Lodging REITs are en route to recovery, but the pace of improvement is likely to be uneven.
After experiencing particularly challenging business conditions during the pandemic, lodging and resort REITs are showing promising signs of recovery as vaccination rates rise and consumer optimism improves. However, the path back for the sector is expected to be a staggered one, reflecting the different routes that leisure, business, and group travel are expected to take.
One of the clearest signs that the lodging sector has turned a corner is that it is finding renewed favor among investors. Total returns in the lodging sector gained 70.3% in the period from Nov. 8, 2020 to May 21, according to Nareit data, after declining 45.5% in the period from Feb.21 to Nov.7, 2020. News that tests of vaccines against COVID-19 had been highly successful emerged in early November 2020, while May 21 marked 15 months since the market peak prior to the pandemic.
On top of that, the 13 lodging REITs tracked by Nareit posted year-to-date total returns of 22.6% as of June 10, compared with a decline of 23.6% for 2020 as a whole.
Occupancy statistics also underscore the improving outlook. Buoyed by travel over the Memorial Day weekend, U.S. hotel occupancy for the week ended May 29 reached 61.8%, its highest level since February 2020, according to STR, a provider of hospitality data.
PwC Hospitality Directions US currently expects annual occupancy for U.S. hotels this year to increase to 57.2% from 44.1% in 2020, and average daily rates (ADR) to increase 8.0% in 2021 following a drop of 21.3% in 2020. Revenue per available room (RevPAR) is expected to increase 40.1% this year from 2020 and finish 2021 at approximately 74% of pre-pandemic levels.
Those numbers reflect a strong upturn in leisure travel.
During a presentation at REITweek: 2021 Investor Conference, Pebblebrook Hotel Trust (NYSE: PEB) chairman, president, and CEO Jon Bortz reported that leisure demand continues to grow. “As people get vaccinated, they book vacations. There’s huge pent up demand there.”
Leslie Hale, president and CEO of RLJ Lodging Trust (NYSE: RLJ), also told the conference that leisure travel would be the dominant driver of demand over the summer months.
Recent financial results for Apple Hospitality REIT, Inc. (NYSE: APLE) illustrate the gradual progress that the industry has been making in the wake of the challenges caused by the pandemic.
In January, Apple Hospitality’s ADR stood at $95.15. Two months later, it had increased to $103.27. During the same period, the occupancy rate rose from 45.1% to 66.3%. And RevPAR went from $42.94 to $68.46.
Justin Knight, CEO of Apple Hospitality, says leisure travel represents about 50% of current demand, compared with about 25% before the pandemic. The REIT’s suburban hotels, at 57% occupancy, outperformed its urban hotels that were at 49% occupancy in the first quarter. Apple Hospitality has experienced particularly vigorous demand in warm-weather states like California, Florida, and Texas.To entice leisure travelers, many properties are offering bonuses to members of their loyalty programs, particularly in markets with weaker demand, according to Ryan Meliker, co-founder and president of Lodging Analytics Research & Consulting.
Meliker says travelers filling up hotels once again will find many of the same pandemic protocols in place, such as stepped-up cleaning procedures and self-check-in kiosks, but more and more properties will relax mask mandates. It’ll take longer, he says, for full-service housekeeping and full-scale food and beverage service to return.
Bringing Back Business
Throughout the rest of 2021, and into 2022 and 2023, industry observers will be keeping a watchful eye on how soon business travel mirrors the promising return of leisure travel. Lodging REITs that largely cater to business, group, and convention travel in major urban markets are expected to face a longer road back.
“While leisure travel will start returning this summer as more people are vaccinated, business travel, the largest source of hotel revenue, is down 85% and is not expected to begin its slow return until the second half of this year. Full recovery is not expected until 2024,” the American Hotel & Lodging Association recently said.
Despite that significant hurdle, a report from Green Street highlights a huge achievement for lodging REITs: They generated positive hotel EBITDA (earnings before interest, taxes, depreciation, and amortization) in March for the first time since the pandemic began. STR, meanwhile, says 92% of the U.S. hotels it monitors were profitable in April.
“Things are clearly on the upswing, and Green Street believes all signs are pointing to a pretty robust recovery ahead—with the caveat about what’s going to happen with business travel and when employers are going to be comfortable with getting people back out on the road,” says Chris Darling, a lodging analyst at Green Street.
Despite concerns over when an uptick in business travel will happen, Darling believes the lodging industry will enjoy “a very quick snapback” compared with the two previous cycles.
For his part, Pebblebrook’s Bortz, speaking at REITweek, said that “for a lot of reasons, we don’t think there’s any structural impact to business travel from the pandemic and any of the technology that’s continued to evolve over that period.”
Hale at RLJ Lodging told the conference that she expects to see a “step change” in business travel as offices and schools reopen after Labor Day, with a gradual recovery occurring after that. As for group travel, “events come back first, and attendance will lag that, but ultimately it will come back,” she said.
Our expectation for the next several years is that we’ll see a meaningful increase in travel for a variety of purposes. I think quarantines over the past year have helped us appreciate the freedom to get out and to explore and interact with people face-to-face.
