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Many investors appreciate REITs for the dividend income stream that the REIT model usually necessitates. They also may appeal to individuals who want exposure to real estate as an asset class that might appreciate after any coming inflation. Trustees also often believe that REIT exposure is necessary to maintain a prudently allocated portfolio of assets, and to ensure that there is income sufficient to meet any current obligations.

This is an analysis of the relative value and dividend growth rates of lodging REITs primarily owning hotels and/or motels across the price spectrum. These REITs all have market capitalizations of at least $1 Billion. They are, in alphabetical order:
  1. Diamondrock Hospitality Co. (DRH);
  2. Hersha Hospitality Trust (HT);
  3. Hospitality Properties Trust (HPT);
  4. Host Hotels & Resorts Inc. (HST);
  5. LaSalle Hotel Properties (LHO);
  6. Pebblebrook Hotel Trust (PEB); and
  7. Sunstone Hotel Investors Inc. (SHO)
Many lodgers have seen less business since the financial downturn, as both business and pleasure travel sustained declines due to the economic contraction. Any improvement in the economy could result in a significant upturn for these lodgers. Some, such as those in centers of commerce, are more dependent upon business clientele, while those that occupy roadside and strictly tourism adjacent locations are more dependent upon family travel. Family travel is often also affected by gasoline prices.
REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. As a result, most REITs offer a respectable yield compared with equities. Of course, some have below average yields and where there is a loss, rather than income, and/or significant debts to be paid, there should be no yield. Additionally, these hotels and motels often require expensive renovation projects, which absorb cash that could otherwise be distributed to shareholders. For the purposes of this analysis, yield includes regular and special dividends, for a total payout yield.
Diamondrock Hospitality Co. (DRH)
  1. Current Yield: 2.91%
  2. Market Capitalization: $1.8 Billion
  3. Price to Cash-Flow: 18.6
  4. Price to Book: 1.3
  5. Short Position: 5.1%
  6. Yield Growth Analysis: DRH had a strong and growing dividend that was suspended during the downturn. In 2007, the annual payout was raised to $0.96 from $0.72 (33.3% increase), after the company increased the quarterly dividend from 18 to 24 cents. In 2008, DRH raised the quarterly dividend to 25 cents (a 4% increase), but suspended the dividend in the last quarter, such that the annual payout was only $0.75 (a 21.8% decrease). DRH only paid one dividend for 2009, at the end of the year, for 33 cents (a 56% decrease), and no dividends for holders within 2010. Last month, DRH paid its first dividend, in the amount of 8 cents, since the one time 33-cent dividend.
Hersha Hospitality Trust (HT)
  1. Current Yield: 3.38%
  2. Market Capitalization: $1 Billion
  3. Price to Cash-Flow: 17.2
  4. Price to Book: 1.5
  5. Short Position: 4.4%
  6. Yield Growth Analysis: From 2006 until early 2009, HT maintained a quarterly dividend of 18 cents, but lowered it to 5 cents in the summer of 2009 (a 72% decrease). The last 8 dividends have been stable at 5 cents, including 2 within 2011.
Hospitality Properties Trust (HPT)
  1. Current Yield: 7.69%
  2. Market Capitalization: $2.9 Billion
  3. Price to Cash-Flow: 8.4
  4. Price to Book: 1.2
  5. Short Position: 5.1%
  6. Yield Growth Analysis: HPT’s yield peaked in 2007, after being raised from a 2006 total of $2.7598 to a total payout of $3.9846 (a 44% increase). In 2008, the yield decreased 22.7% to $3.08, and in 2009 it was slashed 75% to 77 cents, all paid in a single dividend at the start of the year. HPT then suspended dividends until the start of 2010, when it began paying a 45-cent quarterly dividend, for a total payout of 1.80 (a 133% increase). HPT has maintained the dividend at 45 cents so far into 2011.
