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LODGING M&A: HIGHER PRICING, FLAT VOLUMES

Firmer UUP/Luxury pricing in a steady M&A environment - positive for HOT

 

SUMMARY


Volume slips but pricing higher

UUP/LUXURY hotel transaction volume slipped a little in Q2 but we did not include 7 deals that did not disclose a transaction price. However, average price per key rebounded nicely due to multiple sales in tier one cities.

 

Based on recent comments from REIT management teams and capital markets participants during 2Q, we believe there is an increased willingness by banks and capital markets (CMBS) to lend to buyers of upper upscale and luxury lodging assets.  As a result, we expect the number and dollar volume of transactions in these segments to increase in the second half of 2014.  The environment bodes well for HOT and it's continued move to an asset light strategy.

 

There were a number of sizable portfolio transactions that were announced during 2Q and will close later this year - including American Realty Capital Hospitality Trust's agreement to acquire the Equity Inns lodging portfolio of 126 hotels totaling 14,934 rooms across 35 states for $1.925 billion from subsidiaries of W2007 Grace I, LLC and WNT Holdings LLC - both of which are indirectly owned by one or more Goldman Sachs Whitehall Real Estate Funds.

 

Intercontinental 

7 Intercontinental hotels changed hands in Q2.  There are 181 Intercontinental hotels worldwide. 

 

Upscale most active

We counted 16 upscale hotel transactions in Q2, up from 9 transactions in Q1.

 

Several large midscale/upscale acquisitions

  • Starwood Capital bought TMI Hospitality (180 hotels)
  • American Realty Capital Hospitality bought Equity Inn Hotels (126 hotels)
  • Accor bought 97 hotels from Moor Park Capital Partners
  • Apollo mgmt bought 18 hotels from Ivanhoe Cambridge
  • Black Sapphire C Cleveland bought 13 hotels from Concord Hospitality

 

UPPER UPSCALE/LUXURY TRANSACTIONS

  • Q2 2014 worldwide hotel transactions (UUP & Luxury brands) volume was close to $2.4 billion, lower than the $2.5 billion seen in Q1 2014 but slightly higher than Q2 2013's $2.3 billion.
  • The number of US luxury/UUP hotel transactions (where price was disclosed) was 11 in Q2 2014 - 1 less sequentially and year ago
  • The number of non-US luxury/UUP hotel transactions (where price was disclosed) was 6 in Q2 2014 – 5 less sequentially and 2 less year ago.
  • UUP
    • US average price per key (APPK) was $469k, above its 6 quarter average of $263k.  
    • International APPK was $315k, above its 6 quarter average of $293k.
  • Luxury
    • US APPK was $519k in the US, above its 6 quarter average of $432k
  • As usual, private equity and REITs were very active 

 

COMPANIES OF NOTE 

 

Starwood (HOT)

  • Sold Aloft Tucson University for $127k APPK
  • Sold leasehold of Park Lane Hotel 

Sunstone (SHO)

  • Bought Wailea Beach Marriott for $599k APPK

RLJ Lodging Trust (RLJ)

  • Sold Holiday Inn Austin NW for $70k APPK
  • Sold Courtyard Portland City Center and Embassy Suites Irvine Orange County for $219k APPK

FelCor (FCH)

  • Sold Doubletree Suites hotel-Dana Point and Embassy Suites BWI Airport for $121k APPK
  • Sold Doubletree Suites Charlotte for $178k APPK

Hersha (HT)

  • Bought Hilton Garden Inn Midtown East for $416k APPK
  • Bought Parrot Key Hotel & Resort for $676k APPK

LaSalle Hotel Properties (LHO)

  • Sold Hilton Alexandria Old Town for $378k APPK
  • Bought Hotel Vitale for $650k APPK

Pebblebrook (PEB)

  • Bought Prescott Hotel for $306k APPK

Strategic Hotels (BEE)

  • Sold Marriott London Grosvenor Square for $876k APPK

LODGING M&A: HIGHER PRICING, FLAT VOLUMES - L

 

Our detailed transaction database is available on request.


ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue

Takeaway: The latest survey of mutual fund trends displays continued inflows into all fixed income categories with outflows in US stock funds.

This note was originally published July 03, 2014 at 09:24 in Financials

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $3.2 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had slight outflows to the tune of $29 million with domestic equity funds contributing their 9th consecutive week of redemptions. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 20 weeks in taxable bonds and 24 consecutive weeks of tax-free or muni bond inflows) compared to over 2 consecutive months of outflows in U.S. stock funds. Interestingly however, equity ETF flows last week continue to be impressive with another $7.2 billion coming into passive equity products versus a $100 million outflow in bond ETFs. We think this reflects stronger institutional demand for equities with non-retail firms allocating into the stocks at current levels despite the strong run this cycle with institutional investors also positioning for more pain in fixed income over a longer term perspective with outflows over the past several weeks. 

 

Total equity mutual funds put up a slight outflow in the most recent 5 day period ending June 26th with $29 million coming out of the all stock category as reported by the Investment Company Institute. The composition of the $29 million redemption continued to be weighted towards domestic equity funds with $1.3 billion coming out of domestic stock funds which was offset by a $1.2 billion inflow into international products. This outflow within domestic equity funds has become an intermediate term trend with now the ninth consecutive week of outflow in the category. The aggregate redemption of $29 million for the recent five day period was below the year-to-date average for equity funds of a $2.3 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $3.2 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.1 billion. The inflow into taxable products of $2.7 billion made it 19 of 20 weeks with positive flow for the category and the inflow into municipal or tax-free products of $562 million was the 24th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETF results created the tale of two tapes with equity ETFs putting up another strong week of production offset by weak passive bond flows. Equity ETFs produced another robust subscription of $7.2 billion this week, off of the back of a 2014 best $11.2 billion inflow the week prior, while fixed income ETFs suffered another outflow of $102 million. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $937 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.7 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 1

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 3

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 4

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 5

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 6

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 8

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.7 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION?

Takeaway: A likely Joko Widodo victory + improving cyclical GIP fundamentals are supportive of remaining long Indonesian capital and currency markets.

On JAN 30th of this year, we published a note titled “SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND” in which we advocated for investors to get long of Indonesian capital and currency markets on a directionally positive intermediate-term GIP outlook amid a likely bearish-to-bullish TRADE & TREND reversal on our proprietary factoring.

 

Since then, the iShares MSCI Indonesia ETF has appreciated +20.1%, which compares to a sample mean of +14.8% across the 24 country-level ETFs we track throughout the EM space. Additionally, the Indonesian rupiah (IDR) has appreciated +4.5% vs. the USD since then, which compares to a sample mean of +2.9% across the 21 currencies we track across Asia and Latin America.  

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - EM Divergence Monitor

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - FX

 

Rather than book yet another round of alpha on the long side of emerging markets in 2014 (after having been the bears in 2013), we are content to keep this research idea “on”, given that we anticipate further upside from here.

 

Looking to the cyclical side of the trade, our predictive tracking algorithm pegs the Indonesian economy squarely in Quad #1 (i.e. growth accelerating as inflation decelerates) for the current quarter. Assuming this forecast is correct, this would mark the third straight quarter of decelerating inflation amid tougher compares and marginally less annualized currency debasement. Bank Indonesia’s +175bps of rate hikes from JUN ’13 to NOV ’13 are clearly bearing fruit.

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - INDONESIA

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - CPI

 

<chart5>

 

Indonesia’s stronger growth profile for the third quarter is supported by easier compares and improving manufacturing and industrial production trends.

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - MANUFACTURING PMI

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - INDUSTRIAL PRODUCTION

 

Looking to the structural side of the trade, we think investors are likely to continue paying up for a probable victory by Jakarta Governor Joko Widodo come Wednesday’s presidential election. Recall that the IDR declined -6.7% vs. the USD from its YTD high in early-APR through late-JUN on the specter of über-nationalist candidate Prabowo Subianto closing the gap on “Jokowi” in the polls.

