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Acquisition of Gaylord's brand and hotel management business looks like a solid deal for MAR




  • Assumes that MAR will begin managing their hotels after their shareholder vote in 3Q12
  • During the past 4 years, GET feels like the value of their equity doesn't reflect the value of their company
  • Given the limited access to capital now, it is very difficult to develop new resorts
  • Their cost structure is currently inefficient.  Failure to act on GET's part would likely resort to a takeover by another entity below intrinisic value which would likely undertake similar tactics to reduce expenses. 
  • They believe that the hospitality industry is still in the early innings of a recovery and that their assets will be worth a lot more a few years down the road.  As a REIT, their investors will benefit from a large dividend and improvement in cash flows.
  • GET had an auction of their brand and feel like this deal reflects the best value to their shareholders by allowing them to reduce operating costs and convert to a REIT.
  • MAR's management expertise should help them improve occupancy and drive additional transient demand to their property.
  • GET will no longer pursue large scale developments.  Once GET converts to a REIT, they will pursue other growth strategies consistent with their new structure. 
  • See positive trends in their lodging business, however, their overall outlook on the business has not changed.
  • There were 3 other management companies that bid on their management company/ brand



  • GET believes that their large shareholders would approve of this transaction
  • How did they estimate the fee reduction? 
    • Have $45-50MM of overheard that they allocate to their hotels - i.e. central services
    • Think that there will be $16-17MM of savings at the corporate level
    • $20MM of savings after management fees by outsourcing management costs
  • GET already does a great job of managing occupancy in the 70s and since these are existing assets, they don't really pose a conflict to MAR's existing managed properties
  • MAR is not interested in buying GET's real estate
  • GET's Board unanimously approved the transaction 10-0
  • GET will post an investor presentation on their website with pro-forma 2013 estimates based on consensus analyst estimates in 24 hours
  • GET's credit statistics will improve because of improvements in cash flow generation from this transaction
  • GET's core expertise - Group business
    • GET light - potential of 500-600 room hotels with meeting space
    • Think that their is great growth potential from their existing assets
    • Potential from leisure business addition from MAR's existing customer base
  • MAR expects to earn incentive fees starting in 2013 and thinks that they are paying 8x for fees
  • This is a more accretive transaction than MAR buying stock
  • They are optimistic for the future growth of the GET brand but will likely take a long time given the scale of these assets
  • GET expects to hear from the IRS on the private letter ruling within the next week.  80/20 distribution is fairly standard.
  • The $210MM is the net proceeds from the deal.  GET will have about a $50MM tax bill after using up their NOL.
  • GET views that this transaction will materially improve their FCF and funds available for distribution. They are still in the process of developing a dividend policy though.
  • MAR thinks that they are paying 8-9x 2013 EBITDA for this deal
  • Not sure what the impact of this deal will be on their capex plans for 2013
  • Incentive management fees will be based on a pooled amount from the 4 assets. They are going to be getting a share of the EBITDA above a threshold target.
  • Multiple is 10x base fees in 2013 and expect that incentive fees will be in the money in 2013 so that takes down the level as well
  • The GET properties will be integrated into the MAR system
  • GET's floating rate debt is at historically unprecedented low rates and they don't see that rates will be increasing over the next 12 months.  Doesn't really make sense to convert that debt to fixed immediately and increase their borrowing cost by 4%. However, they will move their debt to 50/50 fixed/floating over the next 18 months.
  • If GET acquires resorts that they believe will benefit from the GET brand, then they will be talking to MAR about managing those assets
  • If GET can figure out a way to do Aurora that will get branded into a GET hotel and be MAR managed, that's their only obligation to MAR
  • Believe that they have the knowledge and expertise to meet meeting planner demands that can generate good returns. So GET does anticipate acquiring smaller "convention/group" hotels.
  • The $55MM of one-time costs are all cash
    • Conversion costs
    • Moving over systems 
    • Transaction costs
    • Severance and transition costs
    • Banking fees
  • They will be materially reducing the number of GET employees at the corporate level
  • The Opry, Ryman, Grand Ole - nothing will change there. They will continue to focus on growing those brands as they have in the past.
  • GET assumes that thier multiple will stay around 11x - similar to their C-corp.  However, quality REITs trade very differently (i.e. they do think that they can get a valuation premium). Their RevPOR on their assets is as good as any REITs and their leverage will be at a healthy level. They will also have a good dividend yield. 
  • Private equity has a 20-25% IRR hurdle rate and tend to bottom fish.  GET believes that the value of their assets will be worth a lot more in a few years and so it's much better to hold onto them rather than fire-sell them today.
  • MAR doesn't anticipate managing the assets until October 2012
  • There are fixed specific targets above which MAR will earn incentive fees which are similar to 2012 numbers
    • There is a cap of 20% of operating profits off of which MAR can earn incentive fees
  • GET's revenues are around $1BN so management fees are around $20MM
  • GET's aggregate costs to manage their hotels are about $60MM (central cost allocation and overhead). There will be a whole slew of efficiencies.  MAR's scale should help them save $8-10MM on just procurement costs. They spend $50MM+ a year on marketing. They spend $15-18MM/year on technology and money on accounting systems and reservations systems. Their current system was built not to increase too much with each hotel addition - MAR has thousands of hotels so it makes sense that they have much better cost leverage.



