The hotel sector has been devastated by the impact of COVID-19 as countries around the world hit the economic pause button to slow the spread of the new virus. Hotel real estate investment trusts (REITs) have seen their shares get cut in half, or worse, in 2020. Although countries around the world have begun the reopening process, investors shouldn't get too excited when it comes to hotels. There's still a huge amount of pain in the sector, and a long way to go before there's anything remotely close to a recovery.
Getting shut down
Hotels are unique in the property space because they have leases that are, effectively, one night long. That means that these properties quickly feel the brunt of economic downturns, since reservations can be canceled with little to no consequence. It shouldn't be any surprise to find out that hotels, and the real estate investment trusts that own them, have been pummeled by investors as COVID-19 spread across the globe.
The logic here is pretty simple. To slow the spread of COVID-19, world leaders asked citizens to practice social distancing, and forced non-essential businesses to shut down. Basically, people around the world stopped traveling for recreation and business purposes so they wouldn't catch the coronavirus or unwittingly give it to others. So far, the effort appears to have helped -- but economically speaking, it has been extremely painful.
Investors reacted quickly, pushing shares of Apple Hospitality REIT (NYSE:APLE) lower by nearly 40% for the year at this point. Pebblebrook Hotel Trust (NYSE:PEB), meanwhile, is off by around 50%. And Park Hotels & Resorts' (NYSE:PK) stock is down by about 60%. These are just a few examples -- the entire hotel REIT sector has been hard hit. And the worst part? The stock declines here actually represent an improvement from the lows reached in March.
A recent uptick in the shares of these REITs, and others in the hotel space, is being driven by the fact that economies around the world are starting to reopen. Notably, the United States has taken broad steps to return from the shutdown. That's good news, to be sure, but don't get too excited just yet. Things are still really, really bad for hotels.
Recent results aren't good -- they're just less bad
For example, industry watcher STR recently came out with occupancy and room rate statistics for the week that ended on May 23, 2020. It is sobering news. U.S. hotel occupancy was just 35%, down roughly 50% year-over-year from the same week in 2019. Revenue per available room, meanwhile, was lower by roughly 70%. So not only are hotels running well below historical occupancy levels, they haven't been able to charge nearly as much as they used to, either.
To be fair, occupancy has increased notably over the past month or so. To put some numbers on that, the week ended April 11 saw occupancy at roughly 20%. So the May 23 results amount to a 75% or so improvement. That in and of itself is excellent news, but when you look at the year-over-year comparison, it really just points out how terrible things are today.
The bigger problem is that there's no quick fix. Hotels will have a hard time filling beds for as long as businesses and consumers continue to hold back on travel. Notably, higher-end hotels, like the type that Park Hotels & Resorts, Pebblebrook, and Apple Hospitality own, have been lagging behind economy hotels in the sector's nascent recovery, according to STR. That's because conventions have largely been put on hold, since COVID-19 appears to spread easily in large crowds. That's not likely to change in the near term, putting REITs with higher-end properties at a disadvantage. But the truth is that until travel recovers from the COVID-19 hit, which could take a long time, hotels will continue to struggle. A key piece of this puzzle is that hotels are large and expensive assets, so they need to generate a material amount of revenue just to turn a profit. Thirty five percent occupancy with revenue per available room down 70% is nowhere near enough to make that happen.
Don't get too excited
Investors have been bidding up the prices of hotel REITs as the United States starts to reopen. While the outlook for the sector has improved notably in recent weeks, it's important to put that story into the larger context. As the data from STR show, hotel REITs are still facing extremely difficult conditions. This is a turnaround story for sure, but one that most long-term investors should probably avoid until more progress has been made -- and, just as important, until there's more clarity around the long-term impact of the COVID-19 crisis.