“We ended 2009 with the best REVPAR results we have seen since the third quarter of 2008, and our continued focus on costs allowed us to beat expectations again in the quarter. Lodging demand continued to improve in the fourth quarter, with group and business transient posting positive bookings. After being buffeted by headwinds throughout 2009, our portfolio is set to begin a rebound in 2010 from a deep drop-off.”

- Frits van Paasschen, CEO

Forward Looking Comments from the Release

  • "While business conditions continue to improve from depressed levels, it is very hard to forecast the pace of recovery, especially rate. While group bookings have picked up, booking pace for 2010 has continued to lag behind 2009. Booking windows for both transient and group business have remained short. As such, late breaking business is a larger component of what will drive our performance in 2010 making forward looking predictions four quarters out particularly challenging."
  • "Full year 2010 REVPAR at Same-Store Company Operated Hotels Worldwide could be flat to +5% in local currency and approximately 100 bps higher in dollars at current exchange rates. REVPAR at Branded Same-Store Owned Hotels Worldwide could be -2% to +2% in local currency and approximately 100 bps higher in dollars at current exchange rates."
  • 2010 adjusted EBITDA "guidance": $750MM with one point of RevPAR driving +/- $15MM of EBITDA
  • 1Q2010 guidance:
    • "REVPAR change at Same-Store Company Operated Hotels Worldwide of -2% to flat in local currency (+1% to +3% in dollars at current exchange rates)."
    • "REVPAR change at Branded Same-Store Owned Hotels Worldwide of -3% to -5% in local currency (-1% to +1% in dollars at current exchange rates)."
    • "Management and franchise revenues will be up approximately 1% to 3%."
    • "Operating income from our vacation ownership and residential businesses will be flat to down $5 million"
    • Adjusted EBITDA guidance: $135-145MM
    • EPS: $(0.04) to $0.00


  • I love a call that starts with quoting Timmy
  • Group & transient business started to improve and was only down 7% in the 4th Q
  • ADR improvements will lag the general economic environment, since group and corporate rates are priced looking backwards
  • Looking ahead, its safe to say that their headwinds (Luxury, Urban, International, FX) will become tailwinds
  • As they shed assets they will continue to have higher cash yields
  • Were able to beat EBITDA by $50MM (oh but that included a $23MM gain and $20ish MM of cancellations)
  • Guests are coming back to luxury
  • Asia had +1% RevPAR (including 600bps of FX benefit - note that benefit will dissipate through 2010 at current rates)
  • $315MM was generated liquidating VOI
  • No maturities due over the next 2 years
  • Restructured the VOI business, and as a result decided to curtail existing projects, stop new projects, and lower prices (ala Marriott- no surprise)
  • Rolled out a new yield management tool that should help them price more efficiently
  • Bottom of a cycle is a great time to open hotels
  • Cleaning up Le Meridian and Sheraton brands
  • Spent $6BN re-branding Sheraton
    • Am i the only one that hears them say this on every call for as long as I can remember ... this is long long repositioning
    • Apparently this is a 3 year rebranding cycle
  • NY saw occupancy levels of 88% in 4Q09
  • Leisure continues to lead the way
  • 60% of their hotels are either freshly renovated or brand new
  • Estimate that by 2015, 400MM Indian and Asian travelers will have the means to travel internationally
  • Over 50% of their hotels are internationally located and 80% of their pipeline is international
  • Pipeline as a % of their existing assets is the highest in the business
  • 80% of their income is from fees...but some of those fees are non-cash and non-recurring
  • 4th Q story was all about the return of the corporate traveler, and they beat the quarter due to close in bookings. The beat was entirely driven by better occupancy especially for weekday room nights
  • Rate continues to lag, Jan rate was -9% compared to -12% in October
  • Cancellations were down 30% and leads for group bookings were actually up
  • Business have started to confirm meetings that were put on hold
  • Internationally they are seeing similar trends, Asia leading the way with +7% RevPAR (occupancy up 9%) in Jan
    • China led the Asian recovery, and Japan was the only market that lagged
    • EMEA was down 2% in Dec & Jan, occupancy turned positive and rate decline moderated
    • Latin America is the weakest, but improving quickly
  • Timeshare: SVO generated over $300MM in cash flow.  Decided not to develop some land that they own. Other projects where they had developed some phases but then decided not to develop others.  Also decided to accelerate sales in existing projects by cutting prices
  • What will make or break 2010 is late breaking corporate bookings
  • Don't extrapolate current trends though as comparisons for RevPAR will get tougher in the 2H2010, uncertain how the economy will look like in the 2H2010. It's also positive that some of the fastest growing markets in Asia can slow
  • Europe flat to up 3% and US flat to down 3%, growth will be driven by EM: (Asia 5-8%, Latin America could grow a lot as well with its commodity exposure to asia, ME can grow 6-8% as well)
  • It is unclear that the FX will remain a tailwind, as many forecast a stronger dollar
  • Expect Mgmt fee growth to track RevPAR growth
  • Occupancies are likely to be positive but rate will likely be negative, hence they will need to monitor costs
  • They will have margin reductions in owned EBITDA again in 2010
  • VOI business will be down $40MM on a SS basis as well - but $23MM is due to no gains accounting, but that will be offset by $40-45MM benefit from new SFAS accounting
  • Claim that the $750MM needs to be compared to an apples to apples 2009 # that is $20MM lower due to asset sales
  • 4.0x  leverage ratio
  • Will be working with their bank group to extend their R/C beyond 2011
  • The cash flow generated from SVO should cover capex at Bal harbour (which may be lower given deposits)


