Pessimists and Optimists in the Hotel REIT Industry

The investment strategy for hotel REITs has become a controversial topic amongst optimists and pessimists. Being an optimist, I have been amazed at the fallout within the sector last year which has, undoubtedly, been caused by pessimists in the industry.

Just to be clear, the hotel sector had one of the highest operating growth rates in 2015 amongst equity REITs. STR, a supply and demand data-tracking firm, highlights the fact that hotels broke several records in 2015 –average daily rate (ADR), demand, occupancy, revenue per available room (RevPAR) and room revenue. On the other hand, investors have become skeptical of the sustainability of this momentum and are following the mindset that “what goes up, must come down.” This has resulted in one of the most prolonged selloffs I’ve ever seen.

Overall, lodging REIT stocks fell around 30% in 2015. Apple Hospitality is the only stock that showed excellent return of 11%. Ryman Hospitality Properties, which includes four gigantic upscale group-oriented hotels, and Summit Hotel Properties, which focuses on upscale and upper midscale segments, had slightly negative returns.

To date, in 2016, the returns are not optimistic but February has seen improved lodging REIT stocks.

  Pessimistic Optimistic
AirBnb

 

Airbnb is disruptive and competes with hotels in price. AirBnb has not had a significant impact on ADR in 2015.
Supply

 

After multiple years of supply constrain, supply growth has finally occurred with projections to increase in the coming years. The projected rates continue to be below historic averages.
Top Markets

 

Some of the top markets in the United States, New York, North Dakota, Ohio and Texas, have shown signs of weakness. The majority of other top markets have indicated excellent ADR growth and occupancy levels.

 

In less volatile markets where recession rumor is not a threat, lodging REIT stocks would probably have not decreased as rapidly, or not even decreased. The advantages for hotels during interest rate hikes simultaneously work against them during more volatile periods. When inflation and interest rates rise, hotel owners quickly adjust rates. On the other hand, hotel owners must also decrease rates in the same way when the economy is entering a recession or negative external factors are relevant.

In conclusion, because the pessimistic viewpoint seems to be favorable at the moment, the best approach is to wait for catalysts to initiate purchase.

Source: Apple Hospitality REIT, Inc.(NYSE:APLE),Summit Hotel Properties(NYSE:INN),Ryman Hospitality Properties(NYSE:RHP)

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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