Back in my hometown of Spartanburg, South Carolina there’s a landmark burger joint called the Beacon Drive-in.
Founded in 1946 the legendary restaurant is famous for its delicious “southern sweet tea” that’s served up with a splash of lemon in a cup of shaved ice. According to the owner, the southern hot spot serves up more tea than any single restaurant in the United States (3,000 pounds of sugar used weekly).
But the most famous item on the menu at The Beacon Drive-in isn’t the sweet tea, it’s the highly addictive southern delight known as the Chili-Cheese-A-Plenty. If you think the name is a mouthful, just consider the ingredients: a chili-cheeseburger underneath piles of sweet onion rings and french-fried potatoes.
To top off the Chili-Cheese-A-Plenty I highly recommend chowing down on a loaded banana split , or what the restaurant refers to as “The Pig’s Dinner”.
It’s hard to burn off those calories at the Beacon since the area favorite offers curb service, patrons can simply cruise into the parking lot and fill up on all sorts of sweet treats, all super-sized of course, just yell out the words “a-plenty”.
In my Forbes article last week, I explained that when it comes to investing “a dividend yield that is considerably higher than other stocks could ultimately lead to a depressed share price”.
In the context of the Beacon Drive-in that would be called dining out on a “Pig’s Dinner”. In other words, chasing high yielding securities – frequently referred to as “sucker yield” stocks – can oftentimes lead to indigestion.
In the same article last week, I also referenced the benefits of quality over quantity, that is, focusing on dividend growth instead of dividend yield.
For the same reason that some restaurants lure customers into their storefronts with mesmerizing offers like the “Pig’s Dinner”, investors can also have eyeballs larger than their stomachs. By maintaining discipline and avoiding the “sweet treats” an investor can become quite satisfied with less a volatile strategy that I call “dividends-a-plenty” .
Two Tasty REITs With Dividends-a-Plenty
In my article last week, I provided a list of 45 Real Estate Investment Trusts (or REITs) that have increased their dividends in 2016, 15 of which boosted their payout by at least 10%. Since REITs are forced (by law) to payout at least 90 percent of their Net Income in the form of dividends, these securities offer outsized yield.
Remember though, we’re not just seeking yield (the Pig’s Dinner), we’re looking for a steady diet of dividends that will compliment your overall investment portfolio, with no heartburn.
But paying too much for Dividends-a-Plenty can also lead to heartburn . Within the list of 45 REITs referenced last week, I did not reference price whatsoever - I simply provided the menu of dividend growers without specific recommendations. However, I decided to provide you two of the top-performers that offer all of the ingredients for something special, dividends-a-plenty.
Peblebrook Lodging (PEB) has increased its annual dividend by over 22 percent in 2016 and the company has increased dividends annually since going public in 2009. PEB owns 37 high-end hotels that are located in major U.S. gateway cities such as Washington, D.C., San Francisco, Los Angeles, Seattle, Portland, New York, and Boston.
Around 61% of PEB’s operators are independent and 39 percent represent major brands (like Kimpton, Viceroy, etc...). Despite the difficult macro environment, PEB has been able to add value at the property level by adding hotel rooms and cutting expenses (since its inception, PEB has implemented $37.2 million in total estimated annual savings).
PEB's 2015 same-property RevPAR was up 3.3 percent, and the hotels generated $281.9 million of same-property hotel EBITDA, which represents an 8.3 percent growth rate. Same-property hotel EBITDA margins improved by 148 basis points to 33.1 percent. EBITDA per share was $3.57 per share in 2015.
Over the last five years, PEB's common dividend has grown at a 26 percent compounded annual growth rate and the company recently announced that it had increased its quarterly common dividend from $0.31 to $0.38 per share, an increase of 22.6 percent, and one the highest dividend increases announced this year in the REIT sector.
I have modeled a conservative forecast, in which I believe the shares could hit $34.84 at the end of 2017, and that equates to average annualized returns of ~20 percent. Using a cap rate of around 6.5 percent PEB's NAV (net asset value) is around $34.80 per share, and the shares are now trading at a cap rate of around 7.7 percent.
CLDT owns 38 hotels with an aggregate of 5,675 rooms and the company also has a 10 percent interest in two joint ventures owning 95 hotels. I like this category because the hotels have higher profit margins than full service with a higher growth profile as it relates to consumer demand. In addition, I believe that CLDT’s lower cost model will respond more favorably in tough economic times.
CLDT has a Coastal Preference: 50 percent of the portfolio is located on the West Coast and 24 percent in the Northeast. The 2nd highest exposure to West Coast markets of all U.S. lodging REITs. Also, CLDT has NO exposure in Manhattan (a good thing since NYC is absorbing lots of rooms).
By focusing on these "premium brand select" hotels, CLDT earns higher RevPAR and market share than other select service hotels. That means higher margins, lower cost and attractive cash flow that is not dependent on group business models. In 2016 the company has guided $2.45-$2.55, which implies +9.2 percent earnings growth and CLDT recently raised its monthly dividend to $0.11/share from $0.10/share, or $1.32 on an annualized basis.
In terms of valuation, one must recognize that the hotel industry is cyclical and heavily dependent on both the consumer and business sentiment/environment. A slowdown in economic activity is likely to negatively impact the lodging industry, leading to lower-than-expected results.
However, given where we are in the cycle, it seems that PEB and CLDT provides a healthy balance of defense and growth, which appears to have strong internal growth catalysts to drive earnings and of course, my favorite ingredient on the menu, dividends-a-plenty.
The author owns CLDT and PEB.
Source: SNL Financial and FASTGraphs.
Brad Thomas is editor of Forbes Real Estate Investor and writes for Forbes.com. He is the co-author of The Intelligent REIT Investor: The Definitive Roadmap For Investing In Real Estate Securities and he is writing a book, The Trump Factor, about presidential candidate Donald J. Trump.
