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Quarter was disappointing given the stock run. Typically bullish conference call wasn't bullish enough.



"I am pleased to report another solid quarter with double digit EBITDA growth and increased margins, led by strength at MGM China and our Las Vegas Strip properties... These results are reflective of the continued market share gains from programs such as M life and our focus on international marketing strategies combined with our best in class collection of resorts and amenities."


- Jim Murren, MGM Resorts International Chairman and CEO




  • Reported a very strong 3Q 
  • Improved operations at CityCenter
  • Grand/Bellagio room remodels have been successful and driving business
  • NY/NY and Monte Carlo remodeled sections will be open in Spring 2014
  • Mobile will enhance M-Life database
  • MGM Cotai construction is progressing really well; piling/sitework will be done by end of year; basement/tower construction next 
  • Maryland:  decision will be at the end of the year
  • Massachusetts:  final decision will be made in April 2014
  • Margins improving, property investment yielding good returns
  • LV Luxury business was up 18% EBITDA - high-end international customers were strong
  • LV:  baccarat grew 20% in 3Q; 16% in table games revenues at wholly-owned LV properties; non-bacc volume was flat
  • Better pricing due to increased convention room nights
  • 4Q REVPAR flat:  consistent with mgmt expectations; 14-15% mix consistent with last year's mix; tough comp at Mandalay.  Core properties do not have the pricing power as luxury properties.
  • Accelerating REVPAR track in 1Q 2014 (peak convention room mix: 21%)
    • 1Q 2014 convention nights approaching all-time highs
    • Optimistic for 2014; typically booked 80% of next year's bookings (currently at 88%, up mid-single digits in terms of rate)
  • Aria:  EBITDA negatively impacted by $17MM due to low hold; table drop increased by 12% YoY
  • Vdara EBITDA up 9%; hotel occu 89%, ADR: $197, REVPAR: $177; F&B increased by new Sean McClain restaurant and new buffet; entertainment increased by full quarter of Zarkana show
  • Crystals: +26% YoY, opened 3 new tenants in 3Q; opened another tenant in October.  
  • Sold 28 Mandarin Oriental units and 2 units at Veer - $27MM in condo revenue
  • CityCenter refi:  Cash interest expense reduced by $80MM
  • $1.1 BN revolver, $1.45 bn at MGM China
  • Cash: $1.4 balance ($925MM at MGM China)
  • $78MM capex at wholly owned properties
  • 300-325MM capex FY 2013 guidance (vs 350 previously due to timing)
    • $52MM at MGM Macau, $260MM at MGM Cotai
  • 4Q: Corporate expense: ~$50MM
  • 4Q: Stock comp: $7-8MM
  • 4Q:  D&A similar to 3Q
  • 4Q: $210 gross interest expense ($5MM at MGM China, $9MM of non-cash amortization)
  • MGM China:  $8MM branding fee; $12MM adverse low hold; $7.5MM additional tourism tax fee
    • Still see better VIP table yields
    • VIP win rate: 2.2% vs 3.0% in prior year
      • VIP Volumes up 10%
    • Slot handle up 10%
    • Upgrading mass floor; remodeling/expansion of Supreme Land (60-70 more premium slots) will be done in 2014
    • Very competitive market
  • MGM Cotai:  early 2016 opening; budget $2.6BN; cap interest (not material) and land concession costs ($75MM)


  • Massachusetts: licensing by November 2013
  • 1Q 2014 REVPAR growth:  led by convention business and strong by each subsequent quarter
    • 2014 convention mix:  approaching 15.5-16%
  • Vegas:  convention will boost leisure rates as well
  • 2014 Vegas room flowthrough:  60% long-time target; up 94% YTD; flowthrough should be stronger in 2014 compared to 2013
  • Mandalay Bay and night clubs are doing well.  Core properties non-gaming spend slowly coming back, but luxury non-gaming doing much better.
  • Japan:  hope something will come forward in Spring 2014 
  • CityCenter - buy out partner?
    • Partner has not asked them to buy them out as the asset has increased in value
  • Had thoughts of selling Crystals as cap rates fell below 5%; had second thoughts about it; will not sell in 2013
  • Q4 slot business in Macau has seen improvements but growth has slowed due to harder comps
  • Bellagio hold was low last year, this year a touch better but still lower than what the property had done
  • Q4 LV hold:  Bellagio and MGM Grand had high hold
  • Cotai:  Govt has not staggered 2016 opening dates
  • LV:  upgrade program under way for all properties; last big convention attendance was 2011, which indicated revenue and EBITDA growth
  • Borgata:   may be relicensed by 1Q 2014; 
  • $110MM sitting in NJ trust account
  • Culinary agreement:  typically 5 years 
  • Vegas:  THE HOTEL conversion to Delano (1,200 room remodel) will start in April 2014 
  • Hainan-interesting opportunity



