Hotel Property Stocks’ Rebound Could Be at Risk

Business Improves in Second Quarter

Hotel property stocks including Host Hotels & Resorts (HST), Pebblebrook Hotel Trust (PEB), and Apple Hospitality REIT (APLE) have underperformed the broader market recently, but signs are emerging that business is improving. Cumulative funds from operations, a key earnings metric in commercial real estate, turned positive in the second quarter for the first time since early 2020. Meanwhile, Apple Hospitality and Pebblebrook reported their first quarterly profits since late 2019 and Host’s losses narrowed significantly during the second quarter.

But that rebound may be hurt by rising COVID-19 cases, as the Delta variant continues to spread in many parts of the country. That could slow down the recent boom in leisure travel and could prevent a rebound in business travel.

REITs See Improvement

Hotel REITs (real estate investment trusts) were among the hardest-hit sectors during the pandemic. Their fortunes are directly tied to how many hotel rooms are rented out, so they get battered when individuals are not traveling for work or leisure. Many REITs own hotels and pay companies like Marriott International (MAR) management fees to run the properties.

REITs’ occupancy rates started improving earlier this summer as people ventured out again, and many of the properties which were shut during the pandemic reopened. Since January, hotel-per-room revenue increased 50%, and average occupancy rates stood around 64% according to data from early last month. Though some markets including San Francisco and Washington DC are still struggling with low occupancy rates.

Recovery Could Be Bumpy

Despite the recent improvements, investors appear to be anticipating a bumpy recovery for the sector. While REIT stocks benefited from the COVID-19 recovery rally, more recently shares have been under pressure over concerns about the Delta variant. Pebblebrook stock is over 10% lower since the end of April. The performance of the stocks and the recovery for the industry depends on the Delta variant ebbing and business travelers returning, which are two big uncertainties.

The hotel REIT sector is underperforming as concerns about COVID-19 and business travel increase. While some may see a buying opportunity, others aren’t so sure. It will be interesting to see how the market plays out as we move through the remainder of the year.

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