Home Price Appreciation Slowing

July CoreLogic Home Price Report

CoreLogic released its monthly home price report for June/July earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 


CoreLogic estimates that home prices rose +7.0% YoY in July, a deceleration vs the +7.5% in June and +8.3% in May. We show this in the first chart below.


Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. In the last two months, however, the revision was negative. The preliminary estimate for June was +7.7% and the final number came in at +7.5%. Meanwhile, May has been downwardly revised twice in the last two month. It began at +8.9%, was cut to 8.8% and is now 8.3%.


Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.9% YoY). As such, we think the next 6-8 months of worsening pricing data will weigh on the housing complex.


Our main thesis on housing is that the rate of home price appreciation will slow meaningfully over the course of 2014 and into 2015. Historically, inflections in the rate of HPI or HPD have been major macro drivers of relative positive or negative performance.


Home Price Appreciation Slowing - chartA


Drilling down, MGM’s quarter was not as good as advertised.  Macau commentary flashed some warning signs.




We remain negative on most of the Macau operators – Galaxy (0027.HK) is the exception – and MGM’s Q2 earnings and call did not provide any relief.  MGM maintains the lowest exposure to Macau of the major gaming operators but the company disappointed us in the US as well.  Going forward, lower flow through, tough comparisons, and new supply could temper sentiment for the Strip.  However, our real concern remains Macau and MGM management’s tone and commentary seemed to provide some backing for our Mass decelerating thesis.



Here are two takeaways from MGM’s Q2 earnings release.

  • MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year.  However, if you normalize hold in both periods, EBITDA was roughly flat.  That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.
  • MGM Macau disappointed with net revenues in line with our projection but EBITDA fell $14 million below our estimate and $18 million below the Street.  From our estimate, it looks like yet another Macau property missing on margins.  The below normal VIP win % of 2.7% was already reflected in our model.  We estimate margins should’ve been over 100bps higher than the actual EBITDA margin of 25.4%, given the higher Mass mix of revenues in Q2 2014 versus Q2 2013.



MGM’s earnings call probably provided the most important takeaways.  MGM China CEO Grant Bowie seemed to hint that there could be a Mass slowdown this summer.  While not discussed by the Street because it conflicts with their "Mass Is Great" thesis, June Mass growth decelerated to +27% from 30-40% in recent months.  Bowie’s comment about Macau seasonality emerging similar to other mature markets suggests that Mass growth in July and August could continue to decelerate.  Mass deceleration has been our thesis as articulated in our 06/13/14 note, MACAU: HANDICAPPING MASS DECELERATION.


Second, Mr. Bowie also seemed to suggest that conditions in the Mass market are very competitive.  We believe these market conditions may have contributed to the across the board softer margins for the Macau operators in Q2. Meanwhile, while probably stable, it doesn’t look like there is any meaningful uptick in VIP trends.  This is in line with our view that VIP seems to have bottomed but growth remains elusive.



Our primary concern remains intact:  Mass is decelerating and operators may face increasing pressure to grow this business. While VIP continues to struggle, the decelerating Mass would be the biggest delta from investor expectations.  The sell side seems focused on a 30% Mass growth rate for 2H 2014 but the math and anecdotal evidence (some of it from the MGM call) seems to suggest a rate 5-10% lower.  We see Mass growth decelerating to the high teens by the end of the year.  While we remain positive on Macau long term, Mass deceleration would likely pressure the stocks further.

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LEISURE LETTER (08/05/2014)



  • Aug 6:
    • HT 2Q 9 am:
    • Credit Suisse Gaming, Lodging, Leisure & Restaurant Conference
  • Aug 7:
    • MPEL 2Q 8:30am: , pw: MPEL
    • Credit Suisse Gaming, Lodging, Leisure & Restaurant Conference
  • Aug 8:
    • DRH 2Q 10am: , pw: 153358818
    • SHO 2Q 12n:


27:HK – Galaxy Entertainment Group Ltd announced a pay bonus and share award to encourage staff at senior manager grade and below to stay with the company until the end of 2017. Galaxy said its new pay increase and share award announcement was timed to coincide with the tenth anniversary of operations in Macau and would be effective from August 1. Terms of the new compensation arrangement include: all full-time team members at senior manager grade and below will be awarded company shares equal to three times their salary in August 2014, known as a ‘Special Share Award’. A cash bonus equivalent to one month’s salary will be issued on July 2015 and 2016 as a ‘Special Bonus Award’.

