Eric Fry

Occasionally, it’s a great idea to pay top dollar for a hotel room… But it’s almost never a great idea to pay top dollar for a hotel REIT.

“Real estate investment trusts are still priced at bubble valuations,” insists Dan Amoss, the analytical mind behind the Strategic Short Report. “These valuations bear little connection to economic reality.

“2009 was the year that the REIT sector bought itself some time by selling lots of bonds and stock to the public as the financial markets recovered,” Amoss explains. “Investment bankers worked overtime to promote these deals to their institutional clients. Robert W. Baird’s real estate research team estimates that REITs raised $17 billion in equity from secondary market offerings in 2009. But that wasn’t enough capital for the most highly levered REITs, which remain at risk of bankruptcy in a double-dip economy.

“These levered REITs still need much more capital to repair their balance sheets,” says Amoss. “Baird estimates that another $26 billion in new equity needs to be raised over the next few years. But it’s doubtful that REITs will be able to raise that kind of money anywhere near current prices…or at any prices. So 2010 may be the year that REIT promoters run out of greater fools to buy secondary stock offerings at bubble valuations.”

REIT valuations are stretched, Amoss argues, even though fundamental trends in commercial real estate are grim. “Deflationary forces in commercial real estate will continue to weigh on REIT valuations in 2010,” Amoss predicts. “In cases where lenders can no longer ‘extend and pretend,’ we’ll see properties repossessed and sold at fire-sale prices to vulture buyers. Supply will far exceed demand in most geographies and property types, so rents and REIT profits will remain under pressure.”

Net-net, if you are going to be any kind of fool at all, Amoss advises, be the kind of fool who buys a crazy-expensive hotel room for a night, rather than the kind of fool who buys a crazy-expensive hotel REIT.

Admittedly, no automatic correlation exists between the price of a hotel room and the delights that hotel room nourishes. For example, the one-star Jolly Roger Motel in Santa Monica, California could easily produce a 5-star memory. (In fact, it did). On the other hand, the upscale Casa Del Mar Hotel that sits right on the sands of Santa Monica beach could easily produce a 5-star nightmare. (In fact, it did).

Let’s not blame the Casa Del Mar; but your editor would have preferred a night in a cardboard box anywhere outside the hotel to the “getaway” he experienced inside the hotel. An oceanfront balcony and 800-thread-count Egyptian cotton sheets are simply no match for an enraged lover with a wine glass full of pricey cabernet.

And so what? Even in the worst of outcomes, the overpaying hotel guest would have dropped $600 for a miserable night and a great breakfast buffet. There are worse things in life.

The pricey hotel room, like a call option, never costs more than the initial “premium.” But like a call option, the hotel room merely offers the promise of potential reward…not a guarantee. So if things go wrong, blame your companion…not the Egyptian cotton sheets.

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • wawawa

    Can we make a couple of bucks buying SRS now (lets say selling in one year time frame)?

Recent Articles

Buy the Dips: Why the Pullback in US Shale is Only Temporary

Matt Insley

Since early July, there's been a sharp pullback in the prices of most major U.S. shale players. Is this the start of a long-term meltdown, or is this simply a great opportunity to "buy the dips"? Matt Insely explores, and offers four specific ways to play the trend. Read on...


A Federal Program that Could Turn Your Town into a Warzone

Chris Campbell

Media coverage of the situation in Ferguson, Missouri has documented a very disturbing trend in local law enforcement... namely, why is a small town police force armed to the teeth with military equipment? Well, as Chris Campbell explains, it's all thanks to a little-known Pentagon agenda called the "1033 Program." Read on...


The New Bitcoin Trend that Could Make You $100,000 Per Month

Josh Grasmick

Few investments have yielded better returns for early investors than Bitcoin. But now that the price has stabilized, are there any gains left to be made? Today, Josh Grasmick details one investable Bitcoin service coming online that could still lead early investors to massive profits... and with less speculation and risk. Read on...


Maestro
Preserve Your Wealth in the Face of Financial War

James Rickards

The Cold War introduced the world to a terrifying new phrase: mutually assured destruction. Thankfully the cold war ended without ever realizing this outcome. But the remnants of that "balance of terror" between the US and Russia still exist... and are beginning to surface in the financial sector. Jim Rickards explains...


How to Use Market Forecasts to Your Advantage

Greg Guenthner

'Tis the season for fall market predictions. But don't dust off that crystal ball just yet. Good traders don't try to predict when an important price move is going to happen - they just react when it does. However, as Greg Guenthner explains, forecasts can help you manage your risk/reward, as well as your non-trading portfolio. Read on...