Q4 lukewarm but 2012 should be HOT.



HOT’s headline number should beat consensus when they report Q4 on Thursday.  The benefit from the sale of the Bal Harbour units will boost Q4 EBITDA as Starwood should have started booking in the quarter.  Excluding the Bal Harbour units, the ‘clean EBITDA’ number could be on the lower end of company guidance and a little below consensus of $279MM.  However, any slight miss would be due to USD strength, offset by stronger North American RevPAR trends. 

International exposure which has been a tailwind for Starwood these last 2 years turned into a headwind this last quarter.  Since HOT reported 3Q results on October 27th the Euro has depreciated by 7.4% vs. the dollar and the dollar index has strengthened 4.4%.  While HOT hedges roughly 50% of the Euro exposure, it still maintains plenty of exposure to other currencies.  Every 1% move in FX impacts EBITDA by $4MM.


Given the healthy trends in NA RevPAR, we’ve been positive on the lodging space since late August (see “IT’S NOT THE ECONOMY, STUPID” 08/25/2011).  However, given HOT’s heavy international and European exposure, we have preferred to express our positive thesis on lodging through MAR, which now derives almost all of its EBITDA from higher multiple fees.


Q4 Detail:


We estimate $285MM of EBITDA and EPS of $0.61, inclusive of Bal Harbour sales.


We model owned, leased and consolidated JV revenues of $440MM and margins of 19.2%

  • $281MM of room revenue, up 0.5% YoY
    • Room count should be down 8% YoY as a result of asset sales
    • We estimate non-same store RevPAR of $157.62
  • $159MM of F&B revenue, down 11%
  • CostPAR of $279.70 – up 2.2% YoY compared to up 8% in 3Q – benefiting from the strong dollar

$227MM of revenues from management & franchise fees, and other income

  • $85MM of base management fees, up 15% YoY
  • $56MM of incentive fees, up 3% YoY.  4Q10 is a tough comp as incentive fees were up 38.5% YoY
  • An 8% YoY increase in franchise fees to $35MM
  • $30MM of amortization of deferred gains and termination fees & other
  • $11MM of miscellaneous income

$175MM of VOI and residential sales and $44MM of operating profit, including Bal Harbour


Other stuff:

  • $90MM of SG&A
  • $78MM of D&A (including $11MM of unconsolidated JV)
  • $47MM of net interest expense plus $6MM pro-rata unconsolidated interest
  • 24% tax rate and 195MM shares


Keith back into WMT, one of the few retailers that will remain unscathed through the upcoming JCP-fueled apparel retail mele, to the Hedgeye Virtual Portfolio.







We’re below the Street for Q4 but PNK has underperformed and light Louisiana numbers are well-known.



After making or beating expectations for two years, PNK could report 4Q11 results below expectations.  We are projecting net revenue of $274MM and adjusted EBITDA of $58.7MM, which is 4% below the Street.  PNK could underperform over the near-term as questionable ROI on new projects and soft revenues could continue to provide an overhang on the stock.  However, the relative weakness of the company’s Q4 report is probably well-known at this point.    



While the Q4 is always seasonally weaker than Q3, some properties underperformed this quarter.  L’Auberge gaming revenues were only up 4% YoY after an 11% rise in 3Q.  Margin estimates seem a bit aggressive to us.  Margin improvement of 320bps are difficult to fathom.  Last quarter, PNK’s margins only improved 1.4%.  Adding back the $1.7MM of ‘unusual’ expenses from last quarter, PNK’s margins would have been only 50bps better.  Going forward, margin comps are a lot more difficult than in the first half of 2011.


Other assumptions:

  • Corporate expense: $6.7MM
  • Stock comp: $1.7MM
  • D&A: $25.8MM
  • Net interest expense: $24.0MM
  • Same effective tax rate of 7.5% as for the first 9 months of the year 

European Banking Monitor and EUR/USD Update

Positions in Europe: Short EUR/USD (FXE)


Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"


If you'd like to receive the work of the Financials team or request a trial please email .


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 5 bps from last Monday to 77 bps today.


European Banking Monitor and EUR/USD Update - 1. ois


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis. 


European Banking Monitor and EUR/USD Update - 1. ecb


European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 34 of the 40 reference entities. The average tightening was 2.3% and the median tightening was 9.4%.


