Like clockwork, HOT beats the quarter and lowers guidance. Management's reassurances of benefitting from the eventual recovery weren't enough to save the day.
General Commentary:
- Continued to see better results as they moved through the quarter. Results are improving by the week
- Dramatically cut back on their costs, but realize that they can't save their way to prosperity
- They will hold the line on costs while focusing on driving revenue
- St. Regis NY was sold out for 50% of the nights in September
- While occupancies are starting to creep back, it's unclear when rate will recovery. It's typically two quarters after occupancy turns positive
3Q09 Results & Outlook:
- I love how he says that they are able to beat consensus each quarter through cost controls... how about by lowering numbers each quarter and setting a low bar???
- Think that international, FX, and luxury & upper upscale concentration will soon again become tailwinds instead of headwinds
- We agree on international and FX especially
- China is recovering nicely, as RevPAR gets less bad
- India is one of their weakest markets but they are optimistic in the long term
- Latin America was negatively affected by H1N1; their owned Mexican properties were down 40%+
- North America is slowly getting less bad, Europe is doing a little better
- Given the continued pressure on rate, they are preparing for a difficult 2010
- Points out that owned portfolio has fallen so far that it will be a big source of upside when things recovery... of course who knows when that will be
- Timeshare - deliquencies stabilized around 4%, tour flow down
- Cost cutting
- Full year SG&A around $400MM. Majority of cost cuts came at corporate and in NA & European regions with emerging markets left largely uncut
- Leveraging account coverage over more properties
- SPG is also driving their topline, think that they generated $100MM of incremental revenues by incentivizing more visits to their property through deals and promotions
- Spoke at length about the Sheraton relaunch, maybe it's just me but it seems like they've been "renovating" this brand since I began covering lodging circa 2001
- Decided to complete Bal Harbour, but won't be doing any other new builds like this going forward
- 2010 will likely be another challenging year, but will greatly benefit from a recovery - Stating the obvious...cyclical businesses do this. Although the more asset light they become the less leverage they will have on the upside
- Continue to focus on selling assets and liquidating their timeshare inventory (shrinking the business), and becoming more a brand/fee company
Balance sheet/other:
- Leverage ratio was 4.3x and there will be no major maturities until 2012
- Securitization markets have improved markedly over the last 6 months
- They will be in the market this quarter to complete a securitization deal
- Hope to close some asset sales in the 4Q (I believe he said $125MM)
- Think that they will achieve their goal of $3BN of net debt by year end
- IRS tax refund is delayed to 2010 now
Outlook:
- While the fact that things are getting better (i.e. less bad) is undeniable, pace of recovery is uncertain
- Rate of recovery is strongest in Asia ex-India
- Mexican economy remains one of the weakest markets in Latin America
- North America - rate accounted for most of the RevPAR decline
- RevPAR at company operated hotel is tracking down 16% QTD
- Focus now is entirely on improving rate realization
- VOI close rates are improving while pricing is very weak
- Gains from any securitization are not included in guidance...they will likely beat next quarter with the help of this gain though...
- Group business on the books for 2010 is lower than the low levels they had on the books last year
- 2010 will be all about business booked for the year and that's very difficult to predict
- Corporate rate negotiations have just gotten underway and they hope to hold rates flat while customers hope to get a discount to '09
- Just a reminder corporate rates do not mean guaranteed room nights - just indicative.
- Just a reminder corporate rates do not mean guaranteed room nights - just indicative.
- Think that MEA will be up a little, in Latin America they expect flat-to-modest growth, NA probably down 5%, and Europe better than US but still weak in 2010
- Expect that owned hotel RevPAR growth to be a the low end of their guidance range
- FX should help RevPAR but not margins (no it has the opposite effect on margins)
- Timeshare - will lose roughly $30MM of interest income, and pre-FASB changes they will have a decrease of EBITDA in timeshare, but post changes they will benefit by $25-30MM in EBITDA. They will operate the VOI business for cash, meaning that they will only expend capex to finish projects in sellout. May look to cancel future projects/stages of existing projects and/or lower pricing on products (like MAR) and will probably take a write off charge in 4Q
- SG&A is expected to increase as they start paying bonuses again and give modest raises to stay competitive in a recovering market
Q&A
- Pricing for group in 2010/2011 is down but there isn't lot on the books at this point
- What is normalized capex for next year?
- Hotel maintenance capex in line with this year
- Timeshare will just be completion of what is underconstruction
- Bal Harbour - $330MM to complete - but it's not all going to be spent in 2010
- Thoughts on assets sales from a pricing perspective, and appetite to unload more assets
- They want to continue to selectively sell assets - especially non-core assets
[Just a quick reminder that unlike in the past, these assets are not likely to retain HOT flags in a sale] - See more money available for deals than a few months ago and expect that trend to continue if capital market trends continue
- They want to continue to selectively sell assets - especially non-core assets
- Sheraton revitalization
- Unclear what that means re: RevPAR
- Pace of deflaggings should slow in 2010
- Bal Harbour - what is the rational for completing this development?
- As the economy starts to rebound, and more than 50% of their current buyers there are international, they think that the demand will be there
- The incremental capital required to complete the project was small vis-a-vis cash from closing
- Owned Margins under various scenarios
- Think that they will be able to cut a little more cost than they can cut at the hotel level next year
- Just as an aside, we have noticed that some luxury hotels are no longer providing services such as turndown. In our opinion, this is ok if we're paying $119 to stay at the WYNN but not ok when prices come back
- However, if RevPAR is down 5%, then margins will decline 250 bps (wow... we think it's a lot more than that, especially given that RevPAR declines are going to be rate driven)
- Their RevPAR guidance isn't really based on GDP expectations, but rather on trends
- What was the $9MM increase in "Other Management & Franchisee fees"?
- FX gains? I think it's a lot of termination fees
- Think that NY will be a faster recovering market
- This is because occupancy in NY is around 90% and small changes in occupancy amount to huge changes in rate, since pricing power is all about being close to sold out. This market always has higher volume
- China is also expected to recover faster
- Luxury and Upper Upscale is expected to recover/get less bad faster given that they fell the farthest
- Any impact of MAR dropping pricing on their residential pricing?
- Unclear but they certainly indicated that they may be doing some of this as well
- A large part of MAR's write down was also in fractional and international which HOT doesn't really have
- Haven't seen a palpable impact from MAR's move
- Advance rates and interest rates on timeshare are better than they were last time around, so there will likely be gains but don't know how much
- New franchise agreement for St. Regis?
- It's a one-off situation
- Pipeline?
- Internationally they continue to see robust growth
- In NA, the hotel financing environment is still very challenged since existing assets are trading at a lower price per key than the cost to build
- Are in discussions with capital partners to manage distressed assets that the partners may want to acquire
- Brand standards?
- Starting to look at standards across brands as a way to save money, and only retain unique things about each brand