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MGM 4Q12 CONF CALL NOTES

Takeaway: We're still cautious on Las Vegas in 2013

In line quarter with low than normal hold in Macau (known) and higher than normal hold in Las Vegas (wasn't known).

 


"2012 was a transformational year for MGM...highlighted by major improvements in our financial position, significant progress on future growth opportunities and strengthening of our company culture.  We closed the year with strong fourth quarter results driven by a 5% increase in wholly owned domestic resorts EBITDA.  We are off to a great start in 2013, with our Cotai land recently gazetted, a $500 million special dividend announced by MGM China, and solid events thus far in Las Vegas including Super Bowl and Chinese New Year."

 

- Jim Murren, MGM Resorts International Chairman and CEO

 

CONF CALL NOTES

  • Board meeting next week at MGM China where they will discuss putting together a formal dividend policy
  • Made some tweaks to CityCenter that are going a long way to improve results
  • Goal is to improve employee morale which will result in higher customer satisfaction
  • Maryland: in the ERP process for the 6th license in MD. Have a May deadline to submit their proposal and believe that they will succeed in winning the award - should be awarded by year-end.
  • Confident that their proposal will prevail in MA
  • Partnership with Cadallac Fairview in Ontario - which is the premier developer in Canada- subsidiary of their Canadian Teacher's fund. 
  • Seeing encouraging signs in their domestic play.  Non-baccarrat drop grew 6% in the quarter.
  • Increase in occupied room nights was due to completion of MGM Grand renovations
  • Convention mix was flat YoY in 2012 at 15%
  • 1Q Strip trends similar to 4Q - flat RevPAR
  • $230MM of savings on cash interest expense due to refinance
  • Guidance:
    • Corporate expense of $40-45MM/Q
    • Stock comp expense of $9MM in 1Q
    • D&A: consistent with 4Q in 1Q
  • Interest expense: Gross interest expense : 225MM (8MM from MGM china and 8MM in amortization expense)
  • City Center:
    • Seeing results from changes in Aria - Zarkana opened - and sales are at 88% of availability- which is helping drive F&B
    • Slot handle increased 11%; table drop increased 5%; hotel revenues grew 3%
    • Strength from international visitors
    • So far, the remodeled buffet is well-received. 
    • Opening new pizza concept in the summer
    • Convention sales are pacing well, with sales 14% ahead of this time last year
    • Vdara occupancy grew to the low 80s
  • MGM China: 
    • Seeing early signs of success from their level 2 VIP expansion opened in September
    • Adding another junket operator
    • Main floor table gaming business had their best quarter to date
    • 60% of their EBITDA comes from non-VIP sources, which is also helping their margins at the property
    • Feb 27th is their scheduled ground breaking for Cotai
    • Construction budget of $2.6BN excluding land and capitalized interest.  Includes expanded foundation work. 80% of GSA allocated to non-gaming amenties.
  • Off to a very solid start in 2013.  What is very solid, is it = to good? Already had new events which set a positive tone for the year.  CNY was strong for them. Believe that the international business is off to a great start. Light Group is opening 3 new restuarant/bars in the Spring and a daytime pool. Mayweather is signed on for as many as 6 fights. The Hotel will be rebranded to a Delano and undergo a full room renovation.  Luxor should benefit from improvements at the Mandalay.

