Marcus (MCS): Per Share Value of the Hotel Assets
I’m revisiting Marcus (MCS) with an attempt to appraise the hotel side of the business. Andrew sent me some articles discussing property tax appraisal of Milwaukee hotels (including those owned by Marcus). I looked at some other property tax records. I looked at Penn State’s hotel value index. Andrew spoke with the CFO of Marcus. And I consulted a few other sources.
My best guess is that the pre-COVID fair value of Marcus’s hotel assets was around the $235 million to $400 million range. On a fully diluted basis (41 million shares) assuming that the convertible is fully converted – this is inaccurate, because it ignores the “capped call” Marcus entered into – that works out to between $6 and $10 a share from the hotel segment. Remember, Marcus has like $5 a share in debt. It has cash, tax refunds due, other assets it isn’t using etc. that might be worth around $2 a share. But, then this is a hotel and movie theater company. So, it’ll burn through some cash in the quarters ahead. Maybe it’s best to ignore the cash, tax refunds, excess land etc. and assume that Marcus will just need to use that stuff to fund cash burn through 2021. That leaves $6 to $10 in hotel value per share vs. debt of $5 a share. So, hotel value net of debt is $1 to $5 a share. Marcus stock is at $11 a share right now. So, the stock is pricing the theater chain at like $6 to $10 a share. In a normal year – like 2022, maybe (certainly not next year) – I wouldn’t be surprised if Marcus could do $1 a share in free cash flow from its theaters alone. So, that’d mean the stock is now priced at like 6-10x free cash flow from the theaters.
What’s MCS stock really worth? Probably more like twice that amount (14-20x free cash flow) if it was priced like a normal business.
How solid is this $6 to $10 a share (after the conversion adds to Marcus’s shares outstanding) in hotel segment valuation?
Not very. Hotels are pretty difficult to value in the sense that they bounce around a lot like stocks do. Cap rates are important. If yields on other assets are very low, hotels will rise in price. If debt is widely available, hotels will rise in price. And then these are cyclical assets. If you look at the year-by-year figures for hotel values on a per room basis – each year is priced a lot like the market is just extrapolating the present into the distant future. Hotels may have fallen like 30% or something in value during COVID. But, this isn’t really relevant on an asset like this. And I’m going to ignore 2020 values for hotels even though they are our most recent valuations. I’m not going to value hotels in 2020 for the same reason I wouldn’t value a stock portfolio using early 2009 prices. They clearly crashed and they’ll recover.
How long will they take to recover?
I don’t know. I don’t think hotel cash flows will recover till at least 2023. Movie theaters should recover much, much faster. This is because hotels – especially hotels like the bigger, urban, and more upscale ones Marcus owns – depend a lot on business travel and conferences and conventions and so on. That business will not be back in 2021 or 2022. I don’t know if it’ll be back in 2023. It usually takes several years to see a full recovery in business travel. This is obviously the worst decline in business travel ever. I can compare it to 2001 (September 11th), and 2008 (the financial crisis) – but, I’m not sure either really captures how deep and long this business travel recession could be. Businesses may permanently move some in person stuff to online. Even if that shift is very small – hotels are a high “barrier to exit” business. Supply just won’t disappear quickly even if demand declines. So, you’d have worse per room economics for a while even if everyone stopped building new hotels for a bit.
On the other hand, might hotel values – as opposed to hotel earnings – recover far faster than 2023?
Yes.
In fact, this seems super likely.
Yields on almost all assets have dropped a ton. Hotels don’t look expensive right now on cyclically normal earnings vs. any sort of comparable assets you could invest in. Basically, hotels look cheap relative to other kinds of assets if you are using peak earnings of this most recent cycle. Obviously, a lot of hotels are losing money right now. And it might take years to get to the prior peak.
Finally, how accurate are these appraisals I’ve made?
Not very.
