Takeaway: Give thanks for the Fed as the U.S. Dollar gets devalued to year-to-date lows following yesterday's Q1 GDP disaster.
Superb start to 2014: strong group bookings, higher ADRs and improved F&B spend + higher transient ADRs = expanding operating margins and a strong outlook for several quarters.
- 2014 is off to a strong start - hotel demand continues to grow, particularly in our group business, allowing for increased ADRs across all segments.
- Solid group demand in Q1 drove exceptional growth in F&B
- Adjusted EBITDA for the quarter was $308 million. +8.8% YoY
- Strong results due to:
- RevPAR +6.8%
- Occupancy +1.5%
- Group business revenues +11% as demand increased by more than 6% and average rate improved by nearly 4.5%. All segments of group benefited from rate increases, and our corporate demand was up by more than 10%.
- While the calendar change of Easter to April clearly boosted group activity, we saw solid demand improvement throughout the quarter.
- Transient room nights were flat to 2013, but ADR +3.5% driven by both rate increases and positive mix shift especially in our higher price segments.
- Transient revenues +3.3%
- F&B and AV was +13.5% due to strong group activity
- Banquet - revenue per group room nights >5%
- Total F&B revenues +9.5% as catering activity was exceptionally strong in New York (Super Bowl) and West Coast hotels.
- Strong flow through resulted in adjusted operating profit margin expansion of the 120 basis points and comparable hotel adjusted operating profit growth of 12.5%
- Investment activity in Q1 saw the purchase of Powell Hotel in San Francisco for $75 million.
- Invested $6 million in ROI CapEx - completed the expansion of the Willow Stream Spa at Fairmont Kea Lani in Maui
- Invested $5 million in a series of energy conservation projects and the repositioning of the Cast & Plow Restaurant at the Ritz-Carlton Marina del Rey.
- Invested >$13 million in the Novotel, Ibis,
- Projects represent a total investment to date of approximately $105 million.
- Have a few assets currently on the market for sale and continue to pursue acquisitions given the difficulty in predicting the timing of completing these transactions - guidance does not assume the benefit of any transactions other than the ones we have already closed.
- The remainder of 2014: demand growth throughout the U.S. should continue to be strong; GDP growth and business investment trend positively for the full year, and international travel continues to demonstrate robust growth.
- Overall, occupancy in the portfolio is ahead of 2007 peak
- Expect group demand to remain strong throughout the remainder of the year
- Second quarter group activity will be lower, primarily because of the year-over-year Easter Holiday shift. O
- Booking pace for 2014 continues to be quite strong as revenues are up 5.5% compared to last year.
- ITQFTY: room night booked for the remainder of the year exceeded last year’s pace by more than 4%, with bookings for the month after April up nearly 10%. Approx 85% of our full-year expected group bookings on the books
- Comparable hotel RevPAR growth for the year will be between 5% and 6%.
- Expect comparable food and beverage revenue to increase 4% to 5%, which is a full point above prior estimate of the 3% to 4% increase.
- Margins - incremental profitability and strong flow through from ADR and group results in adjusted margin guidance to 70 basis points to 120 basis points for the full year.
Operating & Financial Performance
- West Coast RevPAR +14%, occ 450 ADR 700, expect continued out peformance
- SF RevPAR +25%, Group +15% while transient +8%, mix shift ADR +16%, expect hotels to continue to outperform for 2014
- Central & South RevPAR +250 bps, weak convention calendar and weather hindered Chicago; Florida less vacation travelers due to Easter shift; expect RevPAR to increase vs. Q1 and in-line with portfolio
- East Coast RevPAR +260 bps, Boston weak down 270 bps, WDC flat, NYC +420 bps. Boston weakness due to room renovations. WDC negatively impacted by YoY comp to 2013 inauguration - expect challenges to persist due to new competition. NYC - pursued group strategy for SuperBowl with NFL and Media also aided F&B uplift.
- International: constant $ RevPAR +10.3%.
- Lat Am RevPAR +21%, expect continued strong performance across Lat Am
- Asia/Pac RevPAR +8.2% strong group and transient, Oz transient rates +9% in Q1.
- European JV +2.8% in constant Euro; increased F&B at 11 of 18 assets.
