Hotel REITs: Picking a Winner

Monopoly - car on Park Place with hotel


COVID has hit hotel REITs very hard, but this year has seen a lot of US leisure travel. Data from the Transportation Safety Administration shows that passengers traveling, as a percentage of 2019 levels, reached essentially 100% in July of this year, after diving to near zero in April 2020.

line chart with data as described in text

Income Builder Hoya Capital

According to research by Hoya Capital, hotel occupancy rate is back to 96% of 2019 rate, while ADR (average daily room rate) is up 11% and RevPAR (revenue per available room ) is up 7%. However, when inflation is taken into account, ADR is down about 2.5% and RevPAR is down about 6.2% since 2019. All three measures (Occupancy, ADR and RevPAR) should be fully recovered to pre-pandemic levels in real terms. by 2024.

bar chart and table, showing the data as described in the text

Income Builder Hoya Capital

As a result, hotel REITs are the fourth best performing REIT sector in 2022, with an average total return of (-6.71)%, compared to the Equity REIT Index of (-18.52)%.

list of 18 REIT sectors, showing hotel REITs in 4th place with a total return of (-6.71)%.  Only casinos, farmland and net leases have outperformed hotels year-to-date, while office, regional mall and cannabis REITs are trailing behind

Income Builder Hoya Capital

Earnings growth forecasts are exceptional for the entire hotel REIT industry.

So the question is, if you want to start or grow a position in a hotel REIT, which company? This article focuses on the hotel REIT best positioned to reward investors over the next 12 months.

First criterion: balance sheet

There are 15 hotel REITs in the United States. Since a strong balance sheet is the necessary foundation for any solid investment, let’s take a look at how these 15 companies are positioning themselves for liquidity and debt, in order of market capitalization.

Hotel REITs Liquidity Rate of endettement Debt/EBITDA Obligation
Hotel and Resort Hosts (HST) 2.29 32% 3.4 BB+
Ryman Hospitality (RHP) 1.00 38% 6.9 B
Apple Hospitality (APLE) 3.07 30% 4.0
Park Hotels (PK) 1.81 57% 10.6 B
Hotel Pebblebrook (PEB) 1.95 43% 15.0
Sunstone Hotel Investors (SHO) 3.14 19% 2.5
Accommodation RLJ (RLJ) 1.95 56% 7.5 B+
DiamondRock Hospitality (HRD) 2.00 36% 8.0
Xenia Hotels (XHR) 1.90 49% 7.0 B
Trusting Service Properties (SVC) 1.21 93% 14.9 B+
Hotel Summit (DCI) 1.45 44% 8.0
Chatham Lodging (CLDT) 2.41 46% 9.0
Hersha Hospitality (HT) 1.44 62% 9.0
Hotels in Braemar (BHR) 1.43 89% 11.5
Ashford Hospitality (AHT) 0.98 102% 15.5
Sotherly (SOHO) Hotels 1.13 73% 18.7
InnSuites Hospitality (IHT) 1.60 29%
Average hotel REIT 1.81 41% 9.5
Overall average of REITs 1.90 25% 6.4

Source: Hoya Capital Income Builder and TD Ameritrade

In the chart above, values ​​shaded in green are above both the hotel REIT average and the overall REIT average. Values ​​shaded in yellow fall between the hotel REIT average and the overall REIT average. Values ​​shaded in red are below both averages.

As you can see from the bottom two lines, the hotel REIT sector is in worse shape than the REIT sector as a whole, with lower liquidity and significantly higher debt.

There are a lot of distressed balance sheets in this sector. Since we are looking for the best hotel REIT to invest in, we can safely weed out any companies that have a cash ratio, debt to equity ratio or debt to EBITDA ratio below the hotel REIT average. This includes all companies with red in their row of values. This eliminates all candidates except four: HST, APLE, SHO and DRH.

That’s not to say that none of the other hotel REITs could make money for you as an investor. For example, Sotherly Hotels (SOHO) was recently singled out by Zacks as a strong buy. It’s just that with such weak balance sheets, it’s too big a risk for my taste.

Second criterion: funds from operations

Healthy companies do a good job of steadily increasing revenue, which is best measured in the REIT world by FFO (Funds From Operations) per share. Let’s see how our 4 candidates fare in this regard.

Teleprinter FFO growth over 3 years FFO growth over 5 years * FFO growth 2022 * FFO growth 2023
HST (-2.1)% (-0.3)% 174% 7.2%
APPLE (-3.2)% (-3.1)% 58% 13.6%
SHO (-11.3)% (-8.0)% 1750% 33.8%
HRD (-6.1)% (-2.5)% 633% 17.0%
Average hotel REIT (-6.4)% (-15.0)% 888% 29.9%

Source: Hoya Capital Income Builder


The 3- and 5-year FFO growth figures show that our four candidates are outperforming the average hotel REIT, which has still not recovered to pre-pandemic levels. But all four lag considerably behind the overall REIT averages of 9.1% and 7.8%, respectively. The exception is SHO, which outperforms hotels on 5-year growth, but underperforms on 3-year growth. So Sunstone was a little slower to recover from COVID than the other three candidates.

