What is Hospitality REIT?

Explanation

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 acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more 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.

How Does it Work?

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 that the hospitality industry is inherently seasonal, which means that the industry witnesses peak and off-peak seasons during certain specific periods of the year. Typically, peak periods are witnessed during summers when people in large volume plan their holidays, and as such, hotels are required to arrange accommodation for various types of clients ranging from international tourists to local travelers. The hotels are able to 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 dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. 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.

Examples of Hospitality REIT

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Example #1 – Host Hotels & Resorts

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 ratiosLeverage RatiosDebt-to-equity, debt-to-capital, debt-to-assets, and debt-to-EBITDA are examples of leverage ratios that are used to determine how much debt a company has taken out against its assets or equity.read more as compared to the industry benchmark and is the only entity in this segment to enjoy investment-grade credit rating.

Example #2 – Apple Hospitality REIT

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

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 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 major 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 hospitality REITs 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 payoutDividend PayoutThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company’s net income. Formula = Dividends/Net Incomeread more of 90% of the net incomeNet IncomeNet Income formula is calculated by deducting direct and indirect expenses from the total revenue of a business.. It is the most important number for the Company, analysts, investors, and shareholders of the Company as it measures the profit earned by the Company over a period of time.read more to the shareholders).It incurs high management and transaction fees that result in lower payouts to the shareholders.

This has been a guide to what is Hospitality REIT and its meaning. Here we discuss examples and how hospitality REIT works along with advantages and disadvantages. You may learn more about financing from the following articles –

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