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Summary of U.S. Hotel REITs / REOCs Industry Update (21 November 2017)

Core Content

This report provides an industry update on U.S. Hotel REITs and REOCs (Real Estate Operating Companies) following participation in the DB Conference and REITWorld meetings. The analysis highlights key themes, company-specific insights, and valuation perspectives for the sector, emphasizing the importance of selectivity in investment due to current valuations and the need for identifiable catalysts.

Main Viewpoints

• No Major Shift in Strategy: The overall approach of hotel REITs to capital allocation and positioning remains unchanged post-conference.
• Selective Investment Approach: With current valuations, the focus is on identifying specific catalysts and valuation disconnects.
• Favored REITs: Three REITs—HST, RHP, and PLYA—are highlighted as Buy-rated due to their strategic positioning and potential for growth.
• RevPAR Outlook: While October and November showed strong RevPAR performance, corporate demand remains weak. Leisure and group business are stable, and the real growth potential for 2018 hinges on corporate travel budget expansion, possibly due to tax reform.
• M&A Outlook: There is guarded optimism about potential M&A activity in 2018, though challenges remain with valuations and the need for accretive deals.
• Operational Improvements: Many REITs are focusing on asset management strategies, including pricing, revenue enhancements, and cost containment.

Key Information

RevPAR and Demand Drivers

• RevPAR Performance: Strong in October and November, driven by calendar shifts and favorable comparisons.
• Corporate Demand: Still weak, but could improve with tax reform or other catalysts.
• Leisure and Group Demand: Leisure remains strong, and group business is stable but not growing rapidly.
• Cancellation Policies: Positive impact on room rates, with potential for industry-wide shift to airline-like change/cancel fees.

M&A and Capital Allocation

• M&A Activity: Likely in 2018, but REITs are cautious due to valuations.
• Non-Core Assets: Can be sold at strong multiples, but re-deploying proceeds is difficult.
• Capital Stack: Some REITs, like AHT, maintain a high-leverage, floating-rate debt strategy, which may not appeal to all investors.
• Insider Ownership: AHT has the highest insider ownership (19%) among peers.

Valuation Methodology

• Preferred Valuation: EV/EBITDA is the preferred method for valuing hotel REITs due to better comparability.
• Price Targets: Based on 2018E EV/EBITDA multiples, with variations depending on company-specific factors.

Risks

• Competitive Supply Growth: Could pressure margins and occupancy.
• Expense Creep: Rising costs could impact profitability.
• Travel Industry Disruptions: Geopolitical events, macroeconomic factors, and inflationary pressures on operating expenses.
• Market Concentration: Some REITs, like CHSP and DRH, are heavily exposed to specific markets, increasing risk.
• Liquidity Concerns: AHP has limited liquidity and trading volumes, which could affect investor interest.
• Uncertainty in Guidance: Lack of formal earnings guidance increases risk for investors.
• Acquisition Challenges: Difficult to find accretive acquisitions in the current market environment.

Company-Specific Insights

Ashford Hospitality Trust (AHT)

• Valuation: 11.0x 2017E EV/EBITDA.
• Key Points: Management believes the stock is undervalued; has the highest dividend yield (7.4%); focused on asset management and value creation.
• Risks: High leverage, evolving strategy, lack of guidance, and exposure to macroeconomic and geopolitical risks.

Ashford Hospitality Prime (AHP)

• Valuation: 12.0x 2018 adjusted EBITDA forecast.
• Key Points: Focus on luxury assets and RevPAR correlation; prefers resorts; has a strong pipeline of acquisitions.
• Risks: Limited liquidity, high leverage, asset concentration, and lack of guidance.

Chesapeake Lodging Trust (CHSP)

• Valuation: 11.5x 2018E EV/EBITDA.
• Key Points: Confident in EBITDA growth; not focused on rapid portfolio shifts; limited opportunities for significant portfolio changes.
• Risks: Market concentration in San Francisco, slower ramp-up of recent acquisitions, and over-indexing to smaller hotel brands.

DiamondRock Hospitality (DRH)

• Valuation: 11.5x 2018E EV/EBITDA.
• Key Points: Focus on resorts; expects RevPAR growth in Chicago; has a good acquisition pipeline.
• Risks: Exposure to NYC, difficulty in making accretive acquisitions, and earnings volatility from new properties.

Hersha Hospitality Trust (HT)

• Valuation: 12.5x 2018E EV/EBITDA.
• Key Points: Focus on NYC and Miami; expects better RevPAR performance in 2018; has a strong insurance renewal position.
• Risks: Market concentration, earnings volatility, and lack of quarterly guidance.

Host Hotels & Resorts (HST)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Maintains a high-quality asset strategy; focused on margin improvement and cost control; has a good acquisition pipeline.
• Risks: High leverage, reliance on specific markets, and potential for earnings volatility.

Summit Hotel Properties (INN)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Emphasizes location over brand; has a strong pipeline of acquisitions; focused on cost containment and margin improvement.
• Risks: Market concentration, potential for earnings volatility, and rising insurance costs.

Park Hotels & Resorts (PK)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Unionized labor contracts provide predictable costs; focused on diversification and margin improvement.
• Risks: Market concentration, potential for earnings volatility, and competitive supply.

Playa Hotels & Resorts (PLYA)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Focused on increasing direct bookings and brand recognition; considers expansion into new markets.
• Risks: Market concentration, potential for earnings volatility, and reliance on third-party distribution.

Ryman Hospitality Properties (RHP)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Expansion at Gaylord Texan; bullish on Nashville's growth; plans for Gaylord Rockies.
• Risks: Market concentration, potential for earnings volatility, and limited acquisition opportunities.

Extended Stay America (STAY)

• Valuation: Not explicitly stated, but mentioned as a Buy-rated name.
• Key Points: Targeting asset sales and re-franchising; planning new developments; evaluating redevelopment in California.
• Risks: Market concentration, earnings volatility, and potential for lower RevPAR in certain properties.

Conclusion

The U.S. hotel REITs and REOCs sector is characterized by cautious optimism, with a focus on value creation through asset management, selective acquisitions, and improving RevPAR. While corporate demand remains weak, leisure and group segments are stable, and there is potential for growth in 2018. REITs are generally more willing to acquire assets than before, but challenges with valuations and competitive supply persist. The report highlights three Buy-rated names: HST, RHP, and PLYA, with detailed company-specific valuations and risks provided.