After 10 months of fighting to stay above water, a few hotel REITs, or real estate investment trusts, have demonstrated their resiliency and determination to come out of the pandemic bigger and stronger than ever. Three of these REITs are MGM Growth Properties (NYSE: MGP), Apple Hospitality REIT (NYSE: APLE), and Summit Hotel Properties (NYSE: INN).
MGM Growth Properties
MGM Growth Properties isn’t a typical hotel REIT. The company owns real estate leased to some of the largest casino resorts in the world, including MGM, Mandalay Bay, The Mirage, and others.
While other hotel REITs have had to pause or cut dividends as revenue plummeted, MGM Growth Properties was actually able to increase its dividends in June 2020 -- and has maintained them since. This is mainly due to the fact it receives fixed rent on the majority of its properties.
The REIT has actually increased its dividends 11 out of 18 times paid to date. Its third-quarter 2020 AFFO of $0.57 per share puts a 6.2% dividend at a payout ratio of 86%, which should keep its dividends sustainable, as long as its tenants are able to continue making their lease payments.
While many other hotel REITs have been surviving on credit for the past 10 months, MGM Growth Properties has cut its net debt down to $3.5 billion from $4.3 billion at the end of 2019. This has the company’s debt/EBITDA ratio at 4.6 times and leaves them with over $1.9 billion in liquidity between cash and available credit.
While the REIT is heavily dependent on the success of MGM Resorts International (NYSE: MGM), this major tenant is in a healthy cash position and is expected to see significant revenue growth from sports betting legalization. This should further protect its already well-covered master lease.
Apple Hospitality REIT
Apple Hospitality’s management team has done remarkably well at managing the pandemic and keeping the company going. After the initial blow from the worldwide lockdowns, this REIT was able to get back to being cash flow-positive in July 2020 and has managed to stay there since. According to the company’s third-quarter 2020 report, it's leading the industry in EBITDA per room among only three hotel REITs that are in the black.
Like other hotel REITs across the board, Apple Hospitality suspended its dividends after its March 2, 2020, payout. The company hasn’t given an anticipated time frame to reinstate dividends, but the fact it hit cash flow positive before its peers is a good indication it will be one of the first of the hotel REITs to get back to paying distributions.
However, it may be awhile before Apple Hospitality goes back to being the high-dividend REIT it once was. The management team is balancing its priorities between paying dividends and taking advantage of the acquisition opportunities available. While this is likely to mean a lower return in the near term, I expect Apple Hospitality will provide the best long-term growth in both share price and dividend yield for investors.
Summit Hotel Properties
Summit Hotel Properties has historically held one of the best-performing hotel portfolios in the industry and took quick action to minimize losses once the pandemic hit.
Summit is one of the few hotel REITs that reported a positive EBITDA in the third quarter of 2020, and I expect to see its profits recovering at a faster rate than its peers due to how well the company has historically done operating at high margins.
The company has some room to breathe, as long as the industry doesn’t take any more unsuspected blows. At the end of the third quarter, it had $426.5 million in liquidity, enough to carry them for 80 months. It also just closed its public offering of $287.5 million in convertible senior notes, providing an even more comfortable cash position.
This REIT also suspended distributions in March 2020 as part of its COVID-19 response in order to preserve liquidity. There haven’t been any talks yet of reinstating dividends, but I think investors willing to sacrifice short-term payouts will see the cost savings to the company will allow them to take advantage of opportunistic acquisitions that will provide long-term growth.
Buying hotel REITs now
There’s no sugarcoating it: Hotel REITs are a risky play right now. There’s no way to anticipate how long it will take their revenue to recover -- or their dividend payouts when they do.
I expect a number of hotel owners will see their liquidity dry up before their portfolio can sustain itself, which will result in some consolidation throughout the industry as companies who have been able to hang on to enough cash take advantage of the acquisition opportunities. I believe these three hotel REITs are in the best position to increase their share of the market and offer the highest return for investors that show their faith in them today.