Keep the Hotels Full, and Rest of Operations will Follow...The last three years we've learned that Lodging is a tough business during Pandemics. Really tough. We see today the positive impact that busy hotels has on GH, quite impressive.
You think about it for a moment, if your hotel is occupied, there's a good chance the occupant will find entertainment, Food & Beverage, and maybe use your bank machine during the course of their stay, depending on their luck at the roulette wheel they may even book an extra night!
"Get them in the hotel, they'll find the saloon." I can hear the CFO trumpeting those orders loudly.
He's right. Fill the hotels and the rest of the business will flourish.
I think that's what we're seeing here in Q3. Occupancy up to 78%, average cost $165/night; this was 22% of Gross Revenue for the Quarter. Wouldn't be surprised if their is their target for lodging as percentage of Gross Revs, somewhere between 20-25%. Q3 really proves it.
With that said, temper expectations for Q4. Will be Christmas season, yes, parties and events, full Deerfoot Hotel, maybe some no-limit poker with Kasking & $anta. Don't expect Q4 Gross Revenues to top $22mm, not by much if they do. Nothing wrong with that, just dial down expectations. As management noted, Q3 experienced higher lodging occupancy in GP due to wildfires. We have two hotels in GP that are more impacted by seasonality than Calgary the operations.
This is a fixed-cost business, where the higher occupancy of hotels leads to increased profitability throughout all its operations. Look for Q4 to be similar to Q3, maybe just a touch stronger depending on how "charitable" guests feel around the Christmas season. (Side note: Mortgage costs are rising countrywide, that will reduce consumer spending.) We are fortunate because Albertans carry less mortgage debt than households in other provinces, and Alberta business with exposure to the resource sector are better positioned to increase salaries of employees, even grow their teams. This will be positive for GH and its Alberta peers in the short-medium terms. GH could remain strong while peers in BC and ON will face harsher recessionary forces as their customers have less in the purse to part with.
Stepping back, the company is emerging from the Pandemic downturn, much leaner than before. 2016 to 2019, we used to linger around $10 per share. 2024 we will find that support again somewhere near the $10-11 mark. Yes, I can hear the yawns from the popcorn throwers in the back. Slow-growth isn't fancy, it doesn't draw crowds; but if managed correctly we can take advantage of cheap shares through the NCIB. Simply, if others don't want to buy the stock, then GH can continue to buy back its shares at a discount. (I need a hat that says: Buy Back Stronger) This buyback strategy has really started to work, that's how we achieved $0.27 EPS in Q3; cost management combined with way fewer shares outstanding. The buybacks are causing profitability on a per-share basis to accelerate even though operations are probably within 10-20% of their peak revenue generation potential.
Speaking of $0.27eps, that supports another new Benchmark for investors to glance at: Annual EPS, earnings per share
If you were to roughly extrapolate the $0.27/sh eps from Q3 over the next 12mo, you will arrive at the mythical, majestic high-water mark of $1.00/sh eps. While not important to the analysts, this is a nice clean reference point for Generalists, the mom & pop crowd. Investors like Kasking and myself, we enjoy Round Numbers, stuff that's easy to work with. When you have a business that generates $1.00/sh EPS, you apply a normal EPS multiple of 12 to 14 to arrive at a price target.
So if GH is consistently and predictably generating $1 eps, then a reasonable price target would be 12 to 14x that figure, say $13 is reasonable for time being.
If anyone wants to talk Dividend, we can. Just glancing at where we stand today, there will be plenty of room to take us up to $0.06/mo over next 12-18mo. Above $0.06/mo dividends, we are above the 80% payout ratio mark. 80% is kind of an optimal payout ratio target for steady, slow-growing businesses like GH. Gives you some room to continue regular dividends when we experience an eventual recession. Kind of like planning ahead for the inevitable slowdowns.
I think topping out a regular dividend at $0.72/yr would be prudent. Whatever remains above that can then be used for continued NCIB, Debt reduction, Venture Capital, maybe even the odd "Bonus Distribution" depending on Kasking's cut at the tables.
Cheers gang, good quarter. Keep expectations in check. Economic turbulence ahead, as always. $12+ next 12mo wouldn't be surprising.
Little roadmap below. Profitability getting back to where we like it. The new 17% AGLC commission sharing certainly helping. We walk the eggshells until we have some clarity of a possible extension of the current 2% increase.
Be good, $anta always watching in Q4.