After being bearish for the better part of two years, we have been hearing from the field more data points that are incrementally positive for Burger King.  The industry issues remain, but the increased focus on value gets the brand back in the game. 





ASCA misses consensus due to surprisingly higher promotional spend.  After PENN, PNK, and BYD, expectations were pretty low 




  • Think they had a pretty solid quarter.  They are very pleased with the margin performance
  • Huge synergies at Black Hawk, full quarter of regulatory reforms can be seen in 3Q and in the 4Q there is a substantial improvement in revenues and EBITDA as a result of the hotel opening
  • East Chicago was flat, which was a "pretty outstanding result" given the new competition and the fact that a competitor was closed last year
  • Vicksburg was impacted by a new competitor but they are seeing some improvement as a result of management efforts
  • Are in the process of working with lenders on an extension of their R/C ... "we are in striking distance of getting it done..."
  • Blackhawk:
    • So far they are very encouraged, and the initial results are exceeding expectations
    • Characteristics in the first month of hotel performance are more in line with a mature property
      AKA margins will be good
    • Very pleased with the reception from the Denver market
  • Seeing a little less spending per trip per patron and continued impacts of the weak economy across their portfolio (aside from Black Hawk)
  • Margins improved at all properties except at Vicksburg
  • Don't expect borrowing any funds on R/C in 4Q
  • Fixed charge covered was 3.12x, but expected to decline slightly as a result of higher interest from unsecured note offereing
  • Expect Black Hawk margins to improve going forward



  • Blackhawk - when they started the project they thought they could get a 15-17% ROI, putting them in the $60-65MM range, but since then, smoking ban was implemented offset by favorabl regulatory changes and hotel
    • Customer base in the "metro area" has been waiting for a first class facility
  • Vicksburg - significant impact from the economic weakness, impact from new competition
    • Some light at the end of the tunnel from operating the facility better.  Are starting to see some margin improvement there.  Making some adjustments to increase customer satisfaction and profitability
  • 2010 capex in the neighborhood of $75-80MM including several projects to increase air quality and site stabilization in Vicksburg ($20MM for those two - which is front-ended)
  • Capitalized interest will be very minimal
  • What's in the 4Q09 maintenance number? What was it for 3Q09?
    • 4Q09 number is a cash number, and a number of FF&E purchases made in the 3Q are being paid for in 4Q
    • Run rate is still approximately $11 million per quarter
    • Growth Capex is mostly carryover from Blackhawk - have about $15MM of payments to make ... some may flip over to Jan ($5-6MM)
  • What is the new normal for Vicksburg and East Chicago?
    • In Vicksburg - consumer confidence is still weak
    • Some lag affect there too, between Wall street and regional economies
    • Are seeing some encouraging signs of consumer confidence coming back a little bit, think it will be a longer and slower recovery in consumer spending.  Too soon to say that the recession is over and all economies are local
    • East Chicago - for 9 days in July Horseshoe was closed as they transitioned to new facility.  Still see unemployment going up for the next quarter or 2 which will impact them
  • Still in the process of making changes in Vicksburg but began making those changes a quarter ago
    • Hope that 3Q09 will be a trough in margins, especially taking seasonality into account
    • Changes they are making there will be completed in 4Q.  Adjusted the casino layout and the F&B outlets to make them more attractive.  Costs will be adjusted for seasonality
  • Modified stock forfeiture rate.  Last year they had a substantial reduction in work force which positively impacted the forfeiture rate.  Normalized run rate is going to be around $4MM
  • Tax rate was very low in Q3.  A few years ago they booked a deferred tax liability, and now the statute of limitations has expired so now they were able to make the permanent adjustment in the quarter.  Next year it will still be 42-43%
  • Increase promotional spending for next year?
    • Because of hotel at Black Hawk (comped rooms), but saw a higher cash occupancy then they expected
    • Will be higher in terms of dollars but similar as a % of revs
  • Hotel in Blackhawk is performing pretty well, occupancy rate consistant with other properties that have similiarly sized hotels. Rate has been strong with more cash rooms.  However, its still very early.  The increased bet limit, being able to add more table games, coupled with hotel all add up to the expectation of higher margins going forward
    • Huge increase in table game play
    • With the hotel opened the day time mid-week play is also improving
    • Attracting some new guests and the ones that were coming before are staying lower and spending more
  • Uptick in promotional allowances?
    • As long as it continues to produce EBITDA they are ok with it being a little higher.  Believe that any change they see to the promotional line item will be efficiently spent on increasing reveneues
    • There are some competitors that have chosen certain markets to be more competitive in.  "Sporadic fighting" but "they are choosing not to engage in it,"  that said they "do test marketing initiatives" on a continuous basis
  • Interest payments are made semi-annually, that's part of the "better cash flow"
  • Debt?
    • Have over $500MM of R/C commitments, will likely close next week
    • Confident that they won't need to issue anymore senior notes
    • Won't comment on increased cost but it will be "more of a footnote than a headline"
  • Market share in Vicksburg is down bc of the impact of Riverwalk.


