"Revenue per available room across our North American system declined less than expected during the third quarter as leisure travelers responded to attractive promotions and great values in our hotels. With solid cost controls, our hotels translated better than expected occupancy rates to stronger than expected fee revenue and earnings."



Outlook for 2010

  • Expect RevPAR to modestly decrease in 2010
    • ADR rates for group and government business will constrain and negatively impact ADR, as will the mix shift towards leisure
    • ADR will also be negatively impacted by supply increases
  • 25-30k new rooms expected to open
  • Applications from franchisees have slowed for their limited service hotels
  • Asia represented 40% of their full service pipeline, and virtually 100% is under construction
  • Think that there is a flight to quality for owners and franchisees
  • Haven't yet seen a pick up in conversions but expect to see a big pick up in 2010 as the number of workouts increases
  • System wide RevPAR flat to -5%
  • New managed hotels in Asia & ME will help incentive fees
  • Assume that international will be better than NA for 2010 (I'm sure the that FX will be part of this)
  • For timeshare, assume flat timeshare development profits and flat contract sales
    • Over 50% of costumers are paying for their timeshares with cash, so they are financing a smaller portion than before
    • Accounting change for FASB will add 5 to 8 cents to EPS in 2010
  • Timeshare expected to generate $75MM of FCF in 2009 and double that in 2010
  • Believe that a large portion of the savings they booked in G&A are permanent
  • 2010 should see large debt reduction
  • 1Q2010 is likely to continue to show meaningful RevPAR declines, driven by rate


Results for the quarter and 4Q09 outlook

  • Better profits were largely due to better RevPAR and cost controls
  • Corporate demand at MAR has been profoundly impacted by the economy
    • Room nights were down 11% compared to an 18% decline (y-o-y) in 2Q09. However some of the improvement is just easier comps
    • Room rates less encouraging.  Everyone wants a special deal.  Corporate room rates declined 19%. Expect them to continue to be weak until occupancy recovers
    • Corporate represent 25% of room nights and group represented 33%
    • Cancellations and attrition were better than 1H09, but last minute bookings in the quarter were very light
    • Occupancies in NY have moved up - a sign that corporates are dipping a toe in the water
  • Leisure accounted for 40% of room nights vs 30% last year
  • Weekend occupancy was 6 points higher than weekday occupancy
  • International
    • ME impacted by early Ramadan
    • European occupancies exceeded 70% despite big ADR drops
  • Domestic RevPAR is roughly at 2004 levels
  • Timeshare helped by customer incentives
    • Seeing stabilization in core 1 week sales
    • US delinquencies increased to 10.8% in Sept, however they were flat at 5.5% excluding loans already in default
    • Because of an improvement in cure rates they were able to get higher residual interest
    • New FASB rules require them to consolidate, debt & asset balances will increase while equity will decline. Revolver covenant calculations won't be impacted nor will the way rating agencies treat non-recourse debt.
    • Will try to monetize excess land in their timeshare division at favorable rates
      • Based on our estimates they have over 7 years of inventory at current sales velocity so selling land makes sense
  • Expect debt to decrease $600-650MM in 2009 with further reductions in 2010
  • Development front: opened 10k rooms and closed 500 rooms
    • Roughly 50% of the rooms in the pipeline are under construction and 7% are awaiting conversion
    • Added 8,000 rooms to the pipeline and cancelled 5,000
  • 4Q09 "outlook" not "guidance"
    • Much of the RevPAR decline will come from ADR and mix shift to lower rated and leisure business
    • Unit expansions will help fees but tougher cost comps will hurt them. 
    • House profit margin declines will be similar to what they experience in the 3Q09
    • Timeshare note sale in the 4Q09, and given the strong securitization market expect to book a $10-15MM gain
    • Expect G&A to decline 20%
  • Look forward to the upturn which they believe is "ever closer"




  • Expenses rising next year at corporate and property level?
    • There were basically slim no increases in 2009 and bonuses were also zero.  In 2010 they will probably need to give employees some wage growth and bonuses.  Healthcare and utility costs should increase slightly as well.
    • Need positive RevPAR to keep margins flat
  • Overwhelmingly their recovery will be levered to corporate and group recovery; ie GDP and economic recovery
  • Hope to cross over the zero line of occupancy hopefully in 1H2010, and at that point they can ease promotions
  • What more can they do at the property line to hold margins?
    • Procurement - managed to improve F&B margins
    • Labor productivity continues to improve
  • Timeshare Strategy change
    • Made a strategic decision concerning pricing especially at the luxury side of the business and at the new prices the NPV of the projects were materially lower, hence the impairment charge
    • Decided to accelerate sales in Europe and sell the remaining land inventory
    • Decided not to develop some land that they bought at the top of the market
    • Got ahead of themselves from an inventory standpoint, so now they are going to "right-size" the inventory to the current sales velocity
      • Most of the replenishment occurred in 2007 because the sales pace grew so much between 2005-2006, normal inventory should be 2-3 years not 7+ years
  • Could they be too conservative?
    • There aren't really any leading indicators for their business
    • Their business is heavily dependant on economic activity
  • One analyst claims that he is seeing stronger rates at hotels... I don't know what he is seeing but I travel very frequently and I'm seeing a tremendous amount of deals.  This week alone I saw
    • Wynn rates for $109
    • All inclusive Mexican resort for $59 per night per person
    • $419 7-night Caribbean cruise on Princess
    • 55% off on Accor hotels in Oct
  • Pay increases?
    • In the 3rd quarter the true run rate SG&A number was really $124MM (excluding $5MM of legal and $15MM deferred comp).  Can't continue to not pay people forever.  So assume SG&A will be up modestly in 2010.
  • Assumption that International will outperform NA in 2010?
    • Part of it is easier comparisons (like H1N1 and political instability in certain markets like Thailand)
    • Since they didn't book a lot of group business in the US for 2010, they need to dig themselves out of that hole in the US, while international has a lower % of group business
  • Cancellation and attrition in group is a less of an issue now than in 1H09, but booking pace is still very weak
  • 2010 will start with a meaningfully bad RevPAR number but will end a lot better... how things progress throughout the year will really determine what the final y-o-y RevPAR change is
  • Room growth:
    • Full service portion of their pipeline is primarily outside of the US. Its very difficult to develop full service in the US unless it's municipally financed or part of a mixed use project. There is no financing available for full service in the US.
    • Headwind in supply in US is in upscale not upper-upscale
  • Transaction volumes have not stepped up so far, but expect them to
    • Banks aren't forcing as many assets into foreclosure
    • They are interested in buying distressed assets for a short term hold and retaining management contracts
  • Timeshare, elaborate
    • In Europe they decided that they have plenty of inventory and it doesn't make sense to develop any more
    • For luxury residential, they are exiting that business -  at least what they develop, not what they license
    • Will continue to do fractionals though
  • FX tailwind?
    • 16-18% RevPAR declines in constant dollars for 4Q09, so they will be impacted by currency. They have some hedges in place too - so the bottom line impact won't be significantly material


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