For the region of country where Marcus owns hotel (the Upper Midwest), the pre-COVID valuation would be about $150,000 to $160,000 per room. For the class of hotel Marcus owns, it’d be higher than this nationally. However, it may be that upscale hotel valuations nationally are skewed too much to high valuations in New York, San Francisco, etc. whereas Marcus is mostly in Wisconsin. However, Marcus owns especially strong properties in the places where it does operate. So, if you knew what hotels sold for per room in Milwaukee – that’d probably undervalue Marcus’s hotel rooms, because Marcus’s rooms are some of the best in that city. In other words, valuations for upscale hotels nationally may overstate the value of upscale Wisconsin (and other midwestern) hotels. But, valuations for upscale hotels in the Midwest may underestimate Marcus hotels in the Midwest. This is because, in a couple cases, Marcus owns the best asset in the area.
I have property tax appraisals from several different years. Keep in mind that these are tax appraisals – not fair market values (though for the hotels I’m about to give you – the local government claims the appraisal is supposed to be done aiming for tax appraisal to match fair market value). Using 2006 property valuations and then adjusting for inflation between 2006 and today, the per room valuations for the Hilton Milwaukee Center, the Saint Kate, and the Pfister would be: $73k/room, $110k/room, and $163k/room respectively. The Saint Kate was a totally different (branded) hotel at the time. It’s been closed, renovated, rebranded, etc. Marcus says it expects it to make more money post rebranding than it had been – the rates it’s been charging seem to reflect this. Also, interest rates were higher in 2006 than today. If those property tax appraisals for 2006 were accurate indicators of fair market value – then, today’s values would probably be higher because of the Saint Kate’s rebranding and the fall in cap rates (rise in multiples) on hotels. As you can see, the median here is $110k/room. The mean is $115k. It’s worth noting that the largest hotel by rooms had the lowest valuation per room. But, across all hotels belonging to Marcus I’ve looked at – there is no pattern in this regard.
Okay. So, those are old tax appraisals from almost 15 years ago. I also have tax appraisal from like a year ago. For those, I have 5 hotels (the 3 I mentioned plus Grand Geneva and Hilton Madison Monona). The figures are similar. The mean is about $125k per room. The median is $110k per room. However, the year-to-year valuation among appraisal per room is extreme. In one case, the same hotel was appraised at $130k/room and $220k/room within a fairly short period of time. So, these tax appraisals are often stale compared to fair market values and then we see big one-time jumps.
I also have one appraisal of a non-city property that I believe to be seriously incorrect. I’m not sure if the appraisal doesn’t cover all of the property or if appraisals are made at far different valuations from fair market value on this particular property. This low end appraisal skews things like the mean. Without it, the mean valuation would be over $140k per room. Since other methods tend to indicate about $150k per room as the norm – it may be the tax appraisal method (if you throw out this one property I suspect is an anomaly) – would actually be in line with other methods of appraisal.
I also used another method. With this method, I ignore the tax appraisals and past sales and so on of hotels and just look at average daily rates. I multiply the average daily rate by a figure that is correlated with what I know of hotel values where we have both info on what they sold for and what their average daily rate was. I then use the data given to us about average daily rates for Marcus hotels and apply the multiplier. In any one case, this might be wrong. But, Marcus owns 8 hotels. The correlation between average daily rates per room and fair market value of a hotel per room – when spread over 8 different hotels – should offer another reasonable enough method of estimating value.
This method gives a valuation of $90k to $120k per room. But, I need to add a major caveat having to do with cap rates. The valuation multiples I used was based on what hotels were selling for versus their average daily rates as of the early 2010s. Not in recent years. In other words, the “real” (inflation adjusted) value of Marcus owned hotel rooms may have been $90k to $120k at the bottom of the last cycle – not at a “normal” point in this most recent cycle. The $90k figure I got here is an outlier that I can’t reproduce using any other methods. No method of appraisal gives me $90,000 values for Marcus hotels except this one. And, even in this case – the $90,000 is the low-end of a $90,000 to $120,000 range. It seems to me the bottom end of the range of room values for Marcus is really more like $110,000. The top is maybe $160,000.
Rounding those down a bit, I’d say $100,000 to $150,000 per room is an appraisal range we can use based on all the different methods I considered. Really, I did not find methods that consistently gave me sub $100,000 per room estimates nor estimates that consistently came in above $150,000 per room.
