Peak Resort’s Initial Public Offering. What’s Going On?

Back on April 18th, Peak Resorts filed an S-1 with the Securities and Exchange Commission (SEC) to take the company public. There have been four amendments since then, with the latest filed September 19thHere’s the link to that most current version of the S-1. The company is not yet public but, based on that filing, is still working on the process.

It is, by any measure, not an easy time to take a company public. Skullcandy, you’ll recall, had to delay their offering a while due to market conditions. I don’t think Peak Resorts is facing any better conditions.

Peak Resorts operates 12 ski areas in the Midwest, Northeast, and Southeast U.S. They had about 1.8 million skier/boarder visits in the 2010/2011 season. Total revenues for the fiscal year ended April 30, 2011 were $98 million. Mount Snow generated 40% of Peak’s revenue and Attitash, 12%. None of the other areas generated more than 8%. Lift tickets were 52.2% of total revenue and food and beverage, 15.5%. Hotel/lodging represents only 6.5% of total revenue because Peak’s areas are overnight drive ski areas and day ski areas. They don’t have any of the areas characterized as fly destination areas.
 
That’s part of their strategy as all their areas “…are located in or near metropolitan areas and target a regional market.” They think their experience in acquiring, integrating and managing areas is one of their competitive strengths, and they expect to look for more acquisitions.  
 
Numbers
The S-1 still has a lot of the usual holes in it. They expect to raise about $75 million, but we don’t have a proforma balance sheet yet showing what it will look like after the offering. Neither do we have an estimate of the share selling price, or specifics as to how the proceeds will be used, though they note that a chunk will be used to pay down debt. We’ll get back to that.
 
We do, however, have historical financials. Revenues for the three years ended April 2009, 2010, and 2011 were $84.3 million, $89.8 million, and $97.6 million respectively. Earnings from operations for the same three years were $9.9 million, $13.8 million, and $16.8 million. As a percentage of revenue, earnings from operations have grown from 11.7% to 15.3% to 17.2% over those three years.
Note that their latest acquisition, Wildcat Mountain, was completed October of 2010, so its results are included in the April 30, 2011 numbers.
 
Interest expense, at $10.8 million, was 12.8% of revenue in 2009. In 2010, it was $11.4 million or 12.7% of revenue. The numbers for 2011 are $11.3 million or 11.6% of revenue. Those numbers exclude, for 2009-2011, $2.1 million, $2.2 million, and $2.6 million of interest that was capitalized rather than expensed.
 
Taxable income was a loss of $492,000 in 2009. There were profits in 2010 and 2011 of $2.8 million and $6.4 million respectively. In 2009 and 2010, Peak Resorts was a subchapter S corporation, so there’s no corporate income tax on the income statement. Those earnings, or the loss, flowed through to shareholders who are responsible for paying the taxes in 2009 and 2010. Net income is therefore the same as taxable income for the company. For the 2011 fiscal year, as part of doing this stock offering, they converted to a C corporation and had to book a $10.4 million income tax provision. That resulted in a loss of $4 million for the year. But there’s some funky deferred tax stuff going on, so if you can’t ignore the number, you can’t take it as typical of their tax rate going forward either. That is, their tax rate will not be 163% of income in future years.   That would be discouraging.
 
Ok. Balance sheet. There was a time when I wrote a lot more about winter resorts for SAM. Back then, I used to tear my hair out trying to decipher balance sheets with negative current ratios and other interesting stuff. Finally, I reconciled myself to the inevitable gyrations of winter resort balance sheets and focused more on cash flow.
 
Peak Resorts has $107.6 million in long term debt as of April 30, 2011. As part of current liabilities, they have an additional $34.8 million representing the current portion of long-term debt and capitalized lease obligations. That is, they’ve got to pay or refinance $34.8 million of debt before April 30, 2012. Basically, it’s one big payment due April 1, 2012.
 
Also at April 30 2011, they had $27.7 million of cash on their balance sheet. If a winter resort was ever going to be flush with cash, it would be at April 30. $11.3 million of that cash is restricted. That restricted cash is the “…interest due on our outstanding debt with EPT, our primary lender, and rent under the lease for the Mad River resort for the 10 months following April 30.” So that $11.3 million is not available for paying down the debt due this fiscal year. 
 
A little footnote diving tells us that this is the only year through the 2016 fiscal year where Peak Resorts has to pay off a big chunk of debt. In none of the other years through 2016 does the amount of principal due even get to $1 million. In the S-1, Peak Resorts says they “…have $28.3 million under various loan agreements to fund expansion and capital expenditures at our ski areas. We expect that our liquidity needs for the near term and the next fiscal year will be met by continued use of operating cash flows (primarily those generated in our third and fourth fiscal quarters) and additional borrowings under our loan arrangements, as needed.”
 
Peak Resorts is telling us they can pay off the $34 million in long term debt due this year from resources created or available to them from the normal operation of their business. Good, but I’ve got questions.
 
We know the $11 million in restricted cash isn’t available for debt repayment. The $28 million available under existing lines seems to be for expansion and capital expenditures and that would be borrowings from basically the same people they already owe the $34 million to (EPT- see below). The Consolidated Statement of Cash Flow for 2011 shows net cash provided by operating activities of $12.2 million. But they used $13 million in investing activities, most of which was additions to property and equipment and land held for development. Capital expenditures in the current fiscal year are projected to be $11-$13 million. We also know (because they tell us) that “…the repayment of this debt will not result in additional borrowing capacity under these credit facilities but may create available collateral for future borrowing if necessary.”
 
