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A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT

Takeaway: Recent data reduces the probability of our 2H14 US GIP outlook materializing as previously outlined – for now.

As Keith highlighted in today’s Early Look, we’ve been wrong on our forecast for USD debasement and commensurate commodity price inflation for 1-2M now. Moreover, the quantitative signals embedded therein are now at/near critical thresholds that would cause us to materially alter our fundamental views.

 

The US Dollar Index is flirting with a bearish-to-bullish reversal on our intermediate-term TREND and long-term TAIL durations. It’s super early, so we don’t want to get horned up chasing a potential head fake, but to the extent this signal is confirmed, it would represent a seismic shift in global monetary policy expectations and the direction of international capital flows:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - DXY

 

In conjunction with the aforementioned developing bullish TREND signal on the DXY, our TACRM system is signaling the US Dollar Index (UUP) as a “BUY” and is also calling for investors to reduce their allocation to Foreign Exchange as a primary asset class, at the margins:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - TACRM Heat Map

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - TACRM Summary Table

 

In the context of the quant signals highlighted above, the CRB Commodity Index is now literally dancing on its TREND line of support. Like with the DXY, we need to see price, volume and volatility all confirm any subsequent breakdown in the coming weeks:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CRB INDEX

 

For now, stick with the process and don’t get whipped around in the emotion of it all!

 

What Just Happened:

 

  1. Domestic Economic Growth Ripped in 2Q: GDP growth accelerated to +4% QoQ SAAR in 2Q14. The 1Q14 figure was revised up to -2.1% QoQ SAAR from -2.9% prior. The GDP deflator accelerated to +2% QoQ SAAR from +1.3% prior, making the headline growth figure even more robust. “C”, “I” and “G” all accelerated on a QoQ SAAR and YoY basis in the second quarter. “I” was the primary contributor to the massive acceleration in 2Q GDP, contributing a full 257bps to the headline figure. Some pundits are whining about inventories contributing 166bps, but we can literally go either way at this point (i.e. channel-stuffing or purchasing managers anticipating an economic cycle?).
  2. Consumer Confidence Ripped in JUL: The Conference Board Consumer Confidence Index ripped +4.5pts MoM to a new post-crisis high of 90.9, which is the highest reading since OCT ’07. Moreover, the trend in confidence continues to accelerate on a 3M, 6M and 12M basis. Lastly, the present situation component accelerated to 88.3, which is the highest reading since MAR ’08. We’d attribute this meaningful acceleration in consumer confidence to two things:
    • The Consumer Is Getting Un-Squeezed, At the Margins: Looking to our proprietary Consumer Squeeze Index, which is easily the most sophisticated model we’ve built to track market-based cost-push inflation, we’re now wrapping up our third consecutive month of sequential deflation. Per this metric, we need to see incremental cost-push inflation to support having anything more than a mildly bearish outlook for consumption growth. The consumer squeeze we’ve seen in the YTD is nowhere near the levels of inflation or duration that we saw in 2008 and 2011.
    • Job Growth Is Begetting More Confident Consumers: The trending improvement in domestic labor market conditions is not new-news, so we’ll refer you to our latest analysis of initial jobless claims trends and our detailed review of the JUN Employment Report for more details.
  3. Today’s FOMC Statement Was Hawkish, On the Margin: While continuing to paint both sides of the fence with their assessment of the path for prospective monetary policy, today’s FOMC statement is decidedly hawkish, on the margin, with respect to the committee’s assessment of economic conditions. Refer to the red H’s for “hawkish” and green D’s for “dovish” in the side-by-side statement below for more details. Remember, one month does not constitute a trend in official guidance, so we’ll need to closely monitor the Fed going forward to see if a discernible trend develops. Key Upcoming Monetary Policy Events Include:
    • Mid-to-late AUG: Janet Yellen participates in well-publicized discussions at the Fed’s annual conference in Jackson Hole, WY
    • 8/20: minutes released from the JUL 29-30 FOMC meeting;
    • 9/3: the Fed’s Beige Book is released;
    • 9/16: FOMC policy announcement;
    • 9/22: Bill Dudley speaks in NY;
    • 10/8: minutes released from the SEP 16-17 FOMC meeting;
    • 10/15: the Fed’s Beige Book is released; and
    • 10/29: FOMC policy announcement.

