|R. W. Baird’s David Loeb (left) discussed the state of hotel stocks alongside fellow panelist Ian Weissman of ISI.
NASHVILLE, Tennessee—Investors are hesitant to buy into hotel stocks despite strong fundamentals, according to a panel of analysts last week during the Hotel Data Conference.
Undermining confidence is a feeling of general skittishness about the broader economy, among other macro factors, said David Loeb, senior research analyst at Robert W. Baird & Company, during the panel, “Coming back for more: Hotel stocks strive for respect.”
Another barrier is the price of the hotel stocks themselves, added Ian Weissman, managing director and head of ISI’s hotel research team.
“The macro picture is too cloudy. The stocks are not cheap enough. (Investors would) rather sit on the sidelines … than invest in lodging,” he said. “… Investors today are less bulled up on lodging in the near term.”
The much-discussed “fiscal cliff,” which would see a number of tax increases and spending cuts go into effect at the beginning of 2013 in the United States, is not a concern among the investment community, the panelists agreed. The event will be tabled and pushed back to 2014, regardless of which nominee is elected president in November, said Jeffrey Donnelly, senior analyst, equity research real estate and hotels, for Wells Fargo Securities.
The U.S. is not in the clear, however. Economic chaos spurred by the euro crisis, which resulted in a pullback in hotel stocks last summer, is slowly beginning to creep its way into the country, Donnelly said. And tension in the Middle East remains an ongoing concern.
A different breed
Hotel stocks in general are at a disadvantage compared to other sectors, the panelists agreed.
“In my career, it’s much easier talking to investors and getting them on board … where the cash flow streams of those companies are much more predictable,” Weissman said.
In the office sector, for example, analysts can model out net operating income five years into the future because the industry operates with fixed seven- to 10-year leases. Hotels have leases of a single day.
“In hotels, it’s a much, much, much shorter-term outlook,” Weissman said. “The investment crowd has less patience for that. It’s much, much more susceptible to macro shocks.”
The susceptibility allows investors to “play hotels as a way to play the economy,” Loeb said. “And they did short heavily last summer when they thought the economy was going to fall off a cliff.”
Hotel companies also are much smaller than those in other industries, Donnelly added. The average apartment company, for instance, has $2 billion to $3 billion in equity and another $2 billion to $3 billion in debt. Hotel companies are typically less than $2 billion in equity capitalization, “which is very small for public companies.”
Wells Fargo Securities
Because of that, it’s harder for hotel stocks to grab investors’ attention, he said.
The magic metric
“There’s no one silver bullet in this business,” Weissman said when asked what metric was the best bellwether for hotel stock performance.
Revenue per available room is a good indicator of the overall health of the hotel industry, but it’s backward-looking while the stock market is forward-looking, he added. Thus, there’s often a disparity between the two, such as during 2011 when RevPAR was up approximately 7% while hotel stocks underperformed.
Donnelly pointed to gross domestic product and unemployment as being strongly linked to hotel stock performance, but even those have their fallbacks.
But short of a single metric, analysts said far more important is the insights available at the property level.
“Oftentimes, the folks in the field who work in hotels … don’t know what they know. It’s valuable to us. It’s all these little nuggets of data we try to get,” Donnelly said.
Weissman often finds himself on the road or making calls to better understand the dynamics of the hotel industry from the property level up.
Loeb also pointed to supply and demand as key indicators.
“That focus is on the direction and the relationship between supply and demand. It’s often that simple,” he said.
Hotel companies cash in
Analysts provided updates on a number of hotel company stocks during the 75-minute panel.
Choice Hotels International
Choice’s special cash dividend of $10.41 per common share was a result of tax policy, Donnelly said. Issuing cash now when tax rates are so low is a much more efficient way to pull capital out of the company.
An initial public offering is coming, Donnelly said. The only question is when.
“They seem to go down that path now, which would likely imply it will be sometime in 2013,” he said, with one caveat: “provided the market’s there for that.”
“The only thing you can predict is that (Hilton owner) Blackstone’s going to do what’s best for Blackstone and its investors,” Loeb added.
Hyatt Hotels Corporation
The company’s 2009 initial public offering resulted in a strong first year of trading, “but it’s underperformed in the last two,” Donnelly said.
“I think they really blew it recently,” Loeb said. “The Pritzker family, they’re very smart, they’re very long-term-oriented, and frankly they don’t give a rat's ass about public shareholders. It’s just not what they think about.”
The family does not give much information to shareholders, and they provide little guidance to analysts, he added. “I think they have a long way to go to build back investor’s confidence.”
“It’s a tough stock for investors,” Weissman said. “There are better alternatives for investors.”
“The challenge is, when you look at a lot of the (real-estate investment trusts), there tends to be a high relationship between RevPAR per room, total RevPAR per room, profit per key … that you value REITs at,” Donnelly said. “When Gaylord comes into the fold, they’re actually going to be the No.1 or 2 in a lot of those metrics.”
But complicating matters is that the company only owns four properties.
“I think it’s going to be somewhat of a rocky start,” Donnelly added.
The session closed with each panelist highlighting a hotel stock with strong potential.
Loeb: “Chesapeake (Lodging Trust). Although it’s had a big run of late, it’s still a bit cheaper than some of the others. That discount will go away over time.”
Loeb added he also likes Hersha Hospitality Trust for the long term because of its focus on urban, select-service hotels.
Weissman: “We’ve been very bullish on Sunstone (Hotel Investors),” which trades at a “pretty wide discount.”
Donnelly: Chesapeake and Sunstone also top his list, as well as Strategic Hotels & Resorts.