Download - REIT HST Valuation
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Real Estate Investment Trust specialized in hotels (1993)
$2.83 B of market capitalization
02/16/2009
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Profile
Leader in the lodging real estate sector
119 luxury and full service hotels managed by strong brands (Marriott)
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StrategyMaximize shareholder value by acquiring assets
high quality in prime locationswith significant barriers to entry
Create value through aggressive asset management
Expand their leadership to take advantage:greater scale geographic diversification in top markets (Europe, Asia)
Be flexible: cash and not too leveraged 3
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ManagementSimple organizational structure => flexibility
Experienced and promoted from within expertise in the lodging real estate.knowledge of real estate cycles and crisis
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CompetitorsMain direct competitor: Lasalle Hotel Properties. Unquestionable Leader (market capitalization, revenues,
assets…)Higher capital efficiency and return on assetsLower growth (rationalization) Lower operating profit margin
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Profitability
After tax operating profit margin= 16%
ROIC= 8%
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Good profitability Real estate cycles
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Financial conditionLT Debt/ Equity = 1.07Debt maturing 78% in 2012 and after.
Current ratio= 4.9Important amount of cash (4.7% of assets)Increasing operating cash flow= $1.050 billionIncreasing free cash flows= $741 million
Low financial risks, flexibility and options
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RisksFuture decrease in hotels valueLasalle Hotel PropertiesCredit crunch Volatility of profit and profitabilityStock price volatility => 8.55% of Default within 6
months (Merton model).S&P BB rating.
Modest financial risk profileFocus on prime location in constrained marketsDiversificationGood cash flow statement
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Historical Cash Flows
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Quarterly Cash Flows
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Historical TRS & Volatility
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Cumulative log return
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Volatility
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Valuation (base case)
V= 0.87
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Valuation (stress case)Decrease of ROIC from 4% to 3% during phase 1 and from
12% to 11% in stage 2.Decrease of sales growth from -10% to -12% in phase 1, from
8% to 7% in phase 2 and from 6% to 5% in phase 3Decrease of capital efficiency by 50 basis points in stage 1
and 3 as well as 20 basis points in stage 2.Increase of cost of capital from 14% to 15% in stage 1 and
from 10% to 11% in stage 3
Price= $4.89Undervalued by 1%.
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Recommandation
Buy shares to take advantage of the:undervalued stock,future economic recoveryleading position in lodging real estategood financial condition.
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