Investing in Hospitality REITs

Hospitality real estate investment trusts (REITs) have been gaining in popularity, even though they're a unique type of real estate investing.

A hotel REIT is an option for investors interested in commercial real estate, who have strong stomachs, and who are prepared to handle some wild ups and downs as hospitality cycles run their course. They're not bad investments, but investors should know what they're getting into before choosing lodging REITs since they differ from hospitality stocks and other stock market sectors. Diversification can even out the bumps of hospitality cycles in a portfolio containing hospitality REITs, depending on the composition of the REITs you choose.

Understanding hospitality REITs

Hospitality REITs, like all other real estate investment trusts, invest in real estate, and profits on investments are returned to shareholders. Unlike other REITs, however, hotel REITs invest in extremely short-term leases -- most commonly, a single night at a hotel. Consequently, they have some features that are unique within the REIT space.

Hotel REITs make their money in a very straightforward way: They rent rooms and conference spaces to the general public. Although real estate purchases and sales are also part of the regular business of a hospitality REIT, they're not the primary driver of income. Most income comes from tenants -- one day, two days, or a week at a time. The sector obviously includes hotels of all sorts, but it also encompasses resorts and business lodging.

Advantages of investing in hospitality REITs

REITs in general tend to be fairly stable and solid long-term investments when managed properly, and hotel REITs aren't much different when times are good. They give investors a chance to buy a piece of the lucrative hospitality industry, which can result in higher returns and higher dividends than other types of investments.

In addition, unlike real estate purchases, REIT investors have no active involvement in the property. They only need to choose their hotel REIT carefully, accept the risks that may come with it, and sit back and watch their investment grow. They never have to evict anyone or clean up after a messy tenant; professional management teams behind the REITs do all the heavy lifting.

Risks of investing in hospitality REITs

Despite their significant rewards, hospitality REITs are not without risk. These risks cause many REIT investors to choose other REIT classes, especially those who want a smoother and less heart-clutching ride.

Hospitality REITs come with four major risks, many of which can be avoided or minimized with good management. Risk factors include interest rates, oversupply, economics, and financing:

• Interest rates. REITs tend to move in the opposite direction of low-risk interest rates such as the 10-year Treasury note. Because of this, investors who choose REITs are forgoing the opportunity to earn interest with absolute certainty. As those safe investment yields rise, investors expect their REIT yields to rise as well. However, higher REIT yields can translate to lower stock prices.
• Oversupply. If there are too many hotels in one place competing directly with a particular hotel REIT, vacancy rates can become so significant that room prices fall to stimulate demand. A thoroughly diversified hospitality REIT can be a better choice since a wide range of locations and property types will help to spread the risk.
• Economics. Because hotels are so often a discretionary expense, they don't do great when times are tough. However, hotel REITs also include properties that are popular with business travelers and luxury vacationers who travel regardless of the economy. Also, because hotels offer what are essentially daily leases, they can respond quickly to an upturn and increase rents without any hesitation when the tide turns back in their favor.
• Financing. Like all types of REITs, financing plays a crucial role in the expansion and upkeep for hotel REITs. They may require lines of credit to get through tough economic times, acquire new real estate, or upgrade properties. Because of how quickly they can suffer in difficult times, it's important for hospitality REITs to maintain a low debt-to-capitalization ratio to avoid being dragged under if rents dry up.

5 hospitality REITs to consider in 2023

There are plenty of good, well-managed REITS in the hospitality space, and who's on top changes almost daily. But you can be sure that your money will be safe with an excellent financial steward that really understands their customers and their segment in the industry.

Apple Hospitality REIT

The Apple Hospitality REIT contains a number of familiar names for anyone who has ever been on an inexpensive family vacation. Courtyard, Fairfield, and Residence Inn are brands listed among its portfolio, which stretches from coast to coast. Apple Hospitality's management has been working to improve efficiencies, reduce operating expenses, and swap out older hotels for newer ones. Along with consistently improving occupancy rates, this dedication to efficiency will serve investors well.

Summit Hotel Properties

Summit Hotel Properties is a REIT that also holds economy hotels. Although economy hotels sometimes have more narrow margins, they're also far more likely to weather economic storms when vacationers downgrade their more expensive rooms to save cash. Summit is investing heavily in major Sunbelt cities such as New Orleans, Houston, Dallas, and Oklahoma City, where there never seems to be enough supply to meet the demand. 

Park Hotels & Resorts

Park Hotels & Resorts is a hotel REIT holding middle-range hotel properties under the Hilton, DoubleTree, and Hyatt Regency brands. Besides having a portfolio of solidly performing properties in locations such as Honolulu, Chicago, and Key West, the company's leadership has been keeping a close eye on the balance sheet. Even with hotel closings throwing off occupancy rates and incomes, the REIT has been able to strategically sell properties and pay off hundreds of millions of dollars in debt and establish significant liquidity.

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Hersha Hospitality Trust

Hersha Hospitality Trust controls just 36 hotels in seven states. Because of its focus on high-end luxury brands, it has been seeing high occupancy and growth rates since the hospitality industry began rebounding from pandemic lockdowns. More recently, Hersha had suffered some setbacks due to COVID-19 surges, but the company managed to beat estimates on quarterly funds from operations (FFO) for the fourth quarter by a large margin. Hotels such as the Parrot Key Hotel and Villas in Key West and The Envoy in Boston ensure a clientele that can be considered relatively economically cushioned. As long as Hersha continues to balance luxury with efficiency, it will continue to serve a steady stream of guests.

Pebblebrook Hotel Trust

Pebblebrook Hotel Trust owns both high-end hotels and resorts, but its resorts really make it stand out. From multiple beach resorts in Key West to the newly acquired (and legendary) Jekyll Island Club Resort, Pebblebrook has an eye for this particular space. The REIT has also made progress toward sustainability and social responsibility goals that are appealing to investors who want to do more good while doing well. Even with its recent acquisitions, Pebblebrook Hotel Trust has been able to maintain a reasonable debt load.