A REIT trades in the same way as stocks or exchange-traded funds and includes various types of properties such as cell phone towers, data centers, self-service warehouses, malls and malls. .
Hotel REITs own and operate hotels, accommodations and resorts. These properties can range from basic mid- and lower-level hotels to upscale and luxury hotels and convention centers, says Chris Kuiper, an equity analyst at CFRA, a New York-based financial research firm.
The hotel and resort industry is large and can offer investors another type of property for diversification, he says.
REITs are attractive to investors looking for income and diversification in a portfolio and because they are not correlated to stocks and bonds, but have some similarities to dividend-paying stocks, says Rich Messina, vice-president. senior chairman of investment product management of E-Trade, a New York company. based brokerage company.
Hotel REITs such as Park Hotels and Resorts (ticker: PK) and Hospitality Properties Trust (HPT) focus on the development, management and acquisition of hotel properties.
The risks vary with the various investments of the REIT. A weaker economy and fewer consumers taking vacations could negatively affect the performance of a hotel REIT, according to Messina.
âIt’s about really understanding what’s under the hood before you invest and taking a close look at your tolerance for risk,â he says.
Here are some factors to consider before investing in hotel REITs:
- Revenue generated from rooms and food and beverage sales.
- Hotels can offer diversification.
- Industry can suffer during downturns.
Revenue from rooms and food and beverage sales
Hotel revenue is generally divided into room revenue relative to food and beverage revenue, as well as other options such as spa and conference services.
Margins can also be reported separately, as hotel REITs can provide room costs versus food service costs, Kuiper explains.
One of the main hotel-specific metrics that is closely monitored and tracked is called âRevPARâ or ârevenue per available roomâ. This measure is important, he says, because it is a combination of the two factors that make up revenue from hotel rooms: the average daily rate (ADR) per room and occupancy. It is calculated by multiplying the two together or by taking the total revenue from hotel rooms and dividing it by the number of rooms available.
Host Hotels & Resorts (HST) is one of the largest publicly traded hotel REITs and is one of the largest owners of upscale and luxury hotels, with 75 properties in the United States and five in the international with a total of 46,500 rooms. The company partners with brands such as Marriott (MAR), Ritz-Carlton, Westin, Sheraton, Hyatt (H) and Hilton (HLT).
Park Hotels & Resorts (PK), which went public in 2017 after its spin-off from Hilton, acquired Chesapeake Lodging Trust, a former publicly traded REIT, in September, bringing its number of hotels to 65 upscale hotels.
Hotels can offer diversification
The hotel and resort industry is large and can offer investors another type of property for diversification. This industry can offer investors significant leverage or exposure to a strong economy, Kuiper says.
âHotel demand comes from two main types of customers: business travelers and leisure travelers,â he says. âBoth of these types of customers will increase demand during strong economic cycles. Hotel REITs also have high operating leverage, as many of their costs are fixed.
The hotel REIT sector represents a total enterprise value of $ 800 billion with a commercial market capitalization of $ 46.5 billion and represents 3.9% to 4.4% of the benchmarks FTSE REIT and MSCI REIT, said Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin. .
âInvestors generate billions of capital flows to the hotel REIT industry daily,â he says.
Three hotel REITs that could attract investors are RLJ Lodging Trust (RLJ) and Sotherly Hotels (SOHO) and MGM Growth Properties (MGP), according to Underhill.
RLJ Lodging Trust, which owns 108 full-service compact hotels such as Embassy Suites and Fairfield Inn & Suites, has a strong eight-year payment history of a 7.9% return, which is “exceptionally attractive to investors in the current environment, âhe says.
âThe stock is up 24% from the current market price,â Underhill said. “The company completed a share buyback this year which was equivalent to approximately 1.5% of the company’s market cap, so we see an attractive portfolio of assets driving yield and prices to new highs.”
Sotherly Hotels only has 13 hotels and most are located in the South, such as Miami and Atlanta. The company is focused on the acquisition, renovation and repositioning of high-end full-service hotels. The stock is up 26% from its current market price of $ 6.59.
MGM Growth Properties’ portfolio includes 11 resorts and is a REIT established three years ago from the properties of MGM Resorts with a current dividend yield of 5.79%. The company has increased its dividend eight times, to $ 1.87 annualized per share or 31% since its initial public offering in 2016, according to Underhill.
The hotel-casino business has split in two in recent years, with major casino operators pulling out of hotel and casino buildings, he says.
âThe split created opportunities to invest in casino real estate, including a new type of REIT created solely to own operator-leased casino hotels,â Underhill said. “Despite strong competition in the gaming market, top casino REITs have performed well and have been rewarded with rising stock prices recently.”
Industry can suffer during downturns
The biggest risk with investing in hotel REITs is that they can suffer greatly when the economy weakens, Kuiper explains.
“In times of economic weakness, demand for contracts is both from business travelers and weaker demand from leisure travelers, who limit their discretionary budgets for things like vacations,” he said. he declared. âFixed costs become a handicap because rooms can be left empty. “
Another major risk is oversupply. Strong demand prompts developers to bring more supply to the market, Kuiper says.
âIf too many developers add supply, it can lead to oversupply conditions, leading to lower occupancy and lower prices,â he says. âHotels are very competitive in the age of online search engines and price comparison tools, as well as increasing competition from other sources like AirBnb. The oversupply is particularly a problem for hotels that require long construction times, such as several years. “