  • Casino revenue related to wholly owned domestic resorts increased 3% compared to the prior year quarter.
    • Table games revenue increased 10% and the overall table games hold percentage in the third quarter of 2013 was 21.5% compared to 20.4% for the prior year quarter.  
    • Slots revenue increased 1% with a 3% increase at the Company's Las Vegas Strip resorts
  • Rooms revenue at wholly owned domestic resorts increased 5%, with a 3% increase in REVPAR at the Company's Las Vegas Strip resorts
  • The Company's wholly owned domestic resorts earned Adjusted Property EBITDA of $350 million, an 8% increase compared to the prior year quarter
  • The Company's wholly owned Las Vegas Strip resorts earned Adjusted Property EBITDA of $280 million, a 12% increase compared to the prior year quarter
  • MGM China's Adjusted EBITDA increased 25% to $191 million
  • CityCenter's Adjusted EBITDA related to resort operations was $62 million, a 6% increase compared to the prior year quarter
  • MGM Cotai: Groundbreaking took place in February 2013 and the project continues to remain on pace for an anticipated early 2016 opening.  In May 2013, MGM China signed a deal with China State Construction to serve as sole general contractor for the project. The total project budget, excluding capitalized interest and land, is $2.6 billion.
  • The current year third quarter results were affected by non-cash impairment charges of $26 million, primarily related to land holdings in Jean and Sloan, Nevada. The current year third quarter income tax provision was affected by $28 million of valuation allowance on U.S. deferred tax assets
  • We continue to be opportunistic in accessing the capital markets as indicated by our recent CityCenter refinancing, which will lower its annual cash interest expense by approximately $80 million.
  • The Company's cash balance at September 30, 2013 was $1.4 billion, which included $925 million at MGM China.  At September 30, 2013 the Company had $2.9 billion of borrowings outstanding under its $4.0 billion senior credit facility and $553 millionoutstanding under the $2.0 billion MGM China credit facility. The Company repaid net long-term debt of $77 million during the third quarter, bringing total net repayments during 2013 to $553 million.


Solid quarter, group bookings are improving, and lower Q4 guidance due to gov't shutdown already anticipated.



"We had a solid quarter with worldwide REVPAR up nearly 5% YoY.  Short-term group business picked up in North America and occupancy rates reached nearly 75% worldwide.  Room rates moved higher, in part due to an improving mix of business, contributing about three-quarters of the REVPAR increase in the quarter, and the number of company-operated and franchised rooms in our portfolio rose 4% YoY.  Owner demand for our brands continues to be robust.  Our development pipeline increased for the fifth straight quarter and we're on track to sign a record number of rooms in 2013." 

- Arne M. Sorenson, president and chief executive officer of Marriott International



North America systemwide REVPAR: +4-6%

Worldwide systemwide REVPAR: +4-6%

  • Group revenue booking pace for 2014 North American group business improved in the third quarter and is now up over 4% compared to up 2% a quarter ago.  
  • Group revenue booked in the 2013 third quarter for calendar 2014 was up 14% compared to group revenue booked for calendar 2013 in the year-ago quarter.  Given our strong development pipeline, unit growth should accelerate in 2014 as our global system of rooms is expected to expand by approximately 5% gross, or 3.5-4%net."