- Costs: ex higher utilities operating margins +120 bps, F&B flow through 58.5%.
- RevPAR driven by ADR = strong flow through.
- 28% of full year EBITDA earned in Q2, therefore Q2 lwoer than 2013 because 1) sold land adjacent to Newport Beach 2) lost ebitda for assets sold 3) Hyatt Maui timeshare sales ($5M)
- Redeemed/repaid $675M of debt with available cash and ended Q1 with approx $392M of cash and $782M of capacity under the credit facility.
- Recovery of Group - seeing deeper trends to resort locations from gateway markets -- seeing growth across all markets, Q1 centered in NYC and West Coast. Seeing growth across price points. Catering contribution F&B per Group night up each of last two quarters, but increasing aggressively.
- Supply growth - mid 7% range in NYC in 2014 but strong 5% Group growth in NYC, likely struggle to generate ADR growth in NYC.
- Why transaction market so quiet - pricing working way higher, fundamental problem is view cycle has a long runway as such sellers have no interest to sell nor impetus to sell. Expect 2014 activity to be greater than 2013.
- International transactions - capital global moves to opportunities, Asia, Middle East, US, etc. Run into different investors in different markets, but sovereign wealth funds see consistently.
- Acquisition market - given capital availability by PE and leverage, looking at more non-core (International, non-branded, etc)? Looking internationally, would love to do more Palm San Francisco, some add'l limited service in certain markets, no plans for the Caribbean and would look to avoid Caribbean.
- Have teams focused on opportunities within global regions - each office focused on specific region.
- Development opportunities - when not make sense vs. cycle - market by market analysis. Repositionings still look good in most markets, new development limited, but select service development appears okay for now.
- F&B guidance - also include F&B revenue increase? View remainder of year based on Q1 results, also feel Q1 success portends better results for remainder of 2014.
- Given guidance of 21% EBITDA in Q1 and revised 2014 EBITDA guidance - how big was Q1 beat? $17M but also $3M insurance gain (was expected but not in Q1), so more like $14M.
- Holiday calendar shift in Q1 vs. Q2 - have not run analysis, but expect Q2 to be less strong vs. Q1.
- Balance of dividends vs. opportunity to purchase assets - what prevents higher dividend - expect as EBITDA increases, so should taxable increase and such dividend should also grow. Then what to do with FCF of $300M/year - acquisitions (property) or reinvestment in current portfolio. If unable to grow through investment, then return capital to shareholder.
- Brands with better/stronger RevPAR trajectory - no comment on brands within portfolio, ask the lodging operators.
- Why 2014 RevPAR guidance not increased based on Q1 strength - more comfortable after mid-point of the year, patient, but more comfortable in the higher end of the range for now.
- How/why outperform in WDC - better group strength in March as well as transient.
- Banquet/F&B per room vs. prior peak and trajectory -
- Seattle or Denver transactions - Seattle convention center
- Chicago trends - harsh winter in Q1 and remainder of 2014 not as strong of a convention year
- Renovations pipeline and benefit - relatively consistent levels of maintenance capex, not significant disruption which provide uplift.
- Gain on Sale - why so large and tax impact small is there a 1031 exchange plan. Philadelphia asset, gain baked into 2014 forecast and dividend.
- Pace ITQFTQ +19% vs. Q1 2013, ITYFTY +4% room nights for year but for May - Dec +10%
- Later Easter because stretched out spring break travel in Florida.
- What percentage of portfolio needs higher maintenance capex - very small deferred capex, consistent capex investment, accelerated capex in 2010 and 2011. Maybe six assets have some level of deferred capex but usually assets thinking about selling.
- $70-$80M of reinvestment in portfolio
- Group by month in Q1: Jan weakest; Feb slightly above 6%; March double digit growth%; April likely weaker than 2013
- Group vs. Transient mix: leave $ on the table but how weather impact? Yes weather impacted transient, but also transient rate was stronger 3.5% but increased transient business in lower priced markets while group was stronger in higher priced markets.
- Balance Sheet: V and Z notes - pre-payable, yes callable in 2016.
Takeaway: After a horrendous Q1 GDP print, shall we buy US growth in May and pray?
The US Dollar is on its knees (at year-to-date lows) following the massive 0.1% U.S. GDP miss. Incidentally, if all the so-called economic “weather experts” nailed the weather, why didn’t they nail this number?
