Standard earnings release for HOT:  Beat, lower next Q, and keep full year. The fact is, lodging fundamentals remain strong.


"As we look to 2012, it is shaping up to be another record year of room additions and strong REVPAR growth"


- Frits van Paasschen, CEO



  • Headwinds cost them $30MM of EBITDA in 2011, and yet they still made their guidance
  • They are bullish about the coming year and still believe that they are in the early part of the cycle
  • On track to deliver $3/share in cash from the sale of Bal Harbour condos
  • Standout markets are Miami and San Fran.  NY was steady at 7%.
  • Softness is likely to continue in Europe, but Europe only accounts for 14% of their fees and 20% of their owned EBITDA
  • Fastest growing region in 2011 was Latin America and they are the largest player there
  • China RevPAR ex Shanghai increased 14%
  • Japan RevPAR increased 2% 
  • Africa and ME RevPAR was flat - Dubai was +12% offset by Egypt weakness
  • Rising dollar slowed inbound travel to the US from Europe
  • SG&A was up only 2.3% in 2011 and they have no intention to allow for costs to creep back
  • Added 389 hotels, or 8% annual unit additions over the last 5 years
  • SVO deliquencies are back to normal levels- they have several years of inventory to monetize and the team is looking for efficient ways to keep growing that are less capital intensive
  • They have not had a large core customer tell them that they will travel less in 2012 than 2011.  Corporate rates will be up mid-single digits. 
  • Top 2% of their guests account for 30% of their profits
  • 40% of their Elite travelers live outside of the US
  • Offering 24-hour check in for their elite guests and other services will differentiate them and help them maintain and gain guest loyalty
  • Expect to have 200 Westin hotels by YE 2012.  70% of the Westin openings will be internationally located.
  • Assume that the global economy just muddles along with its recovery in 2012 but no blow ups. Their balance sheet is prepared for the worst though. 
  • They have limited their exposure to the Euro at a rate of $1.44 (on a net earnings basis). Their remaining exposure is just 9%.  Expect a difficult year in Europe.
  • China growth ex-Shanghai is in the double digits. Expect a continued recovery in Japan. Don't believe that China will have a hard landing. Assume that China and Asia will continue to grow at the current pace.
  • Optimistic that US travel will return to Mexican resorts.  They assume another robust year of growth in Latin America.
  • Expect lodging recovery to continue in NA but the pace will not be as robust as the 9% rate in 2011
  • December was one of the best group production months 
  • Transient momentum remains steady and strong
  • Rate will be the primary driver of RevPAR growth in 2012
  • Expect LATAM to be above their guidance range and Europe and Africa to be below it
  • Shanghai effect is behind them.  Post March, they will benefit from easier comparisons in ME & Japan, and in the back half Europe will benefit from easy comps.
  • Significant renovations in 2012 will impact results (and asset sales)- by EBITDA $10MM 
  • Net FX drag will be around $7MM net of the hedge
  • In the developed world, their goal is to hold costs flat
  • VOI EBITDA will be roughly flat. They are making some selective investments in inventory for timeshare.
  • Each point of RevPAR = $15MM of EBITDA
  • Bal Harbour: 120 closings are targeted for 2012- with most front half weighted
    • $1300/SQFT average price
    • Project on time and under budget
    • Will not undertake a project of this kind in the future
  • Difficult to calculate Bal Harbour EPS impact so they won't break it on the EPS line
  • Lower interest expense from lower debt is offset by the fact that they can no longer capitalize Bal Harbour expenses
  • There will be no cash taxes paid on Bal Harbour given their tax credits
  • Q1 will have the largest drag from renovations and asset sales - $5MM EBITDA impact.  SG&A growth will also be higher in 1Q than the rest of the year.


