Wednesday, June 23, 2021

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

49 comments:

  1. You moved the market, lets see if can enter a bit lower. Thanks

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  2. Have you tried to reconcile the $318m initial transaction value?

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    1. Reconcile how? It was about a 8% cap rate.

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    2. I mean, how you get to $318m transaction value for the original NexPoint transaction to compare it to your current enterprise value table. In their proxy they disclosed $144m for equity instruments and preferred (@ $11.1/share) and $136m gross debt (ignoring cash). Based on an EV-table like yours this would be around $280m ./. cash... Not so much upside? Or am I missing something?

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    3. Ah got it. I think the difference is the transaction assumed CDOR would buy out the 20% JV interest in one of their hotels, which they did. So that added ~$34MM in assumed debt to the EV.

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  3. Hi... in your 2019 EBITDA estimate, did you give them credit for cost saves? I am seeing EBITDA a little lower (say $23MM) for 2019?
    Also, not that we would know, but fwiw, I would think they would get closer to 8% cap rate if they were able to get that last time, and now the properties are leaner (?) ... is there a reason it would be worse? obviously good to be conservative
    Thanks!

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    1. Whoops - I see the $26.2MM EBITDA right in their PR... never mind - thanks

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    2. I would caution getting too aggressive with the EBITDA estimate in a sale, we're already using 2019 numbers which will be a couple years before returning to that level, so I wouldn't give them too much additional credit for cost savings. I would say that's probably what a buyer is thinking, they might have a thesis that cost saves are permanent (although labor prices are obviously increasing). But I guess you could play with the numbers, lower current EBITDA lower cap rate, or bake that risk into the 2019 cap rate which I think is what other transactions are doing.

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  4. sorry - one more thing - they used to pay a div, which on the new sharecount would be about a 9.5% yield...

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    1. I wouldn't pay too much attention to the former dividend, other than cancelling the dividend might have driven some yield investors out (one of my favorite themes is REITs/BDCs/YieldCos that don't pay dividends) and could be one reason the shares are cheap.

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    2. Check out Mesa Royalty Trust. You will like that one. Trades at sizable discount to SJT due to a $1m charge because of a past mis calculation. And very unlikely to be sold in a forced liquidation sale when prices are low, like many other royalty trusts.

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  5. Thought this was an excellent write-up. Would have liked to buy more than I was able to in the mid 5s.

    Back in 2019, the offer implied a current year cap rate of 8.24% when the 10yr was at 1.8% ish so delta of 6.44%. I think buyers will need a higher delta now, something above 7% probably. Given 10yr is at 1.5% now, that means 8.5% could be doable. Even at 8.75-9.00%, it represents nice upside. If management does right by the company, they will sell it, given its liquidity profile and covenant waivers lapsing soon.

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  6. Good idea! It's interesting that CLDT announced acquisition of two Austin hotels and CDOR has two Austin hotels (both extended stay which fit perfectly with CLDT's portfolio). Could be just a coincidence but it could mean CDOR just sold 2/12 properties for nearly 25% of enterprise value...

    https://chathamlodgingtrust.gcs-web.com/news-releases/news-release-details/chatham-lodging-trust-prices-public-offering-6625-series

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    1. Seems a bit unlikely it is CDOR's hotels, just the timing doesn't quite match up if they bought these on 6/15, but at a minimum, shows that there is activity and interest/financing for these assets.

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  7. RevelationOnVacationJuly 14, 2021 at 11:10 AM

    Condor just entered into a master confidentiality agreement and standstill provision with Highgate Hotels, INC. Highgate is a real estate investment and hospitality management company with over $10 billion of hospitality assets under management.

    Highgate purchased 197 hotels from Colony Capital in September of 2020, in a transaction valued at $2.8B.

    CLNY Hospitality Portfolio (2019)

    Property Operating Income: $828.3M
    Property Operating Expenses: $555M

    "Hospitality Porfolio EBITDA" = $273.3M
    Cap Rate = ~10%

    Occupancy and RevPAR standards have increased sharply since this deal, considerably lowering the risk in the lodging industry. This leads me to believe a deal in the 9 cap range is more than possible. This also keeps me comfortable as a 10 cap works out to $5.21 per share.

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    1. Thanks, I didn't see that. CPLG also just announced a strategic alternatives process, stock jumped today but if you do the 2019 EBITDA math after backing out the properties they've sold, I still get a double digit cap rate on the portfolio.

