Mean Boy, Mr. Market Cornered and Beat Down Lodging REITs Last Week

In year-over-year results, the U.S. hotel industry’s occupancy decreased 1.4% to 70.7%; its ADR was up 3.6% to $122.32; and its RevPAR increased 2.2% to $86.46.

Sourced through from:

Lodging claimed our number one spot for the worst performing year to date Real Estate Investment Trusts (REIT) investments last week. Although the Fed’s decision prompted a buying spree amongst most REIT stocks, it did not positively affect the lodging segment. All of the lodging REITs that we track were painfully singled out and crushed by Mr. Market last Friday. In fact, lodging even took over Timber as the worst performing REIT category in 2015.

Lodging was one of the hardest hit REIT stock segments during the infamous August selloff. However, it was one of the fastest to rebound. Only days after the selloff, lodging REITs bounced back to the levels they had previously enjoyed. It goes without saying that the market has been extremely volatile recently. During the second half of August, the Volatility of the S&P 500 (^VIX) spiked over twenty-five for the very first time since September 2011. I believe that lodging would likely be in first place if there were a chart that measured the volatility of each REIT segment.

I am not typically concerned with short-term market movements. That being said, I have closely followed the highs and lows during the past few weeks, and this extreme volatility has grabbed my attention. The lodging industry has enjoyed a good run in the past. If there is a business type that that will benefit from a rising inflationary circumstance, that sector is lodging. The reason is due to the fact that lodging has an incredible ability to adjust rates quickly.

One of the main factors causing the problem is that many cities have confirmed a weakness in occupancy figures, or their available daily rate has stalled. These dynamics may have caused investors enough concern to stay away. This brings up the question, ‘Has the peak in industry fundamentals already been attained?’

Amongst the eighteen lodging REITS that we research from a valuation standpoint, most price-to-FFO ratios have logged in between 10x, and 15x. In addition, divided yield has recorded as high as 7.7 percent, with a 4.8 median.

Source: Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s