Hotel stocks are improving, but risks remain

Real estate investment trusts are behind many hotels and resorts. Host Hotels & Resorts Inc. And companies like Apple Hospitality REIT Inc. own hotel properties and earn revenue from renting rooms and selling food and drink. In return, REITs pay management fees to operators such as Marriott International Inc. to run the properties.

Hotel REITs are among the riskier real-estate bets because rooms change every day and travel is particularly vulnerable to economic swings. They were among the hardest hit when the pandemic started. New figures show that things are getting better. According to the National Association of Real Estate Investment Trusts, in the second quarter, cumulative wealth from the operations of hotel REITs—a widely used earnings metric in commercial real estate—turned positive for the first time since the beginning of last year.

Higher revenue helped Apple Hospitality and Pebblebrook Hotel Trust post their first quarterly net profits from late 2019 and early 2020, respectively, while Host and another large hotel REIT, Raman Hospitality Properties Inc., both declined significantly.

“It’s a really encouraging development, given that business travel costs a lot less than leisure travel,” said Calvin Schnure, a senior economist at the association. “You have a lot of potential in that area,” he said.

The results were a marked change from last year, when occupancy rates at many hotels fell into the single digits. Some REITs temporarily close properties altogether, realizing that it was better to let them sit empty than to pay to operate them. Many of those already closed properties have been reopened.

Overall, hotel-per-room revenue has more than doubled since January, according to hotel-data firm STR. STR says that the average occupancy at the beginning of this month was around 64%, which is down by about 9% from the same period of 2019. But the recovery has been uneven as some of the larger markets, notably San Francisco and Washington, DC, have struggled to fill room.

Investors are pricing in a slow recovery. After hotel REIT stocks jumped during the broader Covid-19 recovery rally earlier this year, many have fallen sharply as concerns over the variants have mounted back.

For example, the stocks of Pebblebrook and Park Hotels & Resorts Inc., which spun out of Hilton a few years ago, are down more than 10% since late April. The broader MSCI US REIT Index is up nearly 10% over the same period, outperforming the S&P 500.

According to real-estate research firm Green Street, the decline in their stock prices has caused hotel REITs to appear cheaper on a historical basis relative to other property sectors, with projected risk-adjusted annual returns for hotel REITs at around 6.5 compared to 5.5%. % Is. for other areas.

“I think hotels are some of the more attractive options,” said Morningstar analyst Kevin Brown. Before the pandemic began, stocks of many large hotel companies were up about 10% or more at the end of 2019.

Recovery depends on two important sources of uncertainty: the delta variance and the return of business travel. Analysts said that relative to the travel industry at large, many hotels are skewed to the higher end of the REIT market, which relies more heavily on corporate travel and events to fill its rooms.

The Delta version has already prompted some large companies to push back their return-to-office plans, among them Amazon.com Inc. and Apple Inc. has announced that they will delay their workplace returns until at least January. The risk for hotels is that it is through business travel.

“If people are not returning to their own office, there is no point for them to travel for business to another office that doesn’t have people,” said Morningstar’s Mr Brown.

Some big events which are usually a draw for hotels have also been canceled amid concerns of Delta type. These include the New York International Auto Show and the annual meeting of the National Rifle Association in Houston.

Delta-type concerns have in turn prompted some analysts to slightly revise hotel REIT earnings estimates for the coming quarters, although expectations for the industry’s rebound trajectory over the next year remain largely unchanged.

Still, some large hotel investors say they are encouraged by booking data for the second half of 2021. For example, at Host, group bookings for the second half are back above 50% of where they were in 2019 before the pandemic began. With the demand spread across the major markets, the company has said.

Green Street analysts said in a report this month that while some hotel REIT stocks are looking cheap amid the bullish recovery so far, it could provide “an interesting entry point for investors with a strong stomach and a longer-term horizon.” Is.