Lodging stocks had a better week last week along with the market, but our lodging coverage is still down an average of 20% since the June 8th mini-peak versus the S&P 500 down 3%, as the “reopening trade” has stalled following rising COVID-19 cases. Timeshare stocks have been performing with broad lodging, and in this week’s piece we discuss several thoughts with charts highlighting why we think there should be more differentiation between timeshare and hotel stocks.
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Election day is now less than five months away, and we expect this topic to increasingly become a focus in the coming months. Former Vice President Joe Biden has proposed raising the U.S. corporate tax rate from 21% to 28%, while also increasing minimum tax rates on foreign based income. Last week our Accounting & Tax Policy team published a report discussing the potential impact. In this week’s piece we discuss the impact of the election to our coverage, and we specifically examine what higher taxes could mean to our group.
RRR reported 1Q after the close (05/19/20). Adjusted EBITDA was $74.3M, versus the Consensus Metrix Average of $98.1M and our $81.9M estimate.
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.
State governments have begun releasing plans to reopen many parts of the economy, though casinos are likely later on the reopening schedule. We think some U.S. casino properties within our coverage may begin to open late this month, with most opening in June and even July depending on initial progress, in our opinion, but there are still many unknowns. As casinos reopen, we expect they will operate significantly below prior capacity/volume for several months given social distancing measures as well as time for consumers to regain confidence. In this week’s piece we calculate how much revenue we think is needed to break even on cash flow for each operator – it varies depending on lease structures and leverage, but we think some operators can break even with around 60% of prior peak revenue while others may need around 80% of prior peak revenue.
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).
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