Solid quarter driven by systems (how much was recurring?) but cracks emerging in gaming ops and product sales.




  • Game sales: 3,213 in NA of which 2,182 units were replacements 
  • International sales were down partly due to importation restrictions into Argentina offset by increased sales in Mexico
  • ASP continued to be impacted by lower priced VGT units and mix to lower price jurisdictions internationally like Mexico
  • Gaming operations: NY lottery market was very strong 
  • Centrally determined system units declined due to removal of certain licensed fees in Mexico
  • Systems:  was slightly ahead of their expectations. 
  • Expect Systems margin of 75% for full year 2014
  • Effective income tax rate was lower due to a settlement with the IRS from an audit of their financials of 2006-2009
  • Received an additional 27k shares as part of their ABB program
  • MJ - want to be starting something and Jackpot Empire were released in the first Q
  • Based on their current release schedule, they do not expect their WAP install base to grow QoQ in 2Q but do expect growth to resume in 2H14
  • Lots of rave reviews around ProWAVE cabinet.  It will start shipping in early 2014. They believe that the fact that most of their game library will be available on day 1 will be huge for them.
  • Expect systems revenue to grow at least 10% YoY in FY14
  • Super Slot Line product drastically reduces the cost of upgrading casino floors. This will allow them to sell a lot more of their system applications.
  • Interactive - continue to expand their presence in Europe.  Both as a content and technology provider they are well positioned in the US. Expect to go live in NJ & NV.
  • They will be able to offer their customers a single view of their customer - which is a key point of differentiation for them
  • Have received gaming approvals in 14 of the 20 jurisdications needed for closing
  • Kevin's assumption of the acquisition integration frees up management to focus on running their business
  • 1Q results came in slightly ahead of their expectations. Now expect that quarterly diluted EPS will now be more equally weighted across the remaining Q's.
  • Their guidance does not include the 9 cent favorable tax settlement with the IRS in this first Q
  • They are confident that they will see meaningful growth resume in their gaming operations business in the 2H14


  • Customer feedback from the ProWAVE cabinet and they expect to see sales in F3Q.  They don't think that ASPs will increase greatly when they release the cabinet.  They don't expect margins to be impacted by the new cabinet - they are just charging a higher ASP so they don't expect a hit.
  • Flat to slow growth in gaming operations install base - not a decline
  • International game sales fell short of expectations. It's not where they want to be. They have been working hard to developing game content that appeals to international jurisdictions. Feel like that effort is beginning to bear fruit but they are not yet there...content is getting better so sales should follow. Hoped that they would be getting a few more games into Argentina but that didn't happen. Believe that SHFL will help them
  • Updates on synergy guidance - early close will save them about $18MM of expenses. Still think it will be at least $30MM.
  • Thinks that WAP yields will continue to improve. They are positive about the yield improvements in the future
  • Takeaway from G2E was that they need to stay on their toes with R&D and innovation
  • Haven't seen any real competitive pressures in the Q. Expect 2Q to be equal or greater than Q1. Still feel like they are getting more than their fair share of the IL market.
  • NASCAR took yields down a touch this Q
  • Game sale ASPs - domestically, prices are more or less holding up the same as before. Given that NA sales aren't a huge part of their business, they have been able to maintain price more so than competitors.  ASPs were hurt by more sales to Mexico in the Q.
  • Regulatory changes in Mexico - don't believe that that will have an impact on them. Most of the changes are really attacking grey area single machine locations and skill based games.
  • Biggest drop was more of conversion to sale of non-premium games. With regards to their premium footprint it remains quite healthy. 
  • They are investing a lot more R&D in the WAP and daily fee segment going forward. Pawn Stars is doing great. Have a lot of good content coming in the premium daily fee segment.



