Orient-Express Hotels Management Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 2.10 | About: Belmond Ltd. (BEL)

Orient-Express Hotels Ltd. (OEH) Q3 2010 Earnings Call November 2, 2010 10:00 AM ET

Executives

Paul White - President and Chief Executive Officer

Martin O'Grady - Chief Financial Officer

Ned Hetherington - Company Secretary

Victoria Legg - Director, Public Relations

James Hurlock - Chairman

Analysts

Josh Attie - Citi

Amanda Bryant - Susquehanna

Joe Grass – JPMorgan

Operator

Good afternoon ladies and gentlemen. This is the third quarter 2010 earnings conference call for Orient-Express Hotels. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Victoria Legg. Please go ahead madam.

Victoria Legg

Thank you, operator. Good morning ladies and gentlemen. As the operator indicated this is the third quarter earnings conference call for Orient-Express Hotels. We issued our news release last night and it’s available on our website at orient-express.com as well as on the SEC website. For anyone, who have not yet seen it the summary is as this follows.

Third quarter total revenues, excluding real estate up 14% to $159 million. Revenue from Owned Hotels up 16% to $132 million. Same-store RevPAR up by 14% in local currency up 11% in U.S. dollars. Adjusted EBITDA before real estate of $37.1 million, up 22%. Overall, margins showed 140 basis points improvement.

On the call today are James Hurlock, Chairman of Orient-Express Hotels, Paul White, President and Chief Executive Officer, Martin O'Grady, Chief Financial Officer and Ned Hetherington, Company’s Secretary to whom I now handover for the usual housekeeping announcements.

Ned Hetherington

Thank you, Vicky. The usual housekeeping announcement is our cautionary statements under the Private Securities Litigation Reform Act of 1995. In the course of remarks for you today by Orient-Express Hotels’ management and in answering your questions they may make forward-looking statements concerning Orient-Express Hotels such as its earnings outlook, future investment plans, and other matters that are not historic facts.

We caution that actual results at Orient-Express Hotels may differ materially from these forward-looking statements. Information about these factors that could cause actual results to differ is set out in today’s news release, the company’s latest Annual Report to shareholders, and the filings of the company with the U.S. Securities and Exchange Commission.

That’s all I have. I’ll now turn the call over to Paul White our Chief Executive Officer.

Paul White

Thanks, Ned and good morning, everyone. I was reminded this morning that this is the third conference call out of our last four that we seem to have hit an Election Day on either side of the Atlantic. It reminded me to go back and look at what we said a year ago and I think you will find the tone of our call like many calls at the moment a little different from that of November 2009.

Our third quarter represents the coming together of good revenue growth enhanced margins and ultimately profit improvements, coupled with some real progress on our debt positions around the world. A system wide 14% local currency RevPAR growth coupled with a 22% uplift in EBITDA was in our view a very satisfactory outcome in a quarter, which is traditionally Orient-Express’ strongest.

Most encouraging with a spread of growth across the portfolio with Europe, America, Brazil, Asia, South Africa and our luxury trains increased portfolio all showing good revenue gains. I do not want to repeat what is written in our press release, but would like to stress how particular pleased I was with the results out of Brazil up 33% and South Africa are up 57%.

The story of the quarter in line with previous quarters this year was one of occupancy growth with occupancy growing 16%. Rate in local currency was 1% down this repeats the story for 2010 in general as we intended to recover the lost room nights of 2009. You will recall our advanced reservation stats have been showing quite a large growth in the past quarters and today we move into quarter four with 22% more room nights on the books than this time last year. Three months ago you will remember we were sitting 17% ahead, and we ended the quarter 15% ahead.

So, let's give you some more detail on the quarter by regions and booking spaces we moved into 2011 a key year for our company and our industry. Italy a key market for Orient-Express, RevPAR rates for local currency up 8%, with the Caruso and the Cipriani both up double-digit. Interestingly, driven by the American visitors and the Italian domestic market more interestingly excluding the two Sicilian hotels, same-store U.S. revenue was up 10%, UK was up 4%. The Italian business was at 25%, even more interesting the rates that the Italian’s are paying, averaged €859 only invested by the Americans averaging €893 and of course the Russians averaging €1011, they tend only to book suites.

I must state the things that even 10 years ago, the domestic business initially would outstrip most European countries, I would have been laughed at, but this has been a key strategy as we move forward in our company not just in Italy, but else where in the world. And this all bodes well for 2011. As we do expect some recovery from the UK market, as the UK economy finally showed signs of strengthening. 2011 bookings are already 6% ahead of this time last year, in a year where we expect rate growth to match occupancy growth.

