Cartoon of the Day: Yield-Chasing Hamsters

Takeaway: The complexion of the US stock market this year has become a slow-growth-yield-chaser.

Cartoon of the Day: Yield-Chasing Hamsters - Yield chasing hamsters 5.09.2014


As CEO Keith McCullough wrote in today’s Morning Newsletter, "If you’re a levered long high-multiple-growth-momentum-chaser, you may not like the complexion of the US stock market this year, but that doesn’t change what it’s become – a slow-growth-yield-chaser."

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Video | $YUM CFO Talks Taco Bell Breakfast

Here's a short excerpt from an institutional conference call that restaurants analyst Howard Penney held with YUM CFO Pat Grismer earlier this week.


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Disciplined management focused on opportunities and execution. High ROI projects on the way. Secondary coming in mid-June? 





  • Q1 Results 6.6% RevPAR based on +3.6% ADR and +1.9% Occupancy
  • First time in many quarters, system-wide group revenue growth in Q1 outpaced transient revenue growth.
  • Consistent with view at the midpoint of the cycle, group business continues to build.
  • System-wide group revenue growth in the quarter of 7.4% YoY
  • Banqueting revenue >12% in U.S.-owned and managed hotels
  • Big Eight hotels, group F&B spend for occupied room was up ~30% and 13% in our U.S.-owned and managed hotels.
  • F&B trends drive an overall increase revenue of almost 10% over the same time period in our U.S.-owned and managed hotels
  • Transient >6% across system
  • Weather offset by Easter shift
  • U.S. owned and operated hotels operating margins +157 basis points YoY
  • Owned and operated hotels outside the U.S. operating margins +191 basis points on a currency neutral basis.
  •  EBITDA $544m, margins +400bps
  • Hilton NY:
    • 6th Avenue repositioning begin by year end, complete by 2Q15
    • Interval sales to begin 2H14, units complete in 2Q15
    • Retail to add $8m EBITDA, NPV of Timeshare + Retail = $165m
  • Q1 approved 107 hotels = 15,000 rooms
  • Waldorf Astoria Beverly Hills, first new build on West Coast on Wilshire & Santa Monica will be 170-room luxury hotel
  • Increased fee paying rooms by 8,000 rooms in Q1
  • Launch two new brands in 2H14

Remainder 2014

  • Group very strong with increase in volume and rate
  • Group 8 up HSD YoY
  • Corp Mtgs up 12% in US O&M YoY
  • "very optimistic" for 2014
  • AsiaPac:  Japan significant    China 6-7%, Thailand weak
  • Europe:  UK, Turkey lead; sluggish France   Europe up MSD
  • Middle East / Africa:  Egypt weak, Saudi weak, Africa strong:
  • Resulting in revised RevPAR, EBITDA, and EPS

Financial Performance

  • Total M&F Fees: top line, units driven.  Franchise fees better.  Franchise rate 4.6% and increasing
  • Ownership: 172 bps EBITDA margin growth and 5.1% RevPAR
  • Timeshare:  transient rental, lower corp support costs, favorable in sale prices
  • Corp Exp & Other: 1x $18m conversation into stock based comp program, new program flow thru G&A and included in EBITDA
  • US:  Rack rate business +11%, corp trans +6% YoY
  • AsiaPac:  RevPAR - Japan +25% in Qtr, China +7% in Qtr
  • Balance Sheet: reduce leverage, use substantial FCF to reduce debt and achieve investment grade rating.   paid $200m in Q1 and $100m today and interest rate now L+250 bps
  • Cash $287m. no borrowings on revolver
  • Timeshare EBITDA guidance increased. 
  • Expect to prepay debt of $700m-900m in 2014


