Standard earnings release for HOT: Beat, lower next Q, and keep full year. The fact is, lodging fundamentals remain strong.
"As we look to 2012, it is shaping up to be another record year of room additions and strong REVPAR growth"
- Frits van Paasschen, CEO
CONF CALL NOTES
- Headwinds cost them $30MM of EBITDA in 2011, and yet they still made their guidance
- They are bullish about the coming year and still believe that they are in the early part of the cycle
- On track to deliver $3/share in cash from the sale of Bal Harbour condos
- Standout markets are Miami and San Fran. NY was steady at 7%.
- Softness is likely to continue in Europe, but Europe only accounts for 14% of their fees and 20% of their owned EBITDA
- Fastest growing region in 2011 was Latin America and they are the largest player there
- China RevPAR ex Shanghai increased 14%
- Japan RevPAR increased 2%
- Africa and ME RevPAR was flat - Dubai was +12% offset by Egypt weakness
- Rising dollar slowed inbound travel to the US from Europe
- SG&A was up only 2.3% in 2011 and they have no intention to allow for costs to creep back
- Added 389 hotels, or 8% annual unit additions over the last 5 years
- SVO deliquencies are back to normal levels- they have several years of inventory to monetize and the team is looking for efficient ways to keep growing that are less capital intensive
- They have not had a large core customer tell them that they will travel less in 2012 than 2011. Corporate rates will be up mid-single digits.
- Top 2% of their guests account for 30% of their profits
- 40% of their Elite travelers live outside of the US
- Offering 24-hour check in for their elite guests and other services will differentiate them and help them maintain and gain guest loyalty
- Expect to have 200 Westin hotels by YE 2012. 70% of the Westin openings will be internationally located.
- Assume that the global economy just muddles along with its recovery in 2012 but no blow ups. Their balance sheet is prepared for the worst though.
- They have limited their exposure to the Euro at a rate of $1.44 (on a net earnings basis). Their remaining exposure is just 9%. Expect a difficult year in Europe.
- China growth ex-Shanghai is in the double digits. Expect a continued recovery in Japan. Don't believe that China will have a hard landing. Assume that China and Asia will continue to grow at the current pace.
- Optimistic that US travel will return to Mexican resorts. They assume another robust year of growth in Latin America.
- Expect lodging recovery to continue in NA but the pace will not be as robust as the 9% rate in 2011
- December was one of the best group production months
- Transient momentum remains steady and strong
- Rate will be the primary driver of RevPAR growth in 2012
- Expect LATAM to be above their guidance range and Europe and Africa to be below it
- Shanghai effect is behind them. Post March, they will benefit from easier comparisons in ME & Japan, and in the back half Europe will benefit from easy comps.
- Significant renovations in 2012 will impact results (and asset sales)- by EBITDA $10MM
- Net FX drag will be around $7MM net of the hedge
- In the developed world, their goal is to hold costs flat
- VOI EBITDA will be roughly flat. They are making some selective investments in inventory for timeshare.
- Each point of RevPAR = $15MM of EBITDA
- Bal Harbour: 120 closings are targeted for 2012- with most front half weighted
- $1300/SQFT average price
- Project on time and under budget
- Will not undertake a project of this kind in the future
- Difficult to calculate Bal Harbour EPS impact so they won't break it on the EPS line
- Lower interest expense from lower debt is offset by the fact that they can no longer capitalize Bal Harbour expenses
- There will be no cash taxes paid on Bal Harbour given their tax credits
- Q1 will have the largest drag from renovations and asset sales - $5MM EBITDA impact. SG&A growth will also be higher in 1Q than the rest of the year.
Q&A
- Bal Harbour:
- 3 year sell out, with pace dropping off markedly after 1Q'12
- There were some contracts signed in 2006/2007 so unclear how those will play out, but everything they signed post crisis is closing fine
- How is the financials services fairing and how large is that sector as a % of their business?
- Consultants are the largest grower in financials
- Professional services are growing as businesses outsource more
- Pharma is strong too
- Financials contributes low to mid teens
- Why are group ADR's so weak?
- Group ADRs aren't weak. For new business booked, ADRs are strong. Business booked in 2011 for 12' have rates up mid-single digits and double digits for more than one year out (booked in 2011)
- Why were incentive fees down YoY?
- Last year a lot of their incentives were loaded into the 4Q because late in the year it became clear that they would hit necessary targets. So the comp was hard. This year they didn't earn a lot of fees in ME & Africa. Adjusting for affected regions, it would have been up 14%.
