Transcript fa13-Weissman

ISI International Strategy & Investment Group, Inc.
Is the US Economy Poised to
Accelerate in 2014?
Ian Weissman
Managing Director - Head of Lodging/Gaming Research
[email protected]
212.446.9461
1
ISI International Strategy & Investment Group, Inc.
Agenda:
1) Looking Back Over the Last 18 Months
2) A Closer Look at Important Macro Drivers for Lodging
3) 2014 Macro Forecasts
4) Can We Still Make Money in the Lodging Sector?
2
ISI International Strategy & Investment Group, Inc.
First Piece of Advice: Pay Attention!!!!
Stock Returns (Since April 2012)
35%
32.4%
32.0%
30%
23.4%
25%
23.3%
20%
15%
10%
7.1%
5%
• Since we presented
at the last HAMA
conference 18
months ago, lodging
stocks have materially
outperformed…up
32%
0%
Lodging CCorps
Lodging REITs
NASDAQ
S&P
REITs
3
ISI International Strategy & Investment Group, Inc.
Rewind…Our Thoughts 18 Months Ago
Positive:
 Bullish on lodging fundamentals – forecasting 7% RevPAR growth in Gateway cities
for ‘12/’13 (market exceeded that)
 Bullish on lodging stocks – forecasting 15%+ returns (market exceeded that)
 8% unemployment (finished ‘12 at 7.8%)
 Capital markets would remain open, and deal pipelines would be active
Potential Roadblocks:
 Talk of Double Dip Recession
 Oil prices were spiking
 Investors were focused on the Deficit and fiscal drag – Fiscal Cliff
 Eurozone financial crisis/recession
 China slowdown
 US elections had the 1%-errs thinking about defecting
4
ISI International Strategy & Investment Group, Inc.
What’s Happened with the Economy the Last 18 Months?
Macro Backdrop – Global Recovery Underway
 Job Growth has averaged 170k/month
 US unemployment rate has dropped 80bp to 7.4%
 US averted a double dip recession
 Oil prices are down $10/barrel to $110
 Housing prices up 15%-20%
 US jumped off the ‘Fiscal Cliff’ with a parachute
 Eurozone financial crisis behind us
 China slowdown averted
…and Tiger Woods is Still without a Major win under his belt
5
ISI International Strategy & Investment Group, Inc.
What’s Happened with Lodging the Last 18 Months?
Lodging Has Been a Clear Winner…
 RevPAR growth +6.5% (100bp higher in gateway cities)
 ADR growth +4.2%
 Supply remains in check
 Company balances sheets continue to improve, as debt and equity
markets remain wide open
 Plenty of capital on the sidelines looking to invest into lodging
(Blackstone, Thayer, sovereign wealth $$$, and REITs)
 Hilton has finally filed plans to go public – good for the industry
6
ISI International Strategy & Investment Group, Inc.
What Can We Expect Over the Next 18 Months?
• Lodging in mid-cycle - 4th inning
• Limited new supply growth – good through 2016
• Stronger group – largely dependent upon business sentiment and jobs
• Broader US lodging recovery – secondary and tertiary markets
• Forecasting 6% to 7% RevPAR growth
• Rate recovery to continue – 4%+
• Incentive management fee growth will accelerate
• Consolidation – its coming
7
ISI International Strategy & Investment Group, Inc.
Econ 101 – US Macro Drivers
8
ISI International Strategy & Investment Group, Inc.
GDP: Important for Cyclical Sectors—Just NOT
This Time Around
US GDP growth has
averaged a
disappointing 2.2%
per quarter since the
‘Great Recession’
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Q18
Q17
Q16
Q15
Q14
Q13
Q12
Q11
Q10
Q9
Q8
Q7
Q6
Q5
Q4
Q3
Q2
Q1
'90/'01 Recessions
GDP is tracking nearly
200bp lower than
where the US was
following the ‘01 and
‘90 recessions
'09 Recession
9
ISI International Strategy & Investment Group, Inc.
US RevPAR Recovery: Solid, Especially in Gateways
14%
12%
12%
11%
10%
10% 10% 10% 10% 10%
10%
9%
9%
7%
8%
6%
6%
6%
4%
4%
2%
0%
0%
-2%
-4%
3Q13
2Q13
1Q13
Gateway RevPAR
4Q12
3Q12
2Q12
1Q12
4Q11
US RevPAR
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
-6%
Despite tepid macro
backdrop, its been a
particularly strong
recovery with
RevPAR up +7.3%
over the prior 14
quarters.
