This month's REIT Focus is on Lasalle Hotel Properties (LHO). LHO is a self-administered and self managed Maryland real estate investment trust that is the 99.6% owner of the general partner interest in Lasalle Hotel Operating Partnership, LP, the UpReit partnership that owns the assets of LHO. LHO engages in the ownership, development and lease of upscale and luxury full service hotels located in convention, resort and major urban business markets. Lasalle Hotel Lessee, Inc. ("LHL"), a wholly owned taxable REIT subsidiary of LHO leases each hotel.
As of 4/13/12, LHO owned 38 hotels with over 10,100 rooms in nine states and the District of Columbia. Each of the hotels is leased to LHL or a wholly owned subsidiary of LHL under a participating lease that provides for rental payments equal to the greater of (i) base rent or (ii) participating rent based on hotel revenues. Each hotel is managed by a third party non-affiliated hotel operator pursuant to a management agreement. LHO was incorporated in the State of Maryland in 1998 and is based in Bethesda, MD.
As of 12/31/11, the average occupancy, daily rate and RevPAR (revenue per available room) were 76.5%, $193 and $148, respectively. As of 4/13/12, LHO had 85.6 million shares outstanding, a stock price of $27/sh. and a market capitalization of approximately $2.3 billion.
Select financial data for LHO as of the 12/31/11 10K and for the year period 1/1-12/31/11 is as follows (in 000's where applicable):
|Real Estate Assets, Gross||$3,421,000|
|Borrowings, Bonds and Mortgage Loans||$951,000|
|Earnings Per Share||$.16|
|Cash Flow from Operations||$165,000|
|Unsecured Credit Facility ($485 million available)||$750,000|
|Market Capitalization (equity value only)||41%|
|Real Estate Assets Per Room||$339,000|
|Dividend Yield ($.44/sh)||1.60%|
|NOI and Value Calculation:|
|Revenues Per Above||$719,000|
|Less: Hotel Operating Expenses||($518,000)|
|Net Operating Income 2011||$201,000|
|Projected Inflation Rate||103.5%|
|Projected NOI for 2012||$208,000|
|Projected Cap Rate||9%|
|Projected Value of Portfolio||$2,311,000|
|Less: Total Debt & Preferred Stock||($1,109,000)|
|Projected Value of Company Equity||$1,202,000|
|Projected Value Per Share||$14|
|Market Price Per Share (4/13/12)||$27|
As shown above, our value for LHO is $14 per share versus the market price of $27 per share. A portion of the value difference can be attributed to projecting a forward one year net operating income for 2012. The market, however, is valuing the company at a cap rate of approximately 6% which we believe is way too rich for a hotel owner and developer.
Hotels are 60% business operation and 40% real estate investment and therefore have a higher risk profile than traditional real estate investments. Due to the higher risk inherent with a lodging business, hotels should be valued at higher cap rates than office, retail, apartment and industrial real estate. Our cap rate of 9% is in line with the average cap rate for hotel type properties per a CBRE 2011 cap rate survey.
LHO has seen its operations improve substantially from the depths of the recession in 2009 and is not highly leveraged. Net income has increased 447% and cash flow from operations 48% from 2009 to 2011. However, its dividend has declined from $1.95 in 2007 to a paltry $.44 today. While LHO is probably one of the best hotel owner/operators in the country, we do not recommend purchasing the stock at this price. Also, the dividend yield at only 1.6% is not very attractive. We would however, recommend purchase of the stock if it comes down to the mid or high teens.
REIT Focus reviews in prior issues of VOM are as follows:
1. BRE Properties, Inc., June 15, 2011
2. Boston Properties, Inc., July 15, 2011
3. Simon Properties Group, Inc., August 15, 2011
4. First Industrial Realty Trust, September 15, 2011
5. Public Storage, October 15, 2011
6. Ashford Hospitality Trust, Inc., November 15, 2011
7. AvalonBay Communities, Inc., December 15, 2011
8. Alexandria Real Estate Equities, Inc., January 15, 2012
9. Federal Realty Investment Trust, Inc., February 15, 2012
10. Digital Realty Trust, Inc., March 15, 2012