Are Hotel REITs Overpriced?

Are Hotel REITs Overpriced?

Hotels have struggled throughout the COVID-19 pandemic. With business travel still being significantly reduced, supply is outstripping demand. This has created a lingering weakness in the Hotel & Hospitality industry. Are Hotel REITs overpriced for the profit they can offer?

The Hotel Industry Had Great Metrics and Market Conditions in Early 2020

One metric that captures the strength of the Hotel industry at any given moment is RevPAR (revenue per available room). This figure was at all-time highs when 2020 began. Under these conditions, hotel stocks and hotel REITs were priced bullishly.

The COVID-19 Pandemic Hit the Hotel Industry Hard

In March 2020, the COVID-19 pandemic began to take hold. One of the landmark cultural moments that signaled the seriousness of the pandemic was the cancellation of the NBA season. With it, came all the travel and hotel accommodations that NBA teams would need throughout the rest of the season. The pandemic soon spread throughout the entire economy, having devastating effects on hotel traffic.

REIT Indexes Seem to Be Recovering, But There are Technical Divergences That are Cause for Concern

The MSCI US REIT Index plummeted from $1,345.33 in the week of February 24th, 2020 to $790.88 by the end of the week starting March 16th. By April 23, 2021, the REIT index had recovered to $1305.18. There are technical signs, however, that the recovery is not to be trusted. There are significant divergences on both the MACD indicator and the Relative Strength Index (RSI). This means that despite being almost at the same price level as before, it is not really on the same level from a statistical perspective.

Hotel REIT analysis

REIT Fundamentals Also Suggest an Overvalued Sector

It is also obvious from a fundamental perspective that Hotel REITs are overpriced. These price levels would only make sense if revenues were recovering. That is not the case, however. In fact, it appears that travel patterns may change forever—having serious long-term consequences for the hospitality industry. For example, Prologix is the largest component of the MSCI US REIT, and its PE ratio rose from 32.67 in March 2020 to 57.15 in April 2021. Similarly, Equinix also exhibited the same kind of increase, from 104.27 in March 2020 to 171.80 in April 2021. These multiples were justified in the great market conditions that existed before the pandemic. But now that the landscape has changed the fundamentals, they are no longer justified.

Conclusion

Hotel REITs opened 2020 in a great position to continue their growth. But in March 2020, that all changed with the COVID-19 pandemic. It dramatically changed the landscape of the travel and hotel industry, perhaps permanently. In April 2021, the REIT industry is demonstrating prices that suggest the sector is recovering. However, if you look at the weekly charts of REIT indexes like the MSCI US REIT Index, you will see divergences that would give pause to any technical trader. Furthermore, the fundamentals simply do not support the price levels that were seen before the pandemic.