“If it is reorganization, a new deal and a change you are seeing, it is Hobson’s Choice. I am sorry for you but it is really vote for me or not vote at all…” Woodrow Wilson
Let’s face it: were you Caesars Entertainment’s (NASDAQ: CZR) newly minted CEO Mark Frissora, preparing for a 1Q17 earnings call conference, the only logical footwear you could reasonably be expected to wear to the party would be tap-dancing shoes. Leading the once iconic casino company focused on the day to day business as it struggles through a bankruptcy war with its bondholders, you’d be left with little other choice. Lawyers gleefully logging mega-hours through the maelstrom understandably warned management to stay muzzled about the future. Just run the place. Make happy talk, cut costs, don’t you dare breathe a word about a Caesars that could emerge on the other side of bankruptcy late this summer two and a half years after the original filing.
The idea is, get the doors open every day, staff the casinos right, make sure the buffet line doesn’t get too long, get the dated rooms upgraded, reinforce a culture of strong customer service when employees are worried about their jobs. So if shareholders expected anything but a nice buck and wing out of management during the earnings call, they were bound to be disappointed.
But that is exactly what Frissora and company have done. Even within the legal strictures of what is prudent to talk about post bondholder deal, the earnings release at best was thin gruel.
CZR is still a Tinkertoy construction until the exit
It is to be remembered that CZR is a jerry-built cluster of subsidiaries cobbled together pre-bankruptcy by the company, it asserted, to protect its asset base. In the company’s view it was perfectly legal. In a court appointed investigator’s opinion it was at best borderline, if not a demonstrably, fishy construct. But many parts of that Three-Card-Monte game of asset shuffles remains in place today and will remain until the company finally emerges out of bankruptcy into two projected entities: An OpCo that will operate all the company’s casino assets, and a PropCo REIT that will own all its realty controlled by bondholders.
Now that the bondholders have finally made nice with the company. and its private equity owners Apollo Global and TPG, investors need to begin attempting to envision a post-bankruptcy Caesars that can be valued beyond the framework of the OpCo/PropCo split already public.
Let’s begin with a capsule glance at the key elements of the May 2nd 1Q17 earnings release:
Net revenues: $2b, up 1% YoY.
Adjusted EBITDA: $551 million up 1% Yoy.
Adjusted EBITDA margins: 26.9% up 64 bps YoY.
The centerpiece of the glad Q1 tidings really has a single high note:
There was strong cash ADR growth on the hotel side due to a price raise and what management ascribed to a room renovation program that had made company properties more competitive and thus able to gain pricing power:
1Q17: $159, up YoY 11%.
1Q17: 84.8% up 1%, YoY. This is fine, but it fundamentally means very little in a single quarter. Yet it is fair to state that management drawing a straight line between improved ADR and occupancy and its large scale renovation program is valid. Management expects that by the end of 2017 more than 50% of the CZR Las Vegas portfolio will have been upgraded since 2014. Nationally, throughout the current Caesars system 7,000 rooms will be renovated.
Market share of Las Vegas gaming volume, however, was flat:
The quarter was adversely bruised by a low hold percentage, which shaved an estimated $15 to $20 million from revenue, well above the expected normalized number of $10 million. Unless your casino floor is populated by turtle-like dealers, too much dated slot product, etc., hold percentage always lies in the realm of the gaming gods. Nobody’s fault.
This is good news, but as with all reports of quarterly ADR up or down in the casino industry, they aren’t indicative of long-term trends. There are so many factors that can impact ADR over a short time frame that the number, while positive, really doesn’t lend much insight into the state of the nation, as it were.
INNOVATIONS: Skill-based games are under test at Planet Hollywood, Harrah’s Tahoe and Harrah’s Southern California. Results from our sources: Far too early to call, nothing great, nothing terrible so far. A panacea? Probably not. Will it take time to make a sound judgment call? Yes, it will.
FRONT DESK KIOSKS: Caesars is testing express check in and check out kiosks in selected properties and early results are encouraging. Waiting times have been reduced 40%. Expect this to expand.
VEGAS SUPPLY OUTLOOK: As of now it would appear that no major additions to room supply fall within the short or intermediate term to challenge the two mega-multi-property operators like CZR and MGM (NYSE:MGM). The Fontainebleau project, launched in 2007, is still a sitting structural eyesore. Carl Icahn has bought the property in bankruptcy for $150 million against its projected $2 billion cost. He’s agreed to cloak the building with a cover to reduce the eyesore factor. Alon Las Vegas has made zero progress. And even the most logical potential entrant of all, Genting’s Resorts World Asia-themed property – announced in 2015 – has since moved little beyond shoveling dirt from one pile to another. Steve Wynn has moved his Paradise Park outdoor lagoon project to a master plan of sequenced opening, going ahead with his waterside attractions and amenities but holding back on the originally planned 1,000 room addition.
