RLJ Lodging Distancing Itself From The Competition: Watch For Strong Dividend Hikes

Feb.24.14 | About: RLJ Lodging (RLJ)

RLJ Lodging Trust (NYSE:RLJ) sold 11 of its worst performing hotels for a nifty $85 million. This portfolio of hotels was generating revenue per available room (RevPAR) of $68, which is well below the $100 average for the rest of the portfolio. The properties were located in Colorado, Indiana, Michigan, Nevada and Texas.

This transaction follows the announcement earlier in the week that it had acquired a 10 hotel portfolio from affiliates of Hyatt Hotels Corporation (NYSE:H). The acquired hotels have RevPAR of $120 and the transaction is expected to close next month.

With the move, the company will distance itself even further from peers, after having achieved an 8.2% RevPAR growth in 2013.

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While the Hyatt purchase was not for hotels in core markets, it does strengthen its relationship with Hyatt to over 7% of EBITDA. The company's top markets are listed below.

The company plans are to continue to:

  • Continue to convert brands
  • Refinance mortgage debt
  • Recycle additional capital from non-core assets

Its strategy has been to reduce square footage and provide fewer food and beverage outlets in order to get a majority of revenue from rooms, resulting in higher margins and higher ROI.

For investors looking to diversify their REIT exposure and specifically the hotel REIT exposure, RLJ is the largest of the focused service hotel REITs. The company necessarily compete against Host Hotels and Resorts (NYSE:HST) but is the 3rd largest lodging REIT behind Host and Ashford Hospitality Trust (AHT) on an EBITDA basis.

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If the transactions mentioned above go according to plan, investors should expect continued growth in FFO, which should lead to dividend increases over the short to intermediate term. The company has increased its dividend aggressively since going public just a few years ago.

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The company has grown funds from operations from $125 million for the 9 month period ending in September 2012 to $175 million for the 9 month period ending in 2013. With dividends paid through September of $0.60, this translates into a very reasonable payout ratio of less than 50%.

The company will announce 4Q 2013 results and we expect the news to be positive.

Sources: Morningstar, RLJ Website

Disclosure: I am long HST. 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.