Q&A

  • Margins in 4Q were better than expected in LV. How much of that was due the impact of renovations earlier in the year? Margins and traffic were impacted by rooms being offline at MGM Grand in 2012.  Streamlined FTE's and doing a better job attracting better guests which spent more at their resorts.
  • Expect to show better profit than revenue growth in 2013
  • Thoughts on CNY in Macau early results? 
    • Trend that they have been seeing over the last 4 years
    • Seeing a lot more families during the holiday season
    • As that traffic departs, they see a stronger return of gambler play
    • Seeing a lot less volatility around holidays
    • Main gaming play is very strong
  • Seeing a continued trend of strength in non-baccarrat play in 1Q.  They are seeing a pick up in their domestic customers recently. Business is good around events. Weekends are still strong. Mid-week is still a little choppy. But things are headed in the right direction. M LIFE investments are helping their mid-week business. ASCA deal is also helping their traffic.
  • Their promotional expenses are down and they are getting better at target marketing to their customers. 
  • Convention block looks up for 2013 vs 2012...they are pacing higher as a company and 2014 is looking even stronger. They will have more room nights at the MGM Grand in 2013 so that helps too. They are also assuming higher rates.
  • Have no interest in acquiring assets regionally or otherwise. Have a great interest in deleveraging though. Think that that there will be industry M&A but they will not participate. They are interested in MA where they aleady have a lot of customers in their database.  The one at National Harbor right next to the nation's capital is an even better international opportunity for them.
  • They are reapplying in AC because they believe in that property.
  • Their Cotai development is their #1 priority
  • Maryland and Mass will not open until 2016/2017 - so that gives them plenty of time to get their balance sheet in order
  • Cotai budget is up a little bit due to the tenders they received and some scope changes, intentions to apply to increase their GSA in the future
  • Vegas - mid-week group segment competition:  It has gotten more competitive especially with other cities that they compete with. It's really the lower end and Core properties that they struggle and 2013 will be a bit of a challenge. Miami and Chicago are more aggressive then they used to be with competing for citywide business.
  • City Center JV update with Dubai World:
    • They are looking at ways to monetize portions of City Center... looking at Crystals. It was always designed to be sold. That is a high target opportunity for them. They are not in negotiations to sell it yet but that is something that they will look at down the road.
    • Their relationship with their partner have never been better
    • Looking forward to refinance their debt there which has a 9% coupon
  • Segmentation of the Macau customer base and how that works, how much more upside remains?
    • Driven from premium down. Physically segmented their property to make sure each segment of their casino has the right product for the targeted customer.
  • Strip high-end does did better than the rest of their portfolio? Why is that?
    • Without the solid Citywide conventions, their lower end properties are harder to fill
    • They don't believe that their lower end customers are suffering more economically - in fact they are spending more than they used to in some cases. It's more of a supply demand issue and being able to get the right customers in there.
  • Smoking ban impact in Macau & work in Macau
    • Supporting the premium product - want to expand premium slot products - into the supreme private high limit product
    • Will upgrade platinum lounge
    • Too early to make a judgement on the impact of the smoking ban. There is clearly some impact on play patterns in their Mass floor.
  • Expect that they would get strong returns - at least high teens from investments in MA & MD. In the case of Toronto, it's still unclear on what the opportunity will be.  MGM Detriot is a good guide for what they expect.
  • Too premature for FY guidance but they like how things are shaping out for Vegas
  • The opening of Hakkasan will have a material adverse impact that will drive traffic and currently they have construction disruption at that end of the Strip
  • City Center cash - what is the plan there? Cash from condo sales. They intend to reduce leverage and improve cash flow there. At some point in the future they will look to pull money out of that venture. They are still owed about $100MM of cash proceeds from condos but those proceeds can't be dispersed until the Perini dispute is resolved.

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted Property EBITDA of $505MM and wholly owned property EBITDA of $334MM
  • Wholly owned domestic resort highlights:
    • Consolidated casino revenue increased 1% YoY
      • Overall table games hold percentage was 21.9% compared to 22.8% last year
      • Slots revenue increased 2%
    • Rooms revenue at wholly owned domestic resorts increased 2% with a 1% increase in RevPAR at the MGM's Strip resorts to $112
      • Strip Occupancy was 87%, up 1% YoY
      • ADR increased $1 to $130
  • MGM China Adjusted EBITDA of $176MM and net revenue of $731MM
    • YoY revenue increase was driven "by increases in volume for main floor table games and slots of 13% and 37%, respectively. VIP table games turnover increased 6%... while hold percentage was 2.9%... compared to 3.2% in the prior year quarter"
    • Cotai development: "We look forward to our groundbreaking ceremony next week. We remain on track for an early to mid 2016 opening of what will be our most stunning resort and casino yet"
    • February 20, 2013, MGM China's Board of Directors announced a special dividend of $500MM, which will be paid to shareholders of record as of March 11, 2013 and distributed on or about March 18, 2013.  MGM will receive $255MM, representing its 51% share of the dividend.
  • City Center Adjusted EBITDA of $68MM and net revenue of $272MM
    • Aria's table hold was 23.9% vs. 27.2% last year
    • Aria's occupancy percentage was 86% and its ADR was $202, resulting in REVPAR of $173, a 2% increase compared to the prior year quarter
    • In December 2012, CityCenter closed on a sale of 427 of the remaining 438 units at Veer for $119 million in proceeds
  • Corporate expense increased to $87MM, primarily as a result of approximately $34MM of costs associated with development efforts in Maryland and Massachusetts
  • "We achieved several financial milestones in 2012, culminating with the refinancing transactions in December which allowed us to lower interest expense by over $200 million annually. We remain focused on reducing debt while continuing to maximize our free cash flow and have set a foundation for the execution of growth and development initiatives at our existing resorts and in new markets."
  • Cash: $1.5BN ($952MM at MGM China)
  • Debt: $13.6NBN ($2.8BN on Sr credit facility & $554MM under the MGM China credit facility). 
    • "At December 31, 2012, the Company's senior credit facility consisted of approximately $1.05 billion in term A loans, $1.75 billion in term B loans, and $1.2 billion of revolving loan commitments"
    • "At December 31, 2012, the interest rate on the term A loans was 3.3% and the interest rate on the term B loans was 4.25%."
  • Impairments & one time charges in the quarter included:
    • $65MM impairment charge related to MGM's investment in Borgata;
    • $366MM impairment charge related to land holdings on the north end of the Las Vegas Strip;
    • $167MM impairment charge related to land holdings in Atlantic City;
    • $47MM write-off related to the MGM's holding of South Jersey Transportation Authority ("SJTA") road development special revenue bonds;
    • Loss of $505MM related to the December refinancing transactions;
    • $372MM related to the change in valuation allowance for U.S. deferred tax assets

