David Loeb, a senior research analyst and managing director of Robert W. Baird & Co. based in Milwaukee, has been tracking real estate-related companies for more than 20 years, with a special emphasis on the lodging and office sectors. Before joining Baird last year, he was a managing director in real estate research at Friedman Billings Ramsey, and has been a research analyst with Credit Lyonnais Securities, CIBC World Markets (formerly Oppenheimer & Co. Inc.) and Bank of America.

NREI recently spoke to Loeb about prospects for hotel REITs and the broader outlook for the hospitality market, which has been so robust in recent years.

NREI: Last year, the FTSE NAREIT hotel index posted a strong 28.71% increase. Can this year be anything as strong, or are the best days over for investors in hotel REITs?

Loeb: Not quite, because many investors will still benefit from strong lodging fundamentals over the next two years. But we'll also see a slowing of the growth rate over the same period, a deceleration of hospitality industry growth. Investors will be less likely to pay premium valuations in the next few years, even before there's a downturn in the industry.

In terms of the FTSE NAREIT index, it's also true that hotels have gotten a slow start out of the gate this year: 4.84% total return as of the end of February, with all of the growth occurring in January. We've actually downgraded a couple of names to neutral that we thought were already fully valuing all of the good news they're going to see over the next two years. Those two companies are Host Hotels and LaSalle Hotel Properties, two of the largest and most liquid names.

Conversely, we still see a lot of value in some of the limited-service names. Winston Hotels was in that group until the recent takeover bid for it, and that process led to full value being realized in its shares.

NREI: Why do you see value in the limited-service segment? There would seem to be fewer barriers to entry and more competition in it.

Loeb: That's true. A lot of investors have favored full-service names because of those reasons. The momentum for full-service has been superb, posting the biggest increases in RevPAR (revenue per available room) and share price, especially the luxury segment. But I think that stock prices in the luxury and upscale segments have gotten ahead of themselves. Limited service has more of an upside from here because it hasn't really participated in the recent rally.

NREI: Assess the volume of merger and acquisition activity in the hotel sector, particularly among REITs themselves.

Loeb: In the hotel space, we haven't seen a lot of public companies acquiring other public companies. We saw more of that in the 1990s, but since then there haven't been major valuation disparities among the publicly held companies, and a lot of the public companies that used to be relatively small now feel that they're big enough to go it alone.

NREI: But several REITs have gone private. Is this a new phenomenon?

Loeb: There have been such transactions for quite a while, even as long ago as the 1990s. Part of the reason is that the cost of capital is lower for the private players than the public ones. And much of this activity has been driven by The Blackstone Group, which has been like a giant vacuum sucking up all sorts of smaller hotel companies, from Extended Stay America to Windham to Ameristar and others.