One of the most important things an investor can do is to understand what they own. Hotel real estate investment trusts (REITs) are a prime example of this today, as the impact of COVID-19 has effectively -- though hopefully temporarily -- destroyed their businesses. Left in the wake of this disaster is a string of dividend cuts that has income investors reeling. Here's the lesson investors should take from this painful trend.

Dividend cuts galore

CorePoint Lodging (NYSE:CPLG) announced it was suspending its dividend after the first quarter on April 9. Park Hotels & Resorts (NYSE:PK) made a similar call on March 13. Apple Hospitality's (NYSE:APLE) last monthly dividend payment occurred in March. The list could keep going, with names across the hotel real estate investment trust niche making the same painful decision to reduce dividends or simply stop paying them altogether.   

A hotel employee greeting a customer in a hotel lobby

Image source: Getty Images

The reason is obvious. When Pebblebrook Hotel Trust (NYSE:PEB) announced its 2020 guidance on Feb. 20, it did so based on what was known about the coronavirus at the time. It withdrew that guidance on March 9 and ended up taking the dividend down to just a token $0.01 share. The reason? It had experienced a precipitous drop-off in its business. According to CEO Jon Bortz:

We have seen a considerable rise in corporate group- and convention-related cancellations due to concerns surrounding COVID-19, and therefore, we are unlikely to achieve our first quarter and full-year 2020 outlook. These cancellations, which have dramatically escalated in just the last 10 days, are largely for business previously on the books for March, April, and May of 2020. We've also experienced significant cancellations and material declines in business transient demand, while leisure bookings have also been impacted, but to a lesser extent. 

Shocking, but not surprising

The key piece of the quote above is "dramatically escalated in just the last 10 days." This is the basic reason why all of the aforementioned hotel REITs cut their dividends, along with Hersha Hospitality Trust, Ryman Hospitality Trust, Summit Hotel Properties, and more. The dividend pain was widespread and, frankly, predictable. 

That's not meant to suggest that anyone could have imagined the disruptive impact that COVID-19 would have on the world or predicted the exact timing of the rise and spread of the coronavirus in some way. What was predictable was that an economic dislocation would hit the hotel niche hard and fast. If you didn't expect that as soon as countries around the world started to shut down in an effort to slow the spread of COVID-19, you didn't fully understand the nature of hotel REITs.

While other REIT sectors (such as net lease and office) can have lease terms that last up to a decade or more, providing stability to the rent roll, hotels basically have a lease term of one day. A single night's stay. And it's super easy to cancel a hotel reservation: All you need to do is call and say you've changed your plans. No contract to renegotiate and usually no penalties involved. You can even leave in the middle of a stay and not pay for the rest of the time you booked. That means that hotels can go from "no vacancy" to completely empty very rapidly. Note that it took just 10 days for Pebblebrook Hotel Trust to realize that its future had dimmed considerably. 

RHP Chart

RHP data by YCharts.

Thus, when there's an economic dislocation of any kind, hotels are among the first businesses to feel the pain. A similar thing took place during the 2008-09 recession, though the impact of COVID-19 has been faster and more widespread. Dividend investors need to remember this simple fact. While you can't possibly predict the future, it's pretty easy here to understand what impact an economic downturn will have on hotel owners. It happened during the last recession, this time around with COVID-19, and it will happen the next time, too.

Once the likely recession caused by COVID-19 runs its course, perhaps pushing a few hotel landlords into bankruptcy, the industry will eventually recover.  Dividends will also eventually get reinstated. And investors will inevitably forget the spree of cuts that happened when the coronavirus disrupted the hotel business. Don't follow along with Wall Street on this one: Remember that the hotel business is inherently sensitive to economic conditions. It's a basic tenet of long-term investing: Know what you own. That's not to suggest you shouldn't own a hotel REIT, but that you should go in recognizing the very real risks you face when you do buy one.

Next steps

Anyone who owns a hotel REIT at this point has to pray for the best. They are all working overtime to make sure they can survive the current troubled times. Cutting dividends to preserve cash was simply a part of a much bigger effort to ensure long-term survival. The important takeaway for investors, however, is that the hotel business model has inherent risks that show up quickly when times get tough.