Real Estate Investment Trusts (REITs) / Stocks That Pay Dividends / Real Estate

Hotel Stocks: Room for More Gains

 

Please enjoy this complimentary preview published in the November 2013 Turnaround Letter.

Another sector where the fundamentals are strong but the stocks remain undervalued is the hotel and motel group.  While the group has performed decently, current industry conditions are very favorable and suggest more gains are ahead. Like most sectors, the key drivers of performance in the hotel/motel are supply and demand.  Demand comes from travelers, particularly business travelers, and this has been growing nicely over the last couple of years.  Supply comes from the construction of new hotel rooms, and that is lagging well below historical averages because it is still difficult to get financing. Growing demand and static supply means that hoteliers should be able to continue to raise room prices, which is great for the bottom line.  Moreover, because most of these companies are structured as real estate investment trusts (REIT’s), increasing profits will mean growing dividends.

Diamondrock Hospitality has acquired premium hotels in gateway markets, while disposing of non-core hotels located in secondary markets.  Rebranding the new properties as well as making capital improvements and management changes are expected to create value.  Diamondrock is well financed and positioned to capitalize on growth opportunities.

Felcor Lodging announced in 2010 that it would dispose of 39 non-strategic hotels; to date the company has sold or is in the process of closing on the sale of 27 properties.  Management has used the proceeds to pay down debt and extend maturities – currently there are no debt maturities until June of 2019.  The stock has performed well since we recommended it in November 2012, but we think it has a lot further to go, and we are raising our maximum buying price to 9.  Also, we wouldn’t be surprised to see Felcor reinstitute a dividend fairly soon.

Hersha Hospitality owns and operates 48 hotels located in what management describes as urban gateway markets such as New York, Boston, Miami and Washington, DC.  With the recent agreement to sell 16 properties to the Blackstone Group, Hersha has exited from Long Island, suburban Philadelphia, Connecticut and Rhode Island at the same time it is expanding in the San Diego and Miami markets.  As a result, Hersha is now a more focused urban operator with exposure to some of the best performing markets in the U.S.

Host Hotels & Resorts is the 800 pound gorilla of the sector with a market capitalization three times its next largest competitor.  Unlike many competitors, it has not been a forced seller of assets.   Rather it has been able selectively to be both a seller and a buyer and build a strong international presence in upscale properties in the U.S., South America, Europe, Australia and India.  The company has reported improving operating metrics, including occupancy which is now at the highest level in roughly a decade.

LaSalle Hotel Properties has built an attractive portfolio of upper-scale properties in resort and convention destinations that have high barriers to entry.  Management has earned a solid reputation by consistently achieving market beating profitability.  As the cycle progresses, opportunities in the up-scale sector continue to look attractive.

SoTHERLY Hotels has a small market cap, but its 56 year history attests to its ability to weather industry cycles.  During the first quarter of 2013, the company changed its name from MHI Hospitality to SoTHERLY in order to reflect its emphasis on the Mid-Atlantic and Southern U.S.  For the last several years management has been focused on repositioning existing hotels and restructuring the balance sheet.  Now the company is once again looking to expand via distressed properties that it can refurbish and rebrand.

Sunstone Hotel Investors’ management has been working since the last recession to repair the balance sheet and rebalance its portfolio of properties.  It has recently sold eight non-strategic hotels and made acquisitions in Chicago, New Orleans and Boston.  As a result, Sunstone now operates 28 luxury and upscale hotels, mostly in California and the North Atlantic Coast.  At the same time, Sunstone has reduced debt and preferred balances by about $428 million since 2012.  The recent reinstatement of a quarterly dividend demonstrates management’s confidence in continued operating gains.

Lodging Industry: Still Affording Comfort to Your Stock Market Portfolio

Company

Symbol

Recent Price @ 11/13

6-Year Range @ 11/13

Market Cap. Mil. @ 11/13

Price To Book @ 11/13

Dividend Yield @ 11/13

Diamondrock Hospitality

DRH

11.55

16.98–2.30

2,260

1.36

2.90

Felcor Lodging*

FCH

6.73

8.99–0.66

835

NM

0.00

Hersha Hospitality

HT

5.75

6.94–1.08

1,170

1.42

4.10

Host Hotels & Resorts

HST

18.63

19.88–3.08

13,970

1.94

2.60

LaSalle Hotel Properties

LHO

31.23

41.32–3.84

3,010

1.60

3.50

SoTHERLY Hotels

SOHO

4.66

4.81–0.76

47

1.65

3.90

Sunstone Hotel Investors

SHO

13.56

27.81–1.99

2,210

1.49

1.48

* Previous Turnaround Letter Recommendation            

Disclosure Note Accounts managed by an affiliate of the publisher own certain stocks discussed in this article.

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