A hospitality REIT is a real estate investment trust that owns, acquires, and manages hotels, motels, luxury resorts, and business-class hotels, and leases out space in the properties to guests. Hospitality REITs also provide and serve meals, non-alcoholic and alcoholic drinks, and other services that are ordinarily provided within households but are unavailable to travelers and vacationers.
Investing in hospitality REITs ensures a steady income throughout the year by offering meals, accommodation, and conference venues to individuals and corporate customers.
One downside faced by the hospitality industry is that it is seasonal, which means it experiences peak and off-peak seasons during specific periods of the year. High seasons occur during the summer when a majority of the people go on holiday, and hotels accommodate different types of clients ranging from local to international tourists. Prices are the highest during the peak season.
Off-peak seasons often attract low prices because there is a low demand for hospitality services. Normal seasons are observed in the rest of the year when people go on business trips, and companies organize conferences for their employees, investors, and other stakeholders.
Understanding Hospitality REITs
Hospitality REITs focus on developing, acquiring, managing, or financing the construction of hotels, lodgings, and other properties in the hospitality industry. Such REITs purchase existing hotels and resorts and take over the management of such properties. They also acquire land in strategic locations in metropolitan areas and central business districts.
Also, hospitality REITs develop hotels and business-class resorts that meet the existing demand, either for conferences, accommodation, or vacationers. Once complete, the company can directly manage the property or pay a third-party management team to be in charge of the daily operations of the hotel and get a share of the revenue.
Hospitality REITs may also be contracted by other companies to manage their hotel and resort properties. The REIT may recruit an experienced hotel manager to turn around the business or work with the existing management team in the property. It then gets a share of the revenue earned by the properties under their management.
Since hospitality REITs are experts in the hospitality industry, they develop or acquire properties in areas where there is a potential to generate continuous business throughout the year. For example, coastal beaches are a welcome target for hospitality REITs since such areas generally attract huge numbers of local and international tourists.
How Hospitality REITs Work
Hospitality REITs generate income by offering meals, beverages, accommodation, conference venues, parking levies, etc. They can also lease out some of the premises in their buildings to other businesses, such as tuckshops, in order to generate additional revenues.
After meeting the operating expenses, the REITs are required to distribute at least 90% of the net revenues to their shareholders in the form of dividends. It is one of the requirements for REITs that was enacted by the U.S. Congress. REITs that comply with such requirements are exempted from the corporate taxes that are chargeable to other corporates.
Being in the hospitality industry offers REITs an advantage compared to other companies in the real estate industry. One of the advantages is access to information on properties in the hospitality industry that are on sale. If the properties meet the REIT’s criteria for acquisition, the company uses the funds contributed by investors to acquire the new properties and adds them to their list of properties.
At the same time, hospitality REITs should align their strategies with the business cycles. During a recession, companies cut their travel and conference budgets and go for alternatives, such as video conferencing. It may be the best time to acquire new properties because their value is on the downside, in readiness for an economic boom. When the recession ends and the local economy recovers, the value of the properties increases in value and sales skyrocket.
How Hospitality REITs Compare to Other REITs
There are various types of publicly traded REITs that investors can invest in the public exchange markets. The performance of each type of REIT depends on the specific real estate properties that they focus on. Generally, the performance of hospitality REITs in one business cycle will differ with the performance of other types of REITs, such as retail, office, and industrial REITs.
Hospitality REITs generate a majority of their incomes from luxury, with the biggest spenders being the rich and the upper-middle class. During periods of recession, people can cut on the luxuries and spend only their incomes on basic expenses, which explains the peak and off-peak seasons experienced at certain times of the year.
Compared to hospitality REITs, commercial REITs may also experience cyclical lease rates during the boom and bust cycles, as businesses leasing space in the properties struggle to keep afloat. If some of the businesses operating in the commercial properties declare bankruptcy, the commercial REIT will be affected negatively and will be forced to look for new tenants for the vacant space.
Industrial REITs tend to be more steady compared to commercial and hospitality REITs since the machines can be shut down to minimize expenses during slow business periods. The industry building can also be converted to host a warehouse, fulfillment centers, or even an office, and it can help the business withstand the changing business cycles.