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MACAU/LV CORRELATIONS DON’T HOLD UP

Chart of the Day:  Statistics cloud recent speculation that Vegas is benefiting from weak Macau VIP

 

  • Contrary to a recent assertion, we found very little correlation between VIP volume in Macau and Baccarat volume in Las Vegas
  • In fact, the weak correlation is actually positive which makes it unlikely that Las Vegas is benefiting from the weak Macau VIP volumes
  • Weakness in Macau VIP appears to be secular to that market while Vegas continues its rebound

MACAU/LV CORRELATIONS DON’T HOLD UP - hh


MAR Q2 2014 - EARNINGS PREP

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

 


Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $3,510 million
    • Owned, Leased:  $265 million
    • Franchise Fees:  $198 million
    • Base Mgmt Fees: $177 million
    • Incentive Mgmt Fees:  $72 million
  • Adjusted EBITDA:  $396 million
  • EPS:  $0.67/share

 

MANAGEMENT GUIDANCE

 

Q2 2014:

  • Comparable systemwide RevPAR on a constant dollar basis:
    • North America, Outside North America & Worldwide +4% to +6%
  • Total fee revenue: $440-$450 million
  • D&A: approx. $30 million
  • G&A and other: $165-$170 million
  • Operating income: $300-$320 million
  • Gains & other income: approx. $0 million
  • Net interest expense (net of interest income): approx. $25 million
  • EPS: $0.63-$0.68

FY 2014

  • Comparable systemwide RevPAR on a constant dollar basis:
    • North America: +4.5% to +6.5%
    • Outside North America: +4% to +6%
  • Total fee revenue: $1,665-$1,705 million
  • D&A: approx. $130 million
  • G&A and other: $640-$650 million
  • Operating income: $1,105-$1,165 million
  • Gains & other income: approx. $5 million
  • Net interest expense (net of interest income): approx. $100 million
  • EPS: $2.39-$2.53
  • Tax Rate: 32%

QUESTIONS FOR MANAGEMENT

  1. Views on share repurchases given stock strong performance?
  2. Where are inflation pressures negatively impacting margins?
  3. Gaylord:  update on booking trends, acceptance into the MAR group bookings channel; performance relative to expectations and how many Gaylord assets can the US support?
  4. Update on the Protea acquisition, integration, cost saves and profit contribution?
  5. Discuss the roll-out of AC Hotels in the US - are you having to offer key money or incentives to franchisees?  How is MAR using income guarantees to promote adoption of the brand?  Last quarter 28 were approved and 40 were in discussion.
  6. Discuss the global roll-out of Moxy - why would a developer opt for Moxy over Marriott or Courtyard?  Had 12 in pipeline with first hotel expected to open later this year.

 

RECENT MANAGEMENT COMMENTARY

 

Protea Acquisition

  • April 1, 2014, completed the acquisition of Protea Hospitality Group covering 116 hotels and 10,148 rooms in seven African countries.
  • The company paid approximately $200 million at roughly 10 times anticipated pro forma 2014 calendar year EBITDA
  • Marriott now manages approximately 45% of Protea's rooms, franchises approximately 39%, and leases approximately 16%.
  • Protea's pipeline is more than 65 hotels and 14,300 rooms, including more than 20 hotels and 3,000 rooms in Sub-Saharan Africa
  • Protea Hospitality Group created an independent property ownership company that retained ownership of the hotels PHG formerly owned, and entered into long-term management and lease agreements with Marriott for those hotels. 
  • The property ownership company also retained a number of minority interests in other Protea hotels.

Overall

  • Given strong transient and group demand, intentionally reducing government occupancy in many markets.
  • The way transient and group grow in an economic recovery, group doesn't really, on a sustained basis, outperform transient until transient begins to weaken.
  • Sees strength in corporate and leisure transient businesses.

Transient

  • Very strong transient trends and improved group bookings have increased MAR's RevPAR growth outlook modestly in 2014.
  • Hopeful transient business continue to grow faster than group.
  • Courtyard benefited from the strong transient demand.

Group

  • Second quarter group booking pace in North America for the Marriott brand is modestly higher year-over-year, despite the timing of Easter, and see strength in corporate and leisure transient business.
  • Group always takes a bit longer to come back than transient business
  • Group business is building - three months ago, MAR's 2014 North American group booking pace for the Marriott brand was up just over 4%. Today, it's over 5%.
  • Corporate group pace is even stronger.

Washington DC

  • While we haven't seen an upturn in U.S. government business, government demand seems to be stabilizing and comparison should get easier as the year progresses.
  • Government group business, the comparisons get dramatically easier in the second half of the year compared to the first. So, government business stayed and paid in the second half of 2014 compared to the second half of 2013 could be up meaningfully, maybe 10% or some number like that wouldn't be surprising.

