November 8, CorePoint Hosting (NYSE: CPLG) announced that he had agreed to be acquired. But there was an unusual twist here. This is what you need to know about the deal, why shareholders might get another small payment, and why it still won’t ‘make you whole’. Ultimately, however, the biggest issue for investors is what this deal could mean for the larger hotel real estate investment trust (REIT) industry.
The basics of the case
Highgate and Cerberus Capital Management subsidiaries join forces to buy CorePoint Lodging for $ 1.5 billion. This is an all-cash deal that will end up paying CorePoint investors $ 15.65 per share. With the stock currently trading $ 0.10 to $ 0.15 less than that, investors must decide whether they want to sell and switch to a new investment or stay and collect the roughly penny of extra cash. Only, it is not that easy.
There’s the normal discount that appears to be in CorePoint’s price due to the risk of the deal collapsing before it’s done. But there’s also another $ 0.10 per share that could be kicked out if there is a positive outcome of a tax issue the company is arguing about. So now there is maybe $ 0.25 per share to deal with. Together, these two facts only add up to about 1% more of an increase, so the conservative types would probably be better off taking the money and “running”.
A bigger issue is that the press release points out that the offer price is 42% higher than what CorePoint traded on July 13. Why this date? Because it was the last trading day before CorePoint said it was exploring strategic options for the hotel REIT. But the price of $ 15.65 was actually significantly lower than the over $ 17.60 per share CorePoint was trading the day before the deal was announced. This suggests that investors had an exaggerated view of CorePoint’s real value.
Higher stakes for the industry
This last point is actually revealing, because at the end of the day it was really a ‘takeover’ rather than a ‘takeover’, which is a Wall Street saying when a company is purchased for a price lower than its share price. Normally there is a premium that is paid.
The interesting thing is that CorePoint has liquidated itself slowly for a number of years by selling assets that it considered to be non-core. These aren’t small numbers either, with the company having sold 210 hotels in the past three years or so. CorePoint used a large chunk of the money to pay off the debt.
To be fair, in some ways CorePoint was a poorly positioned hotel owner trying to get back on track. Ultimately, the easiest way to do it was to go private to avoid the public scrutiny that comes with quarterly earnings. However, while CorePoint was bought for around 10% less than it traded the day before the deal was announced, perhaps other hotel operators are overvalued in the market as well.
Indeed, CorePoint is not alone in being a heavily indebted hotel owner who is still trying to cope in the aftermath of a global health alert. For example, Ashford Hospitality Trust (NYSE: AHT) and Hersha Hospitality Trust (NYSE: HT) both have higher debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios than CorePoint. Considering the situation with CorePoint, investors in names like these may need to reconsider what they own.
Hersha’s stock has recovered well from the depths of the bear market of early 2020 and is now around 25% below its starting level that year. Was the rebound too strong? Ashford was not so lucky, having been caught up in the meme stock craze. After volatile highs and lows, it is now 95% below where it started in 2020. Even that can be too generous.
No matter where you step out of these two hotel REITs, whether you own them or any of their peers, you should rethink your assumption to make sure it still holds, given the numbers from the CorePoint acquisition.
Not a good sign
If you own CorePoint, there’s not much you can do from here – the deal is done. If you owned it because you expected a hotel takeover, well, it’s probably time to sell and move on to an entirely different business idea. The extra cash you could get by sticking around probably isn’t worth it. If you own another hotel REIT, make sure you understand what they have and have a strong belief in their value. Based on CorePoint’s “support”, your expectations might be too high.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.