Hotel REIT stocks do not deserve to be in the bottom

Hotel REITs have under-performed the broad REIT market in 2015 (thus far), in a big way, returning 15% less than the broad REITs index.While sector fundamentals forecasts suggest more growth is ahead,

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Although our analyses have shown that hotel REITs are a top performing sector in Q2 (which will likely continue in Q3) operationally speaking, we’ve been struck by the underperformance of their stocks.

Growth stocks such as Pebblebrook, DiamondRock, and Chatham are in the bottom 10 percent of performing REIT stocks year-to-date. The question is, how can a top performing sector, which sports higher growth rates of cash flow generation and profitability than most property sectors, be in the bottom position in terms of stock performance?

Oversupply doesn’t seem to be an industry concern in the short-term (despite being the first concern of a real estate investor). Nevertheless, Pebblebrook’s CEO, Jon Bortz, addressed the concern of a potential oversupply in their Q3 conference call, “Supply continues to be restrained with the three months trend at just 1.2% and our expectation is that demand will likely continue to outpace new supply over the next two to three years.”

Demand has exceeded supply, and although new supply is expected over the next months, supply should not catch up with demand in 2016.

Occupancy peaks could be a concern, but hospitality performance isn’t only occupancy. The sector has reached an occupancy in the low eighties and many people, including some in the industry, don’t believe it can go any higher. In contrast, occupancy is not the only important metric for internal growth since room rates (ADR and RevPAR) can increase.

Self-storage is a property sector that is faring well operationally and in contrast is also performing well in the stock market. Like lodging, self-storage has been faced several times with fears of oversupply, although they don’t seem to be as strong as there are clear bottlenecks in the industry that will slow supply down.

In summary, it’s not clear why investors have been dumping lodging REITs. They recently suffered a major drop after Pebblebrook indicated softer results in Q3 and adjusted down its Q4-outlook. The main reason for the adjustment was softer growth in international inbound travel, lackluster data on global growth, and weaker job growth.

Source: Pebblebrook Hotel Trust (NYSE:PEB), DiamondRock Hospitality Company (NYSE:DRH), Chatham Lodging Trust (NYSE:CLDT), Seeking Alpha

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.

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