All this confirms our view that both occupancy and ADRs in Las Vegas will have a firm support base against projected visitation of between 43 and 45 million to the 2020 out years. This lends support to the projection by CZR that at least its Las Vegas portfolio room valuations are fairly solid.
But other than that core metric, there was very little in the earnings call signal to present a sensible entry point on the stock at its current price. Against this we have a one year analyst price target at $13 against a current market cap of $1.6 billion. The most news about the Q1 CZR earnings release was that there was essentially no news.
Yet the stock has moved.
Nearly six months ago the shares were trading at $7.15 and now, at this writing, it’s $11.15 – up 55%. Its 52 week range is $5.39 to $11.83, up 55%.
Yet we have this continuing flow of earnings reports that fundamentally tell us very little other than that Frissora and & Co are doing their best to slash costs, fine, renovate rooms, fine, and keep employees smiling nice. All that is for the good, all that is under orders from the phalanxes of suspendered lawyers for management to just tend to its knitting.
So why has the stock moved, where is it going and should you be a buyer, seller or holder now?
The company maintains a 65% institutional ownership profile spread among 113 holders. Of these, 68 transactions indicated increases in holdings, 39 decreased and 24 stood still. Topping the list is private equity holder Apollo Global with 26.4 million shares. This would appear to support the idea that despite the blistering Chapter 11 wars with the juniors, most institutional holders remain believers. This could be out of the conviction that the asset base that will emerge shorn of over $10 billion in debt, and will have to be valued up by the market.
Or, conversely, there is some opinion that the bondholders, who will essentially own control of the company post-bankruptcy, will be hanging up the for-sale sign on many of the company’s laggards, particularly in the many soft-revenue regions in which they operate.
This school of thought posits the following, as expressed to me by a bond trader friend who has in the past owned lots of casino debt. He first asked me, as an industry person, to look over the portfolio in terms of existing properties, the market trends in which they operate and the prospects for those properties going forward.
Right now CZR owns 34 properties nationally, manages another 7 and has an additional 8 properties scattered throughout the UK and Egypt. “Assume they all wind up in the PropCo REIT. How many are viable in your view?” he asked. “Look at it like a gaming guy, not a realty evaluator.”
My answer: I think we will see a case for serious consideration by the new ownership group to offload whatever they can. I don’t see a fire sale, but a concentrated effort to lighten up the portfolio. The circumstances that supported the idea of a massive chain of US regional casinos popping up in every nook and cranny where gaming was legal is an idea whose time has come and gone.
And the guy who built on that idea, former CEO Gary Loveman, is gone as well. He saw Caesars as a massive system linked by the highly successful Total Rewards program database that literally would chain customers to visit a Caesars property wherever they lived or traveled because they could generate points. That worked for a while but it couldn’t survive the undertow of recession and increasing competition from smart operators.
My take: I see 10 Nevada properties as solid, another 5 strongly situated regionally and the rest varying from marginal to questionable in the longer term. The industry is headed toward regional consolidation either through the REIT structure or mergers. The timing is good for Caesars to do deals with strong regional operators with the balance sheets and operating smarts to acquire many of their properties. And I sense that is, without a doubt, an option the new bondholder/ownership group will need to entertain.
By unloading properties that will either fall into its REIT or remain owned and operated at sensible prices over time, CZR will be enabled to strengthen its balance sheet with both cash as well as the debt relief already in hand. It will be so strengthened that it will be in position to compete for a place in Asia, where it so badly missed the boat in the early 2000s.
I think the CZR that was pre-bankruptcy has no reason to be in the gaming sector as it exists today. The economic collapse of 2007/8 was beyond their control, and the idea of gobbling up companies and properties willy-nilly just to feed the database was fine for a while, but the latter went wildly out of control.
A new post-bankruptcy CZR – bringing to the table one of the world’s great gaming names, as well as a clutch of really good properties shrunken to fit its financial capacities and of a size lending itself to better management controls of the type that CEO Frissora is attempting to ignite now – could be a stock worth owning at the current entry point. Bit since nobody can read in the tolerance level of a bondholder, nor now know what the new management or its people will want to do, we have to conclude that somewhere between its current price and perhaps $15 CZR could be a buy for investors undaunted by a guessing game until summer.
If management seems to be clinging to the idea of a post-bankruptcy Caesars that is merely a pre-bankruptcy Caesars shorn of $10 billion in debt with no prospects of portfolio reduction in many of the weaker markets it now operates in, it’s time to sell.
Beyond that it’s either a hold, or given the other opportunities in the sector with strong regionals and global leaders poised for the big Japan moves later this year, it’s a sell if you can take some money off the table now.
Author’s note: My own gaming portfolio is held in a blind trust for my children and grandchildren so as to avoid any potential conflicts of interest with casino consulting clients, past, present or future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.