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HST 1Q2011 CONF CALL NOTES

As we expected, HST missed the Street's lofty estimates

 

 

HIGHLIGHTS FROM THE RELEASE

  • HST reported revenues of $903MM, Adjusted EBITDA of $144MM and FFO of $0.11- missing consensus estimates by 2.5%, 16% and 11%, respectively
  • "Comparable hotel RevPAR increased 5.4% for the first quarter as a result of the improvement in average room rate of 4.8% combined with a slight increase in occupancy."
    • On calendar quarter, comparable RevPAR would have been 6.9%
    • "Two of the Company's larger properties, the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown, were severely disrupted by major renovation projects during the quarter. On a calendar quarter basis, excluding the results of the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown, comparable hotel RevPAR would have increased by an additional 150 basis points."
  • "Despite the improvements in RevPAR, comparable hotel adjusted operating profit margins for the first quarter decreased 10 basis points compared to 2010, largely due to higher payroll taxes, property-level bonuses, and lower attrition and cancellation revenue. These items disproportionately effected the first quarter and collectively reduced margins by approximately 85 basis points. Comparable hotel adjusted operating profit margins for the quarter were further reduced by 60 basis points due to the substantial disruption at the Sheraton New York Hotel & Towers and the Philadelphia Marriott Downtown."
  • On April 27, 2011, HST reached an agreement to expand its investment in the European JV through the establishment of a new fund (the "Euro Fund Two").
    • New fund target size: EURO450MM of new equity and a total investment of  EURO1BN.
    • Each of the current partners will own a 33.3% LP interest in the Euro Fund Two, while an affiliate of the Company will have a 0.1% GP interest.
    • HST is contributing the Le Meridien Piccadilly to the JV for a transfer price of GBP64MM.
  • 1Q Capex
    • ROI Project:  $46MM; Maintenance: $48MM
  • For 2011 Capex guidance
    • ROI Project: $230-250MM; Maintenance: $300-325MM
  • "Based on the current guidance for 2011, the Company intends to declare... an aggregate annual dividend of between $0.10 and $0.15 per share."
  • Revisions to 2011 Guidance:
    • Operating profit margin expansion reduced by 10-20bps to 210-260bps
    • FFO guidance raised by a penny to 88-93 cents
    • Adjusted EBITDA raised by $10MM to $1,010-1,045MM
    • $16MM increase in revenues to $4,946-5,031MM and a $23-34MM increase in expense to $4,597-4,647MM

CONF CALL NOTES

  • Slight increase in guidance was due to acquisition activity
  • Group demand continued to increase and transient demand was healthy.
  • Transient: Rate increase of 6.2%. Overall demand slipped by 7/10% as they relied less on discounted channels
  • Group: Benefitted from a rate increase of 2% and a demand increase of 4%. 24% increase in demand from higher rated group business. Association business was off by 17% this year but is expected to recover during the course of the rest of the year.  Group is now exceeding 2007 levels. Expect group revenues to increase meaningfully this year and rate to continue to get better in the balance of the year.
  • Acquiring Hilton in Melbourne Australia for $150MM
  • Expect that M&A activity will pick up this year beyond just the major markets.  They do expect to sell some assets in the 2H11 but aren't including that in guidance
  • Expect that room rates will continue to increase throughout the balance of the year as mix shift improves
  • Expect that 2H11 will exhibit better RevPAR and margin improvement
  • Top performing market was San Fran 24.3% increase in RevPAR (occ 7% and 12% ADR). Expect that this market will continue to outperform in 2Q
  • San Deigo - 22.6% RevRAR increase. 2Q expect them to underperform due to fewer city wides and lower group demand
  • Hawaiian 18.7% increase. In 2Q they expect hawaii to have an outstanding quarter
  • New Orleans - 14.6% increase in RevPAR. In 2Q, expect them to underperform
  • Phoenix turned the corner finally this quarter. Expect this market to outperform in 2Q
  • Boston RevPAR increased 6.9% despite bad weather and renovations. Expected to underperform in 2Q
  • San Antonio RevPAR only increased 1.3%. Expect them to have a great 2Q and outperform the portfolio
  • NY RevPAR -2.3% as occupancy fell 7%. Expect NY hotels to underperform the portfolio in 2Q but outperform in 2H11
  • Philadelphia was their worst market - 23% RevPAR decline. Expect underperformance in 2Q but outperformance in 2H
  • 5 of their 11 international hotels had double digit RevPAR increases
  • Margins were impacted by:
    • Higher state unemployment taxes which impact 1H disproportionately
    • Higher bonus accruals at the property level; hotel level bonuses are expected to be flat for the year though
    • Lower cancellation and attrition fees - well below their typical levels - expect that to continue for the balance of the year
    • Sheraton NY and Phili Marriott renovations
    • All items impacted margins by 145bps
  • Unallocated cost increased 6.2%
  • Utilities increased 4.2%
  • Expected RevPAR increase to be driven more by rate than occupancy and should lead to strong flowthrough despite above inflation cost growth
  • Expect unallocated costs and utilities and marketing to increase above inflation for the year as well as property level taxes
  • 2 of their hotels that they acquired in New Zealand  - 348 rooms were damaged by an earthquake.  39 rooms impacted. Deductible is up to $14.4M or 3% of the loss. They hope to open these hotels later this year. 
  • Raised $100MM under their continuous equity program
  • 108 of their hotels do not have mortgage debt

