Hotel stocks went bonkers in February

Investor confidence erased pandemic losses, but signs of trouble remain


Hotel investors can rest a little easier at night.

Robust gains in February put share prices of publicly traded hotel companies back up to pre-Covid levels, a year after the pandemic sent valuations into a nosedive.

Share price indexes of firms that operate hotels, and own their physical assets as REITs, grew more than 20 percent last month, despite much of the hospitality industry still suffering.

The gains were roughly five times that of the broader market. The Nasdaq Composite rose about 4 percent during that time while the S&P 500 gained 5 percent.

“Investors are looking past damage” and “toward recovery” said Chris Darling, a hotel analyst at Green Street.

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The share price of Sunstone Hotel Investors, operator of 17 hotels with over 19,000 rooms in mostly coastal areas, grew 20 percent last month. It was the stock’s best month of the pandemic except for November, when initial results of Covid-19 vaccine trials were announced.

The pandemic forced hotel REITs to conserve cash at a time when, according to Darling, operating income has fallen more than 100 percent.

Sunstone recently sold a 502-room property outside Los Angeles International Airport for $92.5 million, one of the largest pandemic-era deals of its kind, and handed ownership of the Times Square Hilton hotel in New York City back to its lender.

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Hotel properties typically serve industry conventions, business trips and leisure travel. Experts expect the last of those three to recover most quickly.

“Conferences and conventions will probably take longest to recover,” said Michael Jerbich, president of B. Riley Real Estate, noting that the International Housewares Association canceled its August convention at the McCormick Place Convention Center in Chicago.

Apple Hospitality, with hotels in urban and suburban markets, grew 14 percent in February. Its share price closed Monday at $14.15, less than a dollar below its level of last February. Apple’s diversity has helped it hold up better than its peers, according to Darling.

DiamondRock Hospitality Company ended February with its share price more than 23 percent higher than where it began the month.

Investor enthusiasm, however, does not mean the industry is out of the woods.

Delinquency among commercial mortgage-backed securities loans – mortgages held by many individual investors rather than by banks – remains nearly twice as high for hotel properties as for retail, said Jerbich, who expects leverage to increase as the recovery progresses.

“Lenders will likely consider more forward-looking underwriting,” basing loan amounts on future financial conditions, “which we saw following the Great Recession,” said Jerbich.

For now, hotels are crawling toward normalcy.

National hotel occupancy sat below 50 percent for the week ending Feb. 20, a drop of nearly 24 percent since the pandemic began, according to hotel data firm STR, while revenue per room was down 40 percent compared to 2020.

In the nation’s top markets, Miami had the highest occupancy rate, almost 76 percent, while Minneapolis and Oahu Island had the lowest, about 32 percent each, suggesting temperate locations within driving distance had the best chance for an early post-Covid recovery.

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