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Takeaway: Q3 margins were solid but Wynn highlights mass margin pressures beyond Q3. Estimates for most of the Macau operators need to be reduced.

Q3 a beat but conference call downbeat






  • Mass gains offset VIP losses
  • Central govt very aggressive on corruption and misconduct
  • Still very bullish on Macau
  • Wynn Palace:  on target, on budget
  • Non-gaming offerings on new Cotai properties will be much better
  • Massachusetts: just finished casino design


  • Disappointed with market
  • HK protests disrupting business community
  • October 2014:  had perfect storm; lowest hold ever (had held 0.9% at one point)
  • Mass hold % was really high: have no clue on normalized hold - Hedgeye thinks the high Mass hold contributed to the better Macau margins and drove most of the beat
  • Smoking ban:  do have an impact but not major with respective to revenues
  • Mass increasing because of pressure to VIP? Yes.
  • Margin pressure in Macau? Yes. Competition is very intense resulting in either market share loss or margin loss.
  • Very dramatic capacity coming at Wynn Macau hotel: 2 new VIP areas in January 2015.
  • Mass market margins have been constant over last 3 quarters (+/- 100 bps) Have seen premium mass margins stabilize.
  • October:  more margin pressure going forward. 
  • $56mm incremental spend on Phase II Cotai:  1/2 of it due to pre-opening expense (incremental payroll/HR programs). Have protected contingency on construction budget.
  • VIP:  October is clearly worse than in the past
  • WYNN shares Adelson's thinking (LVS):  if they increase promotional allowances and it can add to the bottom line, he will do it even at the expense of lower margins.
  • Last month, WYNN raised Las Vegas rates by 18% to OTAs
  • Las Vegas:  hoping 2014 EBITDA  will be above >$500; want to have the most profitable hotel in Las Vegas
  • Japan:  not sure what will happen. Thinks the Japanese government wants a domestic operator.
  • Direct VIP Turnover was relatively flat YoY in 3Q; VIP collection has been steady.
  • Junkets are cautious and being conservative. People are not spending lavishly. High-end brands (e.g. Louis Vuitton, Chanel) reporting declines. 

Cartoon of the Day: Hanging By a Feather?

Cartoon of the Day: Hanging By a Feather? - fed cartoon 10.28.2014


"We've been on bear island solo for all of 2014," Hedgeye CEO Keith McCullough tweeted earlier today. We remain there as we head into the almighty central planning decision tomorrow (Fed meeting) and Q3 GDP report this week.

subscribe to cartoon of the day


Takeaway: Q4 decelerating from a strong Q3 but new shareholder friendly financial policy and embrace of asset light strategy the key takeaway

"Need to grow. Leverage balance sheet to drive growth.  Will see use of Balance Sheet to drive growth... so stay tuned"   -- New CFO, Tom Mangas



CEO Fritz:



  • Key Trend lines continued in Q3, driving long-term demand
  • More volatility around our world:  Europe, ISIS, Ukraine, Ebola
  • Pleased with Q3 results - revenue, EBITDA, RevPAR

Q3 RevPAR trends:

  • North America - sixth quarter of record performance ~9% 
    • Hawaii slow due to Japan slowdown; ex HI, NA +10% 
  • South America continues to struggle
  • Central America strong with Mexico very strong +20% 
  • Europe 6%; France & German good
  • A/ME ~5% 
  • China ~9%
  • Asia ex China: flat 
  • Thailand, Vietnam, Malaysia, Japan:  all soft

Outlook for Q4 and 2015

  • Q4: WW RevPAR 3% to 5%
  • 2015 outlook: initial RevPAR 4%-6%
  • Moving quickly toward target leverage
  • Asset sales - more key transactions moving forward, hope for more news before year end.
  • Net rooms growth 2%, below 4% to 5% set last year - slower than forecast. Longer development lead times.

