HPT asserts with confidence that it has Net leases from national oeprating sponsors to hold it up and is therefore not subject to the downside of reduced occupancies and room rates, and that their brand name sponsors "must pay". This is completely WRONG AND CRAZY. The problem, THE BIG PROBLEM, is that the long term leases signed by national brand name operators, except for the modest cash deposits which have been made, HAVE NO CREDIT BEHIND THEM. The sponsors, Marriott etc, have set up "special purpose corporations", (with no net worth in them/shell corporations) in order to sign these long term leases. AND, HPT HAS NO ABILITY TO OPERATE THESE HOTELS, so they MUST DO WHATEVER THE OPERATOR ULTIMATELY INSISTS ON. Thus when the operator comes to say, let's renegotiate leases downward because of market conditions, what is HPT supposed to do? The answer is they have structured the enitre HPT company as a "fool's game"; meaning, that the operators have a win/win situation (win if the market is good, renegoiate or walk away if the market is bad on the downside); a disastorus structure for HPT and its shareholders.
Thus, it is just "unbelievable" to me that HPT shareholders can take "any comfort" in these leases which are NOT WORTH A SHIT under conditions of duress, and except for the existing deposits, are "walk away material". So, when the managers put a gun to HPT's what alternative does HPT have, operate them themselves NO, to rebrand the hotels? NO. All they can do is relent and renegotiate and then tell shareholders under the circumstances what a good job they have done.
As soon as the renegotiation starts, HPT is in big trouble, stock will have "unlimited downside" in the short run, and then stabilize at a 12 to 15% yield on the new negotiated lease rates; probably around $10 to $12 per share. In the meantime HPT Management's "credibility" and "market story" will be completely decimated.
Get out now when you can. Only half or less of the damage to the common has been felt.
"but any company whose only asset is borrowed money depending on interest rates and market conditions to squeek out a return, is in my opinion a disaster waiting to happen. Call it anything you like." I'd call it a bank.
FYI, I'm long NLY, long-ER AHR. I would like to see some educational posting on this board by professionals (like exists at AHR) that professionally addresses issues that I have put forth. x_stock does a good job at doing so, I'm wondering if there are others that can do so too.
I appreciate your views very much. I agree that if lodging losses persist for a long enough time, noone will be spared, not even HPT. That will be because we don't need so many hotels and the operators will be closing shop, leaving them or negotiating them down. Currently, it's debateable whether we are overbuilt. I hope we are not.
I think we will get over the WTC disaster very quickly. It's the long lasting recession that will be challenging us and the good operators will prevail. Like many an HRP investor, I've learnt that it's not the quality of the asset, but the quality of the management.
I think HPT will do well, or better than others in the short term. For the long term, I can't tell.
Merrill Lynch indicated in an update on HPT they have "corporate level" guarantees meaning guarantees from the parent.
The fact that HPT is trading so well is an indication that this fact is being recognized and with that the beginning of what I think will be a change in sector leadership.
If the dividend holds and again Merrill Lynch laid out a scenerio for cutting the dividend that may or may not occur. There are early signs..... Vegas, MHX's cc last night that things are getting better than even they anticipated in the near term w/o the benefit of the cut rate air fares which are about to begin very soon.
Airlines are going to need to get people in the air now on the cheap if they hope to make premium bucks during the upcoming holidays. The airlines will sacrifice near term profit to fill planes that are already flying 20%+ empty even after the cuts in flight schedules.
I don't know who you are and wonder if you are a short that picked the wrong lodging reit stock to short. You need to do your homework to understand that 55% of our revenues are guaranteed by parent companies of publically traded companies.
I owould like to see what these corporate guarantees are. Branded Operators like to have "defined" maximum losses, meaning the "deposits" in conjunction with the no credit leases; a credit lease under times of duress (like now) can be a tremendous downside liability to a credit guaranteed lease from an operator. Rather, the operator wants to shift this liability to the REIT Sponsor, or shareholder.
If HPT has corporate guaranteed leases then they should shout it from the rooftops, and if they do then FANTASTIC.
Until proven otherwise I assume that Marriott structured these leases the same way they always have which is WIN WIN for Marriot and WIN LOSE for HPT.
If I'm wrong on the credit of the leases I would like someone to "post" with creditility and facts.
The abscence of HPT stating that there are lease guarantess tells me that there are not.
I've probably posted too much.
suspecting also that the Marriott operating companies have little financial backing with relatively few assets. I think our sense of security can be delusional. Up until the WTC incident, I felt quite good about my investments in HPT and FCH. Ultimately, it is only reasonable to assume that these stocks will perform only as well as their underlying properties but I believe it to be anybody's guess as to how they will perform over the long term. If the properties severely underperform for a sustainable period of time(perhaps 6 months), the operators will be in a strong position to negotiate or walk away. In all likelihood, HPT would be willing to negotiate a reduction in lease terms. However, I am not so sure this move will be done casually by the operators as it will have some effect on business and their reputation. Investors should understand there are numerous hotel operators, besides Marriott out there that can operate these properties. I do agree with your premise that ultimately this stock will perform largely to the extent that travel recovers over the intermediate term. I would anticipate the dividend will be maintained at current levels for at least two quarters.
