The real estate sector has been one of the market's worst performers in 2020 due to the COVID-19 pandemic's impact on commercial real estate, and real estate investment trusts (REITs) that focus on hospitality properties have been hit harder than most. Simply put, while leisure travel has come back a bit, business travel and group events aren't happening much right now, and most hospitality businesses are still operating at significantly limited capacity.
That could change in 2021, as the population becomes vaccinated against this awful virus and the world starts getting back to normal. If you're looking for ways to play the rebound in your investment portfolio, here are two hospitality REITs -- one that's still pretty speculative and one that isn't -- that you might want to consider.
Experiential properties were hard-hit by COVID-19
EPR Properties (NYSE: EPR) is an experiential REIT, with properties that include indoor waterpark resorts, ski destinations, golf attractions (like Topgolf) and much more. But the company's number one property type is movie theaters, which made up 46% of the company's pre-COVID-19 revenue.
Given the portfolio's composition, it shouldn't be a surprise that EPR is one of 2020's worst performing hospitality stocks. Even after the recent vaccine-fueled rebound, EPR is still down by 55% this year. The company only collected 21% of its contractual rent during the second quarter and 41% in the third. And while more than half of its theater properties are open, the operators aren't exactly in good enough financial shape to pay rent as agreed.
Although it was the harder-hit of the two stocks here, it also could be the REIT that has the most to gain as the world gradually returns to normal. Much of its missed rent is deferred, so it will be collected eventually. And believe it or not, even with a 41% rent collection rate, EPR was slightly profitable in the third quarter. With nearly $1 billion of cash on hand, EPR is in a great financial position to be patient, and it could pay off for long-term investors.
A long-term play on legalized gambling
MGM Growth Properties (NYSE: MGP) is a rare hospitality REIT in the sense that its price has actually increased in 2020, but its 3% year-to-date gain still lags the S&P 500 by a big margin.
If you aren't familiar with the company, it's a REIT that was created for the specific purpose of owning gaming properties operated by MGM Resorts. And while MGM Growth Properties doesn't own every MGM-operated casino, it has an impressive collection of 15 fantastic properties. The portfolio includes Las Vegas icons like Mirage, Mandalay Bay, and Park MGM as well as properties outside of Vegas such as the spectacular MGM National Harbor in the Washington, D.C., area and Borgata in Atlantic City.
In all, the REIT's portfolio consists of 1.3 million square feet of gaming space, 2.7 million square feet of meeting and convention space, and more than 27,000 hotel rooms. With virtually all of its revenue coming from a high-quality tenant like MGM Resorts, there's little downside risk. MGM Growth Properties pays a generous 6.1% dividend yield and has increased its payout nine times since its 2016 IPO.
Great long-term buys, but expect near-term turbulence
As a final thought, it's important to mention that although I think all three of these companies could have an excellent year in 2021 if the pandemic comes to an end, don't buy them just because you think they'll do well next year. At this point, there's no telling how long it will actually take to vaccinate the population, nor do we know how long it will take for hospitality revenue to approach pre-pandemic levels. And until we get the answers to those questions, don't expect a smooth ride.