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Real Estate Investment Trust specialized in hotels (1993) $2.83 B of market capitalization 02/16/2009
Profile Leader in the lodging real estate sector 119 luxury and full service hotels managed by strong brands (Marriott)
Strategy <ul><li>Maximize shareholder value by acquiring assets  </li></ul><ul><ul><li>high quality  </li></ul></ul><ul><u...
Management <ul><li>Simple organizational structure => flexibility </li></ul><ul><li>Experienced and promoted from within  ...
Competitors <ul><li>Main direct competitor: Lasalle Hotel Properties.  </li></ul><ul><li>Unquestionable Leader (market cap...
Profitability <ul><li>After tax operating profit margin= 16% </li></ul><ul><li>ROIC= 8% </li></ul>5 <ul><li>Good profitabi...
Financial condition <ul><li>LT Debt/ Equity = 1.07 </li></ul><ul><li>Debt maturing 78% in 2012 and after. </li></ul><ul><l...
Risks <ul><li>Future decrease in hotels value </li></ul><ul><li>Lasalle Hotel Properties </li></ul><ul><li>Credit crunch  ...
Historical Cash Flows
Quarterly Cash Flows
Historical TRS & Volatility
Cumulative log return
Volatility 8
Valuation (base case) V= 0.87
Valuation (stress case) <ul><li>Decrease of ROIC from 4% to 3% during phase 1 and from 12% to 11% in stage 2. </li></ul><u...
Recommandation <ul><li>Buy shares to take advantage of the: </li></ul><ul><ul><li>undervalued stock, </li></ul></ul><ul><u...
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REIT HST Valuation

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HST\'s valuation

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REIT HST Valuation

  1. 1. Real Estate Investment Trust specialized in hotels (1993) $2.83 B of market capitalization 02/16/2009
  2. 2. Profile Leader in the lodging real estate sector 119 luxury and full service hotels managed by strong brands (Marriott)
  3. 3. Strategy <ul><li>Maximize shareholder value by acquiring assets </li></ul><ul><ul><li>high quality </li></ul></ul><ul><ul><li>in prime locations </li></ul></ul><ul><ul><li>with significant barriers to entry </li></ul></ul><ul><li>Create value through aggressive asset management </li></ul><ul><li>Expand their leadership to take advantage: </li></ul><ul><ul><li>greater scale </li></ul></ul><ul><ul><li>geographic diversification in top markets (Europe, Asia) </li></ul></ul><ul><li>Be flexible: cash and not too leveraged </li></ul>3
  4. 4. Management <ul><li>Simple organizational structure => flexibility </li></ul><ul><li>Experienced and promoted from within </li></ul><ul><ul><li>expertise in the lodging real estate. </li></ul></ul><ul><ul><li>knowledge of real estate cycles and crisis </li></ul></ul>
  5. 5. Competitors <ul><li>Main direct competitor: Lasalle Hotel Properties. </li></ul><ul><li>Unquestionable Leader (market capitalization, revenues, assets…) </li></ul><ul><li>Higher capital efficiency and return on assets </li></ul><ul><li>Lower growth (rationalization) </li></ul><ul><li>Lower operating profit margin </li></ul>4
  6. 6. Profitability <ul><li>After tax operating profit margin= 16% </li></ul><ul><li>ROIC= 8% </li></ul>5 <ul><li>Good profitability </li></ul><ul><li>Real estate cycles </li></ul>
  7. 7. Financial condition <ul><li>LT Debt/ Equity = 1.07 </li></ul><ul><li>Debt maturing 78% in 2012 and after. </li></ul><ul><li>Current ratio= 4.9 </li></ul><ul><li>Important amount of cash (4.7% of assets) </li></ul><ul><li>Increasing operating cash flow= $1.050 billion </li></ul><ul><li>Increasing free cash flows= $741 million </li></ul><ul><li>Low financial risks, flexibility and options </li></ul>6
  8. 8. Risks <ul><li>Future decrease in hotels value </li></ul><ul><li>Lasalle Hotel Properties </li></ul><ul><li>Credit crunch </li></ul><ul><li>Volatility of profit and profitability </li></ul><ul><li>Stock price volatility => 8.55% of Default within 6 months (Merton model). </li></ul><ul><li>S&P BB rating. </li></ul><ul><li>Modest financial risk profile </li></ul><ul><li>Focus on prime location in constrained markets </li></ul><ul><li>Diversification </li></ul><ul><li>Good cash flow statement </li></ul>7
  9. 9. Historical Cash Flows
  10. 10. Quarterly Cash Flows
  11. 11. Historical TRS & Volatility
  12. 12. Cumulative log return
  13. 13. Volatility 8
  14. 14. Valuation (base case) V= 0.87
  15. 15. Valuation (stress case) <ul><li>Decrease of ROIC from 4% to 3% during phase 1 and from 12% to 11% in stage 2. </li></ul><ul><li>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 3 </li></ul><ul><li>Decrease of capital efficiency by 50 basis points in stage 1 and 3 as well as 20 basis points in stage 2. </li></ul><ul><li>Increase of cost of capital from 14% to 15% in stage 1 and from 10% to 11% in stage 3 </li></ul><ul><li>Price= $4.89 </li></ul><ul><li>Undervalued by 1%. </li></ul>9
  16. 16. Recommandation <ul><li>Buy shares to take advantage of the: </li></ul><ul><ul><li>undervalued stock, </li></ul></ul><ul><ul><li>future economic recovery </li></ul></ul><ul><ul><li>leading position in lodging real estate </li></ul></ul><ul><ul><li>good financial condition. </li></ul></ul>10

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