MAR: Q2 CONF CALL HIGHLIGHTS

Key Takeaways:

  • Cost cutting has run its course
  • Margin pressure will accelerate as rate declines continue
  • International RevPAR declines are intensifying
  • Transient rates below group rates are a very bad thing - group rates are usually lower. Points to further downside in 2010
  • Rate driven RevPAR declines will hurt a lot more than occupancy driven RevPAR declines
  • On a positive note, defaults by owners will have no effect on MAR and other franchisee companies since the last thing to go is the flag

 

MAR Q2 EARNINGS CALL

General Commentary:

In NA they saw stabilization in occupancy

Mix of business remains skewed to leisure transient travel

  • Corporate rate travelers decline 18% while leisure increase 12%
  • Personal group up 7%
  • Weekend occupancy was actually better than weekday occupancy

Expect pricing power to return only as occupancy recovers

Leisure the strongest, expect business travel to follow as the needs presents itself

Swine Flu is negatively affecting their 17 hotels in Mexico

Properties are aggressively controlling costs

Timeshare promotion offering 15% discounts to new owners and 25% off to existing owners

  • May consider becoming more aggressive on residential and fractional projects going forward which may result in further write-downs

Expect to continue to reduce debt levels throughout the years

Have eased brand standards where it makes sense, and deferred capital expenditures

Opened 8,000 rooms in the quarter and have 110,000 hotels in the pipeline (50% under construction)

  • Expect that US growth will be driven by conversions

 

Second Quarter Results:

Timeshare - some sales were likely pulled forward from future periods

Tax rate higher as revenues from lower tax jurisdictions lower

Transient room nights only declined 4% in the quarter as they replaced that business with lower rates business (government / etc). Rate decreased 19% here.

Room nights from group declined 19%.  While cancellations have subsided in recent months, however, attrition continues to deteriorate.  RevPAR declined 25% from this segment

  • Room night bookings are down 18% for the rest of the year

House profit margins only declined ~530 bps, despite the steep drop in RevPAR

  • management wages down 16%

Mexico and Asia where badly affected from the swine flu

Ritz had the worst RevPAR performance, but had a large increase in leisure travel (59%)

Delinquency rate on timeshare loans was 10% in June down from 10.2% in May.  Triggered change in payments, which reduced cash flow by $20MM.

  • FASB 166 & 167 will make them consolidate off-balance sheet loans
  • However, the covenant calculations won't be affected and don't expect any change from rating agencies in the way they look at the debt
  • Won't change the fact that its non-recourse

 

3rd Quarter Guidance:

 International lodging markets have significantly weakened

  • Impact from swine flu doesn't help

Much of the NA RevPAR decline will come from rate and lower rated mix

While unit expansions will help their fees, tough comps will also hurt them

Seasonality more pronounced as well in the 3rd quarter

Believe that they pulled forward some sales with the promotional activity in the 2nd quarter, therefore impacting their 3rd quarter results

 

Full year 2009 Guidance:

Confident that timeshare business will be cash flow positive in 2009

Reduced total fee income by 5 cents per share (weaker international and incentive fees)

Higher tax rate reduces outlook by 4 cents

Higher diluted share count due to stock dividend reduces EPS by 2 cents

 

Q&A:

Think that the impact of political rhetoric is gone, but clearly the economic pressures haven't lessened. Don't see any rebound from the economic pressures anytime soon

How much room is left to cut costs (non-occupancy related?)

  • Going forward the pricing pressures will make it more difficult to maintain margins, especially as cost cutting comps become more difficult
  • On the corporate front they continue to look at overhead - doesn't sound like it

How are they positioning themselves for future growth opportunities?

  • Maintaining a strong balance sheet to take advantage of any opportunities that arise
  • Paying attention to asset trades that drive conversions and reflagging fees
  • Expect more defaults or the number of delinquent loans to increase... still not a lot out there yet

Seeing transient rates fall below group rate - how will this effect group rates?

  • Pace of decline in rate is still accelerating while occupancy has stabilized... could be a big issue for group business

Impact of more cuts from airlines?

  • Corporates just aren't traveling

Timeshare - top-line is the same but profitability is worse

  • As default rates accelerate they don't get interest on their residual, they also had the write down this quarter
  • Services revenues related to unused rooms that are sold have also dropped as rate has dropped
  • Plus the tax item (8-9MM)
  • Rating agencies - each one looks at the timeshare business a little differently (left it vague)

 

International Commentary:

  • China - high supply growth and travel restrictions have outweighed stronger economy
  • India - very small market, also has very weak RevPAR
  • US: DC is still one of the best markets
  • Middle East is a relatively strong performer (Saudi & Egypt stronger)
  • Europe is average

If RevPAR stays negative will they get little to no incentive fees going forward?

  • When they report incentive fees they do it on a run-rate basis and then have to make adjustments if it results deteriorate on a TTM basis. (basically we think that they are paying back fees that were previously accrued)
  • Don't need to have positive RevPAR to get incentive fees because some contracts pay them off the top (like in some international markets). But generally negative RevPAR will have negative impact on incentive fees.

How does a recovery look like?

  • It is not unusual for leisure customers to be pursued more aggressively and respond more quickly to discounting and therefore fill in lower demand periods
  • Will not be able to drive pricing through leisure though - group/business will really need to drive pricing

Incentive fees lower, why?

  • International much worse
  • Rate is worse so margins (even if occupancy is better) will be worse (that's why we're negative on 2010 for owners)

Occupancy (mid-60's) is starting to level off, but rate continues to weaken. But until occupancy improves they don't have any pricing power.

Courtyard is all transient business travel - hence it's performing worse than many limited service brands

Business on the books for next year is down significantly (about 20%).

  • Not a meaningful number because a lot of the business booked in 2008 for 2009 was cancelled
  • Right now they have a very short booking window. Meeting planners are all sitting on the sidelines looking for better deals

Composition of development pipeline

  • 50% under construction
  • 6-7% conversions
  • 30% is international
  • 60% is limited service in North America, predominantly franchise
  • Balance is international and mostly management
  • Think that they will continue to add rooms in 2010 - don't know how many
  • Conversions vs new builds - only had 2 conversions in the 2nd Quarter, expect 8-10% for the balance of the year to be conversions

What percentage of management or franchised hotels is in some state of default?

  • Cash defaults on debt payments - very few
  • Hotels financed in 2005-2007, and if they were financed aggressively may be in trouble, but most of that was floating rate debt - so those owners have also benefitted from very low rates
  • Defaults will depend on how long this malaise will continue... if the recovery is fast there will be less defaults because owners will fund the shortfall... we take the other side of that though.. we don't think it'll be a fast recovery
  • We would note that even if a hotel defaults on its bank financing this DOES NOT mean that the property will be de-flagged. Normally banks will keep the flag and pay the fees.

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more