This REIT Just Raised Its Dividend 40% — Is More To Come?

U.S. companies are sitting on a total of more than $1 trillion in cash, but many are being rather stingy with their dividend payouts while they wait to see how the economic recovery progresses.#-ad_banner-#

There is one company, however, whose management was confident enough to boost its dividend payment recently by 40%. This real estate investment trust (REIT) has raised its third-quarter dividend to 28 cents a share, which makes for a 4% annual yield.

With 40 hotel properties and 10,600 rooms in the U.S., this REIT caters to the upscale business travel and leisure travel markets, which have slowly begun to recover from the recession. The REIT looks for markets where there are barriers to entry, making it difficult to build new properties, as well as those where demand is robust, which allows it to charge profitable rates on its hotel rooms.

The REIT gets 90% of its earnings from nine of the U.S.’ largest and best-known metro markets, and its hotels are managed by such well-known operators as Kimpton, Westin, Starwood (NYSE: HOT) and Hyatt Hotels (NYSE: H). The REIT I’m talking about is LaSalle Hotel Properties (NYSE: LHO).

  After backing out renovation expenses at its Park Central Hotel in New York, LaSalle’s RevPAR grew 6.7%.  

LaSalle’s revenue rose 8.5% in the second quarter from the same period last year, and its revenue for the first half of 2013 rose about 10% from the first six months of last year. The REIT’s funds from operations (FFO) per share — a measure of earnings that accounts for a REIT’s real-estate-heavy portfolio — was also up more than 10% in the second quarter and more than 20% for the first half of the year.

Perhaps more importantly, the REIT — whose profit margin was a healthy 37% — saw its revenue per available room (RevPAR) rise 0.9% in the second quarter as hotel occupancies went up, allowing LaSalle to get better rates for its rooms. After backing out renovation expenses at its Park Central Hotel in New York, however, LaSalle’s RevPAR grew 6.7%, which may be more indicative of its revenue growth going forward.

Over the past five years, LaSalle has seen its hotel revenue grow from $587 million in 2008 to $862 million, with earnings per share rising nearly ninefold, from 6 cents to 52 cents. The company has forecast FFO of up to $2.23 a share for the year, making for a price-to-earnings ratio of about 11.5.

Risks to Consider: The hotel sector is very competitive, and demand for rooms could cool if the economy falters again. LaSalle has taken on debt on which interest rates could go up, which could cut down on its profits even though it uses hedges to ward off this risk.

Action to Take –> REITs are required to pay as much as 90% of their income to shareholders, so there is a good possibility of higher dividend payments for LaSalle’s owners. There is also some upside on the stock as the REIT continues to grow. Because construction activity was down during the recession, fewer hotel rooms coming online as demand is going up, so the REIT is anticipating a favorable environment for the near term.

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