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HST 2Q 2015 CONFERENCE CALL NOTES

Takeaway: HST continues the trend of lodging companies reporting weaker Q2 RevPAR

  • Strong ADR and group demand
  • Domestic REVPAR (constant-currency): +5.3%
  • Except Houston and NY, portfolio performed in-line or better 
  • Group demand: +2.7%, rate: +4.7%, Overall group rev: +7%
  • Transient demand: >2%, rate: +4.9%, transient revs: >+4%
  • June was strongest month; April was a renovation month
  • Calgary Marriott Downtown Hotel renovations
  • YTD, REVPAR: +4.4%
  • Overseas travel (excluding Mexico and Canada): +3%
  • Weakness in travel from EU offset by strong travel from West Coast (Asian customers)
  • F&B: +5% (+2% on adjusted basis), excellent flowthrough
  • Euro JV:  Sold Crown Amsterdam for $106 euros.  Expect to close another asset transaction for $10m
  • Transactions impact on 2016: +12m
  • $100-200m  in international sales by end of 2015.  $100-250 in domestic sales in 2015.
  • YTD, invested $101m in ROI projects, $220 renewal projects
  • Outlook for 2015: 
    • Group bookings in 2Q for 3Q/4Q grew 20%.  Booked revs are flat in 3Q (calendar challenges) and up 6% in 4Q
    • Pleased with shift to higher-rated business
    • Overall, expect 2H REVPAR to trend higher than 1Q 2015
    • Net M&A will reduce FY 2015 EBITDA by $5mm
    • Houston and NY will underperform previous expectations
    • Seeing strength in group rates for 2016
  • 2Q:  San Diego, Seattle, San Francisco, Hawaii all achieved double digit REVPAR
    • San Diego:  Group +19%, Transient +12%
    • Seattle:  Group: +15%, Transient: +14%, F&B: +17% (banquet/catering lead)
    • San Francisco:  strong association business,  transient: +9%, group: +8%; expected to only slightly outperform portfolio for 2H 2015
    • Hawaii:  F&B: +27% (banquet/catering/outland sales), group & transient: +20%, Hawaii expected to underperform in 2H 2015 due to decrease in citywide events and and visits from Japanese customers.
    • Atlanta:  F&B+ +15%, expect Atlanta to outperform portfolio in 2H 2015
    • Washington DC:  group nights: +12%, transient nights: -11%;  group rev: +19%, transient rev: -3%. 
    • NY/Houston/Calgary:  combination of increased supply, renovation and oil issues
      • Originally expected NYC to be slightly positive REVPAR, did not happen.  High supply and lower international travel to US impacted US.  Expect better group bookings pace in 2H vs 1H.
      • Houston: flooding in May.  Some renovation disruption in December 2015.
      • Calgary:  declining energy business 
    • 8 of our 18 Euro JV hotels achieved +9% REVPAR.  Outlook on Euro hotels remain encouraging.  Spain/Netherlands is improving. YTD, US travel to Europe up 5% with 3Q looking stronger.
    • 3Q REVPAR should be slower than 1H REVPAR 
    • 4Q REVPAR (strongest quarter of year) should exceed 3Q REVPAR 

Q & A

  • M&A markets:  expect to put a lot of domestic properties in the market in the fall.  Looking to acquire in LA and Seattle.
  • Best pricing is for one off transactions
  • Group demand in the quarter for the quarter:  modestly down
  • NYC: Flat bookings pace in 2016 (down in 2015)
  • 2015 NYC EBITDA will be 12% of total
  • Lowered FY 2015 EBITDA
    •  -~$5m EBITDA:  Phoenician addition offset by EBITDA loss properties sold for a net of $5m
    • The rest of EBITDA decline is spread out among the factors they raised (e.g. NY/Houston, renovations)
  • Secondary markets had better occupancy gains in last 12 months
  • NYC:  least pricing power right now
  • Hard to push rate for transient business
  • 2016 Group bookings up 6% YoY in revs
  • Continue to sell weaker assets in portfolio
  • NYC:  1st few wks in July - roughly in-line with June (slightly positive REVPAR)
  • Houston:  a little of both cancellations and delays, 
    • Group bookings pace quite weak in 3Q but quite strong in 4Q
  • Will be net seller in Europe

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15

Takeaway: 2Q GDP was largely in-line and the focus was mostly on the revisions. Growth is set to meaningfully decelerate in 2H15.