All the data points we monitor on the health of the consumer continue to flash RED.


HOUSING CONCERS CONTINUE - Today, the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 8.2% to 608.3 from 562.3 last week; this was the first increase in a month on the back of lower mortgage rates.   The refinancing gauge jumped 15%, while the index of purchases fell for the fourth consecutive week.   The purchase Index includes all mortgages applications for the purchase of a single-family home.  It covers the entire market, both conventional and government loans.  The trends in the purchase index does not bode well for the next data point existing home sales.


CONSUMER SPENDING PATTERNS - The Research Edge Retail team pointed out  that the current results out of MasterCard’s results does not support a rebound in underlying consumer discretionary spending patterns. 


From our Retail post today – “While showing continued progress on a number of fronts this quarter, MasterCard’s US credit card volume continues to show no meaningful signs of turning around. In fact, credit card volumes for the last three quarters now, on a year over year basis, have been: -16.9%, -18.9% and -17.9%; not the kinds of numbers that signal a recovery. Granted, the volumes have stabilized and importantly they have arrested the decline that was in place from 2Q08 through 1Q09, but since then we have yet to see them move decisively back towards the positive column, which is what we’d expect to see amid the backdrop of a real (vs. perceived) recovery.   For reference, credit card volumes are a better proxy than debit cards for the discretionary side of the US consumer’s wallet, as consumers tend to revolve discretionary items, whereas they put staples on debit cards which are paid in full at the time of purchase.”


TEAM CONSUMER DATA CHECK - 11 4 2009 8 12 45 AM


A DECLINE IN NON-ESSENTIAL CONSUMER SPENDING – The following is from a post that the Gaming, Lodging and Leisure team did on the subject of consumer spending.



GDP = C + I + G + (EX – IM).  While the G may be expanding, C probably won’t.  Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so.  As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010.  Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison.  Due to leisure spending, both lodging companies and the cruise lines reported better than expected Q3 revenues.  For all of 2010 Research Edge projects a 5.2% decline. 




Despite GDP growth and the market rally since March, unemployment continues to increase.  As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010.  For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure.  Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008.  A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.


We remain short the XLY (Consumer Discretionary ETF) in the Virtual Portfolio.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


The Institute for Supply Management’s index of non-manufacturing businesses fell to 50.6 from 50.9 in September.  A Bloomberg survey suggested an expansion to 51.5; clearly the result is a sign that joblessness is likely to restrain consumer spending.  To date, the improvements in economic conditions in the US have been based on government assistance, which over the longer term is unsustainable.  The implication here is that the recovery will likely lose momentum as stimulus fades. 


Howard Penney

Managing Director





OEH meets consensus expectations for the first time in while, which seems good enough... for now




Quarterly Review & Outlook

  • No big surprises in the 3rd quarter as trends set in the 2nd quarter continued
  • Grand Hotel Europe was down $3MM in EBITDA, $1.4MM was due to currency
  • Mexico was down $0.75MM (continued H1N1)
  • Occupancy grew 2% in Italy
  • Trains and cruises, cost basis in Euros impacted results by over a $1MM, despite some revenue recovery in certain products
  • Goal of reducing fixed cost base has been achieved and now they need to hold costs down
  • Goal of deleveraging:
    • First step is selling non-core assets, should have proceeds of "over" $100MM by year end
    • $55-65MM in cash proceeds expected from sale of villas in St Martin
    • Worked at Keswick hall to sell some plots for residential development
    • Net result should reduce debt by $140MM
  • Business outlook
    • Italy RevPAR grew 3%, Russia grew 9% in local currency in October
    • However, October still saw revenues drop 19%
    • Trends over the last 5 weeks have been consistent
    • Nov & Dec are trending 18% behind in bookings, but should end up better
    • 1Q2010 is running 50% in bookings from where they were a year ago
    • Bookings are very last minute still
  • Restricted cash was $18MM
  • 9.0x TTM debt/EBITDA
  • $116MM of loans drawn of R/C loans outstanding
  • $51MM of debt due in 2010 is related to Cupacoy which should be repaid from villa sales
  • Some of the capex this quarter was covered by insurance proceeds
  • Tax charge of $12-14MM for FY2009
  • Discussing debt maturities with their banks
    • One of the strategies is rebalancing debt maturities, for example Grand Hotel Europe, which they beleive is worth over $200MM only have $20ishMM of debt want to add some leverage there
  • Are seeing some interesting opportunities arise in the luxury space, will look at more management related opportunitites



