Diamondrock Hospitality is a middle capitalization lodging REIT that is undervalued. The REIT’s share price peaked in January of 2015 at $16. Since then it has been on the decline. It is now trading at multiples below its peer average. The company clearly lacks a strong action plan that will rebound the REIT.
The company’s portfolio is diversified across the country, but in Q1, 25% of the company’s hotels were in challenging locations: 14% in New York and another 11% in Chicago. The rest of the hotels are peppered across the country, many of them in coastal states, for example California, Florida, Massachusetts. The portfolio also includes resorts, for example in Key West, to add variance and keep the portfolio diversified.
The stock is clearly undervalued. The company admits they have a gap of 30% between net asset value and share price. Wall Street is more conservative with their estimate, claiming a 13% upside. In terms of multiples, the stock is trading below nine times the projected 2016 AFFO, whereas the sector average is trading at ten times.
Despite being undervalued, the company doesn’t have an aggressive plan to remedy these shortcomings and improve the share price. Their growth goals for 2016 are reasonable. They aim to increase RevPAR 2-4% and AFFO per share 5%, but these goals might not be enough to improve their situation.
Diamondrock Hospitality purchased three assets in 2015, but currently the management has said that they will not invest in anything new while their shares are still undervalued. In the meantime, the board approved a program to begin buying back stocks. On the dispositions front, they just sold a property in Orlando airport and are in the process of selling another asset, but this will not be enough to quickly increase their share price.
The investment site Wall Street Daily recently pointed out that this “rough diamond” has been insulated from Brexit by focusing on the domestic market. Unfortunately, Diamondrock has been affected by New York and Chicago, cities that have been either inundated with new hotel supply or suffered from reduced demand.
In summary, without an ambitious action plan to remedy their undervalued shares, the diversified portfolio that Diamondrock boasts might not be enough to soar share prices back to a comparable sector average.
Source: Diamondrock Hospitality Co.(NYSE:DRH)
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