COST OF CAPITAL DRIVES LODGING MULTIPLES

Lodging EV/EBITDA multiples appear to inversely track cost of capital more closely than for gaming operators.  Not only is the R Square higher but there is no lag on the causal relationship.  In other words, cost of capital changes get immediately reflected in the lodging multiple.  One explanation for this might be the real estate nature of the lodging business.  As bond yields rise, high dividend stocks tend to underperform.  REIT's pay large dividends.

 

COST OF CAPITAL DRIVES LODGING MULTIPLES - lodging multipls vs yields

 

So where does that leave the multiples?  As can be seen on the chart, at the end of April trailing EV/EBITDA multiples were close to historical lows.  This seems appropriate given the sharp rise in borrowing costs.  However, industry EBITDA may be down 35% in 2009 and another 10% in 2010 which renders the trailing EV/EBITDA somewhat irrelevant.  Here we defer to our prior analysis that found forward lodging multiples to be reasonable at best, even if 2009 is trough EBITDA (we don't think it is).  HOT and MAR are trading at 10.5x and 11.5 our 2010 EV/EBITDA estimates, respectively.


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