MAR hosted a well-attended analyst day in NYC today (3/18/2019). Overall the day seemed mostly constructive to us and our three key takeaways are 1) positive EBITDA targets from net unit growth, 2) the business seems more resilient in the event of declining RevPAR than we think many perceived, but 3) cash conversion on the EBITDA targets was weaker than normal.
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Since CCL’s last earnings report and subsequent earnings reports from RCL and NCLH earlier this year, many investors have asked what’s driving CCL’s yield underperformance. We think there are four main explanations, which we’ll explore, and we think there are solutions.
Last week we lowered our Lodging sector rating to Market Weight and downgraded HST to Underperform. Our view is we seem late in the lodging cycle and we think U.S. RevPAR faces risks. See our notes with our complete thesis here and here. To be clear we aren’t making a negative call on all lodging. We’re still bullish on timeshare (VAC and HGV), which is our favorite sub-group, and RevPAR isn’t a KPI for timeshare. We also think the hotel C-Corps can still work in a tepid U.S. RevPAR environment because the asset-light business models are powerful, and efforts by China/Europe to re-stimulate could start to favor names with international exposure like the C-Corps, but admittedly we now see less exciting upside to the C-Corps as reflected by our target prices. Given the move in lodging stocks as well as slowing U.S. RevPAR the risk/reward of the space seems less compelling. Owned real estate in the U.S. seems most exposed to our view, which is the reason for our downgrade of HST to Underperform. Investor feedback on our call has generally been receptive, and it feels like sentiment is definitely biased negative. From our conversations we even sense some bearishness towards the high-quality C-Corps.
Late last night (03/14/19) the Macau government extended the concessions – that is, the right to operate casino gaming – for SJM (not covered) and MGM from March 2020 to June 2022, which now puts them in line with their four other peers in Macau. The extension required minimal/immaterial payments and labor terms, in our view, with MGM paying the government ~$25M, paying SJM ~$2M, and establishing a labor-related bank guarantee of ~$101M.
This is a recurring piece we write monthly where we track several key monthly indicators, which have historically led Macau GGR growth. The data points for the most recent month show 10 of the 19 y/y indicators are better than the prior month versus 12 of 19 last month. We chart all 19 of the indicators, and we show a summary table in Exhibit 2.
Today (3/11/2019) we lower our sector weighting on Lodging from Market Overweight to Market Weight, and we also downgrade HST from Peer Perform to Underperform. The reasoning for the change is largely based on the idea that we are later in the cycle with soft U.S. RevPAR growth, which we do not expect to improve in the near-term.
We downgrade shares of HST from Peer Perform to Underperform and establish a YE19 target price of $17, based on 10x our now lower 2020E EBITDA. Our thesis is largely based on the idea that we are later in the cycle with muted U.S. RevPAR growth and mounting margin pressures, factors that have a disproportionate impact for lodging REITs over C-Corps.
Since the cruise lines reported 4Q earnings, bunker fuel prices have risen and FX hasn’t been helpful, either. We believe this is one key reason why the momentum in the group has cooled. Historically movements in fuel and FX have worked as a natural offset, so the unusual double headwind, or lack of offset, is not helpful for earnings or sentiment.
H hosted an analyst day in NYC this afternoon (3/5/19). Attendance was a bit lighter than we expected, with ~50 people in total which was lower than what we counted at the 2016 event, which we think is a function of lodging apathy and particularly around H after overly positive sentiment a year ago. Overall the day seemed positive, with a few noteworthy items.
We spoke with two different owners of several WH properties to learn more about the economics and the value proposition of using the brand, particularly at the lower end of the chain scale. We’re calling this week’s “Charts of the Week” our “Conversations of the Week,” and below we include a paraphrased Q&A dialogue we had with these two separate owners. Note we rate shares of WH as Peer Perform despite a lower-end valuation because of high owner exits (~7% of rooms annually) limiting net unit growth relative to peers, and our belief that branding is less relevant for owners at the low end of the chain scale, particularly the very low end budget segment. We still believe the latter to be true, but we walked away from our conversations feeling marginally more constructive. Note, the two owners we spoke to are seemingly higher quality owners who own higher quality and newer/fresher properties than the domestic system average, in our view.
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