  • Rates for domestic group bookings for 2H2010
    • 2011 is seeing a higher rate than 2010
    • Moderation in rate in 2010 is getting better (compared to 2009)
  • Will continue to pull out $150MM or so a year out of timeshare for a few years
  • Will continue to be a net seller of real estate, but are looking for very high multiples, isn't the best time to sell
  • Regarding reinvestment, they will continue to invest in IT and explore renovation projects at existing projects
  • Only after they become investment grade would they consider share buybacks
  • Domestically they ended well with share for W & Westin but lost share for Sheraton, gained share internationally
    • Tend to do better in up cycles with share and worse in down cycles
  • Growth in occupancy has enboldened them to take a stronger stance on rate
  • Sheraton Manhattan (deflagged it) - future plans. Don't want another BalHarbour project.  Reason they deflagged it, was because this property just doesn't represent the brand standard anymore. They want to take their time fixing it up.  Will spend $4BN over the next few years on Sheraton rebranding
  • Net debt would decline $100-200MM before the SFAS adjustment ($445MM of securitized non-recourse debt comes back on the balance sheet)
  • Current pace of sales in Timeshare can be sustained for 2-3 years with little incremental investment (basically they have many years of inventory to liquidate without the need to replenish it)
  • Any effort to acquire distressed assets?
    • Continue to want to move to asset light, preference to look at any opportunities like that with a partner
    • Would rather grow brands and flags to grow market share rather than buy assets
    • We're also not seeing truly distressed assets, despite expectations
  • Outside the US and W. Europe there are still opportunities for ground up construction, inside the US they are focused on conversions.
  • Expect attrition to taper off (now that they are close to completing repositioning), think that exits next year should be closer to 5% (or 30 hotels with 300 rooms a price), so many 50 net hotel additions
  • Select service growth has been less successful internationally - they are more focused on full service growth
  • Outside the US, group isn't as large a part of the business, and the group they have is usually in the year for the year.
  • They will definitely down year over year for group, but think transient will be stronger and make up the difference
  • With occupancy up and rate down, they expect 10-15% declines in owned EBITDA


Oink!: Greece isn’t the only concern

Positions: Long Germany via EWG, US Dollar (UUP); short Russia (RSX)


As Howard Penney noted in his morning strategy post, “Lingering Concerns” of sovereign debt issues have heightened the RISK AVERSION trade, globally. In Europe, arguable one of the main epicenters, European equities continue to be adversely affected by persisting concerns that governments will fail to meet their debt obligations.  Yesterday, Portugal joined “the club” to have its over-extended debt levels examined, causing the Portuguese equity market, the PSI 20 Index, to fall over 3%, while the country’s 10 year bond yield and sovereign CDS prices continue to shoot up to the right hand corner as investors demand increased premium to hold Portugal’s IOUs (see chart). Today we’re seeing follow-through selling from European equity markets, especially from the PIGS [Portugal, Ireland (or Italy or Iceland), Greece, and Spain].


