Stocks of real-estate investment trusts that own hotels staged a sharp rebound late last year, outpacing gains of all other classes of commercial-property stocks for 2009 as investors wager that beaten-down hoteliers are poised to start a recovery in 2010.
The Dow Jones Equity Hotel REIT Index of 13 stocks rose 66% on a total-return basis in 2009, following a 59% decline in 2008. Hotel REITs' rally last year handily outpaced the next-biggest gainers, manufactured-home REITs and hybrid REITs, which both gained 44%.
Whether the heady performance of hotel-REIT stocks is warranted is subject to debate.
Bullish investors note that hotels, which can empty out or fill up overnight, typically bounce back more quickly than other commercial real estate in an economic recovery. Bulls note that hotels' steep declines in occupancy and revenue last year now are shrinking, and growth in demand for rooms should outpace waning new supply in the U.S. by the middle of 2010.
"We can comfortably say now that the bottom is behind us," said Mark Woodworth, president of research company PKF Hospitality Research LLC in Atlanta. "It's been a long, painful ride down the hill, but the [first] quarter is when we see demand start to turn around."
Ashford Hospitality Trust, a REIT that owns 102 hotels, posted the biggest advance among hotel REITs last year—a 303% gain—after hitting a low of 91 cents last March. "It's going to take time before increasing demand outpaces the new supply," said Monty Bennett, Ashford's chief executive. "We definitely should see some recovery in the latter half of this year."
Another factor boosting hotel-REIT stocks: REITs with manageable debt loads such as Host Hotels & Resorts Inc. and cash-flush new arrivals such as Pebblebrook Hotel Trust figure to snap up prime properties on the cheap this year and next
Many hotels with mortgages coming due in the coming months will face foreclosure or receivership for lack of refinancing options or because the properties will be worth less than their mortgage balances. A hefty $10.6 billion in securitized mortgages tied to hotels will come due from 2010 to 2012, according to Trepp LLC.
Less bullish observers caution that hotel occupancy and revenue won't bounce back as quickly this time as they did after previous downturns because the overall recovery is predicted to be long and slow. What's more, hotels have a long way to climb to get back to their 2007 heights; U.S. hotel occupancies in 2009 were 8.3 percentage points lower than in 2007, according to Smith Travel Research. Revenue per available room fell 18% in that span.
PKF predicts U.S. hotel occupancies will climb slowly from 55% at the end of 2009 to 57.2% by the end of 2011. It foresees revenue per available room rising by 5% in that span to $56.12.
"Hotels are not a bad place to be if you believe that over the next five years we'll continue to gain economic momentum and experience a gradual recovery," said Joe Rodriguez, portfolio manager of Invesco's AIM Real Estate Fund, which has owned shares of Host Hotels and LaSalle Hotel Properties. But, "we could see a soft patch in the short term, which would mean we might see a pullback in stocks that are [tied] to the economic recovery."
Where hotel-REIT stocks trade in relation to the REITs' estimated asset value indicates that the rally is a bit overdone. According to research company Green Street Advisors Inc., hotel REIT stocks are trading at a premium of 18% to 20% to the estimated per-share value of their assets. In contrast, most other REIT stocks are trading at premiums of about 10%.
If any segment takes longer to recover that the broader hotel market, it likely will be luxury hotels. They posted the industry's worst declines in occupancy and revenue as customers reined in their travel and spending. Additionally, the luxury segment has slightly more new supply to absorb than other classes of hotels due a wave of projects started during the boom. That is unwelcome news for hotel REITs with several luxury properties, such as Strategic Hotels & Resorts Inc., which posted a 10.7% rise in its stock in 2009 despite a 28% swoon in the fourth quarter.
"The rebound for luxury is going to take longer than in previous recoveries," Green Street analyst John Arabia said. "I think there will still be a fair amount of scrutiny placed on high-end business travel, particularly for groups."
Write to Kris Hudson at kris.hudson@wsj.com
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