Own A Luxury Hotel For Free
And a preferred kicker with 25% upside if taken out and stable yield
The stock market seems to make new highs everyday. Valuations are lofty with ratios at nosebleed levels. The new presidential seat has extrapolated fears with the key fear gauge, gold, hitting new highs. Despite the new all time highs and potential for political instability, I continue to buy cheap stocks and search for ideas that will generate meaningful alpha.
But finding cheap stocks is becoming more challenging. I run screeners on a weekly basis and they are beginning to run dry. It is the same stocks every week, the same ones every value guy is purchasing. So I have decided to look in more obscure places for value. Places where eagles dare. The wild wild west. OTC stocks.
This will be Issue #1 of weird OTC stocks. Every week I will be reading through annual reports of obscure OTC stocks and if I find something interesting, I will publish my findings.
Today’s issue will cover a luxury hotel that is trading significantly below replacement cost with a massive land bank that you get for free. Here are some other interesting statistics:
The company owns an iconic luxury hotel. Enterprise value per room is only $89k. Replacement cost of a luxury hotel on a per room basis is closer to $400k on the low and $1mm on the high.
The company owns 5,500 acres of timberland surrounding the hotel. Land value on a per acre basis goes for $2,000-5,000 per acre in the area. Using the midpoint of $3,500/acre, the value of the land is $19mm, exceeding the current market cap of only $15.5 million.
A recent transaction of a hotel in the same area, with the same number of rooms, but not as luxurious and with less amenities, and with only 418.56 acres, sold for $17.8 million. This purchase price did not include an expensive capex program to refresh and update the hotel, that I estimate could exceed $6 million.
The company recently did a room refresh in 2023 and will have less capital expenditures in future years.
The balance sheet is strong with $586k of net cash, fixed 4.80% debt, and the hotel generates strong cash flows. At the current valuation, the company has an 18% cap rate.
The hotel is primed to be bought out by a REIT or strategic. Corporate G&A is $3.2 million and a platform buyer could eliminate all of these costs and realize immediate synergies.
As a going concern I think there is 58% upside through continued free cash flow generation and potential uplift in occupancy. In the event of a takeover, I think the company could have over 100-150% upside.
Given the extremely low valuation for an irreplaceable asset, a large base of owned land and continued free cash flow generation, I don’t see any downside at the current valuation.
The company also owns a publicly traded preferred stock that has 25% upside to the par plus owed preferred dividends. The management team has recently started to write annual letters to the preferred stock holders and my guess is they will look to take out the security over the next few years as cash begins to pile up on the balance sheet.
This is a very interesting stock with a ton of embedded value. I haven’t seen one person talk about this security publicly which gets me even more excited.
Let’s dig in.