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2 Hospitality REITs to Buy Now

Nov 19, 2020 by Matt Frankel, CFP
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To put it mildly, 2020 hasn't exactly been the best year to be in the hospitality industry. Travel has picked up a bit recently but is still dramatically lower than it was a year ago; concerts, conventions, and other large gatherings aren't happening; and restaurants, movie theaters, and many family entertainment centers are struggling to stay alive.

While hospitality businesses aren't thriving now, there could be excellent value for long-term investors who know where to look. That's why I have my eye on Ryman Hospitality Properties (NYSE: RHP) and EPR Properties (NYSE: EPR) -- especially after the recent positive developments in the race to find a COVID-19 vaccine.

This group hotel operator could emerge even stronger

When the COVID-19 pandemic started earlier this year, it's no wonder Ryman Hospitality Properties' stock price plunged by more than 80%. Ryman is a hotel REIT especially affected by the pandemic. Its five large-scale Gaylord hotels are designed specifically to accommodate conventions, conferences, and other large events.

In fact, while most hotel owners found it at least worthwhile to stay open, Ryman didn't -- its hotels were shuttered for most of the second quarter. In addition, Ryman owns a few live entertainment venues that host concerts, such as its namesake Ryman Auditorium and the Grand Ole Opry in Nashville, Tennessee. Clearly, these haven't been great businesses in 2020 either.

However, there is light at the end of the tunnel. Ryman recently reported it's successfully rebooked more than 1 million group nights for 2021 and beyond. Its Nashville entertainment venues recently got the green light to start hosting live performances at 25% capacity. And the company's Circle streaming entertainment brand has seen strong results in the stay-at-home world.

There are actually a few reasons to believe that Ryman's business could be even stronger in a few years than prior to the pandemic. For one thing, Ryman has temporarily pivoted to attracting leisure travelers to its properties, which could lead to a new loyal customer base to compliment its group business. And while group event demand is strong, if the remote work trend continues in the post-pandemic world, Ryman could even see an increase in demand for in-person gatherings among coworkers, as CEO Colin Reed pointed out on the company's recent earnings call.

A bad time to be a movie theater owner

I won't sugarcoat it: EPR Properties isn't exactly a great business right now. It derives about 46% of its revenue from one of the last types of hospitality properties to reopen: movie theaters. Well, technically speaking, many movie theaters have reopened, but they don't have any big movies to show and really can't afford to pay rent right now.

However, with this stock trading for about 45% of its pre-pandemic value, I think it's worth a closer look. Hear me out on this one.

I wasn't expecting much good news from EPR going into its third-quarter earnings report, so I was shocked to find out EPR was profitable. Well, sort of -- after adjusting for one-time items, EPR earned a small positive funds from operations (FFO) profit. Cash flow was negative $4 million (far better than Ryman's, actually), and this isn't very alarming for a company with $1 billion in cash on hand.

Not only was the quarter decent, but more importantly, things were consistently improving. Rent collections grew from 35% in July to 40% in August and 48% in September. And with the recent strong vaccine data, I'm feeling far more confident the major theater operators will be just fine when the dust settles.

Expect some volatility

Neither of these stocks is going to go straight up, and while I think the long-term trend will be a positive one for both companies, it could be a rocky road in the near term. So, only invest in these if you have a relatively high risk tolerance and a multiyear time horizon.

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Matthew Frankel, CFP owns shares of EPR Properties and Ryman Hospitality Properties. The Motley Fool owns shares of and recommends EPR Properties and Ryman Hospitality Properties. The Motley Fool has a disclosure policy.