Description

Summary / Thesis

PLAYA Hotel & Resorts is a Hyatt JV that owns and operates a portfolio of 13 all-inclusive resorts in Mexico and the Caribbean. PLAYA is going public via a merger with PACE Holdings, a SPAC sponsored by the private equity fund TPG. The acquisition creates PLAYA at a discount to US hotel & lodging stocks and cruise line operators on EBITDA and FCF multiples. PLAYA should trade in line or at a premium to peers given its superior EBITDA margins (~33%) and higher FCF conversion (~93%) thanks to the attractive unit economics of the all-inclusive resort business model, 100% leisure customer mix, USD revenue stream and local currency cost base (80% in local currency, 40% in pesos) and recently redeveloped portfolio with moderate maintenance capex requirements (4-5% of revenues).

As a ~$1.1 billion market cap company, we expect PLAYA to be covered by analysts and attract institutional investor interest, driving a re-rating of the stock. The shareholder vote will take place on March 1, 2017 and the transaction is expected to close somewhere between March 10, 2017 – March 31, 2017 (Outside Date). After transaction close, the shares and warrants will be listed as “NASDAQ: PLYA” and “NASDAQ: PLYAW.” If PLAYA re-rates in line with peers, we think there is 40-70% upside to the current share price of $9.97 and even greater upside for the warrants which are reflecting pretty cheap time value at current prices of $0.60-0.70.

PLAYA Overview

PLAYA was founded in 2006 by the current Chairman & CEO, Bruce Wardinski and the hedge fund Farallon Capital Management who saw an opportunity to capitalize on the favorable industry trends and the extremely attractive unit economics of the all-inclusive resort business as well as roll-up a fragmented market. Through a 2013 JV with Hyatt marking Hyatt’s entry into the all-inclusive resort segment, PLAYA became the exclusive Hyatt franchisee of Hyatt all-inclusive resort brands in Mexico, Costa Rica, Panama, the Dominican Republic and Jamaica with this exclusivity arrangement running through December 31, 2018.

Today, PLAYA owns and operates a portfolio of 13 all-inclusive resorts (6,142 rooms) in prime beachfront locations in Mexico (9 resorts), the Dominican Republic (3 resorts) and Jamaica (1 resort). During 9M 2016, PLAYA’s guest origin based on number of room nights consisted of 58% from the US (vs. 53% in 2015), 9% from Canada, 15% from Europe and 18% from other countries.

Industry Dynamics

Tourist arrivals to Mexico, the Dominican Republic and Jamaica rose by ~14-16% from 2014-2016E and expected to increase by a further 16-20% by 2020 facilitated in part by an improving US economy and the Open Skies Agreement which is expected to drive an increase in airline capacity/lower fares to Mexico. Currently around 80-90+% of the available hotel rooms in PLAYA’s markets are all-inclusive with healthy occupancy rates of 75-90% with PLAYA averaging 87% for its "stabilized" properties in 2015.

To open a new resort, developers need to secure prime beachfront property, thus limiting supply growth as compared to urban settings. Industry supply is projected to grow between 2-7% in PLAYA’s primary markets, below the anticipated growth in visitors, which is expected to sustain high occupancy rates and RevPAR growth. In general, we think that all-inclusive business models are less vulnerable to pressure from disruptors such as Airbnb given the comprehensive package experience sought by travelers and different target customer segment.

The resort industry is fragmented in PLAYA’s target markets, with a limited number of branded players and many family-owned businesses (less than 25% of hotels are under internationally recognized brands).

Management and Ownership

PLAYA is led by the Chairman & CEO, Bruce Wardinski who has 29 years of experience in the industry previously serving as CEO of two lodging companies: Barceló Crestline Corporation and Crestline Capital Corporation (NYSE: CLJ) and the Senior VP & Treasurer of what used to be Host Marriott Corporation (NYSE: HST).  The CFO, Larry Harvey, previously served as the CFO of Host Hotels and Resorts (NYSE: HST) from 2007-2013.

