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As expected, HST beat and raised and held a bullish conference call. While they missed our EBITDA estimate, it was due to lower cancellation and attrition fees. Here are our notes from the conference call.



  • "The increase in RevPAR was significantly affected by an increase in transient demand of 8.1%, combined with an improvement in average room rate of 2.8%, the first such rate growth since the second quarter of 2008. Group demand increased 10%, though this was partially offset by a 4.7% decrease in rate."
  • "Comparable hotel adjusted operating profit margins were unchanged as a decrease of $16 million in incremental attrition and cancellation fees reduced margins by 100 basis points compared to 2009. For year-to-date 2010, margins declined 110 basis points and the decrease in attrition and cancellation fees was $28 million, which resulted in a similar 100 basis point decrease in operating margins."
  • Acquisitions & Developments:
    • "On July 14, 2010, the Company participated in a settlement agreement with the owner of the W New York - Union Square and the property's mezzanine lenders under which the hotel owner will be acquired by a venture led by the Company and in which Istithmar World will be a minority member... Closing is anticipated to occur by September of 2010 and is subject to bankruptcy court approval."
    • "On July 20, 2010, the Company reached an agreement to acquire the 424-room Westin Chicago River North for approximately $165 million... The Company expects to complete this acquisition, which is subject to customary closing conditions, in August of 2010."
    • "On July 20, 2010, the Company's joint venture in Asia, Asia Pacific Hospitality Venture Pte., Ltd. (the "Asian joint venture"), in which it is a 25% partner, reached an agreement with Accor and InterGlobe to develop seven properties totaling approximately 1,750 rooms for a total cost of approximately $325 million in three major cities in India; Bangalore, Chennai and Delhi (the "Indian joint venture"). The Asian joint venture will invest approximately $50 million to acquire approximately 36% of the interest in the Indian joint venture. The properties will be managed by Accor under the Pullman, Novotel, and Ibis brands. Development of the properties is underway, and the first hotel is expected to open in the second quarter of 2011."
  • 2010 FY Guidance:
    • RevPAR: 4% to 5.5% [1.5% to 3% increase over prior guidance]
    • Operating profit margins (GAAP): increase 205 to 270 basis points
    • Comparable hotel adjusted operating profit margins:  -50bps to flat [50 to 75bps better then prior guidance]
    • FFO per diluted share: $.66 to $.70 [$0.05 to $0.08 raise from prior guidance - consensus is $0.66]
    • Adjusted EBITDA: $795 to $825MM [$25-45MM raise from prior guidance]


  • RevPAR improved throughout the quarter, with period 6 RevPAR up 10%; ADR also turned positive in the quarter.
  • Hotels are becoming less reliant on discounted room nights.
  • Average rate in premium and corporate business increased more than 6%.
  • 1% decrease in discounted business in the quarter.
  • Average decline in group ADR was less than 5% in the quarter.
  • Booking pace had improved to +8% by quarter end for 3Q2010.
  • Timeline for opening the hotels in India: early 2011-2013.
  • Guidance assumes that they will complete at least one additional deal this year and no dispositions.
  • Comparable RevPAR results and outlook:
    • Boston was their top performing market - +23.8% (13pts occupancy growth, 3.4% ADR growth). Mix shift, easier comps due to renovations underway last year.  For 3Q, expect Boston to perform in-line.
    • New Orleans: (+7.9pts Occ, 7.5% increase in ADR).  Expect outstanding 3Q.
    • NY: 19.1% (7% rate increase). Expect strong 3Q.
    • Miami / Ft Lauderdale (rate was down 2.9%) RevPAR +14%.  Expect a weak 3Q due to the renovations and tougher comps.
    • Orange county: expect it to underperform in the 3Q due to business booking decline.
    • San Fran: 10.2% RevPAR, expect them to slightly underperform in 3Q.
    • Chicago: 9.2% RevPAR, Swisshotel had 26% increase in RevPAR due to renovation. Expect outperformance in 3Q.
    • Hawaiian hotels: RevPAR down 2%, ADR was down 12.4%. Expect Maui market to outperform in the 3Q.
    • Phoenix: 3.9% RevPAR decline, (group rate discounting).  Expect continued underperformance in 3Q.
    • San Diego continued to underperform - RevPAR was down 12.9%.  Expect them to outperform in the 3Q though.
    • European JV: 5.6% increase for RevPAR (ADR down 5%) in local currency.
  • Property level bonuses increased in the quarter and negatively impacted margins in the quarter by 25bps.
  • Mix shift to more banquet and audio & visual business helped margins in the quarter.
  • Wages and benefits increased 3.5%, unallocated expenses increased 6% (credit cards fees, rewards, etc- occupancy related). Utility increased .6%, property taxes decreased 2.8%, insurance increase 15%.


