Real estate investment trusts (REITs) represent some of the best hotel stocks to buy. REITs are growing increasingly valuable in today’s volatile market, providing a way to build wealth through income. Over a 15-year period, in fact, actively managed REIT investors have averaged an annualized return of 10.6%. However, it is worth noting that while REITs have done well in recent history, there’s still a sector that is brimming with opportunity: hotel REITs.
In the wake of the pandemic, hotel REITs were hit particularly hard for obvious reasons. Travel and leisure was one of the hardest-hit industries globally as each country quarantined in its own unique ways. As a result, hotels have underperformed the market over the last year and a half, but the tides may be turning.
Today, the threat of the Coronavirus (and its subsequent variants) is just as real as ever, but the economy is gaining momentum. In an attempt to make up for lost time, more and more people are expected to travel soon, which means the stagnant hotel industry is expected to see an influx of business sooner rather than later. Hotel REITs are expected to benefit immensely, and savvy investors who play their cards right may be able to do the same.
The following will detail what a hotel REIT is and how investors may be able to use today’s developing trends to beat the market moving forward.
What Is A Hotel REIT?
Aptly named, hotel REITs are businesses which own, finance or operate income-producing real estate assets associated with the hotel sector. Of course, in order to be considered a hotel REIT, the business must simultaneously meet the following requirements:
A hotel REIT must invest a minimum of 75% of its assets in real estate
Hotel REITs must derive at least 75% of their gross income from rents, interest on mortgages financing real property or from sales of real estate
Every hotel REIT is expected to pay at least 90% of its taxable income to shareholders in the form of dividends
In order to be considered a hotel REIT, the business must be classified as a corporation
All hotel REITs must be managed by a board of directors or trustees
Hotel REITs must have a minimum of 100 shareholders
no more than 50% of a hotel REITs shares can be held by five people or fewer
To be fair, any REIT must meet these requirements, but hotel REITs do so while investing specifically in the hotel industry.
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Risks Of Investing In Hotel REITs
Any stock with the potential to generate wealth also has the potential to turn into a bad investment, and hotel REITs are no exception. Not unlike every other investment strategy, investing in hotel REITs coincides with an inherent degree of risk. In fact, hotel REITs are generally viewed as one of the riskier investments in the REIT sector. As a result, it may literally pay to learn the potential risks associated with hotel REITs:
Industry Disruption: The hotel industry is alive and well, even as the pandemic drags on. However, the entire sector is ripe for disruption. Companies like Airbnb and VRBO are already starting to chip away at the market share of the travel and leisure industry. That’s not to say hotels are going away anytime soon, but rather that there may come a time when they need to adapt.
Interest Rates: Perhaps nothing is more influential on the performance of hotel REITs than interest rates. If for nothing else, hotel REITs borrow a lot of money. When rates are high, it costs more to borrow the money they need to remain operational. As interest rates drop, however, borrowing costs help hotels retain more profits.
Over Saturation: The performance of hotels are directly tied to supply and demand. In areas where demand greatly outpaces supply, hotels tend to perform well. However, many of the best areas for hotels to operate in are oversaturated, which drags down earnings and revenue. Therefore, if you are interested in a hotel REIT, you will want to choose one with a healthy balance of supply and demand.
Dependance On Borrowed Money: Similar to all of their other REIT counterparts, hotel REITs rely heavily on leverage and borrowed money. As a result, the same dependency on leverage that allows hotel REITs to operate can constitute a significant risk in times of economic uncertainty. If the economy crashes, hotels aren’t likely to be able to meet their debt obligations. Travel and leisure are often the first industry to be hit when the economy underperforms, making it harder for hotels to pay back their loans.
Why Are Hotel REITs Economically Sensitive?
Hotel REITs are economically sensitive because of their inclination to leverage borrowed money. That said, most businesses leverage money to attempt to scale and grow revenue. However, hotel REITs are more susceptible to shifts in economic conditions.
When the economy is firing on all cylinders and households have excess capital, it’s easier for hotel REITs to maintain their borrowing obligations. When the economy is expanding, more people are typically willing to spend their disposable income on things like travel. Consequently, economic contractions (like what we saw over the course of the pandemic) will force more households to save more money. At the very least, fewer families will have the disposable income to spend on lengthy stays in hotels across the globe. When fewer people are booking vacations at hotels, it becomes increasingly harder for hotels to pay off their debts.
Due to their economic sensitivity, hotel REITs typically have some of the most conservative balance sheets of their peers. More specifically, hate REITs like to have a debt-to-capitalization ratio somewhere in the neighborhood of 40% or less. With more money on their books, hotel REITs can attempt to weather any storms that come their way based on economic conditions.
3 Best Hotel REITs To Invest In
While the best hotel stocks to buy will ultimately be determined by each individuals’ investment strategy, the following companies have proven to be a good place to put your money in the past, and could present a lot of potential as the economy reopens:
Ryman Hospitality Properties, Inc. (NYSE: RHP)
Apple Hospitality REIT, Inc. (NYSE: APLE)
Xenia Hotels & Resorts, Inc. (NYSE: XHR)
Ryman Hospitality Properties
Ryman Hospitality Properties has developed a reputation for providing its customers with premier, upscale convention center resorts and country music entertainment experiences. In other words, RHP generates the majority of its profits from large groups. As such, Ryman Hospitality Properties’ $4.4 billion market cap was hit hard by the pandemic. In a matter of weeks, the hotel REITs stock price dropped as much as 137%, and the once attractive dividend was suspended. Quarantine orders and government-mandated stay-at-home orders effectively closed each of the company’s properties for the better part of a year, as groups have been more than hesitant to gather.
