Strategic Divestment and Asset Reallocation in Hospitality REITs: A Response to Operational Inefficiencies in Low-End Hotels

The hospitality sector's low-end hotel chains are grappling with a perfect storm of operational inefficiencies and margin compression, driven by cost pressures that have outpaced revenue growth since 2023. According to a CBRE report, operating expenses-including labor, food and beverage (F&B), and energy-rose by 4.1% year-over-year in 2024, while total hotel revenue grew by just 2.3%. CBRE also found labor costs alone surged 4.8%, reflecting higher wages and reduced staff hours due to service cuts and labor shortages. These trends have eroded gross operating profit (GOP) and EBITDA margins, prompting hospitality real estate investment trusts (REITs) to rethink their asset strategies.

The Case for Strategic Divestment

Hospitality REITs, long sensitive to macroeconomic cycles, are increasingly adopting asset-light models to mitigate risks and optimize returns. By divesting low-end properties-often characterized by thin margins and high operational volatility-REITs can reallocate capital to higher-yielding assets. For example, Hyatt's $5.6 billion asset-light shift since 2020 has allowed it to focus on fee-based income from luxury and resort properties, reducing exposure to real estate price swings, according to Hospitality Investor. Similarly, REITs like Apple Hospitality REIT and Chatham Lodging Trust have sold underperforming low-end hotels, generating proceeds to reinvest in mid-tier and urban properties with stronger demand profiles, as reported by Hotel Investment Today.

The asset-light strategy, while not without challenges, offers clear advantages. By leasing properties to third-party managers or franchising brands, REITs avoid the burdens of direct operations while retaining revenue streams tied to gross revenue. This model also aligns with shifting consumer preferences: business travelers increasingly favor urban business hotels, while leisure demand gravitates toward resorts with ancillary services, a trend noted by Hotel Management.

Financial Outcomes and Case Studies

Post-divestment financial performance varies, but several REITs have demonstrated resilience. Apple Hospitality REIT, for instance, sold six low-end hotels in 2024 for $63.4 million, realizing gains of $19.7 million and achieving a 2.7% year-over-year RevPAR growth in Q4 2024, according to Hotel Investment Today. Chatham Lodging Trust's $44 million in proceeds from three property sales enabled it to maintain GOP margins above industry averages. Meanwhile, Park Hotels & Resorts' decade-long divestment of 45 low-end hotels has improved its debt flexibility and liquidity.

However, the sector faces headwinds. As noted by Hotel Investment Today, softer leisure demand and normalization of travel trends have led to revised 2024 RevPAR projections, with some REITs like DiamondRock Hospitality offsetting declines through group bookings and repositioning efforts. The mixed outcomes underscore the need for disciplined capital allocation and adaptive strategies.

Risks and Opportunities

While divestment offers a path to margin stabilization, it is not without risks. Brand erosion and service-quality concerns persist in low-end segments, where REITs may lose operational control under franchising agreements. Additionally, rising technology costs-such as for revenue management systems-threaten to offset gains from asset reallocation, according to a Forbes article.

Yet, the long-term outlook remains cautiously optimistic. PwC highlights that hotels prioritizing dynamic pricing, loyalty programs, and ancillary revenue (e.g., upselling F&B) have mitigated cost pressures. For REITs, the key lies in balancing short-term liquidity needs with long-term portfolio resilience.

Conclusion

The operational struggles of low-end hotels have forced hospitality REITs into a strategic reckoning. By divesting non-core assets and embracing asset-light models, these firms are navigating a landscape defined by rising costs and evolving consumer behavior. While challenges remain, the shift toward higher-margin properties and fee-based income streams positions REITs to capitalize on recovery cycles, particularly in business travel and premium leisure segments. For investors, the lesson is clear: agility in asset reallocation may be the most critical factor in sustaining profitability amid a volatile market.