Gateway cities
continue to
outperform, beating
the broader US by
150bp
10
ISI International Strategy & Investment Group, Inc.
Consumer: Key to Lodging Recovery
11
ISI International Strategy & Investment Group, Inc.
Consumer: Stock Market is Back in a Big Way
• S&P 500 is up 19% in ’13,
surpassing the ‘07 peak in March
‘13
1,900
1,700
• Consumer net worth (i.e.,
stock market) is a key variable of
our RevPAR forecasting models
1,300
1,100
900
Jul-13
Mar-13
Nov-12
Jul-12
Mar-12
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
700
Mar-07
S&P 500
1,500
• Unlike prior cycles, however,
QE has helped to drive equity
values -- Bernanke wrote in
2010, “Higher stock prices boost
consumer wealth and help
increase consumer confidence
which can spur spending”
12
ISI International Strategy & Investment Group, Inc.
Consumer: Household Debt Continues to Fall
U.S. CONSUMER DEBT
% NOMINAL DISPOSABLE PERSONAL INCOME
2013:1Q 104%
130
120
110
100
90
80
70
60
50
1960
1970
1980
1990
2000
2010
As a result of the surge in
equity prices, and ultimately,
historically low mortgage
rates with tougher
underwriting standards,
Consumer’s have been able
to repair their balance sheets
as personal leverage ratios
are down nearly 30percentage points since
peaking in 2010
13
ISI International Strategy & Investment Group, Inc.
Consumer Sentiment is on the Rise
95
Consumer Sentiment (Index)
90
85
80
With stocks on the rise,
consumer sentiment
continues to move
higher.
75
70
65
60
55
50
The US consumer has
been a key driver in the
latest lodging recovery
14
ISI International Strategy & Investment Group, Inc.
While Consumer Spending Remains Robust
Good news for the recovery
has been that consumers are
back on their feet with
spending well past the prior
peak
15
ISI International Strategy & Investment Group, Inc.
Housing Has Been an Important Driver of Recovery
Case Shilller Home Price Index
110
100
90
80
70
60
50
40
As we head into year four of
the US economic recovery,
Case-Shiller Home Index
continues to move higher.
Index is up 28% since
bottoming in ’12, however,
remains 36% ‘06 peak
That said, recent spike in
mortgage rates has ISI’s
Housing Survey under
pressure
16
ISI International Strategy & Investment Group, Inc.
With Housing Starts Nearly Doubling
Housing starts have nearly
doubled since bottoming in
‘08, but remain well off the
‘06 peak
That said, keeping a watchful
eye on recent softness amid
rising interest rates.
If the US economy is going
to reaccelerate, Housing
needs to be strong
17
ISI International Strategy & Investment Group, Inc.
Corporate America: Cautiously Optimistic
18
ISI International Strategy & Investment Group, Inc.
Corporate Profits: Up 17% Per Annum
2300
2100
1900
1700
1500
1300
1100
900
700
Since bottoming in late
2008, corporate profits
are up 17% per annum,
well past the ‘07 peak
Cost cutting/savings
remains the primary
driver
…yet Lodging
companies have yet to
witness the benefits of
corporate America’s
rebound (Group
Business remains a
disappointment)
19
ISI International Strategy & Investment Group, Inc.
Biggest difference has been Sentiment levels
90
Part of the explanation
relates to “Confidence”.
85
75
70
65
60
55
Business Sentiment
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
50
Apr-08
Sentiment Index
80
Consumer confidence
continues to surge, while
Business sentiment has
been flat throughout the
recovery
Consumer Sentiment
20
ISI International Strategy & Investment Group, Inc.
As a Result: Rate Growth Has Been Disappointing
60
6%
0%
-2%
30
-4%
20
-6%
-8%
10
-10%
ISI Trucking Survey
ADR Grth
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
-12%
May-09
0
Jan-09
ISI Trucking Survey
2%
40
ADR Growth (Hotels)
4%
50
Historically, there is a very
strong correlation between
Business Confidence
(Measured by ISI’s Trucking
Survey) and ADR Growth
Both have flat-lined the last
several years
Without jobs, business
sentiment will remain flat,
and hotel operators will have
a hard time pushing rates
higher
21
ISI International Strategy & Investment Group, Inc.
Currently, Rate Accounting for 80-90% of RevPAR
12%
100%
90%
70%
8%
60%
6%
50%
40%
4%
30%
20%
2%
10%
Occup.
ADR
Aug-13
Jun-13
Apr-13
Feb-13
Oct-12
Dec-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Jun-11
Aug-11
Apr-11
Feb-11
Dec-10
0%
Oct-10
0%
ADR as % of RevPAR
80%
Aug-10
RevPAR Growth
10%
Rate growth accounting for
85%+ of RevPAR gains…
Sector could be doing better.
