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Hotel Stocks Have Offered a Pleasant Stay

18 July 2014 in Trading Ideas

It’s hard to beat the ol’ supply-and-demand dynamic, and for investors in hotel stocks, the combination of rising demand for hotel rooms and a supply that can’t keep up has literally paid dividends.

The Hotel REIT segment of the On The Road motif (where it has a 35.7% weighting) has gained 5.6% in the past month and is up 24.7% over the past 12 months.

The overall motif has risen 5.3% in the past month and has increased 48.9% over the past 12 months. During those same respective time periods, the S&P 500 has returned 2% and 19.7%.

 

A recent article on real estate website GlobeSt.com noted that with the exception of New York City, hotel supply growth across the US is trending below long-term averages.1

Cowen analysts James Sullivan and William Kuo, in a recent report suggesting that investors overweight the hotel REIT sector cited by GlobeSt.com, wrote: “Overall low levels of new room supply growth combined with healthy demand growth are resulting in the highest gains in asset level cash flow of any REIT sector.”

The analysts expect that hotel room demand is likely to continue growing faster than supply growth, especially in the major gateway coastal markets. That should set the stage for “an extended period of pricing flexibility and enhanced growth” producing “incomparable hotel EBITDA” driven by RevPAR [revenue per available room] growth averaging 6.7% in 2014 and 5% for the REITs that Cowen covers.

Excluding acquisitions or sales, the analysts expect that to produce comparable-hotel EBITDA of between 7% and 9% next year. That compares to same-store net operating income growth of 3% for the rest of the REIT sector.

In addition, Cowen expects per-share funds from operations to grow 15% this year and 10% next year for hotel REITs, vs. only 4% and 6%, respectively for the firm’s non-hotel REIT coverage.

Also contributing to the rosy expectations was the recent news that the outlook for business travel continues to brighten.

The Global Business Travel Association recently reported that the number of business trips by US companies rose nearly 3% in the first three months of the year as compared to that same period in 2013.2

Meanwhile, the amount that businesses spent on those trips rose 7.6% to $71.2 billion.

According to the trade group, US business travelers are expected to spend $292.3 billion this year, 6.8% more than 2013. And a key factor in the uptick has been an increase in the amount spent on group meetings or conventions, with a 7.1% increase expected for such travel compared to last year.

And, needless to say, all those convention-goers will need somewhere to rest their respective heads.

1Paul Bubny, “Hotel Trusts Outpace REIT Sector at Large,” globest.com, July 10, 2014, http://www.globest.com/news/12_898/national/hotel/Hotel-Trusts-Outpace-REIT-Sector-at-Large-348048.html, (accessed July 15, 2014).

2Charisse Jones, “U.S. business trips on the rise,” July 8, 2014, usatoday.com, http://www.usatoday.com/story/money/business/2014/07/08/business-travel-spending-increasing/12310921/, (accessed July 15, 2014).

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