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HST 3Q09 beat consensus and Adjusted EBITDA came in line with our estimates. However, guidance for 4Q09 fell short of our expectations and we are now more confident that 2010 Street numbers need to come down.


The big conference call takeawy is that margins will down in 2010, contrary to current analyst projections, due to ADR declines and a slowing of cost cutting opportunities.


Q3 Results

  • Performance this quarter exceeded their financial expectations and they are seeing some signs of improvement
  • Lower banquet business, occupancy and more conservative spend per guest all negatively impacted their F&B business
  • Overall demand continues to be weak, translating into much softer room rates. They did see some positive signs
    • Demand in transient room rates did not fall this quarter
    • High end transient occupancy decline was offset by an increase in lower rate transient business
    • Transient room nights are actually running ahead in 4Q09 implying that corporate business is flattening out
  • Group room nights declined by 15% with high end being the weakest. Some positive signs
    • Bookings improved in the quarter
    • Booking cycle continues to be very short, and 4Q09 booking cycle is behind pace, but given the number of open rooms there is a possibility to catch up
  • Still expect the combination of lower occupancy and people's expectations for lower rates to impact RevPAR, expect that RevPAR will be negative in early 2010
  • Need to see a meaningful improvement in occupancy before they can raise pricing
  • Do not project any additional dispositions for the balance of 2009
  • Continue to monitor acquisition activities.  Expect that the $30BN of CMBS hotel debt coming due through 2014 will trigger many defaults and present attractive acquisition opportunities for them
  • Hotel construction costs have decreased 8-10% from the peak
  • Expect total capex for the year to total $340MM
  • Not comfortable giving 2010 guidance now given the uncertain environment. Will give color on 2010 on the 4Q09 call
  • Operating strategy over the next few months will evolve with the market
    • As various markets stabilize they will look to adjust prices
  • Believe the low supply environment over the next few years will benefit them in the future

Details on the Quarter

  • San Antonio & New Orleans were very strong in 3Q09 but San Antonio will underperform in 4Q
  • DC Metro region continued to outperform given to strength of government business
  • New England region rebounded in the 3Q09, had 2 hotels not been under renovation results would have been even better and expect this region to outperform in 4Q09
  • Seattle hotels outperformed by inducing demand with price promotions
  • Hawaiian RevPAR decreased over 20% but expect it to outperform in 4Q09 given easy comps, while Seattle and San Francisco are expected to underperform in 4Q09
  • Transient demand benefitted from international vistation
  • New York is expected to continue to struggle, while Philadelphia is expected to continue to outperform
  • Ft Lauderdale benefited by close in bookings induced by promotions
  • International hotels decreased 14% on a constant dollar basis
  • Marriott Marquis ground lease in NY negatively impacted profits
  • Wages and benefits decreased 11% and unallocated expenses decreased 13%. Utilities decreased 17% (lower usage/lower rates). Property taxes increased
  • 4Q09 comparable operating margins will decrease more than they have YTD due to harder comps and high levels of cancellation fees recieved in 4Q08 last year
  • Continue to evaluate the secured debt market and have seen costs come down
  • Have a continuous equity program that allows them to more efficiently tap the market
  • Accounting for dividends paid in common stock will increase their share count starting 2010 and will be retroactive to Jan 1, 2009


  • How much does occupancy need to improve to get pricing power, 300 or 500 bps? Will 1Q2010 occupancy be down?
    • Really a market by market issues. For NY, LA, DC they can fairly quickly raise rates since they are at higher occupancies.  But in lower occupancy markets it will take a lot longer.  NY has 90% occupancy now, while DC has 80%.  Others are down at 60%.  Expect slightly lower occupancy in the beginning of 2010, but the weakness comment was primarily related to rate
    • Their business is really dependent on a recovery in the economy and job growth. Think that 2H2010 is when they would see a recovery in ADR
    • Sense that 4Q09 will still be worse on an absolute basis than where they were in 1Q09, hence 1Q2010 should still be down
    • Thought there was some business that was canceled or postponed in 2009 that may come back in 2010... but its still on clear whether that will materialize
  • Spending in 2010 (capex) will be slightly less than 2009
    • Only going to be doing necessary improvements
  • Asset pricing.  When do they expect to start making acquisition?
    • Not really clear where pricing is, since there aren't many transactions. But starting to see cap rates decline as people become more comfortable that things have bottoms
    • Sold their assets at 8% cap rates, but when you include the capex investments that those assets need its more like 6%
    • Working hard on a number of transactions in Asia both full & select service - expect to announce something in in 2010
  • Aren't too many assets that they would consider buying with negative cash flow
    • Looking at 10 year IRRs that will yield a premium to their cost of capital (11-13% unleveraged IRR return)
    • Cap rates that you see depend on their recovery of scenarios for RevPAR
    • Haven't bought properties with existing debt, usually all cash or corporate debt. Relying on secured debt is tricky given how much unwriting assumptions have changed.
  • Expense growth in 2010?
    • While there are some opportunities to reduce some costs - like management fees if RevPAR is lower or utilities depending on where commodity prices are - most of the cost cutting is behind the company
    • 2003 margins are a good place to look to get a sense of what margins will look like in a moderately negative RevPAR environment 
    • 2002 dropped 200 bps on 5% RevPAR decline but as they got to 2003 and exhausted cost cuts, margin declines were worse
  • A lot of special servicers or lenders don't want to foreclose because they have no confidence that they can sell the asset or that things won't get worse. But depends on the situation and whether owners are willing to fund negative cash flow. Thinks that the shortfall to refinancing becomes more apparent and that more deals will come to market
  • Will also see some non-distressed deals come to market as people transition their businesses by getting rid of non-core assets
  • Their buyers had the cash on hand to complete the acquisitions and then would put debt on them down the road
  • Increase group bookings for the quarter in the quarter
    • Discount segment driven
  • Increase in corporate expense?
    • Higher stock comp
  • Dispositions? Are they done?
    • There are over the next 2-3 years but will not be that active in the next 12 months given where pricing is. 2010 disposition pace will be slower
  • Do they expect to grow their assets over the next few years?
    • Yes - expect to be a net buyer over the next few years
    • But also think they will sell more assets too, net net they will be bigger
    • Think that transactions will be more complex given all the layers of debt, and this is part of the reasons why its taking longer for distressed assets to come to market