THE LEISURE LETTER (3/5/2014)

Big overhang for NCLH shares at the same time their pricing in the Caribbean remains iffy


EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES 

Wednesday, March 5

  • STAY – 7:30 a.m. Citi Global Property CEO Conference
  • LHO – 9:30 a.m. Citi Global Property CEO Conference
  • RHP – 10:10 a.m. Citi Global Property CEO Conference
  • FCH – 11:30 a.m. Citi Global Property CEO Conference
  • HT – 12:10 p.m. Citi Global Property CEO Conference
  • MAR – Mitsubishi Seattle Consumer Conference
  • BYD – 4Q13 earnings, AMC, 5 pm call

Thursday, March 6

  • Todd in Boston       

Friday, March 7

  • Employment Report for February 

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Monday, March 11

  • CZR 4Q 2013 conference call

Tuesday, March 12

  • MTN FY2Q 2014 conference call

Friday, March 14

  • Hyatt Investor Day

COMPANY NEWS

NCLH:  15m secondary,  Genting HK to sell entire RM7 bln stake in NCLH The Edge Malaysia

Genting HK Ltd has proposed to sell entire 31.35% stake (worth US$2.18bn) in NCLH.  Chairman and CEO Tan Sri Lim Kok Thay said the disposal was in line with group's strategy to unlock the value of its NCLH investment.  It plans to seek shareholder approval.  Lim said "whether the disposal is made in the open market at market price or through secondary public offering(s), the minimum selling price per remaining NCLH share shall not be less than US$19."  Star NCLC, Genting HK's wholly-owned unit sold 7.5m NCLH shares via a block trade yesterday. After the sale, Star NCLC will continue to own 56,819,334 NCLH shares or 27.7% of total outstanding shares.  Genting HK will use the proceeds for general working capital and/or to fund new investments.

Meanwhile, NCLH issued a 15m share secondary by selling shareholders, Star NCLC and Apollo Global Mgmt last night. 

Takeaway:  Genting HK may need capital to finance its Resorts World Vegas project. Any way you cut it, these stock sales are negative for NCLH.  Our cruise pricing survey suggests that Caribbean discounting continues.

IGT – announced a 40% floor share of games running on the newly installed IGT Advantage Systems at Dania Casino and Jai-Alai.  Dania Casino has 549 slot machines.  

 

Takeaway:  Another system install for IGT. Taking share back from BYI?

 

PENN – Judge Eliza Ovrom granted the city of Sioux City's request to intervene in the Argosy Sioux City riverboat casino's lawsuit against the Iowa Racing and Gaming Commission.  This ruling occurred after Argosy owner Penn National Gaming Co. last Friday voluntarily withdrew its motion opposing the city's intervention.  Judge Ovrom also canceled a hearing on the issue that had been scheduled for Friday in Des Moines.

Takeaway:  This legal dispute will culminate with final arguments on September 6, followed by rebuttal filings shortly thereafter and a hearing in November or December.  It is looking increasingly likely analysts will have to pull SC out of their 2015 estimates.

 

HOT – CEO, Frits Paasschen, speaking at the Citi Global Property CEO Conference indicated the most misunderstood aspect of the company is the attractive growth and cash flow characteristics of its asset light operating model. HOT’s EBITDA is >60% fee based today vs. ~25% six years ago. The long term goal remains 80% through continued asset sales and unit growth.

Takeaway:  While we wouldn't quite characterize it as misunderstood, we appreciate the asset light strategy. What we don't appreciate is HOT's under leveraged balance sheet.  With the transactions market continuing to improve, more asset sales are likely.  HOT ramped up it's return of capital to shareholders but there is a long way to go.  HOT remains our favorite lodging name.

 

HST – CEO, Ed Walter, speaking at the Citi Global Property CEO Conference said “equity issuance this year should be minimal in the absence of significant acquisition opportunities, as HST is approaching its leverage target of 3x.”

Takeaway:  This is welcome news as we’d like to see the positive earnings leverage to the lodging cycle flow to the bottom line without further equity dilution which occurred in prior up lodging cycles.

INDUSTRY NEWS

Black Sea season affected Cruise Industry News

Is the Black Sea cruise season in jeopardy? It might seem so as the three most popular ports, Odessa, Sevastopol and Yalta, are all in the Ukraine, and one happens to be the naval base that Russia’s Vladimir Putin is reportedly so concerned about.  Cruise lines have not yet announced any changes, but among the major operators, Costa and MSC, as well as Azamara and Crystal, have programs in the Black Sea this coming season.

Takeaway:  This could dampen the resurgence in Eastern Europe. So far, pricing remains steady.  

 

Downtown BR hotels get boost from Mardi Gras bookings Business Report

While New Orleans hotels have been full with Carnival revelers over the five-day Mardi Gras holiday, those visitors are not translating into spillover crowds in Baton Rouge hotels.  Nevertheless, officials at the city's growing number of downtown hotels say they have enjoyed some of their busiest weekends yet, thanks to local Mardi Gras festivities.   DDD Executive Director Davis Rhorer, "All the hotels were sold out last weekend. More importantly, several have had high occupancy rates in the 80% to 90% range over the past several months. That is very good news for downtown and quite high in the market." Citywide hotel occupancy rates in Baton Rouge typically average between 65% and 70% for any given month, which is slightly better than the national average but not as good as some local hotels would like it to be

Takeaway:  Good news for the Baton Rouge market.  PNK has the largest exposure to BR.

MACRO 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.