PLAYMATES HOLDINGS
LTD.
After its founding in
1966, Playmates quickly established itself as a key
outsourcing partner for toy doll manufacturers located
around the world. Not content to be solely a
behind-the-scenes manufacturer, the Company aimed to
transform itself into a developer, marketer, and distributor
of a diversified portfolio of toy lines. In 1984, Playmates
became the first toy company to list on the Hong Kong Stock
Exchange. Armed with cash from its successful IPO, and eager
to expand its action figure portfolio, Playmates launched
its full line of Teenage Mutant Ninja Turtles toys. The
Turtles became a global phenomenon, leading Forbes to label
Playmates as the most profitable toy company in the world.
As the Turtles
phenomenon slowly faded away in the late 1990’s, so did
investor enthusiasm for Playmates’ stock. The 1990’s toy
industry entered into a rocky transitional period. As young
children gravitated towards interactive toys, traditional
toy companies such as Playmates found themselves behind the
curve. The 9/11 terrorist attacks further compounded the
Company’s problems and pushed the industry into recession.
Playmates stock price, reaching HK$3.50 in 1995, trades at
around HK$1.00 today.
To reduce the
volatility of its toy business, in 2001 the Company decided
to gradually deploy its excess cash into Hong Kong real
estate. The first purchase was its headquarters, The Toy
House, located in Kowloon, Hong Kong for roughly HK$520
million. This transaction was followed by the purchase of
its factory in 2002 and apartment buildings in 2005 and
2006. Since 2002, the portfolio’s value has increased by
HK$420 million. At the end of 2006, the Company’s real
estate had an appraised value of HK$1.2 billion.
With its current
property portfolio, it could be said that Playmates is a
real estate company with a toy business thrown in for free
(or at least very cheaply). The Company’s cash, financial
investments, and real estate currently totals HK$1.7
billion. Considering its total market capitalization of
HK$1.9 billion, one could sell the real estate and
effectively pay only HK$200 million for the toy business.
Since 2003, the toy business has averaged HK$105 million in
pre tax operating profit. Valuing the property portfolio and
toy businesses separately, we arrive at a sum-of-the-parts
value of HK$1.50.
Playmates management
has signaled its intention to unlock the value of both
businesses. In an April 27th press release, the Company
announced it was considering a separate listing for its real
estate assets. A typical scenario could see a Hong Kong REIT
purchasing the real estate assets and a US-based toy company
buying the toy business. Looking ahead we expect the market
to gradually close the gap between the Company’s value and
depressed stock price.
LAKEVIEW HOTEL REIT
Established in 2004,
Lakeview Hotel REIT is among several junior REITs that have
launched over the last couple of years. At the end of Q1
2007, Lakeview owned 12 limited service hotels with a total
of 862 rooms. Geographically, the REIT’s focus is secondary
markets in Alberta and British Columbia that have exposure
to growing oil and gas exploration and production. Unlike a
typical hotel REIT, which may own a portfolio of hotels with
various brands, Lakeview immediately re-flags purchased
hotels with the Lakeview banner. The REIT has a 49% interest
in the names “Lakeview Resorts” and “Lakeview Inns &
Suites.”
Secondary markets,
while certainly not as glamorous as city centres, provide
many opportunities for Lakeview. The main advantage is
higher cap rates: average rates in these markets hover
around 10% compared to 7-8% for urban cities such as
Toronto, Calgary, or Vancouver. Additionally, secondary
markets fall under the radar screen for larger industry
participants. As a consequence, limited service hotel
ownership is fragmented with many owned and operated by
local entrepreneurs. Sophisticated hotel management systems
and practices, such as yield maximization, are for the most
part completely absent. With over 20 years’ experience in
the industry, Lakeview’s management can identify and employ
strategies that will immediately raise room rates, lower
costs, and drive higher occupancy. The REIT’s internalized
management team opens up avenues for organic growth that are
not available to its peers.
While Lakeview’s
strategy is essentially the same as all new REITs – growth
via acquisition – the Company’s brand strategy is a
competitive advantage and hidden asset. Each hotel is
quickly brought up to the standards of the brand (which is
usually accompanied by an increase in room rates). Marketing
and brand positioning is vital in the hotel industry; once
the number of hotels flagged under a brand reaches a
critical mass, travelers begin to associate the brand with
certain levels of service, comfort and pricing. As the
number of Lakeview-flagged hotels grows, the brand’s value
grows in lock-step. We would not be surprised if the REIT
started to license its name to other hotel developers. The
revenue from licensing will flow directly to the bottom
line.
Based on a
conservative forecast of accretive acquisitions and
licensing revenues, we arrive at a NAV of $5.50 per unit.
Given the management team’s conservative approach and
extensive experience in the industry, we have confidence
that Lakeview will emerge as one of the leaders of the new
generation of REITs.
