Total GGR grew 22% to HK$24.3 billion, toward the high end of our HK$23.5-24.5 billion estimate.  Market shares are below.  Galaxy was the clear winner this month, despite the opening of Sands Cotai Central (SCC) on April 11th.  LVS had a better finish to the month but April market share still came in below recent trend despite the opening of SCC.  We do believe that LVS held low in the month but also that the VIP volumes were probably disappointing.  






In preparation for MGM's FQ1 2012 earnings release Thursday morning, we’ve put together the recent pertinent forward looking company commentary.



MGM abandons plans for casino in Mass. town (March 27)

  • "The unique nature of MGM's plans for an all-inclusive world-class resort of the Brimfield site, and our growing understanding of the needed scope for its infrastructure, simply do not allow us to pursue the comprehensive MGM resort originally envisioned here."
  • MGM would pursue "other potential development sites" in the western part of the state

MGM Q4 Conference Call (February 22)

  • "In 2012, we expect to spend approximately $350 million in capital excluding MGM China: included in those capital plans for this year is the continuation of the room remodel project at MGM Grand; the room remodel of the Spa Tower later on this year here at Bellagio; the conversion and investment in the Michael Jackson show with Cirque du Soleil at Mandalay coming online late 2012, early 2013; and the Blue Man Group show at Monte Carlo coming on this year."
  • "We expect our corporate expense to moderate and be in the mid $30 millionish area in 1Q before stock compensation expense. Our stock compensation expense in 1Q is estimated to be approximately $10 million. Our depreciation expense in the quarter, we estimate to be approximately $235 million to $240 million, and our interest expense in the fourth quarter was $274 million, including approximately $6 million from MGM China and about $24 million in amortization expense."
  • "We estimate that our interest expense in the first quarter will be approximately $285 million, including roughly about the same amount, $6 million, for MGM China, and about the same amount of $24 million in amortization expense."
  • "And as we pointed out in the release, we've received preliminary approval from roughly 62% of the lenders on our Amend and Extend transaction of our credit facility, we expect to initially achieve roughly about 150 basis points in rate improvement on the extending portion of that facility."
  • "As a reminder, our average borrowing cost is – on our outstanding debt – approximately 8%, so for every 1% improvement in rate that we can achieve, that's an incremental $125 million in interest rate and incremental free cash flow to our company."
  • "For 2012 we have over 100% of our planned convention room nights already booked [at Aria]. Aria's leisure segment business is also improving; our production numbers in domestic leisure are on par with Bellagio's as awareness in United States continues to build. We are making progress in the international leisure market as well and see an opportunity for further improvements in that market."
  • [MGM Macau] "We opened our new MGM VIP in-house area in mid-December and while it's still very early, we have seen initially strong increases in volume. CapEx was $45 million in 2011 and will be approximately $80 million in 2012. Of this, $45 million is allocated to build out the undeveloped space on our second floor with the balance being applied to rejuvenating capital works."
  • "We have plans to open a Hakkasan. Hakkasan is going to spend a tremendous amount of money at the MGM to replace Studio 54 that's been there for over 10 years."
  • "On the ADR side, we mentioned this a few times last year, we said the first quarter would be the toughest comp, because there was a big, big convention here last year and we have to overcome that, but even still because of recent bookings, we believe our RevPAR will be up in the first quarter, up a couple of percent, 2%, 3%, but growing. In fact the second quarter looks particularly strong and we think our RevPAR is going to grow nicely throughout the year, even on top of the good growth that we had in 2011."
  • "Just to mention a few coming up, we have Floyd Mayweather fighting in May at the MGM and then Manny Pacquiao the next month in June. Madonna is coming back; she's going to be here in October and we have several of these type of events throughout the year, which we know has a material impact on ADR and casino revenue."
  • "We're seeing very strong pace throughout the year, and our convention base is extremely solid and when you combine that to the growing FIT and leisure bookings, we're seeing a broad-based retail improvement in rooms revenue."
  • "Can you achieve mid to high single-digit growth there [FY 2012 REVPAR]? Yes."
  • [Sands Cotai Central impact] "We will be able to sustain and maintain our position as we've continued to do as we just keep on executing on our strategies."
  • "We're up over a 50% for the overall year in 2011 and I think that's a good way to kind of model the incremental flow through going forward."
  • [I-poker] "It's hard to say exactly when or if. I do believe it will be passed at the federal level, and I do believe it will be passed this year."
  • "We still have roughly about $180 million sitting in a trust account in New Jersey and are continuing to work through that process and are working on the sale of our interest in Borgata as well on top of that $180 million. So that's clearly another lever that will go to reduce debt and provide that additional lever."
  • "It's unlikely that we would sell any of our operating assets."
  • "We're projecting for 2012 kind of the same convention room mix as we kind of finished up 2011 with. And I think what it will come down to is the in-the-year for-the-year of bookings which in 2011 were exceptionally strong. And if we can come anywhere close to that, we think we can drive better rates in 2012 than 2011; 2013 and 2014 pace right now looks exceptionally strong both in terms of rate and room nights booked and we still have more work to do there as well, but we're gratified by what we see this early on, and 2013 and 2014 looks very strong....the 2013 rate is strong and 2014 is even stronger."
  • [International hotel mgmt contracts] "Branco which is the company that has, for a fee, lent the name MGM to MGM China goes in cash flow from $15 million last year to $30 million this year."
  • "There's no added first class room inventory on the horizon in Las Vegas for quite some time."


