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Cartoon of the Day: GDP Reality Check

Takeaway: US GDP for the first half of 2014 is 0.87% annualized (Old Wall was looking for +3-4%) and is slowing again sequentially in Q3.

Cartoon of the Day: GDP Reality Check - GDP cartoon 07.30.2014


While RevPAR may have been slightly disappointing to some investors, mix and law of averages suggest potentially better RevPAR for Hyatt and Hilton.




MAR posted a strong quarter all around although expectations were high and recent Smith Travel Research numbers suggested a higher RevPAR estimate and result. HLT and H look good into their prints this week as we believe the read through is actually positive.  HLT’s mix should provide better RevPAR than MAR and HOT (who was also lower than STR) while Hyatt should benefit from the outperformance of its portfolio and lower investor expectations.  Moreover, the law of averages suggest with two of the four major branded hotel companies already posting lower than STR RevPAR, the probability of better RevPAR from the other two rises.



In our July 10, 2014 note “LODGING: STRONG EARNINGS SEASON” we noted “very strong Q2 RevPAR translates into upside revenue and EBITDA revisions for the lodging operators and REITs” and highlighted, “we believe HLT and H have the most upside versus current consensus estimates and even we might be conservative.”


Following MAR earnings release, we feel strongly that HLT and H will beat earnings expectations.  MAR gave some explanation as to why their North America RevPAR trailed the Smith Travel numbers and it certainly resonates that it’s not a perfect comparison.  However, we still believe that H and HLT should outperform MAR and HOT on North America RevPAR.



STR RevPAR for Q2 2014 was as follows for North America.




The STR data when paired with the lodging operators' North America rooms data results in implied RevPAR for the lodging operators.  There are obviously other variables so the comparison is only a guide.  Geography, comp mix, and Canadian exposure will all impact the comparison.




Based on this math, the implied Q2 2014 RevPAR for MAR was 7.6%.  By comparison, MAR reported 2Q 2014 actual North American RevPAR of 6.0%.  Implied Q2 2014 RevPAR for HOT was 6.8%; however, HOT reported 2Q 2014 actual North American RevPAR of 5.7% (6.3% in constant dollars).


Unlike Marriott and Starwood, Hilton has a significantly greater portfolio exposure to the upscale segment, which experienced the strongest increase in RevPAR during Q2 2014.  Based on this analysis, Hilton’s implied RevPAR is 7.5% and Hyatt’s implied RevPAR is 6.9% for Q2 2014.




Given the recent commentary from Hilton management regarding lift in group bookings, a stronger outlook for the Big 8 assets, as well as management’s incentive to under promise over deliver, coupled with Blackstone’s shared interest in a beat and raise story, we reaffirm our positive conviction on Hilton into the earnings print – we predict Hilton will go 3 for 3, with a 3rd straight beat and raise in only its third earnings report as a public company.


In addition to Hilton, we also like Hyatt into the earnings print.  Similar to Hilton, Hyatt has sizable room exposure to the upscale segment with 25% of total rooms.  We have confidence in Hyatt’s ability to continue to drive superior RevPAR performance at Andaz and Park Hyatt (categorized as luxury) as was the case during Q1 2014 when RevPAR at Andaz was +13.6% and Park Hyatt was +9.5%.  Finally, we believe Hyatt like Hilton will also benefit from continued strong fee growth due to RevPAR growth and new hotel openings. 

Darden $DRI: Light Gets In

Takeaway: Clarence Otis is stepping down as Chairman and CEO of Darden Restaurants.

Editor's note: This note was originally published July 29, 2014 at 07:30 in Restaurants. Hedgeye restaurant analyst Howard Penney has been a leading and vocal critic of Darden management, in particular CEO Clarence Otis.

“There’s a crack in everything.  That’s how the light gets in.”

-Leonard Cohen


Here is the good news: Clarence Otis is stepping down as Chairman and CEO of Darden Restaurants and the company will separate the Chairman and CEO roles.  Otis will continue to serve as CEO until his successor is appointed or by December 31st, 2014.  A search for his replacement will begin immediately.


In addition, Darden announced it will nominate up to nine of its independent directors for election at the Annual Meeting on September 30th, 2014, effectively giving Starboard three seats on the Board.  Darden continues to pursue a proxy settlement with Starboard, but the two sides have been unable to come to an agreement. 


Starboard needs to get control of this company – and they know it.


The joy of this news is tempered by the fact that Charles Ledsinger, Independent Lead Director, will become Non-Executive Chairman of the Board, effective immediately.  In our view, Ledsinger represents part of the old guard at Darden which oversaw substantial value destruction at the company, including the sale of Red Lobster.  Rewarding him this role should be temporary, because the company needs wholesale changes.


Mr. Otis and the current board were once considered the biggest obstacle to our long thesis.  The shift is beginning, but how far will the company go?  Mr. Otis dug his feet in to fight off the activists and leaves a lasting impression on the company, with the Red Lobster fiasco being his signature dish.  It will take time to fix the disaster he created.


