Record Year For Hotel Industry, But REITs Left Behind

Dec. 07, 2017 2:29 PM ETCHH, DRH, H, HLT, INN, IYR, LHO, MAR, PEB, PK, RHP, RLJ, SHO, VNQ, HST11 Comments

Summary

  • Defying the headwinds of oversupply and slow corporate demand, the hotel industry is on pace for another record year of occupancy and RevPar. Unfortunately, hotel REITs haven’t yet benefited.
  • Hotel ownership is a tough “asset-heavy” business. While the hotel operators are up 45% this year, hotel REITs are flat. These REITs have had success improving margins and capital expenditures.
  • Strong performance over the past several years has been driven by robust individual business and leisure travel. Corporate tax cuts may finally rejuvenate the long-dormant group-bookings segment.
  • Supply growth continues to hang over the sector and is most acute in the business travel segments and urban markets. REITs hold a disproportionate amount of hotels in this segment.
  • As expected, the strong hurricane season provided a boost to the extended-stay hotel segment but disrupted operations at several REIT properties. Overall, the hurricane was a net-negative for hotel REITs.

REIT Rankings: Hotels

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REIT Rankings Hotels

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Hotel Sector Overview

Hotel REITs comprise 5% of the REIT indexes (VNQ and IYR). Within our market value-weighted hotel index, we track nine of the largest hotel REITs within the sector, which account for roughly $40 billion in market value: DiamondRock (DRH), Host Hotels (HST), LaSalle (LHO), Park Hotels (PK), Pebblebrook (PEB), RLJ Lodging (RLJ), Sunstone (SHO), Summit (INN), and Ryman (RHP). We also track four of the largest hotel operators.

For real estate investors who are accustomed to simple business models, the hotel industry is an outlier. Generally, the companies that are ubiquitous with the hotel business - Marriott (MAR), Hilton (HLT), Hyatt (H), and Choice (CHH) - don't actually own hotels, but simply manage the hotel for the property owners. These hotel operators are typically structured as c-corporations and tend to operate in an asset-light model with higher margins and lower leverage.

Hotel REITs, on the other hand, operate with an asset-heavy model by owning the assets, collecting the revenue, and paying a set percentage to the management company. Hotel REITs tend to be less nimble and have slower growth rates than c-corp hotel operators, but have historically paid a sizable dividend yield to investors. Simplistically, hotel operators are the growth side of the business while

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