I can’t say that the announcement from Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT) that it was exploring strategic alternatives came as a surprise. There has been speculation that Starwood Hotels would be acquired for more than a decade.
Starwood has a number of upscale brand names in its portfolio, including St. Regis, Sheraton and W Hotels. The talk of a sale comes as Starwood Hotels struggles to grow overseas, which it had expected would drive its overall growth in the coming years.
Considering that hotel stocks have generally been on fire, as travel has been booming, the notion that HOT stock is even struggling at all should give investors some reason to believe the talk this time around.
Starwood Earnings
Despite enormous growth in RevPAR, total revenue only grew 2.9% after accounting for brutal currency exchange effects, and net income fell 28% to $99 million. Even worse, Starwood Hotels said earnings could get whacked for $45 million in currency effect if rates stay where they are.
It’s depressing, because Starwood Hotels actually is performing fairly well.
RevPAR increased 5.2% in constant dollars, including 7.4% at Westin, 6.5% at W, and 15.2% at Aloft. Worldwide, however, Starwood Hotels RevPAR at same-store owned hotels increased 8.4% in constant dollars, but that got trimmed down to 2.8% in actual dollars (thanks a lot, U.S. dollar). Revenues at same-store owned hotels increased 9%, and became 3.4% after currency effects.
Meanwhile, most of the other hotel stocks are putting up revenue increases in the high single digits.
The great news continues in HOT timeshares, where total revenues increased 17%. I love the timeshare business and always have. It was brilliant of all the major chains to gobble up timeshare companies. Where else can you borrow money from a bank at a low rate, build a huge hotel, sell each unit 52 times, and in most cases, finance those purchases at an 8%-10% interest spread?
Part of the talk about a Starwood sale includes a spinoff of the timeshare business at year’s end. That’s a spinoff I’d look carefully at if it went public.
Starwood’s balance sheet still is in great shape, too. There’s $623 million in cash, and $2.5 billion in debt. Even with the depressed currency situation, HOT still looks to generate $1.2 billion in adjusted EBITDA.
What About a HOT Stock Buyout?
HOT stock jumped more than 6% on the news of a possible sale. One wonders who might scoop up the operation, which is presently valued at $15 billion. Would one of the hotel stocks pony up the money, which would obviously require a lot of debt?
It’s possible, but also just as likely that private equity will swoop in.
The state of the industry is such that more M&A is likely as we reach this point in the economic and hotel cycle. Ashford Hospitality Trust, Inc. (NYSE:AHT) has a presentation worth noting.
On Page 16, we note that as the value per key of hotels rises, so does hotel transaction volume. On pages 20-23, we see that there continues to be a supply/demand imbalance with respect to growth, RevPAR is expected to continue its solid growth trajectory, and that EBITDA will continue to be robust.
So whomever buys Starwood Hotels — and I think someone will — they will be buying in at an attractive time.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. This article is for informational purposes only and does not constitute an offer or solicitation to buy or sell shares or securities in any company mentioned. This article does not constitute investment advice. The author has not received compensation, directly or indirectly, current or prospective, from any known issuer, underwriter, or dealer in conjunction with the writing of this article. Do your own due diligence and confer with your financial advisor before buying or selling any security.
