Description

Stamford Land (STL)

Stamford Land was previously written up in August, 2019 by Honeycreek at a similar price to where it trades today. Please read that write-up for a good overview. I thought it was attractive then as well and Honeycreek’s thesis has held up, with the unexpected addition of COVID. I find STL especially attractive today because I tend to gravitate to situations where controlled companies that have historically traded at gigantic discounts to NAV begin the process of selling themselves (see my recent writeup on HDG for a different flavor on the same theme). Broadly, I find that investors are often too timid in changing the discounts they apply when the facts change.

While the crux of the investment is an event driven idea, given the exposure to Australia re-opening, I do think it is timely in terms of an underappreciated macro trend, which is Australia going from one of the worst countries in terms of economic impact from COVID to likely one of the best positioned over the next 3 months or so.

Situation Overview:

Stamford Land is a Singaporean company that is primarily an owner & operator of hotels in Australia. It also has development assets plus a Class A+ office building in London with a locked-in, LT lease. Stamford is controlled by the Ow family, who own approximately 50% of the business. The Ows, different from a lot of Asian family controlled companies, have been very active repurchasers of their own stock when trading windows allow, including post COVID. The mgmt team has been quite shareholder friendly and seem like reasonably good stewards of investor capital.

Stamford Land trades at less than 50% of NAV (including corp G&A) and less than 40% on an liquidation basis, and is currently actionable as an event driven idea. Stamford held up reasonably well during the pandemic, with revenue through YE March 2021 falling 28.7% and retaining positive net income for the year. Their portfolio includes  5 star hotels in Australia with a mix of business and leisure travel.. The hotels are well maintained, with the vast majority of the hotels being remodeled in the last 3 years. There is very little leverage on the business, 3x gross normalized EBITDA for the hotels, with cash covering the entire amount of the recourse debt. It looks more levered on the face of it (including in the summary at top of VIC), but the vast majority of the debt is associated with the non-recourse London property.

On March 25, 2021 Stamford Land announced “The Board of Directors of Stamford Land Corp wishes to announce that it is exploring the possibility of the divestment of part of its portfolio of properties under its hospitality business segment and moving to an asset light strategy with respect to hospitality assets.” Subsequently a local article came out and stated that they were expecting to receive bids of $1B for 6 of their hotels (the 7th is not for sale). While those prices were likely planted by the selling brokers, even taking reasonable discounts to those prices and assuming all corporate costs continue gets you to 100% upside to NAV from these prices. Mgmt at Stamford Land acknowledged the article and while they didn’t actively confirm it, they certainly didn’t refute it-they cited their original press release. Reading the tea leaves, it would seem like the Ow family has been building to this for at least 2-3 years. They have undertaken remodels at almost all of their hotels, presumably to dress them up for sale. 

If you assume the prices noted by brokers were correct, and they were to actually wind the business down, you get to 200%+ upside. I don’t think that is likely, but just trying to frame the valuation disconnect.  I don't utilize the rumors in my valuation, I am only noting them as a background.

I think the likely outcome is somewhere in between full liquidation and status quo; the Ow family has been a consistent repurchaser of stock and firmly believe it is undervalued. They don’t have a liquid equity market or really any benefit of being listed at this point. If they sell the 6 Australian hotels they will be left with $1.07 per share of net cash, the London property and one hotel. My instinct is that they will take Stamford private at a small discount to cash, creating value for themselves and existing shareholders (given the huge discount). The other likely outcome would be a very large special dividend, either of which would get investors to the same desired result. 

This news about the sales process came out just under 6 months ago and nothing has been further leaked or announced. Brings up the question of whether this is a broken process. Given the macro news, it seems more likely the process is just delayed. At the end of March, the world seemed to be coming back, Australians were more free to move, and travel was on the rise broadly. Subsequently, Australia has been subject to a series of debilitating rolling lockdowns, which presumably has slowed the marketing process. Australia was significantly behind other major developed countries in terms of the vaccine rollout, but in the last few weeks has started to catch up. It appears that Australia will cross the vaccination rate needed to fully open back up in November and from there should likely mirror the travel rebound we are seeing taking shape more broadly across the rest of the developed world. Based on articles from the last couple of days, it actually seems like Australia will end up as one of the most vaccinated countries in the world by December. I would expect the marketing process to regain steam as all of the major airlines and hotels have been targeting end of year for a return to normal. Australian Macro factors have stopped me from sizing this up over the last 6 months, but the last few weeks of data has given me the courage to be more aggressive. 

Valuation:

Despite shutdowns across Australia, it is still a very attractive market for hotel & travel related assets. This can be seen in the very aggressive recent bidding for the Sydney airport. We expect that these hotels will be in very high demand as Australia should still be a secularly growing market for hospitality. 

I assume 18x EBITDA on peak EBITDA, which was 2018. While that may sound aggressive, we actually believe it is reasonably conservative. FY 2018 was the last unaffected year to look at financials. 2018/2019 had a big Aussie dollar move and a lot of supply hit the market, 2019/2020 had the giant wildfires in Australia and 2020/2021 had COVID. Since FY 2019, Stamford has actually renovated 5 of their 7 hotels, so even assuming market profitability is lower for hotels post COVID, we would expect Stamford to be able to maintain flat profitability to 2019. Obviously if the market comes back to the 2019 levels or beyond, that would be an added bonus. With the Australian 10 year at 1.3% and cost build very high, we think 18x normalized EBITDA is pretty down the fairway for assets like these.

I would note this 18x EBITDA gets to me significantly less than they have been trying to shop the 6 hotels for. I value all of the hotels at 900mm, whereas they hope to sell 6 of the 7 for over a Billion. It’s hard for me to underwrite that number, but I wouldn’t be blown away if it were true. If you take those numbers at face value, you get to $1.37 per share in NAV.

I value the London office building at 2019 cost. While Central London is weaker than when they purchased, with 12 years of duration on their leases and rates as low as they are, the valuation there still appears fair (and not hugely important in terms of equity value).

Below shows the NAV at 18x 2019 EBITDA. It leads to an NAV per share of $1.04, versus the current $..49 trading price. I would note that includes a full drag from the unallocated corporate costs. 

Takeaways:

If Australia recovers from COVID in the way that markets expect the broader world to recover, Stamford Land is very cheap. The game theory on the stock is a bit more difficult, because it is hard to know what the Ow family will do with the cash. However, the Ow’s have been shareholder friendly and an active buyer of stock. I would expect if they end up with something like $1.07 per share in cash (plus two other valuable properties), we will do well having bought at $.49. 

Risks:

• Australian lock-downs continue and/or travel does not come back

• Ow family decides not to sell hotels

• Interest rates rise

• Family sells hotels, but doesn’t return any capital

Catalyst

Stamford Land sells Hotel Portfolio