  • The Company increased its fiscal 2014 guidance for Diluted EPS to a range of $3.80 to $4.10 and now expects that quarterly Diluted EPS will be fairly equally weighted during fiscal 2014. This guidance does not reflect the impact of the planned acquisition of SHFL entertainment or any acquisition-related costs or savings or the effect of the favorable tax settlement realized during the first quarter of fiscal 2014.
  • The acquisition is expected to close prior to the end of this calendar year. The completion of the SHFL entertainment acquisition remains subject to SHFL shareholder approval, the approval of certain gaming regulatory authorities, and other customary closing conditions.
  • "We showcased seven new wide-area progressive (“WAP”) titles at last month’s Global Gaming Expo (“G2E”), up from three new titles shown last year, reflecting our escalating R&D commitment to our gaming operations footprint. Customer response to our new WAP, premium, and for-sale content, as well as to our new Pro Wave cabinet, which was one of the stars of the show, was very encouraging.”
  • “Operating margins increased to 25 percent when excluding costs related to the planned acquisition of SHFL entertainment, which marks our highest quarterly level in more than three years"
  • “Revenues that are recurring in nature were a quarterly record and represented 57 percent of total revenues driven by a first-quarter record in WAP revenue and quarterly records in systems maintenance and services revenues."
  • "During August, we amended our existing credit facility and successfully syndicated our new $1.1 billion Term Loan B with an all-in yield of 4.375 percent. The planned acquisition of SHFL entertainment will be funded with proceeds from the Term Loan B and excess capacity on our existing Revolving Credit Facility, which had $505 million undrawn as of September 30, 2013.”
  • Gaming equipment: 3,995 new units / ASP: $16,307
    • 20% international 
    • 456 IL VLTs
    • ASP of new gaming devices decreased 3 percent to $16,307 per unit from $16,853 last year, primarily as a result of lower ASP’s in certain international jurisdictions
    • Gross margin increased to 50% from 47% last year, due to continued cost reductions on the Pro Series line of cabinets and sales mix.
  • Gaming operations: Gross margin increased to 70% from 69% last year, primarily due to lower jackpot expense
  • Systems: 
    • Maintenance revenues of $25MM. 
    • Gross margin decreased to 75%, primarily as a result of the change in product mix. Specifically, hardware sales were 30% of systems revenues, and software and service sales were 37%, as compared to 26% for hardware and 34% for software and services in the same period last year.
  • SG&A increased to 29% of total revenues as compared with 27% last year, primarily driven by $5 million of costs associated with the planned acquisition of SHFL entertainment.
  • In connection with the pending acquisition of SHFL entertainment, the Company incurred professional and other fees totaling approximately $5.2 million during the first quarter of fiscal 2014, with additional acquisition-related fees and expenses anticipated to be incurred throughout the balance of fiscal 2014.


Takeaway: Current street estimates remain disconnected from reality.

Editor's note: Hedgeye Restaurants Sector Head Howard Penney continues to bang the "Dismantle Darden Drum." Here is a complimentary excerpt from his latest research note and a link to video interview.




We believe we’ve been very clear on how this will end for Darden (DRI), we just don’t know the timing.  As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends.  We can summarize the current trends in two words – not well!


The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career.  His ability, or inability, to handle the current pressure should help shed light on the timing of future events.


On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results.  In our view, current street estimates remain disconnected from reality.  The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.  


Below, we share incremental thoughts on DRI’s fundamentals.

  • The 2nd quarter is traditionally the lowest for the company, seasonally.
  • Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
  • Same-restaurant sales trends have been disappointing so far.
  • DRI has not introduced any new promotional items and still has the promotional items that have not been working.
  • There is no cohesive plan to fix the crown jewel – Olive Garden.



We believe we’ve been very clear on how this will end for DRI, we just don’t know the timing.  As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends.  We can summarize the current trends in two words – not well!

The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career.  His ability, or inability, to handle the current pressure should help shed light on the timing of future events.


On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results.  In our view, current street estimates remain disconnected from reality.  The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.  


Below, we share incremental thoughts on DRI’s fundamentals.

  • The 2nd quarter is traditionally the lowest for the company, seasonally.
  • Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
  • Same-restaurant sales trends have been disappointing so far.
  • DRI has not introduced any new promotional items and still has the promotional items that have not been working.
  • There is no cohesive plan to fix the crown jewel – Olive Garden.


