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#HousingsHammer: Don’t Be Fooled by This Morning’s Print


Expectations for continued improvement in the domestic housing market - a theme we've dubbed #HousingsHammer - remains a 1Q13 Macro Investment theme we continue to like.  Superficially, this morning’s -10% print in the MBA Purchase Index would appear to signal a change in trend and a notable drop off in demand. 


However, an analysis of the historical seasonal pattern for February in conjunction with the trajectory of the broader, rolling 4wk and 1Q13 YTD growth trend suggest this week’s steep decline represents a poor reflection of underlying demand.  


Below is a more detailed analysis of this morning’s MBA Mortgage Application release from our Head of Financials (and all things Housing Related) Josh Steiner.  Email if you would like to trial Josh’s work.   



Don't Be Fooled By This Morning's Weak Print

This morning's print from the MBA certainly got our attention, as the purchase index was reportedly down 10.0% week-over-week, reversing a string of positive progress since the start of the year. Did demand to buy houses really drop 10%? We don't think so.


There are a couple ways to approach this, but the simplest are to consider whether there was an inflection in the year-over-year rate of change, and there was virtually none. This past week was up 20.5% vs. the prior year, which compares with the YoY growth over the preceding three weeks of: 22.6%, 20.3% and 20.7%. In other words, the weakness seems to be stemming from a recurrent seasonal adjustment distortion and not from a bona fide decline in demand. This is backed up by looking at WoW change for this past week in prior years. In 2012, this week was down by -8.4%, which was then recovered shortly thereafter. In 2011, this week was down by -5.9%, which was recovered in the following week. In 2010, it was down -7.0%, which was again shortly thereafter recovered. As such, we would certainly expect to see purchase demand bounce back in the weeks ahead.


Taking a bigger picture view, as we mentioned above, the last four weeks of purchase data have been growing at an average rate of +21.0% YoY. On a 1Q13TD basis, the volume is up 16.5% vs. 1Q12, and continues the streak of 5 consecutive quarters of sequential YoY growth acceleration. There is little doubt, at least to us, that mortgage purchase demand remains strong and continues to accelerate.


Our bullish thesis on housing continues to revolve around price and the idea that housing is a Giffen good. As prices rise, consumers buy more of housing and vice versa. The empirical evidence bears this out. This is also at the heart of why housing trends tend to be autocorrelated. Rising prices beget growing demand, which, in turn, reinforce further price increases and so on. So long as we see demand rising, which it is, our bullish thesis on housing remains intact.


Refi Continues to Cool

Refinancing activity, not surprisingly, continues to cool down vs. its recent 3Q12 peak as rates continue to creep higher. Refi volume was down 6.0% week-over-week, which brings the index level to 3,887. This compares with the 1Q13TD average of 4,009 and the 4Q12 average of 4,345 (3Q12 was 4,533). 1Q13TD is still 9% higher than 1Q12 levels of activity, but on a QoQ basis, it's down 8%. 


Rates on 30-year fixed conforming loans have backed up from lows in the 3.4% range throughout 4Q12 to 3.64% today based on the Bankrate index. Using the contract interest rate provided by the MBA, rates have risen to 3.75%, up 2 bps WoW and up in 8 of the last 9 weeks.


The outlook for refi activity is clouded by two big unknowns. First, rates appear to be headed slowly but steadily higher. This is putting obvious pressure on activity levels. Second, President Obama would like to roll out underwater refinancing availability to non-GSE borrowers (HARP 3.0), though this remains more of a proposal than a probable event at this point. 


Taken together, the purchase and refi activity, overall mortgage activity is tracking +8.3% YoY thus far in the first quarter and down -5% vs. 4Q12.


Joshua Steiner, CFA


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Two potentially big developments in Gaming Supply




Late yesterday, we began hearing from a few of our slot manager contacts that 2 weeks ago, IGT began offering price discounts to all of its customers.  The discounts apply only to for sale games and do not extend to IGT’s participation products.  So far WMS & BYI are not matching, but they are calling their customers and scrambling for a response.  We believe that IGT’s aggression could pressure an already flat industry pricing environment.  