  • Don't expect the booking window to further shorten but at the same time don't expect it to lengthen
  • Some of the group business they have is also booked within a month of the event
  • Any corporate bookings they have are last minute
  • 2010 should be like 2009 booking wise
  • "Last year all the bookings were last minute, now they are last second"
  • Domestic business around the world has increased to offset the considerable decrease in UK travelers, while US traveler has somewhat stabilized
  • Rate of expense growth next year?
    • Think they can really keep a very tight lid on costs for one more year
    • 50% target on variable costs (on flow through), the real challenge is for that not to grow when things recover
    • There are some properties that will likely see additional declines next year - like Mexico
    • Hope to keep fixed cost growth at or below local inflation levels
  • American guest (ex - domestic properties) is just above 30% (consistent across most of Italy, ex Ravello which is in mid 20's)
  • Debt refinancings?  Trying to achieve 85% on renewal (loan to value).
  • Balance of doing it now vs keeping the current low pricing?
    • They can do a forward start agreement to balance some of that out
    • Debt would be marked around mid 200's spread - would be happy there (sounds very low to me)
    • Would like to have something done by filing of 3Q2010 10Q, otherwise they have a current debt issue
  • Color on market pricing
    • Have traditionally bought assets around a 10x multiple (on what they think is a stabilized number).  Their special sauce is buying slightly run down assets.  Developing countries would have a slightly lower multiple though higher cost of debt
  • Performance in Asia is bouncing back nicely
  • Any change on dual class structure?
    • Hearing in Bermuda 6 weeks ago, and the court has ordered a further hearing on a pure question on law on whether having the dual structure is legal as well as OEH's desire to move to dismiss the charges.  No date set - sometime in 2010
  • El Canto
    • Dealing with some interested parties putting together JV
    • Would only do the project with a JV partner
    • Have $52MM sunk there
  • No more payments due on NY library until 2010, taking the total to $30MM
  • Brought recurring capex down from over $100MM to $35-40MM including the completion of Cataratas for 2010.
  • Any acquisition they would pursue in the intermediate term would likely pursue it through a JV that is asset lite from their end.  Hopefully see some opportunities come through in next 6-8 months


For the first time in recent memory OEH's results were in line with consensus estimates.  However, outlook hasn't really changed and the story remains centered on asset value.


I suppose when the Street keeps lowering their numbers, companies will eventually meet them.  Street revenues and EBITDA numbers came down 14% and 30% for 3Q09, respectively since last quarter.  We still think the Street is too high for 2010, but again this story is all about asset value.  OEH's outlook basically tells us nothing new:

"While the ongoing decline in demand that has characterized the last two quarters has slowed, I believe it is still too early to predict a return to growth... We will therefore continue with our prudent approach to cash management, including the tight control of costs and capital expenditure, and continue to expedite the sale of non-core assets and developed real estate. Our aim is to significantly deleverage the Company by the end of 2011, with a targeted ratio of debt to EBITDA on a stabilized basis, in the four to five times range."





Owned Hotels:

  • Owned revenues of $116.5MM came in $4MM better than our estimate while EBITDA was $1.4MM lower
  • Disappointing results in North America were somewhat offset by better results in Europe
  • Rest of the world was mostly in line with our expectations. Asia results were the least bad, followed by South Africa.

Everything else:

  • Adjusted for Charleston Place, hotel management and JV interest income came in at a $100k loss versus our estimate of $1.3MM
  • Restaurant revenues and EBITDA were $0.4MM and $0.2MM below our estimates, respectively
  • EBITDA from trains was in line with our estimate at $7.7MM
  • Central costs actually increased y-o-y which was a surprise to us

Other things of interest from the release:

  • LOI signed in October for sale of a 3rd non-core asset, with estimated proceeds in the $15-20MM range
    • Our guess is that it's Bora Bora which has been accepting bids since August 2009. For more assets that could be "for sale" see our note "OEH: TRUE VALUE", published 8/12/09
  • Sold 2 villas in Koh Samui for $1.7MM


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.