Description

Peak Resorts, Inc (SKIS)
Long equity

Peak Resorts (SKIS) presents the opportunity to own a good business with durable earnings power at 7x EBITDA and 5.8x after-tax Free Cash Flow.  Until very recently, SKIS was suffering a liquidity crunch due to a perfect storm of negative events that have all worked out in the company’s favor by way of new capital and a handful of expected catalysts materializing.  With ski season successfully underway, we have line-of-sight to meaningful free cash flow generation ($13mm estimate for FYE 4/30/17) and a reinstatement of the dividend as early as February.  The market has yet to appreciate the turnaround has already happened.

Background

Peak Resorts is the owner and operator of a number of drive-to destination ski mountains including Mount Snow, Hunter, Attitash, Wildcat and ten additional small Midwestern hills. While the business is both highly seasonal and weather dependent, ski mountains are a good business.  Environmental activists and unobtainable government approvals ensure there won’t be another resort developed in the US.  In fact it’s been 30 years since a new major resort was created, hence we believe the supply of ski areas will remain static.  US Ski resort visits have been flat over the last decade oscillating between 53 and 60 million annual visits. It’s possible we see growth in visits as skiing falls squarely into the experience over ownership preference of millennials. While unquantifiable, the lack of zika virus in the mountains may be a tailwind on the margin for families deciding between a winter Caribbean vs. ski vacation. 

The primary business drivers are skier visits, which have been relatively stable for SKIS at 1.5-1.6mm annually and effective lift ticket pricing, which increases at low single digit annually.  Skier visits drive ancillary revenues including food & beverage, ski rentals, ski lessons and hotel/lodging.  Prior to the awful 2015/2016 Northeastern ski season (more below), Peak Resort’s EBITDA was $25.9mm, $25.4mm, and $25.4mm in ‘13, ‘14 and ‘15 respectively.  

There are roughly 470 ski mountains in the US though SKIS is one of only three public US companies including Intrawest (SNOW), which owns 4 US mountains, and Vail (MTN) which owns 11 US mountains. Industry ownership remains very fragmented. Concomitant consolidation and well run operations have generated significant growth in EBITDA stock prices of Intrawest and Vail.   Due to a perfect storm of events that the company has put behind them, SKIS should be able to follow suit.

Perfect storm

Three factors pushed Peak Resorts close to a breaking point last year: 1) The disastrously warm winter in the Northeast/Midwest where SKIS operates exclusively 2) A $36mm, 100% debt financed acquisition of Hunter Mountain in January of 2016--heading into the same disastrous warm winter and 3) A $52mm EB-5 financing stuck in escrow waiting for government approval over two years.  

SKIS has run with high leverage since its inception and continuing through its IPO at $9 in November 2014.  They entered last year’s ski season with $110mm of debt against a $25mm EBITDA expectation. The durable earnings power supports the high leverage.  In an opportunistic transaction, Peak acquired family operated Hunter for $36mm in January using 100% debt financing.  The deal was attractively priced at 6x EBITDA and provided SKIS the means to sell a multi- mountain pass (Peak Pass) akin to Vail’s EPIC Pass and Intrawest’s Max Pass.  Unfortunately for Peak Resorts and skiers across the Northeast, to say the 2015/2016 ski season was a bust is an understatement.  Starting with 70 degree temperatures in Vermont over Christmas, the winter season never arrived.  Snowmaking coverage doesn’t apply when temps average 50.  Consequently, EBITDA , which should have been $31-$32mm pro forma for Hunter, plummeted to $16mm.  At the same time, debt increased to approximately $140mm.  

Adding to the financial misery, Peak completed a targeted $52mm debt raise from foreign investors through the EB-5 program in August of 2015. EB-5 is an investor visa program administered by the United States Citizenship and Immigration Services (USCIS) to stimulate the U.S. economy through the creation of jobs and capital investments in U.S. companies by foreign investors. Investors in EB-5 programs must file petitions, known as I-526 Petitions, with the USCIS seeking approval of their suitability. Approval typically occurs between 12 and 18 months from the initial I-526 Petition filing date. Once the USCIS approves an I-526 Petition submitted by one of the company's EB-5 investors, all offering funds may be released from escrow. Peak Resort’s first I-526 Petition for this project was submitted in May 2014 yet remained in bureaucratic limbo for inexplicable reasons.  It is largely assumed that EB-5 fraud committed at a completely unrelated Vermont mountain, Jay Peak, held up all other Vermont approvals.  The $52mm is tied specifically for two projects at Mount Snow: The West Lake Project to grow snowmaking from 80% to 100% coverage and a new state-of-the-art ski lodge (Carinthia Ski Lodge).  The funds stranded in escrow would not have been a problem for Peak other than delaying the construction. However, they spent $15mm of non-EB-5 cash on hand to get an immediate start on the West Lake Project, assuming that their escrow would release in the normally proscribed timeframe.    