It is our understanding that the discounts extend to the end of September – the end of IGT’s fiscal year.  There is some speculation in the slot community that IGT is just trying to boost its ship share and produce another big quarter with the Ader Group proxy fight under way but that wouldn’t completely explain the longer discount duration.  We believe that the main goal of this program is to try and spur a replacement cycle on their video poker platform and S2000 (mechanical spinning reels) by offering very aggressive pricing, especially to bulk purchasers.  IGT dominates both the reel-spinning and video poker categories so that could mitigate the reaction from competitors.  The discounts in the most competitive segment – video (not poker) – were much less aggressive.


This is a bold move on IGT’s part and somewhat risky if the other players match IGT’s aggression.  However, replacement demand, while improving, is still at depressed levels and could use a spark, especially in reel-spinning and video poker, where IGT was most aggressive with the discounts. 


Here are some of the details from their program:

  • For ~10 machines:$500 off; >11-25 machines: $1,000 off, >26-50 machines: $1,750 off
  • Additional discount if you take delivery by June 28th
  • Very aggressive pricing on the S-AVP (mechanical reel) meant as a replacement to S2000
  • Very aggressive pricing on video poker (G20 & bar top version) 
  • Universal Slant with MLD has a hefty discount or a lower discount with a heavy trade-in credit



Switching gears, our research has turned up a potentially large opportunity for the gaming suppliers.  Apparently, the Oregon Lottery is considering submitting an RFP to refresh its all the units in its 20,000 VLT market.  This would be a series of very big orders that would meaningfully impact earnings of IGT, BYI, and WMS.  



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:  WORSE - Even after adjusting for low hold, property EBITDA missed our Street low estimate by $2 million.  Demographical headwinds remain while the consumer is even more descriminating with higher payroll taxes and gas prices.




  • WORSE:  Spend per visit was similar YoY while overall trip frequency declined.  Retail segment was very weak.  Softness seen in 4Q has continued into January.
  • PREVIOUSLY: “In terms of the spend per visit increase, it is coming largely from our top three tiers, the quality of the guests that are visiting our properties and the incentives that we're providing to them are yielding higher spend per visit.”


  • WORSE:  "4Q Consolidated Adjusted EBITDA margin fell 158bps to 21.0%, principally due to L'Auberge and Baton Rouge still being in its operational ramp up period.  On a same store basis, Consolidated Adjusted EBITDA margin was essentially unchanged YoY at 22.5%."
  • PREVIOUSLY: “We continue to improve our margins, not only in this property, but all of our properties.  We believe margins this quarter are sustainable going forward.”


  • SAME:  In 4Q, marketing reinvestment was down 70bps YoY, excluding Baton Rouge.  With Baton Rouge, reinvestment increased slightly, up 10bps YoY.
  • PREVIOUSLY: “These results are being delivered with more efficient and effective marketing spend. For the quarter, marketing expense as a percent of gaming revenue was down 60 basis points. This marks the third consecutive quarter where marketing reinvestment has been reduced versus prior year.”


  • SAME:  Overall, L'Auberge is pleased with the visitation trends.  Baton Rouge has not materially impacted play at other PNK's properties.  
  • PREVIOUSLY: “L'Auberge Baton Rouge...we have seen strong visitation as evidenced by over 48,000 new mychoice sign-ups during the first month of operations. VIP business has opened up ahead of pace and we're optimistic about our ability to drive continued pace in this segment given the high quality amenities at this property... We're pleased with what we see in October and most important, we really feel like we nailed this facility." 