The rest of Europe continues to be our biggest challenge. Although RevPAR was up 8% in local currency, Reid’s, Madeira, which is relied on the UK market was actually down 8%. Bookings for next year overall are up 8%, but Reid’s is still a negative territory. Most encouraging however, is the Grand Hotel Europe up 27% and the La Residencia up 26%.

Moving on to America, where same-store RevPAR was up 18% in the quarter and we returned to profitability. Bookings for the fourth quarter are up 27% with Mexico seeming to have turned to corner. The bookings for the next 12 months are dominated by Charleston Place, but overall it’s showing a 4% increase.

In the rest of the world, local currency same-store RevPAR was up 32% with Asia, South America and Africa all contributing strong numbers. Likely in Brazil, I was pleased to see 47% growth in the Brazilian business at the cost [Inaudible]. But we really are now the preferred, have been referred to the [Inaudible], especially out of [Inaudible] $57 million.

The outlook for the rest of the world is also increased, remember we have no book up next year in Africa [Inaudible] and new increases in the fourth quarter 2010 and then leading into 2011 else where all our owned properties are showing good growth for the next 12 months with the Copacabana Palace up 11%, Cataratas up 21%, Asia up 30% and currently the fourth quarters for rest of the world is 18% ahead of this time last year.

Finally a few words on Trains and Cruises despite the issues of floods, reduced government subsides in Peru, the EBITDA have exceeded our internal budget. Bookings for next year on a revenue basis are 11% ahead of this time last year. And the fourth quarter of this year looks encouraging up currently at 26%.

Coming off the quarter and indeed the year, we have grown occupancy in [Inaudible] pretty much as planned. Looking into 2011, [Inaudible] a few more balance and opportunity to grow rate particularly for [Inaudible]. On the flip side, despite completing the few projects, you will not be surprised to hear that we are seeing little movement in the second home or vacation home market on what most of the buyers of Porto Cupecoy [Inaudible] we have not sold any further units in the last three months.

Similarly, there has been little movement with La Samanna villas or the Keswick plot. I believe this is more of a market issue than an issue for Orient-Express Hotels and thus we have reduced the amount we are currently spending on seven of these properties to a minimum until we see more positive signs generally in the market.

In closing, I think the quarter ended on a positive note, good RevPAR and EBITDA gross margins expanding a much more solid platform as we enter 2011 than a year ago. Business trends continue to look more normal or should I say guests are starting to book a little earlier. Key market to watch for our company in 2011 is the UK market. If the economies are right and the UK is lagging the U.S. by one year to 18 months, then we’ll definitely hit our targets.

I cannot end without repeating though we at Orient-Express remain focused on leverage. Getting our debt to EBITDA down to less than 5 times with EBITDA growth, asset sales and the sale of real estate being those key drivers to get there and indeed beyond, Martin.

Martin O'Grady

Thank you, Paul. Good morning everyone. At the end of the quarter, the company had $132 million of unrestricted cash plus an additional $35 million of funds available under working capital and revolving credit facilities. Restricted cash was $40 million. Total term debt at September 30th was $805 million. Outstanding working capital facilities were just $0.3million.

Taking into account of our cash balance of $146 million net cash at the end of the quarter were $659 million. On a trailing 12 months basis, the ratio of net debt to adjusted EBITDA free for to-date was 7.9 times, which is down from 8.4 times last quarter. Our debt coverage ratio was around 2.5 times.

Out term debt maturity schedule taking account of $82 million of revolvers mature in 2011 and $28 million of revolvers that mature in 2012 did now as follows: 2010 to the balance of this year $8 million, 2011, $524 million, 2012, $138 million after 2012 up are [Inaudible].

At the end of September, the interest costs on 34% and the average cost of debt including [Inaudible]. Turning to net cash flow net cash from operation excluding real estate was $34 million that was $9 million of CapEx in the quarter including $2 million for our new hotels in Italy and $3 million for hotels [Inaudible].

Net debt repayments in the quarter was $13 million and overall the net increase in unrestricted cash of $19 million. Regarding Q4 [ph] the debt was fully repaid before the end of the second quarter and we received $16 million in the third quarter has been transfer to sold unit’s to customers. At the end of the quarter after one cancellation we’ve sold 103 units and transferred legal title on 87 of these.

In the fourth quarter, taking onto some possible defaults from buyers who are yet to close, we should still receive an additional $4 million to $5 million from the [inaudible]. Net tax charges in the quarter was $8 million compared to a net charge last year of $11 million, cash tax in the quarter was $4 million. Our full year cash tax is expected to be in the range of $13 million to $15 million, which means the balance of cash tax in the last quarter should be in the range of $2 million to $4 million.

