Too Much Room at the Inn?

12/22/2008 9:54 am EST

Focus: REITS

Peter Slatin

Founder and Editor, The Slatin Report

Peter Slatin, editor of the Forbes/Slatin Real Estate Report, says oversupply makes it too early to buy hotel REITs, but investors should get their shopping lists ready.

In 2008, after several years of embracing hotels and hotel development, investors at the direct and indirect level have taken their money and run for the exits. Through November 30th, hotel real estate investment trust (REIT) stocks had lost a devastating 63% of their value.

While the slump in stock prices suggests that there are already bargains galore for investors, there has been virtually no more indication of investor appetite for shares than there is for properties. In other words, no one is biting.

It would be comforting to think that that will change when asset prices do begin to come down more sharply-which they are sure to do-as owners face refinancing and/or selling pressure. But a rush of new investors is not likely to materialize.

Renewed investor interest will be slower to gather steam for hotels than for other property types. Noted hotel analyst Dr. Bjorn Hanson, now a professor at New York University's Tisch Center for Hospitality, says that demand or its absence is driving investor sentiment to the negative. The challenge of slipping demand is especially visible against a backdrop of growing supply.

Developers are going into cancellation or suspension mode on new projects across the country, but new hotels already funded and in progress are expected to add 4.5% to supply this year and next. Yet demand, which Hanson says has retreated 1% this year overall, will slide a further 2% in 2009. Thus, relatively minor adjustments in both areas will exacerbate the growing operational imbalance.

Still, although the trigger that will bring investors back to the hotel sector is not yet visible, it is clear that price alone will not do the trick. Even if share values are a harbinger of how far property values will fall-and that is unlikely to be the case-such a dramatic plunge would still be missing an economic or business driver. That will only come as global, national, and regional markets right themselves and push business and recreational spending back into alignment with supply.

With all that as backdrop, are there any hotel companies worth dipping into for the patient investor seeking a bargain? Not yet, and probably not until mid-2009 at the earliest. Start with Marriott International (NYSE: MAR), which was among the first to acknowledge that times were getting tough. Marriott's weak spot, lack of international exposure, may actually be a help as global travel slips.

Although MAR still has significant downside to worry about at home, it is in a much better balance-sheet position than rival Starwood (NYSE: HOT) among the hotel giants. Host Hotels & Resorts (HST) is another well-managed hotel REIT with strong assets that is significantly cheaper than it once was and that should be able to withstand debt pressures through the downturn.

(Marriott closed just below $18 Friday, while Host closed below $8-Editor.)

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