Intrawest’s Quarter; Business as Usual. Mostly In a Good Way

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You may recall that Intrawest got in an avalanche of unmanageable debt when the Great Recession took down the resort real estate market.  They solved the problems of an unpayable interest bill by getting their primary debt holder to convert a big chunk of its debt to equity and taking Intrawest public. I wrote about their predicament before they went public.

Intrawest, to refresh your memories, owns and operates Steamboat, Winter Park, Mont Tremblant, Stratton Mountain, Snowshoe and Blue Mountain. Let’s start with their income statement for the quarter ended December 31. This is prepared according to generally accepted accounting principles- just the way I like it. You can review the entire 10Q here if you want. Unless otherwise noted, all the numbers in this article are in thousands of U. S. dollars.

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Intrawest’s First Quarterly Report

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Intrawest recently filed their first public report since going public. You’ll remember that they did an initial public offering (IPO) as a way to restructure their balance sheet after the real estate market for mountain properties collapsed. I wrote about that here and here. Fortress was the company that owned most of Intrawest’s debt. Now that the debt has been converted to equity as part of the IPO, “Fortress beneficially owns 60.1% of the voting and economic equity interests of the company.” 

The company’s second quarter ended December 31, 2013. They acknowledged being late getting this report done due to the pressures of the public offering. I’m going to briefly review the numbers they reported, but remember that these numbers are before the conversion of their debt to equity and completion of the IPO that happened in the first quarter of 2014.
 
Revenue for the quarter fell slightly from $104.3 to $102.1 million. Operating expenses dropped from $109 to $106.7 million. Operating income improved slightly from a loss of $19.6 million to a loss of $18.6 million. They recorded a net loss of $122.2 million compared to a loss of $109.4 million in last year’s quarter. Last year’s quarter included interest expense of $89.6 million compared to $70 million for the quarter ended December 31, 2013. As I discussed in my earlier articles most of that interest expense goes away once the IPO is done because the debt becomes equity.
 
Let me also show you some other income statement numbers below operating income.
 
 
The numbers are in thousands of dollars. The first column is the 2012 quarter and the second for 2013. I’m pretty sure those are all related to restructuring the company and have damned little to do with running a winter resort. But you can see they generate some significant distortions in the income statements and in the year over year comparison.
 
I don’t spend much time discussing the balance sheets of winter resorts. It’s more about cash flow than the balance sheet at a particular point in time. For example, only on winter resort balance sheets have I seen negative current ratios that don’t seem to bother anybody. Hell, they don’t even bother me much anymore. What they do (and what I’d do) is borrow on their lines of credit when they need to pay expenses not covered by cash flow. No reason to incur interest expense until you have to.
 
Revenue from Intrawest’s Mountain segment was $76 million during the quarter, up from $72 million in the same quarter last year. “The Mountain segment includes the operations of the Company’s mountain resorts and related ancillary activities, comprising Steamboat, Winter Park, Tremblant, Stratton, Snowshoe, as well as a 50% interest in Blue Mountain.”
 
Here’s some further information on the Mountain segment. ETP is effective ticket price. RevPar is revenue per available room, and ADR is average daily room rate. They note that the decline in ETP was due to selling more season passes, so that decline is kind of in a good cause. It’s nice to get money up front. They got one-third of their list revenue from season passes or frequency products in fiscal 2013 and the percentage is increasing. 
 
 
The Adventure segment revenue fell from $13.1 to $11.5 million. The Adventure segment comprises CMH, which provides heliskiing, mountaineering and hiking adventures, and ancillary aviation services, which include fire suppression, maintenance and repair of aircraft.”
 
“The Real Estate segment includes a vacation club business, management of condominium hotel properties, real estate management, including marketing and sales activities, as well as ongoing real estate development activities.” Its revenue fell from $17.1 to $13.9 million.”
 
They also provide what they call “adjusted EBITDA” for each segment. Here are those numbers below the revenue per segment.
 
 
I’m not going to spend much time analyzing this report. There’s a lot of noise in the numbers caused by the restructuring and IPO. The key fact is that starting with the June 30 quarter, we’ll start to see how Intrawest can do financially without all the interest and some associated expenses and managerially without the distractions associated with having your balance sheet upside down and having to do an IPO you didn’t really want to do.

 

 

Intrawest Officially Trading as a Public Company. What’s the Impact?

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As many of you know, Intrawest, the owner of Steamboat, Winter Park, Tremblant, Stratton, Snowshoe, Mammoth, and half of Blue Mountain, started trading as a public company on January 31. The initial offering price for the stock was supposed to be $15 to $17, but it ended up going public at $12 in a soft stock market where fear of the Fed tapering and its impact on certain developing countries is taking its toll. As I write this Monday morning, the stock is at $11.78 at 9:40 AM Pacific time with the whole market taking another drubbing. The trading symbol is SNOW, which kind of makes sense.