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - UNITED STATES

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CONSUMER CONFIDENCE

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CONSUMER SQUEEZE INDEX

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - 7 30 2014 3 00 14 PM

 

What Is Likely To Happen Next:

 

  1. Growth Will Slow… Duh: We maintain our view that domestic economic growth will slow in the third quarter and potentially well into the fourth quarter.
    • From a QoQ SAAR Perspective: The +4% figure seen in 2Q14 will represent a material challenge to growth accelerating from here. With a +3.1% forecast for 3Q14, consensus is well aware of that. The question is whether they are aware their forecast is 2-3x our current 3Q14 figure of around +1%?
    • From a YoY Perspective: Toughening GDP compares through year-end should cause real GDP growth to slow in 2H14 if economic activity does not accelerate on a sequential basis, which is the likely scenario – at least through 3Q14. This is especially true with the GDP deflator – which accelerated to +1.6% YoY from +1.4% prior – set to continue accelerating on materially easing CPI compares.
  2. The Fed Will Get Easier, At the Margins: Until the preponderance of our quantitative signals across the fixed income, currency, equity, commodity and volatility markets signal something different than what they’ve been signaling in the YTD, we will maintain our view that the Fed will get easier, at the margins, as the year progresses. The only question is will the ECB and BoJ beat them to it – in both timing and magnitude of easing. Remember, one or perhaps two months of decelerating economic data does not a trend make, so we might have to wait all the way until late-OCT before the Fed gets meaningfully dovish – if at all. This is especially true after a four-handle GDP print (i.e. of course growth will slow… but to what absolute levels?).

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - GDP COMPS

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CPI COMPS

 

All told, we don’t tell the market(s) what “valuation” and “survey data” would suggest it should be doing like a lot of our competitors; rather, we react to what markets are doing, backfill the storytelling with a heavy dose of economic and financial market history and make probability-weighted investment recommendations based on where said markets are likely to go next.

 

It sounds simple because it is. After six years of being as right as anyone on macro, this collection of football and hockey players is still not smarter than the market.

 

Thanks for continuing to pay attention to our dynamic process,

 

DD

 

Darius Dale

Associate: Macro Team


HST 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:  $1,434 million
  • Adjusted EBITDA:  $408 million
  • FFO:  $0.43/share

 

MANAGEMENT GUIDANCE

FY 2014:

  • Comparable hotel RevPAR - domestic: 5% - 6%
  • Comparable hotel RevPAR - int'l constant US$: 7% - 8%
  • Total comparable RevPAR - constant US$: 5% - 6%
  • Total revenues (GAAP): +3.3% to +4.3%
  • Total comparable hotel revenues: +4.7% to 5.7%
  • Operating profit margins (GAAP): 180-240 bps
  • Comparable hotel adj. operating profit margins: 70-120 bps
  • Adjusted EBITDA $1,360-$1,400 million
  • Net Income: $497-$534 million
  • Diluted EPS: $0.64-$0.69
  • NAREIT FFO/share: $1.41-$1.45
  • Adjusted FFO/share: $1.41-$1.46

 

QUESTIONS FOR MANAGEMENT

  • CapEx - total value of growth vs. maintenance capex programs?  ROI on renovations from last 2 years? 
  • Views on:
    • Washington DC, New York, Chicago
    • California: San Diego, Los Angeles, vs. San Francisco?
    • Urban vs. Suburban vs. Resort/Conference
  • Does the company want to achieve a debt rating upgrade from BBB to BBB+ or A- ?
  • What is the Company's dividend strategy/pay out policy?
  • How much current cash is trapped overseas? How do you plan to utilize this overseas cash?
  • Visibility into and expectation for F&B operations during Q3 and Q4?
  • When the lodging cycle turns for the worse, where will we see the slowdown first?

 

RECENT MANAGEMENT COMMENTARY

Overall

  • Hotel demand continues to grow, particularly in group business, thus pushing rates across all segments
  • Demand growth throughout the U.S. should continue to be strong
  • International travel continues to demonstrate robust growth
  • Expect that RevPAR will continue to be driven, primarily by rate growth which should lead to solid rooms flow-through. 
  • 28% of full-year EBITDA will be earned in Q2

Group

  • Corporate demand was up by more than 10% as well as solid demand improvement throughout the quarter.
  • Solid group trends suggest that banquet activity will continue to be strong other than in Q2, leading to improved F&B growth and profitability, which increases margins
  • Expect group demand to remain strong throughout the remainder of the year
  • Q2 group activity will be lower, primarily because of the year-over-year Easter holiday shift
  • Booking pace for 2014 continues to be quite strong as revenues are up 5.5% compared to last year
  • Group revenue is still 10.0% below prior peak levels
  • Group revenues booked in Q4 for 2014 and 2015 exceeded the prior-year’s strong pace
  • Roughly 85% of our full-year expected group bookings on the books
  • Room night bookings in Q1 for the remainder of the year exceeded last year’s pace by more than 4%, with bookings for the month after April up nearly 10%

Transient

  • Strong demand in higher-rated retail and corporate business, which increased more than 6.5%

