• It's Coming...

    MARKET EDGES

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

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

1Q14 CONSENSUS ESTIMATES

• Total revenues:  $1,443 million

o Owned, Leased & JV:  $368 million

o Mgmt & Franchise Fees:  $239 million

o Vacation Ownership: $180 million

• Adjusted EBITDA:  $267 million

• EPS:  $0.56/share

 

MANAGEMENT GUIDANCE

Q1 2014:

  • Adjusted EBITDA $260-$270 million
  • RevPAR SS Company Operated Hotels 5%-7%, 100 bps lower in actual dollar exchange rates
  • RevPAR SS Owned Hotels Worldwide 4%-6%, 200 bps lower in actual current exchange rates
  • SVO earnings $40-$45 million
  • Management, Franchise Fees & Other Income 10%-12% increase
  • SG&A +3% to +5%
  • D&A $78 million
  • Interest Expense $30 million
  • Effective tax rate 33%                  
  • EPS before special items $0.53 to $0.56

FY 2014

  • Our baseline at 5% to 7% in global REVPAR growth and adjusting for asset sales
  • Dollar at today’s exchange rates
  • EBITDA in the range of $1.2B to $1.225B.

QUESTIONS FOR MANAGEMENT

  1. Views on share repurchases given stock under performance vs peers (especially MAR)
  2. Please explain the rationale for low net debt and balance sheet leverage?
  3. Given the low net debt, does management expect a slowdown in lodging industry fundamentals or is the company positing itself for a large, platform acquisition?
  4. Views on assets sales given strength in transaction market as well as hotel REIT share performance - one off vs portfolio transactions
  5. Where are inflation pressures negatively impacting margins?
  6. Address the China concerns
  7. ROI on renovations from last 2 years
  8. Recent commentary from Delta Air Lines indicated strong price taking in April, May and June of this year, how does that compare with what the company is seeing for advance bookings?

RECENT MANAGEMENT COMMENTARY

Margins:

  • 2014 owned hotel margin improvement - a little bit better performance in some of our European hotels, held back in Argentina, Mexico will improve, the U.S. will be okay, and Europe should be better.

Lodging cycle:

  • The lodging recovery in North America continued unabated, driven by strong corporate transient demand

Transient:

  • Transient revenues have been growing at an 8% to 9% clip each quarter, powered by corporate and high-end leisure travel
  • Transient business is robust, growing 8% in 2013

Group:

  • Negotiated corporate rates are up in the mid-single digits for 2014
  • Group business is pacing up in the mid-single digits
  • Group pace for 2014 is pacing in the mid-single digits
  • We are starting to see the return of incentive travel

North America:

  • REVPAR at company-operated hotels grew 6.7% in Q4, we expect these trends will be sustained
  • North America picking up steam 
  • We’ve seen three quarters in a row of record occupancy
  • The lodging recovery in North America continued unabated
  • Owned hotels saw REVPAR up nearly 10% and margins up 350 bps
  • We expect North American REVPAR growth at the upper end of our 5% to 7% outlook range, with rate accounting for 75% to 80% of the increase

Europe:

  • Full year 2013 REVPAR was up almost 2%, starting from a decline in Q1 to a more healthy 4% in Q4
  • Ended the year well, with REVPAR up over 4% in local currencies in Q4
  • Occupancy remained high, nearly 68% for the full year 2013
  • European economies remain fragile and the euro could still be an issue, we’re hopeful that the improving trend will continue
  • In Q4, we saw mid-single digit REVPAR growth in: Spain, Italy, and the U.K - only Germany was a little soft
  • We assume Europe REVPAR growth in 2014 will be at the low end of our worldwide outlook range
  • Europe also had a good January, but it’s the low season
  • We’ll have to wait until March and April to get a better sense of the European trend in 2014
  • We derived 12% of our 2013 fees from Europe

China/Southeast Asia:

  • China now represents a meaningful piece of our global business, accounting for 13% of our fee revenues
  • China is rebounding
  • Expect Asia REVPAR to continue to grow at the high end of our global REVPAR outlook range of 5% to 7%

Latin America:

  • REVPAR is forecasted to grow in the lower half of our 5% to 7% outlook range
  • Same-store owned REVPAR to grow 4% to 6% in local currencies globally, with margin gains of 75 to 125bps
  • Disparate results across the region
  • Mexico continued to rebound, starting with resorts and followed by urban locations
  • Brazil’s the outlook remains unclear but The World Cup should help Brazil and the Sheraton Rio is coming out of renovation
  • Argentina was still a mess and reaching the acute stag
  • Even with the most recent peso devaluation, the gap between the official and unofficial exchange rate remains large

Renovations:

  • In 2014, our capital spend in the hotel business will be about $400mm, lower than in prior years due to the tapering off of renovations

Costs:

  • SG&A growth is expected to stay in the 3% to 5% range, even as we make infrastructure investments in growth markets and in new capabilities

Share buyback/dividends:

  • For 2014, we’ll work hard to continue returning cash to shareholders via - Ordinary dividends, Special dividends, and share repurchases
  • Four planned special dividends associated with the $500 million in cash from the completion of the Bal Harbour project.
  • We have a healthy dividend with an almost 50% payout ratio and a 1.8% yield
  • For 2013, repurchased 4.9mm shares for $316mm
  • The Company’s share repurchase authorization has increased by an additional $250 million. As of October 30, 2013, the total amount available under the authorization is approximately $614 million.

 Asset sales:

  • The (buyers) markets are becoming deeper, and there are more buyers now seeking to deploy larger amounts of money.
  • Used to be the public REITs buying single assets, we now see portfolio buyers, and we believe private equity buyers have returned and soveigns are definitely back.
  • This is prime time for asset sales and we intend to fully take advantage of it.
  • Cap rates: we’ve seen sub-5% cap rates on some of our better hotels and 6% to 7% on some of the more suburban and airport hotels.
  • We certainly don’t want to wait until the 11th hour. On the other hand, being patient in selling assets up until now, I think, has worked in the interest of shareholders, not the other way around

Strategy:

  • Our goal is to get to 80% from fees and 20% from our owned portfolio, and our vacation ownership/other by 2016
  • SG&A 3% to 5% growth is what we're targeting which should generate adjusted EBITDA of $1.2 billion to $1.225 billion.
  • Growing our RevPar by, call it, 5% to 7% this year, should generate fee growth in the 8% to 10%.
  • We have margin improvement at our owned hotels.
  • Balance sheet capacity gives us another $1 billion to $1.3 billion, which means capacity for either growth investments or returning capital to shareholder is approximately $3.3 billion to $3.6 billion over the three-year period, and then in addition to that, as we sell assets that gives us additional capacity.
  • About $3.3 billion in cash generation over the next three years, plus asset sales, coupled with asset light by 2016, means $2 billion or $3 billion of asset sales proceeds, $5 billion, $500 million net debt. 
  • Pipeline is 450 hotels, 105,000 rooms