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Weekly European Monitor: Suspended Gravity Ahead of Sunday’s Greek Elections

-- For specific questions on anything Europe, please contact me at to set up a call.

 

Positions in Europe: Short EUR/USD (FXE); Short Spain (EWP); Long German Bunds (BUNL)

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.9% week-over-week vs +2.9% last week and is down -0.1% year-to-date. Top performers:  Cyprus +26.6%; Greece +13.7%; Ukraine +9.0%; Poland +3.1%; Russia (MICEX) +2.9%; Spain +2.5%; Romania +2.4%. Bottom performers: Finland -1.5%; Italy -0.4%; Czech Republic -0.1%.
  • FX:  The EUR/USD is up +0.93% week-over-week vs -0.58% last week.  W/W Divergences: PLN/EUR +1.04%, SEK/EUR +1.01%, NOK/EUR +0.66%, HUF/EUR +0.43%, GBP/EUR +0.32%, DKK/EUR +0.02%, CHF/EUR +0.01%.
  • Fixed Income:  Yields swung around for yet another week. Greece saw the biggest move, falling -120bps week-over-week to 27.73% on increased bets that a coalition with the pro-austerity party New Democracy will win on Sunday. Portugal also saw large declines, falling -60bps to 10.58%.  Spain powered higher, at +66bps to 6.88% and Italy gained +22bps to 6.00%, however dropped a full -25bps from Friday over Thursday.  Germany also put on quite a move, bouncing +22bps to 1.50%. 

Weekly European Monitor: Suspended Gravity Ahead of Sunday’s Greek Elections - 111. yields

 

 

60/40:


We’ll keep it short this week. We’re assigning a 60/40 probability in favor of a victory of pro-austerity party New Democracy in the Greek election on Sunday. Anti-austerity Syriza party head Alexis Tsipras has been very vocal this week stressing that he wants to “keep Greece in the Eurozone and restore growth”, however based on recent opinion polls we’re still behind the opinion that Greeks identify their future “prosperity” bound with membership in the Eurozone, and not removed with the Drachma, and we think Greeks are uncertain Tsipras can deliver.

 

That said, we view the timing of Spain’s €100B banking credit line as incredibility inept. Leading up to Saturday’s announcement, Troika was playing a relatively strong hand of cards, positioning the vote in Greece along the lines:  vote New Democracy and stay in the Eurozone, or vote Syriza and default and exit the Eurozone. Saturday’s Spanish bailout folded a number of those strategic cards and encouraged the view that Troika will remain an unconditional backstop, regardless of who wins. To this end, Syriza could make this a very tight race. Yet in our opinion the pop in Greek equities this week (+13.7% w/w) is baking in a ND win.

 

The first exit polls are likely to be published at 5pm GMT on Sunday with the first official projections due out a few hours later. However, we may have to wait until late Sunday night or Monday morning for conclusive results.

 

Either way, the winner will most likely need to form a coalition government and will get 3 days to get this accomplished. If that fails, it passes to the 2nd place party for 3 days, and then to the 3rd place party. 

 

The political set-up appears to simply be wait-and-see what happens in the Greek elections. Eurozone ministers have already said that they’ll hold a conference call on Sunday to discuss the outcome of elections. The wild card remains just what the outcome will be and what goalposts Eurocrats could decide to move on Sunday. However, we’d expect a bounce from equity markets and the EUR/USD on a New Democracy victory; and conversely, a sell off should Syriza poll ahead of ND, or if either party struggles to form a decisive coalition.

 

Don’t forget that Eurocrats mostly tread slowly; it’s the market participants and the media that want a resolution from Europe yesterday. As we said many times, given the constrained and conflicted nature of the Union of such uneven states under one monetary policy, Eurocrats have a long road to travel to save the region’s current fabric, if they can at all.