Host Hotels & Resorts Inc. (HST)
  1. Current Yield: 0.5%
  2. Market Capitalization: $11.9 Billion
  3. Price to Cash-Flow: 22.7
  4. Price to Book: 1.9
  5. Short Position: 6.9%
  6. Yield Growth Analysis: Like many others, HST’s payout peaked in 2007. That year, HST raised its dividend by 31.5%, from $0.7437 to $0.9785. HST maintained a quarterly dividend of $0.1957 though 2007 and into 2008, but lowered it to $0.0489 for the last quarter of 2008. In 2009, HST paid only one dividend of 25 cents, and then reinstituted a quarterly dividend in 2010, paying a penny per quarter throughout. For the first quarter of 2011, HST raised the quarterly payout to 2 cents, which would equate to a 0.5% yield if maintained throughout 2011.
LaSalle Hotel Properties (LHO)
  1. Current Yield: 1.6%
  2. Market Capitalization: $2.1 Billion
  3. Price to Cash-Flow: 13.6 Billion
  4. Price to Book: 1.4
  5. Short Position: 6.7%
  6. Yield Growth Analysis: LHO paid a monthly dividend for years, but stopped in 2009. In mid 2007, LHO raised the monthly payout from 14 cents to 17 cents per share (a 21% increase), to peak at an annual payout of $1.95. In 2008, LHO first raised the monthly dividend by ½ a cent, before lowering it to 8 ½ cents for the last 3 months of the year. The annual payout for 2008 was $1.80 (a 7.7% decrease). In 2009, LHO switched to a quarterly dividend, set at a penny per quarter or 4 cents for the year (a 97.7% decrease). Subsequently, LHO raised the dividend to 11 cents in the fall of 2010, and has maintained it there through 2010. As a result, the payout in 2010 was 24 cents (a 500% increase) and should be 44 cents in 2011 (an 83% increase).
Pebblebrook Hotel Trust (PEB)
  1. Current Yield: 2.28%
  2. Market Capitalization: $1 Billion
  3. Price to Cash-Flow: 212.6
  4. Price to Book: 1.6
  5. Short Position: 4.8%
  6. Yield Growth Analysis: PEB is a fairly new REIT, having gone public at the end of 2009. PEB paid no dividends until the end of 2010, when it instituted a 12-cent quarterly dividend. PEB maintained that dividend thus far in 2011. If maintained throughout the year the payout of 48 cents will be a 2.3% yield.
Sunstone Hotel Investors Inc. (SHO)
  1. Current Yield: N/A
  2. Market Capitalization: $1.2 Billion
  3. Price to Cash-Flow: 21.6
  4. Price to Book: 1.3
  5. Short Position: 9.3%
  6. Yield Growth Analysis: SHO has not paid a dividend to shareholders of record since December 19, 2008. Prior to cutting the dividend, SHO had a strong one. In 2006, the quarterly dividend was 30 cents, which it raised to 32 cents in 2007. At the end of 2007 and through 2008, SHO maintained a 35-cent dividend, and paid a special dividend to end the year. Subsequently, SHO has paid no dividends and is likely awaiting a return to more substantial earnings before instituting any payouts, preferring to focus on renovations, additional property acquisitions and paying down debt.
Of the abovementioned names, HPT appears by far the most appealing to me, as it not only has the highest yield by a substantial margin, but it also has the lowest price compared with book value and cash flow. It must be noted, though, that HPT is not a strict lodger, as it also owns a large network of travel centers. Those travel centers are also heavily reliant upon road travel in the form of trucking.
Please note the reasonably high short interest on these names, including HPT, peaking on SHO at 9.3%. Many people are betting against commercial real estate, and this industry in particular is believed to be especially sensitive to economic downturns.
These short sellers are often clever, but many are also sometimes late to leave. Whether these shorts are late leavers or early arrivers is certainly open for debate. SHO may have the highest short interest because it has no current dividend for the shorts to carry and/or because their properties are primarily expensive ones that could be more sensitive to future economic downturns. The fact that all of these companies have short positions above 4% of their float indicates at least a few individuals still find this industry in danger of further turmoil.
Should you be interested in other REIT industries, please take a look at my analyses of (1) mall REITs; (2) open/strip-mall REITs; and (3) mortgage REITs.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Data is derived from Morningstar and/or Yahoo Finance. Yield is but one consideration in choosing an investment, and each investment should be considered relative to the total portfolio.

Source: Dividend Growth Analysis: 7 Hotel/Motel REITs