BBY: COF Credit Sale Hardly Bolsters Confidence In BBY

Takeaway: The early termination and sale of BBY's credit card portfolio at such a fire-sale price hardly bolsters confidence in its long-term outlook.

Here’s something that seemingly flew under radar screens, but Capital One Financial (COF) sold its Best Buy credit card portfolio to Citi yesterday. That’s not unusual, as similar credit transactions happen all the time. But what is very unusual is that the agreement was terminated early and the portfolio sold at book value – usually early terminations come along with a premium for the assets. That wasn’t the case here. This one happened at what our Financials Analyst Josh Steiner called a ‘get out of Dodge’ price. The company chalked it up to ‘strategic differences’, but our sense is that it simply does not want to be linked to a company that faces such severe secular headwinds like BBY.   

 

This is something to keep in mind -- particularly in light of two sell side upgrades over the past 24-hours. 


CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL

Takeaway: The two countries diverge in their responses to the ongoing int’l Currency War, leaving behind sobering clues in the process.

SUMMARY BULLETS:

 

  • Virabongsa Ramangkura, chairman of the Bank of Thailand, was out with some interesting commentary on capital inflows that vividly reminds us of the broad-based capital outflow risks facing many developing economies when developed-country central banks (mostly the Fed) are done pumping trillions of USD liquidity into the global financial system.
  • Arguably the biggest tail risk to asset prices in my space is a sustainably strong USD, which has historically perpetuated BOP crises that ultimately lead to currency crashes, hyperinflation, corporate insolvency and properly market collapses across emerging market economies (see: India’s Rupee Devaluation, Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis, the Turkish Financial Crisis and Sovereign Defaults by Russia and Argentina). No two EM BOP crises look the same, but they all tend to have one common denominator: Strong Dollar – either trailing USD strength or an outlook for sustainable USD appreciation.
  • With RBNZ Governor Graeme Wheeler’s latest statement of intentions, New Zealand has become the latest economy to join the international Currency War. Simply put, in an economic scenario where the RBA stops easing aggressively and the RBNZ has no bias to tighten amid a particularly dovish inflation outlook and concerns about excess currency strength, one could easily see the kiwi give up a decent amount of recent gains vs. its aussie counterpart over the next few months. That same central bank commentary can also be applied to the NZD/USD cross, which is down over a full percent on the day.

 

Thailand: Thailand’s central bank kept its policy interest rate unchanged at 2.75% for a third straight meeting, resisting the central government’s calls for monetary easing to combat baht appreciation.

 

With the THB/USD cross up at levels last seen since mid-2011, we are impressed by Governor Trairatvorakul’s resolve to resist pressure from the Finance Ministry – specifically Finance Minister Kittiratt Na-Ranong – to lower rates in order to discourage capital inflows.

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - 1

 

Virabongsa Ramangkura, chairman of the Bank of Thailand, was out with some interesting commentary on capital inflows that vividly reminds us of the broad-based capital outflow risks facing many developing economies when developed-country central banks (mostly the Fed) are done pumping trillions of USD liquidity into the global financial system. Take heed:

 

“Thailand is an attractive place for hot money because our regulations are not that tight like China. I am concerned, but not panic-stricken yet. There have been huge amounts of inflows to stocks, bonds and property. The situation may be similar to 1... 

 

Land prices in some areas, like by the sea, have risen more than 10-fold. Our economic growth at 4 percent to 5 percent is not enough to cope with such an increase. When money flows in, many people, especially investors in stocks and properties, are happy. I just hope that we have learned our lesson during the crisis and that laws and bank rules have been improved... 

 

Money is like water. It will flow from low- to high-yield places. No matter what regulations or barriers you have, it will always find a way. I can’t think what measures we should use to slow it down. Using a Tobin tax is not easy. Any direct controls like reserve requirements or non-market measures have strong side-effects. If prices of property and financial assets increase enough, investors will suffer a lot when they fall. So no government will be willing to use such drastic measures.”

