• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Strong quarter and guidance

CONF CALL NOTES

  • Exceptionally strong group demand fostered solid rate growth across all segments of their business
  • 3Q marked the second straight Q where they exceeded peak 2007 occupancy levels
  • Comparable F&B revenue growth benefited from outlet sales at several of recently renovated restaurants which saw significant increases in activity

  • Strong rate performance and tight cost controls, coupled with lower utility costs, led to strong expansion in operating margins
  • Key driver of 3Q results was the 20% increase in corporate group demand, which led to a more than 6% increase in group room nights.  Larger group hotels, especially those in Boston and several resort markets, outperformed the overall portfolio.
  • Luxury hotels also experienced strong group activity, especially on the rate which were up >6% in the Q
  • Benefiting from both mixed shift and higher absolute rates in both the corporate and discount segments, average group rates were up almost 3.5% and group revenues were up nearly 10%.
  • Given the increase in group, their managers were able to focus on driving rate growth in transient. Overall growth exceeded 5% - spread across all segments of transient.  1.5% increase in retail room nights, which further increased transient rates.  Luxury transient demand also increased by more than 3%.  Transient revenues increased 6% in 3Q.
  • Current Q booking activity for groups are likely to slow given reduced capacity of vacant rooms
  • Overall bookings in the third quarter were up nearly 9%.  Group revenues on the books are up 7.5% for 4Q. 
  • Likely that the closing of some of the $300-400MM of sales they are planning for 4Q could slip into 2013
  • HST's rent has already increased by more than $6MM annually as a result of the Vornado deal and would expect significant additional rent increases as the project is completed and leased

  • HST is at an advanced stage for negotiating (with Hyatt) on a 131 unit timeshare development on their excess land at Hyatt Regency Maui.  Timeshare units will have access to the amenities at the existing hotel.  In addition to making money on the timeshare unit sales, they will also be making incremental revenues on their existing amenities and have the ability to spread costs across more rooms.  HST will contribute land and some cash.  They expect to create value of $400-500MM from this project.
  • Recent REVPAR results in September have been weaker than recent trends.  This was anticipated though given the timing of the Jewish holidays.  Halloween occurring mid-week and the Presidential elections will also impact the 4Q. However, all of this was expected and is not an indication of any fundamental slowdown. 
  • Too early for guidance for 2013, but they are bullish as occupancies will be in record levels. 
  • Managers should be able to get good increases on special corporate rates, supply remains low, and international travel continues to grow at a high single-digit pace
  • PA REVPAR:  +20.8%.  Both the Downtown Marriott and the Four Seasons had excellent growth in rooms and F&B revenues. Easy comp since there was renovation in 2011.  Expect Philadelphia hotels to underperform our portfolio in 4Q due to a decline in group and transient demand as well as a renovation at the Philadelphia Airport Marriott.
  • Tampa REVPAR:  +18.8%: Tampa Waterside Marriott hosted the Republican National Convention and the REVPAR growth was driven by improvements in ADR for both group and transient business for the quarter
  • Boston REVPAR:  +15.4%: Outperformance was driven by strong group demand, which allowed rate compression for both group and transient business.  Expect Boston hotels to have a good 4Q due to strength in group revenues and an expectation of continuing strong transient rates. 
  • San Fran REVPAR:  +12.7% due an ADR improvement of over 9%. Strong occupancy allowed operators to shift the mix of business to higher-rated transient segments. Expect San Francisco to continue to perform very well in 4Q.
  • Miami/Ft Lauderdale REVPAR:  +11.4%.  Expect Miami/ Fort Lauderdale hotels to have a good 4Q due to solid group bookings. 
  • LA REVPAR:  +9.1%:  Strong group demand created compression to drive both group and transient rate.  Expect Los Angeles to have a great 4Q due to robust group and transient demand.
  • Hawaii REVPAR:  +7.7%: all due to increased rate from mix shift.  Strong group and transient demand allowed shift in the mix of business to higher-rated categories.  Expect our Hawaiian hotels to have a good 4Q.
  • NY REVPAR:  +4.6% due to occupancy and rate growth. They were impacted by renovations at most of their hotels.  Expect a challenging 4Q.
  • Chicago REVPAR:  +3.5% due mostly to rate growth.  Underperformed our portfolio due to lower levels of city wide and group demand compared to the third quarter 2011.  Expect much better performance in 4Q due to better group and transient demand.
  • DC REVPAR: -0.80% (due to occupancy declines).  Group and transient were weak.  Series of room renovations for 4Q so it should continue to underperform.  Expect 2013 to be better.
  • European REVPAR:  +4.1% (ex Sheraton Roma), EBITDA up over 9%.  Inbound international travel into Europe continues to be strong.
  • Wages and benefit only increased 1.4% on a per occupied basis.  Despite a big increase in revenue, costs that are variable with revenues such as sales and marketing and cluster and shared service allocations were well controlled. 
  • SG&A and marketing, and repairs and maintenance increased only 3.2%
  • Utility costs were down 9.6%
  • Expect that comparable RevPAR growth will be increasingly driven by rate in 4Q and good flowthrough as a result
  • Expect lower F&B growth in the 4Q
  • Expect unallocated costs to increase in-line with inflation
  • Expect utility costs to decline in the 4Q

