HOT 1Q12 CONF CALL NOTES

The lodging train keeps-a-rolling.  Not much doubt we are going to continue to see quarterly beats

“Our momentum picked up in the first quarter. Going into the year, we said that 2012 was more likely to surprise on the upside. So far, that is playing out. More importantly, we remain very bullish on the long-term. Seemingly unstoppable demographic and economic trends are fueling global growth in demand for high end travel. Rising wealth around the world and globally interconnected businesses will lead to ever more travel.”

- Frits van Paasschen, CEO

CONF CALL NOTES

  • Still believe that 2012 is more likely to surprise to the upside than downside.  All of their customers plan to travel more in 2012 than 2011. 
  • Financial markets are pricing in some pretty bad events: China hard landing and Eurozone turmoil
  • Low supply in lodging is helping them sustain RevPAR growth.  Supply is likely to remain low:
    • Hotels are still selling below replacement costs so it's still cheaper to buy than build
    • Still hard to get construction loans
  • Japan's occupancy has already bounced back to pre-crisis levels
  • Despite the world's uncertainties, their results are better than ever.  They believe that they are on the cusp of a golden age in lodging.
  • Expect their best ever performance in rooms growth in 2012
  • Sees widespread growth across emerging economies.  Expect to grow their Malaysian footprint by 40%.  Growing their Thailand footprint by 20 hotels over the last nine years.
  • Demand for timeshare held steady with higher tour volumes and close rates, helped by strength in Hawaii
  • Sales at Bal Harbour continue at sales per square footage above pre-crisis levels
  • During 1Q, all 3 ratings agencies upgraded HOT's rating to investment grade.  Goal is to retain their investment grade rating even under the worst case scenarios.
  • Plan to return excess cash to shareholders
  • Luxury travel outlook/commentary:
    • # of ultra high-end households increased by 30% since 2006
    • Luxury travelers want more differentiated experiences which is what their various brands look to achieve
    • Have 28 St Regis hotels growing to 31 in 12 months, up from 14 hotels four years ago
    • Investing $100MM to restore some of their luxury hotels
    • 90% of their pipeline lies outside of the US
    • UUP brands benefit from their luxury portfolio for SPG members
  • In every region they are seeing an accelerating in business momentum
  • N.A. commentary/outlook: 
    • Supply under 0.5% for the past year with no signs of picking up.  Their occupancies are back to prior peak, which should allow them to drive rate
    • Corporate negotiated rates are up 6%
    • Group pace is up 5%
    • Business continues to shift away from discounted business
    • Q2 RevPAR is on track to be better than 1Q
  • Europe commentary outlook:
    • Seeing improving RevPAR trends in 2Q - tracking at a 4% RevPAR level in April and expecting 4% RevPAR in 2Q
    • Expecting a shallow European recession and are more optimistic on Europe's outlook
    • Absence of new supply helps them.  Occupancies ex Greece, are only 100bps below peak 2008 levels
  • Asia: accounts for > 20% of their rooms and 60% of their pipeline
    • RevPAR growth remains robust
    • Expect a sequential RevPAR acceleration in 2Q
    • Pace of openings in China remain strong
    • Indonesia and Korea are booking up 15% in Q1
    • Expect Asia to finish 2012 as their second largest department accounting for 20% of profits
  • ME & Africa
    • Business is still weak in Egypt
    • Expect growth to accelerate in Q2
  • Latin America is their fastest growing region in 1Q
    • Mexico is recovering as US tour groups are returning to that market
    • All indications point to the fact that LA should remain their fastest growing region
  • Canada had a 200bps drag on NA RevPAR as the strong CAD $ is hurting US convention busienss
  • Renovations impacted the Q by $5MM
  • VOI: remains stable. Cash profile improves. Default rates continue to decline to 4.2% in 1Q - which is the lowest rate since 2007.  
  • Bal Harbour: 32 units sold but not yet closed, project will be over 50% closed at the end of 2Q.  Sales momentum looks good with 20 news sales in the Q.  Seeing a sharp increase in NA buyer interest.  Condo sales are being helped by association with the St Regis brand.
  • Remain steadfastly focused on holding cost.  With growth only driven by emerging market growth.
  • Expect net room growth to approach 5%
  • In talks to sell a few assets which they expect to close later this year.  The market is not deep enough to sell a large portfolio of assets.
  • Continue to evaluate acquisition opportunities
  • Want to achieve a BBB rating - one notch higher than where they are today. Leverage target is 2-2.5x as rating agencies calculate it
  • Dividend payout policy of 25-40%
  • Anticipate another cycle of returning significant cash to shareholders

