Hedgeye - HOT Q2 2014 - EARNINGS PREP

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

Q2 2014 CONSENSUS ESTIMATES

Total revenues: $1,538 million
Adjusted EBITDA: $319 million
EPS: $0.75/share

MANAGEMENT GUIDANCE

Q2 2014:

Adjusted EBITDA $310-$320 million
RevPAR SS Company Operated Hotels 5%-7%, in constant and actual dollars.
RevPAR SS Owned Hotels Worldwide 4%-6%, in constant and actual dollars.
SVO earnings $40-$45 million
Management, Franchise Fees & Other Income 8%-10% increase
D&A $75 million
Interest Expense $30 million
Effective tax rate 32.5%
EPS before special items $0.73 to $0.76

FY 2014

REVPAR at Same-Store Company-Operated Hotels Worldwide of +5% to +7% in constant dollars (approximately 25 basis points lower in actual dollars at current exchange rates).
REVPAR at Same-Store Owned Hotels Worldwide of +4% to +6% in constant dollars (approximately 50 basis points lower in actual dollars at current exchange rates).
Margins at Same-Store Owned Hotels Worldwide increase 75 to 125 basis points.
Management fees, franchise fees and other income increase approximately 8% to 10%.
Earnings from the Company’s vacation ownership and residential business of approximately $160 million to $170 million.
Selling, general and administrative expenses increase approximately 3% to 5%.
Full year owned earnings are negatively impacted by approximately $30 million due to 2013 and year to date 2014 asset sales, and a leased hotel that will be converted to a managed hotel in 2014.
EBITDA in the range of $1.2B to $1.23B
Depreciation and amortization is expected to be approximately $310 million.
Interest expense is expected to be approximately $115 million.
Effective tax rate approximately 32.5%, and cash taxes from operating earnings are expected to be approximately $160 million.
EPS before special items is expected to be approximately $2.76 to $2.83 (based on the assumptions above).
Full year capital expenditures (excluding vacation ownership and residential inventory) are expected to be approximately $200 million for maintenance, renovation and technology. In addition, in-flight investment projects and prior commitments for joint ventures and other investments are expected to total approximately $200 million.
Vacation ownership is expected to generate approximately $300 million in positive cash flow, including proceeds from the securitization of receivables the company anticipates completing in the second half of 2014.

QUESTIONS FOR MANAGEMENT

Update on share repurchase in Q2 and Q3?
Update on CFO search?
If the Lodging sector is only in the 5th inning, why have insiders been selling stock?
Views on assets sales given strength in transaction market as well as hotel REIT share performance - one off vs portfolio transactions
Where are inflation pressures negatively impacting margins?
ROI on renovations from last 2 years
Can US REVPAR momentum be sustained into 2H 2014?
What drove the Q2 RevPAR acceleration?
Are global tensions impacting bookings?

RECENT MANAGEMENT COMMENTARY

High Level

The global economy generally and the lodging recovery, in particular, continue to bounce along, with once again some markets doing better and others doing worse.
This year has begun pretty much along the same trend line.
Across mature markets, namely North America, Japan and Europe, growth in demand showed a steady improvement on last year and conditions are set to stay along that same trajectory.

Margins:

2014 owned hotel margin improvement - due to hotels coming off renovation and adapting staffing levels

Lodging cycle:

Driving growth is very strong corporate demand.
Corporate business, both transient and group, is robust and shows no signs of slowing down.
The corporate traveler is back on the road trying to drive sales growth.

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:

Corporate groups are the healthiest of all the group business
The U.S. may be a third group, two-thirds non-group; and non-U.S. is probably more like a quarter group and 75% non-group, so clearly group is more important in the U.S. and U.S. group also tends to have longer lead times.
Negotiated corporate rates are up in the mid-single digits for 2014
Group business is pacing up in the mid-single digits

North America:

At this point, expect late cycle market dynamics in North America with REVPAR growth predominantly coming through higher rates
Occupancies, once again, were pushed to record highs.
North American REVPAR growth to continue to pace in the upper half of our outlook range of 5% to 7%.

Europe:

Europe remains stable, but sluggish.
Hopeful Europe may surprise to the upside in 2014. That may yet happen, but it did not in Q1. And so far, Q2 looks to be more of the same
Need better rate gains in Europe which is predicated on somewhat more robust demand. Until that happens, Europe growth will stay in the 2% to 4% range.

Middle East

(Nomura Conference) based on recent visits to the Middle East, the region feels more optimistic than in 2006 and 2007. HOT ran at 82% occupancy in Dubai in 2009.

China/Southeast Asia:

China's, will see some fits and starts. While the Chinese economy has many years left to grow, China will need to make significant structural changes along the way to facilitate the economic growth.
China remains a relatively low occupancy market. So, Starwood's growth will be driven more by occupancy than rising rates.
Wages have also been rising faster for some time now, so staffing levels are being adjusted to maintain margins.

Latin America:

Latin America behaves like a diverse collection of countries. What's emerging now is a two-tier region.
Latin America, Mexico continues to boom.
Mexican resorts are very popular destinations again.

Costs:

SG&A growth in the second quarter as reported may be higher than you might expect, since we will be lapping the recognition last year of $7 million in state tax incentives, derived from our headquarters move to Stamford.
Have a recurring annual benefit in the $3 million to $4 million range, which will most likely be recognized in Q3 this year.

Share buyback/dividends:

For 2014, 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.
A $614 million buyback authorization to be used as opportunities present themselves. During 2013, repurchased 4.9mm shares for $316mm
The use of that cash would first have been put towards reducing debt, while there isn't a whole lot of that left to do - not likely more debt reduction is needed.

Asset sales:

The market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals.
Have a significant number of assets on the market in North America, Europe, and Asia and intention is to get transactions completed on acceptable terms as fast as possible.
Marketing a group of 6 North American hotels as well as a large number of international hotels.

SPG:

Currently SPG accounts for over 50% of the occupancy at hotels on a global basis.
SPG members tend to pay a higher ADR than non-SPG members.
SPG member have higher food and beverage attachment.

Strategy:

Aloft will get to somewhere around 100 hotels next year
Goal: get to 80% from fees and 20% from owned portfolio and vacation ownership/other by 2016
About $3.3 billion in cash generation over the next three years, plus asset sales of $2-3 billion
Pipeline: 450 hotels, 105,000 rooms
Focused on the three pillars of development strategy; right place, right property, and right partner.