  •  Bal Harbour: 
    • 3 year sell out, with pace dropping off markedly after 1Q'12
    • There were some contracts signed in 2006/2007 so unclear how those will play out, but everything they signed post crisis is closing fine
  • How is the financials services fairing and how large is that sector as a % of their business?
    • Consultants are the largest grower in financials
    • Professional services are growing as businesses outsource more
    • Pharma is strong too
    • Financials contributes low to mid teens
  • Why are group ADR's so weak?
    • Group ADRs aren't weak. For new business booked, ADRs are strong.  Business booked in 2011 for 12' have rates up mid-single digits and double digits for more than one year out (booked in 2011)
  •  Why were incentive fees down YoY?
    • Last year a lot of their incentives were loaded into the 4Q because late in the year it became clear that they would hit necessary targets. So the comp was hard. This year they didn't earn a lot of fees in ME & Africa. Adjusting for affected regions, it would have been up 14%.
  • Euro hasn't moved enough to incentivize US travelers to go there. Also the 4Q is a low season for Euro travel so its hard to have a lot of takeaways.
  • Since NY came back first, it has also slowed down - since the comps are hard. There has also been a lot of incremental supply.
  • To the extent they have excess cash, they will return it to shareholders. Their sense is that the new normal will be more volatile and therefore, it's important to have a strong balance sheet.  Fitch was the first to upgrade them today. Expect others to follow suit soon.
  • Cost assumptions for 2012:
    • 2-4% growth in constant dollars on owned
    • Wage rate increases based on agreements
    • Some pressure on property taxes
    • Hopefully no energy expense spikes
    • F&B - due to rising commodity prices they are working to share best practices to group purchasing/procurement
  • Why did they lower the high end of their guidance?
    • They didn't - just some moving items like interest expense and taxes
    • Marginal tax rate on Bal Harbour is 38% so that impacts their taxes
  • Continue to see steadily improvement trends in timeshare. California appears to be slightly better as a source of demand for the West. 


  • "Adjusted EBITDA was $321 million, which included $33 million of EBITDA from the
    St. Regis Bal Harbour residential project"
  • 4Q RevPARs:
    • WW Systemwide SS: 5.9% (5.8% constant dollar)
    • NA Systemwide SS: 7.7% (7.6% constant dollar)
    • WW SS Owned: 5.7% (5.0% constant dollar)
  • "Special items in the fourth quarter of 2011 included a pre-tax charge of $98 million, representing a charge of approximately $70 million related to an unfavorable legal decision, a charge of $14 million related to certain hotel impairments and a charge of $16 million related to costs associated with the early extinguishment of debt. Special items in the fourth quarter of 2011 also included an income tax benefit of $116 million, primarily associated with the utilization of capital losses which had previously been fully reserved and the tax effects of the special items discussed above"
  • "During the fourth quarter of 2011, the Company signed 36 hotel management and franchise contracts, representing approximately 7,600 rooms, of which 25 are new builds and 11 are conversions from other brands. At December 31, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms"
  • During 4Q;
    • New hotels added to the system: 28/7,900 rooms
    • Exits: 10/1,600 rooms
  • "Originated contract sales of vacation ownership intervals increased 6.2% primarily due to increased tour flow from new buyers and improved sales and marketing performance. The number of contracts signed increased 4.3% when
    compared to 2010 and the average price per vacation ownership unit sold increased 1.4% to approximately $14,500, driven by inventory mix."
  • "During the fourth quarter of 2011, upon receiving the certificate of occupancy, the sales of 36 units were closed and the Company realized incremental cash proceeds of $74 million associated with these units."
  • SG&A increase "primarily due to a reimbursement of legal costs in 2010 as a result of a favorable legal settlement"
  • "In November 2011, a subsidiary of the Company received an unfavorable legal decision. As a result, the Company recognized a $70 million pre-tax charge. The legal decision is not final and the Company intends to appeal."
  • 1Q12 Outlook:
    • Adj EBITDA, ex Bal Harbour: $205MM to $215MM
    • RevPAR: 
      • SS Company operated: 5-7% constant $ (100bps lower at current FX rates)
      • Branded SS Owned: 4-6% constant $ (150bps lower at current FX rates)
    • Mgmt fees, franchise fees and other: +8-10%
    • VOI & Residential earnings: flat
    • Bal Harbour: $60MM of EBITDA
    • D&A: $73MM
    • Interest expense: $54MM
    • Tax rate: 30%
    • EPS (including Bal Harbour): $0.49 to $0.53
  • 2012 Outlook:
    • Adj EBITDA, ex Bal Harbour: $1,060MM to $1,090MM
    • RevPAR: 
      • SS Company operated: 5-7% constant $ (200bps lower at current FX rates)
      • Branded SS Owned: 4-6% constant $ (200bps lower at current FX rates)
    • Margins at Branded SS owned: +100-150bps
    • Mgmt fees, franchise fees and other: +8-10%
    • VOI & Residential earnings: $150MM to $155MM
    • SG&A: +3 to 5%
    • Bal Harbour: At least $80MM of EBITDA
    • D&A: $300MM
    • Interest expense: $212MM
    • Tax rate: 30% and cash taxes of $100MM
    • EPS (including Bal Harbour): $2.22 to $2.33
    • Capex: $200MM of maintenance, renovation & technology; $375MM of investment projects and committments to JVs
    • VOI (ex Bal Harbour): $125MM of positive CF and Bal Harbour is expected to generate at least $250MM in net CF


