Takeaway: Q4 performance, 2015 guidance, and clear strategic and capital deployment vision justifies 52 week high stock price and big multiple


  • Every region signed a record number of deals in 2014
  • Added 5 brands in 5 years (Autograph, Moxy, AC Hotels, Gaylord, Protea)
  • Edition: 2 London/ 1 Miami already open; New York Edition will open in next few months; closed Miami Edition last night
  • Booked $10bn revenue on; nearly 20% coming through mobile 
  • Rewards membership: 49m (contributed 1/2 of worldwide occupancy)
    • 60% new members were next generation travelers
    • 40% new members are outside NA
  • 2015: gross rooms growth 7% (6% net of deletions)
  • Supply:  STR estimates supply increased 0.9% in 2014 and expects 1.3% growth for 2015 
  • Have 10% share of NA rooms
  • Have 26% of share for under construction market
  • Expect to have more than 100 Autograph hotels open by end of 2015
  • 16 Moxies in pipeline (Europe) and 5 Moxies in pipeline (US)
  • Last month, approved 2 Moxy deals in Manhattan. Expect 150 Moxy hotels open by 2023. 
  • Aggressive expansion abroad for limited service (Residence Inn/Fairfield)
  • In 2014, US htoels reported 20% increase in guests coming from Greater China
  • Q4 2014:
    • Higher termination fees added 1 cent
    • NA systemwide REVPAR : ~7%
      • Strong REVPAR in San Francisco, Pacific NorthWest, Florida
    • Transient demand was strong. Nearly half of top 20 markets increased retail REVPAR by double digits
  • Q4 Group REVPAR rose 6%; 4% growth in full service hotels reflecting holiday timing
      • For 1Q 2015, group revenue pace up 6% while FY 2015 group pace is up 5%. Meeting planners bullish, booking windows lengthening and room rates are strengthening
      • In 4Q, group room revenue booked for all future periods increased 9%.
      • 2015 corporate rates will increase 5-6%
  • Across US system, international guests make up only 5%. So don't see FX headwind for US business
  • Expect 5-7% 2015 NA REVPAR
  • Caribbean/Latin America
    • REVPAR rose 8% in 4Q
    • Strong leisure/good group drove results in Caribbean/Mexico
    • Brazil soft
    • Expect constant dollar REVPAR of mid single digits for 2015
  • Europe
    • Q4 REVPAR: 3%
    • Good group attendance, strong holiday demand in Germany/Austria, easy weather comps
    • Weak Russia
    • In 2015, London will benefit from strong group business and rugby Cup later.  
    • ~30% of European lodging demand comes from outside Europe (20% NA, 6% Asia)
    • Expect 2015 REVPAR increase in low single digit rate
    • In 2014, 7% of fees came from Europe
  • MEA
    • REVPAR up 15% in 4Q
    • Egypt strong
    • Expect 2015 REVPAR increase in high single digit rate
    • In 2014, 3% of fees came from MEA
  • Asia Pacific
    • REVPAR increased 3% in 4Q
    • Weaker yen boosted Japan
    • RevPAR in Greater China increased slightly reflecting strong Shanghai demand offset by the disruption from political demonstrations in Hong Kong.  
    • In 2015, expect demand will remain strong in Shanghai and improve in Hong Kong...a mid single digit growth rate for the region.
    • In 2014, 9% of fees came from Asia-Pacific (5% from Greater China)
  • Operations outside US contributed 25% of fees in 2014
  • For 2015, 1% move in dollar, net of hedges would change adjusted EBITDA by $3m
  • In 2015, new accounting rules require service charges to be included in property revenue. Expect WW house profit margins would increase 60bps instead of 90bps as a result of this change
  • 2014: incentive fees increased 18% with more than half of hotels worldwide paying incentive fees
  • 2015:  fee 9-11% growth
    • Incentive fees growing in low double digit rate
      • Constrained by unfavorable FX, lower deferred fee recognition, and renovations
    • Estimate FX to reduce fee revenues by $15-20m in 2015
  • 2015 guidance excludes pending Delta acquisition.  P&L impact from Delta will be 'noisy'.  Transaction should be modestly accretive in 2016.
  • REVPAR sensitivity unchanged: 1 point REVPAR = $20m fees and $5m on owned/leased
  • 2015:  plan to renovate several owned/leased hotels and begin construction Fairfield Inn Brazil
  • Cash return to shareholders in 2015 will be at least that in 2014
  • 1Q 2015
    • Fee growth in mid teens rate with higher relicensing and application fees
    • While group pace is strong, full service RevPAR growth in North America is likely to be a bit lighter than later in the year due to property renovation schedules and the recent northeast snow storms.  
    • Expect owned leased and other revenue net of expenses will increase more than 20% with the Addition of the Protea leased hotels and higher credit card branding fees.  
    • G&A should increase in the first quarter reflecting higher brand initiatives and hotel development expenses.  However, first quarter G&A will also benefit from a roughly $12  million net favorable impact to our legal expenses associated with certain litigation resolutions.

