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: Where are you focusing in the space right now? What areas do you think are well-positioned for this environment?
Mr. Yarmak: When I look at our "buy"-rated names among the C-Corps, we like names that still have some operating leverage. Starwood Hotels & Resorts Worldwide still has $5 billion of owned real estate, which continues to generate strong returns. However, when assets sales pick up - the company hopes to sell $2 to $3 billion over the next few years - they will take that cash and return it to shareholders in the form of share buybacks and dividends. Additionally, Starwood has a strong pipeline, which is primarily international, particularly in Asia.
We do not have as favorable of a view on the operators and franchisers. Unit growth has been somewhat muted this cycle; usually at this point of the cycle, supply would be growing at 1.5% to 2.0%. The long-term trend has been supply growth of 2.0%. The industry as a whole is growing supply at less than 1.0%. Due to the lack of supply, the operators and franchisers are growing their systems with some of their own money as opposed to growing strictly from other people's money.
This was made pretty clear with Marriott International's announcement earlier this month that the company has signed a letter of intent to acquire Protea Hotels' brands and its management business. Protea operates or franchises 116 hotels across three brands with 10,184 rooms in South Africa and six other Sub-Saharan African countries. Last year, Marriott acquired the Gaylord brand from the Gaylord Entertainment Company (RHP). The transaction added four hotels and approximately 7,800 rooms to Marriott's portfolio. This is why we don't favor those names.
Additionally, we still have a favorable view of the timeshare industry. We have "buy" ratings on Wyndham Worldwide Corporation and Marriott Vacations Worldwide. Wyndham is one of our top picks in the sector. The company has a diversified business model, with 50% of their EBITDA comes from the timeshare business, 28.0% from the timeshare and rental exchange business, and the remainder coming from its hotel segment, the largest system in the world in terms of hotels - 7,440. The company has been able to transition its timeshare business, at least somewhat, to more of an asset-like model through its Wyndham Asset Allocation Models, WAAM. This has enabled them to turn around free cash flow by over $1.0 billion and deliver $800 million to $900 million of free cash flow per year to investors. The current free cash flow yield for the company is close to 10.0%, the highest yield in the sector.
Marriott Vacations Worldwide was spun out of Marriott International in November 2011 at about $18 to $20 a share. Today the company is trading north of $50 a share. This has been accomplished by educating the Street that there is more to the timeshare business than timeshare sales. Due to the volatility of the timeshare sales, the segment traded at a multiple of five to eight times. Management here has showed investors that there are three other revenue sources for the timeshare business: managing the resorts, renting out unsold units and financing the purchases. All have a more consistent cash flow stream that commands a higher multiple.
Due to its healthy stable cash flow, the company recently established a 3.5 million share buyback program, which is about 10% of their float. I think going forward, the company will continue to return cash flow to shareholders and could possibly establish a dividend 18 months from now. Shrinking their share count could provide some outsize returns over the next couple of years.
TWST: What's driving that timeshare space, from a consumer's perspective?
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