Morgan Stanley Says Gaming And Lodging Not Immune To Higher Rates, Reduced Liquidity

  • Morgan Stanley analysts provided insights on the ramifications of tighter credit market on gaming, lodging and leisure companies.
  • The analysts noted that the group is not immune to higher rates, reduced liquidity, or a weaker consumer. However, the analysts still see opportunities for idiosyncratic alpha through cycle.
  • First, the analyst said their banking analysts believe the pressures at Silicon Valley Bank were idiosyncratic and do not believe there is a liquidity crunch facing the banking industry.
  • However, they anticipate an increase in funding costs ahead, leading to tighter lending standards, slower loan growth, and wider loan spreads.
  • RelatedThe Inevitable End - SVB Financial Officially Files For Bankruptcy In New York
  • As a result, tighter lending and wider corporate credit spread impact companies with high leverage and/or refinancing requirements.
  • A hard landing affects companies more exposed to discretionary income and/or high operating leverage.
  • Leverage: Debt levels vary widely across the sector, with the highest levels at the cruise lines even if fully reopened.
  • Gaming also continues to have high leverage, though much of the leverage is through rent, which is less at risk from a capital markets standpoint, but still amounts to operating leverage.
  • On pure Net Debt / EBITDA, Caesars Entertainment Inc CZR and Wynn Resorts Ltd WYNN are highest in gaming at about 3.5x/4.5x 2024. Select Hotel REITs have significant leverage, including Park Hotels & Resorts Inc PK and Pebblebrook Hotel Trust PEB at about 8x/5x2024.
  • Interest Coverage: Given differences in borrowing costs and rent versus own mix, the analysts also look at interest coverage based on EBITDA/interest and EBIT/interest expense.
  • CZR, PEB, PK have the lowest coverage and Choice Hotels International Inc CHHHilton Hotels Corp HLTMarriot International MAR and Host Hotels and Resorts Inc HST have the highest.
  • Other factors considered were maturities, interest sensitivity, revenue growth expectations, previous credit crunch examples, and operating leverage.
  • Analysts list things investors should remember about a few key differences versus prior cycles while assessing Gaming, Lodging and Leisure stocks.
  • Leverage levels are largely still below levels prior to the GFC (global financial crisis), most of the c-corps have shed the higher operating leverage and capital intensive owned/leased and/or timeshare segments.
  • Also, many casinos have sold underlying real estate, but are still on the hook for capex and have rent even with lower traditional debt and international exposure has generally increased, which could dampen a more confined slowdown.
  • The analyst prefers c-corps with more visible growth with less volatility and recovering companies in Gaming, Las Vegas Sands Corp LVSDraftKings Inc DKNG and Red Rock Resorts Inc RRR.
  • CHH was the only purely asset light hotel stock in GFC, yet it outperformed the S&P 500, analysts noted.
  • Wyndham Hotels & Resorts Inc WH, HLT, MAR more closely resemble CHH today than their respective businesses in 2007 given reduced owned/leased hotel and timeshare exposure.
  • Also ReadFed Money Printing To Go Overboard? JPMorgan Sees $2T Infusion Into Banking System Amid Central Bank's Move To Shore Up Liquidity
  • Photo Via Wikimedia Commons
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