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.

It’s Not a Good Time to Own Lodging REITs

 

sample.pngI am surprised at the financial markets sudden pessimism at the beginning of 2016 after the markets ended 2015 on a positive note. The interest rate hike made the domestic economy more predictable, but concerns overseas have amplified losses in the S&P 500 and equity REITs. Suddenly I started to give Janet Yellen credit for being concerned about China.

In 2016, lodging and timber REIT stocks could be potential casualties. Two weeks into 2016, lodging is down by 17% and timber is down by 14%; this is already half the losses both sectors experienced in all of 2015. In 2015, infrastructure fell by 32%, lodging by 29%, and timber by 17%.

Lodging REIT stocks have had great growth rates, but now is not a good time to own these stocks. First, market sentiment is negative towards lodging due to their performance. Investors have assumed that they are at its peak and ready to go downhill. Investors have been so sensitive that every piece of bad news associated with lodging makes them dump the stocks.

In addition, market sentiment is negative towards REITs in general due to the interest rate hike. Whenever the Fed raises the yield on 10-year treasury notes, they become more competitive against REIT dividend yields. 10-year treasury notes are risk free which gives them a clear advantage over owning REITs.

In a statement last week, LaSalle Hotel Properties said they have revised down the metrics and don’t expect fourth quarter growth in RevPAR. They also will not provide forward looking statements for 2016 because the current environment has been too clouded. Their stocks have dropped by 11.4%. Largely because of the statement, lodging stocks, on average, have fallen by 10%.

Also, John Petry of Sessa Capital LP, which owns 8.2% of Ashford Hospitality Prime, is currently trying to remove the board and management after witnessing ‘one self-serving action after another.’ Petry wants to put it up for sale. I welcome a move to more transparency in the REIT space, but in this negative environment, I can only wish Petry good luck. Easy to play the hero role, but hard to execute it. The market seems to believe the same thing as Ashford’s stocks plummeted between 16%-18% last week.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Heli Brecailo

Companies: Ashford Hospitality Prime, Inc. (NYSE:AHP), Ashford Hospitality Trust, Inc. (NYSE:AHT), LaSalle Hotel Properties (NYSE:LHO)

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 January 15, 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 December 31, 2015, 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 has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.