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ECB Opens Door For Rate Cut Next Month!

Draghi made some noise in this morning’s ECB conference call (and it wasn’t by keeping the main and deposit rates unchanged) – he strongly hinted that the ECB could cut the main rate in its next meeting in June, citing:

  • “The strengthening of the exchange rate with low inflation is a serious concern.” 
  • “ECB is not resigned to have inflation too low for a long amount of time.”

The EUR/USD, up ~ +0.5% heading into the Draghi comments, backed off hard following them. The cross is now flirting with a breakdown at our immediate term TRADE line of support @ $1.38 – we’d interpret that a breach of TREND support in the Euro and an associated breakout in the dollar would be cause for us to consider shifting our current positioning, but that’s not the case currently.  The USD is still broken in our model, so we’ll let the trade breathe for a bit here. The EUR/USD remains above our intermediate term TREND and longer term TAIL lines of support.

ECB Opens Door For Rate Cut Next Month! - vvv. eur


Today’s shift in tone demonstrates that Draghi is focused on weakening the Euro and stoking inflation. 


This position inflects from more recent meetings that focused on how the Bank was managing a “prolonged period of low inflation” that it believed would grind higher to its 2.0% target rate over the longer term. It also deviates from recent focus on devising lending programs to support the flow of credit to the “real” economy.


The June meeting will also include updated GDP and inflation projection from the ECB’s staff. This data, which will likely lean light on GDP and inflation vs previous projections in March, could further support a decision to cut the main interest rate.


For reference here are the March projections:

GDP Staff Projections:  1.2% in 2014; 1.5% in 2015; 1.8% in 2016

CPI Staff Projections:  1.0% in 2014; 1.3% in 2015, 1.5% in 2016


Draghi said today that there are downward risks to the region’s growth based on 1). a weakening global demand, 2). geopolitical risks,  and 3). the (high) exchange rate.

Nothing like a rate cut to influence what he most directly can, point #3, the exchange rate. 


Matthew Hedrick


VIDEO | Keith’s Rant of the Day: Ignore These Market Signals at Your Own Peril

*Make sure to watch this 1-minute video to the end. CEO Keith McCullough is in rare form and takes a hard look into current market internals and how to play the market.



Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




• Total revenues:  $2,366 million

• Adjusted EBITDA:  $490 million

• EPS:  $0.09/share



Q1 2014:

  • System-wide RevPAR:  4.5% to 6.5% - in the U.S. and UK, we expect the weather to marginally affect Q1 RevPAR growth. However, this should be somewhat offset by the lapping of the beginning of the U.S. government's sequester during the Q1 2013
  • Adjusted EBITDA:  $480-$500 million, including a 1x benefit of approximately $25 million from the reversal of an accrual related to the conversion of our prior cash-based long-term incentive compensation plan.
  • Management and franchise fees:  +10% to 12%
  • Diluted EPS:  $0.08 - $0.10

FY 2014

  • System-wide RevPAR:  5% to 7%,
    • 60% to 70% ADR driven.
    • between 0.5% and 1% of occupancy growth
  • Ownership segment RevPAR:  4.5% to 6.5%
  • Adjusted EBITDA:  $2,365-$2,435 million
  • Management and franchise fees:  +10% to +12%
  • Incentive Management Fees:  sort of in the 8% to 10% range
  • Timeshare Adjusted EBITDA:  $310-$325 million
  • Corporate and other segment expense: +3% to 5%%, including incremental public company costs.
  • Diluted EPS:  $0.57 - $0.61
  • Capital expenditures:  excluding timeshare inventory, total approx. $350 million including about $250-$260 million in hotel CapEx, which represents roughly 6% of ownership revenue
  • Net unit growth: 35,000 rooms to 40,000 rooms.
  • Tax Rate: 32%
  • Overall basis, we're optimistic that 2014 will be stronger than 2013



