The bullish trends for commercial real estate that started in 2010 have continued into 2011. The right mixture of economic and market conditions have helped funds like the Vanguard REIT Index ETF (NYSE:VNQ) surge more than 200% since its March 2009 lows. These market forces and renewed investor interest have helped the office, apartment and medical/hospital real estate sub-sectors return to their former pre-crash glories. However, one of the hardest hit segments of the real estate market is finally starting to turn a corner and represents a great value buy for investors.

TUTORIAL: Ratio Analysis

It's All About RevPAR
The recovering global economy is greatly benefiting the hotel and leisure real estate sector. Hotel REITs and operators have been experiencing a return of business travelers, as well as seeing a rising demand for leisure travel. According to Smith Travel Research, demand for U.S. hotel rooms increased by more than 7% in 2010. This is favorable to 2009's more than 6% decline. Additionally, data compiled by Smith showed that the industries key metric, revenue per available room or RevPAR, has been steadily improving since the sector's lows. Average day rates (ADR) and occupancy percentages have also steadily increased as U.S. economy has begun its recovery. Globally, both the Asia-Pacific region and Latin America have produced solid RevPAR growth. Major hotel markets like China and India remained relatively unaffected by the global economic turmoil and are enjoying rising double digit RevPAR and ADR growth rates.

This improvement has many analysts bullish on the New Year's prospects for hotel REITs and operators. As bookings continue to improve, profits are expected to multiply further throughout 2011. Real estate services firm Jones Lang Lasalle (NYSE:JLL) estimates that lodging purchases will gain 15 to 20% to nearly $30 billion in 2011 as real-estate investors react favorably to rising occupancy and room rates. The firm predicts that most of the deals will be in the luxury sector and throughout Europe, Asia and Africa. Jones analysts expect an increase of as much as 25%.

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. Many hoteliers, such as Sunstone Hotel Investors (NYSE:SHO) and Strategic Hotels & Resorts (NYSE:BEE), cut their dividends during the global real estate crisis in order to preserve capital and pay down debt incurred at the height of the real estate bubble. These companies can represent interesting turnaround plays for investors. However, for investors looking for "steadier" opportunities, here are some picks.

With a price-to-book ratio of 1.2, Pebblebrook Hotel Trust (NYSE:PEB) represents a discount to other hotel REITs like FelCor Lodging (NYSE:FCH). Formed in June 2010 in order to take advantage of the nearly $29 billion worth of distressed hotel properties, Pebblebrook has been quite active in deploying its capital. The new REIT now owns nine up-scale hotels across six states. Shares of Pebblebrook yield 2.3%, but that yield could grow as the ADR and RevPAR numbers continue to rise.

After cutting its dividend and switching its focus from just providing first mortgages, mezzanine loans and construction loans to other hotel operators, Ashford Hospitality Trust (NYSE:AHT) has gone on the acquisition hunt. Recently, the REIT announced a takeover of an 8,084 hotel room portfolio from distressed seller Highland Hotels which CEO Monty Bennett called "strategic and accretive." On top of this Ashford recently reinstated its dividend and now yields 4%.

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 property. By 2020, China is expected to be the world's largest travel destination. Both Intercontinental Hotels Group (NYSE:IHG) and Wyndham Worldwide Corporation (NYSE:WYN) have invested extensively in China.

Bottom Line
As the global economy continues to recover, so will the lodging industry. Increasing RevPAR, occupancy and ADR metrics all bode well for the sector going forward. For investors looking for one of the few real estate values left may want to consider hotel REITs like Summit Hotel Properties (NYSE:INN) or major franchisers like Choice Hotels (NYSE:CHH). (For related reading, also check out 4 Key Factors That Drive The Real Estate Market.)


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Tickers in this Article: VNQ, JLL, SHO, BEE, PEB, FCH, AHT, IHG, INN, CHH

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