Hospitality

Overview

Hotels of various types, mostly select-service and extended-stay brands like Marriott, Hilton, and Hyatt subsidiaries, and occasionally full-service or resort properties. Hospitality DSTs are less common than other types because of the operational complexity and the cash flow volatility, but they exist. Structurally, they're typically held through a master lease or a TRS (taxable REIT subsidiary) arrangement to keep the DST investors out of operations.

Analyst Notes

Hospitality is the highest-volatility asset class on this list. Don't get sold on trailing-twelve numbers from a peak year. Stress-test the cash flow assuming a meaningful downturn in RevPAR, because one is coming eventually, the only question is when. Look at brand strength, market RevPAR trends over a full cycle, supply pipeline within the competitive set, and the operator's track record. Make sure there's adequate FF&E and PIP reserve. And honestly, ask yourself whether you're really seeking the income profile of a hotel, because it's not what most DST investors actually want.

Advantages

• Hotels reprice their rooms daily, so rate growth flows through immediately when demand or inflation rises.

• Strong markets and well-positioned brands can produce outsized returns during favorable cycles.

• Tax depreciation benefits are significant because of the high personal property component (FF&E) and bonus depreciation rules.

Disadvantages

• Hotels are the most cyclical commercial real estate asset class. They get hit first in recessions and recover last.

• Operating intensity is extreme. Revenue and costs flow through directly to the property level, so a small dip in occupancy or rate compounds quickly.

• Brand and PIP costs. Franchise renewals require substantial reinvestment every five to ten years, and these capital needs can eat into distributions.

Frequently Asked Questions (FAQ)

Property Type Performance Averages