JCP: FCF Cushion


JCP is pulling one of its levers – i.e. monetizing the majority of its REIT portfolio – to get the cash they’ll need. Chances are they’ll need to do it again while Ron Johnson & Co. work to right-size the ship, but we’re not going to beat them up for monetizing an investment that’s up +30% over the past year. To be fair, it’s the smaller of the two with JCP’s real estate worth an estimated 7x-10x more, but notable in that JCP’s next step should it need additional cash will be to  monetize at least some portion of its real estate portfolio.

Here’s some context on the sale of JCP’s Simon holdings today:

Structural impact:

  1. The value of JCP’s REIT portfolio accounted for nearly 6% of overall EV at ~$380mm, now = ~1%
  2. JCP has a stake in 3 REITs listed below with SPG accounting for ~90% of entire portfolio
  3. They sold ~90% of that stake today (still own 205k units – had owned 2.2mm)
    • Proceeds of the deal of $248mm are at a 20% discount to market value of $311mm and = ~$1.13 in value/share
    • This will be modestly offset by SPG’s $1/share dividend that has generated $2mm in annual Pretax profit (less than $0.01 in EPS)

FCF impact:

  1. JCP guiding to $1bn in CFFO and $800mm in CapEx in 2012 = ~$200mm in FCF
  2. Over last 5yrs, JCP has generated less than $200mm in FCF in 4 of 5 years
  3. In 2011, JCP generated negative FCF of -$50mm
  4. This deal will provide a ~$250mm cushion. Keep in mind, when they report earnings in another 3-weeks they will have likely burned through ~$1Bn in free cash flow (nearly $700mm in Q1) - so they need it

What this means for JCP:

Realizing $1/share in value will likely offer some support to the stock over the immediate-term. But with the value of the operational retail business eroding in value, it’s worth revisiting the value of JCP’s primary asset in the event it too gets monetized.

With Cap rates in the high 7%s and taking into consideration the lower end of the average rent these locations typically command – in the $3.25-$4.00 rent/sq. ft. range, we think JCP’s real estate portfolio is worth $1.8-$2.1Bn in value or $7-$9 per share. This equates to 40%-50% of JCP current market value of $4.4Bn making this asset increasingly more relevant with the stock hovering around $20.

To be clear, this scenario would not be a positive event as it would suggest the need for additional capital inflow implying further erosion in the core retail business. But it does remain an option nonetheless given JCP owns ~40% of its current store base.


JCP: FCF Cushion - JCP REIT Inv Value


JCP: FCF Cushion - JCP REIT Value




Bulls Fighting: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI) and Energy (XLE)


Plenty of people keep fighting us on this (and I personally really like to fight), so that means our fundamental research call for #GrowthSlowing is not yet consensus. Quantitatively speaking, managing the risk of the immediate-term range isn’t as easy a call to make.


Across all 3 of our core risk management durations, here are the lines that matter to me most: 

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1348
  3. Immediate-term TRADE support = 1329 

In other words, what was immediate-term TRADE support (1348) is now resistance, and we have ourselves a fight.


But the real fight remains between those who thought growth was fine in March/April and those bulls who are still long that same thesis as they see entirely different revenue results. Fighting reality versus expectations is always tough.


Lower-highs since April, keep the bulls on defense and the bears wondering why they aren’t shorter on days when the short side pays.


Keep managing the risk of this bearish intermediate-term range,



Keith R. McCullough
Chief Executive Officer


Bulls Fighting: SP500 Levels, Refreshed - SPX





In preparation for PENN's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Penn National Gaming Files for Ohio VLT Licenses and Consent to Relocate Its Racetracks to the Mahoning Valley and Dayton (7/2/2012)

  • Intention to construct new $125 million racetrack and video lottery terminal (VLT) facilities at the new locations
  • PENN has agreed to pay a $75 million relocation fee for each racetrack, in addition to the $50 million VLT license fee per track.
  • In addition to up to 1,500 VLTs per facility, both of the new properties will feature restaurants, bars and other amenities.
  • PENN has previously indicated that it will continue to operate Beulah Park in the Columbus suburb of Grove City and Raceway Park in Toledo until the expected opening date of the new facilities sometime in 2014. 
  • The new Austintown facility – which will be a thoroughbred track – will be located on 184 acres in Austintown’s Centrepointe Business Park near the intersection of Interstate 80 and Ohio Route 46. It will be known as Hollywood Slots at Mahoning Valley Race Course.
  • The Dayton facility – a standardbred track – will be located on 125 acres on the site of an abandoned Delphi Automotive plant near Wagner Ford and Needmore roads in North Dayton. It will be called Hollywood Slots at Dayton Raceway.

Penn National Gaming to Acquire Harrah’s St. Louis for $610 Million in Accretive Transaction (5/7/2012)

  • Acquires the stock of Harrah’s St. Louis for $610 Million
  • The transaction price represents a 7.75x trailing 7.75 trailing twelve month EBITDA multiple and will be funded through an add-on to PENN's existing Senior Secured Credit Facility. While the acquisition is a stock transaction, for tax purposes, it will be treated as an asset transaction which Pennexpects will provide tax benefits that will effectively reduce the purchase multiple to 6.75x trailing EBITDA.  Pro forma for the completion of the transaction, PENN's total debt to EBITDA leverage ratio will increase to 3.25x from 2.75x (at March 31, 2012). 


  • "Our customers are back and they're back in force, and most of our properties are doing extremely well."
  • "We are seeing overall increased spend per visit slightly, and our marketing activities continue to move low-end customers away from being rated into unrated. So that has an overall effect of improving the quality of your rated play on a per trip basis."
  • "There's rational promo environment out there....The recovery I think will continue to be slow, which is reflected in our guidance for the balance of the year. And we do see the strength in our VIP segment, which is good to know that we're protecting our VIP customers, even though we're able to continue to improve our margins at the lower end of our rated database."
  • "It's clear that the cannibalization immediately is not as strong as what we've been indicating in our previous thought process. So that doesn't mean that the cannibalization doesn't happen. It just seems to be a little bit more delayed than we had in our original numbers."
  • "Relative to what's happening in Kansas City, the ISC property obviously started off really well. And as I think I've indicated a number of other times, it's following the exact pattern that we have seen in every other opening of a property, which is that the property starts off really strong, and then it has a period of a few months where it doesn't match those initial numbers. And it takes anywhere from four months to six months to climb back to the – and I won't say the opening week, but maybe the second, third weeks' opening results. It takes about four months to six months to get back there."
  • "Maryland Live! versus Charles Town, I mean, certainly we are incorporating a bit of that. We think that the cannibalization, original cannibalization thoughts may have been a little bit accelerated in terms of the immediate impact. So we have pulled that back just a little bit."
  • "We're still feeling like there's a lot of room in this year's guidance for movement relative to where we may end up, just because of the fact that there are so many, again, so many issues happening this year as we've moved through these different openings."
  • [Maryland] "Now there has not been a decision on when there's going to be a special session. We assume there will be. We're hopeful that that flawed piece of legislation doesn't come back up in the special session, or if gaming is included in the call, that we kind of reset the clock and that we have an opportunity to argue the merits of our proposal being included in a competitive bid, should the sixth license make it through."
  • "With the opening of the tenth license in Des Plaines, we were prepared for that. We restructured our costs in both Aurora and Joliet to reflect lower business volumes that we're seeing there.  Then in Lawrenceburg, the thing that we've continued to do there is continue to being the 800 pound gorilla in that market today, continue to restructure our marketing spend and reduce our marketing reinvestment, again, to the lower level of our rated database. That has continued to improve the overall margins of that business as well."
  • "We started to see a little bit of improvement in the Boulder Station numbers for the Las Vegas locals. But that coupled with our continued rationalization of the cost structure, we continue to reduce FTEs where we can and adjust our hours of operation in our restaurants and our other non-gaming areas to reflect more current business demands....And continue to, as we've done with the other businesses, look at our marketing reinvestment to the low end of the rated database, and all those things continue to show improvement to the overall performance in the M. But again, we're still early on in this, and it's going to take a couple more quarters going forward into this year and into next year for this to completely take hold. So we're off to a decent start this year, but there is more to come."
  • [Baton Rouge] "I think there is going to be very, very modest growth in this market, and I do think there is going to be significant cannibalization of the two existing casinos that are in that market. So we don't anticipate that there is going to be a good story in Baton Rouge once Pinnacle does open there. So we think the market is fairly well saturated and there will be modest overall growth. Probably not too different than what you're going to see in Atlantic City with the Revel opening that just occurred, given how saturated that market is, we see similar kind of effect in Baton Rouge. So we're preparing for lower business volumes and therefore ready to adjust our cost structure to accept a new paradigm of business levels."
  • "We have seen in certain cases where certain manufacturers have become very aggressive in their pricing to us that has caused us to move a little bit of share over. And machine price over the last five or six years hasn't correlated well with any win-per-unit performance.  So to see an operator or manufacturer, like Konami be very aggressive with their pricing is something that has caught our interest and has given them a little bit of a share shift toward their product, which has performed very well on our floors, especially in the low denom area."

