Hospitality REITs: How To Invest in 2023

A hotel or hospitality real estate investment trust (REIT) can offer strong returns but can go through wild fluctuations. Unlike other commercial REITs, REITs in the hospitality sector rely primarily on short-term rental income, which can fluctuate based on seasonality or occupancy rates. Hotel REITs are considered some of the riskiest REITs but often attract investors for above-average (potential) rewards. Read on to find the benefits of hospitality REITs with some investment options to consider this year.

What are Hospitality REITs?

Hospitality REITs are a type of real estate investment trust that specializes in investing in and operating properties in the hospitality sector. These REITs primarily own and manage hotels, resorts and other types of lodging facilities.

Hospitality or lodging REITs own, acquire and manage various types of hotels, luxury resorts, motels and business-class hotels. While hospitality REITs also purchase and sell real estate, the primary driver of income is typically tenants. Hotel REITs rely on very short-term leases from the general public renting rooms or conference spaces. They lease directly to the consumer, which means seasonality, climate issues or natural disasters can all affect occupancy. 

Within hospitality REITs, some focus on one type of hospitality property, like resorts, boutique hotels, economy properties or midscale hotels. Consider the REIT's diversification of properties within an asset class to mitigate risk. For example, if a REIT invests in resort properties in Florida and the Caribbean, a hurricane could destroy operations in the area for a couple of weeks or many months, depending on the severity of the damage. 

Top 5 Hospitality REITs To Invest In

If you're ready for wild fluctuations and possible strong long-term returns, consider this list of hospitality REITs for possible investment opportunities: 

1. Park Hotels & Resorts Inc. (NYSE: PK)

Park Hotels and Resorts tops the list with a solid portfolio of mid-range hotel properties you'll recognize. Its portfolio includes Hilton, DoubleTree and Hyatt Regency brands. These brands have solidly performing properties across the U.S., diversifying the risk of a single natural disaster harming the bottom line. The REIT has recently paid off hundreds of millions in debt and significantly increased liquidity. 

It gains a place on this list from its strong balance sheet, a market cap of $2.91 billion, 4.55% dividend annual yield and an increase in stock value of 15.73% year-to-date.

2. Apple Hospitality REIT Inc. (NYSE: APLE)

Apple Hospitality holds a portfolio of economy properties, with 97 Marriott-branded hotels, 119 Hilton-branded hotels, four Hyatt-branded hotels and one independent hotel. These include brands like Courtyard, Fairfield and Residence Inn.

With properties spread across the country, the REIT has strong diversification. Although stock values have decreased in the past five-year and one-year reporting periods, management is working to improve efficiencies and increase occupancy rates. 

Apple Hospitality's $3.437 billion market cap and 6.27% dividend annual yield make it a strong possible option as a hospitality REIT. 

3. Pebblebrook Hotel Trust (NYSE: PEB)

At the other end of the economic spectrum, Pebblebrook Hotel Trust strategically acquires and invests in upper upscale, full-service hotel and resort properties in or near urban markets in major U.S. gateway cities. Investing in resort properties is one of its greatest strengths. Resort holdings include multiple beach resorts in Key West, Jekyll Island Club Resort, as well as properties from California to Washington, D.C. Of particular interest to ESG investors, Pebblebrook has made significant progress toward sustainability and social responsibility goals.

While dividend yields are low — just 0.26% — the stock price has increased more than 10% year to date. With a market cap of $1.825 billion and a reasonable debt load, Pebblebrook Hotel Trust can be a reasonable luxury market REIT choice.

4. Summit Hotel Properties Inc. (NYSE: INN)

Another economy hotel REIT, Summit Hotel Properties, owns properties across the U.S., with a recent acquisition focusing on southern US cities like New Orleans, Houston, Dallas and Oklahoma City, where demand continues to outpace supply. Summit Hotel Properties owns familiar brands like Residence Inn, AC Hotels by Marriott, Embassy Suites and Hilton Garden Inn.

