Why JMP Securities Is Bullish On Hotels Despite REITWeek Sentiment

On Friday, JMP Securities analysts Robert LaFleur and Whitney Stevenson published a bullish research note after attending both REITWeek (NAREIT) and the NYU Lodging Investment Conference (NYU) held the prior week.

They noted a significant disconnect between hotel business fundamentals at NYU), and perceptions by the equity markets at NAREIT.

The strong operating environment was a major theme at NYU, which JMP summarized by quoting one observer: "It is a unique time in the hotel industry when you can make money buying hotels, selling hotels, and lending to hotels."

On the other hand, at Wall Street focused NAREIT, "the fact that hotel REITs were down 7% QTD and 12% YTD (vs. RMZ QTD -9%, YTD -6%) […], this issue was more front and center."

While it was a tale of two conferences, JMP came away net positive after 12 individual company meetings, and suggested that investors take another look at these four top picks:

• Host Hotels & Resorts HST - $15 billion cap, 4 percent yield
• Summit Hotel Properties INN - $1.1 billion cap, 3.6 percent yield
• FelCor Lodging Trust FCH - $1.5 billion cap, 1.55 percent yield
• Hersha Hospitality Trust HT - $1.4 billion cap, 4.3 percent yield

Tale Of The Tape - Lodging Performance 2015

Notably, Summit Hotel investors are still ahead 23 percent over the past 12 months on their INN shares, not including the dividend.

Related Link: Credit Suisse Bullish On Hotel REITs: 4 Outperform Picks In '20% Club'

JMP - Lodging World: Big Picture
From the report:

1. Lodging fundamentals are sustainably strong, supply fears are overblown, risk of a strong dollar tourism catastrophe is fading.
2. NYC will not be overwhelmed by new supply.
3. Hotel cap rates are not increasing anytime soon.
4. Buyers and sellers are still active.
5. Debt is readily available with reasonable underwriting and attractive rates.
6. The REIT sell-off was a macro and fund/ETF driven event.
7. The past couple days of trading in REIT shares suggests a potential decoupling in the interest rate/REIT trade.

JMP - Host Hotels and Resorts Market Outperform, $25 PT

• The JMP target price represents a 25.5 percent potential upside from the June 12, close of $19.92 per share.
• The HST $25 PT is based on 14.0x JMP's 2016 estimated EBITDA.

JMP - Summit Hotel Properties Market Outperform, $15.50 PT

• The JMP target price represents a 20 percent potential upside from the June 12, close of $12.95 per share.
• The INN $15.50 PT is based on 13x JMP's 2016 estimated EBITDA.

JMP - FelCor Lodging Trust Market Outperform, $16 PT

• The JMP target price represents a 55 percent potential upside from the June 12, close of $10.33 per share.
• The FCH $16 PT is based on 13x JMP's 2016 estimated EBITDA.

JMP - Hersha Hospitality Trust Market Outperform, $8 PT

• The JMP target price represents a 24 percent potential upside from the June 12, close of $6.46 per share.
• The HT $8 PT is based on 14x JMP's 2016 estimated EBITDA.

JMP - Bottom Line

In JMP's view, "this looked a lot like a classic 'baby and bathwater' scenario. Once the dust settles, we suspect the fundamentals/valuation disconnect in hotel REIT shares will become more apparent and that savvier investors will again revisit the space, particularly given the expected long duration of this lodging cycle."

Investor Takeaway - FelCor Lodging

Based upon FCH's current valuation and JMP's target price, the FelCor Lodging Trust projected return is significantly higher than its peer group.

JMP noted that after portfolio repositioning and replacing expensive debt, FelCor's "EBITDA for the 40 hotels that will comprise the portfolio on a go forward basis is expected to grow to $279M in 2016, representing a 44% increase from the 2014 level of $194M."

Additionally, JMP pointed out that "FCH's 2015 RevPAR growth guidance of 8.5-9.5% is 150 bps points higher at the midpoint than the next highest range established by a peer."