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Another lodger disappoints on Q2 RevPAR and F&B growth. However, guidance and forward commentary was positive



Q2 2014 commentary:

  • High occupancy driving ADR and thus RevPAR
  • International hotels continue to outperform
  • Transient: demand 1.6%, rate 5%, revpar 6.5%
  • Group slow due to Q2 calendar shift:  demand 0.8%, revenues 2%

For H1 2014 commentary:

  • Group REVPAR:  +3.5%, demand:  +3.5%, ADR +6% best performance since last peak
  • Corporate group +5% demand
  • Transient demand + 0.7%  rate +4.5% = +5% revenue
  • Banquet revenue +6.6%.  F&B +4.8%;  50% flow through

Acquisitions: active pipeline and expect acquisitions before year end but not included in forecast currently due to timing of closing


Disposition:  expect to sell at least one asset ($200M) before year end


Total capex:  $180m



  • Slow GDP growth, employment growth, limited new supply
  • Group booking pace very strong: revenues tracking 6% higher
  • Group IQFTY up 14%
  • 3Q booking trending better than 4Q
  • Solid banquet spend and good flow through
  • 2H margins expand more than 1H

Q2 Market Highlights:

  • Latin America:  RevPAR +40%, Rio & Mexico City +53% RevPAR, outpeform in Q3
  • West Coast: RevPAR +7.1%; ADR +7%,
    • SF ADR +11.2% mix shift toward transient and higher rated group.
    • Seattle: Q3 stronger than portfolio
    • Pheonix: rate and occ gains due to group gains, driving transient mix, 3Q in line with portfolio
  • Denver: strong group business = strong Q3
  • Hawaii: negative impact due to Hyatt Maui, Q3 improving performance
  • Florida: RevPAR +16.5% in April, 13% in Q2.  Q3 in line with portfolio
  • Houston: lost  2% occupancy due to comp and attrition: Q3 and Q4 expect under performance due to renovations and lack of citywides.
  • Atlanta: Q3 better
  • Chicago: RevPAR down, lack of citywides.  Q3 better
  • NY:  occupancy up, rate weaker, Q2 RevPAR 5%, F&B +8% in Q2, supply growth hampering rate gains.  Q3 and Q4 in line with Q2 but supply overhang
  • Wash DC: ADR declines, suffering, Q2 group room nights -9.2%, replaced group loss with lower rated transient. Q3 expect continued weakness


  • Q2 slow down due to calendar shift
  • Q3 stronger

EBITDA outlook:

  • Margin: 100-130 bps better, insurance and overhead gains
  • 3Q: 22% EBITDA of total FY EBITDA will be earned in 3Q

Balance Sheet:

  • Blended and extended revolver and term loan


  • Strong outlook, large FCF, increased dividend to $0.20 - will be run rate for few quarters.
  • Potential for special dividend.
  • May issue additional dividend greater than 100% of taxable income if unable to find suitable uses for excess cash.



