CorePoint Lodging: Plenty Of Gains Still To Come

Summary

• Leisure and weekend bookings to the fore in Q2 as occupancy rates increase.
• Core portfolio continues to report higher margins.
• Solid progress made on non-core disposition initiative with collections of $143 million in Q2.
• Current trends point to a rising share price here in the long run.
• Looking for a portfolio of ideas like this one? Members of Elevation Code get exclusive access to our model portfolio. Learn More »

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We wrote about CorePoint Lodging (NYSE:CPLG) in December of last year and stated the REIT had sufficient balance sheet strength to withstand the uncertainty which was certainly prevalent at the time. When we penned that piece, the price was hovering around the $6.50 level which means shares have returned approximately 135% over the past 10 months or so. Furthermore, as the chart depicts below, there are no warning signals that the outperformance we have seen in recent months will come to an end sometime soon. In fact, long holders should continue to milk this rally for all that it is worth as CorePoint's present bullish trend has far more possibilities of continuing upward than turning around anytime soon in our opinion.

As chartists, we believe every piece of information surrounding CorePoint has already been embedded in the technical chart. Although the REIT has been downsizing its portfolio significantly in recent times by selling off its non-core assets, the market has been keenly aware about what has been happening under the hood in CorePoint.

For example, although CorePoint is still reporting negative earnings over a trailing twelve-month average, the near-term trends are very much in the company's favor. In the recent second quarter, management reported $138 million of top-line sales and EBIT of -$9 million. The top-line number for example came in 92% higher over the same period of 12 months prior and operating profit increased by $44 million.

Despite CorePoint's near-term encouraging trends, the REIT is still not profitable from a net-profit standpoint over a trailing twelve-month average. This fact (along with the suspension of the dividend) takes CorePoint off the watchlist of many investors but unfairly so in our opinion. The reason being is that profitable companies which have been able to grow their earnings is only one piece of the profitability conundrum. Earnings can be easily manipulated for example to give a positive number either by cutting costs or by buying back large amounts of stock. Suffice it to say, we need to go beyond earnings growth and look at metrics such as the firm's return on equity, etc. This metric gives a better picture of CorePoint's profitability

As we can see from the chart below, CorePoint's ROE (although still coming in negative at approximately 6% trailing) has grown very aggressively over the past 12 months. These gains can be attributed to a demand-driven market where CorePoint's offerings of select-service hotels in excellent locations meet that elevated demand nicely. This trend was a major tailwind on the earnings side in the second quarter but what about the equity side which is just as important?

Source: Seeking Alpha

Given the fact that 25 hotels were sold in the second quarter (which brings the total amount of non-core hotel sales to 147), some investors would have definitely envisioned that the balance sheet would be in far worse order than it presently is. However, at the end of the second quarter, shareholder equity came in at $857 million which means shares, despite the relentless rally they have enjoyed this year, are still trading only fractionally above book value. Furthermore, capital from the asset sales has predominately been directed to debt payments which means the balance sheet is far less leveraged than it was just a few short years ago.

CorePoint still has roughly 63 hotels to sell so we continue to expect more unlocking of value from the company's non-core assets. Gross margins now come in at almost 22% over a trailing twelve-month average and we only see this metric continuing to grow as the REIT becomes more efficient from a profitability standpoint. We saw this trend taking place in the second quarter from the company's core assets (105 in total) where revenue per room on average came in over 30% higher than their non-core hotel counterparts. CorePoint's assets as we stand remain roughly 50% cheaper over the sector in general so we continue to see upside as long as virus-related travel restrictions can be kept at bay.

To conclude, the bullish trend CorePoint has enjoyed over the past 18 months does not look like it will come to a halt any time soon. Over 60 non-core hotels remain to be sold which means the sustained trends we are seeing with respect to reducing leverage and return on equity will continue to get better. Core units are operating very well and shares continue to trade at a discount to the sector in general. If rumors begin to circle about a possible sale of the company here, this will also help the share price going forward. We look forward to continued coverage.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CPLG over the next 72 hours. 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.