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By Carla Pasternak

MHI Hospitality (Nasdaq: MDH) ($5.96) is the limited partner of an operating company that owns a small chain of upscale and mid-scale hotels and motels in the Mid-Atlantic, Midwest, and Southeastern United States.

MHI has paid a dividend of $0.17 per quarter since early 2005. With an annual dividend of $0.68 per year, the company is yielding nearly 11.4% at current prices.

MHI owns six upscale and midscale hotels under major brand names such as Hilton, Crowne Plaza, and Starwood (NYSE: HOT). It currently operates in Georgia, North Carolina, Florida, Indiana, and Pennsylvania, with just under 2,000 rooms available for travelers.

A variety of factors have conspired against the REIT's financial performance over the past year and a half. First, it is renovating two key properties, causing revenues to fall. Next, business travel is somewhat weak because of the slowing economy. Finally, the company has suffered a financial hit caused by interest rates swaps on its line of credit.

For 2007, MHI saw revenues marginally increase compared to 2006 levels, from $67.2 million to $69.8 million. Net income, however, dropped from $0.48 per share to $0.36. Meanwhile, funds from operations dropped from $0.95 per share to $0.87 -- a key figure since it is the source of dividends.

This financial trend continued to worsen slightly in the first quarter of 2008 as revenues dropped from $16.9 million in 2007 to $15.5 million. Revenues per available room (RevPAR), a key metric in the hotel industry, dropped -5.5% while occupancy decreased -8.2%, in part because of the renovations. The company fell from a 2007 per-share profit of $0.09 to a loss of -$0.07 in the first quarter.

That said, MHI's forecast for the whole year was reassuring. The company projected per-share funds from operations of $1.02-1.12, including the negative impact of an interest rate swap on the company's line of credit. The forecast was admittedly tempered by a warning that rising interest rates could have an adverse impact on the company's financial performance.

Still, if MHI meets its target, it would be paying out only between 66-73% of funds from operations with its current dividend amount. This is a manageable level that would likely allow the dividend to be maintained at the current rate.

MHI appears to be in the early stages of a financial rebound as renovated properties begin to kick in and lead to increased sales and cash flow. This REIT is suitable for aggressive investors seeking a robust yield of nearly 11.4% who are willing risk that an increase in interest rates could adversely affect the company's cash flow and therefore, possibly its dividend.

Disclosure: none

Source: MHI Hospitality Offers a Dependable 11.3% Yield