But that’s the past.


Darden has essentially given Starboard three seats on the Board, but the activist wants more.  In fact, they've publicly shared their intentions to replace the entire Board.  This makes a settlement unlikely and while we doubt they'll gain all twelve seats, we'd be willing to bet they get the majority (at least seven) of them.  If this comes to fruition, we could see more wholesale changes on the way, including a new Chairman and management team.  As it stands, we think these three are strong potential candidates for the following roles:


Chairman of the Board: Jeffrey Smith (Managing Member, CEO and CIO of Starboard Value)


Chief Executive Officer: Brad Blum (former President of Olive Garden and Starboard consultant)


Chief Operating Officer: Bob Mock (former Executive VP of Olive Garden and Starboard consultant)


Restoring Olive Garden to the most respected brand in casual dining is the first thing any new management team must do.  While there are other things that need to be done as well, we suspect that bringing in two seasoned restaurant executives like Brad Blum and Bob Mock to reshape the company, specifically Olive Garden, would not only be well-received by the street, but also by current employees of Darden.


While there is still much uncertainty, today’s news is a significant step in the right direction.  This is the first crack to open up in Orlando and while there’s some light, we know the future can be much brighter.


More needs to be done.


Call with questions.


Howard Penney

Managing Director




Fred Masotta



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Offsetting a nice all around quarter is high expectations and slightly disappointing NA RevPAR relative to Smith Travel data



  • 35% increase in development support team
  • While MAR continues to see little new full-service hotel construction in the US, they are getting their fair share
  • MAR flags account for 30% of the roughly 50 upper upscale and luxury branded hotels currently under construction in the US, more than any competitor.
  • Picked up a significant number of rooms with a pretty acquisition, but even excluding the impact of that transaction, room signings are up 45% this year. 
  • Despite tremendous North American growth, there is no need to panic. 
  • Strength of NA pipeline is indication of an overcharged industry supply
  • A number of Ritz-Carlton, Marriott, Renaissance Mac and Courtyard hotels is growing in China while construction pace and China remains on track, deals are taking longer to execute as they concentrate their development efforts in large secondary markets in the West.  
  • Development is particularly strong in Brazil and Mexico. 
  • Bullish about conversion opportunities in Europe, particularly for Autograph brand.
  • Now estimate 2014 room growth of 7% gross or roughly 6% net of dilutions. 
    • Impressive REVPAR growth of 6% despite Easter impact of -1%
    • Western US particularly strong; improving trends in Eastern US
    • RevPAR greater Washington exceeded expectations, rising 2%. RevPAR in greater New York increased over 3% despite significant supply growth in the city. 
    • Group demand is looking very good. Marriott Hotel group bookings made in the second quarter for the next 12 months increased 8%.
    • For meetings that took place in the quarter, attendance exceeded expectations, and cancellations were below trend.
    • Marriott hotel brands reported group RevPAR of roughly 3% in the quarter, but MAR estimates it would have been up roughly 5% excluding the timing impact of the shifting Easter holiday.
    • For full-year 2014, group booking pace of the Marriott brand in North America remains up about 5%.
  • Caribbean/Latin America
    • Systemwide REVPAR +11%; strong demand from World Cup
    • For the full year 2014, excluding the Venezuela, MAR modeling high single digit RevPAR growth for the Caribbean and Latin America.
  • Asia-Pacific
    • RevPAR in the Asia-Pacific region increased 5.6% in the quarter.
    • RevPAR growth was strong in Japan and Indonesia, offset by lower year-over-year RevPAR in Thailand. 
    • RevPAR in greater China rose over 7%; Shanghai RevPAR increased double digits.
    • Expect RevPAR in the Asia-Pacific region to increase at the mid-single-digit rate for the full year.
  • Europe
    • Expect Europe's RevPAR to grow at a low single digit range
    • ME&A: RevPAR: +4.9%, a bit ahead of expectations
    • For the full year, MAR expects comp hotels in the Middle East and Africa region to increase RevPAR at the mid-single-digit rate, reflecting easier comps for Egypt later in the year.
  • Incentive fees 2014:  high teens growth rate
  • Looking ahead, P&L will benefit from lower development costs of the Miami residences as these contracts close
  • Group booking pace is very strong in the third quarter.  4Q pace is less robust given the unfavorable shift in the timing of holidays in the fourth quarter. 


Q & A

  • Not concerned about STR comparison - what matters to them is RevPAR comparisons to the competitive set in each market where MAR is outperforming on average year to date
  • Increased capital return target by $100m because they did additional debt capacity, growth in EBITDA
  • Transient expected to be strong in 3Q/4Q
  • Group is meaningfully weaker in 4Q
  • RevPAR will be higher in 3Q vs 4Q because of group
  • More hotels paid incentive fees in 2Q (40% vs 34% in prior year); 2/3 were international
  • Committed to lower G&A
  • Q2 group business booked for next 12 mths:  +8%
  • Q2 group business booked 13-24 mths:  +8%
  • Group bookings pace for 2014:  +5%
  • Group bookings pace for 2015:  maybe a little lower than mid single digit
  • July/August huge months for group
  • Want to maintain BBB rating:  around 3x leverage
  • Incentive fees:  20% of domestic hotels pay; international hotels in the teens
  • Venezuela:  very lumpy market; very hyperinflationary; total investment will be $10 million
  • 2H 2014:  Some integration costs will be incurred due to Protea. There are probably two major cost items that we have in the second half timing that are different than the first half.

