Since October 23, when HOT gave its outlook for 4th Quarter and preliminary 2009 guidance, RevPAR has continued to plummet from negative mid to high single digits to a run-rate of -20% during the first 17 days of January, with Upper Upscale tracking down almost 23%. The rest of the world isn’t doing that much better with worldwide RevPAR tracking at negative double digits in most regions across Europe and Asia Pacific.

Bottom line is that the street is still way too high and HOT management way too optimistic in its guidance. The only bright spot may be for credit investors as cash flow should remain positive in 2009.

The Street is currently projecting $905 million and $1.26 in mean EBITDA and EPS for 2009. Before we cheer the Street for being conservative vis-à-vis management guidance of $1 billion and $1.55, respectively, consider this. The Street is probably too high on EBITDA by about 15% and EPS probably needs to fall by 50%.

Below are some of our key assumptions:

Owned Business:

- US Owned RevPAR (ex Canada & Mexico) of -12.5%, NA RevPAR of -16% in 4Q08 with no great improvement in 2009. Canada & Mexico represent about 22.5% of HOT’s North American owned EBITDA and on a blended basis those currencies have depreciated 17.5% y-o-y in the 4Q08 and would have about an 18% drag on 2009 comparisons if FX rates stay at current levels
- Local currency international RevPAR of -12% in 4Q08 and -10% in 2009. However on a constant dollar basis the dollar appreciation vs HOT’s currency exposure should produce an incremental drag of ~10% in 4Q08 and 2009 (at current FX rates). So we’re talking about RevPAR down about 20% in each of the next four quarters.
- Taking into account recent cost cutting measures, decreases CPI and global commodity deflation we believe that EBITDA margins will be down 550 bps and 410 bps for HOT’s owned portfolio for 4Q08 and 2009, respectively (not same store).

Management & Franchise Business:

- Managed and franchised net room growth of 4.7% for 4Q08 and 5.5% in 2009. However, we wonder whether attrition rates will accelerate amongst franchisees as they attempt to cut back on capital expenditures in the face of deteriorating income, and are unable to maintain brand standards.
- Despite the room growth, we believe that fee income will be down about 10% in 4Q08 and almost 15% in 2009. Incentive fees are sure to take a hit.

From a valuation standpoint, almost 9.5x 2009 a reasonable EV/EBITDA and 24x earnings is nothing to get excited about. Starwood does look “ok” on a FCF yield basis, trading at an almost 8% yield, and probably isn’t the best short for credit investors. However, it will be interesting to see how the stock trades when estimates get cut in half.

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