The 1Q earnings miss was attributed largely to greater-than-expected spending behind the January rollout of the Happy Hour initiative at the Bistro.  The inefficiency around executing this new program, along with some other incremental discounting activities at the Bistro, cost the company about 80 bps on the COGS line and 100 bps on the labor line, or about $0.13 per share.  As the company better refines the Happy Hour initiative and improves execution, this negative margin impact should diminish going forward.  For reference, in the Happy Hour test markets (Arizona and Pacific Northwest), it took about 3-5 months for margins to normalize so the company should continue to experience some margin pressure at the Bistro for the most of 2Q10. 


The company is working to offset this margin pressure by buoying average check with a +1%-2% price increase at the Bistro in late May, in addition to decreasing the company’s reliance on discounting.  It will be important to monitor whether the company can continue to grow traffic with prices moving higher; though it seems a little odd that for the first time in two years the Bistro saw traffic turn positive and management is quick to raise prices and slow the discounting that customers were looking for.  Management said it is comfortable taking price as it makes sense both internally (to combat increasing fixed costs and higher labor expense) and on a macro basis.


PFCB should also be better able to leverage these additional pressures as same-store sales improve.  Traffic was positive in the quarter at the Bistro and trends have gotten sequentially better for the last 7 months. 


April Trends:

Management stated that trends in April are trending 2% higher than 1Q10 trends at both the Bistro and Pei Wei, driven largely by traffic improvements. 


Current FY10 Guidance:

Management said it is still comfortable with its FY10 EPS guidance of $2.00; though due to the greater-than-anticipated spending behind Happy Hour, “there is not as much wiggle room” and “if you were thinking $2.10 or $2.20, strike that from your brain.”


From an earnings perspective, 3Q should be weaker than 2Q and 4Q.  Each of the three remaining quarters is expected to be better than its corresponding quarter last year.


Commodities are still expected to be favorable in FY10.  The company is fully contracted on all of its protein for the year and is expecting favorability for beef, rice and shrimp.  Chicken is flat for the year while produce hurt a bit in 1Q10.


Initial FY11 Commodity Guidance:

Overall, the company expects its cost of goods basket to be higher in FY11 than in FY10, but it has been a little more aggressive in extending its contracts beyond FY10 to mitigate some of the pressures from increasing costs in the market.  The company is locked in on 80% of its chicken needs through FY11 and on its rice needs through September 2011.  Management said it is monitoring beef and pork now.


Unilever licensing agreement – PF Chang’s Home Menu:

The company again did not provide too many details about its licensing agreement and expected royalty payments.  The product was just shipped last week and can be found in Wal-mart and in the grocery aisle in the next week or so.  Unilever has advertised the product on social media sites and will continue to do the same for the next few weeks.  We can expect to see additional support behind the product in the June timeframe. 




EPS still aiming for $2 for full year

  • Only $0.38 for 1Q – work to do


Positive comps at the Bistro

  • Taking modest price
  • Less discount activity moving forward
  • More revenue per transaction for the balance of the year at the Bistro
  • Happy hour promotion cost 80 bps in COG and 100 bps labor yoy
  • Generated positive traffic at the bistro.


Pei Wei

  • Traffic was positive
  • Unit level returns on IC increased in quarter
  • Margins expanding
  • Pleased with progress
  • Increasing capital allocation this year



  • 200 bp improvement from 1Q comp results so far in both concepts
  • Unilever has begun shipping PFCB packaged goods
  • Opening 2 domestic and 2 international Bistro units this year



Q:  80 bps of COG and 100 bps labor impact…what is affected by happy hour, check average degradation?  Going forward, how quickly will that pressure ease?

A: By and large that’s happy hour related.  Not as efficient as we’d like to be at the outset of this promotion.  Overspent on labor a little bit.  You don’t bring in someone for happy hour from 3-6pm.  You have to bring them in for longer so you over staff a little before or after.

Q: Do you have any units where efficiency in happy hour improved as you went – markets where you started happy hour well before rest of the system?

A: Yes, the same pattern.  It improved gradually.

Q: Can you comment on small plates at Pei Wei and check?

A: Small plates were tested with menu at Pei Wei running those.  They were observed as being accretive to check.  In Dallas testing there was short term pressure on check but as guest realized value that was available, it was good for traffic.

Q: Price increase timing?

