OK quarter but the outlook is strong


“Results were terrific in the first quarter of 2012. There is tremendous strength in global travel today; travelers are on the road, attending meetings, making sales calls and taking family vacations."


-Arne M. Sorenson, president and CEO of Marriott International




  • Hotel room supply is estimated to grow by less than 1% in 2012.  Room supply is expected to stay low for the next few years, especially for full service hotels.  Financing is challenging, personal guarantees are often expected and lots of equity.
  • Expect a modest pull back of supply growth in China.  However, they still expect China to be one of the fastest growing market. They have 15% share of rooms under construction in Asia.
  • Have a big pipeline in India as well
  • In Europe, supply growth is also projected to be under 1%.  Their focus in Europe is mostly on conversions
  • International arrivals to MAR's US hotels is up 7%.  Brazil visitors up 16% and Chinese visitation was up 32%
  • RevPAR rose 9% in London
  • 2012 special events:
    • London Olympics
    • Paris conventions
    • Euro Soccer Championships
  • Attendance at group meetings is ahead of expectations
  • Ritz Carlton - demand from consultants and transient business is strong and had allowed them to push rate.  Have 24 Ritz hotels under development with 50% in Asia.
  • Higher group attendance and stronger last minute business helped their results in the Q
  • Systemwide RevPAR would have increased 6.5% this Q internationally if you include March results
  • Japan continues to improve. 
  • RevPAR in the Middle East declined 6%.  Expect easier comps as the year continues
  • Property level margins were helped by improved productivity
  • Improved profitability in Eastern Europe, Asia strength, helped drive incentive business
  • Sale of their Execustay - expected to close at the end of April.  $100MM of revenues in 2011 from this business. The results though are immaterial.
  • Autograph continues to gain momentum 
  • Seeing some construction delays in ME and Asia as well as some conversion delays since renovations need to be completed in advance of conversions
  • Higher transient expectations reflect stronger transient and group bookings, especially at smaller hotels
  • Much stronger results at leased hotels in London, Tokyo, and Anaheim are driving full-year estimates higher.



  • Normal growth in benefits and wages - sees 100-200bps in margins given their RevPAR expectations
  • The 11% number is (for group business) for Marriott brands.  What they see underneath that is 16-17% growth for group bookings at the smaller hotels and high single digit growth at the larger box convention hotels.  What that means is that smaller groups that require less lead-time are doing better than the very large conventions.  Government groups are the one area where they are cautious, especially in the quake of the GSA scandal
  • 20% growth in incentive fees is probably a good number for the full year, but it will vary Q to Q
  • Most of the the 11% group bookings increase is volume - only 2% is rate
  • Why didn't the higher RevPAR translate into higher fees this Q aside from the $3MM fee reversal?
    • Lower re-licensing fees - thinks that's more timing
    • Ancillary fees - grew 5% but not as good as RevPAR
  • Their appetite for acquisitions hasn't changed over the last few years.  They remain committed to being a management company.  Although, they have some flexibility to hold real estate for recycling purpose for select opportunities like Edition.
  • Europe first quarter results were comforting- came in around budgeted levels.  Much of that was driven by global gateway markets like London and Paris that benefit more from stronger international travel trends. They feel a little better for the balance of the year for Europe but are still cautious on rural UK, weak Spain, etc. Watching Germany, have very little exposure to Greece - only one hotel there.  In Russia and the East they are still seeing strength.
  • In the year for the year bookings came in stronger.  Also meeting attendance was higher than expected. They also had lower group cancellations in the quarter.  Combined, that led to better results in the quarter.  Think that better attendance and lower cancellations may be a trend for the rest of the year
  • They are guardedly encouraged by Europe's results in the Q and wouldn't be surprised with 0% RevPAR in that region
  • Diluted quarter end share count was 332MM basic shares plus 11MM of dilution = 343MM shares at Q end 
  • Base management fee $3MM reversal color?
    • Relative to the restructuring and the capital going into the hotel, MAR agreed to temporarily adjust down their fees
  • Think that China will continue to grow very robustly. It's in some of the biggest and most established markets, that residential development is slowing. Often times, those residential developments include a hotel.  They are a bit more cautious about deal signings in cities like Shanghai and Beijing. 
  • Board is more included towards share buybacks vs. dividends
  • They would gladly partner with development partners to develop their brands faster.  The Fairfield investment in India is just that.
  • They have already started talking to buyers for their Edition hotels under construction.  But they won't count on selling the hotels before they are open. London would be the easiest to sell since it's furthest along while NY is in the earliest stages so that wouldn't sell for a little while until all construction costs are nailed down.
  • Tokyo is coming along very strong vs. last year's very easy comp
  • Residence Inn has been the weakest brand, but given the longer stay at those, it tends to lag.  They have seen a bit of a shift from the Eastern US strength to Western US.  NY is actually doing well as is Philadelphia, as is Chicago and Boston.  Would not say though that this recovery has just been driven by key gateway markets, it's been pretty broad. 
  • Anticipate that the return of capital will be through buybacks and dividends, but if unique opportunities presented themselves that could change
  • Think that the current conditions in DC are only partly related to the Election year, but also has to do with budget cuts in the government and the Congressional calendar. They do expect DC to continue to stay weak. Post election, things should improve. Group bookings in 2013 look stronger than 2012.  The biggest threat to DC is a reduction in government in general.
  • Chinese NY timing isn't a factor for their results this quarter
  • They are seeing very marginal improvements in labor productivity. They are are in the middle of DC labor negotiations.



