Buy RLJ Stock For High Dividend Growth in 2015

Expect lots of dividend growth, but not much else in 2015

Last year was a great year for real estate investment trusts, with the MSCI US REIT Index posting a 30% gain in 2014 to more than double the S&P 500.

And despite the big gains last year, there are still plenty of returns to be found with REITS in 2015.

Just look at RLJ Lodging Trust (RLJ), a REIT that focuses on acquiring and managing premium branded focused service like Hampton or Hilton Garden Inn, as well as compact full-service hotels. As of September 2014, the RLJ REIT owned 150 properties in 21 states and the District of Columbia, offering approximately 23,000 rooms.

RLJ stock gained 38% in 2014, handsomely beating both the S&P 500 and the MSCI US REIT Index. And there’s plenty of reason to expect big returns again in 2015.

RLJ Stock Has Solid Operations…

Since going public back in 2011, RLJ has seen its average revenue per available room (RevPAR) grow nearly 30%. In November, RLJ reported YTD Q3 RevPar of 7.3%, and if industry estimates are any indication, a full year RevPar 2014 growth rate over the industry average of about 9% seems possible.

RLJ has also seen steady increases in gross margin over the past few years increasing from 39.2% in 2011 to 41.6% on a trailing twelve month (TTM)basis.

This increased gross margin has fallen all the way to the bottom line, with trailing 12-month EPS growing from 12 cents in 2011 to $1.03. RLJ has also been able to keeps its rooms full with increasing occupancy rates of 4.3% and increasing average daily rates of 2.9% for the YTD period ended in September 2014.

rlj-stock
Source: Yahoo Finance

And what about that all-important income? RLJ stock currently offers a 3.6% dividend yield has had 4 consecutive years of increases and an average annualized dividend growth rate over the last three years of 60.2%.

…But Not Much Growth Ahead

Although the U.S. hotel market looks poised for another great year in 2015 Analysts don’t seem to believe that RLJ stock will be able to profit above its current valuation. The consensus estimated stock price only offers a slim 4% in price appreciation, leaving 2015 RLJ stock return up to dividend growth.

With RLJ stock’s current price to 3-year average cash flow at 14.6 compared to the industry average of 14.8 and a price-to -earnings ratio of 33.2, compared to the industry of 30.2, the market appears to fully value any upside in the current stock price. In fact, in mid December KeyBanc downgraded RLJ REIT stock to “hold” from “buy” on valuation concerns.

Bottom Line

I anticipate 2015 to be a good year for hotel REITs in general, with increasing revenue per average room and average daily rates as the U.S. economy continues to improve. That improvement will spur more people to travel for leisure as well as business.

RLJ stock will no doubt gain from this increased economic vitality, which will increase dividends, but I would not expect any commensurate increase in RLJ REIT stock price to yield additional returns.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.

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