STARWOOD 3Q09 QUICK REVIEW

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.


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more