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HOT: CONSENSUS NAV LOOKS OVERSTATED

Our NAV analysis is more exhaustive, and we shake out at a lower NAV than “consensus”.

 

 

JPM, our consensus proxy, values HOT’s Owned Portfolio at $6.6 billion or approximately $310k per key.  Given the firm’s aggressive $64 price target, we’d expect some pretty aggressive NAV assumptions.  And boy, did we find some aggressive assumptions.  Our NAV analysis values HOT’s Owned Portfolio at "only" $5.1bn or $241.5k per key or almost 18x 2010E owned, leased, and consolidated JV EBITDA.  So why are we so "conservative" compared to consensus?  For one, our analysis is more comprehensive including a review by our real estate consultant.  Second, JPM makes a mistake assuming HOT owns all these assets outright.  Some are joint ventures and leased hotels.

 

HOT: CONSENSUS NAV LOOKS OVERSTATED - jpm2

 

Sheraton

  • We’re about $25k per key below JPM’s Sheraton valuation.
    • The issue is that 7 of the hotels in this portfolio have over 500 rooms and with the exception of Sheraton Manhattan, the sheer size of the assets will cap their per key value.  Excluding the Sheraton Manhattan, the other 6 assets make up 57% of the owned Sheraton rooms.  For example, there aren’t many buyers for an asset like the Sheraton Centre Toronto Hotel for north of $300MM.
    • Airport hotels comprise another 12% of the Sheraton room base.  Airport assets typically fetch low per key values since they have no alternative "higher and better" use and attract a price sensitive customer.  For example, Sheraton Suites Philadelphia Airport and Sheraton Gateway Hotel in Toronto Int'l Airport are unlikely to fetch more than $125k per key.
    • There are only 3 assets in the Sheraton portfolio that we think would fetch north of $300K.
      • The Park Lane Hotel, which we estimate, is worth $750k/key (leased)
      • Sheraton Manhattan Hotel and Sheraton Diana Majestic Hotel (leased), which we estimate are worth $400k/key

Westin

  • We’re about $45k per key below JPM’s Westin valuation.
    • The largest HOT owned Westin is the Atlanta Peachtree Plaza.  It would be tough fetching significant north of $100k/key for that asset given its size and the massive oversupply in the Atlanta market.
    • Similarly, The Westin San Francisco Airport is unlikely to fetch more than $125k/key for the reason we already discussed above.
    • We estimate that only 3 Westin assets would fetch north of $300k per key.
      • The Westin Excelsior in Florence & Rome – roughly $500k/key
      • Westin Dublin Hotel - $350k/ key

St. Regis Luxury Collection

  • We’re about $100k per key below JPM’s Luxury collection valuation.
    • The Phoenician, which is the largest asset in this collection, making up 26% of the Luxury collection rooms, is in need of material ($100MM) capital improvements and is in a challenged market.  Arizona is only second to Vegas in terms of housing issues.
    • St Regis NY is the jewel of this portfolio.  We estimate that this asset would fetch $1.25MM/key.  In addition to the NY asset, we believe that only the Italian assets and the St. Regis Aspen would fetch north of $500k/key.  All in, these assets (including NY) represent just 31% of the rooms in the collection.
    • Park Towers BA are also unlikely to fetch more than $250k/key, given the economic reality in Argentina.
    • We’re pretty confident that St. Regis San Francisco wouldn’t fetch much more than $300k/key.
    • While the Spanish assets are nice, they are in secondary cities and the economy is in crisis.  We have them valued at $350k/key.

W Hotels

  • We’re about $150k per key below JPM’s W Hotels valuation.
    • Aside from the Times Square W, we don’t think a single asset in this portfolio is worth anywhere close to $425K/key.
    • Several W’s have recently traded at $200k handles.
    • 510 Keys or 18% of the W’s in this portfolio are at W’s in New Orleans.  Even OEH’s Windsor Court traded for only $137k/key last year.  JW Marriott in New Orleans traded for around the same per key price in 2008.

Four Points

  • We’re about $75k per key below JPM’s Four Points valuation.
    • Second tier markets and limited service – including and airport hotel… find me one asset that’s traded at 125k/key.
    • The last Four Points that traded in July 2009 went for $14k/key (in Revere, MA); another traded in May 2009 for $16k/key  (Minneapolis, MN).

