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Do you know how to identify quality hospitality real estate investment trusts (REITs) in the sea of real estate investment trusts seeking your capital?
Currently, 18 REITs specializing in the acquisition and financing of hotels, resorts, business lodging and motels trade publicly.
Hotel REITs operate differently than other REITs, and it’s important to have a thorough understanding of the hospitality industry and market before making your investment decisions.
I performed extensive research on the top hotel REITs, examining stock prices, risk assessments, growth projections and dividend ratios to select the five best hospitality REIT ETFs and stocks to buy in 2023.
Let’s take a closer look at these hospitality trusts and the important details that make them wise investments.
Top 5 Best Hospitality REITs
- Apple Hospitality REIT – Best hospitality REIT
- Park Hotels & Resorts – Best hotel REIT
- Nuveen Short-term REIT ETF – Best hotel REIT ETF
- Diamondrock Hospitality Co. – Best hotel REIT stock
- Ashford Hospitality Trust – Best lodging REIT
Apple Hospitality REIT (APLE) – Best Hospitality REIT
The Apple Hospitality REIT’s portfolio focuses on high-end U.S. hotels and has core relationships with companies such as Hilton, Marriott, and Hyatt.
Market experts praise Apple Hospitality for its operative strategies that actively mitigate risks that come along with lodging REITs.
- Types of investments – Trading as APLE on the New York Stock Exchange (NYSE), Apple Hospitality invests in room-focused hotel brands that lead the market.
- Markets – Apple Hospitality REIT, Inc. has 220 hotels in its portfolio across urban, upscale suburban and developing markets in 37 U.S. states, primarily on the east coast.
- Dividend yield – 0.62%
- Best – Hospitality REIT
Why we Recommend it – APLE stock has strong momentum with stock price increases over the third quarter of 2022 and the entire last year.
It also relies on hotel industry heavy hitters, such as Hilton, Marriott, and Hyatt, which provides stability.
Park Hotels & Resorts (PK) – Best hotel REIT
Park Hotels & Resorts trades as PK on the NYSE and also affiliates with hotel brands like Hilton, Marriott and Hyatt.
This hospitality REIT uses a capital recycling program to strengthen its target market presence and avoid high-risk assets.
- Types of investments – The bulk of the Park Hotels & Resorts trust portfolio is in the luxury hotel sector. It focuses on high-end resort hotels and lodging in proximity to major airports for accommodating business travel.
- Markets – Park Hotels & Resorts owns 47 properties in U.S. states and Puerto Rico.
- Dividend yield – 0.33%
- Best – Hotel REIT
Why we recommend it – This stock offers promising payouts, and its market cap is over $2.69 billion. Recently, investment firms cited its ownership of several Hilton flagship properties as contributing to its success.
Nuveen Short-Term REIT ETF (NURE) – Best Hotel REIT ETF
It specializes in short-term lease investment properties.
- Types of investments – The fund invests in apartment, self-storage, manufactured home and hotel REITs, with hospitality investments making up over 18% of its portfolio. One of its significant acquisitions is Host Hotels & Resorts.
- Markets – Nuveen Short-Term REIT ETF invests in the U.S. hospitality market.
- Dividend yield – 2.6%
- Best – Hotel REIT ETF
Why we recommend it – Nuveen is a subset company of The Teachers Insurance and Annuity Association of America-College Retirement Equities Fund.
The financial organization has over $1 trillion in combined assets and has operated for over 100 years. Currently, it’s presenting encouraging trends.
Diamondrock Hospitality Co. (DRH) – Best Hotel REIT Stock
Diamondrock Hospitality Company, which trades on the stock market as DRH, is a destination-focused resort and hotel investment firm.
It prioritizes acquiring risk-adjusted assets in destination markets.
- Types of investments – Diamondrock Hospitality Co. works with brands that include Hilton, Marriott, Margaritaville Hotels & Resorts, Renaissance Hotels and Autograph Collection Hotels. It invests in vacation resort properties for leisure travel.
- Markets – Diamondrock owns resort hotels in 15 U.S. states, primarily in Florida and California.
- Dividend yield – 1.31%
- Best – Hotel REIT stock
Why we recommend it – Diamondrock Hospitality Company offers sustainable dividend yields with strong earnings and payout ratios.
Not only is this stock secure but it also anticipates growth.
Ashford Hospitality Trust (AHT) – Best Lodging REIT
Ashford Hospitality Trust is a REIT that mainly invests in full-service luxury hotels. The company supports several major community-focused charitable organizations and takes an ethical but aggressive investment approach.
- Types of investments – Trading as AHT on the NYSE, Ashford Hospitality Trust owns properties operated by brands such as Marriott, Embassy Suites Hotels, Hilton, Residence Inn, W Hotels, Hyatt and Westin Hotels & Resorts. Its properties are mostly upscale and full-service. Ashford Hospitality Trust also owns a few airport hotels.
- Markets – This real estate investment trust operates within urban markets of many U.S. states.
