Given that Street numbers have come down over 10% since the second quarter, we think this will be another quarter where Starwood beats and moderately lowers expectations.
Street expectations have come down more than 10% for 3Q09 since the last time we updated the consensus table in our model. Therefore we won't be surprised if Starwood manages to eke out another small beat vs lower Street expectations.
We are projecting Q3 Adjusted EBITDA of $182MM vs Street estimates of $175MM and company guidance of $165-$175MM. We estimate that adjusted EPS will be $0.12 vs guidance of $0.06 to $0.10 and Street estimates of $0.10. Below are some of our assumptions for the quarter:
- Branded Owned Hotels Worldwide: while our numbers aren't same store, our -24.5% RevPAR assumption compares to HOT's guidance of -24% to -26% (21% to 23% in constant dollars) for same store Branded Owned hotels worldwide
- Since the dollar weakened against all currencies save the Argentinian Peso and Mexican Peso in Q3 vs Q2, we estimate less currency drag in the quarter than the first half of 2009
- We estimate that total RevPAR (not SS) will decrease 21.4%, which compares somewhat to HOT's guidance of SS worldwide company operated hotels of -20% to -19% (-17% to -19% in constant dollars)
- We are projecting that Owned, Leased and Consolidated JV hotel margins will decrease 970 bps and that total expenses for Owned, Leased and Consolidated JV hotels will decrease 22% y-o-y (vs 28% last quarter)
Last year in the 3Q08 release, HOT gave some "broad parameters" regarding how to think about 2009. Given that Starwood has traditionally been more aggressive in providing its outlook than MAR, we expect them to give us a preview for 2010 expectations.
Going forward, a few things to keep in mind:
- Starting 4Q09, FX will once again become a tailwind for Starwood. More than 50% of HOT's owned EBITDA comes from outside the US. A weak dollar will strengthen reported RevPAR numbers but make cost comparisons more difficult as well. We estimate that in 4Q09 FX will benefit international ADR's by as much as 7.5% at current FX rates for the owned portfolio. For 2010, if FX rates stay constant, international ADR's will be aided by an estimated 5%
- Starwood also has high international exposure in its managed and franchised business, so their system wide reported RevPAR statistics will also benefit from a weak dollar
- 56% of HOT's managed and unconsolidated JV rooms are outside of North America (even higher when you exclude Canada)
- Almost all of HOT's incentive fees are coming from international hotels at this point since international contracts typically don't have an owner's priority clause (where the brand doesn't get paid until the owner earnings a minimum return each year)
- 26% of HOT's franchised hotels are located outside of North America
- Aside from FX benefits, international RevPAR may recover faster than US RevPAR (barring more natural disasters, terror attacks and worsening swine flu outbreaks) given several unusual events in 2009:
- H1N1, which heavily impacted travel starting April 2009
- Supply overhang in China post Olympics
- Mumbia attacks in India and bombings in Indonesia
- Political instability in Thailand and Fiji
- We've noticed that the number of new hotels opening in 2010 advertised on Starwood's website is roughly 50% less than what we counted opening in 2009. However, these are gross hotels vs net, but nevertheless this is worth noting
Despite the likely favorable FX benefit, we think Street estimates remain too high due to unrealistic margin assumptions. See our 10/15/09 post, "LODGING: HISTORY REPEATS", for details.
"YouTube" from 2Q09
"It appears to be a slow recovery so far. While the RevPAR decline is moderating in relative terms, it is still deep decline in absolute terms. The pace of improvement at this point is dependent on rate..."
Business conditions/ Outlook:
- Occupancy stabilized in Q2 in North America and Europe... The fact that rate trails occupancy is fairly typical for [what] happens at this stage in the cycle. What is hard to pin down is the pace at which rates will stabilize. History would suggest it will be one or two quarters after occupancy does.
- In North America, mix is skewing towards more price sensitive leisure business. Weakened demand, which is also more price-driven, is stronger than weekday, especially Monday through Wednesday demand.
- Corporate room nights are down, leisure room nights are up, but there are early indications that corporate business is slowly coming back.
- Group production in June was the best so far this year, and there are more leads coming in than we had earlier in the year. But so far, this feels more like a slow recovery than a sharp pickup from pent-up demand.
- [Regarding group bookings] cancellation piece of this should abate and, at the same time, we are starting to see some pickup in activity that will certainly help as you get to the later part of 2010 and beyond.
- RevPAR declines will be lower than in Q2, but the absolute level of decline, at over 20%, is still deep by any historical measure. As such, we remain very focused on cost control. Our guidance implies that the rate of decline moderates even more in Q4, as we left the 15% decline last year. The situation is very similar in Europe with one major difference. Through the first three quarters, we face significant foreign exchange headwinds.
- So if you look at it on a two-year basis, our expectations for the fourth quarter are really not that different from roughly where they are today. Clearly, the Forex in dollar reported terms dramatically changes. And in the second quarter, our entire international portfolio had a Forex headwind of around 800 basis points, and that becomes a tailwind of about 100 basis points. And if you say international is roughly half, that’s a 400 basis point benefit right there just from translation.
- 4Q09 RevPAR thinking: close to high-single digit, double-digit decline in Q4.
- The contracted wage growth would probably be in the range of 3% to 4%
- Our reported pipeline now stands at 90,000 rooms. We pulled 25 deals from the pipeline based on financing issues experienced by our owners.
Asset sale commentary:
- We have some non-core assets that we are in discussions on. These include hotels we do not plan to retain our flag on, non-hotel businesses and land. Our preference would be to sell non-core assets at this point if we can realize good values.