HOT should report a decent Q4 and provide more detailed guidance for 2010. We still think the Street has the margins wrong.
In many respects, we are not far off the Street’s expectations for 2010. Our revenue estimate of $2.68 billion is probably a touch higher than most estimates. For management & franchise fees and other, we are projecting $660 million, in-line with the Street. Where we differ is in the owned & leased hotel category but not with revenues – we are at $1.53 billion. Rather, the Street’s margin projections appear too high and we’ll tell you why.
On October 22, 2009, HOT guided 2010 RevPAR for company owned hotels worldwide to fall 0% to 5% in local currency. In US $s, guidance was 200bps higher given the exchange rate on that date. The dollar has moved higher since then which will be a bit of a drag from the guidance number but not that germane to our discussion. Given where the industry is in the cycle, room rates will undoubtedly be negative in 2010 if HOT’s RevPAR guidance proves accurate. Since room rates are almost pure margin, it is inconceivable that margins will be flat, as predicted by the Street. We wrote about the margin flow through of rate versus occupancy in our 10/15/09 post, “LODGING: HISTORY REPEATS”.
For 2010, we are projecting $699MM of EBITDA and $0.41 of EPS compared to consensus of $730MM of EBITDA and $0.57 of EPS. Below are some of our assumptions vs. management guidance.
- Guidance of 0 to -5% for WW operated hotels and 200bps higher on a dollar basis if FX rates stayed at 10/22 levels
- We have FY2010 RevPAR of -1% (FX impacted) assuming down ADR and positive Occupancy
- Our Owned RevPAR is down 20 bps but margins are down roughly 300 bps given that FX will also impact costs, higher occupancy and flat constant currency cost per occupied room assumptions
Management, Franchise fees and Other Income
We estimate a 9.5% decline y-o-y, mostly due to the $80MM+ of “Other” Bliss revenues. Below are our assumptions:
- Base fees + 5%
- Incentive fees down 2.5%
- Franchise fees + 7.5%
- Amortization of gains & termination fees down 3%
- Bliss & Miscellaneous income -74%
- Timeshare will be negatively impacted by new FASB rules (see our note on 10/26/2009 “LODGING: BETTER TIMESHARE ACCOUNTING”)
- SG&A should decrease almost $80MM just as a result of the Bliss sale, so let’s see how much “net” cost inflation creeps back into pay and bonuses. We’re only estimating 2% which gets us to $326MM
- Interest expense: Realistically HOT will need to redo its bank facility early next year, despite the extension which gets them to Feb 2011 (otherwise they become current). While HOT should be able to keep very little drawn on the new facility given the capex reductions and cash generation from liquidation of timeshare inventory, the new facility will likely come at a materially higher cost. Ignoring this, and assuming the draw is de minimis, we estimate net interest expense of $220MM in 2010.