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Great quarter, guidance conservative but not exactly sandbagging.

“Lodging demand for our nine global brands accelerated as we moved through the first quarter, allowing us to beat expectations on robust top-line growth. We continued to hold the line on costs. Most encouraging for us was that occupancy gains were led by the luxury market. This benefits Starwood, thanks to our leading presence in the four and five star categories. With the depths of the downturn behind us, we have a long runway ahead as we move into the upcycle.”

- Frits van Paasschen, CEO

As we wrote about earlier this morning, HOT reported a very solid quarter and impressive guidance.  We saw that at least one sellside firm mentioned that people may be disappointed that the guidance implies 2H2010 moderation in RevPAR growth and "light" flowthrough.  While we are still going through the numbers, we are not at all surprised. 

First of all, Starwood got hit harder earlier on than its competitors given its outsized exposure to luxury, urban and international hotels.  All one needs to do is look at the occupancy declines they experience in 1H and especially 2Q09 to see this point. Those declines moderated materially as the year went on and were actually positive last quarter for W, Luxury/St. Regis, Le Meridian, and Westin brands.  Secondly, at current rates, currency will turn into a headwind for their owned portfolio in the 2H.  Thirdly, fx also impacts costs and given that the RevPAR gains are largely occupancy driven there is a lot of cost creep that should come back into the system.  Finally, since much of the upside was driven by late breaking transient demand, visibility remains lower than normal.

Given the momentum in this space, exaggerated expectations may finally kill these stocks.  We may have further thoughts post the call, but for now, please see our conference call notes.

 

CONF CALL

  • Lots of businesses are done cutting costs and shifted to try and grow revenue by hitting the road to drum up business
  • Hopeful but cautious on the back half the year
  • Refuse to give back the savings that they have achieved
  • Plan to continue deleveraging the balance sheet
  • Strong transient demand and in the quarter for the quarter group bookings drove the upside in the quarter
  • ADR did improve month on month throughout the quarter and are approaching turning positive in many markets
  • Leisure and transient demand offset lower group bookings - Paris was up 43% for example
  • New bookings are up 30% in 2010, and cancellations are below historical levels
  • Lead volumes were also up, especially for small group meetings
  • Group business on the books for 2010 is approaching flat to 2009
  • Expect positive RevPAR for their hotels in every region
  • NYC alone has almost as many rooms as all of India (ah this reminds me of Jason Ader's India Hospitality road show years ago)
  • Pheonician - occupancies were up 30% in the quarter.  Restarted ballroom properties
  • W's were their best performing brands. NYC close to peak occupancy
  • Sold $20MM in residences at Bal Harbour
  • Some deals put on hold are coming back to life (luxury development)
  • Given the recovery going on, they want to postpone their asset sale program, since assets are trading well below replacement costs (although replacement costs don't capture depreciation)
  • Asia was up 20% in April. Japan and Thailand are the only 2 laggards. There was significant late breaking business.  ADR's are now up 2% in April.  Expect Asia to contribute over 20% of their fees
  • North America had the biggest upside surprise in the quarter.  Occupancy in NYC was 75% in 1Q and rate was down 7%. In April they are seeing the first positive ADR change in NA. 
  • Continental Europe recovery is also underway.  First quarter is a loss season so its hard to extract trends.  Late breaking corporate business is the driver of recovery here.  Don't expect the Iceland incident to impact 2Q
  • ME & Africa: Wil derive 13% of their fees from this region.  Didn't see growth here because of weakness in the UAE (-12%)
  • Latin America: South America was very strong (Brazil up 30%) but Mexico was very weak but is slowly recovering.  In Q2 Mexico will lap H1N1 - so far in April Mexico is up 7%.
  • Vacation ownership:  Price reductions help close rates.  On track to generate record cash levels through timeshare- more then enough to fund Bal Harbour
  • Exchange rates remain a tailwind in 2Q- adding 200bps. 
  • Expect to have their first quarter of margin improvement in Q2.  However, occupancy driven recovery doesn't help margins, and fx doesn't either (well not by much at least)
  • Fees and other income included a non-recurring $7MM last year
  • Still have little visibility issues as the booking window is very short 

 

Q&A

  • Sheraton... is the pruning done? 
    • They are 4/5 done with the pruning. Now they are going back and promoting the brand. Launching the "Rediscover Sheraton" campaign
  • Comps get harder in the back half so they would need to see absolute increase from here to see back half growth
  • Look at the 2004 recovery it also started off very strong and moderated
  • Impact of cancellation fees in 1Q09 and FY2009
    • It's a single digit number not very meaningful
  • They basically want peak multiples on peak EBITDA for asset sales - lol.  no wonder there is a wide bid/ask spread
  • Their NOL expires at the end of next year.  Plan to use as much as they can before it expires.  That will influence their sale strategy.  There are ways to extend it though
  • One of the reasons that group bookings are looking better is because more people are showing up to group events
  • Timeshare securitization in the $100MM range for the back half