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HST 1Q 2015 CONFERENCE CALL NOTES

CONF CALL

 

  • 15 hotels had significant construction/renovations
  • 1Q portfolio grew market share
  • Transient: +4.5%, strong rate growth
  • Group:  +1% (+8.5%-association business, corporate business was flat despite tough Super Bowl comps)
  • 9% of EBITDA come from international
  • Continue to have positive view on lodging cycle
  • Do not expect 2017 suppy to accelerate meaningfully
  • Lending continues to improve. Pricing has continued to improve
  • Expect mid-teens return on investment opportunities
  • Expect to complete more acquisitions in 2015 than 2014
  • Stock repurchase program effective once they file 10Q this week
  • View stock as attractively priced
  • Replacement costs for portfolio avg $425k/key (well above current trading level of $328k/key)
  • Expect group demand to be solid for remainder of 2015. Bookings in the 1Q 2015 for 2015 was +10% (rate: +8%).  Demand for 3% in 2Q in 2015, (rate: +3.5%) resulting in rev growth of +7%.
  • 2Q Construction impact will be not as severe as in 1Q
  • Expect FX impact to be $25m for FY 2015 ($8m worse than previous prediction in February)
  • Cost-saving initiatives will raise margins higher than what was forecasted in February
  • REVPAR declines: NYC/DC/Houston/Canada
  • Boston: +6% in occu, +9.5% in ADR, +19% in F&B
  • San Francisco:   Driven by strong group (+15%) and transient demand (+12.1% REVPAR). Will continue to be a top market.
  • Phoenix: +15.8% REVPAR; group demand up 27% driven by Super Bowl, baseball spring training. Expect Phoenix to be one of the strongest in the year.
  • Asia:  +11% REVPAR (rate: +9.2%); Australia/New Zealand benefited from Cricket World Cup
  • Outperformers: Los Angeles, San Diego, Florida. Expect continued outperformance in 2Q
  • Embassy Suites Chicago renovation will be completed in May
  • NYC:  Expect positive REVPAR growth in remaining quarters
  • Strong dollar:  No impact on US visitation
  • DC:  Citywide strong for 2016/2017
  • Canada:  -21% REVPAR.  Room renovations expected to be completed in June. Meeting space to be done by August.
  • Euro JV:  strong transient offset softer group business.  Outlet revs up 2.8% offset by banquet revs decline of ~3%. 
  • Eurozone sentiment improved in April
  • Spain/Germany macro forecast raised
  • Utilities: -7.7% YoY
  • Property insuarance: -10.3 YoY

Q & A

  • Positive view on lodging cycle
  • Why Stock repurchase $500m?:  $500m is a good round number
  • Near-term opportunities:  look at Calgary contract which they had renegotiate 
  • They're also looking at international assets, single assets, and smaller deals
  • Potential asset sales:  likely be spread out.  
  • Risks on demand side, not supply side
  • Capital allocation: Could also put out $600m in form of dividend
  • Few large projects that will start later in 2015 that will have renovations in 2016. Feel 2016 renovation by $ amount will be lower than 2015 (more than 10% decrease)
  • REIT consolidation?  hard to predict in near-term
  • $25m incremental revenues will flow through in 2016 and 2017 as a result of the renovation projects
  • DC hotel renovations may be completed in May 2015
  • Looking at meaningful energy ROI project which will reduce their utility costs
  • Try to issue stock if stock price above NAV
  • Have benefited from cap rate compression
  • Trajectory of REVPAR growth by quarter in 2015:  Q4 is strongest. Expect things to improve as they work through the year.
  • Q4 will be strongest in margin growth perspective
  • US travel into Europe up 6-8% YoY in 1Q 
  • Tourists tend to book a little longer out (longer than 60-90 days). 
  • Asian travelers to US (excluding Japanese) are growing 

Keith's Macro Notebook 4/30: Euro | 10YR Yields | Russell 2000

Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.


Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. It was published at 7:46am ET. Click here to learn more and subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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Early Look

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YELP: The New Major Red Flag (1Q15)

Takeaway: Declining Salesforce. The fact this is even remotely an issue suggest this story is going to turn much sooner than we initially expected

KEY POINTS

  1. MUCH WORSE THAN WE EXPECTED: We expected YELP to bounce off a beat and high 2Q guidance with support from inorganic tailwinds.  It did the opposite.  What’s worse is that YELP maintained 2015 Revenue guidance; which is not only lofty to begin with, but also means the sell-side is going to up their estimates for 2H15; ultimately increasing the hurdle. 
  2. THE NEW MAJOR RED FLAG: We estimate that YELP’s salesforce sequentially declined this quarter.  Given that the company guided to growing its salesforce by 40% in 2015, but only achieved 25% y/y growth, we believe YELP experienced a heightened level of sales rep attrition in excess of what’s implied in by the net figures.  But more importantly, It doesn’t matter why this is happening, what matters is that this is an issue at all (next section). 
  3. PULLING THE THREADWhile we expected our primary read this quarter to be salesforce productivity, we weren't expecting a decline in its salesforce itself.  Remember that YELP’s business model is predicated on hiring enough sales reps to drive new account growth in excess of its rampant attrition.  That said, the only thing preventing declining revenue for YELP is its growing salesforce.  The fact this is even remotely an issue suggest this story is going to turn much sooner, and get much uglier, than we initially expected. 

