See Little Upside Today For Industry’s Small-Cap REITs

NEW YORK— These are already not the best of times for many hotel REITs, but if proposals put forth by President Bush eliminating stock-dividend taxes pushes through— even in a somewhat modified form— several real estate investment trust leaders maintain there could well be a number of smaller-cap companies rushing to de-REIT. As suggested by AmeriVest Properties CEO William Atkins— and adamantly reinforced by InnSuites Hospitality Trust EVP/Secretary-Treasurer Marc Berg— during the course of a Roundtable of REIT CEOs kicking off The Wall Street Transcript’s 2003 REIT Investment Conference here, almost any change in dividend tax laws would negate REITs’ market advantage and thereby negatively impact their ability to attract investment. Accordingly, it was surmised a considerable number of (small-cap) REITs could— and should— think long and hard about de-REITing if the President’s proposals pass in any way even close to what he initially put out on the table. However, it was further contended most of these de-REITing entities would likely still remain public companies. As Berg noted: “REITs have always been looked at as a yield play. If [we are]to keep our advantage, it might mean [we]have to raise the level of the dividends we pay out.” In light of today’s market conditions, Berg added: “We [hotel REITs]are not real happy to be trading way below our net asset values. I often think that if we were private [or C corps]we’d be much better off in today’s marketplace.” As for what life is like for a small-cap hotel REIT these days, Berg noted the frustration is particularly evident when trying to tap into the capital markets. “When we call on lenders, they treat us like we’re selling a disease or something. In our case, in order to raise capital we’ve had to re-finance three properties over the course of the past year. It might also be the only way left for us to raise additional capital [given any thoughts of a public offering are absolutely unthinkable in this environment]is to sell-off some non-strategic assets.” That being the case, it would seem such a course of action would hold limited appeal to an operation like InnSuites Hospitality, considering the four-year-old REIT “only” has a dozen properties in its portfolio. “The biggest problem,” Berg continued, “is that while there has been little new supply coming on-line, that ‘positive’ is being blunted by the fact demand is just not there. And if there’s no money coming in, then we’re just treading water. The bottom line,” he said, “is we need to find a way to get heads in beds.” Indeed, it seems many of the leading factors impeding profitability are beyond the control of hotel REITs. In addition to the depressed state of the current U.S. economy, Berg also alluded to what he called “Iraq-phobia;” the fact just the anticipation of war in the Mideast appears to be taking nearly the same toll on lodging fortunes any such actual war itself would. “No question about it,” the InnSuites executive maintained, “if a Mideast war did break out, the lodging sector could expect to get hammered. Perhaps the only positive is there would be even less new supply coming on-line.” Finally, lamenting the fact that— in the present-day economy— only the bigger REITs can hope to get better, Berg claimed: “[Small-cap] hotel REITs seem to be in a tainted asset class right now. I sometimes wonder if the market would notice us… even if we ran 100% occupancy with great daily rates.”