Chris B

We Don't Need No Stinkin' Rally: Eye on Hotel REITs

Good analysis! However, in a scenerio where hotel REIT earnings are negative for 2-3 years, bankruptcy could come quick and the implied guarantees of cumulative preferred shares may go unfulfilled. After all, REIT's don't exactly sit on piles of cash, they distribute all their earnings. This tax requirement also means they could not hoard cash like a normal company even when they could forsee shortages of future earnings and refinancing options. When there are no earnings, how does anyone get paid? The carry-through nature of REITs means they could go bankrupt after a relatively short period of losses, and their heavy leverage means that the buildings themselves should not be considered collateral. Overall, these shares should be analyzed much as one would analyze junk bonds. The appearance of a bargain is there for a reason!

Also, in the event of a recovery in late 2009 or early 2010, the common shares are likely to appreciate faster than the preferreds. BEE common at $0.77, for example, might appreciate 600% within a month or two at the first whiff of even a mild recovery compared to "only" 400% total return per year for the preferreds. Sound unrealistic? It would only be a return to November 08 prices.

Triple digit returns are hard to imagine, for sure, but that's what always happens to the shares of the most speculative companies after the bottom of a stock market crash.