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Hospitality REIT

Updated on April 22, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Hospitality REIT?

Hospitality REIT refers to the real estate investment trusts (REIT) that are engaged in the ownership, acquisition, and management of hotels, luxury resorts, motels, and business-class hotels, along with leasing out of properties to guests. Besides, these entities also offer other services associated with an ordinary hotel, such as serving meals, alcoholic and non-alcoholic drinks.

Hospitality REIT Meaning

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They are suitable for investors who want to invest in commercial properties and have the ability to absorb the risks and volatility of the hospitality sector. Proper research should be done since they are different from hospitality sector stocks. However, it is always better to diversify investments.  

Key Takeaways

  • Hospitality REITs are real estate investment trusts that own, acquire, and manage various types of hotels, luxury resorts, motels, and business-class hotels. These REITs rent out their spaces to visitors and provide services similar to traditional hotels, including meals and beverages.
  • Hospitality properties and REITs are subject to seasonality, with peak and off-peak periods throughout the year. 
  • Currency movements can have an impact on the performance of hospitality REITs. Some organizations within the industry benefit from favorable currency movements, which can increase the attractiveness and tourism appeal of specific locations.

Hospitality REIT Explained

Hospitality REITs are focused on the development, acquisition, management of lodgings, hotels, and other similar properties along with the added responsibility to fund the construction of these properties. Typically, they either purchase land in strategic locations in a particular business area and set up their own hotel or acquire an existing hotel or resort and take over its management responsibilities. Once the new setup or acquisition is complete, the entities either directly manage the properties or hire a third-party to manage and take charge of the daily hotel operations in exchange for a predefined share of the revenue. On the other hand, there are instances wherein other companies hire Hospitality REITs to manage their hotel, motel, lodging, and resort properties.

Please note that it is also referred to as Hotel REITs.

REIT or REAL ESTATE INVESTMENT TRUSTS – Easy Video Explanation

 
 

Income Generation

As far as income generation is concerned, Hospitality REITs earn by offering a range of services that include accommodation, conference venues, meals, beverages, parking levies, etc. They also earn by leasing out a certain portion of their building premise to some other businesses, such as tuck-shops, which basically serve as the source of additional income.

Although it is a source of steady income, it suffers from one strong downside: the hospitality industry is inherently seasonal, which means that it witnesses peak and off-peak seasons during certain specific periods of the year. Typically, peak periods are detected during summer when people in large volume plan their holidays. As such, hotels must arrange accommodations for various clients ranging from international tourists to local travelers. Consequently, the hotels can earn the highest prices during the peak seasons.

They are mandated to distribute a minimum of 90% of the net revenue (= revenue – operating expenses) to the shareholders in the form of dividends. This is a mandatory requirement that was enacted by the U.S. Congress, and compliance with it has various benefits that include exemption from the corporate taxes.

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Examples

Hospitality-REIT

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Example #1

It is one of the largest hospitality REITs in the market, with a market cap of $14.0 billion. Host Hotels & Resorts operates upscale hotels and resorts under the brand names such as W, Hyatt Regency, and Marriott and currently owns around 100 hotel properties. The company leverages such a large scale of operation to achieve operational efficiency. In fact, it operates on one of the lowest leverage ratios as compared to the industry benchmark and is the only entity in this segment to enjoy investment-grade credit rating.

Example #2

This hospitality REIT belongs to the mid-market hotel segment. It currently has a market cap of $3.7 billion and caters to the “select-service” hotels. As the category name indicates, these hotels are different from the normal mid-market hotels and offer guests more than regular budget hotel chains. However, it doesn’t have amenities that can be compared with that of luxury resorts. The brands fall in this category include Homewood Suites and Courtyard by Marriott. Typically, business travelers are customers.

Example #3

Ryman Hospitality Properties is a large-scale destination resort with a market cap of $4.2 billion. It can be placed at a level above luxury resorts given that it offers vast experiential components over above the usual amenities typically offered by luxury hotels. It offers lots of food and beverage outlets, retail stores, along with vast space for the convention. As far as meeting spaces are concerned, Ryman operates the three largest non-casino hotels in the U.S.

Hospitality REIT Index

One of the most popular indexes for American hospitality REIT is the Dow Jones U.S. Hotel & Lodging REIT Index. The index covers nine companies from the U.S. hospitality market. Over the last 52 weeks, the index has reached a high of $122.01 and a low of $$33.61, and currently, it is trading at $53.89. The index has witnessed a significant slump since the onset of the ongoing COVID-19 pandemic.

Advantages

  • These entities enjoy higher returns during currency movement that make the particular destination more attractive and tourist-friendly.
  • Risk is diversified among a larger group of investors as against a sole property owner.
  • These investment avenues usually pay higher dividends.
  • When compared to ordinary real estate ownership, REITs provide better liquidity as it has the option of selling the shares and not an entire property.
  • Investors are able to purchase ownership in large properties that they won’t be able to afford otherwise.
  • All the properties under REITs are managed by trained professionals.

Disadvantages

  • The income generated from American hospitality REIT can be volatile due to the highly cyclical nature of the underlying industry.
  • It is extremely vulnerable to any adversarial impact on global economic growth.
  • REITs usually have a lower scope of growth as they are allowed to retain more than 10% of the net income in the business (mandated to a dividend payout of 90% of the net income to the shareholders).
  • It incurs high management and transaction fees that result in lower payouts to the shareholders.

Frequently Asked Questions (FAQs)

1. What are the risks associated with investing in a Hospitality REIT? 

Investing in a Hospitality REIT carries risks such as market volatility, occupancy and demand fluctuations, intense competition, rising operating expenses, and regulatory/legal risks. These factors can impact the profitability and performance of the REIT, potentially affecting the income and returns for investors.

2. How does the performance of a Hospitality REIT correlate with the overall economy? 

The performance of a Hospitality REIT is closely tied to the overall economy. During periods of economic growth, increased consumer spending and business activities typically lead to higher travel and tourism, benefiting the hospitality industry. Conversely, reduced travel and financial constraints can impact occupancy rates and revenue for Hospitality REITs during economic downturns.

3. What factors should be considered before investing in a Hospitality REIT? 

Before investing in a Hospitality REIT, factors to consider are the location and quality of the properties within the REIT’s portfolio, the financial health and experience of the REIT’s management team, the occupancy rates and revenue growth trends in the hospitality industry, the REIT’s dividend policy and historical performance, and an assessment of the overall real estate and economic market conditions. Conducting thorough research and seeking professional advice is essential.

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