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Cartoon of the Day: A Closer Look Behind Today's GDP Report

Takeaway: A closer look behind today's GDP number reveals a picture not nearly as pretty as the headline suggests.

For more Hedgeye macro perspective on today's GDP report click here.


Cartoon of the Day: A Closer Look Behind Today's GDP Report - GDP cartoon for 10.30.2014


Takeaway: Perception of Vegas recovery remains much stronger than the data indicates. Another weak quarter from MGM

How to convinced the Street that normal is not normal - low hold blamed for tough quarter (19.8% is pretty close to the midpoint of 18-22% normal range unless my calculator is broken)




  • Very robust mass market growth at MGM China
  • Lower margins at Strip due to investments made to Delano, lower table hold, and increases in certain expenses
  • MGM Cotai: on schedule to open in Fall 2016; 
  • Delano completed at end of September:  has exceeded expectations
  • Monte Carlo/NYNY:  construction work disrupted performance
  • MGM National Harbor opening Fall 2016
  • MA: Confident on NO vote on Proposition 3
  • Japan IR debate:  remains active
  • Strip REVPAR:  6% exceeded guidance of 5%
  • Grew convention mix by 3% points; in 4Q, will increase convention mix by 2% points, will bring FY convention mix to all-time high of 17%.
  • 4Q REVPAR guidance: 5%
  • STRIP EBITDA:  -$40m due to lower table hold, higher employee benefits, and marketing costs associated with Delano
  • CityCenter:  improved profitability at VDara
  • Aria:  lower EBITDA due to lower table hold %
  • Vdara:  96% OCCU, 12% in REVPAR
  • Crystals:  another successful quarter
  • $545m cash at MGM China
  • MGM $1.2 bn: available liquidity; MGM China $1.4 bn available liquidity
  • $404m cash CityCenter ($157m in restricted cash); total debt: $1.5bn
  • 3Q:  $103m capex (wholly-owned); $46 (National Harbor/MA), $98 MGM China ($17 at MGM Macau, $81m at MGM Cotai)
  • MGM China
    • Slot handle: 5%; revs: -7% due to lower hold
    • Mass: drove 75% of profits
    • Will continue to allocate tables to mass floor
  • Las Vegas consumers:  feeling better, lower gas prices; +4% visitation YTD
  • Mandalay:  will increase conv space in 2015 by 300k sq ft


Q & A

  • -$40m breakout excluding low table hold impact:  70% related to changes in employee benefit side; 30% impact from Delano/Monte Carlo
  • Flow through has been more volatile.
  • MGM China margins:
    • Controlling costs in tough revenue environment
    • Mass business - pretty steady and consistent
  • Convention 1Q 2015:  pace continues to get better; 
  • 2015 convention mix should be higher than 17%; low single digit growth in convention business 
  • Goal is to increase REVPAR in every quarter in 2015.
  • MGM China VIP/Mass margin pressures?
    • Some operators have been discounting. Does not motivate customers. MGM China does not see need to discount.
    • Premium mass outperforming in the Peninsula
    • Highest EBITDA/per room in the industry
  • Low Bellagio 3Q REVPAR:  have started to push rates.  Convention rates were lower than what they could have been. 
  • 3Q Low table hold:  Mirage - largest decline  on a YoY basis; MGM Grand (held well last year, held more normal this year); Bellagio table hold (being a little better this year at normal levels)
  • REVPAR:  luxury/core pretty consistent; revenue spend up 3-5% on luxury and core properties; consumers getting more healthy
  • REVPOR was 6% in 3Q, strong performance
  • 2015:  convention business will be stronger in the city than 2014, will build share and benefit core properties 
  • 4Q:  having a great convention quarter; mix up 3% points;  but tough comps in 4Q 2013.  Shake Shake coming in mid-December.
  • F&B Vegas EBITDA:  +9% in 3Q, driven by catering business driven by strong convention calendar; 
  • Excited about Genting project:  will drive new customers to Las Vegas


Takeaway: We continue to like NCLH and think Prestige synergies are likely to contribute to continued estimate beats

Positive commentary regarding 2015 $25m Prestige synergy target which we think is too conservative. Guidance for 4Q yields is above Street expectations. 






