The Revival of the US Hotel REIT Sector
Business travel demand has steadily been on the rise, breathing new life into the US hotel Real Estate Investment Trust (REIT) sector. Strong occupancy rates and increased room rates have propelled the sector’s same-store revenue per available room (RevPAR) to an impressive 3.8% growth compared to the robust numbers seen in the second quarter of 2022.
While these figures have surpassed pre-pandemic levels, it’s worth noting that investors remain somewhat cautious. Despite the sector’s strong performance, share prices are still significantly discounted from their 2019 levels. In essence, the lodging sector has yet to regain the full trust of investors, as evident from the lukewarm share price performance over the past year.
AHOTF: The Hidden Value
In this environment, American Hotel Income Properties (OTC: AHOTF) stands out as an undervalued gem among its peers. When the COVID-19 pandemic hit, like many hotel REITs, AHOTF had to make tough choices to conserve cash. The suspension of its dividend led to a sharp decline in share prices.
Surprisingly, as AHOTF began to recover and reinstated its dividend on February 15, 2022, investors seemed hesitant to return. The new dividend of $0.18 per share, paid out monthly, offered an attractive 5.14% yield at the time, based on a $3.50 share price. However, even with the current share price at $1.64, the dividend yield remains an impressive 10.97%, nearly three times the sector average.
In their most recent investor presentation, AHOTF’s management asserts that not only is the dividend sustainable, but it also represents a payout ratio of less than 50%. Furthermore, the company’s shares are trading at a significant discount to the analyst consensus Net Asset Value (NAV) of C$3.60 ($2.65 USD), with today’s price representing less than 62% of NAV. On an earnings basis, the consensus shows that AHOTF shares are currently trading at just 4.08 times forecasted Funds From Operations (FFO), compared to the sector average of 7.4 times.
These fundamental metrics, including yield, discount to NAV, and price-to-FFO ratio, make a compelling case that AHOTF shares might indeed be cheaper than those of its peers. Yet, the question remains: why is this hidden value not fully recognized?
AHOTF: The Unconventional Player
One of the factors that set AHOTF apart is its unique shareholder base. Unlike most established REITs, AHOTF shares are predominantly held by individual investors, with the majority being Canadian. It’s a trend seen with other Canada-based REITs with US property portfolios, such as BSR Real Estate Investment, Slate Grocery, or Flagship Communities. These stocks tend to trade at premiums when Canadians are enthusiastic about US real estate investments and at discounts when enthusiasm wanes, which seems to be the case currently.
Another notable difference is AHOTF’s dividend reporting. While the company reports financial results and pays dividends in US dollars, shareholder returns are reported on a K-1 form rather than the typical consolidated 1099. Despite the common aversion to K-1s, this reporting method offers highly tax-efficient treatment of the dividends.
AHOTF: A Familiar Player with Strong Assets
Despite these differences, AHOTF is very much in line with other US hotel REITs when it comes to its assets. The company boasts more than 7,900 guest rooms across 70 properties in 47 US cities. These hotels are affiliated with well-known brands like Marriott, Hilton, and IHG, which you’ll find in other hotel REITs such as Apple Hospitality, Chatham Lodging, RLJ Lodging, and Summit Hotel Properties.
The Challenges in the Hotel Sector
However, it’s essential to acknowledge the challenges faced by the hotel industry as a whole. Hotels have borne the brunt of the economic impact of the pandemic, grappling with supply chain disruptions, labor shortages, and rising costs. While leisure travel has made a robust comeback, business travel has been slower to recover, still lagging behind 2019 levels.
Higher interest rates have also weighed on the sector, with some REITs even handing back properties to lenders. AHOTF, despite paying down some of its debt, remains highly leveraged. Additionally, rising property and business insurance rates pose further challenges. AHOTF recently had to renew its property insurance with a significant increase in premiums, adding to expenses.
Risk and Reward
Investing in hotel REITs comes with its fair share of trepidation. The industry is highly susceptible to economic fluctuations, from competition and inflation to recession. However, AHOTF’s high dividend yield and discounted share price present an intriguing opportunity. I, for one, am optimistic about its potential and have taken a long position. While the hotel sector has certainly weathered storms, AHOTF may just be the hidden gem worth exploring in the US hotel REIT sector.
