Like a broken record, Starwood beat and lowered again. Contrary to current Street projections, HOT pointed to lower 2010 margins and EBITDA.
HOT reported Adjusted EBITDA of $179MM, $4MM above the high end of guidance and the Street, and adjusted EPS of $0.14, $0.04 above the high end of guidance and Street. As has become customary, HOT lowered guidance for the following quarter. New Adjusted EBITDA guidance of $190-$200MM or full year guidance of $735 to $745 is below the $750MM they guided to last quarter. Would anyone be surprised if after the Street lowers their numbers for next quarter, HOT comes out and beats again?
Starwood missed our estimates by $2MM on Adjusted EBITDA but beat our Adjusted EPS estimate by $0.02 given the artificially low 7.1% effective tax rate resulting from a reversal of deferred taxes. Using a "normalized" tax rate of 28%, we estimate that HOT's Adjusted EPS was really $0.09 for the quarter. If we use their numbers and tax away the $10MM tax reversal, which isn't recurring, we come up with $0.08. In any case, we realize that no one attaches much significance to EPS, so let's move on to the details of the quarter.
Owned, Leased, and Consolidated JV
- Revenues came in $3MM light of our estimate but HOT more than made up for the revenue weakness with tighter cost control
- ADR for Owned hotels was 2% lower than our estimate, while occupancy was 3.5% better.
- The change in mix shift away from group was evident in the 34% y-o-y estimated decline in F&B revenues
- Total COSTPAR (total expenses per occupied room) decreased 13.5%, compared to 8.3% in 2Q09, which was certainly impressive
Management, Franchise Fees, and Other Income
- Fee income came in $3MM below our estimate, with the entire miss attributable to lower incentive fees
- Management, Franchise and Incentives fees ("real fee income") were $124MM, down 23% from 3Q08
- Managed & franchised rooms grew 4.4%, adding 11,216 rooms y-o-y to the system
- Growth in managed and franchised rooms was roughly 2,200 rooms light of our count due to more hotels exiting the system and possible delays in announced openings
- New brands contributed 5,103 of the room addition, or 2%
- Across the brands, ADR results came in below our estimates (by roughly 2.5%) while occupancies came in better, net RevPAR declines were only 40bps below our estimate
- The "junk" (deferred gains/ termination fees/ and bliss revenues/ etc) was flat year-over-year, hence management comment of fee income only being down 17%
- Amortization of deferred gains was $21MM, same as last year, we suspect that the other $11MM in "Other Management & Franchise Revenues" consisted mostly of termination fees
- Bliss and other miscellaneous revenues were $25MM, down 26.5% from 3Q08
Timeshare
- Came in largely in line with our numbers
- Originated sales declined slightly less than we expected but deferred revenues were a lot higher, bringing down the net number
- Originated sales margins where higher than our expectations, so net operating profit of $24MM was $2MM better than our estimate
Other details
- SG&A was $8MM higher than our estimate, as HOT neared the end of its cost containment efforts
- Starwood's effective tax rate was only 7.1% in the quarter due to some tax reversals. Since this is clearly not a normalized number, we wouldn't use it to calculate "Adjusted EPS"
- Starwood stopped providing a RevPAR breakdown for "other systemwide" hotels which we thought included some of the new brands and non-branded properties
4Q09 Guidance
- As we already mentioned, the mid-point 4Q09 guidance is below Street numbers and below Starwood's guidance given last quarter
- RevPAR guidance was left unchanged
- EPS guidance was lower
- D&A guidance was tweaked down a bit, due to asset sales and write-downs
- Everything was roughly the same
2010 Outlook
" While business conditions have clearly stabilized, it is very hard to forecast the pace of recovery, especially rate. While group bookings have picked up for 2011 and beyond, booking pace for 2010 has continued to lag below 2009. And booking windows for both transient and group business have shortened considerably. As such, late breaking business is a larger
component of what will drive our performance next year making forward looking predictions four quarters out particularly challenging."
- SS Company Operated WW Hotel RevPAR expected to be flat to down 5% (same as MAR's guidance) in local currency (FX will help though)
- US and Western Europe are expected to be at the lower end of that range and emerging markets are expected to be at the high end
- At current exchange range, HOT estimates a 2% benefit to reported RevPAR
- Management and Franchise fee growth is expected to be in line with RevPAR growth
- RevPAR at SS Owned WW Hotels also expected to be flat to down in local currency (and 200 bps better in current dollars)
- Margins at owned hotels will likely be DOWN
- Timeshare origination sales are expected to be flat, but interest income will be down assuming that Starwood can complete another securitization sale in 4Q09. However, under the new accounting rules, timeshare operations will get an estimated boost of $10-15MM with no associated cash flow benefit
- Most SG&A increase
- Possibly more asset sales
Adjusting for the timeshare we expect Street numbers to come down (again). Consistent with our 10/15/09, Street margin expectations for 2010 were too high.
