Summary
- Hotel REITs have been hit harder than any real estate sector during the ongoing coronavirus pandemic and resulting economic lockdowns, plunging more than 50% in 2020.
- Dividend cuts abound. Every hotel REIT slashed its dividend over the last quarter, but even that might not be enough to stay afloat as the industry faces an existential crisis.
- "No vacancy" becomes "no occupancy." Following a record year of occupancy and revenues for the hotel industry in 2019, hotels are expecting a mind-blowing 50% plunge in revenues this year.
- A rebound in economic activity since April has thrown a lifeline to several highly levered REITs teetering on the edge, but a "second wave" of the pandemic could be the death knell.
- Hotel ownership is a tough, capital-intensive business even in the best of times. Outside of several well-capitalized hotel REITs, value-seeking investors should be wary of catching the falling knife.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
REIT Rankings: Hotels
(Hoya Capital Real Estate, Co-Produced with Brad Thomas)
Hotel REIT Sector Overview
"No vacancy" has become "no occupancy" for Hotel REITs in 2020, which have been hit harder than any property sector during the coronavirus pandemic and resulting economic lockdown amid an existential crisis for the leisure and hospitality industry. Following a record year of occupancy and revenues in 2019, the hotel industry is expecting a mind-blowing 50% plunge in revenues in 2020. Within the Hoya Capital Hotel REIT Index, we track the 18 largest hotel REITs, which account for roughly $25 billion in market value.
Hotel ownership is a tough, capital-intensive business even in the best of times, and hotel REITs tend to be "overweight" in the most affected segment of the lodging industry: business travel and international tourism. Thus, Hotel REITs ultimately remain at the mercy of the pandemic, which forced roughly half of hotel properties owned by these companies to temporarily close during the peak of the lockdown in April, though most hotel properties have since opened. According to data from STR, hotel occupancy bottomed out at just 24.5% in April but has recovered to 46.2% in the week ending June 27th. Room rates, meanwhile, remain lower by 29% from last year, amounting to a total revenue per available room RevPAR decline of a whopping 56.5%.
Hotel REITs were a favorite of yield-hungry investors for much of the past half-decade, but it's tough to pay dividends if hotels are sitting empty. The past quarter has been a bloodbath for hotel REIT dividend cuts, as all eighteen hotel REITs suspended their dividend since the start of the pandemic. Despite comprising just 10% of all equity REITs, the hotel sector has accounted for nearly a third of the total dividend cuts across the REIT sector. We have now tracked 58 equity REITs - primarily in the economically sensitive retail and lodging REIT sectors - out of our universe of 165 that have now announced a cut or suspension of their common dividend.