Spain, long ailing from unemployment of near 20% and the bursting of its housing bubble, is positioning to prevent being the next debt poster child. Its Treasury sold $3.5 Billion of 3-year notes today yielding 2.63%, well above the 2.14% for similar notes issued in early December of last year.


What’s clear is that even if the combined GDP market share of Portugal, Ireland, Greece and Spain is only around 19% of Eurozone GDP (based on the latest figures from the World Bank), the periphery affects the whole. The last weeks have shown that the fears associated with the levered balance sheets of the PIGS put massive downward pressure on the Euro, which is now hovering around $1.38, and down 8.3% versus the USD since December 1st.  While we’re not implicitly short the Euro, we’ve been long the USD via UUP in our model portfolio to capture this movement.


With no great surprise, the ECB and BOE held rates steady at 1% and 0.5% today, and the BOE paused its $317 Billion bond-purchase program. With mounting banking issues and inconsistent results from its “quantitative easing” plans, we’re staying away from investment in the UK. In our portfolio we added to our long position in Germany (EWG), a low-beta play on a fiscally conservative state with manufacturing upside that stacks up against our higher-beta short position in Russia (RSX) that rhymes with our bearish intermediate term view on oil (USO), which we maintain despite covering USO this morning for a TRADE.



Matthew Hedrick


Oink!: Greece isn’t the only concern - port





"While we are disappointed with fourth quarter net revenue and EBITDA levels which continue to reflect the impact of the economy, we believe the fourth quarter of 2009 could be the Company's most successful quarter ever from a future development and expansion perspective.  It is evident from our fourth quarter progress that we have well-developed strategies to create new long-term value for shareholders by deploying Penn National's strong balance sheet and facility development skills to operate in new jurisdictions. New facilities in Maryland, Ohio and Kansas -- all of which will be opened within the next two to three years -- will further diversify our geographical reach, expand our current base of slot machines by approximately 20% and position the Company to be less susceptible to cannibalization from future gaming expansion."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming


Highlights from the Earnings Release

  • "Unfortunately, we have limited control over how consumers are continuing to respond to economic pressures and as a result, the gaming industry experienced revenue compression again in the fourth quarter... operating results reflect reductions in consumer spending in almost every market and while customer visit levels are off only modestly, we're continuing to see less spend per visit. We have undertaken extensive analysis of gaming trends, which indicate that regional gaming spending declines are slowing. However, at this time, these trends generally do not support expectations of 2010 revenues exceeding 2009 levels and these expectations are reflected in our guidance."
  • Maryland update: "We have commenced construction on one of the state's first gaming operations, a $97.5 million Hollywood-themed facility with 75,000 square feet of gaming space, 1,500 video lottery terminals, food and beverage offerings and parking for over 1,600 vehicles.... the facility is expected to open to the public in late 2010, which will likely result in historically high returns on capital before other facilities in the state come on line."
  • Ohio update: "Penn National has begun to develop the Toledo and Columbus facilities, with planned investments of approximately $300 million and $400 million, respectively, and targeted opening dates in late 2012. We have already completed the acquisition of the 44-acre Toledo site and approximately 24 acres in the Columbus Arena District. In addition, as announced last month, we are also working closely with Columbus community leaders on the parallel pursuit of an alternative Columbus site. We recently entered into an option to purchase the 123-acre site of the former Delphi Automotive plant on Columbus' West Side as an alternate location for our planned development of Hollywood Casino Columbus."
    • "On January 27, 2010, the Ohio Legislature approved the language for a Constitutional amendment changing the designated casino location in Columbus to the Delphi site. The issue is now scheduled to appear on the statewide ballot in May 2010. Given the uncertain outcome in the legislature and at the ballot, we are pursuing development at both Columbus sites simultaneously."
  • Kansas update:  "Subject to background investigations and licensing by the Kansas Racing and Gaming Commission, which are expected to be completed in early 2010, the Penn National/ISC joint venture will begin construction in the second half of this year with a planned opening in early 2012. With an overall budget of approximately $410 million inclusive of land and licensing, this facility will feature a 100,000-square-foot casino floor with capacity for 2,300 slot machines and 86 table games, a high-energy lounge and a variety of dining and entertainment options. We estimate that Penn National Gaming's share of the future cash expenditures will be approximately $155 million."
  • 1Q2010 Guidance:
    • Revenues: $596.7MM
    • EBITDA: $137.9MM
    • EPS: $0.23
  • 2010 Guidance:
    • Revenues: $2433.MM
    • EBITDA: $563MM
    • EPS: $1.00


