NEW YORK— In the words of a select group of hotel REIT leaders, it might well be investors today that see something analysts and industry professionals alike have so far failed to identify— an inexorable upside to their respective companies’ valuation. During the course of a NAREIT lodging sector conference call last week, Wachovia Securities VP – Real Estate and Lodging Group Jeffrey Donnelly opened a wide-ranging discussion among a half-dozen hotel REIT executives with the observation that current stock pricing in this sector seems to be irrationally high. On this general note, there was little argument from the likes of LaSalle Hotel Properties Chairman/President/CEO Jon Bortz, Innkeepers USA Trust EVP/CFO/Treasurer David Bulger, RFS Hotel Investors EVP/CFO Kevin Luebbers, Hospitality Properties Trust President/COO John Murray, Host Marriott Corp. President/CEO Chris Nassetta and FelCor Lodging Trust EVP/CFO Rick O’Brien. In fact, Bulger may well have been the most blunt in his concurrence with this scenario when he openly agreed with prevailing sentiment that stocks in this arena are unquestionably expensively priced. On the other hand, what he did question was how investors could possibly value lodging REIT shares at the levels they trade at today, seemingly neglecting to factor in the industry’s overall lackluster performance over the past months. To this end, Donnelly suggested that today’s investors— historically non-REIT/non-real estate types— apparently don’t think lodging stocks are overpriced at this time. Rather, he said their mindset is such that they seem to believe such stocks are in line to ultimately command even higher values. “It may well be investors view today’s environment as being much like that of the early ‘90s, when lodging stocks last traded at unseemly high multiples,” Donnelly said. Explaining further, Donnelly offered that— during normal economic times— hotel REIT stocks generally trade somewhere between seven – nine times EBITDA; in good times, that can move up to nine – 11 times EBITDA; in bad times, that can drop to five – seven times EBITDA. “With not a lot of capital invested [comparatively]in this particular sector,” Donnelly pointed out, “it really doesn’t take a lot of money to push the REIT market.” Of course, despite the “attractive” pricing of hotel REIT shares, it may well be the entire phenomenon is little more than a moot point as it concerns the capital-raising potential in this end of the market. “After all,” as Donnelly pointed out, “who [among hotel REITs]is really in a position to sell stock anyway?” On the contrary, today’s overvalued market conditions just makes it that much tougher for anyone who might be entertaining thoughts of buying back outstanding shares.
David Bulger