Right now, it looks like both the currency and bond markets are front-running a Yellen “un-taper” in May. We shall soon see.
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YUM announced this morning that Chairman and CEO David Novak will become Executive Chairman on Jan. 1, 2015, transitioning from his current role. At this time, Greg Creed, Preisdent of Taco Bell, will become the next CEO of Yum! Brands.
Novak will then form the Office of the Chairman, which will include Sam Su (YUM Vice-Chairman and Chairman/CEO of the China Division) and Greg Creed. According to the press release, "This new Office of the Chairman will partner as a triumvirate on overall corporate strategy and leadership development to propel continued growth."
We will be hosting a conference call with Yum! Brands CFO Pat Grismer next week on Tuesday, May 6th at 11am EST.
Broadly speaking, we plan to hit on three key topics, including:
1. Succession planning
- Pending CEO Greg Creed
- Office of the Chairman
2. Taco Bell breakfast
- How is it progressing?
- What is the go-forward game plan?
- What are the important benchmarks?
3. China Division
- How is it progressing?
- What is the go-forward game plan?
- What are the important benchmarks?
Toll Free Number:
Direct Dial Number:
Conference Code: 551668#
Takeaway: We reiterate our call for continued consolidation in the “Abenomics Trade” with respect to the intermediate term.
Editor's Note: This research note was originally sent to subscribers on April 30, 2014 by Hedgeye Macro analyst Darius Dale. Follow Darius @HedgeyeDDale.
- We reiterate our call for continued consolidation in the “Abenomics Trade” (i.e. short JPY/long Japanese equities) with respect to the intermediate term. We continue to think both the fundamentals and the crowded nature of positioning in this trade warrant said consolidation.
- Specifically, our models call for Japanese economic growth to slow sharply here in 2Q (in line with official estimates), which should weigh on structural inflation expectations and risk appetite among Japanese investors – effectively underpinning a domestic bid for the JPY.
- Externally, we continue to pound the table on the non-consensus view we’ve held all year: accelerating inflation will slow domestic economic growth, at the margins, throughout the balance of 2014. Furthermore, we anticipate that this catalyst will result in decidedly easier monetary policy out of the Federal Reserve – which may manifest in particularly dovish forward rate guidance, or an outright “un-taper” by the mid-to-late summer. Refer to our 4/16 note titled, “10 Scary Charts on US Growth; 5 Not-So-Scary Charts on Chinese Growth” to review this thesis in more detail.
- The catalysts outlined in point #3 should continue to result in global selling pressure on the USD – which continues to careen to the downside as a leading indicator for this fundamental backdrop. That’s directly bullish for peer currencies, including the JPY; what’s bullish for the JPY continues to be bearish for the Japanese equity market given the tight inverse correlation that remains in place (YTD r² = 0.70).
- Long-term/low-turnover investors should continue to remain in the trade or remain on the sidelines in advance of what we anticipate will be far better entry prices on the short side of the JPY and long side of the Nikkei/TOPIX at some point over the intermediate term. When analyzed in the context of our forecasts for Japanese GDP and CPI, the BoJ’s downwardly revised growth forecasts and stagnant inflation forecasts at today’s non-event BoJ meeting lead us to believe that they are likely to expand their QQE program sometime in mid-to-late 3Q – well after it has become clear to consensus that the Yellen Fed isn’t the hawkish institution consensus currently assumes it is.
JAPAN GIP MODEL
US GIP MODEL
RECENT JAPANESE HIGH-FREQUENCY
Industrial Production trends cooling off:
Retail Sales pull-forward ahead of the April 1st consumption tax hike:
Manufacturing PMI tanking as Abenomics fails to deliver the necessary structural reforms that can sustain Japan’s economic recovery:
Consumer Confidence tanking as rising inflation takes a healthy bite out of the consumer’s wallet:
Business Confidence following suit as the consumption tax hike is spread throughout the supply chain:
Export growth mirroring the dollar/yen rate to some degree:
Import growth surprisingly cooling in the YTD, but ripping alongside global energy prices in the most recent month:
Inflation continues to accelerate and is poised to gap up as the consumption tax is largely passed on to consumers:
Real wages are feeling the pinch of stingy Japanese corporations and policies to tax & inflate out of Tokyo:
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Takeaway: YELP failed to show anything to detract us from our Short thesis. 1Q14 was fairly strong at face value, but a deeper dive says otherwise
- 1Q14 FAIRLY STRONG...AT FACE VALUE: YELP beat revenues by $1.5M, Showing relatively strong growth across all its major cohorts. Additionally, its "customer repeat rate" hit a new high
- UNDER THE HOOD: 1Q14 marks YELP's smallest top-line beat since 3Q12. 2Q Guidance calls for marked deceleration in revenue growth. More importantly, It's customer repeat rate is misleading, and is somewhat distorted. Net-net, new account growth is slowing, while its attrition rate is not improving.
