BOOOOOM . . . Spain Downgraded!

From the 1950s to the 1980s, a popular foreign policy theory was called the Domino Theory.  This theory postulated that when one nation came under the influence of communism, then the surrounding nations would follow in a domino effect.


Arguably, we are starting to see the domino effect of sovereign debt downgrades.  Greece . . . Boom.  Portugal . . .Boom.  And now, Spain . . . Ka-boom!


While downgrades are not defaults, they are likely somewhat of a leading indicator.  Also, if sovereign debt crises of the past have taught us anything, it is that sovereign debt issues do not end with just one nation defaulting.


In the charts below, we’ve highlighted the CDS spreads and equity market performance for Spain over the last 6-months.  The charts are not pretty. Risk, as in Bad, Bad Risk, has accelerated on both market measures of risk for Spain.


Why does Spain matter more than Greece? Well, simply put, it is substantially larger.   According to the IMF, Spain has the 9th largest economy in the world with a GDP of $1.5 trillion.


The primary issue with Spain is that real estate was an astonishing 16% of the Spain’s GDP as recently as 2008.  The decline of that boom has lead to massive growth in unemployment, which currently sits at 20%.  Yes, 20% unemployment.


Currently Spain’s budget deficit as a percentage of GDP is north of 11%, which is well above the European Union limit of 3% and beyond the red zone line of 10%. 


While Spain is still considered a AA investment grade credit by S&P despite this recent downgrade, the metrics outlined above suggest it will not stay there for long.


The Domino Effect of Sovereign Debt is happening at a country near you.  Stay tuned.


Daryl G. Jones
Managing Director


BOOOOOM . . . Spain Downgraded! - DAXIBEX


BOOOOOM . . . Spain Downgraded! - Spain CDS





"While the economy is still affecting our results, we are pleased to be reporting better than expected revenues and costs and we continue to see a gradual and steady improvement in the booking environment," said Richard D. Fain, chairman and chief executive officer. Fain continued, "This recovery, combined with our cost containment efforts and improving fleet profile, bode well for improvement in our returns on investment and our balance sheet in 2011 and beyond."


- Richard D. Fain, chairman and chief executive officer




  • Second quarter 2010 Net Yields are expected to improve approximately 6%, and for the full year 2010 Net Yields are forecasted to improve 4% to 5% due to improved business conditions offset by negative currency movements and the impact of the recent European travel disruptions.
  • NCC excluding fuel are expected to be down approximately 1% for the second quarter and for the full year 2010.
  • Initial estimates for the recent travel disruptions in Europe are a reduction in earnings per share (EPS) of less than $0.05 and this adjustment is reflected in the EPS guidance the company is providing.  
  • EPS for the full year 2010 is expected to be in the range of $2.15 to $2.25. Second quarter 2010 EPS is expected to be in the range of $0.16 to $0.21.
  • Based on today's fuel prices the company has included $170 million and $678 million of fuel expense in its second quarter 2010 and full year 2010 guidance, respectively.
  • The ongoing focus on fuel consumption has allowed the company to meaningfully reduce its full year 2010 consumption estimate to 1,346,000 metric tons of fuel versus the guidance the company provided in January 2010.
  • The company's fuel consumption is currently 50% hedged for the second quarter of 2010. In keeping with its previously disclosed hedging strategy, forecasted consumption is now 48% hedged for the remainder of 2010, 53% hedged in 2011 and 40% hedged in 2012.
  • The company also reaffirmed that the midpoint of its guidance would generate around $1.5 billion in EBITDA for 2010 and further commented that outside of possible opportunistic actions, it does not anticipate a need to access the capital markets for the foreseeable future.
  • Based on current ship orders, projected capital expenditures for 2010, 2011 and 2012 are unchanged at $2.2 billion, $1.0 billion, and $1.0 billion, respectively.  
  • Capacity increases for the same three years are 11.5%, 8.7% and 2.8%, respectively.