Europe/Middle East/Africa

  • Expect low single-digit growth in RevPAR in both Europe and the Middle East and Africa regions, held back by disruption in Russia, continued weak demand in France and ongoing weakness in Egypt.

Caribbean/ Latin America

  • Anticipate RevPAR will increase at a double-digit rate in the second quarter in the Caribbean and Latin America, as we benefit from strong demand in Mexico, the Caribbean and Brazil.

Asia Pacific

  • RevPAR should grow at a mid single-digit rate, reflecting strong results in most markets

G&A

  • Flattish in 2014

Capital Allocation

  • Approx $1.25 billion to $1.5 billion could be returned to shareholders through share repurchases and dividends and expect to continue to repurchase shares in 2014.

Investment Spending

  • Investment spending in 2014 will total approximately $800 million to $1.0 billion, including approximately $150 million for maintenance capital spending
  • New mezzanine financing and mortgage notes, contract acquisition costs (including the approximately $200 million payment associated with the Protea transaction)

Additions/Attritions/Cancellations

  • At quarter end, worldwide pipeline stood at over 200,000 rooms with nearly 40% already under construction.
  • In the U.S., across all our brands, have a 10% share of existing rooms, but nearly a 25% share of industry rooms under construction.
  • Overall development pipeline still favors smaller markets.
  • Anticipates gross room additions of 6% worldwide for the full year 2014 including the Protea hotels.
  • Net of deletions, the company expects its portfolio of rooms will increase by approximately 5% by year-end 2014

Cartoon of the Day: Retro Bubbles

Takeaway: Bubbles, bubbles, all around...

Cartoon of the Day: Retro Bubbles - Yellen bubbles 07.29.2014


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LEISURE LETTER (07/29/2014)

Tickers: LVS, HLT

EVENTS

  • July 29: 
    • WYNN 2Q 8:30am ; pw: 67663320
    • NCLH 2Q 11am ; pw: 63063248
    • IGT 2Q release
    • GLPI 2Q call 10am
  • July 30: 
    • MGAM 2Q earnings
    • MAR 2Q call 10am : , pw: 59383825
  • July 31:
    • HST 2Q call 10am:
    • BEL (OEH) 2Q call 10am: , pw: 68627603
    • H 2Q call 11:30am:  , pw: 21721745.
    • BYD 2Q call 5pm:  , Passcode: 2654057
  • Aug 1:
    • HLT 2Q 10am: , pw: 67361605

COMPANY NEWS

 

BTH:SP – According to Vietnamemet, which quoted Vietnam Investment Review, Banyan Tree Holdings Ltd will be be granted a casino licence for Laguna Lăng Cô beach resort on the central coast of Vietnam. 

Takeaway: More regional-type casinos across Asia.

 

LVS & 1928:HK – Macau labor group Forefront of the Macao Gaming is demanding a meeting with officials from Sands China Ltd to discuss the company’s policies on pay and promotion of casino floor workers. The group’s President Leong Man Teng indicated if officials from Sands China Ltd do not meet with the labor group by Friday, August 1, the group may organize a new protest or even a strike on August 28, the anniversary of the opening of casino resort Venetian Macao, Sands China’s flagship property.

Takeaway: Increasing labor tensions just as worker recruiting is about to begin for the new property openings.

 

1159:HK – (Sinogreen Energy International Group Ltd) Jack Lam Yin Lok, a veteran of the Macau VIP business (Jimei Group Ltd) and British Virgin Islands entities called Creative Cosmo Ltd and New Elect International Ltd acquired 325 million new shares in Sinogreen for a total amount of HKD113.8 million (US$14.7 million). With the investment, Sinogreen diversifies its operations awhile Jimei Group essentially secures access and an indirect listing on the HKSE.  Jimei Group currently operates Jimei Casino near the Grand Lapa hotel on Macau peninsula, as well as junket rooms in seven other Macau properties including Wynn Macau, Sands Macao and City of Dreams, as well as Fontana Leisure Parks & Casino at Clark Special Economic Zone in the Philippines.

Takeaway: New capital sources for the junkets?

 

6889:HK Dynam Japan – said total revenue for the quarter ended June 30 decreased by approximately 4.8% year-over-year to JPY38.2 billion (US$375 million) due to an 8.3% year-over-year decline, to JPY213 billion, in total gross coin-in.  The company indicated the reductions were due to the Japanese sales tax increase from 5% to 8% in April.  Dynam Japan Holdings is a financial supporter of Macau Legend Development (1680:HK) due to its US$85 million investment in Macau Legend. 