Deliver Value

  • Technology innovations - keyless check-in
  • App to catalog rooms features, SPG members share unique needs & preferences = greater loyalty
  • B2B loyalty offering with SPG Pro, replaced legacy programs

Thoughts on India

  • Follows China and UAE
  • Extended time with local partners
  • Exceptional time: 2nd largest market behind China, Local optimism, global trends playing out locally & propelling middle class, challenging as a place to do business


New CFO, Tom Mangas:


Attracted to Starwood

  1. Brands & Properties
  2. Believe in global secular trends
  3. Confident in shareholder value creation
  4. Joining a winning team & "help accelerate plans to growth ahead of peers in years to come"



Group total revenue up low double-digits with room nights up high single digits and rate up mid-single digits.


Exceptional Q3 group book activity with IQFQ up double-digits and bookings made in Q3 for 2015 up high single digits as well as very strong group booking activity for all future years. 


Leisure and corporate transient travel segments were both up in the mid-single digits. 


For Q4: transient is shaping up to be strong with revenue on the books up low double-digits similar to the second and third quarters.


Transient and group growth projected in the mid single digits in Europe consistent with what we've seen year to date.  Expect transient and Asia-Pacific up mid-single digits but group will be down with weaker demand from Thailand and Malaysia. 


Fees in line with expectations

Core fees: +7.3% and Core Fees = better metric


SVO:  lower average price offset by higher number units sold



Balance Sheet:

  • increased repurchase authorization
  • bond issuance $650 million for repurchase activity
  • implemented Commercial Paper program
  • repurchased 10.4 million shares = ~$857 million ~ 82.57/share
  • continue to be in the market in 4Q
  • cash return $2.3 to $2.4 million by year end 2014
  • net debt / ebitda 1.4 vs. rating agency calculated 2.5x
  • target 2.5 - 3x on rating agency basis
  • Debt to EBITDA at high-end (3x) by year end
  • Comfortable with 2.5x to 3x leverage, could move higher over the longer term


Q4 2015 Outlook:

  • Reduction driven by f(x) rates = $10 million
  • Ebola, Middle East conflicts, China
  • Yom Kippur shift
  • Core fees 2% to 3% in Q4
  • Because of Comm'l Paper program, no longer planning a timeshare securitization


2015 Outlook:

  • Catalysts for strong outlook
  • But still cautious global travel outlook, group pace up L/M SD
  • Lapping $30 million of non-recurring fees
  • Headwinds from f(x)
  • No incremental EBITDA from Design hotels in 2015


Q: Footprint growth

  • Focus on conversions in North America & India, US business key is finding new ways to accelerate growth in specialty select segment.

Q: Q4 2014 share repurchase 4-5 million shares

  • In market, more programmatic approach - get to about $500 to $550 million of repurchase activity in Q4 2014.

Q: Capital returns - higher leverage, balance return of capital vs. acquisitions?

  • Value BBB rating on debt, see company to be in the BBB zone of 2.5x to 3x, with asset sales drop below, with acquisitions get above but always track back into the zone. 
  • Will look at acquisition opportunities - especially on asset light basis.  As business mix shifts to asset light and lower volatility, then take leverage ratio up. 

Q: Dublin Westin Leasehold to franchise?

  • Not well structured, HOT carried volatility, covert lease to other agreement to mitigate volatility.

Q: G&A guidance increase - other lumpy items?

  • Mobile check-in technology largely all the increase, no mechanism to recover the expense over next few quarters.

Q: How much expect North America / International growth to slow in Q4 and 2015? 

  • Deceleration given geographic mix. Still see NA strong mid-single digits in Q4, seeing some weakness in Q4, shift in Citywides into Q3.  Q3 positive impact from Ramadan. Yom Kippur shift in 2014.  Good IYFY, Q4 general weaker for HOT, but momentum is still there for 2015.

Q: Citywide shift from Q4 to Q3?

  • Yes, shifts from Q4 into Q3.

Q: 2015 outlook weakness, why?

  • China pressures on ADR, lapping Sheraton Macao ramp, World Cup.  North America will be strong in same zone as 2014.  4% to 6% range is attractive and good start. 

Q: China

  • Momentum still exist in China, huge outbound travel.

Q: Time share - why sales slowing & current inventory?

  • Sold much of inventory, thus change in pace, need to find balance sheet friendly ways to maintain SVO.  But don't want SVO to be major growth engine, goal not to grow business but need sufficient inventory to maintain momentum.

