Hotels

Ho-Ho-Hotels: Prepare the sled, who cares about the Fed

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The hospitality industry has always fascinated me and maybe it’s because I watched my grandfather get rich developing motels in Myrtle Beach, SC.

When I was a kid, I remember playing at the T&C Court, a motel that had the very first color televisions in Myrtle Beach.

The amenities were incredibly basic: swimming pool, air conditioning, outdoor trampoline and of course, color television.

I guess that’s where the term “limited service” was coined.

Anyway, later in life, becoming a real estate developer, I never wanted to own motels or hotels. I preferred to own simple net leasehold properties that required no operation in which tenants paid taxes, insurance and maintenance.

I ventured outside of net lease security to build malls for chains like Walmart (WMT) and PetSmart, but again the leases were 5-10 years and required no cleaning, cooking, marketing or customer service.

Later in life, my former business partner had the urge to build a full service hotel and that was the end of the alliance. I had no desire to participate in this high-risk development, which, through no fault of my own, led me to a number of sleepless nights.

I’ll save that for another day (my lessons learned book), but rest assured, I’ve seen my share of losses in the hospitality industry.

It’s an entirely different animal to most other real estate sectors, and of course the biggest difference is that tenants leave every morning and prices can be adjusted higher during the day if demand allows.

In a recent article I explained that as a child I remember living with high inflation in the 70’s. I remember visiting my dad in Myrtle Beach but I was too young to understand the price of gasoline.

Also, in the early 70’s, Myrtle Beach was booming and my grandfather was smart enough to acquire some great real estate along the King’s Highway.

As I pointed out in my 2022 REIT Roadmap, “the hospitality sector is the best positioned sector during periods of sustained rise or rise in inflation” because room rates can be adjusted in real time .

I added that “the key issue for 2022 will be the timing of the recovery in business travel demand. This recovery should drive both large group demand and transient business demand.”

The hospitality industry’s EBITDA growth in 2022 will depend on the magnitude of the “pent-up demand” factor for business travel, but high inflation is expected to be a strong positive for hotel revenue. ‘industry. As I pointed out,

“Fundamentally, any growth in earnings before interest, taxes, depreciation and amortization (EBITDA) that this sub-sector can achieve over the next 12 months will very much depend on the willingness of companies to return to their typical convention and absence schedules. from the office. getaways. »

A few days ago, we provided iREIT on Alpha Members with an in-depth analysis of all of the hosting REITs in our coverage spectrum. As noted below, hotel REIT valuations are very attractive at the moment, and while I’m still somewhat skeptical of the heavy operational attributes, I can’t ignore their overall cheapness.

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Of course, as iREIT on Alpha members know, we’re starting to dip a few toes into the hospitality industry, including a call we made in early January 2022 with Braemar Hotels & Resorts (BHR) – see our NAV article – which by the way is the best performing hosting REIT in 2022:

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In fact, we have added BHR stocks to our Small Cap portfolio and the stock has returned over 19% year-to-date, compared to -8.6% for the Vanguard Real Estate ETF (VNQ).

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Now that we have the first quarter in the rearview mirror, I decided to provide a list of my top 3 hosting REITs (the full list can be found on iREIT on Alpha).

Choose #1: Braemar Hotels & Resorts (BHR)

BHR invests in high-RevPAR luxury resorts and high-end city hotels. The company now owns 15 properties after completing the acquisition of The Dorado Beach, Ritz-Carlton Reserve in Puerto Rico. This new property offers a unique and ultra-luxurious beachfront resort and community that saw a 66% occupancy rate in Q4-22.

The company took advantage of historically low interest rates to refinance its Park Hyatt Beaver Creek Resort & Spa for an attractive two-year term (with three one-year extension options), an interest-only floating SOFR plus a rate interest rate of 2.86%.

Highlighting the portfolio’s post-pandemic recovery, the company announced the restoration of common stock dividend payments. BHR will pay $0.01 per share beginning Q1-22. The company stressed that it will continue to analyze and adjust its dividend policy as financials continue to improve.

