LEISURE LETTER (12/12/2014)

Tickers: CZR, PENN, H, PEB, NCLH, RCL

EVENTS

  • Dec 14: City of Dreams Manila Opening
  • Dec 17:  Upstate NY Casino Decision
  • Dec 19:  Hedgeye Cruise Pricing Survey (Wave #1)
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

NCLH – A crewmember from Oceania Cruises' Insignia remains in a hospital in St Lucia after a fire onboard which claimed the lives of three others. Oceania announced it will give all 656 passengers 100% refunds as well as a 50% credit toward a future Oceania Cruise voyage. Insignia was on a 10-night cruise which departed San Juan on December 7 and was scheduled to arrive in Miami on December 17.

 

Article HERE

Takeaway:  Not much media coverage over this unfortunate incident. Can luxury cruising brush aside another ship incident? We will see any kind of pricing impact in our pricing survey next week.

 

COMPANY NEWs

CZR – Caesars Entertainment Corp. is expected to miss a $224 million interest payment owed to bondholders as the company prepares to file Chapter 11 bankruptcy on its largest operating division next month.  The move is another step as the casino giant seeks to restructure its gaming industry-high $22.8 billion debt. Caesars has been in debt reduction talks with banks and creditors since September. The discussions center primarily around Caesars Entertainment Operation Co., which controls about 80% of the overall debt and is running out of cash to meet those obligations. Sources said a framework to a restructuring agreement has been reached, which includes a prepackaged bankruptcy covering CEOC and moving the casinos controlled by CEOC into a real estate investment trust.

 

Article HERE

 

Other CZR developments:

  • The First Lien Bank Lenders believe they had reached an oral agreement with the company. That oral agreement in principle, however, was contingent on, among other things, the company reaching an economic deal with respect to a Restructuring acceptable to the First Lien Bank Lenders with certain beneficial holders of CEOC's 11.25% senior secured notes due 2017, CEOC's 8.5% senior secured notes due 2020 and CEOC's 9% senior secured notes due 2020.
  • The First Lien Bank Lenders understand that, at the time of this press release, the company has not reached an agreement with the First Lien Bondholders on the terms of a Restructuring that are acceptable to the First Lien Bank Lenders, nor has the company negotiated the details of the definitive documentation relating to such Restructuring or resolved all of the substantive issues with the First Lien Bank Lenders.
  • The agreement:
    • Structurally, CEOC would be restructured as a real estate investment trust with an operating company and a property company
    • In addition, a subsidiary of PropCo would own all of the assets of Caesars Palace Las Vegas
    • In connection with the REIT structure, pursuant to two separate leases, one for CPLV and one for all other properties owned by PropCo, OpCo would lease all the properties owned directly or indirectly by PropCo and pay rent to PropCo.
    • The beneficial holders of CEOC's senior secured credit facilities would receive a 100% recovery based on principal outstanding
    • The beneficial holders of CEOC's first lien bond debt would receive a 93.8% recovery based on principal outstanding
    • The beneficial holders of CEOC's second lien and unsecured bond debt would receive an amount of equity directly or indirectly in PropCo or OpCo equal to the value of the unencumbered assets
    • CEC contemplates raising capital from third parties to finance its funding obligations by issuing $150M in convertible debt with a variable strike price of no more than $14 per share
    • Term sheets (including the terms and conditions set forth therein) have not been negotiated with, or agreed to by, the First Lien Bank Lenders.

Takeaway: We remain very skeptical of CZR's sponsored REIT. Such a REIT would be single tenant focused but likely with significantly higher leverage. Expect the negotiation process to be contentious and protracted.

 

27.HK–  Chairman of Galaxy, Francis Lui, says the Group’s phase II project will be unveiled during the first half of next year as scheduled, that the exact date of the opening of Phase II will be announced in January, Mr. Lui also revealed that the Group is to hire some 7,000 to 8,000 employees for the Phase II operation.

 

Galaxy will begin construction on its Galaxy Hengqin Island Resort in 2015 with work completed in three phases over seven to eight years. The Hengqin Resort will feature Maldives-style leisure resorts to supplement the high-end, high-density entertainment projects in Macau that the Group is creating.

 

Article HERE

Takeaway: We await the phase 2 date in January. 

