Bijelo polje

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2019-10-22 02:19:17

CorePoint Lodging Inc. (CPLG) is a REIT that was spun off LaQuinta and traded initially at over $27 a share in July of 2018. The shares drifted lower and 6 months later, in December of 2018, traded at less than $12. They are now at $9.69, over two times less than the conservative tangible book value of $20.95 per share. At the same time, not only does the company pay a 8.26% dividend, but also buys back shares. Despite short-term challenges, the company can easily maintain and grow its dividend, warranting much greater price in future.

Value of Real Estate

CPLG own hotels worth at least $2.2B as of 6/30/19, with values likely being overly conservative. With $1B of debt and 57.7M shares outstanding, you are buying 1,200/57.7=$20.95 worth of hotels for the current price of $9.69.

Source: CPLG Form 10-Q

Note the depreciation in the above table. Also note that the hotels that CPLG sold recently were sold at a gain, meaning they were carried on the books at a value lower than the sales price. The $2.2B real estate value is likely understated by quite a significant amount.

Source: CPLG Form 10-Q

Cash Flows

While the company reports GAAP losses, they are able to pay dividends, invest into hotel “repositioning” and buy back shares. The reason is simple: they depreciate in excess of CapEx and the effect will only get more pronounced as they dispose of older hotels that have lower depreciation but greater maintenance CapEx expenses. Company contends that maintenance CapEx is about 5% of revenues, which would put it at $21M for 6 months (on revenues of $427M). They had D&A of $90M during the same period. Additional CapEx is for “repositioning” of hotels to move them more upscale and increase revenues.

Source: CPLG Form 10-Q

Very roughly, the company depreciates its property at $180M a year, maintenance CapEx is actually $42M, resulting in a difference of $138M, not taking into account the growth in real estate prices. After the GAAP net losses that are being reported ($92M annualized from above), there is roughly $45-50M a year left for dividends and buybacks.

Management and Franchise Agreement

There are plenty of fees that CPLG pay that are based on revenues. Below is relevant information.

Source: CPLG Form 10-Q

It becomes obvious that in order to improve profitability, the company needs to get rid of its least-profitable hotels. That way the margins on the remaining hotel portfolio will grow. This is exactly what they are doing. They identified hotels with the lowest margins and are selling them while using proceeds for debt reduction and a modest buyback program.

The stock has been under pressure lately due to the item I outlined in orange above. This is certainly temporary and does not affect my investment thesis. Below is the information on the non-core hotel sales.

Non-Core Hotel Sales

The benefits of sales of non-core hotels are outlined below. It is worth noting that for the hotels sold so far, proceeds of $50 resulted in gain on sales of $7.3M and only reduce FFO by $0.8M a year, which is less than interest savings on a $50M debt reduction.

Source: CPLG Form 10-Q

As the remaining non-core hotels are sold, maintenance CapEx, debt and interest expense get reduced while proceeds can partially be used for share repurchases. Overall company-level FFO will only improve with these sales, more so on a per-share basis.

Dividend

While CPLG is a REIT and has to pay out most of its income in dividends, it makes most sense in tax-free accounts since dividends on REITs are taxed at rates of ordinary income. I do not provide tax advice; make sure you look into tax implications of investing in REITs. The current dividend is well-covered and should only increase as the non-core sales progress.

Good afternoon, Anthony. I'll take your second question first with respect to the dividend policy, which is obviously regularly reviewed at the Board level. We believe our dividend is well covered. Our annual $0.80 dividend represents about 50% of AFFO from a payout perspective based on our revised AFFO midpoint. If you further incorporate our estimated annual maintenance CapEx, which we conservatively assume to be about 5% of total revenues. Our dividend and net maintenance CapEx level is also covered at about 90% of AFFO.

And then I would further add a few other things. The non-core dispositions, we expect to reduce maintenance CapEx going forward as well as we sell these older higher CapEx assets. And given the low EBITDA contribution even lower or marginal AFFO contribution, we would expect to reduce the go-forward maintenance CapEx without really losing much AFFO. And then lastly, I'd just reiterate Keith's comment that we do not think that our revised fiscal year 2019 outlook is reflective of the potential capability of this portfolio.

And then circling back to your first question on capital allocation, our priority has been on paying down debt to strengthen the balance sheet and opportunistically repurchasing our shares accretively. So as we go forward, as we look at this given the profile again of the low EBITDA contribution, we are confident that we can actually pay down debt and still have proceeds left over to repurchase shares and our debt-to-EBITDA leverage ratios actually come down again, given that we're selling on a revenue multiple basis. So we're unlocking a lot of value in proceeds relative to the little EBITDA that they're contributing. So overall, we think we can accomplish both of our capital allocation priorities paying down debt and accretively repurchasing shares

Source: Dan Swanstrom, CFO, CPLG Conference Call, emphasis mine

Valuation

The company currently pays a 8.26% dividend that is easily sustainable and should grow over time. They also repurchase shares. At the same time, the book value per share grows since the true value of hotels being sold is being unlocked and due to accretive share repurchases.

As a result, to date in 2019, the company has repurchased 2.2 million shares of its common stock at an average price of $11.70 per share for an aggregate purchase price of approximately $26 million. That leaves us with about $24 million of remaining authorized capacity under our existing share repurchase program.

Source: Dan Swanstrom, CFO, CPLG Conference Call

If we assume the conservative scenario that the current challenges with occupancy rates persist, the long-term value of hotels should keep growing approximately at a rate of inflation. Since each share implies $2,200/57.5=$38.26 of real estate (and $17.39 of debt), for which the current price is $9.69, you are buying both the dividend income and a 54%-discounted leveraged (2:1) inflation hedge. In other words, at current prices, you get a total expected long-term return of at least 13% per year. Or significantly more when the occupancy issues are resolved or the market factors in the true value of CPLG’s real estate. CPLG has a bright future and I keep adding to my position.

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.


seekingalpha.com Dmitriy Kozin
cplg hotels capex value company dividend debt they share shares maintenance future












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