Hotel real estate investment trusts are back in action. The Dow Jones U.S. Hotel & Lodging REITs Index is up by more than 5% since the turn of the year, implying the long-felt effects of the Covid-19 pandemic are behind us. Moreover, a U.S. interest rate pivot is on the horizon, likely providing a creditworthy tailwind to cyclical real estate assets such as hotels and resorts.
If you share the same outlook on the property market as I do, then here are two hospitality-centric REITs to consider.
Park Hotels & Resorts
Headquartered in Tysons, Virginia, Park Hotels & Resorts Inc. (PK, Financial) is a former Hilton-owned company that invests in premium hotels. With more than 33,000 rooms in total, it is one of the largest publically traded REITs and hosts an extensive market position.
Apart from its robust market position, a big draw to the company is its most recent uptick in occupancy, which surged by 14.8% year over year as per the end of its second quarter, landing at 65%. Moreover, Park Hotels & Resorts achieved adjusted free cash flow per share of 42 cents in the same quarter, up by 425% from the previous year.
The illustrated combination of top-line growth and economic value added is yet to be priced by financial market participants as the asset is trading at a price-to-funds from operations ratio of 5.6, which outranks approximately 84.04% of Park Hotels & Resorts' sector peers.
Lastly, a salient feature worth mentioning is the REIT's recent land acquisition. In a deal worth $18 million, Park Hotels & Resorts purchased a property adjacent to the Hilton Hawaiian Village Waikiki Beach Resort. It also illustrates the company's ability to acquire prime real estate while cornering the market and fending off rising competition.
Host Hotels & Resorts
Host Hotels & Resorts Inc. (HST, Financial) is the largest owner of lodging real estate and owns a variety of luxury hotel properties. The REIT's stock has gained by more than 5% since the turn of the year, which bodes well with its respectable dividend yield of 2.53%.
The primary attraction to Host Hotels & Resorts in today's market environment relates to the momentum it receives from industry-related occupancy levels that are only 7% adrift from their pre-pandemic levels. The industry's recovery was recently highlighted by independent research and trading firm Compass Point, which also believes the company provides "the most liquid way to participate in the urban hotel recovery."
Furthermore, Host Hotels & Resorts' latest financial results conveyed numerous talking points. First, in its third quarter, the REIT produced a 31.1% increase in revenue per available room, resulting in quarterly revenue of $1.38 billion. Over and above that, an Ebitda margin of 32.5% was achieved, suggesting the vehicle is more than capable of passing through multidecade-high inflation to its customers.
A deeper look into the REIT's investment thesis illustrates why it is able to tolerate trying macroeconomic times. Host Hotels & Resorts only invests in investment-grade lodges with synergetic opportunities. To expand on the latter, the group invests in properties that it believes integrate with its portfolio's ancillary service providers, such as operators. By phasing synergies into its corporate portfolio, Host Hotels & Resorts is able to cut costs and provide its shareholders with excess returns.
Lastly, the prospecting landscape for the REIT looks bright as it is in the middle of a renovation cycle and a management style transition, which it believes will both add to revenue and cut future costs.
By and large, Host Hotels & Resorts is an operating powerhouse that provides significant shareholder value.
Noteworthy risks
Before considering a position in either of the REITs, it must be considered that hotel assets are tremendously risky. For instance, their prospects are inextricably linked to the economic environment, which is still uncertain. Additionally, hotel properties generate short-term cash flows due to high tenant turnover. Therefore, most stock market participants assign higher risk premiums to them, resulting in lower valuations.
Final word
Expected returns on hotel REITs have rarely been brighter as the pandemic has abated, an interest rate cycle shift is en route and intra-industry recoveries have commenced.
Among the most lucrative assets within the industry are Park Hotels & Resorts, which has a phenomenal market position with its cunning ability to corner the market. Additionally, Host Hotels & Resorts is in the process of a significant recovery as its revenue per available room is skyrocketing.
As a result, both assets are showing signs of value and it is only a matter of time before investors latch onto them.