We expect the full year tax charges still be in the range of $22 million to $24 million, thus we are expecting the last quarter a charge of $7 million to $9 million, it’s still too odd to say how the tax charge and cash tax for 2011 will look but at this stage we could believe that it will be a similar fashion for this year or be at a marginally lower level.

I would like to now update you on the 2011 loan maturities, which amount to $524 million and help to [inaudible] investors. Thanks to the support of our lenders we fully appreciate the quality and valuable assets we have made the following progress. The $67 million Charleston Place loan was refinanced in October on the last call I reported that we’ve had bank credit committee approval for a new $75 million loan.

Because of the strong recovery of the hotel this year, which continued in the third quarter we were able to increase the facility amount to $80 million by the time of closing. This is a five year loan including two one year extensions at our option; it has an amortization of $1.6 million a year and carries a margin of 3.5% over LIBOR.

Secondly, we obtained in October a new $43 million loan secured by three of our U.S. properties, IPC, Keswick and 21 Club. This is a three year loan with amortization of $4 million per year and has a 3.5% margin over LIBOR. This new loan replaces an existing $46 million loan that also included El Encanto a security, thus our El Encanto development is now free of debt and gives us more flexibility as we continue to see co-investor for that project.

Third, we signed last week and in fact funded today a new three year loan for €37.5 million secured on Reid’s and Le Manoir this loan carries a margin of 2.75% over LIBOR and has an annual amortization of €2 million. Finally and most significantly, we also signed last week a new five year loan for €150 million, secured on the four Italian Hotels that is excluding the hotels in Sicily. Funding for this loan is scheduled to take place next week after local Italian security documents have been executed later this week.

This loan carries a margin of 2.5% over LIBOR and have annual amortization of €3.75 million. Altogether, using exchange rates at September 30th, these four new loans totaled $379 million and replace existing loans of $439 million and thus require a net repayments excluding fees of $60 million. Additionally, it is worth noting that our Hôtel de la Cité asset will no longer be encumbered by any of these loans.

At least two smaller loans that mature in 2011 totaling $60 million we have had constructive dialog with our lenders and expect to refinance these loans by the end of the first quarter of next year. We anticipate making a net repayments on these loans in the range of $15 million to $20 million.

I’ll now pass it back to Vicky.

Victoria Legg

Thank you, Martin. I’ll now hand back to the operator, so we can take your questions. In interest of time, please limit yourself to three questions each. Thank you, operator.

Question-and-Answer Session

Operator

Thank you, Madam. (Operator Instructions) And we will take our first question from Josh Attie from Citi. Please go ahead.

Josh Attie – Citi

Hi, thank you. You had previously talked about being able to monetize some of the residential real estate on your balance sheet for, I think $50 million to $60 million and has that view changed following the impairments or does the impairment already reflects those numbers?

Paul White

Yeah. I mean the view, Josh, haven’t changed, what has changed is the expectation on the timing what I, we have a couple of choices here we could try to fly itself the remaining unit of which, as Martin said we’ve got about 80 left to sell. But to be honest where the market sits and the research and the advice that we’ve had is, that we would have to drop those prices probably in the region of 50% to do that.

So our decision has been that, which is backing of the, the sales process a little bit, give the market and really the debt market that supports that market a chance to recover. As you know, there is no debt on these properties. But probably rather than seeing that money coming in over the next two years, it’s probably going to take an extra, probably an extra year.

The impairment really reflects the expectation that we had certainly been sort of quoting to the street and to yourself, so your numbers are right it’s just the faith over three, three and a half years rather than two, two and a half years.

Josh Attie – Citi

And can you just remind us what’s the book value of the residential real estate after the write down?

Paul White

Including the other assets, it’s about a 100 and excluding Keswick the villas at La Samanna and Cupecoy.

Martin O'Grady

Cupecoy by itself it’s going to be in the order of 120 to 130 after the impairment. And then you’ve got the land at Keswick, which would have a pretty.

Paul White

I think a pretty a good low leverage value.

Martin O'Grady

And then you’ve got the villas themselves, eight villas at about, four each I think…

Paul White

Yeah.

Martin O'Grady

$30 million.

Josh Attie – Citi

Okay, thank you.

Paul White

Thanks Josh.

Operator

(Operator Instructions) And we’ll take our next question from [Amanda Bryant] from Susquehanna. Please go ahead.

Amanda Bryant – Susquehanna

Great, thank you, that was Susquehanna believe it or not.

