The dual headwinds of being both tied to discretionary consumer spending as well as being part of the real estate complex, made the hotel & resort sector one of the worst performers during the Great Recession. The resulting commercial real estate recovery wasn’t necessarily kind to the hotel real estate investment trusts (REITs) as well. The sub-sector was left behind by many of its office, retail and medical property peers.
However, recent data points and rising business travel spending are finally beginning to push the hotel REITs upwards. For investors, the former beaten down and ignored sector could finally be a buy.
Rising RevPAR & Business Spending
The hotel operators are finally breathing a sigh of relief as several key metrics are now showing positive growth for the year, all of which should make their investors quite happy.
First, the industries key metric- revenue per available room or RevPAR- has been steadily improving since the sector's lows. According to commercial property brokerage house Jones Lang LaSalle (NYSE:JLL), RevPAR metrics came in at an average $102.99 for resorts at the end of August. This is nearly a $7 year-over-year improvement and sits closer to historical averages. RevPAR averages are expected to rise about 6% this year and in 2014, as business and leisure travel continues to rebound. Additionally, average hotel occupancies continue to increase and marked a 1.1% gain to sit at 67% total occupancy.
Secondly, deal making across all sectors of the lodging industry, both limited service and luxury, continues to rise as investors plow capital into the industries bargains. Data provided by researcher Real Capital Analytics showed that sales of limited-service hotels totaled $3.8 billion in the first half of the year. That’s more than double the amount of 2012. All in all, this buying activity has also pushed up the average price per room by 21% to sit at $77,635. Meanwhile, the luxury resort sector has seen some blockbuster deals as well. For example, Luxury hotelier LaSalle Hotel Properties (NYSE:LHO) recently shelled out $184.5 million for a 260-room resort in Key West.
All things considered, these factors have nearly two-thirds (64%) of hotel owners believing that hotel values will rise in the coming year. This compares to 55% who held a similar view in first quarter of the year.
Booking A Room
With the lodging industry beginning to show some real signs of recovery, investors may want to take a bet on some of the hotel REITs and operators. Unfortunately, unlike many real estate subsectors, the hotel/lodging industry does not have its own broad ETF representing it. Investors need to go with individual picks. Here’s some top names to consider.
Ashford Hospitality Trust (NYSE:AHT) continues to reinvent itself. At first, the company was just a provider of capital for other hotel owners. However, since the Great Recession, Ashford has moved into owning more properties directly. That includes its recent $90 million purchase for a resort in Key West. However, Ashford isn’t done yet. The company is planning on spinning-out several of its high luxury and yielding properties as a spate company called Ashford Hospitality Prime. The new firm will feature a RevPAR of $140.20. That’s sustainably higher than luxury rivals Sunstone Hotel Investors (NYSE: SHO) and Strategic Hotels & Resorts (NYSE:BEE). For investors, Ashford and Ashford Prime could be big winners over the longer term. AHT currently yields 3.7%.
Focusing on upscale extended-stay hotels and premium-branded, select-service hotels, Chatham Lodging Trust (NASDAQ:CLDT) could be another interesting bet for investors. The hotelier’s occupancy rate continues to be above average- at over 80%. This occupancy is also helping drive critical RevPAR growth and revenues. CLDT is expected to see a 20% jump in its revenues this year. Meanwhile, shares trade at cheap metrics and provide a juicy 4.5% monthly dividend yield.
Finally, for investors looking for a different way to play the return of hotel traffic, the owner/developer partners might be a better choice. These companies provide the capital and then earn fees by managing or franchising the actual property. The trio of Intercontinental Hotels Group (NYSE:IHG), Choice Hotels International (NYSE:CHH) and Wyndham Worldwide Corporation (NYSE:WYN) all provide a chance to play the “brand names” in hotels, while snagging some dividends.
The Bottom Line
After feeling some of the worst effects of the global real estate meltdown, the hotel and lodging sector is coming back with a vengeance. Critical data points- such as RevPAR- are all moving upwards. For investors, hotel REITs could be some of the best real estate plays going into 2014.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.