Plenty of Upside, and Dividends, in Hotels

by Lawrence Meyers | May 17, 2012 9:40 am

The economic recovery has been hit or miss, depending on the sector you look at. One sector that recovered early on, continues to do so and has a lot of upside remaining in this current cycle is the travel and leisure segment — specifically, hotels.

This industry’s fundamentals are in great shape.

Hotels move in cycles of five to 10 years, and we’re probably a third of the way through the present lodging cycle. It’s important to understand that the best hotels are hard assets: They aren’t only valuable real estate, but they produce income. Hotels are also inflation hedges because they’re able to change their prices daily not only due to demand but to offset inflation.

The U.S. economy is probably looking at slow growth for the next several years, primarily because the GDP growth we had seen earlier was driven by easily obtainable debt. Now, however, we’re deleveraging so that will slow growth down.

Hotel cycles are tightly correlated to GDP, and that may not bode so well. But it doesn’t take into account that hotel demand is outstripping supply, which increases occupancy, giving hotels further pricing power. Supply will remain constrained because it’s even harder to get financing for new hotels than it is for existing ones.

This all translates into higher revenue per available room, or RevPAR, for the next several years — the key metric for hotels. RevPAR is forecast to expand at a 5% compound annual growth rate. This in turn translates to 40%-80% EBITDA growth, and historically, investing at this point in the cycle has led to shareholder returns of 25% annually.

Can you identify any other sector with that level of growth ahead of it, particularly in this economy?

So what hotels are worth buying stock in right now?

My favorite continues to be Ashford Hospitality Trust (NYSE:AHT[1]). This REIT continually outperforms its peers in EBITDA flow-through, EBITDA margin increase, and its dividend yield and adjusted funds from operations (AFFO) dividend coverage. Oh, and it has also provided more shareholder return across every time period from one year to eight years. Plus, it has the highest insider ownership (21%) of its peers.

While virtually every other company had to issue huge amounts of equity to survive the financial crisis, Ashford actually repurchased almost half its outstanding common shares. Other hotels cut their preferred dividends, Ashford did not.

The company ladders its debt maturities, consistently refinancing its debt, has ample liquidity and no recourse debt outstanding. The stock trades at $8.25, and I place today’s fair value closer to $14. It’s a slam-dunk value play, and it pays a 5.4% dividend. I also like the Preferred D shares, which pay a 9% yield.

Hersha Hospitality (NYSE:HT[2]) is a new addition to my radar. Its first-quarter results are in line with the robust performance the sector is seeing, it pays a 4.4% yield and has 15% insider ownership.

Host Hotels & Resorts (NYSE:HST[3]) is a big player in the space. The $11 billion company saw comparable RevPAR increase by 6% and AFFO up 17%. Its average room rate jumped a very impressive 2.9%. Host is also gradually replacing some of its more expensive debt with less expensive notes. Other refinancings and equity offerings will result in a drop in overall debt from $6.1 billion to $5.2 billion. The company offers only a 1.5% yield, but that may increase as the sector improves.

Things are also improving at LaSalle Hotel Properties (NYSE:LHO[4]). Like its peers, it also saw 6.2% RevPAR growth, a huge leap in AFFO and expanding margin growth. It’s also redeeming its expensive preferred shares, and it lifted its dividend in a big way — from 11 cents quarterly to 20 cents, or a 2.8% yield.

If you seek bigger yields, definitely check into the preferred shares of hotel companies. With the financial crisis behind us, the only danger in these preferreds is overpaying and having them called.

As of this writing, Lawrence Meyers[5] owns AHT. He is president of PDL Capital, Inc.[6], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at[7]. He also has written two books[8] and blogs about public policy[9], journalistic integrity[10], popular culture[11] and world affairs[12].


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