Paul White

At least we know Amanda.

Amanda Bryant – Susquehanna

I know you do, thank you. Just a couple of questions, I am sorry, I may have missed this, either it’s on static on the line during your comment, but I wanted to understand where do your bookings on a same-store basis stand over the next 12 months, will be my question and my second question would be in terms of, I know you had talked in the past about hiring some one to head up development to, try to obtained some management contracts, I just wanted to see where you stood on that? Thank you.

Paul White

Okay, on the later, I am hoping that we’ll actually be able to conclude on that issue in the next week or so. He may even be listing on the line. On the former, on a same-store basis overall we are sitting 6% up year-on-year. So basically that includes just about everything expect for the two Sicilian hotels, which interestingly I was going to make reference to but the de Mayo actually finished the quarter 30% up in RevPAR it’s not in the same-store on the prior year, so those two assets are going well, but they are not in the same-store, but we are 6% up a couple of days ago.

Amanda Bryant – Susquehanna

Okay, prefect. Thank you so much.

Operator

And we’ll now take our next question from Joe Grass from JPMorgan. Please go ahead.

Joe Grass – JPMorgan

Hello everyone.

Paul White

Hi, Joe.

Martin O'Grady

Hi, Joe.

Joe Grass – JPMorgan

Paul, I may have missed, I know it wasn’t on the earnings release, did you disclose what that non-core asset was that you’re in an agreement to sell for $12.5 million?

Paul White

No, I didn’t, but I think a few of you guys have worked it out, but I am not going to – due to the agreement that we’ve entered into I am not going to disclose the asset until the, probably the end of November. Okay, mainly because of the local issues down where the asset is.

Joe Grass – JPMorgan

Got you. I think you’re right on your initial comment as well, that fit in here.

Paul White

It certainly went to all the queue.

Joe Grass – JPMorgan

Martin, when you were talking about the refinancing, there was quite a bit of static on the phone, but I understand between what you’ve already closed or signed refinancing agreements for that’ll, it sounds like that will require you to pay down net about $60 million. And then with these two smaller loans outstanding that will require you to pay down another $15 million to $20 million. Is that correct? Did I hear that correctly?

Martin O'Grady

Yeah, that’s correct.

Joe Grass – JPMorgan

And then so on the $439.3 million, what’s the incremental cost of debt on that? That part, I did not get.

Martin O'Grady

We computed that yesterday to about another 85 basis points, even though the margins have expanded by more than. We’re re-swapping at new, fixed rates and base rates have come down. So I would say, to be safe, you could build-in an extra cost of 100 basis points.

Joe Grass – JPMorgan

Okay. And then, in the past you held a view that your leisure guest or typical guest over a period of time should outperform, lets say the typical business travel, I mean do you think that still holds true next year for you?

Martin O'Grady

Yeah. I mean even if you do break the current sort of business down by segments, it is the traditional leisure FIT guest that is performing best, but actually what we’re seeing is a key movement away from booking just room and then arriving on property, to booking a lot more than just room at the reservation stage.

So the packages that we’re offering are actually showing 300%, 400% growth whereas the FIT is sort of being compensated for there. As far as the business traveler, obviously the four or five business hotels that we have half performed pretty well. But the base rate that we start off at properties like Charleston Place like even the Ritz in Madrid is as much lower than the start point of the Italian properties or South American properties.

And the real, I think the real encouragement is the way the rate has performed almost rest of the world properties, which now actually sits above our North American properties. So I think that the trend will continue, I think that people paying money out of their own pockets will always exceed the people that are paying money, if you like, out of their business’s pockets.

Joe Grass – JPMorgan

Alright. To infer from those comments, would you think that from here going into next year that your non-room RevPAR growth exceeds your room RevPAR growth?

Martin O’Grady

I think actually in 2011, I haven’t seen consolidation of a lot of the budgets yet, but I think at the moment, I think we’ll probably be on a par. Clearly, as we went through to sort of the 2007 when we reached the peak our non-room revenue was exceeding our room’s revenue then as we declined, the decline in the rooms, in the non-rooms revenue was less. So we’ve performed quite well in the previous sort of three to four years now, I think, it’s probably going to be fairly even going into 2011. I’ve a much better feel, when we do the next conference call actually.

Joe Grass – JPMorgan

Great, thank you.

Operator

(Operator Instructions) We have no more questions at this time.

Martin O’Grady

Okay, well, thanks everybody. Apologies for this static on the line, I hope you heard everything that we have to say and look forward to talking to you again in a few months time.

Operator

That will now conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!