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - 8

 

Arguably the biggest tail risk to asset prices in my space is a sustainably strong USD, which has historically perpetuated BOP crises that ultimately lead to currency crashes, hyperinflation, corporate insolvency and properly market collapses across emerging market economies (see: India’s Rupee Devaluation, Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis, the Turkish Financial Crisis and Sovereign Defaults by Russia and Argentina). No two EM BOP crises look the same, but they all tend to have one common denominator: Strong Dollar – either trailing USD strength or an outlook for sustainable USD appreciation.

 

We’ll be doing a lot more long-term cycle work here in preparation for a deep dive in the coming months, but you can rest assured that a retreat of the structural appreciation pressures underpinning EM FX is the base-case scenario if the USD continues on a path of sustainable appreciation amid a backdrop of European growth woes, Japanese Policies To Inflate, #HousingsHammer and #6-HandleUnemploymentRisk.

 

Our Summary Thoughts On How Bubbles in EM FX and EM Property Markets Are Formed:

  • Have US monetary and fiscal policy perpetuate expectations for a sustainably weak USD. Check.
  • Have international capital allocators (investors and/or corporations) chase higher rates of return abroad (often in emerging markets). Check.
  • Have EM corporations increasingly tap international debt markets as weak dollar pacifies Libor/the cost of international capital and the strength of their local currencies makes servicing int’l debt increasingly cheap. Check.
  • Have all those capital inflows inflate the liabilities of EM financial intermediaries’ balance sheets (time and demand deposits). Check.
  • Have EM financial intermediaries seek assets to correspond with this rise in liabilities. Check.
  • Have EM capital markets not be large enough to absorb all the additional liquidity. Check.
  • Have EM financial intermediaries/investors park the excess capital in fixed assets (i.e. PP&E), both as an inflation hedge (down dollar/up int’l food  & energy prices) and out of necessity (EM capital markets aren’t big enough). Check.
  • Rinse & Repeat.

How It All Becomes Unwound:

  • Have US monetary and fiscal policy start to perpetuate expectations for a sustainably strong USD (Reagan/Volcker in the early 80s or Clinton/Gingrich in the mid-90s) or have the rest of the G3 basket (i.e. Europe and Japan) get perpetually more dovish than the US. TBD.
  • On the expectation of tighter USD policies (both domestically and abroad), foreign capital is drained out of EMs and back into better-performing domestic markets. TBD.

 

For our previous discussion on this long-term asset allocation topic, please refer to our 6/8/12 note titled: “TWO SCHOOLS OF THOUGHT PART II” for more details.

 

New Zealand: Per RBNZ Governor Graeme Wheeler, “When the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one- way bet… The Reserve Bank is prepared to intervene to influence the kiwi. But given the strength of recent capital flows, we can only attempt to smooth the peaks.”

 

With this statement of intentions, New Zealand has become the latest economy to join the international Currency War. Their threat to combat recent gains comes as the spread between the AUD/USD and NZD/USD is as narrow as it’s been since 3Q10 (-$0.19), suggesting some degree of excess gain in the kiwi as the RBNZ hasn’t been quite as aggressive as the RBA in combating currency strength (0bps of cuts for the former over the LTM vs. -125bps for the latter).

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - 2

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - New Zealand Macro Factor Model

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - Australia Macro Factor Model

 

With New Zealand’s recent inflation data  coming in-line with our forward projections for 1H13 (Quad #1), and Australia’s doing the same w/ respect to our GIP outlook (#Quads 2 & 3), there’s a more than fair chance the NZD/AUD cross has put in its short-cycle top on 2/14 ($0.82) and is poised to return to the mid-70 cent range over the intermediate term.

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - NEW ZEALAND

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - AUSTRALIA

 

Simply put, in an economic scenario where the RBA stops easing aggressively and the RBNZ has no bias to tighten amid a particularly dovish inflation outlook and concerns about excess currency strength, one could easily see the kiwi give up a decent amount of recent gains vs. its aussie counterpart over the next few months. That same central bank commentary can also be applied to the NZD/USD cross, which is down over a full percent on the day.

 

CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL - UNITED STATES

 

Darius Dale

Senior Analyst


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MAR 4Q 2012 CONF CALL NOTES

In line quarter with guidance midpoint slightly below the Street. We think guidance is conservative.

 

 

“We were delighted with our 2012 results.  While this year is off to a strong start, we are providing a somewhat broader and more conservative range for 2013 REVPAR growth due to the potential effect on the travel industry of the impending federal budget sequestration.”

