Suspect capital allocation policy and and lower than expected 3Q guidance cools HOT. RevPAR acceleration from here unlikely so near term catalysts must be asset sales and more aggressive share appreciation.
- Co owned hotel margins +87 bps
- First time into four years without a global economic wobble
- North America - record occupancy
- Corporate Profitability high & Confidence = 2008
- RevPAR during Q2 2014
- Slower in North 4.4%, Chicago flat, WDC <3%, NYC 5%, Boston & Baltimore up double digits,
- Hawaii flat - weak yen, higher airfares, higher Japanese sales tax.
- Better in South & Southwest 9%
- Latin America +5%, Mexico +13%, Brazil +25% (Germany stayed at Sheraton Rio), Chile demand struggles. LA ex Brazil +1%, expect low end of RevPAR range if not lower.
- Europe: modest recovery to continue; RevPAR 2%. Greece +25%, UK slow, France soft, Germany tough comps. Ukraine & Russia - if events don't escalate, expect improved European outlook.
- Africa/ME -1%: Dubai down, Qatar +17%, Saudi flat, Egypt -20%, Nigeria down more than 20%.
- South Africa +6%
- China +11%, skewed by Sheraton Macau. Ex Sheraton +7%, demand better and increased occupancy +550 bps. Shanghai double digit revpar. West & Central China 4%. Sheraton Macau tailwind will taper.
- Indonesia +19% Thailand -12% due to coup but calm returning and business slow to recover. India down more than 4%, hoping for needed economic change and development.
- Asia ex China expect growth in the low single digits.
- Maintain RevPAR outlook
- Management fees: in 3Q, difficult comps but YoY growth remains very strong. Ex this fee, growth would be 12%.
- During 2Q opened 19 hotels, 3,800 rooms. 2H14 openings > 1H14 openings.
- SVO: better tour flows, better pricing, higher closing ratios. Focused on high returns in Orlando, Mexico, Hawaii and St. John.
- June 6th, closed final unit at St. Regis Bal Harbour.
- SG&A: up 16% but lapped $7m in CT State Tax incentives. In 3Q benefit of $3-$4m in new tax incentives.
Outline to Capital Allocation
- Impossible to have a Balance Sheet which pleases all shareholders
- Leverage: stay investment grade in wake of major economic downturn. Conduct a Monte Carlo scenario for how business would operate during a major economic downturn. $500m in off shore cash. Leveraged allowed to 2.5x but less than 3x. Today about $750 million of add'l capacity to get to 2.5x. Maintain target leverage.
- Dividends: regular dividends based on payout ratio of 50%, but 35% to 50% on a future basis.
- Stock buybacks: offset annual dilution of stock based comp of $85 million in 2014; expect to compete $614 million in 2014.
- Opportunities: Step up pace of repurchase activity or special dividends (asset sales).
- Optimistic HOT will announce significant transactions in 2H14 and early 2015.
- CFO search progressing with Korn Ferry.
- Portfolio Sales $1 billion transaction in market or greater value on single asset basis?
- Geographic: not a consistent set that appeals to a single buyer, finding better/greater prices via individual asset sales.
- US RevPAR: Luxury lagging, broader acceleration?
- Early in recovery, significant and higher growth rates in upscale, upper upscale and luxury, but now percolating down to lower segments.
- RevPAR trends and performance through cycle?
- Continue to build rate so additive, performance of international segments outperforming, so not sure HOT will underperform.
- Share repurchase?
- $85 million at least to offset dilution (baseline) but as HOT gets to asset light and sell $2.5 billion in sales, they will generate cash and then evaluate repurchases vs. special dividends
- Given capital model - only able to buy back $750 million shares versus some estimates of $2b to $3b?
- Need to take into consideration rating agency definitions, but $750m is NOT the maximum.
- Opportunities to grow/add brands - especially in 3/4 star segments?
- Aloft today is what W Hotels was 10 years ago...and present opportunity to grow select service hotels.
- Four Points continues to draft off Sheraton
- Element small but growing, tremendous growth potential
- Difficult/challenging to launch and build De Novo
- Group pace:
- Bookings in 2Q. Good for in the year, for the year, but slower for 2015 but still mid-single digits range is on par with historical booking trends.
- Share based compensation - why leave out of adjusted ebitda?
- Better transparency to client and better measure of core business.
- CFO search, characteristics, & timing?
- Strong CFO, with seat at the C-Table, great mind, not afraid to have an opinion/discuss strategy and financing functions. Have a number of interested and exciting candidates. Will announce when they have "a name".
- REIT Spin off of assets
- Most North America REIT trading at discount to NAV, REIT would require add'l G&A, too many US lodging REITs trading with too few assets in their portfolio and shareholders not benefiting
- Summarize from Q1 call to today, how did capital strategy and thinking change?
- Had an approach to leverage limits and targeted debt levels, today more clarity on calculation.