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ONE BIG THING

Hotel REITs On the Decline Since Hurricane Milton: Did Wall Street Get It Wrong?

What: Hurricane Milton struck Florida between October 9-10, causing hundreds of thousands to flee their homes and drive north for safer lodging. The Georgia Department of Transportation reported a 280% spike in northbound traffic ahead of Milton’s landfall.

Where: Every hotel around metro Atlanta and southern Georgia sold out fast with Florida evacuees. The same was true for Jacksonville, FL which was spared most of the hurricane’s wrath, and Orlando, which got heavy wind and rain but not the severe destruction of other Florida cities further south. Even in Tampa, hotels were still full of displaced homeowners since Hurricane Helene hit Florida two weeks earlier.

Those fleeing Milton also drove northwest into Dothan, Alabama for safe hotel lodging. However, many motorists learned that hotels across the Southeast were already filled with travelers from Florida who dared not return home because of the impending storm. Some found refuge in RV parks and others slept in their cars.

Why: Strangely, with all this increased business, hotel REITs have hardly budged this week and several have even traded lower since the storms hit. Wall Street must be wary of major hotel damage which will impact earnings. However, there have been no reports of any damage to hotels. Au contraire, Wall Street, when fourth-quarter earnings come out in January, hotel brands such as Hilton, Hyatt, Holiday Inn, Marriot and Wyndham will report huge spikes in occupancy and RevPAR (revenue per available room) for Q4. These are all brands owned by REITs.

Takeaway: Hotel REITs such as Apple Hospitality REIT Inc (NYSE: APLE), Park Hotels and Resorts Inc (NYSE: PK), and Diamondrock Hospitality Co (NYSE: DRH) stand to prosper in Q4 by the various evacuations from several hurricanes this fall. Apple Hospitality has the largest Southern portfolio with 27 hotels between Georgia and Florida and a few more in Dothan.

Furthermore, aside from the temporary high occupancy from the evacuees, where will thousands of people stay while their severely damaged homes are being repaired? Of course, some may stay with family or friends, but not everyone has that opportunity. And what about the thousands of people from Hurricane Helene in the Carolinas, Georgia and Tennessee who were left homeless? All of these residents could be living in hotels for some time.

Therefore, you can expect a strong fourth-quarter report from several hotel REITs. True, the Q3 earnings aren’t even out yet and maybe Wall Street isn’t excited about those earnings, and Park Hotels’ operating profit has lost share price because of a hotel workers’ strike. But looking ahead, investors take note- Florida’s terrible misfortune could become the Hotel REITs’ Q4 good fortune.

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WHAT WALL ST. SAID ABOUT REITS THIS WEEK

SBA Communications Corp (Nasdaq: SBAC): It was a good week for the Boca Raton, FL-based specialty wireless communications REIT with three analyst price target hikes. On October 10, Barclays analyst Tim Long maintained SBA Communications with an Overweight rating and raised the price target from $236 to $256. That same day, Wells Fargo analyst Eric Luebchow maintained an Equal-Weight position on SBA Communications and raised the price target from $220 to $240.

But wait, there’s more - On October 14, Keybanc analyst Brandon Nispel maintained SBAC at Overweight and raised the price target a whopping 21.7% from $230 to $280. After a few weeks of declining share price, SBAC bounced up 2.70% on Monday to finish at $239.82.

Essential Properties Realty Trust Inc (NYSE: EPRT) was another REIT to receive attention this week from more than one analyst. On October 16, Michael Goldsmith of UBS maintained EPRT with a Buy rating and raised the price target from $36 to $39

On October 11, Scotiabank analyst Greg McGinniss maintained Essential Properties at Sector Perform and raised the target price from $30 to $32. McGinniss notes that lower interest rates are already priced into the present valuation, but Scotiabank remains constructive on the overall REIT sector.

Easterly Government Properties Inc (NYSE: DEA) also had a good week. On October 14, Jefferies analyst Peter Abramowitz upgraded Easterly Government Properties from Buy to Hold and increased the price target from $13 to $15.

Abramowitz said the Washington, DC-based REIT that leases Government offices should see an easing cost of capital constraints and a reduction of external growth headwinds. Abramowitz noted the over 20% discount of the historical average Price/FFO is attractive from a risk/reward standpoint.

On October 15, Easterly announced it acquired a 104,136-square-foot facility in Aurora, Co. The facility is adjacent to the Buckley Space Force Base and is occupied by Northrop Grumman Systems Corporation. The facility already had a triple-net lease with annual rent escalations. 

American Tower Corp (NYSE: AMT) Conversely, on October 10, Wells Fargo analyst Eric Luebchow downgraded American Tower Corp from Overweight to Equal-Weight and reduced the price target from $245 to $230.

Analyst Luebchow noted a likely slow leasing environment in 2025 and little AFFO growth until 2026. American Tower trades at a 3x-5x premium to its sub-sector peers on an EBITDA-to-FFO ratio.

FIVE ZINGERS:

Goldman Sachs: Hurricane Milton Could Cost Florida’s Homebuilders up to $2.5 Billion, with PulteGroup, Inc. (NYSE: PHM), Lennar Corp Class A (NYSE: LEN) and DR Horton Inc (NYSE: DHI) at severe risk of loss. Yet, share prices are holding steady this week.

WP Carey Inc (NYSE: WPC) sold off its 87 office holdings 11 months ago to improve its bottom line, but analysts still feel indifferent about it. Maybe that’s what happens when you cut the dividend two weeks after announcing a dividend raise!

Option action heating up: Twice as many calls to puts are coming in on Medical Properties Trust Inc (NYSE: MPW) this week. Q4 earnings come out October 23. Are investors anticipating a bust-out quarter?

Mortgage Rates Climbing: Well, that wasn’t supposed to happen. Didn’t the popular media say rates would drop after the Fed cut? The 30-year fixed has climbed from 6.12% to 6.52% in two weeks and total mortgage demand fell by 17% this week and 5% the week before. Silly Rabbit, it’s the 10-year Treasury that dictates mortgage rates.

First and Foremost: As usual, Prologis Inc (NYSE: PLD) was the first REIT to declare third-quarter earnings this week and Mr. Market was quite happy with the results as PLD rose 3.75% on Wednesday. Although Prologis’ revenue of $1.90 billion missed the street estimate of $1.95 billion, it reported FFO of $1.43 per share, topping the street consensus of $1.37. Prologis also upped its full-year 2024 core FFO guidance from $5.39-$5.47 to $5.42-$5.46, ahead of the $5.42 consensus.