“The Company and industry are forecasting a low to
mid-single digit percentage increase in revenue for 2016 compared to 2015,”
notes Justin Knight, boss of Apple
Hospitality REIT. “As of December 31, 2015, the Company had
outstanding purchase contracts for four additional hotels, with a total gross
purchase price of $81.1 million.” But the market is oblivious to the optimistic
message and the buying frenzy. In past year, hotel REITS have been losing
Hotel REITs have two objectives: first, to provide income
through operating cash flow; second, to increase the value of its common
shares. To achieve these objectives, the hotel REIT will seek to enhance return
and the value of the hotels that it owns.
But the value creation
is often by capital allocation and not by hotel management per se. Typically,
unrelated companies, such as Driftwood
Hospitality and GFManagement, manage the hotel
portfolio on behalf of the Hotel REIT. Common terms between the parties include
Base Management Fee between 1 to 4 percent and Incentive Management Fees
between 10 to 20 percent of gross operating profit. Working Capital Provision
requires the hotel REIT to fund the cost of supplies. In addition, sale of a
hotel provision may limit the hotel REIT’s ability to sell or transfer the
hotel unless the transferee assumes the related management agreement.
Airbnb, an online marketplace that enables people to list, find,
and rent vacation homes, is just one of the behemoths the earnings of a hotel
REIT faces. The cyclical nature
of the lodging industry is another, notes Ridzwan Rahmat of REITsWeek, a newsletter. There is
also refinancing risk associated with debt. In a tight credit environment at
loan maturity date, the ability to extend debt is unpredictable.
Room revenue per
available room (RevPAR), average daily rate (ADR), and occupancy are key
measures of operating performance. RevPAR is calculated by dividing the annual
revenue by the number of rooms and the number of days. ADR represents the
average income per room. Occupancy is the number of rooms occupied divided by
number of rooms.
The bleak outlook of
the lodging industry is concerning investors. Despite a five-year growth in
performance metrics, hotel REIT’s valuation declined in all hotel REITS listed
in the NAREIT index in the past year. It is not unwarranted.