Vail 2nd Quarter Results- Watching Real Estate Will Be Interesting

Given that Vail says the snow up to about Christmas was the worst in 30 years, you have to say that they really did okay. But I think the most interesting thing in the whole 10Q was the disclosure that 13 holders of contracts to purchase Ritz-Carlton Residences had sued to get out of the contracts and get their deposits back because of a disputed delivery date.

If you really wanted your new 2nd home, you probably don’t sue because it’s a little late being finished. Maybe you negotiate for some free upgrades (heated toilet seats?), but you don’t sue to get out of the deal. Unless, of course, you can no longer afford to buy the place and/or it’s now worth a lot less than you’ve agreed to pay for it. Hey, why should the winter resort real estate market be different from other real estate markets?
Apparently it isn’t. In the risk factors section, Vail talks about the “… increased risk associated with selling and closing real estate as a result of the continued instability in the capital and credit markets and slowdown in the overall real estate market, including the risk that certain buyers may be unable to close on their units due to a reduction in funds available to buyers and/or decreases in mortgage availability, as well as the potential of certain buyers being successful in seeking rescission of their contracts” They go on to note that, “… the Company cannot predict the ultimate number of units that it will sell and/or close, the ultimate price it will receive, or when the units will sell and/or close.”
Vail “… currently does not plan to undertake significant development activities on new projects until the current economic environment improves.” The 10Q can be found here and you might also want to review the March 11 investor presentation.
I’ve commented before, though long ago, on the relationship between mountain and real estate development for winter resorts with both. To maximize total value, you have to synchronize the development of both, not letting either get too far ahead of the other. As Vail puts it, “The Company’s real estate development projects also may result in the creation of certain resort assets that provide additional benefit to the Mountain and Lodging segments.”
Real estate revenues are recognized in the income statement only when a sale closes. Obviously this means, as we’ll see when we look at the financial statements, that sometimes there’s a lot and sometimes there’s a little. That’s just the way the real estate development business is. But of course if you don’t start projects, it’s going to be kind of hard to finish them and recognize revenue as your book of projects under development runs down. Let’s look at the numbers to see what this means.
Mountain revenue for the quarter ended January 31, 2010 was up 1.35% to $261 million compared to the same quarter the previous year. Lodging revenue fell 6% to $38.7 million. Real estate revenue pretty much disappeared, falling from $89.2 million to $870,000. That’s largely determined by when the sales close assuming, of course, that there are sales in the pipeline.
The Mountain segment includes the operations of the company’s five resorts as well as the related ski school, dining, and retail/rental operations. About half of its revenue comes from lift tickets, including season passes. It’s recognized in the income statement over the course of the season. Season pass revenue was up about 9% this season and is expected to represent about 35% of list ticket revenue for the fiscal year.   Vail noted that the Mountain EBITDA (earnings before interest, taxes, depreciation and amortization) was up by 3.6% due to this increase and to the “…cost reduction initiatives implemented during the second half of the prior fiscal year.” 
Mountain operating expenses were down 2.2%, the result of a freeze in the company’s 401K matching contributions, a company-wide wage reduction plan, and better inventory management offset by some higher food, fuel and medical costs.
In the Lodging segment, the average daily rate the company earned on its owned hotels and managed condos fell by 2.1% in the quarter compared to the same quarter the previous year. Revenue per available room was down 11.1%. EBITDA was down from $2.5 million to $0.9 million for the quarter ended January 31, 2010. This was due almost entirely, according to the company, to declines at Keystone properties and to higher employee medical costs.
Total revenue for the quarter ended up declining by 22.7% from $389 to $301 million. This was almost completely the result of the decline in real estate revenue. Total operating expenses fell 21.7%. All three segments showed declines, but again, most of the total was the result of real estate expense falling from $60 to $7.4 million.
Net income fell 32.8% from $60.5 to $40.7 million. And yes, it’s because of the decline in real estate revenue, but how do we look at Vail’s overall performance given the variability in real estate?
We can start by subtracting segment operating expense from segment revenue for the quarter and constructing the little chart below and show what I guess we’ll call operating income for each segment for the January 31, 2010 quarter and the same quarter last year. The numbers are in thousands.
SEGMENT                                            1/31/10                                1/31/09                               
Mountain                                              $106,960                              $102,301
Lodging                                                $888                                     $2,453                                  
Real Estate                                         $(6,547)                                $29,649
Total                                                      $101,301                              $134,403
Remember that below this line we’ve got all that interest, amortization, taxes, depreciation, investment income, and net income attributable to noncontrolling interests. How shall we allocate it among the three segments?
You got me. Perhaps I shouldn’t quite put it like that. There are ways to allocate, and some of them would be better than others, but you’d find that there isn’t just one right way to do it. But remember what I said (and what Vail said) above. The performance of each of these segments is related to the others.
Let’s say you got a dollar in the bank, and you need a total of three dollars to do a few projects. So you borrow two dollars and add them to the one dollar you already have in the bank to do the projects (they’re small projects). The projects are all related to each other. You have to pay interest on two of those three dollars, but which project do you allocate that interest expense to? Does it matter? Probably not. Would you learn anything by doing it? I don’t think so. Could you screw up your comparisons across sectors? You bet.
Vail’s quarterly earnings of $40.7 million represent a return on end of the quarter equity of 5.2%. It was 8.1% for the same quarter next year. They’ve got very little debt coming due in the next four years- only $2.6 million through fiscal 2013. At the end of the quarter, they had no debt drawn under their senior credit facility and the land they are holding for development was bought at favorable prices which means a low holding cost. They report that through March 7, for the season, they’ve seen some recovery since the poor early season snow. Total skier visits were now up 0.4% and lift ticket revenue was up 1.6%.
Vail suffered like most businesses from the recession. As you think about their future, the extent and timing of the recovery is where you have to focus. When can they begin to develop real estate again and what will they be able to sell it for? How committed are snow sliding consumers, and will their caution be, to any significant extent, a long term condition?