A: in the third quarter probably in May.  It will be pretty modest, in the 1%-2% range when all shakes out. 

Q: Combined with discounting will this mean check will go up?

A: Goal is to help check.  Reduce discounting and increase price.  “Hopeful” that average check will show strength but the environment continues to get better on the margin and with sequential improvements at the Bistro we can see check move up in the balance of the year.

Q: Happy hour promotion, can you give us an idea on ROIC on that…COS, Labor…is the ROI meeting internal hurdles?

A: Pretty pleased with how happy hour is working.  We look at happy hour as marketing spend. 

Q:  Where is Unilever marketing the product and how?

A: Began shipping last week.  Marketing has been around social media sites.  Plan on doing additional support in the June timeframe. 

Q: Catering and to go business?

A: Probably more on takeout side than catering.  Product doesn’t lend itself well to catering like PNRA can.  For us, there is some opportunity in catering but it’s more on the catering side.

Q: What % of sales coming through happy hour, as you looked at AZ which was the first market to get it, how long did it take margins to normalize?

A: Happy hour is not a core of our business in terms of revenue contributions.

For AZ, it took 4/5 months before “we got our arms around it”

Q: Price at Pei Wei as well?

A: Just rolled a new menu April 19th. It has a little less than 1% price included.

Q: Looking at where you fell out on margin deleverage and EPS for the quarter was that in line with internal expectations?

A: Invested more than I (Vivian) had anticipated but that’s the side I want to err on.

Q: Looks like there was a larger drop off in AWS and SSS, can you explain the differences?

A:  For comps the weeks are lined up against comparable weeks of the calendar year.  For Q1 comp purposes we are not up against new years.  The New Year’s impact is seen more in AWS.

Q: Happy hour - how many stores got the rollout in 1Q?

A: 160 to 170 in total but some didn’t come on in 1Q since Arizona and Washington had test areas.

Q: Commodity cost basket and outlook for year

A: YoY Bistro COS up 40 bps Pew Wei down 10 bps. Bistro can be attributed to product enhancement, loyalty discount cards, happy hour.  Next three quarters should bring favorability in wok oil.  Favorability on beef rice shrimp and poultry was flat, fewer lettuce wraps cut per head of lettuce so produce hurt a little bit.  PFCB is being aggressive with contracts.  Company has contracted 80% of chicken through 2011. Locked in rice through September 2011. Seafood also.  Beef and pork are others the company is looking at.

Q: What are you seeing in terms of inflation?

A: We have a great supply chain groups.  We’ve been in some of our contracts for a couple of months.  Anytime you lock in for more than a year you can face a premium but we’re comfortable with our contracts.  You are directionally correct for 2011.  Basket is going to be higher in 2011 than 2010.  Trying to secure these things to mitigate anticipated cost increases, particularly in volatile items.  PFCB has been fairly successful with some of these contracts. We see some of the same things that you are seeing.

Q: Third quarter tends to be soft in terms of EPS.  EPS guidance assumes changes in seasonal relationships but can you drill down into underlying assumptions?  Marketing benefit is supposed to help change in seasonal trends with Unilever – can you give any more light?

A: We have more work to do in the back three quarters.  Expect all three quarters to beat their corresponding quarters of a year ago.  3Q will be the weakest of the three quarters.  Underlying assumptions haven’t changed but getting to $2 is more difficult now than it was a couple of months ago.  Momentum will continue build.  Positive buzz around Pei Wei will continue. 

Q: What have you seen for Pei Wei in terms of new opportunities?

A: Some existing markets have remaining territory.  Some other markets where some traction has been gained.  Will take one new market aggressively with Pei Wei which would be the Chicago area.  Patient plan for Pei Wei but we are definitely moving forward.

 There were many challenges facing Pei Wei in the past but lessons have been learned.

Q: Is the happy hour menu permanent?

A: It’s not going anywhere anytime soon but permanent is a long time. 

Q: How big is the frozen Asian market?  What is your royalty structure with Unilever?

A: We’ve been quiet on that. Creating a product that is going to surprise people.  There are 8 skews that have been rolled out.  Unilever tested these products with Bartoli product and ours will also be best in class.

Q: Happy hour is quasi permanent, where are you planning on pulling back in discounting?

A: some relates to tweaking happy hour marginally.  Also a loyalty card program that will be tweaked.  In 4Q last year there were some coupons given out that impacted 1Q.  Those types of programs are not going on for the rest of the year.

