Leading hotelier Starwood Hotels & Resorts Worldwide Inc. (HOT) posted mixed fourth-quarter 2014 results.
Adjusted earnings of 97 cents per share comfortably beat the Zacks Consensus Estimate of 77 cents by 30%. Earnings were higher than management’s expected range of 73 to 77 cents. Moreover, earnings increased 8% year over year. The upside was primarily due to solid revenue per available room (RevPAR) growth.
Revenues decreased 1% year over year to $1.49 billion 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 $1.523 billion by 2%.
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 11% year over year to $370 million. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 4.7% in constant dollars, led by 4.2% and 5.4% RevPAR growth in North America and overseas, respectively.
Management and Franchise Revenues
Management fees, franchise fees and other income increased 11% year over year to $294 million, better than management’s expectation of 7% to 9% year-over-year increase. Worldwide system-wide RevPAR for same-store hotels increased 4.4% year over year backed by RevPAR growth in North America.
The company witnessed RevPAR growth of 5.8% in North America. System-wide RevPAR grew 2.7% internationally. Starwood’s Asia business is divided into two parts — Greater China and Rest of Asia. RevPAR growth in Greater China was 4.1%.
In terms of brands, Starwood’s Aloft recorded the highest RevPAR growth of 8.7% followed by 5.8% improvement in Westin’s RevPAR.
Vacation Ownership and Residential Sales and Services
Total revenue from vacation ownership and residential sales and services declined 3% year over year to $170 million as residential revenues plummeted 90%, marginally offset by increased vacation ownership revenues.
Other Revenues from Managed and Franchised Properties
Other revenues from managed and franchised properties were up almost 2% year over year to $659 million.
Margins and EBITDA Update
Worldwide same-store company-operated gross operating profit margin was up 32 basis points (bps), aided by higher margins in international markets, partly offset by lower margins in North America. Adjusted EBITDA was $335 million, up 7% year over year.
Update on Hotels
During the quarter, Starwood signed 63 hotel management and franchise contracts, representing approximately 12,900 rooms — 52 are new builds while the rest are conversions from other brands — and opened 27 hotels and resorts with roughly 5,800 rooms.
On the other hand, the company divested 12 properties. As of Dec 31, 2014, the hotelier had nearly 480 hotels in the active pipeline representing almost 108,000 rooms.
Full-Year Results
In 2014, adjusted earnings were $3.02, up 1% from the year-ago period.
Revenues were $6.0 billion, down 2% from 2013.
Other Events
Concurrent with its earnings release, Starwood announced its plans to spin off its vacation ownership business as a separate publicly traded company. The spin-off is subject to certain regulatory approvals, and will not require shareholders’ vote. The spin-off — expected to be completed in fourth-quarter 2015 — will take place through a pro-rata distribution of the new entity’s stock to current Starwood stockholders.
2015 Earnings Guidance
Starwood’s earnings guidance assumes the planned spin-off of the vacation ownership business scheduled to take place on Dec 31, 2015. It expects adjusted earnings per share in the range of $2.87 to $2.97. The Zacks Consensus Estimate is pegged at $2.82.
RevPAR growth is expected to be 5–7% at worldwide same-store company-operated hotels. RevPAR growth at same-store owned hotels is likely to be 2–4% in constant dollars. Management fees, franchise fees and other income are expected to increase in the range of 2–4%. Worldwide same-store owned hotels margin is expected to go up 25–75 bps.
Earnings from the company’s vacation ownership and residential business are expected to be within $140 to $150 million. Further, selling, general and administrative expenses are expected to increase approximately 2% to 4%.
Guidance for First-Quarter 2015
For first-quarter 2015, earnings are expected within 53 to 57 cents per share. The Zacks Consensus Estimate currently stands at 65 cents.
Starwood expects same-store system-wide hotels to record RevPAR growth of 4% to 6% (in constant dollars). RevPAR increase at same-store company-owned hotels is expected in the range of 3% to 5%. Management fees, franchise fees and other income are expected to remain flat due to a substantial termination fee.
Earnings from the company’s vacation ownership and residential business are expected within $35 to $40 million. Additionally, adjusted EBITDA is likely to be in the $250 to $260 million range.
Our Take
Starwood is likely to benefit from the economic revival and steady rise in the demand for hotels. Moreover, the increase in demand for hotels is expected to exceed supply growth in 2015 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 over the long run. However, we are 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 some parts of Africa and an economic slowdown in China are the concerns.
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 Vacations Worldwide Corp. (VAC). While Choice Hotels sports a Zacks Rank #1 (Strong Buy), Intercontinental Hotels Group and Marriott Vacations carry a Zacks Rank #2 (Buy).
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