The growth figures projected for 2022 are garish. This is mainly because most hotel REITs returned to positive FFO last year, so comparables are extremely easy. So the 2022 Hotel REIT forecast average FFO of $1.58 per share looks great, compared to the 2021 average of just $0.16. (Wow! That’s an 887.5% increase! See what I mean?)

SHO is looking great in this year’s FFO forecast growth column precisely because it was the slowest of the four candidates to return to a positive FFO. Similarly, APLE’s projected 58% growth looks anemic alongside the others’ triple-digit rates, but that’s because APLE emerged earlier and stronger than the rest, so its peers are more difficult.

The most significant and revealing figure in this table is the expected average growth in FFO per share of the hotel REIT sector for 2023: 29.9%. Of our four candidates, only SHO tops the pack on this metric. The others are behind the projected average precisely because they came out earlier and stronger than the others.

Our four candidates should grow at a healthy pace.

Dividend Indicators

This is where we start to see some separation. Listing our four candidates in order of market capitalization, a clear favorite emerges.

Company Div. Yield Div. 3 years Growth Div. Score Payment Div. Security
HST 2.72% (-18.9)% 1.45 30% A
APPLE 5.29% (-11.2)% 3.70 50% A+
SHO 0.00% (-33.0)% 0.00 ten%
HRD 0.00% (-33.0)% 0.00 ten%
Hotel REIT avg 1.71% (-26.3)% 0.68 17% A
REITs in general 3.38% 6.2% 4.05 59% VS

Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium

Dividend Score projects the yield three years from now, on stocks bought today, assuming the rate of dividend growth remains unchanged.

As you can see, APLE far outperforms the other contenders in actual yield and, in fact, APLE pays well above the REIT average at 5.29%. All companies in the hospitality sector eliminated their dividend during the COVID sell-off. APLE was the first to restore its dividend. So when the dividend growth rate is factored into the Dividend Score, the APLE emerges just a little below the REIT average at 3.70, but far ahead of second place HST at 1. 45.

Evaluation Metrics

Let’s now list our candidates in order of dividend score and examine the valuation.

Company Div. Score Price/FFO ’22 Premium to NAV
APPLE 3.70 10.4 (-16.5)%
HST 1.45 9.9 (-23.3)%
SHO 0.00 13.9 (-14.6)%
HRD 0.00 9.1 (-19.0)%
Average hotel REIT 0.68 10.2 (-22.4)%
Overall average of REITs 4.05 19.5 (-5.0)%

Source: Hoya Capital Income Builder, TD Ameritrade and author’s calculations

The average hotel REIT is now “a bargain” priced at 10.2 times the FFO for 2022, just over half the price/FFO ’22 of the average REIT. Our four candidates are grouped near the average for hotel REITs, with SHO in the high part at 13.9x and DRH in the low part at 9.1. The difference is enough to knock SHO down to fourth place, but doesn’t justify any changes to the first and second picks. Only Host Hotels (HSTs) are trading at a higher discount than the average hotel REIT, and barely.

Market capitalization “Sweet Spot”

Hoya Capital’s research indicates that the size of a REIT has a real influence on its total return. The optimal size is “upper mid-cap”, $4 billion to $10 billion. This is the Sweet Spot. Second best is large cap, then “lower mid cap,” $1.4 billion to $4 billion. Small-cap REITs trail behind.

Here is how our four candidates position themselves on this key factor.

Company Market capitalization
Hotel and Resort Hosts (HST) $12.6 billion
Apple Hospitality (APLE) $3.6 billion
Sunstone Hotel Investors (SHO) $2.4 billion
DiamondRock Hospitality (HRD) $1.9 billion

Source: TD Ameritrade

Of the four, APLE is closest to the sweet spot, at $3.6 billion. The second most favorable place is held by the HST, at $12.6 billion.


It’s kind of obvious. Since almost all hotel REITs pay very low dividends, investing in any one except APLE is a value play. Investors aren’t as yield crazy as they were earlier in the year, and the real cost of money has come down somewhat. The environment for growth investing is therefore better than it was in January, but it is still more of a value investor environment. From a growth standpoint, it is difficult to identify a leader in the peloton. However, from a value perspective, there is no dispute, as a company enjoys a vastly higher dividend.

And the winner is . . .

The hotel REIT that emerged first and strongest from the pandemic, with strong FFO growth, the first to restore its dividend and the only one paying an above-average return for REITs:

company logo

Apple Hospitality REIT

#Hotel #REITs #Picking #Winner

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