LODGING C-CORPS UP, REITS DOWN

Source: Bear, Stearns & Co.

April 9, 1999
Even as US stock markets have soared to new heights in 1999, shares of big-cap lodging C-Corporations (or standard structure corporations) have rocketed ahead, beating the performance of the Dow Jones Industrial Average by 8.0 percentage points and outpacing the S&P 500 Index by 9.9 percentage points, according to Bear, Stearns & Co. senior managing director Jason Ader in New York. But the stocks of lodging real estate investment trusts (REITs) show a very different picture, Mr. Ader says.

The Bear Stearns Hotel REIT Index is down 8.4 percent year-to-date, after a dismal performance in 1998 during which lodging REIT stocks lost more than half of their value.

"Stocks of lodging C-corporations such as Starwood Hotels & Resorts Worldwide (HOT), up 25.9 percent, Marriott International (MAR), up 15.9 percent, Promus Hotels Corp. (PRH), up 12.4 percent, and Hilton Hotels Corp. (HLT), up 5.6 percent, have rebounded from a difficult 1998 as investors put fears of hotel industry overbuilding behind them - and adopt a more positive view of the US economy," Mr. Ader notes. "But lodging REITs continue to suffer. With limited capital, most lodging REITs have dim prospects for growth-by-acquisition. And in internal growth, most have already achieved as much leverage as they can from increases in average daily room rates at greater than the rate of inflation," he adds.

Behind the poor performance of the hotel REIT sector are some company-specific issues, Mr. Ader notes. For example, Innkeepers USA Trust (KPA) lowered first-quarter earnings estimates after suffering hotel-opening delays and weaker-than-anticipated results in some markets. Sunstone Hotel Investors (SSI) missed its fourth-quarter earnings targets.

"But there is good news for hotel REITs: their battered share prices make their current dividend yields very high," Mr. Ader says. "For example, Sunstone (SSI), with a yield of 15.3 percent, has the highest yield of almost any REIT of any type - including hotel REITs, apartment REITs, office REITs and so on," he adds. Hotel REIT stock yields now range from 10 percent to 15 percent, with the exception of Host Marriott Corp. (HMT), which is closer to 7.4 percent, according to Bear Stearns.

"What we see now is that hotel REIT stocks have resumed their traditional role as 'value' or 'income' issues - after a period in 1997 and early 1998 when they were dramatic growth stocks attracting investors who aim for a dramatic upswing," Mr. Ader says.

Meanwhile, shares in lodging C-corporations have more of an upside, Mr. Ader said, as firms such as Marriott International (MAR) and Promus Hotels Corp. (PRH) continue to enjoy unit growth. Starwood (HOT), he says, can boost revenues, cut expenses, renovate properties and sell assets to raise cash and pay down debt as well as take other actions to generate meaningful increases in earnings.

"And unlike REITs, lodging C-corporations such as Marriott (MAR), Starwood (HOT) and Hilton Hotels Corp. (HLT) reap all the cash flow from their owned properties -- and benefit from increasing revenues and better margins," Mr. Ader notes.