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Long Term Perspective from the Eyes of a Wall Street Analyst Ian Weissman

Long Term Perspective from the Eyes of a Wall Street Analyst Ian Weissman Managing Director - Head of Lodging Research iweissman@isigrp.com 212.446.9461. Lodging Recovery: While RevPAR Growth Has Been Fairly Consistent…. …Its Been A Roller Coaster Ride for Investors.

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Long Term Perspective from the Eyes of a Wall Street Analyst Ian Weissman

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  1. Long Term Perspective from the Eyes of a Wall Street Analyst Ian Weissman Managing Director - Head of Lodging Research iweissman@isigrp.com 212.446.9461

  2. Lodging Recovery: While RevPAR Growth Has Been Fairly Consistent…

  3. …Its Been A Roller Coaster Ride for Investors Concerns over US ‘Double Dip’ during late fall ‘11 sent lodging stocks into a tailspin, down ~30-40% since peaking Feb ’11—Wall Street Pegged Probability at more than 50%.

  4. Bullish on Lodging: • Even in low growth environment, fundamental story works: 1)ISI forecasting 2.5% GDP in ‘12; 2) demand growth still solid as corporate profitability remains strong; and 3) supply in check (1%); • ISI proprietary Hotel RevPAR model forecasts growth +5.5%-7.5% in ’12 for the Gateway Cities • Recent economic data has been better than expected: (Manufacturing PMI, Employment, Claims, and Consumer Spending) – Last 27 weeks has been strong • Flurry of hotel deals in 2011 further highlight the spread between public and private valuations; • significant capital remains on the sidelines—expect further consolidation • Public valuations remain compelling relative to other asset classes: 10% discount to NAV

  5. Despite YTD Outperformance, Upside Left in Lodging Stocks ‘12 YTD Returns: Lodging Outperforms Forecasted Returns: Upside Left in Lodging

  6. My Agenda: • Econ 101: • ISI Economists Bullish on US Economy – Economic Data Continues to Surprise to the Upside • Potential Roadblocks to the Recovery • Oil Price • Deficit • Europe • China • Real Estate: • How Far Off of Peak • Hottest Markets • Deals, deals and more deals • CMBS • Q&A: Softballs Please!

  7. GDP is Important…But You Need To Dig Deeper Historically there has been a strong correlation between US economic growth (GDP) and RevPAR performance, however at ISI—we try and dig a little deeper

  8. Job Growth #1 Variable to a Healthy US Economy: US created 1.8mn jobs in ‘11 and ISI expects ~2mn for FY12 ISI is forecasting another 2mn jobs to be added to the US economy in 2012, taking the unemployment rate down to 8%

  9. US Unemployment Claims Fall to 4 Year Low Claims is considered among the strongest indicators for where we are in the economy. Many skeptics out there who believe labor market is not healing…this would prove otherwise Suggests 4% 1Q12 GDP

  10. Very Strong Correlation Between Job and ADR Growth With job growth of 2mn in ‘12 we would not be surprised if ADR growth averaged 4%-5% in ‘12 vs. the 3.5% recorded in 2011

  11. Company Profits Are Up – Good For Lodging Corporate Profitability has surged to a record high of $2 trillion While growth is expected to slow, ISI economists expects corporate profits to remain robust.

  12. US Consumer Remains Healthy: Consumer Spending Well Above ‘08 Peak Annualized growth rate in consumer spending is nearly 4.5% since the ‘08 bottom to $11 trillion

  13. Consumer Spending in 2012 Likely to Grow +2.0% U.S. REAL CONSUMER SPENDING Y/Y % 2012:1Q 1.3% e Based on lagged effects of the improvement in house prices and increases in consumer sentiment and stock prices, ISI’s forecast is for Real Consumer spending to accelerate to +2.0% Y/Y in 2012. Forecast 2012:4Q 2.1%

  14. First Increase in Consumer Debt: Another Sign that Consumers Are Opening their Wallets 1Q12: Consumer debt is up for the first time since 2008 – another sign that consumers are opening up their wallets and spending

  15. Housing: Starts Likely to Turn Up in 2012 While US economic recovery has been in full swing for almost 2 years, Housing has lagged…until now. Great news for labor Will help to contribute to GDP

  16. ISI Cos Surveys Hit 5-Year High ISI’s proprietary surveys of over 320 companies suggest that business is very good. Over 50 suggest economic expansion…no longer just a recovery

  17. ISI Airline Survey Continues to Surge- Another Strong Sign for ADR Growth

  18. ISI Economists Remain Bullish on US Economy • ‘12 GDP: 2.5% (bias to the upside) • ‘12 Job Growth: ~2mn jobs • ‘12 Unemployment Rate: 8%

  19. ISI Forecast: Expecting RevPAR to Top 7% in ‘12 Across Gateway Cities ISI Hotel Rev. Forecasting Model: Luxury/Upper Upscale

  20. Feeling Pretty Good!!!!!!

  21. Potential Roadblocks to US Lodging Recovery

  22. Catalysts for Double-Dip Concerns Our best guess is continued growth of +2.5% in 2012. However, here’s the list of catalysts for double-dip concerns in 2011. The list for 2012 is not inconsequential. • 2011 . • US budget impasse • US debt downgrade • Oil prices (Arab Spring) • Inflation accelerating • Central bank tightenings (ECB, etc) • Eurozone financial crisis • Japan disasters/supply-chain disruptions • US storms, etc • End of QE2 • 2012. • Oil prices (Israel/Iran) • Deficit and fiscal drag • Eurozone financial crisis/recession • China slowdown • US elections (and foreign)

  23. 1) Rising Gasoline Prices Has ISI Economists Concerned… • $123 Brent Suggests a Record • Expect $4.25 Gasoline this Summer

  24. 1) Comparing RevPAR Performance and Oil Prices (Brent) No clear thesis on rising oil prices and impact on fundamentals... However,, spikes in oil pressure RevPAR performance and operating margins What can we expect in ‘12?

