Don’t Buy Lodging Stocks — Buy THESE Lodging Stocks

by Lawrence Meyers | June 26, 2012 12:01 pm

There are many advantages to buying lodging stocks in the present economic environment.

Most pay dividends, their high-quality real estate properties retain their value, they are a hard asset (always a good thing to have), they aren’t financial assets (good things NOT to have), most carry non-recourse debt, and they have a lot of liquidity.

However, not all stocks in this sector have fully recovered from the financial crisis. Let’s see which investors should avoid and which ones are buys.

Cold

Most lodging REITs suspended their common dividends during the financial crisis, and three still have not reinstated them: FelCor Lodging Trust (NYSE:FCH[1]), Sunstone Hotel Investors (NYSE:SHO[2]) and Strategic Hotels and Resorts (NYSE:BEE[3]).

Strategic’s portfolio is still generating a sizable quarterly loss of more than $30 million dollars, and while all of the REIT’s metrics are improving, the trust has a long way to go.

FelCor is in the same position: It continues to lose money and has interest rates of about 7.5% on its $1.6 billion in debt. It’s also disposing of hotels to raise cash.

Sunstone is struggling with quarterly losses of around $20 million, but unlike the other two, it has not had to issue enormous amounts of new stock, diluting shareholders’ equity.

I’d avoid all of these for now, though speculative investors who think big turnarounds are possible might want to dip their toes in. Also, these companies’ preferred stocks pay very generous dividends. Still, there are companies paying the same rates that are in better shape.

Warm

Three lodging stocks are doing nicely coming off the sector’s nadir and are possibly worth diving into as their fortunes increase. Pebblebrook Hotel Trust (NYSE:PEB[4]) is a smaller play, owning 14 hotels in the upper-upscale sector. Pebblebrook’s strategy was to buy distressed assets, invest in improvements, then turn a profit. The plan is on target: The company yields 2.1% and is poised to go higher.

Host Hotels and Resorts (NYSE:HST[5]) also just modestly boosted its dividend and has a very safe AFFO coverage ratio of nearly 3.8 to 1.

Diamondrock Hospitality (NYSE:DRH[6]) is in great shape financially, with 12 of its 23 properties unencumbered by mortgage debt, no borrowings on its $200 million facility and $128 million in cash. All of its metrics are improving significantly, with AFFO coverage of better than 2x. Diamondrock is poised for good things.

Hot

LaSalle Hotel Properties (NYSE:LHO[7]) plays in the luxury space, and thus far, wealthy folks who can afford to stay in these hotels appear to be traveling as if money doesn’t matter. The company just raised its dividend 82%, to 80 cents per share, for a 2.9% yield. The company’s AFFO coverage is well above that, suggesting there may be room for another dividend boost.

My favorite play, though, remains Ashford Hospitality Trust (NYSE:AHT[8]). The company’s presentation[9] is worth going through. Highlights include: Ashford beat its peers consistently in EBITDA flow-through, EBITDA margin change, shareholder returns, management insider ownership (a whopping 21%), and it has the strongest dividend coverage, along with one of the highest yields. The Preferred Series D and E pay 8.45% and 9%, respectively — but hurry up because they go ex-dividend on June 30 (like most other REITs).

Lawrence Meyers owns shares of Ashford Preferred D.

Endnotes:
  1. FCH: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCH
  2. SHO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHO
  3. BEE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BEE
  4. PEB: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEB
  5. HST: http://studio-5.financialcontent.com/investplace/quote?Symbol=HST
  6. DRH: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRH
  7. LHO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LHO
  8. AHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=AHT
  9. presentation: http://www.snl.com/Cache/1500041423.PDF?D=&O=PDF&IID=4088185&Y=&T=&FID=1500041423

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