Sales Trends

For the year, Darden is still guiding to sales growth of +6-8% and blended same-restaurant sales growth for the Big 3 to be +0-2% -- this is after the company reported -2.3% blended same-restaurant sales growth in FY1Q14.  The current consensus estimate for blended same-restaurant sales growth in FY2Q14 is +0.6%.  Given anemic casual dining trends and DRI’s lack of a cohesive strategy to fix the core business, we believe these estimates may be off by 1-2%.







Food Costs – Seafood Inflation Acceleration

Management Commentary on the FY4Q13 Earnings Call – June 2013

“In terms of specific food categories and items, total seafood prices for fiscal 2014 are expected to be higher than fiscal 2013, because of the shrimp supply disruptions.”


Management Commentary on the FY1Q14 Earnings Call – September 2013

“Seafood inflation was normal in [FY1Q14], but we now expect double-digit inflation in the second, third, and fourth quarters, primarily related to the shrimp production issues in Asia.  The source of the problem has been identified, but getting solutions in place is taking a little longer than we expected when we spoke to you in June.”


As you can see, management was not prepared for the spike in shrimp costs back in June.  Fast forward to September, and management finally realized there is going to be a significant increase in shrimp costs.  Red Lobster is currently promoting Endless Shrimp Tuesday’s, which is very likely to pressure margins in the quarter.





Labor Cost Deleverage

Current consensus estimates are for labor costs to increase +30 bps y/y in the quarter, after increasing over +100 bps y/y in each of the last three quarters.  In FY1Q14, restaurant labor expenses were +100 bps higher due to lower average wage inflation, reduced productivity and sales deleverage at Olive Garden and Red Lobster.  Given the current sales trends, we do not see how the trends in FY2Q14 are going to improve sequentially.


DRI: PENDING FY2Q14 DISASTER? - labor costs



Other Expenses

Other restaurant expenses have been up significantly (+100 bps on average) for the past four quarters, due to the acquisition of Yard House and other reasons.  Currently, street estimates are for other expenses to increase +10 bps y/y in FY2Q14.  In our opinion, this estimate does not fully account for a large enough impact from sales deleveraging at Olive Garden and Red Lobster.


DRI: PENDING FY2Q14 DISASTER? - other expenses



G&A – The Wild Card

In an effort to cut some fat from the company cost structure, we are expecting to see approximately a $7 million (net) expense associated with G&A cuts in FY2Q14.




Howard Penney

Managing Director




Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Key takeaways were better group bookings and a much improved asset transactions market.



"In the third quarter, positive demand trends in the U.S., among both transient and group guests, were accompanied by challenges in certain international markets, including China and India. We continue to be focused on growing fees and increasing margins while pursuing additional growth opportunities." 


- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation



  • Pace of openings has accelerated this year. 
  • Andaz Maui: first new resort on Maui in over a decade. The property also has villas which will be sold to buyers over time. 2 of the 12 villas are already under contract. Expect that the resort will ramp up over the next year or 2.
  • Hyatt Regency Orlando: largest single property acquisition in the company's history. It's adjacent to the convention center, which is the second largest convention center in the country.  Years ago they purchased 40 acres of land adjacent to the convention center but never developed the land because of construction costs rising.  Feel like they can add value by adding smaller corporate groups and transient travel through their system.  They are already doing that.  They feel like they have turned away plenty of Orlando group business to make them confident that they can fill this hotel.
    • $10MM of EBITDA in the 4Q of 2013.  Historically this hotel earns 2/3rd of its EBITDA in the first half of the year
    • Acquired for below replacement cost
  • Made a significant investment in Playa hotels during the 3rd Q. Expect to earn between $18-20MM of EBITDA from this JV in 2014
  • M&A: Over the last 6 months they accelerated their asset disposal activity. Sold for an average of 5% on trailing NOI. They don't have any hotels listed by brokers but do expect to sell additional hotels over then next year and are in discussions with various interested parties.
  • Didn't purchase a lot of stock in 3Q because of transaction activity
  • Benefits from strong RevPAR growth in San Fran and Maui and completed renovation in San Diego 
  • Group revenue benefited from strength in Atlanta and Anaheim
  • China RevPAR declined 3.5%
  • UK had a 15% RevPAR decline, excluding this market RevPAR would have been up 5% in this region EMEA/SW. Asia
  • ME was strong
  • Overall EBITDA was negatively impacted by: 1) transaction activity by a net $5MM and also negatively impacted unconsolidated JV EBITDA by $2MM; 2) Maui ramp up/pre-opening costs were $3MM 3) lower incentive fees
  • Lease termination fee benefited NA owned and leased margins y 50bps but was offset by higher rent/property expenses which negatively impacted NA margins by 80bps
  • Converted 4 hotels in France this year but higher unexpected wage and benefit costs negatively impacted them
  • Margin growth is likely to be modest due to higher property taxes and rent expense costs and will ease in 2Q14
  • Group production increased 9% in the quarter. Group pace for 2014 is now up in the low single digit range. 


