These Yield Plays Could Become Buyout Targets

Includes: AHT, INN
by: Bret Jensen

Regular readers of my columns know that I have been quite vocal in the last 18 months advocating the value and yield available in a variety of hotel Real Estate Investment Trusts (REITs) including Diamondrock Hospitality (NYSE:DRH), Felcor Lodging Trust (NYSE:FCH) and especially Chatham Lodging Trust (NYSE:CLDT). I have written about Chatham more than a half dozen times starting in early 2012 when the shares traded under $13 a share.

That believe in Chatham's value has started to be recognized as the stock has climbed some 50% over that time frame. Today BlueMountain Capital Management announced a $21.50 a share bid for Chatham and also encouraged the REIT to also solicit other and possibly higher bids.

I think this could be the start of a trend for private equity and other funds. The hotel industry is showing solid growth in Revenue per room (RevPAR) and average daily rates (ADRs) as well as increases in occupancy as the economy continues to slowly recover from the financial crisis of 2008/2009.

Here are two attractive yield plays within the industry that I like at current levels. Both are solid values by themselves at these levels and the possibility of a buyout at some point in the future would just be icing on the cake.

Ashford Hospitality Trust (NYSE:AHT) currently primarily invests in hotels with a focus on the ownership of upper-upscale and upscale full-service and select service hotels in primary, secondary and resort markets as well as mid-scale and luxury hotels. The firm invests across all segments and at all levels of the capital structure, including direct hotel investments, first mortgages, mezzanine loans, construction loans, and sale-leaseback transactions. It primarily concentrates among Marriott, Hilton, Hyatt, and Starwood brands.

Ashford is in the middle of a process to spin out its luxury & upscale hotels into "Ashford Prime". This should result in two more focused entities and also should increase shareholder value nicely. The remaining hotel portfolio will have a customer profile very similar to the hotel portfolio at Chatham which just caught that bid from BlueMountain.

The shares currently yield just under four percent (3.7%) and the company increased its payout ~9% earlier in the year. Insiders have not sold a share in the last year and a half and have been net buyers of the shares over the last two years especially in 2012. The stock sells for 8.5x forward FFO and just over 1x annual revenue.

Summit Hotel Properties (NYSE:INN) is a hotel REIT focuses on upscale and upper-midscale select-service hotels on a national basis. It has about 95 hotels with more than 11,000 rooms. Summit has done an impressive job in growing by making accretive acquisitions as well as improving operating performance since it came public in early 2011.

Summit has a solid balance sheet with staggered debt maturities. The shares also yield almost five percent (4.9%). The dividend payout should be lifted significantly in FY2014 as FFO (Funds from Operations) is projected to go up 25% next year. After posting revenue growth north of 65% this fiscal year, analysts believe another gain of at least 25% is in the cards for FY2014. The shares sell for less than book value and ~9x forward FFO.

Disclosure: I am long CLDT, FCH, INN, AHT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.