The share award becomes active, or is ‘vested’, on December 31, 2017.

Takeaway: Making good with labor.


880:HK – Mr. Ambrose So, CEO of SJM Holdings commented that the casino operator is not joining the recent trend to compensate worker via a cash or share scheme in an attempt to retain workers as rivals in the industry announce pay bonuses and share award programs to retain and attract staff.  However, Mr. So indicated this position may change near the completion time off the Lisboa Palace. The Lisboa Palace will provide up to 700 gaming tables and over 1,200 slot machines. The total construction cost is approximately HKD30 billion (US$3.9 billion) and is scheduled to open in 2017. 

Takeaway: An interesting counter point to Galaxy and Sand China Limited.


CWN:AU – paid $280 million for the nearly 35 acre, former Frontier Casino property to El Ad Properties - a fraction of El Ad's $1.4 billion purchase price.

Takeaway: Mark to market - Las Vegas strip land is fairly valued at $8 million an acre, higher than the roughly $4 million Genting Group paid Boyd for the Echelon site and a fraction of the $34 million per acre paid by El Ad to Phil Ruffin at time of purchase.  The Klondike Casino at the south end of the strip traded for $1.5 million per acre during Q1 2013.


9766:JP – Konami Corp’s gaming and systems division reported an increase in net revenue of 11.9% for the three months ended June 30. The Japanese conglomerate announced net revenue from that division reached JPY6.8 billion (US$66.3 million) for the period. Operating income from gaming and systems reached JPY1.3 billion, an increase of 4.8% compared with a year ago.  For the second quarter, Konami’s net revenue was JPY48.6 billion, up 6.6% year-over-year while net income rose by 45.6% to JPY1.4 billion.

Takeaway: Konami taking share.


CZR – Despite recent news commentary to the contrary, Caesar's Entertainment said Monday that the company does NOT expect any news regarding a potential sale of the Showboat Casino Hotel and the company is continuing with its plans to shutter the property on August 31.

Takeaway: Could this be a straight faced poker bluff?





MAR – Director Lawrence Kellner disposed of 14,599 shares of Class A on Friday at a weighted average price of $64.53 per share and now owns a total of 2,000 company shares. 

Takeaway: More insider selling of shares.


Cotai Construction Update (Macau Daily TImes) According to the Land, Public Works and Transport Bureau, some of the gaming operators face challenges in developing their new casinos and hotels.  Reportedly, Wynn Macau was granted a superstructure construction license while SJM holds a foundation construction license while SCL's Parisian holds a flatwork construction license.


(Hoje Macau) In a separate story, the news agency reports Macau Studio City is preparing to suspend work and MGM will likely suspend construction activity. MGM indicated it has completed work on the property basement and would soon begin construction of the tower.  While Wynn indicated no interruption of any kinds in the construction of Wynn Palace.

Takeaway: We only have confidence in the Galaxy and Wynn opening targets.


Macau International Airport – During July, passenger volume recorded an 11% increase year-over-year, surpassing 490,000, while the aircraft movement in July was more than 4,300, an increase of 3% over the same period last year. On a year-to-date basis through July 31, passenger volume exceeded 3.1 million and aircraft movements over 29,000, increasing 11% and 8% percent respectively year-on-year. In September, new flight service between Macau and Tianjin will begin with four weekly flights. 

Takeaway: Airlift growth a positive and MIA traffic represents about 20% of monthly Macau visitation.


Macau Punter Exclusions – According to the DICJ, 77 people applied for voluntary casino self-exclusion between April and June, up from 50 people in the first quarter. A total of 252 people applied for self-exclusion from Macau’s casinos in 2013. The maximum exclusion period is two years but it can be extended. The applicant can apply for exclusion from all or just some casinos. Those who fail to comply with the exclusion order risk up to one year in jail or a fine

Takeaway: The potential exist for this list to grow significantly.


Northeast Regional Gaming – Maryland Live! Casino’s two-story 14,800 square-foot poker room, one of the biggest in the Mid-Atlantic, is set to open Wednesday, August 28 just in time for Labor Day weekend. The room will house 52 tables, raising the casino’s total table game count to 174. The Las Vegas style poker room will feature a variety of limits, high-profile tournaments and games.