Operators remain hesitant to
push rates on Group
ADR as % of RevPAR - T3M
22
ISI International Strategy & Investment Group, Inc.
Monthly Job Growth and ADR Growth Are Flat
2.0%
6.0%
1.0%
4.0%
2.0%
0.0%
-1.0%
-2.0%
-2.0%
-4.0%
ADR Growth
Monthly Job Growth
0.0%
Near perfect
correlation between
monthly job growth
and ADR growth
-3.0%
-6.0%
-4.0%
-8.0%
-5.0%
-10.0%
-6.0%
Both have flat-lined
over the last two
years
-12.0%
Jan-09
Jun-09
Nov-09 Apr-10
Sep-10
Feb-11
Monthly Job Growth
Jul-11
Dec-11 May-12 Oct-12 Mar-13
Y/Y ADR Growth
23
-800
6/1/1988
4/1/1989
2/1/1990
12/1/1990
10/1/1991
8/1/1992
6/1/1993
4/1/1994
2/1/1995
12/1/1995
10/1/1996
8/1/1997
6/1/1998
4/1/1999
2/1/2000
12/1/2000
10/1/2001
8/1/2002
6/1/2003
4/1/2004
2/1/2005
12/1/2005
10/1/2006
8/1/2007
6/1/2008
4/1/2009
2/1/2010
12/1/2010
10/1/2011
8/1/2012
6/1/2013
T3M Employ. Chg.
200
6%
4%
0
2%
-200
0%
-2%
-400
80% Correlation
Chg. In Employment
-4%
-600
-6%
-8%
T3M RevPAR Growth (lagged 3 months)
ISI International Strategy & Investment Group, Inc.
Key is Employment: That Relations Goes back 25 Yrs
400
8%
-10%
ADR Growth
24
ISI International Strategy & Investment Group, Inc.
Unemployment Needs to Be Below 5%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
-10.0%
1Q88
4Q88
3Q89
2Q90
1Q91
4Q91
3Q92
2Q93
1Q94
4Q94
3Q95
2Q96
1Q97
4Q97
3Q98
2Q99
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
-9.0%
-10.0%
Unemployment Rate
ADR Growth
• Rate (ADR) growth
rarely exceeds 5% (on
a consistent basis),
unless the US
unemployment rate
runs at 5% or lower.
• ISI economists
estimate that the US
would need to add
225k jobs per month
to get to under 5%
unemployment
• 2+ more years
25
ISI International Strategy & Investment Group, Inc.
Macro Economic Forecasts
26
ISI International Strategy & Investment Group, Inc.
What the “Experts” are Saying: Only Getting Better
• While ‘12 was about “Growth Problems”, the current view by ISI economists is
considerably more bullish – “ The US economy is poised for a reacceleration”
How do we know that?
• Unemployment claims and PMI data have both dramatically improved
• Diffusion index of ISI’s company surveys has recently ‘hooked up’
• Global expansion underway – Eurozone, UK, Japan and China
• Gasoline prices continue to fall
• Taper-delay, the new QE?
• Housing is key to U.S. growth accelerating: while the Homebuilding Survey has
recently dropped, recent back up in mortgage rates could help reaccelerate growth
27
ISI International Strategy & Investment Group, Inc.
8.5%
60.0
7.5%
59.0
6.5%
58.0
5.5%
57.0
4.5%
56.0
3.5%
55.0
2.5%
• Airline survey ticking higher – should
lead to accelerating RevPAR growth…
16-Sep-13
1-Sep-13
2-Aug-13
17-Aug-13
18-Jul-13
18-Jun-13
Airline Survey
3-Jul-13
3-Jun-13
19-May-13
4-May-13
19-Apr-13
20-Mar-13
5-Mar-13
4-Apr-13
61.0
ADR Growth (T4W)
RevPAR Grth
53.0
52.5
52.0
51.5
• while leading macro indicator, ISI’s
Company Survey Index, continues to
push higher
ISI Company Surveys
ISI Airline Survey (T4W)
More Bullish Signals for Lodging Fundamentals
51.0
50.5
50.0
49.5
49.0
48.5
48.0
4-Jan-13
4-Feb-13 4-Mar-13 4-Apr-13 4-May-13 4-Jun-13
4-Jul-13
4-Aug-13 4-Sep-13
28
ISI International Strategy & Investment Group, Inc.
