Takeaway: Stocks notch a new all-time high as the Yellen Fed remains dovish.
Hedgeye CEO Keith McCullough explains during today’s institutional call why we might be heading into Quadrant 4 of his model. That’s when both growth and inflation slow. Here’s how to position yourself.
Takeaway: Buy RHP for exposure to hotels, a better than expected group outlook, and an attractive dividend yield/valuation
Adding to Hedgeye Best Ideas. Conference call on Monday September 22nd.
CALL TO ACTION
We are adding RHP to the Hedgeye Best Ideas as a long. Amid a very favorable fundamental backdrop for domestic hotels, RHP is the REIT with the greatest exposure to the group segment. Our research indicates group could show the most upside versus expectations this year and next. Indeed, we expect Q3 and Q4 earnings beats for RHP and we enter the 2015 fray above the Street once again. RHP appears undervalued versus its comp space and with the potential for a major dividend increase and better earnings, we see the potential for a total return of 40% over the next 12-18 months.
We will be hosting a conference call on Monday September 22nd at 11am to review our investment thesis in more detail. Please email for call details.
- Investors should be bullish regarding RHP’s leading exposure to the group segment
- Our primary research suggests the group outlook is stronger than the consensus view and should lead to positive 2014 and 2015 earnings revisions
- Street overestimating share count, resulting in a $0.25-0.45 AFFO/share understatement on the incorrect share count alone
- Marriott affiliation is an advantage that offsets the single tenant risk
- EV/EBITDA valuation discount of over 3 turns looks attractive
- A likely dividend hike that should improve current yield of 4.7% - already above industry average
The lodging C-corps (the operators) such has Hilton, Marriott and Starwood for the past two quarters have noted a recovery in bookings and events associated with group travel. Ryman Hospitality Properties, “RHP,” is the lodging REIT with the greatest exposure - approximately 80% of total bookings are group bookings. We also see a recovery in food and beverage spend. We believe the lodging sector will continue to experience stronger fundamentals on a prolonged trajectory. This in turn will result in better revenues, EBITDA and dividend growth for RHP. Today, RHP trades at a discount to its lodging REIT peer group.
RHP is the REIT with the greatest exposure to the recovery in Group Bookings & increased F&B spend. Recent comments from the hotel c-corps (operators) indicate the group bookings segment is strengthening. Here are some comments made during Q2 conference calls:
- Group Rate +5% systemwide and will pick up in H2 with M/HSD growth in 2H14 and ancillary group spend was +14% during Q2
- Big 8 hotels will have margin uptick driven by group position
- Group demand is looking very good. Marriott Hotel group bookings made in the second quarter for the next 12 months increased 8%.
- 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%.
- Group booking pace is very strong in the third quarter.
- Q2 group business booked for next 12 months: +8%
- July/August huge bookings months for group
- Group pace trending +8% for 2015
- Group pace good for in the year, for the year, but slower for 2015 but still mid-single digits range is on par with historical booking trends
- Host Hotels & Resorts
- Group booking pace very strong: revenues tracking 6% higher
- Group IQFTY up 14%
- Seeing a significant increase in corporate business, especially in Q2
- IQFTQ room nights up 9%, rest of 2014 nights up 5% translates into revenues up 14%.
- ADR significantly higher YoY
Over the past two weeks, we have called meeting planners and group agents across the country in an effort to take a current pulse of the lodging business and group booking trends. As a result of our conversations, we are more upbeat and have conviction that lodging fundamentals remain very strong.
Specifically, we learned the group booking window is lengthening; however, the hoteliers are holding back inventory to yield up ADR with the transient segment. Consequently, hoteliers are creating a greater in the quarter for the quarter or in the year for the year business strategy. Categorically, all groups are spending significantly more on hotel rooms. Due to substantially higher ADRs in primary cities, many agents indicated a willingness by groups to travel to secondary and tertiary cities or going to the suburbs to save on absolute rate but at higher rates relative to prior years at booked hotels.
Regarding food and beverage budgets, all agents indicated F&B budgets are increasing but several agents noted larger budgets because of more attendees. Interestingly, Nashville, Denver and New Orleans were top cities most often mentioned for desired destinations. Las Vegas was often mentioned as a desired destination but very difficult to book due to casino hotels extracting “unnecessary” and “outrageous, miscellaneous fees”.
