Baird analyst Loeb on evolving sentiments at NAREIT

In his recap of the mid-November NAREIT conference, R.W. Baird analyst David Loeb suggested there was much uncertainty among the hotel REIT leadership teams in attendance, but that management teams remained cautiously optimistic about the year ahead.

“We expect to be in a wait-and-see environment until at least year-end as urban gateway markets continue to underperform, which is preventing sentiment from improving; the investment community is closely monitoring weekly/monthly STR data and waiting for signs of improvement and/or stabilization,” Loeb wrote in his report.

The discrepancy between public and private market valuations remains wide, Loeb said, which could lead to increased M&A activity.

Wait-and-see environment

Loeb reported that investors’ focus is squarely on the less-than-stellar near-term RevPAR growth trends, particularly in urban gateway markets, which is preventing sentiment from improving. “Growth expectations have appeared to moderate a bit,” he said. “Management teams have taken a more conservative stance on growth expectations in both 4Q15 and 2016, particularly those with outsized exposures to the San Francisco CBD after October trends were not as strong as expected.”

While management teams said forecasting transient demand remains a challenge in high-occupancy urban markets, stronger group trends are expected across the board in 2016 (except Chicago and Seattle), which should create additional compression and less reliance on the more volatile and price sensitive transient customer.

Allocation strategies

While some REIT leaders are waiting for more clarity/stability, others are continuing share repurchases with disposition proceeds. “Management teams continue to acknowledge the large discrepancy between public and private market valuations, but differing views exist about how to close this wide gap,” Loeb said.

Loeb added that some companies expect to remain active on the share repurchase front while targeting additional dispositions to further refine their portfolios and fund their planned buyback activity. However, other companies appear to be remaining patient on the share repurchase front as they are wary of increasing leverage at this point in the cycle.

M&A seen as a potential catalyst

For the first time this cycle, Loeb said a divergence between management teams’ views of the remaining duration and trajectory of the upcycle in the U.S. is emerging, which could result in increased M&A activity over the next year.

“Also, we sense management teams are becoming increasingly frustrated with their discounted stock prices despite still-positive fundamentals and operating results within their portfolios, which also could be trigger for more companies to explore strategic alternatives in the near-to-intermediate term,” Loeb concluded.