Q&A

  • A very high percentage of their room nights have a fly in customer attached to it. They are concerned about the impact of higher airfare, but in the past they have found that cost of the increased fare didn't really impact their demand.  They are more concerned about reduction in flights. They aren't feeling any impact right now
  • Too early for a HOT like transaction as they had in 2006 - focus on asset sales is still on non-core
  • Their goal for dividends is to pay out their taxable income
  • 1Q for Washington was relatively weak. Feel like the market was impacted by a potential government shutdown. Washington held up the best during the downturn. Hence they assume that the recovery there would be less than in other markets. But don't think that the market will weak - expect it to be inline with the rest of the portfolio
  • Haven't seen big differences in brand that aren't attributed to market concentrations
  • Why is their guidance on corporate expense down YoY to $99MM. Lower incentive compensation is the main reason. Number of shares they get depends on relative performance to their index so that number gets revised
  • Thoughts of all the new systems being rolled out by the brands?
    • Too early to tell
    • None of them proceed without bumps along the road -  like Marriott's new system
    • Have generally done better at some of their larger hotels than smaller hotels
    • Marriott brands have gained share over the last few years
  • Their guidance this morning does include the $150MM Hilton Melbourne acquisition - and is largely responsible for the raise in guidance
  • They did see their in the quarter for the quarter bookings were lower than what they were last year. Conversely bookings for the next 3 quarters were far stronger than what they were last year.  Think that more people are willing to book a little further out. Have positive room nights on the books for 2Q & 3Q and the almost flat for 4Q
    • Rate growth is also better for the balance of the year
    • Real drive will be what happens on the corporate side. Corporate group has been improving
  • Thinks that the transient business in the Q was more impacted by the weather than group business, like NYC
  • Expect to see improvement in Group occupancy for the balance of the year
  • Expect to see a slight increase in transient occupancy but the growth there should really be rate driven
  • NY supply issues?
    • Thinks that 1Q had some supply impact, partly because NY is always seasonally weaker in 1Q
    • For the rest of the year they are pretty optimistic. However, they will still have construction disruption
  • How close are they to peak occupancy in their urban markets? Across their portfolio they are down 6% in room nights and 9% in rate from 2007. Thinks that that is pretty evenly distributed between weak and weekend nights
  • Still expect to NY to meaningfully outperform their portfolio in 2012

TALES OF THE TAPE: SBUX, EAT, KONA, PFCB, PNRA, DPZ, CMG, BWLD

Notable news items and price action from the past twenty-four hours along with our fundamental view on select names.

  • SBUX reported earnings yesterday after the close.  U.S. company comps came in at +7%, EPS was in line with expectations at $0.34.
  • KONA reported a 7.6% increase in 1Q same-store sales after the close yesterday.  Overall, restaurant sales increased 12.3% and restaurant operating margin increased to 14%.  Net loss for the quarter was $0.01 per share and the company is guiding to earnings in the second quarter of $0.02 to $0.04 per share.
  • EAT CEO Doug Brooks is committed to creating shareholder value.  Yesterday he said he would sell Maggiano’s if the right offer came along.
  • BWLD investors will be happy to read that an appeal by the NFL to reimpose a lockout on players while they remain in dispute was rejected by a federal court judge yesterday.
  • CMG and Pinkberry feature in an interesting story about overseas expansion for restaurant companies.
  • DPZ’s Domino’s Pizza U.K. & Ireland is hoping to capitalize on German growth with an all-share purchase of the country’s master franchise and plans to expand the brand from two stores in Berlin to a 400-store empire. 
  • PFCB declined 10.4% on accelerating volume following poor earnings yesterday.
  • PNRA also declined on accelerating volume after worse-than-expected earnings on Tuesday.

