67 WALL STREET, New York - December 2, 2013 - The Wall Street Transcript has just published its Gaming and Leisure Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: U.S. Regional and Emerging Market Hospitality - Gaming Opportunities In Asian Markets - Macau VIP and Mass Market Gaming - Lodging C-Corporations - Timeshare Industry Recovery - Regional Casino Development
Companies include: Starwood Hotels & Resorts Worl (HOT), Marriott International, Inc. (MAR), Wyndham Worldwide Corporation (WYN), Choice Hotels International In (CHH), The Blackstone Group (BX), Host Hotels & Resorts Inc. (HST), Goldman Sachs Group Inc. (GS)
In the following excerpt from the Gaming and Leisure Report, an experienced real estate research analyst discusses the outlook for the sector for investors and provides his top stock picks:
TWST: Do you have a lot of "buy" ratings now, relatively speaking?
Mr. Yarmak: We cover six companies in the C-Corp space, and we have three "buy" ratings and three "hold" ratings. The one "buy" rating we have not talked about is Marriott Vacations Worldwide. VAC has made significant strides as a public company over the last two years, including the shift to a points-based timeshare sale system from a week-space timeshare system. This shift has enabled the company to better allocate capital.
If you go back to the last cycle, investors believed that the timeshare industry was more of a five times to eight times multiple business because of the volatility in the timeshare sales. When sales were down, it was seen as more of a five times or six times multiple, and when sales are up, the industry is seen more of a seven times or eight multiple business. However, this cycle they have been able to convince the Street that the timeshare business is more than just selling intervals and units. Marriott Vacations has been able to show the world that they are really three other businesses to the timeshare industry, with recurring cash flows. They include the financing business, where the owner of the unit is able to finance his timeshare purchase at about 80% to 90% loan-to-value at a 12% or 13% interest rate, provided by the company. The mortgage is generally for 10 years, and although prepayable, it generates a fee stream that lasts for several years.
Another lever is the management business. VAC collects 10% of the management fee revenues as the company runs the day-to-day operation on its timeshare properties. The management business is a very high-margin business that provides strong, pretty consistent and stable EBITDA. Lastly, VAC has the rental business. The company rents out unsold timeshare units on a nightly basis through the Marriott.com website. Those three businesses - financing, management and rental - are pretty stable, and they've been able to demonstrate that to the Street.
We think you should put a 13 times multiple on their management business, because it's pretty stable recurring income, similar to the hotel management and franchise run by Marriott International. You should probably put a nine times multiple on their rental business and a seven times to nine times multiple for the financing business. When you blend all four multiples together, you're pushing more of an eight times to 10 times multiple, higher than the business was valued at a number of years ago. They've been able to show the Street that the company is worth more, $51.45 today, much higher than the initial spin price of $18 to $20. Lastly, VAC was comfortable establishing a 3.5 million share buyback program for close to 10.0% of its float. This program should put a floor in the stock for the foreseeable future.
TWST: Are there areas of your universe that you're concerned about or companies that you're down on right now?
Mr. Yarmak: One name I'd say is Choice Hotels International. Choice has a pure-play franchise model. The company owns very few hotels and does not manage any hotels. They have one of the largest systems, with over 6,300 hotels and over 500,000 rooms. Today, the stock is trading north of 15.0 multiple on 2014 EBITDA. The company should trade at a higher multiple due to its asset-light, high-margin, pure-play franchising model, but not as rich as it is trading. Additionally, the company's balance sheet is more levered than its peers, and its unit growth is a third of where it was back in 2006-2007 time frame.
For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.