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At A Crossroads?

Lodging Industry Watches Closely As Stock Market Slide Continues

Tuesday, February 06, 2018
Dennis Nessler
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The wild roller coaster ride that is the U.S. stock market continued for suddenly skittish investors this morning. The Dow dropped more than 500 points immediately after the opening bell only to recover and go more than 300 points in the black for a roughly 900 point swing. Of course, the overall news is not good as the Dow has dropped more than 2,000 points in a week, a new record that included a dip of more than 1,100 points yesterday alone.

Many theories abound on the precipitous drop and just where it goes from here, but most financial experts acknowledge it’s a overdue market correction at the very least. After all, the market has grown at a feverish pitch for the last several years reaching heights never previously thought possible breaking the 25,000 mark. It wasn’t that long ago that reaching 20,000 was a major accomplishment.

Of course, like every industry the lodging industry is paying very close attention to the movement on Wall Street and how it will impact the macro business. While industry fundamentals have been going in the wrong direction for some time—with supply growing and demand declining—overall performance and profitability has remained largely intact.

In fact, the in-vogue catch phrase bandied about at the recent ALIS Conference in Los Angeles was “supercycle” with some hoteliers suggesting that this prolonged upswing would continue for several more years. Much of that optimism has been attributed to a robust economy, which is actually humming along like it hasn’t in quite some time with unemployment way down to nearly 4 percent and wages on the increase for the first time in a long time. However, that brings with it its own red flag, as wage hikes are often a precursor to an increase in interest rates which as we know can spook investors. The Federal Reserve has already raised interest three times since last January.

Certainly, an increase in interest rates can have a profound impact on the lodging industry as asset values can be negatively affected and transactions can become far harder to execute. Nevertheless, the hospitality industry has gained favor on Wall Street in recent years. In fact, according to the Baird/STR hotel stock index, hotel stocks outperformed the S&P 500 and the MSCI/REIT for the fifth straight month in January.

But make no mistake the lodging industry public companies are certainly not immune to the kind of bloodletting that’s taken place on the market within the past week. As an example, a look at the big 3 brand companies shows varying declines. Marriott International’s stock went from $148.22 a share to $132.14 between Wednesday of last week and earlier this morning, representing a sizable drop. During the same time period Hilton Worldwide saw its stock slide from $86.80 a share to $77.90, while IHG saw slightly less volatility going from $67.56 a share to $62.30.

Meanwhile, a look at the lodging REITs—which have actually been among the biggest gainers in recent months—revealed smaller declines in general. Apple Hospitality REIT watched its per share price fall from $168.37 on Jan. 31 to $155.35 earlier today. During the same time period, RLJ Lodging experienced a smaller decline going from $23.28 a share to $21.19, while Hospitality Properties Trust went from $28.53 to $26.48. A couple more examples include Pebblebrook Hotel Trust’s stock dropping from $39.00 to $35.13, and La Salle Hotel Properties going from $30.55 to $27.55.

Some financial experts have suggested this is the beginning of a prolonged bear market, while others are convinced it’s just a bit of an overcorrection. To say the market ‘bears’ watching (pardon the pun) over the next several days is an understatement, but let’s not lose sight of the fact that at the end of the day success or failure in hospitality is determined by Main Street not necessarily Wall Street.

Dennis Nessler    Dennis Nessler
Hotel Interactive®, Inc.
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