Part of the reason why the sector is well-positioned to recover is that companies entered the crisis with solid balance sheets.
Host Hotels & Resorts, Inc. (Nasdaq: HST) President and CEO Jim Risoleo said during REITweek that “the hospitality sector is the most volatile sector of any REIT sector. We’re always keenly focused on what our leverage levels look like relative to where we are in the economic and lodging cycle.”
Patrick Scholes, a lodging analyst at Truist Securities, says lodging REITs generally were well capitalized at the outset of the pandemic and not overextended on debt. Plus, REITs have found lenders to be “very accommodating” in terms of borrowing money, he says.
“This time, the banks and the investors were ready, willing, and able to give them whatever they needed,” Scholes says of lodging REITs, “and they didn’t even need it for the most part.”
For Host, Risoleo noted that the REITs’ actions prior to the pandemic “put us in an incredibly strong position from a leverage perspective as we came into 2020.”
Even though lodging REITs are mostly sitting in a solid financial position, the lodging snapback described by Darling may be hampered by staffing issues, at least in the short term.
Nonetheless, Scholes and other analysts are optimistic about the industry’s rebound.
“Anything’s better than last year. So, I think in that sense, there’s reason to celebrate that we’ve made it through,” Scholes says. “It’s definitely getting less bad, but it’s still way, way off from where it was in 2019. The worst is behind us, but it’s not that far behind us.”
Michael Bellisario, a lodging analyst at R.W. Baird, believes 2022 will be a “reset year” for the lodging sector. “The pendulum will swing,” he says. “It’s just a matter of how far it swings back next year to business and group travel.”
Green Street anticipates the performance gap between leisure travel and business travel won’t narrow until late 2021, while Scholes at Truist calls business travel “the real wildcard” in the recovery of the lodging sector.
In light of the expected lag in the reboot of business travel, Darling doesn’t envision the sector’s bottom-line profitability getting back to pre-pandemic levels until 2023. In line with that forecast, Green Street estimates gross demand for lodging will witness a cumulative reduction of roughly 5% to 10% over the next few years compared with the pre-pandemic period due to widespread adoption of virtual meetings.
STR and Tourism Economics, meanwhile, predict U.S. hotel demand will fully recover in 2023, with a near-recovery of RevPAR projected for 2024. Lodging Analytics Research & Consulting expects RevPAR for U.S. hotels to increase 30.6% this year and increase at a compounded annual growth rate of 16% from 2020 to 2025, with RevPAR and EBIDTA hitting 2019 levels in 2023 and occupancy hitting that level in 2024.
Meliker says that while there is still a tremendous amount of uncertainty regarding the pace and schedule of the economic recovery, “we are confident that the remainder of 2021 and the years that follow will show extraordinary growth for the lodging industry, driven by recovery from the worst year the industry has ever seen, but also by unprecedented levels of fiscal stimulus, savings rates, and pent-up demand for leisure travel and experiences.”
For RLJ Lodging, all three legs of the lodging demand stool—leisure, business, and group—will be needed to bring about a full recovery, which the REIT is currently projecting for 2023.
At Apple Hospitality, Knight is confident about his REIT’s performance in the second half of 2021, and beyond. Based on the loosening of pandemic restrictions and the return of more workers to the office, “we’re optimistic about how the remainder of the year is likely to play out,” he says.
“I think our expectation for the next several years is that we’ll see a meaningful increase in travel for a variety of purposes. I think quarantines over the past year have helped us appreciate the freedom to get out and to explore and interact with people face-to-face.”
For a lot of reasons, we don’t think there’s any structural impact to business travel from the pandemic and any of the technology that’s continued to evolve over that period.
Patrick Scholes, analyst at Truist Securities, says that while lodging REITs will see occupancy rates continue to improve, customer service problems stemming from labor shortages could impede this recovery. Some lodging workers who were furloughed during the pandemic may have found other jobs, he says, while others may simply “have a bitter taste in their mouth” and don’t want to come back.
Executives at several lodging REITs say extended unemployment benefits provided during the pandemic have hindered their ability to bring back hourly workers like housekeepers and cooks. However, they say that issue should subside once the benefits end in September. Federal stimulus checks and childcare issues also have played a part in the industry’s difficulty in rebuilding their workforces, executives say. At some lodging REITs, managers have had to step in to take on housekeeping and other duties.
During the first-quarter earnings call for Chatham Lodging Trust (NYSE: CLDT), Dennis Craven, executive vice president and COO, said the hospitality labor crunch has challenged the West Palm Beach, Florida-based company.
Filling jobs at the company’s 39 properties is a “major focus” of Chatham’s operations team, he said. Part of that focus involves getting “very creative” with employee incentives, such as signing, performance, and retention bonuses, Craven said.
Similarly, CorePoint Lodging Inc. (NYSE: CPLG), an Irving, Texas-based REIT with 200 properties, is exploring recruitment and retention incentives. “We came into the pandemic as an industry with a labor shortage, and that labor shortage has increased,” President and CEO Keith Cline said during CorePoint’s first-quarter earnings call.