Takeaway: Continue to like the lodgers. Still a lot of gas in the tank for this cycle

Another solid earnings report from a hotel company. Sorry Hyatt.


The Company's owned hotel revenues increased 4.6% for the first quarter of 2013.... due to the strong performance of its comparable properties, as well as incremental revenues of $21 million from the Grand Hyatt Washington, which was acquired in July of 2012. The increase in comparable hotel RevPAR as adjusted was primarily driven by strong improvements in average room rates. For the first quarter, average room rates improved 4.0%, while occupancy improved 0.7 percentage points to 72.3%. The improvements in revenues led to solid margin growth as comparable hotel adjusted operating profit margins increased 85 basis points"




  • 2013 is off to a strong start.  
  • Timing of the Easter and Passover holiday presented challenges for the month of March
  • Calendar challenges lead to a reduction of F&B revenues
  • YoY RevPAR growth %s would have been 100bps higher if 2012 had not been a leap year
  • Solid increases in transient ADR's lead the outperformance in the quarter with revenues from this segment increased more than 10% in the Q.
    • 4.5% increase in rate; adjusted for the leap year demand was also up in all 3 months and highest premium rated segment was up 13%
    • Demand for higher rated promotional segments also increased double-digit, while lower rated government demand decreased 1.5% 
    • Increase in demand of more than 5% 
  • Resorts locations benefited from the holiday shift with RevPAR up 11.6%
  • Group front - Jan started strong with a 3% increase in room nights and a rate increase of 3.5%.  Feb demand was flat but average rate was up 1%, in March volume in the final week fell 45% - resulting in a 12.5% decline for the month.
  • Overall, group demand adjusted for the leap year declined by nearly 4%, but from a segment perspective, high priced corporate business increased.  Decline was driven by reductions in discount business, which included a few cancellations (including from government and government related groups). A decrease in short-term government bookings contributed to the shortfall.

  • Booking activity in 1Q was weak (revenues down 2.5%), but is up 3% for the balance of the year with revenues looking up 6%. 2Q & 4Q look good but 3Q is flat. Bookings for 2014 picked up nicely in 1Q14 suggesting that they are seeing a lengthening of the booking window. At this point 85% of group bookings for 2013 are under contract for the year. 
  • Continue to be active on the M&A front as they look to increase exposure in core markets while reducing exposure in non-core markets. Expect to be a net acquirer.
  • Anticipate acquisition activity of $135-150MM in 2Q but this is not in guidance
  • Dividends for the balance of the year will depend on asset sales and operating results
  • Geographic color:
    • San Antonio: +16.6% (Occ +4%, ADR+10%) Group mix shifted to higher rated association and corporate business. Expect to have a weaker second quarter and then perform better in the second half of the year due to strong city wide bookings.
    • Boston: +14.2% The outperformance was driven by in-house group demand, which created compression to drive rate.  Expect a good 2Q due to solid in-house group bookings.
    • Miamu/Ft lauderdale: +12.8%. strengthened both group and transient bookings allowed our hotels to drive rate.  Expect inline performance in 2Q.
    • NY: +12.1% (occupancy increased 8%): Overseas arrivals were very strong. 1/3 of all US arrivals come to NY. Benefited from easy renovation comps. But still had final phase of some renovations. Expect continued good performance.
    • Houston: +11.8% substantially driven by improvements in ADR from both rate increases and the shift in the mix of business for higher-rated segment as both group and transient demand were strong.  Continue to perform well in 2Q due to solid group and transient booking.
    • Hawaii: +8.4% due to strong group and transient demand, which drove rate growth to 5%. Expect continued good performance in 2Q
    • Seattle: 7.6%  transient demand was very strong. Expect great 2Q due to excellent group bookings.
    • Washington: +2.3%.Downtown hotels performed much better than the suburbs with RevPAR up 5.3%. Expect DC to continue to struggle due to weakness in government and government related travel somewhat stemming from the sequester.   
    • San Fran: -2.5% due to renovations (occ down 4%).  RevPAR for the Marquis was down 13% and excluding this asset, RevPAR would have been up 6.7%. Expect better performance in 2Q.
    • San Diego: (Occ -4.6%/ ADR -2%) Struggled in the first quarter due to poor citywide demand and were affected by rooms renovations at three of our hotels in the quarter. Expect better performance next Q.
    • Euro JV: Excluding Sheraton Roma (under reno last year) -1.5%, EBITDA margin decreased 220bps. Expect much better performance in 2Q.
  • 80% of RevPAR growth was driven by ADR which benefited their margins this Q
  • F&B profit declined 3.6% as a result of leap year 2012 less group business and the movement of Easter holiday into the first quarter. 
  • Support cost (incl. G&A), repair and maintenance, sales and marketing utility decreased ~1% due to excellent cost controls. Property taxes increased 5%.

