The global pandemic has been devastating to the hospitality sector, which was basically forced to shut down during the initial global spread of the coronavirus in early 2020. As vaccine research efforts start to bear fruit, however, is it time to jump back into this niche of the real estate investment trust (REIT) space? Or are the risks still not worth the rewards being offered? Here’s a look at two very different players in the space, Apple Hospitality REIT (NYSE: APLE) and Ryman Hospitality Properties (NYSE: RHP), to help figure out the answer.
Apple Hospitality: The one-night lease
Hotels are the most economically sensitive sector within the REIT space. When you think about the business, that makes total sense, since effectively, they offer leases that last just a single day. And with little to no consequence for canceling a reservation, occupancy quickly falls as soon as the economy cools off. Normally, that doesn’t happen quite as quickly, or fall quite as deeply, as it did in the face of the coronavirus, but this is the typical cycle hotel REITs like Apple Hospitality face.
As the world starts to reopen and vaccine developments suggest there’s a very real chance the world will overcome the COVID-19 challenge soon, things should start to improve. To put some numbers on this, Apple Hospitality’s occupancy was around 76% in February, fell below 20% in March and April, and is now back up to 52%. All of the hotel owner’s hotels are back up and running again. In a regular operating environment, 52% would be a terrible number, but given the headwinds, it’s pretty impressive.
The problem is that Apple Hospitality investors have taken a pretty big hit, too. The REIT suspended its monthly dividend in April. With modified funds from operations (FFO) of just $0.04 per share in the third quarter compared to $0.45 in the same stanza of 2019, it’s highly unlikely the dividend will return anytime soon. But as travel slowly picks up, Apple Hospitality’s business, which is focused at the high end of the hotel space, should too.
Ryman Hospitality: The party planner
While Ryman Hospitality also operates hotels, its business isn’t as simple. The REIT’s business is centered around group events: It owns five of the largest convention centers in the United States. In addition to this business, which goes under the Gaylord banner, it also owns the Grand Ole Opry, a country Western-themed amusement venue, and some related media assets. To put it simply, this is not a typical hotel REIT.
To give an idea of just how different it is, Ryman’s occupancy in the third quarter was just shy of 15%, down from around 77% in the third quarter of 2019. In its earnings release, the REIT focused on its cash burn rate, which is running at nearly $23 million a month, and how many months of liquidity it has on hand (roughly 30, which suggests it can muddle through the COVID-19 hit). These are not the types of things you want to hear a REIT discussing, because they speak to a very troubled business. Ryman’s adjusted FFO for the quarter was a loss of $1.09 per share.
But this makes complete sense, given what it does. As businesses pull back and people look to social distancing to help keep themselves safe, going to a convention or amusement park is low on the list of risks worth taking. Adding to the headwinds here, there are actual costs involved in canceling conventions. So it will likely take longer before its business starts to pick back up again, since new conventions are likely to be stalled until there’s a clear indication the world has gotten a handle on COVID-19. The company suspended its dividend when it announced first-quarter earnings, and that payment is likely to take even longer to return than Apple Hospitality’s dividend.
The winner is…
The ugly truth here is that neither Apple Hospitality nor Ryman are great options for most investors today. But when you compare this pair, Apple Hospitality’s business appears like it is recovering more quickly and will likely continue to do so. For aggressive investors looking for a turnaround play in the REIT sector, Apple Hospitality’s hotel focus probably makes more sense. Indeed, Ryman’s group-centered properties face an extra headwind that’s likely not worth getting involved with just yet.