All things considered, Ryman Hospitality Properties went from firing on all cylinders to losing the vast majority of its business in just a couple of weeks. That said, the light at the end of the tunnel is growing. As the economy continues to expand, Ryman Hospitality Properties continues to book more stays at its locations. Not only is RHP witnessing a growth in “rebookings,” but the company fully expects a formidable book of business for not only the rest of ’21 but for the next several years. “Cumulatively, since the first COVID-19 cancellations began in early 2020, we have materially exceeded our targets of 50% by rebooking 67% of all canceled room nights,” said Colin Reed (Chairman and Chief Executive Officer at Ryman Hospitality Properties) in the latest earnings report.
While it hasn’t yet returned to its pre-pandemic highs, it’s only a matter of time. The reopening of the economy is inevitable, and Ryman Hospitality Properties will benefit greatly. The number of rebookings, combined with future business, make the company’s 6.17x price-to-sales ratio more than attractive in an industry set to benefit from the reopening. Additionally, RHP is expected to reinstate the once loft dividend it offered shareholders, making this stock a great long-term play.
With a market cap of $3.4 billion, Apple Hospitality is slightly smaller than Ryman Hospitality Properties. Still, Apple Hospitality’s portfolio boasts 235 hotels with more than 30,000 guest rooms spanning 34 states. In all, the company’s holdings represent one of the country’s largest and most diverse groups of upscale hotels. Not unlike Ryman Hospitality Properties, Apple Hospitality’s primary business model was completely disrupted over the course of the pandemic. From January to March of last year, the introduction of the Coronavirus dropped Apple Hospitality’s stock by more than 63%.
The drop was immediate and warranted, as nobody was looking to travel by the second quarter of last year. It is worth noting, however, that share prices have returned to their pre-pandemic levels in the face of an expanding economy and shrinking travel restrictions. As the country begins reaching herd immunity, more people are looking to travel again. Whether it’s pent-up demand or the majority of the population being tired of staying at home, Apple Hospitality is well-positioned to benefit from the impending influx.
APLE’s portfolio consists of three of the top brand names in the industry: Hilton, Hyatt, and Marriott. With its current positioning, Apple Hospitality is sure to gain a lot of attention over the course of 2021 and into 2022.
Justin Knight, Apple Hospitality’s CEO, expressed his confidence in the return of travel in the company’s most recent earnings call. “With enhanced safety protocols in place, the accelerated rollout of the vaccine, and the loosening of restrictions, travel confidence has significantly improved and positively impacted performance across our portfolio,” said Knight.
The unique combination of future business projects and an inexpensive 3.40x price-to-sales ratio make Apple Hospitality look like a great long-term hold.
Xenia Hotels & Resorts
Xenia Hotels & Resorts operates in the same industry as the previously mentioned hotel REITs, emphasizing uniquely positioned luxury and upscale hotels. Also, not unlike the others, Xenia Hotels & Resorts lost the majority of its market capitalization at the onset of the pandemic. By the time the market had bottomed out, shares of XHR were trading for more than 50% less than their pre-pandemic level.
At the moment, XHR shares are trading just below where they were at the beginning of 2020. It is clear that the downwards pressure of the pandemic still weighs heavily on the travel and leisure industry. Xenia Hotels & Resorts, in particular, seems inexpensive with a price-to-sales ratio of 3.21x, well below the industry median of 6.46x. As a result, XHR appears to be trading at a discount.
With a well-diversified balance sheet, Xenia Hotels & Resorts could weather the storm better than most of its industry peers. Now, with the worst of the pandemic most likely behind us, the company can start looking forward to taking advantage of the upcoming travel demand. The last quarter came in well ahead of expectations, and there’s no reason to believe the next quarter won’t deliver even better results.
How To Invest In Hotel REITs
There’s no doubt that the safest, best way to invest in hotel REITs is with a long-term horizon. At the very least, longer holding periods allow investors to ride out short-term volatility in the form of interest rates and seasonality. More importantly, however, the longer an investor can hold onto a truly great hotel REIT, the more they will be able to benefit from stock price appreciation and years of cash-flowing dividends. While the same can be said for all REITs, the long-term investment horizon rings especially true for hotel REITs because of their correlation to the economy. A longer time horizon will help investors ride out any signs of economic weakness. Of course, that’s not always the case, but the stock market (as a whole) has taught us one thing: share prices typically drop faster than they increase, but they almost always increase more than they drop.
Hotel REITs may have developed a reputation for carrying more risk than their more traditional counterparts. Still, the opportunities presented by today’s best businesses in the sector may outweigh the downside. If for nothing else, many of today’s best hotel stocks to buy are trading at a discount because of the lasting impact of the pandemic. Still, we can see the light at the end of the tunnel, and the economy is starting to show stronger signs of life. If investors can navigate today’s short-term volatility, buying and holding the best hotel REITs today could be a great move.
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