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| SAN FRANCISCO - Sept. 15, 1998--With industry fundamentals
still generally attractive, investors looking for value in today's market
should consider many of the publicly traded lodging companies, according
to NationsBanc Montgomery Securities' senior lodging analyst.
The analyst, Michael G. Mueller, made his remarks at the 28th Annual NationsBanc Montgomery Securities Investment Conference, which opened yesterday. The conference, which is the firm's largest to date, features 245 companies with a combined market capitalization of $1.6 trillion making presentations to more than 1,900 portfolio managers. These managers represent 280 different institutions with a combined $3.5 trillion in assets under management. "We're recommending that investors continue to overweight their portfolios with lodging stocks," Mueller said. "The fundamental trends for the publicly traded companies should remain favorable and we are forecasting continued above-average earnings growth. With many of these stocks well below their highs, valuations for many lodging stocks are quite attractive," Mueller added. The majority of publicly traded lodging stocks are down 20 to 50 percent thus far in 1998. Mueller attributed the price declines to investor fears over a potential recession, a belief that there is an over-supply in the market and the outflow of investor funds from mutual funds that invest in Real Estate Investment Trusts (REITs). Mueller believes that the business fundamentals for publicly traded lodging companies remain solid, adding that such firms usually outperform the privately held sector of the lodging industry. Publicly held firms, such as Host Marriott, have strong brands and own better-positioned, better-maintained facilities than their privately owned competitors, Mueller said. Many of these firms are positioned in the fastest-growing, highest-return segments, such as upscale, full-service hotels and extended stay facilities. Supply growth in the industry is being limited by a tight financing market, Mueller said, as "the equity and debt markets have basically shutdown" for lodging companies. Consequently, the industry is not in danger of facing an over-building boom, as it did in the 1980s. A number of companies have recently curtailed their development programs due to financing concerns. In fact, said Mueller, supply growth peaked in 1997 and should somewhat decline over the next few years, which should help the industry's supply/demand balance. In some segments, such as full-service urban hotels, demand remains very strong, allowing the industry to raise prices faster than the inflation rate. According to Mueller, among the attractive investment areas in lodging are: franchise/management companies; urban, upscale, full-service hotels; the extended stay segment; lodging REITs; timeshare companies; and companies with properties undergoing extensive remodeling or repositioning. Franchise/management companies, such as Host Marriott, MeriStar Hotels Resorts and Promus Hotel Corporation, are experiencing stable and growing royalty and management fees and strong balance sheets, Mueller said. They have little or no real estate exposure and therefore generate significant free cash flow. In the extended stay segment -- which Mueller characterized as "hotel rooms with kitchens" -- there is very strong demand and limited supply. Yet several of the stocks in this sector are trading below their book values, Mueller said.
Companies that engage in extensive remodeling or repositioning convert older, well-located hotels to "like-new" condition, allowing them to significantly boost room rates. Again, companies in this segment, such as MeriStar and FelCor Lodging Trust, are attractively valued now, Mueller said. Lodging REITs, Mueller said, have a well-maintained, high-quality asset base, superior brands or locations and a financially sound growth strategy.
The timeshare industry, which markets "units" of resort lodging to consumers in one-week-per-year increments, is one of the fastest growing segments of the lodging industry, Mueller said. Timeshares have strong consumer appeal, flexible exchange privileges and high consumer satisfaction. The industry is well-positioned to take advantage of favorable demographic trends and to penetrate international markets. Mueller's stock recommendations among timeshare companies include
NationsBanc Montgomery Securities LLC (NMS), a subsidiary
of NationsBank Corporation, is a full-service investment bank and brokerage
firm with approximately $900 million of regulatory capital. The company
provides research, trading and issuance in the equity and fixed-income
markets (high yield, emerging markets, high grade and mortgage-backed markets).
Other services include MA advisory, financial buyer coverage, loan syndications,
global investment banking, real estate finance, mortgage finance, money
markets and the primary dealer. Through NationsBank, NMS clients can also
access products and services that include senior bank debt, bridge financing,
real estate banking, treasury management, trade finance and risk management
(derivatives products and foreign exchange). NMS is a registered broker-dealer
with the Securities and Exchange Commission and is a member of the National
Association of Securities Dealers and the New York Stock Exchange. NMS
employs more than 2,700 investment professionals.
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