2 High-Yield Hotel REITs to Buy in 2020

By: , Contributor

Published on: Jan 05, 2020

These hotel REITs could be fantastic ways to add growth and income to your portfolio.

Real estate investment trusts, or REITs, can be an excellent way to get growth and income in your portfolio. Hotels are an especially interesting case, as there are some great hotel REITs with relatively high dividend yields. Two great examples are Apple Hospitality REIT (NYSE: APLE) and Ryman Hospitality Properties (NYSE: RHP), so here's a rundown of why each one of these may belong on your watch list as we head into 2020.

Apple Hospitality REIT -- 7.4% dividend yield

Apple Hospitality REIT specializes in select-service hotels. Think of these as hotels in the middle of the market. Select-service properties have more amenities and are usually nicer than budget hotels and motels, but generally don't have amenities that you would find in luxury resorts, such as full-service restaurants. Just to name a few examples, some of the brands represented in Apple Hospitality's portfolio of 235 properties include Hilton Garden Inn, Homewood Suites, Residence Inn, and Courtyard by Marriott.

These types of properties tend to have higher operating margins than more luxurious properties, because the focus is solely on the rooms -- not on providing tons of amenities. There's less need for capital expenditures, and operating costs are generally lower.

In addition, these hotels are in a better position than most when it comes to recessions and other adverse conditions. They get a relatively high percentage of revenue from business travel, a segment of the industry that is less recession-prone than discretionary spending. In strong economies, people are more likely to spend money on travel, but in weak economies, select-service properties get somewhat of a trickle-down effect from people who would typically stay at higher-end properties but are looking to cut costs.

Apple Hospitality has done a great job of strategically buying and selling properties in order to maximize shareholder value. It focuses on properties under Hilton and Marriott brand names, and that have a below-average effective age (time since the last renovation). And its 7.4% dividend yield is well-covered by its income, representing just 67% of its funds from operations (FFO).

Ryman Hospitality Properties - 4.0% dividend yield

Unlike Apple Hospitality, Ryman Hospitality Properties is focused on the higher end of the market. The company only owns five major hotel properties, but these are large-scale landmark resorts. All are operated under the Gaylord brand, with properties in Nashville, Washington, D.C., Denver, and other major tourist areas.

These are big resorts. The flagship Gaylord Opryland property has almost 2,900 rooms and 640,000 square feet of meeting space. It has 19 food and beverage options on-site, 13 retail stores, and an 18-hole golf course. The three largest group-oriented, non-casino hotels are in Ryman's portfolio.

The Gaylord hotels are all group-focused, with about 70% of the company's hospitality revenue coming from group business. Ryman has nearly seven million future room nights booked, and its successful and repetitive group business is a key reason why.

Plus, Ryman isn't just a hotel company. It has an entertainment division with some valuable assets and lots of room to grow. The Grand Ole Opry and Ryman Auditorium are part of the entertainment portfolio that gets over two million customers per year. Ryman has tremendous growth potential through new partnerships -- for example, the Ole Red restaurant and entertainment venue brand is a partnership between Ryman and country star Blake Shelton and is in the early stages of expansion with a fourth location expected to open in 2020.

Ryman is a hotel REIT at heart, but it is so much more than that, and there are some exciting growth possibilities on both sides of the business.

Not low-risk stocks

Let's be 100% clear: I wouldn't call either of these a "low-risk" stock. Of all the subsectors of REITs, hotels are the most recession prone. After all, even hotels with a focus on business travelers rely on discretionary spending for a large portion of their revenue, and unlike other types of commercial real estate, customers don't commit to any length of time -- the "lease" length with hotels is typically measured in just days.

With that in mind, while I feel that both of these companies will perform quite well over the long run, it would be wise to expect significant fluctuations over shorter time periods. Hotel REITs are not well-suited for investors who panic if their stocks drop by 20% during tough times, for example. However, if you have a relatively high risk tolerance and a long time horizon, these two stocks could definitely be worth a look.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ryman Hospitality Properties. The Motley Fool has a disclosure policy.