HOT: WHAT GOES UP MUST COME DOWN….

Over the last 7 quarters, Starwood has benefited from a weakening dollar. If current FX rates hold, this tailwind will turn into a nasty 2009 headwind. The first set of charts was pulled from Starwood’s presentation touting the benefit of international diversification. Roughly 45% of Starwood’s owned EBITDA and 55% of its fee income is derived outside the United States. We estimate that over 50% of HOT’s International Owned RevPAR is exposed to Euro currency countries, followed by exposure to the Australian dollar, British pound, and Argentinean peso and Brazilian Real.

And that’s not all. Starwood’s reported North American RevPAR includes results from its Mexican and Canadian hotels, which account for 16% of total owned EBITDA, or 23% of NA EBITDA. For the last 6 quarters, HOT’s reported NA RevPAR has benefited from the appreciation in the Canadian dollar. In the 4Q08, the average CAD FX rate was .83 vs. 1.02 in 4Q07, representing 19% y-o-y depreciation. At current rates, of .79 this would equate to a 16% drag on RevPAR when translated into USD in 2009. The Mexican Peso isn’t doing much better, down 16% y-o-y in the 4Q08, and at current rates tracking down 21% for 2009.

The second chart highlights the recent FX boost and the FX pain we estimate HOT will face as a result of its international exposure. Unfortunately, the domestic business won’t be picking up the slack any time soon. Smith Travel is reporting that year to date upper upscale hotel chains are trending down 23% nationwide, and down 25% in the cities where HOT has the most exposure.

A 50% EPS cut may indeed be in the offing.

Anna Massion
Director

International diversification won't be beneficial in 2009
International RevPAR could fall 20-25% in 2009 due in part to Fx