There are some other complications. I don’t know the details of a hotel that Marcus operates under a long-term lease. This is the AC Chicago Downtown. In my minimum appraisal ($6/share), I threw out this hotel completely. In my maximum appraisal, I treated it as if the company owned the hotel outright (both assumptions are wrong). In all my attempts at appraisal, I allocated 60% of the rooms at the Skirvin (an Oklahoma City hotel) to Marcus. The company owns 60% of that hotel. So, that was the easiest way to do that calculation.
Also: Marcus actually owns other stuff – besides typical hotel rooms – in the hotel segment that I made no attempts to value. I don’t believe I have enough info about condo hotels, partially owned parts of non-majority owned properties, etc. to make any guesses as to their values.
Okay. So, we’re just using Marcus’s number of rooms (about 2,100 to 2,500) across all 8 hotels and then applying a single appraisal value per room.
What room value would it take for Marcus’s hotels to be worth more than its debt?
It’s under $100,000.
At the midpoint of a cycle, I’m not coming up with any method that values Marcus’s hotels at less than $110,000 per room. So, it’s clear to me that – in normal times – Marcus hotels would carry a fair market value greater than the company’s debt. This would mean the stock’s price in terms of the theater’s FCF multiple is really no more than whatever the stock price is in dollars.
For example, if Marcus trades at $7/share – you’re not paying any more than about 7x normal theater FCF per share (of $1 a share). If Marcus trades at $11/share – you’re not paying any more than 11x and so on.
Could Marcus’s hotels be worth far more than $100,000 per room? Yes. They could definitely be worth 50% more than that. An appraisal of $150,000 per room does not seem any less reasonable than $100,000 per room. And…If cap rates go crazy low, Marcus’s hotel rooms could be worth double the $100,000 a room amount I mentioned. They could be worth $200,000. It’s like any kind of real estate that way. Everything from houses to apartment buildings to self-storage could be worth more in the future than it was a few years ago if yields on other safe assets abnormally low. Loose credit and low interest rates would tend to push up hotel values the same way it would push up stock valuations.
Finally, are my share counts including convertibles accurate?
No.
I am exaggerating the amount of shares Marcus will have out. The company entered a “capped call” transaction to lessen the amount of dilution. If I do another write-up on Marcus, I can get into this topic. It’s been discussed in presentations, earnings calls, etc. There is also an 8-K that discusses the transaction.
But, yes, I have written everything up about Marcus as if more shares will be out than may actually be out.
And then: does the company have other assets?
Yes. I think Marcus has like $2 (just my best guess) per share in excess land it could sell in the next couple years plus cash on hand plus taxes to be refunded in cash and so on. However, the company is capable of burning through $2/share during COVID. So, these can be thought of as “prepaid” losses.
I’m not counting this stuff despite my belief that Marcus’s theater segment has substantial real estate assets (former locations, never developed locations, parking spots no longer needed, etc.) that it may sell off in the next year or so. I can’t value that stuff. It’s not make or break for the stock overall (though it is material to the valuation). And it may all end up being used to finance cash burn. So, it’s kind of a wash where I can neither accurately value the “non-earning” assets of the theater segment and I can’t accurately estimate how long the COVID cash burn will last – so, I’m putting them both aside by assuming once cancels out the other.
Finally, what about leases in the theater segment?
This is a complicated topic. Marcus only owns about 2/3rds of its locations. It leases the other third. Shouldn’t I add the capitalized value of these leases to debt?
Answer: yes.
But, other theater chains don’t do this. So, I believe these leases are debt. But, I also believe that the free cash flow multiples I’ve used – which are LEVERAGED free cash flow multiples – don’t overstate Marcus’s price vs. other theaters. The stock – like other theaters, retailers, restaurants, etc. – is using leases to achieve the returns it is getting. But, investors routinely value such lease using companies at multiples of free cash flow where Market Cap / FCF is in the 10-20x range. You can compare Marcus’s 7-11x estimate I gave earlier to what other theaters (like Cinemark – which leases almost everything) go for.
Since news of the vaccines came out, movie theater stocks like Marcus and Cinemark have risen in price.
That has obviously lowered my interest level in them compared to when I first looked at these stock.
Geoff’s follow-up interest level: 60%
Geoff’s re-visit price: $7/share