 

In a thick calendar for June we see a high likelihood that no firm policy action comes from the meetings this month.  Monday starts the G20 Summit in Mexico; the Eurogroup and EcoFin meet on June 20-21; and the EU Summit convenes in Brussels on June 28-29. The main topics of discussion will include:

  • Fiscal Compact
  • Pan-European Deposit Insurance
  • Eurobonds
  • European Redemption Fund
  • ESM (and EFSF)
  • European Financial Transactions Tax

We continue to view Ms. Merkel as the Eurozone’s paymaster, the lead horse pulling the Eurozone cart along. We see Germany pushing the fiscal compact route, the initial building block should Germany even decide to sign off on Eurobonds or a pan-European deposit insurance facility.   That said, we see agreement on a fiscal union over the near term as incredibly challenged as countries are unwilling to part with their fiscal sovereignty.

 

Interestingly, there have been mixed messages on the Germans’ position on the potential of a €2.3T European redemption fund that would essentially take over the excess sovereign debt of all countries that exceed the EU’s Growth and Stability Pact’s 60% debt to GDP limit in exchange for stricter economic oversight. This, however, especially in its initial discussion, seems out of character for the Germans who don’t want to signal they’re taking on the bulk of Europe’s risk (debt) – even though they’re carrying the lion’s share— and it also goes against their positioning that the member countries should do more for themselves (at least initially) to sort their fiscal houses before big brother Germany or Troika has to jump in.

 

As a reminder there will also be final round of parliamentary elections in France this weekend; the Socialists under PM Hollande look set to gain control.  

 

For more on the impact of Spain’s €100B bank credit line see our note on 6/11 titled “Spain’s Cracked Credibility and Europe’s Bailout Messaging”.

 

 

EUR-USD:


Keith shorted the EUR/USD today in the Hedgeye Virtual Portfolio. Below is an updated EUR/USD price level chart. Our immediate term TRADE support is $1.24 and resistance is $1.27. Our intermediate term TREND support level remains at $1.23 and resistance is $1.29. Our call is that if $1.23 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it. As we said above, we think the cross bounces on a New Democracy win and falls on a Syriza victory or any stumbles in coalition formation. That said, the wild card remains just how Eurocrats will responds on their Sunday conference call to the elections. Eurocrats, after all, can suspend gravity longer than you can remain solvent.

 

Weekly European Monitor: Suspended Gravity Ahead of Sunday’s Greek Elections - 111. EUR

 

 

Call Outs:


Spain:  El Mundo reported on Wednesday that loans made under the €100B bank bailout for Spain will have to be repaid in 15 years. The paper added that Spain will have to start repaying the loans in 2017, giving it a five-year grace period.

 

Germany's bailout bill continues to rise:  The WSJ noted that the Spanish bank bailout will raise Germany's exposure to financially troubled Eurozone countries by as much as €25B. According to Credit Suisse, Germany's total commitment to crisis-fighting programs currently amounts to €113B, or 4.4% of German GDP. The firm also said that if the entire resources of the EFSF and ESM are eventually called upon, Germany's exposure to these facilities would be €401B. In addition, Germany has indirect exposure to the crisis via the ECB of €57B of the central bank's €212B holdings of peripheral sovereign debt, while its share of the €660B Target2 liabilities of Greece, Ireland, Italy, Portugal, and Spain is €179B. According to Credit Suisse, added together all the potential German exposure accumulates to €671B, or 25% of German GDP.

 

Italian tax increases back fire:  Value-added tax receipts have declined since raised by 1 percentage point in Sept. as the economy was slipping into recession, government data released June 5 showed.


Germany:  The government and opposition parties failed on Wednesday to resolve a row holding up parliamentary ratification of both the EU's new fiscal treaty and the euro zone's permanent rescue fund (ESM), and will resume talks next week. The ESM is meant to start working from July 1 but cannot do so without the approval of Germany. Merkel wants parliament to approve the two items at the same time, but needs opposition support for the fiscal treaty.

 

Spanish banks borrowed new record high from ECB in May:  Bank of Spain noted that Spanish banks borrowed a new record high of €324.6B from the ECB in May, up from €316.9B in April. It added that total net borrowing was €287.8B in May, up from €263.5B in April.  

