U.S. REITs – Pebblebrook Prompts New Lodging Selloff

chart01Pebblebrook Hotels Trust (NYSE:PEB) has ranked among the highest-performing hotel REITs — but not because chairman, president and CEO Jon Bortz served in similar functions at another reputable publicly-traded hotel REIT, LaSalle Hotel Properties (NYSE:LHO), for over a decade. In fact, in Q2 Pebblebrook had a fine metrics performance ensemble associated with dividend generation potential, but upon the release of Q3 results on October 22, the market threw uncertainty upon its performance.

Pebblebrook decreased the higher end of its 2015 guidance for adjusted funds from operations (AFFO) (which has dropped US$0.01, from $2.47-2.51 to $2.47-2.50) and also lowered both ends of its guidance for same-property RevPAR growth rate by 100 basis points. The guidance for the hotel industry has not changed. Above is a sample of their Q3 results.

During Q3, among internal growth metrics, same-property occupancy dropped 1.3 percent to 88.4 percent from Q3 2014, as also did that for the last nine months. On the other hand, same-property RevPAR and ADR increased 4 and 5.3 percent respectively.

chart02Comparing the magnitude of the adjustments — which appeared more like fine-tuning — with a major hotel-price drop (-3.2 percent last week), the market appears to be overreacting. Industry demand has advanced more than supply, internal growth metrics — excluding occupancy — have advanced, and cash flow and profitability have increased.

What caught our attention, however, is the changes in long-term trends that Pebblebrook management indicated. They believe that, owing to a strong dollar and lower growth abroad, international inbound travel will weaken, affecting gateway cities where company hotels are located. The strong dollar also affects US travelers who use weaker currencies as an opportunity to travel abroad — and doubles down the negative effect over the domestic hotel industry.

To be continued…

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