  • WORSE:  Low table hold affected results but PNK did see some softness at the property.  Some hotel rooms have been out of service; remodeling will pause in the summer months and resume in September.
  • PREVIOUSLY: “Houston is a very underpenetrated market where we think that there is a lot of unmet demand, and we've been able to yield that facility – meaningfully better over the last couple of years mostly by having more profitable guests that come through our place but given the depth of that market. So we think that there is certainly room to go there and we've made enhancements to our facilities to make sure that we can take advantage of that demand.”


  • WORSE:  $0.5MM unusual expenses (flooded room) in 4Q.  The market has been more competitive and the trends have been soft.  PNK is upgrading some amenities (e.g. buffet) that will the Spring and early Summer in hopes of helping position the property.
  • PREVIOUSLY: "We continue to grow admissions in a declining market, and we remain focused on leveraging our unique assets while maintaining marketing spend discipline.”


  • WORSE:  Property continues to be challenging.  4Q revs fell 5% while EBITDA tumbled 13%.
  • PREVIOUSLY: “In New Orleans, the property and the market are clearly struggling, but underlying trends at Boomtown got progressively better throughout the quarter, notwithstanding the impact of Hurricane Isaac.”


  • SAME:  Demoition will be completed shortly.  Plans to open 2Q 2014. PNK predicts a 15% ROI on River Downs.
  • PREVIOUSLY: The project's expected to cost $209 million, excluding license fees, land and capitalized interest. We expect to begin construction this year with the entire facility scheduled to open in the first half of 2014. We have master planned this facility for future expansion should demand conditions warrant the additional investment.”


  • SLIGHTLY BETTER:  Multipurpose center will come online in Summer 2014 and the hotel will open in 3Q 2014.  Project is slightly ahead of schedule.
  • PREVIOUSLY: “At River City in St. Louis, the $82 million expansion is progressing rapidly with the parking garage expected to open in about a month. The multipurpose event center is expected to come online before the end of next summer, and the hotel will open in the second half of 2013.”


  • WORSE:  PNK took a $25MM (23% of investment) cash writedown on its ACDL investment. Process has been taking longer than expected.
  • PREVIOUSLY: “To date, we have contributed about $14 million of the $15.6 million, and we expect the remaining funds to close in the fourth quarter. ACDL continues to make meaningful progress on the development. And while there is work to do on the regulatory front, the project remains on track to open the first quarter of next year."

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Takeaway: Bad demographics and consumer headwinds will make top line growth difficult at a time when margin expansion is behind the company

A bigger miss than even we expected and it wasn't just hold.


"As we move further into 2013, we look to build on our record 2012 performance and remain focused on increasing shareholder value. We are vigilant on maximizing the financial performance of our assets, and will continue to target profitable revenue growth and improved operational efficiency across our portfolio. We will also remain focused on executing the remaining projects in our growth pipeline in 2013, and will work diligently to bring the Ameristar transaction to successful completion and to achieve a seamless integration. We believe 2013 will be another year of significant growth for our Company."


- Anthony Sanfilippo, President and Chief Executive Officer of Pinnacle Entertainment




  • Guests visited less often but their spending was flat YoY.  This trend continued into January.  They adjusted down their marketing spend as a result of these trends. Most of the weakness seen was in the retail customer segment.
  • Baton Rouge: Very strong trialing.  All LA properties have universal card functionality. 27% of the gaming revenue are coming from their marketing database customers.  Hosting high profile events throughout the year is key to developing VIP players and remains a priority for them
  • In March of 2012, they did a new bond issuance at attractive rates



