Hotel REITs: Hot Deal or Suckers' Bet?
Lodging real estate investment trusts (REITs) have been on a tear, generating total returns, including dividends, of about 25% so far this year. But the group's high-speed run may soon hit a road bump or even a blowout as money managers increasingly believe the rally is premature and that a significant rebound in the hotel business is still more than a year away.
"I think people are trading on not only what the sector is going to do this year and next but what it's going to do over the next four or five years," says John Arabia, a managing director at Green Street Advisors in Newport Beach, Calif. Valuations appear to be "at the high end of a fair range," he says. David Loeb, a senior analyst at Robert W. Baird & Co., expects little earnings growth until 2012 and believes the wait will "test the patience" of investors who have already bid up the shares. "I do think [the rally] is largely ahead of itself," he says.
(Read about how REITs pounced on mortgage assets in 2009.)
Lodging REITs generated total returns of 67.2% in 2009 and have gained an additional 25.5% so far in 2010 (as of market close Friday, April 16), outpacing the S&P 500 index, which rose 26.5% in 2009 and has advanced only 7.5% so far this year. They also outperformed equity REITs in general, which rose 28% in 2009 and are up another 11.2% in 2010.
Many investors jumped into lodging REITs, hoping to cash in on stocks that stand to see the biggest and earliest gains from an economic recovery. Since hotels change their rates nightly, they can respond quickly to changes in the economy and have historically rebounded faster. "Investors want to buy low and get in early," says Bjorn Hanson, a professor of hospitality and tourism management at New York University.
(See how commercial real estate was victimized by 2009's speculative frenzy.)
But Loeb believes the rally may be premature at best and overdone at worst. "I just think there could easily be a sell-off of 10% to 15%, or more than that" before the sector rebounds, says Loeb. Those who do buy now, he says, ought to be prepared to hang on to the stocks for at least three years. "They look really expensive to me," says Loeb. "Investors will just have to wait for several years before those multiples make sense."
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