Another Hotel REIT Hit by the Unpredictable Economy

For being in general undervalued and having good dividend yields, hotel REITs are a sound path investors might choose if they want to see potential good returns on their long-term investment. However, it is imperative for investors to understand that all hotel REITs are affected by the economy. Let’s take a close look at what is taking place with Chatham Lodging Trust.

chart01

  1. Due to a decline in business travel, Chatham Lodging Trust has lowered its guidance for 2016.
  1. For two trading days following the announcement, the share price dropped by 13%.
  1. Chatham joins the ranks of other hotel REITs that are being affected by macroeconomic factors.
  1. We felt it, but we are still optimistic about the sector and the stock.

Due to the decline of business travel, the hotel REIT Chatham Business Lodging Trust has lowered its annual guidance for revenue per available room (RevPAR) and AFFO per share. Despite the average daily rate (ADR) and occupancy remaining strong, the RevPAR figure did not meet the company’s expectations. During the Q2 conference call last week, the company revealed that it believes this pattern will continue for the rest of the year. The management stated that business travel is declining due to poor GDP growth. Until they see more GDP growth, business travel should be restricted.

After the release of the Q2 results, the share price has dropped by 13%, offsetting all of July’s return. However, the year to date return is still positive since the stock is yielding close to 6%. If nothing dramatic takes place by the end of the year (except a possible Federal hike in September), Chatham investors should be pleased with the stock performance.

Pebblebrook, FelCor Lodging Trust, and Hilton Worldwide have been some of the hotel REITs that reported restrain on Q2 growth for the same reason as Chatham. Besides poor business demand, Chatham has pointed out that discounted rates from online travel agents and increased supply in some gateway markets are two factors that are influencing their performance.

Despite the overall results, we still feel good about the stock. During the call, Chatham stated that numbers for July were not impressive, but they expect them to get better in August and September. The REIT has a solid portfolio that is supported by a sound investment strategy and multiple catalysts. It is also important to point out the following: stock has traded at a mid-range level over the previous twelve months, multiple is in line with peers, and dividend has been covered well.

In short, despite the negative impact on our REIT portfolio, we are not panicking. Our due diligence leads us to believe they can weather through.

Source: Chatham Lodging Trust(NYSE:CLDT)

Written on 04 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

A Way to Go About Hotel REITs

Summary

  1. Hotel REITs have been out of favor, but recent chase for yield has helped to propel share price performance.
  2. Several stocks that failed to approach their fair value present their own catalysts. FelCor Lodging Trust is a great example.
  3. FelCor management is actively engaged in selling non-core hotels and using the proceeds to repurchase stocks.
  4. Moreover, although being an activist target doesn’t necessarily lead to gains, the company has worked cooperatively with activists in an effort to improve governance.
  5. Finally, the company is actively looking to reduce its leverage level and improve its debt profile.
  6. June’s share dip was a great opportunity to buy, but new dip after softer Q2 results presents new opportunity.
Quick Profile (as of 29 July 2016)
Industry Fundamentals: Favorable, but potentially near or at peak

Hotel Portfolio: Luxury and upper upscale, balanced, diversified

Stock Volatility: High

Small Cap (Market Cap: $0.9 billion)

Dividend Yield 3.5% vs Hotel REITs 5.4%

AFFO Payout ratio: 19%

Upside: High (38% below 52-week high)

Risk: High

External catalyst: Fair

Internal catalyst: High (sale of five hotels, repurchase of stocks, decrease of leverage ratio, potential credit rating upgrade)

A Way to Go About Hotel REITs

That hotels, one of 2016’s trailing REIT performers, have been out of favor is not news. Investors have been cautious because many believe hotel REITs have either already reached or are currently reaching their peak in the real estate cycle. Nevertheless, recent chase for yield has helped to propel hotel REIT share price performance. Although share price performance was flat in the first half of the year, July demonstrated to be more promising.

Hotels overall lack a long lasting industry catalyst to convince investors. Although industry figures still demonstrate that supply has yet to surpass demand, supply has been on track to reach the historic growth rate of 2%. Also, supply has seen intensified construction in several hotel categories, especially upscale and upper midscale markets. In a highly competitive industry, this doesn’t come off very encouraging.

To top it off, economy has not helped to make the industry’s case. Rumors of recession have been on and off, the same way Fed’s Janet Yellen has demonstrated to be very sensitive to the swings of labor figures. In addition, a potential appreciation of U.S. dollar will scare international tourists away, especially to gateway locations such New York and Miami.