Q & A

  • Difference between upscale and UUP #s is really about group
  • In a higher rate environment, transient grows faster than group
  • Shortcoming of REVPAR is that it doesn't include non-room revenue...that's associated with group business
  • Don't think near maturity of cycle
  • Focused on G&A costs flat, growing at a minimum
  • Limited service paying fees: 50% in 2014, 38% in 2013
  • No hotel renegotiations that have moved the needle
  • Lending market getting a little better for big hotels but it's targeted.
  • Lead times extended out for construction
  • Full service development:  very small volume of deals
  • Asia-Pacific REVPAR rising in 2015: In 1H 2014, Thailand was rough. China should be similar to 2014 but easier comp.
  • Potential Asset sales ($600-650m) 
    • Have small Courtyard in Europe on the market. 
    • 2 EDITIONS in Miami and Residences 
      • Expect $50m in Residences
    • Also will collect some notes due 2015 ($30m)
    • Preferred stock coming due
  • Buyback vs dividend:  buyback more flexible. PE multiple at 26 (higher than 20-yr avg of 22) but think EPS can grow 20% in next couple of years so valuation not a concern
  • Conversions:  into Marriott and Renaissance brands from independents
  • Capex breakout:  need to spend $80-100m to finish Edition buildings. Don't need to put a lot of capital to get new Select-Service hotels. $100m or so on key money and loans. Not more aggressive on key money than their competitors
  • US Net room growth:  most will be upscale in secondary markets
  • Half of 2015 openings will be US. Most will be franchised select service and extended stay hotels
  • Assume breakeven on Miami Edition Residences
  • Intensely competitive business
  • NY international exposure: 10-15%
    • FX will hurt arrivals in NY
    • Room night international arrivals to NY down 3% in 4Q 2014
  • FX helping travel to Paris/London
  • Shanghai REVPAR: 6-7%; continues to see it perform well
  • Expect govt austerity to continue to China
  • Q4 interest accretion $7m benefit: had been recording too much interest on accreting bond.
  • Expect US pipeline to continue to grow
  • Expect fewer signings in China in 2015
  • Delta impact in 2015:  transaction costs will result in a couple of pennies impact (not in guidance)
  • Fees 1Q 2015:  more chunkier relicensing fees than other quarters
  • Tough comp for 3Q 2015:  in 3Q 2014, had $15m deferred fees
  • Expect franchise fees to grow faster than managed fees
  • Expect REVPAR for franchise and managed to be roughly comparable
  • FX impact most pronounced in Europe 
  • Moxy Europe per key costs:  40-50k euro range
  • Diluted share count at end of 2014: 286m 
  • 1Q NY Group could be negative: (Super Bowl comp, snow storms and supply)
  • Expect NY to underperform by few hundred basis points with Q4 2015 being the weakest 

Keith's Macro Notebook 2/19: UST 10YR | Oil | Vix


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

Retail Callouts (2/19): FL, AdiBok, NKE, UA

Takeaway: FL stock Repo is no surprise, but need for capital investment intensifying. AdiBok CEO search = positive for NKE & UA , negative for FL.


Retail Callouts (2/19): FL, AdiBok, NKE, UA - 2 17 chart2





FL - New Stock Repo and Capital Allocation Plans



Takeaway: The $1bn repo announcement is not a surprise. The company is coming to the end of its existing $600mm authorization ($70mm left at the end of 4Q by our math), and every year at this time it announces its capital deployment plan following the first Board meeting of the new fiscal year. 