Significantly reduced FY 2012 guidance management optimistic about pricing recovering, resilient onboard spending, and no Costa impact on 2013 bookings. More transparency helps investor confidence this morning.




  • 'Confident' Costa Concordia (CC) incident will not have a long-term impact
  • Overall bookings remain down in the mid-to low teens
  • Close-in bookings declined more than farther-out bookings
  • Q2/Q3 2012 - level of uncertainty is high
  • Didn't want to make projections
  • Had anticipated higher yields in Europe due to easy comps pre-CC
  • China opportunity will take some time to pay off
  • 2012 yield: 1-2% yield comes from ship revitalization, international expansion, technology development
  • Had great pricing momentum going into 2012
  • First time, RCL has more non-US customers than US customers
  • 4Q Ticket yield: double digits in Caribbean; Europe yields were down
  • 2011: fuel cost EPS 20 cents; Japan Earthquake/Arab Spring cost 65 cents
  • 2011 pricing: improved slightly more in US than Europe but this is driven more by itinerary mix than economy
  • 2011: Operating cash flow $1.6BN; reduced debt by 650MM
  • Current booking environment:
    • Demand trends still fluctuating
    • All new itineraries were down by 20% following CC
    • Post CC: North American demand recovering steadily to high single digits decline; Europe weaker
  • Extra caution for forward guidance
  • 2013 bookings unaffected
  • Last 5 years, fuel efficiencies have decreased expenses by 18% but due to deployment of ships, fuel expenses will be higher YoY. 
  • 2012 Fuel expense impact: 57 cents higher than 2011; FX rate 20 cents higher
  • Have resumed full marketing programs
  • Non-Caribbean (20%) itineraries are doing well and performing ahead of last year
  • Started to see improvement in bookings this week; some pricing have returned to pre-CC levels
  • No increase in 'cruise rejection rate' through their research
  • Completed Summit revitalization last week
  • Reflection will deliver in Oct 2012

Q & A

  • Has Celebrity resumed advertising?
    • Yes, restarting originally planned 2nd week of Wave Season advertising
  • People seeing CC as an isolated incident
  • Wave Season could be extended
  • Higher Insurance premiums?
    • Nothing dramatic
  • Distribution changes: more weighted towards 1Q 2012; least in Q3; some in Q2 and Q4
  • Deployment initiatives: Voyager of the Seas is going to China; increased capacity in Australia - driving higher fuel consumption and expense
  • Somewhat increased Northern Europe capacity; decreased Eastern Europe capacity; Europe overall capacity is lower
  • Baltic off to good start despite hard comps
  • Would like to get 50% of Arab Spring impact (15/16% less capacity in Eastern Med)
  • Azamara ding well
  • Loyalty program: January sign ups was a record
  • 2012 On board rev: have not seen any notable decline or any decline in ship revenue last few weeks
  • Most of the 1Q volatility will be in March sailings and on-board rev spending
  • Onboard promotion: 50% deposit sale; UK promotion
  • May have a 1Q 2013 bump due to lost January bookings this year
  • Will lower pricing to fill ships but not right now
  • 1st time cruisers: did increase YoY







  • Distribution changes and deployment initiatives will increase NCCs by approximately 300 basis points.  Absent these changes, Constant-Currency NCC excluding fuel are expected to increase approximately 1% to 2% on a comparable basis (flat to 1% As-Reported.)  


