Hotel real estate investment trusts can be excellent businesses when economies are good, but they are also the most vulnerable type of commercial real estate during recessions and other turbulent times. In simple terms, when times are tough, people travel less and businesses are more conservative when it comes to paying for their employees to travel to meetings and conferences.
However, this also means that during times of weakness, there can be bargains in the hotel REIT subsector for patient long-term investors. Here's a quick primer on what investors should know about the hotel real estate business as well as three excellent hotel REITs you might want to put on your radar.
What is a hotel REIT?
A real estate investment trust, or REIT (pronounced "reet"), is a special type of corporation that primarily owns, operates, develops, or manages real estate assets. Among other requirements, REITs are required to invest at least three-fourths of their assets in real estate investments and must pay out 90% or more of their taxable income.
Most REITs specialize in a certain type of property, and there is a REIT subsector that primarily owns hotel properties. Many specialize even further -- for example, there are REITs that only own luxury resorts.
Why are hotel REITs so recession-prone?
Some types of commercial real estate are not particularly cyclical, meaning that they tend to do just fine no matter what the economy is doing. Healthcare properties are a good example, as are office buildings. On the other hand, hotel real estate is the most economically-sensitive type of commercial real estate there is.
There are two big reasons why. First, staying at a hotel is typically a discretionary expense. In tough times, people can choose not to go on vacation and businesses can choose to cut back on employee travel. And second, unlike other types of commercial real estate, there are no leases that guarantee income. Office tenants typically sign leases that last for 10 years or so. Even apartment tenants are generally committing to a year's worth of rent payments.
On the other hand, the "lease" for a hotel room is on a daily basis. This can be a tremendous asset in good times: If the market allows it, a hotel is free to increase its rates whenever it wants. But in bad times, it not only means vacancies spike, but also pricing power can disappear.
The COVID-19 pandemic wasn't exactly a positive catalyst for the hotel industry. Hotels that remained open during the early days of the pandemic were operating at single-digit occupancy percentages in many cases, and in some cases, it was more economical to simply close.
Three hotel REITs to buy right now
REITs are among the publicly traded owners and operators of hospitality properties that have seen some recovery, and now might be a good time to pick and choose a few to venture back into.
Nareit lists 13 REITs in its lodging/resorts vertical, and after a disastrous 2020 that saw its average total return collapse to -23.60%, those real estate stocks have averaged 13.28% in that metric so far this year.
However, their average yield is 0.04%, about what you might get from savings at your bank. So, regard them as possible growth stocks for now, and include in that consideration a possible return to a decent income stream.
Remember, REITs have to return at least 90% of their taxable income to shareholders in the form of dividends, so expect that to be a priority for these three, which each have portfolios potentially poised to bounce if and when leisure and business travel fully recover from the pandemic.
We chose to focus on three here with very different portfolios and a concentration in different markets, including two whose names are synonymous with their geographies. They are Park Hotels & Resorts (NYSE: PK) of Tysons, Virginia; Ryman Hospitality Properties (NYSE: RHP) of Nashville, Tennessee; and MGM Growth Properties in Vegas, Baby!
Ryman Hospitality Properties
Ryman Hospitality Properties indeed owns the Grand Ole Opry, WSM 650 AM, and the legendary Ryman Auditorium. Of course, “legendary” is so liberally applied nowadays as to be cliché, but in this case, Johnny Cash and June Carter actually met there, so there’s that.
More to the point here, Ryman Hospitality also owns five of the 10 largest nongaming convention center hotels in the United States based on indoor meeting space, including the amenity-laden Gaylord Opryland in Nashville, Tennessee; Gaylord Palms in Kissimmee, Florida; Gaylord Texan on Lake Grapevine, Texas; Gaylord National on the Potomac in National Harbor, Maryland; and Gaylord Rockies in Aurora, Colorado, all operated by Marriott International.
In a Sept. 9 investor update, Ryman Hospitality says group room nights traveled and revenue continued to grow month over month in August, that it rebooked about 65% of group nights canceled since March 2020, and that group bookings for 2022 are actually ahead of 2018 levels for 2019 at the same point on the calendar.
Let’s be clear, this company has suffered, and so have its shareholders. Ryman last paid a dividend -- of $0.95 a share -- on April 20, 2020, amidst a sea of red ink that it’s been battling ever since. But the market believes in it: The stock closed at $86.87 a share on Oct. 1, 2021, not far from its 52-week high of $90.83 from Sept. 27 and more than twice as high as its 52-week low of $35.41 on Oct. 2, 2020,
Our Matt Frankel and Deidre Woollard discuss Ryman’s recovery and prospects in depth here: "1 Reopening Stock That Could Win Big in 2022 and Beyond."
MGM Growth Properties
If you buy some shares of MGM Growth Properties now, sometime next year -- pending all those requisite approvals -- you’ll find yourself owning 1.366 shares of VICI Properties (NYSE: VICI) for each MGM share you own now, and you’ll get some dividend yield in the meantime.
That’s because VICI Properties recently bought MGM Growth Properties for $17.2 billion in a deal expected to be consummated sometime in 2022.
This deal is pretty much all about Vegas. MGM Growth Properties was created in 2016 to own real estate operated by MGM Resorts, including The Mirage, Mandalay Bay, and the MGM Grand in Sin City as well as the Borgata in Atlantic City and MGM National Harbor in the Washington, D.C., area.
VICI Properties is also a spin-off, created in 2018 by Caesars Entertainment (NYSE: CZR) and the owner of 28 properties -- including other big-name Vegas hotels and casinos and some other prime Strip property that could be ripe for new development of its own.
See our Millionacres interview with VICI CEO Ed Pitoniak here for more on that. In the meantime, keep in mind that VICI and MGM Growth Properties agreed to give each Class A share of the latter for $43 in VICI stock, a 16% premium at the time.
So there could be a premium there come deal-closing time as well as the current dividend yield of $2.08 per share, a yield of 5.2% based on that $39.07 closing price from Oct. 1. And if you’re thinking of this as a buy-and-hold, you’re buying into VICI’s vision for its own business future. (Bonus fact: VICI was paying a yield of 4.94% itself as of Oct. 1.)
Park Hotels & Resorts
Here’s a Bloomberg headline that underlines why now might be a good time to consider buying shares of Park Hotels & Resorts: "New York Hilton Set to Reopen in Milestone for Battered Industry."
The hotel, one of the Big Apple’s biggest, is owned by Park and run by Hilton. It stayed shut even as others reopened there, but as of Oct. 4 it's expected to again be welcoming guests, supporting that property as well as retail and other businesses around it.
As for Park, check out this page for more on a blue-chip portfolio that currently comprises 55 premium brand convention, center city, and resort properties with more than 32,000 rooms in, just to name a few locations: Chicago; Orlando, Florida; San Diego; Denver; Seattle; Washington, D.C.; and Caribe, Puerto Rico.
Like Ryman, Park hasn’t paid a dividend since April 2020, when it shelled out $0.45 per share. So, until the dividend is restored, think of this as a growth stock. The investing world apparently does see some promise in that regard. Park stock closed at $19.92 on Oct. 1, compared with its 52-week highs and lows of $24.67 and $9.31 from March 18, 2021, and Oct. 29, 2020, respectively.
The Millionacres bottom line
The delta variant and whatever comes next will have much to say about the recovery of the hospitality industry and the REITs that inhabit that space. If you think the light at the end of this tunnel shines bright, these three companies have the destination creds to make them good considerations for an October buy.