A joint venture between investment firms Highgate and Cerberus Capital Management plan to buy CorePoint Lodging, a lodging trust with a significant presence in the affordably priced hotel segment, for $1.5 billion.
But a move from Wyndham Hotels & Resorts is the play to keep an eye on in this closely watched potential acquisition. CorePoint’s portfolio is largely comprised of La Quinta hotels spun out into an independent lodging trust after Wyndham acquired the brand and its franchise and management operations in 2018.
Wyndham announced this week it would sever its management agreements with the new entity should the deal close, potentially in the first quarter of next year. That push adds to an ongoing initiative at the hotel company to move away from lower-profit revenue streams.
“The termination of these management contracts will mark our exit from the lower margin, resource-intensive, select-service management business and afford us the opportunity to focus on the continued growth of our asset-light and highly profitable, cash generative franchising business,” Wyndham CEO Geoffrey Ballotti said in a statement.
A shift from management contracts in favor of franchise agreements where a third-party management company runs the hotel isn’t something analysts expect to be limited to just Wyndham.
Major hotel companies still want to manage bigger hotels due to the higher upside those properties can have during a normal travel climate. But the margins on a more select-service product aren’t as appealing to major hotel groups when they could be focusing resources on their typically highest-performing assets in non-crisis times.
While convention hotels in major cities might be suffering now, hotel companies like to manage them because of the margins that come from offerings like meetings and events not typically found at a select-service hotel. Hotel companies are better positioned to negotiate group business and generally want to be able to focus on bigger cities where there can be a cluster of their properties to manage in proximity.
“From an investment landscape, it makes a lot of sense for investors to have a cleaner storyline in terms of earnings growth,” said Greg Miller, vice president of lodging and experiential leisure equirty research at Truist Securities. “Managing properties can add, in some respects, some variability to performance.”
Higher Margins, Higher Valuations
Wyndham chasing its own higher quality revenue streams can also push the company’s valuation higher. A Truist Securities report ahead of third quarter earnings season noted the similarities between Wyndham and Choice but the latter’s higher valuation.
The analyst report based this around Choice’s perceived stronger brands like Comfort and Cambria relative to Wyndham’s deeper bench of economy-scale brands like Super 8 and Howard Johnson.
The move away from this sector is only one part of Wyndham and the hotel industry’s deeper focus on asset-light strategies and higher-margin operations.
Wyndham removed 20,000 rooms last year company leaders deemed unprofitable or non-compliant with brand standards from its network.
IHG Hotels & Resorts is still underway with a review of 200 underperforming Holiday Inn and Crowne Plaza hotels.
Leaders at Choice Hotels, seen as Wyndham’s most closely aligned competitor due to their similar focus on drive-to and leisure travel, indicated a quality check was also underway at their own company. They did not indicate how many hotel contracts were in jeopardy.
But Dominic Dragisich, the chief financial officer at Choice Hotels, noted the “targeted terminations” were “an opportunity for royalty revenue growth, as we plan to replace these hotels with higher quality and more revenue-intensive units.”
No Done Deal
The CorePoint portfolio is largely focused on the select-service sector of hotels that generally don’t have amenities like restaurants or spas. The lodging trust spun out from La Quinta as part of Wyndham’s nearly $2 billion acquisition of the brand in 2018.
Hotel companies like Wyndham are more about the franchise business today than property ownership, so the real estate was parked into CorePoint.
The $1.5 billion takeover announced this week is already garnering mixed signals from shareholders.
Blackstone affiliates own 30 percent of CorePoint shares, and the group made an agreement to vote in favor of the deal. But the $1.5 billion offer, equating to $15.65 per share, sparked scrutiny for how it was a significant discount to the stock’s closing price last week of $17.76 per share.
However, the offer is more than 40 percent above the company’s share price in mid-July, when CorePoint CEO Keith Cline said the company was exploring “strategic alternatives to fully maximize value for our stockholders.”
Cameron Sperance