I explained the rationale for the public offering a couple of weeks ago in this article. To summarize, they are great at running resorts, but the real estate crunch did them in. It left them with an untenable debt burden and they are resolving the problem by having most of the creditors agree to convert their debt to common stock. I guess I think they would have preferred another solution, but didn’t have one.
 
When I wrote my initial article, I did it based on an SEC filed S1 which didn’t have all the numbers filled in. That’s standard procedure. Now, with the company actually public, there’s a final prospectus with all those numbers, and I thought I’d point out a few things. You can see that document here.
 
The selling price is $12.00 a share, but the underwriting discount is $0.78 a share, so the selling shareholders get $11.22 a share before the costs of doing the deal.
 
With the deal done, the “initial shareholders” control 65.3% of the common stock. Those shareholders are all controlled by the Fortress Investment Group. For this discussion, you can pretty much think of Fortress as the seller of most of the shares.
 
As part of the deal, Fortress converted about $1.4 billion in debt to equity. Intrawest itself sold 3.125 million shares and will receive about $32 million. The initial shareholders sold 12.5 million shares and are receiving (probably on February 5th) about $140 million. To be clear, that $140 million is not available to Intrawest for operations. It goes to the entities who converted their debt to equity.
 
Let’s see what Intrawest has accomplished financially by doing this deal, starting with the income statement.
 
For the years ended June 30, 2011, 2012 and 2013, Intrawest reported net losses of $499 million, $336 million, and $296 million respectively. Yet in those same years, they had positive cash flow from operations of $21 million, $43 million and $42 million respectively.
 
If you look at the expenses for those years, you’ll see all kinds of noncash expenses for losses on sale of assets and impairments of goodwill, real estate, and long-lived assets. They are particularly big in 2011, and decline thereafter. The loss from operations is $197 million in 2011. It falls to $19 million in 2012 and is a positive $3.5 million in 2013.
 
But below the operating line is interest expense. Here’s the numbers for the three years in millions of dollars.
 
Interest expense on third party debt                     (143,463)             (135,929)             (98,437)
Interest expense on notes payable to affiliates    (160,943)              (195,842)             (236,598)
Total Interest                                                      (304,406)             (331,771)             (335,035)
 
That, I think, can be characterized as a lot of interest and the bottom line, as indicated above, reflected it. What’s the impact of getting rid of it which, after all, is the purpose of Intrawest going public?
 
In a pro forma income statement they provided, which assumes the deal is done (it is done now), interest expense in the year ended June 30, 2013 falls from the $335 million shown above to $48 million. Net income goes from a loss of $296 million to a profit of $5.4 million. Quite a difference.
 
With the assets all written down to a reasonable value and interest expense reduced dramatically, Intrawest can now go about making money running resorts. That’s not a slam dunk, but it’s lower risk than mountain real estate right now. And who knows, maybe there will be a time in the future when those now low valued assets will be worth a bunch again.

   

Intrawest Files for Initial Public Offering. Will it Happen?

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On November 12, Intrawest Resort Holdings, Inc. filed the first draft of a form S1 with the SEC for an initial public offering. Like all first drafts, there’s some significant information missing, including the proposed price of the stock and how much they want to raise. But at 400 pages as a PDF, there’s also a lot of interesting information that I thought you’d want to hear about. Here’s the link if you want to skim it yourself. 

Intrawest, to refresh your memories, owns and operates Steamboat, Winter Park, Mont Tremblant, Stratton Mountain, and Snowshoe. It also owns 50% of Blue Mountain. In the year ended June 30, 2013, Intrawest had total revenue of $517 million. 65.5%, or $339 million, came from the mountain and lodging operations at those resorts. 22%, or $114 million, came from their adventure segment. Mostly that’s Canadian Mountain Holidays that provides heli-skiing trips. The remainder of the revenue, 12.5% or $64 million, came from real estate. That includes real estate development as well as real estate management, except there isn’t any real estate development going on right now.
 
Now, some of you will recall that back in the good old days of “The Best Economy Ever” Intrawest and other resorts made a whole bunch of money developing and selling real estate in coordination with the improvement of the mountain experience. The real estate market has changed a bit since 2007.
 
Intrawest tell us they have 1,150 acres of “core development parcels” surrounding or adjacent to their resorts. They also say, “While we do not have any specific plans for the development of our core entitled land, we are focused on designing strategies for future development of this land in concert with planning for on-mountain and base village improvement.”
 
Sounds like there’s a lot of planning going on, but not much else. When might it move past planning?
 