  • Some of the beat this Q was due to timing: a penny in fees, 2 cents per termination branding fees on the owned/leased segment, and a penny improvement in G&A. Not all due to timing: penny of outperformance due to strong results as some of our own Middle East hotels, 3 cents due to true-ups of our foreign tax provision and the lower-than-expected tax rate. 
  • NA Transient REvPAR increased 7% with groups up 3%. High rated retail business was very strong and group business was better than expected attendance
  • In NA, leisure demand was "extraordinary". San Fran, Houston, Miami and Atlanta saw double digit RevPAR growth
  • 6% decline across the greater DC market - and this reduced their NA system-wide RevPAR by 70bps
  • In Europe, strong performance in Eastern Europe offset declines in London. Excluding the London market and the impact of last year's Olympics, RevPAR increased 4%. 
  • Unrest in Egypt reduced RevPAR in the Middle East by 3%. 
  • Caribbean/Latin American: favorable leisure demand drove RevPAR 
  • Asia-Pacific region: Strong results in Indonesia, Thailand, and Japan drove RevPAR growth. Excluding China, performance was even stronger, with constant dollar RevPAR up 8%. 
  • Incentive fees were strong in Boston and New York, or flattish in many international markets and retreated a bit in DC.
    • Booked $7MM of deferred base fees last year with the sale of Courtyard hotels - so its a tough comp
    • ~25% of full serviced mgmt hotels paid incentive fees vs 19% a year ago in NA
    • WW 1/3 of mgmt hotels paid incentive fees vs 28% last year
  • Expect roughly 100bps of margin improvement for the full year in owned, leased and other margins. 
  • Owned/leased/other: longer quartered benefited results by $2MM. Better results at leased hotels with higher termination fees but london had softer results and there $2MM of pre-opening expenses
  • Deleted about 2200 rooms. Nearly 40% of openings this Q where conversions. Expect 10k system deletions in 2013 and 30k new openings. 
  • Short term bookings are up in the 4th quarter. The calendar is favorable
  • Europe...run down of international markets
  • 4Q guidance: 
    • NA RevPAR: 4.5-5.5%; excluding DC think that RevPAR would be 100bps higher
      • Group revenue pace for the Marriott brand is up nearly 7% due to a strong short-term booking. The timing of holidays in the fourth quarter is favorable with Hanukkah and Thanksgiving day following the same low travel week. 
    • International constant $ RevPAR: +1 to 2%
      • Asia Pac: low single digit growth
      • Europe: should improve as UK comps ease
      • Caribbean/Latam: should see continued strong leisure demand/ mid-single-digit range
      • ME: remain a challenge
  • Expect very strong performance in New York, Boston, San Antonio, New Orleans, and continued international growth for incentive fees.  Unit growth and higher RevPAR should increase their incentive fees by 10% in FY13
  • Occupancy levels at their hotels are at record levels allowing them to successfully yield out lower rated business. They plan to further reduce price sensitive accounts in 2014 and continue to drive business higher
  • 2014 RevPAR guidance:
    • Bookings made in 3Q 2013 for 2014 increased 14% YoY and 60% of Group bookings are already on the books for 2014.
    • Europe is growing again.  New supply is under 1%, and therefore expect that RevPAR will increase in the low single digit range in 2014. 8% of MAR's fee revenue
    • Asia: expect mid-single digit RevPAR growht in 2014. 9% of fee revenue comes from this region with 50% coming from China
    • Latin America/ Caribbean: Mid-single digit growth. Region represents 5% of total revenue
    • ME: Mid-single digit RevPAR (little risky). Egypt is challenging and UAE/ Saudi Arabia are strong.
  • Have increased SG&A spend in adding resources to development of new brand launches as well as feasibility and legal in order to drive new unit growth.  Only 2/3 of their G&A are administrative costs which are likely to grow 5% in 2013 and slow in 2014
  • Nearly 50% of the new hotel openings are outside the US.  Opening hotels in Asia every 8 days. More than 70% of their limited service hotel openings are outside the top 25 MSAs. 
  • Premiums over their comp sets have increased this quarter
  • Early results are exceeding their expectations in London Edition which opened last month (occupancy over 75% and ADR north of $425). Miami Edition is scheduled to open in 2014 and NY in early 2015
  • Gaylord: integration has taken longer than they expected and have been negatively impacted by government austerity program. Gaylord hotels are benefiting from optical improvements in synergies under management. We've also seen a significant uptick in YoY trends in demand, including Marriott rewards business. We've added sales resources to pursue the profitable 1000+ for my business and expect the brand integration to be complete this year 
  • AC brand: Have 15 projects signed in NA under this banner and are looking at another dozen sites
  • Moxie Brand: Identified 30 sites and approved 12 projects
  • Acquired Charlotte Marriot for $115MM and will use the property to showcase some initiatives before selling it
  • Employed capital to enter new markets. They seeded capital to grow in India and have now attracted additional capital. They are also investing some of their capital in [Brazil]
  • Proceeds from capital recycling are likely to exceed xxx
  • Have an LOI that would monetize all 3 Edition hotels upon their opening. 
  • Expect to return ~$1BN of cash to shareholders through buybacks and dividends and expect to continue returning cash in 2014
  • They are very bullish on their prospects in 2014
  • Should experience considerable operating leverage in 2014 as SG&A growth slows