Weaker industry catalysts don’t imply that individual stocks cannot present their own internal catalysts. A way to go about this situation is to look for undervalued stocks (which is the large majority of hotel REITs) and find those that are creating events that could spur a share price performance. A promising hotel REIT that has failed to realize its value and fits the bill is FelCor Lodging Trust.

Among hotels, FelCor is the REIT with one of highest upsides. FelCor’s share price has been 37% below its 52 week high and 14% below its 2016 high. While hotel REIT shares are up by 9% this year, shares of FelCor are down by 6%. In June, its share dropped by 6%.

The management is focused on propping up shares. They put up for sale 5 of its 41 hotels and plan to use the proceeds to reduce debt, repurchase stocks and redevelop several hotels. Also, the sale of non-core assets will raise FelCor’s portfolio profile, improving hotel metrics, such as RevPAR, Hotel EBITDA per key, and hotel EBITDA margins. The company’s core assets have been in gateway urban markets and resort locations that can be more difficult to break into.

Maybe one of the reasons why the company has been flying under the radar is its debt profile. In April of 2015, Standard & Poor’s upgraded the company from B- to B, which is still two notches below investment grade.

The company is actively looking to reduce its leverage level and improve its debt profile. The company doesn’t have any major debt maturity in the next two years as interest expense has decreased over time and debt metrics have improved.

Diversified Portfolio Not Potentially Affected by Supply Growth

chart01FelCor owns luxury and upper upscale hotels in gateway cities and tourist locations. They own well rated hotels that are ranked very competitively to the hotels in the surroundings.

Gateway urban markets remain to generate a significant portion of revenues. Geographically, they have a balanced distribution of properties on both east and west coast, in cities such as Boston, Los Angeles and San Diego.

What is in the company’s favor is its diversified portfolio composed of suburban, airport, and resorts, which is not one of the subsectors potentially affected by supply growth.

Seasoned Leadership More in Touch with Shareholders

FelCor, although they encompass two entities, is a de facto internally managed REIT. The management is seasoned and composed of executives who worked for other companies in the industry. Key people in the senior team have been with the company for about ten years.

The board has accumulated an equivalent average tenure, although the company has taken recent measures to reduce the board term from 3 to 1 year. The desired effect is to reduce the average tenure and promote renewal that better reflects shareholders’ concerns. It is one of the actions to improve corporate governance.

Choppy Dividend Record, But Who Doesn’t?

chart02Although the company has been around since 1994, the company’s dividend record has been choppy. Notably, the REIT hasn’t distributed dividends for almost six years, between 2008 and 2014. The management interrupted dividends because they had predicted a sharp drop in FFO in the following years in function of the great recession, which actually forced the company into negative territory in 2010.

In January of 2014, the company resumed distributions, but management has clearly been cautious as they only distribute equivalent to 19% of the adjusted funds from operations. The company is concentrating its efforts on internal growth. For that reason, the dividend has been well covered, but yield is one of the lowest among hotel REITs.

The truth is that there’s nothing to be ashamed of this record. In fact, very few hotel REITs have dividend records that date back before the great recession in 2008. The sector has not produced a premier, long lasting dividend payer yet.

Activists Made Compelling Case

The company has been the target of activist Land and Buildings, which has almost doubled down on its position and now owns approximately 4% of the shares. Although being an activist target doesn’t necessarily lead to future gains, they did make the management improve its governance by including two independent directors. In the end, the company seems to be working cooperatively with the activist, something that is positive in itself.

In late January, Land and Buildings cited an upside of 60% to NAV and made a series of proposals to accomplish the target price. In February and March, FelCor shares were on a roll, rallying by more than 30%. However, weeks later, the stock lost steam and went back down.

Latest Results

chart03Following its Q2 announcement late July, the stock began trading with a significant drop. The management was treading lightly after seeing business travel getting soft in Q2. The weakening of corporate demand in transient travel forced the company to lower expectations for some of the metrics, including the full-year 2016 guidance for AFFO per share. The corporate transient segment accounts for 30% of overnight stays.

Despite the market’s negative reaction, the firm owns an overall portfolio that has the potential to deliver positive results. Also, the management has resources to partially mitigate the softness.

On Track for a Credit Rating Upgrade

chart04Highly levered, the company has been making a systematic push to reduce its debt level. By the time the company finalizes the planned sale of some hotels, the leverage ratio will be below the peer average. Moreover, the company has one of the best maturity profiles among hotel REITs and the majority of its debt is fixed rate interest (79%).

Following its corporate credit rating upgrade from B- to B by Standard&Poor’s April last year, the company improved its debt profile. Although it is two notches below becoming investment grade, the company managed to expand its borrowing capacity. Also, the company was able to replace its outstanding 6.75% senior secured notes due 2019 to 6.00% senior unsecured notes due 2025.

