Condor Hospitality Trust: Covid Deal Break, Renewed Strategic Alternatives

Condor Hospitality Trust (CDOR) is a small (~$80MM market cap), illiquid (50+% owned by two funds), lodging REIT that owns 15 hotels primarily across the upscale and upper-midscale segments, with an emphasis on extended stay layouts, both of which have held up better than the upper-upscale or gateway/convention market type peers.  Back in 2019, Condor had an agreement to be purchased by NexPoint's lodging REIT (NHT in Canada) for a $318MM enterprise value or $11.10/share (it trades for $5.00/share today with a $260MM EV), that deal was delayed during the outset of the pandemic last year, later broke, and now that hotels are in recovery mode, Condor is once again putting itself back up for sale.  Given private equity's interest in hotels and particularly the extended stay segment, I could see Condor receiving plenty of buyer attention and selling for a price above where it trades today.

Condor used to be similarly positioned to CorePoint (CPLG), focusing on the midscale and economy select-service segment with a couple hundred hotels, but over a decade or so, they sold off most of that portfolio and repositioned themselves into the 15 hotels (1,908 rooms) they have today:

Most of these hotels were acquired since 2015 for a total purchase price of $288MM.  The portfolio is in reasonably good shape, and in healthy markets where covid restrictions have been relatively minimal (TX, FL, etc); just two of their hotels closed briefly in April 2020, only to reopen a couple months later by the start of July.  Hotel level operating metrics have improved dramatically, the company as of March was no longer burning cash, April occupancy was over 70% largely on the back of leisure travel, with management also optimistic on business travel "We anticipate that business travel led initially by local business demand, and then regional demand, will begin late in the second quarter and improve over the remainder of 2021."  Take these types of metrics with a grain of salt, but the company also likes to tout how they're outperforming their peer set on a relative basis:

Either way, best I can tell, this portfolio is of reasonable quality and likely not at risk for obsolescence in a post-covid recovery.  Hotels are generally are in recovery mode, STR has a good report here with some interesting charts, longer term I think there could be some tailwinds, people might extend vacations knowing they can work remotely and hotels themselves have shed operating expenses (daily cleaning, guest services via mobile app versus the front desk, etc.) some of which could become permanent.  And if you're in the market for real estate recovery plays, hotels just seem better positioned longer term than the other bombed out sectors like office or retail. 

So you have a relatively bite sized portfolio that held up well comparatively through covid, some emerging tailwinds as people begin traveling again, plenty of PE money sloshing around the industry (thinking about CLNY selling their big select-service/extended stay portfolio, BX/Starwood buying STAY, etc.), and a company that's already sold itself once before and clearly motivated to do it again.

A quick review of the capital structure, this is fairly leveraged entity, like many of the lodging REITs they had to raise capital to make it through the crisis.  But here's where things get a little harry, the company issued a "bridge loan" in the form of convertible debt to one of the two funds that own a significant portion of the common stock and the preferred stock.  The convertible debt has a 10% coupon (bumps up under certain scenarios) and is convertible at $2.50/share, it was in the money from the beginning compared to where the stock was trading at the time in November.  The proceeds were used to pay down the KeyBank credit facility and the convertible will likely convert to equity here in the coming days as a requirement for the one of the many amendments to the credit agreement.

With that dilution, we have about 16 million shares at a ~$5/stock price, for a $260MM enterprise value.  Now obviously valuation is a little tricky these days, 2020 was an extraordinary year for the hotel industry, most transactions I've seen quote a "2019 cap rate" as a normalized value, we can argue if that's realistic, it'll likely take a couple years to get back to 2019 run rates, but that's how others are quoting transactions that are happening today.  In 2019, Condor generated $26.2MM in "hotel EBITDA" which is a reasonable proxy for net operating income, on the $260MM enterprise value, that's an approximate "2019 cap rate" of 10%.

Recent Lodging REIT transactions, each of these are better located/quality properties than CDOR, but still good relative data points as they're all similar brand/format sales/purchases:

• Park Hotels & Resorts (PK) sells two hotels in May (better located, but two brands CDOR has in its portfolio) for a 7-7.4% 2019 cap rate
• Somewhat close peer, Apple Hospitality (APLE) in their recent earnings release "The company has acquired five hotels for a total purchase price of approximately $161 million since the beginning of the COVID-19 pandemic."
• Chatham Lodging Trust, another somewhat close peer, in December, sold a Residence Inn in San Diego for $67MM, a 6.5% 2019 cap rate

Again, probably none of these are a perfect comparable, but they've all moved at much lower cap rates than what the CDOR equity implies, seems like an interesting setup.  Per the background section of NexPoint deal proxy, the company began to explore a sale in 2018, they actually received 7 initial all cash offers for the REIT, before settling in with NexPoint.  Times have clearly changed, but given the concentrated ownership here, I think the company will almost certainly be sold again, an 8.5% "2019 cap rate" (the quotes mean I know its a bit of a silly valuation metric) would be $7.40/share.

Other thoughts:

• Probably only 1% of the thesis, but I like that Matt McGraner from NexPoint led the acquisition negotiations in 2019, he's the brains behind NexPoint's real estate strategy and from what I gather quite talented.  Obviously things have changed, he's an asset gatherer so maybe wasn't the most price sensitive, but another point in the "these assets are decent enough" bucket.
• The OSK X mortgage loan listed above is financing one property, the Aloft in Leawood, KS (suburb of Kansas City), that was purchased from a local bank by O'Brien Staley Partners.  Condor had previously gotten covenant waivers from the local bank, but O'Brien Staley Partners has put them into default on the loan.  Condor believes they can refinance the loan with another lender, but there's a possibility that property goes back to the lender in foreclosure.
• My guess is they've received inbound inquiries already and that the sale process won't take more than a few months, again, lots of interest in the sector, we're at a tipping point, I think those that have a bullish thesis on hotels want an opportunity to express it before the recovery becomes fully obvious.

Disclosure: I own shares of CDOR