prev

HOT REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

 

 

OVERALL:  BETTER - HOT's results came in above the high of company guidance. The outperformance was driven by better results across all segments of their business: owned, leased, and consolidated JV, fees and higher contribution from Bal Harbour. 

 

 

Here is the report card evaluating actual results against management's previous assertions. 

  • FY 2012 OUTLOOK
    • SLIGHTLY BETTER:  HOT raised RevPAR by 1% and lowered some below the EBITDA line items, however, the raise on Adjusted EBITDA and EPS for the year was basically a carry-through of the beat in 1Q
  • SUPPLY OUTLOOK
    • SAME:  Supply continues to be tight and will remain so in the near future.
  • SG&A GROWTH:
    • WORSE:  SG&A growth was taken up by 1% on the low end of HOT’s guidance range.  In the quarter SG&A was up 20% YoY or 11% excluding the $3-4MM of non-recurring items  and a $3-4MM reversal the company guided to in 4Q. 11% is a lot higher than prior guidance of +3-5%.
  • RENOVATION IMPACT:
    • SAME:  About $5MM in the Q
  • EUROPE
    • BETTER:  2Q12 will be better than 1Q12.  Booking windows are returning back to normal.  REVPAR is tracking at +4% in April they expect it to come in at +4% in 2Q
  • CANADA
    • SAME:  Canada remains sluggish as it dragged North America REVPAR by almost 200 bps.  The strong Canadian dollar has had a negative effect on their big box hotels in Toronto.
  • MEXICAN RESORT RECOVERY
    • BETTER:  HOT's earlier optimism played out well in 1Q as their Mexican resorts 1Q REVPAR grew 17% as US travelers returned    
  • CORPORATE RATE NEGOTIATIONS
    • LITTLE WORSE:  Corporate rates are trending up 6%, on the low end of previously given "mid to high single digit" guidance. 
  • GROUP TRENDS
    • SAME:  Group was up 5% in 1Q.  Management had indicated previously that the group pace was going to be in the mid-single digits in 2012.
  • TRANSIENT TRENDS
    • SAME:  "Transient rates continue to climb as momentum remains robust" 

  • REVPAR OUTLOOK BY REGION
    • SAME:  Latin America is still expected to be the strongest RevPAR growth region followed by Asia, NA, Europe and ME&A in last place
  • FX IMPACT
    • SAME:  HOT still expects the dollar will be a headwind to pull down REVPAR by 200bps 
  • NORTH AFRICA AND JAPAN RECOVERY
    • SAME:  HOT saw big jumps in March RevPAR as the region started to lap some easy comps. 
  • VACATION OWNERSHIP TRENDS
    • SAME:  Business remains stable with interval sales and revenues up. HOT reaffirmed its 2012 cash flow target of $125 million
  • BAL HARBOUR:
    • BETTER: Raised EBITDA forecast by $20MM, which mostly reflects $18MM of higher than expected EBITDA in 1Q12.  The company also increased the project’s cash flow expectation by $50MM to $300MM for 2012
  • CASH TAXES
    • SAME:  “Cash taxes in 2012 will be approximately $100 million."
  • CAPEX GUIDANCE:
    • SAME:  “$575 million in 2012, $200 million in maintenance and IT capital, and $375 million in ROI projects.” 
  • COST GROWTH:
    • SAME:  "Holding the line on costs" remains HOT's mottoo

HOT 1Q12 CONF CALL NOTES

The lodging train keeps-a-rolling.  Not much doubt we are going to continue to see quarterly beats

 

 

“Our momentum picked up in the first quarter. Going into the year, we said that 2012 was more likely to surprise on the upside. So far, that is playing out. More importantly, we remain very bullish on the long-term. Seemingly unstoppable demographic and economic trends are fueling global growth in demand for high end travel. Rising wealth around the world and globally interconnected businesses will lead to ever more travel.”