  • "Worldwide pipeline of hotels under construction, awaiting conversion or approved for development increased to approximately 115,000 rooms, including over 51,000 rooms outside North America"
  • "The company expects to add 25,000 to 30,000 rooms and expects 7,000 to 8,000 rooms to exit the system in 2012."
  • "Over 3,200 rooms opened during the quarter, including nearly 950 rooms converted from competitor brands and nearly 1,200 rooms in international markets.. Ten properties (2,487 rooms) exited the system during the quarter."
  • "Marriott repurchased 4.2 million shares of the company’s common stock for $150 million during the quarter. Year-to-date through April 17, 2012, the company repurchased 6.7 million shares for $245 million"
  • "Comparable Marriott Hotels & Resorts properties in North America, room revenue from negotiated special corporate business rose over 9% in the first quarter. Group room revenue at comparable hotels increased approximately 6%"
  • "At quarter-end, group room revenue bookings for North American comparable Marriott Hotels & Resorts properties for the remainder of 2012 are over 11% higher than for such bookings at the end of the 2011 first quarter"
  • "29 percent of worldwide company-managed hotels earned incentive management fees compared to 25 percent in the year-ago quarter."
  • Guidance:
    • Comparable systemwide WW, NA, and International RevPAR: 6-8% for 2012 and 2Q12
      • Up 1% from last quarter's guidance
    • Fee revenue: 2Q12: $345-355MM; 2012: $1,425-1,465MM
      • Up 1% from last quarter's guidance or $15MM 
      • Street's at $350MM for 2Q and $1,430MM for 2012
    • Owned, leased, corporate housing and other, net: 2Q12: $35-40MM; 2012: $140-145MM
      • Increased by $5-10MM from prior Q's guidance
    • Adjusted EBITDA: $1,105 - 1,160MM 
      • Increased EBITDA guidance by $10-25MM
      • Street's at $1,108MM for 2012
    • EPS: 2Q12: $0.39-$0.43; 2012: $1.58 to $1.69 
      • Raised EPS guidance 5-6 cents from last Q's guidance
      • Street's at $0.42 for 2Q and $1.58 for 2012


Terrific quarter.  Margin improvement continues.


“Our first quarter revenue, adjusted EBITDA (inclusive of $6.4 million of pre-opening expenses), net income and diluted EPS significantly exceeded guidance primarily due to the robust growth of the East/West segment relative to our projections, which we believe was attributable to a combination of the mild East Coast winter, healthier consumer spending, and excellent operating performance by our property teams. In addition our consolidated first quarter revenue and reported adjusted EBITDA growth ... benefited from the February 3 opening of Hollywood Casino at Kansas Speedway and a lower than forecasted impact to Argosy Casino Riverside following the opening, a healthy contribution from M Resort, and ongoing progress across the organization in enhancing operating efficiencies and maintaining a disciplined approach to marketing." 


