Description
CNL Lifestyle Properties
Short 7.25 2019 bonds @ 92= 8.8% YTW.
Jamming on a few ideas but with market feeling soft wanted to get this bond short out for people as I think its timely. There is a lot more to the story than below but I wanted to get something out there, please feel free to ask any questions/comments will as always do my best to answer.
CNL Lifestyle Properties focuses on properties baby boomers should gravitate towards. The company currently owns or has an interest in 170 properties across various asset classes consisting of ski and mountain properties, golf
facilities, senior living facilities, attraction, marinas and additional lifestyle properties.
Current Capital Structure
Cash and Equivalents $163mm
Mortgage Debt $518mm (EXCLUDING JV DEBT)
7.25 Bonds : $400mm
Total Debt $918mm
EBITDA : $142mm
FFO:~90mm
Just under 50% of CNL's owned properties are subject to a triple net-leasing arrangement under which the company receives a fixed lease payment from tenants who operates the properties.
The remainder of the properties are either managed assets or joint ventures.
The company is structured as a Private REIT, where equity has been sold to retail as a “yield” type investment.
By Purchase Price the breakdown of the company’s asset classes is as follows:
Ski: 20%
Golf: 17%
Attractions: 13%
Senior Living: 31%
Marinas: 5%
Other: 14%
The thesis for the creation of CNL Lifestyle was the graying population which the company felt would lead to an increased demand for luxury/entertainment type properties. However this has not worked out quiet as well as anticipated as declining consumer discretionary spending has far outweighed any demographic shift. First a few points on the asset classes: Ski resorts and golf courses are notoriously difficult assets and are not really the best asset classes to be owned in a REIT structure. Many ski-resorts and golf courses are run to as a way to draw visitors into the more lucrative transaction of selling resort homes (that is my understanding of the bull case in MTN as well as the attempted Fortress LBO of Whistler/blackcomb etc.).
However there are two issues with these ski-resorts: A) most of them are NOT in what one would say are strong locales for secondary home purchases (Maine, Michigan etc), and unconfirmed but we are trying to determine if some of them sit on national park land and either way could not be used for alternate purposes including residential. Several of the Companies assets are ground leased, and we believe they may be the ski-resorts.
Golf is a difficult asset class and what we will point out here is the company has had problems with several of its tenants in this property, and one of its newer/larger tenants is now Eagle Golf (www.eaglgolf.com). A brief look at Eagle’s website shows that they are focused on “turnaround” efforts of golf courses operations. Golf properties are not like other traditional real estate, maintenance is very high and it is difficult to reposition an asset. Our thought process here is fairly simple, if the company has brought in a turnaround expert, the company is running out of bullets to save these properties. While we can’t speak to these assets individually what we can say is: the majority of them were purchased near a peak. Again, golf courses are often built as money losers to draw in secondary home buyers who eventually will become members and leading to a profitably run club. If the home buyers never showed up, there are not enough members to reach critical mass. While I do not want to lay out a list of all of their assets, I would urge you to look @ their website or to check Schedule III of the 10-k and you will get a strong understanding that these assets (both golf and ski) are in secondary markets and are not trophy assets in any way shape or form.
The company has recently been out buying senior living properties in connection with Sunrise Senior Living (Ticker :SRZ), while we are still trying to get our arms around SRZ as an operator, we note that these properties are structured in separate JVs that are levered VERY aggressively with purchase prices financed 70%-80% with debt. Why is the company being so aggressive here? We think they are desperately trying to reposition the portfolio away from their legacy assets with what capital they have available. A few notes here before I jump to stage two:
First the majority of the company’s assets were purchased near the peak, with almost 75% of gross proceeds spent between 2005 and 2007. These were NOT trophy properties and the type of real estate assets that have suffered the most in the fall have been the exact type of assets CNL owns: secondary non-traditional assets.
