Buyback blues mar Starwood Hotels’ earnings
25 APRIL 2014 8:35 AM
Analysts questioned executives’ decision not to repurchase shares during Starwood Hotels & Resorts Worldwide’s earnings call.
STAMFORD, Connecticut—Approximately $190 million in dividends was not enough to quell investors’ ire after Starwood Hotels & Resorts Worldwide finished its second consecutive quarter without any share buybacks.
The company posted net income of 72 cents a share, down 35.1% from the three-month period ending 31 March 2013.
“We know that many of you would like us to step up our stock buybacks, adopt a less opportunistic and more programmatic approach. You would like to see us borrow more at current rates and reset our capital structure. We want to assure you that your views have been heard by (President and CEO Frits van Paasschen) and I, as well as our board,” said Vasant Prabhu, vice chairman and CFO, in his prepared remarks on Thursday during an earnings call with analysts.
Prabhu reiterated the company’s flexible approach to capital allocation, which includes regular and special dividends in addition to share repurchases. Starwood Hotels declared a regular quarterly dividend of 35 cents per share in addition to a special dividend of 65 cents per share as part of cash realized from the completion of The St. Regis Bal Harbour residential project and sale of the hotel.
“In total, these dividends will return over $750 million to shareholders this year. And as a reminder, over the last 10 years, we've returned nearly $10 billion to shareholders in the form of dividends, special dividends and share repurchases,” van Paasschen said.
Analysts were quick to voice the concerns of investors, however, who viewed executives’ reluctance to repurchase shares as a sign of wavering confidence in Starwood’s near-term prospects for growth.
“One of the major controversies right now, and potentially one of the reasons for the underperformances as some investors would call out, is the clarity of the buyback story relative to some of your peers,” said Carlo Santarelli, research analyst at Deutsche Bank AG, during the question-and-answer portion of the earnings call. “Do you feel at any point where you start to look at the (return on investment) implied by maybe more aggressive buyback as a way of manifesting that long-term view in the near term and buying more of a company that you're bullish on, longer term?”
Van Paasschen argued that underperformance was more a result of volatility in emerging markets throughout the globe, into which Starwood has expanded aggressive to establish footholds.
The company’s stock price closed Thursday at $76.18 per share and is down 4.1% year to date. By comparison, the R.W. Baird/STR Hotel Stock Index was up 3.6% during the same timeframe.
“The reason for our underperformance in the first quarter, if I were to hazard a guess, had more to do with the emerging market selloff than lack of clarity around buybacks,” he said. “I don't think that our buyback strategy in fact got suddenly less clear in the first quarter after a great performance of our stock over the course of 2013.”
Executives have more than $600 million in stock buyback authorization to deploy and will do so “as opportunities present themselves,” Prabhu said.
When those opportunities arise is difficult to predict, van Paasschen said.
“As the world zigs and zags, we believe, we will come into some opportunities, or potentially could, based on what's happened historically where our stock may trade at more of a discount to its intrinsic value,” he said.
Executives said they remain confident in the long-term trend lines of hotel performance and global demand for travel.
In a research note, David Loeb, senior real estate research analyst at R.W. Baird, said he expects the company to repurchase stock if shares fall to $70 or below.
“We believe investors are overly focused on Starwood's capital allocation strategy (or perceived lack thereof) despite very strong trends in the company's underlying businesses and the potential for increased disposition activity in (the second half of 2014), which could support buyback activity at a higher price threshold,” he wrote.
Starwood reported an increase in revenue per available room in same-store hotels of 6.3% during the quarter. Management fees, franchise fees and other income increased 14.3%.
Executives repeated the importance of a flexible approach to capital allocation going forward.
“We've tried to create maximum flexibility both for us and you, our shareholders. … We have said that we have a very healthy regular dividend, one of the best yields in our sector. We now have a special dividend that is quarterly, that gives us a structure that can be continued if it makes sense. And we've said that we will consider continuing it as a way to return cash from asset sales or other sources, and we have the ability to do buybacks at whatever level we want,” Prabhu said.
Starwood during the quarter inched closer to its goal of $3 billion in asset dispositions over four years by completing the sale of The St. Regis Bal Harbour Resort for gross cash proceeds of approximately $213 million. Subsequent to the end of the first quarter the company sold the Aloft Tucson for approximately $19 million, subject to a long-term franchise contract.
While van Paasschen acknowledged that pace is slightly behind what is needed to hit that four-year target, he said executives’ disposition activity is market-driven.
“The good news, I think, is—and this isn't to speculate that we'd sell more, although I think the indications would suggest that—is that we have more hotels on the market now than we've had in any time since the crisis, and that's in response to what we see to be a deeper and broader market in terms of hotel asset sales …
“If that situation persists for 12 months, we would sell more than we did over the last 12 months, but do please keep in mind that there were a couple ifs in that statement,” he continued.
Executives are marketing assets for sale around the globe, Prabhu said.
“We have assets on the market in Europe, and not individual assets, but multiple assets. … And yes, we have a lot of hotels that are in the market in the U.S. But again there are all kinds of rumors out there; there've been various press reports,” he said. “It's not our practice to confirm individual things, but we will announce these sales as they happen.”
Corporate and group business
Driving much of the company’s hotel performance during the quarter was strong corporate demand for transient and group, Prabhu said.
“As we anticipated, the conference traveler is back on the road trying to drive sales growth,” he said.
Corporate rates increased in the mid-single digits, Prabhu added. “Certainly, corporate groups are the healthiest of all the group business.”
Group business in general for Starwood is pacing in the mid-single digits with smaller, corporate group business particularly strong. Larger association group demand remains weak, he said.