2016 has yet to see a catalyst that justifies an above average performance of hotel REITs. In fact, the recent performance of hotel REITs hasn’t been all that different from REITs in general. While the stocks did go up by 8.5% this March, they haven’t fared any better than the average equity REIT, whose stocks in aggregate went up by about 9%.
I haven’t observed any changes in the fundamentals that make me think that demand will continue to exceed supply. While it is true that demand has surpassed supply and supply has been below historic average, hotel pipeline has increased. This has caused the gap between supply and demand to narrow, which shows that supply just might catch up with demand soon.
The real question is where in the lodging cycle are we at right now. In 2015, the hotels broke several records, including average daily rate (ADR), demand, occupancy, and revenue per available room (RevPAR). Unfortunately, while the hotels were enjoying one of the best growth rates among REITs and the sector was in the expansion phase, the financial markets believed they reached their peak and share prices tanked.
Thanks to the string of good news, we saw one of the most prolonged selloff periods in recent times, where stocks fell by around 30% over the course of 2015. The market was so sensitive that a change in guidance would prompt new selloffs. The mindset was “what goes up, must come down” and that’s what the market got.
As a result, hotels have become one of the best REIT sectors to harvest high yielding stocks. While the median equity REIT is yielding 4.1%, hotel REITs is just under 6%, which is better than healthcare, for instance. Out of the 17 hotel REITs that we track, only four have a dividend yield that is below average. At the same time, multiples have been lower than the historic norm at 10 times AFFO.
At the same time some investors have argued that REITs with high multiples will go down, some have now argued that REITs with lower multiples will go up. I find it very difficult to believe the latter thesis is sustainable because no new factor has been generated to shift lingering skepticism towards the fundamentals.
Even downplaying the limiting factors that are holding back hotels doesn’t change the picture. The appreciation of the dollar, which affects the number of international guests, impacts mostly gateway markets. Also, Airbnb’s competitive price has created a bunch of hype and appears to be a threat to lodging. That being said Airbnb hasn’t had a substantial impact on ADR in 2015.
Finally, hotel owners quickly adjust rates based on the state of the economy. In an environment where there are constant rumors that the economy is entering a recession, the industry just might be on edge.
In conclusion, even if none of the factors above come true, they don’t appear to change the dynamics.
Source: Pebblebrook Hotel Trust(NYSE:PEB), Chatham Lodging Trust (NYSE:CLDT), hotelnewsnow.com, Fast Graphs
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