     

Spain:  ABC reports that Oliver Wyman & Roland Berger have set the capital needs for Spanish Banks at ~ €60-65 billion according to a draft report of the audit. 

  

                                          

CDS Risk Monitor:

 

Week-over-week CDS were largely down.  Portugal saw the largest declines in CDS w/w at -47bps to 1042bps, followed by Ireland -17bps to 669bps, and France -16bps to 197bps. Of the countries we track Spain saw a notable gain on the week of +4bps to 590bps.

 

Weekly European Monitor: Suspended Gravity Ahead of Sunday’s Greek Elections - 111. cds   a

 

Weekly European Monitor: Suspended Gravity Ahead of Sunday’s Greek Elections - 111. cds   b

 


Data Dump:


Eurozone CPI 2.4% MAY Y/Y vs 2.4% APR

Eurozone Labor Costs 2.0% in Q1 Y/Y vs 2.8% in Q4

Eurozone Industrial Production -2.3% APR Y/Y (exp. -2.7%) vs -1.5% MAR   [-0.8% APR M/M (exp. -1.2%) vs -0.1% MAR]

EU 25 New Car Registrations -8.7% MAY Y/Y vs -6.9% APR

 

Germany CPI 2.2% MAY Final Y/Y vs pre vest 2.1%

Germany Wholesale Price Index 1.7% MAY Y/Y vs 2.4% APR

 

France CPI 2.3% MAY Y/Y vs 2.4% APR

France Industrial Production 0.9% APR Y/Y (exp. -0.3%) vs -1% MAR

France Manufacturing Production -1.4% APR (exp. -0.9%) vs -0.4% MAR

France Non-Farm Payroll 0.1% in Q1 Q/Q [UNCH vs prev. est.]

 

Italy Q1 GDP Final -0.8% Q/Q (UNCH)   [-1.4% Y/Y vs prev est. -1.3%]

Italy Consumer Confidence 61 MAY vs 62.5 APR

Italy CPI 3.5% MAY Final Y/Y [unch]

 

Spain House Transactions -9.9% APR Y/Y vs -22.7% MAR

Spain CPI 1.9% MAY Final Y/Y [unch]

Spain Home Prices -12.6% in Q1 Y/Y vs -11.2% in Q4

 

UK Industrial Production -1% APR Y/Y vs -2.6% MAR

UK Manufacturing Production -0.3% APR Y/Y vs -0.9% MAR

 

Switzerland Producer and Import Prices -2.3% MAY Y/Y vs -2.3% APR

Portugal CPI 2.7% MAY Y/Y vs 2.9% APR

 

Norway CPI 0.5% MAY Y/Y (inline) vs 0.3% APR

Norway Producer Prices incl. oil 2.5% MAY Y/Y vs 2.5% APR

Finland CPI 3.1% MAY Y/Y vs 3.1% APR

Sweden CPI 1.0% MAY Y/Y vs 1.3% APR

 

Greece Unemployment Rate 22.6% in Q1 vs 20.7% in Q4

Malta CPI 3.7% MAY Y/Y vs 3.8% APR

 

Latvia Unemployment Rate 12.3% MAY vs 12.9% APR

Hungary CPI 5.3% MAY Y/Y vs 5.7% APR

Hungary Industrial Production -3.1% APR Final Y/Y [unch vs prev. est]

Slovakia CPI 3.4% MAY Y/Y vs 3.6% APR

 


Interest Rate Decisions:


(6/14) SNB 3-Month Libor Target Rate UNCH at 0.00%

(6/15) Russia Overnight Deposit Rate UNCH 4.00%

(6/15) Russia Overnight Auction-Based Repo UNCH 5.25%

(6/15) Russia Refinancing Rate UNCH 8.00%

 

 

The Week Ahead:

 

Sunday: Greek Elections; parliamentary elections in France; May UK Rightmove House Prices

 

Monday: G20 Summit in Los Cabos, Mexico; May UK Nationwide Consumer Confidence (Jun. 18-22)

