Although numerous studies examine REIT performance over extended periods of time, many online and data-driven investment tools do not adequately provide existing and prospective investors with the tools necessary to extract business management risk out of lodging REIT returns. Given investors' current reliance on technology and graphic-oriented return analysis, it is critical that lodging REIT shareholders understand that not all equity REITs are equal. Typically, investors govern by a combination of return on capital and diversification. However, lodging REITs are inherently misleading due to their "equity REIT" classification. As lodging REITs expand to encompass a vast portion of the hospitality industry, particularly marquis lodging assets in primary metropolitan markets, an accurate comprehension of inherent risks is critical for any investor considering deploying capital into a lodging REIT.

1. ANALYSIS OF LODGING REIT PERFORMANCE
TO ASSESS THE IMPACT OF BUSINESS OPERATION RISK
BRAD KUSKIN
NOVEMBER 16, 2017

2. This investigation of Lodging REIT performance is segregated into five distinct areas, as follows:
1 Establish Research and Identify Problem Statement
2 Research Review
3 Analysis of Research Methodology
4 Evaluation and Summation of Research
5 Interpretation of Results and Future Path of Research
ORGANIZATION AND BREAKDOWN OF ANALYSIS
LET’S GET STARTED >>

3. Since the early 1970's, REITs have grown to become one of
the most significant asset classes in the US economy.
REVIEW
OF
REITs
REIT ASSET CLASS SEGMENTATION >>
REITs are pools of real estate oriented assets organized as
companies. These companies trade publicly on major US stock
exchanges, mirroring the access and liquidity synonymous with
traditional stocks. Investors infuse capital into REITs because a
REIT share represents ownership in a securitized form of real
estate, with all accompanying claims on tangible assets or
underlying liens on physical assets
Investor options in real estate based REITs have become
dynamic, allowing capital to seek out returns across various
classes of real estate, under different management structures,
and with multiple micro-niche focused REITs.
[REAL ESTATE INVESTMENT TRUSTS]

4. EQUITY REITs ARE SEGMENTED INTO TEN DISTINCT ASSET CATEGORIES. THIS
CLASSIFICATION IS BASED UPON PROPERTY TYPES HELD WITHIN THE REIT AND MUST
REPRESENT MORE THAN 75% OF TOTAL HOLDINGS.
EQUITY REIT
SEGMENTATION
REIT MANAGEMENT STRUCTURE >>

5. CRITICAL TO UNDERSTAND SEPARATION OF
ASSET MANAGEMENT VS. PROPERTY MANAGEMENT
REIT
MANAGEMENT
LODGING REITs >>
LODGING REITS REPRESENT A UNIQUE BLEND OF BOTH

6. The tremendous growth of the lodging REIT sector continues as
investors gravitate to above-market returns, spurred by the
ability to alter market rents on a daily basis.
A 2015 study found that lodging REITs had a 72% proportion of
unsystematic risk, while the national average for other equity
REITs was less than 20% (Gu & Kim, 2015). The discrepancy in
the assigned risk coefficients among lodging REITs as compared
to all aggregate equity REITs is emblematic of the hotel industry
as a whole.
LODGING
REITS
"Lodging REITs own and manage hotels and resorts and
rent space in those properties to guests."
(NAREIT, 2017)
SOPHISTICATED ASSET MANAGEMENT IS REQUIRED
TO MITIGATE THE RISKS INHERENT IN THE LODING
INDUSTRY.

7. ASSESSING RISK >>
THE DELTA BETWEEN NON-ADJUSTED AND
RISK-ADJUSTED RETURNS OF LODING REITS
REPRESENTS THE ASSET MANAGEMENT
RISKS OF A BUSINESS-ORIENTED ASSET
CLASS.
RESEARCH
HYPOTHESIS

8. LODGING REIT PERFORMANCE >>
THE FIRST STEP TOWARDS PROVING THE
STATED HYPOTHESIS IS TO GAUGE THE RISK
INHERENT TO THE TOTAL EQUITY REIT SECTOR.
EQUITY REIT
INDUSTRY
PERFORMANCE
Upon a cursory review of data, equity REITs outperform a
primary index based stock market portfolio. However, when
assessed on a risk-adjusted basis, a balanced stock portfolio
vastly outperforms an equity REIT investment over a long-term
investment timeline. This data leads to some identifiably
unique characteristics inherent to the REIT industry.
• DOMESTIC ECONOMIC CYCLES
• LEGAL RESTRICTIONS
• CAPITALIZATION OF REITs
DATA SUGGESTS THAT EQUITY REITs ARE RISKIER THAN GENERAL
MARKET INDICES

