With stocks still priced relatively cheaply, investors are ready to come back to Wall Street—but they’re going to want quality.
Editor’s note: This article was originally posted on 28 January 2010. The article was chosen as part of Hotel News Now’s look back at 10 years of the hotel industry.
SAN DIEGO—With stocks still trading largely at discounted prices, investors are ready to start buying into the market—though they are likely to be a lot pickier about what investments get their cash, finance experts said at the Americas Lodging Investment Summit this week.
“There’s discipline out there on the market,” said Benjamin T. Leahy, managing director at Goldman Sachs, during a breakout session titled “The Wall Street Outlook—Some Tough Times for Wall Street and the Capital Markets, But Is There a Light at the End of the Tunnel? How Is Wall Street Viewing the Hotel Industry and What Can We Expect to See in 2010.”
Leahy added, “The right strategies, the right management teams, and the right balance sheets will get funded.”
As an example of investors’ search for quality, Leahy cited Hyatt Hotels’ initial public offering. He said investors were taking a close, careful look at Hyatt’s IPO before making a commitment.
“It’s a spread and invest game,” said Paul Whyte, managing director at Deutsche Bank Securities. “There’s still a lot of room to run.”
Confidence also is returning for investors, Leahy said. He said The Blackstone Group’s purchase of a portion of Highland Hospitality Corporation’s debt helped soothe any remaining fears.
“It’s important for people to see that, OK, someone sees value,” he said.
Shopping for discounts
Stoking investors’ return to the market are the still relatively inexpensive prices of many equities, said John C. Puritino, North American head of lodging and leisure, investment banking at Credit Suisse.
“2010 will be a good year,” he said. “Stocks are at a discount relative to 2009.” Still, he added that much of the rebound already has been priced into the market.
Some investors might be wise to take to heart the words of the Oracle of Omaha, Leahy said.
“People will think like Warren Buffett: ‘Why weren’t we greedy when others were fearful?’” he said.
Bye-bye blind pools
While investors are looking to become more active, there is one investment they might not be able to participate in for much longer. Blind pool real-estate investment trusts soon might be a thing of the past, said Jack J. Vissicchio, managing director at Bank of America Merrill Lynch.
“A year from now, we will not be talking about blind pools,” he said. “It’s a short window.” He cited as an example the struggles of Chesapeake Lodging Trust, which in December temporarily shelved its IPO before coming back earlier this month with a smaller offering.
Any future blind pools that come to market are likely to be smaller, he said, perhaps about US$150 million to $US 200 million in size. Chesapeake’s offering was scaled back to US$150 million from US$250 million.
Other REITS would appear to be better positioned, however, Puritino said. There is a big demand from investors for yield. And with little yield coming from government debt, people are likely to look at REITs, he said.
“Most REITs have generally taken the potential for zero (returns) off the table,” he said.
One audience member, however, questioned how REITs will be able to sell investors despite so-so performance of late.
“Well, they’re not the airline industry,” Puritino quipped, drawing laughter from the audience.
Vissicchio took a more serious stab at the question.
“It’s short-term memory,” he said. “These guys (investors) are in it for 10 months, not 10 years.”
The low cost of capital for REITs is another draw, Leahy said.
“REITs will be able to take advantage of the market we’re in and go out and acquire,” he said.
Appetite for acquisitions
Speaking of acquisitions, Whyte questioned whether there would be much mergers-and-acquisitions activity during 2010.
“It’s hard to go in and pound the table of the boardroom and get support for leveraging up your balance sheet the way the economy is going,” he said.
That said, deals such as the announcement last week that an affiliate of Lone Star Funds would acquire Lodgian for US$54 million has done a lot to bring investors back to Wall Street, Leahy said.
“People see that and confidence comes back,” he said.