Hospitality REITs are real estate investment trusts with a strong focus on owning, managing, and operating luxury and business-class hotels, affluent destination resorts, upscale lodging, and similar types of properties within the hospitality industry.
According to the National Association of Real Estate Investment Trusts, there are 18 publicly traded hospitality REITs, and each has a slightly different business strategy. For instance, a hospitality REIT may be focused on the acquisition, operation, and ownership of large-scale casino and convention properties in and around Las Vegas, while another may be focused on owning premium-branded and extended-stay luxury resort hotels across the nation.
Below we’ll take a closer look at the characteristics of hospitality REITs and also discuss some of the challenges they’ve faced as a result of the ongoing Covid-19 pandemic.
How Do Hospitality REITs Work
Like all REITs, hospitality REITs are governed by a strict set of rules and operating procedures.
In order to be classified as a REIT, a company must:
- Invest three-fourths of its total assets into real estate
- Derive at least 75 percent of gross income from those assets
- Pay 90 percent or more of its taxable income back to shareholders in the form of dividends.
REITs also must have a minimum of 100 shareholders, with no more than 50 percent of ownership controlled by five or less shareholders.¹ By adhering to these stipulations, REITs aren’t taxed at the corporate level. Instead, taxation is passed on to individual shareholders, who receive a Form 1099-DIV when they are paid dividends from a REIT.
Characteristics of Hospitality REITs
Like the hospitality industry, the majority of public and private hospitality REITs struggled mightily during 2020. Most, if not all, experienced particularly challenging times as the pandemic slowed or shuttered operations at luxury resorts, destination properties, convention centers, and similar tourism/vacation venues.
Take Las Vegas as an example that can be extrapolated nationwide. According to the Las Vegas Convention and Visitors Authority, visitor counts to Las Vegas tumbled 55 percent in 2020 compared to year-earlier numbers, while convention attendance fell to its lowest point in more than two decades.²
Hospitality REITs are heavily dependent upon tourism, much more so than REITs with an alternate focus, such as multifamily or senior housing – people always need a place to live, as the saying goes. They don’t have to take vacations or visit luxury destinations, especially during economic downturns, however. Business travel, another major contributor to resort occupancy, also was sharply curtailed in favor of online virtual meetings. The pandemic and ensuing industry-wide tourism and travel slowdown showed that this dependency could significantly increase investment risk with hospitality REITs.
Despite those challenges, the lodging industry has experienced a significant rebound in 2021. Leisure travel is on the rise, occupancy rates continue to increase, and many hospitality REITs are returning increased dividends versus significant pandemic-related declines in 2020.³
The Bottom Line
The decline in business and leisure travel in 2020 was nearly $500 billion in travel spending alone, the U.S. Travel Association reports.⁴
While leisure travel experienced a strong return in 2021 as pandemic-weary Americans resumed taking vacations, business travel is expected to continue to lag. The performance of many hospitality REITs – especially those with high exposure to the hotel sector – is strongly correlated to business and group leisure travel. As America continues to navigate the pandemic and its new variants, the hospitality industry as a whole is likely to continue lagging behind other industries, which can affect hospitality REITs’ ability to return dividends to shareholders.⁵
1. How Does a Company Qualify as a REIT, Nareit, https://www.reit.com/what-reit?gclid=Cj0KCQiA8ICOBhDmARIsAEGI6o3LmveNlEUSLqmMXkXgSXZmlDq_hVGQ3VeiYCdt1FySSeAsU4OomJMaAqJCEALw_wcB
2. The Impact of Covid-19 on the Southern Nevada Tourism Industry, Las Vegas Convention and Visitors Authority, https://res.cloudinary.com/simpleview/image/upload/v1624476915/clients/lasvegas/COVID_Impact_on_Tourism_Industry_FINAL_c415242c-e6f4-4bf5-91ea-98496d1afe3a.pdf
3. Lodging Industry and Resort REITs are Showing Signs of a Recovery, Nareit, https://www.reit.com/news/reit-magazine/july-august-2021/lodging-and-resort-reits-are-showing-signs-recovery
4.Travel’s Dramatic Losses in 2020, U.S. Travel Association, https://www.ustravel.org/research/fact-sheet-travels-dramatic-losses-2020
5. Hotel REITs Wait for Business Travelers to Check In, Morningstar, https://www.morningstar.com/articles/1062693/hotel-reits-wait-for-business-travelers-to-check-in
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.