Lodgingreal estate investment trusts (REITs) are in the early
stages of what promises to be a multiyear recovery that is
creatingprofit opportunities fordividend investors.
A key hotel metric,revenue per available room (RevPAR) , is
forecast to rise 6% thisyear and next year, reversing a trend of
double-digit declines during therecession . The premium hotel
segment is expected to experience even strongergains , according
to a PriceWaterhouseCoopers study. These gains are being fueled
by an improving U.S.economy , increasing business and vacation
travel, and anemic growth in the supply of new hotels.
The lodging sector struggled during the recession, and
difficulties in obtaining financing kept hotel developers on the
sidelines. As a result, the domestic supply of new hotel rooms
grew only 0.5% in 2011 and 2012, well below the 25-year average
annual growth rate of 2.6%. There has not been enough new
construction to replace demolished hotels. Industryinsiders
anticipate a 2.2% rise in lodging demand this year, but the
supply of hotel rooms is expected to increase only 0.8%. The net
effectwill be a boost in hotel occupancy rates to above 62%, the
highest level since 2007, and hotels raising room
These two high-quality lodging REITs are particularly well
positioned to profit from rising occupancy andRevPAR rates
because of their premium brands and assets in major urban
markets. Both are delivering double-digitincome gains along with
generous yields and are reasonably priced compared with other
Chatham Lodging Trust (
Chatham invests in premium extended-stay and select-service
hotels. Since itsIPO in 2010, the company has spent $465 million
to acquire 20 hotels. Premium brands in Chatham's portfolio
include familiar names such as Residence Inn, Homewood Suites,
Courtyard, Hampton and Hyatt. Nearly 60% of Chatham's hotels are
located in major U.S. cities.
In addition, through a joint venture with CerberusCapital ,
Chatham holds a 10.3% interest in 64 additional hotels. These
assets were acquired at bargain prices during the
bankruptcy-forcedsale of Innkeepers USA Trust. Chatham
contributed $37 million to the joint venture in 2011 and has
already received $21 million of itscash back throughmortgage
refinancing, the sale of eight noncore hotels and joint venture
Most of Chatham's assets are extended-stay hotels with
roomsoffering a full kitchen and complete furnishings. Because of
this, Chatham's hotel occupancy rates have historically outpaced
the overall lodging industry by 15 to 20 percentage points.
Chatham posted an average hoteloccupancy rate of 82% during 2012;
most other lodging REITs had occupancy rates below 70%.
RevPAR growth for Chatham was below the industry average in
2010 and 2011 due to an extensive renovation and remodeling
program affecting 13 of the company's properties. Chatham
recently completed this program and was able to deliver 8% RevPAR
growth in 2012, outpacing the 6.8% industry average. Chatham also
had the highestEBITDA (earnings before interest,taxes
,depreciation andamortization )margin in the lodging REIT
industry last year at 37.4%.
In addition to its above-average RevPAR growth, Chatham
increased EBITDA by 81% last year, to $40.9 million.Funds from
operations, which is the standard REIT measure forcash flow ,
improved by 46%, to $1.30 a share.Analysts think Chatham can
boost funds from operations by 23% this year and maintain 28%
average annual growth for the next five years.
Chatham'sshares gained 43% in 2012 but still appear
bargain-priced at amultiple of 11 times 2013's estimated funds
from operations. The company also delivers an industry-leading
5%dividend yield and converted from quarterly payouts to monthly
this year. Chatham raised its dividend by 5% in December, to an
annualized rate of 84 cents. This was the company's second
dividend increase since the IPO and 20% higher than its dividend
two years ago.
Diamondrock Hospitality (
Diamondrock owns 27 upscale hotels in top urban gateway cities
and resorts. More than half of the company's hotels are located
in New York City, Boston, Chicago and Washington, D.C., the
cities expected to post the highest RevPAR growth in the next
three years. The premium brands in Diamondrock's portfolio
include Marriott, Hilton, Renaissance, Westin and Courtyard.
The advantage of Diamondrock's urbanmarket focus is that sites
are harder to find, so new hotels are rarely built. As a result
of constraints on new supply, long-term RevPAR growth for urban
hotels such as those owned by Diamondrock has been consistently
higher than in non-urban markets, at 3.8% and 2.9% a year,
In the past 24 months, Diamondrock has repositioned its
portfolio. The company made $1.3 billion of hotel acquisitions in
its major city markets while divesting $300 million of noncore
assets. Diamondrock is also spending $140 million in the next two
years to renovate a third of its portfolio. Once the renovations
are complete, Diamondrock expects RevPAR growth will accelerate
to 7% a year.
Diamondrock improved EBITDA by 17% last year, to $189.7
million. The company's funds from operations per share rose 26%,
to 78 cents. Diamondrock expects growth in funds from operations
of only 1% to 3% this year, but analysts look for 19% growth next
year after the renovation program is completed.
The company held its dividend steady at 32 cents in 2011 and
2012. In March, Diamondrock increased its payout 6% to a new
annual rate of 34 cents. Analysts think another dividend hike is
likely next year after the renovation program is done.
Diamondrock shares have lost 6% of their value in the past 12
months, but they appear cheaply priced at a 1.1 times
price-to-book value (P/B ) ratio, a 35% discount to the lodging
REIT industry's average P/B ratio of 1.7.
Risks to Consider:
As REITs, both of these companies are required to distribute
the majority of their income to investors. As a result, these
companies are forced to rely ondebt orequity financings to raise
capital for acquisitions. Diamondrock sold $200 million worth
ofstock last year, and Chatham is in the process of closing a $74
million share offering this week.
Action to Take -->
I like Chatham for its robustFFO growth, generousyield and
monthly payout. Diamondrock is attractive based on its current
low price and prospects for accelerated growth from its renovated