  • Expect RevPAR to be driven primarily by rate growth in the balance of the year. Expect better F&B revenues and profits. Expect support costs to increase above inflation, particularly for rewards and sales and marketing where higher revenues will increase cost and for utilities where they expect rates to increase, particularly in the second half of the year.  
  • Expect 30-32% of their EBITDA to be earned in 2Q
  • Cash interest expense run rate of $230MM/ year currently



  • Gap between comp and non-comp revenue? Strong performance of hotels that they have invested capital in and hotels that they have purchased ... those hotels had RevPAR growth of 27% in the 1Q. There are also hotels that have moved out of the portfolio. Hotels in the non-comp set should continue to materially outperform their SS comp set.
  • Rationale for the equity issuance. They are relatively confident that they will close on a few assets in 2Q - so the equity issuance was in anticipation of that. They are anticipating an acceleration on of asset sales later this year and do expect to fund most of the acquisitions out of those proceeds.
  • They do always look at whether it makes sense to buyback their stock. Feel like it's been more prudent to redeploy cash in acquisitions. In the future if they have more sales than purchases they may consider buying stock. 
  • Feel good about the length of the cycle and the progress they have made on the balance. They are likely to begin funding more acquisitions with some debt but not necesssarily at the asset level.
  • Still feel good about group. There was some weakness in 1Q relative to overall bookings. Some of that is likely due to weakness in government bookings. Saw a fall off in the range of 40% of government bookings.
  • Today's employment growth gave him more optimism over what they may see in the back of the year
  • Bulk of the lift in guidance they gave is due to the Newport Beach land gain.  1Q was a little more challenging but they did better than they expected. They don't really have a change in outlook for the balance of the year than they did in Feb though.
  • Pretty clear that they are interested in the Coastal markets, Chicago and Hawaii.  Focus on West Coast ex. San Diego, Hawaii ex. Maui. Interested in Miami on the East Coast.  There continues to be a slow flow of assets to the market- not a rush - since people are confident that the cycle will last longer. Transaction activity this year should be comparable to last year.
  • They are still looking globally for acquisitions. Have $130MM of equity in their Euro JV that needs to be deployed. Focused on N. Europe (Germany in particular). In Asia they like Australia and in LATAM they like Brazil. 
  • Cap rates are 5-6% for top tier assets and about a point wider for limited service
  • Both associations looking at bigger events and corporate bookings are also better- which are both driving the wider booking window
  • Group booking for 2014 are up over 6% 
  • Their Rio project is progressing along right on schedule. They are more interested in acquiring existing assets than new build in that market
  • What % of hotels are paying incentive mgmt fees: 43% forecasted for 2013 vs. low to mid 60's were paying incentive fees in the peak.  Don't see any reason why they won't get back to peak levels or higher. Still expect some occupancy growth, but do think that there is a reasonable prospect for even better rate growth in the balance of the year.  As long as rate growth is above inflation they should have better margins.
  • They are interested in acquiring limited service hotels in urban markets. Think it's a natural complement to hotels that they already own. 
  • Getting mid to high teens ROI's on their renovation projects. They never seem to have a shortage of these projects.
  • There has been a significant improvement in the CMBS market. 
  • On the full service side, assets are still trading at a discount to replacement cost, although that gap has narrowed in some markets that have recovered faster. Limited service in urban market have a smaller gap where new construction may make sense.
  • Impact from the Healthcare reform? Still unclear.  Don't expect a dramatic impact though.
  • What amount of in the year for the year business is at risk due to the short term sluggishness?  DC UUP RevPAR was up 4%. They have a bunch of assets that are outside the DC downtown area.  Inside the city they were ahead of where the market was. Their Hyatt Capital Hill was also under renovation so that had some impact as well. 
  • 85% of their group business is already on the books for 2013 as of today. Of course some of that is subject to cancellation. Most properties have gone out to their government business to confirm it this past month.  
  • Not really seeing any softness on the rate side. Group Business represents 38-39% of their business. Their transient business is so strong that they may end up with less group than they thought given that they are able to fill those rooms with better rated transient business.
  • Government business represents about 6% of their room nights split between transient and group 
  • They have been actively trying to reduce their exposure to government. 
  • Bulk of the activity in Europe is occurring due to debt maturities. Yields in Europe vary considerably depending on the city & country. London & Paris are comparable to top us markets. In Germany the target rates are higher.
  • As the CMBS market recovers there should be more financing support for non-gateway markets