  • 25th consecutive quarter of trailing EBITDA (TTM) growth; 23% CAGR
  • Anticipate Prestige closing in mid-November; 4Q call will be first with integrated company
  • Norwegian Escape:  offering 7-day cruises beginning in Nov 2015
  • Have set Ebola protocols across fleet; have seen impact on the margin over past several weeks however, booking have returned back to pre-Ebola levels.
  • FX impacted 3Q by 2 cents; going forward impact will be similar in 4Q
  • Made incremental investments in marketing in 3Q
  • 4Q
    • Drydock earlier than expected 
    • Work underway for scrubber installations; will have a number of staterooms out of service
  • 2015 capacity: 59% in Caribbean, 17% in Europe, 5% Hawaii, 3% Bermuda
  • 2015 Caribbean capacity: slightly down for the year;
  • 1Q 2015: tougher comps (3.8% yield in 1Q 2014, two ship charters that did significantly well (Sochi/Bud Light Hotel)); volume will be consistent with 1Q 2014
  • Investor Day in early February and will provide 2015 commentary
  • In 2016 and afterwards, will report on consolidated basis

Q & A

  • 2015:  significantly more loaded on Getaway, Epic, and Breakaway in 1Q YoY.  Well ahead on every quarter on load in the Caribbean.  1Q pricing is a little bit tough 
  • <1% industry capacity change in Caribbean in 1Q from 53% to 52.2% 
  • 1Q yield: could finish +1% yield (but would be difficult to achieve that given tough comps)
  • Prestige synergy of $25m:  is already in the bag; more opportunities ahead - port contracts, shore excursions, fuel
  • Margin opportunity with Prestige?  if economic picture gets a little better, could be another 500bps improvement
  • 2015 Prestige:  booked solidly; revenues up significantly, feeling some pressure in 1Q, same as Norwegian. 
  • Revenue opportunities with Pride of America and The Haven concept
  • Shift of drydock impact on 4Q? $2-3m benefit 
  • 1Q 2013 charter contribution: a little over a 1% of growth
  • Commissions/transportation/other line run rate:  15.5-16%; renegotiated port contracts, renegotiated credit card costs, more casino initiatives; more targeted incentive programs.
  • MSC aggressive 'free-ship' offer:  great brand in Europe
  • Europe:  pricing doing well in 2014 but because of carnage in 2012/2013; sees good pricing continuing.
  • Asia:  will be more interested in 2016

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Strong Q3 but Q4 tempered by renovations and more difficult YoY compares in 2015





Ed Walter, CEO

  • Strong F&B and Group rated results in Q3
  • Feel good about business and outlook
  • Highest Q3 occupancy since 2000 which drove ADR
  • Q3 strong demand across all group segments especially Association +14%  and strong Corp demand +3.5% resulted in Corp rate +4.5%, Sept group revenues +15% was second strongest month of the entire year.  
  • Group demand in the quarter increased nearly 6%, rate jumped by more than 4.5% and  group revenues improved by more than 10.5%.
  • Group limited transient occupancy, resulted in transient rate ADR +6.5% 
  • Banquet & AV revenues +8%, 40% flowthrough
  • Acquisitions 
    • European JV buying Grand Esplanade Berlin Euro 81 million
    • b2 Miami $58 million
    • Desire to buy hotels with third party operators, currently have seven third party operated hotels in portfolio
  • Disposition
    • European JV Sheraton Skyline
    • Tampa Marriott $199 million
  • CapEx $29 million - ROI projects such as:  1) conversion of underutilized space such as Manchester Grand Hyatt San Diego;  2) rebranding/ renovations such as Memphis;  3) projects to reduce energy costs $17 million in NY for $3 million in annual savings
  • Q4: lower group demand, lower F&B
  • H2 > H1 results
  • Rooms booked in 2014 for 2015 +5%
  • 2015 RevPAR driven by rate and change in business mix


Greg Larson, CFO

RevPAR results

  • Lat Am +26%; Q4 will be slower
  • West: rate driven, strong group, group revenues +11.4%. Group created compression eliminated special corp.  Q4: SF continue to out perform, SEA & LA in line, DEN under perform. Phoenix better/stronger
  • HI and San Diego, under performed, higher airfares.  SD meeting space renovations and pre-construction.   Q4: SD weak/construction; HI out perform
  • South Central:  strong group rev +11.9%, 8% F&B rev.  ATL, CHI strong.  Group volume 8%, rev +11%.  Outperform in Q4.  Houston weak due to difficult comps.  Q4: negative due to renovations
  • East: transient rev +15%.   Q4 Boston / WDC weaker - Boston Q4 13 World Series.  NY: under performed in Q3, =8.5% Group revenue gain, but impacted by select service supply.  Q4: NY under perform
  • European JV:   Q4:

Margin Growth:  180 bps in H1 and 170 bps in H2


Special Dividend:  possible in Q4 if not find 1035 exchange for Tampa Marriott proceeds




Q: Independent hotels - why shift, why now?

