Here's Why Hotel REITs Could Be Big Winners in 2021

The hotel business hasn't exactly been performing well in 2020, as tourism and business travel are at a fraction of normal levels. However, there's reason to believe this could change as we head into 2021. In this Nov. 17 Fool Live video clip, two experts from The Motley Fool's real estate brand -- Millionacres real estate analyst Matt Frankel, CFP, and Millionacres editor Deidre Woollard -- discuss why hotel real estate investment trusts (REITs) could end up having an excellent year in 2021, and some particularly interesting stocks to watch. 

Deidre Woollard: Interesting. Yes. I think it could also be strong ski season could be good news for some hotels. One of the things on the Ryman (RHP -0.95%) earnings call that they talked about, was that people aren't staying at each other's houses as much, because this year, people are already canceling their Thanksgiving plans and thinking about winter vacations and how to handle those. But some people, if they are planning to see family, they may not be planning to stay with family because of social distancing concerns, that it might be safer for them to stay somewhere else. I know that's something my family's looking at. Do you think that that's going to have an impact on the short-term future for hotels?

Matt Frankel: Well, we saw from Airbnb's filing that they were profitable last quarter.

Deidre Woollard: Yes, they were.

Matt Frankel: Which I thought is incredibly impressive, and that's to your point where people want their own space. They don't want to stay with relatives right now, especially if you have older relatives, it might be a little too much of a risk to stay with them. When it comes to hotels, there are a few different categories that really have very different dynamics right now. You have hotels that focus on leisure travel, which for the most part, are coming back pretty quickly. More people are traveling for leisure right now than for business. You have hotels focused on business travel, which are generally like your extended stays. Things like that are very business-focused. That's coming back somewhat. It's coming back slower than leisure. Then thirdly, you have hotels focused on group travel, which are hotels that host conferences, conventions, and things like that. That's going to be the last to come back, and that's what Ryman is. Ryman is doing a good job of pivoting toward leisure travel for the intermediate term. That's not really the core of their business. When people are traveling to Disney (NYSE: DIS) World, the Gaylord Palms isn't usually what they are looking at. They're usually looking to stay on property. Or if they don't want to spring for Disney hotel, they want something on the budget side nearby. But they're doing a good job of filling some of their rooms. That was the highest performing on their portfolio, by the way. But they are a group hotel business. So when you're looking at hotel REITs, there's that hierarchy that you're going to see when things start to come back. Leisure travel, which is already pretty much coming back. Not to 2019 levels by any stretch, but much better than the other types. Then you have business travel, which like the Apple Hospitality REIT (APLE -0.20%), APLE is the symbol for that one. They're primarily focused on extended stay type properties, so they do a lot of business travel. Then at the bottom end of the spectrum is group hotel, which are going to be the longest to come back, but have the most to benefit from something like a vaccine. I mentioned that Ryman popped by 48 percent since last Monday. That's because that type of hotels has the most again from a vaccine. APLE Hospitality Properties, like I just mentioned, which is business-oriented, is up by 22 percent since the vaccine, so about less than half the game, and that's because you've already seen their business start to come back, They didn't get hit as hard in the first place. Ryman's business was so bad when the pandemic broke out that they decided it was just better to close. Most hotel operators did not close their doors. Hotels only need, in most cases, 15 to 25 percent of occupancy to break even, which obviously, isn't ideal, but it's worth keeping the doors open. Ryman said, we're going to be so empty that it's not even worth turning the lights on and opening the doors. Most of Apple Hospitality's properties kept the doors open. A lot of properties in the extended stay category, especially were part of the solution to the pandemic, traveling nurses stayed in them in a lot of cases. Things to that effect. A totally different dynamic there. It's really important as a REIT investor, whether you're talking about retail, hotels, hospitality, to know there is a bunch of different levels of these properties and when they're going to come back. In retail, we talked about the hard hit once like Simon (NYSE: SPG) and Tanger (NYSE: SKT) already. But then there are some like Realty Income (NYSE: O), which is a retail REIT, that mostly owns essential businesses. So it's a big difference in how they're performing in the pandemic, and since the vaccine data was announced, because Realty Income's properties were already open. The vaccine is nice, but they really didn't need it to be profitable and keep going as usual. Simon and Tanger both do. They need the vaccine. They're both profitable, but not nearly like they were before the pandemic, and that's why you're seeing a couple of different levels within each of these REIT sub-sectors, and it's really important to know everybody knows that hotels have gotten crushed, but not all hotels are created equal here.