Top Hotel Markets And The REITs With The Most Exposure

Includes: DRH, HST, HT, LHO, PEB
by: Daniel Lauchheimer

I have now written two articles on the hotel sector with a focus on New York City, both of which received the fewest views of any of my articles written to date. Therefore, the fact that I am spending the time to research and write another article on the topic of hotels, truly shows how this topic stands out as a true labor of love.

In this article I will expand the focus of the geographies that I spoke about in my previous two articles. Specifically, I will not only speak about the hotel economics in New York City, and its effects on Hotel REITs, but I will expand my focus to the other supply-constrained markets around the country. Through examining these statistics I will further examine the hotel REITs, which I discussed in my previous articles, and draw some conclusions about the attractiveness of these various hotel REITs.

Markets Besides New York City

When determining the most attractive markets for hotels, I chose those markets with the highest RevPAR, and assumed those with highest RevPAR are the most attractive. I presume the higher the RevPAR, the more pricing power hotels have over their customers, and therefore the more attractive the market. Another reason for choosing this metric over say, supply and demand, is because the two companies that control this info - STR and PKF hospitality research - charge a fortune for this research, and I was able to find RevPAR numbers for free. According to Deloite the following markets (pdf) have the highest RevPAR:

FY 2011


New York


Oahu, Hawaii


San Francisco






Washington, DC


The classic USA gateway cities - New York, Boston, DC, and San Francisco - made the cut, but in addition the vacation hotspots of Miami, and Oahu (aka Honolulu), also made a strong showing. Another important side point - New York trounced the competition, having a higher RevPAR by more than an astounding 48% than its closest competitor, Hawaii! This figure goes a long way in supporting the argument I made in my first article about the underlying attractiveness on the NYC hospitality space, see there for more details.

Presumably, the REITs with the highest concentration of their hotels in the above markets should prove most attractive to investors. Therefore, let's turn our attention to which hotel REITs have a strong presence in the above markets, which could better inform our investment making decision.

Hotel REITs in Core Markets

The following chart lists some of the largest hotel REITs and their exposure to the markets listed above.

Total Rooms

Rooms in Top Markets

Percentage of Rooms in top markets

Pebblebrook (PEB)




LaSalle (LHO)




Host Hotels and Resorts (HST)




Hersha (HT)




Diamondrock (DRH)




Before I turn to my analysis I would like to make a brief point about these figures. As shown above, the RevPAR figures vary widely from one market to the next within these "top markets" - the difference between NYC (the top market) and Washington, DC, (the bottom market) approaches 100%. Therefore, a more accurate presentation would show a sort of weighted average, where a room in New York City would carry more weight than a room in Washington DC. I did a slight variation of such an approach, and came away with basically the same numbers as above, with some slight variations in terms of the spreads between the different markets. For example, in the above chart PEB and LHO have a 23% spread between their respective "market share in top markets" whereas using the other method their difference would narrow to 17%. And considering you probably want to go back to playing some addictive online game, I won't bore you with another chart.

Considering this chart in a vacuum would cause you to choose Pebblebrook as the best investment in the hotel REIT sector. However, I think you must consider other factors when making the decision of where to invest. In my previous article I outlined some of the main metrics used on the hotel sector - FFO to dividend payout, net debt to EBITDA, debt service to EBDITDA, and operating performance - and I concluded there that with all factors taken into consideration LaSalle proved the best option for investors. I think the numbers above continue to support that theory, but again referencing back to that article Pebblebrook did stick out with some very positive and compelling figures. I would still tip my hat to LaSalle when deciding where to invest, but I think this information gives investors more to consider. Bottom line, I think when taken in totality LaSalle has better economics than Pebblebrook, but more careful consideration could change my mind.


In this article I wanted to add another wrinkle to the discussion of the best investment in the hotel REIT space. I still think that in order to gain a fuller understanding we could explore other areas not yet looked at, and dive deeper into some of the issues we have already discussed. Specifically, we still need to discuss the particular hotel segments each of these REITs traffic in - select service, full service, luxury, boutique etc - and other leading markets in the United States. Additionally, we have yet to explore international markets at all (a space only Host traffics in), and other hotel REITs I have as of now left out of the discussion completely. I hope to deal with these issues in the coming articles, so stay tuned!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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