- Euro hasn't moved enough to incentivize US travelers to go there. Also the 4Q is a low season for Euro travel so its hard to have a lot of takeaways.
- Since NY came back first, it has also slowed down - since the comps are hard. There has also been a lot of incremental supply.
- To the extent they have excess cash, they will return it to shareholders. Their sense is that the new normal will be more volatile and therefore, it's important to have a strong balance sheet. Fitch was the first to upgrade them today. Expect others to follow suit soon.
- Cost assumptions for 2012:
- 2-4% growth in constant dollars on owned
- Wage rate increases based on agreements
- Some pressure on property taxes
- Hopefully no energy expense spikes
- F&B - due to rising commodity prices they are working to share best practices to group purchasing/procurement
- Why did they lower the high end of their guidance?
- They didn't - just some moving items like interest expense and taxes
- Marginal tax rate on Bal Harbour is 38% so that impacts their taxes
- Continue to see steadily improvement trends in timeshare. California appears to be slightly better as a source of demand for the West.
HIGHLIGHTS FROM THE RELEASE
- "Adjusted EBITDA was $321 million, which included $33 million of EBITDA from the
St. Regis Bal Harbour residential project" - 4Q RevPARs:
- WW Systemwide SS: 5.9% (5.8% constant dollar)
- NA Systemwide SS: 7.7% (7.6% constant dollar)
- WW SS Owned: 5.7% (5.0% constant dollar)
- "Special items in the fourth quarter of 2011 included a pre-tax charge of $98 million, representing a charge of approximately $70 million related to an unfavorable legal decision, a charge of $14 million related to certain hotel impairments and a charge of $16 million related to costs associated with the early extinguishment of debt. Special items in the fourth quarter of 2011 also included an income tax benefit of $116 million, primarily associated with the utilization of capital losses which had previously been fully reserved and the tax effects of the special items discussed above"
- "During the fourth quarter of 2011, the Company signed 36 hotel management and franchise contracts, representing approximately 7,600 rooms, of which 25 are new builds and 11 are conversions from other brands. At December 31, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms"
- During 4Q;
- New hotels added to the system: 28/7,900 rooms
- Exits: 10/1,600 rooms
- "Originated contract sales of vacation ownership intervals increased 6.2% primarily due to increased tour flow from new buyers and improved sales and marketing performance. The number of contracts signed increased 4.3% when
compared to 2010 and the average price per vacation ownership unit sold increased 1.4% to approximately $14,500, driven by inventory mix." - "During the fourth quarter of 2011, upon receiving the certificate of occupancy, the sales of 36 units were closed and the Company realized incremental cash proceeds of $74 million associated with these units."
- SG&A increase "primarily due to a reimbursement of legal costs in 2010 as a result of a favorable legal settlement"
- "In November 2011, a subsidiary of the Company received an unfavorable legal decision. As a result, the Company recognized a $70 million pre-tax charge. The legal decision is not final and the Company intends to appeal."
- 1Q12 Outlook:
- Adj EBITDA, ex Bal Harbour: $205MM to $215MM
- RevPAR:
- SS Company operated: 5-7% constant $ (100bps lower at current FX rates)
- Branded SS Owned: 4-6% constant $ (150bps lower at current FX rates)
- Mgmt fees, franchise fees and other: +8-10%
- VOI & Residential earnings: flat
- Bal Harbour: $60MM of EBITDA
- D&A: $73MM
- Interest expense: $54MM
- Tax rate: 30%
- EPS (including Bal Harbour): $0.49 to $0.53
- 2012 Outlook:
- Adj EBITDA, ex Bal Harbour: $1,060MM to $1,090MM
- RevPAR:
- SS Company operated: 5-7% constant $ (200bps lower at current FX rates)
- Branded SS Owned: 4-6% constant $ (200bps lower at current FX rates)
- Margins at Branded SS owned: +100-150bps
- Mgmt fees, franchise fees and other: +8-10%
- VOI & Residential earnings: $150MM to $155MM
- SG&A: +3 to 5%
- Bal Harbour: At least $80MM of EBITDA
- D&A: $300MM
- Interest expense: $212MM
- Tax rate: 30% and cash taxes of $100MM
- EPS (including Bal Harbour): $2.22 to $2.33
- Capex: $200MM of maintenance, renovation & technology; $375MM of investment projects and committments to JVs
- VOI (ex Bal Harbour): $125MM of positive CF and Bal Harbour is expected to generate at least $250MM in net CF
