Cedar Fair, L.P. (FUN) will be reporting losses early next month, and investors already know the results will be abysmal. In a press release issued on October 1st, the company reported preliminary results. Based on those results, it’s difficult to understand why the Unit Price (Cedar Fair is a limited partnership that trades “Units” rather than shares and pays out a “Distribution” rather than a dividend) remained in the mid- to upper $20s. Part of that press release reads:

…the Company suspended operations of its parks beginning on March 14, 2020, … …Beginning late in the second quarter, the Company resumed partial operations at seven of its parks on a staggered basis, in accordance with state and local approvals and health and safety guidelines.

In connection with reopening the parks, the Company has implemented enhanced health and safety protocols, including increased cleaning and sanitization procedures, social distancing protocols, capacity limitations, face covering requirements, and health and temperature screenings for both guests and employees. In addition, the Company has actively managed the parks’ operating days and hours to optimize cash flow.

I found the above paragraph somewhat deceptive. While I have no doubt that Cedar Fair management “actively managed the parks’ operating days and hours to optimize cash flow,” it ignores the fact that demand must have been far less than anticipated. Initially, the parks were to be open seven days a week, have capacity limits and have timed entry via an on-line reservation system in order to maintain social distancing. However, by looking at the reservations available at the various parks shortly after they reopened, it was obvious that attendance wasn’t coming anywhere close to the number of reservations or visits that were allowed or expected. The press release deception continued:

Attendance at the reopened parks has been impacted by self-imposed limitations, fewer operating days and hours, significantly reduced marketing spend, and a limited event lineup. Despite these limitations, park attendance trends have gradually improved since reopening. Attendance versus the prior-year period has ranged from approximately 20% to 25% upon initially reopening, to approximately 35% to 40% for the last few weeks leading up to Labor Day. On several days in August, attendance at several parks easily exceeded 50% of prior-year attendance.

Within weeks of the openings, there was no problem making a reservation, even with a shortened four-day week. It seemed clear that the self-imposed limitations weren’t a significant factor in restricting attendance. Furthermore, the visitor value and experience were diminished by the shorter operating hours and reduced attractions. Not only were the parks closing earlier than usual, but during the hours that they were open, many key rides were unavailable. And, at least one of its parks – Dorney Park in Pennsylvania – where the ticket included an integrated water park, never opened the entire section with water attractions.

The last sentence in the above paragraph that discussed how attendance at several parks easily exceeded 50% of prior-year attendance on several days during August could have used a bit more detail. I suspect some of those August attendance figures that easily exceeded last year’s may have been at its lower-priced water parks and tied to the fewer available days. Cedar Fair CEO Richard Zimmerman stated:

…Getting parks open has allowed us to reengage with our customers and, at the same time, demonstrate the ability to provide our guests and associates with a safe and enjoyable entertainment offering. While attendance levels were somewhat soft upon initially reopening, we are pleased with how demand trends have improved and are encouraged with this positive momentum as we look ahead to 2021.

While the entertainment offering may have been safe, if it was so enjoyable, why weren’t there many more repeat visits from season pass holders? That “positive momentum” still resulted in attendance coming in at a paltry 1.3 million visitors in Q3, a decline of 90% from the 13.2 million visitors in Q3 2019. The attendance decline was largely attributed to six of its thirteen parks being closed in the quarter, along with its limited dates, but it still doesn’t explain why the reservation system wasn’t required.

READ ALSO  Canada blocks bulk exports of some prescription drugs in response to Trump import plan

From my perspective, the explanation that makes the more sense is that potential visitors were either too afraid to go to the parks, were concerned about a lack of income, or unwilling to pay for an experience where key rides and attractions were unavailable. Unless an effective vaccine is developed and becomes widely available, there is little reason for investors to expect that attendance in 2021 will come close to the numbers achieved in 2019.

Additional info in the press release also gave an update on the debt situation:

As of Sept. 27, 2020, the Company had cash on hand of approximately $215 million, compared with a balance of $301 million as of June 28, 2020, which represents an average cash burn rate(1) of approximately $30 million per month during the third quarter.

Including $359 million available under its revolving credit facility, net of $16 million of letters of credit, the Company had total liquidity of approximately $574 million as of Sept. 27, 2020. Based on this level of liquidity, the Company anticipates it will have ample liquidity to meet its cash obligations through the end of 2021, even if operations remain disrupted.

“The actions we’ve taken to date to manage our cash burn rate and improve our capital structure provide us with the necessary financial flexibility and balance sheet strength to manage through this pandemic-related disruption,” added Zimmerman. “Given the ongoing uncertainty surrounding COVID-19, we will continue to explore ways to further enhance our liquidity position and reduce cash outflows.”

