned to peak 2007 levels
- Construction costs are beginning to increase again which should help suppress new supply
- Estimate that the replacement value of their portfolio is $400k per key vs. implied value of $260 per key imbedded in their stock price
- San Fran: +17% RevPAR - strong transient demand. Expect 3Q to continue to outperform due to excellent transient and group demand.
- Hawaii: +16.5% - expect Hawaii to underperform in 3Q due to renovation disruption
- Tampa: Expect that the hotels will perform well in 3Q
- Miami/Ft Lauderdale: +14.9% RevPAR; 3Q to be great and outperform portfolio
- Phoenix: +11.3% RevPAR; expect significant outperformance in the 3Q
- San Diego: +9.2% RevPAR -occupancy improved 7%; 3Q expect them to underperform
- Chicago: +6.7% RevPAR due to solely ADR growth; expect strong 3Q performance
- NY: +2.9% RevPAR; expect RevPAR to improve significantly in the balance of the year
- D.C.: +2.5% RevPAR; expect the market to continue to underperform in the 3Q
- Boston: -0.4% RevPAR; Expected to underperform in the 3Q
- Philadelphia: -2.4% RevPAR; expect to outperform in 3Q as renovations wrap up
- Euro JV: +10.1% RevPAR increase in constant dollars
- Expect strong flow through for the balance of the year despite higher than inflationary growth in expenses (labor, utilities, property taxes, insurance). Expect strong growth in F&B and other revenues in 2H11.
- Hope that their properties in New Zealand will re-open in mid-2012. Have business interruption insurance. Have not included proceeds from insurance in their guidance though.
- They will have to record an additional $5MM tax liability (non-cash charge) related to their European JV
Q&A
- D.C. is underperforming this year because it held up better during the downturn. There are also budget issues in the government and as a consequence of uncertainty the government has reduced their group bookings which account for ~20% of D.C. area bookings. However, longer term they believe that Washington is a great market to invest in - from 1 it was one of the best performing markets and held up better during the downturn - they are already back at peak 2007 levels. Lots of things are happening to make Washington a 24/hr city in the future. Past 2012, they are very excited about the market. Think that they are buying the Grand Hyatt at a 10% discount to replacement - also think that there will be synergies with their other Hyatt DC asset as well as their other DC hotels.
- Some of the southern European markets that have weaker economies have seen increases in tourism from stronger European economies
- M&A market in the US is still largely a REIT market; as debt markets improve, they expect there will be more interest by private capital.
- Last year, their near term bookings driving results. This year, near term bookings aren't as robust but future bookings 2-4 quarters out are a lot stronger. However, short term bookings were unusually strong.
- Confidence in the 2H11 guidance is driven by performance of +7% excluding renovation disruptions. Renovation disruptions abate in back half. Group bookings are also better. GDP outlook is still robust at +3%, don't see any reason for business travel to slow in the back half.
- Their new hotels don't come into their comp set until they own them for 1 year. If those new hotels were in their comp set, then their RevPAR would be about 1pt higher (1%)
- 2012 group pace is ahead of where it was in 2011 at this time. Revenues on the books is up about 6-7% - almost all occupancy driven. Most of the rate improvement is driven by near term bookings.
- ROI capital investment in 2012 should be meaningful next year. Grand Hyatt in D.C. only needs between $10-12MM over the next few years, unless they want to re-optimize the F&B outlets. That asset had a lot of capex invested in it over the last few years.
- Lenders that have only focused on top 8-10 markets have started branching out more. As that happens, levels in secondary markets should improve and that will help them sell more assets over the next few years
- Supply growth in NY should be less of an issue beyond 2012
- Helmsley - spend $65-70MM starting in the fall of 2011 and complete renovations in 2Q 2012
- Generally would pay a higher multiple in NY than DC for similar properties in similar locations.
- Excluding NY & PA disruptions, group demand would have been up 1%.
- Will fund the Hyatt acquisition with their cash on their balance sheet and assume a mortgage on the property. Their goal is to keep the mortgage but are in negotiations with the current lender.
- Have $475MM of liquidity on their line of credit. Expect to fund future acquisitions with a combination of ATM equity, debt and cash from operations as well as proceeds from asset sales which should pick up over the next few years.
- Expect 4Q to be stronger than 3Q because of the general economic outlook, moderation of renovation disruptions, and investment spend in 4Q10 was also a lot larger (i.e. more disruptions in 4Q10).
