Google Finance
Filing
Feb. 26, 2018
Q4 2017 Data
Price: $2.57, Share outstanding 25.3m. Cap: $64m
1.Basic Information
(1) History
The company was IPOed in early 2007 at a REIT trust. At that time, it only has a 180-room hotel in Moose Jaw, Saskatchewan called Temple Gardens Hotel and Spa. It was externally managed by Shelter Properties Ltd., a company controlled by Arni Thorsteinson who is also the CEO of Temple REIT.
Since 2007, the company pursued pretty aggressive growth by acquiring more hotels, especially at 2007 and 2013, by end of 2014, it had 32 hotels with around 4100 rooms. The growth was mainly done by mortgage and debts which made it became very high leveraged. It became a problem when west Canada's economy trended down because of the drop in oil price.
In 2014, Morguard Corporation, a multi-billion public RE company run by Rai Sahi, started to purchase the company's shares and collected 4.7m shares which are 11.5% of total 41m shares by year-end.
In May 2015, Centennial Group Limited, a 5% shareholder, started a proxy fight with the company and it led to new board election including Rai Sahi from Morguard and two others from Centennial.
In later 2015, the company did a private offering of $40m for $1.1/share. At end of 2015, Morguard, through the private offering, owned 30m shares which are 39% of total 78m outstanding shares.
On April 01, 2016, the company transferred its management from Shelter to Morguard. At the same time, Rai Sahi replaced Arni Thorsteinson as new CEO of the company.
In Dec. 2016, the company did another $50m private offering for $0.67/share. Increased total shares to 151m. Morguard increased its shares to 85m which is 56% of total shares.
In June 2017, the company did 6 for 1 share consolidation. As a result, it now has 25.3m shares. Among which Morguard has 14.1m which is around 56% of total shares.
(2) Business-related:
(3) Management.
Rai Sahi is the key person in this company right now. He is an immigrate from India in 1971. After working for several years, he created his own trucking business and later entered real estate at around 1996. His company is now called Morguard Corporation which owns and manages over $17b real estate.
(4) Debt and Credit Facility.
By Q4 2017, it has following debts:
(1) $370m in mortgage debt. The average interest rate is around 5%. It was not in compliance with coverage ratios with 6 mortgages total around $100m.
(2) $13.5m Revolving loan provided by Morguard. Prime rate +2%.
(3) $41m convertible loan due on Sept. 30, 2020. Interest rate 7.25%. There is $2.2m redemption each year. Converting price $9.75
(4) $34m convertible loan due Mar. 2018. It will be repaid since Morguard issue a new $35m facility for $6.5% on Feb. 2018.
Totally the company has around $450m in debt. It has to pay around $25m in interest. Also, the company's total asset is around $460m which is almost the same as the total debt. Mainly because there was quite a lot impairment in the past few years.
(5) Insider holding, options, Insider trading info, share buyback.
(6) Employee numbers
Not important
(7) Industry comparison.
(8) Major events
2. Financial data.
3. Valuation
(1) With distressed oil price, the company still be able to generate around $14m in Fund From Operation(FFO). While current Cap is 64m. The yield of FFO to market cap is around 21.5%. By average, REIT should be traded less than 10% of FFO. That gives room to double the current price if it is priced fairly.
(2) Currently, all the hotels in Alberta simply are not making money. If the company sell those hotels, the company will be able to deduct 2/5 of its debt and the profit will still be the same. However, that doesn't reduce leverage ratio that much since currently the company's equity is really low.
(3) Before 2015, the appraised value is always higher than the cost of acquiring those hotels. Now the book value of all those hotels is around $430m while the original cost is over $730 by my estimation. I think the fair value of those hotels should be no less than $550m. That gives a $120m in addition to book value which is around $4.8/share.
4. Risk
(1)Unlike OTEL, who's earning is stable but the debt interest rate is too high. This company needs to improve its profitability before it can make it to lower leverage. Although current RevPar is low and is improving, there is the risk that it might go down again.
(2) Competition from lodge sharing service like Airbnb might be a threat to the whole lodging industry.
(3) Now with both convertible debt been extended to the year 2020, although its debt level is high and it is not in compliance in some mortgage debt terms, its debt actually is not a big issue for now. It can pay down some individual mortgages if the talk fails. Also, it has the choice to sell some of the nono performing hotels. Most of the hotels are booked below the purchase price now.
5. Conclusion
The current price is significantly undervalued the company's real asset value. It expects the company to raise more capital and dilute existing shares. While I feel it is more likely won't need to issue any new shares and the business might also be getting better.
6.Links
Interview with Rai Sahi
Apr. 08, 2019
Price: $1.74. Shares: 50m. Cap: $87m.
(1) For 2018, it only generates $11.2 in FFO which is lower than last year's $14m.
(2) I was wrong that the company did have to raise money to cover debt repayment. It did a 1:1 share offering at $1.75/share which doubled the share count to 50m. Most of the shares were taken by Morguard. As a result, all convertible shares were redeemed. It owns Morguard by $65m. I estimated it will save $3m in annual interest which will be added to FFO.
(3) Assume by 2021, it can generate $18m in FFO. at 8% rate, it supports a $225m cap which is $4.5 share price.
