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Real Estate Investment Trusts

How to Pick the Best Hotel REITs

Given the mixed economic reports that we hear so much, you might be surprised when I tell you that the hotel business is booming. But it’s true. All the relevant economic numbers: occupancy rates, room rates, and total revenues, already near multiyear highs, are still trending up.

Even better, all of the stocks that I’m going to tell you about operate strictly in the U.S. So, what happens in Greece, Italy or Spain won’t matter much.

For starters, you need to know that, for most hotels, there are two companies involved: the hotel property owner and the hotel manager. The name you see on the building such as Marriot or Weston is the manager. Hotel property owners typically hire management firms with strong brand recognition to operate their hotels. The owner takes a base rent and a cut of the receipts. When it comes time to refurbish or upgrade the hotel, the property owner foots the bill.

I am going to focus on hotel property owners because most are organized as real estate investment trusts (REITs) and pay high dividends. 

REITs trade like regular corporations, but they don’t pay federal corporate taxes as long as they pay out at least 90% of taxable income as dividends. However, the dividends that you receive are taxed at regular rates—the 15% maximum doesn’t apply.

Finding Hotel REITs 
You can use a stock screener to find hotel REIT candidates. Screeners are programs available on some financial websites that allow you to pinpoint stocks that meet your particular requirements. I’ll use the free screener at FINVIZ.com to demonstrate the process. Start by selecting Screener on the FINVIZ homepage (finviz.com).

On FINVIZ, you use “filters” to set up your stock selection rules. On the Filters bar, select “All” to display all of the available filters. Then use the associated dropdown menus to setup your filter values.

USA Hotel Industry
Limit your search to lodging REITs by clicking on the Industry filter (top row) and then scrolling down until you see “REIT – Hotel/Motel.” Then use the Country filter and select “USA” to rule out foreign stocks.

Dividend Yield
Dividend yield is the next 12 month’s expected dividends divided by the price you pay for the shares. For instance, the yield would be 10% if you paid $1 per share for a stock expected to pay dividends totaling $1 over the next 12-months. Use the Dividend Yield filter to select your minimum acceptable yield. Start with “Over 3%.” Lower that minimum if you want to see more REITs.

Revenue Growth
In this market, viable candidates should be experiencing at least a modicum of revenue (sales) growth.  Use the Sales Growth (quarter over quarter) filter and specify “Positive” recent revenue growth.

Smart Money
Institutional investors such as pension plans and mutual funds have access to information that small investors never see. If they aren’t buying, you shouldn’t either. Institutional ownership measures the percentage of shares held by institutional buyers. Use the Institutional Ownership filter and specify “over 40%.”

Analyst Advice
FINVIZ tabulates stock analyst buy/sell ratings into these categories: strong buy, buy, hold, sell, and strong sell. Since analysts tend to be overoptimistic, it’s risky to buy stocks that analysts are avoiding. Use the Analyst Recommendation filter to specify “Buy or better.”

Price Action
Stock price momentum is an important consideration when selecting stocks. Stocks that have been moving up in price tend to continue their winning ways and vice versa. Require that passing stocks has recently moved up, not down, buy using the Performance filter to specify “year-to-date (YTD) up.” 

Price & Volume
A very low trading price tells you that most players are avoiding a stock, probably for good reason. Use the Price filter to require “over $5.”

Most stocks trade several hundred thousand shares daily. Illiquid stocks with very low trading volumes can be trouble when you want to buy or sell. Use the Average Volume filter to require “Over 50K (50 thousand) shares traded daily.

My screen turned up three hotel property owner candidates. Here's a link to the live screen so that you can see what it's turning up today.

Ashford Hospitality Trust (AHT)
Owns more than 100 hotel properties managed by major operators including Hilton, Marriot, Sheraton, Starwood and Westin. Dividend yield 5.4%.

Chesapeake Lodging Trust (CHSP)
A January 2010 IPO, Chesapeake owns 12 hotels; some very upscale and some mid-scale extended-stay hotels in major city downtowns in six states and in D.C. Dividend yield 4.9%.

RLJ Lodging Trust (RLJ)
A May 2011 IPO, RLJ owns 144 mid-priced limited service hotels such as Courtyard by Marriot and Embassy Suites in 20 states and DC. Yield 3.7%.

As with any screen, consider the listed hotel property owners to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 8/21/12

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