European Banking Monitor and EUR/USD Update - 1. banks


Security Market Program – The ECB has still yet to publish its secondary sovereign bond purchases for the week ended 1/27 (normally due out by 10am EST on Mondays).  It bought €2.243 Billion in the week ended 1/20 to take the total program to €219.0 Billion.  We’ll post on the 1/27 amount as soon as it’s released.    



A note on our short EUR/USD position and Europe’s Fiscal Compact illusions:

We remain short the EUR/USD via the etf FXE in the Hedgeye Virtual Portfolio.  This is a position that has worked against us since last week’s announcements from President Obama (State of the Union Address) and Federal Reserve Chief Bernanke (FOMC Press Conference), both of which fundamentally changed our previously bullish outlook on the USD.


However, there’s been no resolutions out of Greece on PSI and increasingly Portugal is looking like the next Greece, which suggests we may see a chess fight between the EUR/USD for the weaker link of the pair. Also to note is that Germany has called to establishing a budget overseer in Greece to have strict control and veto power over Greece’s fiscal policy decisions going forward in return for bailout funds. Greece’s Finance Minister Venizelos adamantly rejected this plan and warned that “anyone who puts a nation before the dilemma of economic assistance or national dignity ignores some key historical lessons,” which signals to us that the Fiscal Compact being pushed in Europe has little hope of success as countries refuse to give up their sovereignty to Brussels (or Berlin). In short, we expect cultural difference to trump, and the union of uneven countries to struggle to resolve deep seeded sovereign disparities. In this light, we see a higher probability of intermediate term weakness in the EUR/USD. 


Below is a heat map we use, courtesy of The Economist, which clearly shows the great difference in sovereign debt (as a % of GDP) across southern versus northern Europe. We expect this unevenness to have a long tail, and ultimately, and even if levels can be reduced through fiscal consolidation, to come at the expense of growth. 


European Banking Monitor and EUR/USD Update - 1. Heat Map


Matthew Hedrick

Senior Analyst

Gnarly: SP500 Levels, Refreshed

POSITION: Long Energy (XLE)


I came into today with no US Equity exposure in terms of US Index or Sector ETFs. Coming out of The Bernank Tax last week, I sold everything US Equities in the Hedgeye Asset Allocation Model. Today, I’ll take that US Equity position back up from 0% to 6%, buying some inflation protection (Energy – XLE).


I know this isn’t (wasn’t) the way consensus Keynesians want you to think about it – but from a Growth and Inflation Expectations perspective, this is the way the market sees that it is. On the margin, inflation expectations just went up and growth expectations down. Thirty S&P handles matter.


In the chart below you can see this manifesting itself in terms of the always dreaded lower long-term highs. From 1363 in April of 2011 to the 1326 closing high last week (1333 intraday high on Thursday), this looks a lot like US policy – Japanese. As a result, the long-term SP500 chart looks like the Nikkei.


Across all 3 risk management durations in my model, here are the lines that matter to me most right now: 

  1. Immediate-term TRADE resistance = 1326
  2. Immediate-term TRADE support = 1297
  3. Long-term TAIL support = 1267 

In other words, I buy/cover here – but I’m taking my time. Lower-highs toward 1363 look firmly in place provided that the Policy To Inflate (slow growth) does.


The long-term TAIL holding tells me this is going to be an epic debate about the US Dollar and the policies that attempt to support or debauch it.




Keith R. McCullough
Chief Executive Officer


Gnarly: SP500 Levels, Refreshed - SPX


No change to HK$23-24BN projection for January 



In what will likely be considered a disappointment, total Macau gross gaming revenues (GGR) should finish the month around HK$23.5 billion, up around 30% YoY.  Recent expectations have been elevated, unfortunately.  However, our original projection was HK$23-24 billion, so we wouldn’t exactly consider January a bad month.  February does face a comp that included the Chinese New Year (CNY) celebration last year, although the VIP hold comparison is quite easy. 




In terms of market share, LVS is the clear winner this month.  As we expected, LVS’s big junket effort paid off handsomely during the CNY celebration with all the whales in town.  Both MPEL and WYNN posted disappointing January market shares.  Hold likely played a role, particularly for MPEL.  We would expect the Macau stocks to be weak today with the possible exception of LVS. 


With a lack of near-term positive catalysts in Macau – although analysts still need to raise Q4 estimates for MPEL – and the recent big move, Macau stocks could underperform.




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