Q & A

  • Edition Hotels: Value was driven by MAR's estimated cost of completion. They will retain a long term management contract. MAR bear the construction risk around cost completion of the projects.  Performance measures are in the contract but they are standard
  • Why didn't they buy more shares this Q?  Their capex spending is about $100MM less than they expected - though leverage would be higher. The Edition sales are under an LOI but those aren't 100%. Don't want to spend money before they receive it. 
  • Hopeful that they will be able to avoid a government shutdown in early 2014
  • Over the last 6 or 7 quarters, they see business booked in the Q for future periods were mostly up but in the first 2 q's of this year it was down. So they saw a healthy inflection point this Q
  • Value of the condos at the Miami Edition? $100MM of estimated sales proceeds. Have about 60% of the SQFT to be sold under contract already. Pricing has been about $3,000/SQFT. Best guess is that they will recoup their invested capital. Not looking for gains on that peice. Ian Shrager's involvement is as a fee participant, so he will not participate in any return of capital
  • Managed hotel room count have been declining - what's going on there? The portfolio has been declining in the US and growing internationally.  In the US franchisee and management fees aren't really that different. Two drivers behind this trend: 1) increasing interest in franchise or managed formula in the US. 2) as their hotels age they have been deleting hotels from the system as they no longer meet brand standards.  Given that 20 years ago they were more titled towards mgmt vs. franchisee hotels a lot of the mgmt hotels are leaving the system.  A lot of these hotels change hands to a franchise hotel and get a lot of new capital to refresh them 
  • Today they don't franchise a single hotel in China - they manage all their hotels in that market
  • Select service is growing fast on the franchise side. Most of the domestic select service hotels are franchised
  • 16% of total domestic hotels in the US paid fees this Q vs. 12% last year. Not one of the Courtyard hotel portfolio of 120 hotels is paying fees - they will go from $0 to 100% fees on that portfolio. Feel like they will have nominal margin growth in 2014 on their hotels.  Feel like it will take a few more years to get them back to 2007 margins and then a few more years where incentive dollars will get back to prior peak levels in incentive fees. However, international incentive fees should continue to grow during this period.  Over the next few years international fees should exceed US incentive fees.
  • Low single digit RevPAR growth would imply incentive fees growing about the same as revenues. Plus new unit growth will also drive incentive growth performance because incentive fees kick in almost right away with new additions. Room openings should drive incentive fee growth of 10-15% in Asia even with only 3% RevPAR growth
  • The smaller the group the stronger activity. They are taking significant group share. Core hotels (full service between 250-450 rooms) see the best performance -- better than the larger big box hotels.  Part of that is due to the location of these hotels and that fact that they are more tilted towards corporate bookings. 
  • Have made a very deliberate effort to invest in growth in their (SG&A line) over 2012-2013.  Adding new brands (Moxie & seeding India, etc), investing in their teams around the world.  So 2014 should see some leverage. 
  • They will still continue to look for good brands and investment opportunities- not at the same pace as the last 2 years but are interested in some local brands etc. 
  • RevPAR guidance for 2014 is a little lower than some of the other guidance seen out there, despite their higher exposure to NA. 
    • can't really comment on anyone else's estimates for RevPAR. But that is their best estimate looking at group business on the books, special corporate accounts, yield management opportunities, and where things are trending
    • There is some positive mix impact in their numbers (meaning yielding better rated business and weeding out discount business) most of their RevPAR will be rate driven
  • Why are full service hotels now outperforming select service, despite select being mostly transient?
    • Group is growing less than transient. 
    • Select service has more distribution outside the top 25 MSA's which are outperforming secondary MSA's 
    • Full service has more concentration in the top 25 MSA's which outperform 
  • 2013 got hit in for the year in the year group bookings because of 2 government shutdowns. Hopefully 2014 will not
  • Have seen improvements in corporate spending but it has not come back to pre-"austerity" measures. You can see some of the recovery in F&B in the quarter which is trailing room revenues.  
  • They have always done well in converting other flags to their flags. Think that the Autograph brand is helping them do that 
  • Group revenue pace for 2014: +4% is overwhelmingly volume not rate.  Rate is up maybe 1%.  They hope that the last 40% of rooms booked will get more pricing power
  • Lower tax rate in 3Q: International tax returns - recorded a 1x $7MM benefit from accruals.  They are running closer to 32.5% - they will likely end in the 31.5-31.8% in 2013 as they grow internationally which tend to have lower tax rates than their domestica business. 
  • India is a difficult market to get financing - debt rates are in the mid-teens.  Anticipate that new deals at the luxury end in India slow down. Fairfield should continue to do well though
  • Fees should increase next year and they should get proceeds from at least a few of the Edition hotels.  So they expect that they should continue to "deliver healthy" returns to their shareholders- wouldn't say that they will return at least $1BN but implied it. Over time, share price is less of a determinant factor
  • Any trend changes in cancellations and attrition in group meetings aside from what's going on in DC.  They generally see positive building trends in Group
  • Aurora Gaylord, they are hopeful but its a bit far away. They would not build that on their balance sheet. 
  • Trends were better in July and August and weaker in September - partly due to the threat of the government shutdown but have not seen continuing deterioration.



