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Suspect capital allocation policy and and lower than expected 3Q guidance cools HOT. RevPAR acceleration from here unlikely so near term catalysts must be asset sales and more aggressive share appreciation.




Prepared Remarks:


  • Co owned hotel margins +87 bps
  • First time into four years without a global economic wobble
  • North America - record occupancy
  • Corporate Profitability high & Confidence = 2008
  • RevPAR during Q2 2014
    • US
      • Slower in North 4.4%, Chicago flat, WDC <3%, NYC 5%, Boston & Baltimore up double digits,
      • Hawaii flat - weak yen, higher airfares, higher Japanese sales tax.  
      • Better in South & Southwest 9% 
    • Latin America +5%, Mexico +13%, Brazil +25% (Germany stayed at Sheraton Rio), Chile demand struggles.   LA ex Brazil +1%, expect low end of RevPAR range if not lower.
    • Europe:  modest recovery to continue; RevPAR 2%.  Greece +25%, UK slow, France soft, Germany tough comps.  Ukraine & Russia - if events don't escalate, expect improved European outlook.
    • Africa/ME -1%:   Dubai down, Qatar +17%, Saudi flat, Egypt -20%, Nigeria down more than 20%.
    • South Africa +6%
    • China +11%, skewed by Sheraton Macau.  Ex Sheraton +7%, demand better and increased occupancy +550 bps.  Shanghai double digit revpar.  West & Central China 4%.  Sheraton Macau tailwind will taper.
    • Indonesia +19%   Thailand -12% due to coup but calm returning and business slow to recover.  India down more than 4%, hoping for needed economic change and development.
    • Asia ex China expect growth in the low single digits.
    • Maintain RevPAR outlook
  • Management fees:  in 3Q, difficult comps but YoY growth remains very strong. Ex this fee, growth would be 12%.
  • During 2Q opened 19 hotels, 3,800 rooms.  2H14 openings > 1H14 openings.
  • SVO: better tour flows, better pricing, higher closing ratios. Focused on high returns in Orlando, Mexico, Hawaii and St. John.
  • June 6th, closed final unit at St. Regis Bal Harbour. 
  • SG&A: up 16% but lapped $7m in CT State Tax incentives.  In 3Q benefit of $3-$4m in new tax incentives.

Outline to Capital Allocation

  • Impossible to have a Balance Sheet which pleases all shareholders
  • Leverage: stay investment grade in wake of major economic downturn.  Conduct a Monte Carlo scenario for how business would operate during a major economic downturn. $500m in off shore cash. Leveraged allowed to 2.5x but less than 3x. Today about $750 million of add'l capacity to get to 2.5x.  Maintain target leverage.
  • Dividends: regular dividends based on payout ratio of 50%, but 35% to 50% on a future basis. 
  • Stock buybacks: offset annual dilution of stock based comp of $85 million in 2014; expect to compete $614 million in 2014.
  • Opportunities:  Step up pace of repurchase activity or special dividends (asset sales).

Transaction Markets:

  • Optimistic HOT will announce significant transactions in 2H14 and early 2015.


  • CFO search progressing with Korn Ferry. 



  • Portfolio Sales $1 billion transaction in market or greater value on single asset basis?
    • Geographic:  not a consistent set that appeals to a single buyer, finding better/greater prices via individual asset sales.
  • US RevPAR: Luxury lagging, broader acceleration?
    • Early in recovery, significant and higher growth rates in upscale, upper upscale and luxury, but now percolating down to lower segments.
  • RevPAR trends and performance through cycle?
    • Continue to build rate so additive, performance of international segments outperforming, so not sure HOT will underperform. 
  • Share repurchase?
    • $85 million at least to offset dilution (baseline) but as HOT gets to asset light and sell $2.5 billion in sales, they will generate cash and then evaluate repurchases vs. special dividends
  • Given capital model - only able to buy back $750 million shares versus some estimates of $2b to $3b?
    • Need to take into consideration rating agency definitions, but $750m is NOT the maximum.
  • Opportunities to grow/add brands - especially in 3/4 star segments?
    • Aloft today is what W Hotels was 10 years ago...and present opportunity to grow select service hotels.
    • Four Points continues to draft off Sheraton
    • Element small but growing, tremendous growth potential
    • Difficult/challenging to launch and build De Novo
  • Group pace:
    • Bookings in 2Q. Good for in the year, for the year, but slower for 2015 but still mid-single digits range is on par with historical booking trends.
  • Share based compensation - why leave out of adjusted ebitda?
    • Better transparency to client and better measure of core business.
  • CFO search, characteristics, & timing?
    • Strong CFO, with seat at the C-Table, great mind, not afraid to have an opinion/discuss strategy and financing functions.  Have a number of interested and exciting candidates.  Will announce when they have "a name".
  • REIT Spin off of assets
    • Most North America REIT trading at discount to NAV, REIT would require add'l G&A, too many US lodging REITs trading with too few assets in their portfolio and shareholders not benefiting
  • Summarize from Q1 call to today, how did capital strategy and thinking change?
    • Had an approach to leverage limits and targeted debt levels, today more clarity on calculation.

