Activists have ignored a lingering investor sentiment against lodging as a major driver. Instead, they have been looking for an uncertain fight. Last month, Sessa Capital targeted the Ashford REITs and Land & Buildings selected FelCor Lodging Trust.
While it’s impossible to deny that some lodging REITs have enjoyed a very strong operational performance, their share prices have all gone downhill anyway. In fact, the market hasn’t spared a single stock. We saw a big bloodbath in 2015 and 2016 hasn’t started out any differently. So far, lodging has been a bottom performer; something I hope will come to an end soon.
If I had to give a reason for this massive selloff, I’d say that investors have been afraid of oversupply. Although the lodging REITs deny that supply has outpaced demand, some investors are not keen on the steadily rising supply. Carter Wilson from STR wrote an interesting analysis of the current environment in the lodging industry.
Airbnb has also been mentioned as a reason, but anyone who travels abroad regularly knows that renting rooms, and even entire homes, is nothing new and has never made the hotel industry disappear. Yes, Airbnb has made it more secure and easier to rent rooms and homes, but I believe that it is farfetched to call it a major threat to hotels.
We have mentioned Sessa Capital’s case in a previous post. Early February they filed a lawsuit against Ashford Hospitality Prime questioning a huge termination fee that penalizes Ashford Prime if they elect a majority of directors not approved by its external management Ashford Inc. The share price fell by 33% this year, only trailing NorthStar Realty Finance’s 35% drop.
As to Land & Buildings, at the same time they were challenging NorthStar Asset Management for being undervalued, they were also making their case for FelCor Lodging Trust.
FelCor is a $1 billion market cap that invests in several types of hotels outside the gateway market, such as resorts and those in suburban and airport areas. If the new supply is being built in the gateway market, which currently receives most of the spotlight, the rationale was, why don’t we invest in a hotel REIT that is located elsewhere? According to L&B, FelCor is the hotel REIT in the best position to capitalize on this idea, as 57% of the investments are exposed to markets expected to outperform for the next two years.
When we last looked at FelCor in 2015, the company was experiencing a decline in revenues, as well as one of the highest leverage ratios among its peers. The good thing was that FelCor featured strong same store growth markets and its AFFO per share increased. To get rid of its reputation for low quality and reposition it as one of higher quality, the company has sold and renovated some of its assets.
Last month L&B listed several items that would help close FelCor gap between their net asset value per share and their share price. Among others, they recommended that they sell their NY hotels, reduce their current debt, buyback their shares, and enhance corporate governance. In response, FelCor said that they had already implemented these ideas.
FelCor, indeed, has an AFFO multiple that is below its peer average and like a good portion of the lodging REITs, FelCor has been undervalued. However, that doesn’t mean that I will be running out to buy their stocks just yet. The bloodbath in the sector is not over yet.
Source: FelCor Lodging Trust Incorpora(NYSE:FCH), Ashford Hospitality Prime(NYSE:AHP),Ashford, Inc.(AMEX:AINC),NorthStar Realty Finance Corp.(NYSE:NRF),Northstar Asset Management Gro(NYSE:NSAM),Land and Buildings, Fast Graphs, Yahoo!Finance
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