Gaylord hotels are viewed as a great and viable alternative to Las Vegas, West Coast, & New York convention centers. Also, Gaylord group rates are typically $50 to $100 lower per day than Las Vegas, San Francisco, San Diego or New York. As a result, the group meeting planners (and attendees) have more dollars to spend on food and beverage dining/events.
THE MARRIOTT SYSTEM
Marriott International is the operator of Gaylord hotels. Marriott is able to draw upon its more than 40 million Marriott Rewards members worldwide for group or transient bookings. Marriott dominates the large group booking and distribution network with nearly 70 convention hotels worldwide. Marriott’s system is ranked #1 preferred brand for booking large meetings requiring 200 to 2,000 rooms. On a more local basis, more than 11 million Marriott Rewards members live within 300 miles of a Gaylord Hotel to in-fill transient nights at Gaylord hotels.
On a yield basis, 1% of occupancy = 50% flow through while 1% of ADR = 85% to 90% flow through. Higher transient ADRs coupled with higher occupancy, lifts RevPAR. The resulting higher RevPAR has a significant flow through to EBITDA and FCF. Finally, Marriott’s operating system also affords better purchasing power than the former Gaylord's owned and managed systems.
The culmination of the stronger group bookings trends, higher ADRs, optimized transient yield strategy coupled with Marriott’s operating system offset any single tenant risk issue for RHP.
FORECAST ABOVE STREET (EXCEPT SHARE COUNT)
For 2H14 and 2015, based on our primary research for continued strength in the group segment coupled with the optimization of the Marriott operating strategy, forecasts are higher than the Street and guidance. We believe that management has been conservative with Q3 and Q4 guidance, possibly due to the upcoming conversion date of the company’s Convertible Senior Note.
We forecast significant dividend growth for RHP from $2.30/share current annual dividend (or 4.6% current yield) to $2.60/share in 2015 and increasing to $3.00/share in 2016.
THE STREET HAS THE SHARE COUNT WRONG
The most misunderstood aspect of the RHP model is how the street models outstanding shares for RHP related to the 3.75% Convertible Senior Notes, maturing October 1, 2014.
- Unlike the many analysts on the sell-side, we are NOT modeling an increase in share count, nor are we modeling an equity issuance to address the maturity. We have seen several models that include a higher share count assumption that could be related to the retirement of the Convertible Note.
- Every 1 million of additional diluted shares reduces 2015 FFO/share and AFFO/share by about $0.08-.09/share. We think the Street is approximately 3-5 million shares too high in their diluted share count for 2015.
- As of June 30, 2014, $229.461 million of notes remained outstanding
- The Convertible Notes are convertible through the close of business on September 29, 2014 pursuant to the indenture
- Concurrent with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to its common stock with counterparties affiliated with the initial purchasers of the Convertible Notes, for purposes of reducing the potential dilutive effect upon conversion of the Convertible Notes.
- “The Balance Sheet Two Step”: On September 29, 2014 (prior to the end of the current quarter), the Company will draw down $229.461 million (assuming no change since June 30, 2014) on its corporate credit facility (revolver) and hold the proceeds as “cash” as an asset on the balance sheet. Then on October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash".
- The equity share count should not increase materially despite the conversion due to the prior hedge transaction.
RHP is undervalued versus peers in our opinion. Today, RHP trades at less than 11x 2015 EV/EBITDA versus the peer group average of 14x 2015. RHP trades at a 2015 dividend yield of 5.5% versus 4.1% (excluding BEE dividend yield) based on our forecasted dividend for RHP. Fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the current 4.7% current dividend yield (forecasted to increase significantly over the next six months). Total return potential could exceed 40% over the next 12-18 months.
RHP is the REIT with the greatest exposure to the group segment which is where we see the most upside vis a vis Street expectation. Thus, current earnings are likely to be exceeded and dividends raised. RHP is undervalued versus its comp space and we see the potential for a total return of >40% over the next 12-18 months.
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Takeaway: While Starbucks is still a great company with an enviable management team, the stock is far less attractive today.
Editor's note: The following excerpt below is the introduction to Hedgeye restaurants sector head Howard Penney's new 80-page slide deck detailing his short thesis on Starbucks. After five years of being one of the street's biggest bulls on SBUX, Penney now thinks "the stock is far less attractive." For more information on Penney's research please ping email@example.com.
It’s been seven years since Howard Schultz penned his now famous memo to Starbucks’ management and employees, outlining where the company had gone wrong and what it needed to do to get back on track, and it’s been six years since we first turned positive on the stock.