 

- Frits van Paasschen, CEO

 

 

CONF CALL NOTES

  • Still believe that 2012 is more likely to surprise to the upside than downside.  All of their customers plan to travel more in 2012 than 2011. 
  • Financial markets are pricing in some pretty bad events: China hard landing and Eurozone turmoil
  • Low supply in lodging is helping them sustain RevPAR growth.  Supply is likely to remain low:
    • Hotels are still selling below replacement costs so it's still cheaper to buy than build
    • Still hard to get construction loans
  • Japan's occupancy has already bounced back to pre-crisis levels
  • Despite the world's uncertainties, their results are better than ever.  They believe that they are on the cusp of a golden age in lodging.
  • Expect their best ever performance in rooms growth in 2012
  • Sees widespread growth across emerging economies.  Expect to grow their Malaysian footprint by 40%.  Growing their Thailand footprint by 20 hotels over the last nine years.
  • Demand for timeshare held steady with higher tour volumes and close rates, helped by strength in Hawaii
  • Sales at Bal Harbour continue at sales per square footage above pre-crisis levels
  • During 1Q, all 3 ratings agencies upgraded HOT's rating to investment grade.  Goal is to retain their investment grade rating even under the worst case scenarios.
  • Plan to return excess cash to shareholders
  • Luxury travel outlook/commentary:
    • # of ultra high-end households increased by 30% since 2006
    • Luxury travelers want more differentiated experiences which is what their various brands look to achieve
    • Have 28 St Regis hotels growing to 31 in 12 months, up from 14 hotels four years ago
    • Investing $100MM to restore some of their luxury hotels
    • 90% of their pipeline lies outside of the US
    • UUP brands benefit from their luxury portfolio for SPG members
  • In every region they are seeing an accelerating in business momentum
  • N.A. commentary/outlook: 
    • Supply under 0.5% for the past year with no signs of picking up.  Their occupancies are back to prior peak, which should allow them to drive rate
    • Corporate negotiated rates are up 6%
    • Group pace is up 5%
    • Business continues to shift away from discounted business
    • Q2 RevPAR is on track to be better than 1Q
  • Europe commentary outlook:
    • Seeing improving RevPAR trends in 2Q - tracking at a 4% RevPAR level in April and expecting 4% RevPAR in 2Q
    • Expecting a shallow European recession and are more optimistic on Europe's outlook
    • Absence of new supply helps them.  Occupancies ex Greece, are only 100bps below peak 2008 levels
  • Asia: accounts for > 20% of their rooms and 60% of their pipeline
    • RevPAR growth remains robust
    • Expect a sequential RevPAR acceleration in 2Q
    • Pace of openings in China remain strong
    • Indonesia and Korea are booking up 15% in Q1
    • Expect Asia to finish 2012 as their second largest department accounting for 20% of profits
  • ME & Africa
    • Business is still weak in Egypt
    • Expect growth to accelerate in Q2
  • Latin America is their fastest growing region in 1Q
    • Mexico is recovering as US tour groups are returning to that market
    • All indications point to the fact that LA should remain their fastest growing region
  • Canada had a 200bps drag on NA RevPAR as the strong CAD $ is hurting US convention busienss
  • Renovations impacted the Q by $5MM
  • VOI: remains stable. Cash profile improves. Default rates continue to decline to 4.2% in 1Q - which is the lowest rate since 2007.  
  • Bal Harbour: 32 units sold but not yet closed, project will be over 50% closed at the end of 2Q.  Sales momentum looks good with 20 news sales in the Q.  Seeing a sharp increase in NA buyer interest.  Condo sales are being helped by association with the St Regis brand.
  • Remain steadfastly focused on holding cost.  With growth only driven by emerging market growth.
  • Expect net room growth to approach 5%
  • In talks to sell a few assets which they expect to close later this year.  The market is not deep enough to sell a large portfolio of assets.
  • Continue to evaluate acquisition opportunities
  • Want to achieve a BBB rating - one notch higher than where they are today. Leverage target is 2-2.5x as rating agencies calculate it
  • Dividend payout policy of 25-40%
  • Anticipate another cycle of returning significant cash to shareholders

