Tags: Shidlo | Hotels | Cheaper | Paulson

Shidlo: Get Into Hotels at Lower Price Than Paulson

By    |   Friday, 10 December 2010 12:31 PM

In recent months, entities such as John Paulson's hedge-fund firm Paulson & Co. have been investing in hotel real-estate investment trusts, or REITs, such as FelCor Lodging Trust (FCH) and Strategic Hotels and Resorts (BEE).

Paulson’s hedge-fund portfolio owns nearly 100 shares and recent securities filings show his buys and sells as well as additions to existing positions.

Although hotel REITS aren’t in his top-five holdings, they are interesting to follow, as it seems Paulson has been regularly adding to his positions in this sector.

For example, in August, Paulson increased his stake in FelCor by 50 percent to 4.5 million shares. The estimated average price which Paulson paid for FelCor was $6.98, with a purchase price range from $5.19 to $8.72, according to Gurufocus.com.

Another hotel REIT which Paulson purchased for his multibillion dollar portfolio was Strategic Hotels and Resorts (BEE). According to filings, his average purchase prices were in a range of $4 to $6.85, with an estimated average of $5.02.

Although current prices of both hotel REITs are very near Paulson’s average purchase, they are still at levels which are worth investing in (as of near midday Friday, Dec. 10, FelCor was trading at about $6.72 and Strategic Hotels at about $4.95).

Hotel companies have seen a surge in business demand in recent months as they have succeeded in raising room rates and boosting occupancy. It seems that hotel purchases are increasing faster than sales of offices or shopping malls in the United States.

Why is this? Unlike other commercial properties that have tenants who sign multiyear leases, hotels can increase the rates and take advantage of a recovery in leisure and business travel. Because hotel rooms are rented by the night and not by the month, they benefit more when there is a recovery — although they lose much more during a downturn.

We have recently seen quite a few hotel REITs purchasing properties as more products are coming to market.

Interest rates are at a historical low (ability to raise capital as investors see growth) and current prices of many properties are being sold at a deep discount to replacement costs.

For example, FelCor recently bought the Fairmont Copley Plaza Hotel in Boston for $98.5 million. Host Hotels and Resorts recently purchased seven hotels in New Zealand.

Hotel construction slowed during the recent recession, benefiting hotel REITs from a low supply of hotel rooms in the U.S. This will enable them to continue to increase room rates with the recovery of the travel industry.

Even though the average individual investor cannot normally purchase a hotel building, they can profit by investing in the various hotel REITs such as FelCor, Strategic Hotels, Ashford Hospitality Trust (AHT), Host Hotels and Resorts (HST), LaSalle Hotel Properties (LHO) and Sunstone Hotel Investors (SHO).

Indeed, one shouldn’t invest only in one hotel REIT but build a portfolio of various ones because they target different markets.

Some REITs are more into luxury hotels, having a portfolio with such brands as Hyatt Hotels (H), Ritz-Carlton (a subsidiary of Marriott International, MAR) and Four Seasons Hotels and have a mix of domestic and international properties targeted at tourists (Strategic Hotels).

Others are more domestic (Hospitality Properties Trust, HPT) and target business, governmental and family travelers with such brands as Courtyard and Residence Inn as well as Staybridge Suites, Candlewood Suites, Prime Hotels, Homestead Suites, TownePlace Suites and SpringHill Suites.

It is important to point out that a real-estate investment trust is a company that owns, and in some case operates, income-producing real estate. In order to qualify to be a REIT, a company must distribute annually at least 90 percent of its income to shareholders. REITs generally pay little or no corporate taxes. Investors may benefit from investing in a portfolio of properties rather than investing in one single building.

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In recent months, entities such as John Paulson's hedge-fund firm Paulson Co. have been investing in hotel real-estate investment trusts, or REITs, such as FelCor Lodging Trust (FCH) and Strategic Hotels and Resorts (BEE). Paulson s hedge-fund portfolio owns nearly 100...
Friday, 10 December 2010 12:31 PM
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