  • +/- 80% flowthrough on the room when RevPAR is ADR driven.  50% flowthrough in F&B this quarter, but 40%ish is more normal.
  • Feel like there is a better opportunity to invest in the mid and upscale sectors in markets like India and China vs. upper upscale & luxury sectors in US.
  • Update on the hotel transaction market
    • Have seen a pick up recently, but we are nowhere near a "hot" market.  Most deals are either distressed or have near term maturities that are difficult to refinance.
    • In looking at the assets that they would like to sell, it makes more sense to wait until 2011/2012 to market them.
    • In general will be more active in the US than international markets over the next few years, but not imbalanced.
    • In certain markets, you can see some sub 5% cap rates and in others, it's a little higher, but that assumes nice recovery.  Europe has slightly lower cap rates then the US.  Asia Cap rates are far more varied given emerging markets and stable market mix. In EM, there is a higher projected ROI.
    • Ultimately, they are looking for acquisitions that will exceed their cost of capital using a 10 year unleveraged IRR.
  • Desert Springs Marriott is encumbered by a $74MM loan, and it's the only one in breach of its covenants and has negative coverage but they are making the payments for it.
  • They would need an improvement above their forecast to increase their dividend.  However, if they sell assets and have capital gains, then they would do a special dividend.
  • Why did they pay so much per key for the Chicago asset?
    • assumes that there were fairly material capex needs in other assets that traded hands in that market.
    • This hotel doesn't need a lot of capex.
    • This hotel is performing very well among its peers. The management contracts expired in 2020 - they have the option whether to extend it or not -so that's unusual and attractive. 
  • They have seen consistent short term bookings strength for the last 2 quarters, so they are getting more optimistic. Corporate demand has really been growing and corporate pays the best rate.  Hotels also feel less need to offer discounts in order to get occupancy.  So not only is the pace of bookings up but also the rate on those bookings are up YoY.
  • Doesn't think that the reinstitution of brand standards will cause their capex to tick up, since they have been consistently investing in their portfolio. However, over-leveraged hotels purchased in 2006/7 may be pushed over the edge by the reinstitution of brand standards.
  • There was a relatively small group of bidders for the Chicago Westin - it wasn't a widely marketed deal.
  • Have 2 assets that they are close on acquiring and feel confident that at least one will come through.
  • Union Square deal - don't expect cash flow to be negative at the hotel and the capex program they are contemplating is nowhere near $25MM.
  • Performance over the last 2-3 weeks has been good for them. Corporate travel trends have still been strong. Group bookings pace has also been normal.
  • Thinks that ground up development for them will be primarily in Asia.
  • How much EBITDA growth is from contributions from acquisitions?
    • Approximately $5MM, since they now have to expense acquisition costs.
  • For business that is booked close in, there is very little cancellation and attrition fees. Part of that is that they don't negotiate for fees since it's so close in and because they would rather get higher rates on F&B and rooms. However, for further out conferences, they are negotiating for some cancellation and attrition fees but they are lower than what they used to get back in 2006 & 2007.
  • Current pricing and occupancy trends
    • June/July RevPAR came in around 9-10%, some rate growth there
  • So far they aren't seeing a pullback from customers. They are expecting rates to go up nicely for corporate rate negotiations and their sense is that their corporate customers are accepting that.
  • Property bonuses are $11MM annualized this year.
  • 2011 is still a little behind (4%) for what's on the books now. From a rate perspective, they are flat already-- expect that tide to turn in 2H2010.  Will start out 2011 at least as good as 2010 if not a little better.