  • NA RevPAR vs. STR data
    • Secondary market performed better than primary markets, natural evolution of lodging cycle.  Leisure sector stronger than rest of the market, better performance at lower price points.  Non-comp hotels had double digit RevPAR growth.
  •  Acquisitions: why no assumed acquisitions in guidance?
    • Nothing to announce today, mid-year 
  • Acquisition pricing vs. replacement cost vs. historicals?
    • Difficult to compare on replacement cost, still better to be a buyer vs as a developer.  Certain markets with stronger recoveries (West Coast and Miami), transaction pricing approaching replacement cost, so some new development. Not yet at the levels of 2006 and 2007 when buyers willing to pay 15% to 20% higher price than HST ability/desire.
  •  Acquisitions: what's in the pipeline -- US vs. International?
    • Mixed, good European activity, looking in Europe. Also looking at higher end of select service in the US.  Asia slow, nothing immanent. 
  • Acquisition - how to find appealing opportunities given interest by PE, SWF, and other REITs?  Repositioning?
    • Change in operator or change in brand which allows HST to satisfy their yield requirements.
  • Dispositions?
    • A number of assets listed for sale, expect potential closing late fall into early winter
    • If sell a $200 million asset, then EBITDA down $4 million in Q4. 
  • Group - increasing lead time, pricing power? 
    • Seeing a significant increase in corporate business, especially in Q2.  Pleased with booking activity in Q2,  IQFTQ room nights up 9%, rest of 2014 nights up 5% translates into revenues up 14%. Bookings getting done now ADR significantly higher than YoY.  Encouraged by booking pace.   2015 unclear...1H very good on rate and occupancy but 2H rate lower and not seeing booking nights pick up. 
  • Prior Peak EBITDA on current portfolio?
    • 2007 peak $1.48B but acquired and sold various assets, so not a true comparable number. 
  • F&B spend in Q2 vs. Q1 for groups?
    • Up strongly in Q1, flat in Q2, up in Q3 but difficult to tell for Q4, Q4 impacted by holiday party spend decisions which are close to date. Generally seeing decision to spend more closer to event. 
  • Upscale select service opportunity?
    • Decision based on return opportunity of the asset as well as the outlook for the asset. Not see a meaningful increase in upscale hotels in portfolio. 
  • European JV portfolio - H1 vs H2 trends?
    • Noticed similarities in Spain & UK, urban hotels under performing.  Spanish resorts did very well and outperformed urban assets. Weaker in Europe in H1 due to event timing, group events in 2013, coupled with internal travel shifts.  Pleased with F&B and profit flow through.  H2 trends reverse, upticks in group business.  
  • More acquisitive with JV partner as European economies recover?
    • Looking and also seeing an uptick in activity.  Will be disappointed if HST does not participate in few transactions in H2 of this year.
  • Occupancy trends - markets running high 70s/80ish, how to get additional occupancy gains?
    • Add'l RevPAR gains will be ADR driven.  Middle of the week 90% occupancy so drives rate, on weekend need to drive occupancy and ADR will follow.  Trying to move groups more to weekend stays. 
  • Incentive management fees - trending over coming quarters? 
    • Expect 50%-55% of hotels to pay IMFs.  Renegotiated IMF contracts with several operators.  Expect historical IMF increases in 2015 and 2016, but will approach prior peak of 70% of hotels paying IMFs.
  • Domestic RevPAR below MAR and HOT - why?   
    • Portfolio composition and YoY compares. But encouraged and mid-point of guidance today was upper end of range last quarter. If include non-comp hotels, then Q2 closer to 5% revpar growth.
  • Maui timeshare - quantify expenses?
    • Have expense during Q2... didn't quantify.  But $11 million of EBITDA will be recognized in Q4 when the timeshare sales begin
  • Redevelopment opportunities?
    • Houston Marriott, San Diego ballroom, plus couple of other redevelopment opportunities, will have more commentary on 3Q call, but expect 2015 ROI capex budget to increase slightly.  
  • Washington DC outlook?
    • Outlook better - more rooms booked for 2015 and 2016.
    • Negative is what's happening with the Government politically, government sequesters, cutbacks.  H2 drag more muted/modest. 


Takeaway: Fewer people losing their jobs remains the signal from the claims series.


As the chart below shows, rolling initial jobless claims (SA) are now running sub-300k (297k), putting them right in-line with the lows seen in early-2006 at the peak of the last cycle. 


While history shows early-2006 was indeed near the peak of the economic cycle, at that time that wasn't all that clear. In fact, the stock market remained fooled for another ~18 months, not peaking until late Fall 2007. 


There's definitely some volatility in the data brought on by auto manufacturing furloughs, as is there is most years. This is one of the reasons we double check by looking at the NSA data, and on that basis the data remains strong as well (actually stronger this week than last week).





Credit Cards

Credit Cards remain our favorite long on the improvement in initial jobless claims. We've been vocal in our enthusiasm for Capital One (COF) on the long side amid early signs of a resurgence in loan growth arising from increasing willingness to extend credit to subprime borrowers. So long as claims remain low, the coast is clear on the long side here and we expect both better than expected earnings and think there's good likelihood for some multiple expansion.


The Data

Prior to revision, initial jobless claims rose 18k to 302k from 284k WoW, as the prior week's number was revised down by -5k to 279k.


The headline (unrevised) number shows claims were higher by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.5k WoW to 297.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -12.6%






























Yield Spreads

The 2-10 spread rose 0 basis points WoW to 200 bps. 3Q14TD, the 2-10 spread is averaging 204 bps, which is lower by -17 bps relative to 2Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


TGT – New CEO Is Wrong Strategic Move

Takeaway: This CEO hire is the mother of missed opportunities for TGT. The Board balked on #TGT2.0 and went for #OldEconomy.

Well…if you didn’t know why TGT has been strong over the past month, now you know. It’s been on the verge of hiring a new CEO and someone apparently got the memo. Quite frankly, we’re very surprised and extremely disappointed by the Board’s appointment of Brian Cornell as the new CEO and Chairman. There’s nothing wrong with Cornell at face value from where we sit. But a company as well capitalized as Target has the resources to hire the best of the best. We assumed that it would. It didn’t.


