Why Hotel REITs Look Like a Buying Opportunity

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Kevin Brown: Hotel REITs have recently sold off due to headwinds created by the coronavirus. While the travel restrictions and consumer fears of the virus might create a major short-term headwind for the hotel industry, we think that this could be a buying opportunity for these companies.

Even if the coronavirus eventually has a negative impact on 2020 RevPAR, we believe that companies would quickly rebound in 2021. In our recent analysis of the hotel industry, we found that hotel revenue was highly correlated with the growth of the overall economy and that the share of the economy's budget spent on hotels rose over time during periods of economic growth and fell off sharply during recessions. If the coronavirus ends up being a relatively small event and the U.S. economy continues to grow at a modest level in 2021 and beyond as we are currently assuming, then the hotel industry should see growth in 2021 as the industry rebounds and continue to produce modest growth through the end of the current cycle.

However, if the coronavirus triggers a recession in the U.S., then we expect the hotel industry to see several quarters of negative growth. In a recession, the first thing that many businesses cut from their budgets is travel as they look to cut unnecessary expenses and consumers fearful of losing their jobs cut back spending on luxury goods like travel. Even as the economy recovers, historical evidence suggests it takes years for the hotel industry to return to the level of spending seen prior to the recession.

The risk of the virus causing a U.S. recession should keep risk-averse investors on the sidelines. However, if investors believe that the U.S. economy will continue to produce healthy growth despite the (coronavirus) fears, then we think that the hotel REITs can be purchased at discounts to their long-term fair value estimates.