This REIT Could Skyrocket

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Strategic Hotels & Resorts (NYSE: BEE) hasn’t been as strategic as some shareholders would have liked. We’ll get to that soon, but for now, there’s one important point that needs to be made: the luxury hotel market has improved considerably over the past four years, and revenue per room has increased throughout the industry. Yet, Strategic Hotels & Resorts is still unable to turn a profit. While revenue has moved north over the past two years, Strategic Hotels & Resorts lives in the red on an annual and quarterly basis. Fortunately, there is a potential solution.

The current situation

Strategic Hotels & Resorts is a REIT that operates luxury hotels in North America and Europe. It operates hotels under the following brand names: Embassy Suites, Four Seasons, Hilton, Hyatt, InterContinental, Loews, Marriot, and Ritz-Carlton. Its standout properties include JW Marriot Essex House in Manhattan; the Four Seasons in Punta Cana, Mexico; and the Four Seasons in Jackson Hole, Wyoming. Altogether, Strategic Hotels & Resorts operates 19 properties.

Shareholders are upset because they believe Strategic Hotels & Resorts is burdened with corporate overhead, which is diluting shareholder value. To put it bluntly, they think management stinks. Whether these shareholders should be upset or not is arguable. On one hand, the company is constantly losing money, and there is no yield (not that there should be considering the company’s leveraged position). On the other hand, the stock has appreciated more than 100% over the past three years.

What shareholders really want is for Strategic Hotels & Resorts to be acquired, as they feel that $14 is likely. Note: the stock is currently trading at $8.87. Earlier this year, Orange Capital (owner of 3.7% of Strategic Hotels & Resorts) lobbied for Strategic Hotels & Resorts to explore the benefits of a sale.

Strategic Hotels & Resorts recently hired Eastdil Secured, an investment bank, for assistance with a potential sale, and to find interested parties. The stock popped more than 10% on this news. The question now is whether or not a sale will take place. If so, then investors will have a big win on their hands. If not, then it will likely be difficult for Strategic Hotels & Resorts to see sustainable stock price appreciation. The stock has been performing well for years, but if profits are difficult to come by, then the long-term outlook is poor. 

Other options in the space

Ashford Hospitality Trust (NYSE: AHT) has seen increased revenue over the past two years, but it also can’t get out of the red. Ashford Hospitality Trust has reported a loss in every quarter over the past year. On the other hand, it currently yields 4.10%, which is better than any other yield you will find in this article. The company’s debt-to-equity ratio of 2.50 is above the industry average of 0.9, which increases the odds of the dividend being in danger in the future. However, if you're looking for dividends, then this is one option to consider. 

Host Hotels & Resorts (NYSE: HST) has seen revenue growth for three consecutive years, and it delivered a profit in 2012 after three years of losses. It has also been profitable in four of the last five quarters. Furthermore, it’s the only REIT mentioned here that sports a debt-to-equity ratio below the industry average -- 0.76 versus 0.90. This has allowed Host Hotels & Resorts to offer a decent yield, which currently stands at 2.70%. Thanks to a strong balance sheet, the dividend should remain intact.

Conclusion

If you’re looking for a speculative play that has the potential to pay off in a big way, then consider Strategic Hotels & Resorts. If it’s acquired, then shareholders will rejoice. However, investing in a company based on acquisition speculation comes with risks. In this case, if an acquisition doesn’t take place and the losses continue, then new investors will have wished they had stayed on the sidelines.

Ashford Hospitality Trust offers a nice yield, but the leverage position and the consistent losses lead to high risk. Why take that risk when you can invest in a REIT that’s better positioned for the long haul in Host Hotels & Resorts. Of the three REITs mentioned in this article, it’s the only one with a positive profit margin, and it has shown the best debt management. The 2.70% yield doesn’t hurt, either. Due to the uncertainty of the macroeconomic environment, it could be a bumpy road ahead, but it’s likely to be the best long-term bet of this bunch.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure