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Currency Wars Heat Up

While the Japanese Yen continues to get smoked courtesy of the political class, Europe is dealing with its own set of problems. The Euro (EUR/USD) in particular is encountering heavy immediate-term TRADE resistance around $1.36/7 and intermediate-term TREND support at $1.31. French President Francois Hollande has been making noise in recent days about how “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” Essentially, Hollande is keen on currency manipulation and not letting the markets dictate the true price of the Euro. 

 

Currency Wars Heat Up - EUR


HOT YOUTUBE

In preparation for HOT's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

HOT YOUTUBE - HOT2

 

STARWOOD HOTELS COMPLETES SALE OF ALOFT AND ELEMENT LEXINGTON FOR $36 MILLION (01/31/13)

 

STARWOOD TO REDEEM ITS 7.875% SENIOR NOTES DUE 2014 (~$179MM OUTSTANDING) ON DECEMBER 24 (12/14/12)

 

STARWOOD PRICES $350 MILLION OF 3.125% SENIOR NOTES DUE 2023 (12/5/12)

 

 

 

YOUTUBE FROM Q3 CONFERENCE CALL

  • "We control property and corporate costs."
  • "We see mixed signals in North America and China. But the case can be made that the current deceleration is a temporary pause in growth."
  • "Corporate transient travel, for example, continues to be robust with occupancies up versus last year. That said, some group bookings are on hold as customers wait to see how their business will perform next year. A more positive sign in lodging, as with autos and housing, is that pent-up demand for new hotel construction might soon contribute to growth. We're beginning to see more interest among owners to initiate projects than at any time since before the crisis."
  • [China] "Starting with credit tightening, we have yet to see an existing hotel project stopped for lack of financing. And year-to- date, we've signed more new deals and opened more hotels than last year; the bulk of our development has moved from Tier 1 to Tier 2 and Tier 3 cities....So, overall, despite tighter credit we see an active development community that's bullish on hotels and has confidence in Starwood."
  • "The euro situation remains volatile and far from over. Now that we're in the travel off-season there, it may be a while before we see where that market is headed."
  • "Going forward, we can now expect our earnings to be 65% fee generated. That compares with less than 20% prior to our host transaction in 2006."
  • "After New York, Dubai has more Starwood Hotels than any other city in the world; and not to mention seven more hotels in nearby Abu Dhabi and Sharjah. And despite our hotel count, our occupancies there are running over 83% this year."
  • [NA REVPAR]  "Corporate America is cautious ahead of the elections and fiscal cliff discussions, so it's unlikely that we'll see any up tick in the fourth quarter. On the positive front, Canada is improving sequentially and will have REVPAR growth in Q4."
  • "Systemwide occupancies in North America are now above the prior peak set in 2006. Rate is still 5% below prior peaks. In Q3, rate accounted for 80% of the REVPAR gain. The business in the U.S. is well positioned to benefit from meaningful rate improvement should demand trends pickup."
  • "We remain of the view that corporate rate negotiations should result at least in the high single-digit increase for 2013. We will describe the group business as steady, but not robust. The large group segment is an area of weakness. We expect that North America REVPAR growth in Q4 will be in the upper half of our 4% to 6% guidance range."
  • "Despite the issues in Europe, our company-operated hotels are almost at peak REVPAR levels in constant dollars. We are experiencing a fair amount of volatility from week to week in Europe, but no meaningful change in trend... Europe REVPAR growth will be at the low end of our guidance range."
  • "With a leadership change now slated for November 8, we do not expect any improvement in China for the rest of the year. In fact, the trend may get worse before it gets better. As our business in China has grown to over 100 hotels, with more and more in Tier 2 and Tier 3 cities, we are very much a local company with two-thirds of our business coming from Chinese travelers. Our team on the ground is convinced that China will get back to business after the transition but probably not till early next year. We expect Asia REVPAR growth to be in the middle of our guidance range or lower...  we are optimistic at this point that growth in Asia will pick up as we enter the new year."
  • "In Africa and the Middle East, Saudi and the Gulf states continue to do well. Across the rest of the Middle East our business reflects what you read in the papers. Things are not improving in Egypt. Except for Algeria, the rest of North Africa remains unstable. Sub-Saharan Africa is doing well with Nigeria and South Africa leading the way. Easy comparisons helped report our results in this region in Q3, comparisons and are more normal as we enter Q4 and we expect REVPAR growth in the middle of our range."
  • "We expect Argentina to remain a significant drag for our Latin American business and the most significant crisis linked to a currency devaluation cannot be ruled out."
  • "Canada is recovering, but New York and Phoenix are weaker than we expected."
  • [Bal Harbour]  "We expect to deliver another $10 million in EBITDA in Q4, bringing the full year total to $135 million.  By year end, we expect to have closed over 70% of the residential units available for sale. Demand for units remain strong and we continue to raise prices. We are on track to achieve our goal of $1 billion from condo sales revenue at sellout."
  • "Asset sales completed to date impacted EBITDA by $2.5 million in Q3 and will reduce Q4 EBITDA by another $8 million....As a result of the hotel sales completed to date, our 2013 EBITDA will be negatively impacted by approximately $20 million versus 2012, a total of $30 million on an annualized basis."
  • "We intend to maintain a leverage ratio as defined by the rating agencies of 2 to 2.5 times, so that we can retain an investment-grade rating through the hotel cycle."
  • [2013 REVPAR guidance]  "Our general sense is that at current trends, we're in the lower half of the range. We do think there could be an uptick post the leadership transition in China and in the U.S., which would put us in the upper half of the range."
  • [Potential portfolio sale] "There still isn't yet the kind of volume and depth in the market to create the appetite for that. That could very well change as we get into 2013. We'll certainly keep an eye on it."
  • [Capital spend outlook]  "I think you should assume that next year, we'll be at or slightly above where this year was because of some of those things being pushed into next year. And then after that, we should start to see it moderating."

MPEL 4Q REPORT CARD

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

 

 

OVERALL:   BETTER: Volumes were healthy across both properties and EBITDA was above the Street even before adjusting for low hold. The new financing also removes some very restrictive covenants and allow MPEL to pay a dividend once they are have some of their constructive out of the way in 2014.

 

COD PERFORMANCE

  • BETTER:  Despite low hold, COD EBITDA handily bear consensus estimates. Mass and VIP volume growth exceeded that of the market.
  • PREVIOUSLY: "City of Dreams continues to maintain its market-leading mass market yields when compared to all other major mass-focused properties in Macau, while at the same time, it has delivered strong improvements in rolling chip table yields over the prior period."

ALTIRA PERFORMANCE

  • SAME:  Altira delivered GGR growth with 40 less tables YoY  
  • PREVIOUSLY: "Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter, which we are confident can be further built from here."

MSC TIMELINE

  • SAME:  Studio City remains on track to open around the middle of 2015.  Has done 95% of the piling work is complete. ...ready to move on to the basement. have 500 workers on site with the main contractor.  
  • PREVIOUSLY: "Studio City is moving ahead on its expected timetable, with the majority of the piling and foundation work now complete. We have also recently engaged on a fixed price lump sum contract basis, our main contractor, providing us greater clarity and certainty around Studio City's design and construction costs. We remain on track to open this property around mid-2015."

COD PHASE III

  • SAME:  Still waiting for the land to be re-gazetted.  They are optimistic that the project can begin by the end of 2013.
  • PREVIOUSLY: "City of Dreams, Phase 3, the additional tower – we're going through the formal government approvals because we have upgraded the building and included more amenities. So assuming it gets approved, we are hoping that we could get started on that project, probably the middle or the later half of next year."

MANILA TIMELINE

  • SAME:  Manila project remains on track to open by mid-2014.
  • PREVIOUSLY: "With our current expected investment upon opening of both Phase 1 and 2 of the project expected to be around US$600 million, we believe this venture offers the company an opportunity to deliver strong returns on invested capital while also providing us with a platform for future expansion throughout Asia. We currently expect those Phases to open together by the first half of 2014."

PROJECT CAPEX FUNDING

  • SAME: For MSC, won't know for a few more months on whether their partner will choose to fund part of the $225MM sponsor guarantee or whether MPEL will increase their ownership stake and fund 100% of the guarantee.   In Manila, they expect to spend $450-475MM capex in 2013 which could be funded through a local loan but all options are on the table, including raising equity. Have plenty of cash to fund Phase III of CoD
  • PREVIOUSLY: "In addition to the Studio City numbers that we've already discussed, we anticipate spending approximately $600 million in Manila upon opening. And as we said, we anticipate having $325 million of that funded through a local loan. So, you can back into our equity component there. And you're correct on Phase 3 of City of Dreams, that will be funded by cash and internally generated cash flow."

2013 OUTLOOK

  • SAME:  Chinese economy is picking up and optimistic about the new administration.  MPEL expects at least 10-15% YoY market growth in 2013. 
  • PREVIOUSLY: "So heading into next year and hoping that some of the global headwinds like the European – people get used to the European debt crisis and there's less headwinds, and eventually, I think the Chinese leadership, they've had a very tight grip on the various sectors such as the real estate sector which has impacted asset prices. But once those things are behind and with the new leadership in place, I'm quite optimistic about next year."

 

VIP TABLE YIELDS

  • SAME: "Our table use at the City of Dreams continue to outperform all other major properties in Macau while at the same time our table yields in the rolling chip sector are both Altira and City of the Dreams continue to improve. Our table optimization initiative is ongoing, as we proactively look for ways to maximize the performance"
  • PREVIOUSLY: "In terms of the yield on the VIP side... we are a little bit discount to the leading property at the moment. So I guess we have put plans in the optimizing process during the last three quarters in both Altira and CoD. This is a ongoing process, and we hope that we could be able to stabilize Altira at the moment, but we are still continuing to put the effort in CoD. So you will see some improvement in the next few quarters."

MARGIN GUIDANCE

  • WORSE:  Q4 marings came in at 22.5%, in-line with 3Q margins, due to unfavorable hold.  However, mix remained steady as well with non-VIP segments comprising 75% of luck adjusted at CoD and two-thirds of EBITDA on a group-wide basis
  • PREVIOUSLY: "In terms of the mass and VIP mix, I think it's a ongoing process and you'll see some margin-based improvement if we are doing this new performance in the next few quarters."

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Prime Time For Mortgages

New data shows that banks are easing their standards on prime residential mortgage loans. On balance, 4.6% of banks reported flat to lower standards on prime residential loans, up from 1.6% last quarter. This means that banks are willing to lend to more borrowers as they ease credit standards and that is a positive for the housing market, which is already in the midst of recovery. We are also starting to see subprime loans come back into the picture, albeit not fully yet.  

 

 

Prime Time For Mortgages - MORTGAGE1

 

 

On the demand side, borrowers are showing plenty of interest in mortgages. The first quarter of 2013 marked the sixth consecutive quarter of banks reporting quarter-over-quarter growth in prime residential mortgage demand. Naturally, much of this is refinancing demand.

 

 

Prime Time For Mortgages - MORTGAGE2


MPEL 4Q12 CONF CALL NOTES

Takeaway: Long term looks favorable for MPEL but will have to overcome fears of a China junket crackdown

Strong quarter; beats the Street, but falls a little below our projections due to higher costs

 


“Our results in the fourth quarter of 2012 completes a stellar year for our Company, achieving record quarterly and full year EBITDA. Our flagship property, City of Dreams, continued to deliver impressive results, recording significant sequential and year-over-year improvements in operating fundamentals in the fourth quarter, particularly as it relates to the increasingly important premium mass segment."

 

- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment

 

CONF CALL NOTES

  • Improvement in margin was driven by mass/vip mix
  • Table yields at CoD continue to outperform. Table optimization activities continue.
  • Expected to close the $825 million high-yield bond debt this month
  • The RC segment has begun to return to growth
  • Adjusted for poor hold, EBITDA would have been approximately $255MM 
  • Very pleased with the financing they obtained for both of their projects
  • Non operating guidance:
    • D&A: $90-95MM
    • Corporate: $20-22MM
    • Net interest: $38-40MM (mid-quarter issuance and refinancing of their bonds, excluding the 1x cost of the note repurchase)

 