  • During the first quarter of 2013, the Company recognized a previously deferred gain of approximately $11 million related to the 2005 eminent domain claim by the State of Georgia for 2.9 acres of land at the Atlanta Marriott Perimeter Center for highway expansion. The Company received the cash in 2007 but could not recognize the gain until certain requirements were completed. The gain has been included in NAREIT FFO per diluted share.  However, due to the significant passage of time since receipt of the proceeds, the Company has excluded the gain from its Adjusted FFO per diluted share and Adjusted EBITDA for the quarter.
  • Capex summary: 
    • 1Q ROI Capex: $21MM.  Projects completed during the first quarter included the development of a pavilion at the JW Marriott Desert Springs Resort & Spa and the conversion of a former restaurant into meeting space at the Westin New York Grand Central. 
    • Acquisition related Capex:  $15MM. During the first quarter, the Company completed the renovation of all 888 guest rooms at the Grand Hyatt Washington and continued work on the guestrooms renovation in the second tower of the Manchester Grand Hyatt San Diego. 
    • Maintenance: $87MM.  During the quarter, major renewal and replacement projects included rooms renovations at the Philadelphia Airport Marriott, the San Francisco Marriott Marquis and the San Diego Marriott Mission Valley, as well as the renovation of almost 40,000 square feet of meeting and public space at The Ritz-Carlton, Tysons Corner and over 36,000 square feet of meeting space at the Westin Denver Downtown. 
  • In early April, the Company sold approximately four acres of excess land adjacent to its Newport Beach Marriott Resort and Spa to a luxury home builder for $24 million. The land, which had previously been used for tennis courts, has been approved for the development and sale of 79 luxury condominiums. The Company recognized a gain of approximately $21 million, which will be included in net income, Adjusted EBITDA and Adjusted FFO in the second quarter of this year.
  • Balance sheet items in 1Q13:
    • Issued its first investment grade senior notes in a $400 million offering of 10-year bonds at an interest rate of 3.75%, which is 100 basis points lower than any non-convertible bond coupon in the history of the Company. The bonds mature in October of 2023. The proceeds of the offering, along with available cash, will be used to redeem on May 15, the $400 million of 9% Series T senior notes due 2017 at 104.5%, which reflects an $18 million call premium. The annual interest savings are $21 million per year. 
    • Called the remaining $175 million of 2004 exchangeable debentures for redemption and holders of approximately $174 million of the debentures elected to exchange their debentures for shares of the Company's common stock totaling approximately 11.7 million shares, rather than receive the cash redemption proceeds, while the remaining $1 million of debentures were redeemed for cash. These shares have been included in our dilutive share count when determining our full year NAREIT and Adjusted FFO per diluted share for the past few years.
    • Issued 6.1 million shares of common stock, at an average price of $16.78 per share, for net proceeds of approximately $102 million. These issuances were made in "at-the-market" offerings pursuant to Sales Agency Financing Agreements with BNY Mellon Capital Markets, LLC and Scotia Capital (USA) Inc. There is approximately $198 million of issuance capacity remaining under the current agreements.
  • Subsequent to the end of the quarter, the Company repaid the 4.75%, $246 million mortgage loan on the Orlando World Center Marriott with available cash. The Company also called $200 million of its 6.75% Series Q senior notes due 2016 at 101.125%, which reflects a $2 million call premium. The redemption will be funded through a $150 million draw on the revolver portion of its credit facility and with available cash. After adjusting for these transactions, including the redemption of the Series T senior notes, the Company will have approximately $380 million of cash and cash equivalents, $692 million of available capacity under its credit facility and approximately $4.8 billion of debt.
  • The Company's weighted average debt maturity is 5.8 years and its annual cash interest expense will be approximately $230 million. 