We still really like this name as a Short. Admittedly, the next few weeks will be an uphill battle. With last night’s announcement, the print on 3/6 (which we don’t think will be outstanding, but probably won’t tank), and the company’s analyst meeting on 3/16 in NYC.

But any way we cut it, the warning signs are there.  The key to this call is that the model is transitioning into a lower margin and lower-return business.  Under the Hicks regime, capital was pulled from the model (stores, SG&A, working cap, capex) which took productivity and margins to new peak.  The new model is one where store closure opportunities are minimal, and both SG&A and capex need to head higher to refurbish existing stores to maintain market share – and that’s a best-case scenario. In fact, the 2015 capital budget remains elevated at $220mm up from $160mm two years ago.


AdiBok, NKE, UA - Adidas launches search for new CEO



Takeaway: This was a long time coming at Adi. Not because of shareholder activism. But because the brand has been handing over market share hand and foot to Nike globally while at the same time it sat on the sidelines as UA became the #2 player in the US market. Now, there is instability at the top of the organization just as the brand is trying to right the ship. There is no clear timetable for Heiner to become the old CEO. The longer the search takes, we think = a bigger opportunity for Nike and UA to accelerate market share gains.


As for Foot Locker, we think that this is probably a slight negative development on the margin. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. That competition will ease before it ultimately (in a few years) intensifies. Nike and UA won't have to fight as hard, or spend as much, to get incremental space at FL. And keep in mind that Nike is already at 68% of sales for FL. Foot Locker wants nothing more than to have a strong staple of contenders looking to take a few points of share. That's not gonna happen.




Kering Classifies Sergio Rossi as Sale Asset



AdiBok - Taylormade: First work from new creative lead



AAPL - Samsung to acquire digital wallet platform—and Apple Pay competitor— LoopPay



Facebook debuts product ads



Kenneth Cole Names Marc Schneider CEO





Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

February 19, 2015

In today's edition of RTA Live, Hedgeye CEO Keith McCullough dials in from San Francisco to break down the Real-Time Alerts positions as of 10:30AM, as well as take subscriber questions on TLT (of course), housing, and 3D printing stocks.

Patient, Contrarian Investors Are Getting Paid

Editor’s noteThis is a brief excerpt from Hedgeye morning research. Click here for more information on how you can become a subscriber.

*  *  *  *  *  *  *

Patient, Contrarian Investors Are Getting Paid - pa7


What a difference 24 hours in the bond market makes…


The 10-year Treasury yield drops -11 basis points in the last 24 hours from 2.16% to 2.05% after:


A) The data (PPI -0.8% vs consensus expecting ½ that decline) and

B) Fed Minutes effectively suggesting that a hike in June could be “premature” (Powell, a Fed voter, cautioned on the rising expectation of dropping the word “patient” too)


Expect volatility in the bond market to continue to rise.


Bottom line: The patient investor has bought every pullback in the Long Bond (TLT) for the last 8 months and has made plenty of money doing so.


Patient, Contrarian Investors Are Getting Paid - cod TLT


24 Hours

Client Talking Points


UST 10YR Yield drops -11 basis points in the last 24 hours from 2.16% to 2.05% after A) the data (PPI -0.8% vs. consensus expecting a decline of 1/2 that) and B) Fed Minutes effectively suggesting that a hike in June could be “premature” (Jerome Powell, a Federal Reserve voter, cautioned on the rising expectation of dropping the word “patient” too) – expect volatility in the bond market to continue to rise.


Oil was down yesterday, then down hard this morning as the USD Down move last week shows no follow through. The risk range for WTI is now narrowing ($49.04-51.64), so we don’t expect oil volatility (OVX) to re-test its highs of $63-64 on this oil pullback.


On an absolute basis, Oil’s volatility (55) looks nothing like U.S. equity volatility (15), but they are both bullish from an intermediate term TREND perspective. VIX is testing the low-end of its immediate-term risk range and has upside to $19-21.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).



Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


VIDEO | Why Oil Prices Are Set To Go Lower



It does not matter how slowly you go as long as you do not stop.



There are 73 startups with a valuation over $1 billion according to venture capitalists. Of the 73 companies, 23 make software, 13 work in e-commerce and 13 are consumer oriented internet services.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.