As we outlined previously (see comments below) the company could have gone in one of two directions. 1) TGT 1.0: sustain its recent strategic acceleration to being an old economy retailer – a capital-light option that will make tweaks to the business to produce near-term earnings results, or 2) TGT 2.0: hire someone who can transform the retailer to be aligned with how consumers will actually shop over the next 5-10 years, and re-emerge as the best-in-class aspirational retailer in the US, and even globally. Capital intensive near-term, but huge potential payoff long-term.


In the press release, the Board snuck in a statement that ‘Omnichannel’ will be a focus for Cornell. But truth be told, ‘Omnichannel’ is a focus for just about everyone. It’s the most abused buzzword retailers have had in decades. Don’t mistake that for #TGT2.0.


We’re divided on what this means for the stock.  The twittersphere is already lighting up about how positive this is for TGT, and we’re seeing sell-side upgrades on the news. This is after a 11% run in the stock since the beginning of last month – which is a lot for Target.  


Without having heard Cornell’s plans, we’re inclined to think that he’ll be focused on near-term tactical patches to the model. At risk of sounding punitive, he has not even been in any of his four most recent executive roles for more than 3-4 years before exiting for the next opportunity. Maybe he’s looking to settle down in Minny for the long haul. A near-term focus could mitigate numbers going down further over the near-term. That’s an obvious inhibitor to a short playing out right now. But it would rob exponentially from the value that could be created in the outer years – the same value that any long-term investor would pay for today.


In the end, we need to see what Cornell’s plans are for this company. The market already is placing its bets that he’ll be a winner. But call it #TGT1.0, #OldEconomy – it’s all the same. This is a bad choice and a missed opportunity to make this company great again.   


07/24/14 08:33 PM EDT

TGT – Target 1.0 vs 2.0


Takeaway: If it turns out that WMT’s US CEO left to take the top job at Target, we’d look to get much heavier on the short side of TGT.


CONCLUSION: If it turns out that Bill Simon left his post as CEO of WalMart US to take the top job at Target, we’d look to get much heavier on the short side of TGT. We think that move would simply be disastrous for Target, and would set the company down a path that is simply uninvestable, and likely value-destroying.



First off, there’s nothing wrong with Simon. The guy ran a $280bn business – nearly 4x the size of Target’s revenue base. Did WMT’s US stores knock the cover of the ball during his tenure? No. But you don’t get to be CEO of the largest division of the biggest company in the world (ranked by revenue) by being incompetent. Furthermore, Simon potentially knows more about how to collect customer data and use it to generate sales than everyone in the Target organization combined.  Ultimately, for someone who thinks that the key for TGT is to be more competitive with WMT, then this would be a massive win.


But TGT Needs to Become Everything That WalMart is NOT. Trying to become WalMart is what got Target into trouble in the first place. Remember in 2008 when ‘Tarjay’ was actually inked in the Urban Dictionary to memorialize Target as a place where teens went to get trendy fashion at cheap prices? Well, management had the Branding equivalent of lightning in a bottle. Yes, WalMart envied it. So did Macy’s. So how did Target answer?

  1. It converted 65% of its stores from 2008 through 2013 to P-Fresh stores. Basically, this is a Supermarket where a Soccer Mom could get Eggs, Bread, Pop Tarts, and then grab a sweater and some bed linens.
    TGT – New CEO Is Wrong Strategic Move - tgt note 1
  2. It pushed the Red Card, which gave 5% off all purchases. Over the same 2008-2013 time period, Red Card went from 5% of purchases to just shy of 20%. We’re really not worried about the direct financial impact, which is about $833mn/yr in lower Gross Profit due to higher discounts, as that realistically was offset at least a little bit by higher purchase volume. The real problem we have is with how this, combined with P-Fresh conversion changed the shopper profile.
    TGT – New CEO Is Wrong Strategic Move - tgt note 2
  3. Mix changed accordingly, with the highest margin categories like Apparel and Home Furnishings giving way to perennially low-margin Food and Household Essentials (non-food products you buy at a grocery store).
    TGT – New CEO Is Wrong Strategic Move - tgt note 3

So think about it. TGT went from cool, edgy ‘Tarjay’ where it was the envy of most of its peers, with a relatively defendable customer and would actually compete on the fringes with the likes of H&M, to being the place where a person who cares about nothing but price, or shops there simply because they hate going to WalMart. It went from having a peer group where it had a notable competitive advantage, to putting itself right in the middle of four unique competitors – 1) WalMart, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets. As a bonus, it has Amazon.com hovering over its head plucking away every last sales dollar it can.


Oh, and by the way, once TGT realized this was a multi-year string of horrible decisions, it decided to look to a new venue for growth – Canada. We have a whole deck quantifying why that’s flawed. But by now that’s hardly an out-of-consensus view.


Our point is that this whole mess is why Steinhafel was fired as TGT’s CEO. It wasn’t due to the data breach. Maybe the breach was a good excuse, or a catalyst, for the Board. But it was not the reason for ousting him.