Q&A

  • Expect that calender 3Q would have been closer to 6% 
  • Group bookings have been very strong.  Transient bookings have been very strong.  Gives them confidence in the continued strength of the business.
  • Expect that corporate activity will be more condensed.  Still expect group to be up meaningly but not as good as 4Q since they have less availability, but ADR should be very good.
  • The Grand Hyatt acquisition cost was a little lower than they projected
  • Feel like this will be an extended recovery cycle.  In 2013, whether they are a net seller or buyer will depend on what the acquisition pipeline looks like.  Think that they will be neutral.
  • NY- think that supply addition pressure will abate.  Their numbers are impacted by renovation disruptions.  Almost all their NY hotels will have no construction disruption next year so they should do well in that market.
  • Renovation impact in 2012?  They know that there has been a material impact but it's tough to quantify it.  Fairly confident that their capital spending should significantly decline in 2013 and therefore there should be much less disruption.
  • Will not disclose the timeshare capital commitment until all the documents are executed in a few weeks
  • Canada: A lot of the increase in the quarter was currency driven.  There was a small increase in local currency too.
  • The booking cycle has lengthened a little bit. Rooms that they booked in 3Q held up well.  Didn't expect that the final group revenue growth would be as good as 10% in the Q.  Given stronger close in booking and better retail bookings, they were able to push rate.
  • $25MM increase in capex budge?  Some was an acceleration of spend from 2013 to 2012.
  • Why does their guidance imply a margin slowdown in 4Q?  Some of that was due to the real estate tax bill.  YTD they have been growing at less then inflation, but for the year they still expect a 6% increase - so it's heavily back-end loaded.  Same thing with insurance.  F&B and other: they aren't as optimistic on that category as they were earlier this year.
  • How much of the guidance increase/better performance was due to sandbagging vs. just improving fundamentals? REVPAR has trended better, saved money in real estate taxes which they didn't expect, lower unallocated costs than expected, and reduction in utility costs.
  • CMBS market does seem to be strengthening.  That is a key source of financing in M&A.  They continue to want to be an active seller over the next 2 years in order to improve the quality of their portfolio.  Expect that their sales targets for 2013 will be even more aggressive than 2012.
  • Continue be interested in investing in Europe, Brazil and Asia.  However, they expect that the bulk of their activity will be in the US.
  • Groups continue not to commit to a lot of F&B in advance unless they are forced to but end up spending a decent amount anyway
  • Without putting a specific number on it, they fell very optimistic about 2013. Occupancy being so high, combined with the level of group activity, they expect a lot of rate growth next year.
  • Do not expect a material level of disruption from Vornado's redevelopment activity. 
  • Still have more transient and less group today than they had in 2007.  More group is going to benefit them - it's not just rate but it's also higher F&B spend.  As they get less availability for transient, the low end discount transient business is what gets displaced, not the high end.
  • Hotel acquisition in Nuremberg:  Bought it all cash and they intend to finance.  It's small so there is a fairly liquid market in Germany that will provide attractive (south of 4%) financing at the 50% ATV.  Multiple was also attractive - significantly below replacement cost.  The market in Europe is not extremely active.  Most of the sellers are "motivated."
  • As they start off a year, expect that about 70% of their Group rooms would be on the books.  Group represents 37-38% of total rooms.  They are likely going to be closer to 38-39% of total this year.
  • Saw a significant increase in their corporate group bookings.  That continues to be the area where they see the biggest improvement.  Association is a bit less consistent. 
  • As they look at 2013, there is more business on the books each quarter YoY
  • Benefit from RNC at their Tampa hotel - not that material
  • European debt portfolio:  would be happy to own it