  • Most improvement in earnings driven by revenues
    • "not excited" by 2.6% yield improvement; reached inflection point on yields
    • Revenues declined due to recession
  • Capital spending will peak this year and will drop by 1/2 next year.
  • New ship orders: equation hasn't changed....stronger dollar, more accommodating shipyards, and exceptional performance...but need to balance with strengthening balance sheet
  • Celebrity Eclipse - delivered directly to British market, first voyage the day before yesterday... she is selling well.
  • Load factor 103%
  • Brands are controlling running expenses
  • All-in net cruise cost per APCD 2.2% lower YOY;
  • $86 legal settlement adjustment
  • Bookings
    • demand has continued to improve
    • pricing leverage slowly returning
    • 20% higher volume yoy
    • booking window healthy - European and Alaska
    • 2nd and 3rd quarter volumes strong
    • pricing still weak in 2nd and 3rd Qs
  • No need to access capital markets in the near-term
  • New reporting method with SEC: 10-Q should be available tomorrow morning
  • Hope to return to Mexico Riveria market in future
  • Deployment of Mariner---in 2012, half of fleet will be in Europe
  • May 2011--RCL may emerge as cruise leader in terms of carrying number of passengers
  • Celebrity Eclicpse:
    • Eclipse volume and rate as expected on previous call
    • other solstice ships performing as expected
    • deployment summer 2011-winter 2012
      • 4th ship--Silhouette-- will debut in July 2011
      • 50% of capacity will be solstice class



  • capital allocation going forward?
    • focus on de-leveraging balance sheet--have goal of moving towards investment grade... no need to reinstitute dividend at this year
    • "Solsticing" some of the existing ships...have found some of those investments very effective
  • European travel summer bookings?  Bookings have normalized.
  • Cost control: want to temper expectations of continued cost reductions (i.e. Net Cruise Costs per APCD excluding Fuel)
  • Yields:  business environment is better; if no disruption in Europe, would have been 100 bps improvement
  • EPS benefited from FX
  • Spain and Brazil color:  Spain has stabilized but at a "terrible" level; ahead of budget with respect to Spain; but still no signs of economic impact in Spain
    • Brazil---overcapacity concerns...2 of 6 ships in Brazil had successful seasons... for next season starting in December, still no visibility.
  • Oasis-- on-board revenue: best in fleet; most positive outlook among all the fleets...
  • Iceland volcano impact: bulk will be revenue hit.
    • should be less than 5 cents but edging up to that #.
  • Narrowing high end of range of FY yield forecast: if not for strength in dollar, the guidance would have been 5-6% for FY 2010.
  • On-board revs: Driven not by minimums...consumers were spending....on-board revenues and ticket yields tend to move in same direction....1Q 2010 on-board revenues was a little less than 3% and ticket yields 4.6%.
  • Allure and Oasis pricing/premiums: cost basis similar; same ship operated in same way; both ships should command a premium in Caribbean market;
  • BP oil explosion in Gulf--no impact
  • Balance sheet improvement expected to come from: free cash flow (expect $1.5 EBITDA FY 2010)
  • ROIC--want to exceed WACC.
    • With '08 cost structure, ROIC can be 8%.
  • Forward bookings: "mid to high single digits growth" for 2Q, 3Q, and 4Q 2010.
  • 3Q yield forecast: not back to pre-recession levels
  • On-board revs: Spanish tour operations have been scaled back; improvements in balance of fleets---developmental itineraries.
  • NA pricing/European pricing--driven by currency changes - positive yield developments despite currency constant dollars, still favorable






"Although the strength and speed of the recovery is difficult to predict and booking pace remains short, the Company now anticipates that for 2010:"

  • RevPAR: 1% - 4%
  • Operating profit margins: +100 - 220 basis points
  • Comparable hotel adjusted operating profit margins:  -125 to - 50 basis points
  • EPS: -$0.32 to -$0.25;
  • Net Loss: $205 to $158 million
  • FFO/ Share: $0.58 to $0.65
  • Adjusted EBITDA: $750 to $800 million