 

3918.HK – NagaCorp Limited's Board of Director's made a decision “in principle” to utilize NagaCorp’s current share repurchase mandate approved at the company’s last annual general meeting, in April. The board has set no specific limitations on the size, timing or price of repurchases. The filing pointed out there is no assurance the company will make any repurchases at all.

Article HERE

Takeaway: With capital needed to fund the development of the integrated resort casino in Vladivostok, we are skeptical NagaCorp will repurchase any shares.

 

PENN – Penn National Gaming Inc. is critical of the state legislature, after the Ohio Senate passed an amendment requiring the gaming operator to pay half of the $500,000 owed to Austintown Township and the city of Dayton for three years. The $500,000 annual payments are supposed to be paid by Dec. 31 and are to be used 50-50 for infrastructure and capital improvements and general-fund use. That is the same set up as the two $1 million payments Austintown already received, which went toward resurfacing roads and paying off a communications system debt.

Article HERE

 

H – announced today that the Company's Board of Directors authorized the repurchase of up to an additional $400 million of the Company's common stock. As of December 11, 2014, the Company had approximately $465 million available under its share repurchase authorization (including the $400 million authorized yesterday).

Takeaway: This is a $206m expansion of the repurchase availability as of 3Q 2014.

 

PEB – announced that it has acquired Union Station Hotel, Autograph Collection for $52.3 million.  In 2015, PEB forecasts that the hotel will generate earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $4.5 to $5.0M and net operating income after capital reserves (“NOI”) of $3.8 to $4.3M. The property will maintain its association with Marriott’s Autograph Collection and will be operated by Sage Hospitality, who also operates PEB's The Nines in Portland. 

Article HERE

Takeaway: The likelihood of a follow-on equity issuance increased with this announcement.  Pebblebrook held about $119 million in cash on 9/30/14, then raised about $146 million in late October when it issued 3.68 million shares of its common stock. During this quarter, PEB acquired the Palomar Los Angeles and Westin Colonnade Coral Gables for a combined $138 million, the company will spend $52.3 million on the Union Station and is under contract to purchase a full service hotel in Boston for $261 million. PEB has about $300 million of capacity on its corporate revolver. 

 

Insider Transactions:

RCL – Director Arne Alexander Wilhelmsen sold 50,236 shares of Royal Caribbean Cruises on Thursday, December 11 at an average price of $79.05 and now directly owns 2,470 shares of the company’s stock.

 

INDUSTRY NEWS

CPC Disciplinary Watchdog In The House – The Communist Party of China's (CPC's) disciplinary watchdog will establish resident offices in four CPC central organs to intensify anti-graft work. It is the first time the CPC Central Commission for Discipline Inspection (CCDI) has sent resident supervisors to the CPC Central Committee's General Office, Organization Department, Publicity Department and United Front Work Department, and the National People's Congress, the National Committee of the Chinese People's Political Consultative Conference, and the General Office of the State Council.

Article HERE

Takeaway: The Tiger hunt intensifies.

 

Las Vegas Master Planned Home Building Restarts – Developers of Skye Canyon, a 9,000-home community planned at U.S. Highway 95 and Fort Apache Road, announced deals with Woodside Homes and Pulte Homes on 80 acres at the 1,700-acre site. Olympia Chairman and CEO Garry Goett said at a June ground breaking that homes at Skye Canyon would have floor plans unique to the community. He also said prices at the community would range from $200,000 to $600,000.

Article HERE

 

MACRO

China November New Loans were CNY852.7 billion vastly exceeding consensus expectations of CNY650 billion and October's CNY548.3 billion. While Chinese Bank deposits increased 9.6% year-over-year compared to 9.5% in October.

 

China 2015 GDP Growth Target Lowered – China's Central Economic Work Conference concluded and though not formally announced, it is widely believed, the Conference lowered China's 2015 GDP target to 7%, down 0.5% from 2014's target.  In addition, the just-concluded Central Economic Work Conference, for the first time, systematically articulates the meaning of "New Norm" theory. "New norm" is a phrase used by President Xi Jinping several times recently, reflecting the leadership's drive to wean the economy from dependence on infrastructure investment and exports. One of the cores of the theory is to let the economy adapt to a slower growth, as top policymakers have expressed many times that the economy cannot maintain its previous high-speed growth.

 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 

 

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 

Olympia Chairman and CEO Garry Goett said at a June ground breaking that homes at Skye Canyon would have floor plans unique to the community. He also said prices at the community would range from $200,000 to $600,000.