Cedar Fair, LP (FUN) owns more than a dozen water and theme parks, and other than one in Toronto, Canada, all are located in the US. As the name indicates, the company is a Limited Partnership that trades units, rather than shares, and pays a distribution rather than a dividend. So, instead of a receiving a 1099-DIV form earlier this year, one would have received a more complex Schedule K-1 earlier this month. For those that own several hundred units in a tax advantaged account, such as an IRA, SEP or KEOGH, they could find that they have a tax obligation due to the extent of its Unrelated Business Gross Income, or UBGI. For example, one account where I hold just over 200 units had $391 of UBGI. On the other side of this coin, the company reported an ordinary business loss while distributing $3.71 per unit, providing a potential tax shelter when the units are held in taxable accounts.
While I am certainly not an expert on taxes, I have found that the most popular tax software packages easily handled the Schedule K-1. I should also point out that Cedar Fair also reported “NONRESIDENT STATE INFORMATION” for nine states (including Pennsylvania) as well as “RESIDENT STATE INFORMATION” for Pennsylvania. And if all of this hasn’t scared you away from investing in Cedar Fair, perhaps the dizzying fall in the unit price could change your mind.
Earlier this year, the units traded as high as $56.53, and as recently as February 25th, the shares opened at $50.40 and touched a low of $46.29 before closing at $47.78. That was probably the last time the unit price would see $50 for quite some time. The price fell below $40 by March 5th, $30 by March 11th, below $20 the next day and would bottom out (hopefully) at $13 on March 18th, before rebounding.
The plunge in the price was more terrifying than the drops in some of the company’s top-rated roller-coasters. It closed that week (March 20th) at $18.24. Since then, it more than doubled off the $13 low to an intraday high of $28.83 on Wednesday of this past week, before pulling back to a low of $21.26 on Friday and finishing the week at $22.66. It seems safe to forecast that the volatility isn’t over.
Zimmerman Letters
While the price was falling and fears surrounding COVID-19 intensified, Cedar Fair CEO Richard Zimmerman issued a number of “Messages”.
On March 12th it began:
Cedar Fair’s highest priority is always the safety of our guests and associates. We know you continue to hear and see news reports about the coronavirus, or COVID-19, and some of its effects around the world. The Cedar Fair team is closely monitoring this evolving situation and is in regular contact with health agencies for information and guidance.
All Cedar Fair properties intend to welcome guests in accordance with our published schedules…
The very next day the message changed:
At Cedar Fair, there is nothing more important than the safety of our guests and associates. This is our highest priority now and always.
As we continue to monitor developments surrounding the Coronavirus (COVID-19), we want to provide you with another update regarding our parks. We will be temporarily closing Knott’s Berry Farm in Buena Park, CA and both Schlitterbahn Waterparks in New Braunfels and Galveston Island, Texas effective Saturday, March 14. The parks will remain closed until the end of this month. In addition, we will also be postponing the opening of California’s Great America in Santa Clara, CA, Kings Dominion, in Doswell, VA and Carowinds in Charlotte, NC until the first weekend of April. We believe this decision is in the best interest of our associates, our guests, and our communities.
All our hotel properties will remain open as scheduled …
And, on March 20th:
At Cedar Fair, the safety and well-being of our Guests and Associates are always our top priorities.
As we continue to follow regional and national health directives related to COVID-19, we want to provide the latest update regarding park schedules. Currently, Knott’s Berry Farm, California’s Great America, Carowinds, Kings Dominion and our Schlitterbahn parks are temporarily closed. It is our hope to reopen those parks mid-May or as soon thereafter as possible. Likewise, we plan to open Kings Island, Worlds of Fun, Dorney Park, Cedar Point and Canada’s Wonderland mid-May or as early as possible. Valleyfair and Michigan’s Adventure are expected to open as originally scheduled or as soon thereafter as possible. We believe these decisions are in the best interest of our associates, our guests, and our communities.
We will continue to work with our Season Passholders and Guests who have prepaid tickets during the time period of any park closure.