  • $1.1BN: cash and undrawn RC
  • Fuel
    • Forecasted consumption is now 55% hedged via swaps for all of 2012 and 47%, 30% and 20% for 2013, 2014 and 2015, respectively.  For the same four-year period, the average cost per metric ton of the hedge portfolio is approximately $521, $518, $575 and $580, respectively.  
  • Capex
    • Based on current ship orders, projected capital expenditures for 2012, 2013 and 2014 are $1.2 billion, $500 million and $1.1 billion, respectively.  The company has one option for a second Sunshine-Class vessel which would be delivered during the second quarter of 2015 that expires in late February 2012.  
    • Capacity increases for 2012, 2013 and 2014 are 2.1%, 2.5% and 0.6%, respectively.


Soft quarter and guidance.  Management probably a little conservative but cannibalization is a wildcard




“Although widespread economic concerns and volatility in the capital markets prevailed throughout the quarter and full year, consumer spending at our facilities remained relatively stable and we continued to make progress across the organization in enhancing operating efficiencies and maintaining a disciplined approach to marketing. Our current outlook and guidance for 2012 contemplates a continuation of the trends experienced in 2011, reasonable expectations for our newest facilities and the rate at which they will ramp to their potential and a realistic view of the impact of new competition on current operations."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming



  • October was soft, November was stable and December was great. Started slow and finished strong. Weather helped and is continuing to help in January
  • Guidance: Taking a realistic view given the uncertainty in the economy
  • Saw slight increase in YoY SS sales growth - with strength at the VIP segment ($400+)
  • Promotional environment remains rational which helped them achieve their margin improvement in the quarter



  • They expect some minor EBITDA improvement in markets not impacted by cannabilization but in markets with cannabalizations they will take a margin hit. Expect good margins from new facilities
  • They will complete construction on Toledo on March 15th.  Hope that they can open before May but they know that it won't be mid-March. They will have more clarity on the opening date in the next week hopefully. They hope for a opening sometime in April.
  • Will be opportunistic with their buybacks. However, they are still looking forward to a number of projects down the line so they want to leave dry powder. Middle of 2015 when the Fortress warrants expire they will have a material reduction in share count
  • Cash: $238MM; Bank debt: $1.7BN; 4.2MM capital leases; $325MM of bonds.
  • Capex: Maintenance of $24.8MM in the Q and 64.7MM of project capex. Kansas investments: $23.6MM in the Q
  • Given all the moving pieces in 2012 (opening timing and impact from competitive openings) they prefer to be conservative in their estimates. Given all the variables this year - they can easily come in +/- $30MM of EBITDA vis a vis their projections. That being said they gave a number that they thought was achievable
  • They are clearly concerned about Charlestown with the opening of Anurdel but that will also impact Perryville to some extent.  Very difficult to predict what the impact will be of all the new openings this year.
  • Impact of Scotia Downs opening?
    • They think that the impact of their early opening will be inconsequential
    • Thinks that many other steps will need to be taken and overcome before they will be able to open
    • They are proceeding very carefully on Ohio VLTs. There is a hearing to dismiss the lawsuit in a [month]
    • If they are able to open a few months before PENN they have no concerns that MNTR will have a first mover advantage over them given the superior quality of their facility
  • Ramp in Ohio?  Good proxy would be Penn National from a revenue and margin ramp
  • SS revenues excluding properties impacted by openings are basically flat.  Biloxi is struggling, other markets are better
  • $5.9MM impairment charge in NJ?
    • 50/50 JV with their Freehold partner in Kansas
    • Their partner did a valuation of the goodwill in their JV which needed to be written - no more goodwill left in the JV
  • Tax rate bounces around due to the deductibility of various expenses. They had an accrual issue vs. estimates getting trued up in the last quarter
  • Corporate expense in 4Q - included in other. Nothing extraordinary in that number which is in line with past few quarters
  • Latest on VLTs in IL:
    • Government remains opposed to slots at tracks
    • Online gaming could change some things
    • Slots at bars? no impact from that - West Virginia is a very good comp of why they don;t think anything will happen
  • Senator Kyl and Reed are keeping things very close to the vest. Expect some movement on the Senate side but expect some delays and issues on the House side.  They continue to have reservations about online gaming. They are monitoring the situations and there are a lot of unanswered questions on the topic
  • Sioux City: Have had some advice discussions about relocating their operations to a location that would benefit all parties involved. They have had discussions about changing partners which PENN is opposed to.  They are hopeful that they can come to an agreement by mid-year
  • Looking at land in Massachussetts.  Worried about local politics.  Cautiously optimistic but need community support.  They have a plan.
  • Casino Rama - mgmt contract extended for another 6 months to 12/31/12 under current terms. Can't predict what will happen after that.
  • Kentucky - Slots at tracks potential bill.  Need 3/5ths majority.  Senate will be a challenge.



