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

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


My exclusive consultant on the ground in Macau sent me a very thoughtful write up on how Beijing may be viewing Macau. If true, Macau may not be the investment oasis we all thought. Here are his thoughts verbatim:

“在中国新年,当它是传统的为了中国人民能递幸运的金钱对他们的家庭和朋友时,我们有这个问题为您: 如果您在MOP40Bn在税收入采取,因为政府在北京允许它的公民到您的赌博娱乐场自由地移动,并且您然后送MOP5.5Bn回到祖国,那是否不会被认为税? 我认为我们可以全部同意澳门的天作为自由市场经济是。 北京编写足够的数据在前6个月签证制约期间确切地知道什么“每6星期”签证政策的作用一次有在澳门经济对 “一次每10星期”选择。 允许词条通过香港或没有现在于另一根杠杆安排北京的。 如果澳门为政治局的口味快速地成长为(或太减慢),北京可能在将来做必要的调整。 为在计划经济被修造的国家,这是一个重要工具。 它意味着天30%, 40%甚至50%成长在澳门是。 在那上下文, MOP5.5Bn的最近付款由澳门政府对四川省的人民必须严密被审查。 只被授予了, 2008年,澳门政府能花费什么的~MOP20Bn,粗砺一半这花费了in。 并且那MOP20Bn非常明智地未可争论花费。 无论如何,为送MOP5.5Bn的城市状态~500,000为地震重建到它的君主乞求问题: 在澳门被积累仅存钱罐为“特别项目”的财富,当他们在北京也许升起? 在可怕四川地震以后,有大量压力在澳门“做更多”,并且许多甚而相信澳门的“缺乏贡献”对基础设施的早重建在四川直接地导致了放在适当的位置的签证制约。 但它采取的澳门将做什么与所有金钱? 当它在大厦公共基础建设时,来到零用钱Edmund的政府反复证明是不适当的: 轮渡终端和光路轨是只最可看见的这些失败。 那么可能这为北京是最佳到罪状澳门入遣返回国这些资金。 一种税为是祖国的一部分。 一种税为容忍所有恶习澳门促进”。

And in English:

“On Chinese New Year, when it is traditional for Chinese people to hand Lucky Money to their family and friends, we have this question for you:

If you take in MOP40Bn in tax revenues because the government in Beijing allows its citizens to travel freely to your casinos and you then send MOP5.5Bn back to the motherland, would that not be considered a tax?

I think we can all agree that the days of Macao as a free market economy are over. Beijing has compiled enough data over the last 6 months of visa restrictions to know exactly what the effect of a “Once every 6 week” visa policy has on the Macau economy vs. the “Once every 10 week” option. Allowing entry via Hong Kong or not is another lever at Beijing’s disposal now. If Macao grows to fast (or too slow) for the taste of the Politburo, Beijing can make the necessary adjustments in the future. For a country that is built on a planned economy, this is an important tool. It means that the days of 30%, 40% or even 50% growth in Macao are over.

In that context, the recent payment of MOP5.5Bn by the Macao government to the people of Sichuan Province has to be examined more closely. Granted, in 2008, the Macao government was only able to spend ~MOP20Bn, roughly half of what it took in. And arguably that MOP20Bn was not spent very wisely. None the less, for a city state of ~500,000 to send MOP5.5Bn for earthquake reconstruction to its sovereign begs the questions: Is the wealth that is being accumulated in Macao only a piggy bank for “special projects” as they may arise in Beijing?

After the horrific Sichuan earthquake, there was plenty of pressure on Macao “to do more” and many even believe that Macao’s “lack of contribution” to the early reconstruction of infrastructure in Sichuan directly led to the visa restrictions being put in place. But what will Macao do with all the money it is taking in? The government of Edmund has proven time-and-again to be inept when it comes to spending money on building public infrastructure: the Ferry Terminal and Light Rail are only the most visible of these failures. So maybe it is best for Beijing to guilt Macao into repatriating these funds.

A tax for being part of the motherland. A tax for tolerating all the vices Macao promotes.”


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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Eye On The UK: One Reason Why We Remain Short

That giant sucking sound you hear is UK house prices sinking further…

January data released yesterday by Hometrack registered a decline of -9.4% year-over-year for the average cost of a home in England and Wales. Hometrack also reported that the average time a property spends on the market rose to 12.3 weeks, a 45% increase from a year earlier, while sellers are achieving less than 90% of their asking price. The group forecasts prices to decline -10% this year.

Supporting Hometrack’s negative view, the British bankers Association released December mortgage a data yesterday showing net mortgage lending down for the 4th month in a row (although, looking at the delta, the number of mortgage approvals were up by nearly 5,000 since November’s decade low reported level). The small silver lining on the margin provided by this uptick in approvals may signify, at last, a response by lenders to the increasingly hostile tone taken by Prime Minister Brown’s government towards banks that have yet to pass on liquidity injected by state funds.

We are short the UK via the EWU ETF, and remain negative on the duration for prospects to change any time soon.

Matthew Hedrick
Andrew Barber

GMCR – Poking holes in the business model

GMCR’s success relies on the razor/razor blade growth model in that the company is currently selling its Keurig At-Home Single Cup Brewers at cost. The company justifies foregoing margin on the sale of this product in an attempt to further penetrate the market and increase sales of its K-cups, which it recognizes as the driver of future margin growth. This strategy is taking its toll on the company’s profitability as GMCR’s sales mix has been shifting more toward this zero gross margin At-Home product, which has resulted in significantly lower YOY gross margins. Thus far, the company has been able to generate improved profitability by offsetting these huge gross margin declines with significant cuts to its SG&A line, which is not a sustainable business strategy.

Although I have questioned GMCR’s razor/razor blade growth model, may further complicate the company’s strategy with its promotion of a product that allows customers to recycle their K-cups. maintains that its product allows customers to reuse each K-Cup up to 20 times by filling it with any coffee or tea, which if true (full disclosure: I have never bought or used the My-Kap product so I cannot vouch for it), could provide real risk to GMCR’s K-Cup sales projections and margin story. Keurig already sells a reusable K-Cup, which costs about $15, but states that Keurig’s reusable product does not make as good a cup of coffee as the K-Cups due to its different design.

The GMCR story is dependent on significant growth in sales of K-cups. Given there are zero profits generated from selling the brewers, a blip in the sales trends of K-cups could be disastrous for the stock.

US Dollar: The Line That Matters

I wrote about this in my “Early Look” note this morning, and wanted to hammer on the same point with a picture rather than prose.

Someone needs to send this to Obama’s crackberry with a note attached that says ‘look at what the US stock market did in December when the US$ broke this white dotted line.’ That’s it Mr. President – you don’t need a room full of “economists” to make the call. I don’t think it’s any more complicated than that. Break the buck’s $83.96 line, and assets will start to “re-flate” again.

Note that there is a monumental difference between re-flation and inflation. “Re-flation” builds confidence. Confidence perpetuates momentum. Positive momentum is what the US stock market has lost – that positive momentum line in the SP500 is now 873.

If Geithner can break the dotted white line below, the apocalypse cometh bears trekking the grounds in Davos, Switzerland are going to have to deal with me getting bullish like I was in December. If the US$ holds above this line, commodities and US equity markets are going to continue to be clawed on every rally, as they should.

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