Coronavirus-struck 2020 was a terrible year for hotel real estate investment trusts (REITs). Industry participants were down across the board, with names like Host Hotels & Resorts (NYSE: HST) down roughly 20% in the 12-month span and Hersha Hospitality Trust (NYSE: HT) off by a painful 45%. And yet those losses still include major rallies from early-year lows during the pandemic-driven bear market. Investors need to think critically about the future here as coronavirus vaccines start to roll out more broadly in 2021, because a business recovery won’t be easy.

1. It is really, really bad

The first fact that investors must come to grips with is the severity of the hotel downturn. Some numbers will help. REIT Host Hotels & Resorts saw its revenues decline 84% in the third quarter of 2020. Hersha Hospitality’s top line fell 75%. Park Hotels & Resorts (NYSE: PK) witnessed an 85% year-over-year revenue drop. And Apple Hospitality REIT’s (NYSE: APLE) income was off by 55%. This list could keep going, but the main point is pretty clear — this isn’t simply a normal quarter-to-quarter variance. Hotel REITs aren’t facing a massive drop in demand.

2. Better doesn’t mean good

With that backdrop, investors need to understand that it would be very hard for 2021 to not be a better year than 2020. But that doesn’t mean 2021 will be good. For example, Host Hotels & Resorts’ third quarter revenue decline of 84% was awful, but it was a whole lot better than the REIT’s second-quarter revenue decline of nearly 93%. However, looking directly at the revenue numbers behind those percentages is even more telling. In the second quarter of 2020, Host Hotels & Resorts’ revenue was a scant $103 million or so. In the third quarter, it increased to about $198 million. Sequentially that’s an over 90% improvement, but both numbers are still terrible. Across the board, 2021 will be filled with easy comparisons like this, where even modest improvements will look very impressive if you don’t examine the fine details.

3. Vaccinations will take time

This brings up the real problem that 2021 will pose to hotel REITs: Trying to vaccinate roughly 330 million people is not a small task. There are massive logistic issues, including the need to keep some of the vaccines in extremely cold conditions throughout the distribution process. That, specifically, means extra equipment and special protocols. Then there’s the issue of actually putting needles into arms, which is a time-consuming process. Moreover, one stick won’t be enough, people need to come back for a second injection, further lengthening the time before the process can be completed.

The United States simply can’t turn this around in a month or two. It will likely be many quarters before a material dent is made. And that means that it will be at least several quarters before enough people are vaccinated to materially alter the course of the coronavirus pandemic. The conditions that hotel REITs are facing aren’t going to dramatically change for the better anytime soon and very likely not until the end of 2021 or early 2022. And until there’s a notable change for the better, hotels will continue to struggle.

4. Some changes may be permanent

Complicating the recovery is the fact that the pandemic may result in permanent change. It is unlikely that vacation travel will see a permanent decline, even if the recovery is slow. People simply enjoy getting out of their homes and into new and exciting environments. However, business travel, which tends to be very profitable for hotels, could be a very different story. It, too, will recover, since a video conference can’t replace every in-person interaction. But video conferences have been very successful so far and, more importantly, they are a lot less expensive than traveling. Businesses looking to keep costs low will likely think twice before they open the expense account wallets wide again. That will drag out the recovery even more for hotels.

Turnarounds are risky

When you step back and take a closer look at the hotel REIT sector’s prospects in 2021, the big-picture story is likely to be improved although conditions will remain challenging. In the end, compared to the hit these companies faced during the early days of the pandemic, almost anything would represent an improvement. The depth of the sector downturn and the severity of the still-material headwinds, meanwhile, mean that hotel REITs are basically turnaround stocks. That’s a genre of investing best left to the most aggressive investors, since it can take a very long time for a troubled company to get back on track, and some never manage the feat. With so many hotel REITs having rallied strongly from their bear-market lows, now is a time for caution.

Source Google News