HOT 2Q2010 QUICK THOUGHTS

HOT’s 2Q2010 results blew past consensus numbers and bested ours. The beat was solid and the raise in guidance – in our opinion – was way too conservative.

 

The high end of HOT’s new FY guidance touches our prior estimates while 3Q guidance looks like a sandbag – with the high end of guidance meeting the Street as usual.  If it were another company, we would be worried that they were back end loading results, however, this is classic HOT fashion – beat, raise for the year, and sandbag the coming quarter.  If HOT’s results aren’t up on these results, then only a change in Macro sentiment will help them.

2Q2010 Detail:

Starwood reported $723MM of revenues and $226MM of EBITDA, beating our estimates by roughly 4% on both metrics. 

  • Owned revenues of $437MM came in $21MM above our estimate and owned EBITDA of $90MM was $16MM above our estimate or 17% better.
    • The entire beat on Owned, leased, and other hotel revenue came from F&B and Other.  RevPAR of $143.09 was actually $0.07 lower than our number and room revenues were spot in line with our estimate.
    • Food & beverage and other revenues grew a staggering 18% YoY.  While the comp is easy (2Q09 F&B and Other revenues were down 36%), this is still impressive and is likely a reflection of the mix shift to better rated corporate business and a pickup in banquet business.
    • As a result of the strength in non-room revenues, RevPOR increased 5.9% YoY, compared to .7% YoY growth in 1Q2010.
    • Even more impressive was that CostPAR only increased 70bps, which lead to margin improvement of 4% YoY to 20.6%.  We would note that 2Q09 was the easiest margin comp as margins decreased 10.2% YoY that quarter compared to a 6.9% decrease for 2009.
  • Fee revenues of $177MM came in $1MM above our estimate.  Management & Franchise fee growth of 17.5% was better than HOT’s guidance of 11-13% and our estimate of 14.4% growth.
    • Base Management fees of $69MM were spot in line with our estimate, while incentive and franchise fees were each $2MM higher.
    • This was somewhat offset by lower “low quality” other “stuff” which was $2MM light of our estimate.
    • Amortization of deferred gains was still $20MM/Q.
  • Total VOI and Residential Sales and Service revenue of $137MM was $5MM better than our estimate, due to stronger residential sales.  Timeshare results of $34MM were 12% higher than our $30MM estimate.
    • Originated sales revenue of $177MM was lower than our estimate due to lower contract sales and lower YoY pricing, which was somewhat offset by a lower percentage of sales revenue getting deferred.  35% margins on originated sales was inline with our estimate.
    • Residential sales were $5MM higher and there were no associated expenses – which is a bit odd and is why the overall results in this segment was better than our estimate.
    • Other Sales and Services Revenue of $62MM was $1MM higher than we expected but margins 7.6% lower (i.e. expenses were $5MM higher)
  • Other Stuff:
    • SG&A was $12MM higher than our estimate – company claims it's due to timing of incentive-based accruals. However, they raised FY guidance for SG&A growth to 6-8% growth from 3-5%.  Anyway, higher pay for better results is no surprise given the crummy years that the sector has had.
    • D&A was $4MM lower than our estimate.
    • Net interest expense was $2MM below our estimate and $2MM light of company guidance.