Takeaway: More competition for both PENN and Caesars.

Cyprus Gaming Expansion – the government plans to fast-track a bill that will offer a casino license be valid for 30 years, together with a 15-year exclusivity agreement for the successful bidder. The operator awarded with the casino license will also be requested to pay a 15 percent tax on gross revenues.  In the eyes of the government, the operator will offer no less than 100 gaming tables and 1,000 electronic gaming machines and that will be classed as a top-tiered casino resort in Europe, and one of the finest in the world. 

Takeaway: More slots sales.


New Chinese Yuan Loans(Shanghai Securities News) big four Chinese banks CNY210B in July vs CNY290B in Jun. Additionally, the big four Chinese banks experienced a net deposit outflow of CNY1.5T last month vs inflows of CNY2.2T in June.

Takeaway: Credit growth abating.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Constant hold at wholly owned properties yields flattish EBITDA YoY while MGM Macau missed. Did we detect a softening tone regarding Macau business levels?




  • Wholly-owned Strip EBITDA up 12%
  • CityCenter EBITDA up 20%
  • Increase in mix from high-end main floor business.
  • May:  broke ground on Arena.  Will open in mid-2016. 
  • June:  CityCenter veiled Hershey store to great success.  Tom Urban/ Shake Shack will open in December.
  • Mandalay Bay:  half of rooms of Delano are complete.  Sept 1 grand opening.  Delano brand will attract higher rates and higher margin customers.
  • MGM Harbor Maryland:  have begun construction; mid-Atlantic market is thriving.  Expanding from 2.8m sq ft to 3.2m sq ft.  If demand warrants, can even expand 2nd floor.  Increased budget to US$1.2 bn, up from US$1bn previously, due to this new expansion plan.
  • Remain optimistic on Japan (Tokyo/Osaka); met with several local companies
  • MGM Cotai:  completed basement and now moving up to hotel tower.  On budget and on schedule to open in 2016 (no date or month offered).  
  • MGM:  7th consecutive YoY growth in EBITDA and margin improvement on LV Strip
  • Luxury Strip properties EBITDA grew 13% YoY
  • Core Strip properties EBITDA grew 8% YoY
  • Core Strip outperformed on REVPAR growth
  • Strip Bacc win: 64% YoY;  non-bacc win: +10% YoY
  • Grew convention mix by 1% in the quarter
  • FY convention mix to be up 16% - above prior peak levels
  • Expect REVPAR growth of 5% in 3Q
  • CityCenter:  
    • Aria:  increased table game volume and higher hold
    • Vdara:  +10% in REVPAR; occupancy just inside of 95%
    • Crystals:  +12% YoY in EBITDA
  • Cash:  $1.4 bn ($658m cash at MGM China);  
  • $1.2bn available under RC.  MGM China - $1.4bn available under RC 
  • CityCenter prepaid $150m outstanding debt, lowering debt to $1.5 bn; leverage at end of quarter was 4.5x.
  • 2Q capex:  $114m (domestic operations), $64m (MGM China) - $4m MGM Macau, $60m MGM Cotai
  • MGM China
    • Branding fees:  $4.5m
    • Lower VIP hold and turnover
    • EBITDA margins increased 90bps, due to higher mass revenues
    • Low VIP hold affected EBITDA by $14m YoY
    • Mass:  2nd consecutive quarter of outperformance, relative to market growth; 77% mass contribution to EBITDA (1Q contribution was 70%)
    • Slot revenue: +11%, lower hold but higher volumes
    • Continue to see more opportunities to improve table operations
    • Best mass win per day in the market
    • MGM Cotai:  $2.9bn budget; have 50% of contracts complete
      • 2nd phase:  all non-gaming; will add 700 guest rooms;  in 3Q, they will release preliminary budget
      • Govt process has changed in the past year
      • Wants to submit a perfect document on 2nd phase
      • Tremendously capacity constrained on hotel rooms in Macau
    • MGM Macau:  highest EBITDA per room in the Macau market
    • 2 hotels open in Mainland China; more under construction