The Revenue
Each of these messages paints an increasingly gloomy outlook on the number of operating days. The company went from the parks remaining open to temporarily closing and hoping to re-open by the first weekend in April to “our hope to reopen those parks mid-May“. Knott’s is particularly important because it is the company’s only park open year round, drawing more than 5 million visitors. And, with at least two months of no visitors, it’s extremely unlikely that the lost days there could be made up. The same is probably also the case for each of the other parks that was already open or scheduled to open prior to mid-May. And, it’s not just the Admissions, but the ancillary revenues from the “Accommodations” and the “Food, Merchandise and Games” line items. The 10-K shows that 2019 revenue from these three categories was as follow:
- Admissions $795.3 million
- Food, merchandise and games $473.5 million
- Accommodations, extra-charge products and other $206.2 million
- Total $1,474.9 million
Direct comparisons to quarterly data and trends wouldn’t have been practical because of the acquisition of two waterparks in Texas, the land purchase at Great America and the Sawmill Creek property purchase, which occurred at various times between June and the end of 2019. However, from a press release issued last year, we know that the two waterparks cost $261 million, and during 2018 had 1.2 million guests
…and generated annual revenues of approximately $68 million. Cedar Fair expects the two Texas locations to achieve Adjusted EBITDA margins in line with comparable Cedar Fair park-level results as management implements a number of growth and operational initiatives over the next two years, reflecting an accretive EBITDA multiple post synergies.
With these two water parks shutting down for at least two months, we can be fairly certain that they won’t come close to generating the $68 million figure achieved in 2018. And, along with the temporary closure of the various other parks, the only question is how steep will be the revenue decline?
Here’s what CFO Brian Witherow had to say about the unevenness of the revenue on 2019’s Q1 conference call:
Please note that due to the seasonal nature of our business, a majority of our revenue is realized during a 130 to 140-day period, beginning in the second quarter and in recent years, supplemented with a growing amount of fourth quarter revenue stemming from our popular events and activities surrounding the Halloween season and more recently with our WinterFest celebrations.
As our first quarter represents less than 5% of full-year revenues, results in the period are not indicative of performance for the remainder of the year.
So, if we end the busy season with the Labor Day weekend, and count backwards “130 to 140 days”, it puts us right in the middle of May. Whether or not reopening the parks by then is wishful thinking on the part of Zimmerman, I would think that there will still be a significant revenue shortfall. The bullish call would be that people that have been housebound for months will rush to the parks for entertainment. And, with the price of fuel dropping, the cost to make the round trip will have come down.
The bearish call would be that following months of looking at rising death tolls, potential visitors will not be anxious to be in close contact with thousands of strangers. Even if that weren’t a deterrent, the rising levels of unemployment will be putting a dent in the disposable income of potential guests. (The silver lining to rising unemployment could come in the form of a larger pool of seasonal workers). Another potential deterrent could be from the wealth destruction caused by the stock market tumble.
Lastly, even if the attendance somehow manages to post decent figures, the delayed start at some of the parks guarantees a drop in the potential revenue generated from limited accommodations.
The Debt
What we know with certainty is that the company had a significant increase in debt, from $1.658 billion at year end 2018 to $2.146 billion at year end 2019, or $488 million. We also know that the interest expense for 2019 was $100.4 million, up significantly from $85.7 million in 2018, and that the quarterly run rate exiting 2019 was $28.6 million vs. $23.1 million in Q4 2018.
It’s probably reasonable to assume that the company won’t be able to reduce the level of debt in 2020, and if anything, may need to take on additional short-term debt. I’m basing this on the timing of cash coming into the company and incremental investing in 2020. Historically the company is cash flow negative in Q1 since most of the parks (except for Knott’s and the two acquired water parks) have a very limited number of operating days.
At the same time, the company typically makes significant capital investments during the early part of the year. This mostly includes larger maintenance projects, as well as a few major investments in new rides and attractions. Regardless, for purposes of this exercise, I have assumed that the interest expense for 2020 will be at least four times the amount in Q4 2019, or $114.4 million. That’s nearly $30 million more than 2019.
Offsetting a portion of that increase in interest would be the lease cost for the land under Great America. Various reports have put that lease cost between $5.6 million and $7 million. Assuming those lease estimates are reasonably correct, the net increase in cash cost from the debt and lease savings would be approximately $24 million.
