Stock buybacks by lodging REITs: Do they work in the down cycle? Asks UNITE HERE

In the face of plummeting stock prices, stock buyback schemes announced by several lodging REITs may do little to shore up share prices or dividends, according to a new report released by UNITE HERE. The report examines stock buybacks by lodging REITs during the last downturn, finding the impact of buybacks was quickly erased by subsequent high volume share issuances.

“We question whether stock buybacks are the best use of capital for lodging REIT shareholders at this point in the cycle,” said JJ Fueser, Research Coordinator for UNITE HERE. “It’s a good time to sell hotel assets – and return value to shareholders through special distributions or an outright business sale.”

In 2008, a number of lodging REITs pursued stock buyback programs. The report presents evidence that these repurchase programs intensified the cash crunch experienced in the sector, as in 2009 these REITs subsequently:

• Issued several times the volume of shares previously repurchased
• Issued greater volumes of stock than peers not buying back stock
• Made distributions in stock rather than cash.

In the last downturn, lodging REITs not only saw share prices lose upwards of 80% of their value; they also saw dividends dry up or cease. Lodging REITs suspended regular dividends for an average of 2.7 years. Had lodging REITs distributed funds used to buy back stock in 2008, shareholders could have seen between $0.18 and $2.88 per share in special distributions.

Moreover, roughly half of listed lodging REITs were sold outright between 2006 and 2007, providing shareholders with premiums over stock market prices.

In 2015, several major lodging REITs, including Chesapeake [NYSE: CHSP], Hersha [NYSE: HT], Host [NYSE: HST] and Xenia [NYSE: XHR], authorized share repurchases collectively worth about $2 billion, representing 4% to 22% of outstanding stock.

Public market volatility underscores signs that the lodging industry may be in the late stage of the upcycle. High real estate values and continued capital availability, however, means this moment in the lodging cycle presents opportunities. “Learning from the past hotel cycle, shareholders are not well served by share buybacks, and could be better served by urging management to pursue strategic alternatives while asset values remain high,” says Ms. Fueser.

Read the full report: http://www.hotelcorpgov.org/wp-content/uploads/StockBuybacks2.pdf.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160216006201/en/