  • Really pleased in RevPAR trends in the Q and results were good when you take into account the $10MM impact. Americas performance was positive. SG&A was well managed. Pre-opening at Wailea was much higher than they expected.
  • Incentive management fees for the French hotels was lower than expected
  • Rent expense and property taxes were higher than they expected
  • Had an $8MM gain in relation to the gain from sales of residences in Maui 
  • Disruptive activities in Grand Hyatt HK and 4 French hotels
  • Atlanta: cautioned about challenging prospective results over the coming year. Still believe that due to the calender, 2014 will be challenging in Atlanta.  This quarter was very good though. 
  • Hawaii, Dallas and San Fran were particularly strong in the Q.
  • Don't see a major impact from the government shutdown in 4Q.  It's in the low million range so far.
  • Group business update: 
    • Group pace is up in the low single digit
    • 60% is on the books in 2014 today
    • Production in the Q for the Q was also strong
    • Feel better about group than a Q ago
  • Southern China was quite strong but North and Eastern China were quite challenged due to continuing effects of the austerity program. Feel like the austerity state is the new normal in China.
  • India - the market is quite disrupted. Rupee is under a lot of pressure - but benefited them bc more Indians stayed in the country. Feel like conditions are starting stabilize though.
  • Cash $800MM - excluding $400MM of restricted cash tied to hotels for sale through 1031 exchanges
  • Expect to continue to fund any buybacks with cash 
  • Sold: 6 full service hotels for about 15x TTM EBITDA. transaction activity should be neutral in 4Q, except with the addition of Peabody Orlando.
  • Unconsolidated JV EBITDA. Waikiki will continue to be a drag for the next few Qs
  • Playa Resorts:What kind of EBITDA do they expect? Expect to add 6 hotels from the Playa portfolio (out of 13) or 3,000 rooms to their managed portfolio. $18-20MM of EBITDA for next year. They did not recognize any EBITDA from Playa this Q due to some lag accounting. Expect $4-5MM to come through in the 4Q.  They also have renovations for the properties that have yet to be converted. 3Q is seasonally the weakest.
  • Peabody will not impact RevPAR since its not comparable - not until 2015. They did not draw on the revolver
  • Hyatt Regency New Orleans: No impact from the redemption of their preferred interest in that property. It was not in EBITDA as it was in the Other Income line.
  • Development expenses for new hotels are all included in SG&A
  • Don't see any unusual maintenance capex for 2014. 
  • They had over $800MM of cash plus received another $90MM from the redemption of their preferred interest
  • Guidance? They have been adding to clarity and detail in their disclosures. They have also been working on laying out how the company is expected to grow and evolve for Investor Day 2014.
  • Group business: Total production in the Q was strong - not just for in the Q for the Q production. Production for 2015 and further out association basis was stronger. The quarter was more driven by corporate vs. group business
  • Select service performance has really been superb. Relative to the US segment they are performing well. They look at market share as well within their markets. They are for the first time entering urban markets - big change for them. Up until now they have had no urban hotels. These new Urban openings are doing great.  That will also start to enhance the brand and enhance the absolute RevPAR levels (i.e. they will be a lot higher).
  • Overall M&A outlook:  Activity is up significantly. More capital chasing hotels. There is also a lot of momentum in performance in various markets. It will continue to be an attractive time for PE to be buying assets.
  • Still see plenty of opportunity to expand their presence in gateway cities and recycle repositioned assets as well as legacy assets
  • Park Hyatt is still supposed to open on time and on budget next year
  • Will continue to manage their buyback program in the same fashion that they have in the past. No comment on levels. 