  • Recent operating results have turned positive on the top line in March.  RevPAR would have only declined 1% if all the results from their properties were included.
  • For the 3rd straight quarter they experienced transient demand growth which grew 12%. Special Corporate increased 28%--which was especially strong in luxury where demand increased 50%.
  • Overall the positive mix shift towards transient helped overall rates. Transient rates were up 3.6%.
  • Group demand increased by 0.5% for the quarter.  Association room nights increased 14% and discount room nights increased 5%.  Saw a meaningful pickup in forward group bookings - especially in luxury hotels (which increased 18%).  Group revenues decreased 8.6% in the quarter. Their big box hotels outperformed in the quarter
  • Transient booking for 2Q2010 is tracking ahead of last year
  • Business are definitely loosening their travel budgets
  • There have been a limited number of assets that came to market.  Pipeline of potential transactions has increased both domestically and internationally
  • Signed an agreement to sell the Ritz in Dearborn which has negative cash flow and is in a very challenged market. Should close in the 2Q2010.
  • Outlook for 2010 - it is clear that the broader economy is in recovery.
  • Commentary on the quarter's performance:
    • Phili top market:  12.3% RevPAR increase. Expect Phili to underperform in the 2Q though
    • Miami:  Occupancy was up 6.7% and ADR was up 1.7% - due to Superbowl and Pro Bowl. Expect Miami to have a weaker second Q but still post RevPAR
    • San Antonio should have decent 2Q and strong 2H
    • Boston:  Expect great 2Q - with double digit RevPAR growth
    • Orange County:  RevPAR grew 6.7% in the Q - ADR down 7.9%.  Should perform well in 2Q
    • NYC:  RevPAR increased 2.6% (7.7% ADR decline). NYC should have outstanding 2Q
    • Chicago:  ADR fell 9.9%. Expect better performance in 2Q
    • Hawaii:  14.1% decline in RevPAR due to a 13.4% decline in ADR. Expect much better performance in the 2Q
    • DC:  2% decline in Occ and a 13.4% decline in ADR.  DC should have positive RevPAR in 2Q
    • San Fran:  RevPAR declined 16.9% (occupancy 3% , ADR 12.2%) also negatively impacted by renovations. Expect better 2Q but still weak better 2H
  • Margins in 1Q2010 where negatively impacted by cancellation fees in 1Q09 (comp) and occupancy growth in the face of ADR declines.  Loss of audio visual business impacted them.  Ground lease payments on Marriott Marquis - $3MM - reduced EBITDA by $3MM.  Have the option to buy the property for $19.9MM
  • Utilities decreased 8.4%.  Real Estate taxes where flat
  • Expect higher occupancy to lead to wage and benefits to grow at inflation. Utilities will grow above inflation as will Sales and Marketing.  Property insurance to rise at inflation and RE taxes to rise above inflation.
  • 2010 cancellation and attrition fees will be materially lower than 2009
  • Have $1.8BN of liquidity
  • Have 99 assets unencumbered by mortgage debt