Takeaway: Japan sales tax hits local gaming.

 

GENS:SP – Genting Singapore and Landing International (582:HK) announced in June a partnership to build a US$2.2 billion casino resort in Jeju, modeled after Resorts World Sentosa in Singapore and will be called Resorts World Jeju. Previously Landing International Development Ltd said it would use about HK$320 million (US$41.3 million) of the HK$600 million proceeds from a share offering for investment in Resorts World Jeju. Earlier today, Landing International said another HKD125 million will be used for the casino business. Construction of Resorts World Jeju is expected to start in the third quarter of 2014

Takeaway: More details on Resorts World Jeju.

 

HLT – announced "China Summer Getaway" promotion for Mainland China and Hong Kong. The promotion will reward customers who book directly through Hilton Worldwide's portfolio of hotels in Mainland China and Hong Kong with exclusive discounts as well as, offering HHonors membership points to our valuable members. Hilton Worldwide Announces “Summer Getaway” Promotion for Mainland China and Hong Kong From today to August 29, 2014, all fully prepaid direct bookings up to two days prior to arrival will enjoy up to 34% off at any participating hotels and resorts under Hilton Worldwide across Mainland China andHong Kong.

Takeaway: Interesting as recent commentary indicated China was a strong market, we look forward to commentary on the earnings call about this promotion.

INDUSTRY NEWS

Singapore/Malaysia Vehicle Tolls – According to the Land Transport Authority, Singapore will match any new or increased toll charges by Malaysia on vehicles entering Johor. Currently, vehicles from Singapore entering Johor via the Causeway in Woodlands pay RM2.90 ($1.10). This would be increased to RM9.70 ($3.80), a more than three-fold increase. In addition, Malaysia also intends to impose a new RM6.80 ($2.70) charge on vehicles exiting the checkpoint back towards Singapore. This means a Singapore vehicle going for a day-trip into Johor would have to pay a total of RM16.50 ($6.45) for a round trip. Buses will be charged RM13.30 for a round-trip while taxis will be charged RM8.20 ($3.20). The new charges are supposed to kick in this Friday, 1 August. All of this comes on top of a proposed new Vehicle Entry Permit (VEP) from both countries. Malaysia is proposing a VEP fee of RM50 (S$19.50) for all Singapore-registered vehicles entering Johor. This after Singapore's LTA said it is raising its VEP on foreign vehicles entering the Republic from S$20 to S$35 for a daily permit, starting this Friday

Takeaway: Bad news for the Singapore mass segment business at RWS and MBS. 

 

Las Vegas Residential Real Estate – After a brief lull, lenders are again ramping up pressure on delinquent Las Vegas homeowners. The number of default notices filed in Clark County has climbed every month this year, from 194 in January to 735 in July as of Thursday. 

Takeaway: A headwind for the locals.  We recently wrote about this emerging headwind on July 16th "LV Locals: The Mirage of a Recovery"

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


NCLH 2Q 2014 CONFERENCE CALL

Management's conference call tone was positive, despite lower Q3 guidance. However, we remain cautious on Q4 guidance as pricing may not match the bullish volume commentary.

 

 

CONF CALL

  • Caribbean environment:  highly promotional
  • Core fleet has done well 
  • Getaway:  leads in guest satisfaction
  • Expanded casino partnerships
  • Tougher comps will ease in 4Q
  • Anticipate the promotional market to continue for the year and into early 2015
  • Europe:  Med continues to do well
  • 3Q:  tougher comps YoY (strategically held pricing in 3Q 2013 (ticket yields was up 5%);
  • Going forward, Breakaway yields expected to perform in-line with rest of fleet;  
  • Higher Caribbean capacity in Q3 (23%) is reason why yield guidance is lower in Q3  this holds no water since you have to Bermuda in the mix.  Q3 Caribbean+Bermuda capacity is 40% of total itineraries vs 32% year ago.
  • Overall, 2014 load is ahead of 2013
  • Q3 deployment:  23% in Caribbean, 32% in Europe, 17% in Bermuda, 18% in Alaska
  • 3Q:  doubling of Caribbean capacity YoY in Miami due to Getaway.  Absent its introduction, yields would be 200bps higher
  • Getaway 5-yr payback
  • 4Q:  easier Caribbean comps
  • Higher costs on new ship orders (2018-2019):  higher euros, new enhancements on ship; will take a little more than 5 yrs to pay back

 