  1. Expectation for additional Owned & Leased margin improvement and flow through for the remainder of 2014 and 2015?
  2. Group pace update at Big 8 owned hotels for 2014 and 2015 (early 2014 comments were stronger than peers, but peer commentary has caught up)?
  3. Outlook for ADR vs. occupancy growth in RevPAR?
  4. What are the opportunities to move-out lower yielding government/flight crews for higher priced transient?
  5. Additional updates on value creation opportunities Waldorf Astoria, NY Hilton, Waikoloa, Park Lane? 
  6. Update on new brand development/brand extension, boutique offering?
  7. How is Europe looking for this coming summer?
  8. Which parts of the World are experiencing weakness? 
  9. Where are inflation pressures negatively impacting margins?
  10. ITYFTY trends?
  11. Viability of asset light timeshare strategy?
  12. Exposure to China and thoughts on macro impact?



Embedded/Value Drivers

  • Margin expansion in ownership segment due to group strength
  • Higher and better use land opportunities
  • Migration to capital-light & divesting of some or all of the real estate over time

Big 8

  • Up 10% in group in our Big 8 last year, we're up 10% again this year
  • Expect 2014 to have very good RevPAR growth higher than the high end of our guidance driven by these factors, which is building both occupancy but also rates in the group side and providing that strong foundation for us to continue to squeeze out lower-priced transient business and only take the best transient business


  • We are in the sweet spot of the cycle with group demand driving premium revenue growth in our big group boxes
  • Picking up momentum during 2013 and into 2014
  • A very positive outlook for 2014 group business with both rooms on the books, and rate up meaningfully versus last year (2013).
  • 2014 group revenue position at our Big 8 hotels is up 10% compared to the same time last year (2013).
  • Group business for the same period for our larger group of managed hotels in the U.S. is up 70%.

Asia Pacific

  • Expect continued strong performance again in 2014.

  • Japan was particularly strong as all our hotels delivered double-digit RevPAR growth in 2013.

  • Japan's outlook for 2014 remains very strong, as the government continues to inject liquidity into their markets.

  • China to moderate a bit, and we expect to see slightly lower RevPAR growth in 2014 of 5.5% to 6%, down from nearly 7% in 2013.


  • Expect the improving economic climate experience in 2013 to continue into 2014 and we expect HLT's RevPAR performance to continue to improve

  • London continues to pick up and in 2014, group revenue position in the region overall was up significantly at 20%.

Middle East & Africa:

  • A tail of individual markets.
  • Africa, Indian Ocean, Arabian Peninsula, and Kingdom of Saudi Arabia markets have been and are expected to continue to be strong, and of course
  • Egypt remains highly volatile.

Time Share

  • In 2013, 54% of our interval sales were on behalf of third party and 78% of our year-ends inventory was capital-light.

  • By expanding our new capital-light deals, combined with continuing to develop additional smaller phases of new developments on our own balance sheet, we can continue to grow our timeshare EBITDA at a steady pace with significantly less capital investment than has been spent historically

  • Can continue to grow timeshare EBITDA at a steady pace


  • Group demand driving premium revenue growth in our big group boxes, combined with our disciplined approach to managing costs should allow us to continue to drive premium margin growth.


  • Expect net unit growth to accelerate in 2014 and 2015 (as compared to  2013, opened 207 hotels with nearly 34,000 rooms, conversions accounted for 35% of the openings, and after removals had net unit growth of more than 25,000 rooms representing growth of over 4%)

Balance Sheet

  • The outstanding balance of the term loan facility at year-end was $6 billion
  • Ended the year with cash and cash equivalents of $860 million including $266 million of restricted cash.
  • No borrowings outstanding under our $1 billion revolver
  • About $700 million to $900 million should be available for debt reduction in 2014

  • Finish 2014 at about 4.5 times net debt/EBITDA

Asset Sales

  • Do not have a lot that we intend to sell in 2014.
  • We do have a few, what I would describe as dribs and drabs, very small assets, a few in the UK that we've been working on

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Jobless Claims: Not Outstanding, But Decent

Takeaway: After the hiccup last week, jobless claims are back to decent numbers.

