Tag: CorePoint

CorePoint Q1’19 Recap: Asset sales are the real story $CPLG

CorePoint reported Q1’19 EBITDA of $43MM compared to $40MM estimates and $37MM last year.

Net/net this was an OK result. Obviously, EBITDA beat expectations. RevPar was up 3% according to the company, which is ahead of their 0-2% growth guidance. Unfortunately,  though, excluding the hurricane-impacted hotels of last year RevPar would’ve been down ~1%. EBITDA improved due to these hotels coming back online, but that was to be expected.

April was also looking slightly weak due to oil related market which the company noted was softer than Q1’19 as well as an outage at their call center.

Fortunately, the outlook was also left largely unchanged. The company filed an 8-K that shows they are taking steps to lower G&A (reducing headcount which should save 7% of G&A or $1.5MM).

As I noted in my prior post, the real developing story, Core Point is looking to divest “non-core” hotel assets. They had conducted 2 sales at very attractive multiples when they initially announced this.

They also announced 3 more hotel sales. The hotels carried an average hotel RevPar that was 25% lower than the portfolio average and the average hotel EBITDA margin was 700bps below the portfolio average.

Therefore the implied valuation for these 15x at EBITDAre or 2.5x revenue multiple, per the company disclosure. This is a great result. Let’s take a look at what that means so far for the five hotels sold:

We know from this chart below that there is still a lot of wood left to chop.

Since the 76 non-core hotels were already excluding the 2 asset sales sold for $4.5MM, there are still 73 hotels left worth $132MM of sales and $11MM of EBITDA.

This is important because the sales proceeds / multiples thus far have come well in excess of where CPLG is trading. CPLG currently trades at 9.9x 2019 EBITDA… If it can continue to divest non-core assets at multiples above where it trades, this could be very incremental to the stock, as shown below:

More than likely, the company will probably sell these assets for 2.0x Sales as they move forward, meaning CPLG would be trading at 8.4x on a PF basis. If the stock were to trade at 10x, this would mean it is worth $18.7/share, or 35% upside.

That said, I think that would still be too cheap given multiple ways to look at it, whether it be cap rate, book value, EV/EBITDA, etc. CPLG is too cheap.  Imagine if CPLG just traded at book value… the stock would be worth $21/share.

It seems to me that the reported book value as well as the JP Morgan valuation is looking more and more accurate.

The company has also started to buy back some stock. Per the earnings call, “Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV.”

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

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:

  1. 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
  2. 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.
  3. 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.

Lodging play trading at a substantial discount to asset value. High margin of safety + solid dividend means we are paid to wait for value to be realized $CPLG

Margin of safety is the theme today. Made famous by Seth Klarman, the famous value investor harps on this notion given that predicting the future is an imprecise science.

The stock is CorePoint Lodging (ticker CPLG) and represents the owned assets of La Quinta that were spun out on their own in early 2018. When I think of La Quinta hotel, I first ask myself “when was the last time I stayed in a La Quinta??” and I think the answer is once, maybe never. But just because I also don’t shop at a discount grocer like Dollar General, doesn’t mean that the market isn’t huge for low-to-mid economy businesses.

In mid-2017, La Quinta decided to spin its owned real estate into a new company and the remain-co would be an asset-lite franchise and management company, which tends to garner high multiples. Then, in 2018, Wyndham announced it would acquire the La Quinta business (i.e. the high margin franchise business) for $1BN. Therefore, the La Quinta brand and management of the hotels would be folded into Wyndham’s portfolio and plans for CorePoint remained for it to be spun out to shareholders before the Wyndham acquisition was consummated.

CorePoint currently consists of 315 hotels in 41 states, with high concentrations in Texas, Florida, and California with most of the hotels being in the midscale range.

geography

Importantly, and discussed a bit more below, the company is ended a capex program to renovate its hotels. This should help the dated-looking portfolio compete with other chains. As shown below, this appears to be a positive step:

Hotel refurb.PNG

There are also a few benefits of being folded into Wyndham. For example, La Quinta hotels will now be included in the Wyndham network and endorsed by Wyndham, which includes their rewards program.  Additionally, there are cost efficiency opportunities to be had from Wyndham’s scale and procurement strategies.

All this sounds good. So what has happened with the stock?

CorePoint’s stock is down 50-55% from the initial spin at the time of writing. What happened?