  • "Repurchased 2,225,889 shares of our Common Stock in the fourth quarter for approximately $78.2MM, or an average price of $35.12 per share."
  • “The anticipated openings of Hollywood Casino Toledo and Hollywood Casino Columbus in the second and fourth quarter of 2012... Both the $320 million Toledo facility and the $400 million Columbus property remain on budget and despite public reports from the Ohio Casino Control Commission that our anticipated opening date for Toledo might be pushed back, we are continuing to work with the Commission and staff with the hope of minimizing any potential delays." 
  • “The State of Ohio has approved the placement of VLTs at the state’s seven racetracks and while we await the final regulatory framework, we are actively pursuing the relocation of our existing racetracks in Toledo and Grove City to Dayton and Youngstown, respectively, subject to the satisfaction of regulatory and other approvals. 
  • 4Q benefited from "strong property performances in our East/West segment attributable to continued strength at Hollywood Casino at Charles Town Races as well as further operating margin improvements.
  • Outlook/assumptions:
    • "Hollywood Casino at Kansas Speedway (joint venture) opens on February 3, 2012 with an expected impact to the Company’s Argosy Casino Riverside property;
    • Hollywood Casino Toledo opens in May 2012
    • Hollywood Casino Columbus opens in November 2012 with a relatively minor impact on Hollywood Casino Lawrenceburg;
    • Margaritaville Biloxi opens in May 2012 with an anticipated impact to our Boomtown Biloxi property;
    • Maryland Live! opens in July 2012 with an expected impact to our Hollywood Casino at Charles Town Races, Hollywood Casino at Penn National Race Course and Hollywood Casino Perryville properties;
    • L’Auberge Baton Rouge opens in August 2012 with an impact to the Company’s Hollywood Casino Baton Rouge property;
    • Horseshoe Cincinnati does not open during 2012 (and thus, no impact is expected to Hollywood Casino Lawrenceburg);
    • The January 2012 signing of the Casino Rama management contract which extends the agreement through September 2012;"
    • Pre-opening expenses: $17.2MM in 2012, $7.3MM 1Q12
    • No gains from insurance proceeds related to the Hollywood Casino Tunica flood
    • D&A: $225.2MM for 2012, with $51.2MM in 1Q12
    • Stock comp: $28.7MM for 2012, with $7.2MM in 1Q12;
    • Tax rate: 39%;
    • Diluted share count:106.5MM

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We feel even better about our long-term positive thesis after the Q.



We will have a more detailed note out when we are done with the model.  As you know, BYI is one of our favorite long-term and intermediate names.  However, had we known the quarter was going to be this good we would have been on the trading side of this call too.  Shame on me.  However, the quarter did provide us with comfort on our longer term thesis.  Certainly, more comfort than we thought. 


