HOT Q1 2015 CONFERENCE CALL NOTES

Takeaway: Strategic alternatives exploration overshadows a strong Q1

CONF CALL

  • Opened 20 hotels in 1Q (double 1Q 2014); 8 of 20 were conversions (high priority for HOT)
  • Signed deals for 33 more hotels (highest # of deals signed in Q1 since Q1 2008)
  • Q1 North American signings are up 70% YoY
  • Independent 3rd party interviewed owners including HOT and competitors:  
    • Results are in. HOT can be more communicative and speeding up HOT decision making.
  • Tribute brand: 4-star independent hotel brand
  • Expect to get to 100 Tribute hotels in next 4-5 years
  • Sheraton:  represents 40% of global room footprint
  • On track to open more select-service hotels in 2015 than in any other year since 2009.
  • Transaction market remain strong
  • Will make transactions evenly throughout 2015 rather than back end loaded
  • $25m SG&A savings in 2016
  • Will save $50-60m in centralized services
  • Canceled the lease on Starwood corporate aircraft
  • Constant dollar core fees was up 5%
  • Southeast Asia and Macau were weak
  • Owned hotels: up 8.4% in REVPAR, well above expectations
  • Aloft NA and international REVPAR: 24% and 13%, respectively
  • Vacation ownership/residential: strong resort performance, made adjustment to loan loss reserve. Expect to file Form 10 in next couple of months. Still expect spinoff in 4Q 2015.
  • Expect to incur additional expenses during the year as HOT restructures to become more efficient ($30-35m over next several quarters, ending in mid-2016)
  • US:
    • Double digit REVPAR growth in the West esp. San Francisco/Phoenix
    • South: REVPAR grew 8% (solid in Atlanta, Ft Lauderdale)
    • Hawaii remained weak due to lower inbound travel from Japan
    • North: REVPAR only up 4.6% (NYC declines)
      • REVPAR at owned: flat
      • Compared to REVPAR index, up 550bps. Owned/managed grew 800bps
    • Double digit REVPAR increases in Boston/Chicago
  • Overall did not see material decrease in inbound travel to US due to strong dollar however, ADR in NY was affected
  • Group revenue in 1Q was +6% at owned/managed
  • Corporate group up ~10%
  • Revenue in the Q for the Q up double digits
  • Looking ahead, group revenue production into all years also up double digits
  • Expect group revenue on the bookings for 2015 up mid single digits. That's an increase from lower single digit pace in 4Q 2014. 
  • Transient up 4%, driven mostly by increases in rate
  • Latin America: Mexico REVPAR up 20%, Brazil REVPAR down as a result of continued weak economic situation. Argentina performance has stabilized. Expect similar trends in future
  • Europe: ahead of expectations. Spain/Austria strong. Looking ahead, expect system-wide Europe REVPAR SS to be slightly softer against stronger prior year base. Southern Europe strong; weaker trends elsewhere.
  • Double digit growth in demand for US and Middle Eastern travel into Europe and an increase of roughly 30% in Chinese travel into their European hotels which they attribute to the weaker Euro.
  • Middle East/Africa REVPAR: +0.8%: strong Abu Dhabi offset by Dubai hotels. Expect MEA to remain soft in 2Q
  • China: weak demand from HK and impact from Macau anticorruption campaign. Mainland China REVPAR: +3.2%. Expect current trends to continue in Macau/HK. In Mainland China, expect REVPAR improve modestly in 2Q. Strong REVPAR in Australia and Thailand
  • 2Q 2015: SG&A will be up 3-5% due to Tribute launch and incremental Aloft investment
  • Have fully offset FX headwinds they experienced since last conf call
  • Leverage ratio: 2.5x (S&P), 2.8x (Moody's)
  • Made 60 page presentation to Board of Directors diagnosing Sheraton underperformance - fixing Sheraton has been tried many, many times over the years
  • Maintaining current leverage levels of 2.5-3x
  • Midscale brands: sticking with Aloft/Element/Four Points. Will not say if they will pursue another brand.
  • Search for new CEO proceeding as planned.
  • Capital Markets are good
  • Committed to asset light
  • Mainland China improvement in 2Q:  Feb REVPAR down due to CNY comp, but March REVPAR improved sequentially. Sees better trends.
  • Aloft: grew in NA but grew even more substantially in Asia, EUrope, Africa, Middle East.
  • Element: increasing marketing spend in 2Q to accelerate growth
  • 2015 guidance:  increase FY guidance by $10m largely due to vacation ownership success in 1Q and better SG&A, offset by FX headwinds. 
  • NA performed in-line with expectations. Outlook hasn't really changed since beginning of year.
  • REIT structure?  HOT suffers from a lack of critical mass that could fit well into a REIT structure. Several assets in Europe/South America that can't benefit from REIT spend. But not taking anything off the table.
  • Increase ownership by using balance sheet? A possible option too.