• Badge

    Hedgeye’s 10 Year Anniversary Super Sale

    Huge Savings on All Hedgeye Products

    Subscribe now & save more than 25%!

Solid Q and fairly optimistic outlook. Europe and currency will continue to drag

“We kept up our momentum in the second quarter, despite a choppy global economy. Our REVPAR grew 6.9%, with occupancy over a healthy 71%. Despite the uncertain global environment, we expect the trends we saw in our business for the past quarter to continue through the second half of the year.”

- Frits van Paasschen, CEO


  • No talk from corporate customers about cutting travel budgets. They are convinced that long term trends have not changed. Their business is much more robust than headlines suggest
  • Have seen a deceleration in China but nothing precipitous. None of their hotel projects in China have been put on hold
  • In NA they are still benefiting from tight supply
  • Occupancies in big cities are in the mid 70's, which suggest rates should continue to rise
  • The slow down in Latin America was mainly due to Argentina
  • Argentina, Canada and European owned properties hurt their performance this quarter
  • Overall 2Q EBITDA was better than they expected and even better when you include Bal Harbour
  • View that the world is filled with huge opportunity and huge risk
  • Optimism over:
    • Secular growth in travel as rising wealth in the middle class
    • Globalization of brands which should allow the strong brands to continue to get stronger, allowing HOT to continue leveraging their fixed cost base
    • Unlocking $4-5BN of cash through real estate sales 
      • Hotels, timeshare and Bal Harbour sales
      • In the last 4 years they monetized $800MM from timeshare sales and $1BN of lodging sales. Will continue to bring their owned hotels to market either one at a time or in portfolio
  • Reduced their debt and now 2 agencies have them rated 2 notches above investment grade
  • SG&A is down 11% since 2007, despite having 24% more hotels in their system 
    • To be fair they also own a lot fewer hotel rooms.
  • Asia accounts for 65% of their pipeline with China representing 2/3rds of that. 53% of their pipeline is with existing owners of HOT brands
  • Non-US members account for 44% of their SPG guests. Continue investing in their SPG program. SPG members spend more and are their best brand advocates. SPG room nights grew 12%; while platinum nights grew 17%
  • Expect to deliver on 2012 expectations. 
  • Deliquencies are back to pre-crisis levels of 2% and interest charged on loan is 13%
  • They are now rated BBB by 2 rating agencies, which was their goal
  • European RevPAR outlook:  Business is improving slowly, but steadily.  Up 3.4% in Q2 for company operated hotels. Business is holding up well because they operate in key cities. Local business is down, but there is growth in regional and foreign business. They will be helped by Olympics in London and good business in Rome, as well as the strong dollar driving leisure business from the US. Expect that RevPAR will remain steady in 3Q and maybe improve in 4Q, given the easier comps
  • China RevPAR outlook: Have 100 operating hotels in China and 100 more in the pipeline. They are having a leadership transition which is impacting their business as a lot of activity is on hold until the change goes through. North China is growing in the high single digits. South has been hurt by slow down of exports and a short term supply in balance. Total revenue in China in 1H12 is up 25% YoY. Openings are not slowing either. They have signed 30 new hotel contracts vs. 27 during the same period last year. Do not expect the trend in China to improve anytime soon. Government change will occur in September but then there is a transition period. Exports imbalances are likely to persist for the next 6-9 months. However, a hard landing is not likely given that it is a managed economy. The government has also started easing which should help stimulate the economy
  • ME & A outlook: countries impacted by Arab Spring grew over 20%
  • Latin America: Anticipate a continued slowdown in Latin America due to Argentina
  • Canada: strong Canadian dollar has hurt trips to Canada from US by 3% but trips by Canadians to the US picked up. 
  • Excluding Canada, NA grew 7.9%; Rate accounted for 60% of RevPAR growth
  • High occupancies are helping them raise rates
  • Expect that 2013 corporate rate gains will exceed those in 2012
  • Best estimate is that recent trendlines will continue for the rest of the year
  • Still expect 70-80 hotels to open this year. 
  • Europe, CAD, Argentina account for 40% of owned EBITDA and 33% of owned rooms
  • At Bal Harbour they have now completed sales from prior period and future sales will depend on new sales. Expect about $5MM of sales per quarter and expect to sell out by 1Q14 or earlier. 
  • Have several assets for sale which they expect to close by year end
  • Goal is to maintain an investment grade rating though any downturn
  • Expect to deploy excess cash to shareholders