  • Eleven hotels were opened. As of September 30, 2013, the Company's executed contract base consisted of approximately 215 hotels or approximately 50,000 rooms. . Our current base of executed contracts for new hotels is the largest it has ever been and represents approximately 40% of our current system size.
  • The Company repurchased 702,502 shares of common stock at a weighted average price of $41.28 per share, for an aggregate purchase price of approximately $29 million.  On October 29, 2013, the Company's Board of Directors authorized the repurchase of up to an additional $200 million of common stock.
  • "We have made significant investments in 2013 to position the Company for growth, including an investment in Playa Hotels & Resorts which will enable us to enter the rapidly growing all-inclusive resort segment and to debut two newly created brands, Hyatt Ziva and Hyatt Zilara. We expect to open the first two franchised resorts by year-end and anticipate that our investment in Playa and our entry into this segment will provide us with a compelling platform for growth."
  • Adjusted selling, general, and administrative expenses decreased 2.9% in the third quarter of 2013
  • M&A in 3Q:

    • Sold Andaz Napa (141 rooms) and Andaz Savannah (151 rooms) for an aggregate amount of approximately $115 million.
    • Sold Hyatt Regency Santa Clara (501 rooms) for approximately $93 million. The total sale price may increase to $100 million if certain performance thresholds are met.
    • Sold Hyatt Regency Denver Tech Center (451 rooms) for approximately $60 million.
    • Entered the all-inclusive resort segment by investing $325 million in a joint venture.
    • An unconsolidated hospitality venture sold the Hyatt Regency Waikiki. The Company received approximately $6 million for its equity interest and received a full repayment of a $277 million note receivable which matured in July 2013. The Company continues to manage the hotel under a long-term agreement.
  • Subsequent M&A
    • Completed the acquisition of The Peabody Orlando for approximately $717 million in cash and rebranded the hotel as Hyatt Regency Orlando.
    • Received approximately $89 million in cash related to its investment in Hyatt Regency New Orleans, of which approximately $63 million reflects a return of capital and approximately $26 million reflects a preferred return. The Company continues to manage, and also retains a residual interest in, the hotel.
  • 2013 Guidance update:
    • Adjusted SG&A: $310MM
    • Capex: $250MM (including $80MM of investment in new properties)
    • Investment spending: $1.2BN
    • D&A: $340MM
    • Interest expense: $70MM
    • Hotel openings: 45


  • Owned and leased Adjusted EBITDA increased 1.0% in the third quarter of 2013 compared to the same period in 2012 and was negatively impacted by approximately $5 million of portfolio changes related to dispositions, acquisitions and openings.
  • Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA decreased 27.8% in the third quarter of 2013 compared to the same period in 2012. The decrease was primarily due to portfolio changes related to openings and dispositions, including approximately $2 million related to the net impact of portfolio changes since the third quarter of 2012 and approximately $3 million related to pre-opening expenses and operating ramp-up at Andaz Maui at Wailea.
  • Comparable hotel revenue increased 5.8% in the third quarter of 2013 compared to the same period in 2012. Comparable hotel expenses increased 5.5% in the third quarter of 2013
  • Comparable owned and leased hotel operating margins in the Americas were negatively impacted by higher benefit costs, rent increases at two hotels and higher property taxes partially offset by a non-recurring lease termination fee.  Comparable owned and leased hotel operating margins in ASPAC and EAME/SW Asia were negatively impacted by weaker market conditions in Seoul and a difficult comparison in London due to the Summer Olympics last year.


