Hotel REITs Wait for Business Travelers to Check In

October 25, 2021

Hotel REITs Wait for Business Travelers to Check In

October 22, 2021 | Kevin Brown

The coronavirus pandemic caused a historic downturn in the U.S. hotel industry that was larger than the ones caused by either the 2008-09 recession or the 9/11 attacks. While spending on hotels fell to historic lows at the outset of the pandemic, much of the industry has since recovered. In fact, the economy and midscale hotel chain segments have already returned to and surpassed their 2019 revenue levels, largely due to the quick return of leisure travel thanks to the rapid rollout of vaccinations in 2021.

However, the continued spread of the virus due to the delta variant has caused many businesses to delay plans to return employees to the office, which has kept business and group travel near historic lows. With the upscale, upper-upscale, and luxury hotels more exposed to business and group demand, revenue for these chain segments remains below prepandemic levels. Because the hotel real estate investment trusts are exclusively focused on these higher-end chain segments, they have reported same-store portfolio performance that has lagged the U.S. hotel average. With the delta variant likely to further delay the return of business and group travel, hotel REIT stocks have underperformed the broader U.S. REIT market. While the lingering effects of the pandemic may slow the pace of recovery for the upscale and luxury hotel segments, we believe that business and group travel will eventually return over the next few years.

The slow but steady return of this business should lead to several years of REITs outperforming the hotel industry on revenue growth. Additionally, hotel REITs typically find new ways to permanently cut costs during a downturn, so we believe operating margins will return to above the prior peak once revenue recovers, which should lead to net operating income well in excess of 2019 levels. Therefore, we believe that the short-term disruption caused by the delta variant and any other lingering effects of the pandemic has created an attractive discount for investors looking for a REIT sector that should produce years of growth above the historical average.

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Derek Hayes
Blue Vault's Services
April 14, 2016

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