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HOT management's commentary is in quotes and our responses are bulleted.

 

REVPAR COMMENTARY:

"RevPAR declines in the quarter were increasingly driven by declining rates while occupancy appears to have found a plateau"

  • Price changes are very sticky so ADR isn't going up anytime soon. That is why the hoteliers resisted for so long. Now, they are falling off a cliff.

"Our guidance does not include any impact from the recent concerns about swine flu. It is very hard to estimate impact."

  • Providing themselves an out in case business doesn't stabilize?

"Also, the year-over-year comparison is very unfavorable for FX in the first three quarters, but with the dollar at current levels the negative FX impact disappears in Q4 this year.  In short, our second half RevPAR numbers benefit from easier comparisons to last year and the disappearance of the FX hit in Q4."

  • We already take this into account hence the less bad ½ 2009 RevPAR. However, costs won't be falling as much either.

"Last year in Q1, our RevPAR growth for company-operated hotels was a positive 8%. This year it was negative 24%.  So on a two year basis, we were down 16%.   FX hurt us to the tune of almost 500 basis points in the first quarter.  So the two-year run rate on a constant dollar basis was down around 11%."

  • They didn't back out the FX from last year as well. North American RevPAR had the benefit of the Canadian dollar being up 17% in 1Q08

"Last year our RevPAR at company-operated hotels was down 12%. With the dollar where it is today, there is only a 200 basis point FX impact. So a two-year run rate on a constant dollar basis of 11% in Q4 this year, i.e. an assumption that things on a two-year basis stay about as bad as they are right now, would imply relatively flat RevPAR in Q4.  We're not suggesting that that is what we are expecting.  In fact, as you can see from our baseline adjustments, we're assuming RevPAR stays materially negative in Q4 which would imply a worsening two-year run rate into Q4."

  • Sorry but we just don't see RevPAR moderating to being flat year over year in the 4Q09. You can "You Tube" us on that one. We have consistently said that we need to see occupancy declines stabilize and improve before we see a real recovery. With occupancies in the 50's industry wide, there is no pricing power since the hotels are trying to fill rooms with low rated discount business to simply cover fixed costs. Therefore, we are sticking with our thesis that ADR will continue to be weak until we get occupancy recovering - and we are seeing no signs of that occurring.

 

PROMOTIONAL ACTIVITY:

"We're being more active than ever with key travel participants including, for example, double savings with AAA and a 4% credit to the master account for meeting planners. We're also working closely with online travel agencies to drive business through limited time offerings."

"While this is another steep decline, the second quarter would be the first time in six quarters that our RevPAR trend is not expected to worsen. The second derivative is, at worst, becoming less negative."

"We're working on innovative offerings to drive business to our hotels, such as SPG flights which extends our 10-year old, no black-out offer to the airline space. Members can use points to book an airline ticket with the same convenience of a hotel room."

"For every two stays, our members will be rewarded with one free weekend night."

  • This basically amount to a 30% ADR cut

MANAGED & FRANCHISED FEES:

"Our managed and franchised revenues dropped 15.4% in the quarter as our footprint growth offset declining RevPAR.  We're earning new fees from the nearly 200 hotels that we opened between 2006 and 2008."

  • Clearly they are not commenting on incentive fees or fees earned on Bliss & other businesses - those were both down a lot more than 15% as totalfee income fell 21%
  • Incentive fees dropped 32% and fees from Bliss & Miscellaneous dropped 24%.... amortization of gains though stayed pretty constant at $20MM (from $21MM a year ago)

 

 

VOI:

"Close rates and tour flows were in line with our expectations, and for the first time in several quarters we actually saw some trends improve.  Price realization was slightly lower than expected but this was entirely a result of product mix, not price reduction."

"...delinquencies are running at 4.4% versus 2.9% a year ago."

"Also not included in our guidance is any loss we might incur from a securitization. We expect the loss to be small."

  • Of course let's not count the loss but give them credit for the interest income

COST CUTS:

"We're still on track to achieve overhead savings of over $100 million"

"We also cut our company-wide capital spend by roughly 60% from 2008. Meanwhile we continue to evaluate options for Bal Harbor where we've already significantly reduced costs and slowed our capital spend."

"We expect to offset some of this additional decline by doing better on hotel level costs by $20 million and another $20 million more in SG&A cost reductions. Interest expense will be higher, depreciation and amortization will be lower, as will our tax rate for the year."

"...my sense is that the majority, something like ¾, I think, are sustainable long-term, maybe more than that."

  • This is fodder for another, more detailed post. We don't believe they will sustain 75% of the cost cuts. Coming out of the lodging downturn of 2001-2003, flow through on the huge RevPAR gains of 2004-2007 was extremely disappointing

BALANCE SHEET:

"With a high probably of at least one receivable sale, we now expect the gross debt will drop below $3.5 billion and even lower when we execute some of the other initiatives that are currently in the works."

  • We do like the job management has done with the balance sheet. The timing on Friday's $500 million debt offering looks very advantageous to HOT with a yield of only 8.875%. HOT already cured its covenant issue with the recent amendment to its credit facility and now has the liquidity to fund next year's maturity.