Bear Stearns' Ader starts lodging at market weight, picks Extended Stay, FelCor

New York, Jan. 24 - Bear Stearns & Co. analyst Jason Ader began coverage of high yield lodging bonds with an overall market weight recommendation on the sector and identified Extended Stay America and FelCor Lodging Trust as his top picks.

The new coverage makes Ader, a senior managing director and the firm's lodging analyst, the first major Wall Street analyst to cover both bond and stock issues for the lodging industry, according to Bear Stearns.

In a new report, "Lodging Outlook 2002," Ader says high-yield lodging companies face a "challenging near-term environment" but long-term he believes the sector is sound because the economy appears to be rebounding slowly and there is likely to be little new supply of rooms.

Ader estimates room inventory will grow 2.5% in 2001, 1.5% in 2002 and 1% in 2003 thanks to the lack of confidence in the industry and a short supply of new finance.

He also noted that most lodging companies in the high-yield sector have adjusted costs and capital spending to better withstand the current environment.

"We believe that these proactive steps position the lodging industry to potentially realize significant EBITDA expansion in 2003-05 and a strengthening of credit measures that were weakened after September 11," Ader wrote.

The most difficult issues, such as ratings downgrades and covenant amendments, have already been resolved and priced in, the analyst noted.

And he sees "modest" upside for investors with a 12-24 month horizon - although he also warned them to expect volatility in the coming months from unfavorable earnings comparisons.

Looking at specific names, Ader recommends Extended Stay America and FelCor as offering the best risk-adjusted total return potential.

He sees Extended Stay as one of the more stable credits in the current environment since its business model is better insulated from the economic downturn and travelers' fear of flying.

With a new round of financing completed last summer, Extended Stay also has "ample" liquidity, Ader said.

Among the three lodging REITs, Ader believes FelCor entered the downturn in the best financial condition, adding that its geographical diversification with limited exposure to the top U.S. markets has become a comparative strength.

MeriStar Hospitality's senior subordinated notes are also attractive from a relative value point of view and are well suited for collateralized bond obligations, given their comparatively low dollar price of 87.75 on Jan. 18, Ader wrote.

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