Q & A

  • Started to see some booking traction (last 12 wks):  substantial growth (+20%) in booking activity
  • Q3/Q4:  solidly loaded over prior yr; can protect pricing
  • Cautiously optimistic 
  • Feel better about pricing
  • Cost volatility from Q3 to Q4:  food offerings, guest interaction investments from the NEXT program
  • 2015:  better loaded across the board than in 2014 and 2013; pricing looks good; beginning of a fundamental shift (most of pressure in Q1 (Super Bowl lap))
  • 2015 pricing should be solid
  • Feeling better about Caribbean in 2015 (excluding Q1)
  • Lower cost of sales
    • In Q2, have lowered port agreement costs
    • Have expanded casino players, with no incremental costs
    • Had done less air packages and aggressively negotiated with credit card companies
  • Hearing from Genting that they will not sell at current levels
  • Frustrated with stock price
  • Recently mandated a 3% price increase across fleet.... still seeing good volume
  • Alaska:  overall pleased.  Sun booked significantly better than 2013.
  • Europe:  Q2 pricing above 10% (because of easy comps in 2013)
  • Two ships year-around in Europe which benefits Q4, with signficantly higher pricing and load
  • Premiums on new ships:  across 12 months,  still double digit premiums but onboard could be impacted by a mix issue (larger families spend less onboard)
  • Don't have any 'old' ships; not looking to sell any ships

RAI – Strong Pricing Offsets Volume Declines

We’re encouraged by the performance of RAI in the quarter, driven on strong price realization.  The company reported Q2 revenue of $2.16B (or -0.6% Y/Y) that came in lighter than consensus expectations of $2.19B, yet it beat consensus EPS by 2 cents at $0.89 (or +6.0% Y/Y). The quarter was marked by share gains from its core brands (Camel, Pall Mall, Grizzly, and American Spirits), and pricing to offset massive cigarette volume declines of -8.3% in the quarter (versus est. industry average volume of -5.5%), and impacted by one less shipping day in the quarter. Total cigarette market share was down 0.1pp to 26.5% in the quarter.

 

From a quantitative perspective RAI is broken across its immediate term TRADE and intermediate term TREND durations, follow the leg-down after the announcement of its announcement to acquire LO two weeks ago (see chart below).  

RAI – Strong Pricing Offsets Volume Declines - z. rai

 

From a fundamental perspective, we remain constructive on a proposed RAI + LO. The combined entity would make it the 2nd largest U.S. tobacco company to compete with #1 MO (~51% share).  We remain extremely bullish on menthol’s superior fundamentals to traditional tobacco, and Newport Menthol is the #1 U.S. menthol brand (37.4%). RAI+LO would reap $800M in cost savings over two years (according to the company) and we think the strong sales and brand equity of LO’s portfolio is complemented well by the strength in RAI’s non-menthol brands like Camel, and its more western U.S. geographic exposure.  The combined company’s ability to leverage a larger sales force, attain more shelf space and compete for higher margin (premium and above premium cigarettes and smokeless) should prove very profitable.  

 

If the stock can overcome our resistance levels, we expect it to grind higher in the back half of the year as the regulatory process plays out. As a reminder the closing is not expected until 1H 2015, and there may be hiccups along the way due to the brands it intends to divest to Imperial to reduce its menthol portfolio.

 

In the quarter, there was no updated information on the proposed acquisition of Lorillard.  A key question that remained unanswered from management is whether going forward we can expect non-combustible products like its e-cigarette VUSE to make up for declining cigarette volume and whether RAI can get VUSE to a margin at or above cigarettes. Clearly, investors have concerns on how cannibalization of cigarettes is playing out alongside the adoption of e-cigarettes, and the company was undefined, citing “early days” in the category.

 

What’s clear is that VUSE is creating an investment drag on the company. In the quarter operating income for the “All Other” segment, which includes VUSE, was a -$49M loss (versus -$39M last quarter).  This loss is expected as the company supports the launch of VUSE, yet it begs the question on when RAI expects VUSE to be profitable.  The company stated that it will continue to invest behind VUSE for the balance of 2014 and into 2015, and expects VUSE to be profitable sometime in the middle of 2015.  For reference, if we look at blu, which LO acquired in Q1 2012, LO’s operating profit was a mere $6M on $231M for FY 2013 (7 quarters later), signaling just how capital intense supporting the new category was for them.   

 

CEO Susan Cameron said the national roll-out of VUSE (underway in the western states of America since June with plans to move eastward in early September) is progressing smoothly, currently in ~ 21,000 retail outlets. She’s confident that the technology sharing agreement with BAT offers both enhanced innovation and the ability to take the brand VUSE global.

 

The company tightened its FY 2014 guidance to $3.35 to $3.45 (or 5% to 8%) versus prior guidance of $3.30 to $3.45 and repurchased 4.8M (worth $267M) in the second quarter to complete its $2.5B share repurchase program started in November 2011. 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 


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