 

Tuesday: Apr. Eurozone Construction Output; Jun. Germany Zew Survey; May UK CPI, Retail Price Index; Apr. UK ONS House Price; Jun. France Own-Company Production Outlook, Business Confidence Indicator, Production Outlook Indicator

 

Wednesday: Eurogroup Meeting, Ecofin Meeting in Luxembourg (Jun. 20-21); May Germany Producer Prices; BoE Minutes; May UK Claimant Count, Jobless Claims Change; Apr. UK Average Weekly Earnings, ILO Unemployment Rate, Employment Change; Apr. Spain Trade Balance; Apr. Italy Industrial Orders, Industrial Sales, Current Account

 

Thursday: Jun. Eurozone Consumer Confidence – Advance, PMI Composite – Advance, PMI Manufacturing and Services - Advance; Apr. Eurozone BoP Current Account, ECB Current Account; Jun. Germany PMI Manufacturing and Services – Advance; Jun. UK CBI Trends Total Orders, CBI Trends Selling Prices; May UK Retail Sales; Jun. France PMI Manufacturing and Services – Preliminary; Apr. Spain Mortgages-Capital Loaned, Mortgages on Houses; 1Q Netherlands GDP - Final

 

Friday: Jun. Germany IFO - Business Climate, Current Assessment, Expectations; 1Q France Wages – Final; Jun. Italy Consumer Confidence Indicator; Greek T-Bill Redemption for €1.3B; Apr. Greece Current Account


 

Extended Calendar Call-Outs:

 

18-19 June: G20 Summit in Los Cabos, Mexico

 

20-21 June: Eurogroup Meeting; Ecofin Meeting in Luxembourg

 

22 June: Greek T-Bill Redemption for 1.3 Billion EUR

 

28-29 June: EU Summit in Brussels, aim to formally sign off on growth proposals; EC meets to discuss Institutional Affairs

 

30 June:  Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio, Iceland – Presidential election

 

JULY:  France – extraordinary session of parliament in July is due to re-draft the 2013 budget 

 

1 July:  ESM to come into force

 

5 July: ECB governing council meeting

 

19 July: ECB governing council meeting

 

18-19 October: Summit of EU Leaders

 

 

Matthew Hedrick

Senior Analyst

 


CHART DU JOUR: CRUISIN' FOR THE LONG-TERM

  • Worldwide passenger growth has outpaced berth growth for the last three years
  • The cruise industry will see favorable supply dynamics thru 2015, which bodes well for pricing.  Since 1981, the cruise industry has averaged more than 7% in capacity growth.
  • We will see good yield growth in the next few years as long as passenger growth doesn't decelerate quickly

CHART DU JOUR:  CRUISIN' FOR THE LONG-TERM - CRUISE


Idea Alert: Shorting FXE

Positions in Europe: Short Spain (EWP); Short Spain (EWP); Long German Bunds (BUNL)

 

We don’t have a crystal ball when it comes to getting ahead of the massive political risk in Europe that will greatly weigh against the EUR/USD cross. That said, the most immediate catalyst for the cross is the Greek election this Sunday. We’re assigning a 60/40 probability of a victory for the pro-austerity party New Democracy.  Anti-austerity Syriza party head Alexis Tsipras has been very vocal this week stressing that he wants to “keep Greece in the Eurozone and restore growth”, however based on recent opinion polls we’re still behind the opinion that Greeks identify their future “prosperity” bound with membership in the Eurozone, and not removed with the Drachma, and we think Greeks are uncertain Tsipras can deliver.

 

That said, we view the timing of Spain’s €100B banking credit line as incredibility inept. Leading up to Saturday’s announcement, Troika was playing a relatively strong hand of cards, positioning the vote in Greece along the lines:  vote New Democracy and stay in the Eurozone, or vote Syriza and default and exit the Eurozone. Saturday’s Spanish bailout folded a number of those strategic cards and encouraged the view that Troika will remain an unconditional backstop, regardless of who wins. To this end, Syriza could make this a very tight race. Yet in our opinion the pop in Greek equities this week (+13.7% w/w) is baking in a ND win.

