REIT recovery: Here’s why hotels are up 20%

After a rough start to the year, real estate investment trusts are getting back on track.

Returns slid across the board at the beginning of the year, bottoming out in February. From Jan. 1 to Feb. 8, REITs, on average, tumbled roughly 13 percent, according to data compiled by 2nd Market Capital, a public equities investment firm. Every property type sold off and only 2.8 percent of REITs saw a positive total return during the period. Hotel REITs in particular fell about 7 percent.

To some extent, that was a result of the broader market taking a dip, analysts said. The slump had less to do with the companies themselves — and was more a case of “throwing the baby out with the bathwater,” said Michael Bellisario, an analyst at financial services firm RW Baird.

But now, following a bout of investor pessimism, REITs are poised to end 2018 on a stronger note. Amid a relatively strong economy and increasing M&A chatter, hotel REITs, in particular, have an advantage. As shares have risen, analysts are optimistic the sector is on more stable footing.

“The selloff was painful for all REIT investors,” said Simon Bowler, chief communications officer at 2nd Market Capital. “We’ve been recovering from an overreaction.”

In a research note in late January, Bellisario described sentiment toward the sector as “tempered.” But things have been looking up since then: From Feb. 8 through the end of August, REIT returns averaged 21 percent. Hotel REITs are up 20 percent.

And in just under six months, LaSalle Hotel Properties — a Maryland-based REIT with 41 hotel properties across the country — saw its price tag shoot up from $3 billion in March to $5.2 billion this month. A bidding war between the Blackstone Group and Pebblebrook Hotel Trust raged on for months, until the latter emerged with the winning bid last week.

Regardless of who won out, the scenario was a positive for the broader sector, said Chris Woronka, an analyst at Deutsche Bank.

“The offers and implied valuation of that deal kind of gave a lift to the valuation of the entire group,” he said.

At the same time, the strength of the broader economy serves as a source of growth. James Risoleo, CEO of Host Hotels & Resorts, underscored this during an August earnings call, noting that the “global economy continues to exhibit strength and appears supportive of industry growth.” Economic indicators, such as corporate profits, are strong, he said. And the pickup in business travel is a bright spot.

Similarly, the CEO of RLJ Lodging Trust pointed to healthy fundamentals and a robust rise in consumer spending. Those factors have helped prop up companies’ RevPAR, or revenue per available room — a central performance metric in the sector. Even if those growth rates stay steady around 2 to 3 percent, analysts said, the companies aren’t in bad shape.

Plus some specific markets have been much stronger. In the second quarter, Hersha Hospitality Trust reported 9.5 percent RevPAR growth in South Florida. That was driven by both leisure and corporate travel, less new supply and an increasing number of international travelers, the company said.

In Manhattan, RevPAR has continued to slide — however the figures are still an improvement from the last two years. The average daily rate for a hotel room in the city was roughly $249 through the first half of the year. While that’s a 2 percent year-over-year decrease, it’s better than 3.8 percent and 2.6 percent decreases in the first halves of 2016 and 2015, respectively.

Meanwhile, new supply numbers are lessening, which should be a boon for room rates. A forecast from consulting group HVS predicts that RevPAR in Manhattan increase to 2008 peak levels by 2020.

While all those factors are encouraging for hotels, the big swing in REIT returns comes down to a psychological change. It’s more a reflection a changing mindset than shifting fundamentals, analysts said. Companies have fared better as investor expectations are more in line with reality.

“Stable is great: It makes for a pretty good backdrop,” Bellisario said. “So it’s just a function of sentiment and where people’s expectations are.”