Market watchers Seeking Alpha have commented that the hotel REIT sector as a whole is drastically undervalued relative to other REITs, pointing out that the sector trades at an FFO multiple of 11.7, as compared to the SNL Equity REIT Index, which on average, trades at a multiple of 15.1.
You may ask, why the discount? This has been blamed on everything from: an inactive congress resulting in low Washington D.C. hotel room occupancy, to Hurricane Sandy and reduced travel from Europe to East Coast hotels.
In 2012, Smith Travel Research reported 6.8% RevPAR(revenue per available room) grew to $65.17, a growth that was driven by a 4.2% gain in ADR (average daily rate) and 2.5% increase in occupancy. Despite this positive upturn in 2012, factors like the fiscal cliff, international economic concerns, and Hurricane Sandy took a toll on the travel business. But by the end of December, the lodging sector was comprised of 17 REITS with total market capitalization of $30.3 billion, an increase of almost 25% from $24.3 billion in 2011.
Looking ahead,an updated lodging forecast released last month by Price Waterhouse Coopers US, anticipates stronger RevPAR recovery in 2013, compared to the previous outlook. Lodging demand growth, which had eased in the third quarter of 2012 on a seasonally adjusted basis, gained more strength than expected in the fourth quarter.
Regardless of near-term economic challenges, lodging demand and pricing, are expected to remain on positive trajectories. PWC expects lodging demand in 2013 to increase 1.8 percent, which combined with still restrained supply growth of 0.8 percent, is anticipated to boost occupancy levels to 62.0 percent, the highest since 2007.Hotels in the higher-priced segments are expected to experience the strongest gains. Hotels in the lower-priced segments have not experienced as solid a recovery in occupancy, but are still expected to realize increased room rates as demand gradually strengthens.
Supply growth is expected to accelerate in 2013; however, by historical standards, supply will stay low and will not negatively effect market performance. The STR/McGraw Hill Construction Dodge Pipeline Report indicates that about 87,000 new rooms will be added in 2013, representing about a 1% increase in supply. Most of the new development will involve properties in the upscale and upper midscale segments. While not large in numbers, upper upscale openings are also expected to increasepointedly.
The improvement in the lodging sector in 2013 is expected to be a result of ADR rather than occupancy. U.S. residents and business will increase spending on travel as the economy continues to strengthen in 2013. International tourism to the Unites States is expected to grow, as regions like Hawaii and the West Coast are expected to experience an increase in tourism from Asia.
Prospects for 2013 for the lodging sector are positive as the US economy continues to firm up. If domestic or international markets suffer significant economic setbacks, the performance of the lodging sector will be affected.
REIT commentators RETI Café sum it up thus: “Lodging sector REITs will benefit from the market’s improving fundamentals. With a low interest rate environment, and large dividend pay-outs, lodging sector REITs have become particularly attractive in 2013.”