*Note:  The July data carries revisions & statistical updates including:  revisions to 2012-1Q15 GDP data, statistical methodology changes to reduce residual seasonality and the introduction of the GDI/GDP hybrid series and the Real Final Sales to Private Domestic Purchasers series.

 

  • Revision (1st chart below):  This bigger news is  probably in the revisions than in the 2Q data itself with 1Q15 revised from negative to positive (from -0.2% to +0.6%) and 1Q14 revised from -2.1% to -0.9%. 
  • Headline:  QoQ GDP = +2.3% = below consensus at +2.5% but the miss is largely irrelevant given the revision to 1Q  (i.e. people were largely modeling 2Q relative to the original -0.2% 1Q print or some mostly unknown expectation around the revision)
    • YoY – GDP decelerates to +2.3% YoY vs 2.9% prior
    • Consumption:  YoY Consumption Growth decelerating sequentially against the upwardly revised (& post-crisis peak) 1Q15 figures. 
  • C + I + G + NX: all expenditure types contributing positively in 2Q
    • Consumption:  Contributing +1.99% to headline and accelerating QoQ  to +2.9%.  Solid growth across all of Durables/Nondurables/Services
    • Investment:  Contributing 0.06% and decelerating to +0.3% QoQ  à Inventories were a negative contributor this quarter after last quarter’s outsized contribution, Resi investment was decent while NonResi investment contributed -0.1% and was down -0.6% QoQ
    • Government: Contributing 0.14% and accelerating to +0.8% QoQ
    • Trade Balance:  Contributing 0.13% with exports rising at a premium to imports QoQ following 1Q’s collapse
  • Inflation:  GDP price index and Core PCE accelerating sequentially (on QoQ basis) to +2.0% and +1.8%, respectively  – not overly remarkable given the 0% inflation reported in 1Q. 

 

Sub-Aggregates:  Better on balance

 

  • Real Final Sales (GDP less Inventory Change):  accelerating to +2.4% from -0.2% prior
  • Gross Domestic Purchases (GDP less exports, including imports):  modest deceleration to 2.1% growth vs +2.5% prior
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  arguably the best read on overall domestic demand; accelerating to +2.2% vs. +1.7% prior  

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP PRe Post

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - Real PCE YoY

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP Summary Table

 

-Christian Drake, Senior Analyst

 

U.S. GIP Model Update

With the advent of the 2Q15 GDP report, we are now at +2.1% for CY15, which is down -10bps from our previous estimate as 2Q15 came in 10bps shy of our forecast of +2.4% YoY. The QoQ SAAR figure came in at +2.3% as well, or 20bps shy of our forecast of +2.5%.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - UNITED STATES

 

Looking to our U.S. Economic Summary Table, we see that growth is slowing on a sequential and trending basis across a broad swath of key high-frequency data:

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - U.S. Economic Summary Table

 

The decelerations and/or outright YoY declines in consumption and investment growth coupled with plunging consumer and business confidence speak loudly to the lack of sequential momentum in the economy that could otherwise help economic growth surmount steepening base effects throughout the balance of the year.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP COMPS

 

The net result on the model is that real GDP growth is likely to slow sharply in 2H15 from a cycle peak growth rate of +2.9% YoY in 1Q15. Our revised forecasts are as follows:

 

  • 3Q15: +1.6% YoY and +1.4% QoQ SAAR
  • 4Q15: +1.5% YoY and +1.7% QoQ SAAR

 

***Reminder: we don’t care much about the “headline” QoQ SAAR figures. The YoY rate of change continues to be where our focus lies as that has historically been the most explanatory of asset class returns and most useful for front-running key inflection points in and across economic cycles.***

 

Keep in mind that we won’t get the 3Q GDP report until the end of October and 4Q GDP won’t be reported until the end of next January. That lag may give the Fed scope to pretend like domestic economic growth is hanging in there just fine (even though the preponderance of high-frequency data is unlikely to support that view in the interim).

