Why the Best Hotel Stocks Are REITs, Not Operators

The leading hotel operators-Marriott, Hilton, and Hyatt-face a classic value investor's dilemma: they are expensive stocks navigating a difficult operating environment. This combination creates a narrow margin of safety, making it hard to justify their current prices based on near-term fundamentals.

The industry's top-line performance is under pressure. In the third quarter, overall U.S. hotel occupancy decreased by 1.5% year-over-year, as supply growth outpaced demand. With average daily rates rising only slightly, revenue per available room (RevPAR) fell by 1.4%. This is the core problem: the cycle is normalizing. After volatile years, the industry is entering a more stable but less lucrative phase where travel activity stabilizes and growth is measured. For operators, this means a shift away from volume-driven expansion toward a more disciplined, margin-focused model.

This challenging backdrop is reflected in the stock market. Public hotel companies have significantly lagged the broader market. The Baird Hotel Stock Index, which tracks major operators, ended 2025 up 6% year to date, a stark contrast to the S&P 500's 16.4% gain. The underperformance was even more pronounced for the hotel brand sub-index, which gained 9% but still trailed the S&P by over 7 percentage points. This divergence signals that investors see limited near-term catalysts in the operator model.

The setup for 2026 is not one of easy recovery. While there is optimism around events like the FIFA World Cup, the fundamental operating environment remains cautious. Cautious corporate travel patterns weigh on near-term momentum, and elevated costs persist. For a value investor, this means the current stock prices likely already reflect a best-case scenario. The margin of safety-the buffer between price and intrinsic value-is thin when the business cycle itself is flattening.

The REIT Advantage: Capital Allocation and Competitive Moats

While hotel operators grapple with a flattening cycle, a select group of REITs is creating value through a different playbook. Their strength lies in disciplined capital allocation and durable competitive advantages that are more visible and less cyclical than the operator model.

Apple Hospitality REIT (APLE) exemplifies this approach. The company has engineered a clear capital allocation arbitrage. It sells its hotels at a blended 6.2% cap rate, a premium that reflects the current defensive supply environment, while simultaneously repurchasing its own shares at a valuation discount. The math is compelling: the company is effectively transferring value from private buyers to public shareholders at a rate of $48 million year-to-date through October 2025. This is not just a financial maneuver; it is a statement of confidence in the intrinsic value of its remaining portfolio. The competitive moat here is structural. With 63% of its 220 hotels facing no new upper-scale competition within a five-mile radius, Apple Hospitality operates in a historically favorable supply environment. This reduces downside risk and positions the portfolio to capture disproportionate upside when demand eventually strengthens.

Host Hotels & Resorts (HST) presents a different but related opportunity. The REIT is viewed by some analysts as modestly undervalued, with a consensus price target suggesting a potential 6.3% upside from recent levels. This setup is built on a portfolio of luxury assets that, while more exposed to corporate travel cycles, benefits from the same structural supply discipline. The key for both REITs is the shift from operating risk to capital allocation risk. Their cash flows are more predictable, and their ability to buy back shares at a discount to asset value provides a direct path to shareholder value creation that is independent of quarterly RevPAR trends.

The bottom line for the value investor is that these REITs are not betting on a cyclical recovery. They are capitalizing on a cyclical trough. By selling assets at attractive cap rates and using the proceeds to buy back shares at a discount, they are compounding value for remaining owners. This disciplined approach, anchored by a durable competitive moat of limited new supply, creates a more predictable and less volatile path to intrinsic value than the operator model.

Valuation and Shareholder Yield: The Margin of Safety Check

For the value investor, the margin of safety is the difference between price and intrinsic value. In the current hotel landscape, that safety net is far wider for certain REITs than for the operators. The evidence points to a clear divergence in valuation and cash return potential.

Apple Hospitality REIT stands out with metrics that signal a significant discount. It trades at a median price-to-sales ratio of 1.13, a level that suggests the market is pricing its assets conservatively. More compelling is its shareholder yield of 9.7%, which far exceeds the industry median. This yield is not a passive dividend; it is the direct result of the company's capital allocation strategy-selling assets at a premium cap rate and using the proceeds to buy back shares. This creates a powerful, self-reinforcing cycle of value creation for remaining owners.

Contrast this with the operators. Their recent stock performance reflects high expectations, leaving little room for error. The broader industry's lagging returns underscore this. The Baird Hotel Stock Index, which tracks major operators, ended 2025 up 6% year to date, a stark underperformance against the S&P 500's 16.4% gain. This divergence is not a temporary blip. It signals that the market has already priced in the best-case scenario for a cyclical recovery, with the current operating environment of stabilized travel activity and elevated costs seen as the baseline.

The bottom line is a selective investment landscape. The industry's underperformance against the S&P 500 highlights a market that is not rewarding all participants equally. It favors disciplined capital allocators like Apple Hospitality, who can generate outsized returns by buying back shares at a discount to asset value. For the patient investor, the margin of safety lies not in betting on a better cycle, but in identifying companies that are compounding value regardless of the cycle's phase.

Catalysts and Risks: What to Watch for the Thesis

The investment thesis for hotel REITs hinges on a specific set of forward-looking factors. Success depends on monitoring the pace and quality of demand recovery, particularly in historically weaker markets, and assessing whether companies can manage costs as the cycle normalizes.

First, watch for signs of a broader industry inflection. The July 2025 data shows a clear regional divide, with New Orleans at 53.9% occupancy and Phoenix at 55.3% lagging significantly behind the national average. Sustained improvement in these markets is a critical early signal that the normalization is becoming more uniform. Conversely, persistent weakness there would confirm the "uneven regional performance" noted in the industry outlook, challenging the thesis that supply discipline is broadly benefiting all portfolios.

Second, track the fundamentals of RevPAR growth and occupancy rates. The industry's path to validation is through stabilized, positive growth. The recent quarterly data shows a 1.4% decline in RevPAR due to supply outpacing demand. The key metric to watch is whether this trend reverses. Positive, sustainable RevPAR growth would confirm that the industry is successfully transitioning to a more normalized, margin-focused model rather than a prolonged period of stagnation.

Finally, assess cost management. Elevated labor and operating costs remain a persistent headwind. The ability of REITs and operators to protect margins as demand stabilizes will determine the quality of any recovery. This is where the REIT model's capital allocation advantage may shine. By focusing on asset sales and share buybacks, they can insulate shareholder returns from the vagaries of operating cost inflation, provided they can execute their strategy at attractive valuations.

The bottom line is that the thesis is not about a dramatic cyclical surge. It is about disciplined capital deployment during a trough. The catalysts are the steady, measurable signs that the industry is stabilizing and that companies are managing their capital and costs effectively to compound value for owners.