“As the economy continues to improve, we expect consumers will have more disposable income and a greater inclination to engage in and spend on leisure activities. We also expect recreational adventure and experiential travel to continue to gain in popularity as individuals, including the important “baby boomer” generation, live longer, healthier lives. We believe that our business is well positioned to capitalize on these favorable trends…”
 
I don’t know when consumer spending is going to improve, or how much improvement Intrawest requires before they might put some of these plans into action. But if they’re waiting for consumers to start partying like it’s 1999 again, I suspect they’re in for a long wait. The focus on the baby boomers isn’t new for resorts, and I’ve previously questioned whether that’s an adequate strategy. The focus has to be on people with high disposable incomes, boomers or not, though obviously there’s a big overlap there.
 
But I digress. I do that sometimes. Let’s get back to the impact that resort real estate development had on Intrawest. It will lead us to why they are going public.
 
Here’s what they say the real estate collapse that started in 2007 did to them:
 
“Prior to the collapse in the housing markets in late 2007 and the global financial crisis that followed, we were actively engaged in large scale development and sales of resort real estate, primarily in North America. In light of the then prevailing market conditions, we ceased new development activities in late 2009. As a result, we were left with a portfolio of real estate assets, high leverage levels and litigation initiated by purchasers of resort real estate seeking to rescind their purchase obligations or otherwise mitigate their losses. This confluence of factors had a material impact on our consolidated financial results for the fiscal years presented below.”
 
Material impact indeed. Here’s some summary numbers from their income statement for the last three years ended June 30 (In $000s).
 
       
2011
2012
2013
Total Revenues
    
$559,523
$513,447
$524,407
(Loss) Income From Operations
  
(196,516)
(19,332)
3,478
Interest Expense on 3rd Party Debt
(143,463)
(135,929)
(98,437)
Interest Expense on Notes Payable to Partners
(160,943)
(195,842)
(236,598)
Net Loss
      
(498,506)
(336,063)
(296,714)
             
2011 had almost $150 million in impairment charges for goodwill, real estate, and long lived assets. There was also a $26 million loss on the sale of some assets. These all impacted operating income. The total of such charges fell to about $21 million in 2012 and to almost nothing in 2013, permitting Intrawest to show an operating profit.
 
But now look at the interest expense numbers. This is interest on loans that was going to be paid, and the loans paid off, through the development and sale of real estate. And said real estate is no longer being developed or sold. If we visit the June 30, 2013 balance sheet, we see long term debt of $581 million and notes due to partners of $1.359 billion. With a “B.” What they call partners’ deficit (basically equity) is a negative $1.02 billion, having worsened from a negative $724 billion a year ago. 
 
The people to whom all this money is owed seem to have recognized that there is no imaginable combination of economic improvement, perfect snow conditions, and growing visitor days that will let them get out from under this debt. I’d say they’re right. Shades of American Skiing Company- though they didn’t have the issue of an imploding real estate market.
 
Their solution is to take Intrawest public. But what fool would buy shares in a company with this kind of balance sheet losing this much money? The answer is none, or at least not enough.
 
The partners’ solution is to convert their $1.359 billion in notes to equity, moving it out of liabilities. That includes the accrued, but unpaid, interest of $761.7 million as of June 30, 2013.   The restructuring reduces total liabilities from $2.14 billion to $756 million, producing a much cleaner balance sheet. How clean exactly we don’t know yet because the proforma balance sheet in the S1 is incomplete- no surprise since we don’t know how much money they will be raising.
 
But we do have a proforma income statement for the year ended June 30, 2013 prepared as if the deal had been done a year earlier. It shows net income of $8.5 million instead of a loss of $297 million.
 
Why, you might ask, don’t the partners just restructure the balance sheet without going public? Well, if you’re a shareholder (especially if you didn’t really want to be a shareholder) you might want to be able to sell your stock someday. That’s a lot easier if the stock is publically traded. It may also be the case that Intrawest needs the cash that will be raised in the public offering.
 
Intrawest, you may recall, was acquired by Fortress Investment Group in a leveraged buyout. Wikipedia tells us that “Three weeks before the opening of the 2010 Olympics, Fortress failed to make payment on its loan used to buy out Intrawest. This caused its creditors to force Intrawest to divest itself of several of its resort holdings in 2009 and 2010 which includes Whistler Blackcomb, in order to reduce its debt load.”
 
As part of the restructuring for the IPO, which is a bit more complicated than I’ve bothered to describe in this article, a subsidiary of Fortress is “contributing” $50 million to Intrawest. Why would they do that?
 
“As of June 30, 2013, Cayman L.P. [the legal entity that owns Intrawest’s resorts until this deal happens] had loans due to affiliates of Fortress, consisting of notes payable to partners with a principal balance of approximately $597.0 million and accrued interest of approximately $761.7 million. Pursuant to the applicable loan agreements, Cayman L.P. currently accrues interest at rates ranging between 15.6% and 20.0% per annum on the notes payable to partners.” 
 
