With no surprise to anyone, HST beat consensus through good cost controls. However, 4Q guidance is at the low end of expectations with top end just touching consensus. Here are our notes from the conference call.
HIGHTLIGHTS FROM THE RELEASE
- "The increase in RevPAR was significantly affected by the improvement in average room rate for transient business of 6.8% combined with an increase in transient demand of 1.8%. Group demand increased 7.9%, combined with a 1.3% increase in rate. For year-to-date 2010, comparable hotel RevPAR increased 5.6%."
- "Comparable hotel adjusted operating profit margins for the third quarter of 2010 increased 150 basis points, despite a $5 million, or 50 basis point, decline in revenues from attrition and cancellation fees compared to 2009."
- "During the third quarter the Company completed the acquisition of three, high-quality hotel assets in New York, Chicago and London for a total investment of approximately $430 million, including assumed consolidated debt of $166 million."
- HST will use $121MM of cash to defease the mortgage assumed on the W New York-Union Square
- "Subsequent to quarter end, the Company acquired the 245-room JW Marriott Hotel Rio de Janeiro, Brazil for approximately $48 million."
- "During the third quarter of 2010, the Company issued 7.4 million shares of common stock at an average price of $14.08 for net proceeds of approximately $103.5 million."
- FY 2010 guidance changes:
- Lowered comparable revenue guidance by $84 to $106MM
- Lowered comparable expense guidance by $77MM to $85MM (so lower revenues but better cost controls)
- Increased Corporate & Other expenses by $5MM
- Tightened FFO guidance (up 1 penny on the low end and lowered by 1 penny on the top end)
CONF CALL NOTES
- Ancillary revenues increased 1.6% and comparable F&B increased 6% YoY
- YTD comparable F&B grew 4.3%
- Improvement in RevPAR has continued to shift towards rate and business mix has continued to improve
- Would expect to see continuing strength in rate as mix improves towards better rated business
- Group revenues increased by 9%, driven by a 1% increase in rate and an 8% increase in room nights. Demand was driven by luxury corporate and association business
- Booking cycle continues to be very short. Group booking activity is up 6% for 4Q compared to last year.
- As they look out to 2011, their booking pace is up slightly
- Acquisition price on the 4 assets they recently bought represent a 14x multiple on 2010 EBITDA and were at a 40% discount to replacement cost
- Outlook for the rest of the year:
- Improvement in RevPAR was offset in a more cautionary outlook on F&B and ancillary revenue
- FFO was impacted by debt repayment and acquisition costs
- 2011 guidance will be given on their next call in February
- New Orleans and Orlando were the best performing markets
- New Orleans RevPAR was up 28.3% (8.3% ADR & and 12pts of occupancy). The hotel benefited from a significant increase in group room nights and contract business related to the Gulf oil spill clean up. For 4Q, expect the property to underperform the rest of the portfolio due to less city wide business.
- Orlando RevPAR was up 26.7% (all Occ driven). Group demand particularly association business increased significantly. Expect underperformance in the 4Q due to lower levels of group business and the start of the rooms’ renovation at the hotel
- Chicago RevPAR was up 14.2% (occupancy +3% & ADR +9.4%) despite 2 less citywide events; they benefited from more corporate business. Expect Chicago to perform in-line in 4Q.
- Boston RevPAR was up 14.5% (ADR +6.9%; Occ +5.8%). Outperformance was driven by a 30% increase in group and citywide room nights. Expect the hotel to underperform in 4Q due to fewer city-wide room nights and ballroom renovation.
- NY RevPAR +12.9% (driven by 12.4% increase in ADR). Reached nearly 91% occupancy, Expect NY to have a very good 4Q despite room renovations.
- Hawaii finally recovered. RevPAR +11.8% (ADR was up 8.3%) due to increased air capacity and better group demand. Expect to outperform in 4Q.
- Denver RevPAR +11.8% (occupancy +7.2%). Expect them to outperform in 4Q.
- San Fran: RevPAR up 11% (ADR up 3.9% and Occ +5.3%). Expected to perform in-line in 4Q
- San Antonio RevPAR fell 7% (6.6% decline in occupancy). The poor performance was due to lower transient and group demand. Expect hotels to rebound in 4Q and outperform the portfolio due to a substantial increase in group and citywide demand.
- Phoenix RevPAR declined over 9.8%. Expect these hotels to continue to underperform the portfolio due to continuing renovations
- San Diego is expected to significantly outperform in the 4Q
- European JV RevPAR was up 10.3% - in constant Euros
- Rooms flowthrough was excellent at over 80%
- F&B flowthrough was worse than expected due to more cautious group spend
- Unallocated costs increased 7% - all due to variable expenses. Utility increased 6.2% due to higher utility usage costs due to weather, property taxes decreased 1%, and insurance decreased 20%
- In the 3rd Quarter, they terminated their sublease of the HPT hotels due to a default of their tenant. They will terminate the residence in properties on Dec 31, 2010. They will also terminate the lease on the 53 courtyards effective Dec 2012.
- W Union Square mortgage is $115MM
Q&A
- Expect that roughly 1/3 of their hotels will be paying incentive fees by year end. Don't expect anywhere close to 2/3rds to be paying by end of 2011.
- Corporate rate negotiations? Doesn't have anything to really add to Arne's comments. Still very early. Some early customers that renegotiated came in at high single digit rate.
- Broadly speaking they are more focused on the coasts than the middle of the country for ownership.
- Groups are meeting again, but are being more cautious on what they spend on F&B especially during breaks. So group spending per customer is down a little. On the ancillary revenue, they aren't seeing as much spending on spa and golf. Given the occupancy increases, they were hoping to see more growth on that side. They also hope that at some point they will begin to be able to start charging for meeting rooms - which have good margins. Have only been able to do so in limited markets.
- Have looked at the JW Marriott in Rio a few years ago but there were some title issues that needed to be resolved. Still suspect that the majority of the assets that they are looking at will be domestic.
- Expect that 2011 wage increases will trend above CPI by a percent or two. Have had some pressure on the wage area as bonuses come back in this year, but next year the increase shouldn't be as material year over year since it's not off of a zero base.
- Things aren't moderating, comps are just getting a little more difficult. They also have some renovations in Nov & Dec - when business levels are usually lower and therefore disruption isn't as great.
- September was up 9% for them. Booking pace continues to follow the same pattern of strong close in bookings. Supply is also moderating which helps.
- Despite the fact that GDP is weaker, corporate earnings and results are trending stronger than expecting, which is good for spending. They expect corporate investment to be up in 2011 over 2010.
- 80% flowthrough on room revenues is as good as it gets really
- International exposure for them is roughly 7-8%. In the future if they feel like they can successfully invest abroad, then they may increase exposure there.
- If rates were to increase, they still believe that pricing will hold up since increased rates means that business is also better. Also while rates are lower it's also harder to get leverage. Cap rates should trend up as the anticipated growth rate moderates. Also over time, pricing on assets and replacement cost tends to converge.
- Thoughts on development? Would be surprised if they saw progress on new full service development over the next 12 months. Think that 2005-2006 is a good proxy for growth. Luxury development will be even tougher since in the past, hotels were subsidized by condos. Do expect growth in limited service.
- Expect occupancy to also be up next year, but rate growth should play an increasingly larger role. While mix shift has helped, they have also been getting increases in rate.