 

The first exit polls are likely to be published at 5pm GMT on Sunday with the first official projections due out a few hours later. However, we may have to wait until late Sunday night or Monday morning for conclusive results.

 

Either way, the winner will most likely need to form a coalition government and will get 3 days to get this accomplished. If that fails, it passes to the 2ndplace party for 3 days, and then to the 3rdplace party. 

 

Ultimately we think the EUR/USD cross bounces on a New Democracy win and falls on a Syriza victory or any stumbles in coalition formation. That said, the wild card remains just how Eurocrats will responds on their Sunday conference call to the elections. Eurocrats, after all, can suspend gravity longer than you can remain solvent.  

 

Keith shorted the EUR/USD today in the Hedgeye Virtual Portfolio. Our quantitative set-up for the immediate term TRADE support is $1.24 and resistance is $1.27. Our intermediate term TREND support level remains at $1.23 and resistance is $1.29. Our call is that if $1.23 breaks, look out below! And we’re not EUR parity folks because we see Eurocrats stepping in to prevent it.

 

Idea Alert: Shorting FXE - 111. EUR

 

The political set-up over the intermediate term TREND appears to simply be based on wait-and-see what happens in the Greek elections.

 

Don’t forget that Eurocrats tread slowly; it’s the market participants and the media that want a resolution from Europe yesterday. This could mean that headline risk moves the currency around, but it stays within a band between $1.23 and $1.29. As we said many times, given the constrained and conflicted nature of the Union of such uneven states under one monetary policy, Eurocrats have a long road to travel to save the region’s current fabric, if they can at all.

 

In a thick calendar for June we see a high likelihood that no firm policy action comes from the meetings this month.  Monday starts the G20 Summit in Mexico; the Eurogroup and EcoFin meet on June 20-21; and the EU Summit convenes in Brussels on June 28-29. The main topics of discussion will include:

  • Fiscal Compact
  • Pan-European Deposit Insurance
  • Eurobonds
  • European Redemption Fund
  • ESM (and EFSF)
  • European Financial Transactions Tax

We continue to view Ms. Merkel as the Eurozone’s paymaster, the lead horse pulling the Eurozone cart along. We see Germany pushing the fiscal compact route, the initial building block should Germany even decide to sign off on Eurobonds or a pan-European deposit insurance facility.   That said, we see agreement on a fiscal union over the near term as incredibly challenged as countries are unwilling to part with their fiscal sovereignty, which should put downside pressure in the cross.

 

Interestingly, there have been mixed messages on the Germans’ position regarding the potential of a €2.3T European redemption fund that would essentially take over the excess sovereign debt of all countries that exceed the EU’s Growth and Stability Pact’s 60% debt to GDP limit in exchange for stricter economic oversight. This, however, especially in its initial discussion, seems out of character for the Germans who don’t want to signal they’re taking on the bulk of Europe’s risk (debt) – even though they’re carrying the lion’s share— and it also goes against their positioning that the member countries should do more for themselves (at least initially) to sort their fiscal houses before big brother Germany or Troika has to jump in.

 

Again, you’ll have to trade around the rhetoric versus actions of Eurocrats on any of the six policy bullets (listed above) that will be debated in the go-forward meetings.  We’ll continue to update you on this ever changing political scene and refresh our quantitative levels.

 

Matthew Hedrick

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Hedgeye Geopolitical Geography Update

We would like thank a subscriber for sending this to us and wanted to pass it on as we are sure many of you have been a little confused as to geopolitical identities over the past couple of years.

 

1. “Spain is not Greece.”

Elena Salgado, Spanish Finance minister, Feb. 2010

 

2. “Portugal is not Greece.”

The Economist, 22nd April 2010.

 

3. “Ireland is not in ‘Greek Territory.’”

Irish Finance Minister Brian Lenihan.

 

4. “Greece is not Ireland.”

George Papaconstantinou, Greek Finance minister, 8th November, 2010.

