Earnings season is now largely over, and we come away with 15 developing themes. We discuss with charts for each theme. Please click here to view the full report.
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H reported 1Q yesterday after the close and hosted their call this morning. Adjusted EBITDA was $86M, versus the Consensus Metrix average of $100M and our $90M estimate.
Our high-level thesis for our coverage is to favor drive over air travel, leisure over business travel, and domestic over international travel, all else equal. With that backdrop we think it’s hard to be constructive on hotel stocks given their leverage to those factors. The valuations also still do not seem interesting enough to us despite the sharp selloff. We looked at prior recessions to determine when we might see prior peak earnings and then we discounted that future value back to present value. We’ll discuss that idea as well other ideas regarding net unit growth and the pipeline.
This morning (04/21/20) H announced a new $500M bridge facility, an unsecured debt offering, a covenant amendment to its revolver, and a 1Q pre-report. After the close, H announced that it had raised $900M in senior notes ($450M at 5.375% due 2025 and $450M at $5.75% due 2030) which we think is intended to replace the bridge financing and pay down any previously drawn revolver capacity.
Our view has been that timeshare businesses are better positioned in this crisis relative to other travel and consumer cyclical industries due to recurring revenue, significant liquidity, leisure over business travel, more drive travel, variable costs, and a generally healthier consumer demographic that we believe is also helped by the CARES Act. However, a concern we’ve heard from skeptical investors pertains to the loan portfolios and the potential for elevated default activity. In this week’s piece we examine those portfolios as well as historical write-offs, and our conclusion is timeshare is still better positioned, in our opinion.
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.
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.
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...
ERI is now down 52% from its all-time high in less than a month, and this week alone it was down 33%, as coronavirus continues to weigh heavily on ERI and our coverage. We think the two specific concerns are 1) ERI/CZR leverage, and 2) it’s a casino operator, with the view that demand will be impacted by coronavirus. We’ll discuss these two ideas with several points. Specifically, we show the following: how large drawdowns are not uncommon and historically have been great buying opportunities; ERI/CZR liquidity including debt maturities, revolvers, and any covenants; how much revenue would have to decline before ERI/CZR is not free cash flow positive; the mix of customers between U.S./non-U.S., drive/fly, and leisure/business; and why we believe the ERI/CZR iGaming and sports betting segments will add substantial value with a potential spinoff later this year (and provide more liquidity and de-leverage capability).
In this week’s piece we examine risk metrics for our coverage following last week’s severe selloff. Specifically, we show current debt maturities by year, current undrawn borrowing capacity, and current leverage for each company in our coverage. We then show how current credit spreads for a couple metrics compare to historical levels. For historical context we also show how much revenue declined in prior recessions for the sub-industries within our coverage, for GGR, RevPAR, timeshare contract sales, and cruise net yields, though it seems the impact from coronavirus is likely to be felt differently depending on how this evolves.
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