Hospitality real estate investment trusts (REITs) in Singapore were among the best performing REITs in 2017. These REITs specialise in owning and managing hotels and serviced residences. Some examples of hospitality REITs include Frasers Hospitality Trust (SGX:ACV), Ascendas Hospitality Trust (SGX:Q1P) and OUE Hospitality Trust (SGX:SK7). If you wish to gain exposure to this sector of REITs, it is important that we learn to assess the quality and performance of the REIT’s portfolio.
So, here are four metrics used to analyse a hospitality REIT.
Revenue per available room
The revenue per available room (RevPAR) tells investors if the REIT is able to increase its price per room.
If a hospitality REIT is able to consistently increase its RevPAR, it is a sign of good management of the property and the ability to attract customers to its portfolio of hotels.
Gross operating revenue and gross operating profit
The gross operating revenue (GOR) and gross operating profit (GOP) are two commonly used performance indicator in the hospitality industry.
The GOR is the total revenue generated by a hospitality REIT. It includes all revenue from room bookings, food and beverage outlets, and rentals of convention and banquet rooms.
The GOP of a hotel is measured by deducting all operating expenses from the gross operating revenue. It illustrates the profitability of a hotel. A hotel that is able to increase its GOR and GOP over the long-term is indicative of a well-managed hotel.
Average daily rate
The average daily rate (ADR) refers to the average rental income paid per occupied room. It is equivalent to the rental reversion rate of REITs that have long-term leasing contracts. The ADR reflects the pricing power of the hotel and is one of the key performance indicators in the hospitality sector.
A REIT that can increase ADR over the long-term is a signal of the portfolio’s strength and pricing power it has with its customers.
The occupancy rate of a hotel is measured by dividing the total number of occupied rooms by the total number of available rooms. Investors should compare the occupancy rate of the REIT’s portfolio with previous years to see if the REIT’s strategies for increasing occupancy rate have succeeded.
However, occupancy rate increase should not come at the expense of average daily rate. A hotel that is able to increase both, without neglecting the other, is a good sign of increasing popularity of the properties.
The Foolish takeaway
The hospitality industry has its own specific key performance indicators. If you wish to invest in a hospitality REIT, it may be useful to use these metrics to compare between the multiple options available.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.