My personal observations while still in the work world was that tele-conferenceing would never replace the old eye to eye personal visits in business. Some things may be ok via phone (even video) but no subsitute. Soon as things cool a little, I expect to see air travel right back where it was and hotel occupancy back. Maybe I will be disapointed but I have an optimistic outlook right now.
Good fortune to all.
After reading a ML report on HPT explaining what circumstances would have to occur for a dividend cut to be granted.... I believe there is an excellent chance the dividend will hold thru the crisis period. I believe the market is beginning to step up and vote that the chances of holding the dividend are getting better everyday.
Interesting exercise on lack of knowledge or Reits. I understand your desire to collect on your short position, but please get your facts a little more in line. First no reit can operate their assets be they hotel or office or apartment. They have to lease them to an operating concern. The terms of the lease is what is of concern here and it appears to me, that the operators are credable and sound financially to withstand a few weeks of 30-40% reductions in revpar. I firmly believe, that air traffic will return to near normal within 45 days. I don't think on an annual basis, that will devistate the operators. Hurt the profit line, tis true, but bankruptsy, hell no.
Please state your position in regard to hpt. If you own it, please sell and ease your mind. If you are short, then say so, and we will understand when you post negative news that is factual.
Have a nice day.
Dear Nomowk and all,
1. I have no position, long or short, in HPT. I have owned it previously; and would buy it again when the risk reward dynamics are "favorable". The current price dynamic is a "fools game" for HPT longs. I respond to your reply to me, which I consider miss directed.
2. HPT STRUCTURAL DEFECTS. It goes "without saying" that hotel REITS can't be operators, this is precisely the "very core of the structural problem". Rather than own/operate REIT's must collect their revenues from long term leases. These Branded Operator leases are "without credit". If you went to any rating agency and said "will you please rate this Branded Operator revenue stream, i.e. AAA, AA, A, BBB, BB, B, CCC the leases could not even be rated CCC. Why? Becuase the Branded Management entities that sign the leases wants to have a win/win can't lose dynamic commercial relationship with the REIT. They achieve this by creating a special purpose corporation, with NO NET WORTH and NO CREDIT TIE IN TO THE PARENT. A professional landlord would never take this credit, but the surrogate landlord, naive REIT shareholers will. There is a long history here when Branded Operators did the same structure with private placement Partnerships in the 70's and 80's. This is how the Branded Operators prosper from the prior experience at the expense of new victims. The worst imbalance structurally is that when occupancies and room rates decline, thus taking away the "sandwich" profitability for the Branded Operator, one of two things can happen: 1) the Branded Operator can continue to make the lease payments, and suffer 100% of the revenue/profit decline; or 2) the Branded Operators go back to the REIT Sponsor and say: "Share the Pain"; renegotiate and reduce the lease payment. The REIT sponsor is SCREWED because he cannot reply "a contract is a contract, PERFORM", because of three reasons: 1) he is dependenot on the Branded Operator for Management, occupancy and rates and this relationship is critical to the future operations, thus he must make the Branded Operator happy, he can't have the operator "walk" 2) it is ILLEGAL under REIT rules for the REIT sponsor to step in and do it himself, and 3) switching to another Branded Operator does nothing other that result in the same LEASE RENEGOTIATION at lower rates that would have otherwise occurred with the existing Branded Operator. NET RESULT: when idustry revenues go down, the leases aren't worth the paper they are written on; and the REIT sponsor has little negotiating leverage other than to use deposits (which is fine with the OPERATORS).
INDUSTRY ECONOMICS. During the next two or three years (compared to the halcyon record last three years in the hotel industry)the best situation for hotel REITS is that: 1) lease revenue overages will vanish, 2) occupancies will probably drop between 5% and 10% (as employers have more telephonic meetings for both economic and safety reasons) and 3) duration of stays will decline. It is this last 10% of revenue that "makes" all the profit for the industry, and net net the Branded Operators sooner or later will demand renegotiation. Worst case is worse industry economics.
REIT Shareholders will be furious, HPT's Managment will be even more furious, but they are hamstrung: the "non-swimmer in the water, with the only lifeline held by the Branded Operators who play the heads I win, tails I win structural power game".
I repeat, over the next few months/quarters the fundamentals of the hotel industry will become clear, and it will highlight the structural flaws in HOTEL REITS, and the parties that lose will ultimately be REIT Shareholders. So, in my opinion, sell now. When the new economics unfold, HPT will still be yielding double digits, but on a much lower revenue base and a stock price down as much as 50% from these levels. That is when the stock should be purchased.