Here are some comments from our slot expert, Anna Massion:

  • It was a good quarter.  New unit sales were as expected but ASPs were better and margins lower.
  • Their ship share was 17% - including WMS’s deferred units (which were not immaterial – but we look at ship share on a what’s shipped basis).  Even so, that 17% is a 2% QoQ improvement and a 3% YoY improvement.
  • Systems and Game ops were just better than expected and will continue to improve in the coming quarters
  • While Italy continues to disappoint, that will be more than offset by early shipments to Scotia Downs
  • Our projections don’t even include the other 5 Ohio racetracks (8-10k slots) or IL VLTs, so plenty of upside potential.
  • Growth in BYI’s WAP install base was better and that’s before Grease and Michael Jackson.  We’re not really giving them much credit there either, so more upside potential.
  • You can see the impact of gaming ops on the balance sheet with the increase in jackpot liabilities
  • Backlog may have grown - an increase in customer deposits while A/R declined.



***It has come to our attention that the hyperlink in Tuesday's note did not successfully download the accompanying presentation for everyone. As such, we're re-sending the link to the deck; please email us if the updated link below still fails to work and we'll be happy to get you the PDF file.***


Conclusion: The perception of the Japanese sovereign debt market is at risk of a fundamental inflection point in 2012, as heavy issuance is likely to be accompanied by very public failures in passing much-needed fiscal reform. As such, we will seek to manage immediate-term risk within this long-term bearish thesis by trading Japanese equities and the Japanese yen with a bearish bias.


Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).


“I skate to where the puck is going to be, not where it has been.”

-Wayne Gretzky


For long-time Hedgeye clients, our long-term bearish outlook for Japanese economic growth is not new news; neither is our aggressive stance against their ultra-Keynesian monetary policy and fiscal positioning. That said, however, 2012 shapes up to be a rather interesting year for Japan’s sovereign debt market, as both a heavy auction calendar coincides with debates on key fiscal reforms – both of which possess the potential of dramatically surprising consensus expectations to the downside.


Given our own deep understanding of the tailwinds supporting the Japanese yen and the Japanese government bond market, it would be reckless to assign a timeline to a potential Japanese sovereign debt and/or banking crisis. We have, however, done the work and are comfortable in saying that, more so than any year prior, 2012 shapes up to be the year where confidence in the JGB market is lost – putting Japan at risk of being next in line to face the music of ourSovereign Debt Dichotomy theme.


As the aforementioned quote by hockey great Wayne Gretzky suggests, we think it’s appropriate for investors to begin hedging their portfolios against Japanese sovereign credit risk. As always, feel free to email us at if you have any follow-up questions and would like to dialogue further.


Darius Dale

Senior Analyst


Claims Tailwind Persists 

Weekly initial jobess claims for last week fell 10k WoW to 367k (down 12k after a 2k upward revision to last week’s data). 4-week rolling claims fell 2k to 376k. On a non-seasonally-adjusted basis, reported claims fell 2k WoW to 415k.


This obviously represents continued progress. The big question is whether claims have reached self-reinforcing levels yet. We've chirped endlessly about 375-400k being the threshold that, below which, unemployment begins to fall, which allows autocorrelation to take hold. In other words, falling unemployment inspires confidence which begets further declines in unemployment. This is an extremely powerful force and it's important to understand that its different from the move from 650k to 400k that we've seen from early 2009 through year-end 2011. That move was catalyzed on the back of monetary and fiscal stimulus alone. 


As we highlighted last week, the Fed's significant easing last week has thrown cold water on what had been a strengthening US dollar. As our Macro team makes clear daily, a strong dollar is good for America as it makes gas, food and lots of other less perceptible things cheaper for the average American. The opposite of this, inflation, is a tax and markets hate new taxes. So it will be interesting to watch the interplay between self-reinforcing claims and this inflationary tax. For now, claims are trending lower, which bodes well for the Financials on two fronts: credit quality and loan growth.












2-10 Spread

The 2-10 spread tightened 17 bps versus last week to 160 bps as of yesterday.  The ten-year bond yield also decreased 17 bps to 183 bps.






Financial Subsector Performance

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




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


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