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OEH 1Q2010 CONF CALL "NOTES"

OEH 1Q2010 CONF CALL "NOTES"

 

"In what is traditionally Orient-Express' quiet quarter, it was pleasing to see revenues begin to show growth, with system-wide same store local currency RevPAR growing at 5%, underpinned by growth in Rest of World of 16%. The Company has ended the quarter well positioned for growth and of course, we are now moving into our strong trading season. Our 2011 goals remain unchanged. We are focused on maximizing revenue, continuing sales of non-core assets and developed Real Estate, with the aim of continuing to reduce net debt to within an acceptable range of 4 to 5x EBITDA." 

- Paul White, President and Chief Executive Officer of Orient-Express Hotels

 

 

HIGHLIGHTS FROM THE RELEASE

  • Owned Hotels same store RevPAR was up 5% in local currency and up 12% in US dollars
  • Most PeruRail services to Machu Picchu have resumed. It is estimated that it will be possible to make the entire journey from Poroy station in Cuzco to Machu Picchu by rail from July 2010, subject to favorable weather conditions enabling completion of the track repair work.
  • The Peru hotels joint venture was out of compliance with financial covenants in a loan agreement of the joint venture amounting to $27.8 million. Discussions with the banks are ongoing and an ultimately successful
  • The closure of European airspace due to the eruption of the Eyjafjallajoekull volcano in Iceland in mid-April caused travel chaos and resulted in lost revenue estimated at $0.8 million to the end of April.
  • Awarded GBP7.7 million ($10.5 million) in a legal action to protect the "Cipriani" trademark
  • Completed sale of Lilianfels Blue Mountains in Australia for AUD21 million ($19.3 million)

CONF CALL

  • Bookings pace is strong
  • Madeira REVPAR down 30% YoY... should see recovery later in 2010
  • As REVPAR grows, we see occupancy growth as key driver in 2010
  • Margins
    • Large negative impacted from FX; should see it flatten out over the course of the year
    • net-net: EBITDA margin down 2%;
  • Strategy
    • Can't cut costs further; revenue will drive results now
  • Employee costs will begin to rise with inflation going forward
  • Port Cupecoy; 21 out of remaining 99 units had been sold as of April 2010; expect that 78 remaining units will be sold by 2012
  • Outlook
    • As of April 30, 2010:
      • Overall Bookings Q2 +19% YoY; Q3 +15% YoY;
      • Europe Q2: +22% YoY; Q3: +12% YoY;
      • US: Q2 +14%, Q3: +38%--driven by Washington and Charleston
    • Trains and Cruises: 70% of annual budget is already on books; 80% of VSOE is already on books.
  • Debt/EBITDA: 9.9x (includes $78 MM debt from Sicilian acquisition); excluding this acquisition leverage would be 8.8x
  • Debt coverage ratio: 2.4x
  • Debt Maturities: 2010- 57MM; 2011- 525MM
  • Net debt repayments: 15MM in Q
  • Expected cash taxes of $12-14MM (for 3Q); for FY 2010: $20-22MM
  • Market interest for CMBS much stronger
  • Will renew credit facility: L + 350bps

Q& A

  • In Madeira- no local Portuguese business.
  • Booking window: starting to lengthen; although it is still far from 2007 levels
    • Curuso in Italy: 63% YoY bookings higher.
  • Two new Italian hotels:
    • Bookings in-line; Sant'Andrea sold out for first week;
    • Improving room stock; Sant'Andrea turning rooms into suites; 3MM euros more investment for next winter.  Have $11MM more investment in property.
  • Expenses in-line with local inflation
    • fixed-cost model for luxury business
    • may contract slightly in US with occupancy higher
  • Overall, as much as 80% of REVPAR will be driven by occupancy.
  • EBITDA expectations for 2010:
    • Higher expectations than 3 months ago
    • Peru: $2.5MM cost in Q2;
  • M&A: Need to see US domestic market to open up again
  • In 2009, biggest source market that is down was the UK;
  • Biggest thing to keep an eye on is recovery of UK traveler: 20-22% of business
  • Hotel RE market transactions
    • In Europe, not much distressed sales; not much opportunity; low interest rates
    • In US, a lot of distress sales but not much interest at any property; need to see a "special" property i.e. Sicily properties.

