Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Strategic Hotels & Resorts, Inc. (NYSE:BEE)

Q4 2011 Earnings Call

February 23, 2012 10:00 AM ET

Executives

Jon Stanner - VP, Capital Markets and Treasurer

Laurence Geller - President and CEO

Diane Morefield - CFO

Analysts

Bill Crow - Raymond James

Will Marks - JMP Securities

Enrique Torres - Green Street Advisors

Rich Hightower - ISI Group

Smedes Rose - Keefe, Bruyette & Woods

Matthew Dodson - Edmunds White Partners

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2011 Strategic Hotels & Resorts Earnings Conference Call. My name is Jasmine and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today conference, Mr. Jon Stanner, Vice President, Capital Markets and Treasurer. Please proceed.

Jon Stanner

Thank you and good morning everyone. Welcome to Strategic Hotels & Resorts fourth quarter and full-year 2011 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the company’s website in the Investor Relations section. We are hosting a live webcast of today’s call, which can be accessed by the same section of the site with a replay of today’s call also available for the next month.

Before we get underway I’d like to say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings.

In the press release and supplemental financials the company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.

I would now like to introduce the members of the management team here with me today. Laurence Geller, President and Chief Executive Officer and Diane Morefield, our Chief Financial Officer. Laurence.

Laurence Geller

Good morning. 2011 was truly a terrific transformational year for Strategic Hotels & Resorts. During that year we methodically completed our comprehensive balance sheet restructuring program. This culminated in the successful partial tender for preferred stock and the announcement of the declaration of the accrued and first quarter 2012 preferred dividend payment.

Our asset management-driven, industry-leading operating results continued to be impressive as our double-digit RevPAR growth nearly 13% for the year in our U. S. portfolio, again led our peer group by a considerable margin. Most importantly, our hotels once again outperformed their respective market-specific competitive sets for 2011, gaining 1.5% in Smith Travel’s penetration index, RevPAR penetration index and this occurred for the sixth consecutive quarter.

We continue our very bullish outlook for the high-end lodging industry in general but more specifically to our unique portfolio of great assets located in multi-segmented, high barrier to entry markets. Our current group pace for 2012 is up 1% in room nights with the average rate on those rooms up 3.2%. This translates into group RevPAR being up 4.2% for the year. We’re very comfortable with this level of comparative group pace given that the group booking window was indeed lengthening in the first half of last year, then market turmoil and globally negative headlines focused on the nation’s debt ceiling debate and the ongoing European sovereign debt crisis caused a noticeable shortening of the booking window. These factors combined with ongoing political uncertainty here has resulted in corporate uncertainty and the narrowing booking timeframe has persisted into this year. When you combine this with tougher comparisons from strong 2011 results all of this is having a noticeable impact on our comparative full-year 2012 group pace.

As of the end of January we had 70% approximately of our expected 2012 group rooms on the books, which is consistent with where we were this time last year. And for reference, during our peak year of 2007 we had about 80% of our group rooms on the books at the end of January but we are now building off an already improving group base.

Occupied room nights in 2011 increased 5.4%, with rates on those rooms up nearly 6%. This resulted in group RevPAR increasing a significant 11.6% in 2011. It’s important to remember that the group booking window remains very short-term and we anticipate another strong year of in the year for the year that’s itty-bitty group bookings. As an illustration, group RevPAR is up approximately 4% for the full year. However, in the first quarter group room nights are already up over 7% with rate up over 3%, yielding an 11% increase in group revenue. Group production remained strong in January, with group room nights bookings 6% higher than the previous year same time.

Group non-room spending trends are continuing to strengthen at our properties. As an example, banqueting revenues were up 11% in 2011, with banqueting revenue per occupied group room increasing 6% compared to 2010.

Our transient business also improved in 2011, with room nights up 4.6% at rates 5.7% higher and we continue to aggressively book more rooms in the higher rated segments of our business. For both group and transient demand corporate business was the primary driver of growth in 2011 highlighted by our corporate transient demand, which was 9% higher than its previous peak in 2007.

Our 2012 RevPAR guidance of 6% to 8% reflects the continuation of the strong recovery in the high-end lodging sector and implies a two-year RevPAR compounded annual growth rate of nearly 9%. This important metric takes into account our outperformance last year, which is again continuing into this year and the obviously resultant tougher comparisons for us in 2012. This number of 9% is consistent with the trends of the two previous cyclical recoveries where luxury RevPAR growth CAGRs average between 8% and 8.5% over a multi-year recovery.

