cibc analyst: target US$ 3.75, NAV US$ 4.25Summer Brought On A HOT Recovery
Our Conclusion
While we had expected a recovery in profitability through year-end, the pace and extent of it have handily exceeded our expectations (call that perhaps a bit of Northern bias as we under-estimate the rapidity of openings south of our still-closed border). Indeed, AHIP’s RevPAR is quickly approaching 2019 baseline levels (occupancy already reached 90% of pre-COVID-19 levels in July, while ADR levels in July 2021 matched those in July 2019). While the prospect for a full recovery over the next few months is perhaps in the cards, this would likely require a further increase in occupancy levels, which is not necessarily a given. As summer leisure demand begins to taper off (Q4 and Q1 tend to be the seasonally weaker quarters), corporate demand becomes more important, and this segment continues to significantly lag historical levels (we’re still work-from-home). As we look forward, the possibility of a re-imposition (or lack thereof) of harsher lockdowns in relation to a “fourth wave” remains the largest swing factor. Our NAV increases to US$4.25 (from US$3.75). Applying a modest ~10% discount to NAV in setting our price target (in acknowledgement that we are not quite out of the pandemic woods yet) yields a price expectation of US$3.75.
Key Points
Earnings Results: Q2/21 FFO was $0.14/unit, significantly above consensus at $0.09 and our estimate of $0.03. The variance to our estimate can be explained by higher-than-expected occupancy (300 bps higher or $0.01), higher ADR ($109 vs. $100 per night, or $0.01), wider-than-expected operating margins (650 bps wider, or $0.05; note, however, that such wide margins are likely not sustainable, in our view), and lower property tax and land lease charges (~$5MM, which rounds out the differential).
Operational Update: Given trough operating results in Q2/20, RevPAR more than doubled (132% growth) from the comparative period. More importantly, sequential results this year have improved in every month (across both ADR and occupancy), which is a very promising sign. Further, management has provided excellent context as to how well the recovery has progressed by indexing key metrics to 2019 baseline levels; occupancy, ADR, and RevPAR for July 2021 were at 90%, 100%, and 90% of July 2019 levels, an undeniably strong result given the ongoing pandemic.
Leadership Team Changes: Travis Beatty has joined the REIT as the new CFO (note that Mr. Beatty was the CFO of Northview Apartment REIT between 2016 and 2020).
Debt And Liquidity Position: As at Q2/21, the REIT had a D/GBV of 55.4%, as compared to 56.0% at Q1/21. Total available liquidity at quarter-end was $40.2MM ($11.MM in unrestricted cash + $29.1MM of available revolver capacity), with an additional $34.6MM in restricted cash.
It’s Getting Harder To Get A Reservation
Where Are We Today? With the hospitality industry representing the most sensitive real estate asset class to the pandemic, the single-most-important swing factor for profitability, in our view, continues to be the prevalence, and, indeed, harshness, of COVID-19-related lockdowns. For context, ADR levels are generally far more resilient than occupancy levels in a downturn (the two combined formulate RevPAR). Indeed, ADR levels in the U.S. reached an all-time high in mid-July, coming in above 2019 (pre-pandemic levels). Put simply, there appears to have been a full recovery in ADR levels. Occupancy levels, on average, have now rebounded to over 70% (continuing a generally upward trend, after adjusting for seasonality, since March 2020). At the RevPAR level (which is what ultimately matters for cash flows), STR notes that 33% of U.S. markets are in the “recovery category,” which is defined as having a RevPAR that is 80%-100% of 2019 baseline (pre-pandemic) levels. Remarkably, 54% of U.S. markets are now classified as being in the “peak category,” having surpassed the 2019 baseline. This leaves only 13% of markets which are classified as either “recession” or “depression.” In our view, the above paints a picture of a U.S. hospitality market that, as a whole, has recovered more quickly than many (ourselves included) would have imagined, albeit with significant pockets of weakness. And while the outlook has continued to improve overall, there are some important caveats to keep in mind. Most notably, the risks related to a potentially material fourth wave could, potentially, lead to the re-institution of harsher lockdown measures in certain states. Further, business and group demand continues to trail historical levels, which means that as summer leisurely demand begins to taper off, we could see overall occupancy levels soften. With the above in mind, there is an argument to be made that we may have reached, or are nearing, peak occupancy levels for 2021.
Valuation – Where Can It Go? The REIT currently trades at a 20% discount to our NAV, compared to a ~16% discount historically. At this time, we would suggest that a valuation that is modestly below NAV is appropriate; while we are confident in the value of the REIT’s assets in the current environment, we also acknowledge the risk of a material fourth wave (or,indeed, of a new variant) and what such may do to investor sentiment. Put simply, we believe that material valuation expansion from current levels is certainly a possibility, but this would likely require a widely shared view that the pandemic is unquestionably behind us (a view that we can only hope comes to fruition). On the other hand, to the extent that sentiment may sour towards the pandemic (i.e., for whatever reason), we believe that such negative sentiment could lead to a significantly discounted valuation (as was observed through the beginning of the pandemic). We also believe that the eventual re-institution of the REIT’s dividend (once allowed under the existing covenants) should serve as a material catalyst that would likely see the units trade much closer to their NAV/ Book Value per unit; however, such an event is likely in 2022.
Price Target Calculation Our U.S.-denominated price target of US$3.75 is based on a ~10% discount to our US$4.25 NAV. Our NAV implies a valuation of the REIT’s hotel assets of roughly $1.1B or ~$125K per key.