 

Q&A

  • The Le Meridian transaction really represents the best example of the type of acquisition opportunity that they are interested in
  • Expect 60% of RevPAR to come from ADR for the balance of the year. Feel like they are close to an inflection point in ADR increasing since occupancies are at peak rates already.  Mix shift is changing for the positive and the business on the books from depressed periods is rolling off. 
  • They have never been at an occupancy level so high with the supply growth outlook so low. Therefore, they believe that they should have some strong rate growth in years ahead.
  • They are in conversations on the sale of a few assets.  It's 1-2 single transactions, similar to 2011
  • Incentive fees are being helped by the fact that the bulk of fees (90%) are derived outside the US 
  • Bal Harbour - on track for cash generation and the guidance from their investor day is still good.  Will update guidance later this year.
  • Impact of conversions in Germany: couple of hundred basis points
  • Internationally most of their hotels pay incentive fees (70-80%); in the US, it's probably 30-40% (they need to check)
  • Most of the upside in Bal Harbour is driven by better closing pace and some by better pricing
  • They probably have to pay down a few hundred MM of debt to get to their target ratios
  • Some of the rate "compression" that their numbers may be reflecting include FX and openings in emerging markets which may have lower rates too 
  • Bal Harbour - sold 20 units in the first quarter (50/50 NA vs. foreign buyers) in 2Q sales will be more driven by foreign buyers.  Most of the sales that they have closed on are on sales done in the past. 
  • SG&A - reversal was about $3-4MM and another $3-4MM of one-time items. 
  • 70% of the deals in the NA pipeline are from conversions and those tend to happen more quickly
  • The first quarter is a very light quarter for Europe so the 1Q trends aren't usually that important. The current trends for April and 2Q are more indicative.
  • They like controlling their own VOI business and have no plans to spin it out for now

 

HIGHLIGHTS FROM THE RELEASE

  • 2012 Guidance Changes (if its not mentioned it means there was no change vs. proir guidance):
    • EBITDA was raised by $10MM; basically just carrying through the beat in 1Q to $1.07-$1.1BN (ex Bal Harbour)
    • SS Company Operated WW RevPAR by 1% to 6-8% on a constant $ basis
    • Raised fee growth by 1% to 9-11%
    • Raised SG&A growth by 1% at the low end of guidance to 4-5%
    • Raised Bal Harbour's EBITDA contribution by $20MM to at least $100MM - $18MM of the raise is just a carry through of coming in higher in 1Q
    • D&A $5MM lower to $295MM
    • Lowered interest expense by $2MM to $210MM
    • Raised EPS guidance by 13 cents (including Bal Harbour) to $2.35 to $2.46. The beat in 1Q was 14 cents vs. the midpoint of HOT's guidance
    • Raised the amount of cash expected to be generated by Bal Harbour by $50MM to $300MM
  • Midpoint of 2Q Guidance is in line with the Street:
    • EPS: $0.58 to $0.60 (Street: $0.60)
    • Adj EBITDA: $275-285MM (ex - Bal Harbour) and $15MM additional for Bal Harbour (Street: $296MM includes BH)
    • SS Company-Operated WW (constant $): 6-8% (-200 bps less adj for currency)
    • SS Company-Owned WW (constant $): 4-6% (-250 bps less adj for currency)
    • Fees: +9-11% ($221MM at the midpoint vs. Street at $219MM)
    • D&A: $72MM
    • Interest expense: $53MM
    • Tax rate: 30% 
  • EBITDA ex-Bal Harbour came in $219 above HOT's guidance of $205-215MM
  • RevPAR performance: 
    • WW System-wide RevPAR: 5.8% (6.2% constant $)
    • NA System-wide RevPAR: 7.1% (7.2% constant $)
    • Owned RevPAR: 4.5% (4.9% in constant $)
  • In 1Q, HOT signed 32 hotel management and franchise contracts (9,000 rooms), and opened 18 hotels (~4,500 rooms)
    • 22 new builds / 10 conversions
    • 5 properties (1,000 rooms) were removed from the system
  • Pipeline of 95,000 rooms/ 365 hotels
  • Special items in the first quarter of 2012 included an $11 million (pre-tax) reduction of a legal reserve, partially offset by a $7 million (pre-tax) loss on the sale of one wholly-owned hotel.
  • Fee YoY comparisons were impacted by the conversion of some franchise agreements to management contracts in Germany
  • 1Q owned, leased, and consolidated JV results, were negatively impacted by 5 asset sales and Bal Harbour pre-opening expenses
  • Originated contract sales of vacation ownership intervals increased 1.2%, primarily due to increased tour flow from new buyers and improved sales and marketing performance. The number of contracts signed increased 3.6%, when compared to 2011, and the average price per vacation ownership unit sold decreased 2.4% to approximately $16,000, driven by inventory mix.
  • Bal Harbour 1Q12: 
    • Closed sales of 102 units and realized cash proceeds of $263MM
    • Through March 31, 2012... closed contracts on approximately 45% of the total residential units
  • During the quarter, the Company completed the sale of one wholly-owned hotel. This hotel was sold subject to a long-term franchise contract

