Whistler has significant barriers to entry, pricing power, and a large free cash flow yield that is obscured due to its IPO accounting.   It should see increases in EBITDA and FCF over the next few years and should trade up if the high dividend yield stays constant.  There may also be substantial longer-term value in the stock with KSL Capital buying Intrawest’s stake in the company.  

Great Asset, Barriers To Entry, Pricing Power

Whistler is a unique ski resort with significant barriers to entry due to its size, snowfall, and location making it a highly desirable vacation destination.  Whistler has more skiable acreage than virtually any other resort in North America and is ~1.5x the size of Vail and approximately the same size as the Park City, Deer Valley, and The Canyons combined.  At ~250 skiers/acre, Whistler is much less crowded than virtually any other resort, with Vail at ~325 skiers/acre and Deer Valley at ~900 skiers/acre. 

Whistler enjoys snowfall of around 500 inches/year, which is only matched by a few other resorts. In addition, it has a vertical drop of over 5,000 feet, which is 1.5x that of Vail and 1.25x that of Jackson Hole. 

Given that there have been no major new North American ski resort openings since 1981 there won’t be a lot of new entrants in this space.  If a family wants to ski a huge mountain with a ton of snow, varied terrain, and wide open spaces, there aren’t many resorts that are going to match Whistler, and that will most likely not change in the future. 

The ski industry has pricing power, as annual effective ticket prices among US resorts have risen by 3.6%/year since 2000 and prices were strong even throughout the recession.  Whistler is no different and outside 2010 Olympic pricing, average ticket prices have risen by over 4%/year over the last few years, increased 6% during the 08/09 season versus the 07/08 season, and are currently ~$10 higher than the average ski ticket in the US.  Management expects ticket prices to rise by 4%+ per year going forward, so they should continue to outpace the industry.

Value

Whistler was owned by Intrawest, who was forced to sell the company through an initial public offering when they missed an interest payment in 2010.  After missing the payment and facing down a foreclosure, Intrawest tried to sell Whistler in a private sale but failed.  An IPO followed but the initial pricing of $15 was cut to $14, which was then finally cut to $12, and the stock has traded cheap since then.  FY12 free cash flow of ~$45MM (after payment to minority stakeholder) gives a P/FCF of 11x and the stock currently pays a 7.5% dividend.  Due to Whistler’s IPO in 2010 it wrote up its assets substantially resulting in FY12 D&A of approximately $40MM versus CapEx of $10MM.  This huge spread of D&A versus CapEx allows Whistler a large tax shield while depressing GAAP net income – P/E is 33x.  Going forward, free cash flow should improve due to tax code changes – a small sales tax is scheduled to be lifted in 2013 and a debt refinancing is also scheduled.   

Revenue should rise 4-6% annually going forward due to 3-4% hikes in average ticket prices and 1-2% skier growth. This rise will be fueled in part by the increase in the mix of destination to local skiers. Destination skiers tend to pay more for tickets, merchandise, etc. Costs are likely to be contained as the mountain itself is not getting much bigger (operations don’t change much from year to year). The combination of these factors will lead to expanding EBITDA margins.  EBITDA could climb 15-17% over the next two years and free cash flow should expand even further due to the low CapEx relative to D&A and the tax shield mentioned earlier.  Interest expense should fall by $3-4MM after the refinancing next year which alone would increase 2012 free cash flow by 5-6%.  I think FCF should be closer to $57MM (after payment to minority stakeholder) in 2014, which would be an increase of around 30%.  Given a constant dividend rate, the dividend payout could increase ~30% by the end of 2014.  Assuming Whistler’s yield stays constant, you’d make 30% in appreciation and over 15% in dividends over the next few years. 

As mentioned above, destination skiers represent an area where Whistler can expand their EBITDA.  Before 2008, destination skiers represented ~55% of all skiers in an average year and at one point were as high as ~60% of total skiers.  However, this changed during the recession and was exacerbated due to the 2010 Olympics, as destination skiers stayed away from the mountain and local skiers hit 70% of total skiers in 2010.  However, the Olympics were not a total loss.  The Vancouver aircraft received major renovations and increased capacity by ~15%.  Over $500MM was spent to improve the highway from Vancouver to Whistler and this reduced driving time by over an hour.  One can assume that the Olympics themselves increased Whistler awareness and Whistler itself poured ~$80MM into a new snowmaking system and to a new gondola to connect the two mountain peaks.  All of these renovations make it much easier, and more likely, for a destination skier to consider Whistler. 

Since 2010, destination skiers have gone from a low of 30% of skiers to ~37% of skiers at the end of the 2011-2012 season.  From 2009/2010 to 2010/2011 destination skiers were up 100K versus the year before and the company has recently been more aggressive in partnering with airlines and lodging companies to get destination skiers back to the mountain.  Further, they’ve begun targeting areas outside the US, such as the UK and Asia Pacific.  Currently less than 50% of destinations skiers originate from outside the US/Canada, and I expect that number to rise.  Over time I would expect the local/destination breakdown to slowly trend closer to 50/50 as economies recover, Whistler gets more exposure, and marketing efforts bear fruit.  The improved travel time will also help convince families to travel to Vancouver that may not have been willing to do so before. 

KSL Investment

Private equity firm KSL recently acquired Intrawest’s 24% stake at $12.75 and has already shaken up management and the board.  KSL, run by Michael Shannon and Eric Resnick, specializes in travel and hospitality investments and has a strong track record and reputation with their investors.  Both Michael and Eric worked at Vail, and during Michael’s time as CEO and President cash flow grew at a 27% CAGR.  KSL owns Squaw Valley and Alpine Meadows ski resorts in Lake Tahoe and the two founders have deep rooted ties to the ski industry.  

With KSL’s ownership stake in Whistler, it is a step closer to building a portfolio of ski resorts to rival Vail’s.  Vail owns a host of resorts and has an “Epic Pass” that allows skiers unlimited access to 10 mountains spanning from Colorado to California.  KSL’s two Tahoe resorts are part of a “Mountain Collective” pass that allows two free days at each resort and 50% off tickets at the two Tahoe resorts as well as Alta, Aspen/Snowmass, and Jackson Hole.  Whether KSL will try to partner Whistler with these other AAA resorts and create a North American ski powerhouse like Vail remains to be seen, but KSL will be a good partner to have if they ever want to try to rival Vail’s mountain network. 

• Risks:  KSL focuses on operational improvement versus financial leverage which should be a huge boon in the long run.  In the short run, a heavier emphasis on CapEx could potentially be a negative for the dividend.