Hotel Stocks Offer Safe Harbor (and Yield) During Tough Times

Hotels look good thanks to macro developments.

   
Hotel Stocks Offer Safe Harbor (and Yield) During Tough Times

It might seem counterintuitive that during these tough economic times, hotel stocks are doing quite well. There are several reasons for this, and I believe the good times will continue. In addition, many hotels are structured REITs, which means they pay solid dividends — that helps replace the awful yields we’re seeing in bonds.

Business travel is key to the hospitality world. That’s why we saw hotels struggle so much after the Sept. 11, 2001, terrorist attacks, as well as during the financial crisis. However, gross private domestic investment continues to grow modestly. So while companies aren’t hiring very much, they continue to do business — and that means they send their people traveling.

In addition, folks in higher income brackets still are vacationing. Luxury chains saw a huge 11.2% increase in 2011 RevPAR, and also will outpace all other scales by adding 7.1% this year. Even middle-income Americans are visiting theme parks, as evidenced by the mid-single-digit growth we see in that sector. Personal consumption expenditures are growing around 2% year-over-year, too.

Two other macro factors are helping hotels. The first is that hotel supply is lagging demand. 2013 projections are for demand to increase 2.9% vs. a 1% supply increase. Consequently, hotels have pricing power in their room rates, driving up both occupancy and RevPAR. There’s also stealth inflation going on. Hotels love inflation; it allows them to raise prices.

And to further load the pack, here’s a few more figures:

  • Occupancy has recovered off the 2009 low of 55% — which was lower than the 59% after 9/11 — and is back to 61%.
  • Average daily rates are up a bit more than 4% YOY.
  • Overall RevPAR is up 5%.
  • As of April, the active and planned pipeline of new rooms were down 9% and 15%, respectively.
  • America’s Lodging Investment Summit forecasts 2013 RevPAR growth of 6.6%, ADR increase of 4.7% and flat occupancy.

The trends are all good. They aren’t explosive, but they are solid — and that means solid returns in the stocks, and with yields.

Hotel Stocks to Buy

Readers know my favorite play is a hotel REIT, Ashford Hospitality Trust (NYSE:AHT), and its Preferred D and E series. Ashford common stock pays a 5% dividend, and the company has a solid balance sheet. It has continuously been able to refinance and push debt maturities out year after year. I also think the stock is as much as 50% undervalued. Ashford’s D and E preferred series yield about 8.3% and 8.5%, respectively.

LaSalle Hotel Properties (NYSE:LHO), another REIT, saw a 19% revenue increase in its most recent quarter, driven by those higher room rates. EBITDA rose 25%, funds from operations rose 40%, and margins grew 180 basis points. LaSalle has fabulous credit, and just closed an unsecured $300 million credit line at a measly 2.68% (if it obeys covenants). LHO pays a 3.3% dividend.

Marriott International (NYSE:MAR) saw a 6% increase in RevPAR and a 4.7% increase in ADR, and the company used its liquidity to repurchase almost 10 million shares. Marriott seems to feel shareholders are better served by buying back stock than adding 3% to its measly 1.4% dividend, but to each their own.

Host Hotels and Resorts (NYSE:HST) saw a 7.6% RevPAR increase and a 31% increase in adjusted funds from operations. Host is aggressively replacing more expensive debt (6.6%) with lower-cost borrowings (3.7%). If the company is able to execute its various strategic plans going forward, it might have the greatest capital gain possibility, although it’s a ways off from increasing its 2.1% yield.

Hyatt (NYSE:H) and Starwood Hotels (NYSE:HOT) report later this week and next.

As of this writing, Lawrence Meyers held shares of AHT and its Preferred D stock. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


Article printed from InvestorPlace Media, http://investorplace.com/2012/10/hotel-stocks-offer-safe-harbor-and-yield-during-tough-times/.

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