  • Focus on limited markets, more deeply - already own many large group/convention hotels in current markets, this is natural extension to grow portfolio

Q: Group as %age of revenue mix, now vs. last cycle?

  • ~40% normally, last peak was 43%, 37% today.

Q: Independent hotels - growth and size of this segment

  • Likely grow from acquisitions, have some conversion ideas, would like 10% of total rooms independent channel.

Q: Capital allocation vs. length of cycle - buying assets vs. share repo?

  • Feel good about cycle, look at acquisitions over 10 years, therefore must include some period of softer results as compared to other buyer who may look to buy but also try to sell prior to peak.

Q: Group weakness in Q4?

  • Renovation disruptions....if not renovations, group +4%.
  • Group bookings 4% higher in Q4 if not have renovations across portfolio

Q: 2015 RevPAR comments/framing?

  • Drivers: U.S. economic growth and Worldwide economic growth driving international travel growth
  • Expect strong year, reacceleration

Q: What portion of portfolio unencumbered by mgmt contract flexibility?

  • US portfolio 40% flexible mgmt contract agreements - especially in non-core markets.  So, 75% of assets looking to sell in non-core markets have flexible mgmt contracts

Q: NY & WDC concentration?

  • May look to sell in both NY and WDC over time

Q: RevPAR assumptions regarding demand?

  • US hotels +/- 20% demand is from international travel while in NY +/-40% demand is from international travel. 
  • Lat Am:  World Cup challenges YoY in Brazil, Mexico City strong 2014 due to easy comp vs. 2013, Aussie/NZ MSD RevPAR growth.

Q: Acquisitions - fine tuning brand/market mix vs. EBITDA moving?

  • Issue is scale and size of acquisition, not need to be bigger to be bigger, about improving overall growth and earnings per share. More about fine tuning.

Q: Renovation schedule/activity?

  • About 35% of capex in Q4
  • More importantly, larger hotels undergoing room or meeting room renovations.  Half of disruptive capex happening in Q4 vs. full year

Q: Urban select service?

  • Overall small, but big growth rate, because many small $20 million asset purchases absent a portfolio transaction.

Q: Orlando

  • Finished all work in Q1 and Q2 and Q3 not impacted by construction. Expect good 2015.  Florida portfolio to out perform in 2015

Q: NY Marriott Marquis - update?

  • Construction virtually completed.  Vornado not announced contracts. Expect to get sign operational next month. Look forward to getting retail and observation areas to open.
  • Want to make sure Vornado maximizes rents: retail leased by early 2015, but maintain some signage hold backs due to opportunity of size/location of screen.

Q: Opportunities to convert hotels to select-service

  • Look for opportunities to modify operating model outsource F&B, improve margins and thus maintain full-service rate but select-service margins.

Q: NY issues vs. portfolio ex Marriott Marquis

  • Less about occupancy problem vs. select service additions keeping price ceiling on market. Marquis is a group driven hotel.

Q: Four Seasons Philly - updated on timing and cost conversion?

  • Likely independent, soft brand, but affiliated with major brand.

Q: IMF trends

  • H1 2014 down, FY 2014 +4%, 2015 should

Q: European acquisition pricing in 2014 vs. next year - appetite strength for acquisitions?

  • Cap Rates in Germany 100-150 bps vs. US, London = best US markets at approximately 4% to 5%
  • Expect Germany to have better GDP growth relative to Europe
  • London: capital aggressively seeking assets, more willing to sell than buy in London.
  • Process of marketing other hotels in Europe, look to reduce size of portfolio given buyers willingness to pay full price - especially middle of the pack assets.
  • Still like Europe will stay just more focused.
  • Europe finance on asset-by-asset basis.  Financing shorter term in Europe. Financial markets more aggressive in Europe, delta vs. last year cost of debt lower.

Q: San Antonio lawsuit addback

  • $25 million in restricted cash account.  GAAP impact of $69 million, but EBITDA accrual was $59 million, net-net interest accrual and other litigation accruals.

Q: Supply/Demand for Group, moving to softer nights?

  • Robust transient demand, high occupancies mid-week, so now moving groups around.