  • MAR has agreed to purchase Gaylord Hotels brand and the rights to manage its four hotels for $210MM 
  • Following the transaction GET will convert into a REIT effective 1/1/2013
  • "Terms of the management agreement call for Marriott to manage the four one-of-a-kind properties under the Gaylord Hotels flag. Marriott will receive a management contract with an initial 35 year term, 2% base management fee, and an incentive fee linked to improvement in hotel profitability." 
    • We estimate that management fees in 2013 will be roughly $13MM, excluding incentive fees
  • GET "anticipate[s] annualized cost synergies, net of management fees, will total approximately $33 to $40M. In addition, we believe we will have a unique competitive position in the hospitality REIT marketplace with a well capitalized balance sheet and a relatively predictable FFO (funds from operations) stream.” 
  • "As a REIT, the company will adjust its investment approach on the Aurora, Colorado hotel and convention center project. The company will no longer view large scale development as a means for growth and will not proceed with the Colorado project in the form previously anticipated. The company will re-examine how the project could be completed with minimal financial commitment by Gaylord during the development phase."
  • "By year-end, the company plans to issue its shareholders a special, one-time taxable dividend of its undistributed earnings and profits, after receiving a private letter ruling from the Internal Revenue Service (IRS). GET estimates the amount of the earnings and profits distribution to total approximately $415 to $450M. Gaylord intends to pay 80% of the dividend in shares of Gaylord common stock and 20% in cash." 
  • GET "expects to incur approximately $55M in one-time conversion, transaction and severance expense."
  • "Gaylord expects to hold a special meeting of stockholders in Q3 of 2012 for the purpose of voting on shareholder proposals that will facilitate becoming a REIT, amendments to its Certificate of Incorporation or other restructuring." 


Keith bought LVS in the Hedgeye Virtual Portfolio at $45.79.  According to his model, the TRADE range is at $45.65-49.73 and the TREND resistance is at $51.33.



As we wrote about in "A MACAU TRADE" (05/25/12), we like LVS for a long trade.  Macau market share has been unquestionably disappointing since Sands Cotai Central opened in April.  However, we believe share will increase from May's 17.5% to a more appropriate 19-20% range over time.   


Overall, Macau revenue growth for May will likely come in at the lowest level since summer 2009.  While we've been hitting on the slowing growth theme for almost a year, May was additionally hampered by low hold, a shorter Golden Week, and an unfavorable calendar.  Based on our math and assumption of normal hold, June should post higher YoY growth.  Sequentially better market growth and growing LVS market share should provide positive catalysts for a stock that has plunged 25% since its April high.



The Test: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI) and Short Basic Materials (XLB)


Our Growth Slowing, Strong Dollar, and Bernanke’s Bubbles (short Commodities) Macro Theme calls for Q2 have not changed – consensus is starting to.


Here are the lines, across risk management durations in my model, that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1316
  3. Immediate-term TRADE support = 1294 

In other words, I expect to see The Test (as in a re-test of the YTD closing lows), then maybe I’ll get net longer from there for the bounce. We’ll see. I think being able to change your mind fast is important right now.


Almost the entire Sell-Side still needs to cut their US GDP Growth estimates, again.




Keith R. McCullough
Chief Executive Officer


The Test: SP500 Levels, Refreshed - SPX

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Two More Months of Worsening Data to Go

Initial jobless claims rose 13k last week to 383k. As usual, the prior week print was upwardly revised - this time by 3k. Incorporating the 3k upward revision to last week's print, claims were higher by 10k. Rolling claims also increased, rising 3.75k to 375k. On a non-seasonally adjusted basis, claims rose 11k to 341k.


This week's number was well short of expectations for 370k, and, taken in conjunction with a weaker than expected ADP report this morning, continues to point to a perception that the jobs recovery is stumbling. As we've pointed out many times, this is an illusion caused by faulty seasonal adjustment factors in the government data. The error traces back to Lehman's bankruptcy. This is a major component of why the financials have followed a recurring trading pattern for the last three years, and why they should continue to for the next two years until the five-year lookback period has run its course.


The better way to evaluate the data is to look at the year-over-year trend in rolling NSA claims to remove the effects of the seasonal distortions. When viewed this way, claims continue to improve at a rate of ~11% YoY.  
















