CorePoint Lodging: Disposal Strategy Still In Check
Summary
- CorePoint continues to execute well its two pronged approach.
- Sold $274 million worth of hotel in 2020.
- Repaid $221 million of debt.
- Achieved breakeven at the property level in 2020.
This article is a follow up on my last article, CorePoint Lodging: Check In At Its Core Portfolio For $100 Million where I laid out the thesis to invest in CorePoint (NYSE:CPLG). I still believe that their strategy of selling the lower margin hotels and keep the high margin ones in the portfolio is the right one. The article was written in May, when the pandemic was raging, uncertainty was everywhere, and hotels were almost given away for free by investors. After almost a year, the catastrophic scenario did not happen, and the price went from $3.8 to around $9.3.
Disposal strategy
The management continued with its disposal strategy quite successfully given the pandemic context. The company was able to sell 61 hotels in 2020 for $274 million, which amounts around $4.5 million per hotel. This value represents an average multiple of 2.6x 2019 revenues and 21x 2019 EBITDAre on these properties. After the end of 2020, the company sold 8 hotels for $38 million and has more 31 hotels for $185 under contract.
| Obj | Non core Hotels | Nr | Value ($millions) |
| 78 | Phase 1 already sold | 71 | 283 |
| Phase 1 under contract | 0 | 0 | |
| Phase 1 left to dispose | 7 | 28 | |
| 132 | Phase 2 already sold | 42 | 206 |
| Phase 2 under contract | 31 | 185 | |
| Phase 2 left to dispose | 59 | 316 |
If the 31 hotels under contract are sold in 2021, the company has more 66 non-core hotels to sell which means that in roughly two years the company will have completed their transformation.
CorePoint continues to sell hotels at attractive multiples and unlocking value to pay debt. The average value per hotel of past transactions in each phase gives an implicit value to the unsold hotels of $529 million. The unsold hotels of phase 1 and phase 2 are worth $28 million and $501 million, respectively. It is an interesting number if compared with the company market cap of around $550 million.
Beside all difficulties brought by the pandemic the company executed the sale strategy very well both in terms of number of hotels sold but also in preserving value in the multiple sold.
Operational check
The past year was probably the most difficult year in hospitality that anyone can remember. Whole countries closed, people stopped traveling and work from home has gone mainstream. The impact in hotels and other leisure activities was and continues to be terrible. But beside all the restrictions and difficulties imposed by the pandemic the company was able to reach profitability at the hotel level with an Hotel EBITDAre for 2020 of $10 million. Unfortunately, at a company level the EBITDAre was minus $24 million. And while in 2019 the EBITDAre at the hotel and company level were significantly higher, they are not comparable because the number of hotels they own has been changing very rapidly. Since March 2019, the company has sold 113 hotels for $489 million.
The last quarter of the year is one of naturally lower demand for CPLG hotels, and even so their occupancy was around 47%, and the first two months of 2021 were mainly in line with 4Q2020 numbers.
For the valuing, the core hotels will use the 2019 EBITDAre numbers because I expect them to reach those numbers once the pandemic ends. Additionally, margins should be much higher if they reach the same level of revenues. The current crisis made cash conservation and cost reduction the only viable business strategy, and thus management scrapped a lot of costs at the property and company level, and once sales recover some of that costs will prove to be discretionary or not necessary. Furthermore, the company has been gaining market share during the pandemic with strong gains in the RevPAR Index in the last 3 quarters (2Q2020, 3Q2020, 4Q2020), which is a good indicator of the resilience of the hotel select service offer.
For the core hotels valuation, I assumed an EBITDAre multiples between 12x and 18x. These are conservative multiples compared to past transaction records, and do not consider the core hotels higher margins and profitability, which on that factor alone should conduct a higher multiple. But in the end if the market does not recognise the proper value of the core hotels, maybe a complete liquidation of the entire portfolio is an option.
Scenario 1
| Core hotels EBITDAre (FY2019) | 108 |
| Corporate G&A expenses | 20 |
| CPLG core EBITDAre (FY201) | 88 |
| EBITDAre Multiple | 12 |
| CPLG core valuation | 1.056 |
| Non core hotels | 529 |
| Wyndham settlement payment | 1 |
| Adj Cash | 136 |
| Adj Debt | 772 |
| Equity | 950 |
| Equity per share | 16,6 |
Scenario 2
| Core hotels EBITDAre (FY2019) | 108 |
| Corporate G&A expenses | 20 |
| CPLG core EBITDAre (FY201) | 88 |
| EBITDAre Multiple | 18 |
| CPLG core valuation | 1.584 |
| Non core hotels | 529 |
| Wyndham settlement payment | 1 |
| Adj Cash | 136 |
| Adj Debt | 772 |
| Equity | 1.478 |
| Equity per share | 25,8 |
In my opinion, CorePoint value per share is worth around $16 and $26, but it could be much higher if one splashed a past transaction comparable multiple, since during 2020, a pandemic year, the company sold 61 hotels for 21x their EBITDAre. Why shouldn't we value CPLG core hotels with that multiple like that? First, these multiples are hotel level EBITDAre multiples and in the core hotels valuation we have also to take into account the general and corporate expenses at the company level. Secondly, we want to be conservative to contemplate Mr. Market vagaries.
Putting it all together
At current price CPLG is still attractive with an upside of between 78% and 178% if management continues to execute both of their strategies well.
The disposal strategy has been well executed and almost all the proceeds are going into repay debt, which is helping the company deleveraging their balance sheet and reducing overall risk. The biggest risk is in the management of the core hotels for several reasons. To begin with there is pandemic going on and people cannot travel, and lockdowns are being imposed around the globe, but luckily that will go away in the next year with all the vaccination effort. Secondly, the operational headwind due to Wyndham integration and software problems are not proved to be resolved. While Wyndham made corrections and produced the negotiated tools for CPLG, we need to see a normalized traveling and leisure environment to see if it was fixed or not. The third risk is a perception one since the market may not see the value in CorePoint strategy and continue to value it at low multiples.
Another positive catalyst for the stock is the reinstatement of the dividend. The company cancelled, and rightly so, the dividend to deal with the pandemic, but because they are a REIT, they have a legal obligation to pay dividends as soon as they have results. What I also like is that investing in CPLG comes with a real embedded option, which is the possible sale of CorePoint itself.
Considering the quality of the assets that will remain and the size of the company once the non-core hotels are sold, will be highly attractive for other hospitality REITs looking to consolidate in the same space. I still believe that the odds are on the investor side on this one.
This article was written by
Analyst’s Disclosure: I am/we are long CPLG. 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.
I may buy, add or sell without giving notice here. Do your own research.
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Comments (16)
And the justification is laughable 42% premium “when announced a strategic review” ?! If they sell at that price lets liquidate the company. Sell all the hotels and fire the mgmt and get our money back.
Private Markets a valuing hotels higher than public markets.
They are not selling all the hotels... only the low margin ones! seekingalpha.com/...The idea of the two articles is explaining why is a good investment, in my opinion!High end properties doesn't mean good investment... price still matters!
Well, not me... I try invest when the odds are good, dividend or not!When the disposal is done they will be more profitable and they will start to pay a dividend, which will attract dividend seekers.If the AFFO is low they will be a good takeover candidate. Have seen the multiples on their hotel sales ?
You say "just on liquidation value using their worst hotels being sold in the worst market conditions liquidation value is 2x current stock price". Can tou walk me through your calculations?thanks,
MM
Thanks. Yes "patience" can be an edge...