Jobless Claims: Not Outstanding, But Decent - job interview in diary


Year-over-year, not seasonally adjusted jobless claims (solid 287K on an absolute and down -4.9%) are back to improving after a hiccup last week. The four-week rolling average slides as the strongest print of the year – April 4 (down -16.2% year-over-year) — rolls off.


So, not outstanding improvement, but back to decent.


Jobless Claims: Not Outstanding, But Decent - 3

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VIDEO | Keith's Macro Notebook 5/8: Australia RUSSIA UST10YR


Q was exactly in line but commentary should somewhat allay Union Pay fears.




  • 1Q EBITDA luck-adjusted basis:  $380m
  • Have shifted mass tables to CoD in 1Q
  • CoD premium slot area opened before May Golden Week and better F&B offerings on 2nd floor - was disruptive but am optimistic on these developments
  • CoD Manila due to open later in 2014
  • MSC due to open mid-2015
  • CoD 5th tower:  open early 2017
  • 1Q Property EBITDA:  28.8%
  • 2Q guidance:
    • $95-100m D&A
    • $24-26m Corp expense
    • Consolidated net interest expense $31-33m:  $10m finance interest, $6m (CoD Manila), $17m MSC, net capitialized interest of $19m

Q & A

  • Great start to 2Q - regained share in April, Golden Week May was phenomenal.  Do not see any VIP deceleration given incidents. - Hedgeye would caution that while market share was healthy in April, hold % was high.  RC volume declined 20%+ YoY. Junkets appear to be under performing at the MPEL properties.
  • Macau market very healthy
  • Junket explosion/Unionpay/visa issues:  news stories get too polarized.  Long-term secular story intact
  • Capital allocation plans:  paid dividend but may not do much else given serious capex this year and positive news coming out of Japan 
  • Premium mass:  some disruption in 1Q due to developments.  Committed to table optimization.
  • Competition:  No competition on pricing but more on the side of more offerings or renovations.
  • 80% EBITDA at CoD is non-VIP
  • 75% EBITDA at MPEL is non-VIP
  • MSC:  have 500-550 tables at capacity; govt will work out actual table allocation closer to opening date.  Govt has stressed diversification and non-gaming areas.  Construction progressing well. 
  • Moving tables out of Altira:  will continue to move them if they get higher-yielding tables at CoD
  • UnionPay:  targeted at illegal mobile units... if anything, it would be positive going forward for the gaming industry.
    • Not a Macau phenomenon.  UnionPay is a global brand.
    • Do not see any slowdown from the UnionPay news
  • Manila opening:  middle of the year or 2nd half of year; don't want to open until they're 100% ready; have hired 3,000 people out of the 5,000 people they need.
  • Japan:  looking at a bigger city opportunity
  • Manila:  encouraged by what's going on in that market.  Market is growing.  Local/international visitation both growing.  2nd property to open in Entertainment City/Manila Bay area
    • Leverage customer base in Macau?  Local mgmt team working closely with Macau ops team.  There will be lots of cross-selling.
  • Confident in getting their fair share of tables for MSC
  • Infrastructure projects:  ferry terminal will open later in 2014. 
  • Philippines tax issue:  PAGCOR will have an annoucement soon on income tax issue.  Confident on positive outcome.
  • Altira table breakout:  110 VIP, 30 MASS 
  • CoD table breakout:  194 VIP, 290 MASS
  • Capex guidance: 375m (2Q), 475m (3Q/4Q) 
  • Capex guidance breakout:  MSC 120m (2Q), 250m (3Q), 350m (4Q); CoD Tower (30-40m/Q)
  • VIP
    • VIP liquidity due to junket disappearance incident:  do not have exposure to that junket; no evidence of any deterioration in liquidity
    • Visa shortened from 7 days to 3 days?  Macau govt denies this
      • Higher-end customers stay longer
      • MPEL targeting IVS customers
      • Most of premium mass customers will not be involved

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.