 

- Arne M. Sorenson, president and chief executive officer of Marriott International

 

CONF CALL NOTES

  • Encouraged by recent trends
  • Mexico has seen a resurgence in demand
  • ME is benefiting from eocnomic growth and easy comps
  • Asia is trending up 5% YoY and China should improve as the year progresses
  • Europe continues to struggle but less concern about things falling off a cliff
  • North American financing for limited service construction has eased but maintains challenging for full service builds
  • In the first year of conversion to MAR brands, hotels see an average of 10% increase in RevPAR
  • Group RevPAR increased nearly 10% at their smaller hotels. 
  • Over a 5 year period, they are investing $500MM to jump start the EDITION brand with the goal of recycling their investment as soon as possible by selling the assets and taking back management contracts
  • Greater Lobby initiative will be rolled out throughout the MARRIOT brand later this year
  • Special Corporate was 15% of their full-service managed hotel room nights
  • Group business revenue pace was up 6%.  Hotel booking window continues to lengthen.
  • NA represented 75% of their WW fee revenue in 2012
  • Believe that business in most markets will improve as the year progresses due to easier comps and growth in China. Expect Indonesia and Thailand to remain strong throughout the year. India continues to add Fairfield and Courtyard projects.  Just signed a deal that will double their prescence in Thailand by 2017.  19% of their fee revenue came from Asia. Expect to open a hotel every 2 weeks in China.
  • Europe:  Expect flattish RevPAR growth for 1Q and 2013.  8% of their WW fee revenue.
  • ME&A:  mid-single increase in RevPAR, with double digit RevPAR growth in the 1Q. Represent 3% of their fee revenue
  • Nearly 50% of their 2013 openings will be in the US.  Non-US rooms represent 70% of their pipeline. Increased their development staff by 10% in 2012.
  • Continue to lobby for looser visa restrictions to encourage tourism
  • 20% of their room growth came from conversion of other brands
  • Better than expected fee revenue contributed to MAR exceeding their guidance
  • F&B revenue growth was modest reflecting the impact of Sandy on East Coast convention and meeting business
  • Saw weakening demand in London 
  • Brazil weakened and Panama also suffered from new supply
  • Indonesia and Thailand saw double digit RevPAR growth
  • NA incentive fees increased 32% due to strong performance in Boston and NY
  • Sale of the corporate housing business and shedding of 5 leased hotels impacted their owned & leased revenues
  • Incentive fee growth will likely be constrained by Europe and Asia growth in 2013
  • 1Q of 2013 will include 93 days 
  • Expect to recycle capital in 2013.  Expect to return $MM of capital to shareholders in 2013.

 

Q&A

  • Inaugural impact from DC was a 80bps benefit on their January RevPAR 
  • Group is generally a positive story. Revenue put in on the books in the Q for the next 12 months was up 8%
  • Their capex # is gross - should be lower when you factor in recycling.  1/3 is capex the rest is key money and mezz loans. $200-225MM on their EDITION hotels.
  • Share repurchase is built into their model.  Build in a steady state share repurchase plan throughout the year.  It only produces a penny or so of accretion throughout the year.
  • Special Corporate negotiations came in about 50bps lower than they anticipated. It doesn't give them much concern- it can be explained by anxiety over the fiscal cliff and economic uncertainty in the 4Q when some of the negotiations took place. 
  • Fear of sequestration is singularly driving the low end of their range
  • Their ability to exit some unprofitable leases allowed them to return some extra cash to shareholders 
  • Full service hotels in the US continue to pay more incentive fees.  It's not likely that the select service hotels pay any meaningful incentive fees.  However, on the Asia and M&E front, there should be meaningful growth in incentive fees.  Europe is a slower story.
  • London EDITION will open mid-year 2013. They are hopeful to sell the hotel in 2013.  The Miami EDITION is scheduled to open in late 2013 and it's possible that it slips to 2014. They are pleased with the response they are getting on the 23 residential units.  While they will be collecting deposits on the units shortly, they won't be able to close on the units until the hotel opens in late 2013/ early 2014.
  • Concern on sequestration is not just the government business (12% of the DC area business and 5% nationally) but also on the broader economy and the consumer potentially.
  • In October, they were a little less frightened by the fiscal cliff then when they got to December... things got bleakest in December not in early October. They were hopeful that they government would find a more comprehensive solution rather than the deal that was put in place which resolved very little. There has been zero progress on addressing the debt ceiling issues.  
  • Their level of cash is at historical lows.  They usually like to stay about $100MM. As long as they have access to the CP market and that is backed by the RC which isn't drawn...so they feel ok with their cash cushion.
  • Their guidance doesn't suggest that sequestration will have a 100bps on RevPAR. They are saying that we are 10 days away from something potentially negative happening in the economy and hence having a negative impact on their business. Therefore, they just broadened their guidance range. They do know that some government agencies are already pulling back on their travel budget. However, sequestration has not really started yet. Government business is and has been already weak lately.  They government groups will no longer order lunch for their attendees for meetings over the last year / 18 months.
  • Buyback? Don't think that their long term buyback and dividend policy will be impacted by their view on sequestration
  • Is their pipeline heavily scewed towards franchised? Most of their international units that opened were managed. However, they also had a bunch of units exiting the system so they ended up with more net franchised growth.  In 2013 & beyond, they should have good managed growth. But most of the growth in their system will be franchised.
  • Reported #s in Q4 include Sandy impact - they include the downtown NY hotels that they have, which were closed for a month as a result of Sandy. 
  • Slower pace for F&B spending? Sandy certainly had an impact in 4Q because some groups canceled. They were stronger in the West and South in 4Q.  Generally F&B doesn't give them enormous concern going forward. F&B is growing and should continue to grow in 2013.
  • Hopeful that they will see China build throughout the course of 2013.  There is some sense of stability early in the year. Too early to say though.  Did see their development openings slow in 2012 but they don't think that they lost any projects though. Do have easy comps since they started with 10% in early 2012 and ended around 3% RevPAR growth.  In the South (Sanya & Guangoa) will continue to see a significant amount of supply growth. Over time, supply will be absorbed but in the short term it will put pressure on RevPAR in those markets.
  • Terms for limited service lending is better but still requires guarantees from the builder and lower LTV's than historically.  That is supported for CMBS. Financing isn't really available for new construction full service unless it's subsidized by the city or for mixed use developments. There is more financing for M&A deals.
  • Impact from payroll taxes and higher fuel costs? No, they are not seeing any impact from the consumer. Weekend business has actually been stronger than their weekday business.
  • How much of their anticipated group room nights are booked for 2013 - about 70% for the MAR brand - which has remained pretty constant
  • Sees no new pressure from OTAs (North America contribution has been small)

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EPS of $0.56 and Adjusted EBITDA of $358MM
  • MAR repurchased 6.9MM shares for $257MM during 4Q. On February 15, 2013, the board of directors increased the company’s authorization to repurchase shares by 25 million shares to yield a total share authorization of 34.2 million shares.
  • North American comparable systemwide REVPAR rose 5.9%
  • Worldwide comparable systemwide REVPAR rose 5.2% (constant currency)
  • Pipeline of hotels under construction, awaiting conversion or approved for development increased to nearly 130,000 rooms, including almost 59,000 rooms outside North America 
  • Marriott added 37 new properties (13,982 rooms) to its worldwide lodging portfolio in the 2012 fourth quarter.  Six properties (1,398 rooms) exited the system during the quarter.
  • In January 2013, North American comparable company-operated REVPAR rose 8%.
  • 4Q incentive management fees increased...included a $3 million favorable impact of the recognition of previously deferred fees. 
  • In 4Q, 30% of worldwide company-managed hotels earned incentive management fees compared to 27% in the year-ago quarter. For full year 2012, 33% of worldwide company-managed hotels earned incentive management fees compared to 29% in 2011.
  • Improved results at owned and leased hotels and higher credit card branding fees were largely offset by lower termination and residential branding fees year-over-year.
  • Fourth quarter 2012 expenses reflected routine increases in compensation and other expenses, as well as unfavorable foreign exchange. These were largely offset by a $6 million reversal of guarantee reserves for two hotels, as well as lower legal and bad debt expenses.
  • The company anticipates adding approximately 30,000 to 35,000 rooms worldwide for the full year 2013. The company also expects approximately 10,000 rooms will leave the system during the year.

MAR 4Q 2012 CONF CALL NOTES - mar222


MAR 4Q REPORT CARD

Takeaway: We think Q1 is shaping up better for the lodging sector than guidance

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

  • IN-LINE - Quarter was in-line and guidance was roughly in-line although the midpoint was a little below Q1 and 2013 consensus, respectively.  However, we think management is being conservative and our research shows stronger Q1 RevPAR.

 

MAR 4Q REPORT CARD - mar2

 

4Q NORTH AMERICAN REVPAR

  • SAME:  4Q REVPAR in North America came in at 5.9%, in-line with its 5-7% guidance range.
  • PREVIOUSLY: "We expect REVPAR to remain strong in North America even as we shift from a leisure-heavy quarter to one more driven by business travel. Our fourth quarter guidance reflects 5% to 7% growth in system-wide REVPAR in North America. While our group booking pace is up nearly 9%, the fourth quarter includes a U.S. Presidential Election Week and a midweek Halloween, both of which will likely temper last-minute business-related demand in the quarter."

GOVERNMENT BUSINESS 

  • SAME:  Government has been much more cautious on travel and F&B spending.  If sequestration goes through, cuts will be more severe.
  • PREVIOUSLY: "Better understood as the continued government pressure to cut cost by focusing on travel, the GSA recently announced flat government per diems for 2013. Fortunately, at many full-service hotels in the United States, business is strong enough that we will probably replace this government business with other customers paying higher rates." 

DC MARKET

  • WORSE:  Inauguration impact on January REVPAR was less than one point of REVPAR.
  • PREVIOUSLY: "In Washington, we expect occupancy rates to increase in 2013 as the politicians and lobbyists get back to the city. We estimate that the inauguration alone should increase annual REVPAR growth in the Downtown D.C. market by 150 to 200 basis points. With this strong Downtown performance, we expect REVPAR for Greater D.C. to grow at a mid single-digit rate in 2013. You may recall that roughly 5% of our North American room distribution is in the D.C. area."

GROUP BOOKINGS IN NA

  • WORSE:  2013 Group bookings in North America are up 6% with room rates up 4%.   70% of 2013 group nights have been booked (unchanged YoY) for the MAR brand.
  • PREVIOUSLY: "Our group booking pace for the North American company-operated Marriott brand for 2013 is up over 7%, with nearly 4% improvement in room rates over a strong 2012. Meeting planners and transient guests are booking earlier, and some customers are requesting multiple-year contracts. Given this climate, we are targeting corporate negotiated rates to increase at a high single-digit rate in 2013. In short, we expect North America to be steady as she goes. North America represents about 75% of our annual fee revenue."

EUROPEAN OUTLOOK

  • SAME: Expects flattish REVPAR in Europe in 1Q 2013 and for 2013.
  • PREVIOUSLY: "In Europe, the big 2013 story will likely continue to be the economy as many countries struggle with sovereign debt burdens, austerity programs, and modest economic growth. We will also face tough comparisons to many 2012 special events including the Olympics, the Euro Cup Championship, and a record-breaking 2012 fair schedule in Germany. Given all this, we are expecting flattish constant dollar REVPAR performance in our European hotels in 2013."

ASIA OUTLOOK

  • SAME:  Expects 1Q REVPAR to increase at a mid-single digit growth, which will strengthen a few points as the year progresses.  New supply will continue to pressure REVPAR growth.
  • PREVIOUSLY: "In Asia, in addition to more moderate GDP growth, 2013 REVPAR should reflect significant supply growth in a few markets and slower inbound traffic from Europe. Overall... we expect REVPAR in the Asia Pacific region will increase at a mid to high single-digit rate on a constant dollar basis in 2013."

CARIBBEAN AND LATIN AMERICA OUTLOOK

  • BETTER: Expects 1Q REVPAR to increase at a mid-single-digit rate, improving to high single-digit rate for FY 2013
  • PREVIOUSLY: "In 2013, the Caribbean and Latin American market should benefit from economic growth throughout the region, stronger leisure business in the Caribbean, and a newly renovated hotel for us in São Paulo. Here, we are targeting constant dollar REVPAR growth in the region will increase at a mid single-digit rate."

INCENTIVE FEE GROWTH IN 4Q

  • BETTER:  Worldwide incentive fees were up 22%.  North America incentive fees rose 32% largely due to strong results from Boston and New York.  Full-service fees are particularly robust.  
  • PREVIOUSLY: "When you look at fourth quarter, I suspect we'll see incentive fee growth at lower rates than we've experienced in Q3, and that's fundamentally can be driven by that 3%-ish REVPAR expectation for international hotels in Q4."

SHARE REPURCHASE

  • SLIGHTLY BETTER:  MAR repurchased 31.2 million shares of the company's common stock for $1.2 billion plus dividends 
  • PREVIOUSLY: "We expect to return roughly $1.1 billion in share repurchases and dividends in 2012."

Reviewing Nassim Taleb's "Antifragile"

Takeaway: Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance.

I’ve had many of you ask me for my thoughts on Nassim Taleb’s latest risk management book, Antifragile. So, in the spirit of the main criticism I’d give the book (it’s repetitive), here are some brief notes (< 1000 words = Top 50 highlights):

 

Summary Thoughts

 

  1. He doesn’t like academic/unaccountable government policy. Neither do I.
  2. He likes the recent work of Dan Kahnemann (Thinking, Fast and Slow). So do I.
  3. He’s transitioning from market practitioner to philosopher. I wouldn’t do that.

 

Content Highlights

 

  1. “I’d rather be dumb and antifragile than extremely smart and fragile” (pg 4) Wall St “smart” is changing
  2. “anything that has more upside than downside from random events is antifragile; the reverse is fragile (pg 5)
  3. “This is the tragedy of modernity… those trying to help are often hurting us the most (pg 5) #agreed
  4. I.A.N.D (International Association of Name Droppers)” (pg 6) #funny
  5. “academics with too much power and no real downside and/or accountability” (pg 6) #yep
  6. “Less is more and usually more effective”, cites Steve Jobs  (pg 11); good advice, #practice it
  7. “only practitioners (or people who do things) tend to spontaneously get to the point” (pg 13)
  8. “Table 1: The Central Triad (3 Types of Exposures” (pgs 24-27) very #thoughtful/concise on Behavioral Econ
  9. “We are all… similarly handicapped, unable to recognize the same idea…” (pg 39) good pt on #context #bias
  10. “Abundance is harder for us to handle than scarcity” (pg 42) 
  11. Equilibrium, Not Again” (pg 60) solid complexity theory (Stuart Kaufman) reference vs #Keynesians
  12. “Leopards… are not instructed by personal trainers on the “proper form” to lift a deer up a tree” (pg 73) #true
  13. “you learn from the errors of others…” (pg 73),  #important lessons, especially on Wall St
  14. National Entrepreneur Day” (pg 79) #Obama, please read
  15. “what is made to fly will not do well on the ground… volatility comes from volare, “to fly” in Latin” (pg 81)
  16. “Nature loves small errors… humans don’t.” (pg 85) #evolve
  17. “those experiencing a brand of variations called chaos can be stabilized by adding randomness to them” (pg 103)
  18. “For a theory is a very dangerous thing to have… Theories are superfragile.” (pg 116) #awesome quotes
  19. “Men feel good less intensely than bad.” (pg 155) good quote by Livy in the context of #Seneca’s thoughts
  20. Seneca’s Barbell” (pg 161) #important pg to read related to your #Cash position and #Drawdown risk
  21. “An agent does not move except out of intention for an end.” (pg 169) #quote from St Thomas Aquinas
  22. Convex Tinkering” (pg 182) makes an #excellent risk mgt pt on asymmetry with a picture
  23. “Life is long Gamma” (pg 184) would love to hear the anti-free market #answer to that
  24. “Risk taking ain’t gambling, and optionality ain’t lottery tickets” (pg 185) this ain’t Kansas, and I ain’t Toto
  25. “Few want to jeopardize their jobs and reputation for the sake of change” (pg 192) #truth
  26. “Evolution does not rely on narratives, humans do” (pg 207) #money quote
  27. Table 4: “The difference between teleological and optionality” (pg 214) good thinkers framework
  28. Chapter 15 = “History Written by the Losers” #rant
  29. “The difference between humans and animals lies in the ability to collaborate” (pg 233), bingo #collaboration
  30. “Nokia … began as a paper mill” (pg 235), #re-learn, find a way to win 
  31. “Trial and error is freedom.” (pg 246) #RiskMgt101
  32. “You are taking the joy of ignorance out of out of the things we don’t understand” (pg 253) Fat Tony to Socrates
  33. “What is not intelligible to me is not necessarily unintelligent” (pg 256) #Nietzsche
  34. “It would be like prostitutes listening to technical commentary by nuns” (pg 264) Bernanke, comments?
  35. “Smile! A better way to understand convexity and concavity” (pg 272) #pics summarize hundreds of pages
  36. “Squeezes are exacerbated by size” (pg 279) think #HedgeFundBubble, Short Interest, etc.
  37. “If you have favorable asymmetries, or positive convexity… in the long run you will do reasonably well” (pg 300)
  38. “Innovation is saying no to 1,000 things.” (pg 305) quotes Steve #Jobs again
  39. “we are moving into the far more uneven distribution of 99/1 across many things that used to be 80/20” (pg 306)
  40. “absence of literary culture is actually a marker of future blindness” (pg 314) on some #techies vs the classics 
  41. Medicine, Convexity, and Opacity” (pg 337), you can skip this chapter unless you like to rip on doctors
  42. “mention of the fragilista journalists Friedman or Krugman can lead to explosive bouts of anger” (pg 362) #lol
  43. Chapter 23 = “Skin In The Game” (pg 375) 1st three pages and Table 7 of this chapter #excellent
  44. “a person is only as respectable … as the downside he is willing to face for the sake of others” (pg 376) #skin
  45. “you can’t feel insulted by a dog” (pg 380) #woof
  46. “in traditional societies even those who fail have a higher status than those who are not exposed” (pg 383)
  47. “Isn’t this unethical?” (pg 413) crushes Princeton’s Alan #Blinder for his conflicts of interest as an academic
  48. “Everything gains or losses from volatility. Fragility is what loses from volatility and uncertainty” (pg 421) #conclusion
  49. “Prometheus is long disorder; Epimetheus is short disorder” (pg 422) #conclusion
  50. “living things are long volatility. The best way to verify that you are alive is by checking if you like variations” (pg 423)

 

Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance.

KM

 

Keith R. McCullough
Chief Executive Officer


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