US Securities Markets- An Investment Opportunity In Hotels For Institutional Investors?

With the uncertainty in US Securities markets, many institutional investors have looked more favorably on real estate as an investment.
Michael T Sullivan With the uncertainty in US Securities markets, many institutional investors have looked more favorably on real estate as an investment. Representing hard assets, which theoretically have solid intrinsic values, there has been a recent flight to this investment class due to its long-term tangibility. Such investments are often more favorable than some alternative speculative investments, such as companies bearing few, if any, hard assets (i.e., “dot-coms”). Real estate’s limiting factor, however, is typically the percentage of the total investment amount that most large institutional investors will allocate to this asset class. Most investors will try to limit their real estate (and real estate mortgage) portfolios to roughly 10% to 15% of their total assets, with the balance of their investment portfolios typically deployed in the securities markets. Of this real estate allocation, hotels or hospitality-oriented investments usually do not exceed 20%. Additionally, as the values of their securities portfolios drop in the present equity markets, the percentage of capital that could otherwise be allocated to real estate is diminished. Enticing investors to put their capital in the real estate (and subsequently, hospitality real estate) market, however, is the fact that the recent and prolonged downturn in the US securities markets bears only an indirect correlation to real estate asset valuation. Real estate values, in general, are derived and fluctuate independently of securities prices. However, an interesting exception to this exists, and can be found within domestic hotel-oriented Real Estate Investment Trusts (REITs). These are publicly-held companies that are essentially comprised of individual and/or portfolio hotel assets, which trade on the US securities markets. Examples include Host Marriott, Fel-Cor, and Equity Inns. Presently there are 15 hotel REITs which are traded on US stock exchanges.  Furthermore, several of them have been recently trading at significant discounts to their Net Asset Values (NAVs), due to the depressed state of the equity markets. Recent NAV discounts for several of these companies have ranged from approximately 10%-60%.  Essentially, this demonstrates that the companies’ share prices are lower than the values (on a per share basis) of the hotel investments which they hold. In other words, hotels owned by REITs are worth more outside of the REIT than they are as a holding of the REIT. As such, the sub-par performance in the public equity markets presents savvy investors, who can analyze and determine which of the public hotel REITs offers the quickest upside, with an opportunity to capitalize on recovery in share prices that merely reflects the true values of the underlying assets held in REITs.
Michael T. Sullivan is Managing Director of HVS Capital Corp., joining HVS in June 2001. Previously, he served as Managing Director of Sonnenblick-Goldman, which he joined in 1974. During his career, he has been responsible for the financing and sale of more than 650 hospitality properties (hotels, resorts, golf courses, and shared ownership) and for completing, on average, roughly $1.0 billion per year in debt and equity transactions in hotels/resorts nationwide. In his current position, he oversees a staff of hospitality banking professionals, all of whom are involved in the origination and placement of debt and equity realty assignments, with a primary focus on the Lodging and Leisure Industry. Mr. Sullivan attended the University of Arizona, where he received a degree in accounting and marketing. He is a Certified Instructor for the National Apartment Association and a frequent speaker for the Colorado Apartment Association, BOMA, and other trade real estate groups.


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