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Travel Fears Linger: Can Hotel REITs Stage a Comeback?

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REITs that lease out space have been plagued by fears of missed rent payments and decline in leasing activity in the current coronavirus-led uncertain times. Hotel REITs too have been facing their share of challenges. In fact, hotel REITs are at the base of the REIT sector, thanks to the “shutdown-sensitive” nature of this property sector.

The COVID-19 outbreak-related restrictions on travel and social distancing mandates undertaken to contain its spread resulted in suspension of hotel operations across the country. There has been a significant plunge in leisure and business travel and reduction in event bookings, which are typically demand-drivers, and this continue to severely dampen the hotel industry fundamentals.

Moreover, given the uncertainty surrounding the end of the pandemic and its vaccine, there is a dearth of future bookings for events. This is likely to weigh on the recovery of the industry. Amid these concerns, fundamentals and performance of lodging REITs have gone for a toss. 

In fact, per Nareit daily returns market data, hotel REITs have tanked 50.3% year to date against the S&P Index’s rally of 2.5%.

Moreover, weekly data from STR indicates a dreary scenario. Specifically, for the week ending Sep 19, occupancy stood at 48.6%, declining 31.9% from the same period in the prior year. Also, average daily rate (ADR) and revenue per available room (RevPAR) plunged 28.9% and 51.6% to $95.84 and $46.54, respectively.

Given the high degree of in-person interaction between service providers and customers, recovery of hotel REITs is likely to be slow until the pandemic subsides. Amid this, companies have been making considerable efforts to contain costs and preserve cash. Moreover, given the suspension of operations on the onset of the pandemic, lodging REITs like Host Hotels & Resorts, Inc. (HST - Free Report) , RLJ Lodging Trust (RLJ - Free Report) and DiamondRock Hospitality Company (DRH - Free Report) secured financial waivers to prevent any violation of covenants. This is helping the companies to preserve liquidity and withstand any prolonged business disruption amid the COVID-19-led setbacks.  

Is Any Respite in Sight for the Forsaken Hotel REITs?

Nonetheless, as the economy has started to recover and severe lockdown policies have been relaxed, hotel REITs have started seeing green shoots of recovery in the recent months. These improvements are majorly confined to limited service hotels in drive-to-leisure markets and a rebound in last-minute walk-in leisure customers.

In fact, a number of hotel REITs are resuming operations at their properties with adherence to high levels of cleanliness and sanitation. Such urgent strategic adjustments will go a long way in encouraging patrons who might be unwilling to leave their homes. 

Specifically, Host Hotels reopened a total of 19 hotels in July and August. With this, 70 of its 80 consolidated hotels (88% of total room count) are now operating. Moreover, total portfolio RevPAR grew at a monthly rate of 33.7% in August to $30.7. Similarly, average occupancy advanced 600 basis points (bps) month over month to 18.9% during the same month.

Moreover, 35 of Xenia Hotels & Resorts, Inc.’s (XHR - Free Report) 39 hotels and resorts were open and operating as of August end. These 35 properties had 9,344 rooms and were 30% occupied. ADR and average RevPAR from the properties were $170 and $50, respectively. 

Hence, it may be safe to say that although hotel REITs are starting to see encouraging signs of business resumption, companies will be able to navigate through the current blues in a different format than pre-pandemic times. Further, large property sizes and irreplaceable assets will play a vital role in recovery. Moreover, balance-sheet strength will help these companies to stay afloat.  

Host Hotels & Resorts and DiamondRock Hospitality currently carry a Zacks Rank #3 (Hold) while RLJ Lodging Trust and Xenia Hotels & Resorts carry a Zacks Rank of 5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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