At first glance, Q4 looked amazing and full year 2010 guidance was solid. No complaints on RevPAR but digging a little deeper we found that things weren’t as good as they appear.
By our math, the “clean” EPS number for the quarter was $0.25 (using a “normalized tax rate” and excluding all charges and a fully diluted share count). However, even the "clean" number contained $21MM of what we believe are mostly termination fees. Normally “termination and other fees” run at around $11MM per quarter. If we adjust out for abnormally high termination fees, we get “normalized" EPS of $0.21, which was in line with our original estimate and the Street. Beating on termination fees is not exactly encouraging. Even so, there were a lot of positive things to point to in this quarter's results
Here are some additional and, we hope, unique thoughts:
- For anyone wondering where the upside to guidance came from, we have an answer for you – it's call SFAS 167. If you recall, on the last call HOT explained that the new accounting rules would benefit their 2010 EBITDA to the tune of $10 to $15MM. Well, now that number is $40 to $45MM and it's all accounting - no associated “cash flow” with this raise. The Street’s 2010 EBITDA estimate was $730MM so if you add the extra $30MM the number goes to $760MM, actually ABOVE the new guidance of $750 million.
- “This new accounting rule impacts the accounting for securitized vacation ownership loans. As a result of the adoption of this rule, the Company expects its reported assets (accounts receivable and other assets) to increase by approximately $400 million and its reported liabilities (short-term and long-term debt) to increase by $445 million, prior to any tax effects. Also as a result of the accounting change, vacation ownership pretax earnings for 2010 are expected to increase by approximately $20 million to $23 million and EBITDA is expected to increase by approximately $40 million to $45 million. The new accounting rule is not expected to have any impact on the Company’s cash flow.”
- It also becomes clear that 1Q2010’s EBITDA guidance was also inflated by roughly $8MM, so again a bigger guide down versus the Street than meets the eye
- We understand why HOT is adding back the $17MM of cost of sales price discount adjustments to get to “Adjusted EBITDA”, but to be fair, wouldn’t you also take out the $23MM of gains on securitization then? Same goes for adding back $2MM of D&A on discontinued operations.
- HOT is excluding all the Bliss associated expenses - which were all in SG&A while Bliss revenues were in Management fees & other. We wrote about the Bliss sale on Nov 2, 2009 “HOT: A BLISSFUL EXIT” and on Jan 11,2010 in “HOT: 4Q IN REVIEW”. However, we wrongly assumed that Bliss expenses and revenues wouldn’t come out until 2010.
- 2010 & Q1 RevPAR guidance was actually quite good, no doubt aided by HOT's international exposure
Q4 RECAP
Cliff notes:
- RevPAR was better than expected, especially international. Occupancy led the way
- F&B revenues declined only 9-10% … a nice sequential improvement
- Management & fees where low quality with higher than normal termination fees doubling from prior quarters
- Timeshare income was better due to the higher than previously reported gain
Details:
- Owned, Leased and Consolidated JV revenues and EBITDA cleanly beat our estimates
- International RevPAR was much better than we estimated, to the tune of 5.5%.
- North American RevPAR came in 1.7% better than our estimate
- We suspect the vast majority of the beat here came better F&B and other revenues, which we suspect declined less than 10% in the Q vs. out -20% estimate
- Total costs per occupied room decreased 2.3% (estimated 6.8% in local currency)
- Management fees were messy since Bliss was excluded
- Base fees were in line, just $1MM less than our estimate
- Incentive fees were $3MM better than our estimate, declining 19%
- Franchise fees were $1MM better than our estimate
- “Other Management & Franchise Revenues” came in $12MM higher than our estimate, due to what we believe were higher termination fees. The $42MM included $21MM of deferred amortization of gains (like every quarter), the balance is usually mostly termination fees.
- Bliss was excluded
- So base, incentive and franchise fees decreased 9.7% compared to guidance of down 8-10%
- Timeshare beat due to a $23MM gain on securitization, strange because when the announced the deal the gain was stated at $15MM… hmmm anyone else confused here?
- Originations were better than we estimated though but margins were lower, probably due to discounting of inventory