Comparative analyses of hotel REITs: examining risk‐return and performance characteristics

Purpose – This study aims to compare the risk‐return characteristics and performance of real estate investment trust (REIT) hotel companies (hotel REITs hereafter) with those of C‐corporation hotel companies (hotel C‐corps hereafter). Design/methodology/approach – The risk‐return characteristics and performance of hotel REITs and C‐corps were examined by estimating single‐factor and Fama‐French three‐factor asset pricing models for each portfolio. Differences between the hotel REIT and C‐corp estimations were tested using Wald test statistics. Findings – Little evidence was found that hotel REITs have significantly different risk‐return characteristics and performance than hotel C‐corps, which suggests that hotel REITs and C‐corps are not significantly different in terms of market risk‐return characteristics and performance. The market portfolio had a significantly positive effect on the returns of both hotel REITs and C‐corps. The size and book‐to‐market factors of common stock also had a significant explanatory power for the returns of hotel REITs and C‐corps. Both hotel REITs and C‐corps performed similarly to the market portfolio, on a risk‐adjusted basis, during the 2000s. Research limitations/implications – Despite the fact that the three‐factor asset pricing model explains a significantly greater proportion of the variation in the hotel firms' returns than the single‐factor asset pricing model, approximately 30 percent of the total variation still remains unexplained. Practical implications – The risk‐return characteristics and performance of hotel REITs and C‐corps revealed by this study will render hotel investors' decisions between the two organizational structures less complicated. In addition, the findings can be used by portfolio managers to construct a well‐diversified portfolio. Originality/value – A multifactor asset pricing model was used for the first time in this article to examine the risk‐return characteristics and performance of hotel companies. In addition, the importance of understanding differences between REIT and C‐corp structures in the lodging industry is emphasized.