In as much as hospitality REITs are a unique type of real estate investing, they offer investors the potential to earn steady income and diversify their investment portfolio, by investing in income generating investments. Below we present an overview of hospitality REITs and the implications of investing in them.
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on investing here.
A hospitality real estate investment trust is a company that specializes in owning, operating, and/or financing income-generating properties within the hospitality sector. These properties include hotels, motels, luxury resorts and other lodging facilities.
Like other types of REITs, a hospitality REIT pools capital from investors to invest in a range of commercial properties within the hospitality sector. From the income generated, REITs then distribute the revenue among its shareholders. Hospitality REITs are great for investors looking to venture into the real estate market.
Just like traditional REITs, hospitality REITs operate with the main goal of generating rental income and then distributing returns among shareholders. However, hospitality REITs differ from traditional REITs as they mostly generate their revenue from hotel operations including room rentals, food and beverage sales, conference facilities and other related services.
Hotel REITs generate most of their income through the fee that is paid by guests for short term stays at the hotel as well as for the use of conference rooms and other facilities.
Similar to traditional REITs, hospitality REITs are required by law to distribute at least 90% of their net revenues to shareholders in the form of dividends.
As an investor looking to venture into hospitality REITs, it is important to note that income generated by these REITs is closely tied to travel demand, occupancy rates and average daily room rates.
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Some advantages of investing in hospitality REITs include:
Diversification of your investment portfolio. As an investor looking to gain exposure to properties like luxury hotels and resorts, buying hospitality REIT shares can help you diversify your investment portfolio, thus reducing risk in the event of underperformance of a single property or specific market segment.
Source of stable income. Typically, hospitality REITs generate revenue through rental income from hotel operators or direct management of properties. For investors, this can be a source of predictable income which is usually paid in the form of regular dividends.
Professional management. Hospitality REITs are managed by experienced real estate professionals who handle both property acquisition and management. Due to that, investors benefit from their investments being handled by qualified professionals, without the need for their direct involvement in property management.
Liquidity. Hospitality REITs are traded publicly in the stock market where investors can easily buy and sell shares on stock exchanges. This liquidity gives investors access to make timely adjustments to their investment portfolios as needed.
Potential for capital appreciation. In addition to regular income distributions, hospitality REITs may also offer investors the potential for capital appreciation as property values increase over time. This can be as a result of things like property renovations or strategic acquisitions.
Some disadvantages of investing in hospitality REITs include:
Sensitivity to economic cycles. Hospitality REITs are sensitive to economic cycles, as travel demand and hotel occupancy rates are greatly influenced by the current state of the economy. When the broader economy is performing poorly, this can result in a decrease in travel demand and lower occupancy rates. This can eventually impact the financial performance of hospitality properties and REITs.
Market risks as a result of changes in consumer preferences. After the COVID-19 pandemic, consumer preferences shifted as many travelers opted to stay in vacation rentals as opposed to hotels due to privacy and safety reasons. Such changes in the market can impact occupancy rates and rental income of hotels and resorts in the long term.
Oversupply in one geographic location. Some hospitality REITs may own multiple hotels in the same area and this may lead to generation of lower revenue as a result of competition from other brands or market fluctuations in that area. Having hotels and real estate properties in different geographic locations, can help spread and manage that risk.
Capital expenditure requirements. Hotels and other hospitality properties usually require ongoing capital expenditures for maintenance, renovations and upgrades so that they can stay competitive in the market. These capital expenditures can reduce the income generated, thus impacting the dividend amounts that investors receive.
Interest rate risk. Hospitality REITs can be sensitive to changes in interest rates, as they typically rely on debt financing to acquire and develop properties. That means that an increase in interest rates can increase borrowing costs and reduce the profits made, therefore lowering the returns that shareholders receive in the form of dividends.
As an investor looking to invest in hotel REITs, here are some top choices to consider.
Apple Hospitality REIT, Inc. (NYSE: APLE) is a publicly traded REIT that has one of the largest portfolios of high-end hotels in the United States. With a history of 20+ years in the lodging industry, the company’s portfolio consists of 100 Marriott branded hotels, 120 Hilton branded hotels and five Hyatt branded hotels.
