Using commercial mortgage loans to assess risk and return in the lodging sector

Abstract

The purpose of this study is to investigate the risk and return features of the lodging sector using a large sample of 16,898 commercial mortgage loans securitized into commercial mortgage-backed securities (CMBS) in the U.S. between 2010 and 2018. The results of the analysis show significantly lower loan-to-value (LTV), higher debt service coverage ratios (DSCR), and higher credit spreads in the lodging sector than all other commercial property sectors. Additional findings document significantly higher lodging sector capitalization rates and equity dividend rates. Taken together, the results of the study provide strong empirical support for the positive relationship between risk and return in the lodging sector. Therefore, investors will require higher returns to compensation them for the additional risk of investing in the lodging sector. The theoretical and practical implications of these results are also discussed.