- Dividend yield – 7.1%
- Best – Lodging REIT
Why we recommend it – This hospitality trust’s dividend yield comes in much higher than its peers, and the company’s funds from operations (FFO) easily covers those payouts.
It currently has a low valuation, which balances out some of the risks.
What Are Hospitality REITs?
A REIT finances, operates or owns commercial properties using investor capital. Investors continuously receive dividend payouts based on the trust’s FFO from tenant leases and interest payments.
Hospitality REITs specialize in commercial properties, such as resorts, inns, business-class hotels and conference halls that provide rooms and services to individuals or corporations for business or leisure travel.
The most common property types that hospitality trusts invest in are:
- Luxury hotels
Benefits of Hospitality REITs
Investing in any type of real estate investment trust can be profitable and sustainable, but hospitality REITs have several unique investor benefits.
Stable long-term investments – The hospitality industry is supremely profitable. Even with cyclical industry dips, the high-business times are very high, and the net effect is stable earnings over a long period.
Investing in a hospitality REIT gives a uniquely long-term advantage in earnings compared to other hospitality stocks. REITs are set up to provide shareholders with moderate but long-term capital appreciation as total return investments.
With properties as long-term holdings, tenant leases offer continuous income. Owning shares in a commercial real estate company is much safer and more stable than owning physical property, and investors are still able to reap the benefits of long-term asset appreciation.
Institutional quality assets – Institutional-grade assets refer to properties that have superior construction value, a secure and healthy tenant roster and high-end or large brand operators that qualify them for a specific investor grade.
These properties are prominent in core markets and meet Class A asset standards that are only within reach of institutional investors such as REITs, insurance companies, investment banks, excessively high net-worth individuals and hedge funds.
As a non-institutional investor, you can cash in on institutional quality assets by purchasing stock in a hospitality REIT.
High dividend yields – By law, REITs are required to pay most of their income to shareholders. They must pay at least 90% of their earnings in dividend payouts.
REITs have a unique financial structure that includes Generally Accepted Accounting Principles (GAAP), allowing property depreciation write-offs as losses under net income.
This results in a lower value, despite cash flow remaining constant. The dividend payout ratio then increases as the cash flow remains steady and the net value decreases.
Professionally managed – Investing in professionally managed properties comes with a host of advantages. It minimizes legal issues by having experienced teams handling procedures and streamlining operations by employing consistent and proven systems.
It enhances occupancy or tenant quality and quantity by having branded companies setting market-appropriate rates.
The brands operating the properties that your investment funds do all the heavy lifting. You can just sit back and collect your dividends.
Risks of Investing in Hospitality REITs
Investing in a hotel REIT comes with several major advantages that translate into a stable income, but it can also be risky.
Here’s a breakdown of the biggest risks that come with investing in hospitality REITs.
Oversupply – Hotels are built when the economy is thriving. When the economy dips, businesses and individuals cut back on travel and lodging expenses, causing an oversupply of hotels.
This results in lower occupancy and dropped rental rates, which hurts hotels’ and hotel investors’ pockets.
Competitive industry – Booming vacation rental application companies, such as VRBO and Airbnb, present huge competition for the hotel industry.
Traditional hotels offer a different level of comfort and service, but millions of Americans opt for the lower prices and convenience that a company like Airbnb offers.
Lack of demand – The COVID-19 pandemic obviously caused severe demand challenges for the hospitality industry, including hotels and resorts.
While the United States has recovered strongly with hotel occupancy rates returning to 90% of pre-pandemic levels, international travel is still largely held back by COVID-19’s impact, which lowers demand.
Lease structure – The short-term lease structure of hotel REITs makes them a riskier and more unpredictable investor choice than other REIT types.
Most REITS focus on commercial properties that benefit from long-term tenants, whereas hotel REITs generate income from daily tenants.
The consistency is weaker due to seasonal and economic cycles that lead to drastic fluctuations in rental rates.
How to Invest in Hospitality REITs
First, you need to open a stock trading account through a stock brokerage using a valid Social Security number and U.S.-based residential address.
Decide whether your account will be a non-taxable retirement account or a taxable non-retirement account.
Work with an investment advisor to determine the hospitality REIT that best suits your financial goals and level of risk tolerance before purchasing stock.
Then, start your hospitality REIT portfolio!
Hospitality REITs earn income from short-term leases instead of long-term leases. Choose from the several top REITs to start your investment journey.
It’s critical to have an extensive understanding of hotel REIT risks and benefits before investing.
So, it’s best to work with a professional investment advisor to determine which stocks and funds best suit your financial goals.
Hospitality REIT FAQs
Here are some common questions you may have about hospitality REITs.
Are hospitality REITs a good investment?
Yes. Investing in hospitality REITs offers stable, long-term benefits, including high-yield dividends from professionally managed, institutional-quality properties.
What is the largest hotel REIT?
The largest hotel REIT is Host Hotels & Resorts.
Is there a difference between a hotel REIT and a hospitality REIT?
There’s no difference, as hotel REITs are the same as hospitality REITs, just with a different name.