Bullish Enough? SP500 Levels, Refreshed

Takeaway: It’s a bull market. And consensus is nowhere near Bullish Enough.



Fundamentally, the most important data point this week was yesterday’s jobless claims report of 324,000. Our non-consensus bull case for US Equities continues to get more bullish as the market is rising. Weird, but cool.


Across our core risk management durations, here are the levels that matter to me most:


  1. Immediate-term TRADE overbought = 1626
  2. Immediate-term TRADE support = 1590
  3. Intermediate-term TREND support = 1520


In other words, our model is now consistently signaling higher (all-time) highs of resistance and higher-lows of support. It’s a bull market. And consensus is nowhere near Bullish Enough.


Enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Bullish Enough? SP500 Levels, Refreshed - SPX

Can The Dollar Continue Its Bull Run?

The US dollar is on a tear and is helping the US economy grow through consumption. Remember that Strong Dollar = Strong America. Lower commodity prices are a boon for the American consumer. With the PowerShares DB US Dollar Index Bullish ETF (UUP) up +2.25% year-to-date, there's plenty of room for the dollar to head higher.


Can The Dollar Continue Its Bull Run? - uup ytd

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NWL – Q1 Flattered by Tax Rate, Q2 and Q3 Likely Need to Come Down

NWL is on the tape this morning, and the quarter is decidedly unimpressive despite the optics of the better than consensus EPS result.  Adjusted “core” sales grew 2.5%, right smack in line with the company’s annual guidance, but you have to torture the numbers a bit to get there.  EPS was flattered by a lower tax rate, and the company changed the pacing of the quarterly EPS progression, so less Q2 and Q3 and more Q4.

What we liked:

  • Beating consensus is better than the alternative
  • Maintained full-year EPS guidance despite the dilutive ($0.03 per share) sale of assets
  • Sale of underperforming businesses (Bulldog, Ashland, Amerock, etc.) should be accretive to margins as well as the company’s revenue growth profile (60 bps accretive to top line based on the last three years and 40 bps accretive to EBIT margin)
  • Strategic spending behind the brands set to accelerate sequentially through 2013

What we didn’t like:

  • In Q1 2012, the company called out the timing shift of $28 million in sales associated with the European SAP conversion (pulled forward from Q2 into Q1).  This quarter, the company “normalized” the Q1 2012 income statement for SAP, rather than simply calling out the tougher sales comp.  It appears to us the company got the “benefit” of higher EPS last year, and this year wants to flatter the year over income statement comparisons by normalizing EPS.  It isn’t sitting right with us.
  • Lower tax rate (16.5%) versus our model added approximately $0.04 to earnings in the quarter
  • Company benefitted from lower advertising spend in the quarter due to period of management transition
  • Accounts receivable jumped 8.4% in the quarter
  • FCF declined substantially despite lower capital spending in the quarter
  • Writing business to suffer from consolidation of the U.S. office superstore channel (“overhang on the U.S. Writing business for some time to come”).  The company was asked about this specifically at CAGNY and stated it wouldn’t be a factor – it appears to be now.
  • Guided down Q2 and Q3 (“normalized EPS will be much more evenly distributed across the remaining three quarters of the year then it has been in past years”) – this implies a lower Q2 and Q3 and a higher Q4 – have to watch consensus here.

Our expectations were modest for the quarter, and the company managed to slide in under them, but there wasn’t anything in the quarter sufficient to move us off our decidedly positive view on the name.  We can still see a path to $1.80 per share in FCF over time and a stock price that more appropriately reflects the average staples multiple of FCF (15-20x).


