NEW YORK CITY—With the exception of North America’s largest city, hotel supply growth across the US is trending below long-term averages. That’s just one factor in the bullish predictions for lodging REITs by two analysts headquartered here, Cowen & Co. and MLV & Co.
“We believe that investors should overweight the hotel REIT sector, and we reiterate our Outperform ratings on Host Hotels, LaSalle Hotels and Pebblebrook,” write Cowen analysts James Sullivan and William Kuo in a report issued this week. “Overall low levels of new room supply growth combined with healthy demand growth are resulting in the highest gains in asset level cash flow of any REIT sector.”
The Cowen analysts’ overall premise is that hotel room demand is likely to continue growing faster than supply growth, especially in the major gateway coastal markets. This, they write, should set the stage for “an extended period of pricing flexibility and enhanced growth” producing “incomparable hotel EBITDA,” driven by RevPAR growth averaging 6.7% in 2014 and 5.0% in 2015 for the REITs Cowen covers.
“Absent the impact of acquisitions or dispositions, that would produce growth in comparable hotel EBITDA of between 7% and 9% next year,” they write. That compares to same-store NOI growth of 3% for the rest of the REIT sector. Additionally, Cowen expects growth in per-share funds from operations of 15% this year and 10% next year for hotel REITs, versus only 4% and 6%, respectively, for our Cowen’s non-hotel REIT coverage.
Thanks in large measure to robust growth in demand from overseas, “growth in demand for hotel rooms in the current cycle is running ahead of long-term averages relative to GDP growth,” according to Sullivan and Kuo. By contrast, supply growth has grown just 0.8% year to date, with the exception of New York where the figure is 5.3%.
At MLV, analysts Ryan Meliker and Michael B. Kodesch took a similarly positive stance in a report issued just before the second quarter closed. “With 2Q RevPAR tracking materially above guidance and our prior estimates, we are raising our 2Q estimates, virtually across the board.” Further, Meliker and Kodesch predict that RevPAR will continue to exceed current expectations through next year.
“We believe the stocks to own heading into 2Q earnings are those where not only will the company beat expectations, but management will raise guidance in excess of the 2Q beat,” the MLV analysts write. “We think the entire group will move higher as the cycle progresses, but at this juncture we favor stocks with the most significant internal growth”—including DiamondRock Hospitality Co., Host Hotels & Resorts, Strategic Hotels & Resorts and RLJ Lodging Trust—“and those that trade at material valuation discounts,” including Summit Hotel Properties, Hersha Hospitality Trust and Ashford Hospitality Trust.