The past year has been very challenging for certain sectors of the economy. Governments shut down nonessential businesses and restricted travel to slow the pandemic's spread, hurting retailers, restaurants, hotels, and entertainment venues. As many of these companies struggled to pay rent, that had a trickle-down effect on their landlords.
However, with vaccines rolling out and COVID-19 case counts on the decline in the U.S., people are starting to resume normal life again. As a result, there's a lot of pent-up demand for activities outside the home, which is giving pandemic-hit industries a shot in the arm, including real estate investment trusts (REITs) that lease space to those tenants. Three REITs well-positioned for this recovery are EPR Properties (NYSE: EPR), Host Hotels & Resorts (NYSE: HST), and Service Properties Trust (NYSE: SVC).
Experiencing life again
EPR Properties is a specialty REIT focused on owning experiential properties like movie theaters, eat and play venues, ski destinations, and other attractions. The pandemic hit these industries hard, as many movie theaters and other entertainment venues closed or operated at low capacity levels over the past year. That made it hard for them to generate enough revenue to pay rent.
However, with vaccines rolling out, these venues are slowly reopening to full capacity. As a result, EPR Properties' CEO Greg Silvers stated in the company's first-quarter earnings release that, "We are increasingly optimistic about our outlook as vaccination deployment expands, and consumers are exhibiting their desire to re-engage in the experiences that our customers offer them." That should give EPR Properties' tenants the cash to get back on track with their rental payments, which could enable the REIT to reinstate its dividend.
Meanwhile, with more than $538 million of cash on hand and $1 billion of available credit, the REIT has the financial flexibility to acquire additional experiential real estate. That could supercharge its ability to benefit from the recovery.
Getting bit by the travel bug
With more people getting vaccinated, it's giving them the confidence to travel to see friends and family as well as go on a long-awaited vacation. That's boosting demand for hotel rooms. As the world's largest lodging REIT, Host Hotels & Resorts will be a big beneficiary of this pent-up demand.
The company's already starting to see an improvement. CEO James Risoleo stated in the first-quarter earnings release that, "We significantly exceeded our expectations in the first quarter and returned to profitability at the hotel level for the first time since the onset of the pandemic."
Meanwhile, the company put itself in an even stronger position to benefit from the travel recovery by purchasing two hotels in the first quarter for $771 million, including buying the Four Seasons Resort Orlando at Walt Disney World Resort for $610 million.
Hitting the open road
Service Properties Trust is a diversified REIT focused on owning service-oriented properties like hotels and retail locations such as travel centers and restaurants. The pandemic hit the company's hotel portfolio hard. That led it to make several changes, including converting most of its properties to its 34%-owned Sonesta brand while also selling select locations. It believes that this transition will put it in a better position to benefit from the recovery.
CEO John Murray noted in the first-quarter earnings release that: "We are also encouraged by improving hotel demand trends. As more of the population is vaccinated and government-mandated restrictions continue to be lifted, we expect that occupancy and hotel EBITDA should continue to recover and may accelerate meaningfully in the second half of this year."
Meanwhile, the company is also seeing an improvement in rent collection from its net lease retail tenants. Rent collection improved to 93.1% in the first quarter, up from a low of 80.5% in April of last year.
That number should continue heading higher as the economy recovers and more people travel. That would further improve the REIT's financial flexibility, enabling it to repay debt and get back on a firmer foundation.
Eagerly awaiting the recovery
Vaccines are starting to put the pandemic in the rearview mirror, giving people the confidence to get out and enjoy life again. That's fueling increasing demand for travel, dining out, and entertainment, benefitting companies focused on those sectors. It will also boost the fortunes of REITs concentrated on those sectors, like EPR Properties, Host Hotel & Resorts, and Service Properties Trust. That makes them potentially ideal ways to play the recovery.