Description

Disclaimers

Please see disclaimers at the end of the writeup.

Preamble

CZR is no stranger to VIC. Both Mojo and JWF211 have done great writeups and we know the comments section has been active. Our value-add is a comprehensive up-to-date underwrite that brings all the major puzzle pieces together, including the catalyst path and the revised risk/reward math at current prices. Given recent news flow, we’d highlight that we conducted all our diligence prior to the news of Icahn’s stake. We have never had any communication with them and have no idea what they are doing/thinking. That said, we are not surprised to see investors waking up to the story.

Investment Thesis

We believe CZR near multi-year lows (~$36) is a compelling investment that should nearly generate its market cap in FCF between now and 2027.

1)      Brick & Mortar: too cheap

•       CZR is the largest gaming operator in the US with a footprint of 52 properties spanning 18 states

•       B&M alone (Vegas, Regionals) should generate $4.1bn EBITDAR / $1.3bn FCF in 2025

2)  Digital: profitability inflection ignored by market

•       CZR just ended a multi-year investment cycle during which Digital burned cash for customer acquisition

•       Online Sportsbetting and iGaming have 50%+ incremental margins in an industry growing 30%+

•       Costly brand partnerships rolling off, adding $150mm+ of EBITDA

•       If Digital hits the $500mm EBITDA target in the next 2 years, it could be worth the market cap

3)  Catalysts: plethora of under-appreciated, near-term catalysts to re-rate the equity

•       2H’24 FCF inflection: Double whammy of capex cliff and property ramps from New Orleans and Virginia

•       Non-core disposals: Monetizing land, brands, and non-core leases to accelerate deleveraging

•       Buybacks: Expect an authorization coinciding with capex cliff (~4Q’24)

•       VICI: Might exercise Centaur option at 13.0x in 2H’24, giving CZR ~$2.3bn cash

•       Macro: Consensus back to “higher for longer” = hint of cuts and CZR rips

90 – 170% NTM upside based on FCF inflection, Digital execution, and shift in capital allocation to buybacks. We believe CZR represents the best risk/reward in US gaming for a liquid security (~$140mm ADV).

The Math

CZR is trading at 4.0x P/FCF on ’27 numbers and generates ~85% of the market cap in cumulative FCF between 2024 – 27. The key drivers are highlighted below – 1) digital inflection, 2) regional property openings, 3) capex cliff, and 4) buybacks. Reflecting conservatism, our base case is lower than management’s target of 3-year forward FCF per share of $12.50 (based on ~$5.0bn of EBITDAR) as previewed on the 1Q’23 earnings call.

Business Overview

CZR owns or manages 52 properties across the US. The Las Vegas segment boasts 9 strip properties including the iconic Caesars Palace, and the Regional portfolio is diversified across 18 states. CZR also has a digital segment that is a top-4 player in online sportsbetting and iGaming, with an estimated 6% market share.

Segment EBITDAR breakdowns are as follows (2024E, pre-corporate):

o   Las Vegas - $2,016mm (47%)

o   Regional - $1,962mm (46%)

o   Caesars Digital - $250mm (6%)

o   Managed - $78mm (2%)

In terms of recent history, CZR was formed by the combination of legacy Caesars and Eldorado Resorts in July 2020. Eldorado management took the reins, led by CEO Tom Reeg, an industry veteran who oversaw tremendous value creation at Eldorado during his tenure. Notably, the digital segment was in growth mode for the past three years, totaling $1.1bn+ of cumulative EBITDA losses to expand into new states and acquire customers. Segment is now positive EBITDA and inflecting rapidly.

Why does the opportunity exist?

1) LEVERAGE

Market obsessed with rates (Cuts? When? How many?). Fed comments, CPI, PMI, etc. scrutinized. Recent data shifted outlook to “higher for longer.” Factors moved violently. Leverage = death (for now).

• CZR leverage > 5x EBITDAR (including leases)

• Banks have leverage baskets (e.g., GSXUDEBT)

• Pods: long NVDA/short value & leverage

Counter: no issues on maturities, covenants, coverage, or liquidity. When market gets whiff of cut(s), CZR rips.

2) CONSUMER

Signs of consumer fatigue. Covid stimulus savings exhausted. 

• Gaming: Vegas did poorly in GFC, clearly expose

• Hotels: comp group fading

• Airlines: AAL recent debacle, ULCCs struggling

Counter: 4.5% supply of Strip rooms just removed (Mirage, Tropicana). Raiders, Knights, Sphere. Vegas is different now.

3) DIGITAL PAIR TRADE

#1 Digital business (FanDuel, ~40% share) owned by FLUT. #2 player (DKNG, ~35% share) is only publicly-traded pureplay. Strategy: long winner/short loser. CZR is distant #4 player.

• CZR market share steady at 6% (behind BetMGM)

• Historical execution spotty; burned too much cash

• CZR shifted to profitability focus, impairing subs growth

• Fewer subs, fewer app reviews, less awareness

Counter: Bar is low. Removing wasteful deals = easy bridge to EBITDA growth. Rising tide + steady share. Property promos.

