Wolfe Research Initiates Coverage On Four Hotel REITs: How Do They Compare?
Every day, Wall Street analysts diligently revise and update ratings and price targets on real estate investment trusts (REITs). Sometimes an analyst will analyze several REITs in the same subsector. In these instances, it allows investors to compare and contrast similar stocks to identify which ones are more likely to perform the best in the future.
This week an analyst at Wolfe Research initiated coverage of four hotel REITs and set price targets on two of the four. Take a look at these four REITs to see how each stacks up against the others.
RLJ Lodging Trust (NYSE:RLJ) is a Bethesda, Maryland-based hotel REIT that owns 96 premium-branded hotels with 21,239 rooms across 23 states and Washington, D.C. Its brands include Marriott, Hilton Garden Inn, Embassy Suites and Hyatt.
While still below pre-COVID levels, the occupancy rate increased from 72.7% in the third quarter of 2022 to 74.1% in the third quarter of 2023. Average daily rates (ADR) and revenue per available room (RevPAR) are also higher by about 1.5% than a year ago.
On Jan. 10, Wolfe Research analyst Keegan Carl initiated coverage on RLJ Lodging with an Outperform rating and announced a price target of $15.
RLJ had a flurry of analyst reviews within the last three weeks. Oppenheimer & Co. Inc. rates it Outperform with a $14 price target. Truist Securities calls it a Buy with a $14 price target and Wells Fargo recently maintained it as Equal-Weight with a $12.50 price target.
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Diamondrock Hospitality (NYSE:DRH) is a Bethesda, Maryland-based hotel REIT with a portfolio of 36 premium hotels and resorts consisting of 9,724 rooms in 25 key gateway cities across the U.S. While its revenue has risen this year, RevPAR is still below 2022.
On Jan. 10, Wolfe Research analyst Carl initiated coverage on Diamondrock Hospitality with an Outperform rating and announced a price target of $11.
On Dec. 8, Wells Fargo Securities analyst Dori Kesten downgraded Diamondrock Hospitality from Overweight to Equal-Weight with a $9 price target. Two weeks later, Kesten maintained the Equal-Weight rating while raising the price target to $10.
Summit Hotel Properties Inc. (NYSE:INN) is an Austin, Texas-based hotel REIT that partly or wholly owns 101 assets with 15,035 rooms over 24 states. Marriott, Hyatt and Hilton brands make up 95% of its portfolio.
On Nov. 1, Summit Hotel announced its third-quarter operating results. Funds from operations (FFO) of $0.22 beat the estimates by $0.04 but was below its FFO of $0.27 in the third quarter of 2022. Revenue of $181.8 million beat the estimate of $179.86 million and was ahead of revenue of $178.25 million in the third quarter of 2022.
On Jan. 10, Wolfe Research analyst Carl initiated coverage on Summit Hotel Properties with a Peer Perform rating. No price target was announced. In December, Zacks Investment Research upgraded Summit from Underperform to Neutral. Again, no price target was announced.
Xenia Hotels & Resorts (NYSE:XHR) is an Orlando, Florida-based hotel REIT that owns and operates 32 luxury and upscale hotels and resorts with 9,514 rooms in 25 markets across the U.S. Marriott, Hyatt and Hilton are some of the brands in its portfolio.
On Jan. 10, Wolfe Research analyst Carl initiated coverage on Xenia Hotels & Resorts with a Peer Perform rating. No price target was announced.
Over the past month, other analysts also have weighed in on Xenia Hotels. Jefferies has a Hold rating with a $14 price target, Wells Fargo rates it Equal-Weight with a $14 price target, and KeyBanc Capital Markets has an Overweight rating with a $15 price target.
In its last earnings report, Xenia missed estimates for both FFO and revenue by small amounts.
The chart below compares each of the four hotel REITs on important measures:
Name | Symbol | Price/ FFO | Dividend Yield | Forward Payout Ratio | Performance Last 13 Weeks |
RLJ Lodging | RLJ | 7.12 | 3.46% | 24.6% | 17.74% |
Diamondrock Hospitality | DRH | 10.06 | 1.28% | 12.9% | 16.36% |
Summit Hotel Properties | INN | 7.71 | 3.63% | 25.5% | 13.55% |
Xenia Hotels & Resorts | XHR | 8.78 | 3.02% | 26.4% | 11.55% |
The hotel REIT subsector in general is still somewhat undervalued, which can be seen by the lower price/FFO ratios in the chart above. Payout ratios are also quite low, mostly because hotel REITs were decimated in 2020 when the COVID-19 pandemic began. All four REITs severely cut the quarterly dividends that year from much higher levels. Summit Hotel suspended its dividend for over two years.
Over the past three years, all four REITs have produced substantially improved earnings and revenue, but in that time, only RLJ has raised its dividend three times. Two of those raises occurred in 2023. Summit has raised its dividend twice, and Diamondrock and Xenia have not raised the dividends at all. That suggests superior financial strength and confidence by RLJ Lodging, which is also borne out by its having the best performance record of the group over the past 13 weeks.
There are clear reasons why the analyst rated RLJ Lodging and Diamondrock as Outperform, while Summit and Xenia are rated Peer Perform. Of the four, RLJ has the lowest P/FFO ratio, the second-best dividend yield and payout ratio and the best performance over the last 13 weeks. Diamondrock has the second-best performance. However, the $15 price target for RLJ versus the $11 price target for Diamondrock is substantially better, with Diamondrock a slightly better choice than the rest and deserving of its higher rating.
Among the four hotel REITs with initiated coverage by Wolfe Research, RLJ has demonstrated its superiority over the rest of the group.
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