Q: Q4 slowdown, not one-off, how comfortable lead to reacceleration?

  • In any quarter, numbers move around a bit = variance around mean. Growth in revpar is via rate. 

Q: China pipeline vs. year ago?

  • Seeing a tendency for hotels to open 5-6 years versus 2-3 years, small number of developers with financial difficulties...not a huge number, some financial stress exists.

Q: In quarters same-store revpar vs. fee growth - why fee growth trail revpar growth?

  • See growth when growth in revpar... if not, then 1x fees or new hotels entering at a lower rate.  Slightly more select service hotels coming on line but mgmt fees getting better.  So function of 1x moves.

Q: IMFs lower, imply lower new hotel margin growth - how frame for 2015?

  • Continue to grow, significant non-U.S. contracts based to IMFs  85% of total IMFs from outside North America.

Q: Design Hotels - economics, strategy, opportunity?

  • Looking at ways to bring value to hotels, only recent had full conversations with Design Hotels senior management.

Q: View on SVO/timeshare?

  • Too soon to comment, clearly have world-class vacation ownership business. Will evaluate more intensively in near future.  Needs capital, not sure how to "square circle as move to asset light".  Stay tuned.


Shiller Warns U.S. Home Prices Could Go 'Negative Nationally' [Flashback: We Were First]

Takeaway: We were first and we remain the bears on the U.S. housing market.

Home price growth, as measured by the Case-Shiller 20-city composite, slowed for a ninth consecutive month, decelerating -120bps sequentially to +5.6% year-over-year. The rate of deceleration in August is largely consistent with trend as the last four months have been -150bps, -130bps, -130bps and -120bps as the rate of improvement in HPI has decelerated from +12.4% YoY to +5.6%.


For the record, Hedgeye managing director Josh Steiner highlighted back in August why we were (and remain) bearish on the U.S. housing market. 


September's Polar Vortex? Durable Goods/Retail Sales Slowing into 4Q

Headline durable goods declined -1.3% sequentially, the second consecutive month of negative growth, and decelerated on both 1Y and 2Y basis. 


Sure, the drop in commercial aircraft orders and communication equipment (both volatile components) led the softness but, overall, it just wasn’t a strong report.  Almost every sub-aggregate reported negative MoM growth and most decelerated on a year-over-year and 2Y ave basis as well. 


Durable goods ex-Defense & Transports were down -0.5% sequentially, Core Capital Goods dropped the most in 8 months and Durables ex-Defense & Aircraft – i.e. the stuff the average household purchases – was down for a second consecutive month - the 1st such instance since the polar vortex/weather distortion peak in Jan/Feb. 


It’s worth noting also that the rise in consumer credit has followed the slope of durable goods consumption in recent quarters as household spending on durable goods has helped buttress soft’ish growth in services/non-durables consumption.  A retreat in durables spending would weigh on both credit growth and aggregate PCE heading into 4Q.  


So, while the labor and income data has held steady, the spending and mfg data is slowing from a second derivative perspective as we head into 4Q.   


If you agree with our view that it's the rate of change, or slope of the line, that matters in front-running market and economic inflections then the traversing from “Good” to “Okay” in the domestic macroeconomy as the preponderance of the ROW transitions from “Okay” to “Poor”  as growth slows and disinflation predominates is not your cue to buy the top end of a late-cycle rally with leverage.


A lot of myopic speculation coming down the pike with the Trick-or-Treat double header of FOMC & 3Q GDP on deck to close out the week……     


"Learn to separate the majors from the minors. A lot of people don't do well because they major in minor things."


September's Polar Vortex?  Durable Goods/Retail Sales Slowing into 4Q - Durables Ex Def   Air


September's Polar Vortex?  Durable Goods/Retail Sales Slowing into 4Q - Core Cap Goods


September's Polar Vortex?  Durable Goods/Retail Sales Slowing into 4Q - Revolving Credit vs Durables


September's Polar Vortex?  Durable Goods/Retail Sales Slowing into 4Q - Eco Summary 102814


September's Polar Vortex?  Durable Goods/Retail Sales Slowing into 4Q - Durables Table



Christian B. Drake


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%