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.


In preparation for BYD's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Peninsula Acquisition (May 16) 




  • "Economic fundamentals supporting our business are strengthening and we anticipate this trend will continue."
  • "Our business clearly continues to move in the right direction, and we expect this momentum to continue for the remainder of the year."
  • "The higher end of the database is certainly the area where we continue to see strength, I mean, that the customers we know the best they're obviously most entrenched with our brands and that segment continues to grow, I think at a very healthy pace."
    • Wholly owned EBITDA (post corporate expense): $90-$95 million
    • Borgata EBITDA: $33-$35 million
    • Adjusted EPS: $0.06 to $0.10 
    • Borgata's interest expense: $20 million/Q a quarter
    • Boyd interest expense: $162-$165 million
  • "The guidance we provided incorporates some expected impact of Revel along with some offsetting and marketing expenses, the new marketing programs that we would anticipate to make sure that our customers continue to visit the Borgata along with additional efficiencies that we have built in over the quarter so that we can continue to manage the business and not only create the best experience, but maximize the profitability of the property."
  • "A new competitor has opened in Atlantic City, and while it is early, I can tell you that we have yet to see a meaningful impact on Borgata. So far in April, we have seen year-over-year increases in guest counts, visitation, and rated slot win. Occupancy is higher as well running ahead of our expectations, and our cash room sales were up about 8% during the month. While April's performance is encouraging, we expect it will be several quarters before it is clear what impact this new competitor will have on the Borgata."
  • "We also continued to widen our leadership position in poker where revenue grew by about $1 million as we captured nearly half of the entire Atlantic City poker market. These top line gains were magnified on the bottom line as the property increased EBITDA margins by more than 330 basis points during the first quarter, a reflection of the Borgata team's commitment to driving further efficiencies in the business without compromising the property's first-class customer experience."
  • "We are seeing some positive factors as strip frequency from our customer base continues to grow and is now at the highest level in three years. Looking ahead, we expect steady EBITDA growth in our Local [LV] business."
  • "Looking ahead, there is a lot of excitement about the progress that has been made in Downtown Las Vegas in recent months. The overall gaming market is expanding and its long-term outlook is encouraging. The Smith Center for Performing Arts and the Mob Museum opened during the first quarter, giving people new reasons to come to the area. These are exciting times in Downtown Las Vegas and we expect to see steady growth in visitor traffic as the renaissance of Downtown continues.""Outside of Las Vegas, we certainly are starting to see some positive signs at the lower end as well that shouldn't be a surprise as recovery takes hold."
  • "In the months ahead, we will see further efficiencies from operational synergies contributing positively to EBITDA growth. And the rollout of B Connected next week will have a positive impact as well. At this point, the IP is exceeding our expectations and we see considerable additional upside for the property."
  • IP EBITDA Margin: "I think there is certainly some upside from the 25.9% that we posted. B connected...goes into play live there next week. We think that is a big, big plus from a customer experience perspective and customer reward perspective. The summer is the peak season in the Gulf Coast market....there is a small new player coming online here in the next month or so, which we don't think will have an impact on our business, but, nonetheless, will mix things up a little bit."
  • "We and certainly our competitors have gotten much better at putting loyalty cards in the hands of our customers, the group of unrated almost becomes a difficult group to find anymore."
  • "With respect to the Native American investment we have made, it's still kind of a work-in-progress, it was a small investment we made for a tribe in California that we're still working with to see if we can pull a deal together and make an announcement. We'll probably have something hopefully to report later in the year, but it's still I think it's a construction in progress, if you will, not literally, but just figuratively."
  • [Maryland Live impact] "We are not overly concerned with the impact from that operation. We have looked at our customers, where they are coming from, we're more focused on those properties kind of in the Philadelphia and the New York area. We're not expecting any impact really from that operation."
  • "Our next maturity of $216 million is April 2014 approximately two years from today. We would expect to refinance that debt sometime prior to April of next year."

