One of the most interesting things about the U.S. stock market is how quickly sentiment can change on individual stocks or a sector in general, depending on recent news or their most recent performance. Yesterday’s winners can be today’s losers in the blink of an eye or vice versa.
That was the case this week when one analyst decided to downgrade three real estate investment trusts (REITs) from the hotel subsector. All three REITs performed well for a while in early 2023 as the hotel subsector came roaring back from large total losses in 2022.
Take a look at three hotel REITs that were downgraded this week by Compass Point Research & Trading analyst Floris van Dijkum and the share price losses that ensued.
Apple Hospitality REIT Inc. APLE is a Richmond, Virginia-based hotel REIT, formed in 2007. It has a portfolio of approximately 29,000 rooms in 220 hotels in 87 markets across 37 states. Its portfolio includes 96 Marriotts, 119 Hiltons, four Hyatts and one independent hotel. It has a market capitalization rate of $3.84 billion.
From New Year’s Day through the end of February, Apple Hospitality had a total return of 7.62%. But the stock dropped nearly 16% in March, so the year-to-date return is now negative 7.75%.
On March 22, van Dijkum downgraded Apple Hospitality from Buy to Neutral and lowered his previous $22 price target to $17, a decline of 22%. The stock dropped 5.86% on the day of the downgrade.
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Host Hotels & Resorts Inc. HST is a Bethesda, Maryland-based hotel REIT that calls itself “the world’s largest lodging REIT.” It’s an S&P 500 company that owns and operates 42,214 rooms in 78 hotels in 20 of the largest markets across the U.S. and another five hotels in Canada and Brazil. It was formed in 1993 and has a market capitalization rate of $12.63 billion.
Most Host Hotels & Resorts properties are upscale and luxury hotels in central business districts near airports. Its hotel brands are well-known and include Marriott, Hyatt and Hilton.
On March 22, Van Dijkum also downgraded Host Hotels & Resorts from Buy to Neutral and lowered the price target by 28% from $25 to $18. Host Hotels & Resorts dropped 4.86% following the downgrade.
Sunstone Hotel Investors Inc. SHO is an Aliso Viejo, California-based hotel REIT that owns and operates 15 hotels in upscale areas of Florida, California, Hawaii and three other states as well as Washington, D.C. Its portfolio includes hotels by Hilton, Hyatt, Marriott and Four Seasons.
On Feb. 22, Sunstone Hotel Investors reported fourth-quarter operating results. Funds from operations (FFO) of $0.26 beat the analyst estimates of $0.19 and was a huge increase over FFO of $0.09 in the fourth quarter of 2021. Revenue of $244.14 million was ahead of the consensus of $227.51 million and a 40.4% increase over revenue of $173.89 million in the fourth quarter of 2021.
Sunstone Hotel Investors was up an outstanding 27.87% in January but year to date is now negative 4.34%. The loss in March is over 15%.
On March 23, Van Dijkum downgraded Sunstone Hotel Investors from Neutral to Sell, dropping the prior price target 25% from $12 to $9. Sunstone Hotel dropped 5.54% throughout the day after the downgrade was announced.
So, what’s going on in the hotel industry?
After a busy holiday season, hotels and resorts are reporting slightly weaker and mixed results. The following are the metrics for the hotel industry as of March 11 (percentage change from comparable weeks in 2022, 2019):
- Occupancy: 64.7% (+2.8%, -7.5%)
- Average daily rate (ADR): $158.20 (+8.1%, +16.6%)
- Revenue per available room (RevPAR): $102.38 (+11.1%, +7.8%)
Occupancy rates are still not back to pre-COVID-19 levels, but inflation has forced hotels to charge higher rates. That has made the ADR and RevPAR numbers look good, but with higher costs, the hotels are not necessarily faring better.
While fourth-quarter earnings were pretty good for many hotel REITs, forward guidance has been weaker, with companies acknowledging pressures that are coming from increased overall expenses and problems with renovations. Because Wall Street looks ahead, weaker guidance is not what investors want to hear.
Concerns about the hotel industry are like those of other REIT subsectors — that higher inflation will temper the travel plans of many businesses and families, that borrowing money for new hotel investments will be more difficult and that maintenance, salaries and construction costs are all elevated from pre-pandemic levels.
Investors can look for more downgrades in the hotel REITs to come over the next few weeks.
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