Hotel investors are starting to breathe a sigh of relief as more hotels are reopening, bookings are up, and share prices of publicly traded hospitality companies and real estate investment trusts, or REITs, have been returning to pre-pandemic levels.
As of March 19, 2021, Park Hotels and Resorts (NYSE: PK) was up 33.4% YTD, Pebblebrook Hotel Trust (NYSE: PEB) 35.4%, and Hersha Hospitality (NYSE: HT) up 47%. There’s a lot at play that’s contributing to these rising prices, including some major acquisitions being announced over the past month and increased optimism as over 43 million people in the United States have been fully vaccinated for COVID-19.
So far in March, VICI Properties (NYSE: VICI) has agreed to acquire the Venetian in Las Vegas with its 7,000 guest rooms for $4 billion, Hilton Grand Vacation (NYSE: HGV) agreed to buy Diamond Resorts International for $1.4 billion, and Extended Stay America (NASDAQ: STAY) announced it’s being acquired by a Blackstone Group (NYSE: BX) and Starwood Capital partnership for $6 billion. The optimism shown with these deals, totalling over $10 billion, has given investors a boost of confidence in the hospitality industry and the return of leisure travel in 2021.
Bookings for leisure travel have also been up more than anticipated so far this year. Host Hotels and Resorts (NYSE: HST) saw a 32% increase in group bookings at their Marriott-managed hotels in January 2021 compared to January 2019. Room rates also appear to be improving, with Pebblebrook’s average daily rate for the first two weeks in March within 7% of its 2019 rates for the same weeks.
Is it time to invest in hotels?
After investors watched the price of their shares in hotel REITs and hospitality stocks take a nosedive just over one year ago and struggle the rest of the year to recover, many are still hesitant to jump back in. With dividends still suspended and many experts saying a full recovery won’t be realized until 2023, the hesitancy is understandable.
The surge in optimism may be a little premature, considering the position of these companies the last time their prices were where they are today. While things are improving, many of these companies are still in the red and burning cash each month. Most of the top hotel REITs averaged dividend yields above 5% in 2019, and it’s unlikely investors will see these same yields anytime in the near future.
While prices may continue to climb as the world slowly continues returning to normal, a reversal is likely as valuations hit an unsustainable level. Not to mention, with as sensitive as stock prices have been in the hotel industry, any setbacks in the recovery could send them sinking again.
The Millionacres bottom line
There’s no doubt that the hotel industry will recover, companies will continue growing, and distributions will resume. However, investors should be cautious about jumping back in right away just because prices are climbing. If the prices today look attractive, just remember that a little over a year ago, those same prices came with high dividends and a portfolio that was producing positive cash flow.