Hotel REITs

I am bullish on reopening, especially when you combine it with a money-printing stimulus bill that is so gigantic I am wondering whether it might feel like an abrupt currency devaluation this summer.

The challenge is to find investments that aren't already pricing-in the reopening. Things like airlines and cruise ships are very obvious to retail, and they have never been my favorite investments anyway. I prefer to find things that are royalty businesses or some kind of real asset (e.g. real estate) rather than a low-margin "spread" business that could just as easily be challenged by higher input costs associated with the shock of the reopening.

One idea is hotel REITs. As real estate property, hotels are real assets. We have some reopening plays that are nominal assets, like banks. We bought Carter Bank & Trust (CARE) which has a large portfolio of loans to hotels and was trading at a deep discount to tangible book value. The valuation of Carter was lagging the reopening progress which made it compelling to buy.

Perhaps hotel REITs are lagging now. Here are three candidates that seem interesting. We always like the method of paired comparisons as a way of illuminating value.

Apple Hospitality REIT (APLE)

• $3.23 billion market cap, $1.8 billion debt, $5.03 billion enterprise value
• 30,000 rooms = $165k enterprise value per room 
• 3% upside to 52wh
• 2019 EBITDA $427 million (EV/EBITDA 11.8x)
• 2019 ADR $137 (room is 3.3 years of ADR)
• 2019 net income $172 million (19x P/E)
  

Sunstone Hotel Investors (SHO)

• $2.7 billion market cap, $0.69 billion debt, $3.39 billion enterprise value
• 7,503 rooms = $452k/room 
• 9% upside to 52wh
• 2019 EBITDA $311 million (EV/EBITDA 10.9x)
• 2019 ADR $240 (room is 5.2 years of ADR)
• 2019 net income $143 million (19x P/E)
  

Host Hotels & Resorts (HST) 

• $11.7 billion market cap, $4.1 billion debt, $15.8 billion enterprise value
• 46,142 rooms = $342k per room
  
• 5% upside to 52wh 
• 2019 EBITDA $1.475 billion (10.7x)
• 2019 ADR $324 (room is 2.9 years of ADR)
• 2019 net income $920 million (13x P/E) 
  

It is interesting that Host is the cheapest EV/ADR, EV/EBITDA (2019), and P/E on 2019 earnings.

Host owns really nice properties - I have been to four of their properties and they are the highest overall quality to the discerning traveler, although Sunstone has some trophy properties that would appeal to rich proles.