HOT Q2 “SURPRISE”

The only surprise will be if HOT doesn’t surprise on the upside and raise full year guidance when it reports next Thursday. 

 

 

We’re not sure that there are a lot of mysteries to HOT’s Q2 earnings and outlook, although margins are more uncertain than for MAR.  Like Marriott, we expect HOT to beat the quarter and raise guidance for 2010.  Consistent with history, the company will likely provide pretty conservative guidance for next quarter, in this case Q3.  Our Q2 projection is $217MM of EBITDA and $0.27 in EPS versus the Street at $209MM and $0.25, respectively.  For the full year, we anticipate the company will raise guidance from $810MM and $0.88 closer to our estimate of $847MM and $0.99 in EBITDA and EPS, respectively.

 

Now more than ever, the macro environment will drive revenues and lodging profits, and investors’ views of the future macro environment will drive stock prices.  Current RevPAR trends are strong but the reported quarterly results and weekly RevPAR numbers just give investors a glimpse into the rear view of the mirror.  We find it amusing listening to the sell-side repeatedly asking questions on 2011 trends and beyond.  Face it, there is very limited visibility in this space and hotels only have pricing power when occupancies exceed 70%.  Lodging trends have historically been lagging indicators, since what’s on the books today was booked at some point in the past.  If sentiment changes or things begin to deteriorate, future bookings are impacted, and by the time the numbers show a slowing trend, it would be already too late.  No matter what these companies report, how they trade depends on people’s outlook. The issue today is that investors’ collective view of the future is dimming and comps get much tougher in 2H 2010.    

 

Here are the details of our projections:

 

2Q2010 Detail

 

Owned, leased & other revenue of $416MM and gross margin of 17.9%

  • We expect room revenue to grow 7%.  Starwood owned room based has shrunken roughly 5% since 2Q09.
  • Non-room revenue growth of 4%, less lost NOI from the sale of the retail space at the NY St. Regis.
  • CostPAR growth of 2.9%.

Management, franchise, and other income of $175MM; $136MM (14% YoY growth) of which comes from real fees with the balance coming from “other stuff”.

  • Base management fees of $68MM, up 13% YoY.
  • Incentive fees of $29MM, up 13% YoY.
  • $39MM of franchise fees, growing 15.5% YoY.
  • $30MM of amortization of deferred gains, termination fees and other one time items.
  • $8MM of miscellaneous other revenues.

$132MM of VOI revenues and $30MM of gross margin

  • Originated sales revenues up 3% YoY with gross margins of 35%.
  • $61MM of other sales and services revenues, which includes $21MM of interest income on securitized and unsecuritized loans with $45MM of associated expenses (27% margin).
  • $8MM of deferred revenues and $6MM of deferred expenses.

Other stuff:

  • $80MM of SG&A.
  • $77MM of D&A.
  • $61MM of net interest expense.
  • 22% tax rate.

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