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Summary

  • I am lightening up on the real estate investment trusts in my income portfolio as interest rates are liable to rise from here and the sector has had a great 2014.
  • The primary exception to this move is the Hospitality REIT space which is showing continuing improving business fundamentals.
  • Why Hospitality Properties Trust with its 6.5% dividend yield looks very attractively valued at current levels is highlighted below.

I have lightened up on the Real Estate Investment Trusts (REITs) within my income portfolio recently. The sector has been a stellar performer so far this year as ten-year treasury yields have fallen from just over 3% to start the year to just over 2.4% currently; confounding pundits who generally predicted a continuing rise in interest rates this year.

However, as the Federal Reserve is about to end its latest easing program in October and with economic growth predicted to accelerate in the second half of the year; I believe discretion is the better part of valor here as interest rates should rise providing a headwind to the REIT sector going forward.

The one exception is in the hospitality space. Due to a lack of construction during and after the financial crisis; supply continues to fail up to keep up with increasing demand. This has led to steady growth in RevPAR (Revenue per available room), ADR (Average daily room rate) and occupancy levels.

This has bolstered results at these lodging real estate plays' results and this secular trend remains in place. This morning I took a stake in Hospitality Properties Trust (NYSE:HPT), a better than six percent yielder that remains attractively valued and continues to deliver results.

Company Overview:

This lodging REIT owns 291 hotels and owns or leases 185 travel centers located throughout the United States, Canada and Puerto Rico. The company outsources operations of these properties to the likes of Marriott International, InterContinental Hotels, Hyatt Corporation, Carlson Hotels Worldwide, Sonesta International Hotels Corporation, Wyndham Hotel Group and Morgans Hotel Group. Its travel centers are run by Travel Centers of America.

Recent Results:

The company delivered quarterly results Monday that showed the company continues to deliver on its promise of delivering shareholder value. Among the highlights of the report:

  • Normalized FFO (Funds from Operations) came in at 87 cents a share, two cents a share above the consensus.
  • Revenues came in at just over $450 million (up 9.6% Y/Y) and just over $20 million over consensus.
  • Comparable RevPAR growth of was up 8.5% Y/Y to $89.21.
  • RevPAR growth excluding hotels under renovation was up an even better 11.2% Y/Y to $89.92.
  • ADR was up 6.2% Y/Y to $112.12 and occupancy levels increased 360 basis points to 80.2%.

Valuation:

The quarterly report provided very strong performance across the board as the REIT is operating very effectively to deliver improving results from its properties. The shares offer very good value here at just under nine times this year's consensus FFO per share. Competitors like Host Hotels & Resorts (NYSE:HST) and Ashford Hospitality Trust (NYSE:AHT) go for generally 12 to 15 times forward FFO. Both have lower dividends and are growing revenue at comparable rates. Hospitality Properties Trust pays a generous 6.5% dividend yield which it pays quarterly. Finally, a couple of directors made insider purchases a month ago which is always encouraging. ACCUMULATE

Source: Hospitality Properties Trust: High-Yield Play Continues To Deliver