4) BAD Q1 2024

Revenue, EBITDAR, and EPS missed estimates.  

• Vegas & Digital: extraordinarily bad hold (1-off)

• Vegas: Adele concerts cancelled (rescheduled)

• Regionals: extremely bad January weather

Counter: hold and weather were telegraphed and one-off. Adele is pure timing issue. Yawn.

Catalyst Path

Catalyst path is best visualized as below, and we will follow up with supporting detail for each:

VICI put/call

It is well known that for Harrah’s Hoosier Park and Horseshoe Indianapolis (“Centaur” assets), VICI has the right to call the properties at a 13.0x multiple (7.7% cap) of the initial annual rent in a sale-leaseback transaction – and CZR has the right to put the properties to VICI at 12.5x (8.0% cap). VICI management disclosed that they have already started engaging Indiana state regulators for the approvals process, and refreshed the ATM to a $2.0bn program on 5/9/24. It seems fair to say that VICI is at least laying the groundwork for a potential call in the coming months (both parties have until YE’24 to exercise respective options).

CZR’s party line is that the deal is not a good one. They see this lease as expensive financing – 7.7% cap rate with inflation escalators, when they have access to the unsecured debt market below 7.0%. We are sympathetic to that logic, but we see the Centaur deal with VICI as a positive catalyst as highlighted by the multiple discrepancy – 13.0x transaction multiple versus CZR stock trading at 7.2x ’25 EV/EBITDAR. We estimate property-level EBITDAR of ~$230mm and maximum rent of ~$180mm at 1.3x coverage, which suggests proceeds of ~$2.3bn to CZR. Proceeds are likely split between debt paydown and buybacks to prevent re-levering on a lease adjusted basis. Regardless of the split, we believe that CZR stock should react positively from current levels.

Capital Structure

High leverage is obviously a risk factor. We argue perception is different from reality. First, recent refinancings pushed out most maturities to 2028-2032 and the nearest is a bite-size $1.6bn maturing in 2027. Total liquidity is $2.8bn, consisting of $726mm of B/S cash and $2.1bn of revolver availability. We also note a startling difference of >1,500 bps spread between forward FCF yield to equity vs. 2029 bond yields – and credit is usually smarter! Finally, the $6.1bn of floating rate debt becomes a tailwind if rates fall - $61mm of cash interest savings for every 100bps decline in SOFR.

Digital Segment

CZR’s digital segment should be a material value driver going forward. Management has a target of $500mm ’25 EBITDA and bridged the market to that number in previous earnings calls. We believe the math is sound and the industry-level data is supportive – but have taken a substantial discount in our base case of $400mm EBITDA for next year. There is wood to chop, as CZR needs to increase sportsbetting hold to the target of 8.5% (still well below peers), continue growing iGaming and shed unprofitable partnership arrangements successfully. That said, the market is ascribing little to no value to the digital segment at current prices – so any growth in EBITDA from current run-rate should be accretive to value, regardless of whether 2025 targets are achieved.

Comps Analysis

It is no secret that gaming is cheap across the board. However, CZR stands out from the crowd on the basis of high FCF yield and the underlying quality & mix of the assets. For example, CZR has a unique mix of 1) heavy exposure to LV, 2) owned RE for half of the portfolio, and 3) a digital segment rapidly inflecting to profitability. We believe CZR should trade at a premium to brick & mortar comps – yet it languishes at 7.3x EV/EBITDAR on ’25.

Non-core Assets

CZR has material value in non-core assets that are ignored by sellside and buyside SOTP models. Management tipped their hand in guiding to potential disposals this year. Broadly, non-casino assets, brands, and land could be sold to accelerate de-leveraging. We have a few in mind, but the list is not exhaustive.

SOTP Analysis

We flex our SOTP case analysis below. We target the stock doubling in the base case and a ~$100 price target in the bull case. When thinking about downside, we admit that anything is possible, so our bear case is not reflective of an actual left-tail scenario. Yes, you can definitely lose money, particularly mark-to-market. The takeaway from our illustrative downside case is that we would still arrive at a price above today’s level even with tough assumptions. In other words, we think the company comes through the coming years without permanent capital impairment; despite elevated leverage, we see no liquidity problem and no imminent maturity, so we don’t see the company tipping into distress. Mark to market could suck, no doubt, but the business should survive.

Real Estate Value & Lease Accounting

The last point worth addressing is the owned-RE value. Las Vegas PropCo transaction multiples are in the high teens and CZR owns 6 strip assets. Even the regional RE value is substantial if you apply the rent multiple bid/ask for the Centaur assets. Owned RE value is key and should cushion the downside.

We’d also point out the mathematical disconnect with lease accounting that obscures the value of the CZR equity. Sellside analyst community tends to capitalize operating leases at 8.0x while the B/S lease number is capitalized at closer to 10.0x ($12.8bn obligation vs. $1.3bn rent). The market treats regional gaming assets as ~6.0x businesses while happily capitalizing lease obligations at 8-10x! Regionals are highly profitable and FCF generative yet ascribed virtually no equity value in the SOTP.

