For Subscribers

Get the complete article now!

Three analysts and top management from eight sector firms examine the lodging sector in this special 47-page Lodging Industry issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info557.htm

TWST: Mike, I’d like to begin by asking you to review the performance of the lodging companies and lodging stocks over the past 12 months. In order to do this, is it necessary to divide the period into pre-September 11 and post-September 11?

Mr. Happel: I think that helps. Let me try to give you a quick overview of the fundamentals and the stocks. Going back to early 2001, the US economy was starting to slow, and that was having a negative effect on lodging demand, which was also slowing. Prior to September 11, I was forecasting that RevPAR (revenue per available room) in the lodging industry would be down approximately 3% in 2001, and that would have made it a bad year — a year that was on par with the 1991 recession — but not a disastrous year. Then September 11 came along and travel virtually stopped for a short time period, and that affected the numbers so that RevPAR was actually down about 7% in 2001 — which makes it by far the worst year for the industry on record. This year, 2002, my forecast is that RevPAR will be roughly flat compared to 2001, with the first half of 2002 being weak and the second half of 2002 being much stronger, largely because the comparisons get easier. So September 11 did have a major impact on the industry. In terms of stocks, the stocks actually were performing fairly well in early 2001. At least prior to September 11 they were outperforming the overall market despite the demand slowdown that I described. Then after 2001 the stocks really got clobbered. As a group, they were down anywhere from 30% to 50% after September 11. They have now rebounded quite sharply and, as a group, are trading at prices that are higher than their September 10 prices. So there has been a very sharp rebound in the stocks. I would say they have come back much faster than the underlying fundamentals have come back.

TWST: Mike, you say you are cautiously optimistic. Will you give us the stocks that would illustrate your cautious optimism?

Mr. Happel: I also like Starwood and Host Marriott. The other stock that I would like to highlight is Fairmont Hotels (NYSE:FHR). I think Fairmont is a good buy here still, even at this price. People would probably be quick to point out that it’s trading at something like 10.5 times 2003 EBITDA. That is probably the highest EBITDA multiple in the industry for any of the major hotel companies. What I like about Fairmont is the dry powder on their balance sheet, and the potential for them to do accretive acquisitions in the next 12 to 18 months. Fairmont has roughly 15% debt to total capitalization, and the norm in the industry is closer to 50/50 debt to total capitalization. So you can see from those figures that they have a lot of room to use debt to go out and do acquisitions, and it is a small enough company that they only need to find two to five hotels to make a real impact on the overall company. So I’m excited about Fairmont because of the balance sheet and acquisition story.

This special issue includes:

1) Lodging Industry - In an in-depth (12,400 words) Analyst Roundtable, Brian Egger, Director in the Equity Research Department at Credit Suisse First Boston, Michael A. Happel, Principal of Morgan Stanley Dean Witter & Co. and Bryan A. Maher, Director and Senior Equity Analyst at Credit Lyonnais Securities (USA), Inc., examine the outlook for the sector including impact of September 11, margin erosion and share specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of eight sector firms examine the outlook for their firm and the sector.