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




  • Clearly, good weather had an impact but feeling pretty good about the consumer.
  • Strength in VIP customers (+$400); continue to improve margins in lower rated customers.
  • Saw improvement in spend per visit
  • Marketing activities continue to move away from being rated to unrated. So that has an overall effect of improving the quality of rated play on a per trip basis. 
  • Rational promotional environment
  • Recovery will continue to be slow, which is reflected in 2012 guidance
  • Changes in FY 2012 guidance: Picked up an extra Q of mgmt fees from Casino Rama; moved up Columbus opening by a month; delayed Toledo opening by a month; Maryland Live opening earlier than anticipated.
  • Cannibalization proceeding better than originally thought.
  • KC property performing exactly to formula: New property starts strong for 2 months, then a slowdown for a couple of months, and then 4-6 months to climb back up to opening months performance.
  • FY 2012 guidance still has room to move up 
  • There may be a special session for MD's 6th casino license.  PENN still hopeful on Rosecroft bid.
  • Better Margins in Midwest:
    • Lawrenceburg: Downsized marine operation staff
    • Reducing marketing expenses to lower rated players
  • Increase in pre-opening expense guidance mostly due to Toledo delay
  • M Resorts: have been reducing FTEs; off to decent start but more to come
  • Baton Rouge: the market is saturated; will have significant cannibalization; prepared for lower business volumes at their property
  • Toledo will fight with the Detroit casinos and sees NE Indiana market as an opportunity. 
  • Ohio Roundtable litigation decision should happen by Memorial Day; if approved, Ohio VLTs could happen in 2014
  • Total Ohio fees: $125MM (license + relocation)
  • Debt: $2.03 billion
  • Cash: $214MM
  • Capex: $119.7MM (21.5MM maintenance capex)--doesn't includes KS JV ($19.5MM share)
  • Did not make any share purchases in 1Q
  • Certain slot manufacturers were aggressive in machine pricing i.e. Konami; given them some ship share and win/slot have done well


  • "While the most significant year-over-year growth was driven by the Company’s East/West segment, adjusted EBITDA improvements were achieved at eleven of the sixteen gaming properties we operated during the first quarter of both 2012 and 2011 and twelve of these properties improved their adjusted EBITDA margins year over year. Notably, despite new competition from the operations of the tenth license in Illinois, adjusted EBITDA margins in the Midwest segment rose on a year-over-year basis after excluding the impact of pre-opening costs."
  • Guidance:
    • Net revenue: 2Q12: $711MM (vs Street at $732MM) and FY2012: $2,873MM (vs. Street at $2,906MM) up from prior guidance of $2,786MM
    • Adjust EBITDA: 2Q12: $188MM ($195.5MM excluding pre-opening expenses) (vs Street at $195MM) and FY2012: $762MM (vs. Street at $731MM) up from prior guidance of $721MM
    • EPS:  2Q12: $0.64 (vs Street at $0.62) and FY2012: $2.48 (vs. Street at $2.27) up from prior guidance of $2.22
    • Key assumptions:
      • Pre-opening: 2012: $22MM;  2Q12: $7.6MM
      • Depreciation and amortization: 2012: $235.8MM; 2Q12: $55.6MM
      • Non-cash stock compensation: 2012: $29.4MM; 2Q12: $7.2MM
      • 2012 tax rate: 38.5%;
      • Diluted share count: 105.3 million shares for the full year
  • Hollywood Casino at Kansas Speedway: "Results during the first two months of operations exceeded our expectations and we now anticipate that our share of the construction costs will be $10 million less than the initial $155 million budget." 
  • Ohio updates: 
    • “Based on the determination of the Ohio Casino Control Commission, the $320 million Toledo facility is scheduled to open on May 29, about a month later than anticipated in our initial financial guidance for 2012. Conversely, and subject to regulatory approval, given construction progress, the $400 million Columbus property will likely open slightly earlier in the fourth quarter than initially anticipated"
    • “We recently entered into a non-binding memorandum of understanding with the State of Ohio that establishes a framework for relocating our existing racetracks in Toledo and Grove City to Dayton and Austintown (located in the Mahoning Valley), respectively, where we intend to develop new integrated racing and gaming facilities, each budgeted at approximately $275 million inclusive of license and relocation fees. Pursuant to this arrangement we would pay the state a $75 million relocation fee per facility and The Ohio Lottery Commission would retain 33.5% of VLT revenues. We remain in negotiations with the thoroughbred and harness horsemen’s organizations to determine the level of their participation in the revenue streams from our significant investments in these two new first-class racing and gaming facilities and are optimistic we will reach a resolution equitable to both parties. In addition, the memorandum of understanding restricts any other gaming facility from being located within 50 miles of our Columbus and Toledo casinos, as well as our relocated tracks, with certain exceptions"
  • "We are pursuing new gaming opportunities in Western Massachusetts, for our jointly owned racetracks in Texas, and in Maryland where we’re seeking legislative approval for slots at our Rosecroft Racetrack in Prince George’s County. The Maryland Legislature recently adjourned without taking action on a proposed gaming expansion bill, the latest version of which excluded Rosecroft as an eligible slots location. We anticipate there will be a Special Session called by Governor Martin O’Malley, during which we’ll continue to highlight the benefits to the racing industry, employment, and new tax revenue to be derived from the inclusion of Rosecroft as a potential sixth gaming location in the state." 


Two Weeks of Spring Break?

