OEH reported inline revenues but missed street EBITDA expectations, although I can’t say that we are surprised. It’s hard to remember last time OEH beat expectations. In any event, the stock and its value is more about the option on the real estate and whether management will act in the interest of its shareholders to eventually monetize it.
OEH 2Q09 Earnings call:
- Another challenging quarter for the industry and OEH
- A few odd things to mention
- Swine Flu decimated their results in Mexico
- Thailand social unrest also impacted them negatively
- Hit by rapid collapse in Russia
- The positive is that excluding these properties decline was only 18% (RevPAR – local dollars) and these properties will have a lot of upside (super easy comps going forward)
- They believe that they are at a pivotal point in the cycle, and the team now needs to focus on the long term- think towards the future and not the present. What steps they are taking?
- Reducing cost base
- Deleverage by selling non-core assets
- Focus on positioning for RevPAR & EBITDA growth when the market begins to recover
- Cost cutting started a year ago, and have realized a reduction of $20MM in fixed costs. Diligence on costs will remain, but the benefit from cuts will dissipate going forward
- Trends they are seeing
- Reduced occupancy accounts for 2/3rds of RevPAR declines
- Bookings are very last minute
- At the beginning of the Q biz was down 30% and ended up only down 18%
- For Q3: they are 29% below in bookings
- Rate contracted significantly in Europe
- Q3 is their strongest quarter
- July saw RevPAR down 18%
- UK is weaker than most of their markets – hitting their feeder markets in Portugal
- US groups market is very weak
- Italy is only 6% down but Europe is 22% - Russia
- US – Charleston is down 28%, but other properties are doing better
- Sale of assets
- Lapa Palace
- Progressing with sale of Windsor Court set to close in September
- Bora Bora also marketing for sale
- Have 95 of the 181 units at La Samanna which they plan to sell over the next 3 years
- Sold 2 villas in Thailand for 1.7MM
- Looking towards recovery… the key lies in their brand
- Balance sheet:
- Restricted cash was $13MM
- Windsor court debt - $37MM (in discontinued ops) and proceeds on the sale should be more than sufficient to pay off the debt
- 7x net debt to EBITDA
- Current debt includes $16MM of the Australian debt that was refinanced in July
- Net cash flow of $15MM, 3MM of maintenance Capex, $11MM spent on Porto Cupacoy
- Sale of Lapa Palace - $19MM Euros + 10MM deferred Euros to be received in 2010
- Tax charges included current charge of $5MM and deferred charge of $10MM
- Full year tax charge of 14-16MM
Q&A
- What kind of forward booking window do they have? Cancellation rates?
- Booking window is very short – so outlook is scary. Taking as much as 30% of revenue in for the month in the month – 2 years ago this was unheard of
- Cipriani 4% booked in July for July 2 years ago, this year 30% (for example)
- Booking window is very short – so outlook is scary. Taking as much as 30% of revenue in for the month in the month – 2 years ago this was unheard of
- What % of their business came from finance/ Wall Street in the past?
- Can’t really answer that- not really their market – very hard to quantify that
- Mexico was impacted by Swine Flu, Grand Hotel Europe, any improvement in 3Q09?
- Mexico – think it will recover by end of the year
- Russia – seeing reservations from the domestic traveler are coming back a little bit. This property is really a “Russian” occupied property- should recover when the economy there recovers
- Taxes – spread out balance equally btw 3 & 4Q
- What’s going on with the legal case against them regarding their corporate structure?
- Still proceeding – will have an update in the Q
- Last minute bookings – are they coming in at much lower prices?
- “Being more flexible on rate”
- Orientexpress.com accounts for 13% of the business now – put out special last minute offers
- Long haul traveler is still traveling, but the “weekend getaway” trip is getting canned
- So US travelers are still going to Italy, but canning the short Caribbean trip
- Europeans acting the same
- Basically that 3-4 day holidays has just gone away, suffering the most
- La Residencia
- La Cite
- Reid’s
- Debt covenants?
- Do have tight headroom on some covenants
- Got relief for 2 covenants
- Only have 1 hotel with CMBS debt
- Windsor court - only asset with “toxic” level of debt- but it’s being sold
- Everywhere else they have lots of room on debt to “asset value”
- Coverage ratios are fine given the drop off in rates
- How are the rate trends looking/ compared to occupancy trends?
- Rates are coming down as they try to incentivize people to stay last minute
- Entry level rooms in the shoulder season – “hugely” flexible. Less flexible in the high season on suites/etc
- Not going public on all for sale properties… have identified 8 properties that they will look to sell over the next 2 years (sounds like Grand Hotel was on that list)
- Library / 21 Club status
- Pushed back the whole deal by 2 years, paid an extra 9MM deposit
- Re-evaluating what they will do if anything there – they may just walk away from it – try to sell it and get a manage contract
- Are there any assets that they will “give the keys” back to the bank on?
- NO