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW

Survey Says: 382k Jobless Claims = S&P 500 1,335

Initial jobless claims were 388k this past week, marking the third week in row at roughly that level (388k, 389k, 388k). The print was technically down 1k from last week's 389k, but that's after last week was upwardly revised by 3k. Apples to apples, it was up 2k vs. the prior week. This brings the trend in the rolling series to 382k, a 6k increase over the prior week. These results are bad, quite frankly. For reference, rolling initial claims bottomed at 354.75k on Feb 24, 2012. In the last two months, rolling claims have risen by 27k, or 7.7%. Ordinarily, that would be good for a commensurate decline in the market, but the strength of Apple's earnings seem to be keeping the market propped up for now. 

 

We continue to expect weakness in this claims series for seasonal reasons as we move into the summer months with claims likely peaking in the July/August timeframe. As such, we would expect the market's vulnerability to external shocks like Spain, Iran and other factors to increase in the face of weakening domestic data. For more on this, see our recent note entitled: "Why History Keeps Repeating (Or At Least Rhyming)".

 

For reference, based on the chart below, which demonstrates the cointegration of the S&P 500 with claims, fair value on the market based on rolling claims at 382,000 is 1,335 (vs. ~1,390 currently). 

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - Raw

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - Rolling

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - NSA

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - Rolling NSA

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - S P vs Claims

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - Fed and Claims

 

2-10 Spread

The 2-10 spread widened less than a basis point versus last week to 172 bps as of yesterday.  The ten-year bond yield increased 1 basis point to 199 bps.

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - 2 10

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS POST THREE ABYSMAL WEEKS IN A ROW - Scoreboard

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email? Please click the link at the bottom of the note to view in your browser.


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE M3: GALAXY MACAU PHASE 2; WYNN COTAI

The Macau Metro Monitor, April 26, 2012

 

 

GALAXY MACAU (TM) PHASE 2 NEXT MAJOR DEVELOPMENT TO OPEN IN MACAU Galaxy Entertainment

  • Construction of Phase 2 began in 1Q 2012. Scheduled to open mid-2015.
  • Funding HK$16BN through a combination of existing cash and cash generated from operations and debt.  Does not intend to issue equity.
  • Phase 2 will include:  
    • Over 1,300 additional hotel rooms & suites: 
      • JW Marriott (1,100 rooms)
      • Ritz-Carlton Macau (250 suites)
    • Gaming: 30k sqm, up to 500 tables & over 1,000 slots
    • 45 additional F&B outlets
    • Over 65k SQM of retail space/ +160 retail shops
    • Meeting, event and banquet space to accommodate 2,000 more patrons

WYNN AND GOV'T TO CLOSE COTAI DEAL ON MONDAY: REPORT Macau Business

According to Jornal Tribuna de Macau, the Cotai land grant contract between Wynn Macau Ltd and the Macau government will be closed next week, with final approval of the land concesssion on Monday, April 30. 

