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Takeaway: HOT's quarter was weaker than the headline suggests and in-line with our thesis of weakening lodging fundamentals. 4Q outlook below Street

HOT BEAT DRIVEN ENTIRELY BY BAL HARBOUR AND LOWER SG&A; 4Q GUIDANCE BELOW CONSENSUS

While the headline number was strong, if you look beneath the surface of Starwood’s quarter, it appears that fundamentals are decelerating.  The beat in the quarter was driven by better residential sales at Bal Harbour and lower SG&A. 

Factors that contributed to operating cash flow that was $11MM above our estimate:

  • Residential gross margin was $12MM above our estimate ($17MM vs. $5MM).  We’re not sure why there is a $5MM gap between Residential earnings and GM
  • Fees were $2MM above our estimate, driven by $5MM of higher amortization of deferred gains, termination fees and other one-time fees, offset by lower mgmt, franchise and incentive fees
  • $5MM of lower SG&A expense.  SG&A decreased 1% YoY vs management 2012 guidance of a 4-5% increase
  • Offset by:
    • Owned, leased and JV came in $5MM lower
    • Vacation ownership came in at $5MM 

Detail:

  • Owned, leased and consolidated JV
    • Revenue was disappointing but cost discipline helped mitigate some of the impact to the bottom line
    • Reported (non same-store) margins on owned, leased and consolidated JV’s was unchanged YoY
    • We estimate that room revenues declined 4% while F&B and other revenues were down 2% YoY.  The declines are largely a reflection of asset sales.  RevPOR was $324.91, essentially flat YoY.
    • CostPAR was $266.05, down 0.2% YoY.  FX obviously helped keep costs down – not just revenues.  We estimate that without FX, CostPAR would have increased around 4%.
  • RevPAR came in lower than we estimated on an absolute $ basis across the board.  A lot of this is FX but still, numbers were disappointing.  We clearly can’t model SS so our numbers aren’t apples to apples.
  • Fee income came in 1% above our estimate and 2% below the Street; the mix was lowish quality.  Base, franchise and incentive fees grew 8% YoY, below management guidance of 9-11% growth.
    • Base fees of $88MM, increased just 2% YoY.  We expected more growth given the 8% increase in managed rooms.
    • Franchise fees of $53MM, were up 10% YoY, $1MM better than we expected.  Franchised rooms grew 4% YoY.
    • Incentive fees were $1MM above our estimate, at $39MM
    • There were $21MM of amortization of gains included in “Other Management & Franchise Revenues”
  • VOI was in-line.  The business looks stable with a 4% increase in average price per vacation units sold, offset by a 1% decrease in signed contracts and lower tour flow
    • Margins improved 90bps YoY
  • Bal Harbour sales of $67MM and profit of $12MM came in ahead of management’s guidance of $5MM in profit contribution
  • SG&A was lower than we expected- kudos to HOT for managing the quarter. This marks the second Q of YoY declines in SG&A.
  • HOT repurchased 1.6MM shares in the Q.  Despite the recent buybacks, basic shares still increased by 3MM since 2011 and diluted shares are up by 1MM.
  • More notably, HOT increased its regular dividend by 150% to $1.25/year, representing a 2.3% dividend yield
  • Other observations:
    • New brands like Aloft & Element are becoming a smaller driver of new room growth
    • EPS was aided by higher equity earnings, slightly lower interest expense and $1MM of gains
  • 4Q outlook is below consensus even taking into account this quarter's asset sales.