If you had the experience of staying at a full service luxury hotel, you might have found a piece of candy on your pillow. This is part of a “turndown service”, one of many services and amenities that full service hotels provide, which you might not have valued. If that got you thinking about alternative investment ideas, Summit Hotel Properties Inc (NYSE:INN), a lodging REIT that owns upscale and upper midscale select service hotels, will be of interest to you.
As a proxy for select service hotels and taking into account its strong acquisition growth, Summit Hotel Properties Inc (NYSE:INN) is a real bargain trading at book value with a 4.40% yield.
Why guests prefer select service hotels
The 80-20 rule is applicable to hotel stay as well — most hotel guests need and use probably only 20% of a hotel’s amenities 80% of the time. Given lower room rates, select service hotels like those owned by Summit Hotel Properties are as attractive, if not more attractive than their full service hotel counterparts.
Free Wi-fi and free breakfast are the most important factors that guests take into account when choosing hotels, according to a 2013 Hotels.com Amenities Survey. All guests at Summit Hotel Properties Inc (NYSE:INN)’ hotels get to enjoy free Wi-Fi and more than three-quarters of its hotels also provide free breakfast.
Fishing in less crowded waters
Investing is all about demand and supply, and crowded trades tend to lead to sub-par investment performance. The same principle also applies to hotel acquisitions. Most of Summit Hotel Properties Inc (NYSE:INN)’ peers choose to target their acquisitions in the top ten or top twenty populous Metropolitan Statistical Areas (MSAs) in the U.S, which results in higher bid prices or failed bids.
In contrast, Summit Hotel Properties Inc (NYSE:INN) is on the hunt in less populous MSAs, targeting locations with offices, airports, stadiums, hospitals, or colleges in their proximity. Also, private investors typically owned the bulk of select service hotels in Summit Hotel Properties Inc (NYSE:INN)’ target markets, making it easier for Summit Hotel Properties to flex its financial muscle to get the deals. The numbers speak for themselves. Summit Hotel Properties has added more than 4,000 hotel rooms to its portfolio since its IPO in February 2011, far outpacing its peers.
Independent hotel management companies avoid conflicts of interest
Most of the successful entrepreneurs I know did not hire their family members for their start-ups.
Under such a scenario, employees are motivated by the fact that everyone has a chance to rise to the top and no favoritism is practiced; employers are able to penalize and even fire underperforming staff.
Similarly, Summit Hotel Properties hires ten independent non-affiliated management companies to run its 92 hotels, unlike other lodging REITs which employ affiliated management companies. The independent management companies know if they do not do a good job, nothing is holding back Summit Hotel Properties from replacing them with another company.
Peer comparison
Summit Hotel Properties’ peers include lodging REITs Ashford Hospitality Trust, Inc. (NYSE:AHT) and Host Hotels and Resorts Inc (NYSE:HST). Summit Hotel Properties is the most undervalued and the highest yielding of the three with a P/B of 1 and a forward dividend yield of 4.40%, respectively.
Ashford Hospitality Trust, Inc. (NYSE:AHT) stands out from its peers on two aspects: one positive and one negative. The positive aspect is that Ashford Hospitality Trust, Inc. (NYSE:AHT) has insider ownership exceeding 20%, which aligns management interests with that of shareholders. In contrast, the insider ownership for Summit Hotel Properties and Host Hotels and Resorts Inc (NYSE:HST) are below 5%. The negative aspect is Ashford Hospitality Trust, Inc. (NYSE:AHT)‘s high gearing of 250%, which is partly mitigated by strong short-term liquidity in the form of an unused $165 million credit facility and $234 million of unrestricted cash & marketable securities; and low refinancing risk with no debt maturing in 2013.
Host Hotels and Resorts Inc (NYSE:HST) is more geographically diversified than its U.S.-centric peers Summit Hotel Properties and Ashford Hospitality Trust, Inc. (NYSE:AHT). In addition to more than 100 properties in the U.S., it also owns 19 properties through a European joint venture; one property in Australia, and seven properties in India via an Asian joint venture; and four properties in Latin America.
Similar to stock investing, property management is not just about buying, but also about selling. Host Hotels and Resorts Inc (NYSE:HST) has sold more than 50 hotels for over $2.5 billion in the past decade as part of its capital recycling efforts historically. It recently disposed of land adjacent to its Newport Beach Marriott Resort and Spa and the Atlanta Marriott Marquis in April and January, respectively.
Conclusion
Summit Hotel Properties is probably the only U.S. listed REIT with a national footprint that is a proxy for upscale select service hotels. Moreover, it targets acquisitions in less crowded markets, and avoids conflicts of interest with the employment of non-affiliated property management companies. Summit Hotel Properties’ undervaluation on a book value basis and superior dividend yield relative to its peers make it a strong investment candidate in my books.
The article Should You Stay the Course With This Select Service Hotel REIT? originally appeared on Fool.com is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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