  • Base management fees increased 10.8%.... primarily due to strong RevPAR performance in the Americas and newly converted hotels in EAME/SW Asia. 
  • Incentive management fees increased 11.1%... primarily driven by the contribution of newly converted hotels in EAME/SW Asia. Incentive management fees from newly converted hotels in EAME/SW Asia were approximately $3 million in the third quarter of 2013, which was below the Company's expectations. 
  • Franchise fees and other revenue increased 23.1%.... primarily due to new hotels and hotels recently converted from managed to franchised.
  • Group rooms revenue at comparable U.S. full service hotels increased 6.9%. Group room nights increased 3.8% and group ADR increased 3.0% in the third quarter of 2013
  • Transient rooms revenue at comparable U.S. full service hotels increased 8.7%. Transient room nights increased 4.4% and transient ADR increased 4.2%
  • ASPAC RevPAR was negatively impacted by weaker demand coupled with increased supply in China and revenue from management and franchise fees decreased 10.5%, while EBITDA for the segment remained flat
  • EMEA/SW Asia RevPAR was negatively impacted by lower demand levels in London.  Revenue from management and franchise fees increased 35.7%... primarily due to newly converted hotels. Adjusted EBITDA increased 120%


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




  • MIXED - Performance in the owned segment was worse than expected.  However, management provided a solid outlook driven by a much improved transactions market and strong group bookings for 2014/2015. 



  • BETTER:  Group revenue up 7% in 3Q (Atlanta/Anaheim outperformed).  Group pace for 2014 has increased to low single digit growth rate.  60% on the books for 2014, as expected by mgmt. In the quarter, for the quarter bookings was strong, primarily driven by corporate business.  2015 and beyond looking great due to association business.
    • Pace for 2014 bookings is roughly flat at this time.
    • Overall, over the short-term and consistent with what we stated last quarter, we expect group demand to continue to be positive but not as strong as transient demand.
    • Over the next 18 months, we expect Atlanta and Washington D.C. to continue to be challenging markets, while we expect others such as Chicago and Orlando to be stronger.


  • WORSE:  Incentive management fees for the French hotels were below mgmt expectations
    • Over the first 12 months, post conversion, we expect to earn €5 million of base fees and €5 million to €10 million of incentive fees from these hotels.  There will likely be sequential quarter-to-quarter volatility in incentive fees due to the structure of the agreements. In fact, we expect to earn most of the incentive fees in the second and third quarters during the high seasonal months for these hotels.
    • Because the annual guarantee is measured on a quarterly basis, we may be required to fund up to the guarantee level in a particular quarter, which could negatively impact incentive fees in such a quarter. Again, we're on track to earn €10 million to €15 million of total fees over the first 12 months of operations of these hotels.


  • SAME:  Strength in South China offset by weakness in North/East China.  Austerity program continued to weigh. 
    • Northern China has been the weakest year-to-date. Eastern China is next in line, and Southern China is actually relatively positive. It's somewhat positive in RevPAR. So what you see is a contraction of business. And I think one of the reasons why Northern China which includes Beijing, is relatively more negatively impacted, is that is because of the austerity program. And while we've seen RevPAR contract, I'm happy to report that we maintain comp set leadership in our hotels in Beijing. So I would say that while the overall story is somewhat challenging, our relative performance has been encouraging in terms of our maintenance of our number one position in our respective comp sets.
    • We continue to have confidence in the long-term prospects in China, but anticipate that this year will continue to be challenging.


  • SAME:  Net Impact of Dispositions to Owned and Leased Adjusted EBITDA (incl JV) was $10MM in 3Q. Hotel transactions impact for 4Q should be net neutral, with the exception of Hyatt Regency Orlando which will contribute $10MM.
  • PREVIOUSLY:  Hotel transactions are expected to negatively impact our owned and leased EBITDA in the second half of this year. Specifically, we benefited from acquisitions, such as the Hyatt Regency Mexico City and The Driskill, which mostly offset the impact of asset sales through our second quarter. During the second half of 2013, however, we expect the earnings from recently sold hotels to have a negative impact on reported results, net of acquisitions due to the timing of these transactions and seasonality.


  • WORSE:  RevPAR in London was down 15% due to Summer Olymphics comps.  Excluding London, EMEA/SW Asia REVPAR would have been up 5%.  Baku market continues to be challenged.
  • PREVIOUSLY:  Key owned hotels, particularly Baku and London are expected to have difficult comparisons in the third quarter. In Baku, we continue to face challenges related to significant increases in supply in this market. In London, our results last year benefited from the Diamond Jubilee, the Summer Olympics and the Farnborough Airshow. In London, we've grown market share year-to-date.