Second, by December 2015 the company has to attempt to provide certain liquidity to its investors this will either be through an IPO, or some sort of sale. Unless real estate really rips or these guys pull a rabbit out of their hat, it will be tough not seeing the company proceed with a listing as opposed to a sale. (So keep this one in the back of your minds as a potential future equity short if it does list as I am sure plenty of mom & pop investors are not going to be happy seeing a bunch of shares hit their fidelity account that they did not ever think was real “stock”)
Ok now we have discussed why we disliked many of their assets, how they have paid peak asset prices for most of them and their JV’s are levered to the hilt. We have now briefly discussed asset quality: so the next question is tenant quality. The news here at best lacks transparency. One of their largest ski-resort operators is Boyne USA. We have not been able to garner a ton of information about Boyne; however the company has made several loans to Boyne USA, Inc. totaling $18mm ranging in interest rate from 6.3% to 15% for three year loans, with a maturity this September. Hard to say what will happen but we would not be surprised to see them roll the deal as we doubt Boyne has enough FCF to pay it off (particularly after what has been a particularly weak winter). The company has a $68mm dollar loan out to Big Sky Resort also due in September of this year. Again it is difficult to receive a ton of information here however again this loan is due in September and also 12% in a zero rate environment is not exactly the sign of a superior quality tenant. Further one would hope Big Sky went out to banks etc. before effectively relying on a backstop from CNL. As most of their operators are private it is hard to feel how strong the credit quality of their tenants are: can they handle another crappy winter? If it’s a rainy summer do operators have cash escrowed to make it through a difficult golf season?
By doing these loans to their own operators, CNL allows its resorts to continue to run without having to impair them and makes sure lease payments continue.
Bullish case:
1) The company is currently gross levered 6.5x, which while we feel is rich there are no real solid comps that trade at such low multiples: MTN and SIX speak to a portion of their business, but both are significantly higher quality. Further, comps in the senior living space also trade at double digit type multiples. Our view here is simply that these are different businesses; run as operators with significantly higher quality assets than CNLs. While we think the amusement assets are not too shabby, we doubt that buyers are excited about Ski and Golf assets currently or will be for quite some time.
2) The company will be able to use its cash proceeds to go out and acquire new assets that will provide additional collateral for the bonds. This is true to some extent, however as can be seen in the sunrise JVs management is playing for equity and having an equity stake as collateral for the bonds behind an 80% debt financing is not exactly great collateral.
Catalysts for move lower discussed below
Conclusion:
The risk reward here is fantastic, and frankly we think the bonds are still unattractive at a price of $75 which is a 13% yield.
Getting paid 8.8% to be long bubble purchases of exotic assets combined with highly levered senior living equity does not seem like an appropriate yield to us, and we feel these bonds are due for a tumble. The only thing holding these bonds up is rating.
Catalyst
Catalyst for a move lower:
1) The company pissed off S&P by bringing these bonds in April of 2011 and then in short order (within 1 year), announcing problems with two large tenants and impairing assets. Bonds were promptly downgraded from BB to B and kept on watch negative. The only positive thing I hear about these bonds (when they were BB) is that they were “cheap for their rating and worked for real money managers in their BB bucket”. One more mistake and these go to CCC and then these bonds will drop dramatically as mutual funds puke them.
2) The winter (i.e. 4Q) was a disaster for them due to tough weather for the ski season. If the summer months struggle as well and there is no uptick in revenue (Summer can have seasonal strength due to amusements and golf) the problem of asset quality will again come to the front and further LTM EBITDA metrics will look meaningfully worse and likely lead to another downgrade.
3) In September they have several loans due from their operators, we are curious to see what happens here and again will be a good sign to see the quality of their tenants. We doubt the loans will be repaid, and wouldn’t be shocked if some of them were increased in size, and potentially the coupon was lowered in order to help their operators stay afloat.
The risk reward here is fantastic, and frankly we think the bonds are still unattractive at a price of $75 which is a 13% yield.
Getting paid 8.8% to be long bubble purchases of exotic assets combined with highly levered senior living equity does not seem like an appropriate yield to us, and we feel these bonds are due for a tumble. The only thing holding these bonds up is rating.