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    2. RevelationOnVacationJuly 14, 2021 at 12:18 PM

      Hotel Adjusted EBITDAre for CPLG? Sorry for the double comment I forgot how to login.

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    3. RevelationOnVacationJuly 14, 2021 at 12:32 PM

      $CPLG EV: $1.6B

      2019 Hotel EBITDAre = 166M
      EV @ 10 Cap = 1.66B

      This one is also quite interesting.

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    4. I think its more like $138MM after the asset sales.

      CMBS: $546MM
      Revolver: $75MM
      Market Cap @ $13.15 = $770MM
      Cash from Pending Asset Sales = $220MM
      EV= $1.12B
      2019 cap rate of about 11.5%

      Might write up a post on it too, would love a second set of eyes if you're looking at it as well.

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    5. Lower quality portfolio than CDOR, but BX does own 30% of it, its often compared to extended stay economy like assets, maybe BX takes it back private in their massive non-traded REIT?

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    6. RevelationOnVacationJuly 14, 2021 at 2:02 PM

      "As of March 31, 2021, affiliates of Blackstone beneficially owned approximately 30% of our outstanding shares of common stock and held horizontal risk retention certificates issued by the trust that holds our CMBS Facility indebtedness (“Class HRR Certificates”). As of both March 31, 2021 and December 31, 2020, the portion of our CMBS Facility outstanding balance that correlates to the Class HRR Certificates was $79 million. Total interest payments made to Blackstone as a holder of such Class HRR Certificates for each of the three month periods ended March 31, 2021 and 2020 were $1 million."

      Hmm you might be on to something, this also caught my eye.

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    7. RevelationOnVacationJuly 14, 2021 at 2:20 PM

      Convertible Debt:
      N/A

      DEBT:
      CMBS Facility $546M
      Revolving Facility: $75M

      EQUITY:
      Common Shares Outstanding: 58.52
      PPS: $13.20
      Common Market Cap: $772.46M


      Estimated Common Cap: $772.46M
      Preferred Shares: $15M
      Debt: $621M
      Cash Pending Sale: $220

      Enterprise Value: $1.19B


      2019 Hotel EBITDA = 138M

      EV @ 10 Cap = 1.38B

      ~$16.50 to the common stock


      Opened a position; will do some more digging into the night. A little bit curious about the pending sales and the CMBS numbers they noted in the most recent quarterly VS. the language in the annual. I think at a 10 cap we are being conservative even with mostly economy and midscale.

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    8. Always been a mystery to me how they've been selling their non-core portfolio at 15-20x hotel EBITDA. Their explanation is they are selling to owner-operators, so the buyer doesn't have the corporate overhead, but yes, might be being conservative and this asset class shouldn't be in a lodging REIT structure.

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  8. Are you using the Hotel Adjusted EBITDAre?

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  9. What does the recent 8-K filing mean for the thesis here?

    https://condorhospitality.q4ir.com/sec-filings/sec-filings-details/default.aspx?FilingId=15121315

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    1. I had the 2020 notes converting in my little valuation swag but not the preferred stock, it further dilutes the common by a bit, so it lowers the expected take out value a touch.

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    2. Thanks. Do you think the fact that the pref holders are converting to common equity holders is further evidence that a transaction is imminent? Also, what is the expected take out value range updated for this conversion and roughly speaking when do you think a transaction could be announced? Thanks for all the hard work you do.

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    3. Roughly speaking, about $6.90/share with a 8.5% 2019 cap rate. But hard to say if that's the right cap rate, but that's what I used in the post.

      It's tough to draw too many conclusions, could say that the two funds are taking advantage of the share price and liquidity to sell down now, or could take your stance, given Highgate's interest, I still think a transaction could come in the next month or two.

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  10. RevelationOnVacationAugust 13, 2021 at 8:44 AM

    Per their press release:

    "Hotel EBITDA was approximately $5 million for the quarter with margins exceeding 35% and while a very good result, more importantly, while this is an extremely large improvement to the second quarter in 2020, it represents 64.3% of the 2019 second quarter Hotel EBITDA , and in June 2021 80.7% of June 2019 and compared to 39.9% margins in the second quarter of 2019."

    If I'm not mistaken the net loss was largely due to the derivative liability. Numbers recovered quicker than I would have thought.