ISI Economists Remain Bullish on US Economy
‘14 GDP: 3%
‘14 Job Growth: ~2.4mn jobs (200k/mos)
‘14 Unemployment Rate: 6.8%
 ’14 10-Year Bond: 3.5%
29
ISI International Strategy & Investment Group, Inc.
ISI Forecast: Expecting RevPAR of 6%+ in ‘14
• We are forecasting
+6%+ RevPAR growth in
‘14
10
5
• REIT executives putting
out ranges of +5% to
+7%
0
-5
-10
-15
• Everything dependent
upon job growth
Correlation: 86%
-20
1Q88
1Q89
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
US RevPAR Growth - Y/Y Change (%)
15
Series1
Series2
•West Coast likely to
continue to outperform
30
ISI International Strategy & Investment Group, Inc.
Lodging Stock Valuations – Can We Still
Make Money????
31
ISI International Strategy & Investment Group, Inc.
Lodging Stocks Have Had a Very Solid Run the Last 5 Yrs…
100%
89%
80%
63%
60%
57%
51%
40%
31%
21%
20%
13%
17%
0%
-20%
2009
2010
Lodging REITs
-13%-12%
2011
2012
13YTD
Lodging C-Corps
32
ISI International Strategy & Investment Group, Inc.
Still Forecasting 10% Returns – Valuations Reasonable
Forecasted Returns: Upside Left in Lodging
While Group ‘Fairly’ Valued
EV/EBITDA
Forecasting 12-Month Returns
15%
10%
10%
5%
0%
-5%
-10%
NAV Ratios
Company Name
'13E
'14E
Curr
Host Hotels & Resorts Inc.
14.1x
13.9x
95%
LaSalle Hotel Properties
14.2x
12.4x
98%
DiamondRock Hospitality
15.1x
12.8x
94%
Sunstone Hotel Inv estors
13.7x
12.0x
90%
Strategic Hotels & Resorts
16.9x
16.3x
86%
Pebblebrook Hotel Trust
14.1x
12.6x
96%
Lodging REIT Avg
14.4x
13.5x
94%
EV/EBITDA
Company Name
'13E
'14E
Starw ood Hotels & Resorts
11.8x
11.7x
Marriott International
14.1x
12.4x
Hy att Hotels & Resorts
Lodging C-Corp Avg
11.9x
10.5x
12.7x
11.7x
33
ISI International Strategy & Investment Group, Inc.
Investment Thesis on Lodging…
1) In a rising interest rate environment, the story this year has been own lodging (shorter lease
duration play)
2) Investor sentiment has shifted – less concerned about Macro blow-ups
3) Among the best internal growth stories relative to other asset classes
4) Deals, deals and more deals. Consolidation talk continues. Anticipate the private market bid for
lodging will remain robust.
5) Even talk of cap rate compression --- unique only to lodging
6) Management teams have been very disciplined this cycle
1) Balance sheets are in great shape
2) Accretive acquisitions
3) Capital recycling improves the overall quality of the portfolio
7) We expect lodging stocks to continue to outperform in ‘14….however, questions still remain on
employment trends and supply
34
ISI International Strategy & Investment Group, Inc.
C-Corps the Better Play in ‘14?
In ‘14, within the lodging
sector, we prefer Lodging CCorps vs. Lodging REITs in
2014
18.0x
16.0x
Fwd EV/EBITDA
14.0x
12.0x
10.0x
8.0x
6.0x
Lodging REITS
Lodging REITS LT Avg.
C Corps
C Corps LT Avg.
1) Valuations more
compelling
2) ADR will dominate
3) Incentive management
fee growth will accelerate,
which should lead to
multiple expansion
Risks to C-Corp Call:
China RevPAR Stalling – HOT and H
Weaker Group – MAR
35
ISI International Strategy & Investment Group, Inc.
Questions???
36
ISI International Strategy & Investment Group, Inc.
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.
STRONG BUY
Return > 20%
BUY
Return 10% to 20%
NEUTRAL
Return 0% to 10%
CAUTIOUS
Return -10% to 0%
SELL
Return < -10%
ISI has assigned a rating of STRONG BUY to 19% of the securities rated as of 6/30/13.
ISI has assigned a rating of BUY to 29% of the securities rated as of 6/3013.
ISI has assigned a rating of NEUTRAL to 44% of the securities rated as of 6/30/13.
ISI has assigned a rating of CAUTIOUS to 3% of the securities rated as of 6/30/13.
ISI has assigned a rating of SELL to 1% of the securities rated as of 6/30/13.
(Due to rounding, the above number may add up to more/less than 100%).
37