 

5. “Spain is neither Ireland nor Portugal.”

Elena Salgado, Spanish Finance minister, 16 November 2010.

 

6. “Neither Spain nor Portugal is Ireland.”

Angel Gurria, Secretary-general OECD, 18th November, 2010.

 

7. "Spain is not Uganda"

Rajoy to Guindos... Last weekend!

 

8. "Italy is not Spain"

Ed Parker, Fitch MD, 12 June 2012 

 

Daryl G. Jones
Director of Research


UA: IDEA ALERT


We added UA to the Hedgeye Virtual Portfolio late yesterday. Here’s how we’re thinking about it on different durations...


First off, this is a situation that was brought on by a recent call we made on Nike, whereby the near-term TRADE and sentiment factors are definitely not in its favor. But for a company that we expect to so grossly beat the consensus estimates over two years, we’re not going to get too cute on the short side of that. The better near-term call, however, is to buy UA, where the near-term factors are the inverse of NKE (i.e. very positive).  


Here Are Some Considerations on UA:

 

TAIL (3-years or Less): We think that UA will put up $3bn in revenue by 2014 – an impressive run given that it is coming off of a print of just under $1.5bn in 2011. That incremental top-line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house). Our confidence here is greater than it is with most other companies given that UA clearly has invested (and will continue to invest) the capital in the right places to get the job done. One of the key points we look at is that it’s sitting at an EBIT margin of only 11% -- when it could be printing a margin number with a 2 if it wanted (but would otherwise jeopardize forward growth potential).  It’s tough for us to find any name out there in retail -- -sans LULU – where we can build a consistent annual EBIT growth model in the 25-30% range.


TREND (3 Months or More): A key consideration is that we’re now anniversarying a period last year where inventories were up an average of 70% as UA battled through problems with it’s supply chain. Even with growth humming in the 30-40% range, 70% inventory growth was not exactly a confidence builder for anyone building a financial model. Since these problems, UA has made many changes in its management ranks, created new positions, and made key external hires to get its fulfillment to where it needs to be. The reality is that this happens to just about every company going through different stages of maturation. UA is no different. Where it is different is the speed at which it appears to be fixing the problems. The Punchline is that this is gross margin bullish for UA in the coming 3 quarters. Lastly, one interesting angle here is that UA has less than 5% of sales coming from outside the US. With a strengthening dollar, this creates a situation where its failure has actually turned into a near-term benefit relative to competitors that operate globally and need to translate profits to US$. That ‘benefit’ should wane in 2013 when we start to see the benefit of the new organization UA has put in place in Europe.


TRADE (3-Weeks or Less): There are some mixed message here.

  • On one hand, business appears stable, with the year/year change in apparel market share continuing on the uptrend. In addition, the Hedgeye Sentiment Monitor is sitting near the lowest levels in a year, and the company is about  to execute a stock split. While we all know that this should not matter, the reality is that there are some people that will always think that a $50 stock is half as expensive as a $100 stock.
  • On the flipside, footwear continues to do a whole lot of nothing. That supports the ‘where could we be wrong’ part of our longer-term call, is the potential for a capital infusion needed (hence lower margins) to amp up the footwear business to attain our revenue numbers.
  • The bottom line is that our TRADE factors lend clear support at $101, with near-term upside to $107.

Just a quick point on valuation – something we think needs a bit of context with UA. By most metrics – P/E, EBITDA, EV/Sales, UA is just flat out expensive. But if you went by those metrics over the past 3-years, you’d pretty much have been wrong on both the long and short side almost every time. We think the better metric is EV/Total Addressable Market. For UA, that equates to about 0.15x based on our math. That makes it the cheapest name around. LULU is 0.33x, RL 0.45x, NKE 0.60x.  Will that matter on a day where the consensus freaks out because apparel sales miss by 2%? No. But that’s when we think we’ll be able to step in and make the most money on one of the best names in the space.


