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HST 1Q2010 CONF CALL: "NOTES"

 

HIGHLIGHTS FROM THE RELEASE


"Although the strength and speed of the recovery is difficult to predict and booking pace remains short, the Company now anticipates that for 2010:"

  • RevPAR: 1% - 4%
  • Operating profit margins: +100 - 220 basis points
  • Comparable hotel adjusted operating profit margins:  -125 to - 50 basis points
  • EPS: -$0.32 to -$0.25;
  • Net Loss: $205 to $158 million
  • FFO/ Share: $0.58 to $0.65
  • Adjusted EBITDA: $750 to $800 million

CONF CALL

  • Recent operating results have turned positive on the top line in March.  RevPAR would have only declined 1% if all the results from their properties were included.
  • For the 3rd straight quarter they experienced transient demand growth which grew 12%. Special Corporate increased 28%--which was especially strong in luxury where demand increased 50%.
  • Overall the positive mix shift towards transient helped overall rates. Transient rates were up 3.6%.
  • Group demand increased by 0.5% for the quarter.  Association room nights increased 14% and discount room nights increased 5%.  Saw a meaningful pickup in forward group bookings - especially in luxury hotels (which increased 18%).  Group revenues decreased 8.6% in the quarter. Their big box hotels outperformed in the quarter
  • Transient booking for 2Q2010 is tracking ahead of last year
  • Business are definitely loosening their travel budgets
  • There have been a limited number of assets that came to market.  Pipeline of potential transactions has increased both domestically and internationally
  • Signed an agreement to sell the Ritz in Dearborn which has negative cash flow and is in a very challenged market. Should close in the 2Q2010.
  • Outlook for 2010 - it is clear that the broader economy is in recovery.
  • Commentary on the quarter's performance:
    • Phili top market:  12.3% RevPAR increase. Expect Phili to underperform in the 2Q though
    • Miami:  Occupancy was up 6.7% and ADR was up 1.7% - due to Superbowl and Pro Bowl. Expect Miami to have a weaker second Q but still post RevPAR
    • San Antonio should have decent 2Q and strong 2H
    • Boston:  Expect great 2Q - with double digit RevPAR growth
    • Orange County:  RevPAR grew 6.7% in the Q - ADR down 7.9%.  Should perform well in 2Q
    • NYC:  RevPAR increased 2.6% (7.7% ADR decline). NYC should have outstanding 2Q
    • Chicago:  ADR fell 9.9%. Expect better performance in 2Q
    • Hawaii:  14.1% decline in RevPAR due to a 13.4% decline in ADR. Expect much better performance in the 2Q
    • DC:  2% decline in Occ and a 13.4% decline in ADR.  DC should have positive RevPAR in 2Q
    • San Fran:  RevPAR declined 16.9% (occupancy 3% , ADR 12.2%) also negatively impacted by renovations. Expect better 2Q but still weak better 2H
  • Margins in 1Q2010 where negatively impacted by cancellation fees in 1Q09 (comp) and occupancy growth in the face of ADR declines.  Loss of audio visual business impacted them.  Ground lease payments on Marriott Marquis - $3MM - reduced EBITDA by $3MM.  Have the option to buy the property for $19.9MM
  • Utilities decreased 8.4%.  Real Estate taxes where flat
  • Expect higher occupancy to lead to wage and benefits to grow at inflation. Utilities will grow above inflation as will Sales and Marketing.  Property insurance to rise at inflation and RE taxes to rise above inflation.
  • 2010 cancellation and attrition fees will be materially lower than 2009
  • Have $1.8BN of liquidity
  • Have 99 assets unencumbered by mortgage debt

 

Q&A

  • Dividend will recover more quickly but don't have enough taxable income to pay even the 1 cent per quarter. Even at high end of the guidance they don't really need to increase the dividend
  • The Euro 64MM loan may end up in the JV portfolio
  • Naples Ritz? Trying to get a better understanding at what happened there. There have been no big cancellations that have resulted from the incident
  • NY had a strong period 4 - seeing an acceleration there due to corporate strength
  • All of their non Marriott hotels' March results aren't captured in their 1Q results
  • Ritz Dearborn will fetch a low price - but the asset is losing money in 2010 and lost money in 2009 and was B/E in 2008. There is a lot of deferred capex there as well. Hopefully the transaction will close in the next 60 days
  • For the Euro Loan - they are looking for leveraged returns above the 10+% hurdle rates on unleveraged.  If the loan remains performing they are happy to just get paid off in 2 years, otherwise they would be happy to own them.  Would be comfortable investing in Europe on balance sheet - but prefer the JV structure
  • Single asset acquisition market vs. portfolio market?
    • One group of opportunities are emerging because of RevPAR recoveries and are re-testing the market where there are looming maturities
    • Another group of opportunities of strategic sellers are looking to offload non-core assets and use the proceeds to reinvest in their business
    • Volumes are still relatively light
  • When do they see ADR's recovering to show y-o-y growth and when would comparable operating margins turn positive?
    • Recovery in rate is market by market - some are already happening - NY, New Orleans, Miami, Boston, DC
    • Portfolio wide its at best in the 2H2010
    • On the margin front - looking at a 50bps decline if they get 4% RevPAR growth. So not until 4Q2010
  • Need 4% RevPAR growth going forward to get margin growth?
    • Yes for this year, but going forward inflation also matters. If inflation stays at 2% then they will get better margin growth
    • I doubt we will have 2% inflation if the market keeps recovering
    • In the first 8-12 months of a recovery a lot of the cost cuts creep back in and negatively impact margins
  • FY 09 they had $40MM of abnormally high cancellation and attrition fees
  • They are marketing a few properties currently, but because they have plenty of liquidity they will be very price sensitive
  • Why they got more optimistic on RevPAR?
    • In 1Q they where back to where they where in 2007 for transient demand. When that starts to occur its a great sign of recovery
    • Groups are also getting better - more people are coming to group events then they expect
      • So when last year if they had an 800 room block it would end up closer to 700. Now if the block is 800 it can skew a little above that.  That allows them to cut off some of their cheaper channels and save rooms for those higher priced groups
    • Up for the full year for bookings
  • Why is there guidance so much lower then MAR?
    • They are more conservative - because EBITDA margins matter more for them
    • They own some of MAR's and HOT's best hotels, so there is no reason for them to underperform those 2
  • Bookings are still short term. Which is by 2Q bookings are up over 200 bps above 2Q09 levels 
  • How do rates look?
    • Assume that short term rates are lower than rates on the books aside from some markets (probably referring to sell out markets like NYC)
  • How are they thinking about value for their acquisitions?
    • Looking for an unleveraged rate of return given their recovery assumptions
  • Would be disappointed if they had 5% RevPAR growth in 2011 with no margin growth