CorePoint had a nice run from my recent write-up in January, up 12.5%. Q4’18 earnings beat expectations too, reporting comparable RevPAR growth of 9.9% and adj. EBITDA was $30MM, 13% higher than street expectations.
However, the stock was taken to the woodshed on Friday (March 22) when the company’s outlook disappointed.
The company’s outlook called for $173MM to $184MM of EBITDA compared to $199MM by consensus (though only one analyst covers the stock, so hard to say there is much of a consensus). Like many others have announced, CPLG is cost inflation in its operating costs (e.g. payroll).
In addition, the company’s hurricane-impacted hotels would not be adding as much EBITDA as originally expected. The company previously said it lost $20MM of EBITDA from the hurricanes on these assets. Instead of getting the full EBITDA back, mgmt expects just $10MM of EBITDA. It also expects $7MM from re-positioned hotel portfolio, but expects pressure in its oil-related market (company’s largest state exposure is Texas).
This is clearly disappointing, but not sure its worth the 26% drop on Friday. Like anything, it is likely a mix of factors. Part of this could be spin dynamics. In other words, people decided to blow out of CPLG now because they didn’t want to hold the stub piece long-term anyway. Another piece is likely due to the recession fears that were re-ignited on Friday that led to the S&P being down 1.9% in one day (the worst day so far for 2019). Hotels do not do particularly well in downturns.
Silver Lining -> Strategic Opportunities
There were several silver linings that management highlighted on the call, overshadowed by the market’s focus on the 2019 EBITDA outlook.
First, there are several strategic priorities for 2019:
- Improve Operating Performance
- Clearly, the company is facing cost headwinds. Therefore, its strategic priority is to identify underperforming hotels that have revenue and cost synergies available
- Benefit from Wyndham Relationship
- CPLG transfers onto Wyndham’s platform in April 2019 and full integration will be complete in 1H’19.
- There are clearly cross-selling opportunities and increased distribution for their hotels.
- I continue to think it is underappreciated that La Quinta had 15MM loyalty members, but Wyndham had 55MM in 2017. Those Wyndham loyalty members will now be able to book La Quinta’s in 2019.
- Divest Non-core Hotels
- CPLG sold 2 hotels in Q4 for $4MM. Mgmt noted these hotels were operating at significantly depressed margins.
- More importantly, the company has identified 76 other non-core hotels that are operating at a hotel adj. EBITDA margin of 8%, well-below the 26% average of the core portfolio. In addition, RevPAR is 40% below the core average.
I have written about the first two points in my previous post, but I want to focus on the last point because divesting these hotels could be extremely accretive to the equity. Recall, the SEC document here cites $2.4BN of hotel value compared to $1.6BN of EV. To me, if the company can sell these hotels at higher prices than what the market has ascribed to them (currently a 33% discount to the 2018 appraisal), that will be a solid catalyst for the equity.
When reviewing the portfolio as a whole, and what constitutes “non-core” it becomes more clear why it makes sense to divest these assets. The company will lose $138MM of sales, but very little EBITDA in the grand scheme.
What I think is the most compelling case for upside on the equity is what the 2 under-performing hotels were sold for. Very low EBITDA margin, these hotels were sold for $4.5MM. As Sam Zell has said, investing in real estate many times comes down to replacement value. Perhaps what this sale represented.
Anyway, I don’t think it would be appropriate to think that these 2 sales are data points we can anchor on, but let’s run through some scenarios. First, let’s sale they get the same price/sales multiple.
Translating that into what happens to the valuation of the company:
This math roughly lines up with what is presented in the chart above provided by the company. And what this means is that if you think the company can get $230MM for these assets, the core portfolio is trading for ~8.0x and a 12% cap rate!
Indeed, no matter how you cut it, the PF valuation is very attractive.
So let’s say you think the portfolio should be 8.0% cap rate (a discount to the valuation given in the CMBS report). This points to a $21.6 price target. And this doesn’t bake in any growth for the next 2 years, it simply excludes the non-core portfolio.
3 thoughts on “CorePoint reports Q4’18 beat, but inflation pressures dampen 2019 outlook. Stock is taken to the woodshed, but ignores upside from divesting non-core assets $CPLG”
Well written article with some good points.
I am somewhat skeptical about the lift likely to materialize from cost reductions and joining the Wyndham platform. Maybe they’ll surprise everyone.
I find the most interesting thing to be the valuation of the assets and trimming the core portfolio. Earlier in 2018, Corepoint sold their hotels pretty much at their carrying value and the combined proceeds from the Tuscaloosa and Chattanooga sales were also pretty much at their carrying value (although selling for about $17k per key isn’t a good look. The point being, albeit with a small sample size of less than 10 hotels, every hotel sold has been pretty much at the carrying value. I don’t know what data exists to contradict that the balance sheet’s asset values are materially incorrect.
It seems the company is selling for below its liquidation value and the market doesn’t recognize it, if I’m in management I’d start liquidating those non-core assets ASAP and both pay down some debt and buy back the stock with the proceeds.
If you’re paying a 7.6% dividend yield and your average interest rate is 6.16% (even less ~ 5% after tax deduction), then it seems like management should really focus on buying back their stock. The board authorized a $50m buyback, so let’s see if they act on it.
Thanks for the comment. Could not agree more with the buyback thoughts. They likely will have to use the proceeds of the sale to pay down some of the CMBS debt they have, as the debt agreement likely stipulates “if you sell our collateral, we are owed a pay down” at least to keep the same LTV. But either way, it should create some value (each $ of debt paid down is a $ to the equity)
If anything, if they don’t have the capital to do a buyback, it seems to me that CPLG should be a take-out candidate given the valuation…