Last week we highlighted the uptick in claims being at least partially driven by Spring Break week, in which school bus drivers and cafeteria workers are eligible to collect unemployment benefits. Normally the seasonal adjustment factors appropriately capture this, but last week the adjustment seemed to be off by a week. You can see this in the NSA claims chart below. As such, we had expected this week to be down by roughly 10k, all else being equal. Instead, we got a 6k increase (before the +8k revision). Interesting. Again, looking at the NSA chart below, it seems that somehow those same workers collected benefits for two weeks this year. The bottom line is that even net of these adjustments, claims are rising quickly. In fact, they're rising faster than we would have expected even based on our observation of the faulty seasonal adjustment models the government is using. This suggests that underlying claims may be backing off their intrinsic rate of improvement, i.e. a bona fide deterioration in the jobs market. We'll need to see a few more weeks of data to confirm, i.e. move beyond this Spring Break dynamic, but let's keep a close eye on claims as a leading indicator for domestic employment health.


The headline number for initial claims this week was 386k, this is a 6k increase over the prior week's print of 380k (though a 2k decrease if you factor in the 8k upward revision to the prior week's number: 388k). Larger-than-average upward revisions to the prior week is also a recent trend. Rolling claims rose 5.5k WoW to 375k. On a non-seasonally adjusted basis, claims fell 23k to 368k. 














2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 171 bps as of yesterday.  The ten-year bond yield decreased 6 bps to 197 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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The Macau Metro Monitor, April 19, 2012




Success Universe is spending HKD 700 million to extend its shopping mall in Ponte 16, adding around 20 to 30 gaming tables to its casino, and planning an extra gaming room.  Success Universe’s Deputy Chairman Hoffman Ma Ho-Man said the company would apply for a 20% increase in gaming tables which would, if approved by the authority, add around 20 to 30 new tables to the casino-hotel which currently has more than 100 tables, of which 18 are VIP.


Chairman Ho-Man believed the economic situation in the mainland, including the Government’s tightening over monetary policies, would not have much influence on their gaming business.  However he expressed worry that debts would increase as credit conditions become tighter on the mainland; however, the casino would enforce stricter screening of mainland gamblers’ credit records and require mortgage from some VIP clients.  In addition, they planned on opening one more

gaming room and recruiting one extra junket operator. 

He expected gaming revenue growth in 2012 to be lower than last year but would maintain the double-digit level.  
As to the extension of the shopping mall in Ponte 16, Ho-Man said, “The works would start later this year and finish in 2014.”



According to Business Daily, around 200 workers have been hired for the Macau Studio City project.  Despite what is thought to be worker accommodation being built on site, the project construction has not been restarted, said a spokesperson for Melco International Development Ltd.


Yum reported 1Q12 EPS of $0.76 versus $0.73 consensus.  The negative reaction to the print was, we believe, largely due to the miss in China’s same-store sales.  YUM is priced for perfection and needed to deliver a commensurately perfect quarter.  While the company came close, it didn’t quite deliver.  The quarter was strong; EPS exceeded expectations helped, for the first time in a long time, by the U.S. Division.  Given the weather and calendar-shift benefits that helped the first quarter, the question from here is “how sustainable is the domestic business?”  Here are our initial takeaways ahead of the earnings call this morning:

  • Yum China comps grew 14% year-over-year.  The stock is up 23% YTD.  Can it work from here with China seemingly losing momentum, at least in the first quarter?  As weather helped in the U.S., did cold weather during Chinese New Year negatively impact top-line trends?
  • Yum Restaurants India same-store sales grew 8% in the first quarter.  As China growth moderates – it has to at some point – this division is set to assume a greater role in driving Yum’s global growth.
  • In the U.S., Taco Bell came in at 6% same-store sales growth.  We are concerned that the trend may not be sustainable.  How much of the boost from the new product introduction and breakfast testing will be sustained?  Is Taco Bell one quarter behind Pizza Hut – will it roll over next quarter – or is this concept truly on the mend?
  • Pizza Hut trends rolled over in the U.S.  The 5% print implied two-year trends down 700 basis points sequentially.  What is next to keep trends moving forward?
  • KFC’s U.S. results were clearly a net positive.  Same-store sales grew 2%, with the two-year average trend up 200 basis points.  Was this a weather-and-leap-year head fake?
  • YRI saw same-store sales up 5%, which brought the two year up 150 basis points to 3.5%.  The numbers are impressive for 1Q12, the first quarter that India has been broken out from this division.  Previously, it had been included within YRI.  Margin contraction on 5% comps is one data point we will be trying to understand better from this morning’s call.

 YUM PRE-CALL QUESTIONS - yum china pod1


YUM PRE-CALL QUESTIONS - us taco bell pod1


YUM PRE-CALL QUESTIONS - us pizza hut pod1




Howard Penney

Managing Director


Rory Green


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