TALES OF THE TAPE: SBUX, EAT, KONA, PFCB, PNRA, DPZ, CMG, BWLD - tott stocks 428

 

 

Howard Penney

Managing Director


PNK 1Q 2011 CONF CALL NOTES

PNK beat our Street high EBITDA estimate and it looks sustainable.

 

 

"We are pleased to report another quarter of year-over-year Adjusted EBITDA growth and continued improvements in operating margins. These improvements reflect the ongoing implementation of operating strategies focused on providing best-in-market experiences for our guests and improving our own internal processes.  We continue to progress with better methods to improve operations and elevate the guest experience."

 

-Anthony Sanfilippo, President and Chief Executive Officer.

 

 

HIGHLIGHTS FROM THE RELEASE 

  • The new Stadium Sports Grill and Bar at Lumiere Place will open in early May
  • Baton Rouge project: The three casino hulls were recently moved from the shipyard to the project site along the Mississippi River and construction of the casino is underway.
  • As of March 31, 2011, approximately $290 million of the $357 million construction budget (excluding land and capitalized interest) remains to be invested in the planned Baton Rouge facility.
  • Cash: $143MM, $70MM used in day-to-day operations
  • At the end of 1Q, the Company's $375MM credit facility was undrawn and approximately $9.3 MM LoC were outstanding. The Company expects to begin drawing on its credit facility as construction on its Baton Rouge project further ramps up. 
  • Gross interest expense: $27MM; net interest expense:$26MM
  • Capitalized interest of $0.8MM was related to Baton Rouge project
  • Discontinued operations: Atlantic City: - $2.2MM

 

CONF CALL

  • Cautiously optimistic on consumers
  • 90bps margin improvement ex severance costs
  • Sees shared services at St. Louis (started 6 months ago) making progress
  • L'Auberge and Boomtown New Orleans did very well
  • Boomtown New Orleans efficiency improvements continue into 2Q
  • Tough weather conditions in 1Q, particularly at Belterra
  • Capex:  $38MM ($24MM due to Baton Rouge)
  • Most rivers in Southeast have had abnormally high water levels
  • Baton Rouge: barges are in place; river levels still above normal; now expect summer 2012 opening - pushed back from Q1 2012
  • All Mid-western properties gained share
  • 2011 Marketing expense as % of revs: on track with expectations
  • L'Auberge brand campaign: summer 2011

 

Q&A

  • Severance costs: predominantly corporate; corporate expense; 6.5-7MM run rate for corp expense
  • April trends: continues 1Q trend
  • 1Q Marketing spend: played to expectations; not inflated by myChoice
    • Haven't seen an increase in promotional spend by competitors in their markets
      • St. Louis: special program and brand campaigns drove marketing expense, unrelated to myChoice
    • 1Q myChoice expenses: launch related 
  • Mostly higher consumer spend per visit driving results (even in St. Louis properties)
  • VLTs in Ohio:  encouraged by early thoughts on tax structure
  • Encouraged by early myChoice results
  • myChoice performance metrics: play consolidation, play frequency, migration of tiers, # of new customers YoY
  • myChoice will help retention rate of existing customers
  • Weather impact:
    • Belterra: overall net-neutral; was affected in January
    • South: coastline Lousiana properties not much impact
    • St. Louis: tornado last week no impact
  • St. Louis: early innings of ramp up
  • Louisiana properties: still sees room for improvement
    • L'Auberge: can be better yielded; a lot of work being done
  • Texas: very difficult to pass

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JOBLESS CLAIMS RETRACE ALL GAINS YTD

Initial Claims Rise 25k ... Give Back All YTD Improvement

The headline initial claims number rose 26k WoW to 429k (25k after a 1k upward revision to last week’s data).  Rolling claims rose 9.25k, breaking up through the 400k line to 408k. Reported claims, which are volatile, are now at the same level they were in January 2010.  Rolling claims are at the same level they were in January 2011, translating to no improvement in claims in the last four months. On a non-seasonally-adjusted basis, reported claims rose 5k WoW.

 

We consider rolling claims the best leading indicator for consumer-related loss frequency for lenders. A failure to realize further improvement in this series will put the brakes on ongoing credit improvement in credit card lending. Mortgage and auto lending are similarly affected. What troubles us is that claims are failing to improve in the midst of strong corporate earnings and ongoing QE2. While much of the rest of the market seems unconcerned about the end of QE2, we think it may lead to a cessation of improvement in claims based on the fact that we observed just that at the end of QE1.