9. In an analysis period spanning from 1993 to 2015, the lodging
REIT Sector has the highest long-term returns when compared
to all other equity REIT sectors
However, it is also of note that the lodging REIT sector also
carries the highest volatility of all equity REIT sectors during the
same period
KEY QUESTIONS:
- WHY ARE LODGING REITs MORE VOLATILE?
- HOW IS RISK ASSESSED WITHIN LODGING INDUSTRY?
LODGING
REIT
PERFORMANCE
Kim et al., (2002), studied hotel and resort operational risks to
ascertain upstream effects on lodging REIT performance.
Unsystematic risks associated with property operations
represented a more significant impact on lodging REIT
performance than property management risks posed to
other equity REITs.
RISK-ADJUSTED RETURNS >>

10. SHARPE INDEX
TREYNOR INDEX
A general definition of "performance"
has yet to be universally accepted by
the investment community.
risk-adjusted methodologies are
necessary to contemplate investment
survivability and non-CAPM returns
to provide meaningful investment
performance evaluations weighed
against established industry
benchmarks.
RISK
ADJUSTED
ANALYSIS
JENSEN INDEX
3 STATISTICAL MODELS

11. The Sharpe Index (1966) focuses on the total risk of the market.
The methodology is represented by:
Sharpe ratio = (Mean portfolio return − Risk-free rate) / Standard deviation of portfolio return
SHARPE
INDEX
BENCHMARKING >>
The Treynor (1965) Index measures investment performance adjusted for exposure to systematic risk.
The Treynor Index is calculated as:
(Average Return of a Portfolio – Average Return of the Risk-Free Rate)/Beta of the Portfolio
TREYOR
INDEX
The Jensen (1968) Index is a risk-adjusted performance measure
utilized in the determination of portfolio performance weighed
against companies or portfolios with similar traits or
characteristics within the market.
The Jensen Index relies upon a capital asset pricing model
(CAPM) to assess the general risk coefficient of the larger
grouping of comparable investment portfolios.
JENSEN INDEX

12. While the Jensen Index is perhaps the most
appropriate measure of lodging REIT
performance compared against other equity
REITs, the index's reliance on a benchmark
coefficient allows for the introduction of an
additional user-selected variable
Performance return analysis utilized various
industry benchmarks to assess lodging sector
REIT performance against other accepted
market indices.
RESEARCH COMPARED LODING REITs TO:
1) S&P 500,
2) CRSP Equal Weight Index,
3) CRSP Value Weight Index,
4) NASDAQ; and
5) 90 Day US Treasury Bill
ESTABLISHING
MARKET
BENCHMARKS
FINDINGS >>

13. RESEARCH
FINDINGS
DOES THE LODGING REIT SECTOR OVER-PERFORM OR
UNDER-PERFORM STANDARD FINANCIAL MARKET
BENCHMARKS?
This research reveals that lodging REITs maintain an average monthly return of 1.09%, representing a significantly higher return
than the aggregate equity REIT portfolio, which had an average monthly return of 0.91%. Statistically, however, lodging REITs
had a standard deviation of 6.38%, representing statistical volatility significantly higher than the aggregate equity REIT portfolio.
Although the US Treasury Bill analysis represents a virtually risk-free index and can be utilized for benchmarking purposes,
analysis of actual risk-adjusted returns provides additional insight.
REVIEW OF ALPHAS
The testing of alphas resulted in a determination of whether or not an individual equity REIT sector performed outside of the standard deviation of the market.
Except for the Specialty and Timberland sectors, all equity REIT sectors yield an alpha greater than zero. An alpha coefficient greater than zero does not necessarily
prove that these equity REIT sectors outperformed the market. Sectors with statistically insignificant alpha coefficients contend that these respective sectors
perform similarly to the benchmark. Relying on a significance level of 0.005, only the equity REIT sectors listed in the table shown here provide returns that
significantly deviate from the S&P 500 Index over the twenty-three-year data review period (Note that the Timberland sector of equity REIT is the only sector that
performed statistically worse than the benchmark during the review period).
Performance by Equity REIT Sector
Relative to S&P 500 INDEX Under
Jensen Index (January 1994 to
December 2016)
(Ri - Rf )= α + β * (Rm - Rf) + ε
REVIEW OF BETAS >>