BHR’s portfolio benefited from pent-up demand for leisure travel. The company’s resort destinations drove Q4-22 portfolio RevPAR to beat pre-pandemic Q4-19 comparable portfolio RevPAR by 6.3%. While BHR’s city hotels lagged their peers in terms of occupancy and RevPAR, I believe BHR’s balanced portfolio presents a massive growth opportunity as business travel recovers from the pandemic.

These trends support our buy rating at the current price of $5.86 and we expect RevPAR and ADR to continue to rise in the company’s luxury properties. Although stocks have risen (since our purchase), we are still buying.

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Choose #2: Xenia Hotels & Resorts (XHR)

XHR is an Orlando-based REIT focused on the top 25 lodging markets in the United States. The company owns 32 luxury and upscale hotels affiliated with Marriott, Kimpton, Hyatt, Aston, Fairmont and Loews.

In November 2021, the company completed the sale of Marriott Charleston in West Virginia for $5 million. Later, in January 2022, the company sold the Hotel Monaco Chicago for $36 million. These sales further strengthen the company’s balance sheet and allow XHR to emerge from difficult markets. Both places face long and difficult paths to reach the previous peaks.

XHR announced in early March 2022 that it had reached an agreement to acquire the newly opened W Nashville for $328.7 million. This all-cash investment adds a high-growth, top-25 market location to its portfolio. The asset is expected to produce EBITDA of $25-30 million once stabilized. With W Nashville, the company believes it can take advantage of a rapidly growing market and add value through its close relationship with operator Marriott.

While XHR reported a net loss of $22.9 million in Q4-21, the company saw many positive signs of recovery across the portfolio. The comparable portfolio generated an EBITDA margin of 27.2% in Q4-21, fueled by 31 properties posting positive EBITDA for the year. Compared to pre-pandemic measurements, 25 properties had ADR exceeding T4-19 levels.

As Covid-19 cases and hospitalizations continue to decline at the start of 2022, the top 25 lodging markets are poised for strong growth. I believe the location and quality of XHR’s properties will allow the company to take advantage of pent-up leisure demand and resume business travel. With cash of approximately $950 million, XHR can continue to make strategic acquisitions to maximize its growth. The shares are currently trading at $18.93 and we maintain a BUY.

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Pick #3: Pebblebrook Hotel (PEB)

Pebblebrook Hotel Trust invests in and acquires high-end, full-service hotel and resort properties. The company’s 55 properties across 15 states are uniquely diverse in urban hub city markets.

PEB has remained very active in its investments throughout the pandemic. The company made over $270 million in sales in 2021, including Sir Francis Drake, Roger New York and Villa Florence San Francisco.

Using this proceeds and additional capital, PEB completed four acquisitions totaling $492 million in 2021. These additions added high-quality, leisure-oriented resorts to the company’s portfolio. I’m a fan of actively managing Pebblebrook to better position itself to capitalize on pent-up leisure demand coming out of the pandemic. I think PEB will be rewarded in the years to come for this aggressive approach to navigating Covid-19 in 2021.

The company shows no signs of slowing down on the acquisition front. PEB raised over $740 million in capital in 2021 and currently has $92 million in cash and nothing drawn on its $650 million credit facility.

I like management’s focus on effective cost reduction throughout the pandemic. The investment in cross-training and technology has allowed the company to eliminate approximately 100 to 200 basis points of expenses. I believe this effort will allow PEB to continue to see strong margins during this period of inflation. The shares are trading at $23.98 and we support a BUY.

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Pack the sled, who cares about the Fed

Accommodation is one of the best property categories to invest in when rates rise.

Indeed, as a general rule, REITs with shorter leases offer better protection against inflation than those with longer leases. Accommodation REITs have the shortest leases because hotel room rates fluctuate daily.

While they can adjust prices to absorb higher costs, pricing power is also a function of supply and demand. Historically, accommodation REITs have not performed well during recessions, and you generally want to own these REITs when the recession ends as travel and business pick up.

For now, we are diving into the sector, albeit cautiously, acknowledging that valuations remain attractive and travel is picking up. Keep in mind. We are underweight the sector, allocating capital only to our higher risk portfolio strategies.

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Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right in his predictions or recommendations. Since this also applies to its grammar, please excuse any typos you may find. Additionally, this article is free: written and distributed solely to aid research while providing a forum for second-level thinking.