Jornal Tribuna de Macau says the public announcement of the deal may not be immediate.  Both parties will likely wait for the contract to be published in the Official Gazette, which is expected to happen in the second week of May.


THE HBM: DNKN, BKC, CAKE

THE HEDGEYE BREAKFAST MONITOR

 

HEDGEYE VIRTUAL PORTFOLIO POSITIONS

 

LONGS: JACK, SBUX

 

SHORTS: 

 

MACRO NOTES

 

Employment

 

Initial jobless claims for the week ended 4/21 came in at 388k versus 375k expectations and 389k the week prior (revised from 386k). 

 

THE HBM: DNKN, BKC, CAKE - initial claims

 

 

Commentary from CEO Keith McCullough

 

Most Read (Bloomberg) = “Bernanke Prepared To Do More”, #sad – but our profession continues to beg for Dollar Debauchery:

  1. US Dollar – last I checked, nothing happened in Iran yesterday or on the demand side of oil other than the Buck Burning during Bernanke’s presser. This morning, you see the follow through on that as Oil and Gold push toward lower-highs.
  2. ASIA – you’d think Dollar Down = everything up, especially Tech related Asian Equity markets. Nope. Taiwan -0.55% and KOSPI up 0.1%; both remain bearish TRADE and TREND in our model which is interesting, to say the least. Hong Kong and Singapore Export demand is tanking y/y at -7% and -5% respectively for (March prints).
  3. EUROPE – 1-day squeeze and European Equities are reminded that AAPL isn’t in their indices; straight back down this morning with Spain crashing again (ie down -22% from the Feb top). DAX failing right at my intermediate-term TREND line of resistance (6688) and that’s probably the more impt callout on the margin. UK has stagflation w/ $119/brent.

 

Re-shorted the SP500 as we were waiting on the 1394 re-test.

 

SUBSECTOR PERFORMANCE

 

THE HBM: DNKN, BKC, CAKE - subsector

 

 

QUICK SERVICE

 

DNKN: Dunkin’ Brands reported $0.25 EPS ex-items versus $0.23 consensus.  Comps for Dunkin’ Donuts U.S. came in at 7.2%, with international comps growing 2.3%.  Baskin-Robbins U.S. comps grew 2.1% with international comps growing 7.6%. Management guided to U.S. comps for Dunkin’ Donuts of 4-5%.

 

BKC: Burger King announced an agreement Wednesday with the Humane Society of the United States to switch to eggs from hens not kept in cages, and to only use pork products from pigs also not kept and bred in small cages.

 

 

CASUAL DINING

 

CAKE: Cheesecake Factory missed on the top line with Cheesecake Factory concept comps coming in at 2.6% versus 2.7% consensus. Grand Lux was the big disappointment with comps of 0.3% for 1Q versus 2.8% consensus.  The company beat on EPS, however, reporting $0.37 versus $0.36 consensus thanks to operating margin coming in at 6.9% versus 6.6% consensus.

 

THE HBM: DNKN, BKC, CAKE - cake pod1

 

CAKE: Cheesecake Factory was upgraded to outperform from market perform at Raymond James.  The price target is $34.

 

THE HBM: DNKN, BKC, CAKE - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


LVS: LUCK IS THE RESIDUE OF DESIGN

Branch Rickey uttered those words but while luck didn’t put LVS in Macau and Singapore, it sure helped the quarter.

 

 

“Has a Company ever played this lucky?” – Hedgeye Client

 

This question was posed to me last night by a valued client.  I guess the answer is, maybe in percentage terms but certainly not in dollars.  Probably not even close.  But the reality is that it wasn’t luck that put LVS in a position to make an estimated $145 million off of luck alone, in one quarter.  It was amazing foresight and execution that got LVS into the two greatest gaming markets in the world.  Where else could you generate the kind of volumes that could produce more EBITDA from a luck swing than LVS makes in total in Las Vegas?  That’s more than WYNN and Encore makes and about the same as Bellagio, MGM Grand, and Mandalay Bay combined.