Overall interest rate on the debt is around 10%, and some of it is escalating. Given that interest rate, and the amount of interest they are paying (as described above) you can see why they are planning to use some part of the offering proceeds to pay down debt. It will do wonders for their cash flow and bottom line.
 
Who’s EPT?
Entertainment Properties Trust is Peak Resort’s only lender. It describes itself as“…a specialty real estate investment trust (REIT) that invests in properties in select categories which require unique industry knowledge, and offer stable and attractive returns.” It’s traded on the New York Stock Exchange under the symbol EPR. If you go to the link above and click on “Portfolio” along the top, you’ll come to a map that shows all their properties. If you then click, on the left side, on “Metropolitan Ski Parks” the map will show nine ski areas that are all part of Peak Resorts.
 
I’m told by people wiser than I that what’s happened REIT wise in the winter resort business is that there was a trend for REIT operators to buy areas and then lease them back to the operator. These resorts are shown as part of EPT’s portfolio, but they aren’t all owned by EPT. If they were, then Peak Resorts wouldn’t have on its balance sheet the debt from buying them. It would just be making lease payments and be responsible for running them.
 
The debt that Peak Resorts has to repay to EPT this fiscal year is the “Mount Snow Development Debt.” It’s due April 1, 2012. It “…represents obligations incurred to provide financing for the acquisition of land at Mount Snow that is in development stages.” Under an agreement dated April 4, 2007, EPT lent Peak Resorts $25 million which I assume was used to buy that land. An April 1, 2010 modification to the agreement increased the amount to $41 million. That increase included $8.7 million in accrued interest to the date of the modification. $25 million plus $8.7 million is more or less the amount that’s due next April.
 
You may have noticed that the economy hasn’t exactly improved since April 4, 2007. I would guess that any land Peak Resorts bought is worth a bit less than it was. I suppose it’s unclear if it would make economic sense to develop it. Peak Resorts balance sheet shows $28 million in land held for development. I wonder if that’s the Mount Snow land. If so, then none has been developed and sold. If it had been, the proceeds are required to be used to pay down the debt.
 
On October 30, 2007 Peak Resorts entered into an option agreement with EPT Ski Properties, Inc. (a subsidiary of EPT) giving EPT Ski Properties an option to purchase Hidden Valley, Snow Creek, Brandywine, Boston Mills and the part of Paoli Peaks owned by Peak Resorts at prices specified in the agreement. The same agreement would allow them to assume Peak’s leases at Big Boulder, Jack Frost, and Paoli Peaks. It could exercise any or all of these options on or after April 11, 2011. If EPT did exercise any of those options, it would, under the agreement, immediately lease the areas it bought back to Peak Resorts.
 
One wonders if the prices in that agreement under which EPT could exercise its options are as attractive to EPT now as they were when the agreement was signed in 2007.
 
So What’s Going On?
All I know is what I read. Nobody at Peak Resorts can talk to me because they are in the middle of the offering process. Down to the earnings from operations line, Peak Resorts results look good and improving, and the Peak Resorts managers are known as good operators.   But the interest burden is substantial and they’ve got $35 million in principal to pay off by next April 1st. It looks to me like the deal made with EPT in 2007 doesn’t seem quite so good in 2011’s economic reality and hasn’t worked out the way both sides hoped it would.
 
I heard on CNBC yesterday that the first IPO in two months had just been completed; a testament to how tough this market is. I would expect you wouldn’t try to do one now if you didn’t need to. I hope the next amendment gives us not only a proforma balance sheet showing some debt repaid from the offering proceeds, but a proforma income statement that shows what will be significant improvement of their bottom line from a lot less interest expense and a normalized tax rate.  

 

 

6 replies
  1. Robin Smith
    Robin Smith says:

    Wow! Great insight. This maybe the most interesting article I’ve read in months. I am so happy SAM made it possible for me to read it.

    Reply
  2. Hugh
    Hugh says:

    This is an excellent bit of analysis, and you should be commended. One additional area that you should look into is the management of the various areas. If “acquiring, integrating and managing” is the core strength of this company, then one might expect some very high quality managers at these 12 areas. Upon investigation, you will find that the majority of the areas are managed by the offspring of the founders. Further insight of the qualifications of the personnel of Peaks Resorts would well be needed before an investment in this IPO is prudent.

    Reply
    • jeff
      jeff says:

      Hi Hugh,
      Management always matters. In the case of Peak Resorts, they are generally considered to be good managers. As far as I know, their issue is the real estate and the deal with the REIT- not their management of their resorts.

      Thanks for the comment.
      J.

      Reply
    • jeff
      jeff says:

      Hi Sam,
      As the IPO never went through, there’s no public information so I don’t know what’s happening. As you recall, we learned from Peak’s S-1 filing that they had a payment due their lender, EPT, of about $34 million on April 1st. Meanwhile, between when I wrote the article and now, Peak has acquired another resort and committed to some millions of dollars in facilities improvement. Either I misinterpreted what I was reading in the S-1, or (and this is complete speculation on my part) there’s been some kind of deal with EPT that we don’t have to be told about as Peak isn’t public.

      Thanks for asking. I’ll see what I can find out.

      J.

      Reply

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