“If you wait a year or more, there will be a lot more competition for any asset that comes up for sale,” Adler predicts. “The trick is to get in early and beat the competition. Forget about today's cash flow. Anybody buying in 2009 is looking for a return well down the road. Patience will be required.”

H. Lee Murphy is a Chicago-based writer.

Hotel REITs are on the brink of distress selling

The entire hotel industry was reeling in 2008, but it was the public sector of the market — the real estate investment trusts — that got really slammed. One stock after another was down by 75% or more for the year as investors went fleeing from hospitality.

Ashford Hospitality Trust was trading in late December at $1.43 a share, down 82% for the year. Strategic Hotels & Resorts, once a high-flyer investing in trophy properties, was trading at $1.41, down 93% from a high of $18.87. Felcor Lodging Trust, once a solid name in the industry, traded as low as 66 cents a share in 2008, down 96% from the $17.23 high.

David Loeb, an analyst with brokerage firm Robert W. Baird & Co. in Milwaukee, covers all 10 major hotel REITs, though at the moment he only recommends buying stock in one of them — Hersha Hospitality — whose shares were down 75% to $2.60 in mid-December from the 52-week high. Hersha gets most of its profits from limited-service hotels in New York, Boston and Washington, D.C. — markets where rates and occupancies have held up comparatively well, according to Loeb.

Loeb expects the companies he follows to be active buying and selling in the coming year. He thinks Ashford, Felcor and Strategic — all stretched for liquidity — will be net sellers in the coming months. Strategic already has a Marriott in the Chicago suburb of Lincolnshire and a Ritz-Carlton in Half Moon Bay, Calif., up for sale, he notes.

Who will be buying? Sunstone Hotel Investors has $200 million in cash on its books and is looking for deals. LaSalle Hotel Properties is carrying modest levels of debt on its balance sheet and can do deals, too, Loeb says. Host Hotels & Resorts Inc. could take on another $1 billion in debt without much effort. And DiamondRock Hospitality Co. is known to be seeking more hotels, too.

“Some of these REIT stocks have fallen so far down that these companies are at risk of being delisted,” Loeb observes. “So some will be forced to sell assets to raise liquidity and live to fight another day.”

Some of the companies might be better off taken private, but Loeb believes that would be the most difficult sale of all. “How do you convince shareholders that any per-share offer to go private is fair? These stocks were trading so much higher not long ago.”
— H. Lee Murphy