Other Hotels

  • Bottom line – JPMorgan’s estimate on this portfolio looks about $150k/key rich and doesn’t account for the fact that the largest asset is a JV.
  • Starwood owns 6 non-proprietary branded assets.  Most of these assets have material amounts of deferred CapEx. 
    • The largest asset in this group - Boston Park Plaza - is not wholly owned by Starwood.  We believe that HOT owns 51% of the hotel.  Given the size of this asset and the amount of CapEx a new buyer would need to invest in the asset, we think that it would fetch in the neighborhood of $125k/ key
    • The Caesars hotels look like they haven’t had a refresh since the 80s; our real estate consultant pegs the value on those at $75k/key.

Since EBITDA is obviously depressed and current stock market valuations are huge, the bulls are using NAV to justify bulging price targets.  Fair enough.  Our comprehensive NAV analysis produces valuations well below what we consider consensus.  The $66k per key differential between JPM and us translates into $1.4bn in equity value or approximately $7.50 per share.  At our owned valuation of 18x EBITDA, it's hard to accuse us of being conservative.


TALES OF THE TAPE

Yesterday saw volume in restaurant stocks dry up despite an increase in volume across the broader market.

 

With consumer discretionary (XLY) down on strong volume yesterday, it is no surprise to see a lot of declines in yesterday’s session for restaurant stocks.  Quick service restaurants did not show significant strength, with PNRA’s +0.4% move for the day the largest move to the upside.  Volume was sharply down in all but two stocks, suggesting a lack of conviction in the decline.

 

The casual dining category had more bright spots; MSSR, RUTH, and CPKI rose on strong volume.  On average, volume in the category was down 29% versus the 30-day average.  BWLD, LNY, and KONA all declined sharply on weak volume.  Commodities, other than dairy, declined yesterday.

 

TALES OF THE TAPE - stocks 519

 

TALES OF THE TAPE - comds519

 

Howard Penney

Managing Director


INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH

We've been harping on claims for a while now, pointing to the fact that they have been essentially flat for the last five months. This morning they're actually up quite a bit. The initial claims figure rose 25k to 471k from 446k in the prior week (upwardly revised 2k). This takes the 4-week rolling average higher by 3k to 453.5k.

 

The reality is that without significant improvement in claims, a leading indicator, there will be little improvement in unemployment, and, by extension, net charge-offs for lenders. Remember that most financials, even with the recent sell off, are still pricing in a substantial return to what are considered "normalized" credit costs (i.e. 2005/2006 levels). Based on this morning's number (a continuation of the last 5 months trend), 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 are 75-100k above that level.

 

As a reminder around the census, May is the expected peak employment month. Beginning in two weeks the census will become a headwind for job creation.  

 

INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - rolling

 

INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - raw

 

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 UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH

We've been harping on claims for a while now, pointing to the fact that they have been essentially flat for the last five months. This morning they're actually up quite a bit. The initial claims figure rose 25k to 471k from 446k in the prior week (upwardly revised 2k). This takes the 4-week rolling average higher by 3k to 453.5k.

 

The reality is that without significant improvement in claims, a leading indicator, there will be little improvement in unemployment, and, by extension, net charge-offs for lenders. Remember that most financials, even with the recent sell off, are still pricing in a substantial return to what are considered "normalized" credit costs (i.e. 2005/2006 levels). Based on this morning's number (a continuation of the last 5 months trend), 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 are 75-100k above that level.

 

As a reminder around the census, May is the expected peak employment month. Beginning in two weeks the census will become a headwind for job creation.  

 

INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - rolling

 

INITIAL CLAIMS UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - raw

 

 

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 UP 25K - UNEMPLOYMENT CANNOT IMPROVE WITH CLAIMS THIS HIGH - census chart

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: SANDS' SINGAPORE PROMOTION, UNEMPLOYMENT, TIGHTER VISA, SANDS LAWSUIT, SINGAPORE GDP

The Macau Metro Monitor, May 20th, 2010



SANDS BETS ON MACAU-SINGAPORE CONNECTION Macau Daily Times

Sands China launched yesterday a 88-day campaign for its high rollers that for the first time puts together Macau and Singapore casinos.  The grand prize of the “Win a Billionaire’s Lifestyle” promotion will include private jet transfers to the Lion City and luxury accommodation at the newly opened Marina Bay Sands.  According to Kevin Clayton, Venetian’s executive vice-president for marketing operations, "It’s a very simple way to create the most powerful program possible with which to reward our costumers.Other brands would also like to do that and we have the size to accomplish it."