Meanwhile, the Yield Curve Continues to Pancake

The 2-10 spread tightened 10 bps versus last week to 135 bps as of yesterday.  The ten-year bond yield decreased 11 bps to 162 bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11 when banks across the board saw their margins flatten. It remains to be seen whether the end of Operation Twist on June 30 will take some pressure off the long end of the curve.






Financial Subsector Performance

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






Joshua Steiner, CFA


Robert Belsky


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CHART OF THE DAY: Dancing With the Bear


CHART OF THE DAY: Dancing With the Bear - Chart of the Day

Dancing With the Bear

“Theory helps us to bear out ignorance of facts.”

-George Santayana


I have a good friend whose dad is legendary for giving his sister’s suitors a difficult time.  As it’s been told to me, this young lady will bring guys she is dating home and her father will take them for a little walk outside and basically warn these young lads that they don’t want to dance with the bear – the bear being him.  Since he is a small town burly Canadian fire chief, the daughter’s suitors are pretty clear on the message.


As it relates to being stock market operators, I don’t think any of us enjoy dancing with bear markets.  A good friend of mine, and former colleague, is one of the head traders at a major mutual fund complex.  Every day I get his morning internal news summary which leads off with the ACWI etf, which is a proxy for global large cap equities.  On April 2ndhis note had the ACWI up +11.9% and on May 29thhe had the ACWI up +0.76%.  In effect, any investor who has a long only mandate has had to dance with the bears over the past couple of months and likely, just due to the inflexibility of their mandate, had to endure giving back performance.


But even as many of us have had to dance with U.S. and global equity bears, the Japanese have perhaps had it the worst.  The most populous bear in Japan is the Asian black bear, also called the moon or white chested bear, which is medium sized and, luckily enough, largely a herbivore.  While the Asian Black Bear is mostly focused on eating plants, the Japanese stock market has been focused on eating investors whole. Specifically, overnight the Nikkei close -1.1% and finished the month down -10.3%.


Our bearish thesis on Japan is, hopefully, at this point relatively well known.  In late February we hosted a conference call with a 100 page presentation (email us at sales@hedgeye.com if you aren’t a subscriber of our macro product and would like to trial and view the presentation) that outlined our view that Japan is facing a debt, deficit and demographic reckoning.  It seems Japanese equities are agreeing with us.  


One of the key catalysts we highlighted back then was the potential for a sovereign debt downgrade.  Early last week this catalyst came to fruition as Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level.  As the other rating agencies follow suit and the ratings continue to tumble downwards, the larger risk is that the Japanese banking system has to do a massive capital raise in the future to keep their Tier 1 capital ratio at appropriate levels.  This is an increasingly realistic risk that you may want to bear in mind.


By the time you get this missive, the U.S. will have reported GDP and jobless claims this morning.  Both our predictive tracking algorithms and the stock market have been telling us that GDP is slowing and we would expect the data this morning to reflect the same.  On some level, of course, slowing growth is starting to be priced into the market.  Currently, in the Virtual Portfolio we are leaning slightly net long and have 8 longs and 7 shorts. 


The three most recent positions that we have added to the Virtual Portfolio on the long side are as follows:


1.   Apple (APPL) – As oil and commodities deflate, from a macro perspective the outlook for the iEconomy improves.  Additionally, and not that I have any edge of course, Apple is cheap at 10x forward earnings but also growing the top line, based on the last quarter, at north of 30%.  The simple fact is that many investors still don’t get that Apple is not a hardware company; it is a software company with long term sustainably high margins (think moat and barriers to entry).


2.   Amazon (AMZN) – Amazon, much like Apple, is a play on consumption which we believe continues to improve as oil, and energy input costs generally, continue to break down.  As my colleague Brian McGough wrote about Amazon yesterday:


“Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.”


3.   Utilities (XLU) – On our quantitative model, utilities are the only sector that is bullish on both TRADE and TREND durations.  This is in part due to the predictability of the cash flow streams in utilities and thus relatively safety, but also a compelling dividend yield of right around 4% which, when compared to the government bond market, is downright juicy.


So, even in the doldrums of dancing with the bear market, we’ve been able to find some compelling long ideas.  Time and price will tell whether they are rentals or names that, like Starbucks, we will hold for multiple years.  But the bottom line is this: if you are going to dance with the bear, be prepared to keep your hands, feet, and portfolio moving.


In fact as Wikihow instructs us, the top three tips for avoiding bear attacks are as follows:

  1. Avoid close encounters;
  2. Keep your distance; and
  3. Stand tall, even if the bear charges you.

For stock market operators, the last point is probably the most instructive and translates into buying high quality names when the bear market is charging away and providing a compelling entry point.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $103.27-106.97, $81.99-83.24, $1.23-1.26, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Dancing With the Bear - Chart of the Day


Dancing With the Bear - Virtual Portfolio

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