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OEH: THE LOWER THE EBITDA, THE HIGHER THE MULTIPLE!

OEH announced after the close that it sold the 109 room Lapa Palace in Lisbon for $41.8 million.  OEH deemed it important to identify the huge 22x EBITDA multiple of the transaction.  The property generated under $2 million in EBITDA.  Who cares what the multiple is?  On a per key basis, this palace sold for $383k per key, hardly a trophy value.  We had the property valued higher.


CONDO FINANCING VS HAWKING A LOOGIE

Apparently George Maloof (The Palms) has a solution to a weak condo market-self financing.  Speculation is that if The Palms is successful MGM may follow suit.  Well that sounds like a great idea - I wonder why no one has done that?  Oh wait, someone has thought of that - it's called Timeshare.  The difference is, in this version, the financing spread would likely be hugely negative and there would be a horrible duration mismatch with no securitization market. 

 

Maybe we're missing something, but last we checked the average Vegas operator's cost of borrowing is still around 10%, which is at least a few hundred basis north of the 30 year mortgage rate (even for Vegas condos).  Assuming $1000/month of maintenance charges on a $1MM purchase, any rate less than 8.3% would result in a negative carry on a 70% loan to value.  Then there's the whole issue of duration mismatch since the duration on the borrowings of most companies is less than 10 years while most mortgages have over a 20-year duration.  

 

Aside from perhaps an incremental 10% of equity from the buyers, we're not sure why financing condo sales makes any sense versus just putting them into the hotel rental pool.  Assuming $200 ADR, 75% occupancy and a 30% EBITDA margin, it seems like it would make a lot more sense to just rent out the rooms despite the probable cannibalization of existing room demand.

 

The other risk of providing 70%-80% financing is that operators will be left holding the bag on any pricing declines in excess of 20-30%, which is a reality given that many of these deals were struck at the peak of the market.

 

Looks like a pretty stiff wind to spit into.


Singapore: One more bullish data point for the Revisionists...

 

Positive data point from a very small, very strong economy ...

 

May PMI data released by the Singapore Institute of Purchasing & Materials Management showed a positive reading for the first time since August of last year, registering at 51.2 as orders flowing in from "The Client" showed no signs of abating.  Demand from China for consumer electronics were particularly pronounced, driving the electronic sub index to its second consecutive positive monthly reading of 52.9.

 

As an entrepot economy with the highest per capita GDP in Asia, Singapore has always served as a barometer of regional trade.  These latest figures are yet more support for our long China thesis and a reminder that Korea and Taiwan do not have a monopoly on Chinese demand for high margin consumer goods.

 

Andrew Barber

Director

 

Singapore: One more bullish data point for the Revisionists...  - sing


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The Bull Shark Chart: SP500 Levels, Refreshed...

 

We're getting a lot of questions today as to why we won't ride this perceived to be Bull into the land of perpetuity. The answer is basically because we don't think it's a Bull. We don't think it's a Bear yet either. We think it's a Bull Shark that we don't want to mess with, and we are very price sensitive.

 

For the past three months we have ostensibly picked up a few of the professional Bull riding fan base, but that wasn't our intention. To be clear, we were making the REFLATION call that Squeezy The Shark was going to expedite a short squeeze of generational proportions.

 

After a +40% trough-to-peak move, I'm establishing an intermediate term target that's only 5% higher than yesterday's close (at the 989 in the chart below), this is hardly the time to be pleading for me to be as bulled up about Squeezy as I was... been there, done that.

 

As the US Dollar broke down through the $80 line into the end of December, I got sucked into overstaying my welcome long US equities into mid-January. I have no need to replay that mistake all over again. January was a month where I was wrong, and I don't want to repeat the mistake of buying an overbought tape like that again here in June for the sake of pandering to a stale thesis.

 

Everything has a time and a price. I have an immediate term TRADE line of SP500 resistance that's formidable at the 955 line (dotted red) and if I see that print, I'll only see another 3.5% upside left from there. With the only support line of resistance all the way down at 910 (dotted) green, for now the best decision I can make is to do nothing and wait. Both the US currency and US Treasury market are in crisis - that will have unintended consequences.