Q&A

  • The Le Meridian transaction really represents the best example of the type of acquisition opportunity that they are interested in
  • Expect 60% of RevPAR to come from ADR for the balance of the year. Feel like they are close to an inflection point in ADR increasing since occupancies are at peak rates already.  Mix shift is changing for the positive and the business on the books from depressed periods is rolling off. 
  • They have never been at an occupancy level so high with the supply growth outlook so low. Therefore, they believe that they should have some strong rate growth in years ahead.
  • They are in conversations on the sale of a few assets.  It's 1-2 single transactions, similar to 2011
  • Incentive fees are being helped by the fact that the bulk of fees (90%) are derived outside the US 
  • Bal Harbour - on track for cash generation and the guidance from their investor day is still good.  Will update guidance later this year.
  • Impact of conversions in Germany: couple of hundred basis points
  • Internationally most of their hotels pay incentive fees (70-80%); in the US, it's probably 30-40% (they need to check)
  • Most of the upside in Bal Harbour is driven by better closing pace and some by better pricing
  • They probably have to pay down a few hundred MM of debt to get to their target ratios
  • Some of the rate "compression" that their numbers may be reflecting include FX and openings in emerging markets which may have lower rates too 
  • Bal Harbour - sold 20 units in the first quarter (50/50 NA vs. foreign buyers) in 2Q sales will be more driven by foreign buyers.  Most of the sales that they have closed on are on sales done in the past. 
  • SG&A - reversal was about $3-4MM and another $3-4MM of one-time items. 
  • 70% of the deals in the NA pipeline are from conversions and those tend to happen more quickly
  • The first quarter is a very light quarter for Europe so the 1Q trends aren't usually that important. The current trends for April and 2Q are more indicative.
  • They like controlling their own VOI business and have no plans to spin it out for now

HIGHLIGHTS FROM THE RELEASE

  • 2012 Guidance Changes (if its not mentioned it means there was no change vs. proir guidance):
    • EBITDA was raised by $10MM; basically just carrying through the beat in 1Q to $1.07-$1.1BN (ex Bal Harbour)
    • SS Company Operated WW RevPAR by 1% to 6-8% on a constant $ basis
    • Raised fee growth by 1% to 9-11%
    • Raised SG&A growth by 1% at the low end of guidance to 4-5%
    • Raised Bal Harbour's EBITDA contribution by $20MM to at least $100MM - $18MM of the raise is just a carry through of coming in higher in 1Q
    • D&A $5MM lower to $295MM
    • Lowered interest expense by $2MM to $210MM
    • Raised EPS guidance by 13 cents (including Bal Harbour) to $2.35 to $2.46. The beat in 1Q was 14 cents vs. the midpoint of HOT's guidance
    • Raised the amount of cash expected to be generated by Bal Harbour by $50MM to $300MM
  • Midpoint of 2Q Guidance is in line with the Street:
    • EPS: $0.58 to $0.60 (Street: $0.60)
    • Adj EBITDA: $275-285MM (ex - Bal Harbour) and $15MM additional for Bal Harbour (Street: $296MM includes BH)
    • SS Company-Operated WW (constant $): 6-8% (-200 bps less adj for currency)
    • SS Company-Owned WW (constant $): 4-6% (-250 bps less adj for currency)
    • Fees: +9-11% ($221MM at the midpoint vs. Street at $219MM)
    • D&A: $72MM
    • Interest expense: $53MM
    • Tax rate: 30% 
  • EBITDA ex-Bal Harbour came in $219 above HOT's guidance of $205-215MM
  • RevPAR performance: 
    • WW System-wide RevPAR: 5.8% (6.2% constant $)
    • NA System-wide RevPAR: 7.1% (7.2% constant $)
    • Owned RevPAR: 4.5% (4.9% in constant $)
  • In 1Q, HOT signed 32 hotel management and franchise contracts (9,000 rooms), and opened 18 hotels (~4,500 rooms)
    • 22 new builds / 10 conversions
    • 5 properties (1,000 rooms) were removed from the system
  • Pipeline of 95,000 rooms/ 365 hotels
  • Special items in the first quarter of 2012 included an $11 million (pre-tax) reduction of a legal reserve, partially offset by a $7 million (pre-tax) loss on the sale of one wholly-owned hotel.
  • Fee YoY comparisons were impacted by the conversion of some franchise agreements to management contracts in Germany
  • 1Q owned, leased, and consolidated JV results, were negatively impacted by 5 asset sales and Bal Harbour pre-opening expenses
  • Originated contract sales of vacation ownership intervals increased 1.2%, primarily due to increased tour flow from new buyers and improved sales and marketing performance. The number of contracts signed increased 3.6%, when compared to 2011, and the average price per vacation ownership unit sold decreased 2.4% to approximately $16,000, driven by inventory mix.
  • Bal Harbour 1Q12: 
    • Closed sales of 102 units and realized cash proceeds of $263MM
    • Through March 31, 2012... closed contracts on approximately 45% of the total residential units
  • During the quarter, the Company completed the sale of one wholly-owned hotel. This hotel was sold subject to a long-term franchise contract