Takeaway: Real Americans are about to get eaten.
Takeaway: The U.S. labor market continues to improve steadily.
Editor's note: This is an excerpt from a research report issued earlier today by Hedgeye's Financials team. For more information on how you can subscribe to Hedgeye click here.
Crisis: Risk & Opportunity
Last week, we flagged how the strength in claims represents both risk and opportunity. The opportunity lies in the fact that historically claims tracked at sub-330k for 24 months in the mid-to-late 1980s, 45 months in the mid-to-late 1990s, and 31 months in the 2005-2007 period. Currently, claims have been running at sub-330k for 6 months (though if you count from the initial drop in mid-2013 then we're closer to ~12 months). In other words, history would suggest (the last 3 cycles at any rate) there could be another 18-39 months of track left before claims begin to rise.
The risk lies in the fact that major market downturns follow sub-330k claims periods. And, importantly, there's no guarantee the last 3 cycles will reasonably represent the blueprint for this cycle. We often work in close conjunction with our Macro Team on the labor and housing markets. The chart below, illustrating the dynamic, comes from Christian Drake on the Macro Team.
Prior to revision, initial jobless claims fell 18k to 284k from 302k WoW, as the prior week's number was revised up by 1k to 303k.
The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7.25k WoW to 302k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.1%
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.
- 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
- 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).
- 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.
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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.
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.
* 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).
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.
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.
CONF CALL NOTES
- 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
- Quantum deployment to China is very exciting
- 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
- 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.
- 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.
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.
- 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.
- 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.
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