In this week’s piece we discuss some considerations for medium to longer-term effects to our coverage from coronavirus once the infection rate peaks. We also discuss who we think wins and loses from these changes.
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Yesterday we sent a survey to institutional investors involved in the gaming and lodging space. We received 43 responses over the past 24 hours. We show a summary of the results in Ex. 1. Thanks to all who participated!
Last night the Senate passed a >$2T stimulus package – the House is expected to vote on Friday. From our initial take we see at least three notable positives to highlight for our coverage: 1) $500B of federal funds for loans ($454B ex-airlines and national security); 2) help for consumers including tax credits for middle incomes as well as additional unemployment insurance; and 3) help for small business owners, including hotel franchisees.
VAC hosted a call this morning (3/24/20) with a business update regarding the COVID-19 impact. VAC is closing all North American sales centers for two weeks and closing North American resorts for rental guests for the next 30 days. Even with these updates it seems cash burn will only be minimal.
Credit and liquidity are in focus given the highly precarious environment, and in this week’s piece we examine both factors for our coverage. Specifically, we look at covenants and the implied EBITDA decline before triggering a credit event for each company. However, we also believe current available liquidity and cash burn matter more in the near-term. Last week we showed an interactive cash burn model for gaming operators, since they would be most at risk in our coverage, in our view. We’ve updated that model which can be downloaded here, and we’ve also now built a new interactive cash burn model for our lodging stocks that can be downloaded here. Finally, in this piece we also examine how bond prices for our coverage have trended in recent weeks.
This file is an interactive model where individuals may plug in their own assumptions to see the approximate cash burn per day for a decline in revenue due to coronavirus.
MAR hosted a call this morning after providing a business update last night. The questions we’ve been receiving in the last 24-48 hours and the questions on this call centered around liquidity and MAR’s ability to survive this crisis. These are questions we never thought we’d have to answer for the C-Corps given the nature of the models which are cash generative, fee-based, and asset-light. MAR also has an investment grade credit rating. But that’s where we are in the world, especially for travel names.
We’re again lowering estimates across the board for our gaming and lodging coverage for our best guess on the coronavirus impact, as the situation has continued to meaningfully deteriorate since our last update just last week with now many hotels/casinos closed. We continue to expect 2Q to be the worst quarter. While a V-shaped recovery seems plausible, we also meaningfully haircut 2021 estimates under the assumption that it may take some time to get back to fully normalized trends. We assume a strong recovery in 2021, but not yet a full recovery. Our targets also come down, and we show a summary in Exhibit 2.
Last week we were on the road with WYND, including the CFO and the head of IR. Not surprisingly the questions focused on coronavirus and downside risk to their business. A key theme from management was the idea that the business model is resilient, and that they are better positioned than other travel industries. Ultimately, this could be a time for the industry to prove the model is different, which we think could lead to better multiples over the longer term.
It’s been a wild week with constant news flow that has continued into this weekend with several casino closures. In this week’s piece we discuss several topics with new charts. Specifically, we highlight 1) an analysis on cash burn versus available liquidity for gaming operators, as several casinos in the U.S. have now temporarily closed, and we assume more closures are likely – note we show this cash burn analysis in Exhibit 1, which is an interactive model that can be downloaded here; 2) our thoughts on what’s going on with ERI, including the CZR arb spread which has expanded; 3) what ERI is worth on a standalone basis, even though we continue to expect the deal to go through; 4) high-yield spreads in perspective, and how that may be affecting our stocks; 5) a focus on liquidity, with companies drawing on their revolvers; 6) MGM pulling its tender, which we think ends up working out well for the company; 7) an insider purchase from the WYND CEO this week, but generally much fewer...
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