Lodging/Resort REITs

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Luxury hotel entrance

Lodging/resort (L/R) REITs are a type of equity REIT involved with the ownership and management of hotels, resorts and other accommodations that rent space to tenants. Hotels can be classified by their amenities and level of service, and different REITs may specialize in one or more hotel classes. In general, the spectrum of customers who frequent the properties in this REIT sector is wide, from vacationers to business travelers.

As of August 31 2017, REITWatch puts the L/R REIT market capitalization within the FTSE NAREIT All REITs Index at $53,369.9M, or 4.74 percent of the index. The same numbers for the S&P REITs Index are $27,931.0M and 3.34 percent, respectively. The global L/R REIT universe consists of 21 companies with an implied market cap of $55,074M, a debt ratio of 35.3 percent, an interest coverage ratio (i.e., EBIT/interest expenses) of 6.45 and a fixed charge coverage ratio (EBIT/total debt service) of 5.70.

REIT.com puts the cumulative net total return from hotel REITs from Sep 2002 to Jun 2017 at 183.05 percent, which works out at an average annualized return of 7.31 percent. The annualized volatility through this period is 12.02 percent. These figures include income and capital gains, net of annual investment management fees and expenses of 50 basis-points.

L/R REITs and Economic Conditions

Naturally, good economic conditions favor L/R REITs as consumers have more money to spend on vacations and profitable businesses can afford more business travel. A prolonged economic upswing encourages the building of new properties that eventually absorb and then overwhelm demand once the economy goes into contraction. This tends to create cohorts of properties with regard to construction and closure dates. The effect is to somewhat synchronize renovation cycles within each cohort, a factor that can depress L/R REIT values more than had the same volume of renovation been spread evenly from year to year.

Another negative factor that continues to weigh down L/R REIT values is the growth of shared economy and players like Airbnb. These alternative lodgings are more likely to have their largest impact upon hotel compression (the percent of total occupancy) during bad economic times when consumers are apt to seek the lowest possible prices.

Hotel REITs had a good year in 2016 with a 25 percent total return. Revenue per available room grew by about 3 percent. However, oversupply and Airbnb portend choppy seas once our current economic expansion cycle ends.

Three Largest L/R REITs

Host Hotels & Resorts (HST): Host is the largest lodging REIT and a leading owner of luxury hotels. The company was incorporated in 1998 in Maryland. The REIT is self-managed and self-administered. It’s business strategy is to own a diversified portfolio of upscale properties in urban centers and in resort areas with relatively high entry barriers.

Characteristic	HST
Market Cap	$14.28B
EPS (Q2 2017)	$0.28
Free Cash Flow (TTM[1])	$1.30B
Price/Cash Flow (TTM)	23.75
Cash Flow Growth (5 years)	4.82%
P/E Ratio (TTM)	24.16
ROI (TTM)	5.44%
Dividend Yield	4.14%
Total Debt/Equity (TTM)	54.52%

Hospitality Properties Trust (HPT): HPT owns more than 300 hotels and leases almost 200 travel centers in North America. This dual-track strategy diversifies HPT’s cash flows to different points in the business cycles. Properties owned by HPT are operated by brand owners rather than third-party management. The REIT utilizes portfolio agreements that require specified minimum returns or rent from operators.

Characteristic	HPT
Market Cap	$4.60B
EPS (Q2 2017)	$0.37
Free Cash Flow (TTM)	$556.9M
Price/Cash Flow (TTM)	21.61
Cash Flow Growth (5 years)	3.22%
P/E Ratio (TTM)	23.73
ROI (TTM)	3.13%
Dividend Yield	7.43%
Total Debt/Equity (TTM)	122.09%

Apple Hospitality REIT (APLE): The third largest REIT in this sector owns a sizeable portfolio of 238 select-service, upscale U.S. hotels in 34 states. The properties deliver 30,000+ guestrooms under the Marriot and Hilton brand families. APLE favors developing, urban and high-end suburban markets. This REIT maintains a relatively conservative debt ratio.

Characteristic	HPT
Market Cap	$4.21B
EPS (Q2 2017)	$0.39
Free Cash Flow (TTM)	$351.67M
Price/Cash Flow (TTM)	23.78
Cash Flow Growth (5 years)	12.04%
P/E Ratio (TTM)	23.61
ROI (TTM)	3.65%
Dividend Yield	1.20%
Total Debt/Equity (TTM)	38.43%