The Sponsor of PACE Holdings is TPACE Sponsor (“PACE Sponsor”) Corp., a Cayman Islands Limited Partnership owned by TPG Holdings III (vehicle of TPG Capital) and Karl Peterson (PACE CEO). Karl Peterson was the founder of the travel bookings site Hotwire.com and has led several TPG investments including Sabre Corporation (NASDAQ: SABR) and Norwegian Cruise Lines (NASDAQ: NCLH).

PLAYA shareholders are not selling shares in the transaction. Post-closing, the PACE Sponsors will own 7% of PLAYA and PLAYA shareholders will own ~47% (Hyatt – 11%, Farallon – 28%, Other – 8%).  As part of the acquisition, PLAYA shareholders and the PACE Sponsor will receive $30 million earn-out warrants (1/3 to PLAYA shareholders and 2/3 to the PACE Sponsor) to acquire up to 3 million shares which vest at $13 per share. By our calculation, the vesting of the 3 million “Earn-out Warrants” and the 22 million “Sponsor Warrants” (each representing 1/3 of a share) would equate to 10.3 million shares or ~9% of the pro forma shares outstanding in addition to their sizeable holding of common equity which in our view makes PLAYA management and the PACE Sponsor incentivized to deliver on the business plan.

Growth Drivers

· Continued RevPAR growth.  Limited growth in industry supply below the projected growth in tourist arrivals is expected to support RevPAR growth over the next 4 years. For 9M 2016, PLAYA grew Net Package ADR and Net Package RevPAR by 6.5% and 7.1%, respectively for its comparable portfolio.  

·  Ramp-up of recently redeveloped resorts. PLAYA’s 4 recently re-developed Hyatt properties are in the first year of a 3-year ramp and are expected to add an additional $20 million of EBITDA in 2017.

·  Tailwind from weaker peso. Around 40% of PLAYA’s cost base is denominated in MXN. Management’s 2017E EBITDA estimate of $180 million and FCF estimate of $158 million assumes a MXN/USD rate of 18.25 vs. the current spot rate of ~20. Every MXN $1 change in the exchange rate represents a $6 million opex reduction.

·  Other initiatives. Further EBITDA upside could come from optimizing direct distribution channels by leveraging the Hyatt brand (goal is to increase direct distribution to 50% which would add $50 million in EBITDA). PLAYA can also re-deploy free cash flow of approximately $100 million after interest into accretive M&A and/or redevelopment opportunities in a fragmented market. There is also an opportunity to pursue asset light growth by managing hotel assets for third parties.

Valuation

Post-closing, PLAYA will be the only publicly listed lodging Company focused on the higher margin all-inclusive resort segment. PLAYA’s customer mix is 100% leisure, which we expect will continue to drive higher RevPAR than the US Upper-Upscale segment. Investors in PACE common shares effectively buy PLAYA at 9% FCF yield (on EV) when peers are trading at a FCF yield of 5-6%. If PLAYA re-rates to a FCF yield of 6-7% (2017E FCF: $158 million), the shares will appreciate to $14-17.

·  Common shares. With PLAYA’s shares currently trading at $9.97, we see ~40%+ upside for the common shares if the shares re-rate to reach $14-17. The common shares are currently trading below the $10/share redemption price if a deal does not happen before September 16, 2017. 

·   Warrants. Each warrant represents a right to acquire 1/3 of a share with an expiration date of 5 years after the closing of the acquisition. The warrants are currently trading at $0.60-0.70 and are expected to come into the money once the common shares are re-rated (current break-even share price is is around $13.30).  The warrants traded up to $0.95 when the deal was announced on December 13^th. The upside of the warrants is effectively capped by a provision whereby the warrants can be redeemed at $0.01 per share if the stock price equals or exceeds $18 for 20 trading days out of a 30-day trading period.

Links

Investor presentation: https://www.tpg.com/story/investor-presentation-pace-holdings-and-playa-resorts

Proxy: https://www.sec.gov/Archives/edgar/data/1692412/000119312517038842/d274352d424b3.htm#rom274352_13

Catalyst

Shareholder vote on March 1, closing of the transaction in March 2017, initiation of analyst coverage (stock currently has zero coverage), reporting of FY2016 earnings and inclusion in indices.