 

MUCH WORSE THAN WE EXPECTED

We expected YELP to beat and guide high for 2Q with support from inorganic tailwinds.  It did the opposite. YELP missed both Local and Brand Advertising revenue estimates, with Other revenues surging well ahead of estimates on what was likely understated implied guidance on the Eat24 acquisition. 

 

Delving into its Local Advertising metrics is somewhat trickier now that YELP pulled its legacy ALBA metric for its new Local Advertising Accounts (LAA) metric.  The issue is that we can’t construct a sufficient time series since mgmt only provided us limited history for its new customer repeat rate metric (5 quarters). At a very minimum, there’s no denying that the majority of its attrition is coming from its core Local Advertising segment.

 

More importantly, YELP shot itself in the foot (again) by maintaining 2015 revenue guidance; which was lofty to begin with, but also means the sell-side is going to up their estimates for 2H15 since 1H15 fell short of their expectations;. See scenario analysis below for more detail.

 

YELP: The New Major Red Flag (1Q15) - YELP   Att Mix

YELP: The New Major Red Flag (1Q15) - YELP   2015 Local Scen Analysis 1Q15 

 

THE NEW RED FLAG

We estimate that YELP’s salesforce sequentially declined this quarter.  Given that the company guided to growing its salesforce by 40% in 2015, but only achieved 25% y/y growth, we believe YELP experienced a heightened level of sales rep attrition in excess of what’s implied by the net figures

 

We suspect there are two explanations behind its elevated attrition

  1. Too many mouths to feed: YELP's salesforce is already large enough to canvas the US in call volume.  Hiring more reps just means more mouths to feed from the same trough (see note below).
  2. Not enough food: YELP may have switched its commission benchmark from gross to net revenue, which drastically lowers the commission pool given its rampant attrition.

But more importantly, It doesn’t matter why this is happening, what matters is that this is an issue at all (next section) 

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

Pulling the thread

While we expected our primary read this quarter to be salesforce productivity, we weren't expecting a decline in its salesforce itself.  Remember that YELP’s business model is predicated on hiring enough sales reps to drive new account growth in excess of its rampant attrition. 

 

That said, the only thing preventing declining revenue for YELP is its growing salesforce.  The fact this is even remotely an issue is a major problem, especially since salesforce productivity was already on the decline to begin with.  If YELP is already having difficulty sustaining its salesforce, then the story is going to turn much sooner, and get much uglier, than we initially expected. 

 

YELP: The New Major Red Flag (1Q15) - YELP   Lost annual

YELP: The New Major Red Flag (1Q15) - YELP   sales productivity 1Q15

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet


Macro Pain Trades = #On

Client Talking Points

EURO

There was a big multi-standard deviation move in the EUR/USD straight up to $1.12 now; from $1.05 (our initial 2015 target) that’s one heck of a bounce – European stocks did not enjoy that. We highly doubt ECB President Mario Draghi is going to sit on his hands, especially with plenty of European economic data losing rate of change gains.

10YR YIELDS

There was a big multi-standard deviation move in German Bund Yields (they doubled off the all-time lows!) definitely had its impact on the rates market – so now, like in FX, risk ranges for sovereign rates (our leading indicator for volatility) are widening – there should be plenty of chop to risk manage from here.

RUSSELL 2000

Inasmuch as European stocks don’t like Up Euro, U.S. Growth Investors (especially the domestic consumer) don’t like Down Dollar, because that equals rising gas prices – this is the 1st immediate-term TRADE breakdown signal in the Russell of 2015 – we wouldn’t buy the dip either.

Asset Allocation

CASH 40% US EQUITIES 10%
INTL EQUITIES 12% COMMODITIES 2%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MTW

The Dodge Construction Starts Index accelerated at its highest rate since 1982. The index was driven largely by non-building projects, which was 74% higher for the first three months compared to last year. The Architecture Billings Index (ABI), a survey of architects, increased ~3% month-over-month and ~5% year-over-year for March. The ABI Index typically leads nonresidential and residential construction spending by 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters. This suggests MTW’s crane sales should see a pickup in the first half of the year. MTW reports April 29th after the close. Earnings Call will be held at 10:00am eastern time the following day.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.

TLT

Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.

Three for the Road

TWEET OF THE DAY

MUST SEE TV 9AM ET Hedgeye CEO @KeithMcCullough + @MariaBartiromo go deep on markets, #Fed, #economy etc @FoxBusiness

@Hedgeye

QUOTE OF THE DAY

I am not on this earth by chance. I am here for a purpose and that purpose is to grow into a mountain, not shrink to a grain of sand.

-Og Mandino

STAT OF THE DAY

Restaurants are being charged $5,100 to broadcast the Mayweather-Pacquiao boxing match, Buffalo Wild Wings executives said during its earnings call Tuesday.


CHART OF THE DAY: How Does It All End?

CHART OF THE DAY: How Does It All End? - z 04.30.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.

 

...The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be....

 


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