It's easy to get caught up in Wall Street's emotional swings, but long-term investors need to step back and dig into the numbers. When you do that, investor mood swings sometimes seem a little irrational. That's what appears to be happening today at hotel real estate investment trusts (REITs) Apple Hospitality (NYSE: APLE), Host Hotels & Resorts (NYSE: HST), and CorePoint Lodging (NYSE: CPLG). Here are the numbers to back that up.
The big problem
Hotels provide a place for people to sleep when they aren't at home. That's an important function, but the "lease" length for a hotel is basically one night. That means that economic downturns hit hotel real estate investment trust earnings very, very quickly. Quicker than any other REIT niche, in fact.
And, often, the recovery isn't as quick as you'd expect, as travel isn't usually the first sector to bounce back after a recession. The pandemic has really highlighted the downside risks here, given that people were asked to socially distance and travel was, and in some place remains, constrained by government mandate.
So it's little wonder that Apple Hospitality, Host, and CorePoint all saw their stocks plunge in the early days of the pandemic. It was, in fact, pretty brutal. All three ended up cutting or eliminating their dividends. In fact, Apple is the only one currently paying a dividend, and it's just a token penny a share per quarter. REITs are specifically designed to pass income on to shareholders, so deep dividend cuts like these are really bad signs.
And yet this trio has seen a material recovery in the prices of their shares. Host's stock is now only around 15% below where it started out in 2020, Apple is off by just 10%, and CorePoint is actually up 30%. Although you might argue being down 15% isn't so great, other hotel REITs remain well below that level. The problem is that there's not much to back up the recovery these REITs have seen.
The pain isn't over yet
Wall Street is forward-looking and the second quarter earnings season is just getting underway, so there's a chance that these hoteliers have seen massive increases in their businesses. But if you look at their first quarter results, that seems unlikely.
For example, Host's first quarter 2021 revenues were down 62% from 2020 and 71% from 2019. Although adjusted funds from operations (FFO) was positive, it was just a penny a share compared to $0.23 per share in the first quarter of 2020, a year-over-year decline of 96%.
Yes, travel is picking up again and quarterly comparisons will be pretty easy for the rest of the year, given the massive pain experienced in the final three quarters of 2020. But it's hard to believe that Host's results will be good compared to pre-pandemic 2019. And yet the stock has recovered a huge amount of lost ground. Investors may be getting ahead of themselves.
The same is true of Apple Hospitality. Although it was a nice gesture that the REIT reinstated its dividend, a penny a share is what companies pay when they want to appease institutional investors with dividend mandates. It's not really a sign of strength. Which makes sense when you look at the company's business. Hotel revenues were down 33% year over year in the first quarter and nearly 50% compared to the first quarter of 2019. Sure, business is improving and comparisons for the rest of the year will be pretty easy, but the REIT is nowhere near its pre-pandemic normal.
CorePoint is a bit of an odd duck. Its first-quarter results were weak, as you would expect, with revenues down around 33%. Meanwhile, performance has been improving, with higher occupancy levels and increasing revenue per room night. However, that's not nearly enough to explain why the stock is up 30% compared to the start of 2020.
The reason for the impressive share price performance is that CorePoint has become something of a special situation stock, as it has been liquidating hotels in recent years to refocus its portfolio. And it just announced that the board was looking at strategic options, which basically means that the REIT is looking for a buyer.
While there is often a premium paid during an acquisition, the stock advance here suggests that investors are already pricing in a material amount of good news. But based on CorePoint's still-weak operating performance, that could prove to be wishful thinking. If no deal is reached, or the price agreed to isn't as good as the market hopes, the stock could fall back to earth.
Watch the quarterly earnings
You could argue that travel is on the mend and that it's just a matter of time before hotel REITs start to see their businesses recover. That may be true, but so far the business recovery at Apple Hospitality, Host, and CorePoint doesn't appear to justify the price recovery in their shares. And while the second quarter is likely to show continued improvement, it's hard to believe that the worst is past. Add in the dividend issue, and most REIT investors will probably be better off watching this earnings season from the sidelines here. Wall Street has a habit of getting ahead of itself, and this looks like it may be one of those times.