  • L'Auberge Du Lac:  weak flowthrough even taking account for low hold, why? Could be partly due to the rooms out of service.  They did see some softening in the business and did adjust marketing spend accordingly. They are going to stop renovations in time for the summer season and resume in the fall.
  • Had $500k of unusual expenses at Belterra due to a frozen pipe which broke and flooded some rooms.  They are in the process of ungrading some of their resort amenities by Spring which will hopefully help them compete more effectively in that market - which is weak.  They position themselves as a resort property.  Buffet will be completed by March.  Stadium done by late Spring /early Summer.
  • Baton Rouge: Very pleased with the performance and it gets really high guest ratings. Have continued to adjust labor and expenses to match volumes they see today.  That property was built to attract the high end and VIPs so they see the ramp up period being 12-18 months. They did a lot of advertising on the front end. Their marketing awareness has shifted now and they feel like their operating costs are more appropriate with their current level of business. Also feel pretty good about the airlift that comes into that city and the longer term prospects for the property.
  • Corporate overhead: Think that pre-ASCA is a decent run rate
  • ACDL net carrying value post write-down:  Invested $111MM all-in, capitalized interest so with that, it's gone up to $116MM. Post write downs, the investment is written down to the low 90s.  Hope that this will get resolved quickly. They thought that they would already by now and the linchpin would be getting that certificate amended.
  • Continue to attract new members to MyChoice. Parking garage opened over the Thanksgiving weekend and has been a good addition in the winter months.
  • Heartland Poker Tour is on a very good footing. Anticipate a strong year in the land based tournaments. Will use that brand in off and online. They are on the process of building out their play for fun strategy now.
  • They do anticipate integrating the loyalty program between PNK & ASCA but it's too early to talk about now. Launched myconnection - where the top 3 tier members can chat directly with property management and Anthony as well as each other.
  • Why are trips down as much as they are?  They have not polled consumers, but think that their customers are just reacting to the payroll tax and uncertainty in the 4th quarter.
  • They are very prudent in any investment they make whether in ACDL or anything else they do. Not sure if they would participate in a capital call at this time. Getting the investment certificate is really critical right now for them to remain an investor in that project.
  • Think that River Downs will exceed a 15% ROI
  • Until they close they will not have any say in the ASCA Lake Charles project
  • ASCA financing will likely occur in line with them receiving regulatory approval in the later part of 2Q
  • The write-down was really timing related, not a change of view on the ACDL project prospects
  • They do believe that there will be sources of financing once they get their certificate
  • Once the ASCA deal closes, they will be focused on the integration of the deal and then to reduce debt. For now the buyback program is suspended.
  • Will remain diligent in maintaining their properties
  • They can react very quickly to volume changes seen in their business and adjust marketing accordingly