  • Dividend will recover more quickly but don't have enough taxable income to pay even the 1 cent per quarter. Even at high end of the guidance they don't really need to increase the dividend
  • The Euro 64MM loan may end up in the JV portfolio
  • Naples Ritz? Trying to get a better understanding at what happened there. There have been no big cancellations that have resulted from the incident
  • NY had a strong period 4 - seeing an acceleration there due to corporate strength
  • All of their non Marriott hotels' March results aren't captured in their 1Q results
  • Ritz Dearborn will fetch a low price - but the asset is losing money in 2010 and lost money in 2009 and was B/E in 2008. There is a lot of deferred capex there as well. Hopefully the transaction will close in the next 60 days
  • For the Euro Loan - they are looking for leveraged returns above the 10+% hurdle rates on unleveraged.  If the loan remains performing they are happy to just get paid off in 2 years, otherwise they would be happy to own them.  Would be comfortable investing in Europe on balance sheet - but prefer the JV structure
  • Single asset acquisition market vs. portfolio market?
    • One group of opportunities are emerging because of RevPAR recoveries and are re-testing the market where there are looming maturities
    • Another group of opportunities of strategic sellers are looking to offload non-core assets and use the proceeds to reinvest in their business
    • Volumes are still relatively light
  • When do they see ADR's recovering to show y-o-y growth and when would comparable operating margins turn positive?
    • Recovery in rate is market by market - some are already happening - NY, New Orleans, Miami, Boston, DC
    • Portfolio wide its at best in the 2H2010
    • On the margin front - looking at a 50bps decline if they get 4% RevPAR growth. So not until 4Q2010
  • Need 4% RevPAR growth going forward to get margin growth?
    • Yes for this year, but going forward inflation also matters. If inflation stays at 2% then they will get better margin growth
    • I doubt we will have 2% inflation if the market keeps recovering
    • In the first 8-12 months of a recovery a lot of the cost cuts creep back in and negatively impact margins
  • FY 09 they had $40MM of abnormally high cancellation and attrition fees
  • They are marketing a few properties currently, but because they have plenty of liquidity they will be very price sensitive
  • Why they got more optimistic on RevPAR?
    • In 1Q they where back to where they where in 2007 for transient demand. When that starts to occur its a great sign of recovery
    • Groups are also getting better - more people are coming to group events then they expect
      • So when last year if they had an 800 room block it would end up closer to 700. Now if the block is 800 it can skew a little above that.  That allows them to cut off some of their cheaper channels and save rooms for those higher priced groups
    • Up for the full year for bookings
  • Why is there guidance so much lower then MAR?
    • They are more conservative - because EBITDA margins matter more for them
    • They own some of MAR's and HOT's best hotels, so there is no reason for them to underperform those 2
  • Bookings are still short term. Which is by 2Q bookings are up over 200 bps above 2Q09 levels 
  • How do rates look?
    • Assume that short term rates are lower than rates on the books aside from some markets (probably referring to sell out markets like NYC)
  • How are they thinking about value for their acquisitions?
    • Looking for an unleveraged rate of return given their recovery assumptions
  • Would be disappointed if they had 5% RevPAR growth in 2011 with no margin growth

Early Look

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CAKE just finished presenting at an investor conference….



CAKE notes:



  • Highly differentiated
  • Focused on guest, menu, strategic  marketing
  • Future development can deliver sustainable growth that can reach targets
  • Strong balance sheet

148 Cheesecake factory stores in operation

  • 18-45 yrs old, high income people are most frequent visitors

Grand Lux and Rock Sugar

  • Grand Lux is slightly above Cheesecake Factory
  • High volume
  • Moderate check average
  • Very encouraged by positive comp store sales in 1Q
  • Higher bar sales than Cheesecake Factory
  • Baked-to-order desserts

Rock Sugar

  • Menu items are freshly prepared and served Asian family style
  • On site pastry shop


  • Extensive menu
  • High quality ingredients
  • Portions
  • Dessert and beverages
  • Distinctive décor
  • Non-chain ambience
  • Atmosphere
  • Focus on service, hospitality
    • New restaurants are performing highly


Well positioned brand

  • Industry leading unit volumes with modest average guest check
  • One of America’s favorite upscale casual dining concepts
  • High guest satisfaction scores

Expansion goals

  • Pursuing “A” locations
  • Leveraging smaller format


  • 3 new Cheesecake factory restaurants
  • Variety of sizes selected appropriately for each market
  • Seeing results from operations, marketing
  • Able to generate AUVs of $10m


  • Revenue growth
    • Increase SSS
    • Operating Margin expansion
      • Leverage comparable sales improvement
      • Cost savings
      • Capital allocation
        • Debt reduction
        • Share repurchase

8,000 sq ft

  • Smaller restaurant size is viable
    • Annapolis MD is testament to that format
    • 20% lower investment
    • Able to generate AUVs of $10m


