Hospitality REITs, or real estate investment trusts, have been some of the best-performing stocks in the real estate sector over the past few months, and it isn't tough to see why. The rollout of COVID-19 vaccines is making people more willing to travel and go experience things, and the early data has been promising. Average hotel prices are 11% higher than they were just a few weeks ago, and occupancy in many high-demand tourism regions like beach areas is actually above pre-pandemic levels.
However, that doesn't mean all hospitality REITs are too expensive to buy. Quite the opposite, actually. In fact, here are two in particular that could have lots of upside potential as the demand continues to flow into the economy.
A different kind of hospitality REIT
When most people think of "hospitality" REITs, hotels pop in their mind. While EPR Properties (NYSE: EPR) certainly has some element of lodging, it's not the focus of the portfolio. Rather, EPR focuses on entertainment properties -- think golf attractions, water parks, ski resorts, and movie theaters.
The good news is that EPR's non-theater portfolio is performing quite well, with virtually all of them now open for business. However, EPR still trades for a significant discount to its pre-pandemic share price, and the main reason is its movie theaters, which make up nearly half of the company's contractual rental income. And to be sure, there are still some big question marks when it comes to movie theaters in 2021 and beyond.
However, the recent news has been quite promising. Top tenant AMC Entertainment (NYSE: AMC) has successfully raised enough capital to take bankruptcy off the table, and Warner Brothers, which switched to a simultaneous streaming-and-theatrical release model for its 2021 releases, plans to resume theater-first releases in 2022.
In a nutshell, if you think people will still want to go to the movies after the pandemic, EPR looks like an amazing value right now. And with about $1 billion in liquidity, the company has more than enough flexibility to make it through the tough times.
Because people are eager to treat themselves well
As the world gradually returns to normal, there's tremendous pent-up demand, and not just for typical vacations. I think that elevated savings rates, combined with prolonged periods with no travel at all, will make people want to splurge, and that's why Xenia Hotels & Resorts (NYSE: XHR) could be worth a look.
Xenia owns 35 properties in 15 states, most of which are operated under Marriott (NASDAQ: MAR), Hyatt (NYSE: H), and other luxury brands. Just to name a couple examples of the company's well-known properties, the Fairmont Dallas, the Ritz-Carlton Denver, and the Hyatt Centric Key West Resort & Spa are all Xenia hotels. In a nutshell, Xenia owns some of the best properties in some of the most desirable markets in the U.S.
Historically speaking, luxury and upper-upscale hotel revenue (the technical names for what Xenia owns) has rebounded strongly after economic crises. After falling 48% in 2020, revenue per available room (RevPAR) is expected to climb by 22% in 2021 and 34% year over year in 2022. With shares still about 10% below where they were at the beginning of 2020, now could be a great time to add Xenia to your portfolio as the world starts to return to normalcy.
Don't expect a smooth ride
As a final thought, it's important to mention that hospitality REITs are one of the more volatile types of real estate stocks, even when there isn't a pandemic going on. Over time, both these REITs should do a great job of creating value for shareholders, but it's important to realize they are best suited for long-term investors.