 

Moving on to inflation, we continue to see little sequential momentum in either direction from the perspective of reported inflation here in 3Q.

 

On one hand, decaying base effects support a modest acceleration in YoY CPI in 3Q and a meaningful acceleration in 4Q. On the other hand, the dramatic loss of “non-core” inflationary pressures we’ve seen in the third quarter to-date supports a continued bottoming process in inflation intra-quarter.

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - CPI COMPS

 

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - INFLATION

 

All told, with a sharp deceleration in growth in 2H15 as our most differentiated view from consensus with respect to the U.S. economy, we continue to reiterate our lower-for-longer view on interest rates and our bearish bias on all things reflation.

 

Moreover, we expect market breath to continue to deteriorate on a trending basis as falling growth expectations beget premiums for real growth stories and discounts for the myriad of companies that will see their toplines suffer from the 1-2 punch of slowing economic growth and low inflation. For more on this, we encourage you to review the following two research notes:

 

 

Feel free to email us with any questions. Best of luck out there!

 

-Darius Dale, Director


Here Are Hedgeye's Top-3 Macro Themes For Q3

Editor's Note: Our world-class macro team hosted its highly anticipated macro themes call earlier this month with institutional subscribers. Led by CEO Keith McCullough, the presentation detailed the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications. For more info on how you can access this and other Hedgeye research please email sales@hedgeye.com.

*  *  *  *  *

Q3 2015 MACRO THEMES OVERVIEW:

 

#SecularStagnation

Amid consensus expectations for a return to “normal” economic conditions, our analysis shows ample evidence of secular stagnation. In light of that, we reiterate our “lower-for-longer” thesis on growth, inflation and interest rates and continue to find the FOMC’s hawkish guidance wholly misplaced.

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Growth cartoon 06.03.2015

 

#EuropeSlowing

With our proprietary GIP (growth, inflation, policy) model we’ll outline the top 6 European economies that will be most impacted by real GDP growth slowing as inflation accelerates in the back half of 2015. The timing of ECB head Mario Draghi’s eventual response will be critical in terms of risk managing the EUR/USD exchange rate, as well as any associated spillover risks.

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Draghi balloon cartoon 01.23.2015

 

#ConsumerCycle

Consumption peaks late cycle and with domestic and global growth set to slow alongside easing inflation comps in 2H15, it looks increasingly likely 1H15 marked the current cycle peak in household spending growth.  We'll contextualize the current cycle, discuss the implications and detail how best to be counter-cyclically positioned as the consumer cycle enters its twilight. 

Here Are Hedgeye's Top-3 Macro Themes For Q3 - Growth cartoon 06.10.2015


investing ideas

Risk Managed Long Term Investing for Pros

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BLMN | ANOTHER BACK HALF MISS?

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 1

 

On the heels of the BWLD and PNRA “miss and guide down” we wanted to highlight another “miss and guide down” name, Bloomin’ Brands (BLMN). BLMN is not currently on our list and although we don’t see it as a long term LONG, given the stock performance of BWLD and PNRA on their earnings, up ~11% and ~8%, respectively, this relatively cheap stock could see a “miss and guide down” and similar pop.

 

BLMN has their 2Q15 earnings conference call on Tuesday, August 4, at 9:00am ET.

 

The company’s current guidance of same-store sales of “at least” 1.5% and EPS of “at least” $1.27 will be difficult to achieve.  We believe that same-store sales will be between 0-0.5% and EPS will be closer to $1.20.

