Hotel real estate investment trusts (REITs) have taken a real beating this year, and investors aren't letting up on them yet. However, some hotel REITs are in a position to not only weather the storm but also take advantage of new opportunities on the other side.
Three of these REITs are Host Hotels & Resorts (NYSE: HST), MGM Growth Properties (NYSE: MGP), and Hersha Hospitality Trust (NYSE: HT).
Host Hotels & Resorts
Host Hotels & Resorts is the largest hotel REIT, with 80 hotels in some of the top travel destinations in the world. Most of its properties are located in areas where restrictions are being lifted and are seeing the return of some travelers. Out of all the hotel REITs, Host Hotels & Resorts is probably in the best position to be able to survive the rest of the pandemic -- and even grow because of it.
This REIT has managed the pandemic exceptionally well, considering the impact it's had on travel. While Host Hotels & Resorts hasn't been able to do much about people not traveling, it has been able to cut its expenses to reduce its losses by almost 50% between April and June, and as of August 31 it has reopened 70 of its hotels, accounting for about 88% of its room count.
While nobody knows exactly how long a full recovery will take for the hotel industry, Host Hotels & Resorts preserved access to $2.5 billion of liquidity. This is enough to carry them through mid-2022, even if bookings don't increase from Q2 2020 averages.
Host Hotels & Resorts is also looking at the opportunities it expects will result from the financial losses the entire industry is facing. Its investment-grade credit rating and access to capital should allow it to take advantage of opportunistic investments by purchasing hotels not in the position to be able to withstand the financial strain.
Ahead of the pandemic, Host Hotels & Resorts has been strengthening its portfolio over the past few years by disposing of assets that haven't fit well with its future plans, freeing up its balance sheet to acquire properties more in line with its vision moving forward.
MGM Growth Properties
MGM Growth Properties has a portfolio of destination properties that are home to some of the largest casinos and resorts in the United States. It has a strong market share on the Las Vegas strip. Las Vegas has been experiencing impressive growth, with more companies moving into the city, the arrival of the Raiders professional football team, and the upcoming monorail development.
With impeccable timing, MGM Growth Properties and The Blackstone Group (NYSE: BX) formed a joint venture to acquire the MGM Grand Las Vegas and Mandalay Bay real estate in Las Vegas for $4.6 billion, just before the pandemic put a halt on travel and shut down Las Vegas. The acquisition involved a sale-leaseback agreement with the casinos with a triple net lease.
MGM Growth Properties has collected 100% of its rent through the economic chaos. While the road to recovery may still be long, travelers are already beginning to head back to Las Vegas casinos, as Las Vegas is the top destination on AAA's Top Destination List for 2020.
Besides MGM Growth Properties being in a strong financial position, with its debt/EBITDA ratio at only 3.6 times and 7% year-over-year growth in funds from operations (FFO), the REIT is still a value buy with its incredibly low AFFO price multiple of only 4.5 times.
With its current dividend yield of 6.8% and consistent history of dividend growth, MGM Growth Properties is likely to be a great income producer for investors.
Hersha Hospitality Trust
Hersha Hospitality Trust is a small but nimble hotel REIT. Its smaller portfolio of 48 hotels totaling 7,644 rooms has allowed it to make quick adjustments to mitigate losses and maintain revenue where possible.
Hersha's portfolio is made up of clusters in some of the top hotel markets in the United States, which has been providing helpful operational efficiency by cross-utilizing staff and providing more options for its sales teams.
Hersha has been on top of its sales efforts from the beginning of this pandemic to keep as many of its beds full as possible. The REIT managed to keep its occupancy rates above 60% across its seven-hotel New York portfolio in the second quarter as a result of these sales efforts.
The overall occupancy rate across Hersha's portfolio was largely due to the contracts it negotiated in its New York properties with government groups, police and fire crews, and medical staff. Even as first responders start to leave, its new business has increased with business travelers.
Hersha is likely to continue seeing increases in its occupancy rate as hotel closures are on the rise in New York. Industry analysts estimate 20% of New York's total room count will be permanently closed. With developments in New York cost-prohibitive, the supply of rooms probably won't be increasing anytime in the near future.
The bottom line
While these three hotel REITs look like the most likely of their peers to recover, hotels are still a bit of a risky play right now. If you have the tolerance for the added risk, these three REITs have the greatest upside potential, with an opportunity to buy them at a steep discount.