After a period of severely depressed room night demand, hotel REITs have been experiencing steady improvement during 2022, bolstered by a surprisingly resilient leisure traveler. Occupancy rates, RevPAR and ADR have continued to rebound and, even as there is speculation about a prolonged recession, travel demand is expected to continue to bolster the U.S. hospitality industry. Here’s a quick look back at the roller-coaster ride the pandemic caused investors, and why the investment community can be optimistic about where we’re headed.
Obviously, 2020 and 2021 were unprecedented years in the history of lodging. The dramatic rise in COVID cases in 2020, resulting in depressed room-night demand, had a negative impact on the private market values of hospitality real estate assets—and corresponding hotel REIT share prices. Furthermore, concerns related to business and group travel, labor shortages and inflationary pressures compounded the downward pressure.
With the development and distribution of vaccines during 2021, stringent property cleaning protocols, the growth of contactless check-ins and millions of stir-crazy consumers, hotel REITs operating performance began to recover. Then, following the Omicron variant outbreak in January and February of this year, U.S. travelers began to travel aggressively and occupancies improved dramatically. They’ve stayed on an upward trajectory through the first half of the year, even approaching pre-pandemic levels across the nation, largely due to the return of business and group travel. We estimate that business and group travel in our own portfolio of 100 domestic hotels has now returned to 75% or more of pre-pandemic levels.
While the depth of the pandemic’s negative impact on travel was like nothing we have experienced in modern times, learning from its significant demand shock has given REITs a better view of what to expect and how to respond to times of crisis going forward.
Historically, many hotel REITs have focused on growing assets primarily in major urban markets. That strategy did not work out well in a COVID environment; as a result, they are now focused diversifying geographically by reallocating assets from urban markets to leisure destinations. As a result, it may turn out that the best acquisition opportunities end up being in northern urban markets, especially in hotels that are reliant on meetings and conferences.
While inflation continues to negatively impact business broadly, its effects on lodging tend to be net positive due to the built-in flexibility to reprice hotel rooms every night. The data shows that during the high inflation environment of the 1970s, it was possible for hotels to continue to increase ADR aggressively. Hopefully, we can expect to see a similar pattern this time around.
Due to ongoing labor shortages, our hotels are currently staffed at 75% to 80% of pre-pandemic employment levels. As of the second half of the year, the labor market has (ever so slightly) improved, in part due to 1) significant increases in hourly wages over the past two years (25% to 30% higher than 2019 levels), and 2) certain government subsidies no longer being available. Nonetheless, while the labor market has improved, it is undoubtedly incremental. Shortages still exist in many markets. That said, the pandemic has taught us to run our hotels more efficiently without disrupting the guest experience. We may never get back to pre-COVID levels. We are bringing back labor prudently and focusing on what is crucial to the customer.
Amid concerns that a recession is imminent (or perhaps already started), Transportation Security Administration (TSA) data shows that there has been a steady improvement in the number of passengers traveling this year when compared to previous years. The pandemic forced us to give up travel for more than a year and, for many, work remotely. It only made us realize just how important it is to our quality of life. So, even if households reduce expenditures due to a recession, people will still be motivated to prioritize travel.
Specifically in our portfolio, we are not yet seeing any signs of demand slowing down and as business travel continues to recover, we believe these trends will continue. We are also seeing the corporate traveler having longer lengths of stay and extending their business trip through the weekend than we have ever had across our portfolio.
Given this backdrop, many analysts believe that now is an ideal time to invest in lodging REITs. They cite four main reasons.
First, shares of publicly traded REITs are trading below their net asset value (NAV), which represents what their assets minus their liabilities are worth in the private markets. Second, we’re seeing strong gains in occupancy, particularly as business travel and group business recovers. Third, ADRs remain elevated—and rising. Normally it takes many years for rates to recover coming out of a recession or crisis, but this cycle is uniquely bullish in that rates are already exceeding previous peak levels. Fourth, as we look across the next couple of years, we expect that EBITDA (earnings before interest, taxes, depreciation and amortization) will exceed levels that were achieved before the start of the pandemic—potentially by a significant margin.
Stock prices will continue their random walk; however, some of the best investing opportunities occur when there is a large disconnect between the uncertainty in the public markets and solid fundamentals at the hotel level. That’s what we are seeing today. Invest wisely.
J. Robison (Rob) Hays is president/CEO, Ashford Hospitality Trust and senior managing director, Ashford Inc., an alternative asset management company with a portfolio of strategic operating businesses that provides global asset management, investment management and related services to the real estate and hospitality sectors. He is also a member of the board of directors of Ashford Hospitality Trust.
