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 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.
Can we make a couple of bucks buying SRS now (lets say selling in one year time frame)?
"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...
The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.
The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”
Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...
The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.
It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.