To recap, as of August of 2016, Peak Resorts was in violation of its debt covenants, had approximately $145mm of debt vs. $16mm of EBITDA in its prior year, EB-5 funds were still stuck in escrow, and its next cash generative winter season was 4 months away.  SKIS had also ceased paying its $0.1375 quarterly dividend, which was paid only 5 times before it was suspended after December 2015.   

The storm has passed
When SKIS looked like it was on death’s door, Summer Road, SKIS’s largest shareholder, stepped up and provided a $20mm convertible preferred financing.  The terms of the financing are reasonable given SKIS precarious position. It converts at $6.29, the rate is 8% and there is a 9 month grace period before the initial dividend is paid.  The deal also came with 2.7mm warrants that strike between $6.50 and $9.00.  Subsequently, on 12/13/16, SKIS finally received the proceeds out of escrow from its EB-5 financing and could immediately pocket the $15mm it had already spent on the snowmaking project.  Management noted on its second quarter conference call on 12/8/16 that total company frequency (season) pass sales were up 15.5% in units versus the prior year due to its new multi-mountain Peak Pass. This is despite Peak’s Midwestern mountains declining 22%, which is typical of pre-season pass sales following a terrible snow year.  The early success of the Peak Pass highlights the synergies SKIS has begun to capture with Hunter and emphasizes benefits of owning multiple attractive mountains.  Vail has been very successful at bolting on incremental mountains to increase the attractiveness of its EPIC pass.  SKIS is at the early stages of mimicking the strategy, but management believes fragmented nature of the industry could provide more acquisition opportunities.  The season has started off well to date with Mount Snow and Hunter open by Thanksgiving and all the company’s mountains open by Christmas.  

Management

CEO Tim Boyd has been at the helm since inception of Peak Resorts in 1997 and founded its predecessor, Hidden Valley in 1982.  The rest of the management team has been with the company for 10-15 years. Tim owns 9% of the equity and management collectively owns over 16%. Management strikes us as reasonable operators with incentives aligned with shareholders.

EPR Properties

One hurdle to owning Peak Resorts is its financing arrangement, which is a distinct disadvantage to SKIS.  EPR Properties (EPR) is a public REIT that provides SKIS all of its transactional financings and has a right of first refusal on additional financings.  SKIS currently has $118mm in loans due to EPR secured by specific mountains predominantly due in 2034 and 2036.  The debt is NOT prepayable and carries a 10% interest rate.  For this reason, we believe SKIS is designed to be a dividend paying income vehicle and an acquirer of other mountains rather than a deleveraging story.

SKIS Valuation

Putting it all together, SKIS has a $76mm market cap, $142mm of net debt for a $218mm enterprise value.   With the Summer Road financing and the release of the EB-5 escrow, Peak’s liquidity is in good shape.  Assuming normal weather for the rest of the winter, SKIS should be able to generate over $31mm in EBITDA, double the prior year’s disastrous $16mm. The bridge to $31 is straightforward: $25.5mm of EBITDA based on the average of 2013-2015 plus $6mm of contribution from Hunter.  All of Peak Resorts infrastructure is in good shape and CapEx is expected to be a very modest $3-4mm.  The company should generate $13mm ($0.93/share) of free cash flow for FYE 4/30/17. At $5.45, SKIS trades 7x EBITDA and 5.8x FCF. This represents a 20% and 40% discount to Intrawest’s EBITDA and FCF multiples respectively.  It reflects a 55% and 75% discount to Vail’s on EBITDA and FCF multiples.

Beyond a general re-rating of SKIS once the market realizes it is no longer distressed and will generate its highest ever EBITDA, there exists another near term catalyst.  The company should be back in compliance with its fixed charge coverage covenant (1.25/1) at its next test on January 31 upon which Peak Resorts will have the ability to reinstate a dividend.  Prior to suspending the dividend in December of 2015, SKIS paid out $0.55 annually.  Management has communicated its desire to reinstate a dividend, particularly given their personal ownership.  If reinstated at the same rate, SKIS would yield 10% at the current price while paying out 60% of its $0.93/share FCF.  

We think a reasonable multiple for SKIS is 8.5x EBITDA and 10x FCF putting it at $9/share for 65% upside.  If the company reinstates the previous $0.55 annual dividend, that would imply an attractive 6% yield.

Catalyst

• Reinstatement of the dividend
• Market fully appreciating the numerous catalysts that recently transpired
  • EB-5 funds released from escrow
  • Summer Road financing
  • Normal winter weather
• Doubling of EBITDA in 4/30/17 vs 4/30/16