When you take your first look at the full-service lodging REIT Sunstone Hotel Investors (NYSE:SHO), you realize that their dividend yields are among the lowest in the REIT sector. However, to meet the annual distribution requirements, the company distributes a substantial catch-up dividend, which more than tripled its total distributions for 2014. They paid regular quarterly dividends $0.05, plus an extra $0.36 in the fourth quarter, for a total of $0.51. Unfortunately, the total distribution for 2014 would still keep SHO’s yield below the median for its sector. Should we expect a better distribution for 2015?
In fact, SHO results for Q1 2015 have been better than for Q1 2014:
- Occupancy went up 130 basis points (from 78.3 to 79.6 percent), one of the highest rates in the sector.
- Comparable hotel RevPAR and ADR increased 7 and 5 percent respectively.
- Adjusted FFO per share increased 47 percent to $0.22, resulting in a 23 percent dividend payout. In fact, SHO expects 2015 AFFO to be $1.29 — 10 percent higher than last year.
- Adjusted comparable hotel EBITDA margins increased 220 basis points to 26.2 percent, which is on a level with its peers.
After a five-year hiatus, SHO resumed dividend payments in September 2013, since when they have been paying $0.05 per quarter (except for the catch-up dividend), a pattern they do not foresee changing in the short term.
Better distribution for 2015 can be deterred by capital improvements. The company has been investing in renovations for Boston Park Plaza, one of its largest properties, and Marriott Wailea, its only resort property on Maui. They retained $0.20 of the Q4 dividend, which they distributed as a stock dividend so they could fund these renovations.
Not surprisingly, the company’s price-to-FFO has been below the peer median. Good regular dividends are a better commitment to investors than low regular dividends plus a catch-up dividend, so we can understand there is certain skepticism in the market. We see reasons SHO should raise dividends in the future, but, for now, they might prefer being very cautious.
Source: Sunstone Hotel Investors, Chatham Lodging Trust, Fast Graphs
Written by Heli Brecailo
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