Hotel and resort real estate investment trusts (REITs) have outperformed the overall REIT market this year amid booming travel.
The Nareit Lodging/Resorts index has returned a negative 1.64% year to date through June 10, compared to a negative 19.45% return for the Nareit Equity REIT index.
Wells Fargo analysts recently met with 11 lodging REITs and came away with positive conclusions, including:
1) “Business transient and group demand continue to surprise to the upside,” they wrote in a commentary.
2) “Leisure rates in markets earliest to rebound during the pandemic, predominantly the Sunbelt, continue to experience strong growth versus 2019. But some REITs noted initial signs of softening during the shoulder season, while outside the Sunbelt, rates continue to expand versus 2019.
3) “Should the U.S. experience an economic slowing, management teams expect the pace of recovery versus 2019 to flatten or slow, not decline, given the recovery to date.” There have been “no signs of slowing to date.
4) “Near-term group bookings, group rates, and out-of-room spending have remained relatively strong.
5) “Dividends are likely to return to pre-pandemic payouts as a percentage of funds from operations, as operations improve.”
Wells Fargo remains overweight on the following lodging REITS:
· Hersha Hospitality Trust (HT)
· Pebblebrook Hotel Trust (PEB)
· Ryman Hospitality Properties (RHP), and
· Xenia Hotels & Resorts (XHR).
Wells Fargo’s Takeaways from Meetings with Each Company
Hersha: “The pace of resort rate growth versus 2019 is starting to slow,” the analysts said. “Occupancy could rebound to 80% to 85% in urban markets by the end of 2022, as corporate travel planners are expecting a strong post-summer improvement.”
Pebblebrook: “In the second quarter, one-third of its resorts are in their shoulder season, a time in which rates should be falling off,” the analysts said. But, “rates have not fallen off during this time to the extent they have historically.”
Ryman: It’s the same story as for Pebblebrook, the analysts said. Meanwhile, “80% of its group demand comes from large groups. Typically during downturns, corporations first slow business transient travel, then small group events, then larger group events,” they said.
“The exposure to large groups, is a relative positive during a time when there is worry of an economic slowdown, especially when the company does have a history of collecting cancellation fees.”
Xenia: “Group bookings continue to be relatively strong, along with out-of-room spending,” the analysts said. “Attrition has been limited. There has seen no slowing in bookings or group lead volumes to date.” And management believes that if an economic slowdown arises, it could result in slowing of demand growth, but not a decline, the analysts said.