FUD – Fear, Uncertainty and Doubt
Perhaps I am overly pessimistic in trying to assess the impact of the COVID-19 pandemic. And, why not? The NY Times website has a section devoted to coverage of this terrible disease. It opens with:
More than 100,000 people in the United States have now been infected with the coronavirus, according to a New York Times database, a grim milestone that comes on the same day the national death toll surpassed 1,500 and in the same week that the country surpassed the case totals in China and Italy.
I live in NJ, not too far from New York City. NY state had the most reported cases at 46,000 in the US, with NY City having 26,000 of those along with 450 deaths. The state of NJ was a distant second with 8,825, almost double California’s total. This data was found on March 28th and is constantly being updated. (This section of the web site is dedicated to updates on the COVID-19 and requires an email address, but not a paid subscription, and one can terminate the account at any time).
In addition to the raw statistics, that site noted the following:
When the coronavirus began spreading in the United States, the vast majority of cases were in coastal states. Illinois and Wisconsin had only a few cases. Michigan, Missouri and Ohio had none.
But this week, all of those states have reported alarming new statistics. Many of the new cases and deaths have been concentrated in the Midwest’s largest cities.
In Detroit, more than 850 cases have been identified and at least 15 people have died. Seven deaths and nearly 400 cases have been reported in Milwaukee County, Wis. In Chicago and its inner-ring suburbs, there are nearly 2,000 cases. The areas around Cleveland, St. Louis and Kansas City, Mo., have also seen fast spikes, leading officials to warn that medical facilities could be overwhelmed.
“What we do now will determine if we overrun Ohio’s hospitals and get to a situation where our medical teams are making life and death decisions,” the state’s governor, Mike DeWine, said Thursday. “We don’t want to be in that position. I worry about this every day.”
With more than two dozen cases in my small suburban town, perhaps I’m not pessimistic enough. Note the statement by the Governor of Ohio, home to Cedar Point, the company’s second most important park. Or the comment about Kansas City, home to another of the company’s parks. And, the case totals are still rising dramatically.
It’s more than enough to create fear, and the uncertainty about its implications has been obvious in the price of Cedar Fair’s units. A worst-case scenario could see this lasting for months. In such a situation, there is no doubt that the distribution would be cut. In fact, a cut is already baked into the price that has driven the yield to 16.5%.
Is it possible that Cedar Fair parks could open by mid-May? Anything is possible. And, if the parks get the green light to re-open, will they have the necessary seasonal staff lined up to operate the parks? Or will enough people line up to make opening the parks worthwhile?
Could they be closed for an extended period of time, forcing the company to enter bankruptcy? It’s certainly a possibility, although I see bankruptcy as somewhat unlikely. The company could find alternative financing available, albeit at a high interest rate. Or perhaps the $2.2 trillion virus aid plan that recently passed in congress will have provisions for loan guarantees that could help Cedar Fair.
Unfortunately, we probably won’t know much about anything for close to six weeks. That takes us into the second week in May, the time when the company should deliver its results for the first quarter and an update on the park closures. It’s also the time that the company historically announces its quarterly distribution, a distribution that I expect to see cut.
Disclosures
I have owned Cedar Fair for more than a decade, all of it in tax sheltered accounts. As a result of the funds being in such accounts, I had limited my holdings in order to avoid complications from the fairly large UBGI. I did not sell at the recent highs, nor did I add at the lows. Should the units drop into the single digits (as it did in 2009), I would likely add a speculative position.
I will frequently day trade, or short-term trade, certain stocks and options, although I have not done this with Cedar Fair in the past few years. That said, I may try to trade it.
Final Notes
I am in no way trying to trying to trivialize the personal toll COVID-19 has on our daily lives. Nor am I some Johnny come lately trying to kick Cedar Fair when it’s down. I have been writing about Cedar Fair on Seeking Alpha for about nine years (with more than 50 articles), often annoying both the bulls and the bears.
I am in no way trying to portray myself as an expert on either taxes or COVID-19, but I have tried to follow recent events closely. It seems to me that experts on the pandemic have somewhat divided views. Many seem to think that this will take three months before we have it under control handle, while others put it at a somewhat shorter period. Even then, there are some concerns about a resurgence in the winter. There are issues with respirators, masks, gowns, testing, vaccines, etc.
In the end, this is an investing website. And, unfortunately, it seems that COVID-19 will have a very material impact on the operations of Cedar Fair this year.
Disclosure: I am/we are long FUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy or sell units at any time.
Be the first to comment