Occupancy, Rates And RevPAR Trend Upward - Rachael Rothman - Susquehanna Financial Group LLLP
December 5, 2011 - The Wall Street Transcript has just published Gaming and Leisure Report offering a timely review of the Leisure sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Rachael Rothman, CFA, joined Susquehanna Financial Group LLLP in 2010 as a Senior Analyst covering the restaurant, gaming, lodging and leisure industries. Her research leverages more than a decade of direct operational experience in the hospitality industry with 10 years of experience in equity research. She is a recognized expert in the field and has been selected to Institutional Investor's "All American Research Survey," The Wall Street Journal's "Best on the Street" and the Financial Times' "World's Best Analysts." Before joining Susquehanna Financial, Ms. Rothman was a Managing Director and Senior Analyst at Wedbush Securities and Merrill Lynch. She began her equity research career at Morgan Stanley. She earned her master's degree in hotel and restaurant management from Cornell University, a graduate degree in economics from the University of Virginia and her bachelor's degree from Bates College. She is a member of the New York Society of Security Analysts, the CFA Institute and the Cornell Hotel Society.
TWST: In terms of the hotel and casino space, what's your overall sentiment right now and why?
Ms. Rothman: We view casinos as three separate industries. There is the regional gaming industry, which would be comprised of the likes of Ameristar (ASCA), Isle (ISLE), Penn (PENN), Pinnacle (PNK), Boyd (BYD), which basically cater to local patrons within their local markets. There are the Las Vegas-based destination casino operators, and those would be MGM and Caesars. Caesars is not public currently. The Asian gaming companies which do have some presence in Las Vegas but where that's a smaller component of their overall EBITDA contribution are Las Vegas Sands and Wynn (WYNN).
So the dynamics across gaming obviously vary depending on whether or not you're talking about regional gaming, Asian gaming or domestic Las Vegas-based destination gaming. With respect to hotels, it's obviously one industry largely, as most of the hotel properties are subject to the same macro drivers based on price and maybe some brand affinity. The big differences are where you believe you are in the hotel cycle, and as a result of that how much operational and financial leverage you want, meaning do you want to be invested in a hotel owner or do you want to be invested in a manager-franchiser? That would depend on whether you thought that fundamentals were going to continue to improve or whether or not you thought that they would get worse. The more bullish you are, the more operational leverage you want, all things equal.
TWST: How would you describe the overall health and outlook for the Las Vegas casino operators?
Ms. Rothman: In Vegas, our view on 2012 is pretty bullish. We're pretty optimistic. The basic underlying premise would be that a decent portion of the overall business for 2012 - which is the convention business, it's about 15% of the overall business - is booked at higher rates. That isn't just because demand has improved now. It's also because what was booked for 2011, about a third of that was booked in 2009, a third of it booked in 2010 and a third of it booked in 2011.
Traditionally, the way it works is, a third, a third, a third. For 2012, by the same logic, the convention business was booked in 2010, 2011 and 2012, so you're swapping out a portion of the business that was booked in 2009 for business that was booked in 2010, once the rate recovery had already begun. So even if demand doesn't improve at all from today's levels, you're swapping out lower-rated business for higher-rated business just by definition of when the convention business is booked. Once you have that higher-rated business on the books, it gives the yield management systems and the general managers confidence to drive rate on both the leisure, which is the packaged customers, somebody that comes on Allegiant (ALGT) or through Orbitz (OWW) or Expedia (EXPE), and the individual traveler. So you should expect to see them holding rates longer and yielding rates higher sooner in the booking window than they had over the last two years, when demand was weaker.
TWST: So they burn through these lower rates?
Ms. Rothman: Yes, they just fall off. In 2009, they just wanted occupancy, and they were going to take it regardless of the rate. In 2010, once rates had improved, that wasn't the case anymore. So you have that whole delta between the rates in those two years, which will help support rate growth next year, even if the macro doesn't improve. On top of that, we think that the macro is improving. Recoveries are not linear, just the same way downturns are not linear. But we don't happen to be in the double-dip camp. With respect to regional gaming, it's a slightly different scenario. Again, that customer is tied to local home values and employment, and those remain fairly depressed.
You could expect to see some modest economic recovery, but the direction and magnitude of that recovery isn't being driven by convention business or corporate profits. It's being driven by local metrics. You could think of it as directionally moving with unemployment in the local region or moving with home values in the local region or GDP in the local region, and those numbers are likely to be more modest. For Asia, the numbers out of Asia continue to surprise to the upside. However, our view on the stocks is that the beats are expected, and so unfortunately, you can get into a situation where if the beat just isn't strong enough - it can still be a pretty decent beat, but if it isn't enough - it's viewed as a disappointment, and you can have a sell on a news event. So we are less optimistic on the Macau stocks.
TWST: How are gaming volumes faring? That's a big portion of revenues for these companies.
Ms. Rothman: Baccarat in Vegas has been extremely volatile, so gaming revenues are down, but they aren't necessarily down in the core mass players. They're down due to the volatility in baccarat. Our focus name is MGM, that's our top pick in the Vegas-based, larger-cap destination casinos, and that's really less about baccarat and more about a room rate recovery and a mass market recovery in Vegas. They do have two properties that participate in baccarat, Bellagio and MGM, predominantly Bellagio, but that is a smaller portion of their overall business.
TWST: So that's your top pick for the Vegas market. What other names are in your top investment picks right now?
Ms. Rothman: For the regional gamers it's Pinnacle, and the thesis there would be that not only do you have this slow but steady same-store macroeconomic recovery, which very well could just be in the low single digits, but they have a growth pipeline where they've already spent a significant portion of the capital but aren't generating any EBITDA yet. As those properties begin to open, you'll have the double benefit to free cash flow of dwindling capex and improving EBITDA. The third driver in Pinnacle would be an opportunity for cost cuts as they rationalize their promotional allowances, their direct marketing expenses to their casino customers, owing to a change in the management team over a year ago.
TWST: What companies with an Asian presence do you like?
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