New Home Sales: "WORSE"

Takeaway: Well that was short-lived. Last month's NHS report suggested a return to positive momentum. Nothing could have been further from the truth.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 


New Home Sales:  "WORSE" - Compendium 072414


Today's Focus: June New Home Sales

- He Giveth and He Taketh Away


Last month we found ourselves a bit confounded by the strength of the May New Home Sales report as it posted a +75k sequential increase seemingly out of nowhere. Now we know to continue to trust our gut, which said at the time, "what the ...".


Today's June New Home Sales report shows a complete reversal, more than wiping out the originally reported moonshot increase for May. 


Key Takeaways:


* Total:  New Home Sales saw its largest sequential decline in a year as sales dropped -36K sequentially, declining -8.1% MoM and -12% YoY.  This was on top of a downward revision to May to 442k from 504k (-12%). The softness in sales rhymes with the ongoing weakness in housing starts, which continue to offer little supply side support for forward transaction volumes.   


* Regional:  All regions saw a sequential decline in sales with each, with the exception of the Midwest, returning to negative YoY growth.


* Inventory:  The total inventory of new homes increased +4.2% MoM to 197K.  Supply continues to trend higher on both a 1Y and 2Y basis as well. 


* Sales vs Sentiment:  We highlighted the apparent decoupling of builder confidence from the reality of new construction activity last week alongside the soft starts data for May.  Today’s sales data for June offers further confirmation that the burgeoning builder hopium spread is likely to compress in favor of the data in the coming month(s).


Bottom Line:

Price gains are decelerating and what had been the last stronghold of housing - the new home market - is now falling apart. We remain bearish on housing until we see the next inflection in the second derivative price trends. 



New Home Sales:  "WORSE" - NHS 5Y


New Home Sales:  "WORSE" - NHS Regional 


New Home Sales:  "WORSE" - NHS Regional June YoY 


New Home Sales:  "WORSE" - NHS LT w summary stats


New Home Sales:  "WORSE" - NAHB vs New Home Sales


New Home Sales:  "WORSE" - New Homes For Sale 




About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



Joshua Steiner, CFA


Christian B. Drake


As we expected, Europe lead the Q2 beat despite lower onboard spend than we thought. 3Q net yield guidance was within expectations.  Quantum will be the next catalyst in November.






  • Double Double program (3-yr goal):  
    • Optimizing revenue
      • Structurally, had seen general pressure on pricing and compression on pricing
        • 4 areas of revenue expansion:
          • Strengthening brand
            • Azamara achieving double digit yield improvements
          • Enhancing global footprint
            • Bringing US guests on European itineraries
          • Asia
            • Quantum deployment to China is very exciting
          • Pullmantur
            • Cusp of turning an important corner.  Increased focus on Latin America.
    • Controlling costs
    • Moderate growth
      • 3-5% average compound growth is appropriate
  • Quantum of the Seas
  • 2Q
    • Better close-in pricing for Europe and Asia
    • Caribbean- highly promotional; ticket revenue yields down YoY
    • Onboard revenue yield:  +3% (10th consecutive quarter of onboard growth) - beverages packages and internet service drove the gains
    • NCC - better than expected, mostly timing related; balance of costs will be spent in rest of year
  • Booking environment:  significantly higher YoY.  Booking window continue to expand.  load and APD are up for rest of 2014.
  • Early 2015:  load and APD higher YoY
  • Caribbean:  very price sensitive.  Have implemented various promotions.  Expect Caribbean yield declines but see some improvement on Oasis ships.
  • Europe:   
    • Guests paying 20% more (in-line with our pricing survey)
    • Less supply to sell
    • Black Sea sailings pressured by conflicts in region
    • Med sailings doing well
  • Q3 guidance
    • Positive trends in Europe, China, and Alaska

