NAV: WHO CARES?

When we started doing the analysis on this last week our opening line was going to be, "We agree that Starwood looks cheap on a Net Asset Value basis".  Given the run in the stock and the SHO default on Monday (see our 06/09/09 post, "A PROACTIVE DEFAULT"), that statement is probably no longer accurate.  It appears the market is placing a $100-125k per key valuation on HOT's owned and joint venture portfolio.  Other analysts are making the claim that the rooms are worth $150k or more, based on pre-2009 transactions, I guess.  Either way, our point is that NAV is somewhat of a meaningless valuation metric, especially in this environment.

 

For HOT, most people conveniently ignore the fact that of the 69 hotels in this bucket, not all are wholly owned.  The company says the "majority" of the 22,800 rooms are owned.  We know that they also have $90MM of lease associated expenses in 2009.  In any case, without knowing the details on what's actually owned vs leased and joint venture, any per key valuation we come up with will look artificially too low. 

 

There are other issues with using NAV.  Since the collapse of the financing markets last fall, there have been very few transactions for assets that are comparable to HOT's "owned" portfolio. Most of the transactions that have occurred are limited service, small, single assets under $10MM in size.  Many of the traditional "NAV" buyers (REITs, PE funds like Blackstone & Colony) are notably absent from the market.  The new buyers that have emerged are distressed investors, and guess what?  These guys only care about cash flow, not a theoretical per key valuation. NAV was a relevant valuation metric in 2006 & 2007 because there were a lot of transactions.  A liquid market doesn't exist right now, especially for large assets, let alone a $2-3BN portfolio and therefore NAV is simply not relevant.