MAR hosted a well-attended analyst day in NYC today (3/18/2019). Overall the day seemed mostly constructive to us and our three key takeaways are 1) positive EBITDA targets from net unit growth, 2) the business seems more resilient in the event of declining RevPAR than we think many perceived, but 3) cash conversion on the EBITDA targets was weaker than normal.
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Last week we lowered our Lodging sector rating to Market Weight and downgraded HST to Underperform. Our view is we seem late in the lodging cycle and we think U.S. RevPAR faces risks. See our notes with our complete thesis here and here. To be clear we aren’t making a negative call on all lodging. We’re still bullish on timeshare (VAC and HGV), which is our favorite sub-group, and RevPAR isn’t a KPI for timeshare. We also think the hotel C-Corps can still work in a tepid U.S. RevPAR environment because the asset-light business models are powerful, and efforts by China/Europe to re-stimulate could start to favor names with international exposure like the C-Corps, but admittedly we now see less exciting upside to the C-Corps as reflected by our target prices. Given the move in lodging stocks as well as slowing U.S. RevPAR the risk/reward of the space seems less compelling. Owned real estate in the U.S. seems most exposed to our view, which is the reason for our downgrade of HST to Underperform. Investor feedback on our call has generally been receptive, and it feels like sentiment is definitely biased negative. From our conversations we even sense some bearishness towards the high-quality C-Corps.
Today (3/11/2019) we lower our sector weighting on Lodging from Market Overweight to Market Weight, and we also downgrade HST from Peer Perform to Underperform. The reasoning for the change is largely based on the idea that we are later in the cycle with soft U.S. RevPAR growth, which we do not expect to improve in the near-term.
We downgrade shares of HST from Peer Perform to Underperform and establish a YE19 target price of $17, based on 10x our now lower 2020E EBITDA. Our thesis is largely based on the idea that we are later in the cycle with muted U.S. RevPAR growth and mounting margin pressures, factors that have a disproportionate impact for lodging REITs over C-Corps.
H hosted an analyst day in NYC this afternoon (3/5/19). Attendance was a bit lighter than we expected, with ~50 people in total which was lower than what we counted at the 2016 event, which we think is a function of lodging apathy and particularly around H after overly positive sentiment a year ago. Overall the day seemed positive, with a few noteworthy items.
We spoke with two different owners of several WH properties to learn more about the economics and the value proposition of using the brand, particularly at the lower end of the chain scale. We’re calling this week’s “Charts of the Week” our “Conversations of the Week,” and below we include a paraphrased Q&A dialogue we had with these two separate owners. Note we rate shares of WH as Peer Perform despite a lower-end valuation because of high owner exits (~7% of rooms annually) limiting net unit growth relative to peers, and our belief that branding is less relevant for owners at the low end of the chain scale, particularly the very low end budget segment. We still believe the latter to be true, but we walked away from our conversations feeling marginally more constructive. Note, the two owners we spoke to are seemingly higher quality owners who own higher quality and newer/fresher properties than the domestic system average, in our view.
After the close MAR reported adjusted EBITDA of $864M, above consensus of $857M and our $858M estimate. MAR beat on fee revenue and lower G&A. Offsetting these positives was softer RevPAR, which came in 70bp lower than prior guidance, attributed to labor strikes and softer than expected transient demand – this isn’t surprising, as we’ve already heard from MAR’s competitors in prior weeks.
VAC reported 4Q earnings this morning (2/28/19). Adjusted EBITDA of $180M beat us and consensus of $161M. Contract sales came in marginally lighter, similar to peers, which seems more specific to 4Q, but VAC beat on several other factors including reportability.
After the close yesterday (02/27.19) HGV reported 4Q earnings, beating consensus (see our first take here), and then mid-day today HGV hosted their call. We thought the report and the call were both decent enough.
After the close HGV reported 4Q EBITDA of $186M, above consensus and our $183M estimate. HGV beat the quarter slightly and reiterated FY19 guidance, both of which weren’t surprising. However, contract sales were lighter than expected, as HGV beat on other revenue. Ultimately, we don’t expect consensus to move, which we think is positive, especially for a stock that has already de-rated over the last year from 11x to now 7x NTM EV/EBITDA and from 20x to now 11x NTM P/E.
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