Same-store sales

  • Traffic
    • Unemployment
    • Housing
    • Price
      • 1.4% of price at present
      • ~2% annual target
      • Menu Mix
        • Menu mix is still negative but hoping to return to flat once the economy rebounds
          • Less check management


Cost Savings

  • Expecting 8-10m of cost savings from initiatives implemented last year
    • Already realized 5m in 1Q
    • Leverage over fixed costs due to comps improving is built into guidance
    • 1% comp = $0.08 EPS


  • EPS growth of 20%-25% in 2010
  • Operating margins of 7.3% for 2010






The company is on track to meet goals for 2010




Q: How are you going to make additional cost savings?

A: Last year’s 27m was low hanging fruit.  The $10m for this year was from initiatives undertaken last year.  Any further savings would constitute upside to margins.  We increased margin by 250 bps in 1Q alone.



Q: Looking at 5 year revenue plan…implies new units not opening at lower levels, what do you think about the mix? Should we expect lower revenue from smaller boxes?

A: Annapolis and other small stores delivering greater sales than we thought possible.  Opens up greater geographies where restaurants can be placed.  There is another 7,200 sq ft format we haven’t opened yet and allows more units.  That unit can do $1,000 per sq ft. 


In terms of margin, we could reach 8% in 2Q but for the year we expect 7.2% and 7.5% margins.



Q: In terms of small plates, that exerts pressure on comps?

A: We’ve made small plates on menu.  Not something we’ve been focused on.  Small plates and snacks have given guests opportunity to spend less.  Of those that order off specials, their check average is slightly higher.  So they’re ordering more or getting dessert



Q: Your thoughts on closures and outlook for restaurants?

A: Surprised there weren’t more closures.  In future there will be winners and losers.  Companies that are taking care of customers coming in the door will do well, differentiated brand.  Can’t maximize profitability for today and give the future due attention to preserve long term success.



Q: Consolidation among existing brands or existing acquisitions?

A: A lot of transactions…it’s happened in other industries.  Consolidation hasn’t worked in restaurants, typically.  PE are going to be exercising exit strategies in future so you will see some go public and some consolidation.



Howard Penney

Managing Director


While the results were still good compared to historicals, MPEL's results missed the Street and our mark. We suspect commissions and higher fixed marketing costs are to blame.


"The first quarter of 2010 was the first reporting period to benefit from the full complement of hotel rooms and the opening of other non-gaming amenities at City of Dreams. VIP gaming volume at City of Dreams remained strong and our mass market gaming volume continued to show meaningful sequential growth. Additionally, the improvement in our mass market hold percentage is an important driver of revenue and EBITDA and is a consequence of operational improvements rather than table game volatility. We are pleased that our first quarter results provide an early indication of this property's potential, though we continue to believe there is considerable room for additional improvement."

- Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment



  • Mass hold rate is in the low 20s today
  • As a result of the commission cap, they enjoyed margin improvement at Altira.
    • Actually it had nothing to do with the commission cap but rather a normal hold %.  EBITDA was the same in 1Q09 actually on lower VIP volumes
  • Increase in Mass hold % is sustainable
    • It is related to length of play
  • EBITDA split between the RC and Mass market was roughly 50/50 at CoD
  • Refinancing update for 2Q2010.  Have concrete plans and an announcement will come shortly. Will maintain a substantial part of the R/C at low rate, which is currently in place
  • 2Q2010 Guidance: D&A - $77MM, Net Interest expense - $20MM, Pre-opening expense - $4MM