14. RESEARCH
FINDINGS
(Ri - Rf )= α + β * (Rm - Rf) + ε
DOES THE LODGING REIT SECTOR REPRESENT GREATER
RISK THAN OTHER EQUITY REIT SECTORS?
The reduced Beta coefficients of all sectors may indicate less risk when compared to the general market,
but there is no data to support the hypothesis that the lodging REIT sector performed any better or any
worse than other equity REIT sectors when adjusted for risk.
REVIEW OF BETAS
The Jensen Index assesses risk-adjusted performance returns. The calculated Beta coefficients indicate whether the targeted REIT sector carries less, more, or equal
levels of risk when compared to the benchmark portfolio.
A Beta coefficient equal to 1.0 signifies an equal level of risk, a Beta coefficient greater than 1.0 signifies higher risk, and a Beta coefficient less than 1.0 signifies less
risk than the benchmark portfolio. As highlighted by the data presented in Table 5 all reviewed equity REIT sectors carry sub-1.0 Beta coefficients statistically
significant with 1.0% error. This data indicates that each of the reviewed equity REIT sectors carries significantly less risk than the S&P 500 Index Benchmark.
Performance by Equity REIT Sector
Relative to S&P 500 INDEX Under
Jensen Index (January 1994 to
December 2016)
ADDITIONAL BENCHMARKING >>

15. The previous review of the Jensen Model
output relied on the S&P 500 Index as the
benchmark portfolio. Historical research
highlights data conflicts between equity
REITs and the S&P 500 Index.
Therefore, additional Jensen Index
calculations were performed using the CRSP
Equal Weight Index, the CRSP Value Weight
Index, and the NASDAQ Composite Index as
comparable benchmark portfolios. Table 7
represents the results of these additional
instances of Jensen Index calculations.
Review of the data in the preceding tables
illustrates Beta coefficients less than one for
all equity REIT sectors, regardless of
comparison benchmark. However, the data
also demonstrate that the lodging REIT
sector did not statistically outperform or
underperform any other sector of the equity
REIT market when compared to the four
market performance benchmarks.
ADDITIONAL
BENCHMARKING
Statistically Significant Deviators from the S&P 500 Under Jensen Index (January 1994 to December 2016)
Statistically Significant Deviators from CRSP EQUAL WEIGHT INDEX Under Jensen Index (January 1994 to December 2016)
Statistically Significant Deviators from CRSP VALUE WEIGHT INDEX Under Jensen Index (January 1994 to December 2016)
CONCLUSION >>

16. • With technical analysis so pervasive in many investment
strategies, this research attempted to quantify an often
in-tangible attribute in business – MANAGEMENT
EFFECTIVENESS
• Long-term performance was tested to identify the
performance of the most management-reliant REIT
sectors to other, less management reliant sectors.
• Daily operations, short-term adjustments to market
demand, the inclusion of dozens of non-real estate
services, massive marketing campaigns, and
exceptional levels of customer service make the
lodging REIT sector perhaps the most sensitive to
management decisions.
• This research hypothesized that lodging REITs
would outperform other sectors of the equity REIT
market given the addition of business management
risks in lodging-oriented REITs.
SYNOPSIS
CONCLUSION >>

17. The research sought answers to two distinct questions;
1) How do lodging REITs perform relative to widely accepted industry benchmarks; and
2) How do lodging REITs perform relative to other sectors of equity REITs?
CONCLUSION
Data yielded results that directly contradicted the stated hypothesis
• Data concludes that lodging REITs performed worse than general market indices over the 22 year period.
• Data concludes that lodging REITs performed no better or no worse than any other sector of equity REIT
• In fact Lodging REITs performed worse than the majority, although the levels of significance proved inconsequential
Possible Explanations?
• Lodging REITs closely correlate to economic trends more than most other sectors of equity REITs
• General infancy of the lodging REIT industry during the initial years of the study
Although hard data does not support the stated hypothesis, it does not suggest that management is unimportant or
inconsequential to REIT performance. Instead, the data suggest that managing operational risk is not exclusive to
lodging REITs, or perhaps not accurately accounted for by the market.