As one of the largest lodging real estate investment trusts (REITs) in the world, Host Hotels & Resorts (NYSE: HST) is a good way to play a recovery in the hotel sector. However, investors need to understand the risks here before buying this stock. Here's a look at where the REIT could find itself in three years' time -- and it's not as compelling as you might think.
The business and the pandemic
One of the most important things to understand about hotels is that they have an effective lease length of a single night. That's the shortest of any REIT niche, with profound implications for the companies that operate in the space. Basically, during tough economic times the hotel business falls off a cliff because businesses and individuals pull back on travel. The global coronavirus pandemic merely exacerbated what's a pretty normal trend for the industry.
But it's worth looking at the numbers here. Host's full-year 2019 revenue was roughly flat year over year, with a modest 2% decline in the fourth quarter of that year. The first quarter of 2020, when the coronavirus was just starting to spread, witnessed a 24% year-over-year revenue drop. The second quarter, when the pandemic was in full swing, saw revenues plunge 93%. Third quarter results started to show a bit of improvement, sequentially speaking, but the top line was still down 84% year over year. These are disastrous numbers that speak to how sensitive hotels are to wider economic trends and the immense pain the industry is feeling today.
The problem right now is that there's more afoot than a mere economic downturn. That helps explain why the revenue hit has been so acute. But this also suggests that there are likely to be lingering issues investors need to think about when considering hotel REITs like Host.
No easy fix
First and foremost is the question: How do things get better? The clear answer is that the world needs to figure out a way to deal with the coronavirus. That's a work in progress, with material and swift advances already taking place on the vaccine front. However, creating and approving vaccines is only half the battle. The other half is figuring out the logistics of producing and widely disseminating vaccines, which is no easy task.
It will likely take months, if not quarters, for the vaccine to have any material impact on the direction of the pandemic. That suggests that 2021 won't be a great year for hotels, even though their performance is likely to show material improvement over 2020. Sure, it will be nice to see more business and vacation travel take place. But the truth is that there's unlikely to be enough of an improvement to get Host or any of its peers back to 2019 levels.
Which brings up the second big issue. This isn't just about vaccines. For example, businesses are realizing travel may not be as important as it once was thanks to the shift toward video calls and Zoom (NASDAQ: ZM) during the pandemic. That suggests it could be several years before business travel gets back to 2019 levels -- if it ever does. Indeed, since travel is expensive, businesses are likely to be reluctant to reopen the spigot on that cost center right away.
Then there's vacation travel, which will probably come back more quickly. However, vacations aren't a necessity, so consumers will likely wait until there's notable improvement on the coronavirus front to pack their bags.
In fact, until notable improvement is apparent, consumers will continue to have grave concerns about group settings that will take some time to work through before they decide, en masse, to start traveling again. Don't expect that to happen in 2021. Like business travel, it could be several years before vacation travel claws its way back to 2019 levels.
The Millionacres bottom line
When you step back and look at the future for Host Hotels & Resorts, the next three years are likely to show improvement over a disastrous 2020. However, the real story is that it may take those three years for the company to get itself back to the business levels it achieved in 2019. There's just no light switch to flip here -- it will take time and hard work.
More aggressive investors looking for a turnaround play tied to the coronavirus might be interested in hotel-focused Host, but they'll need to go in understanding this turnaround will be a multiyear process that will probably only get the REIT back to pre-COVID-19 performance levels.