In preparation for HYATT's FQ1 2012 earnings release Thursday morning, we’ve put together the recent pertinent forward looking company commentary.




  • "As we think forward, occupancies are close to peak levels. And with really limited supply especially in the U.S., we think rate could be a higher driver of RevPAR growth over time."
  • "We feel good about select, which was largely only present in the U.S.  We should have a few select hotels open in Latin America and India later this year."
  • "As we think forward, our primary objective is to use the cash to grow the business. We don't have a dividend policy or any program relative to share buybacks at this point because we believe that over the next 12 to 18 months using the cash to grow the businesses is what's going to be the prime driver of capital deployment."
  • "While it's our intended policy at this point where we don't pay dividends or share buybacks, we're going to take a look at that because... we don't necessarily need to run the company with a billion dollars of cash."
  • "Our stated strategy is to recycle a lot of assets we own."
  • "Year-over-year property taxes will be high largely because we got credits in 2011."
  • "Q: If the full service urban Hyatt branded hotel experienced a mid-single digit RevPAR growth rate that was driven two-thirds by price, would you expect the flow through to be 50%, 60%? 
    • A: Yeah, I mean hypothetically speaking, I would say in that range.....the other thing you bear in mind is our food and beverage and other revenue, which tends to be higher outside the U.S. than inside."
  • "New York has got some headwinds in the form of the financial sector, more anecdotically than what we're seeing in the business. But from our perspective, even if there is a bit of a speed bump in terms of the financial sector, the fact that we have an improved product in that market, we believe overtime we can continue to grow market share."
  • "Largely in the sub-urban and secondary cities...  that's where over time recycling out of the capital becomes important. We have been placing a lot of emphasis on the urban centers"
  • [170 hotel pipeline] "It's a 60/40 skew in the full service/select. The full service takes three to five years. Select is two to four years depending on where it is.  I'd say it's skewed towards international relative to North can look at it over five years and this year we said we're going to open a little north of 20 hotels [excluding conversions and acquisitions]"
  • "Our presence in Europe, despite being limited, is really focused around key markets. We are present in France... Germany... We've got some presence in the UK. But there are markets like Spain... where we don't have presence, and over time, our intent is to have hotels in Spain and other markets."