As of February 2024, the company's annual dividend yield stands at 6.08%.
Host Hotels & Resorts (NYSE: HST) is one of the largest lodging REITs in the word with a portfolio of 77 luxury and upscale hotels across top markets in the United States. As an S&P 500 company, Host Hotels & Resorts boasts of being the largest third-party owner of Marriott and Hyatt hotels, with access to data and business intelligence.
As of February 2024, the company's dividend yield stands at 4.12%.
Park Hotels & Resorts Inc. (NYSE: PK) is one of the largest publicly-traded lodging REITs with a diverse portfolio of hotels and resorts that consists of 43 premium-branded hotels, and resorts with 26,000+ rooms located in prime locations within the United States.
Some of the leading brands that the company is affiliated with include Hilton, Marriott and Hyatt.
As of February 2024, the company's annual dividend yield stands at 4.03%.
Pebblebrook Hotel Trust (NYSE: PEB) is a publicly traded real estate investment trust with a portfolio of 45+ upper upscale, full service hotels and resorts. The properties are mainly located in urban markets in the United States.
As of February 2024, the company's annual dividend yield of the company stands at 0.26%.
Ryman Hospitality Properties, Inc. (NYSE: RHP) is a leading REIT that has carved out its niche in the entertainment space. It specializes in running upscale convention center resorts and country music entertainment experiences. The company operates five of the largest non-gaming convention center hotels in the United States, namely:
As of February 2024, the company's annual dividend yield stands at 0.96%.
As an investor, it is important that you understand a REIT's investment strategy before acquiring any REIT investments. Here are key performance indicators that investors should pay attention to.
Occupancy rate. This refers to the number of occupied rooms in a hotel compared to the total number of available rooms. High occupancy rates indicate strong demand and potential to generate higher revenue. On the other hand, low occupancy rates may be a signal of low income generation which may make it challenging to cover both running expenses and provide good returns to investors.
Average daily rate (ADR): It is a metric that is used to calculate the average revenue earned from an occupied hotel room on a given day. Investors should consider the ADR when investing in hospitality as it can help in the assessment of overall financial performance of a property.
Revenue per available room (RevPAR): RevPAR is a metric that can be used by investors to gain insight on a property's ability to fill the available rooms at an average rate. It is calculated by multiplying ADR by occupancy rate.
Integration of technology: Investors should consider the integration of technology when investing in hospitality REITs as properties that have incorporated technology in their operations can benefit from increased operational efficiency, an improved guest experience and better financial performance. Incorporation of technology can help streamline various aspects of hotel operations, such as reservations, check-ins and housekeeping, leading to improved service delivery and cost reduction.
Sustainability initiatives: Another key thing that you should consider when investing in hospitality REITs is sustainability initiatives because they can positively impact both financial performance and environmental responsibility. Implementing sustainable practices such as energy-efficient technologies, waste reduction programs and water conservation measures, can lead to cost savings through reduced utility expenses and operational efficiencies. In addition, sustainability initiatives generally enhance the brand reputation of hotel properties, attracting environmentally-conscious guests and potentially increasing occupancy rates and revenue.
Property portfolio: Assessing a REIT's property portfolio can help investors gauge revenue potential and the amount of risk they are exposed to. A diversified portfolio can help mitigate risks caused by fluctuations in the economy.
Management team: Another key thing to consider when investing in hospitality REITs is the expertise and experience of the management team as the skills of the management team directly affect the financial performance and long-term success of the REIT. A skilled and capable management team can effectively navigate challenges within the hospitality industry and implement strategies ensuring that the shareholders receive maximum monetary value.
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https://corporatefinanceinstitute.com/resources/commercial-real-estate/hospitality-reit/
https://www.nasdaq.com/articles/7-best-hotel-reits-to-buy-now
https://www.investopedia.com/articles/investing/061015/top-5-most-profitable-hotel-companies.asp
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