We don't have a huge call in front of HOT's Q1 release but we do have a few thoughts. We've also included management's forward looking comments from their Q4 release and conf call.
“While it’s tempting to extrapolate the most recent trend all the way through 2010, we think it would not be prudent to do so this early in the year for several reasons. Firstly, we lap the steepest declines in the first two quarters. Comparisons get somewhat tougher in the second half. Second, GDP growth right now is above trend, with inventory replenishment, fiscal and monetary stimulus. Will this be sustained as we enter the back half? Countries like China, India, Australia, and Brazil are all taking steps to prevent their economies from overheating. Could things cool down a bit in some of our fastest growing markets? And finally, we’ve taken a massive hit on rates. What will be the pace of rate improvement? It’s too early to tell.”
- Vasant M. Prabhu, Executive Vice President and Chief Financial Officer, Starwood Hotels
Vasant's comments from the last earnings call where more conservative than the typical HOT commentary. Given the recent STR numbers and guidance from MAR, the commentary is likely to be more bullish on HOT's coming earnings call this Thursday. We expect that HOT will meet raised Street expectations and raise guidance for the balance of the year. Our revised 2010 Adjusted EBITDA estimate is $785MM, $35MM ahead of HOT's guidance and $25MM ahead of the Street. However, at north of 16x EBITDA does it really matter?
FORWARD LOOKING COMMENTARY
- “Looking ahead, it’s safe to declare that our headwinds of 2009 – luxury brands, owned hotels, global footprint, and even foreign exchange – will soon be tailwinds.”
- “Just like prior cycles, ADR improvements will lag the general environment.”
- “We expect 2010 to be the third-straight year of 8%-plus gross unit additions.”
- Comments from Barclay conference on 3/25: "We’re targeting mid-single-digit growth on a net basis in 2010."
- “Leisure travel continues to rebound after the depths of 2009. Group is improving, with new leads up in the mid-teens. Business travelers have returned, as witnessed by improving Monday-to-Thursday occupancies. New York, a good leading indicator, saw occupancy levels of roughly 88% in Q4. That’s just short of the peak of 88.5% in 2007.”
- “Based on what we see unfolding today, we expect worldwide company-operated REVPAR to be between flat and plus 5% in 2010 and REVPAR at our owned hotels to be roughly flat year-over-year.”
- “In developed markets, we do not expect much growth. North America could be flat to down 3% and Europe only up modestly, flat to up 3%.”
- “Positive REVPAR growth will be driven by emerging markets, Asia, Latin America, the Middle East, and Africa, where we earned more than 40% of our fees in 2009.”
- “We expect owned REVPAR to be flattish, down 2% to up 2% in local currencies. Occupancies are likely to be positive, but rates will stay negative. With flat REVPAR and occupancies up, we will need to continue to work hard to limit cost growth. Our intent remains to offset wage and expense inflation with various productivity and procurement programs, as we did in 2009. However, 2010 will be another year of declining owned EBITDA.”
- “You should assume that there is another year of somewhere in the range of 10 to 15% declines in owned EBITDA”
- “With salary adjustments, incentive compensation resets, the negative impact of the weak dollar, and a couple of other items moving in the wrong direction, SG&A in 2010 will be up 3 to 5%.”
- “On an operating basis, our vacation ownership business will be down 40 million or so versus 2009. 23 million of the reduction would be from securitization gains, which we will not have in 2010 due to the change in accounting rules... As a result, interest income this year will be 15 to 20 million lower. This 40 million or so decline in vacation ownership operating results is offset by a 40 million add-back from the adoption of FAS 166/167.”
- “At the midpoint of the zero to up 5% REVPAR range and the plus two to minus 2% range for owned hotels, baseline company EBITDA would be $750 million. Each point of REVPAR adds or subtracts 15 million in EBITDA. For an apples-to-apple comparison to 2010, you have to adjust 2009 down by around 20 million for asset sales and the de-flagging of the Sheraton Manhattan.”
- “Our D&A… is down about 10 million or so due to asset sales. Our book interest expense is up by about 20 million from the accounting change. With a 22% tax rate, the 750 million scenario for EBITDA translates to $0.63 of EPS.”
- “In 2010, we’ll spend 250 million in hotel capital. Investment capital spending will be 100 million, as we undertake some ROI projects which were on hold. Maintenance and IT spending will be 150 million, as we step up spending on technology.”
- “SVO will generate over $150 million in cash flow, more than adequate to cover capital deployed at Bal Harbour. Bal Harbour capital is estimated at 140 million but could be lower as we receive deposits from additional condo sales. Both inquiries and contract activity at Bal Harbour have picked up meaningfully after the turn of the year”
- “Assuming we receive 200 million plus from the tax refund, after paying dividends and before any additional asset sales, debt should come down another 100 to 200 million by the end of the year.”
- Net pipeline additions in 2010?
- “Yeah, if you say about 80 hotels opening, we would say exits are probably in the – hopefully in the 25 to 30 range. So a net 50 with an average of about, let’s say, 300 rooms. So that would give you 15,000 rooms a year on a base of 300. So it’s about 5%.”
CURRENT STATE OF AFFAIRS
- “Guests are coming back to luxury. With higher occupancy, REVPAR for this segment was down roughly 3%. Regionally, Asia Pacific stood out, with REVPAR plus 1%. Yes, folks, you heard correctly, that was plus 1%. But it does include 600 basis points of foreign exchange tailwind.
- “We exceeded our REVPAR expectations as late breaking, in particular corporate transient, business was stronger than we had anticipated around the world, and the recovery trend accelerated as the quarter progressed.”
- “In North America, REVPAR improved from down 11 to 12% in October-November to down 6.5% in December and down 3% in January at company-operated hotels. This pace of improvement was entirely driven by occupancy, which went from being flat to up one point in December, to up over six points in January. And most of the occupancy increase was driven by weekday room nights, which grew 6 to 7% in December and January. Leisure transient room nights remained consistently positive, offsetting group declines. Rate continues to lag, but periods of compression in December and January allowed us to improve rate realization from negative 12% in October to negative 9% in January.”
- “Local currency REVPAR at company-operated hotels in Asia went from negative 10% and 6% in October and November to positive 7% and 12% in December and January, a 20-point swing over the past four months, as occupancy jumped from up three points to being up nine points, while the rate decline in local currency moderated from minus 14% in October to minus 7% in January. The recovery was broad-based across Asia, led by China. The only market that lags is Japan. Powering the recovery was in-the-quarter, for-the-quarter business up 20% in transient and up over 60% in group over the last year.”
- “Europe, Africa, and the Middle East REVPARs were down 2% in December-January after being down 12% in October-November. Once again, occupancy turned positive and rate declines moderated.”
- “South America is coming back strongly as H1N1 effects fade, but Mexico, which is tied closely to the U.S., remains weak.”
- “In our vacation ownership business, the trend towards stabilization continued. Tours and close rates are holding up; pricing is under some pressure.”