We recently compiled a list of the 11 Best REIT Stocks To Buy Under $10. In this article, we are going to take a look at where DiamondRock Hospitality Company (NYSE:DRH) stands against the other Best REIT Stocks To Buy Under $10.
The Recent Fed Rate Cut: A Relief for REITs?
The Federal Reserve finally decided to cut rates beginning with a half-percentage point reduction on September 18. Ahead of this major rate cut, real estate investment trusts rebounded from July through mid-September. As reported by The National Association of Real Estate Investment Trusts (Nareit), rate easing cycles are really supportive for the REIT sector. Matthew Sgrizzi, chief investment officer of LaSalle Global Solutions, mentioned the change in the Fed’s policy supporting a positive stance for real estate. However, real estate investment trusts have a long way to go as it could be a multi-year catch-up for them relative to broader equities.
The head of listed real estate at Cohen & Steers, Jason Yablon, considers the recovery of listed real estate investment trusts quicker as compared to the private real estate market. REITs have been a major victim of the high interest rates. As interest rates increased and property values corrected, investors pulled back from real estate investment trusts.
Thus, REITs witnessed their earnings multiple de-rate more than any other equity sector amidst the recent Fed hiking cycle. Hence, it is reasonable to expect a reverse trend with real estate investment trusts outperforming other equity sectors as the rates fall, in the opinion of the portfolio manager at Janus Henderson Investors, Greg Kuhl.
The historical behavior of real estate investment trusts is also important to consider in this regard. With a decline in 10-year Treasury yields, REIT total returns typically start to rise. This indirect relationship between the movements in 10-year Treasury yields and REITs’ performance can be noticed, starting in 2022.
Positive Prospects for Mortgage REITs
Mortgage REITs have underperformed the broader stock market over the past two years of the Fed’s high interest rates. Nareit has also revealed that the outlook for the mortgage REIT sector is especially positive. According to Steve DeLaney at Citizens JMP, the sector to experience the most significant positive impact is the commercial mortgage REIT segment where higher NOI capitalization rates have reduced real estate property valuations and higher rates have led to increased cost of carry for borrowers with floating-rate bridge loans. A combination of factors such as improved sector valuation, less pressure on book value, and relief on portfolio stress factors including interest rate caps on floating rate loans are to benefit the commercial mortgage REITs with the falling interest rates.
With respect to the commercial property sectors, multifamily tends to be the most attractive to mortgage REITs due to the unaffordability of single-family homes and a chronic shortage of supply in the United States. On the contrary, office and mixed-use properties need the most caution and diligence in the prevailing situation. However, issues with office and mixed-use loans could get better with a rise in employers requiring employees to return to the office.
Our Methodology
To compile a list of the 11 best REIT stocks to buy under $10, we used the Yahoo stock screener to acquire a list of real estate investment trusts with the highest market caps and share prices below $10. We then examined the hedge fund sentiment of each stock and picked the most popular ones. Our list is in ascending order of the number of hedge fund holders as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
DiamondRock Hospitality Company (NYSE:DRH)
Share Price as of October 26: $8.78
Number of Hedge Fund Holders: 21
DiamondRock Hospitality Company (NYSE:DRH) is a real estate investment trust that owns a portfolio of geographically diversified hotels and resorts concentrated in top gateway markets and destination resort locations. The firm has the vision of becoming the premier allocator of capital in the lodging industry.
DRH’s current portfolio encompasses 36 premium hotels and resorts with over 9,700 rooms. The firm maintains one of the most liquid portfolios among peers. DRH has strategically positioned its portfolio to be operated both under leading global brand families and independent boutique hotels in the lifestyle segment. DRH hotels are situated in low-supply markets, with some resort markets having negligible supply growth thereby creating a favorable supply backdrop. Furthermore, the REIT benefits from the strength and resiliency of leisure travel with the intent to spend on leisure travel outperforming overall spending. Business travel is also experiencing continued incremental growth.
For the second quarter, DiamondRock Hospitality Company (NYSE:DRH) posted an adjusted EBITDA of $92.5 million, up 7.8% year-over-year. The REIT’s RevPAR and Total RevPAR were up 2.2% and 4.5% year-over-year, outperforming its peers. Net income was $24.6 million while earnings per diluted share was $0.10.
With a well-positioned portfolio, a strong position among peers, and a favorable secular outlook, the growth potential for DiamondRock Hospitality Company (NYSE:DRH) is bright. In addition to a high-performing and liquid portfolio, the REIT also boasts a flexible balance sheet.
Overall DRH ranks 5th on our list of the other Best REIT Stocks To Buy Under $10. While we acknowledge the potential of DRH as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DRH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