  • "While the outlook for industry prospects seems to be improving over the last couple of months, there are still potential headwinds in the short-term from both Europe and a challenging financial services sector. As a frame of reference, roughly 10% of our overall adjusted EBITDA comes from continental Europe, including owned, leased and managed hotels."
  • "While it's difficult to forecast transient business for 2012, we do know that rate increases on corporate negotiated volume accounts in North America are up as expected in the mid single-digit percentage range for 2012 versus 2011."
  • "RevPAR growth in the quarter was negatively impacted by approximately 150 basis points due to
    bathroom renovations at several Hyatt Place properties. These bathroom renovations will continue through 2012, but are likely to have a lower level of impact to RevPAR from quarter-to-quarter."
  • "For 2012, we expect our effective tax rate to be in the low to mid 30% range before discrete items. Keep in mind that quarterly effective tax rates may be somewhat volatile due to the impact of discrete items. While discrete items by nature are very difficult to predict and can have either a positive or negative overall effect on the effective tax rate, we do not presently anticipate the impact to discrete items in 2012 to be at the same magnitude that we saw in 2011."
  • "Our expectation for this year is approximately $350 million in capital expenditures... includes $65 million which was carried over and... approximately $250 million on maintenance capital expenditures and projects from which we expect to generate a return. This includes conversion or renovation cost for the hotels we've acquired from LodgeWorks, as well as the extended-stay hotels we acquired last May. And approximately $35 million on new investments and properties that will be developed by us or in conjunction with partners over the next few years."
  • [Group bookings] "Our pace for 2012 is in the low-to-mid single-digits. We have 70% of the business we expect already booked at rates higher than where we end the year. Pace for 2013 and 2014 is also positive. We at this point have about 40% of the expected business for 2013 booked and about 25% of the business for 2014 booked at rates higher than what we're booking for 2012."
  • "There's been a proclivity to push decision making closer to the date of the events, which is clearly reflected in the quarter-for-the-quarter production that we've seen over the course of our quarter production that we've seen over the course of our past year and that's kind of what we are taking into this coming year, which is a real focus on continuing to book in the quarter-for-the-quarter business."
  • "The other thing that we're focused on that we've talked about in the past is more urban representation for select service. We have very, very little urban representation for our select-service brands. That's going to change this coming year as we start to open select-service properties that are under construction in some major cities."
  • "On the Rio front, we have been actively engaged in a lot of work around design and securing all the various entitlements that we need to be able to proceed with the project... We're in discussions with a number of potential sources of financing both potential partners but also financial debt financing... Our current plan is to be able to complete that project well ahead of the Olympics, so that we are there and ready to serve those guests coming into the city."
  • "We expect to be active on both the purchase and the sales side... As we look forward over the next couple of years, we do expect transactional activity to grow."
  • "So, my outlook for New York long-term is very bullish. I recognize that there is more supply coming into New York than in most markets around the country."


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There’s nothing like a high profile deal in the restaurant space to get the analyst community pondering names that might be mispriced!


The P.F. Chang’s deal that was announced yesterday does not really say much about the overall restaurant M&A environment, but it does appear that CEO Rick Federico and his team struck a deal that was very favorable for shareholders.  Centerbridge Partners agreed to take the company private for $1.1 billion, or $51.50 per share, valuing the company at just over 9x 2012 EV/EBITDA.


PFCB – NICE! - pfcb matrix



On October 27th, 2011, prior to the company’s 3Q11 earnings call, Mr. Federico had the following to say:


“I feel compelled to address recent articles stating the company is either for sale or negotiating a sale.  It has also been a question that has been asked on the last couple of conference calls. But, let me save everybody some time so that you can ask other questions when we get to the end of our formal comments. The rumors are not true, and we have no intent to sell this company. We believe in our plan. We have the capital to execute against it. We think about this business on a longer-term basis than just quarter-to-quarter. We acknowledge it may be bumpy, but unanimously, between our management team and our Board believe this approach will deliver the best value to our shareholders.”


Following this statement, the company’s Analyst Day, and subsequent meetings with the company, we began to buy into the company’s turnaround plan and felt that it was finally going in the right direction.  Price action in the stock started to reflect that sentiment too.  The question is, since October 27th, what changed for management to sell now?  Most importantly, it seems that the price is right.  Sales trends for 1Q, also reported yesterday, were a little soft so there is significant work to do.  What we do not know, importantly, is what April sales trends did in response to the national advertising campaign and lunch promotion at the Bistro.


While the Bistro and the international division seem to be on the right track, Pei Wei continues to be a thorn in the side of management.  Given the significant changes that need to take place at that concept, going private may offer management a better environment in which to expeditiously realign Pei Wei than remaining public would.  Perhaps management hears the footsteps of CMG’s new Asian concept, which is likely to expand aggressively over the coming years, and realizes that a better-performing Pei Wei or derivative of the concept (Pei Wei Asian Market) needs to be refined and brought to market before it’s too late.



