Sharing economy contributes to REITs’ lackluster results

So far, 2016 has been a seemingly downward spiral for the hotel real estate investment trust sector. When LaSalle Hotel Properties’ stock prices dropped more than 11 percent in January after the company’s third down revision of metrics and announcement that forward-looking statements would not be provided for 2016, investment banking firm Ladenburg Thalmann downgraded its rating on the hotel REIT sector to “sell.”

Since then, Bank of America/Merrill Lynch cut RLJ Lodging Trust’s stock rating to “underperform” from “buy” and that of Hersha Hospitality Trust to “neutral” from “buy,” noting that “for some time all demand indicators are at peak while hotel supply is rising, Internet pricing is dragging on rates and alternative accommodations—including Airbnb—are a threat.”

Perhaps more poignantly, the SNL U.S. REIT Hotel Index is down 28 percent since reaching its peak on Jan. 26, 2015.

Balanced Perspective

Nevertheless, the sector maintains a core of stalwarts, said Paul Breslin, managing director at Horwath HTL. “If you look at the fundamentals of hotel REITs themselves, they’re excellent investments, particularly Host Hotels, Ashford Hospitality Trust and Sunstone Hotel Investors,” he said, adding that revenue-per-available-room growth is an inaccurate indication of a given hotel stock’s growth or contraction because it does not account for market cap value.

But he also acknowledged that several lodging REITs haven’t fared well this year and partly attributes that to the end of a strong run and the start of a renovation cycle that “is costly and doesn’t show well on [profit-and-loss] and balance sheets” while also noting the sharing economy’s impact on hotel business. “There are headwinds in major markets like New York, Los Angeles, Chicago and Miami where the shared-economy model is causing stress on compression,” he said.

Wall Street’s Take

Daniel Donlan, managing director, equity research, at Ladenburg Thalmann also attested that Uber and Lyft are too, in part, responsible for declining RevPAR in major metro hotels. “Uber and Lyft have changed the way consumers look at hotels. It used to be that if you stayed in the suburbs, you’d have to rent a car or take a taxi to your meeting and now in most big cities, you can book a hotel outside of the city for significantly less money and know that Uber will be there to take you to your meeting, and you don’t have to deal with the hassle of a rental car or taxi arriving on time. It has essentially expanded the urban core for hotels,” he said.

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The sharing economy aside, RevPAR growth—or lack thereof—is a metric by which Donlan gauges the current state of the sector. “There aren’t many public securities that I can think of that are not driven by revenue growth,” he said, pointing out that RevPAR growth has decelerated for six consecutive quarters with the current quarter expected to make for seven consecutive quarters. In addition, with lower-price-point hotels having outperformed higher-price-point hotels for several quarters now, we see this is a classic sign of a lodging recovery nearing an end,” Donlan said.

A Mixed Bag

It remains to be seen if RevPAR deceleration and slumping hotel REIT performance is truly indicative of the culmination of the lodging recovery. Bryan Younge, managing director and national practice leader, hospitality and leader group, at global real estate firm Colliers International, said that “as RevPAR deceleration continues, we’re looking at a period of negative growth that hasn’t been seen for a number of years, but opinions differ as to why with some seeing this year as a year of positive growth and others as the start of a slide.”

Like BofA/Merrill Lynch, Breslin and Donlan, Younge also conceded that Airbnb is a disruptor to its competitors in the hotel space. However, he voiced concerns over the extent to which the home-sharing business is actually eroding hotel nights. “I think it’s a coincidence that there’s deceleration in the hotel industry at the same time that Airbnb is proliferating,” he said.

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While Younge recognizes that RevPAR deceleration has been most evident in urban markets with strong occupancies, citywide conventions and ultimately, compression issues, he asserted that Airbnb has had less of an impact than previously expected. “Airbnb may be somewhat of a factor, but it’s certainly not impacting suburban assets, nor upper-upscale properties in urban markets, the way it is with lower-rated properties in the downtown core,” he said.