(1) Broken Spin: CPLG 35% down since spin-off (31 May 2018) due to what appear to be a series of technical factors
(2) Large valuation disconnect:45% upside to 3rd party appraised value of real estate and <9x EV/2019E EBITDA (comps trade at ~10-14x and an average/median of ~12x)
(3) Higher than average growth: a series of idiosyncratic tailwinds provide high certainty CPLG will outperform peer growth. In addition to organic growth CPLG has the following: (i) $20m of EBITDA (+10% growth) from hurricane damaged hotels reopening (this has happened and will feed through from H2’18 into 2019); (ii) $200m of renovation capital with a ~10% ROI (~$20m of EBITDA or +10% growth). 90% of capital spent at 30 June 2018; (iii) 25% of properties are in Texas which is benefiting from above average growth (Texas Comptroller property level data indicates Q3’18 revenue tracking at +10% vs. 2017); (iv) synergies from having property managed by Wyndham
(4) Near Term Catalysts: underlying fundamentals will become evident in the coming quarters. Management to date has provided scant information to the market. They are committed to (and incentived via bonus structure to) provide information and engage with shareholders
Ray Palmer wrote up La Quinta in March (see here: https://valueinvestorsclub.com/idea/LA_QUINTA_HOLDINGS_INC/141874) The write-up is excellent and provides a terrific background to the situation. The very short summary is: (i) La Quinta was split into two parts – a manager of franchise hotels and a REIT which owned properties; (ii) the franchise part was sold to Wyndham for cash and CPLG was spun out in a taxable spin transaction.
(1) BROKEN SPIN
I believe the following factors have caused the spin-off to trade poorly since listing:
(1) The street mis-assessed 2017 (actual) EBITDA and were disappointed. Management was unable to provide clean run-rate historical information in the lead up to the spin. When numbers were reported in Q2’18 (first report post spin) it was below expectations. This was partly the accounts being messy and partly because 2017 benefited from insurance write-backs (which was not properly explained by management pre-spin). In any event, the numbers were a disappointment;
(2) Expectations were very high – street expectations for 2019E were unrealistically high. Pre-spin some numbers were coming out at ~$250m for 2019E EBITDA. This looked very aggressive at the time and implied higher EBITDA numbers for 2018E than where management ultimately provided guidance. This was also a disappointment
(3) Management communication has been appalling. In summary: (i) there is no corporate presentation or any other marketing materials available; (ii) management has done zero investor outreach; (iii) management hosted a conference call for Q2 earnings and did not allow Q&A
(4) JPM Morgan initiated coverage with a sell recommendation and a target price of $16/share. There are a number of mathematical and analytical errors in the report
(5) Some combination of the above has resulted in an information vacuum and the stock becoming orphaned
While the above sounds horrible (and it is) this has created the opportunity. The stock is down 35% since listing and is trading at a material discount to any realistic assessment of intrinsic value.