We’ve implemented sustained productivity measures, which we believe will lead to a long-term improvement in hotel margin. For example, reduction in management employees continued throughout 2011 and for the year the number of management employees is down 23% at our hotels compared to that of 2007 and our property level EBITDA margins have improved approximately 450 basis points since year-end 2009.

We have a healthy pipeline of high-yielding CapEx projects and a program in place to implement these in a tailored and flexible manner at the appropriate time. The virtually 0% supply growth environment in our market foreshadows a sustained robust recovery and continued upward pressure on rates.

Finally and importantly, as an indicator of market strength the same positive trends of last year have continued into the first two months of this year.

With that, I’d like to turn the call over to Diane.

Diane Morefield

Thank you, Laurence. Good morning, everyone.

Yesterday we reported our fourth quarter comparable EBITDA of $39.9 million, which is a 16% increase over the fourth quarter of 2010 and comparable FFO of $0.11 per share compared to $0.03 per share in the prior year. I want to point out, our fourth quarter FFO results included a $10.7 million one-time gain related to our successful preferred equity tender. FFO would have been $0.05 per share excluding this gain. For the full year, comparable FFO was $0.20 per share compared with $0.05 per share in 2010. Again, excluding the one-time gain associated with the preferred equity tender, FFO would have been $0.14 per share, a very healthy per share improvement.

Improvements in both demand and average rate were broad-based throughout our portfolio and covered nearly every segment of our business. RevPAR in our same-store North American portfolio increased 11%, driven by a 6% increase in average rate and a 7% increase in corporate transient rate with 6% increase in group rate. Non-rooms revenue increased a very solid 8% as food and beverage revenues increased by 12% and banquet revenues were up 11%. As a result, total RevPAR increased 9.6% for 2011. RevPAR in the fourth quarter increased 9.8% in our same-store portfolio despite a more difficult comparison to the fourth quarter of 2010. ADR increased 6.4%, and occupied room nights were up over 3% in the quarter. As a result, the fourth quarter represents the eighth consecutive quarter of improving demand driven by group room nights, which were nearly 9% higher than the fourth quarter of 2010.

Another leading indicator of robust demand is compression nights, defined as nights in which occupancy is 90% or higher. In the fourth quarter, compression nights increased 26% at 6% higher rate. For the full-year 2011, compression nights increased 24% at rates 17% higher.

Another leading indicator of robust demand is compression nights, defined as nights in which occupancy is 90% or higher. In the fourth quarter, compression nights increased 26% at 6% higher rates. For the full-year 2011 compression nights increased 24% at rates 17% higher.

Operating costs at our hotels remain very well controlled. Our GOP margins expanded 260 basis points in the fourth quarter. And though we reported an 80 basis point contraction in EBITDA margins, the comparison is skewed by a $4.9 million real estate tax refund we recorded at our two Chicago properties in the fourth quarter of 2010. Excluding this refund, EBITDA margins actually expanded 240 basis points and our EBITDA to RevPAR growth ratio was 2.3 times.

For the full year, EBITDA margins expanded 160 basis points but again excluding the Chicago real estate tax funds, refunds margins actually expanded 240 basis points and the EBITDA to RevPAR growth ratio was 2.2 times for the year.

Productivity, measured by hours worked per occupied room night has improved 8% when compared to 2007 and our FTEs are down 13% since that point.

The Four Seasons Punta Mita continued to be a drag on our 2011 results as RevPAR growth in just our same store U. S. portfolio was 12.7%, a full 1.7% higher than our blended North American portfolio.

Though we remain cautious on the near-term prospects for recovery at our hotel in Mexico we are encouraged by the U. S. State Department’s recent mandate, which lifted their travel advisory for Puerto Vallarta and Nayarit where our Four Seasons hotel is located.

The State Department had formally eliminated the travel advisory on the Cabo San Lucas area and Cabo has actually performed better than the other Mexican resort areas recently. In addition, the mid-year election for a new president in Mexico could be a positive catalyst as the year progresses.

Turning to our balance sheet and our liquidity, during the year, as it has been well reported, we completed our balance sheet restructuring and now have a balance sheet structure that is well positioned for internal ROI capital projects and for consideration of external growth opportunities. The final phase of this restructuring was a successful tender for 3.2 million preferred shares.