Valuation

The company is clearly undervalued. While hotels’ average multiple has been around 10 times AFFO, FelCor’s multiple is around 7 times.

Conclusion

If you buy FelCor, you’re buying it for long term appreciation, not for dividend.

In summary, with the recent dip, FelCor demonstrates to be a good opportunity, but I’d limit its exposure in the portfolio because FelCor performance has been conditioned to the successful hotel sales.

Source: FelCor Lodging Trust Incorporated (NYSE:FCH)

Written on 29 July 2016

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 29, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, PEB.

Why We Have Decided To Invest In This Hotel REIT

chart01Following its official Q2 announcement last week, Pebblebrook began trading with a significant 5% drop. Pebblebrook continues to tread lightly after seeing business travel getting soft in Q2. The weakening of corporate demand in transient and group travel forced Jon Bortz (Founder, Chairman, and CEO of Pebblebrook) to lower expectations for some of the hotel metrics.

The REIT reported that some industries have been sensitive to costs due to weaker corporate profits. For instance, energy and financial services have been more ‘thoughtful about travel’ and have been cutting back on travel. The drop in corporate earnings has forced management teams to become more conservative when it comes to helping their companies save capital. It is also vital to point out that current global events and a stronger U.S. dollar are making people leery about traveling. This has certainly affected the company’s results.

Despite the market’s negative reaction, the firm owns a portfolio that has the potential to deliver positive results over the next year. The customer base has a mixed profile and the west coast properties (especially Portland and Los Angeles) are performing very well at this time.

The company has also made an earnest effort at reuniting a strong series of internal catalysts of growth. They sold a land parcel and two hotels recently. They have also devoted a great deal of their time in renovating and repositioning a number of hotels. The sales of proceeds will be used to lower outstanding debt on a credit facility. The sales of proceeds may also be used to repurchase stocks and pay special dividends.

Pebblebrook’s 5% dip is not as big as their last major share price fall to $24 in June. The slight dip provides a buy opportunity that shrewd investors cannot afford to ignore. Last year, the company was trading above 20 times its AFFO. It is presently trading at 11 times its AFFO. This is not a solid guarantee that the price will increase, it just points out that investors have seen this before.

In short, one must be prudent when it comes to investing in REIT stocks. There’s much hype out there. Pebblebrook has exceptional management and an impressive portfolio. With this slight dip, we have decided to buy the stock. We didn’t want to miss this opportunity!

Source: Pebblebrook Hotel Trust(NYSE:PEB)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

Yellow Flag on Hotel REITs

chart01

During the release of Q2 results last week, several lodging stocks relayed the weakening of corporate transient demand. This has led some management teams to be more cautious while several have decided to review their 2016 guidance figures. Hotel REITs are not saying how long this will take, but they have confirmed that the second half of the year will suffer from the lingering effect.

The main cause has been the macro environment. Many uncertainties have led many companies, regardless of their size, to spend less and also cut travel expenses. Plus, the geopolitical tensions and fears of terrorism have discouraged travelers. With domestic and global events such as Brexit, China economy, oil prices, and U.S. elections, companies are lacking a clear horizon.

Hilton Worldwide, which is planning to spin off to create ‘Park Hotels & Resorts REIT,’ has mentioned on their Q2 call that, because of corporate transient, they remain on the lower end of their guidance range. While the corporate transient segment is slowing down, the group business is still doing well.

FelCor Lodging Trust, which is significantly exposed to the business traveler customer base, has also reported they are expecting group business to remain solid. While the group business partially offsets the decline in business transient performance, they are still continuing to expect negative effects on hotel metrics.

The Dow Jones U.S. Hotel & Lodging index has dropped by 4% by Wednesday, in tandem with most hotel REITs, but it has quickly recovered. Regarding last week’s worst performers, FelCor went down by 8%, Pebblebrook fell by 5%, and Hersha dropped by 3%.

Although the softness was detected a couple of months ago, a stronger impact has recently thrown down a yellow flag on hotels, whose operational results have been doing well. While on the other hand, the softening has made a low to moderate impact on the results. Many management teams have reported that there are ways to mitigate the impact.

In conclusion, the softening is not all bad, but it still will require some monitoring.

Source: Dow Jones U.S. Hotel & Lodging (^DJUSHL), Hilton Worldwide Holdings Inc.(NYSE:HLT), FelCor Lodging Trust Incorporated (NYSE:FCH), Pebblebrook Hotel Trust(NYSE:PEB), Hersha Hospitality Trust(NYSE:HT)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 29, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, PEB.