European Banking Monitor: Spain and Italy Ban Short Selling

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* Spanish and Italian bank and sovereign swaps were wider week over. In contrast, German bank and sovereign swaps tightened


Expect markets to shake this week on the big news this morning of short selling bans across all equities in Spain and Italy. For Spain, the ban has a 3M target, whereas 1W for Italy.


As we've seen with previous short selling bans, we do not expect the measure to put a floor in equity prices, nor provide any confidence in the banking sectors of the respective countries. We expect sovereign yields to rise alongside the duration of bans. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor Spanish and Italian banks widened across the board while German banks mostly tightened. 3 out of 4 French banks widened. Overall, 24 of the 39 European financial reference entities we track saw spreads widen last week.


European Banking Monitor: Spain and Italy Ban Short Selling - ccc. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 35 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Spain and Italy Ban Short Selling - ccc. euribor


ECB Liquidity Recourse to the Deposit Facility – The sharp drop from two weeks earlier reflects the ECB's deposit rate change to 0.0%. Since that time, the index has been roughly flat. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Spain and Italy Ban Short Selling - ccc. facility


Security Market Program – For the nineteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/20, to take the total program to €211.5 Billion.


European Banking Monitor: Spain and Italy Ban Short Selling - ccc. SMP

Retail: Back to School Goes Online

As the summer begins to wind down, children all over the country are gearing up to go back to school. And in this digital age, brick and mortar stores aren’t the only place parents are going for notebooks, folders and binders. According to a study from the National Retail Federation (NRF), 40% of people intend to do their back to school shopping online, up from 32% last year. That’s a 42% increase from the 21% survey that came in during 2007.



Retail: Back to School Goes Online - BACK2SCHOOL



This is hugely important for retail. As we’ve stated before, we like companies that aim high for e-commerce sales even if they’re a bit unrealistic. You can’t just hope for 8-10% of your sales to come from a website and be OK with that. We’re living in a digital age and people are moving full speed ahead without ever looking back.


Hedgeye’s Managing Director of Retail Brian McGough sums up what this growth in e-commerce means for everyone:


“Flying in the face of a deceleration in sales out of eBay’s GSI Commerce yesterday, the NRF released its back-to-school survey with surprising results. We usually take many of the National Retail Federation’s surveys and statistics with a grain of salt, but this one is tough to ignore. Per its latest survey, 39.6% of consumers intend to shop online for back-to-school supplies and clothes. While that’s a big number in itself, it is nearly an 8% acceleration from the 31.7% ‘intent to purchase online’ surveyed exactly one year ago. The rate was 21.4% back in 2007. Translation – ecommerce is accelerating meaningfully.”


If the above chart is any indication of the things to come, e-commerce is clearly more important than ever.

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