(2) LARGE VALUATION DISCONNECT
(1) Appraised Value:3rd party appraised value for the portfolio is $2.445 billion. This implies a net asset value of approximately $1.5 billion. The current market value of CPLG is $1.05 billion, meaning there is ~45% upside to 3rd party appraised net asset value
This was a valuation commissioned for creditors (as part of the CMBS offering)
(2) Comparable Companies: comparable companies trade at 10-15x EV/2018E EBITDA (average/median 12x) and 10-14x EV/2019E EBITDA (average/median 12x). See full details below. CPLG currently trades at 9.5-10.1x EV/2018E EBITDA (management guidance) and ~<9x EV/2019E EBITDA
CPLG has a number of idiosyncratic tailwinds that should allow it to grow EBITDA faster than peers over the coming 12-24 months (see below)
(3) HIGHER THAN AVERAGE GROWTH
In addition to organic growth CPLG benefits from the following idiosyncratic tailwinds:
(i) Hurricane Damaged Hotels Reopening (+$18-22m EBITDA): a number of CPLG’s Texas and Florida properties were severely damaged by Hurricane Harvey and Hurricane Irma in 2017 and closed for repair during Q4 2017 and H1 2018. This is expected to result in a one-off reduction in 2018 EBITDA of $18-22 million (management guidance), which represents ~10-12% growth versus management EBITDA guidance for 2018;
(ii) Renovation capex (~+$15-20m EBITDA): CPLG is completing a $200 million refurbishment program to approximately 1/6th of its portfolio. At 30 June 2018 this program was 90% complete. The expected return on capital invested is at least 10%, or approximately $20 million of incremental EBITDA. Company disclosure indicates that RevPAR growth has been 20% at renovated hotels (note: this assertion is corroborated by property level revenue data available for hotels in Texas – see below for TX details)
(iii) Texas growth: 25% of CPLG’s portfolio is based in Texas, a sub-market that has been performing particularly strongly based on energy demand, materially outpacing growth in other US sub-markets. The Texas Comptroller provides property level revenue data for individual hotels (see here: https://data-secure.comptroller.texas.gov/home/login ). July and August 2018 data indicates CPLG’s Texas portfolio’s revenue grew at ~10% in July 2018 and August 2018 versus July/August 2017
(iv) Synergies: post completion of the sale of La Qunita’s franchise business to Wyndham (WH) there are a number of synergies that should accrue to CPLG. These include:
(1) OTA / channel mix: OTAs are the most expensive distribution channel for hotels. Morgan Stanley estimates (i) ~25% of LQ’s room nights are sold through OTAs @ ~18% commission per booking; and (ii) WYN’s channel mix is <20% OTAs @ ~15% commission. Shifting LQ to WH should step change these economics (see MS analysis below);
(2) Procurement: WH has ~9,200 hotels, 10x the number that LQ was operating standalone
(3) Cross-selling / revenue synergies: WYN has 53 million loyalty members vs. 13 million for LQ
The aggregate of the above should allow CPLG to deliver >25% EBITDA growth in 2019E and have still have tailwinds going into 2020. The average EBITDA growth from comps is ~4%.
Morgan Stanley analysis of OTA savings
(4) NEAR TERM CATALYSTS
Underlying fundamentals will become evident in the coming quarters. Management to date has provided limited information to the market and has engaged in no outbound marketing. This will change post Q3 results as management has committed to investor education. Importantly, one of the criteria for determining management compensation is the company’s engagement with shareholders:
On July 31, 2018 the Compensation Committee (the “Compensation Committee”) of the Board of Directors of CorePoint Lodging Inc. (the “Company”) approved the grant of cash-based annual incentive awards for the performance period from May 30, 2018 through December 31, 2018 (the “2018 AIP Awards”) to specified employees, including Keith A. Cline, the Company’s President and Chief Executive Officer, Daniel E. Swanstrom II, the Company’s Executive Vice President and Chief Financial Officer, John W. Cantele, the Company’s Executive Vice President and Chief Operating Officer, and Mark M. Chloupek, the Company’s Executive Vice President, Secretary and General Counsel (together, the “Executives”).
Pursuant to the terms of the 2018 AIP Awards, each Executive is eligible to receive a cash bonus based on the Company’s performance, as determined by the Compensation Committee in its discretion following the end of the performance period, against strategic priorities including with respect to the Company’s property portfolio, the Company’s investment strategy, the Company’s property repositioning and hurricane impacted hotels initiatives, the Company’s capital structure, and the Company’s engagement with stockholders. The Compensation Committee selected performance criteria designed to be challenging but reasonably achievable and retained discretion to modify the performance criteria and determine their weightings.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Q3 Results - this will show underlying business performance. Management will also likely provide more information regarding progress of Revenue & EBITDA uptick from renovated properties. This will be important to prove out the tailwinds / growth case into 2019 and beyond
Management outbound investor education. Expect this to commence from November 2018
2019E Guidance estimates. This is important as it will move street estimates to incorporate many of the tailwinds described in the write-up. For example, if the above is right then the JPM 2019E estimate needs to increase materially