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As the year draws to a close, a slew of lodging REITs are cutting dividends to preserve their cash coffers. In addition, they are reassessing their guidance for 2008 and beyond due to worsening economic conditions.

Earlier this week, Host Hotels & Resorts Inc. announced a quarterly cash dividend of five cents a share on the Bethesda, MD’s common stock, a cut of 15 cents from its previous quarterly cash dividend. In a statement, Host clarified that, “the reduction in the dividend reflects the weak fourth quarter operating environment, which the company expects will continue into 2009, and the desire to conserve cash in the midst of an uncertain and challenging economic climate.” In that vein, the company revised its 2008 outlook to a comparable property RevPAR decline of between 9% and 11% in the fourth quarter and approximately 3% for the full year. In its Q3 financial report, Host anticipated a RevPAR drop of 3% to 5% in the final three months of ’08 and a flat to 1% drop for the entire year.

Also this week, FelCor Lodging Trust Inc. suspended its common dividend, but elected to pay dividends on its preferred stock of around 50 cents per share. By not paying a common dividend, FelCor anticipates that it will preserve about $48 million in liquidity through 2009. Based on preliminary budgets for next year, the Irving, TX-based REIT estimates that RevPAR will shrink by roughly 6% to 8%.

Then there’s the case of LaSalle Hotel Properties, which last month rescinded its prior outlook for 2008 due to weakening economic conditions and uncertainty regarding how that would negatively impact the lodging sector. “At this time we do not believe that we can provide a credible outlook for the remainder of the year as expected performance at our hotels continues to decline as demonstrated by our portfolio experiencing a RevPAR decline of approximately 11.4% in October versus our projected decline of 6.7% just three weeks ago,” said Hans Weger, CFO of the Bethesda, MD-based REIT, in a Nov. 13 statement.

In addition to slashing dividends, another option lodging REITs are considering is paying a partial stock dividend instead of an all-cash dividend, reports C. Patrick Scholes, a senior lodging analyst at Friedman, Billings, Ramsey & Co. Inc. in Arlington, VA. According to Scholes, the National Association of Real Estate Investment Trusts has contacted the IRS for further clarification as to whether such a tactic can be done. “There have been several private letter rulings that have allowed this, but there hadn’t been a general statement that could be applied to all of the REITs,” Scholes says. Repeated calls to NAREIT on this matter were not answered.

Paying less in dividends or partially in stock would enable lodging REITs to maintain their cash positions. “Having more cash on your balance sheet helps with your debt ratios and allows you to continue with your renovations programs. Essentially it makes it appear that you have a healthier balance sheet,” Scholes explains. “Right now, the problem with paying a cash dividend is, once you send that cash out the door, you will never get it back. The other problem right now is if you wanted to borrow, it’s certainly much more difficult in today’s environment. Let’s say a REIT paid out $50 million in dividends, but it still needed that money. To go to the public borrowing markets and try to get $50 million is a lot more difficult now than it was a year ago. So they would rather use creative methods to retain their cash, and one of the ways would be to pay a stock dividend instead of a cash dividend.”

David Loeb, senior research analyst and managing director at Robert W. Baird & Co. Inc. in Milwaukee, says he believes that the current rules allow for up to 80% of dividends to be paid in stock as long as the owner of the shares can choose between cash and stock subject to those aggregate limits. “What NAREIT wants is to increase the proportion of stock dividends to allow companies to be able to preserve more cash in this downturn. I think that is a fairly clever idea. When you start paying 100% stock dividends, essentially that looks just like a stock split and has no economic value. When you give people a choice then some will end up owning more shares and some will end up with cash and there’s at least some economic benefit to receiving that. Companies are in a position now where they really want to preserve capital and it’s a very smart thing to do.”

Scholes expects that “most if not all” lodging REITs will significantly cut dividends from 2008 levels in 2009. “It’s a reflection of lower net income, simply because the demand trends for hotel rooms and revenues are in the process of substantially falling from where they were a couple of months ago. Additionally, the companies want to maintain more cash and not pay it out. But the number one driver of cutting dividends is lower net income because of the poor economy,” he says.

Even with dividend cuts, companies will maintain the distribution requirement of 90% of taxable income to maintain their REIT status, Loeb says. “If you pay only 90% then you have to pay tax on that last 10%,” he says. “Most companies are unlikely to pay less than 100% of taxable income. I don’t think we’ll see anybody go under 100% unless the banks force that. My guess is that we will see more companies, unless they have an extraordinary distribution, pay a smaller cash dividend.”

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