 

Fast forward to today, the latest polling results from Lingkaran Survei Indonesia put Jokowi squarely in first place at 47.8% vs. 44.2% for Prabowo. Polls are what they are, however – i.e. occasionally inaccurate – so we’ll gladly wait for official confirmation come Wednesday.

 

While both candidates are more-or-less singing the same song with respect to their vision for economic policy (e.g. increased infrastructure spending, reduced fuel subsidies, increased oil & gas exploration, increased assistance to the agriculture sector and further crackdowns on graft), how they plan to get there quickly became a hot-button topic amongst international investors. Specifically, Prabowo is pledging to allocate resources in a more nationalist, authoritarian regime similar to the one he served under during the oft-maligned “New Order” administration led by former President Suharto.

 

Contrast Prabowo’s pledge with Jokowi’s insistence on cutting red tape and improving both the transparency and efficiency of government processes and it’s easy to see what makes the latter candidate more popular with global capital allocators.

 

Regardless of who wins Wednesday’s elections, the country doesn’t have all that much hay to bale on the reform front. The county’s fiscal policy is something to be admired globally – even amongst its Asian peers. Years of relatively tight fiscal policy have left the country with a pristine sovereign debt/GDP ratio of 26.1%, which is the second-lowest in all of Asia. It’s central government budget balance/GDP ratio of -1.4% is the third tightest in Asia behind only Taiwan and South Korea.

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - BUDGET BALANCE

 

That being said, however, the country is an emerging market, which, almost by definition, means it has a number of things it needs to improve upon before becoming competitive at the highest level internationally. Such low-hanging fruit include, but are not limited to:

 

  • Promoting FDI: Indonesia’s stock of FDI is a paltry 2.2% of GDP, which lags regional peers Thailand (3.3%) and Singapore (21.4%), the both of which have more open economies. Increased FDI would help shift Indonesia’s export base towards more value-added goods, at the margins, which may help to narrow the country’s bloated current account deficit (latest: -3.2% of GDP). Currently, natural resources account for roughly 65% of Indonesian exports.
  • Reducing Fuel Subsidies: Indonesia currently spends just over 55% of public expenditures on fuel subsidies. While reducing those subsidies would be inflationary in the short term, it would likely be disinflationary over the long term to the extent the currency rallies on improved BoP dynamics via reduced imports of fossil fuels. That’s not a given though; paring back fuel subsidies has been all but impossible for Indonesian policymakers to do since the aforementioned Suharto was overthrown amid mass protests of said subsidy reductions.
  • Promoting Infrastructure Development: While Indonesia has certainly improved in this area in recent years, the country still ranks only 61st in the quality of its infrastructure, which is often cited as a critical factor in perpetuating both structurally elevated inflation and structurally depressed FDI. Ranking 61st in this critical category for economic development is simply not good enough for the world’s 16th largest economy at PPP.
  • Reducing Graft and Cutting Red Tape: According to the World Economic Forum’s 2013-14 Global Competitiveness Report, “Corruption” and “Inefficient Government Bureaucracy” are Indonesia’s #1 and #2 most problematic factors for doing business. Both candidates have promised varying ways to attack both issues: Jokowi via increased funding for the state’s anti-graft agency and actually cutting said red tape; Prabowo via increasing pay for civil servants (to reduce their need to steal) and re-centralizing central government power.

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - CURRENT ACCOUNT BALANCE

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - GCR  1

Source: World Economic Forum 2013-14 Global Competitiveness Report

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - GCR  2

Source: World Economic Forum 2013-14 Global Competitiveness Report

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - GCR  3

Source: World Economic Forum 2013-14 Global Competitiveness Report

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - GCR  4

Source: World Economic Forum 2013-14 Global Competitiveness Report

 

It’s worth noting that our proprietary EM Crisis Risk Index sees Pillar I and Pillar IV as Indonesia’s key areas of risk, which is perfectly in line with the areas for improvement listed above:

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - SUMMARY TABLE

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - PILLAR I

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - PILLAR IV

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - EXPLANATION TABLE

 

Regardless of who wins the upcoming election, it’s unclear if either candidate has the political backing to enact sweeping reforms – particularly in short order. Specifically, Prabowo’s Gerindra party only controls 13.04% of seats in the lower house of parliament; pairing that up with coalition partner Golkar pegs his baseline backing at only 29.29% of total seats. Still, that is more than the 19.46% of seats Jokowi’s PDI-P party currently holds. As such, investors would be remiss to expect anything but piecemeal reform(s) in the coming quarters given the mixed legislative landscape – irrespective of Wednesday’s outcome.