  • Adjusted EPS of $0.03 and Adjusted EBITDA of $63MM, missed consensus and our estimates
  • "Abnormally low table games hold percentage at the Company's Louisiana properties negatively affected Consolidated Adjusted EBITDA... ,anagement estimates Consolidated Adjusted EBITDA would have been $3.4 million higher had table game hold at these properties been at normal levels."
  • "Recorded $40.6 million of charges....including: 
    • a non-cash write down of approximately $25MM related to its ACDL investment (included in Loss on equity method investment)
    • a $10.2MM charge related to its St. Louis redevelopment agreement (included in Write-downs, reserves and recoveries, net) that reflects the aggregate impact of cash and land donation commitments made by the Company for various projects in St. Louis, and accelerated depreciation expense of $4.7 million stemming from the demolition of the grandstand and related facilities at River Downs (included in Depreciation and amortization)."
  • "In 2012, the Company repurchased 4.4 million shares of stock for $51 million under its $100 million repurchase program, representing an approximate 7% reduction in its diluted share count. Upon announcing the proposed acquisition of Ameristar, the Company suspended share repurchase activity"
  • PNK "Entered into a definitive agreement to dispose of its land holdings in Atlantic City for total consideration of approximately $30.6 million, subject to a financing contingency. The transaction is expected to close by the end of the 2013 first quarter"
  • "On January 29, 2013, the Company completed the previously announced acquisition of a majority interest in the racing license holder for Retama Park Racetrack"
  • "Consolidated Adjusted EBITDA margin decreased... principally due to L'Auberge Baton Rouge still being in its operational ramp up period. On a same store basis, Consolidated Adjusted EBITDA margin was essentially unchanged year over year at 22.5%."
  • "We are encouraged by the early performance of L'Auberge Baton Rouge, including its gaming volumes, strong cash non-gaming revenues, and market awareness growing with an over 100,000 strong mychoice member base. Looking forward, we are optimistic for the prospects in Baton Rouge and are focused on increasing regional awareness for the property, growing the high end business, and increasing the marketing and operational efficiency of the property."
  • L'Auberge Lake Charles: "Revenue and EBITDA performance was negatively impacted by abnormally low table games hold percentage, offset by an improvement in cash non-gaming revenues, efficient marketing, and operating expense discipline. In addition, the property began an extensive room remodeling program in the quarter, which displaced approximately 3,300 room nights. The property anticipates completing the first phase of its room renovation program in the first half of 2013."
  • "Due to the displacement of parking spaces, River City in St. Louis...  construction disruption.. reached its height during the 2012 third and fourth quarters with the concurrent construction of the hotel, garage, and event center elements of its expansion project. Pressure on parking capacity was partially alleviated with the opening of the parking garage in November 2012, which has driven improved visitation during peak operational periods, however, construction of the hotel and event center are still ongoing and are slated for completion in phases in 2013 and could continue to disrupt the property."
  • "The year over year decline in Belterra's 2012 fourth quarter Adjusted EBITDA was driven principally by lower gaming volumes and temporarily elevated repair and maintenance operating expenses." 
  • "Boomtown New Orleans did not perform up to its potential in 2012, and to help address this, changes were implemented during the fourth quarter to stabilize the property's operating performance and position it to improve its results in the coming quarters."
  • Boomtown Bossier City: "Adjusted EBITDA margin at the property was down...principally as a result of abnormally low table games hold percentage." 
  • "L'Auberge Baton Rouge revenue was $34.9 million in its first full quarter of operation, while Adjusted EBITDA was $3.4 million. Adjusted EBITDA margin was 9.7% in the 2012 fourth quarter. The Company expects L'Auberge Baton Rouge to continue to ramp up its operations and rationalize its operating expense structure in 2013."
  • "The reduction in 2012 fourth quarter and full year 2012 corporate overhead expense was driven principally by efforts to eliminate non-value added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings and property allocations related to the Company's shared service centers supporting its properties in the Midwest and Louisiana."
  • Redevelopment of River Downs: "Demolition of the existing grandstand and related facilities is nearing completion and we plan to commence construction of the new gaming entertainment center by the end of the first quarter of 2013. Our plans call for the property to comprise approximately 1,600 video lottery terminals, four food and beverage outlets, a VIP lounge, over 2,000 parking spaces, and new racing facilities...The project is expected to cost $209 million, excluding license fees, original acquisition costs and capitalized interest, and we plan to open the facility in the second quarter of 2014."
  • "The expansion of River City in St. Louis remains on budget and is ahead of schedule. The project reached a significant milestone during the fourth quarter with the opening of a 1,600 space enclosed parking structure on November 21, 2012. In addition, significant progress has been made on construction of the hotel and multi-purpose event center elements of this project. We expect the event center to open in the second quarter of 2013 and the 204-room hotel to commence operations by the Fall. The opening of the garage has alleviated pressure on parking availability at the property, and we look forward to the hotel and event center rounding out River City's amenity set as those elements come online in 2013. $38 million of the $82 million budgeted for this project had been incurred through the end of the 2012 fourth quarter."
  • "In New Orleans, we are preparing to commence construction of a $20 million, 150-room hotel, with ground breaking targeted this month. We expect the hotel to open in the first half of 2014."
  • ACDL has been expecting to open the first phase of the MGM Grand Ho Tram in the first quarter of 2013. While the application for the amendment is progressing through the government review and approval process, it is taking longer than expected. While it may be possible to open the facility in the first quarter, the amendment of the investment certificate has not been completed as of the date of this release. In accordance with GAAP, and in consideration of the uncertainty surrounding the timing of the amendment of the investment certificate, related risks associated with such amendment, reinstatement of funding under ACDL's current credit facility, the subsequent working capital financing needs, the Company recorded a non-cash write down of the carrying value of its investment in ACDL of approximately $25 million. Should the delay in obtaining the amendment and the resumption of funding by ACDL's lenders continue for a prolonged period of time, additional write-downs of the Company's investment in ACDL may be required."
  • ACDL completed an additional $30 million capital raise in December, in which the Company did not participate. As a result, the Company's equity stake in ACDL is approximately 24%... The Company retained an option to invest its pro-rata share of the $30 million capital raise, which would offset the dilution it incurred if exercised.
  • Cash: $102MM 