- HEADS THEY LOSE, TAILS THEY LOSE: We expect YELP's attrition rate to accelerate alongside slowing new account growth in 2014. The 1Q print didn't show us anything to suggest otherwise. If not, it just creates a more challenging setup for 2015. The stronger 2014, the more bearish we become for 2015. See notes below for more detail.
1Q14 fairly STRONg...at face value
At face value, everything looked good.
- Revenues: YELP beat revenue estimates by 1.5M, ahead of its 1Q14 guidance by $2.5M at the midpoint. Raised 2014 Revenue Guidance by $10M at the midpoint.
- Active Customers: Ending Customers increased to 74K, up 64% y/y vs. 68% growth in 4Q13. Customer Retention rate accelerated to 75% (from 70% in 4Q13), marking a new high for YELP
- YELP Cohort Growth: YELP's legacy cohorts (2005-2006 & 2007-2008) continued its strong growth trajectory, only showing mild deceleration from 4Q13. The 2009-2010 cohort accelerated, while the later cohorts decelerated
UNDER THE HOOD
YELP's 1Q14 top-line results were not that impressive, beating consensus by 1.8%, its lowest level since 3Q12. It's 2Q guidance calls for a marked slowdown in revenue growth (56% at the high end of guidance vs. 66% in 1Q14). But more importantly, its operating metrics are somewhat misleading.
The customer repeat rate is not its retention rate. It's customer mix. This is how Yelp defines it,
"Our customer repeat rate, defined as the percentage of existing customers from which we recognize revenue in the immediately preceding 12-month period"
YELP hit an all-time high in its customer repeat (75%); that means that the
- Existing customers % of total is at a reported all-time high, and
- New customers % of total is at a reported all-time low.
Now, in terms of attrition rate, which we calculate using its stated "customer repeat rate" [customer mix], the rate did improve to 17.2% in 1Q14 vs. 17.7% in 4Q13. However, there is some distortion from the 2.2K Qype accounts that YELP migrated to its platform in 4Q13. In actuality, those are acquired accounts.
If we back those accounts out from both periods, the attrition rate held constant at 17.7%, so net-net, we haven't seen any material improvement in attrition.
In aggregate, when we break this down, 1Q14 results suggest that attrition is accelerating, while new account growth is flattening. We measure this on a per-market basis to net out the impact of geographic expansion, which only has a limited runway.
Each new market that YELP enters will have a lower TAM than than its current footprint, so breaking down these metrics on a per-market basis is a glimpse as to what YELP will be facing as they yield from geographic expansion continues to slow.
New Account growth on a per-market basis will eventually slow then decline. Attrition on a per-market basis will only intensify as its account base grows. It's nasty long-term setup that show no signs of abating.
HEADS THEY LOSE, TAILS THEY LOSE
We expect YELP's attrition rate to accelerate alongside slowing new account growth in 2014. The 1Q14 Release didn't show us anything to suggest otherwise
But what if it doesn't? Let's say that new account growth accelerates, and the attrition rate holds constant. All that does is create a more challenging setup for 2015. It's starting customer base [attrition pool] would be larger, and any strength in 2014 is essentially pulled froward from later periods given its limited TAM.
The stronger 2014 is, the more bearish we become in 2015. You can read more about our Short Thesis in the notes below.
If you have any questions, or would like to discuss further, let us know
Hesham Shaaban, CFA
YELP: The Sad Truth
04/28/14 01:49 PM EDT
YELP: Death of a Business Model
04/04/14 10:05 AM EDT