Q&A

  • The junket crackdown news came from a British Media outlet, so that should tell you something in and of itself. They have not heard or seen anything regarding a junket crackdown.
  • Thinks that their Mass tables are performing quite well compared to the market at CoD
  • Premium mass is really about product and services. It's a competitive segment but think that they have the best hotel inventory in Macau. In the last 3 quarters, their margins have remained stable in the premium mass segment.
  • CoD Ph3:  They are very advanced in terms of design.  They are waiting for the land to get re-gazetted since it was orginally meant to be an apartment hotel.
  • Think that the new Chinese administration is currently ramping up and the Chinese economy and market is improving YoY. Predicts at least 10-15% growth in Macau GGR market in 2013. 
  • Feels that the Chinese government continues to be very supportive of Macau, as evidenced by all of the oncoming infrastructure.  While there are crackdowns on specific junkets from time to time, there is nothing unusual going on.
  • $16MM hit to EBITDA at CoD, offset by $10MM benefit at Altira using 2.85% to normalize (we use something higher since historical hold is closer to 2.9%)
  • Slot business performed very well primarily due to the opening of their VIP slot area. Took a few months post opening for that area to ramp up.
  • Altira: Removed about 40 tables and moved them to CoD, but at the same time they are doing the same volume at that property.  
  • What's driving the good hold on the Mass tables at CoD:  Improved efficiency and length of play.  Improved their F&B area, used selective marketing in the past.  Minimum bet levels have also increased. 
  • MCE: capex: $75-100MM of maintenance; MSC they have an obligation to fund $825MM of cash into the project. $285MM remains to be funded from cash. They also have a sponsor guarantee which they will fund $225MM of or 60% of that. For the Philippines:  $450-475MM this year is expected to be spent. They have a few options on how they want to fund the Phillipine capex.
  • There are a number of covenants that were relaxed
  • They are always completely full during CNY.  However, during the first few days of CNY, people usually stay home with their families
  • They would love to increase their ownership of the MSC
  • MSC: heavy duty construction mode since this summer. 95% of the piling work is complete. Have about 500 workers on site. So far the main contractor is doing a great job
  • Manila: Hope the closing of their agreement with their partner will occur in the next month. Some work being done right now on Phase I - structurally. 
  • Given their experience of opening CoD during the financial crisis they are more conservative about leveraging up to pay a dividend during a heavy construction period.  If the openings go well, then they will likely revisit paying a dividend in early 2014.
  • In May, they expanded their premium mass footprint.  It took some time to improve performance on that space. They also completed their renovation of the high limits premium mass area recently. Sees the momentum in their mass business continuing for the rest of the year. 
  • Feel like they have the best partner in the Philipines and what they are building will be very well received 

 

HIGHLIGHTS FROM THE RELEASE

  • MPEL reported $1,101MM of net revenues and $247.5MM of Adjusted EBITDA, 3% and 4% ahead of the Street, respectively
    • COD: net revenue of $772.5MM and Adj EBITDA of $219.5MM
      • We estimate that below normal hold negatively impacted EBITDA by $18MM
    • Altira: net revenue of $281.7MM and Adj EBITDA of $43.8MM
      • We estimate that higher than normal hold boosted  EBITDA by $8MM
       
  • “Successfully priced a US$1BN senior note offering at an attractive 5.0% coupon, which will allow us upon completion to, among other things, refinance our US$600MM 10.25% senior notes."
  • “Studio City remains on track to open around the middle of 2015. We successfully raised US$825 million under our Studio City senior note offering and signed the facilities agreement with the lead arranging banks in relation to our US$1.4 billion Studio City senior secured facilities, both of which are achieved without a corporate guarantee from the Company, while the latter is accomplished based on limited sponsor support from the Company. Together with full contribution of committed shareholder equity, these financings upon full drawdown are expected to deliver a fully funded project at the Studio City level. Our funding approach, together with our fixed price, lump-sum, contracting strategy provides us with greater certainty regarding cost and timetable."
  • “During the fourth quarter, we completed the acquisition of a majority interest in Manchester International Holdings Unlimited Corporation, a company listed on the Philippines Stock Exchange. We remain on track to open our unique integrated casino resort in mid-2014."
  • Capex: $76.7MM "primarily related to various projects at City of Dreams, as well as design and construction costs associated with Studio City"

Dynamic Debauchery

Client Talking Points

The Clan In Japan

Japan’s dynamic duo of Finance Minister Taro Aso and Prime Minister Shinzo Abe are really on a roll with this whole “plan” of theirs. They want to “stabilize” the  Yen and target “2% inflation.” And yet since the Bernanke Top in September 2012, the Yen has fallen -17%. In turn, the Nikkei is up +32.4% since mid-November when #GrowthSlowing stopped. You can’t have your cake and eat it too, so the question remains: when is enough, enough? You can only devalue that Yen so far and you can only artificially pump stocks so much higher. Keep in mind that when consumption slows, growth slows, and that’s not something Aso & Co. want to see. 

Asset Allocation

CASH 40% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“When did RBS think their LIBOR investigation was going poorly? Maybe it was when they saw a trader talk about LIBOR fixing in an email.” -@PeteSchroeder

QUOTE OF THE DAY

“If you haven't found something strange during the day, it hasn't been much of a day.” -John A. Wheeler

STAT OF THE DAY

MBA MORTGAGE APPLICATIONS W/E FEB 1ST: +3.4% V -8.1% PRIOR


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