    Capex: $45MM. "Cash expenditures, including the settlement of prior period payables, totaled $16.2 million for L'Auberge Baton Rouge and $13.4 million for the River City expansion in the 2012 fourth quarter. Excluding land and capitalized interest costs, approximately $38 million of the $82 million budget for the River City expansion project has been incurred."

    "During 2013, the Company expects to spend between $60 million and $70 million on capital expenditures associated with its existing operating properties and corporate initiatives. The upper bound of this range is dependent upon the timing of phased hotel room refresh programs and the renovation of certain food and beverage outlets at select assets in the portfolio. The Company expects to incur between $160 million and $170 million on expansion capital expenditures during 2013, comprising the River Downs redevelopment, the River City expansion and New Orleans hotel construction." 

  • Capitalized interest was $2.6 million 




HOUSING: More Than Meets The Eye

With this morning's news that the MBA purchase demand index had fallen 10% week-over-week was quite a shocker to many after several weeks of positive outcomes. Did demand to buy houses really drop 10%? We don't think so. There was virtually no inflection on the year-over-year rate of change.This past week was up 20.5% vs. the prior year, which compares with the YoY growth over the preceding three weeks of: 22.6%, 20.3% and 20.7%. In other words, the weakness seems to be stemming from a recurrent seasonal adjustment distortion and not from a bona fide decline in demand. 



HOUSING: More Than Meets The Eye - MBApurchase1



Our bullish thesis on the housing recovery remains solidly in tact. As home prices rise, so will demand to purchase homes. We're also undergoing a cool down in refinancing activity as rates rise above 3.4% range we saw throughout most of Q4 2012 to 3.64% this week. The future of refi activity is uncertain due to the possibility of a rise in rates and President Obama's plan to help borrowers who are underwater. We'll keep an eye out on this one to see what direction refi heads.


HOUSING: More Than Meets The Eye - MBApurchase2


Buffalo Wild Wings is talking a big FY13 game but we believe they are running the risk of disappointing for a second consecutive year.  Raising guidance to 25% earnings growth (from 20%) is a big statement for a company facing some top-line uncertainty. Time will tell whether the company can walk the walk.




BWLD reported 4Q12 and FY12 earnings after the market close today.  4Q earnings came in at $0.89 versus $0.96 expected.  FY12 EPS grew by $0.26 cents year-over-year, $0.19 (73% of the full-year EPS growth) of which came from the extra week in 4Q. 


Buffalo Wild Wings’ comparable restaurant sales growth in the fourth quarter was slightly ahead of expectations at 5.8% versus consensus 3.6%.  The company revealed that the first six weeks of the quarter were seeing same-restaurant sales growth of -2.8% at company locations.  However, management estimates that when this number is adjusted to take into account the timing shift of college and football seasons for both seasons, the co-op comparable sales growth would be +2.6% at company locations.


BWLD TALKING THE TALK - bwld eps recap







We believe that casual dining trends, broadly, are likely to disappoint in 1Q and see BWLD as an attractive short at these levels.  The DFRH news was misinterpreted by the market yesterday, sending the stock on a surge; we believe that the shares should go lower from here.  Management raised its implied FY13 earnings guidance to $3.55-3.60.  We expect FY13 earnings to come in at $3.42.  


Call us at the number below to discuss in greater detail.



Howard Penney

Managing Director


Rory Green

Senior Analyst


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