EHTH: Thoughts into the Print (2Q14)

Takeaway: Bad news is mostly on the table, but we're expecting a guidance cut on the release. Stock has taken a beating, so downside may be limited.


  1. MOST OF THE BAD NEWS ON THE TABLE: Many of the headwinds we were expecting for 2014 are already on the table.  Attrition all but negated the 1Q14 surge in Individual & Family Plan (IFP) new membership growth.  Additionally, management suggested that application volumes will be down y/y from 2Q14-3Q14.  EHTH is down over ~40% since we initiated the short position, and we are running out of near-term catalysts, so we will be evaluating the position after the print.
  2. LINGERING 2014 RISK: The lingering tailwind that EHTH has going for them in 2014 is the flow-through of late 1Q13 applications before the Open Enrollment deadline.  However, the deadline could prove to be a headwind as well.  EHTH may have lost additional members who were looking for subsidized plans on the Government Exchanges (EHTH had limited ability to sell those plans in 2014).  For perspective, HCA Holdings, which is the largest hospital system in the US, said yesterday during its earnings call that only 40% of its Exchange patient volumes are coming from the newly-insured.  That means 60% already had insurance, some if not, most of that is coming from private exchanges (e.g. ehealthinsurance.com).  The quarter and guidance could go either way, but we suspect a guidance cut is the most likely scenario.  
  3. MAJOR RISK IN 2015: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.

Let us know, if you have any questions, or would like to discuss further. 


Hesham Shaaban, CFA





Takeaway: As far as 2014 is concerned, the peak rate of improvement in New Zealand’s GIP fundamentals is now in the rearview mirror.

On JAN 30th, we introduced a long bias in the iShares MSCI New Zealand ETF (ENZL) under the guise of:


  1. A likely Quad #1 setup for the balance of 1H14: Looking to the subsequently reported data, real GDP growth accelerated to +3.1% YoY in 1Q form +2.2% prior, which was good for the fastest rate of growth in two years. CPI decelerated to +1.5% YoY in 1Q from +1.6% prior; it rebounded back to +1.6% in 2Q.
  2. Commodity reflation exposure: Looking to subsequent market performance, the CRB Commodity Index has appreciated +4.5% since then, inclusive of a +10.4% rip to its JUN 20th YTD high.
  3. Likely NZD/USD appreciation amid a then-outlook for tighter monetary policy: Looking to subsequent monetary policy adjustments, the RBNZ became the first DM economy to tighten monetary policy in the YTD by hiking its benchmark OCR +100bps from an all-time low of 2.5% in consecutive meetings from MAR-JUL.


Since then, the ETF has appreciated +7.5%, which has underperformed both the S&P 500 (SPY) – up +9.9% since then – and the MSCI World Index (URTH) – up +7.9% since then. Not terrible, but not our best work either; we obviously prefer to beat beta with our macro ETF recommendations.


Moving along, with the index fund recently breaking our immediate term-TRADE line of support (now resistance) amid a deteriorating fundamental outlook, we see no reason to stay involved on the long side at the current juncture.




Looking to the fundamental picture, two developments provide cause for alarm: 


  1. Slowing high-frequency data pointing to a dour intermediate-term growth outlook: Looking to the table below, it’s easy to see that the vast majority of New Zealand’s [very detailed] survey, credit and export data are showing clear deterioration from a 3M, 6M and 12M trend perspective. That, coupled w/ the lagged effects of tighter monetary policy should put New Zealand squarely in Quad #4 for the third quarter, which is not particularly exciting for an equity investor in the absence of rate cuts or QE.
  2. RBNZ currency intervention: After the fourth +25bps hike last Thursday, RBNZ governor Graeme Wheeler stated that, “The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” This verbal intervention in FX markets comes after the threat of actual intervention in MAY, amid the following commentary: “The exchange rate is unjustifiably high because it has failed to respond to a slump in dairy prices.” While he may be merely jawboning to a large degree, FX investors clearly do not think that is the case. The NZD has fallen -305bps vs. the USD MoM, the third worst spot return over that duration across the 32 expanded major currencies tracked by Bloomberg. It’s also worth nothing that Wheeler has the full support of Prime Minster John Key in this initiative to weaken the NZD. Needless to say, he does not have ours.






All told, we think it pays to book the gain in New Zealand here. If you’re looking for places to put your money, our favorite ideas on the long side of Asia/Oceania remain:




Happy hunting,




Darius Dale

Associate: Macro Team

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