When it comes to the hotel industry, one of the best ways to invest is through real estate investment trusts, or REITs. There are many REITs that own hotel properties, with specializations ranging from modest budget motels to extravagant luxury resorts and everything in between.
REITs can be excellent ways to generate both growth and income in your portfolio, and now could be an especially great time to add a hotel REIT or two to your portfolio. Thanks to fears of an economic slowdown, hotel REITs have been some of the worst performers in the real estate sector. Now, there are several great hotel REIT stocks that are trading at fire-sale prices and have some impressive dividend yields. Here's why hotel REITs have performed so poorly in recent months, and three in particular that are worth a closer look as we head into 2019.
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Why have hotel REITs performed so poorly?
If you've been following the financial news recently, you may have read about worries of a coming economic slowdown, or even a recession.
Simply put, the hotel industry is a cyclical one. That is, in strong economies, hotels tend to do very well as Americans have more disposable income and the confidence to spend it. On the other hand, when the economy weakens and consumers cut back on spending, hotels suffer. After all, unlike other forms of commercial real estate, hotels "lease" their space on a daily basis.
This is great during the strong times -- hotel operators can adjust rates upward immediately in reaction to market conditions. Unfortunately, during bad times, it's easy for vacancies to climb and for room rates to plunge.
3 excellent hotel REIT stocks to consider
With that in mind, here are three hotel REITs that are worth a look after the recent plunge. All of them are paying fantastic dividend yields and have some resilient qualities that should help them get through the tough times relatively unscathed.
Apple Hospitality REIT invests in "select-service" hotel properties, which basically means mid-market hotels. Think of brands like Courtyard by Marriott and Homewood Suites. These offer more amenities than bargain-oriented hotel chains, such as complimentary breakfast, business centers, and fitness centers -- but are at a much lower amenity level (and price point) than luxury hotel properties.
Select-service hotels tend to be more resilient during tough times than lower- or higher-end properties. For starters, they tend to cater to business travelers more than other types of hotels. This means that they don't rely on discretionary spending as much. And they tend to get some business during tough economies from travelers who would ordinarily stay at higher-end properties.
Hospitality Properties Trust invests in similar hotel properties to Apple Hospitality REIT. Top brands include mid-market hotels such as Residence Inn by Marriott, Candlewood Suites, and Hyatt Place. However, hotels only make up about two-thirds of the rental income. The rest comes from about 200 travel centers adjacent to interstate highways, which adds a nice element of diversification and also helps mitigate the day-to-day leasing nature of hotels.
One thing to know is that Hospitality Properties Trust's debt levels have been elevated recently and vacancies are relatively high due to a number of property renovations that are underway. This is one reason why the stock pays such a high yield right now, as the market is discounting an additional element of risk. However, this is a temporary headwind and should end up being a positive factor over the long run for the company.
Finally, Ryman Hospitality Properties is the most luxury-oriented hotel REIT in this discussion, but has some unique qualities that should keep revenue high in both good times and bad. The company specializes in destination hotels, including several properties under the Gaylord Hotels brand that are operated by Marriott. Among the more well-known of Ryman's properties are the Gaylord National Resort and Convention Center near Washington, D.C., the Gaylord Opryland Resort and Convention Center in Nashville, and the Gaylord Rockies Resort in Colorado.
While higher-end hotels tend to be more recession-prone, destination properties with an experiential component, as well as those with large convention spaces still tend to have a steady stream of customers, even during the tough times. Ryman owns the three largest nongaming group hotels by meeting space in the U.S. Group hotels not only bring in revenue from the meeting spaces themselves, but this serves to fuel spending in nonroom revenue sources such as food and beverage outlets, spas, retail outlets, and more.
Buy for the long term
As a final thought, it's important to mention that these three hotel stocks work best as long-term investments. If interest rates rise (the 10-year Treasury yield is a good indicator for REITs) or if the economy ends up falling into a recession, these stocks could certainly go down even further. However, all three are good businesses that should perform well over long time periods.
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