Q & A

  • Macau:  Backlog of construction projects;  operators don't know exactly when they will open.  Labor will always be an inhibiting factor. Have received superstructure/ MEP permits. Will open in 2016 but don't know when.  Will not give a precise timeline.
  • MGM China 2Q EBITDA margins:  nothing exceptional there.  No adverse effect from 14th month payments.  Low hold did have some impact but was offset by strong mass revenues.  Clean comparison.
  • 37% flowthrough in 2Q; Monte Carlo had a bad quarter there
  • Delano also affected flowthrough due to construction disruptions
  • Still believe in 50-60% flowthrough going forward
  • Gained market share in convention business and REVPAR
  • Monte Carlo/Mandalay flowthrough will be below 50-60% in 3Q but once Delano opens in September, flowthrough will improve.
  • FTEs up slightly from 2013
  • Continue to maintain costs and expand margins
  • 2015 group convention pace:  pace up double digits (+16k rooms) and higher rate, despite tough comp with ConAgg.
  • 2015: Low single digit rate growth, suggesting low single digit REVPAR 
  • 2015 corporate business:  increasing from 55% to 60% of bookings
  • More high-end business in LV Vegas as a result of increased visibility in Macau - didn't say that LV is up because Macau is down
  • Mayweather fight in May increased baccarat volumes
  • Another Mayweather fight in Sept 2014
  • 2 hotels (Sanya, Chengdu); Sanya benefited from MGM Macau
  • MGM Macau:  Slot volumes - very strong in premium area but unlucky; however, have seen high hold in July 
  • Macau:  junket business still consolidating/stabilizing.  Mass business continues to be strong - Grant Bowie did caveat the commentary by talking about summer being slower now similar to other markets
  • Mass in Macau is competitive - this question was in response to a question about whether there is margin pressure on the mass business and Grant seemed to concede there is
  • Flowthrough color:  YTD, 45%.  Continue to expect 50-60% for the full year.
  • Convention business strong in 4Q 2014
  • 2015 renovation projects:  Standard room tower at Mandalay Bay
  • Adding 300k sq ft of convention space to Mandalay Bay; will break ground in 1-1.5 months; will open in 3Q 2015.
  • Crown transaction in LV:  $9m per acre; certainly a bullish sign for investors; will stimulate the start of the Genting project
  • CityCenter:  generating significant amount of free cash
  • Did explore Crystals sale in 2013 (sub 5 cap rate);  $45M NOI on TTM; thinks it can go to $50Ms.  
  • Want to own 100% CityCenter but Dubai World doesn't want to sell

On Earnings Score Card Consumer Staples is Dead Last!

We’re more than halfway through the earnings season for the sector and we thought it was worth flashing our table that ranks the earnings performance of the S&P500’s 9 sectors.  Of note, Consumer Staples (XLP) is ranked dead last across Revenue and EPS performance!

  • XLP Revenue beats = 35%
  • XLP EPS beats = 48%

On Earnings Score Card Consumer Staples is Dead Last! - 2Q14ES BeatMiss


While the XLP sector has been preferred for such factors as dividend yield and consolidation potential, we’d expect the top and bottom lines of the remainder of the companies reporting this quarter and in 2H to be challenged on:

  • U.S. Macro Factors – as outlined by our macro team, we continue to expect consumption to suffer as U.S. growth slows and inflation rises, in-line with the team’s quarterly themes of #InflationAccelerating (Q1 2014); #ConsumerSlowing (Q2 2014 ); and #Q3 Slowing (Q3 2014)
  • Less Fat to Cut – staples companies have significantly trimmed costs and improved efficiencies to a great extent over recent years. As top lines slow due to macro and consumer factors, we believe companies will be challenged to grow bottom line results with less fat to trim.  Included, we expect input (commodity costs) to remain elevated.
  • Emerging Market Mixed – once the sector’s great growth engine (China, Brazil, India, Russia) we’re seeing slower growth and higher inflation impact the emerging market.  Despite pockets of improvement, we’re seeing lower margins (versus other geographies) and a weaker consumer impacting results.
  • Europe Slow– though off ‘crisis’ lows, Europe has weakened in mid 2014 (PMIs and confidence figures down). With unemployment rates high and sticky, we think Branded company sales will struggle and price taking will be challenged to make up for volume declines. 
  • Hefty Valuation – while the sector’s valuation (P/E of 18.8x) has come in over recent weeks from a 5 year high (see chart below), we could see investor enthusiasm wane alongside slowing growth across the sector. 

On Earnings Score Card Consumer Staples is Dead Last! - z. cs pe


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



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