Q & A 

  • Caribbean:  closer to inflection point; more pressure on 7 night and shorter itineraries.
  • Caribbean got quite a bit worse from 1Q to 2Q but has stabilized since.
  • Caribbean:  1Q 2015 comps will be harder than rest of quarters
  • Either higher dividends or stock repurchases in future
  • China:  proven to be a successful market but it is fairly young; but  investments have been costly, as with all new markets.  Still in the 1st inning.
  • 2015 NCC:  general commitment to cost cutting but there will be inflation pressures
  • Net Yield outlook:  +4% on average is a little on the high side
  • Q4 yield growth:  relatively consistent on bookings environment.
  • New onboard planning tool:  too soon to see how CruisePlanner will perform but doing well on Quantum
  • FY yield target unchanged due to rounding 
  • China vs Caribbean:  economically, Quantum should perform as well in China as in Caribbean (more costs but also more onboard revenues)
  • Demand will drive the profitability change.  Capacity has been set for the next 3 yrs.
  • Onboard revenue:  all categories up.  Doubled efforts on shore excursions.

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 80.51%
  • SHORT SIGNALS 78.32%


Solid quarter relative to expectations. Management guidance is setting up Q3 for another beat. July should prove a big improvement over Q2 when states release revs.




Prepared Remarks

Upcoming Openings:

  • Hollywood Dayton, Aug 28
  • Hotel opening at Zia Park New Mexico, Aug 28
  • Mahoning Valley ~850 slots, September 2014 opening.
  • Plainridge MA - late Q2 opening
  • Jamul CA - mid 2016 opening, backed up by 2 months
  • New York - expect decision by end of 2014


Q2 2014 Results

  • Operating environment remained challenged, but positive on relative basis
  • Low end segments remain sluggish but health in VIP
  • MW and East improved trends
  • Corporate & Overhead expenses run rate $20m savings
  • $253 million cash on hand at end of quarter
  • CapEx $20.2 million in quarter and forecast at $72.5m for year
  • Preopening expenses forecast at $8.2 million for year
  • Argosy Sioux City Iowa: awaiting Supreme Court, disappointed with decisions thus far, rent reduction to GLPI of $6 million if asset closes. 


  •  Regional trends, what drove the June pullback?
    • Calendar driven: May better, June weaker
  •  Regional trends thus far in July?
    • MTD: mixed bag, some mkts better, some markets feeling saturation and competitive pressures and reflected in guidance.
  •  EBITDA flow through, why not greater?
    • Elevated pre-opening expenses in Q3 due to new facilities.  Outlook remains choppy and uneven.  No clear indication of meaningful movement to change previous guidance. 
  • Massachusetts
    • Other licenses will not impact the PENN facilities, expect to have 2 to 3 year opening advantage.
  •  MA Referendum
    • Public opinion polls show >10% lead
  • New developments expect to increase active database from 4 million to 5 million - current data base additions include 10k/month in Columbus and 6-8k/month in Toledo
  • Kansas JV restatement - why now and driving reason, coverage ratio impact to GLPI.
    • Change more appropriately reflects PENN, co-wide adjusted EBITDA, no impact on any ratios.
  • Upstate New York - how consider an upstate property as compared to Mid-Atlantic landscape and potentially Meadowlands/Jersey City casino?
    • Watching closely, New Jersey voters will need to amend state constitution.
  • Dayton is not in Cinci market which is crowded - separate MSA. Parking situation is good there
  • Youngstown over an hour away from nearest casino - great location off interstate 80. 
  • Unlike PNK's Belterra Park, PENN views Youngstown and Dayton as 2 new markets.
  • PA rightly being cautious and protecting existing casinos so not sure if more will be allowed
  • Cash flow should be immediately generated at new racinos
  • No change in acquisition strategy
  • Database under-leveraged without destination property (LV Strip).  Couldn't get to the right valuation on Cosmopolitan.
  • Atlantic City - mgmt not bullish on AC particularly with what is being considered in NY and North New Jersey. Further revenue declines likely.
  • Plainridge - stated in MA filing that $250m in revs is the number and that forecast hasn't changed.


Slumped shoulders conference call. Deteriorating fundamentals finally catch up to PNK. Not many positive takeaways. 