 

In total, LVS amassed $1.1BN of property level EBITDA which is indeed a fantastic number.  Thankfully, some of us can still do math, no matter how many times the management skirted the hold question.  Luck played quite a hand in this quarter’s headline number.  By our estimation, high hold across LVS’s portfolio benefited EBITDA to the tune of a cool $145MM and net revenue by $235MM. 

 

That said, there were plenty of bright spots in the report, but it’s always a question of expectations.  With the stock action leading into the opening of SCC, the bar seems to have been set high.  The company spent a lot of time talking about their potential Spain project which does scare us a lot.  We think that will be the lowest ROI project the company has invested in for a long time.  We would’ve preferred more discussion of SCC.  While way too early to make any determination of the ultimate success of SCC, luck has been looking for payback as table hold at SCC looks low in the first few weeks of operations.  LVS’s share in Macau has actually dropped post-SCC. 

 

LVS: LUCK IS THE RESIDUE OF DESIGN - LVSSS

 

MACAU:

 

Macau revenue and EBITDA were 1% below our estimate.

  • We estimate that hold helped segment results by $40MM of EBITDA and $114MM of net revenue
    • Rather than use the magic 200 moving day average, we used each properties’ VIP hold since opening  to calculate VIP impact and the TTM average for Mass hold impact
    • Excluding the most recent quarter, Sands and Venetian have historical VIP hold rates of 2.92% while FS has a historical hold of 2.69%
  • Direct play was $6.4BN or 20% of RC, which we estimate was up 37% YoY
    • Sands:  11%
    • Venetian:  27%
    • Four Seasons:  16%
  • Junket RC volume was $26.5BN, compared to $21.9BN in 4Q11 and up 33% YoY.  All of this growth came from Four Seasons.  Venetian was flat YoY while Sands was down.
    • Four Seasons Junket RC grew to $10.7BN from $2.4BN in 1Q11
    • Venetian Junket RC was flat at $10BN
    • Sands Junket RC fell 23% to $5.7BN YoY
  • We won’t know what happened to commissions until next quarter, but we do know that rebate rates were up across the board
    • FS:  36.9% or 1.04% vs. 24.9% or 0.97% in 1Q11 (drop vs hold %)
    • Venetian:  35.1% or 1.01% vs. 31.4% or 84bps in 1Q11
    • Sands:  not a fair comparison because of the massive hold differential
  • Fixed costs were up high single digits to teens
  • Mall revenues were indeed pretty awesome.  Even without base rents  we saw huge YoY increases.
  • The addition of EGT’s resulted in very impressive growth in slot handle.  Unfortunately, EGTs also have lower win %s.

SINGAPORE

  • High hold helped the property blow away even our likely Street-high estimate.  However, no matter how LVS tried to massage it, hold of 3.58% is about as normal as the Phoenix Coyotes winning a playoff series.
    • Excluding this quarter, MBS’s historical hold has been 2.83%
    • We estimate that EBITDA got a +$80MM boost from high hold
  • Rebate rate increased to 1.28%
  • We’re not convinced that the Singapore is poised for significant growth
    • Slot handle hasn’t grown since 3Q11 – it's actually been down the last 2 quarters (albeit just slightly)
    • Mass drop hasn’t moved in 4 quarters – stuck between $1.12 and $1.2BN            

LAS VEGAS

  • Too bad no one cares about Vegas anymore because numbers were pretty good
  • Hold did benefit EBITDA by roughly $28MM - 3 year average hold in Vegas has been 18%
  • Slot handle and table drop hold likely exceeded everyone’s expectations as well
  • Looks like Sands continues to be rational with promotional spending
  • 4.5% rebate and promotional expenses decreased to just 12.5% of GGR from 18.8% in 1Q11 and 15.3% in 2011
  • Operating expenses, excluding  taxes, increased 10% YoY to $256MM

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next