Starwood (HOT) Tops Q3 Earnings on Strong RevPAR Growth

Leading hotelier Starwood Hotels & Resorts Worldwide Inc. (HOT) posted mixed third-quarter 2014 results. Adjusted earnings of 66 cents per share beat the Zacks Consensus Estimate of 65 cents by a penny. Earnings were higher than management’s expected range of 62 to 65 cents. However, earnings declined 7% year over year owing to lower revenues.

Starwood Hotels & Resorts Worldwide, Inc - Earnings Surprise | FindTheBest

Revenues decreased 1% year over year to $1.49 billion in the quarter mostly due to a decline in vacation ownership and residential sales and services revenues. Revenues from residential sales mainly dropped as a result of the sale of The St. Regis Bal Harbour residential project in Jan 2014 and Aloft Tucson University in Tucson, AZ. Also, the top line missed the Zacks Consensus Estimate of $1.52 billion by a meager 1.5%.

Inside the Headline Numbers

Starwood earns a major portion of revenues from its hotel business. Apart from this, the company derives revenues from its vacation ownership business.

Hotel Business

Owned, Leased and Consolidated Joint Venture Hotels

Revenues at owned, leased and consolidated joint venture hotels declined 1.3% year over year to $393 million. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 7.2% in constant dollars, led by 7.5% and 7% RevPAR growth in North America and overseas, respectively.

Management and Franchise Revenues

Management fees, franchise fees and other income increased 3.5% year over year to $255.0 million in the quarter, at the higher end of management’s expectation of 2% to 4% year-over-year increase. Worldwide system-wide RevPAR for same-store hotels increased 5.7% year over year, owing to RevPAR growth in North America.

The company witnessed RevPAR growth of 9.1% in North America. System-wide RevPAR grew 5.4% internationally. Starwood’s Asia business is divided into two parts — Greater China and Rest of Asia. RevPAR growth in Greater China was 8.7%.

In terms of brands, Starwood’s Aloft recorded the highest RevPAR growth of 12.6% followed by Westin that posted RevPAR growth of 9.0%.

Vacation Ownership and Residential Sales and Services

Total revenue from vacation ownership and residential sales and services declined 20.5% year over year to $159.0 million as residential revenues plummeted 95.3%, marginally offset by flat vacation ownership revenues.

Other Revenues from Managed and Franchised Properties

Other revenues from managed and franchised properties were up 3.5% year over year to $686.0 million in the reported quarter.

Margins and EBITDA Update

Worldwide same-store company-operated gross operating profit margin was up 125 basis points (bps) during the quarter, aided by higher margins in North America and international markets. Adjusted EBITDA was $298.0 million, down 1% year over year.

Update on Hotels

During the quarter, Starwood signed 39 hotel management and franchise contracts, representing approximately 7,100 rooms — 34 are new builds and the rest conversions from other brands — and opened 18 hotels and resorts with approximately 3,500 rooms.

On the other hand, the company divested five properties. As of Sep 30, 2014, the hotelier had approximately 470 hotels in the active pipeline representing approximately 105,000 rooms.

2014 Earnings Guidance Narrowed

Starwood narrowed its earnings guidance for 2014 owing to the impact of asset sales, a closed hotel and leased hotels that were converted to managed or franchised contracts in 2014. It expects adjusted earnings per share in the range of $2.79 to $2.83 as against $2.78–$2.85. The Zacks Consensus Estimate for full-year 2014 is $2.84.

RevPAR growth is expected to be 5–6% at worldwide same-store company-operated hotels. RevPAR growth at same-store owned hotels is likely to be 4–6% in constant dollars. Management fees, franchise fees and other income are expected to increase in the range of 8–10%. Worldwide same-store owned hotels margin is expected to go up 75–125 bps.

Earnings from the company’s vacation ownership and residential business are expected to be within $170 to $175 million. Further, selling, general and administrative expenses are expected to increase approximately 5% to 7%.

Guidance for Fourth-Quarter 2014

For fourth-quarter 2014, earnings are expected to be within 73 to 77 cents per share. The Zacks Consensus Estimate for the fourth quarter stands at 78 cents.

Starwood expects both worldwide same-store company-operated and same-store company owned hotels RevPAR growth to be within 3–5% (in constant dollars). Management fees, franchise fees and other income are expected to be up 7–9% in the fourth quarter.

Earnings from the company’s vacation ownership and residential business are expected to be within $40 to $45 million. Additionally, adjusted EBITDA is likely to be approximately $310 to $320 million.

Our Take

It seems that Starwood is poised to benefit from the economic revival and steady rise in the demand for hotels. Moreover, the growth in demand for hotels is expected to exceed supply growth in 2014. This leaves scope for increasing room rate, going forward, and thereby improving RevPAR.

Additionally, the hotelier’s strong developmental pipeline, significant international exposure, asset disposition strategy and shift to a fee-based business model are expected to bode well for future growth. However, we remain concerned about the company’s declining residential business, which could continue to hurt the top line in the near term. Also, the lingering political uncertainty in Europe, Latin America and in some parts of Africa and an economic slowdown in China are expected to remain a concern for the company.

Starwood presently has a Zacks Rank #3 (Hold). Investors interested in the hotel industry may consider stocks like Choice Hotels International Inc. (CHH), Intercontinental Hotels Group plc (IHG) and Marriott International, Inc. (MAR). All these stocks carry a Zacks Rank #2 (Buy).

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