But nothing lasts forever. McDonald’s went on an eight-year corporate revival before it lost its luster and we fear Starbucks is nearing the end as well. In this presentation, we will outline a number of concerns we have with the company which makes us believe the street is too optimistic about its future prospects.
We recently read that Harvard Business School Professor and Historian Nancy Koehn has studied Starbucks and its leader, Howard Schultz, for nearly 20 years. She recently released a new HBS Case Study, “Starbucks Coffee Company: Transformation and Renewal,” which traces “the dramatic arc of the company’s past seven-plus years – a period that saw Starbucks teeter on the brink of insolvency, dig deep to renew its sense of purpose and direction, and launch itself in new, untested arenas that define the company as it exists today.”
While all of this may be true, we too have been following Howard Schultz and Starbucks for over 20 years. Unlike Ms. Koehn, however, we did not go to Harvard and we’re not HBS Professors. But we did release a Hedgeye Black Book in early 2009 detailing why we believed Starbucks was a great company and the stock was a great buy.
Today, while Starbucks is still a great company with an enviable management team, the stock is far less attractive. More specifically, and perhaps to the heart of the topic, we believe the company’s domestic business is maturing and management is attempting to stem this decline by rapidly deviating from its core. With sentiment near an all-time high, this HBS Case Study merely seems like another example of a Starbucks “top.”
Takeaway: Labor gets its mojo back, reversing the weakness seen in the last two weeks.
Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
Two Steps Back, One Giant Leap Forward
There's a reason why investors are often advised to look at 4-wk rolling averages when it comes to high-frequency economic data (i.e. weekly initial jobless claims). The last two weeks of data were conspicuously soft and we noted as much in our weekly look at the labor market, but this week was very strong. Notably, on a 4-week rolling basis, the data has been fairly steady.
Prior to a few weeks ago, the data had been running at a fairly steady rate of ~10% improvement year-over-year. That is to say, claims are lower by 10% this year vs. last. Two weeks ago, however, that rate of improvement slowed to 7% and last week claims actually rose by 2%. This week saw claims better by almost 12%, which puts them back on track with the rate of change seen throughout much of the summer.
Prior to revision, initial jobless claims fell 35k to 280k from 315k WoW, as the prior week's number was revised up by 1k to 316k.
The headline (unrevised) number shows claims were lower by 36k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.75k WoW to 299.5k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: Weakness in August offsets strength in July. Bigger picture, SF is grinding higher at a GDP-like pace of low-single digit growth.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: August Housing Starts & Permits
The Census Bureau released its monthly Housing Starts & Permits data for August this morning.
Total New Home Starts declined -161K, or -14.4%, sequentially vs positively revised July Data (revised +25K to 1117K) – the largest month over month decline since January of 2007.
With single-family starts up just +2% YoY on average YTD vs. multi-family up 21%, the concentration in construction activity, and the predominate driver of the recovery in starts, remains well defined.
- Total Starts: Total housing starts re-breached the 1MM level to the downside, declining -14.4% MoM (-161K) to +956K SAAR with July revised to +1117K from +1093K SAAR. Multi-family, which led the upside in July, reversed to drive the downside in the latest month.
- Single Family Starts: SF starts declined -16K MoM (-2.4%) to +643K, essentially in-line with the trailing average.
- Multi Family Starts: MF starts declined -145K MoM (-31.7%) to +313K
- Total Permits: Total Permits declined -59K MoM (-5.6%) to 998K with the -54K decline in multi-family driving the drawdown. Notably, the outsized increase in multi-family permits in July failed to carry-over into the August starts figures.
- SF Permits: Single Family permits declined -0.8% MoM (-5K) to 626K. Inclusive of the negative revision to July, this marks the 2nd month of decline in SF permits. The trend in permits continues to suggest minimal upside for the forward starts data
- MF Permits: Multi-family permits declined -54K (-12.7%) in August to 372K – the third decline in the last four months.
NAHB HMI vs SF Starts: Yesterday’s sequential increase in the NAHB HMI is at odds with the fall in SF starts in August and the growing disconnect between builder confidence and SF construction activity over the last few months remains stark.
As a reminder, there are three factors principally responsible for the ongoing weak performance for housing. First, QM rules that took effect early this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.
About Housing Starts & Permits:
The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.”
Joshua Steiner, CFA
Christian B. Drake
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