Video | Keith Discusses The End Of QE And The Beginning of Deflation on Fox Business


3Q14 GDP (advance est):  Parsing the Hangover


A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 was as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14. 


So how bad was the hangover? 


  • Growth:  Sequential growth across Durables, NonDurables, Residential Investment and NonResidential investment all slowed QoQ (again, not a real surprise given the comps – was anyone really modeling Investment to comp a 19% comp?)
  • Inflation:   GDP deflator decelerated -0.8% (to +1.3% from +2.1%) sequentially.  The lower deflator helped support reported real growth but Nominal GDP was above trend also.  Nominal grew at +4.7% - that is down vs 2Q’s inflated +6.7% gain but higher than the 4-qrt and 8-qtr ave of 4.2% and +3.7%, respectively.
  • Consumption:  Contributed +1.22 (down from +1.75 in 2Q) and growing just +1.8% QoQ (vs +2.5% prior) with Durables & NonDurables decelerating and Services up small.  Growth in Durables consumption is a fledgling positive sign for domestic consumerism and has supported the aggregate PCE in recent quarters.  A slowdown there (ie. the Sept Retail Sales/Durable goods data) will be a bit of a drag, both to consumer spending growth and to growth in (revolving) credit.  We’ll get the final Income & Spending detail data (Sept) tomorrow.  So long as the rising savings rate offsets accelerating income growth, the upside in household spending will remain constrained. 
  • NX:  The trade balance was sizeable…contributing +1.32 to GDP (vs. -0.34 prior) as exports grew +7.8% QoQ vs. a -1.7% decline in Imports.  With ROW slowing, the $USD higher and domestic demand better on a relative basis this magnitude of strength is likely nonrecurring/reversing.
  • G:  A positive support and big increase in defense spending.  Government expenditures contributed +0.83 (vs +0.31 prior) with Growth QoQ = +4.6% (vs. +1.7% prior) and Defense spending up 16% QoQ and contributing at big +0.7.   This was highest contribution since 2Q09 (political conspiracy theorists unite!).
  • Inventories:  after contributing +1.4 to GDP in 2Q, Inventories were a drag with a  -0.6 contribution in 3Q as comps were tough and middling consumption growth failed to expeditiously draw down that burgeoning inventory stock.
  • Investment:  Not much doing…Investment growth moderated sequentially but Gross and net Domestic Private Investment as % of GDP was essentially flat ...same for Residential & NonResidential construction
  • Real Final Sales (GDP less Inventory Change):  +4.2%, accelerating 100bps sequentially and +70bps above headline. 
  • Gross Domestic Purchases (GDP less exports, including imports):  Decelerating -210bps sequentially to +2.1%
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  arguably the best read on overall domestic private sector demand = decelerating to +2.7% from +3.4%, but holding above trend. 

Overall, the 3Q advance estimate probably scores as a 1 aspirin hangover on our proprietary hangover scoring algorithm.  Government & Net Exports were outsized contributors with investment slowing off a strong 2Q and consumption still middling. 


So, easier sequentials for C & I in 4Q vs. tougher year-over-year compares alongside global growth slowing and disinflation predominating.   We're still modeling Quad #4 for the U.S. in the fourth quarter


On balance – if you give allowance to the under the hood dynamics – this is really just more of the same….we’re around 2-2.5% real economy. 






INITIAL CLAIMS:  The good news is claims are hitting new lows. The caveat is this has been a dangerous place historically over the intermediate/long term.


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 


Last week we wrote that jobless claims dropped to a new low of 281k - for perspective that was lower than at any point in the peak of the economic expansion in 2005/2006. This week, claims are unch'd at 281k again. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which accelerated further to its fastest rate YTD at -21%. The progress in the labor market remains substantial. Credit-sensitive financials still have the wind at their back.


But ...

Just as the day is always darkest before dawn, the reverse holds true too. The sun is always brightest before night, or something like that. The chart below is really the point. At 281k rolling initial claims the economy is now in-line with the all-time lows put in during each of the last three economic cycles (2006, 2000 and 1988).  




The Data

Prior to revision, initial jobless claims rose 4k to 287k from 283k WoW, as the prior week's number was revised up by 1k to 284k.


The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 281k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -20.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -19.5%.


HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - Claims NSA 103014


HANGOVERS & LATE-CYCLE JUGGERNAUTS: 3Q GDP & Initial Claims - Claims SA 103014




Christian B. Drake



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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