Peak

  • Occupancy in the portfolio is ahead of our 2007 peak, suggesting hotels should be able to drive rate growth over the next several quarters
  • F&B revenues are still roughly 10% behind 2007 level
  • For the full year, F&B is still looking to be 5% to 6% behind prior peak levels
  • Margins are still 300 bps below peak and profitability 15.0% on a non-inflation adjusted basis

Asset Sales

  • Marketing additional assets but sale multiples could be in the low double digits as substantial capex is needed for several properties

Other

  • Equity issuance this year should be minimal in the absence of significant acquisition opportunities and HST is approaching its leverage target of 3x.
  • At March 31, 2014 approximately $392 million of cash and cash equivalents and $782 million of available capacity under its credit facility.

CapEx (for 2014)

  • Redevelopment & ROI capital expenditures for 2014 will range from $70 million to $80 million.
  • Recent acquisitions capital expenditures will total $30 million to $35 million.
  • Renewal and replacement expenditures for 2014 will total approximately $320 million to $340 million

Market Trends

  • Expect the West Coast properties to continue to outperform - especially, San Francisco, Seattle, Phoenix, and Hawaii.
  • San Francisco: continue to outperform the portfolio. 
  • San Diego: strong results were due to the completion of the rooms’ renovation at the Manchester Grand Hyatt and the San Diego Marriott Mission Valley Hotels. The solid group base at these hotels allowed the managers to drive transient ADR

H 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:  $1,177 million
    • Owned & Leased Hotels:  $616 million
    • Other Revs from Managed Hotels:  $441 million
    • Managed & Franchised Fees:  $102 million
  • Adjusted EBITDA:  $234 million
  • EPS:  $0.45/share

 

MANAGEMENT GUIDANCE

Q2 2014

  • No specific guidance

FY 2014

  • Adjusted SG&A of approx $325 million.
  • Capital expenditures of approx $325 million, including about $150 million for investment in new properties.
  • The Company intends to continue a strong level of investment spending including: acquisitions, equity investments in joint ventures, debt investments, contract acquisition costs or other investments.
  • D&A of approx $375 million.
  • Interest expense of approx $75 million.
  • Open approximately 40 hotels

 

QUESTIONS FOR MANAGEMENT

  1. Views on assets sales given strength in transaction market as well as hotel REIT share performance - one off vs portfolio transactions
  2. Where are inflation pressures negatively impacting margins?
  3. ROI on renovations from last 2 years?
  4. Discuss investment spending plans for the remainder of 2014.
  5. What is your goal in terms of fees vs owned EBITDA?
  6. What is the right leverage?  Current thoughts on share repurchases?
  7. Rate vs occupancy gains this year and where are we in the cycle?
  8. Actual RevPAR vs ST and competition
  9. Group outlook for Q3 and Q4 given MAR management commentary

 

RECENT MANAGEMENT COMMENTARY

Overall

  • Seeing both group and transient strength from sectors such as technology, pharmaceuticals, manufacturing and insurance.
  • Strong top-line results will result in realized strong owned and leased margin growth in the U.S.
  • Confident in the business trends in the U.S.
    • Occupancy rates are at record levels and continue to see strong average rate growth.
    • F&B business continues to improve.
  • Outside the U.S.
    • Positive demand growth
  • Second quarter comparisons will be tougher due to the timing of Easter and some quarterly variability in incentive fees as a result of seasonality and contract structure related to our management of four hotels in France -- which came into the system during the second quarter of 2013. As a result, incentive fee growth in the second quarter of 2013 was strong

 

Group

  • Experienced strong group production in the quarter for all future periods
  • Group revenue booked in the quarter for the year increased over 13%, translating into improved pace for this year
  • Group pace for 2015 has increased about 200 basis points over the last quarter from about 5% to about 7%.
  • Demand remains relatively robust
  • Group pace for the remainder of 2014 and into 2015 is healthy
  • San Francisco, Orlando, San Antonio and Chicago were strong.  D.C. continues to be relatively weak.
  • Increased demand in corporate and association business, see healthy levels of businesses into 2015 and 2016
  • Pace has increased over the last quarter probably in the range of 100 basis points to 200 basis points, something like that. Similar to the expansion in the 2013 pace expansion which was about 200 basis points quarter-over-quarter
  • See a continuation of group into the second quarter and in the future periods and a long look at pace going out into 2015, 2016 and into 2017 as well, the view is for some very healthy numbers, which leads to a lot of confidence in group.
  • The opportunity is there because transient is strong to now really focus on rate, both in the transient side as well as in the group side.

Margins

  • Flow through on the mix of RevPAR that is mostly rate would be north of 60%
  • Internationally, roughly 40%, 42% of our revenue is non-rooms revenue.
  • Domestically, F&B is less, so room revenues to F&B is probably around 70/30.

