market folly

We're posting up notes from the Sohn San Francisco 2018 investment conference.  Next up is Mick McGuire of Marcato Capital Management who pitched 2 longs: Corepoint Lodging (CPLG) and Extended Stay America (STAY).


Mick McGuire's Sohn San Francisco Presentation: Two Longs

•    Corepoint Lodging (CPLG) – lodging REIT spun off from La Quinta
•    Spun off from La Quinta recently so a new company in equity markets
•    315 properties REIT with all La Quinta branded properties and operated by Wyndham
•    Some classic dynamics of spin-off at play (Less analyst coverage, noisy financials, atypical shareholder base due to spin)
•    Earnings were temporarily depressed and should increase as 1) hotels impacted by hurricanes in Texas and Florida will come back online and contribute to earnings; 2) renovations are completed
•    Trading at a discount to peers at 8.3x EV/EBITDA vs median of 10.6x
•    Other sources of earnings upside are increased oil and gas activity – have more exposure to oil and gas markets
•    Trading at a discount based on hard asset value
•    Substantial opportunity to improve hotel level profitability
•    If margin improvement doesn’t happen, business likely to be sold (Taxable spin purposefully preserved ability to sell immediately)
•    55% upside based on current price, using 11x multiple and 2019 EBITDA of $232m


•    Extended Stay America (STAY) – hotel owner/operator with 599 properties and 27 franchisees
•    La Quinta part 2 but at the beginning of the story
•    Largest single brand hotel owner and operator in North America
•    Longer length of stay, less labor and higher margins versus typical lodging operator
•    Company knows current structure is sub-optimal and seems motivated to do something, which could unlock value
•    Highest margins relative to peers, strong cashflow profile, positive industry fundamentals, discounted valuation
•    Re-franchising less profitable units
•    Building new hotels with cash flow
•    Last of its kind to separate its hard real estate assets from its brand company
•    Capital deployment likely to drive shareholder value: stable cash flow from retained hotels, refranchising less profitable hotels, goes into: repurchasing shares, new hotels, growing franchise business which is minimal cost and high returns
•    Attractive valuation: Trading at discount to peers. 8x EBITDA versus peers at an average of 10.7x
•    Argues co belongs in a larger portfolio
•    134% upside to $38.12 target price based on 2022E Maintenance FCF/Share of $2.29 and 15x multiple


Be sure to check out the rest of the Sohn San Francisco 2018 presentations.