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Are Hospitality REITs a Buy as Properties Reopen?

Jul 21, 2020 by Matthew DiLallo

The COVID-19 outbreak forced many governments to issue stay-at-home orders earlier this year to slow the spread, which caused hotel occupancy rates to crater. Because of that, several leading hotel owners, including hospitality REITs like RLJ Lodging Trust (NYSE: RLJ) and Ryman Hospitality Properties (NYSE: RHP), opted to temporarily close some of their properties rather than operate them at an even bigger loss.

However, with most states now having lifted restrictions, these REITs are starting to reopen their properties. While that's a positive development, it doesn't necessarily mean that investors should rush in and buy hotel REIT stocks.

Strategic reopenings

RLJ Lodging Trust has interests in 104 hotels with more than 22,700 rooms across 23 states. It primarily owns focused-service and compact full-service hotels that generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space, and require fewer employees than larger facilities.

During the height of the first wave of the COVID-19 outbreak, the hotel REIT suspended operations at 57 of its properties because the expenses of operating at a low occupancy rate were more than if it had closed its doors. Despite those cost-containment efforts, the company estimates that its portfolio will burn between $25 million to $35 million in cash per month.

On a positive note, RLJ Lodging Trust has since reopened 31 properties because of a recovery in demand. Most are either in resort/beach locations or drive-to/leisure markets and are select-service or extended-stay hotels. Meanwhile, it will reopen others as demand improves. These recent openings should help reduce the company's cash burn rate in the near-term, while eventually returning it to profitability as occupancy recovers.

One noteworthy aspect of RLJ's hotel portfolio is that demand has been recovering much quicker for select-service and extended-stay hotels in drive-to and leisure markets than for other hotel types and markets. That suggests it could return to profitability faster than some of its peers.

Getting ready for the groups to return

Ryman Hospitality Properties owns a much more focused portfolio, including four upscale, meetings-focused resorts with 8,114 rooms. It also owns several other hotels and entertainment venues and some media assets.

The company closed its five largest hotel properties and most of its entertainment venues earlier this year because of COVID-19. However, it has since reopened four of its five resorts and many of its entertainment venues. The company was pleased with the initial demand, noting that occupancy at its Gaylord Texan property was 20% during its first two weeks at an average daily rate of $190, driven primarily by leisure travelers. While it did host some small group meetings, most of its group-oriented guests have canceled, with only about a third of them rebooking for future stays.

The company estimates that the four large hotels it has reopened need to maintain a 15% occupancy level to justify remaining open, 30% to 35% to break even, and 50% to start generating cash. While its properties are off to a good start, demand for convention-style hotels in urban and gateway markets is recovering at the slowest pace. Further, it's worth noting that two of Ryman's hotels are in states where there has been a significant resurgence of COVID-19 cases (Florida and Texas). Because of that, there's a concern that the company might need to close these locations again.

It's still pretty tough for hotel REITs

Many hotel REITs temporarily closed locations earlier this year because it was cheaper to do that than keep them operating given the low occupancy levels. However, with travel restrictions lifting, occupancy has been rising to the points where most of these locations will burn less cash by reopening.

Still, many are operating in the red since occupancy levels need to be above certain thresholds for a hotel to break even and then generate cash. Those levels are lower for the type of hotels operated by a company like RLJ than Ryman since it's cheaper to operate select-service hotels than a major resort. Because of that, just because a REIT has reopened its hotels doesn't necessarily make it a buy since there are many other factors at play. Further, these companies face a long road to recovery, especially with COVID-19 cases back on the rise in many areas, which could force some hotels to close again. Given this uncertain forecast, investors might want to wait until the pandemic is in the past before buying hotel REITs since there could be more tough times ahead.

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Matthew DiLallo 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.

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