Read-Through for Casual Dining


The deal had a positive impact on the group’s price action yesterday but we believe it may have been an overreaction; we are unlikely to see an increase in LBO’s in the space for three reasons:

  1. Small cap growth companies, common in casual dining, tend not to go private but rather seek capital via public markets.
  2. Most executives want to keep their jobs.
  3. As with the P.F. Chang’s deal, the typical restaurant deal is for a mature brand that needs to spend some time out of the public scrutiny to right size the ship.  Outback is the classic example of this.  Burger King, on the other hand, refloating just eighteen months after being taken private is just deal makers doing a deal for the sake of it.

In the case of P.F. Chang’s, this could have happened at any point over the past couple of years.  Despite Mr. Federico’s statement in late October, disavowing the possibility of the company being acquired, we saw it as a possibility that made us nervous at that point.  In a note titled “TOO EASY FOR TOO LONG”, on 11/21/11, we wrote, “I don’t want to buy a cheap stock on the “hope” that I get bailed out by some PE firm.  I also don’t want to short a stock that could fall prey to some activists or PE firm taking the company private.”  CHUX and MSSR are two other examples of where it did not pay to hang around on the short side.



Yesterday’s Price Action


Following yesterday’s deal, KONA, TXRH, and DIN were the best performing names besides PFCB.  TXRH was upgraded yesterday. 


CAKE and RT were next in line with RT having a spotlight on it given that it trades at a significant discount to the group.  RT’s leverage ratios and the news yesterday that the company is doing a debt deal make it an unlikely candidate for going private any time soon. 


BWLD popped 2% yesterday but we are confident that it is not going private.  The company is in the market to overpay for a rapidly growing restaurant asset.  BWLD remains one of our top shorts.


DRI outperformed EAT yesterday, but DRI has been underperforming lately due to legitimate concerns about the performance of the Olive Garden and Red Lobster brands.  DRI is not going to go private, but EAT is a possibility, albeit a remote one.


RUTH was down on the day.  This company may be better off as a private company or even under the wing of a larger organization like BWLD.



Howard Penney

Managing Director


Rory Green








Stinky Cheese

“For every complex problem there is an answer that is clear, simple, and wrong.”

- H.L. Mencken


While they’re not the only ones in the business, the French are rightfully proud of their “stinky” cheeses.  Yet stinky is for the consumer to judge and when it comes to pungent cheese, aroma and taste can run the spectrum from intense pleasure to pain, or alternatively as a pleasure from the pain.


A similar broad spectrum on the handling of the Eurozone’s sovereign debt and banking “crisis” is enjoyed by investors, strategists, journalists, and European citizens alike: abolish it, rescue it, or structure some hybrid of the two.  So what’s the update on the region as we find ourselves in May with the stink currently in Spain?


We continue to throw the abolishment camp out the window on four main factors:

  1. Eurocrats will tote the line to save their job
  2. Fear of the contagion effect from the default of countries and banks on the rest of the continent
  3. Belief in the Union’s economic benefit (namely through open trade and travel)
  4. Belief in the formation of a European identity (including the continental strength to balance the closest geographic spheres of influence in the U.S. and Russia)

While we could argue until we’re blue in the face that Europe needs its own Lehman-like event, to let weaker countries default and/or exit the Union, and that one monetary policy for a collection of joined states growing at uneven rates will continue to compromise the Union because it handcuffs nations from manipulating currencies and interest rates to encourage competitiveness, we think the above factors will justify the maintenance of the existing Eurozone fabric over at least the next 12 months.


So the task is to play an incredibly-challenged environment ahead as Eurocrats try to find a balance between fiscal consolidation, while not obliterating future growth in the process. One key factor to monitor, which we’ll hit on later in the note, is the deterioration of Merkozy, or relations between Germany and France on Eurozone policy.


So what’s so wrong with Europe?

