When an investor decides to buy a real estate investment trust (REIT), they are buying both that real estate company and the large block of tenants or brands occupying the REIT’s portfolio.

Before you decide to buy a REIT, it pays to consider the history and solvency of its largest tenants. Ask yourself these questions: Are there any tenants who are facing bankruptcy or reducing their size? Are the tenants of high-grade quality? Are the tenants diversified, not only geographically, but also by each tenant accounting for a small percentage of the total tenant portfolio?

Take a look at one well-known hotel REIT, and consider the questions raised above in evaluating its merits:

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Most of Host Hotels’ properties are upscale and luxury hotels in central business districts that are located near airports. These hotels generally include amenities such as restaurants and lounges, swimming pools, exercise facilities and gift shops. Of its 78 hotels, 28 contain more than 500 rooms. The U.S. locations are below:

The average age of Host Hotels and Resorts properties is 35 years. The geographic diversity of Host Hotels and Resorts’ properties, as shown above, is an advantage, especially if certain areas hold up better than others during a recession.

Host Hotels and Resorts’ portfolio includes several well-known names. Its tenant brands are:

Marriott International has a $53.55 billion market cap and a dividend yield of 0.92%.

Hyatt Hotels Corp. (NYSE:H), also known as Hyatt Hotels & Resorts, is a Chicago-based company that began in 1957 and grew to include international hotels and resorts by 1969. It owns 26 distinct brands in over 1,100 hotels around the world. The majority of its brands are upscale and luxury hotels.

Accor S.A. (AC.PA) is a multinational company based in France that owns, manages and franchises hotels, resorts and vacation properties. Accor was founded in 1967 and is now the largest hospitality company in Europe and the sixth-largest hospitality company in the world. It has 5,300 locations in 110 countries. Accor and Marriott are the two largest hotel companies in the Middle East.

Accor owns several brands of its own, including Banyan Tree, Sofitel Legend, Fairmont, Novotel, Emblems and others. In 2021, Accor took in 2.2 billion euros. Its portfolio of 40 brands ranges from economy to luxury and premium brands.

Hilton Hotels Corp. (NYSE:HLT), also known as Hilton Worldwide Holdings Inc. is a Tysons Corner, Virginia-based multinational hospitality company that manages and franchises hotels throughout the world.

In 1919, Conrad Hilton purchased a hotel in Cisco, Texas, called The Mobley. Over the next few years, Hilton branched out to purchase other Texas hotels, and after changing the name to Hilton Hotels, expanded across the U.S.

Today the Hilton Hotel portfolio includes 19 sub-brands with 7,165 total properties in 123 countries and territories. Some of its brands include Waldorf Astoria, Conrad Hotels & Resorts and Canopy by Hilton.

Hilton Hotels' stock has a market cap of $39.4 billion.

These are well-known hotels and resorts, enjoyed by hundreds of thousands of travelers each year. But having too many eggs in one basket is always a problem for a company, and so the enormous percentage of revenue derived from The Marriott brand alone could potentially become a problem for Host Hotels and Resorts.

Having only four hotel chains in its portfolio and deriving 88% of its revenue from such a small number considerably enhances the risk for Host Hotels and Resorts. None of these hotels seems to be at risk of bankruptcy or financial difficulties at the moment. Travel has increased across the globe as the pandemic has abated, and the hotel REIT subsector has done tremendously well year-to-date.

But if increasing interest rates bring about a hard recession, those positive RevPAR numbers could easily change. Companies typically reduce their travel expenses to save money, and consumers put off vacations if the economy deteriorates.

Investors may also be wondering why Host Hotels and Resorts pays such a stingy quarterly dividend of $0.12 per share. The annual dividend yields 2.83%, fairly low for a REIT. The present payout ratio is only 26.9%. By contrast, Apple Hospitality REIT Inc. (NYSE:APLE) pays a 5.8% dividend yield.

Host Hotels and Resorts is still playing catch-up from when it suspended its $0.20 dividend after March 2020. It reinstate it in March 2022 but only at a paltry $0.03. But Host Hotels and Resorts also paid a special dividend of $0.20 in December, in addition to its regular $0.12 quarterly dividend payment.

The picture appears to be mixed for Host Hotels and Resorts. While it has solid brands and improving metrics, the headwinds of recession and its reliance on a small number of brands for most of its revenue could ultimately lead to a decline in Host Hotels and Regions earnings, translating into a declining share price.

From a technical viewpoint, the recent share price collapse below the 200-day moving average is also a negative. Investors may want to use caution on Host Hotels and Resorts.

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