H 1Q2010 THOUGHTS

H 1Q2010 THOUGHTS

 

 

Hyatt reported very strong numbers this morning.  The biggest upside surprise came from the huge owned RevPAR number- which of course carried through to better EBITDA on the owned portfolio.  Below are some of our thoughts on the less obvious stuff in the quarter.

  • Hyatt reported $112MM "Adjusted" EBITDA which included an $8MM settlement related to a vacation ownership property.  We would argue that this should be deducted from "Adjusted" EBITDA as it's not recurring in nature. 
  • Hyatt's Adjusted EBITDA also includes $16MM of "other income" which is comprised of "below the line stuff" which is simply not "core" to their business and in our opinion "noise"
    • "below the line stuff ": Interest income, gains on marketable securities, income from cost method investments (not JV's), FX gains/losses, debt settlement costs, provisions for hotels loans, etc
  • Owned EBITDA of $82MM includes $14MM of JV EBITDA, which implies that clean EBITDA from Owned and Leased hotels was $68MM in 1Q2010 compared to $54MM in the 1Q2009 - an impressive improvement
    • EBITDA margins on owned and leased increased 2.1% on a 9.8% increase in RevPAR that was completely occupancy driven
    • CostPAR decreased 5.3% y-o-y after declining 2.1% y-o-y in 1Q09.   The comparisons become more difficult going forward as 2Q09-4Q09 had 6.0%, 7.8%, and 5.4% declines in CostPAR
    • Looks like F&B and other revenues grew about 6% y-o-y
  • At current rates, currency will continue to positively impact Hyatt's results until 4Q
  • Management & franchise fees were actually a little below our expectations
    • North American Full Service RevPAR was a bit lower then we estimated, while Select Service & International were better 
    • Base fees were as expected, but they were a bit lower as a % of estimated mgmt revenues
    • Incentive fees were $2MM light of our estimate and were flat y-o-y after being up 4.2% last quarter
    • The implied costs associated with the global management and franchise business were flat y-o-y at $12MM. Margins were up to 79%. 
  • SG&A was up a lot more than inflation.  As a reminder, adjusting out the Rabbi Trust numbers, clean SG&A was $246MM last year.

Trichet: He Who Sees Inflation

No surprise with Jean-Claude Trichet keeping rates unchanged this morning, but definitely a surprise to some of the US economic doves who are living in the myopia of the moment that there are no global inflation pressures.

 

Trichet said 3 things on inflation:

  1. Inflation is higher than he expected (oil prices cited as leading indicator)
  2. Global inflation pressures continue to mount and “may increase”
  3. “Price risks tilted to the upside.”

Now this view is an easy one to have. All you need are live Bloomberg quotes on your analytical machines. Its also a view that can and will change – because prices do. Our views on deflation in 2009 supporting a bullish stock market environment and our current bearish views on US stocks due to inflation are direct outputs of the direction of one factor – price. As prices change, we will.

 

Piling Debt upon Debt upon Debt to solve for these European liquidity issues will also end in long term inflation. See chapter 12 of Reinhart/Rogoff for empirical data supporting the view that accelerating long term inflation will continue to be the result of a world that’s resorted to printing fiat currencies.

 

Keith R. McCullough
Chief Executive Officer

 

Trichet: He Who Sees Inflation - 1


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GC 4Q09 "YOUTUBE"

GC 4Q09 "YouTube"

 

 

TRENDS & OUTLOOK:

  • "February 2010 revenues in BC declin[ed] by 7.6%, when compared to last year.  In January 2010 for comparison, BC revenues were essentially flat, when compared to January 2009."
  • "In the most recent fourth quarter, weather was fair and construction disruption was minor, yet consolidated revenues were basically at the same level as last year.  So the burden of the weakened economy continues to weigh upon our markets."
  • River Rock Commentary:
    • "Since it commenced operation last August, the Canada Line has grown River Rock’s average visitation by approximately 20% with a commensurate increase in slot coin-in of approximately 10%."
    • "Table drop, slot coin-in and visitation witnessed double-digit improvements when compared to February 2009.  Unfortunately though, the benefit of these increases was offset by a table hold percentage of 14.9%, well below River Rock’s historical average."
  • "The results produced since View Royal’s redevelopment last year have been disappointing to-date, we believe it has mitigated what would otherwise have been a more significant decline."
  • Vancouver Island margin sustainability at 61.8%?
    • "With the expansion that we had at View Royal, we were actually disappointed with that to be quite honest...we feel comfortable with that EBITDA margin that’s there and hopefully can continue to sustain that going forward."
  • "The expansion at Georgian Downs has also been less successful than anticipated."
  • "We anticipate that our development CapEx for 2010 will be approximately $15 million while an initial $10 million will be devoted to maintenance."
  • "Revenue growth would enhance the EBITDA margin and incremental revenues at the margin are fantastic for us.  And on slots, they have 80% margin, on table games, which has some labor, they’re going to be 55%, 60% margin"

 

DEVELOPMENT & INITIATIVES UPDATE:  

  • "Georgian Downs added 400 new machines with a further 150 to follow by the second quarter".
  • "In Nova Scotia, we’ll refresh approximately 500 games by the end of April, replacing more than 50% of those properties’ offerings.  The refresh product will both assist in attracting new patrons and better satisfy existing ones."
  • "In February....we reengineered River Rock’s main gaming floor both to better present the Canada Line facing entrance and create 8,000 square feet of additional gaming space within the property’s existing footprint.  This allowed River Rock to increase its slot and table capacities by more than 15 and 10% respectively."
  • "Across our portfolio, we are beginning to develop more structured and effective patron tracking and rewards
    programs.
    • "River Rock recently introduced patron gaming funds.  These accounts allow players to electronically transfer funds directly to the property and are one of several privileges we are now extending to River Rock’s VIP patrons."
    • "We’ve also established a dedicated area of the property for slot VIPs and introduced a slot VIP program."
    • "At Boulevard, we have recently augmented our VIP table business."
    • "In order to publicize all three of our improvement initiatives, Great Canadian will amplify its marketing efforts throughout the year.  Although this will generate minor increases in operating expenses, we will utilize the targeted approach and communicate with our patrons in a way that they see value."

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED

We take the data on its merits as it comes in. Initial claims fell 7k last week to 444k from 451k (revised up 3k). This brought the rolling four-week average down by 5k to 458.5k. While this marks the third consecutive week of improvement the fact remains that at 444k, claims are still where they were in late 2009, 4-5 months ago. We've been highlighting for the last few weeks the fact that a divergence has emerged between claims and XLF performance. For now that remains the case, although XLF has given back 6.6% in the last 15 trading days, so the divergence appears to have narrowed (albeit for unrelated reasons, i.e. Greece/EU concerns).

 

We remain concerned that without significant improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, we had been bullish on the lift the census would add going into its peak employment months.  However, now that we're into May, it's time to start focusing on the drag it will create on the backside.  

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - rolling

 

The following chart shows the raw claims data.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - reported

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED

We take the data on its merits as it comes in. Initial claims fell 7k last week to 444k from 451k (revised up 3k). This brought the rolling four-week average down by 5k to 458.5k. While this marks the third consecutive week of improvement the fact remains that at 444k, claims are still where they were in late 2009, 4-5 months ago. We've been highlighting for the last few weeks the fact that a divergence has emerged between claims and XLF performance. For now that remains the case, although XLF has given back 6.6% in the last 15 trading days, so the divergence appears to have narrowed (albeit for unrelated reasons, i.e. Greece/EU concerns).

 

We remain concerned that without significant improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, we had been bullish on the lift the census would add going into its peak employment months.  However, now that we're into May, it's time to start focusing on the drag it will create on the backside.  

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - rolling

 

The following chart shows the raw claims data.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - reported

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment.   

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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