The existing rub in directing European policy to improve the fiscal health of countries is that European leadership is inherently compromised: on one hand they have to answer to their citizenry that is largely voting against fiscal consolidation (and rioting on the street to bout), yet on the other they must answer to the markets, and a larger Brussels “authority”. Given that the markets are pricing in slow growth across Europe in 2012 and such threats as the inability of governments to meets consolidation targets, sovereign yields should remain elevated, which in turn increases the cost to raise capital and sets the “non-virtuous” cycle of raising debt and deficits levels. 


With 10YR yields trading at 20.4% in Greece; 10.5% in Portugal; 5.8% in Spain; and 5.6% in Italy; vs 1.6% in Germany, it comes with no great surprise that Germany is not interested in issuing Eurobonds.


But now the stakes in reducing risk have elevated, as Spain has taken the sovereign spotlight after a lengthy focus on Greece!  (Note: Spain’s economy = 5x Greece’s.)


And while Eurocrats have set up a number of firewalls to ease investor concern that the Eurozone is going away—including funding programs such as the EFSF, ESM, and enhanced commitments to the IMF earmarked for Europe, to liquidity programs such as the two 36M- LTROs and the SMP—these programs do little to bind Europe under a growth strategy.  As of recent weeks, it’s growth that has been given more attention by Eurocrats.


More Conflicts Ahead

But how do you manufacture growth? Simply by setting up more funding through the European Investment Bank or earmarking more lending from the IMF?  But who’s paying for it? Importantly, Germany hasn’t put up her hand, and who’s left?


Again, the uneven and compromised nature of Europe (and the Eurozone specifically) cannot be overlooked.  Simply throwing money at “problems” won’t cure structural drags like high unemployment rates, low labor productivity, vulnerable banks, and further risks from declines in housing and property prices ahead.


To highlight a few imbalances: Spain’s unemployment rate is 24.4% vs Germany’s at 6.8%, or Spain has a monster deficit reduction target of 5.3% (of GDP) for 2012 versus 8.5% last year vs the German deficit forecast to fall to 0.6%.  Or consider Portugal’s average annual growth rate over the last 10 years of 0.03% vs 1.07% for Germany, or recall that we forecast house and property prices could fall another 30% from here in Spain! 


It’s such structural mismatches (to name a few) that suggest that even if Europe finds a united path, it won’t come next week, next month, or next year. Uncompetitive countries like a Portugal or a Greece are going to stay uncompetitive. Europe’s stronger nations will simply have to decide how long they want to subsidize them.  Is this a realistic long-term strategy? We think not, but we still must play the likelihood that Eurocrats fight to support the whole.


Of note is that in some cases expectation are just grossly misaligned. For example, the European Commission targeted all member nations to have deficits at or below 3% by 2013. That’s surely not realistic for Portugal, Ireland, Spain, or Greece! Further, the Fiscal Compact, which is really an amended version of the Stability and Growth Pact (aimed at deficit reduction to 3% and debt reduction to 60%), stands to fall short as Brussels wrongly assumes members will give up their fiscal sovereignty.


French Inflections

Returning to stinky cheese, the likely victory of the Socialist candidate Francois Hollande in this Sunday’s presidential elections spells the likely end of a strong working relationship between France’s Sarkozy and Germany’s Merkel. Hollande’s very socialist agenda (increase spending by €20 MM over five years, reduce the retirement age from 62 to 60, raise income tax on earners over €1 MM to 75%, capping gasoline prices for a number of months and a pledge to block corporate job cuts) along with such positions as pro Eurobonds (which Germany vehemently opposes) and opposition to the Fiscal Compact, portend great disunity at a time when the Eurozone needs its two largest economies to pull jointly on the loose strings and direct solutions to its sovereign and banking ills.


Returning to H.L. Mencken’s quote that started the note, it’s clear Europe has a very complex suite of problems. And if expectations are the root of all heartache, it’s the market’s expectation that Europe will be “fixed” tomorrow that needs amendment.   While there is no simple solution, without better coordination through both appropriate targets for fiscal consolidation alongside strategies for growth, we do not see any hope for material improvement across the region over the next 12 months.


The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $119.07-121.06, $78.55-79.32, and 1, respectively.


Matthew Hedrick

Senior Analyst


Stinky Cheese - EL CHART


Stinky Cheese - el VP

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