There are a few reasons to invest in Hotel REITs now:
- Hotel revenues have been hit hard by the recession with a significant decrease in ADR, Occupancy and RevPar. Hotel revenue is closely tied to an economic recovery and highly cyclical. Revenue may have hit the bottom and will likely rise with economic recovery.
- Due to the recession and inability to finance hotel construction, there is little additional supply in the pipeline. New hotel construction usually will take between 2-4 years. Therefore, for 1-2 years post recession, it is likely that demand will rise and supply will remain stable, or even be reduced due to a sizable number of hotels going into foreclosure/bankruptcy. The surviving hotel REITs will likely benefit from this shift in demand and supply.
Among the hotel REITs, I believe the ones that focus on catering to business guests will likely benefit first from an economic recovery as business spending will be at the same pace as economic recovery, while job growth, a key driver for demand for leisure hotels, usually lags economic recovery.
Due to the recession, a lot of weaker and/or overleveraged hotels have been forced into foreclosure and there are plentiful of bargains in the industry. I believe smart REITs, with strong balance sheet, large cash reserve and excess debt capacity, will likely be able to take advantage of attractive valuations in the market and expand their portfolio and market share.
I have researched 7 hotel REITs in order to find the one(s) that has the following:
- Strong cash position.
- Not currently in default of debt payments, or at significant risk of default in the near future.
- Relatively low leverage.
- A portfolio of healthy, upscale, business oriented hotels located in key gateway locations.
The 7 hotel REITs are:
- Host Hotel & Resorts, Inc (NYSE:HST)
- Hospitality Properties Trust (NYSE:HPT)
- Hersha Hospitality Trust (NYSE:HT)
- Diamondrock Hospitality Company (NYSE:DRH)
- Sunstone Hotel Investors (NYSE:SHO)
- Ashford Hospitality Trust (NYSE:AHT)
- Felcor Lodging Trust, Inc. (NYSE:FCH)
Of the 7, I like HST and DRH. Both companies has no debt service default in their portfolio and both has strong cash positions (HST has $1+billion while the smaller DRH has $100+million). They both own mostly upscale branded hotels at desirable locations and cater mainly to business travelers.
During the recession, both companies have done a good job of strengthening their balance sheets by tapping the equity market. HST has also taken the measures to sell (presumably underperforming and/or non-core) hotel properties for cash and restructure some of its debt. Both companies have capacity to add leverage if necessary. In fact, 10 of the 20 hotels in DRH’s portfolio are debt-free.
In my opinion, a key difference between the two, apart from size, is style of management. Both have filled their corporate coffer with cash. Yet HST appears to take a more aggressive approach toward potential acquisition, while DRH appears more conservative and focuses on tightening the ship.
Therefore, if you are looking for a hotel REIT that can quickly take advantage of the growth and expansion opportunity, HST may be a better candidate. On the other hand, if you are looking for a Hotel REIT that is able to benefit from the economic recovery and be a relatively safe investment, DRH could be a smart choice.
Disclosure: Long HST and DRH