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    1. Yep, pretty impressive results, the portfolio is performing well and pretty bite sized, should be easy to sell.

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  11. Thoughts on recent post-earnings slide (albeit on very low volume)?

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    1. Not really, seems like noise, performance getting back to 2019 levels and the earnings release was pretty clear that they're marketing the portfolio for sale.

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  12. Is a sale still in play? 90 days seems like a long time to run a process for a small portfolio and still not gave a buyer selected or have announced anything to the market.

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    1. Um, yes and no, I tend to think things take longer in the real world than investors think on the outside, at least being prat of a few deals/projects during covid, everything takes a bit longer. I also think it depends if they announced the sales process from zero or already had some offers cooking at the time of the announcement, maybe it was a cold start here.

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  13. RevelationOnVacationSeptember 23, 2021 at 7:36 AM

    Sale to Blackstone. Not bad, any thoughts?

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    1. A little disappointed that it is structured as a liquidation, I should have paid closer attention to the language they used in saying they were going to sell their hotel portfolio, so there will be more expenses, less certainty on the final price and timing. My best guess today is its ~$6.50 ultimately.

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    2. It could be as much as $7.5. Because a lot of the expenses are going with the asset I imagine.

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    3. Liabilities** not expenses.

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    4. That seems optimistic to me but I guess we'll wait for the 8-K, I'm just continuing to hold for now.

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    5. By my math total assets are $320m ($305 Blackstone price, ~$12m of cash / restricted cash, and ~$3m of other asset - receivables / prepaid assets) and liabilities are $181m ($170m of long-term debt, $1.2m of 2016 converts and $9.8m of other liabilities). This results in a NAV of ~$139m. Based on ~18.8m shares O/S pro forma for conversion of the 2020 converts, this is $7.40 per share.

      There is a $8.5m land option liability (associated with the Atlanta Aloft, whereby the seller of that asset can buy the adjacent parking lot at a below market rate for 7 years) that I have not included as I don't think the price will adjust for liabilities like that?

      The big question is what liquidation expenses / costs will look like. Anyone have a view on what quantum this is likely to be? If they are $10m, that would result in a liquidation NAV of $6.80 per share, if $20m that would be $6.30 per share (these are numbers picked at random).

      If I am not missing something there appears to be a little bit of upside left here? So what am I missing?

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    6. Not sure if the $305 is gross or net, I think that's the question to be answered, any agent or banking fees that need to be deducted from it.

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    7. The Company estimates that if the Plan of Liquidation is approved by shareholders and if it is able to successfully implement the Portfolio Sale and the Plan of Liquidation, then after the sale of all or substantially all of the Company’s assets and the payment of all of the Company’s outstanding liabilities, the Company will have total distributions to shareholders of approximately $7.35 to $7.85 per share of Company Common Shares.

      You were right

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    8. Great outcome. Have they provided estimated dates?

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    9. Press Release said intend to close sale to BX in Q4. Liquidation to be concluded within 24 months of shareholder approval, which is a pretty standard timeframe in my brief experience with liquidating REITs. I can't see it taking long for the vast majority of proceeds to be distributed pretty quickly but they will have to retain a % to allow creditors to come forward. Low IRR due to liquidation taking a longer than expected definitely a risk.

      Did buy a little today and has traded up to ~$6.75 after hours. Probably will open thereabouts? Trying to think through risk / reward of adding to position at this level.

      Given buyer is Blackstone, I think low chance deal is not consummated. Completion and distribution of majority of proceeds in Q4 would result in a pretty reasonable IRR. Also not impossible for another bidder to come over the top - NHT were at a higher level pre-COVID and termination fee is only $5m.

      On the other hand, delta between $6.75 and $7.35 (low end of guidance re: proceeds) is only c. $12m or c. 4% of the purchase price so not a lot of unexpected fees, costs, lawsuits, etc. needed to erode that upside...

      Curious if anyone else is looking at the arb and has a view.

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  14. This is a situation where I'm buy at all stages of investment. I originally bought at $3-4 as a value investment. I bought at $4-5 after strategic alternatives were announced. And now I'm buying for the special situation.

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    1. Congrats, yeah I wish I jumped on it the morning of the Blackstone transaction, was a bit worried I was missing something, but has worked out well anyway. Plus I own CPLG, which I think could end up similarly with Blackstone already owning 30% and knowing the business well.

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