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Q2 Group shift (impacted f&b too) plus international (Seoul and Bishkek) drag down an otherwise good quarter – asset sales and more buybacks forthcoming. Outlook positive



Q2 Results & Outlook

  • RevPAR results driven by ADR increase
  • Owned & Leased: negative comp due to calendar and strong results at 5 hotels in 2013. 
    • Margins: Americans +100bps  Outside Americas -400 bps (Seoul and Bishkek were poor)
    • Q2 Group RevPAR +1.5%, impacted by Easter but H1 Group RevPAR +5.1% YoY 
  • Fees:  No fees at four French hotels in 2Q vs YoY.   Difficult Q/Q comparisons for the French hotels will continue through 2014.
  • Outlook:  60% of 2015 on the books, pace up in Q2.  Catering pace +10%

Growth & Trans

  • 8 of 9 hotels remain on market, decided to take 1 asset off the market.  The 8 hotels earned $40 million in EBITDA in 2013.
  • 42 of 44 select service hotels recently listed for sale, earned $45 million of EBITDA on LTM minus management fees. 
  • On track to close on Hyatt Residental Group with ILG. 
  • Maui Property $35 million sale at cost
  • ILG will pay ongoing fees per licensing agreement
  • Acquisitions: actively seeking  
  • Gateway: Park Hyatt $375 million plus pre-opening expense, expect to open in August. In discussions to revise acquisition, may acquire 100% of the hotel at original contract value plus $10m to $15 million = $385 to $395 million.  May purchase for all cash.  Allow for deferral of gains on sales if purchase 100%.

Capital Allocation

  • Remains unchanged.  Grow business and finding opportunities to recycle capital back into the business.
  • Acquisitions via dispositions (disposition proceeds used to buy acquisitions)
  • Expect to return capital to shareholders via repurchases. 
  • Maintain investment grade credit rating - keep gross debt / adjusted EBITDA below 3x.
  • Ample disposition proceeds to fund acquisitions, so expect to continue to return capital to shareholders via share repurchases.



  • Group business - was Easter shift the driver of under performance?
    • America's full-service segment RevPAR negative impact by 250 bps
  • Group trends for rest of the year?
    • Select service RevPAR is a proxy for transient demand and transient demand quite strong, Q3 more transient led, while Q4 more corporate and leisure led demand. 
    • Encouraging signs for association and corporate lead times into 2015 - expansion of booking curve
  • Group pace for H2?
    • H1 Group revenue +5%, pace 8% for 2015 
  • O&L RevPAR vs STR?
    • O&L in 2013 +7%, exclude two hotels outside Americas then 80 bps improvement in aggregate - actual RevPAR at two assets was -10%.
  • Margins? 
    • Q2 2013 margins up 230 bps, market specific Seoul and Bishkek Kyrgyzstan (-250 bps)  Seoul new supply, Bishkek demand issues due to US military airbase shutdown.
  • Playa Resorts
    • $4 million of JV EBITDA vs. $13-$15 million for 2014, now at the low end of the range. Focused on getting assets up and running.
  • Asset sales/recycling?
    • Select service - too early in process to comment but likely a six month process.  Could be one large portfolio or three portfolios of 32, 6, and 4 assets.  Older assets.  Hyatt House brand for past six years. 
    • Full service - expect six to nine months from listing to closing.  Listed in Q1 and expect similar timing.
  • Capital Allocation?
    • Dynamic process weight current commitments vs. future opportunities
  • Opening Pace?
    • Executed contract base remains strong, contract base is seasonal - more signings toward year end. Overall level of activity in India abated pending election, now moving from concern to optimism.  China remains consistent, more activity with select service brands, evolving.
  • Other Income line composition in Income Statement?
    • $20 million from sale of Hyatt Place in Austin - looking foward, difficult to forecast due to equity and cost methods of accounting
  • Hyatt Residential Group details and sales?
    • Time share 2% of total Adj EBITDA in 2013
    • Going forward: licensing fees of couple million per year
  • Recent Acquisition proformas?
    • Hyatt Regency Orlando on track to earn $55 million  San Antonio doing slightly better than expectations.
  • Park Hyatt NYC proforma expectations?
    • Return in high single digits, remains current expectation, will go through ramp up, encouraging partnerships
  •  Seoul & Bishkek issues - when do comps get easier/anniversary?
    • Seoul - comps easier in Q4 2014, on going market challenges due to North Korea and travel issues for Japanese and Chinese traveler into South Korea.  So market issue will not get easier anytime soon.
    • Bishkek - less than $5 million in 2013 EBITDA.  Difficult due to limited market and loss of US Foreign Service/Diplomatic/Military travel.
  • 2015 Group Pace Commentary - below peer pace estimate for H2 2014?
    • Short term bookings of IQFTQ - hopeful bookings will come through.
  • Asset sales - buyer universe for limited service buyers and valuation expectations?   Tax implication for portfolio sale?
    • Buyer universe:  know the public REITs, non-listed REITs, private equity
    • Not trying to tee-up deals for tax deferral but rather manage in normal process of acquisitions and dispositions.
  • Group demand duration?
    • Look to be on the ascension of group demand and progression for group, demand building on its own and not recovered on rate

EHTH: Not Out of the Woods Yet (2Q14)

Takeaway: EHTH cut guidance following a disastrous quarter. We're largely out of catalysts for 2014, but 2015 doesn't get any easier.


  1. 2014 RISK ALL ON THE TABLE NOW: Individual and Family Plan (IFP) net membership declined by 49K: EHTH gained 95K new members, while losing 144K existing members (18% of its members from the quarter prior).  While many believed EHTH was working with a massive tailwind from the individual mandate under ACA, we estimate that EHTH saw declining IFP revenues in 2Q14 on a y/y basis.  Turns out the public exchanges posed a much bigger threat than either the street or management believed they would be.  The company's updated guidance range suggests that management is only expecting ~1/3 of its previous growth outlook.
  2. BUT NOT OUT OF THE WOODS YET: Attrition risk will remain into 2015 as pre-ACA plans expire, and MCOs cancel those plans on their own to manage the overall risk profile of their books.  We have suggested that one of the bigger risks heading into 2015 is that MCOs cut commission rates next year now that the public exchanges are largely operational.  Further, when (if) EHTH gets the ability to sell subsidized plans, it must offer all subsidized plans that are available on the public exchanges, regardless of whether it has a commission agreement with that MCO or not.  In a worst case scenario, EHTH could sell an MCO's plan on its platform, and not receive any commission for it.  Under these circumstances, is there a compelling reason to believe that commission rates won't get cut next year?
  3. MULLING THE SHORT: All the major risks to 2014 are on the table now, so we're largely out of catalysts on the short side for the near future.  However, 2015 is around the corner, and as we highlighted above, EHTH is not out of the woods yet.  Remember, EHTH is essentially a distributor without a captive consumer.  It operates in a crowded industry with a growing competitive threat from the public exchanges.  MCOs are likely to push back on rates in 2015; and there's not much EHTH can do about it.  For now, we remain short.  

EHTH: Not Out of the Woods Yet (2Q14) - EHTH   Net Membership Growth 2Q14


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


Hesham Shaaban, CFA



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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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