Despite a robust recovery in major U.S. stock indices since the beginning of the year, the same cannot be said for Real Estate Investment Trusts (REITs). The real estate sector has faced challenges, including disinflation and growing counterparty risk, which have hindered REIT performance.
However, Oppenheimer analyst Tyler Batory, an expert in the REIT sector, sees a clear opportunity within REITs that concentrate on the hotel and leisure segment. He points out ‘bright spots’ that could potentially drive these stocks upward, making them appealing additions to investors’ portfolios for the upcoming year.
“We expect the group to outperform other segments in 2024,” Batory says of the Hotel REIT group, and goes on, “Commentary from REIT management teams indicates booking pace next year should be up double digits YoY on average. The large number of employees working remotely is also a thematic tailwind for group meetings. This trend should help urban markets outperform other locations in 2024. The recovery in corporate travel and favorable comps are contributing factors as well.”
These factors can provide some solid backing, so let’s look into some of Batory’s picks. These are two hotel REITs that could make investors happy for the holiday season. Here are their details, from the TipRanks database, presented with Batory’s comments.
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RLJ Lodging Trust (RLJ)
The first hotel REIT we’ll look at is RLJ Lodging Trust, which operates as a hotel investment company and has focused its portfolio on premium-branded, rooms-oriented, high-margin, focused-service, and compact full-service hotels. Overall, RLJ has 97 hotels in its portfolio spread across 23 states plus DC, boasting a total of 21,400 rooms. The company’s assets are concentrated in markets that feature high long-term growth prospects.
Geographically, RLJ’s holdings are located in diverse cities, including Chicago, Pittsburgh, Charleston, Atlanta, New Orleans, and Seattle. The company chooses properties with the ability to generate a high RevPAR (revenue per available room, an important industry metric) and strong margins—both keys to attractive returns in the hotel business.
In addition, a quirk of RLJ’s target markets makes the company much more interesting to investors seeking exposure to the hotel industry. RLJ invests in markets that feature a combination of high density, high real estate values, and high construction costs – all of which create barriers to entry for individual investors. RLJ has the size and scale to enter these markets, thereby making them accessible to its own investors.
When we look at revenue and earnings, we find that this company brings in the highest values for both in Q2 and Q3 of the year. We have just come off the 3Q23 earnings season, and we can see that RLJ reported some solid metrics. The company’s RevPAR came to $148.81, up 3.4% year-over-year, while the total revenue of $334.4 million was up 5% from the previous year and beat the forecast by $7.75 million. On the bottom line, RLJ’s funds from operations per share, or FFO per share (another key metric when dealing with REITs), was reported as $0.40. This beat the forecast by a penny and easily covered the company’s declared dividend.
The dividend is important, as REITs have long been known as ‘dividend champs.’ In this case, the company last declared a 10-cent per common share dividend and paid it out on Oct 16. The dividend’s annualized rate of 40 cents gives a forward yield of nearly 3.8%, more than enough to beat the current annualized rate of inflation.
For Oppenheimer’s Tyler Batory, the key here is RLJ’s overall strong position. Simply put, the analyst sees this company as perfectly placed to reap gains later on, and to makes those gains available to investors.
“RLJ is the best way to play strong urban market trends, in our view. The portfolio should also benefit from several conversions, improving business travel, and elevated levels of group demand. We believe revenue growth positions the company for better hotel EBITDA performance than peers. The company also has a well-positioned balance sheet and substantial liquidity… Our expectation is these themes will show up on 1H24 results that exceed sector averages. We think they also position RLJ with a larger growth trajectory than peers from 2022 to 2025,” Batory opined.
Batory goes on to give the shares an upgrade from Neutral to Outperform (i.e. Buy), and he sets a price target of $13 to point toward a 22% gain in the coming months. (To watch Batory’s track record, click here)
Most of the Batory’s colleagues are on the same page. Based on 4 Buys and 1 Hold, RLJ has a Strong Buy consensus rating. The shares are trading for $10.63 and their $14 average price target points toward a one-year upside near 32% . (See RLJ stock forecast)
Host Hotels & Resorts (HST)
The second Oppenheimer REIT-pick on our list is Host Hotels & Resorts, a hotel REIT with an international footprint. The company has built its portfolio on high-end hotels, frequently located on or near prime beachfront zones but always set in attractive tourist destinations. The company has 77 hotel properties, located in 20 of the top US markets, as well as in selected cities in Canada and Brazil. Host’s properties boast, in all, approximately 42,000 rooms.
With its extensive portfolio, more than $12 billion in total assets, and its $12.6 billion market cap, Host Hotels can make a strong claim to being the largest lodging REIT in the global markets. The firm has a stated aim of being the best in its class and generating long-term shareholder value. Host’s day-to-day work involves the acquisition, renovation, and development of upscale and luxury hotel properties.
Generating shareholder value has an immediate impact on investors, and can be clearly seen in Host’s policies on share buybacks and dividend payments. The company spent $100 million in 3Q23 repurchasing 6.5 million shares, part of the company’s $150 million worth of year-to-date buybacks. Host has $823 million remaining in its buyback authorization.
On the dividend, Host in September declared its Q3 common share payment for 18 cents per share. This was an increase from the 15-cent dividend paid in Q2. Host has a history of adjusting the dividend quarter-by-quarter to match income levels and market conditions. Extrapolating forward, the current dividend – which was paid on October 16 – gives a yield of 4.1%.
Getting to the company’s revenues and earnings, we find that Host reported $1.2 billion at the top line in Q3, up a modest 1.7% y/y and besting the forecast by $10 million. The bottom line, reported as an adjusted FFO (funds from operations) of 41 cents, easily covered the dividend in full. The FFO was up from 38 cents in 2Q23 and beat the estimates by 6 cents.
Once again, we’ll check in with Tyler Batory, who sees Host Hotels as a strong player in its niche, with solid prospects for further growth as the economy continues to normalize. Batory writes, “We think HST is well positioned in 2024 to take advantage of recovery business transient and the positive outlook for group demand. Roughly 33% of 2022 room revenues was business transient, while 32% was group. Business transient was down 17% to 2019 in September, representing runway for continued recovery. The recovery in Maui and its hurricane-disrupted properties should be tailwinds as well.”
Looking ahead, the Oppenheimer analyst gives this stock an Outperform (i.e. Buy) rating. His price target here, now at $21, implies the shares will advance another 20% by this time next year.
Overall, HST shares claim a Moderate Buy consensus rating from the Street’s analysts, based on 11 recent reviews. These reviews include 7 to Buy, 3 to Hold, and 1 to Sell. The share are currently selling for $17.44, and the average target price of $20.36 suggests an upside of ~17% or more on the one-year horizon. (See HST stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
