Review of 2Q09 results:

Third quarter in a row where costs saved the day

Efforts to reduce costs have been pervasive

Expect to open towards the low range of their hotel pipeline guidance

  • See growth in Asia, Africa and ME

VOI aggressive cost cutting helped them realize profits that were only down 20MM

  • Hawaii is showing modest improvement
  • Visitation trends also look like they are stabilizing

Cost cutting details:

All about flow-through at the property level

Keep saying its “permanent” – sorry we don’t believe it

Majority of the savings are sustainable aside from some “small things”

  • Incentive comp for example

Look hard at capital projects

  • Bal Harbour – evaluating their options – sounds like a downsizing to me


I’m sorry but this whole part of the call was total fluff

  • “Growth begets growth”
  • “Creates a network effect”

Transforming W into a global powerhouse from its NY roots-plan to double the footprint

40 Alofts will be open by year end

Almost done retooling Sheraton… they say this every year, once they finish “retooling” the base they need to start all over again


He’s said Permanent cost reductions about 4x now….

Liquidity/Balance sheet:

Very well positioned from a liquidity standpoint

Good rate on timeshare note – of course the rate is good.  they have a 30% residual that they are holding providing support to the senior notes that were sold

Another securitization expected in 4Q09/1Q2010

Leverage ratio around 4.0x, post quarter total debt was $3.5BN, and expect to get to $3.2BN by year end

Expect year end leverage to be 4.3x and, even if 2010 EBITDA declines, still expect to be in compliance

Sale of the W – spoke about the how accretive the sale was and how big the multiple was… No need to comment here – you guys know what we think

In discussion on non-core assets, (some where they won’t keep their flag – capex issue I’m sure)

Claim that transaction market is improving

2Q Details:

Swine flu impact was $10MM roughly (50% in Mexico)

Occupancy stabilized in 2Q09, but rate continued to deteriorate accounting for over 60% of the RevPAR decrease

Mix is shifting to more rate sensitive leisure business

Early indications that group is coming back

  • Feels like a slow recovery though

Guidance implies that RevPAR declines continue to moderate

When they get to Q4, if rates stay constant the headwind from FX turns into a tailwind

Will continue to be impacted by Swine Flu in 3Q09, reducing revenues by $5MM or so

Things should return to normal in 4Q if there are no outbreak flare-ups

Political instability in the Asia/ ME have impacted RevPAR

Second half expectation for Asia have been lowered, but ME is performing relatively well


  • Tour flow has stabilized but consumers are gravitating to lower end products
  • Increased reserves for loan losses

SG&A will be down less in the back half as comps become difficult


 Asset sales – how many core/non –core?

  • Very advanced discussions on non-core assets – defined as hotels where they don’t care about keeping the flag (that helps sales price when assets are unencumbered)
  • Also mentioned selling non-hotel businesses

Pipeline – how many international/conversion/under construction /etc?

  • 2/3 is international
  • Conversions are a lot less than 10% but expect that number to rise
  • 50% is financed and under construction

American Express deal?

  • Rewards card in place for several years
  • Mutual desire to extend arrangement, in exchange for extension
  • AMEX bought $250MM worth of points to use over time and paid for them cash…
    • Ah… that makes sense… that’s how they back fill some rooms
    • Accounting: will be in other liabilities

Timeshare – haven’t reduced pricing like (MAR for example)

Broader economic commentary

  • Do feel like recovery from this downturn won’t be as quick and sharp as in the past, since the growth will occur at the same time as deleveraging

Owned hotel margins/ threat to fees

  • Don’t do performance guarantees – have almost none
  • Incentive fee mix in the US linked to preferred returns is pretty small as a % of mix
    • International contracts are based on % of GOP (gross margin dollars) get cut from day 1 or so… so its hurt by flow through – so will drop at 2x international revpar (on a constant dollar basis)
  • Haven’t rolled out lean operations across the entire system, but really need rate growth to help owned margins
    • Started in March/April last year on the cost cutting – and have been doing so ever since
    • Already implemented the big savings, but some savings take longer to implement and have the attitude that there is always more room to cut costs

They aren’t interested in buying any assets right now, would find a partner if anything – don’t want to use their own balance sheet

Group booking pace:

  • June has been better than the rest of the year, but the group pace is trending in line with competitor guidance, down high teens/ 20% range
  • Think that cancellation rates going forward will be less

Other management fees

  • Termination fees helped fees this quarter

How is the rate promotion going? (50% off, I believe)

  • Short term tactical effort to stimulate interest

Sheraton RevPAR declines

  • Blaming the underperformance on renovations

400 bps FX benefit in the 4Q if FX rates stay constant

Union contracted wage growth is 3-4% and roughly 1/3 is under collective bargaining agreements in the US