August 11, 2022

Investors Feast on Hotels Amid Travel Boom

The travel and leisure industry was one of the hardest hit during the pandemic, as…

Investors Feast on Hotels Amid Travel Boom

The travel and leisure industry was one of the hardest hit during the pandemic, as people were locked down in their homes with limited freedom of movement. The hotel industry has seen one of its worst phases in the past two years and has struggled to garner the interest of both travelers and investors alike.

As with many other sectors, hotels with poor occupancies resulted in delinquencies, and sale signboards flashed in many parts of the country.

Not anymore! The tide seems to have turned in favor of hotels, with travel demand surging to one of the best years. Hotels are witnessing a rise in both occupancy levels and bookings for the holiday season since people are willing to spend more on travel and leisure activities. Moreover, investors with excess money tucked away during the pandemic are flocking to get their hands on hotels.

According to a WSJ report, commercial real estate information provider CoStar Group stated that in the first quarter of 2022, more than $12.5 billion worth of hotels exchanged hands. This is the highest first-quarter sales figure for hotels since 2016. Not just that, the report also stated that the prices for hotels on sale are soaring, with delinquencies falling to new pandemic lows.

Investors also see a faster recovery in hotels compared to offices or malls, which have been starved of vacancies since the pandemic. Plus, the new hybrid model for work, which has picked up pace since the pandemic, has put added pressure on office REITs (real estate investment trusts).

Notably, hotels can be inflation-adjusted by changing their room rates depending on the economic scenario. This is more applicable to limited-service or extended-stay hotels, which have a limited staff, which also makes their margins more appealing.

According to BTIG’s latest REITs Weekly report, the hotel REITs significantly outperformed the broader REIT sector, with one-week prices increasing 10.3% compared to a modest 0.1% decline in prices both month-to-date and quarter-to-date.

Remarkably, the subsegment’s total returns year-to-date stood at 6.9%, higher than any other subsegment in the REIT universe.

While an average Joe cannot go shopping for hotels, he can definitely buy hotel and hotel REIT stocks and take advantage of the current boom in the market.

Let us take a closer look at three hotel REIT stocks and find out which one best suits your budget.

Host Hotels & Resorts (HST)

HST is a self-managed and self-administered REIT that engages in the management of luxury and upper-upscale hotels. The group has 80 hotels with 44,400 rooms located across the U.S., Brazil, Canada, and Mexico. 

Yesterday, HST stock rose 5.1% on the news that Stifel Nicolaus analyst Simon Yarmak lifted the price target on the stock to $21.50 (5.2% upside potential) from $21 while maintaining a Buy rating. Year to date, the stock is up 15.9%, and has gained 20.8% over the past year.

Host ended 2021 on a bullish note, with fourth-quarter revenue and earnings per share both beating expectations. Notably, HST recorded triple-digit growth across all of its important metrics. Q4 reported the highest RevPAR (revenue per available room) in 2021 of $148.46, growing 249% year-over-year. For the full-year fiscal 2021, RevPAR rose 87.6% to $113.40, but came in 43.2% lower than the FY19 figure.

Moreover, HST even reinstated its quarterly cash common dividend of $0.03 per share based on management’s optimism about the trajectory of lodging recovery. Host is scheduled to report its Q1FY22 results on May 5, 2022.

Recently, HST was ranked No. 2 (out of 93 largest REITs by market value) on Barron’s annual list of the 10 Most Sustainable REITs. Each company was analyzed based on five parameters, namely shareholders, employees, customers, community, and the planet. Moreover, HST was the only lodging REIT to make it to the list.

The Wall Street community has a Moderate Buy consensus rating on the HST stock based on eight Buys, three Holds, and one Sell. The average Host Hotels & Resorts price forecast of $21.13 implies 3.4% upside potential to current levels.

Xenia Hotels & Resorts (XHR)

Xenia is a REIT that engages in the investment in premium services, lifestyle, and urban upscale hotels. It also owns a diversified portfolio of lodging properties operated by industry leaders such as Marriott, Kimpton, Hyatt, Hilton, Fairmont, and Loews. The company owns 34 hotels comprising 9,814 rooms across 14 states in key leisure destinations in the U.S.

The XHR stock closed up 2.9% at $19.39 on April 19. Year to date, the stock has gained 4.9%, and has gained 8.1% over the past year.

Recently, according to CoStar Group, XHR bought the W Nashville hotel for a whopping $328.7 million in cash, the highest-paid hotel price in the city at $950,000 per room.

In its Q4FY21 results, XHR reported revenue that topped analysts’ expectations, and adjusted funds from operations (FFO) of $0.25 per share came in much better than the prior year’s loss of $0.24 per share. Notably, XHR’s total RevPAR for FY21 grew 173.3% annually to $128.67 but was 18.7% lower than the 2019 figure. Xenia is scheduled to report its Q1FY22 results before the market opens on May 3, 2022.

Based on the limited near-term impact from higher borrowing costs, an uptick in travel demand, and attractive valuations, BMO Capital analyst Ari Klein recently maintained a Buy rating on the XHR stock with a price target of $22, which implies 13.5% upside potential to current levels.

With three unanimous Buys, the XHR stock commands a Strong Buy consensus rating. The average Xenia Hotels & Resorts price forecast of $21.33 implies 10% upside potential to current levels.

Sunstone Hotel Investors (SHO)

Sunstone REIT engages in the acquisition, ownership, asset management, and renovation of hotels and resorts. It operates under the following brands: Marriott, Hilton, and Hyatt. 

The company owns 14 hotels with 7,396 rooms spanning 635,000 square feet of meeting space. The SHO stock closed up 2% at $12.08 on April 19. Year to date, the stock has gained 1.9% and has lost 1.6% over the past year.

In its Q4 results, SHO missed revenue expectations but reported an FFO of $0.08 per share, higher than the year-ago period’s FFO loss of $0.16 per share. Notably, its Q4 RevPAR jumped 421.2% to $136.51 and its FY21 RevPAR leaped 121.4% to $105.43.

On March 17, SHO completed the sale of two of its Chicago hotels for an aggregate price of $129.5 million, or $178,000 per room, thereby exiting the Chicago market, which the management considers to be “hindered by excess supply and an inability to drive meaningful rate and profitability growth.” Furthermore, the company plans to invest the money in more profitable properties.

Moreover, the company also gave operating updates as of March 14, 2022, which showed that its Q1FY22 12 hotel comparable portfolio RevPAR stands at $134.14, which is 33.4% lower than 2019 levels. Additionally, the accelerated weekly transient booking activity expected in March and forward is nearing pre-pandemic levels, and Q2 RevPAR is expected to reach 80% of 2019 levels. The company even resumed its share buyback program, which has $464.9 million remaining. SHO is scheduled to report its Q1FY22 results on May 4, 2022.

Wall Street analysts have a Hold consensus rating on SHO stock based on one Buy, three Holds, and two Sells. The average Sunstone Hotel price forecast of $12.08 implies that shares are fully valued at current levels.

Check-Out Points

With the resurgence in travel expected to surpass pre-pandemic levels in the near term, both hotel REITs and hotel stocks can add much-needed upside to your portfolio. Considering the above stocks, Host Hotel & Resorts seems to be the best bet at the moment, with all things working in its favor.

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