This reduced the level of our preferred owner balance sheet from $371 million to $289 million. Our annual dividend payment has been reduced from an annual run rate of almost $31 million to $24 million and the accrued dividend payment was reduced from almost $93 million to $72 million.

As part of the successful tender, we declared 12 quarters of accrued and unpaid dividend which will be paid at the end of June and yesterday we announced the declaration of the first quarter preferred dividend also to be paid on June 29th.

The timing of the first quarter payment is restricted by preferred documents, which dictate that no current preferred dividends can be paid prior to paying unpaid accrued dividends.

We want to highlight that we will address the second quarter dividend next quarter in the ordinary course of business, which will require board approval at that time.

We currently have approximately $54 million drawn on our $300 million line of credit and approximately $72 million of unrestricted cash including cash held at our hotels. We also have two unencumbered assets in the Four Seasons Silicon Valley and Jackson Hole. So our liquidity position is very sound.

Turning to 2012 guidance, we are very pleased with our incredibly strong 2011 results, and our leading indicators for 2012 suggest that sustained recovery is well underway. There are always macroeconomic risks that can give us pause, such as the recently escalating oil prices and ongoing discussions regarding the European financial crisis. In addition, our guidance assumes relatively modest GDP growth in 2012 in the 2% to 2.5% range.

However, the underlying demographics for our portfolio continue to be very healthy including Corporate America for both group and transient business and high income transient leisure travelers.

Based on these various factors and assumptions, we are in a position to provide 2012 guidance in the following ranges. Our EBITDA guidance is in the range of $165 million to $180 million and FFO between $0.22 to $0.30 per fully diluted share.

Same-store North American RevPAR is projected to grow between 6% and 8% and total RevPAR growth between 5% and 7%. Our EBITDA margins are expected to expand by 100 to 175 basis points this year. Our G&A expense is expected to be in the range of $22 million to $24 million and I want to point out that the midpoint of that range is still a 24% reduction from our 2007 G&A level.

Capital expenditures are expected to be in the $65 million to $75 million range, including $35 million in hotel level contractual funding for FF&E spending, and the remaining $30 million to $40 million represents variable owner-funded capital spending, which we are considering based on projected returns, potential displacement and other timing factors. Our guidance range reflects some displacement related to these projects and we will provide more details if and when those expenditures materialize.

With that overview, we would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will come from the line of Bill Crow with Raymond James. You may proceed.

Bill Crow - Raymond James

Let me start with group demand for 2012, because I think it’s a little bit lower when we talk about the pace than what we would have hoped for. Is there any particular demand segment that is maybe weighing on demand at this point?

Laurence Geller

Actually we’re really pleased with the results. I think the issue we’ve got to grapple with is we are on a lengthening trends for the first six months of the year, really healthy in terms of bookings. Production numbers were very strong, and they would go way out in 2012.

In late July and early August, when the chaos started politically here with Europe, the corporate booking start and intermediaries clamed up and really started booking as late into the terms they could to just making sure they kept the space. So we haven’t actually seen anything other than the shortening of the size and in fact the lengthening of the trend.

Here is an interesting statistic that our financial services industry, which everybody was predicting to drop down last year; in fact, we outperformed by over 25% the amount of room nights in our portfolio from financial services in 2007 whereas technology has gradually been increasing and has actually outpaced financial services as the number two segment.

So I think the issue for us is a tough comp for the six months and a much shorter booking window. I share our asset management team thinking that we will have a very good year providing there are no extraordinary exogenous events that come along.

So there is nothing in the trends to put it down. We have outperformed with a 9% CAGR anticipated, we’ve outperformed everybody in RevPAR and in order to keep that 9%, that really is a precursor of really strong group bookings for this year.

Bill Crow - Raymond James

That’s helpful. Laurence, (inaudible), which has been a drag, have you seen any increase in demand from Brazil or other South American countries? We’re hearing that they’re turning to Mexico as a possible destination for?

Laurence Geller

There is no question about it. That really is the three big countries, Brazil, Chile and Argentina that have come in. We focused very heavily on our own direct sales staff in those markets and we’re seeing results. They are lower-rated than our U. S. driven business.

Having said that from November onwards, we started to see a stabilization in our business and in fact probably I think, had the best festive season in terms of revenues that we’ve ever had over Christmas and New Year.

Then, we have been very pleased with the slow but steady pickup that has happened in January and we anticipate more group business given the lifting of the travel advisory for this particular area. I think that was about two to three weeks ago.