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Tech: Back In Action

Technology (XLK) moved back into bullish formation today after being dragged down in large part by Apple (AAPL) over the past few months. It's only up +8.0% year-to-date, compared with the S&P 500 and Healthcare (XLV), which are up +13.4% and 19.8%, respectively. Still, the switch back into bullish formation is a welcome surprise for investors. After today's non-farm payroll numbers, the market is soaring like nobody's business and taking XLK along for the ride.


Tech: Back In Action - XLKtechytd

Will We See 6.5% Unemployment in 2013?

Takeaway: Editor's Note: No one saw a 6-handle move in the unemployment rate coming back in January except us. Here's our highlight from January 23rd.

This note was originally published January 23, 2013 at 14:05 in Macro

As global macro data continues to confirm that growth is stabilizing, we’ve been discussing the possibility of seeing a 6-handle in the unemployment rate in 2013.   With Bernanke offering an explicit employment target of 6.5% for a cessation in QE initiatives, a significant decline in unemployment over the NTM may augur higher yields as the bond market attempts to front-run a prospective Fed exit.  


With market expectations for rates likely to follow the slope in unemployment rather than the actual realization of a 6.5% unemployment rate, we attempted to put some math around how the principal variables driving the Unemployment rate would have to trend for Unemployment to breach the 7% threshold over the next twelve months.  Below we include a quick review of the variables driving the unemployment rate, the summary conclusions, and some other considerations as it relates to the go forward dynamics likely to directionally impact unemployment.   


Of course, Bernanke could effectively hold the exit timeline hostage by again changing the rules mid-game and attaching conditions that a the sub-6.5% unemployment rate be accompanied by a “normalized Labor Force Participation Rate” or a “sustained, negligible output gap”.  We’ve ignored this potentiality here as its largely unmodelable and because the bond market could well move ahead of the Federal Reserve realizing their growth forecast batting average isn’t going to improve from 0%.  


Note that rather than attempting to provide an explicit year-end or 7% unemployment target date, the broader goal of this risk management exercise is to frame up the variable dynamics and quantify the magnitude of change in the relevant unemployment rate drivers necessary to take unemployment below 7.0% and towards 6.5% over the NTM.  Certainly, any number of variable assumptions and scenario iterations can be contemplated.  If you’d like to observe the impact of your own growth and participation rate assumptions on the unemployment rate timeline you can link to the associated model here >> Unemployment Rate Variable Analysis_HEDGEYE



UNEMPLOYMENT 101 - THE VARIABLES:  Below is a summary review of the variables that drive the unemployment rate.  Here, we’ve broken them down into the Input and the Dependent variables based on how we model them.   


Independent/Input Variable Description:

  1. Civilian Non-institutional Population Growth (CNP): The CNP represents persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions, such as penal and mental facilities, and homes for the aged, and who are not on active duty in the Armed Forces.
  2. Employment Growth:  Growth in Employed workers as measured by the BLS Household (CPS) Survey.
  3. Labor Force Participation Rate (LFPR):  Represents the Civilian labor Force as a percentage of the Civilian Non-institutional Population.  Equal to the sum of employed & unemployed workers. 


Dependent Variables:

4. Total Labor Force:  The Civilian Labor force is a product of the Civilian Non-institutional Population & the labor force participation rate

5. Unemployed Workers:   The total number of unemployed workers is the difference between the Labor Force and total employed workers. 


Unemployment Rate = the number of unemployed workers as a % of the Total Labor Force (i.e. the sum of employed and unemployed workers)


So, assumptions need to be made for the growth in the Civilian Non-institutional Population (CNP),  growth in the number of Employed Workers and the Labor Force Participation Rate (LFPR).  The Total Labor Force and the Total Number of Unemployed become a function of the three input variables and the direction in the unemployment rate is determined by the participation rate and the delta between CNP growth and growth in the employed.    



The CONCLUSION:  Can we get 2 out of 3?

In the chart below we provide a timeline view of the 2013 Unemployment Rate under a selection of scenarios.  Obviously, any number of iterations can be envisaged with respect to growth rates and interaction between the principle drivers of the unemployment rate but, in general, 2 of the 3 variables need to trend positively with respect to the unemployment rate for a move to 7% and below to be a 2013 event.  