UA’s Apparel Market Share Continues to Rebound…Footwear Not So Much

 

UA: IDEA ALERT - UA Mkt Sh

 

UA: IDEA ALERT - UA TTT




HOTELS: THE FRANCHISEE/OWNER PERSPECTIVE

Some brand commentary from our private company contacts

 

 

Incentive misalignment:

  • Given that most US incentive fees are so “out of the money”, brand management companies seem more interested in growing the top-line where they collect a percentage of revenues instead of focusing on the bottom line
  • Almost all of the programs offered by brands are focused on growing the top line vs. achieving cost savings

Marriott:

  • Still the premier brand company in North America
    • High brand integrity
    • Best reservation system
    • Strongest exposure to corporate travel
    • Marriott hasn’t been that aggressive in raising fees since they have a lot of large franchisees and operators that would give them strong pushback
  • Salesforce One hasn’t been viewed as particularly successful by owners who complain that it’s more expensive than doing the selling of meeting business themselves and that MAR doesn’t necessarily have maximizing their profits as a top priority
    • Program has not been popular with franchisees who have chosen to opt out for the most part as they see little upside in sharing their convention contacts with MAR
    • Property owners where MAR is the operator complain that they have yet to see results from the shared services model but are hopeful that things will improve as group business revs up in the coming years
    • We’ve heard that once MAR hits incentive targets, they shift business to other properties to maximize their fees

Starwood:

  • The best brand portfolio internationally but isn’t the top dog in North America
  • Perception that Aloft and Element are failed brands in North America. While Aloft does reasonably well in urban and high volume corporate travel markets, there are too many Alofts in suburban markets where the product doesn’t do well.
    • Complaints that the materials they use are very cheap and the walls are thin
    • Lenders refusing to lend on new Aloft developments
    • Many of the ADRs in suburban markets are $80 or less
    • HOT may come out with an Aloft refresh to salvage the brand in the next year or so
    • Little interest in Element:  no new openings in 2011, 1 in 2012 and 2 scheduled to open in 2013

Hilton:

  • Really jacked up royalty fees since the Blackstone deal
  • Increased fees from 4% in 2008 to 6% in 2012
  • Lots of onerous kickback deals in their contracts like forcing franchisees and owners to buy internet from them at 3x the price of getting it from a competitive source
  • Able to get away with the fee hikes given the strong performance and locations of their brands, high brand integrity, and a fragmented ownership base
  • Higher leisure exposure though so MAR is still preferred by many owners who believe that it will be a long time before leisure travel returns to 2008 peak levels

IHG:

  • Brands are on the decline
  • Little brand integrity.  One franchisee referred to IHG as a brand “prostitute” allowing applicants through the door and being indiscriminate about what gets a IHG flag
  • Older product base.  Aside from the Holiday Inn Express brand, they are viewed as having a weak brand portfolio and little group loyalty amongst their customers.

Hyatt:

  • Working very hard to compete head to head with HLT and MAR
  • Hyatt has good reputation amongst owners and is often a second or third choice for owners who can’t get a MAR or HLT flag

Wyndham:

  • Strategy is to be the conversion brand portfolio of choice
  • When HLT, MAR, HOT kicks hotels out of their portfolio after the initial license term expires or if they fail to meet brand standards, WYN is waiting in the wings to convert those hotels. 
  • There are many that think WYN will grow faster than HLT or MAR over the next few years with limited new construction in NA

Choice Hotels:

  • Quality Inn is their go to conversion brand. The majority of Hampton Inns that lose a flag become Quality Inns and a decent percentage become Best Westerns
  • The standard of renewing a license that expires from its initial term of 20 years is much higher than that of maintaining a flag during the license term.
    • Many owners try to sell their hotels a year or 2 before the license expires
    • A hotel with a good flag will usually sell for almost twice the price per key as an unbranded hotel in a suburban location.
    • It’s not easy to get approved for a high quality flag since there are a lot of conformity hurdles
    • Some investors look to buy the old full service Holiday Inns at $20k/key and turn them into Courtyards which sell close to $100k/key

Early Look

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