  • Group wide cost controls? Confident that they can continue to find cost savings in their cost structure over the next 12 months
  • Serviced apartments? 
    • Their focus for the next 12-18 months are just on operations.  At this point in time, they aren't going to make any decision on serviced apartments. 
    • I'm sure they are also looking to see if the Four Seasons units actually close
  • Any impact from Singapore?
    • No
  • Next growth opportunity?
    • Sure there will be new opportunities in Macau beyond 2013 when the table cap expires
    • By the way they reduced their table count at CoD this quarter by 37 tables sequentially and by 95 tables since they opened
  • April looks like its up slightly up over March.  They are tracking in line with the market.
  • Grand Hyatt mix of customers?
    • 85% of the occupancy is from HK or PRC. Decent amount of the rooms are going to comps there
  • M&A opportunities?
    • I don't understand this question... N
  • Moving the Hyatt occupancy to 90% level?
    • Thinks they can get there over the next few quarters
  • Little correlation between property prices and the Macau market, according to Lawrence
  • 95% of customers in Macau "do not put a head in a bed in Macau"
  • Grand Hyatt is in the 70% occupancy level now
  • Still talking to the government on how the tables get accounted for.  Right now operators are really looking on how to yield their tables better
  • Main gaming floor reconfiguration and impact on yields?
    • Well they have less tables so that means less dealers to pay for and higher utilization
    • They did increase their slot count
  • Does the $20MM of net interest expense include the refinancing costs?  Will the rate be better than Galaxy's H + 450bps?
    • Interest expense is not pro-forma for the new R/C but they aren't looking for any material changes to their current interest rate
    • It sounds like they are getting an term extension in return for a commitment reduction
  • They love the new supply of course. Build it and they will come to Cotai
  • Expect minimum impact from Encore opening
  • 18% direct VIP play
    • Looked more like 15% compared to our numbers
  • All of the data that they have seen suggests that the month of April is running ahead of March. Thinks that the leaked data is erroneous. Simon's comment on hold rate having no impact on reported revenue numbers is just not accurate. Of course hold matters... and the leaked numbers are only related to revenues (at least mid-month) not volumes.
  • Striving to make City of Dreams a '"World of Wonder"
  • LVS's Venetian has 25%+ win rates on Mass consistently, according to Simon
    • According to LVS they have never had a 25% mass hold month. They did average 23.6% in 2009 - on $3,4BN of Mass Drop... which CoD is nowhere near. In 2008, Venetian's win rate on Mass was 19.9% and 17.3% in 2007




Sorry for the redundancy – 3rd note in a row – but even after a blowout Q1, the Street looks way too low for 2010.  Here’s why.



Yes, this is a new note. On top of our 3/1/10 note “PNK:  IS THE WORST OVER” and again on 4/22/10 with “PNK Q1 PREVIEW AND COST ANALYSIS,” we once again call for the Street to raise their estimates. The Street is still too low on PNK even after a blowout Q1. Consensus 2010 EBITDA estimate has climbed to $192 million but well below our $213 million estimate. Are we just smoking crack? I know I’m not, and I’m pretty sure Anna and Felix aren’t either. So how do we get there?


As you know, our models are very detailed, and we obviously model in a bottom up way, that is, by property. However, we’ve provided a top down view below to illustrate another way to get to $213 million.




PNK generated $173 million of EBITDA in 2009. The only negative adjustment in deriving 2010 numbers would be the move of $9 million in Argentina EBITDA into discontinued operations. The positive adjustments are the net impact – River City contribution less Lumiere Place cannibalization – of the St. Louis capacity addition, corporate savings of at least $4 million (we could be low), and the normalization of Q4 2009. As we’ve stated, Q4 was a “kitchen sink” quarter, in our opinion, and was understated by about $10 million in EBITDA. 


The Street is either not incorporating the impact of the crazy Q4, not projecting the removal of Dan Lee expenses in corporate, and/or is assuming significant degradation at the property level. Given the sustainable cost cutting and rationalization generated in Q1, especially in the marketing area, we think PNK will offset any continued revenue declines from last year. When incorporating the unrealistic Q4 2009 margins, most properties should show EBITDA growth in 2010.


So there you have it. The Street is always happy to slap huge multiples on gaming names to justify their price targets, however they rarely want to be way ahead of consensus when it comes to numbers.


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