This brings us to why hiring Bill Simon as TGT’s CEO would be a very bad idea.

All of Target’s missteps over the past six years are a product of what we’d call ‘Retail 1.0’.  Simon is the zen master of Retail 1.0. Unfortunately, upgrading to Retail 2.0 is the only thing that can save Target now, and we seriously doubt that Simon could do it. Importantly, if the Board hires him, then it shows us that it is content with Retail 1.0. That’s a multiple-compressing event, over time.


We don’t think that Target 2.0 will be achieved by rolling back the clock to try and recapture the string of excellence it had in the 2000s. That’s actually borderline impossible. It would be like taking a pickle and trying to make it a cucumber again.


It really needs someone to step in and change the paradigm. Target has tremendous assets – in its store base, logistics network, and (too many) people. The Board should not be looking at McMillon’s team at WMT for a new CEO, but instead should be looking at Jeff Bezos’ team at AMZN. That’s the place/culture to look for a winner that could not only fix Target’s dot.com business, but make it a Brand that anticipates where and how consumers will shop 5-10 years down the road.


What This Means For The Stock.

1) We’re going to give the TGT Board the benefit of the doubt on this one. We think that it is looking for a CEO who can make sweeping changes to create considerable shareholder value 4-5 years out (i.e. Target 2.0). We also think that anyone who takes on that challenge will make sure that he/she has the Board’s buy-in to spend the considerable capital needed to change this company so dramatically. Ultimately, we think that this could lead to TGT being the best performing stock in the S&P – in about 2019. Until then, it will be extremely slow and painful, and earnings and cash flow assumptions out there will prove to be way to high. For the record, this is similar to what we said about JCP when it was at $40.  TGT could get cut in half under that scenario.


2) Scenario 2 is a little tougher. This is the Target Board sticking with Target 1.0. That means that we could see the stock pop on the news, like with any scenario, and that the new CEO will be making tweaks to boost near-term cash flow and earnings. That might take numbers higher, but it will seriously dampen the potential for any real growth in this business. Then you’re playing for a levered, low-growth retailer in year six of a retail margin expansion cycle – something we’ve never EVER seen go into year seven.


We still like the risk-reward on this one – a lot. 

TGT – New CEO Is Wrong Strategic Move - tgt note 4


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YUM filed an 8-K yesterday after the close, in which it discussed the recent food scandal involving supplier Shanghai Husi, a division of OSI.  The company has since terminated its relationship with OSI globally, but severe damage has been done. 


According to the company:

  • "While OSI was not a major supplier to Yum! Brands, these events triggered extensive news coverage in China that has shaken consumer confidence, impacted brand usage, and disparaged the hard work of our over 400,000 Chinese employees."
  • "The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days."
  • "At this point, it is too early to know how quickly sales will rebound in China and the corresponding full-year financial impact to Yum! Brands."
  • "However, if the significant sales impact is sustained, it will have a material effect on full-year earnings per share." 


Recall that on July 23, 2014, we removed long YUM from our Investment Ideas list (YUM: Losing Faith) on the basis of a significant, anticipated setback in China following the initial report of improper food handling practices in the country.  Chinese consumers are still fragile and, as we opined, the consequences of this event would be material.  As it stands, we believe consensus full-year same-store sales (depicted in the chart below) and earnings estimates are far too aggressive.  We won't know much more until the company reports 3Q14 results in October, but this is a name we'd stay away from.




Call with questions.


Howard Penney

Managing Director


Fred Masotta



Client Talking Points


Is the U.S. Dollar strengthening because the U.S. economy is, or is it signaling immediate-term TRADE overbought versus the EURO because Europe is slowing now too? We’ll take the latter – because the early cycle growth components of everything from the Russell 2000, Housing, and UST 10YR Yield are.


We see bearish @Hedgeye TREND signals across European Equities  - and while the DAX is down the least (compared to Portugal -1.6%, Spain -1.3%, Italy -1.1%) this morning, at -0.7% to 9523, it’s well below our 9788 TREND resistance line.


Newsflash: One up-day to lower-highs within a bearish TREND for U.S. 10yr yields doesn’t a new bear market in the long bond make. 2.54% 10yr yield within a 2.44-2.56% immediate-term risk range. We reiterate our #Q3Slowing USA theme this morning.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Former CEO of PepsiCo Americas Foods, Brian Cornell, is named as new CEO and chairman of the board of Target.



Creativity comes from trust. Trust your instincts. And never hope more than you work.

-Rita Mae Brown


Another solid session for Chinese stocks, Shanghai Composite up +0.9% to +7.2% year-to-date.

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