Q: How do you see traffic playing out?

A: That’s the risk. Some traffic has been driven by traffic but we have been arguably conservative with price. A little price and slightly less discounting will enable average check to move up as things hopefully improve going forward.

Q: Given the Pei Wei SSS number, should labor line not have been leveraged more?

A: Some unemployment insurance taxes impacted.

Q: stock buybacks?

A: Bought back 49k shares @ ~$43. 

Q: Traffic pickups from happy hour can you figure how much is incremental and how much is pulled forward from dinner?

A: No

Q: Is it safe to say that outlook is not different but adding pricing will make up for over spend in 1Q?

A: As you move through year some things go worse and you make adjustments.  Haven’t made any significant adjustments that we weren’t planning on making.

Q: Marketing spend?

A: Most of it going forward will be on LTOs…the last three exercises in LTOs have allowed the marketing message to be honed. 

Q: Weather impact? Snow and Dallas?

A: Yes. Impacted more than in years past.  Hurt Bistro 100 bps or more.  Pei Wei impacted primarily in Texas.  Got hit harshly on the weekends.

Q: Any headcount addition if comps keep steady?

A: No. Labor additions are around new unit openings.

Q: Is the decision to take price more about macro or is it about the margin structure?

A: We’ve seen increases in fixed costs over the past few years. Labor costs have gone up.  There comes a point when you can’t offset that anymore with efficiency.  As we’re moving into this year and traffic momentum and the environment are improving we’re seeing an opportunity.  We had hoped on doing things this year.  Makes sense internally and on a macro basis.

Q: On the 2% comp pick up is it safe to assume traffic in April or is it check?

A: Primarily traffic.

Q: Still 40m capex in 2010?

A: Development plans have not changed.

Q: On the 2% pickup in traffic, which day part does that skew to or weekday?

A: In 1Q, Bistro was positive comp at the lunch daypart.  Negative in dinner.  Both picked up.  Lunch for the week was positive for 1Q. That tends to support the thesis that business activity is increasing.  Seeing some people that are traveling. 

Q: Unliver deal…little contribution on the royalty? I thought that it would kick in a little more in back half of 2011 and 2012…there wouldn’t be a big contribution from PFCB?

A: That’s right.  Recognizing more of those royalties in the outlying years.  Still figuring out how and when we record those things.

Q: G&A decline…what is outlook?

A: Consolidated G&A may come up a little, not a whole lot.  G&A Q1 lower than 09 quarters.  There were a couple of items going the other way. 

Q: In 1Q at Bistro with traffic positive, was the incremental driver happy hour or was lunch a bigger part?

A: Difficult to tell exactly but there is no question that happy hour got great traction and anticipate that it will continue going forward.  We have seen continuing improvement in Bistro traffic and the macro environment has improved also.

Q: Large party group…any thoughts on that?

A: $85 and up bucket…that bucket hasn’t changed much year-over-year.  Higher ticket traffic activity hasn’t increased yet.  Lower tickets showing more improvement.

Q: $2 implies 25% earnings growth averaged out, is that right?

A: That works, yes.

Q: Big changes on a market basis between 1Q and 4Q. Where is the improvement?

A: AZ, NV, TX, FL, CA, NJ are the big states and we’ve seen improvement in all of them.

Q: Any 2010, 2011 healthcare impact?  Long term?

A:  Will be a long term cost, that’s as far as we’ll go with it. 

Q: Bistro comp trends, impact of Easter timing?

A: Holiday itself is not positive for PFCB.  Various spring breaks around the holiday are more impactful.  Not great at forecasting market-by-market spring break.  Looking at March-April together, 2010 was better than 2009. 

Q: March didn’t get a lot better than February even though February had bad weather.  Did April benefit from not having Easter in it?

A: Don’t overthink it

Q: How did you communicate it to customer base?  Is the happy hour offer going to get less aggressive as discounting is reduced?

A: If you are a happy hour customer you won’t notice a big change (contradicting what he said earlier?).  We didn’t spend a lot of money on advertising other than internal communication to loyalty card holders and social media sites. 



Howard Penney

Managing Director


We're below the Street for the Q and for the year. To some extent, ASCA is a victim of its own, early success in cutting costs.