  • Weak consumer demand; broad softness across most markets
  • July:  better than 2Q overall (closer to May rather than June)
    • Broad softness continues in July although there have been some bright spots  (we think Missouri is one of them but offset by Louisiana)
    • We also think PA is tracking nicely for July but that doesn't impact PNK. Overall, our model and channel checks suggest July state revenue reports should look better than expected in most markets.
  • Gained 320bps in market share due to myChoice integration 
  • Visitation down, spend per visit up 4% YoY (driven by high-end);  retail segment and markets where there is competition saw weaker spend.
  • Most of myChoice loyalty integration costs were incurred in 2Q
  • Q2 marketing reinvestment down 40bps YoY
  • Hotel REVPAR grew +6% thanks to new yield mgmt program (ASCA St. Charles REVPAR up double digits)
  • 25% of Belterra Resort customers also visited Belterra Park
  • East Chicago:  highest market share since Q4 2009.  Highest table share since Q4 2011.  Highest slot share since Q3 2008.
  • Strong VIP table play at East Chicago and River City
  • L'Auberge properties:  strong VIP performance; 30bps improvement in marketing reinvestment
  • EBITDA margins relatively flat primarily due to synergies
  • Softness in electronic gaming business
  • Mostly cost-related synergies; expect revenue synergies to come
  • St. Charles/KC/River City:  some disruptions due to loyalty program integration
  • Expect severance charges/expenses for CO referendum in 2H 2014
  • Belterra Park:  slightly under budget, some hotel issues but will not impact construction budget of $20m; rolodex behind expectations
  • Today, new general mgmt at Black Hawk and ASCA KC (both internal transfers)


Q & A

  • Lake Charles:  record table volumes; do not want to quantify EBITDA impact of low hold
  • Rollout of myChoice:  Additional $6m in advertising costs were associated with the integration but will not be incurred in future quarters
  • Very careful with Belterra Park but clearly a slow start.  
  • L'Auberge properties and East Chicago outlook:  continue to see improvements
  • Visitor profile:  declines at lower end segment; continue to see good visitation and spend from VIP segment
  • Missouri approved credit issuance by casinos:  credit will begin at end of August; will be a benefit starting in 3Q
  • PNK evalutes performance on EBITDA, not on market share. But market share has held up despite challenging conditions
  • Visitor priority:  depends on market.  In Lake Charles, they focus both on new and existing customers.  
  • Properties stay well-maintained.  May do some refurb on restaurants.
  • Will continue to pay down debt

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered

Takeaway: U.S. stock funds put up their 12th consecutive week of outflow with bond fund inflows holding steady

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, the combined equity mutual fund complex had a moderate outflow with $2.2 billion being redeemed from the category. The culprit was U.S. stock funds which experienced a $3.9 billion outflow, its 12th consecutive week of redemption which was slightly softened by a $1.7 billion inflow into global equity funds. Aggregate bond funds conversely, including both taxable and tax free products, netted another $2.4 billion in new investor subscriptions making it 22 of 23 weeks of taxable bond inflows with 25 of 26 weeks of positive subscriptions into tax-free or muni bonds. We are growing increasingly cautious on the trends in U.S. equity funds with accelerating market share gains by passive ETFs and also entering the seasonally slower Summer months and the volatile Fall period. The U.S. stock fund proxies are T Rowe Price (TROW) and Janus Capital (JNS).


Total equity mutual funds put up a moderate outflow in the most recent 5 day period ending July 16th with $2.2 billion coming out of the all stock category as reported by the Investment Company Institute. The composition of the $2.2 billion redemption continued to be weighted towards U.S. stock funds with $3.9 billion coming out of domestic equity funds which was offset by a $1.7 billion subscription into international equity products. This drawdown in domestic equity funds has become an intermediate term trend with now the 12th consecutive week of outflow in the category. The running year-to-date weekly average for equity fund flow is now a $1.7 billion inflow, which is now below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows had another decent week of production with the aggregate $2.4 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.2 billion. The inflow into taxable products of $1.9 billion made it 22 of 23 weeks with positive flow for the category. Municipal or tax-free bond funds put up a $497 million inflow making it 26 of 27 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.2 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETF results were solid during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $5.0 billion subscription, making it 7 of 8 weeks with significant inflows, while fixed income ETFs put up a decent $1.2 billion inflow. The 2014 weekly averages are now a $1.8 billion weekly inflow for equity ETFs and a $839 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $914 million spread for the week ($2.8 billion of total equity inflow versus the $3.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 1




Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 2


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 3


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 4


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 5


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 7


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $914 million spread for the week ($2.8 billion of total equity inflow versus the $3.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

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