  • SAME:  No EBITDA contributions from Playa in 3Q.  $18-20MM JV adjusted EBITDA from Playa in 2014 (fluctuations by quarter due to seasonality and timing).  Hyatt expects to open the first two franchised resorts by year-end.  Hotel transactions pace has picked up recently and has remained high.   
    • During the third quarter, we expect to acquire an approximate 20% equity stake in Playa for $100 million, and purchase convertible preferred equity for $225 million. As to earnings associated with this transaction, in 2014, we would expect to earn in the range of $18 million to $20 million of EBITDA that will be reflected as JV EBITDA excluding franchise fees. We expect these earnings to grow over time as the resorts ramp-up, post renovations and re-branding.  I would say the second half of this year is probably quite modest (Playa contribution).
    • Our expected level of return on our investment is in the mid-teens percentage range, and represents a strong risk-weighted return. The minimum expected return on our convertible preferred equity investment is 10%, and we expect to achieve a higher return on our common equity investment. In addition to these returns, we expect to earn franchise fees from the six resorts that we plan to convert.
    • We believe the market continues to be healthy for transactions and have not seen any significant changes in buyer interest or pricing. And on the select service front, we have been, and I'll reiterate it again, we continue to be very active to look for potential deals and in some cases involving more than one or two properties. So bigger portfolio deals.


  • SAME:  Government sequester continue to have an adverse impact, however, government shutdown had no impact.
  • PREVIOUSLY:  Government remains weak.  We've seen a decline in room nights, and part of that is revenue management, and part of it is underlying demand. Group remains somewhat weak at this point as 2014 paces down a bit. In D.C., we own the Park Hyatt Washington, D.C. We manage the Grand Hyatt and the Hyatt Regency. Both of those hotels have had some renovation impact this year.


  • MIXED:  While share repurchases were lower sequentially in Q3, asset transactions were to blame.  On October 29, 2013, Hyatt's Board of Directors authorized the repurchase of up to an additional $200MM of common stock.  The Company currently has approximately $211 million remaining under its repurchase authorization.
  • PREVIOUSLY:  We will continue to evaluate it.

Top 10 Questions for Twitter

Takeaway: Our top questions for Twitter's management ahead of their highly-anticipated IPO.

This note was originally published October 30, 2013 at 11:53 in Macro

Top 10 Questions for Twitter  - twa

In advance of our Twitter black book call on November 6th (details to follow), we thought we'd circulate our top questions for Twitter management on their IPO roadshow.


The TWTR Top 10:


1.  How are you going to use the IPO proceeds? Can you outline how we should expect the proceeds to accelerate your growth?
2.  More than 77% of Twitter users are from outside the United States, but only 26% of your consolidated revenue comes from outside the United States -  Why is the yield on international users so much lower, and how will this trend over time? Are there structural impediments to revenue internationally?
 3.  Timeline views per monthly average user (MAU) declined sequentially by 1% in Q3 2013? Is this an indication of engagement declining, or is there another dynamic at work?
4.  How should we think about the market size for the total number of global users? Especially, vis-à-vis Facebook’s 1.15 billion monthly users as of Q2 2013?
5.  Generally speaking, why have some advertisers been early adopters and others taken longer to begin advertising on your platform? How do you show ROI to advertisers?
6.  How will the financial model look longer term?  As an example, Facebook currently has costs of sales that are 26% of Q2 2013 revenue and Twitter is at 36%.  Longer term, is there any reason that Twitter can’t have operating margins comparable to Facebook?
7.  Acquisitions have been an important part of your strategy historically, are there any areas in particular that you are focused, like analytics as an example?
8.  How do you view the competitive landscape? In particular, Google, LinkedIn, and Facebook appear to have low barriers to entry given their high user bases and, as we all know, before Facebook there was MySpace.
9.  According to a recent Gallup poll of people that have joined Twitter 36% said they don’t use the service and 7% have admitted to shutting down their account.  Meanwhile, only 7% of Facebook users don’t use their account and only 5% admitted to shutting down their account. What do you make of this poll and the implication on user engagement?  Along that line, how much time per week, or month, does the average user spend per month on the site?
10.  What are the most important metrics for the health of your business?

Bonus Question:  What keeps you up at night? 



Daryl G. Jones

Director of Research


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.