  • Confidence in 2H14 and into 2015 - optimistic because of transient strength in Q1 and continuing into Q2.  Group strength now growing faster than transient.  Big 8 in 2H up nearly 20% on Group.   Starting to see increases in ancillary spend, stronger F&B.
  • New Brands & CapEx - will not build any of new units on their balance sheet will use franchise model. 
  • First brand: 4+ star aggregate urban, iconic and resort brands.  conversion friendly.
  • Second brand: Lifestyle, launch in fall, working deals, upper upscale, 'accessible lifestyle'  not luxury, new builds, conversion friendly. 
  • Both brand focused on new units outside of HLT network, some new builds, mostly conversions.  Neither will impact 2014 net unit growth but will positive impact 2015 
  • NY impacts/any pause for 2H14 - no reason to change outlook.  Slowness due to supply, YoY superstorm Sandy, and weather.  Softer in Q1 but strengthen at muted pace due to supply.
  • Guided Q1 and 2H14 look conservative - flowed thru Q1 beat and feel conservative on guidance.
  • Timeshare - 60% of sales in asset light vs 50% in 2013.  Trajectory 80% of current 5 year inventory is capital light. 
  • Timeshare valued appropriately or consider spinning off - HLT committed to Timeshare.  HLT likes business.  Seeing increasing appetite for Timeshare product by consumers.
  • G&A - some Q1 timing issues were positive, will run-rate during remainder of year.  Expect G&A focus to remain at forefront will keep under control +3% to +5% for 2014 and 2015.
  • BIg 8 RevPAR - 5.1% and revenue growth slightly higher.  Surprised - no, but actually better than forecasts, growth depends on groups and group cycling. 
  • View on 2015 - very good sight lines, momentum building on pace.
  • NY Hilton retail repositioning - HLT doing work with consultants, no partners. 
  • Waldorf - deep into process to maximize value and how to execute against the asset in current form & structure. Considering how to significantly "enhance entire retail platform" given full-block exposure to Park Avenue.
  • Royalty Rates vs. 2013 - on track, raising rates 100 bps.  Had non-comp affiliates in Q1 2014
  • EBITDA Margin - expect 150 to 200 bps expansion in 2014



QM Pressuring Housing Finance: Early Circumstantial Evidence

Takeaway: Fed Senior Loan Officer Survey supportive of our #HousingSlowdown call as residential mortgage demand & availability continued to decline.


QM Pressuring Housing Finance: Early Circumstantial Evidence  - QM Summary Table


The call-out here isn’t huge but it is worth a highlight as it relates to housing finance and the credit availability impacts from QM’s higher regulatory burden.


The 2Q14 Fed Senior Loan Officer Survey released earlier this week showed residential mortgage activity getting squeezed from both sides. 


While demand across all loan types remained under pressure in the latest survey, the tightening of credit standards across non-traditional and subprime loan categories sat as the largest and most remarkable change. 


The net percentage of banks tightening standards for Non-traditional and Subprime residential real estate loans increased to 24.3% and 42.9%, respectively, over the three month period ending in April.      


Whether the Jan 10th implementation of the new Qualified Mortgage standards is singularly responsible for the discrete tightening of credit standards in the latest survey is open to some speculation. 


However, given that the credit tightening was isolated to the loan types most likely to be affected by the regulations (note that the net percentage of banks tightening standards for prime borrowers showed no increase sequentially) and that it occurred exactly concomitant to QMs implementation is highly suggestive. 


While lender caution may be more pronounced in the early going as institutions ‘get a feel’ for the new regulation and its level of policing, we continue to think the more stringent lending guidelines will serve as an ongoing drag to housing demand over the intermediate term.



QM Pressuring Housing Finance: Early Circumstantial Evidence  - Resi Loans Tightening Standards


QM Pressuring Housing Finance: Early Circumstantial Evidence  - Resi Loans Demand



*Reference:  Below is the categorization of loan types used by the Fed for the Loan Officer Survey


  • The prime category of residential mortgages includes loans made to borrowers that typically had relatively strong, well-documented credit histories, relatively high credit scores, and relatively low debt-to-income ratios at the time of origination. This would include fully amortizing loans that have a fixed rate, a standard adjustable rate, or a common hybrid adjustable rate—those for which the interest rate is initially fixed for a multi-year period and subsequently adjusts more frequently. 
  • The nontraditional category of residential mortgages includes, but is not limited to, adjustable-rate mortgages with multiple payment options, interest-only mortgages, and ``Alt-A'' products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.   
  • The subprime category of residential mortgages typically includes loans made to borrowers that displayed one or more of the following characteristics at the time of origination: weakened credit histories that include payment delinquencies, chargeoffs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories


Christian B. Drake


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