  • 3Q base management and franchise fees: $325MM, up $42MM YoY.  $25MM FY calendar change impact. 
  • 3Q worldwide incentive management fees: $53MM, up $17MM. $12MM FY calendar change impact.  Incentive management fees improved in New York and Boston, were flat in many international markets and declined in Washington, DC and Egypt.  32% of worldwide company-managed hotels earned incentive management fees compared to 28% in the year-ago quarter.
  • Owned, leased, corporate housing and other revenue, net of direct expenses: $34MM. $2MM FY calendar change impact. $7MM termination fees. $2MM pre-opening costs:  two EDITION hotels.
    • On July 31, the company estimated third quarter owned, leased, corporate housing and other revenue, net of direct expenses would total approximately $20 million for 3Q.  Actual results in the quarter exceeded those expectations largely due to $8 million of termination and branding fees, $6 million of which were expected in the fourth quarter, as well as better than expected performance at several leased hotels.
  • At the end of the third quarter, the company’s worldwide pipeline of hotels under
    signed contracts increased to over 144,000 rooms. In addition, the company has more than 31,000 rooms
    approved, but not yet subject to signed contracts
  • Nearly 6,600 rooms were added during the quarter, including over 2,500 rooms converted from competitor brands and roughly 2,100 rooms in international markets;
  • 3Q cash: $144MM
  • 3Q debt:  $3.156BN
  • Repurchased 3.2MM shares of common stock in 3Q at a cost of $129MM



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Takeaway: Taking the data at face value, it's less good. However, it's unclear whether California is still causing a meaningful distortion.

This note was originally published October 31, 2013 at 10:06 in Financials

Editor's note: This is an abbreviated excerpt from a Hedgeye Financials Sector report issued earlier this morning by Josh Steiner and Jonathan Casteleyn. For more information on how you can reap the benefits of Hedgeye research click here.



Processing, Processing ...

