OEH: A Q4 “YOUTUBE”

At the end of the day ugly fundamentals overruled the “hidden assets” and takeover parts of the long thesis. We called this initially way back in June 2008 (“OEH: IT LOOKS LIKE KOPIN TAN MISSED THE BOAT”) in response to a Barron’s article pumping the stock.

OEH’s dual super voting class stock structure surely disenfranchises shareholders and without a remedy here the focus will be on the fundamentals. As we approach the company’s Q4 earnings release, the following “Youtube” shines the spotlight on some of management’s prognostications from last quarter’s call, provides our thoughts on some of those comments, and also poses some questions for the call.

Management comment 1:
“As I have said, in many areas bookings for 2009 as of the 30th of September are showing signs of stabilizing, with overall bookings for the portfolio already sitting at the same levels as this time last year, despite everything we have seen in the world.”

Our thoughts:
We expect management to drastically revise this assertion. It’s tough to proactively manage one’s business with expectations so far removed from reality.


Management comment 2:
“The impact of the September revenues, coupled with revising our expectation for the fourth quarter, sees us keeping RevPAR guidance in the 6-8% range.”

Our thoughts:
RevPAR likely fell 15-20% in the 4Q08. This is partly due to a 9% decline in the Euro which has been a tailwind for OEH’s RevPAR during the last 2 years.


Management comment 3:
“A simple fact is that some of our properties in the high season achieve a 40% to 50% RevPAR premium on the nearest competitor, therefore pricing, you know, drops in pricing do not come, do not sort of produce immediate returns.”

Our thoughts:
Exactly, that’s why they are in such rough shape. This is a big, big issue for OEH. We're not sure what they can do since reducing the rate from $1200 to $800/ per night is still too rich for most of us that didn’t get a bonus in 2008.


Management comment 4:
“And our focus has been very much and will be very much on preserving cash to enable this company to capitalize on what we believe are investment opportunities that will come its way.”

Our thoughts:
Preserving cash to pay down debt and remaining a going concern should be their priority since RevPAR is taking a nose dive.


Management comment 5:
“In Venice, the Cipriani has seen revenues drop back to 2006 levels as a combination of the weak dollar, the U.S. recession, and the decline in U.K. short break business have hit the city. Some reports show Venice over 30% down in 2008 versus 2007. Similar numbers are coming out of Florence... Our properties are phenomenal properties, well-run, and this winter we continue the works planned at the Cipriani, which will see the property with 16 new suites, adding to the 10 which came online in 2008.

In Italy, we have reduced operating days at all properties next year, thereby compressing demand and reducing variable costs and bookings that are actually stronger by 17%”

Our thoughts:
If demand is down 30% and the company is reducing operating days, why does it make sense to add 26 rooms to the Cipriani? Ok the 10 rooms have already been added but why continue with the 16 other additions?


Management comment 6:
“So what of our current action plans that we have? We have outlined the key items in our press release issued last night. I have implemented significant SG&A reductions, which we currently have quantified in constant dollars at between $20 million and $22 million.”

Our thoughts:
$20-22MM amounts to a whopping 14% reduction in overhead. SG&A has grown 140% from $70MM in 2000 to 169MM in 2007, a CAGR of 13.5%. For the 9 months ended 2008, SG&A grew 14.5%. Not exactly leveraging overhead? With the further erosion of fundamentals, OEH needs to make much more progress here.


Anna Massion
Director