  • Why were the margins at many of the properties horrible? Please walk through it
    • Joilet: Operating with just the casino there. Have opportunities to be more efficient with marketing spend. Expect margin improvement next Q
    • Bay St. Louis: Recession was late hitting there.  Seeing more softness there, driven by very aggressive promotional spend by their Gulf Port competitor
    • Tunica: Have $1MM of one time items like severance etc, don't see the same promotional aggressiveness as Southern Mississippi
    • Charlestown: Saw in line performance in the month of Jan, trying to figure out most efficient use of marketing dollars now that they have the tax credits.  Table tax rate will be 35%, so net net margins should be 27-28% on a normalized basis
  • January trends?
    • Consumer sentiment is NOT favorable. You can say that the deterioration is slowing, but they really don't have a clue in terms of where 2010 will go. "Don't see a lot of reason for enthusiasm for 2010." Don't have clue regarding the core business.  Their guidance is a "smigit of art and a bit of prayer"
    • Things are still getting worse but at a slower pace, doesn't mean its getting better
    • Dec was partly affect by weather
    • Jan had no weather issues, and they were down about 3% on aggregrate, Excluding Penn National and Lawrenceburg though, revenues were down ~5%. The only good news is that the last week of January was very strong, bu that could be due to no football and good weather
    • Doesn't see anything that gives them comfort that there will be a big improvement in unemployment that will help their customer's situation and make them want to spend more
    • Have a very conservative view for 2010 (they hope)
    • Lawrenceberg - continue to see reasonably good growth there on their capital investment, especially last weekend
  • Is NY totally dead or is there any hope there?
    • Where mystified by the process in NY. It was very clear that they were the winning bid on 2 of the rounds, but then they reopened the bidding.  The conditions laid upon the "winner" matched Penn National's bid
    • There bid was unconditional on tax relief, and the payment was all upfront. No idea why their bid didn't win as it was clearly the highest and best bid
  • View on Ohio slots at tracks vote in Nov 2010?
    • Do anticipate that it will be on the ballot in Nov, but its unclear that the racetracks will spend enough money to get it passed
    • No coalition today that either supports or opposes it
    • They support the issue and will spend their fair share on the campaign
  • Table game potential in Maryland and Maine
    • Maine: Would require a 2/3rds vote to get it approved and it wouldn't have to get on the ballot, however, others say that it does need to go on the ballot
    • Maryland: Governor said he would like to see the facilities up and running first.  Would have to go back to statewide voters to get approved anyway, and no appetite for legislative approval either at the moment
  • Still interested in Las Vegas, would they consider a fixer upper like Riveria?
    • Riveria is a tear down... so no
    • Would have to be something more substantial
    • Fontainbleau will take $1.5BN to finish... (we don't think that Icahn will necessarily finish it and definitely not at those levels)
  • How should corporate expense run next year?
    • $69MM for next year
    • No significant amounts of lobbying, or at least much reduced
    • Don't have table games in there bc they don't know when they will be up and running (PA)
    • No unusual expenses expected in 2010 except leverage to down revenues
  • Not expecting much contribution from Perryville in 2010
  • Not willing to cut costs enough to upset the customer experience
  • Referendum in Ohio is just about the site, not the whole casino issue
  • What's driving EBITDA growth guidance in last 3 quarters of year?  Lawrenceburg and Penn National growing throughout the year and easier comparisons
  • Cash = $713.1MM, Debt = $2.335BN, capex $61.9MM
  • Q1 capex $139.5m ($100m of project), 2010 capex $428m (maintenance $96m)
  • What type of customer? - 65% rated, similar to prior years but spend per visit down - Lawrenceburg used to do $130 per visitor down to $100 per visitor
  • WV table game guidance - 15% of revenue from table games typically
  • Breakdown of $520 million write down - related to Ohio impact - Lawrenceburg BV of $700m now
  • Pre-opening expense runs through gaming expenses at the property level
  • Spent $27 million in Ohio for lobbying
  • Timing of 2010 project capex by quarter:  $106m in Q1, $75m in Q2, $170m in Q3, $70m in Q4
  • VLT impact in IL:  none in 2010 due to timing of licensing, won't be much going forward either
  • Modeling Kansas:  similar to any other regional gaming property despite state ownership
  • Ohio will generate an "adequate" return for shareholders
  • Tightened view on what is an acceptable rate of return given the uncertain environment
  • Restricted payments basket:  has $600-700m remaining.  Evaluating stock buyback.  Also looking at way of locking in value in preferred equity - not opposed to doing some financial engineering.
  • "Will be discouraged if competitors aren't experience the same things we are"