So we have no choice but to focus extra resources on the three big countries in South America but we’re not going to give up on anticipating an increase in Mexico but candidly negative headlines, where they are thousand miles away, if somebody does something stupid in (inaudible), we’re going to get an impact as with everywhere else.

Bill Crow - Raymond James

Yeah, sure. Okay. And then finally from me and I know this is something you’re going to fight tooth and nail, but amenity creep, whether it’s Ritz or Four Seasons, the higher-end properties, could you talk about what you're starting to hear from the brand companies?

Laurence Geller

There is no doubt that there has been a propensity over the past decades when there are problems or where people are embarrassed about putting the rate up too much to throw labor at it. It just isn’t happening in our hotels. We have agreements with the chains, we are very careful about it and I think the biggest evidence is that when we will look at a trailing 12, I think two quarters ago, we reported to you that the number of management team was down 21% over trailing 12, yet we finished the year at 23%. =

So we are containing it. I can’t speak for the other operators, but I can say generically I find the operators pretty sensible and they get that we’ve got to really hold this and we’ve got an opportunity of systemically changing our industry and I think that you start at the high end and it flows down.

Operator

Your next question comes from the line of Will Marks with JMP Securities. Please proceed.

Will Marks - JMP Securities

First I want to ask, this may be a repeat, but had you given a January stat for your total portfolio in terms of RevPAR growth?

Diane Morefield

No, we just gave full year guidance.

Okay. Thanks. And so if it’s so, which -- what would that exclude? It’s the only property you own then or are you looking at -- would it include properties that you didn’t --

Diane Morefield

It would be only the properties that we owned in 2007 and own today and that are consolidated.

Will Marks - JMP Securities

Got it. Okay. And then and just last question, kind of broad overview of where the RevPAR growth should be and should not be this year in terms of markets?

Laurence Geller

I understand so let me make sure. I read a lot in the other transcripts about people talking about D.C. We had a great year in D.C. because we run at a sort of 150% market share penetration, so we upped that dramatically after we bought the property. We’ll have a slower year this year because the IMF, which helped us with such a good year last year won’t be repeating this year. And we’ll take advantage of that to do some delayed capital expenditure work, which will result in displacement primarily in the garage. So, that’s one side.

I think the big opportunities to watch or the big trend indicators would be the Westin St. Francis, the Ritz-Carlton Laguna Niguel and Scottsdale. Those are the – Scottsdale is a JV, obviously, but those will be the trend indicators that will have the most impact on us.

Operator

Thank you. Your next question comes from line of Enrique Torres with Green Street Advisors. Please proceed.

Enrique Torres - Green Street Advisors

In terms of non-room spend what is the more recent trends you guys are seeing and what are your expectations for 2012 relative to the RevPAR growth.

Diane Morefield

Well, non-room spend, we’ve reported that food and beverage and ancillary spend was very healthy last year, again in our guidance, so total RevPAR is obviously below straight RevPAR growth by about 100 basis points on both sides of the range. So we continue to have very, very strong ancillary spend and as you know about half of our revenue is from rooms and the other half is from food and beverage and other revenue.

Laurence Geller

Enrique, we saw nearly a 13% increase in food and beverage revenues in the fourth quarter but part of that was really Michael Jordan’s Steakhouse in Chicago, which has proved to be a stunning success and delivering very high ROIs for us. Excluding Michael Jordan’s our F&B revenues were up 9%. Banqueting revenues are up, spends are up on a per-cover basis as well as number of covers. We are not seeing an increase in spa spending but that is a demographic issue rather than anything to do with actual consumer potential to spend. It really is a trend against the spa services that have traditionally been provided and we are working aggressively on re-formatting our spaces.

Enrique Torres - Green Street Advisors

That colors are really helpful. Thank you. And then in terms of the transaction market, are there any deal that you’re seeing come to market, can you just give us some color on the transaction market? Is there anything that like product that would fit well with your portfolio? And then if I look at your stock price it’s pretty similar to when you did the Four Seasons deal. Now with the price where it is, would you consider going out and doing more acquisitions?

Laurence Geller

Look, you asked two questions. So, first of all as far as the transaction market, it has been very, very slow. Obviously, we saw deals crater at the end of last year, we saw a trade with Bacara on the West Coast earlier, late in the year and this is being remarketed again. We are clearly watching it. We see few properties on market, most of which wouldn’t be of interest to us and we hear of a lot of properties off market, many of which we watch, we follow and we talk to people. Slow and steady for us I think. Yes, the stock is performing well. Values have increased, despite all of the hyperbole values are still increasing in these assets, so we’ll be very cautious about issuing stock. It would have to be for a very strategic purpose.

