Starwood’s Elite Club Now Has Street’s Attention
Wall Street is again in the mood to reward companies that promise fast growth--even if that growth requires taking outsize risks.
Two cases in point: First, the euphoric reception investors have given shares of HSN Inc.(Home Shopping Network) since CEO Barry Diller on Monday set a multibillion-dollar deal to buy Universal Studios’ TV assets. HSN stock has surged 22% to $47 since the deal was announced.
Second, the $13.3-billion surprise takeover bid by hitherto little-known Starwood Lodging for ITT Corp. on Monday brought immediate applause from investors, lifting Starwood shares from $56.50 last Friday to $59.19 on Tuesday, before they drifted back to close at $58.44 on Wednesday.
Shares of other acquiring companies often decline when they announce deals, for fundamental and technical reasons. But with HSN and Starwood many investors sense the potential for tremendous returns down the road, as the companies pursue rapid-growth strategies.
“Modern-day empire builders--that’s what these guys are,” says Bruce Olson, research analyst at the Strong Growth stock fund in Milwaukee, referring to Diller and to Starwood CEO Barry Sternlicht.
Starwood, once a bankrupt hotel investment firm, has become a Wall Street darling as Sternlicht has used it since 1994 to buy a slew of hotels at bargain prices. But with last month’s agreement to buy the Westin hotel chain for $1.8 billion, and now the ITT deal--which would bring Starwood the Sheraton chain--Sternlicht has gotten the attention of institutional investors everywhere.
He has also focused attention on the tiny club to which Starwood belongs: real estate companies that enjoy a special federal tax status, abolished by Congress in 1984 but grandfathered at that time for a few of them. In a nutshell, the status gives the companies a big advantage in raising capital for property acquisitions because investors know that a significant amount of the companies’ earnings will be sheltered from taxes.
That advantage was always there--but only in the last year or so have some savvy executives, led by Sternlicht, been able to convince Wall Street that the tax status could be used to develop real-estate-based corporate giants.
It helps too, of course, that property has again become a decent investment in its own right in America, after the early-’90s real estate slump.
Wall Street clearly loves Starwood, and if the ITT deal is consummated, the stock’s fairly modest float (shares available for trading) will mushroom, giving more investors a chance to get in.
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And what about Starwood’s tax-advantaged “cousins”? “They’re all trying to grow aggressively now,” says Adam Markman, senior analyst at real estate research firm Green Street Advisors in Newport Beach. Whether they’ll succeed or stumble in the long run isn’t clear, but for now, many Wall Street analysts are high on the stocks--most of which, they note, have the added appeal of paying above-average cash dividends.
Patriot American Hospitality of Dallas is viewed as a smaller version of Starwood. Patriot is in the process of buying the Wyndham hotel chain, and its aggressive CEO, Paul Nussbaum, “is every bit as smart as Sternlicht,” Olson believes.
Meditrust in Needham Heights, Mass., is already a big player in long-term health-care facilities and wants to get bigger. It doesn’t yet have the special Starwood tax status--but it will after its upcoming merger with Santa Anita Cos., which has that status.
Cleveland-based First Union Real Estate, meanwhile, has plans to expand its parking garage empire. Interestingly, its management is under attack by investors led by Gotham Capital, which owns 9% of the stock and believes First Union has been too slow to capitalize on its special tax status.
Lastly, Southland-based Hollywood Park is trying to get Congress to restore its special tax status, which it previously surrendered. (Ouch!)
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Growth Vehicles?
Here are data on the four real estate companies that enjoy a special federal tax status that could make them hot growth stocks. Also included is Hollywood Park, which is seeking such status, having previously given it up.
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Stock Wed. close YTD gain Div. yield First Union R.E. $15.88 +27% 2.8% Hollywood Park* 20.50 +37 nil Meditrust 43.94 +10 6.5 Patriot American 32.31 +52 2.5 Starwood Lodging 58.44 +59 3.3
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* Has reapplied for special tax status
Note: All trade on NYSE except Hollywood Park (Nasdaq).
Sources: Bloomberg News, Reuters