HIGHLIGHTS

  • YTD 2012 revenues benefited by $61MM from the acquisition of 10 hotels (~4,000 rooms) in 2011 and the acquisition of the Grand Hyatt DC on July 16, 2012 
  • Investment & Capex summary in 3Q:
    • ROI investment capex: $24MM
      • "Three properties where we recently completed extensive redevelopment work, the Atlanta Marriott Perimeter Center, the Chicago Marriott O'Hare and the Sheraton Indianapolis, have performed exceptionally well. On average, RevPAR increased 38% for both the quarter and year-to-date 2012 when compared to the pre-construction period in 2010. Due to the significant capital expenditures affecting nearly every aspect of these properties including, in the case of the Sheraton Indianapolis, the conversion of one hotel tower into apartments, these properties are excluded from our comparable results."
    • Acquistion capex: $25MM 
      • Finished the repositioning of the NY Helmsely Hotel to Westin NY Grand Central on October 1, 2012 which will have its grand opening later this month
    • Renewal and replacement capex: $66MM
      • Completed renovation of the 834 rooms at the Hyatt Regency Washington and 45,000 of meeting space at the NY Marriott Marquis
  • On July 30, 2012, HST "leased the retail and signage components of the New York Marriott Marquis Times Square to Vornado Realty Trust. Vornado will redevelop and expand the existing retail space, including converting the below-grade parking garage into high-end retail space and creating six-story, block front, LED signage spanning over 300 linear feet at an estimated cost of $140 million. As a result of the agreement, the annual base rental income is now well in excess of the previous rental income for the leased space.  Furthermore, once Vornado completes the planned redevelopment, the Company has the potential to realize significant additional incentive rental income. The lease has a 20-year term with options that, upon exercise, would require title to the retail space to be conveyed to Vornado for a sales price based on future cash flows in the year of sale."
  • YTD HST "has issued $1.5 billion of debt, with a weighted average interest rate of 3.7%, and used the proceeds, along with available cash, to repay $1.8 billion of debt with a weighted average interest rate of 6.6%. As a result of these transactions, the Company has decreased its weighted average interest rate by approximately 80 basis points, to 5.5%, and lengthened its weighted average debt maturity to 5.4 years."
  • In 3Q, HST "entered into a $500 million term loan through an amendment to its credit facility. The term loan has a five-year maturity and a floating interest rate of LIBOR plus 180 basis points, approximately 2.0%, based on the Company's leverage level at September 7, 2012. Additionally, the Company issued $450 million of 4¾% Series C senior notes due 2023 at the lowest interest rate for senior notes in the Company's history.  The proceeds from these issuances were used to redeem the remaining $650 million of 6⅜% Series O senior notes due 2015 and$150 million of 6¾% Series Q senior notes due 2016 and for general corporate purposes."
  • "On July 26, 2012, the second fund of the Company's joint venture in Europe ("Euro JV Fund II"), in which the Company holds a 33.4% interest, acquired the 192-room Le Meridien Grand Hotel in Nuremberg, Germany, for approximately €30 million ($37 million). The Company contributed approximately €10 million ($13 million) to the Euro JV Fund II in connection with this acquisition."
  • "On September 17, 2012, the Company's board of directors authorized a regular quarterly cash dividend of $.08 per share on its common stock."