REITs Take Trading Hit From Legislative Inaction

<B> REITs Take Trading Hit From Legislative Inaction</B>

By Maria P. Vallejo

Hospitality paired-share real estate investment trust executives are crying out for a decision from Capitol Hill on the structure's existence as Congress continues to hold real estate investment trusts under a microscope and affect their stock standings.

Paired-share REIT leaders at the Annual Hotel Investment Conference in New York earlier this month said they want an immediate, definitive response from Congress, regardless of its outcome. The publicized governmental scrutiny has begun to take a toll on the companies' public perception and Wall Street performances. "We just want to end this," said Barry Sternlicht, chairman of Starwood Hotels & Resorts Worldwide. "Hurry up. Tell us what the rules are and we'll adopt our strategy and corporate structure as you define them."

The 1984 Deficit Reduction Act grandfathered four paired-share REITs, which allows them to own and manage their own assets while deferring 95 percent of the REIT's taxes to shareholders through dividends. Three of the four paired-share REITs work in the hospitality industry, including Starwood, Patriot American Hotels & Resorts and Meditrust Companies, which bought La Quinta. Although some argue that the elimination or limitation of such structures would raise government revenue, REIT advocates and some analysts said all the taxes are paid either through the C-Corp. or by shareholders.

Joining most REITs--even those without the paired-share structure, which are suffering from low stock prices-- Starwood Hotels & Resorts and Patriot American attributed their losses to investors concerns that the proposed legislation could limit the earnings ability of the REITs.

"The impact has been in market perception, and the multiple at which our company trades," said Paul Nussbaum, chairman of Patriot American in Dallas. "The impact on us is not an earnings impact. We will be able to continue our business."

"What's suprising is the way the market has thrown the paired-share REIT around the necks of the four or five of us and dragged down our multiples," Sternlicht said. "It has cast a pall over the whole REIT segment of the U.S. market. So much so, in my opinion, that it has been the worst performing section of the S&P classes in the first quarter of this year."

After unsuccessful lobbying efforts by some REIT executives to open up the unique tax structure to all hotel companies, Starwood and Patriot officials said they have devised contingency plans depending on the severity of the ruling.

Proponents of the provision attached to the IRS Restructuring Proposal believe the paired-share REIT structures have an unfair tax advantage allowing them to win bidding wars for new properties and companies. "We need to have a set of rules for everybody," said Thomas Oliver, chairman and CEO of Holiday Hospitality in Parsippany, N.J. "It is a problem to think certain structures are only available to some of the industry, and for that reason we have come out in favor of the legislation."

Starwood's acquisition of ITT Sheraton drew the greatest scrutiny because of the company's ability to outbid Hilton Hotels Corp., Beverly Hills.

Despite notable acquisition wins of Wyndham Hotels & Resorts and Circus Circus by Patriot American, and Westin and Sheraton Hotels & Resorts by Starwood, REIT advocates maintain the unique tax structure does not guarantee them acquisitions. Most recently, Patriot American was outbid by Bass Hotels & Resorts for Inter-Continental, a win that could have broadened the REIT's instant international presence.