On the Margin: Lodging REIT CapEx & Dividend Deep Dive

Research evidence excerpt

On the Margin: Lodging REIT CapEx & Dividend Deep Dive

captures operating profitability,

normalized FCF incorporates the impact of capital intensity, and retained FCF isolates the effect of

dividend policy, reflecting the amount of cash management can ultimately redeploy.

This framework is particularly relevant as the sector exits a multi-year period of elevated capital

investment. With renovation cycles beginning to roll off, the focus is shifting toward cash flow

conversion and capital allocation, where differences in capital intensity and strategy across companies

will likely weigh more heavily on valuation.

Capital Expenditure History

Lodging REIT capital expenditures as a percentage of revenues are among the highest across the

REIT sector with renovation cycles ranging from 7-10 years that are necessary to defend competitive

positioning & RevPAR Index alongside more episodic, higher spend ROI projects that sometimes

require full asset closure. While most traditional REITs differentiate between maintenance & ROI

capital expenditure, the line between the two is significantly harder to draw in the lodging sector, and

the REITs do not report the two consistently. With this in mind, for this analysis we will focus on all-in

CapEx spending, as it provides the most effective benchmarking tool.

Historically, the full service lodging REITs have spent roughly 8-10% of total revenues on capital

expenditures, with spend from the select service lodging REITs materially lower given the relatively

simpler product. Looking over the last decade (Exhibit 1) CapEx is inherently lumpy, with meaningful

variation in timing and strategy across companies.

We see the 2017-2019 period as the pre-pandemic baseline for the lodging REITs, although we do