While stock value has dropped over the past five-year and one-year reporting periods, the diverse portfolio of economic properties has a strong possibility of weathering inflation or economic downturns as travelers downgrade hotel options to save. With a market cap of $662.009 million, this is one of the smallest REITs on this list. Dividend annual yields have been 3.79% offering investors stable, modest returns. 

5. Hersha Hospitality Trust (NYSE: HT)

For the high-end luxury market position, consider Hersha Hospitality Trust, which owns 25 hotels with over 3,800 rooms in markets that include New York, Philadelphia, South Florida, Washington, D.C., Boston and California. The company aims to reach business and leisure travelers seeking premium accommodations and personalized experiences. 

The target clientele usually has a cushion against market downturns, so these properties could continue to see strong occupancy. With a market cap of $256.034 million, this is the smallest REIT on the list. The 3.14% annual dividend yields offer investors modest stability. While stock prices have dropped over the past five years, this could present an opportunity for investors to invest for the long term. 

Where to Invest in Hospitality REITs

If you're wondering where to invest, look at your brokerage or consider these options. 

Benefits of Investing in Hospitality REITs

Hotel REITs have numerous benefits when you invest for the long term. Consider these advantages of adding a modest position of lodging REITs to your portfolio. 

Income Generation

Hospitality REITs can provide a steady stream of income in the form of dividends. These REITs typically have long-term lease agreements or management contracts with hotel operators, ensuring a consistent rental income flow. This can make lodging REITs appealing to income-focused investors seeking regular cash flow.

Exposure to the Hospitality Industry

Investing in hospitality REITs allows investors to gain exposure to the hospitality industry, which is driven by travel, tourism and leisure activities. As global travel and tourism continue to grow, hospitality properties can benefit from increased demand and potential revenue growth. By investing in hospitality REITs, investors can participate in the performance of this sector.

Diversification

Including hospitality REITs in an investment portfolio can provide diversification benefits. Hospitality properties operate in different locations and cater to various customer segments, such as business travelers, vacationers or convention attendees. This diversification can reduce risk by spreading investments across multiple properties and markets within the hospitality industry.

Professional Management and Expertise

Hospitality REITs are managed by professionals with expertise in the hospitality industry. These managers have knowledge of market trends, property operations and revenue management strategies. Investors can benefit from the specialized expertise of these professionals without directly owning or managing hotels.

Potential for Capital Appreciation

Along with generating income through dividends, hospitality REITs offer the potential for capital appreciation. As the hospitality industry thrives, the value of well-performing hotel properties can increase over time. By investing in hospitality REITs, investors can potentially benefit from property appreciation and capital gains.

Potential Risks of Investing in Hospitality REITs

As it's clear from earlier warnings, hospitality REITs can show high volatility and are generally considered high-risk REITs. Here are the risks to weigh before investing in these REITs.

Economic Sensitivity

Hospitality REITs are sensitive to economic conditions and consumer spending patterns. During economic downturns or recessions, travel and tourism activities may decline, leading to reduced occupancy rates and lower revenues for hospitality properties. Economic factors such as unemployment rates, inflation and GDP growth can impact the performance of hospitality REITs.

Market Volatility

The hospitality industry can be subject to volatility from various factors, including changes in travel trends, global events, natural disasters, political instability and public health crises. These factors can significantly impact hotel occupancy rates, room rates and overall revenue. Market volatility can affect the financial performance and valuations of hospitality properties, which, in turn, can impact the performance of hospitality REITs.

Operational Risks

Hospitality REITs rely on the successful operation and management of hotel properties. Operational risks include factors such as competition, changes in consumer preferences, property maintenance, quality of service and the ability to attract and retain guests. Poor operational performance can lead to lower occupancy rates and decreased revenues and can potentially impact the financial performance of hospitality REITs.

Investing in the Hospitality Industry

Holding modest positions in various hotel REITs is a way to invest in the hospitality industry with minimal risk exposure. Consider the financial analysis of individual REITs, past performance, current positions and dividends to find the best hotel REITs for your portfolio. Learn more about hotel REITs and the best REIT stocks and discover commercial real estate REITs.

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