The labor market appears to have lost a step in the latest week, but conflicting reports over whether California's tech issues are finally out of the data make it hard to state definitively what is happening. The year-over-year rate of improvement in non-seasonally adjusted initial jobless claims slowed to 6.6% from 9.8% in the prior week. The state level California data, which is only available on a 1-week lag, is showing that CA claims were still running above the prior year level by ~15k.


Assuming this 15k was still present in the data in the current week it would significantly alter the conclusion, as the data would instead appear to be resuming its pre-California/Govt shutdown run-rate. We expect greater clarity in the week ahead as we'll be able to see next week whether California's level of claims for this week were distorted.

Nuts & Bolts 

Seasonally adjusted initial jobless claims fell 10k to 340k week-over-week (WoW) and there was no revision to the prior week's data. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 355.25k.


The 4-week rolling average of non-seasonally adjusted (NSA) claims, which we consider a more accurate representation of the underlying labor market trend, was lower by 3.8% year-over-year (YoY), which is a sequential deterioration versus the previous week's YoY change of -5.8%







Joshua Steiner, CFA




Jonathan Casteleyn, CFA, CMT




SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk

Takeaway: Trade around today's weakness

Generally it is hard to poke any holes in the third quarter’s results:  SAM beat top and bottom line consensus expectations on double digit growth versus the previous-year quarter.  The stock is taking a hit this morning on management narrowing its FY 2013 guidance by 5 cents to $5.05 – $5.35 versus $5.10 - $5.40. We think the move is overdone. 


We remain bullish on SAM into year-end, however cognizant that the stock is up on a rope: +78% YTD and +38% over the last three months, and is expensive with a P/E of 40.4x vs a peer average of 23.3x. That said, we see 2014 as a very balanced year for SAM to meet and beat expectations on strong healthy growth from Sam Adams and continued support from Twisted Tea and Angry Orchard. We expect the company’s increased cap-ex spend to build brewery capacity (including a new bottling and can line, announced last quarter) to boost 2014 shipping volumes and reverse recent bottle necks resulting from overcapacity and the higher costs associated with using third party breweries.  The company raised depletion trends for FY13 to 21-24% vs previous guidance of 17-22%, and we expect the trend of superior growth of top craft brewers, in which SAM is a leader, to continue over the medium term.


From a quantitative perspective, we’d be buyers of SAM above our intermediate term TREND level of support at $220. Today the stock broke through its previous immediate term TRADE level of support at $246 to become its new line of resistance.


SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam levels


SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam



What We Liked:

  • Net revenue of $216.4MM beat consensus of $200.4MM, an increase of $50.0 million or 30% over the same period last year
  • Net income for the third quarter was $25.7 million, or $1.89 per diluted share that beat consensus at $1.82, an increase of $4.9 million or $0.36per diluted share from the third quarter of 2012, an increase of 24%
  • Depletions growth of 26% in the quarter, from growth in Sam Adams, Twisted Tea, and Angry Orchard
  • FY 2013 depletion trends raised to 21-24% vs previous guidance of 17 – 22%
  • FY 2013 capital spending estimate narrowed to $100MM to $120MM vs previous guidance of $100MM to $140MM
  • Maintained its FY gross margin range of between 52% and 54%
  • Expects price increase of ~ 1% in Q4 to offset higher input and labor costs
  • Tax rate of 38% for FY
  • On Industry Trends: Jim Koch said he’s seeing some signs of variety fatigue with retailers, who are choosing to stick with well defined crafts with high consumer awareness and appeal. From the retailer’s side, this also prevents staff confusion and kegs that don’t turn quickly enough.   Broadly he sees the variety in craft, citing 2-3 new craft breweries opening every day in the U.S., as a positive sign for growth in the category.

What We Didn’t Like:

  • FY 2013 EPS are now estimated to be between $5.05 to $5.35, a decrease from the previously range of $5.10 to $5.40 due to the land write-down and increased brand investments that are estimated to be partially offset by increased shipment volumes
  • In the quarter, Gross Margin declined to 53% vs 56% in the year-ago quarter, on increased brewing costs, higher ingredient costs, and product mix effects 

Matthew Hedrick


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