It’s notable that the NTM moves don’t have to be extraordinary for this to occur.  For example, scenarios in which Employment growth accelerates 30bps (2Y basis) on average in 2013 and CNP growth declines linearly to the historical average over the NTM or the Labor Force Participation rate continues to decline at the 3Y CAGR both result in a move to/below the 7% unemployment level in 4Q13. 


If, however, positive acceleration occurs in just a single variable while the other two flat-line or trend negatively, the timeline for <7.0% unemployment extends significantly.  For example, if employment accelerates 50bps (2Y basis) on average in 2013 while Labor force participation remains static at the current level and CNP growth holds at the current rate, the implied unemployment rate would reach a 2013 low of 7.3% in December. 


In terms of thinking about the directional trend in the relevant variables – with housing continuing to accelerate, the domestic jobs data continuing to trend positively and our #growthstabilzing theme extending itself, we could make a credible case for seeing a modest acceleration in employment growth.  Given that growth in the civilian non-institutional population generally tracks population growth in the 16YOA+ cohort over the longer term and that volatility in active duty military status should be more subdued going forward, the assumption that CNP growth decelerates towards population growth probably represents the baseline case. 


The Labor Force participation rate, and the structural and behavorial psychology dynamics underpinning it, remains the largest wildcard.   The consensus logic goes that in a typical recovery, economic growth and employment growth drive renewed worker interest in employment in a reflexive fashion.  Discouraged workers, who are not currently seeking employment and are not included in the Labor force totals, again begin to actively seek employment.  To the extent that growth in workers coming back to actively look for work outpaces actual employment gains, the unemployment rate is negatively impacted despite the improved economic conditions/outlook.  Here, the transient increase in the unemployment rate would belie a positive economic inflection.


The current situation is complicated by the fact  that despite the ongoing, albeit tepid employment recovery, the resurgence in job seeking, which typifies the back end of business cycle slowdowns, has yet to materialize and the LFPR continues to slide.  Whether this behavioral dynamic continues and to the extent that structural unemployment/length of unemployment is a contributing factor remains an unknown.    Also unknown is the extent to which protracted fiscal policy uncertainty (Health Law, Fiscal Cliff, Budget Control Act/Sequestration, etc) has dragged on employer hiring decisions.  Regardless of the outstanding questions, labor force participation will continue as the real wild-card variable to watch relative to its impact on the unemployment rate.


Will We See 6.5% Unemployment in 2013? - Unemployment Scenario Analysis


Will We See 6.5% Unemployment in 2013? - 16YOA Population Growth


Other Considerations:

  • Annual Benchmark Revision:  the Census Bureau applies an annual population control adjustment to the Civilian Non-institutional Population alongside the January release every year.  Historically, the magnitude of the January adjustment has ranged from tens to hundreds of thousands or even millions of individuals.  An outsized revision to the January 2013 data could shift the unemployment variable dynamics from their current trend.
  • Employment – Growth Connection:  The historical frequency distribution for Employment and growth suggests we’d need to see #growthstabilizing transition to growth accelerating for a concurrent acceleration in employment to manifest.  While employment growth could run ahead of economic growth at the onset of a recovery, historically, employment growth >2% is typically associated with real GDP growth north of 3%.  We show the historical relationship between real GDP Growth  and y/y employment growth as measured by the BLS’s Household Survey below. 
  • Energy/Commodity Inflation:  In our 1Q13 themes call we highlighted the top 3 risks to #growthstabilizing as 1. Rising Oil Prices 2. Japan & 3. Earnings Slowing.  As it relates to risk #1 - as of this morning, both Brent and WTIC have re-captured their respective long-term TAIL risk lines of $92.04 and $111.48 support.  A continued reflation in oil and commodity prices broadly represents a real time tax on consumers, an input cost related margin drag on business, and a material headwind to growth accelerating from here.  


Will We See 6.5% Unemployment in 2013? - Employmet vs GDP Growth


Will We See 6.5% Unemployment in 2013? - Employmet vs GDP Frequency Distribution


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