 

BLMN is down ~10% year-to-date, so expectations are not high for the company, except sell-side estimates are too high for fiscal 2015.  BLMN (like BWLD and PNRA) has seen a significant increase in the short interest over the past three months.  If the beat and miss is less than feared the shorts will likely be forced to cover following the earnings release.     

 

PERFORMANCE

As we just stated BLMN is down ~10% YTD, while the S&P 500 is up ~2.4%. Expectations for this company are low and we think there is a possibility of the company missing by “not that much” which would probably yield a positive reaction.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 2

 

SAME-STORE SALES

Consolidated same-store sales (SSS) are projected to decelerate modestly for the next three quarters. Management’s focus continues to be on Outback, which represents the only brand that matters for the company. Outback needs to maintain positive momentum in order for the company to succeed. This is crux of our issue with BLMN, because we have little faith in the Outback concept long-term.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 3

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 4

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 5

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 6

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 7

 

MARGINS

Restaurant level margins are trending upwards, thanks to cost management practices.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 8

 

EBIT margins are similarly benefiting seeing larger % increases YoY in 1Q15 than Restaurant level margins.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 9

 

VALUATION

This stock is cheap, but rightfully so, multi-concept casual dining chains are disadvantaged from the get-go given the lack of focus and capital allocation issues. But with BLMN currently trading at 8.15x EV / NTM EBITDA, it is trading at a steep discount to the competition, but deservingly so.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 10

 

SHORT INTEREST

Currently short interest is 5.5% of the float, there is not a big bet against this company currently, but short interest is rising heading into the quarter.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 11

 

SENTIMENT

The street cannot get more bullish on this company, 79% of analysts covering the stock have a buy rating, with zero sell ratings.

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 12

 

HEDGEYE RESTAURANTS IDEAS LIST

BLMN | ANOTHER BACK HALF MISS? - BLMN CHART 13 


Lower-highs

Client Talking Points

USD

While yesterday’s Fed commentary was, on the margin, dovish (this time acknowledging that “reflation” isn’t happening anymore), we think both rates and USD are trading up this morning ahead of what should be a “good” headline GDP report – it’ll read good vs the “bad” Q1, then Q3 will just be bad vs. Q2 again. 

GOLD

Positioned for #deflation? Gold bounced then faded like a flower, trading down another -0.9% this morning and has no immediate-term support to $1065/oz – most of the “reflation” trades led the 2-day U.S. equity bounce; fade them.  

DAX

The DAX is up +0.4% on the bounce but remains bearish TREND @Hedgeye with no support to 10,905 – while some may want to ignore the “data” right now, you shouldn’t . July CPI readings are dropping again this morning with Spain back to 0.0% year-over-year.

Asset Allocation

CASH 49% US EQUITIES 5%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 23% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

$LINE $LNCO to suspend distribution!

@HedgeyeEnergy

QUOTE OF THE DAY

If you limit your choices only to what seems possible or reasonable, you disconnect yourself from what you truly want, and all that is left is a compromise.

Robert Fritz

STAT OF THE DAY

This quarter marked the 5th consecutive quarter of traffic growth for PNRA, showing strong performance versus the competition beating Black Box Intelligence traffic metrics by 290 basis points in 2Q.


CHART OF THE DAY: Just One Bad Jobs Report Away From Janet Bailing on Hikes...

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to begin your subscription.

 

And… as you can see in today’s Chart of the Day, the “pace” (which most of you who are mathematically inclined might agree should be defined as the rate of change) of “gains” in US Non-Farm Payrolls has been slowing since February.

 

Therefore the most patient investor does nothing on today’s “good” Q2 GDP report and waits for not only the Q3 economic data, but the next 3-6 jobs reports. With “reflation” crashing, we’re only one bad jobs report away from Janet bailing on hikes...

 

CHART OF THE DAY: Just One Bad Jobs Report Away From Janet Bailing on Hikes... - Z NFP CoD


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