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ARO: Reading the REAL Release

Amidst the sea of sales and earnings releases, how can we not take note of one of the most bizarre sales releases (blunders) in a long time?  This morning at 8AM, Aeropostale (ARO ) mistakenly issued last year’s January sales release.  Based on this, it appeared that ARO once again blew out expectations, with another double-digit comp increase. About an hour later, a revised press release arrived and the REAL results indicated a less impressive 6% same store sales gain, in-line with expectations.  Both releases also noted earnings revisions to the upside, which only added to the confusion. Tack on an oddly timed 3 for 2 stock split along with the official word that the co-CEO’s take the helm next week, and ARO remsins one of our top short ideas.  For an outline of the broader thesis, take a look at our 1/29 note Revisiting a Crowded Debate.


-Eric Levine

Same Store Sales: (Little) January Looking Good

Even with concern about lack of clearance merchandise, Jan was one of the more unanimously positive months we’ve seen in a while.  While we don’t want to get carried away with a month that only accounts for 7% of annual sales, the sequential acceleration across durations can’t be ignored.



The early read this morning on January sales is positive with results largely in-line to better than expectations.  Even with the month being of least importance in the grand scheme of things, there were notable earnings revisions to the upside coming from M, PLCE, GPS, ARO, AEO, ARO, KSS, SSI, and TJX.   Companies that outperformed during the Dec/Nov period appear have maintained momentum (even with tight inventory levels) while the underperformers continued to lag.


On the surface, results out of COST were better than expectations but below the surface there were some key moving parts.  Positive contribution from gas and FX helped to offset a negative 150-200bps hit from the calendar shift of the Super Bowl into February. BJ noted about the same 200bps negative impact from the Super Bowl. Unseasonably cold weather in the southwest was also cited as a headwind during the month.


Perhaps most interesting was a comment out of COST regarding food inflation/deflation. January marked a substantial change in the deflationary trend with the impact now measured at less than 1%.  This marks a substantial change from the mid-single digit deflation that has been impacting the food and consumables category for the past several months.


In a sign that sales day continues to diminish in its level of importance, another company (PLCE) announced that it’s going to discontinue reporting monthly sales – At least they’re going out with a bang, with a significant beat again this month on both sales and earnings.


January Recap:


Upside to expectations & guidance: M, PLCE, GPS, AEO, ARO, KSS, ROST, TJX, SSI

Upside to expectations: COST, ANF, DDS, LTD, ZUMZ, BJ, JWN, SKS

In-line: WTSLA, TGT, JCP

Downside to expectations: BKE, CATO

Downside to expectations & guidance: FRED, HOTT


Same Store Sales: (Little) January Looking Good - Total SSS


Same Store Sales: (Little) January Looking Good - 1yr SSS


Same Store Sales: (Little) January Looking Good - 2 yr SSS


Eric Levine



At first glance, Q4 looked amazing and full year 2010 guidance was solid. No complaints on RevPAR but digging a little deeper we found that things weren’t as good as they appear.  



