Morgans owns two related but distinct businesses. Firstly, they own, operate and manage three hotels in Manhattan, Miami and San Francisco. Secondly they run an asset-light hotel management business, which also acts as a licensor of its Morgans, Delano, Mondrian and Hudson boutique brands.
MHGC is currently trading at around $3.20/share. I believe MHGC will be worth $7.73 within the next year, which represents a 134% return from current prices and as such offers a very compelling risk/reward opportunity.
The Morgans board has been trying to effect a transaction for nearly 3 years but has failed for 2 reasons. Firstly, the slightly awkward makeup of the company means that there are few single buyers who will be interested in both parts of the company, making a sale of the company relatively more difficult to negotiate. However, more important is the fact that the board has been divided over what the best course of action should be. There is also the overhang of the preferred shares owned by Ron Burkle’s Yucaipa, which I will elaborate on later. As a result, both management and the board have lost credibility with the market, and the stock price has plummeted by over 50% ytd.
I value the Hudson in Manhattan and Delano South Beach properties at around $600m together. The Hudson is located near Columbus Circle in a very valuable location. NOI for the Hudson was around $16m for 2014 and NOI for The Delano was around $15m. I used a cap rate of ~5% and $/key of around $400,000 to value the Hudson and a cap rate of ~6.25% and $/key of 1m for the Delano. Comps I used for the Hudson include the acquisition of the Sofitel NYC by Keck Seng Investments, the acquisition of the Times Square Hotel by the Qatar Group and the acquisition of the Palce Hotel by the Lotte Group. Comps for the Delano included the sales of the SLS South Beach and the James Royal Palm hotel.
Currently the hotel management segment of the company is earning around $15m-16m run-rate 2015. Including fees from owned hotels, sales would come to around $23m-25m. If we assume a 37% SGA haircut on sales (consistent with comps: Marriott, Choice Hotels and Starwood), EBITDA should be around $15m. The driver of value for this business is the strength of its brands; MHGC has a great track record of managing hotels: every single hotel managed by MHGC is rated 4 stars or higher on Tripadvisor and sales at thehotel at Mandalay Bay in Las Vegas increased by 30% and jumped by over 100 spots on Tripadvisor after rebranding to Delano Mandalay Bay last year. MHGC’s brand equity and character provides clear differentiation from competitors. There is also a lot of potential for growth (6 signed contracts in the pipeline and each contract is material to MHGC given that EBITDA is only currently around $15m).
The main weakness of the business is that it lacks the scale of chain like Kimpton (which had 70 hotels in its network when it was sold to Intercontinental Hotels), and thus has a loyalty scheme that isn’t as extensive as its rivals. Asset light hotel management businesses generally trade at between 12x and 17x EV/EBITDA multiples. As such I think a 15x EBITDA multiple is conservative here, giving us a value of around $225m for the business.
Currently, total liabilities are comprised of $600m worth of debt, which includes a $400m non-recourse Hudson/Delano mortgage loan as well as the $94m lease for the Clift hotel in San Francisco. In addition, Ron Burkle’s Yucaipa owns $75m worth of preferred shares, and the company owes Yucaipa $50m of accrued preferred dividends. Yucaipa also owns warrants to purchase 12,500,000 shares of Morgans at $6.00, which is expiring in a year. Assuming a target price of $7.60, the warrants will be worth $19.2m.
Taking into account the property assets worth $600m, the hotel management company valued at $225m, and assuming a haircut of 90% on the NOLs worth $380m which is $38m (back of the envelope I admit, but I think it is conservative) and subtracting the net debt of $550m minus the lease of around $94m, preferred shares of $75m, accrued dividends of $50m and warrants worth $13m, the equity is worth $239m, which is around $7.73/share.
On September of 2015, a few weeks ago, Rambleside Holdings, an investment firm specializing in real estate assets and securities and one of the largest shareholders of the company offered to buy the Hudson and Delano for $507m, which is lower than our valuation for the 2 hotels but still higher than the value implied by current market prices. I believe this puts a floor on the value of the hotel properties at $507m.
The dividend yield on Burkle’s preferred dividends will increase to 20% from 10%, thus there is an incentive for the company to redeem the shares before this happens. Currently the firm has around $50m in cash. To redeem the shares, the company will need to raise capital, most likely by selling its two hotel properties.
The key risk to the thesis is the role of Ron Burkle in this whole process. As the owner of the firm’s preferred shares, his interests may not be aligned with the common shareholders. Moreover, his ownership of the preferred shares gives him certain consent rights over asset sales as well as potential acquisition of MHGC by a third party, and so he has significant influence over the value of the company. It is possible for him acquire the firm's hotel assets at an artificially low price. Theoretically he can refuse consent to the sale of the properties to a third party, essentially becoming the only viable buyer. In this worst case scenario, the firm will be a price taker, since they will be forced to sell the assets at Burkle's price.
Catalysts:
- Announcement of new CEO
- Sale of hotel properties (1 year time frame)
- Redemption of preferred shares
- Continued growth of hotel management segment
Thoughts?
Submitted November 29, 2015 at 04:52AM by pershingcubed http://ift.tt/1PUq0su
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