ASCA reports earnings on Tuesday morning and we are projecting a $0.02 miss from the Consensus estimate of $0.26.  Our Q1 EBITDA estimate is $84.5 million of EBITDA, almost 4% below the Street.  For all of 2010 we are projecting EPS and EBITDA of $0.93 and $326 million, respectively, approximately 6% and 3% below the Street.  Given the Q1 positive surprises from PENN and PNK, a miss could be a disappointment.


ASCA maintains a portfolio of top notch and well run regional gaming assets.  Management cut expenses early and aggressively.  Unlike every other gaming operator, company-wide EBITDA margin actually expanded in 2009, by 340 bps.  That only makes further cost cuts more challenging, especially as the company is confronting new supply in St. Louis and a bridge closing in East Chicago.


The following is a "YouTube" from the Q4 earnings release and conference call.




  • "As you know, the Cline Avenue Bridge was closed by the Indiana Department of Transportation, it was indefinitely closed on November 13 due to the safety concerns. Probably, the earliest it can be, would be three to four years before there's a new roadway that would be opened up. Our best current estimate is there's probably an annualized EBITDA impact to the downside for the property (East Chicago) within the range of $10 million to $15 million from this."
  • "We anticipate a steady reduction of debt during 2010. As all of you know, we're generating substantial amounts of free cash flow from this point forward now that all of our major construction projects have been completed. We've obviously got to pay down the non-extended principal amount on the revolver later this year."
  • "Fixed charge coverage ratio has declined. This is a direct result of higher borrowing costs based on us restructuring our debt during 2009. We expect this ratio to continue to decline slightly in the first two quarters of '10. And then in July, the swaps that we currently have in place will expire and we anticipate seeing significantly lower interest rates if LIBOR stays in the range that it has for the last year, for the balance of this year."
  • "Capital spending for the first quarter will be $30 million to $35 million. We're weighting that what we'll spend in the year heavier in the first quarter. We still anticipate total capital spending to be somewhere in the $60 million to $65 million range for the year. "
    • Company clarifies during Q/A that the $60-$65 number is what they were going to put in place in 2010; the $70-$80 million forecast includes settlement costs on St. Charles and "little bit of payment left to our contractor in Black Hawk based on work done in 2009." 
  • On corporate expenditures, "we may see another slight increase in '10, but not material."
  • On Vicksburg market share, "with the way the economy is, the competitive environment, being in the 42% to 44% range is probably a reasonable ongoing expectation."
  • On Debt/EBITDA ratio, "By the end of the year, we would expect it to decrease by an additional 25 to 30 basis points for the current year."
  • "We're spending a little bit more in the first quarter because we're committed to keeping our assets fresh and a lot of our competitors are not doing what we're doing. We see it as a competitive advantage."
  • "Expectation is that dividends will remain flat, but as with all of the things where we spend our money, that continues to be a dynamically watched situation. Assuming that the business remains stable, I don't have any reason to think that the board won't continue to declare dividends at the same rate."

















Some thoughts on BKC ahead of tomorrow's earnings release.


I have not been paying close attention to CKR, but the last 2 months for Carl’s Jr. sales trends are showing why management is selling the company.  On a 2-year average basis, the Carl’s Jr. Concept is one of the worst in QSR.  While management is focused on things other than the core business right now, the comments about CA are interesting. 


From today’ CKE release:


“However, Carl's Jr. same-store sales continued to be negatively impacted by the poor economic conditions and high unemployment rates in our core California market, which continued to climb during the month of March," said Andrew F. Puzder, chief executive officer. "We continue to focus on the excellent value-for-the money of our premium products and combo meals, and have several new initiatives in the works to improve same-store sales and increase market share." 


Outside of the California centric Carl’s Jr concept, Hardee’s posted a +0.3% same-store sales number for Period 3 FY11 which represents a +2% number in two years trends and a 20 bp sequential acceleration.


Recently, CAKE also referenced that unemployment moved higher in March for CA to 12.6% but, nevertheless, CAKE saw improved trends in CA with same-store sales turning positive. 


Our expectations for BKC US same-store sales in FY4Q are for 3-4%, which suggest an improvement in March.  The consensus $0.29 EPS is achievable but somewhat of a mute point for BKC as management already indicated EPS to lower than last year. 


At 7.6x EV/EBITDA, BKC represents good value relative to the other major players in QSR, but lack of strategic market position puts the concept and company in a difficult position.   



Howard Penney

Managing Director

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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

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.