 

Clayton played down the threat of Singapore’s gaming sector to Macau. “Sheldon [Adelson, chairman of Las Vegas Sands] said there is room for many more gaming resorts in Asia”, he recalled.  But the cooperation must not be restricted to Sands’ properties in Asia. “We, the gaming operators, have to work together to build Cotai as a destination”, said Clayton. “We have to get more people into Macau, working with the tourism agencies and the local Government”, the executive stated.

 

For Clayton, the sector has two short-term priorities: “increase the number of overall visitors to Macau and get more people to stay longer”. And that is the purpose, he added, of the attractions to be built at the parcels 5 and 6 in Cotai. Clayton also assured the new areas “are still slated to open in early 2011”.

 

EMPLOYMENT SURVEY FOR THE 1ST QUARTER 2010 DSEC

The unemployment rate for January – March 2010 in Macau was unchanged at 2.9% in comparison with the previous quarter period. Total labour force was 323,300 in the first quarter of 2010, a YoY increase of 1,000.

 

Analyzed by industry, the majority of the employed were engaging in Recreational, Cultural, Gaming & Other Services (23.4%) and Hotels, Restaurants & Similar Activities (14.3%).  In terms of occupation, most of the employed were Clerks (including casino dealers, floorpersons, betting service operators, etc.) and Service & Sales Workers, accounting for 26.1% and 22.7% respectively.

 

Median monthly employment earnings of both the employed (MOP9,000) and the local residents (MOP10,000) held stable as the fourth quarter of 2009.

 

TIGHTER VISA REQUIREMENTS FOR SIX ASIAN COUNTRIES Macau Daily Times

The Government will start to require visas for people arriving from six South Asia countries before arriving at the Macau border in the second half of the year, the head of the Office of the Secretary for Security, Vong Chun Fat, said yesterday.

The measure aims solve the problems of an increasing number of overstayers and illegal workers.

 

The visa entry requirement was announced at the end of last year and include: Vietnam, Nepal, Sri Lanka, Pakistan, Nigeria and Bangladesh.  “Since it is a completely new measure, it is necessary to plan and study it in detail. Currently, the immigration department of the Public Security Forces Affairs Bureau had already done the preparatory works together with the Commissioner of the Ministry of Foreign Affairs in Macau and it has obtained a satisfactory result.  We hope this measure can come into effect in the second half of this year,” he stated.

 

SANDS SUES LAW GROUP AFTER SINGAPORE CASINO COMPLAINT BusinessWeek

Las Vegas Sands Corp.’s Singapore casino resort sued the organizers of the first conference it hosted after payment was withheld for an event where the power failed during a speech by the Chief Justice of New South Wales and delegates complained of unfinished rooms.  Marina Bay Sands Pte is seeking S$300,000 ($214,000) from IPBA 2010 Pte.  Delegates to the legal conference including New York-based Raymond Burke Jr., who received hotel confirmations promising “intimate little touches and impeccable service,” found unfinished rooms and malfunctioning fixtures.

 

Delegates at the IPBA annual general meeting closing the conference proposed challenging Sands on the fees.  The IPBA organizing committee said in an e-mailed statement that it wrote to Sands on May 6 to propose compensation and a meeting on May 11 was followed by the writ.  “Now that we have been dragged to court we will defend the claim and issue a counterclaim as well,” according to the statement.

 

SINGAPORE'S GDP GREW 15.5% ON-YEAR, 38.6% ON-QUARTER IN Q1 Channel News Asia

Singapore's GDP expanded by 15.5% YoY and 38.6% QoQ, ahead of preliminary estimates.  Despite the strong growth, the Ministry of Trade and Industry has chosen not to revise its growth forecast for the economy, keeping it at 7% to 9% for the year.  MTI warned of heightened market anxiety over the possibility of a sovereign debt default in Europe and concerns over excessive asset price inflation in emerging Asia.


US STRATEGY – LOSING FAITH ?

Faith is taking the first step even when you don't see the whole staircase.

- Martin Luther King, Jr.