 

Being in a YTD position to sit on performance and wait is reserved for those who didn't miss the last 3 months of performance. Chasing bulls is not what I do.

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Bull Shark Chart: SP500 Levels, Refreshed... - sp12


Restaurants – Ranking today’s Presentations

Given the environment, there was nothing earth shattering from any of these companies. It was notable that the tone was still one of caution.


Burt Vivian started the day off at 8am with his typical dour tone that we have become so accustomed to. He noted that there continues to be small steps of progress being made at the Pei Wei brand. Although the tone at the bistro is the same; weekdays suck (down double digit) with the weekend showing better trends, allowing the overall trend to be down mid single digits. Favorable cost trends remain a big tail wind for the company. Right now PFCB has a 36% short interest; I'm having a hard time seeing what the short story is on PFCB.


JACK presented next with very typical commentary on current business plans. The focus continues to be on the new platforms and refranchising. I'm actually becoming more favorably disposed to JACK as we head toward the back half of its fiscal year. JACK has the potential to end the year with a blockbuster FY4Q09. With Carl's Jr. lost in its premium product strategy, there is some market share for JACK to take in the California market, so sales trends should continue to show better trends as we finish the fiscal year. At the same time, commodity trends will continue to improve for the balance of this fiscal year, with commodity costs down 2% in FY4Q. With JACK trading at 5.5x EV/EBITDA and the group trading at 7.5x there appears to be at least $6-$12 of upside on accelerating business momentum.


CAKE was next with a very solid presentation. I really think Doug Benn adds a lot of credibility to the CAKE cost cutting story. With CAKE generating $90 million in FCF, which will go to reduce the debt on the balance sheet by $100 million, the focus is on cost cutting and the company ability to offset the MACRO environment. The real opportunity for CAKE is to get the average unit volumes back to $11 million from the current run rate of $9.8 million. Barring a big change in sales trends, the CAKE story is solid and with a 14% short interest there is risk to the upside.


SONC was more depressing. Over the past 12-months, the company raised the prices of its combo meals to the point where consumers are now buying more à la carte putting pressure on the average check. According to the company, the fix is to raise prices on the à la carte products to make the overpriced combo meals look better! How does that work? How did such a well run company get so screwed up? SONC has seemed to have lost its way in a very competitive QSR segment, and the short interest only stands at 10%.

 


Cry Baby

 

As many of you know, we have been consistently bearish of Billy Ackman's investment strategy on Target and the activist strategy more generally.

 

In fact on January 13th, 2009, we wrote the following:

 

"A primary reason we are negative on activist investing is that it typically includes an inability to sell easily due to large, and thus illiquid, positions in a Company's stock.  Additionally, being a "successful" activist often means becoming an insider by way of a Board seat.  The problem with this "success" is that it does not allow an investor to change their view, by way of selling stock, when the investment's prospects change.  The net result is what we call thesis drift, which occurs when your original thesis is no longer intact and you invent a new thesis to justify your investment."

 

Ackman's thesis on Target was the perfect example of thesis drift.  As Target's management acknowledged, "Bill Ackman is an idea machine."  Now ideas are cool and all, but if you are just wrong, either on timing or the investment, a new idea is not going to get the stock up and is merely indicative of thesis drift.  Now Billy manages more money than we do and probably has a higher net worth, but he has also reputedly managed two funds to 90%+ losses, the Target fund and his prior partnership, Gotham Partners.

 

That said, the loss on the investment is not really the worst part.  The embarrassing part is that Billy cried after losing the proxy battle for Target late last week. According to Joe Nocera from the New York Times:

 

"It was pretty startling when, in the middle of his speech to Target Corporation shareholders, William A. Ackman, the hedge fund manager who had waged an expensive, high-profile proxy fight against the company, suddenly choked up and stopped speaking, The New York Times's Joe Nocera writes in his Talking Business column.  Mr. Ackman, he notes, actually wiped away a tear."

 

Billy, if you want to be a big boy activist . . . don't cry.  The "boo hoo hoos" won't get your investors their money back.

 

Daryl G. Jones
Managing Director

 

 

 


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