By our math, the “clean” EPS number for the quarter was $0.25 (using a “normalized tax rate” and excluding all charges and a fully diluted share count).  However, even the "clean" number contained $21MM of what we believe are mostly termination fees.  Normally “termination and other fees” run at around $11MM per quarter.  If we adjust out for abnormally high termination fees, we get “normalized" EPS of $0.21, which was in line with our original estimate and the Street.  Beating on termination fees is not exactly encouraging.  Even so, there were a lot of positive things to point to in this quarter's results


Here are some additional and, we hope, unique thoughts: 

  • For anyone wondering where the upside to guidance came from, we have an answer for you – it's call SFAS 167.  If you recall, on the last call HOT explained that the new accounting rules would benefit their 2010 EBITDA to the tune of $10 to $15MM.  Well, now that number is $40 to $45MM and it's all accounting - no associated “cash flow” with this raise.  The Street’s 2010 EBITDA estimate was $730MM so if you add the extra $30MM the number goes to $760MM, actually ABOVE the new guidance of $750 million.
    • “This new accounting rule impacts the accounting for securitized vacation ownership loans. As a result of the adoption of this rule, the Company expects its reported assets (accounts receivable and other assets) to increase by approximately $400 million and its reported liabilities (short-term and long-term debt) to increase by $445 million, prior to any tax effects. Also as a result of the accounting change, vacation ownership pretax earnings for 2010 are expected to increase by approximately $20 million to $23 million and EBITDA is expected to increase by approximately $40 million to $45 million. The new accounting rule is not expected to have any impact on the Company’s cash flow.”
  • It also becomes clear that 1Q2010’s EBITDA guidance was also inflated by roughly $8MM, so again a bigger guide down versus the Street than meets the eye
  • We understand why HOT is adding back the $17MM of cost of sales price discount adjustments to get to “Adjusted EBITDA”, but to be fair, wouldn’t you also take out the $23MM of gains on securitization then? Same goes for adding back $2MM of D&A on discontinued operations.
  • HOT is excluding all the Bliss associated expenses - which were all in SG&A while Bliss revenues were in Management fees & other.  We wrote about the Bliss sale on Nov 2, 2009 “HOT: A BLISSFUL EXIT” and on Jan 11,2010 in “HOT: 4Q IN REVIEW”.  However, we wrongly assumed that Bliss expenses and revenues wouldn’t come out until 2010. 
  • 2010 & Q1 RevPAR guidance was actually quite good, no doubt aided by HOT's international exposure



Cliff notes:

  • RevPAR was better than expected, especially international.  Occupancy led the way
  • F&B revenues declined only 9-10% … a nice sequential improvement
  • Management & fees where low quality with higher than normal termination fees doubling from prior quarters
  • Timeshare income was better due to the higher than previously reported gain


  • Owned, Leased and Consolidated JV revenues and EBITDA cleanly beat our estimates
    • International RevPAR was much better than we estimated, to the tune of 5.5%.
    • North American RevPAR came in 1.7% better than our estimate
    • We suspect the vast majority of the beat here came better F&B and other revenues, which we suspect declined less than 10% in the Q vs. out -20% estimate
    • Total costs per occupied room decreased 2.3% (estimated 6.8% in local currency) 
  • Management fees were messy since Bliss was excluded
    • Base fees were in line, just $1MM less than our estimate
    • Incentive fees were $3MM better than our estimate, declining 19%
    • Franchise fees were $1MM better than our estimate
    • “Other Management & Franchise Revenues” came in $12MM higher than our estimate, due to what we believe were higher termination fees.  The $42MM included $21MM of deferred amortization of gains (like every quarter), the balance is usually mostly termination fees. 
    • Bliss was excluded
    • So base, incentive and franchise fees decreased 9.7% compared to guidance of down 8-10%
  • Timeshare beat due to a $23MM gain on securitization, strange because when the announced the deal the gain was stated at $15MM… hmmm anyone else confused here?
    • Originations were better than we estimated though but margins were lower, probably due to discounting of inventory

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