 

Putting claims in context: we have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.8% rather than 8.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.8% actual rate.

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - rolling

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - raw

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - nsda

 

Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - S P

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - fed purchases

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 271 bps is 2 bps tighter than last week.

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - spreads

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS RETRACE ALL GAINS YTD - perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 28, 2011


As advertised, the Bernanke did exactly what we thought he’d do yesterday: (1) Raised his inflation forecast; (1) Cut his GDP forecast and (3) Burned the Buck.  As we look at today’s set up for the S&P 500, the range is 32 points or -2.04% downside to 1328 and 0.32% upside to 1360.

 

SECTOR AND GLOBAL PERFORMANCE


The Financials remain the only sector broken on both TRADE and TREND.   

 

THE HEDGEYE DAILY OUTLOOK - LEVELS428

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 832 (-530)  
  • VOLUME: NYSE 960.95 (+5.67%)
  • VIX:  15.35 -1.73% YTD PERFORMANCE: -13.52%
  • SPX PUT/CALL RATIO: 1.21 from 1.15 (+5.28%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.25
  • 3-MONTH T-BILL YIELD: 0.06% -0.01%
  • 10-Year: 3.39 from 3.34
  • YIELD CURVE: 2.72 from 2.74 

 

MACRO DATA POINTS:

  • 8:30 a.m.: GDP 1Q advance, est. 2.0% (annualized), prior 3.1%
  • 8:30 a.m.: Initial jobless claims, est. 395k, prior 403k
  • 8:30 a.m.: Fed’s Duke, Williams speak at Community Affairs Conference in Virginia
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-43.0), prior (-42.6)
  • 10 a.m.: Pending home sales, est. 1.5% M/m, prior 2.1%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA Natural Gas Change
  • 1 p.m.: U.S. to sell $29b 7-yr notes

WHAT TO WATCH:

  • New Zealand’s central bank kept its benchmark interest rate at a record low and called the local currency’s rise “unwelcome.”
  • Most emerging-market stocks fell on concern China will raise interest rates as early as next week.
  • U.S. ‘Disappointed’ by India Rejection of U.S. Aircraft - Bloomberg
  • Google May Overtake Apple in App Sales: All Things Digital
  • Deutsche bank profit exceeds estimates as money management reaches record
  • SAP reports 4.1% gain in first-quarter profit, missing analyst estimate



COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Sugar Seen Capped by Record Thai Production, Curbing Nestle, Kraft Costs
  • Gold Climbs to Record as Bernanke Maintains Stimulus, Dollar Extends Drop
  • Copper Climbs for First Day in Three
  • Aluminum Advances to 32-Month High
  • Crude Oil Futures Retreat From 31-Month High
  • Corn Futures Advance in Chicago as U.S. Midwest May Face ‘Severe Flooding’
  • Sugar Falls as Thai Production May Cap Price Gains; Coffee, Cocoa Advance
  • Rubber Futures Advance for First Day in Four as Fed to Maintain Stimulus
  • Abu Dhabi Oil Surges to Three-Year High on Chinese Demand
  • Copper May Drop Next Week as Stocks Gain, China Demand Slows, Survey Shows

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • German unemployment declines to 19-year low as export boom drives demand
  • German unemployment -37K, est. -37k (prior -55k)  
  • German unemployment rate 7.1%, est. 7.0% (prior 7.1%) 
  • Italian business confidence , est. 103.5 (prior 103.8)
  • European stocks climb as deutsche bank beats analysts’ earnings estimates
  • AstraZeneca first-quarter profit beats analyst estimates after tax accord
  • Spain’s local elections may expose wider deficits in risk for bond markets
  • UK consumer confidence declines to lowest since depth of 2009 recession
  • France Mar consumer spending (0.7%) m/m vs consensus +0.2%

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Japan quake takes bigger-than-estimated economic toll; BOJ lowers forecast
  • Japanese earnings push the Nikkei 225 to the highest level since the March 11 quake.
  • Asian stocks were mixed
  • Nomura profit falls 35% as investment banking fees, trading income decline
  • Panasonic plans to cut 17,000 jobs on Sanyo acquisition, television losses
  • China economic growth faces risks from property ‘shocks,’ world bank says; China declined for the 5th straight day.
  • China telecom net income climbs 8.1% on increase in mobile-phone customers
  • Grantham sees one-in-four chance of china stumbling over excess spending
  • RBA faces rate pressure as CPI outweighs record currency

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director



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