While the overall commercial- and now the residential-real estate sectors have rebounded quite nicely since bottoms of the credit crisis and Great Recession, the lodging and hotel sector has been somewhat of a wet blanket. Falling business travel coupled with cash-strapped consumers took the wind out of the sails of the hotel REITs. Key sector metrics like revenue per available room (RevPAR) and occupancy rates plummeted and prospects for the sector looked bleak.
What a difference a few years makes.
Recent data for the commercial real estate sector has industry insiders gushing with joy. Some have even proclaimed that 2013 could one of the best years for the lodging sector in a long time. For investors, this rebound in RevPAR could be best time to jump into the sector and still find values.
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Slow, But Steady Growth
This week marks the 25th annual Hunter Hotel Investment Conference in Atlanta. That’s basically the Super Bowl for the lodging commercial real estate sector. If early indication from attendees is any clue to the state of the industry, then investors in the hotel sector are in for very good returns.
Already, hotel operators have seen rising average day rates, occupancy percentages, and RevPAR numbers as the U.S. economy has begun its recovery. However, more gains are set to come for the sector in the year ahead.
According to the CEO of hotel franchiser Choice Hotels International (NYSE:CHH), RevPAR will grow by 5% this year on the backs of a returning business traveler as well as seeing a rising demand for leisure travel. While some uncertainties like rising fuel and health costs could dampen some of the gains early this year, by the end of fourth quarter and into 2014 & 2015 business would pick up.
This echoes similar predictions from other conference attendees. Industry group Smith Travel Research predicts a 4.6% increase in average daily room rates and 6% gain in RevPAR for hotel owners. Marriott International (NYSE:MAR) estimates that North American hotels will see between 5 to 7% growth in RevPAR. At the same time, Smith Travel predicts that despite swift hotel construction, demand will continue to outstrip supply in key regions. Overall, room demand should grow by about 2.8% this year.
Finally, attendees seem bullish to the idea that hotel values will rise simply due to the fact that many other commercial real estate sectors have already seen huge gains. Basically, commercial real estate investors will be forced into the sector as it remains one of the few places to find good cap rates and value left.
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Two Beaten Down Picks
As the general commercial sector bounced back, some of the “quality” names in the hotel sector - like Host Hotels & Resorts (NYSE:HST) and Starwood (NYSE:HOT) - rose as well. That means for investors looking to seriously profit off the rebound in lodging, it could be time to bottom fish.
Beaten-up FelCor Lodging (NYSE:FCH) could be an interesting pick. The firm primarily invests and owns upper-upscale, full-service hotels and resorts. FelCor currently operates 66 different luxury hotels. That’s a good thing since the luxury segment is expected to see 6.9% RevPAR growth in 2013. Any RevPAR growth will certainly be beneficial for the struggling firm. Since the recession, FelCor hasn’t turned a profit and cut its dividend.
Already, FelCor is seeing some semblance of a rebound. The firm’s fourth quarter reported adjusted EPS loss of -1 cent per share beat the mean analyst estimate of -7 cents. It also beat the average revenue estimate as well. Any good news could send shares higher.
Then there is Strategic Hotels & Resorts (NYSE:BEE) to consider. Like FelCor, the REIT cut its dividend during the economic downturn and focuses on the luxury space. However, shares of Strategic- which owns 18 luxury hotels - are currently trading below its estimated net asset per share of $11 to $14. That prompted New York-based hedge fund, Orange Capital, to begin pressuring management to close the gap and begin selling all the properties.
Even without a potential sale, things are looking up for BEE. When reporting its 2012 results, Strategic showed a 6.9% increase in revenue per room in North America. That gain exceeded that of many of Strategic's peers like Diamondrock Hospitality (NYSE:DRH).
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The Bottom Line
After being commercial real estate’s whipping boy since the Great Recession, the lodging sector is finally beginning to bounce back. For investors, betting on the sector could now make sense as key metrics continue to improve. Both FCH and BEE make ideal selections.