You already know our big picture view on HOT/lodging. 2010 estimates are still too high as cost cutting has played out and top line will continue to lag the economy. However, we’ve got insights on some important, but less obvious items.
American Express Deal
As Starwood disclosed in its release, American Express is paying them $250MM to buy “points”, which can exchange for rewards by American Express users. This is basically an interest free loan that Starwood is getting, and in return they probably gave American Express a nice discounted rate. When American Express customers redeem their points for a stay at a Starwood branded hotel, Starwood will pay the hotel owner for the stay. There will be a liability on Starwood’s balance sheet to account for the $250MM in payment that they eventually will have to make. However, these payments will never hit the income statement as one would expect and instead just flow through working capital. Somehow the amortization of gains hits the income statement but the negative amortization of a realized liability does not. At the end of the day, cash is cash and over a number of years Starwood will pay out $250MM of cash related to this advance.
Italian Tax Credit
Since the Italian government is in desperate need for cash, it struck a deal with property owners. For a small upfront payment today (undisclosed of course- but I was told it was small), Starwood was able to buy $120MM worth of tax credits that they can use to defer any future capital gains should they sell any of their Italian trophy assets. Not a bad move, since the basis on those assets is low and the Italian capital gains tax rate is 28%. This is probably a little signal from Starwood that they are trying to sell some of these assets. The cash flows on these hotels are pretty de-minimis so the multiples will look great. Whether there are there still buyers of trophy assets out there is the real question.
Non-core Asset Comment
HOT referred to non-core assets on its conference call. My two cents is that they are looking into a possible sale of Bliss... it’s their only non-core non-lodging business. They already license out the use of their brands for retail.
What’s in “Other Management & Franchise Revenues” and “Other (2)”?
You already know our belief that non-cash, non-recurring profits should not get the 15x multiple normally assigned to “Fee” profits just because they’ve thrown it in the “Fee” bucket. Here is a clarification of what else was in those two line items:
- Termination fees can appear in either bucket but this time it was behind door #2, lumped in with Bliss Spa income
- Just as an FYI, Starwood doesn’t get the termination fee if it pushes hotels out of the system because they fail to maintain brand standards, they usually only get the fee when an asset changes hands
- In a default scenario, we do not believe that many hotels will be de-flagged. However, if they are de-flagged, the debtor can reject existing contracts and probably get away with paying pennies on the dollar as a termination fee
- Not sure what the other $10MM of revenues are in the “Other Management & Franchise Revenues (1)” are. However, changes on hedges are also recorded here.