Despite Management’s Bearish Views, This Hotel REIT Gained 10%

chart01Hotel REITs shone brightly last week. It was by far the best performing sector with an average 1-week return of nearly 5%, as opposed to a REIT average of 1.7%. One of the reasons was LaSalle Hotel Properties, which released Q2 results. The stock was the best performing stock of the week, reaching 10% appreciation.

LaSalle Hotel Properties grossed $245 million in proceeds from the sale of its hotels, but the hotel REIT doesn’t plan to put it to work. Instead of investing in new properties or redevelopment, the company is planning on reducing leverage and improving its already good debt profile. Why is the company not taking advantage of opportunities and spending less in capital expenditures?

LaSalle’s lack of activity is a major letdown in an industry that has likely passed its cycle peak. This means, since the lodging industry itself lacks strong catalysts, the lack of internal action will not help LaSalle stock either. The management has a bearish view on the market and has repeatedly said that demand is decelerating, while supply is increasing. In the end, they wanted to see property prices come down, which isn’t happening.

Having been granted investment grade credit rating, the company is improving its already enviable debt metrics in the industry. Net debt to EBITDA is one of the lowest at 2.7 times, net debt to total market capitalization is around 26%, and the debt maturity profile is staggered, without any meaningful payments in the next three years. I want to think, that by doing this, the company is getting ready for a major transaction, but it’s probably just wishful thinking.

With significant exposure on the West Coast, the company is on track to capitalize on the region’s tailwinds. In Q2, its Los Angeles RevPAR increased by 17%, whereas most of the remaining regions were relatively okay. The company also has significant exposure to Boston, San Francisco, and San Diego. On the other hand, its New York RevPAR has decreased by 7%. In the end, the portfolio’s positives outweigh the negatives.

LaSalle is a midcap hotel with one of the highest multiples among its peers. The multiple is 14 times its estimated 2016 AFFO, while the average for hotels is about 10 times. It’s worth mentioning that this is still lower than the whole U.S. equity hotel average and its share price is 19% lower than its 52-week high. For that reason, the stock should have some room to grow.

In conclusion, we are monitoring LaSalle stock, but like the management, we decided to step aside and watch. Instead, we are prioritizing hotels that are actually in action.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 22, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

Source:LaSalle Hotel Properties(NYSE:LHO)

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT.

What’s Attractive About This Hotel REIT?

chart01.pngREIT investors should turn their attention to investing in hotel stocks. Hotels offer the best buy opportunities for investors who are searching for undervalued REITs. Most hotels are now trading between eight and twelve times the projected 2016 AFFO (in some cases, down from last year’s 20 times). It is now time for investors to commit themselves to finding a true gem.

The Pebblebrook Hotel Trust is one investing opportunity that one should not ignore. Pebblebrook Hotel had one of the best hotel metrics in the industry last year. Unfortunately, their shares dropped in value at the same time. They dropped from a peak of $50 in February 2015. At this time, they are now trading close to $28 a share at a multiple shy of ten times projected 2016 AFFO.

Pebblebrook Hotel’s multiple lies within the hotel’s sector average, and the sector presently does not have strong catalysts. Consequently, it is difficult to tell if the entire sector of REITs will improve in the short, mid-term. However, it is imperative to point out that Pebblebrook has demonstrated to be a worthwhile investment.

What’s Attractive About Pebblebrook?

-Jon Bortz is the founder, CEO, and Chairman. Bortz is a restless industry leader who has years of experience with REITs. Bortz led another hotel REIT (LaSalle Hotel Properties) from its IPO in 1998 until 2009. After he left LaSalle, he founded Pebblebrook and worked hard at turning it into a midcap REIT of two billion. Pebblebrook and LaSalle are not very different in market capitalization.

-The portfolio is exposed to bright locations in terms of industry projections. Their exposure to the West Coast (62% of the hotel EBITDA) is larger than the East Coast (35%). Pebblebrook has strong presence in San Diego, San Francisco, and Los Angeles. Please keep in mind that Pebblebrook is exposed to supply inflicted locations such as New York City, but its stake is limited.

-The management’s ability to secure exceptional same store growth rates. Last year, they demonstrated one of the highest same-property EBITDA growth opportunities of any public lodging REIT. This year, it has been reported that in Q1, they were able to increase same-property EBITDA by 15%.

-Pebblebrook has big plans for this year and 2017. The company is expected to renovate and reposition several of its properties. This should help improve their performance in the near future.

Source: Pebblebrook Hotel Trust (NYSE: PEB)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FHC.

Lack of Ambition Contributes To This REIT’s Undervalued Shares

chart01.png

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)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.