Hotel Investors Pack Up

Some argue a better play today could be buying the hotel real estate investment trusts, which own the hotels that Marriott and Starwood manage.

After Hilton(HLT) agreed to be purchased by Blackstone (BX) earlier this year, investors realized public hotel stocks were priced too cheaply.

Now the freeze-up in the credit markets is causing a dearth of hotel property sales, which makes it hard to determine real estate values for hotel stocks, says Arabia, the analyst at Green Street.

"The elephant sitting in the room is, what has happened to real estate values and what has happened to hotel values?" Arabia says.

Green Street recently reduced the asset values of hotel stocks by 5% to 8%. The thinking was that capital has become more restrictive, debt is more expensive and risk has been priced, thus the cost of equity has increased.

Nonetheless, there may be some nice bargains among hotel REITs. Even with revaluations, they trade at larger discounts to NAV than other property sectors, according to Green Street.

For example, Host Hotels(HST), which owns a top-quality portfolio of hotels in major U.S. cities, has a net asset value of $26, according to Green Street data. The company has a well-regarded management team and a pristine balance sheet.

At around $23, the stock trades at a 13% discount to its private market real estate value, which it does not deserve, Arabia says.

Still, Dean Frankel, a portfolio manager with Urdang Securities Management, which owns numerous hotels operator and REIT stocks, says he likes the operators better right now.

"In this kind of environment, you're not getting that much revpar and EBITDA growth. You want to have other ways to have other growth drivers that don't cost you money," he says, pointing to the ability of Starwood and Marriott to expand their management contracts and brands without employing much capital.

In recent trading, Marriott shares were down 4.6% to $42.30. Starwood was falling 2.8% to $59.67, and Host Hotels was slipping 1.7% to $22.64.

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