Casinos & Hotels

Why Lodging REITs Are Back in Style

With the Trump rally slowing somewhat, investors are looking for more opportunities providing a solid return as we head into 2017. One key analyst has tapped lodging real estate investment trust (REIT) stocks as a viable option going forward. This firm believes these hotels are attractive in the later stages of the lodging cycle, given their high margins, consistent cash flows and potential for revenue per available room outperformance.

Janney Capital specifically prefers lodging REIT stocks with exposure to select-service hotels, including Summit Hotel Properties Inc. (NYSE: INN), RLJ Lodging Trust (NYSE: RLJ) and Hospitality Properties Trust (NASDAQ: HPT). Overall the firm thinks acquiring select-service hotels can be more attractive than higher chain scale properties. Janney has increased its fair value estimates and multiples for the sector given improvements to sentiment.

Keep in mind that prior to becoming president-elect, Trump was a hotel mogul. The underlying sentiment of this call is that with this background, Trump will have a positive impact on this industry.

In the report, Janney detailed:

The U.S. election has served to be a significant catalyst for the lodging REIT space with the sector up 20% on average since the 11/8/16 close. The outperformance is primarily driven by the expectation that the new administration will contribute to an acceleration of economic growth. Improved business sentiment could also contribute to more corporate travel. We believe many investors were also previously underweight the sector.

Specifically, the firm has chosen to look at the select-service assets at this point in the lodging cycle due to their strong cash flow characteristics and high margins. These properties typically have fewer rooms and amenities than large full-service hotels, which contributes to a lower fixed cost base. Janney estimates the margin gap between a select-service hotel and others could be upward of 500 basis points.

Looking ahead, the firm thinks it is possible that technology drives more demand to select-service hotels at the expense of the full-service properties. Janney believes the additional amenities could be less appealing now that people are familiar with services like Grubhub to order food, Uber to travel outside the hotel and TripAdvisor or Yelp to source nearby attractions or buy tickets.

Shares of Summit Hotel Properties were last seen at $15.85, a gain of 2.5%, with a consensus analyst price target of $14.94 and a 52-week trading range of $9.00 to $15.86.

RLJ Lodging Trust shares were recently trading up fractionally at $24.56, with a consensus price target of $21.63 and a 52-week range of $16.15 to $25.10.

Hospitality Properties Trust was trading up about 1% at $30.84. The consensus price target is $30.80, and the 52-week range is $26.06 to $31.05.