 

SHOULD YOU CHASE INDONESIA THROUGH THE ELECTION? - Indonesia Parliment

Source: Wikipedia

 

All told, we think a likely Joko Widodo victory and improving cyclical GIP fundamentals are supportive of remaining long Indonesian capital and currency markets. Email us if you’d like to dig in further.

 

Welcome back to the grind,

 

DD

 

Darius Dale

Associate: Macro Team


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Cartoon of the Day: $VIX Fireworks

"Front month VIX testing its all-time lows," wrote Hedgeye CEO Keith McCullough in today's Morning Newsletter. "Closing at 10.32 (it has never held below 10, sustainably).

 

Cartoon of the Day: $VIX Fireworks - VIX cartoon 07.07.2014


Expert Call: Net Neutrality/Title II Outcomes & Implications

Takeaway: We're hosting a call this Wednesday to discuss the progression of the major regulatory debates for the Internet & Media sector

Expert Call: Net Neutrality/Title II Outcomes & Implications - HE IM net

We are hosting a though leader call on Net Neutrality/Title II Outcomes & Implications with industry veteran, Jonathan Spalter, Chairman of Mobile Future. The call will be held on Wednesday, July 9th at 1:00pm EDT.

 

KEY TOPICS WILL INCLUDE: 

  • Net Neutrality Implications
  • Title II Internet Reclassification Implications
  • Various Scenarios for Internet, Media, & Telecom sectors
  • Handicapping Outcomes
  • What the Calendar Looks Like

  

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 286369#

 

ABOUT JONATHAN SPALTER 


Jonathan Spalter, the chairman of Mobile Future, the national mobile and wireless technology association, has a long track record building and leading innovative media, technology and policy research companies in the U.S, Asia-Pacific and Europe. He founded the policy-focused independent investment research company Public Insight and was CEO of Snocap, a digital music licensing company founded by the creators of Napster. Spalter also held senior management roles at the Paris headquarters of Vivendi Universal, the global media, telecommunications, and entertainment group. He was senior vice president of the company's worldwide public policy team and also served as executive vice president of business development and strategy for Vivendi Universal Net and CEO of affiliate Atmedica Worldwide. During the Clinton administration, the Senate unanimously confirmed Spalter as associate director of the U.S. Information Agency, where he was also appointed chief information officer. In addition, he served as an advisor to and spokesman for Vice President Al Gore, as well as having served as a Director on the National Security Council and Assistant Press Secretary for International Affairs at the White House.    

 


'Stunning' Weather Reversal Sends Cotton Prices Down 20%

Takeaway: What a difference a couple of months can make.

Editor's note: This is a brief excerpt from retail sector head Brian McGough's morning research. Click here for more information on how you can subscribe.

 

HBI, GIL - Cotton Boom Goes Bust as Rain-Soaked Texas Crop Sets Glut

  • "Two months ago, a drought threatened output in the U.S., the world’s largest exporter, and stockpiles were heading for a two-decade low. Then came the rains in Texas, the top grower, sparking a planting surge that the government said will send inventories to a six-year high before the 2015 harvest."
  • "The 'stunning' weather reversal may boost U.S. output by 32 percent, Plexus Cotton Ltd. said in a report. Prices that in March were the highest in 25 months are now down more than any commodity this year."

'Stunning' Weather Reversal Sends Cotton Prices Down 20% - cotton

 

Takeaway: Cotton is down almost 20% from its YTD highs. Increased yield forecasts from the US coupled with China's decision to release some its cotton reserves, which accounts for nearly 60% of global stocks, means that the supply side of the pricing equation looks relatively healthy.

 

Material cost deflation should help offset labor cost headwinds facing names like (Hanesbrands) HBI and Gildan Activewear (GIL).


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