Stock declines temper industry cycle peak
Stock declines temper industry cycle peak
23 OCTOBER 2015 5:45 AM
The softness of the overall stock market, not performance of the U.S. hotel industry, has pushed hotel stocks downward in recent months.
REPORT FROM THE U.S.—It’s been a difficult year for owners of hotel company stocks. In September, the Baird/STR Hotel Stock Index fell 6.9%, marking seven consecutive months of decline. Despite the downward slide of hotel stocks, equity analysts don’t believe it is a reflection of the industry’s general performance.

“Whenever the stock market catches a cold, hotel stocks catch pneumonia,” said Lukas Hartwich, a senior hotel industry analyst with Green Street Advisors. “The overall stock market has been down, so no matter how the (United States) hotel industry is performing, those stocks will be down, too. It’s similar to 2011, when there were overall gyrations in the market and hotel stocks underperformed.

Hotel performance data for the third quarter and August in particular worried some investors, said David Loeb, senior hotel research analyst and managing director of Robert W. Baird & Company.
“There are a lot of marginal investors who are broad-based in their focus who were spooked by the weekly numbers that came out in August and the monthly numbers for August,” Loeb said. “And there were other analysts who concluded incorrectly that negative occupancy in August meant the cycle was over.”
According to STR, the parent company of Hotel News Now, August occupancy for U.S. hotels decreased 1.4%; average daily rates were up 3.6%; and revenue per available room rose 2.2%. By contrast, in July, RevPAR rose 8.3% on a 2.3% increase in occupancy and 5.9% rise in ADR.

Ryan Meliker, managing director of equity research for lodging at Canaccord Genuity, said much of the weak performance in August was due to calendar shifts for the Labor Day, Rosh Hashanah and Yom Kippur holidays.
“August performance was entirely driven by calendar disparities,” he said. “But many people in the market were concerned about weakening RevPAR, which became a wider-based fear that maybe August was the start to the end of the lodging cycle.”
In September, stocks of hotel real estate investment trusts experienced a slightly larger decline (down 7%) than did hotel brand company stocks (down 6.8%). Year to date through September, hotel REIT stocks were down 25%, compared to a 15.1% year-to-date decline in hotel brand company shares.
“REITs tend to be much smaller companies, so some of them are doing quite well, but if just a few of their assets are having tough times it can change expectations,” said Wes Golladay, an equity research analyst at RBC Capital Markets. “For C-Corps, there have been some modest resets of expectations, but for the most part they are holding their own on the guidance side.”
Overseas turmoil
Soft global economies, especially in China, have had some effect on U.S. hotel stocks, Loeb said.
“It’s had an effect in a couple of ways, some correctly and some incorrectly,” he said. “It created concern for the global brands’ growth pipelines in China, which is somewhat valid. It also created concerns in the broader market that China might send the U.S. into recession, and it created a certain amount of fear that Chinese investors and Asian money more broadly would stop looking for hotel acquisitions in the United States.

“That is wrong,” Loeb continued. “The turmoil in the Chinese stock market and the economy has actually made some foreign money, particularly Asian money, more interested in parking money in a relatively safe haven like the U.S.”
The analysts discounted any effect the slowdown in the Chinese economy would have on outbound travel from the country to the U.S.
“International travel is absolutely an issue, but from China not so much,” Loeb said. “But there is an indirect factor: While Chinese currency hasn’t changed much relative to the (U.S.) dollar, it has strengthened relative to a lot of other currencies. As a result, for a lot of Chinese travelers the rest of the world is on sale; the U.S. is only a little more expensive.”
Is M&A on horizon?
Meliker of Canaccord Genuity and other analysts believe the uncertainty in hotel stocks could lead to some mergers and acquisitions. He said hotel REITs generally are trading significantly below the valuation of their underlying assets, which could lead to transactions among both private and public hotel companies.
“Those wide levels of discounts of stock prices to valuations don’t usually last very long, and then one of two things happen,” Meliker said. “They might correct by public market stock valuations rising or private market valuations falling. Or you might see a lot of public-to-private (mergers and acquisitions).”
He cited Blackstone Real Estate Partners’ purchase of Strategic Hotels & Resorts, a public company, as precursor to other possible public-to-private transactions. He said both Blackstone and Starwood Capital own large portfolios of select-service hotels that might be ripe for initial public offerings.
“Also, Ashford Hospitality Prime is under strategic review, as is Starwood Hotels & Resorts (Worldwide). Who knows what will come of those reviews, but it’s possible we’ll see more public-to-private (transactions),” Meliker said.
“Bottom line is we’re seeing more deals happening because there is a lot of private equity capital that has been raised,” he added. “When there is that much capital and ample leverage, which there is, I would generally say if these discounts hold you’ll see a lot of public-to-private (transactions).”
Loeb of Robert W. Baird said it’s also possible that some public hotel companies could consider going private during this industry cycle.
“Those executives who lead public companies that didn’t go private the last time around—which is most of the existing public REITs—don’t want to be too late this time,” he said. “They’d rather sell a little early than miss the cycle again. Of course, it doesn’t mean they don’t have contingency plans or other ways to cope when the downturn comes.”
Still bullish
Despite the stock market jitters and shaky industry performance in August, hotel stock analysts are generally bullish about the short- and medium-term prospects for the business.
“The environment is still constructive, but we’re calling for more volatility in the market,” Golladay of RBC Capital Markets said. “We’re going to see the leisure months be a little more challenging. At the margin you have two things going against you: You have some incremental domestic leisure travel going overseas now with the strong dollar, and conversely, some of the strong dollar impact on inbound travel.”
Meliker believes the hotel industry’s supply-and-demand balance should remain favorable through 2016.
“As much as people want to highlight how much supply growth there is, on a basis of percentage of existing supply, we still won’t get above the long-term average until at least the end of next year, so we have 12 months of runway just to get to the long-run average, let alone to a higher level,” he said.

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