- Our strategy for picking winners is to select REITs that are not just safe but also have favorable growth prospects.
- In this low yield environment, we are beginning to take a closer look at the lodging REIT sector.
- The yields are certainly enticing today, but this means that investors should become more tactical in their strategies, and place a high degree of emphasis on QUALITY and VALUE.
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Beginning in 2019 we decided to pullback from the Lodging REIT sector by issuing an “underweight” recommendation. This doesn’t mean that we were avoiding the hotel landlords altogether, we simply opted to shirt our attention to the higher growth sectors like cell towers, data centers, and industrial.
That proved to be a good bet, as these three categories have out-performed year-to-date, as expressed by their P/FFO valuation (as viewed below):
By carefully selecting the highest-quality growth REITs, our core portfolio (known as the Durable Income Portfolio) has performed well year-to-date (as viewed below). Our strategy for picking winners is to select REITs that are not just safe but also have favorable growth prospects.
Keeping in mind that growth REITs are viewed by investors as having the ability to increase FFO (funds from operations) faster than other REITs, and like the “trifecta” sectors above (cell towers, data centers, and industrial), they are enjoying the boom phase – driven by technology – in which they boost rental rates and occupancy rapidly.
Conversely, we have become more bearish with the property sectors, like lodging, that aren’t growing as fast.
However, in this low yield environment, we are beginning to take a closer look at the lodging REIT sector, recognizing that this category could offer opportunities, if the investor understands the risk and reward characteristics for the subsectors.
Limited Service Hotels
Smith Travel Research (or STR), a leader in data collection for the lodging industry, categorizes the hotel industry into six segments known as “chain scales”: Luxury, Upper-upscale, Upscale, Midscale (with food and beverage), Midscale (without food and beverage), and Economy. These chain scales are based on the actual system-wide-average room rates of the major chains. However, many Lodging REITs cross the line within these various segments, and that’s why we decided to write a series of articles to break down the categories into three distinct buckets: (1) limited service, (2) select/full service, and (3) specialty/boutique. Today we will commence with limited service lodging REITs.
According to U.S. Hotel Appraisals, “the services and amenities offered to guests of limited-service hotels are typically simple” and “in today’s market a limited-service hotel’s range of amenities might include a business center, a fitness room, a guest laundry facility, a market pantry, an indoor and/or outdoor pool and whirlpool, and small meeting rooms.”
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