China

  • China appear to be stabilizing relative to a volatile 2013 and realized solid overall RevPAR growth in China

Preferred Acquisition Markets

  • Focused and actively looking gateway city opportunities in Europe, in the U.S., and Miami and Los Angles remain high priorities

Park Hyatt New York

  • Commitment to purchase the hotel upon completion at a fixed price of $375 million - 210 keys, so about $1.8 million a key
  • Hyatt is a two-thirds joint venture partner in the JV that has a commitment to buy the hotel
  • Expect to open the hotel in the third quarter (was previously mid-year).
  • Hyatt will purchase a two-thirds interest in this hotel upon completion, so roughly, $250 million commitment.
  • Will look to finance the acquisition -- in the range of 50% of the purchase price with debt.
  • EBITDA impact, de minimis in 2014.

Modeling (EBITDA) Adjustments

  • The Hyatt Regency acquisition in Orlando, will be a net $45 million of incremental
  • Playa EBITDA is $13 million to $15 million for 2014, about a third of that was generated in the first quarter. Have an additional two hotels towards the end of the year that will be rebranded and converted once renovation is completed

Acquisitions & Dispositions

  • Expect to close (during Q2 2014) on the purchase of the Hyatt Regency Grand Cypress in Orlando, Florida for $190 million.
    • This hotel is currently consolidated as an owned and leased hotel pursuant to a capital lease.
    • There will be no change to Hyatt's reported adjusted EBITDA as a result of the acquisition.
    • From a balance sheet perspective, Hyatt will pay $190 million in cash and reduce debt on balance sheet by $190 million.
    • 2014 interest expense estimate reflects this purchase
  • Hyatt signed a definitive agreement for ILG to purchase Hyatt Residential Group for approximately $190 million.
  • In addition, ILG will acquire Hyatt’s interest in a joint venture that owns and is developing a 131-unit vacation ownership property in Maui, and will reimburse Hyatt an additional approximately $35 million.
  • Currently marketing nine full service hotels in North America for
    a potential sale.
  • The Company expects that a significant number of new properties will be opened under all of the Company's brands in the future.
  • As of March 31, 2014 this effort was underscored by executed management or franchise contracts for approximately 240 hotels (or approximately 54,000 rooms) across all brands.
  • Subsequent to Q1, an unconsolidated hospitality venture sold Hyatt Place Austin Downtown (296 rooms). The Company received approximately $25 million for its equity interest. As a result of this sale, the Company's pro rata share of unconsolidated hospitality venture debt was reduced by approximately $18 million. The Company continues to franchise the hotel.
  • Expect to open 40 hotels in 2015. Opened about 50 hotels last year.

Target Markets

  • Very deliberate - the key global full-service markets are London and Miami, San Francisco, Hong Kong, Los Angeles
  • Select service properties - focus remains on urban development and with respect to resorts
  • Playa focused on Mexico, and the Caribbean in North America.

Openings

  • Hyatt Regency Chongming, 235 rooms
  • Hyatt Place Dubai/Al Rigga, 210 rooms
  • Hyatt Place Portland, 130 rooms
  • Hyatt Regency Tianjin, 306 rooms
  • Hyatt Place Dongmen, Shenzen, 144 rooms
  • Hyatt Atlanta Perimeter at Villa Christina, 177 rooms
  • Hyatt Place Flushing, 168 rooms
  • Park Hyatt Viena, 143 rooms
  • Andaz Tokyo Toranomon Hills, 164 rooms
  • Hyatt Place Champaign/Urbana, 145 rooms
  • Hyatt Place Washington DC/US Capital, 200 rooms

 

Balance Sheet

  • From April 1 through April 25, 2014, the Company repurchased 500,529 shares of common stock at a weighted average price of $53.91 per share, for an aggregate purchase price of approximately $27 million.
  • As of April 25, 2014, the Company had approximately $101 million remaining under its share repurchase authorization.
  • May 16, 2014, the Company announced the Company's Board of Directors authorized the repurchase of up to an additional $300 million of the Company's common stock. The Company currently has approximately $385 million remaining under its repurchase authorization.

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Poll of the Day Recap: 68% are Bullish on China

Hedgeye senior macro analyst Darius Dale has gone from being bearish on Chinese stocks to bullish. In the video below, Darius outlines how both fundamental research and quantitative signals support his bullish thesis.

 

Today's poll asked if readers are Bullish or Bearish on Chinese equities. At the time of this post, 68% of voters are Bullish, and 32% are bearish. 

 

Cast your vote below.

 


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Cartoon of the Day: GDP Reality Check

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


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