  25. 2) Debt, debt and more debt: Fiscal Drag Will Remain an Issue U.S. FEDERAL BUDGET (FISCAL YEAR) 2012 1H -$1.4t It’s bad enough that we’ve already had 3 years with the federal deficit averaging a huge -$1.3t. Now on top of that, the deficit for 1H of FY2012 is running at a -$1.4t annual rate. This is particularly troubling for the 3rd year of a recovery.

  26. 2) Global Growth is Slowing: Emerging Markets: EMERGING ECONMIES REAL GDP Y/Y % 2011:3Q 5.7% e Emerging Market GDP Likely to Slow to 4% in 2012 from a high of 8% in ‘10 Forecast 2012:3Q 3.9%

  27. 2) Global Growth: China is Slowing; Concerns Over ‘Hard Landing’ US economy will NOT be spared from a potential ‘Hard Landing’ in China Soft Landing Level Hard Landing Level

  28. 2) Global Growth: Developed Countries--If Europe Sneezes Will the US Could Catch a Cold? Global Growth is Slowing; Spain and Italy Facing Recession DEVELOPED ECONMIES REAL GDP Y/Y % 2011:3Q 1.1% e ISI Expects Global GDP growth to slow to +0.4%, while Italy is likely to fall into a recession at -2% in ’12 European recession will weigh on US economy—question remains, by how much? Forecast 2012:3Q 0.4%

  29. European GDP Forecasts for ‘12: ISI economists are calling for a recession across most of Europe, however, developed countries up North will fare better than their Southern EU neighbors Germany: 0.0% France: -1.0% UK: -1.5% Italy: -2.0% Spain: -2.0%

  30. Europe RevPAR Data: Slipped into Negative Territory in ‘12

  31. Real Estate Overview: Asset Values – Where are We Now

  32. Off to a slow start in ‘12, but most experts expect an active 2nd half ‘12 Of the $15bn+ of full-service hotels which sold last year, REITs accounted for nearly 40% of the capital

  33. Capital Continues to Concentrate in Tier I Cities; Investors Still Worried About Moving Further Out on the Risk Curve for Higher Yield—That Will Change Top 10 Most Active Markets in ‘11

  34. Trouble in NYC and DC? Not in the Minds of “Smart Capital” In NYC – Pricing remains 20% off of ‘06 Peak, however, we would not be surprised if we exceed ‘11 peak this year (Plaza Hotel trading for $1.4mn/key to India conglomerate) Despite talk of weak fundamentals in DC, institutional capital continues to pay up for high quality assets

  35. Sunny Cal is Where the $ Migrates—Supported by Strong Fundamentals West LA West Coast Remains in High Demand for Investors – West LA and San Francisco in particular San Francisco

  36. CMBS Issuance: Has Placed a Lid on Deal Volumes… Hotel CMBS issuance is way off of ‘06-’07 peaks – with few expecting a near term resurgence

  37. …While CMBS Debt Maturities in ‘12, Expected to Place a Lid on Valuations

  38. Good News is that nearly 80% of the CMBS Loans Due this Year are Performing…that Figure Continues to Expand as Banks Extend Loans

  39. A Perspective on the Future:“If you come to a fork in the road….take it” -Yogi Berra

  40. Analyst Certification and Disclosures ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in the Report. No person(s) responsible for preparing this Report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies. No person(s) preparing this report or a member of his/her household have a financial interest in the subject companies of this Report. At various times, the employees and owners of ISI, other than those preparing this Report, may transact in the securities discussed in this Report. Neither ISI nor its affiliates have any investment banking or market making operations. No person(s) preparing this research Report has received non-investment banking compensation form the subject company in the past 12 months. ISI does and seeks to do business with companies covered in this research Report and has received non-investment banking compensation in the past 12 months. DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security. ISI RATING SYSTEM: Based on stock's 12-month risk adjusted total return; ETR = total expected return (stock price appreciation/depreciation + dividend yield) Buy Low Risk ETR Buy Medium Risk ETR Buy High Risk ETR >+10% >+15% >+20% Hold Low Risk ETR Hold Medium Risk ETR Hold High Risk ETR 0% to +10% -5% to +15% -10% to +20% Sell Low Risk ETR Sell Medium Risk ETR Sell High Risk ETR <0% <-5% <-10% RISK RATING: 30% based on stock price volatility, 30% on EPS volatility, 30% on debt rating & 10% on mkt cap ISI has assigned a rating of BUY to 45% of the securities rated as of 12/31/11. ISI has assigned a rating of HOLD to 51% of the securities rated as of 12/31/11. ISI has assigned a rating of SELL to 4% of the securities rated as of 12/31/11. Due to rounding the above numbers may add up to more/less than 100%.

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