 

In general terms, faith is the persuasion of the mind that certain statements are true, belief in and assent to the truth of what is declared by another, based on his or her supposed authority and truthfulness. Faith in politicians around the world is certainly waning. Europeans, Americans, and Asians can’t see the whole staircase, but they don’t believe their representatives can either.

 

Yesterday the S&P 500 finished lower by 0.5%, with the financials as the only sector positive on the day. The Financials (XLF) sector was somewhat of a surprise outperformer despite headlines out of Washington that continued to feed into worries surrounding the bottom-line impact of financial reform. Specifically, yesterday the Senate failed to cut off debate on the financial regulatory bill as two key Democrats said it still did not sufficiently tighten rules.

 

The market was also unable to take advantage of a short-covering bounce in the euro. The euro has gone straight up from our oversold line of 1.21 and is currently trading at 1.23. The Hedgeye Risk Management models have the following levels for the euro – Buy Trade (1.21) and Sell Trade (1.25). Despite a brief reprieve for euro, the issues in Europe continued to be a drag on sentiment.

 

On the MACRO front, the Mortgage Bankers Association data showed that the mortgage delinquency rate rose in the first quarter to 9.38% of all loans outstanding, from 8.22% last year. Yesterday the Dollar Index gave back some of it recent gains, declining 0.88% on the day. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.48) and Sell Trade (86.97).

 

Currently, equity futures are trading below fair value as markets attempt to reconcile yesterday's decline and the more bullish FOMC minutes. The news in Europe is mixed and there is clear lack of direction coming out of Europe regarding the appropriate strategy for dealing with its debt crisis. As we look at today’s set up the range for the S&P 500 is 41 points or 1.4% (1,099) downside and 2.2% (1,140) upside.

 

The Hedgeye Risk management models have moved to 0/9 sectors on TRADE and 2/9 sectors positive on TREND - Industrials (XLI) and Consumer Discretionary (XLY).

 

Yesterday, the Industrials (XLI) was the worst performing sector, declining 1.3%. Year-to-date, the XLI has been the biggest beneficiary of the MACRO headlines that have been driving the bulk of the direction for global equities. In addition, although the sector has been a big beneficiary of a rebound in the manufacturing sector, May represents that first data point that was a disappointment as the Empire Manufacturing Index fell to 19.1 from 31.9 in April.

 

Consumer Discretionary (XLY) underperformed as stocks leveraged to the housing sector were mostly weaker today with the XHB down 1.5%. The building products names remained under pressure with USG (4.5%), AWI (3.7%) and OC (2.8%) all finishing down for a fifth straight session. The home builders were mixed on the day. As expected, the recent housing data points have come in ahead of expectations, doused by the reality that the stimulus measures have pulled demand forward. Today's MBA release offers some support for that thesis, as the purchase index fell 27.1% week-over-week.

 

Oil halted a six-day losing streak yesterday after stockpiles in the U.S., increased less than analysts forecast last week and supplies of distillate fuel unexpectedly declined. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (69.99) and Sell Trade (74.63).

 

Gold declined 1.9% yesterday as did many other commodities on speculation that the recent rally is ahead of itself. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,180) and Sell Trade (1,251).

 

Copper rose as declining stockpiles in warehouses monitored by the London Metal Exchange boosted speculation that demand for the metal may be increasing. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.90) and Sell Trade (3.11).

 

Three month LIBOR ticked up to 0.48 from 0.46 yesterday. The TED Spread widened to 0.32, indicating that risk perception is heightening. Europe remains a factor for investors gauging global risk; the inverse correlation between the TED Spread and the euro is now -0.95.

 

On the MACRO calendar we have: 

  • Initial Jobless Claims
  • May Philadelphia Fed
  • April Leading Indicators
  • Fed Governor Tarullo testifies at a House Financial Services joint subcommittee hearing on The Role of the IMF and Federal Reserve in Stabilizing Europe 

Howard Penney

Managing Director

 

US STRATEGY  –  LOSING FAITH ? - S P

 

US STRATEGY  –  LOSING FAITH ? - DOLLAR

 

US STRATEGY  –  LOSING FAITH ? - VIX

 

US STRATEGY  –  LOSING FAITH ? - OIL

 

US STRATEGY  –  LOSING FAITH ? - GOLD

 

US STRATEGY  –  LOSING FAITH ? - COPPER


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