  • Hope that they can announce some closings of assets sales by year end. Not at a point where the hotel M&A market can handle portfolios. So they are marketing several individual assets
  • In Toronto they have about 2,700 rooms. The health of the group business is weak. It used to be a great place for US business to go when the CAD dollar was 70 cents. Given the size of their hotels and the lack of group business they have no pricing power
  • Early mid-cycle is where they are now and that means that they have more time to push rate and improve mix-shift. They are continuing to rollout their yield management system which helps
  • Asian RevPAR outlook for the rest of the year. They had an easy comp in Japan which added about 100bps to RevPAR growth won't help them next quarter. 4Q they will have a benefit from an easy comp in Thailand. Expect that RevPAR will be at the high end of their 6-8% range. 
  • Negatively impact from hedging activity: Historically hedging only 50% of their Euro profit. They hedged at 1.44 coming into the year. Their guidance includes this range. $5MM impact from FX in the back half of the year
  • Is development pace slowing in China? Non of their 100 hotels in the pipeline are on hold. YTD their pace for development is up in China and overall throughout their portfolio (including signings)
  • They have more assets on the market that under active discussion now than 3 months ago.
  • If you exclude Canada from NA results (US), you get 7.9% growth. Yes Sheraton has been successful for them. They think that Sheraton is outperforming Marriott brands. 
  • Trends in their group mix have been more consistent that what MAR is seeing. They also have smaller box hotels. 
    • Their yield management systems and SPG also really helps them outperform
  • Owned hotels in US: why RevPAR is only +4.4%. Each hotels has its own market specific conditions.  Had good results on the West Coast and weaker results in DC. 
  • Some of the performance differential in brands has to do with their geographic exposure more than chain scale performance.  Le Meridian and Luxury/St Regis are more concentrated in Europe. Greece was down double digits. 
  • Group pace - continued strong mid-single digit pace for the balance of the year.
  • Reduced their opaque and lower rated business
  • Demand for the corporate base and the high end leisure traveler is strong. 
  • It will be interesting to see what happens in September, which is when transient business picks up after a seasonal lull in summer time
  • Net room growth of 4% or better for 2012, gross of 6%. 
  • How do they think about the value of their European portfolio in light of further devaluation  in the Euro?
    • Think that their European assets are in extraordinary locations where you can't build new assets. Their goal is to have their assets in good shape. They believe that their hotels will trade on a per key basis rather an EBITDA multiple. They are not going to rush their properties to market
  • Have not yet put any hedges in place for next year


 <CHART 1>

  • HOT reported 2Q Adjusted EBITDA of $323MM or $288MM, excluding Bal Harbor ($3MM above the high end of guidance)
  • RevPAR performance was in line for constant currency figures, but FX had a larger drag than HOT's original guidance:
    • WW SS RevPAR: 6.9% (4.2% in actual dollars) 
    • NA SS RevPAR: 7.3% (6.8% in actual dollars)
    • WW Branded SS Owned:  3.1% (-0.4% in actual dollars)
  • "REVPAR at Canadian owned hotels decreased 6.5% in constant dollars as group business continues to be negatively impacted by the strong Canadian dollar."
  • "Year-over-year base management fee and franchise fee comparisons were impacted by the conversion of some franchise agreements to management contracts in Germany."
  • "During the quarter, the Company signed 34 hotel management and franchise contracts, representing approximately 8,300 rooms, and opened 14 hotels and resorts with approximately 2,700 rooms. At June 30, 2012, the Company had approximately 365 hotels in the active pipeline representing approximately 95,000 rooms." 
  • In 2Q,  14 new hotels and resorts (representing approximately 2,700 rooms) entered the system. Five properties (representing approximately 1,000 rooms) were removed from the system during the quarter"
  • "Total vacation ownership revenues increased primarily due to the timing and recognition of deferred revenues and favorable trends with respect to default rates on notes receivable. Originated contract sales of vacation ownership
    intervals and numbers of contracts decreased 5.0% and 1.8%, respectively, primarily due to lower closing
    efficiency partially offset by increased tour flow. The average price per vacation ownership unit sold decreased 2.6% to approximately $14,400, driven by inventory mix"
  • Bal Harbour revenues and EBITDA were $167MM and $35MM, respectively. In 2Q, HOT closed on 45 units for proceeds of $148MM. Through June 30, 2012, HOT has closed on 60% of the inventory at BH
  • Capex: $22MM of maintenance and $70MM of maintenance
  • 2Q-July 25th buyback: 2.84MM shares at $140MM. At July 25th, $110MM remains available under the Company's share repurchase authorize
  • In 2Q, HOT "redeemed all $495 million of its 6.25% Senior Notes due February 2013. Redemption premiums and other costs associated with the redemption were approximately $15 million. Additionally, the Company prepaid a loan secured by one owned hotel of approximately $52 million."