  • Spin off dynamics
    • As is typical in spin-offs, you can have a dynamic where shareholders are left holding a stub business that doesn’t meet the characteristics of what they wanted to buy in the first place (whether it be size, industry, or other business attributes)
    • This was a taxable spin as well, meaning not only would taxes be owed at the corporate level, shareholders would also owe taxes. This also creates selling pressure
  • Poor communication / expectations setting
    • Following the spin, it seems as though there was poor communication by management on what “real” earnings for CorePoint would be. This was no easy task, as the businesses had historically operated together with the franchise business. Estimating stand-alone cost structure is tough, but I’m of the mindset that you always underpromise and over delever (or just promise and deliver…)
    • The Form 10 (essentially the S-1 for a spin-off) highlighted that PF adj. EBITDA was ~$207MM. When the company had its first investor call post-spin for Q2’18, they guided to $182MM of EBITDA, a significant drop. Part of this was due to Hurricane comp, but even worse, they had to guide down 2018 again to $177MM following a weaker than expected Q3’18
      • Part of the decline to 2017 was due to ~$20MM of Hurricane disruption, which management called out and was expected
      • But a second component that I think the street missed / management did not communicate well is higher royalty & management fees as well as stand alone costs than I think many on the street were expecting

EBITDA Bridge.PNG

  • Concentration:
    • The brand is clearly concentrated here on La Quinta hotels, which can give investors a but of heart burn
    • The assets are also mostly in Texas, Florida, and California. Florida and Texas were each heavily impacted by Hurricanes, Florida is known for its cyclicality (tourism driven state) and Texas is impacted by the oil markets.
    • That being said, taking a step back, it does make sense that there assets are in these regions, as they are some of the fastest growing states and have high populations, so I think this risk is often overblown
    • The company also includes this slide below, detailing RevPAR is more stable than other markets

REVPAR.PNG

 

Investment Thesis

But here lies the investment opportunity. The stock, down some 50-55% since its spin has been left for dead. There’s also only one sell-side analyst covering it (who is negative) and the calls are brisk given the lack of following.

I really like situations like this, as it presents an opportunity to buy something that people are missing (I should note, its hard to find CorePoint on a stock screen unless you are looking for it specifically) or have actively thrown out (from the spin)

My thesis comes down to the following points:

  • Comps should improve due to:
    • (i) hurricane assets back online
    • (ii) reinvested assets garnering higher revPAR
      • The company re-positioned ~50 hotels so that it could upgrade the facilities. The capex ran at about $200MM of refurbishment, fortunately mostly funded by the legacy business.
      • The company has noted that the RevPAR for these hotels is growing faster than the balance of the portfolio, though 2019 will have some higher expenses as they ramp. For longer-term investors even looking out to 2020, these renovated hotels should be online and the company will benefit from their full contribution
    • (iii) no longer lapping Q’s with increased stand-alone expense (note the bridge below assumes no cost benefit from Wyndham’s purchase)
      • I 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.

2019 EBITDA Bridge.PNG

  • Downside protected by solid asset coverage
    • The company issued CMBS debt to fund the business post-spin. As part of that, CMBS lenders wanted to know what the asset-value was backing their collateral.
    • This is shown in the SEC filing here. I think the interesting quote is that the properties are valued at ~$2.4BN. Subtracting out net debt of $960MM gets you to $1.4BN of equity value. This compares to current equity value ascribed by the stock market of ~$775MM
    • This is also supported by book value reported on the balance sheet, which is $24.7 per share compared to ~$13.0 stock price.

CMBS Valuation.PNG

  • Upside from take-out or further acquisitions
    • CorePoint currently trades at 8.75x 2019e EBITDA of $200MM, a discount to where comps trade (ranges from 9.0x-11.0x for Extended Stay, Summit Hotel Properties, Apple Hospitality, Chatham Lodgin, and RLJ Lodging)
    • The discount is actually wider when you factor in $200MM of EBITDA includes no upside from Wyndham’s scale and operating efficiencies
    • Given that CorePoint is also the only mid-economy REIT on the market, an acquirer could look to take-out the portfolio at a significant discount to appraised value, and fold it into its operations for diversity
    • Alternatively, the company notes in its filings that it has a clean balance sheet and that it will “be well-positioned to be a consolidator given our scale….We expect to develop a disciplined acquisition strategy which will allow us to expand our presence in target markets and further diversify over time, including through the acquisition of hotels that are affiliated with other respected hotel brands and operators.” An acquisition of another portfolio may mean diversification as well from just La Quinta

This thesis isn’t without risk and, given the learning pains so far coming out of the spin, there may be additional costs the company finds or faces as a stand alone entity. However, the dividend yield is now ~6%, so I’d argue we are getting paid to wait here.

There is another item that I didn’t touch on and that is a potential tax payment. You see, La Quinta and Wyndham set aside $240MM to pay for corporate taxes of the Core Point spin. If taxes were less than that, CorePoint keeps the balance. It is estimated that taxes will be less than $240MM and originally the company thought they’d be getting $56MM, but this is uncertain. I ascribe no value to this given the uncertainty, but it could be a nice surprise.

I think the stock is worth at least $24, assuming only 1x book, with upside as comps get easier. This represents ~87.5% of upside from today’s levels plus a 6% dividend.