Operator

Your next question comes from the line of Rich Hightower with ISI Group. Please proceed.

Rich Hightower - ISI Group

Most of my burning questions have been answered but can you give us any update on booking trends in London just with the Olympics this summer?

Laurence Geller

Well, I’m glad that your burning questions have been doused. London has performed very well and continues to be. We are very cautious. Obviously, we have the Olympics and again the Paralympics, we are very cautious because we traditionally over the last five Olympics that we’ve watched, you get cancellations or people not coming at the last moment, they’ll see a headline tickets aren’t available or something like that.

We are anticipating a very good year based on corporate business at our London property, transient business is still strong, financial services is still strong there. A little uncertainty only around the Olympics, not a question of the rate but it’s a question of whether there is any falloff. But I think we are going to have a tremendous year in London whether it’s going to be, that really was tremendous or just, my word, that was tremendous, I don’t know. I’m putting my British accent on for the London question.

Rich Hightower - ISI Group

Great. Okay. I mean it’s a little bit counterintuitive. I would have thought that maybe some of those Olympic-related rooms would have been booked early on but I guess not.

Laurence Geller

No, no. Let me make sure. I probably did a clumsy job. This is not unusual, we see a falloff in the early booked rooms and that’s not bad because those rooms are booked at lower rates, they’re Olympic Committee driven. So, they fall off. We then have to hope that we can fill them in with high-rated transient, which is traditionally what happens but I can’t predict that because it’s uncertain.

Operator

Your next question will come from the line of Smedes Rose with Keefe, Bruyette & Woods. You may proceed.

Smedes Rose - Keefe, Bruyette & Woods

I just wanted to ask you a little more on your guidance and I guess looking at kind of the lower end of the range, is that just more reflective of potentially more displacement activity as you roll out these CapEx programs you hinted out or is that more just being conservative that if the economy kind of slows from the GDP forecast that you’ve kind of baked in et cetera?

Diane Morefield

Well, Smedes, I think there is a couple of factors. First of all, early in the year we always give a wider range just because there’s still a lot of the year left to see how it plays out. And yes, we have factored in effectively reserve for displacement, potential displacement based on all the projects that we’ve teed up but we don’t know exact timing or if they will all get done this year.

Operator

(Operator Instructions). And your next question will come from the line of Matthew Dodson with Edmunds White Partners. You may proceed.

Matthew Dodson - Edmunds White Partners

Could you help me understand just from the preferred standpoint, so you declared the March dividend but you’re paying it in June.

Diane Morefield

Correct.

Matthew Dodson - Edmunds White Partners

And potentially then will you decide if you declare the June dividend and are you going to start to be current then on your dividend?

Diane Morefield

Yes.

Matthew Dodson - Edmunds White Partners

And then the other question, I would if I could just finish. The other question is, then can you help us understand, since you’ve right-sized the capital structure, when you could potentially start paying a dividend for the common?

Diane Morefield

Right. Okay. Let me address the preferred first. We have three series of preferred outstanding’s and a little bit documentation between the three series, you can’t pay a current if you haven’t caught up all your accrued. So since we had already announced that the accrued portion would be paid in June, we wanted to announce that the first quarter is officially declared but will be paid with this at the same time as the 12 quarters of accrued. The second quarter dividend we will address at the appropriate time in the second quarter. Any dividend declaration preferred or common requires board approval, so you would just expect to see some type of announcement during the second quarter in the normal course of business. And then following that the third quarter on, yes, it’s just a quarterly analysis and announcement.

Regarding common dividend, first of all, we can’t pay a common dividend until the accrued is current. There is also other regulators such as the minimum fixed-charge coverage under our line of credit. So, at this point we wouldn’t meet those requirements and again, the common dividend is the priority and will be addressed as our cash flow continues to increase. And as soon as we feel it’s appropriate we would certainly want to get back to paying a common dividend.

Operator

And we have no further questions at this time. I would like to turn the call over to Mr. Laurence Geller for closing remarks.

Laurence Geller

Well, thank you everybody. I know how busy an earning season this has been, so we appreciate your attention. We had a tremendous 2011, really successful. We’ve got a great portfolio, so here is hoping for a great 2012 for us and for our industry and we look forward to speaking to you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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!

Source: Strategic Hotels & Resorts, Inc. CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts