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In preparation for HOT's 1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • 2013-2015 outlook: "Growth in RevPAR 5% to 7% and again important to recognize that this is much more rate driven than further occupancy driven. So, even though that number isn't maybe as high as it might have been earlier in the cycle, which is typical, it is I think a more profitable growth in RevPAR there. That leads to 10% to 12% growth in EBITDA and then 15% to 20% growth in EPS."
  • "If you look at where we are at the moment, we have 21 hotels in UAE. That is almost half of our portfolio in this region today. When you look at our pipeline, you see that our growth is actually more in the other countries in the Middle East. So 34% of our portfolio growth will be in the UAE and 66% is outside of the UAE, with this very strong focus on new markets like Tajikistan, Kazakhstan, Kurdistan. Until now, we grew 10 hotels per decade. From now on, we will grow 10 hotels each year. And by 2019, we project to operate 100 hotels in this region."
  • "If you look at the year 2000, this was still very much a U.S. company, 63% of our profits and fees came from the U.S. Today, it's well over a half coming from outside the U.S. Our goal here is also to be at 80/20 that's because that's where we feel the growth is being. In fact as you will see soon if you look at our pipeline, it's already 80/20, 80% of our pipeline is outside the U.S. and therefore, we're well on our way to achieving those goals as we open new hotels."
  • "It's important to note that we have a platform in all the key parts of the world now. So, we can grow without adding a lot of G&A. We've established sufficient scale by investing a lot in the last few years, and we will continue to invest where there's growth, like in the Middle East, like Africa, like Asia. But we have platforms everywhere now. There's no place in the world where we have not put a platform in to support the growth, which is why we've been able to only grow our SG&A 3% to 4% a year, while investing heavily in some parts of the world."
  • "In the last four years, we've generated almost $800 million in cash from the timeshare business, expect to do another $150 million to $200 million this year. So, we would have $1 billion in cash coming out of our timeshare business over the last five years. So we're running that business more for cash than earnings growth, and that has worked very well for us. 
  • "Bal Harbour, $460 million in cash last year, more cash this year. That's gone from being a place where we were putting money in to finish the project to significant amounts of cash coming out of it. That'll all be done this year in 2013, we hope to finish, sell out this year. It is not our intent to do projects like these, but in the meantime, it's been a major source of cash for us over the last couple of years."
  • "Our dividend today is the best among U.S. lodging companies. C-Corps, we have a 2% yield. We raised our dividend last year. We can sustain it. So, we are not only – incredibly strong balance sheet, we also pay a very healthy dividend in addition to having the capacity to do buybacks."
  • "Over the next three years, this supply situation is not going to change very much, which makes us optimistic that the recovery in the developed markets or the mature markets will continue for sure over this three-year timeframe and the situation in Europe is no different."
  • "Europe has demand challenges, but our most predictable business last year was Europe. It stayed very steady, growing in the 2% to 3% RevPAR range, it did not surprise. 2% to 3% is not spectacular growth, but it didn't go negative despite a recession. And a lot of that is because there's no supply."
  • "Our incentive fees are driven by significant amount of growth in the emerging markets."
  • [Timeshare]: "So assuming we spend $50 million to $60 million or $70 million in capital each year, we can continue to maintain the business at its current level of performance, while generating the $150 million to $200 million in cash that we have been generating."
  • "Incentive fee growth will be faster than base fee growth for all the reasons we've talked about. They're linked to profit, margins are expanding, profits generally grow faster than RevPAR at a typical hotel. That gets you to 9% to 12% franchise – management and franchise fee growth. Here again, coincidentally, one point of REVPAR, again cumulatively over three years; by 2015, would impact management and franchise fees by $20 million to $25 million."
  • "Our Vacation Ownership business, we're assuming that we will maintain a flat business"
  • "We have a stated strategy of selling hotels. We think the market is improving. If you look at the U.S., the public REITs have been very active and we've been very active in selling to them. The markets are good for public REITs to issue equity. There's no supply. So if you want to add hotels, it's better to buy them than build them."
  • "Our BBB rating.... 3.5x [leverage] is comfortable.  There is no question that we can have a higher debt load than we have today."
  • "There is no more debt to pay down."
  • "What does vary is the group transient mix. In the U.S., [transient] tends to be about a third of the business as group, whereas outside the U.S., it's probably more like 25% sometimes less. It's also a group that doesn't book as much in advance outside the U.S. as it does in the U.S. So, the group business is not as significant in many markets as it is in the U.S."
  • "F&B as you heard is far more important outside the U.S. than it is in the U.S., especially when you get to markets like these where the F&B mix can be 30%, 40% whereas in the U.S. it's probably more like 25%."
  • "If the debt markets really heat up and it sort of feels like they're heading in that direction, I could see some joint venture refinancing opportunities that might be another avenue to realize some value."
  • "We would assume that Europe would be at or below the low end of the (+5-7%) range. U.S. will probably be more in the middle of the range. Latin America is a mixed bag. We're still hopeful that China will reaccelerate once these big leadership transitions are complete. That will pull along a variety of other economies. So we're still hopeful that the growth market, whether it's the Middle East, Asia, China will be at the high end of the range."



  • "Business activity continues to rise but with very few new build hotels coming on stream. So occupancies remain at near peak levels. If the U.S. economy continues on this trajectory, the basic laws of supply and demand suggest that we'll see strong growth in room rates for the next few years."
  • "Europe remained at a stalemate during 2012 and we're not expecting much different in 2013, even though southern European bond spreads suggest rising confidence."
  • [China] "With that behind us, we're seeing demand pick up as government activity starts to resume and business returns to normal....In January, Chinese REVPAR was up 6%. The transition is still ongoing with significant meetings coming up in March when the new leadership formally takes over at multiple levels and new policies are announced. As such we expect the rate of growth to pick up as the year progresses and year-over-year comparisons also become easier."
  • "Corporate and retail transient momentum is strong. Rooms sold in opaque channels are declining improving rate realization. Group pace is tracking in the mid-single digits for the year."
    • "Leads were up 27% in Q4, booking windows continue to lengthen. Group business in the cycle has come back slowly but steadily and companies remain careful about growing their cost base. We expect that negotiated corporate rates will be up in the mid-single digits in 2013."
  • "Business travel in Mexico is up, and American leisure travel is coming back. We expect Mexico to be the engine of Latin American growth for us in 2013. At the other end of the spectrum is Argentina, where we have two large owned hotels. Argentina REVPAR is declining while local inflation hits 25%, squeezing our margins. The inflation devaluation gap is hurting Argentina's competitiveness, and hitting exports and travel. This is only likely to get worse until the devaluation resets the equation. Brazil hit a soft spot as China slowed, but is now recovering."
  • "In Q4 and into Q1, we have been making additional adjustments, incurring some severance cost of approximately $9 million in Q4 and potentially another $10 million in Q1. These costs are included in our SG&A growth estimate of 3% to 5% for 2013."


JCP: Good Move Out of the Gate For Ullman

Takeaway: Great near-term mo -- for the right reasons. But we'd rather get involved higher when we gain confidence it's going up 50%+.

With the stock raging in the final hour of trading on Friday – up 14.6% with volume more than tripling – it’s pretty clear that someone already knew that the company had taken a major step towards shoring up its liquidity.


But in looking at the transaction itself, it's positive any way you slice it, and it makes a ton of sense as Ullman’s first move out of the box as CEO. In addition, while the deal stipulates that the $1.75bn term load is securitized by real estate and ‘all other assets’ of the company – we think that the latter language of that agreement is irrelevant. We estimate that the lower end of JCP’s real-estate value clocks in at a little over $1.8bn, or $8.40 per share. Under a best-case scenario (which we have no fundamental reason to bank on) we get to $2.745bn, or a little over $12.53 per share. Nonetheless, the real-estate should cover the loan.


JCP: Good Move Out of the Gate For Ullman - jcpreti


Our Take On The Stock

Ullman and the stock are one and the same at this point. The good news is that he’ll be a stabilization factor as it relates to a) the balance sheet (done), b) talent retention, and c) stopping the bleeding in what remains of JCP’s core customer.  Even better news is that when JCP reports earnings in May, the company will blame any negatives on Johnson, and take credit for any positive changes on the margin. It'll be tough to spin the print in a way that does not favor JCP. Near-term momentum remains in JCP’s favor.


On the flipside, we’re still not comfortable enough with JCP's long-term strategy to have it on our Best Ideas list, as we’d need confidence in revisiting $2.50+ in EPS power in order to get us enough outsized upside in the risk/reward profile.  While we saw severe incompetence in pricing the existing business with Johnson running the show, the reality is that he had a vision as to what JCP could become, and it was one that made sense. It was no slam dunk by any means, and was riddled with execution challenges. But it was one where we could make financial assumptions in the outer years, apply a discount rate, and build up to over $3 in EPS power.


We’re now seeing Ullman solve the balance sheet issue – but that’s something that we were confidence would have been resolved under Johnson.  What we don’t have anymore, however, is a reasonable sense of what this company could look like in another 2-3 years. Despite what they say, it simply has no long-term strategy. There’s a short-term CEO who is in place to fix short-term problems.  While that happens there’s no reason why this stock can’t grind higher, and we think it will.  The ‘JCP is expensive’ call does not hold much water here.  That said, we’d rather wait to get involved in a big way when we could be confident in the BIG research call – like 50%+ over a 1-2-year period. When playing for that kind of upside, we're not concerned about getting involved a few dollars higher.  Until then, we'll trade the name. 

PODCAST: All Eyes On Europe


On today's Morning Investment Call held for Hedgeye subscribers, CEO Keith McCullough discussed ECB rate cuts, oil prices and gold, as well as S&P 500 levels. In regards to Europe, investors are clearly expecting a rate cut from European Central Bank Chief Mario Draghi and the probability of a rate cut has gone up considerably. Commodity prices continue to come down, with Brent crude oil trading at the higher end of risk range while remaining in bearish formation. Gold caught a bounce this morning but remains in bearish formation. When the time is right, we'll re-short gold via GLD or the Gold Miners (GDX). 


You can listen to the full call in the audio posted above.


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Risk Managed Long Term Investing for Pros

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Takeaway: European fears further recede while the great U.S. yield hunt continues. Big bank swaps place low probability on Brown-Vitter passsage.

Key Takeaways:


* High Yield (YTM)  – Investors continue to discount risk, pushing High Yield rates lower by another 13.6 bps last week, ending the week at 5.53% versus 5.67%.


* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.


* U.S. Financials -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Pretty remarkable, when you consider that BofA was at 483 bps on 11/25/11 and that its lows since 2009 have been around 100 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.



Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 0 out of 12 worsened / 6 of 12 unchanged




1. American Financial CDS -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.


Tightened the most WoW: RDN, MTG, AXP

Widened the most/ tightened the least WoW: AON, MBI, WFC

Tightened the most WoW: RDN, MTG, AXP

Widened the most MoM: MBI, SLM, MMC




2. European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.




3. Asian Financial CDS - Asian bank swaps were mixed, though modest last week. Chinese banks narrowly tightened, while Japanese banks were mostly wider. State Bank of India was the biggest mover with a 10 bps tightening.  




4. Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.








5. High Yield (YTM) Monitor – High Yield rates fell another 13.6 bps last week, ending the week at 5.53% versus 5.67% the prior week.




6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.5 points last week, ending at 1796.




7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.1 bps.




8. Journal of Commerce Commodity Price Index – The JOC index was essentially flat last week at 7.48 versus 7.5 in the prior week.




9. Euribor-OIS Spread – The Euribor-OIS spread remained flat last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 




10. ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  




11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 59.2 bps versus 65.7 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 




12. Chinese Steel – Steel prices in China fell 0.6% last week, or 21 yuan/ton, to 3574 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.




13. 2-10 Spread – Last week the 2-10 spread tightened to 148 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.




14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.5% downside to TRADE support.




Joshua Steiner, CFA


GOLD: Ignore The Bounce?

Gold caught a 20 point bounce this morning to around $1470/oz. While that's fine and dandy for those who bought gold near the top and are reeling from that pain trade, the reality is that gold remains in bearish formation. We have yet to re-short gold via the SPDR Gold Trust ETF (GLD) but we did re-short the Market Vectors Gold Miners ETF (GDX) last week. The precious metal remains down -13% year-to-date and we gather it'll drop back below $1400/oz sooner than later.


GOLD: Ignore The Bounce? - GLDGDX ytdchart


Takeaway: MPEL the stalwart in the high growth Macau market

Macau posted a solid performance last week with average daily table revenues of HK$886 million, up 15% YoY and 15% from last week’s HK$775 million.  Our full month projection is now HK$26.5-27.0 billion, up 9-11% YoY.  We expect May YoY growth to accelerate to mid-teens which could keep up the momentum in the Macau stocks.  


With 23 deaths thus far, the H7N9 virus may be impacting the tour group business but doesn't appear to be affecting gaming revenues.  In fact, less congestion during the May holidays could actually boost VIP activity.  May holidays start today and end on May 3rd.


In terms of market share, MPEL continues to shine with 16.3% share well above recent trend.  MPEL remains our favorite stock in the group.  LVS is also performing well in April and we expect that trend to continue for the rest of the year.  Wynn and Galaxy are the laggards here in April.





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