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US Hotel REITs and C-Corps

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Hotel real estate investment trusts and C-Corps have underperformed the U.S. as a whole in recent years, with only modest growth in RevPAR. During this recent mature part of the cycle, substantial RevPAR growth has been primarily limited to independents, economy hotels, and secondary and tertiary markets. Of course, these are not the segments one would expect to find most REIT and C-Corp owned/managed hotels. The difference in portfolio composition can explain much of the discrepancy in recent performance.

For this analysis, we used 3,145 properties associated with REITs and C-Corporations in the U.S., accounting for 90% of the Baird/STR Hotel Stock Index. In examining the hotel composition of these REITs and C-Corps, we found that they have concentrated their supply into the top three classes, with 74% of their rooms classified as luxury, upper upscale or upscale. Only 37% of total U.S. hotel rooms fit into those categories, and the top 25 markets have 55% of their rooms in the top three classes. Therefore, it is unsurprising that the REITs and C-Corps achieved a higher ADR on average, at $166 versus $126 for the total U.S., and $153 for the top 25 markets.

Although REIT and C-Corp properties in every class outperform the total U.S. and top 25 markets in occupancy, the top 25 markets have a higher ADR in every class with the exception of upper upscale. The most extreme discrepancy is seen in the luxury class, where properties owned by REITs and C-Corps achieve an ADR of $269, while the total U.S. luxury properties saw an ADR of $297, and luxury properties in the top 25 markets achieved an ADR of $327.

In addition to having a higher proportion of properties in the upper tier classes, REITs and C-Corps have overexposure in the top 25 markets. In total, 32% of rooms in the United States are located in top 25 markets; however, 57% of rooms owned by REITs and C-Corps are located in the top 25 markets. This disproportion is particularly high in Orlando, Washington D.C. and Chicago, where REIT and C-Corps have over double the proportion of rooms when compared to total US supply. Surprisingly, the New York market is less disproportionate and represents fewer hotel rooms than these other three markets.

The REIT and C-Corp owned properties also see a greater amount of group business, with a higher proportion of group demand and higher rates. Group demand accounts for nearly 30% of all demand for these properties, while group demand in the total U.S. and top 25 markets represents approximately 23% of total demand.

The REIT and C-Corp properties show higher absolute performance than the total U.S.; however, the growth trend for these properties indicates their overexposure to the top three classes, the top 25 markets and group business might be muting their growth potential. Since 2014, the total United States has continuously shown higher trailing 12 months (TTM) RevPAR growth than the REIT and C-Corp properties. This gap in RevPAR growth has also widened in the past year and a half, with November 2017 TTM RevPAR growth more than double the growth of the REITs and C-Corps.

In the past two years, the top 25 markets have experienced RevPAR growth greater than total U.S. RevPAR growth in only four months, and even experienced negative RevPAR percent change twice. This is indicative of the high occupancy rates seen in those markets, which limits the potential for occupancy growth and relies on disappointing rate growth to increase RevPAR. This slower growth is also seen in group business and in the luxury, upper upscale and upscale classes, all categories that the REIT and C-Corp owned properties have a heavier reliance on than the total United States supply. With industry-wide performance at peak levels, RevPAR growth will continue to be limited, but growth in the REITs and C-Corps might be exceedingly difficult.