Obviously, management wasn’t too comfortable that the “ample liquidity to meet its cash obligations through the end of 2021, even if operations remain disrupted” would be enough. Just how uncomfortable was management? A clue had been in a press release on September 29 with the headline “Cedar Fair Announces Credit Facility Amendment and Extension of Financial Covenants.” The amendment and extension were to allow the company to extend the covenant waiver period

…from the fourth quarter of 2020 to the fourth quarter of 2021, and the covenant modification period has been extended by one year through the end of 2022.

It almost seems like ancient history that Cedar Fair had borrowed $1 billion, although it was only on April 27, 2020, that it announced that the company

… has completed the issuance of its previously announced private offering of $1.0 billion aggregate principal amount of 5.500% senior secured notes due 2025…

It sounded like a lot of money, and as recently as the Q2 earnings conference call on August 5, Zimmerman described the cost savings plan results as being successful in minimizing the cash burn rate, stating that the average cash burn rate since May was “approximately $35 million per month, in line with the average $30 million to $40 million per month” that had been anticipated.

READ ALSO  Consumption to witness robust uptrend in 2021

The October 1 press release continued to paint a somewhat positive picture by reiterating cash burn rates and its liquidity position.

as of Sept. 27, 2020, the Company had cash on hand of approximately $215 million, compared with a balance of $301 million as of June 28, 2020, which represents an average cash burn rate(1) of approximately $30 million per month during the third quarter.

Including $359 million available under its revolving credit facility, net of $16 million of letters of credit, the Company had total liquidity of approximately $574 million as of Sept. 27, 2020. Based on this level of liquidity, the Company anticipates it will have ample liquidity to meet its cash obligations through the end of 2021, even if operations remain disrupted.

The actions we’ve taken to date to manage our cash burn rate and improve our capital structure provide us with the necessary financial flexibility and balance sheet strength to manage through this pandemic-related disruption,” added Zimmerman. “Given the ongoing uncertainty surrounding COVID-19, we will continue to explore ways to further enhance our liquidity position and reduce cash outflows.”

The company had already decided that it didn’t have nearly enough liquidity to get to the end of 2021, and investors found out why there was the need to extend the waivers in its debt covenants in a second October 1 press release issued minutes after the one about preliminary results. That second announcement on October 1 noted that the company

has priced $300 million aggregate principal amount of 6.500% senior notes due 2028

and that subsequently disclosed that it had completed the offering by October 7. Not only was another substantial amount of debt incurred, but the interest rate was also a full percentage point higher than the previous $1 billion debt issue. Part of this could be attributed to the debt load being increased as well as having a somewhat longer duration – a 2028 maturity vs. the prior 2025 maturity – but it’s also likely that the debt is simply considered more risky due to the poor attendance.

To put things into perspective when evaluating the equity, consider the following:

  1. Prior to the suspension of the quarterly Distribution, the payout was at an annual rate of $3.74 and one of the major reasons to own the equity.
  2. The increase to $3.74, or by $0.01 per quarter, was the smallest increase in a decade.
  3. There were 56,706,946 Units outstanding as of July 31, and if the company were to get back to the $3.74 annual distribution, it would cost just over $212 million per year.
  4. The interest on the $1.3 billion of additional debt taken on so far this year will cost almost $75 million per year.
  5. Season Passes for 2020 have been extended to also cover 2021 visits. This means that cash in-flow from season pass sales in 2021 should drop significantly.
  6. An attorney in Ohio is attempting to put together a class action suit against Cedar Fair for failure to offer refunds on Season Passes.
READ ALSO  Record-setting bitcoin faces test after volatile week

Does the company now have enough cash to get through the 2021 season, or will it need to borrow even more before the 2022 season gets into full swing? So much will depend on two key factors. Will potential customers be willing to visit the parks, and if so, will they have sufficient discretionary income to spend on tickets and hotel accommodations. As of the end of September the answer was still a resounding “No!”

We can infer this from the comment by Zimmerman that the attendance versus the prior-year period only got up to 35% to 40% of the 2019 level for the last few weeks leading up to Labor Day. Carefully read the comment by Zimmerman:

On several days in August, attendance at several parks easily exceeded 50% of prior-year attendance.

Again, it must be remembered that the company was comparing the attendance on a daily basis, and that the percentage on the other days of the week was zero percent. The other clue as to how bad the attendance was can be seen by simply looking at this as a 90% drop vs. Q3 of 2019.

Next, consider that these percentage levels may have been inflated by some of those visitors getting a $1200 stimulus check and/or large supplemental unemployment payments of $600 per week. As I write this, President Trump, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell each have vastly different views on how big a new stimulus package needs to be and where the money will go. Meanwhile, many potential customers remain unemployed with deteriorating personal savings.

One of the company’s thirteen parks that managed to open was Worlds of Fun in Kansas City, Missouri. The state’s license plate carries the motto “SHOW ME STATE.” While I’m not from Missouri, I will remain bearish on Cedar Fair until the company can SHOW ME that the $30-40 million per month cash burn rate has ended.

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.



Via SeekingAlpha.com