LaSalle Hotel Properties (NYSE:LHO), Pebblebrook Hotel Trust (NYSE:PEB), and Chesapeake Lodging Trust (NYSE:CHSP) are three real estate investment trusts investing primarily in upscale lodging properties in the U.S. These three companies offer attractive valuations and fundamentals on a number of measures and are also growing through acquisitions.
Valuation and fundamentals
11.8% of LaSalle Hotel Properties (NYSE:LHO)’s rooms are located in New York City. For comparison, Pebblebrook owns 865 rooms in New York City (which is the company’s share in the joint venture), or 14.9% of its total rooms, and Chesapeake’s percentage of rooms located in New York City is about 5.1% (two hotels).
It is interesting to note that Pebblebrook Hotel Trust (NYSE:PEB)’s Manhattan joint venture generated income before taxes of $3.1 million for the company in the first six months of 2013, or 18.8% of the total. A hotel room in Manhattan is worth more than anywhere else. In fact, recent research by Jones Lang LaSalle Inc (NYSE:JLL) indicates the New York City hotel market is the strongest market in the U.S. with a RevPAR (revenue per available room) 35% higher than the next highest market.
Despite having the largest exposure to the New York City market, LaSalle Hotel Properties (NYSE:LHO) has the lowest price-to-FFO (funds from operations) ratio of 12.9. This might be due to having the lowest occupancy rate (which is also declining slightly) and to a $70 million renovation currently underway at the 934-room Park Central Hotel. Large renovations, as well as acquisitions, improve growth in the long-term, but they also take necessary capital and bring more risk.
On a RevPAR basis, Pebblebrook Hotel Trust (NYSE:PEB) is the leader, and it also has the highest occupancy rate at 82.7%. Given this performance, the company deserves its higher price-to-FFO ratio relative to its peers.
| LHO | PEB | CHSP | |
| Market capitalization | $2.7B | $1.7B | $1.1B |
| Enterprise value | $3.9B | $2.1B | $1.4B |
| Number of hotel rooms | 10,600 | 5,800 | 6,000 |
| Occupancy rate (ytd) / change from 2012 | 77.5% / (0.5)% | 82.7% / 3.2% | 78.9% /1.9% |
| Trailing FFO per share | $2.13 | $1.20 | $1.47 |
| Price-to-FFO | 12.9 | 22.7 | 15.5 |
| Comparable RevPAR (ytd) / change from 2012 | $159.3 / 1.9% | $178 / 7.2% | $148.5 / 5.7% |
| Price-to-book value | 1.4 | 1.2 | 1.2 |
Source: SEC filings, Reuters, author’s calculations;
Recent developments
Year-to-date, LaSalle Hotel Properties (NYSE:LHO) has acquired three hotels, of which two (Harbor Court and Hotel Triton) are in San Francisco and combined have 271 rooms and cost $47.8 million, for an average price per room of $176,384. The third hotel is in Boston (Liberty Hotel) and has 298 rooms with a price tag of $170 million or over $0.5 million per room. The Boston deal may prove to be a bad business decision as the Liberty Hotel is ranked 29th out of 77 hotels in Boston according to tripadvisor.com, and the price per room that LaSalle paid seems excessive. Also, LaSalle Hotel Properties (NYSE:LHO) issued redeemable preferred shares ($100 million at 6.375%) and redeemed the same amount of its Series G 7.25% preferred shares.
Similar to LaSalle, Pebblebrook Hotel Trust (NYSE:PEB) issued $97 million of 6.5% preferred shares earlier in 2013. Also, in January, it acquired the 337-suite Embassy Suites San Diego Bay for $112.5 million or about $334,000 per suite. The hotel is ranked 44th out of 269 hotels in San Diego, and 87% of visitors give it a thumbs up on tripadvisor.com. This smaller acquisition and lack of any major renovations should contribute further to Pebblebrook’s position as a growing, but safer investment.
Finally, Chesapeake raised about $166 million earlier in 2013 by issuing 8.34 million common shares and made the following major acquisitions so far in the year for a total of $331 million:
* one 185-room hotel in New York City ($413,000 per room),
* two hotels in New Orleans (507 rooms at $181,000 per room), and
* two hotels in San Francisco (513 rooms at $320,000 per room).
These acquisitions, together with the share issuance and planned renovations for 2014, could be burdensome for the company in the near term. As a result, it may have to raise additional capital and/or reduce its dividend.
Conclusion
It seems like occupancy rates and RevPAR are in a solid recovery. For example, in 2009, the year of the financial crisis, RevPAR for LaSalle was $120.80 and its occupancy rate was 70%, significantly lower than those of today. Importantly, LaSalle, Pebblebrook, and Chesapeake operate in major urban centers, including New York City, that people like to visit.
In conclusion, LaSalle Hotel Properties (NYSE:LHO) seems like the riskiest investment, as it has the largest leverage in proportion to its equity, is undergoing a major renovation, and recently overpaid for a hotel. On the other hand, Chesapeake seems like the investment with the largest upside potential due to its valuation based on price-to-FFO and its concentrated portfolio of properties. On the negative side, it could have cash difficulties in the near term. Finally, Pebblebrook Hotel Trust (NYSE:PEB) has the highest occupancy rate, owns some of the most expensive properties and its New York City hotels are jointly owned, which could limit the upside. Overall, the three companies should benefit from a rebound in travel if the risks of a slowing economy and rising unemployment are kept in check.
Delian Naydenov has no position in any stocks mentioned. The Motley Fool recommends Pebblebrook Hotel Trust. The Motley Fool owns shares of Pebblebrook Hotel Trust. Delian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Three Hotel REITs That Pamper Their Guests and Investors originally appeared on Fool.com and is written by Delian Naydenov.
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