Most Lodging REITs got hammered during the Great Recession but since that time the hotel sector has had a terrific run. During the most recent quarter, most hotel companies exceeded their earnings expectations, yet the market is beginning to fear growth as evidenced by weakness in share price performance.

Photo Source: Host Hotel Investor Presentation.

Year-to-date the Lodging sector returned -7.6% vs. the SNL REIT index of -.6% and much of the weakness is attributed to concerns over the US Dollar and its impact on tourism from international travelers to the U.S. Overall, it seems that Mr. Market is gasping for a breathe as the Lodging sector had an extraordinary run in 2014  with total returns of around 32.5% (source: NAREIT).

We are entering the sixth year of this recovery. Historically, one would expect more downside risk than upside from this point. However, it’s unique to have as little supply growth as we have right now, running slightly over 1% of stock. The long term average is just below 2% and it may take a couple of years to get to that run rate.

The recovery today is different from the others in that REITs have had ample time to retool their balance sheets and prepare for rising rates. As a result, most REITs are well-capitalized and better positioned for the impact to earnings in the near future. In fact, during the recovery there has been a surge in new Lodging REITs driven by the steady flow of debt and equity capital. Several REITs formed since 2009 include Chatham Lodging (CLDT), Pebblebrook Lodging (PEB), Hersha Hotels & Resorts (HT), Chesapeake Lodging (CHSP), and more recent, Xenia Hotels (XHR).

Continue reading this article here.