A logically consistent approach would entail either lowering the grossed up lease obligation or else giving regionals credit for a higher multiple. Out of conservativism and pragmatism, we chose not to do this in our framework. Our thinking is – we think the stock can double/triple without this lever, so let’s leave it as a “nice to have.” Yet we adamantly believe this treatment is logically inconsistent.

Risk & Mitigants

•       Risk (1): Isn’t CZR overly exposed to macro risks?

o   Answer: Yes and no. Yes, there is macro risk here, full stop. If that means no investment at any price, we can’t argue. However, there are mitigants. Structural changes in Las Vegas soften recessionary downside, including recent Strip closures. Additionally, new regional openings in New Orleans and Virginia as well as the Digital inflection cushion core weakness. Overall, management estimates ~$400mm of EBITDA at risk in a GFC-type scenario, but there are counterbalances as noted

•   Risk (2): Isn’t the leverage profile dangerous?

o   Answer: CZR’s balance sheet has low-cost, termed out debt and $2.8bn of liquidity. Deleveraging path will be rapid as FCF inflects and non-core assets are divested in short order

•   Risk (3): Is the $500mm of Digital ’25 EBITDA realistic?

o   Answer: Mgmt. has laid out a credible bridge based on industry topline growth, incremental margins and the termination of low-ROI partnership contracts. We assume $400mm ‘25 base case to be conservative

•   Risk (4): What if VICI does not exercise the call option on the Centaur properties?

o   Answer: CZR mgmt. has communicated to investors that they will not be exercising the put at 12.5x and we do not assume a VICI call in our projection model or SOTP analysis. CZR stock does not price in the event

•   Risk (5): Recent volatility in quarterly earnings?

o   Answer: Low Vegas hold in 1Q was a statistical outlier and will be counterbalanced by quarters in CZR’s favor over the long term. Particularly poor weather is also something that should not recur every quarter

•   Risk (6): Technical headwinds from CZR as a funding short?

o   Answer: We believe CZR is a popular funding short for pods and HFs that are long consensus, pure-play digital names such as DKNG. This dynamic should ultimately unwind as CZR executes going forward

IMPORTANT DISCLOSURES

Current Investment. We currently have a significant long position in the position mentioned in this presentation. Therefore, we and our clients will benefit if CZR’s stock price increases.  We may buy, sell or sell short the securities at any time without notice to anyone. No representation is being made with respect to whether such investment would be profitable.

No Offer or Solicitation; Not Investment Advice. The information in this presentation is not an offer to sell or the solicitation of any offer to buy any securities, or an offer to provide investment advice or a solicitation of such an offer. This information is not investment advice, and no one should rely on the information contained in this presentation to make any investment decision.

Statements of Opinion, No Duty to Update. This document expresses our opinions with respect to CZR as of the date specified, which opinions are based upon, without limitation, field research and inferences and deductions through our due diligence and analytical processes. To our knowledge, the information contained herein is current as of the date of this document, and has been obtained from sources that we believe to be reliable. However, such information is presented “as is,” without warranty of any kind, whether express or implied. The presentation contains and is based in information (including information from third party sources) that we believe to be correct, but it has not verified that information and does not represent that such information is accurate or complete. We make no representation, express or implied, as to the accuracy, timeliness or completeness of any such information or with regard to the results to be obtained from its use.  The delivery of this document does not imply that the information contained herein is accurate or complete at any time subsequent to the date of this document.  We have no continuing obligation to revise or update anything in this document for any reason or to notify you if any information contained herein has changed or is not accurate or complete. We accept no responsibility, and shall not be liable, for any loss arising from or related to anything in this document, any use hereof or any reliance hereon. We prepared this presentation. It was not compiled, reviewed or audited by any independent party.

All statements herein are our opinions and are not statements of fact. Further, all such opinions, estimates and projections are speculative and based on current beliefs and assumptions that are subject to change at any time and for any reason without notice. You should expect that some or all such beliefs and assumptions will not materialize or will differ materially and adversely from any expressed or implied. Use of our research is at your own risk.  We are not responsible for any trading or other losses that you believe may have been caused by your reliance on this document (or any information contained herein).

Forward-looking Statements. Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various assumptions, risks and uncertainties, actual events, results or the actual performance of Caesars Entertainment may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in document may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Many statements in this presentation are our subjective views, and other reasonable persons may have differing views. Unless it is unequivocally a statement of fact, any statement herein (even if not specifically qualified as an opinion (i.e., with language such as “in the opinion of” or “we believe that”)) should nevertheless be understood and interpreted as an opinion with which reasonable persons may disagree, and not as a material statement of fact that can be clearly substantiated. 

Catalyst

Digital profitability inflection, VICI transaction, non-core asset sales, capex cliff, buybacks, deleveraging