Hotel REITs Are On Fire — Will The Heat Continue?

When it comes to choosing stocks that will outperform over the short or long term, investors can compare the relative strength of an individual stock or sector to other stocks or the benchmark index to assess the likelihood of ongoing good performance.

When institutions buy stocks, they can only do small amounts at a time so as not to increase the prices paid. So when you see strong performance in a stock or sector, it’s likely to continue for a while, as the institutions continue to purchase more shares on a daily basis.

Most of 2022 was a bad year for real estate investment trusts (REITs), and the hotel REIT subsector in particular, as inflation, Federal Reserve rate hikes, hurricanes, airline delays and the threat of recession all provided headwinds. Several of these REITs, like Pebblebrook Hotel Trust PEB and Ashford Hospitality Trust Inc. AHT, lost 40% to 50% of their values. Only a small number, like Apple Hospitality REIT Inc. APLE, finished the year with a higher total return, and that was only by 0.79%.

But around the middle of December, things began to change. While still not great, new inflation data was improving, and Wall Street entertained the possibility that the Fed would begin to taper its interest rate hikes in 2023.

Suddenly, hotel REITs looked inexpensive, and the Street pounced on them. Over the past four weeks, 5 of the top 15 overall REITs were in the hotel subsector. That momentum has picked up even more over the past five trading days, as 8 of the top 20 REITs have been hotel REITs. Keep in mind that there are 13 different REIT sectors, so for one subsector to have 40% of the top 20 is an accomplishment.

The best-performing hotel REIT this past week, with a gain of 6.43%, was Pebblebrook Hotel Trust, which had one of the worst performances of 2022. Pebblebrook Hotel Trust is a Bethesda, Maryland-based hotel REIT that invests in upscale, full-service hotels and resort areas in or near large urban areas of the U.S.

On Jan. 20, Pebblebrook Hotel Trust provided preliminary fourth-quarter and full-year 2022 results:

The adjusted funds from operations (FFO) per diluted share for the fourth quarter ranged from $0.19 to $0.20, a marked increase from its prior fourth-quarter outlook of $0.13 to $0.16. Same-property revenue per available room (RevPAR) was set at $174 after the prior outlook was in a range from $173 to $175. Same-property earnings before interest, taxes, depreciation and amortization were added back (EBITDA) was lifted to $63.20 to $65.20, from a prior range of $61 to $65.

Another top performer that gained 6.26% over five days was Braemar Hotels & Resorts BHR. The Dallas-based hotel REIT raised its quarterly dividend payment in December from $0.01 to $0.05. Then on Jan. 6, Braemar Hotels & Resorts announced that it expects to report RevPar of approximately $301 for the fourth quarter of 2022, an increase of 8% over the fourth quarter of 2021. Braemar Hotels & Resorts also had the second-largest four-week gain among hotel REITs, climbing 25.99%.

Xenia Hotels & Resorts Inc. XHR had the third-highest gain over the last five days. The Orlando, Florida-based hotel REIT recently announced it had obtained a new $675 million senior unsecured credit facility that includes a $450 million revolving line of credit, a $125 million term loan and $100 million in a delayed draw term loan.

In November, Xenia Hotels & Resorts announced its board of directors was authorizing a $0.10-per-share cash dividend for the fourth quarter of 2022. Its dividend had been suspended during the COVID-19 pandemic in 2020 but was reinstated in the third quarter of 2022 at $0.10 per share.

Xenia Hotels & Resorts also announced it would be repurchasing up to an additional $100 million of stock throughout 2023.

The fourth-best gainer over the recent five-day period was Ashford Hospitality Trust, up 4.46%. But the Dallas-based REIT was also the best-performing hotel REIT over the past four weeks with an outstanding 33.85% gain.

On Jan. 6, Ashford Hospitality Trust reported that it expects its fourth-quarter RevPar of $118 to exceed its fourth-quarter 2021 RevPar by 25%. Ashford Hospitality Trust anticipates it will release its fourth-quarter operating results on Feb. 21. With the vastly improved RevPar and recent runup in price, it would appear that Ashford Hospitality Trust may report a very good quarter. 

The chart below shows the performance for all 16 of the hotel REITs for the last five days and four weeks. The hotel REITs are on fire right now, with 14 of 16 showing extremely positive performances over the last five trading days, with gains ranging from 1.52% to 6.43%. And stretching out over the past four weeks, 15 of 16 have been blistering hot with gains ranging from 5.06% to 33.85%. 

On the technical analysis side, an investor might think that the hotel REITs are extremely overbought after these recent rallies. But the 14 period relative strength index (RSI) for Pebblebrook Hotel Trust is still only 58.97 and just 60.17 for Xenia Hotels & Resorts Inc XHR, both still within the neutral range.

Investors want to know whether there’s more gas in the tank for these hotel REITs. Given the severe trouncing endured in 2022 and the recent relative strength versus the entire universe of REITs, it’s likely that these recent rallies could continue over the next few months as institutions continue to load up on shares.

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