What happened
Shares of hotel real estate investment trust (REIT) DiamondRock Hospitality (DRH 0.74%) fell 8.9% Tuesday. That decline followed similarly steep losses the day before, as investors took a dim view of the hotel landlord's future following a weak earnings report from peer Park Hotels & Resorts. DiamondRock's own first-quarter earnings, released after the close on Monday, were obviously more disappointing to investors than expected.
So what
DiamondRock's funds from operations -- which for a REIT is the rough equivalent to earnings -- came in at just $0.04 per share in Q1. That was down 80% from $0.21 per share in Q1 2019. There's no particular need to get into the gritty details -- the core problem was the same one that many businesses are having: As broad swaths of the economy shut down and Americans practiced social distancing in an effort to stem the spread of COVID-19, DiamondRock closed 20 of its 31 hotel properties in March, and occupancy rates for those it kept open plunged.
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Hotels basically have lease lengths of one day, so economic shifts impact their top and bottom lines very quickly. The REIT only started shuttering properties in mid-March, so it clearly didn't take long for it to feel the financial hit, and those hotels remain closed. Since state-mandated closures of non-essential businesses are only just now starting to be relaxed, DiamondRock's second-quarter results are probably going to be worse than those it just delivered.
To be fair, the REIT is doing the right things, working to cut costs and focusing on its liquidity, but that doesn't change the bigger picture -- things are likely to get worse for it before they have a chance to get better.
Now what
Hotel REITs are highly sensitive to economic conditions -- a truth that was on clear display in DiamondRock's first-quarter report. Generally speaking, conservative investors should probably avoid this niche. And given that the efforts to hold down the death toll from the pandemic have almost certainly tipped the U.S. economy into a recession, now probably isn't a good time for even aggressive investors to be looking at DiamondRock or its hotel-owning peers.
