Hospitality REITs offer a direct play on the global tourism rebound, frequently providing a higher yield compared to their peers.
However, their earnings profile is unique, behaving quite differently from the more stable office, retail, or industrial sectors.
Before diving into Singapore-listed hospitality REITs, let’s break down their operational mechanics and what key metrics to look out for.
What Are Hospitality REITs and How Are They Different?
Hospitality REITs own income-producing lodging assets such as hotels, resorts, and serviced residences.
Prominent names include Far East Hospitality Trust (SGX: Q5T) and CDL Hospitality Trusts (SGX: J85), or CDLHT.
Unlike other REITs that thrive on multi-year leases, hospitality REITs’ revenues are driven by daily room and occupancy rates based on demand and pricing.
As these assets reprice daily, hospitality REITs are highly sensitive to economic cycles and travel sentiments.
This makes them more volatile during downturns or pandemics than their peers.
Conversely, this flexibility also means that during a tourism peak or economic boom, hospitality earnings can surge rapidly to capture rising demand.
Key Drivers of Hospitality REIT Performance
Occupancy is one of the most important drivers in the performance of hospitality REITs.
Influenced by factors such as tourist arrivals, business travel, and the general economic outlook, higher occupancy directly boosts operating leverage.
The average daily rate (ADR) is also reflective of hospitality REITs’ performance.
During strong travel cycles when rooms are in demand, hotels gain pricing power, resulting in a higher ADR.
Premium locations and strong branding can also raise ADR.
Revenue per Available Room (RevPAR) combines occupancy and pricing, and is the most important operating metric as it captures overall revenue efficiency.
Higher RevPAR translates to higher gross hotel revenue, which improves net property income (NPI).
An increase in NPI usually translates to higher distributable income per unit (DPU), benefitting unitholders.
Dividend Profile: Why Hospitality REIT Yields Look Attractive
Compared to other REIT sub-sectors, dividends from hospitality REITs tend to be more volatile.
Cyclical distribution spikes occur when travel demand is extremely strong.
High occupancy rates and rising room prices push RevPAR higher during strong travel cycles, which allows hospitality REITs to distribute a larger share of earnings.
However, while yields can appear very attractive during these phases, they are not permanent and can reverse quickly when travel demand falls.
For example, during the COVID-19 pandemic, CapitaLand Ascott Trust (SGX: HMN) also saw its DPU for 2020 fall to S$0.0303, down 60.18% from FY2019’s S$0.0761.
High yields in hospitality REITs often represent cyclical upside rather than guaranteed long-term income, with stronger payouts in good years offsetting weaker distributions during downturns.
Why the Balance Sheet Matters More for Hospitality REITs
A hospitality REIT’s balance sheet needs to be robust, as hotel cash flows are inherently volatile.
Unlike long-lease REITs, hospitality income can drop sharply during slowdowns as occupancy and room rates soften.
Equally important are the gearing level and debt maturity profile.
High leverage during downturns will quickly strain distribution.
REITs with well-staggered, long-dated maturities have the flexibility to weather lean travel periods.
Conversely, stretched balance sheets limit options during a crisis, often leading to aggressive distribution cuts.
A clear illustration is how hospitality REITs were among the hardest hit during the height of the pandemic in 2020, when international travel borders were closed, and tourism essentially halted.
Within two months, CDLHT shares dropped 58% from S$1.66 on 20 January 2020 to S$0.70 by 19 March 2020.
Similarly, CapitaLand Ascott Trust also fell 47% from S$1.36 on 20 January 2020 to S$0.72 two months later.
What to Look for in a Strong Hospitality REIT
A high-quality hospitality REIT is defined by prime assets in gateway cities in key tourism markets.
Furthermore, a diversified geographic footprint hedges against localised downturns.
Beyond the portfolio, sponsor strength and a management with a proven track record of navigating travel cycles are equally important.
They must demonstrate the discipline to recycle capital and preserve cash when necessary.
Finally, look for governance transparency, where managers provide timely, clear justifications for acquisitions and divestments to ensure alignment with unitholder interests.
Key Risks Investors Must Understand
Investors need to acknowledge the high and abrupt risks in this sector.
Recessions, travel slowdowns, pandemics, and geopolitical climate can lead to complete travel standstill at an instant.
Rising labour, energy, and operating costs can also compress margins even when revenue is recovering.
Additionally, REITs with poor balance sheets may be forced to raise equity in bad economic times, permanently eroding unitholder value.
Portfolio Strategy: Timing and Volatility
Hospitality REITs are best treated as a satellite allocation rather than a core holding within an income portfolio.
Unlike long-lease REITs, hospitality REITs’ returns are highly cycle-dependent; buying at the peak of a travel frenzy can cap your upside.
Investors should monitor leading indicators (such as tourist arrivals, airline capacity, and ADR momentum) to ensure they are buying with a sufficient margin of safety before the cycle turns.
Get Smart: Treat Hospitality REITs as Cyclical Income Plays
Hospitality REITs may deliver strong distributions during strong tourism periods, providing a cyclical income boost.
But, diversification across REIT sub-sectors, such as industrial and retail, is also important to manage volatility.
While hospitality REITs offer enticing yields, they require a different mindset than “set-and-forget” assets.
By focusing on balance sheet strength, vetting asset quality, and having cycle awareness, investors can capture the sector’s aggressive recovery gains without letting volatility derail long-term income goals.
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Disclosure: Wenting does not own any of the stocks mentioned.
