High Returns for Lodging REITs as Hotel Construction Remains Low: A Wall Street Transcript Interview with Nikhil Bhalla, Vice President of Equity Research in Lodging at FBR Capital Markets & Co.

Wall Street Transcript

67 WALL STREET, New York - November 4, 2013 - The Wall Street Transcript has just published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Pricing Power Outlook - Acquisition and Financing Costs - Apartment, Lodging, Self-Storage and Office REITs - Consolidation Activity - REIT Access to Capital

Companies include: Host Hotels & Resorts Inc. (HST), American International Group, (AIG), FelCor Lodging Trust Inc. (FCH), Diamondrock Hospitality Co. (DRH), LaSalle Hotel Properties (LHO), Hersha Hospitality Trust (HT), The Blackstone Group (BX), Sunstone Hotel Investors Inc. (SHO), Marriott International, Inc. (MAR) and many others.

In the following excerpt from the REITs Report, an experienced real estate finance research analyst discusses the outlook for the sector for investors:

TWST: If you would, please start with a quick snapshot of your coverage universe.

Mr. Bhalla: I cover a total of 17 companies including nine lodging REITs. My focus is really on the lodging sector here. By way of background, I came to Wall Street from the industry. I used to work for Host Hotels & Resorts (HST), which is the largest hotel REIT in the world, before I came to FBR, and I have a master's from Cornell Hotel School. So I have a lodging background, and that's why I do what I do right now.

TWST: What's your overall sentiment and outlook on the lodging REIT space right now and why?

Mr. Bhalla: I think the space is very well-positioned for the next several years of growth. At least for the next two to three years, as far as one has some visibility, the space and the stocks should continue to grind higher, barring any exogenous macroeconomic events. There are a couple of reasons for that.

One is, lodging at the end of the day is tied to economic growth. If you believe the projections that are put out by noted economists right now, the thought process is that there is some acceleration in economic growth coming in 2014 and even more so in 2015, and beyond that some economists are calling for peak employment in 2016. So that represents good three years of runway ahead of us, which is a very positive backdrop for the lodging industry and relates well to the demand growth for hotels.

The other signpost we always look for is supply growth or new room construction growth. What we've always found is, at least in the last three cycles spanning 20 to 30 years, we have had supply growth starting to ramp up midcycle, and peak at a point where the demand growth starts to fall off. Taking a closer look at the cycle that we are currently in, we've had three years of successive RevPAR growth, or revenue growth per room, and we haven't really seen any material ramp up in supply growth.

Fortunately we have a lot of visibility when it comes to new hotel construction growth looking out, and when you look out for the next three years, it's still quite benign. It's about 1% in 2013, a little over 1% in 2014, and in 2015 it starts to get closer to 2%, and I would imagine that you really start to see new construction growth...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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