There are two more things I want you to know. The first is that after the offering is completed, if it is completed, an affiliate of Fortress will own enough of the equity to be able to appoint a majority of the board of directors. Hardly a surprise as it’s their debt that’s being converted.
 
The second is that somehow Intrawest can be classified as an Emerging Growth Company under the Jumpstart Our Business Startups Act of 2012. No, I don’t really understand that either and find it kind of amusing. But what it means is that they don’t, among other things I guess, have to provide five years of financial statements (which they don’t), have the auditor give an opinion over their financial controls, or disclose as much about compensation as usual.
 
We know that Intrawest management knows how to run resorts. And it’s correct to say that they got hammered by the collapse of the real estate market and, if this deal gets done, the impact of that will have been financially flushed out. But they are planning to succeed doing the same things they did before under very different economic circumstances. The question a potential buyer of this common stock has to ask is if they think that’s a reasonable expectation.

 

 

The Last Intrawest Annual Report: One Benefit of Being Bought

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I’ve always admired Intrawest’s ability to combine and coordinate its real estate activities with the development and management of its mountain resorts. It always seemed like they managed to choreograph the two to maximize the value of both. That didn’t mean, however, that I looked forward to reading their annual  Form 40-F filing with Security and Exchange Commission and now that they are about to be acquired by Fortress Investment Group (probably a done deal by the time you read this) I guess I won’t have to do it any more.

 
But I’m a sentimental kind of guy. Just for old time’s sake, I decided to slog through the last one when it came out. And as long as I was being sentimental, I thought I might as well try and figure out exactly why Intrawest decided to sell to Fortress.
 
This all began with a February 28, 2006 press release in which Intrawest announced “…that it had initiated a review of strategic options available to the company for enhancing shareholder value…” Intrawest Chairman Joe Houssian is quoted as saying, “It makes sense for us at this time to evaluate all of the different ways in which we can capitalize on the opportunities in front of us for the benefit of shareholders, and to ensure that we have the bets possible capital structure in place.” Here’s a link to the Intrawest site where you can click through to see the press release: http://www.integratir.com/newsrelease.asp?ticker=IDR
 
Okay, well enhancing shareholder value is a fine thing. Who could argue? But my question was why they thought they had to go through this process to do it. Couldn’t they just run the business themselves? Did they need more capital than they could raise on their own? Were they concerned about softness in the real estate market? Did the diversification of their business (only 32% of revenue now comes from mountain operations) require a different kind of support? The release didn’t say.
 
By way of background, Intrawest went public in June of 1997 at $16.75 a share. The stock bounced around for some years, closing at $18.94 at the end of September, 2004. From there, it moved up smartly, closing at a high of $37.60 the week of May 5, 2006. It then reversed course and went down for eleven of the next thirteen weeks, closing at $26.70 the week ending August 4th. Then the sale of the company was announced and the stock rocketed up to $34.50 ($35.00 a share is the purchase price) and has stayed near that price since.
 
The June 30, 2006 balance sheet is hardly changed from the previous year and the changes are positive. Total assets are almost identical, while liabilities are down and equity is up.
 
Net income rose from $33 to $115 million. The contributions from resort and travel operations fell 11% to $89 million. Management services contribution fell 14% to $37 million. The real estate contribution, however, more than doubled to $143 million. That component of Intrawest’s income can swing around a lot from year to year. I guess it’s normal for that business, but it makes year to year comparisons a little difficult.
 
I thought a telling section of their Form 40-F was the section called “General Development of the Business. It listed what they consider to be “key developments” during the last three fiscal years. There were thirteen accomplishments listed and every single one of them was raised money, sold this, bought that, refinanced this, retired that debt, started our review of strategic options. No doubt these were key developments, but I thought it was interesting that not a one was focused on running and improving the core business operations. I mean, they must have done some good things in those areas. They’ve been doing them for years. 
 
You read the press releases, scour the documents, and listen to the conference call. You still don’t get a specific and satisfying explanation for why Intrawest sold.
 
But if you go to the web site of the Fortress Investment group (http://www.fortressinv.com/) and spend just a few minutes reading about it, you will learn that they are a large, diversified organization with access to capital and the ability support companies in putting in place financial structures that allow those companies to take maximum advantage of their opportunities. Whatever Intrawest can accomplish on its own, it can do more with the support of Fortress. With the support of Fortress, management’s time won’t have to be focused on refinancing, buying, selling and restructuring. They can worry about running the business.
 
If you read a bit about Fortress, the apparent generalities which Intrawest used to explain the motivations for the transaction make a whole lot more sense.