I have been going down to the beach in the offseason for most of my adult life. In the spring and fall it is very peasant to spend a few days relaxing and enjoying the restaurants and beachfront bars without the he crowds that come with summertime. Even for offseason Ocean City struck me as too quiet this trip and I paid the lowest price for an oceanfront room that I have in the past two decades, at least. In addition, while strolling around the boardwalk and town I saw what I considered an extraordinary number of small hotels listed for sale.
This is pretty consistent with what I have been seeing in the hotel industry. The marquis markets like New York and Washington are seeing some strength and their room rates reflect the strong activity. Once outside those markets, I am still seeing low rates compared to years past. The industry is still not seeing much merger and acquisition activity. Most of the deals I have been seeing in the smaller markets are distressed or bankruptcy sales right now. Private deals are happening well below the prices paid by the larger REITS, who seem to be less concerned about pricing when spending shareholder cash.
Longtime readers are aware that I have been super bullish on the hotel industry. I still am in spite of the still-weak conditions in the industry. I was buying hotel stocks and REITS throughout 2010 and 2011 and have assembled a nice little portfolio of smaller hotel groups. Most of them have chugged up along with the stock market so far this year, but they are still historically cheap and I am hopeful that higher gas prices might once again pressure the share prices so I can add to my positions.
When I review my portfolio I still see some strong opportunities in the sector. Ashford Hospitality (AHT) has had a decent run and is up 22% over the past six months. In spite of this the shares are still very cheap. At the current price Ashford trades for just 60% of tangible book value. Management owns a significant percentage of the stock and this has made them very shareholder oriented. At the height of the run up in 2007 the company put hedging measures in place fearing a decline and they have paid off dramatically. The hedging measures have provided more than $200 million of cash flow so far. The cash has been used to buy back stock and they bought back almost half the company at the bottom of the market.
They also just made a purchase of 28 hotels at a cost of just $158.000 per room. Ashford has solid portfolio of properties and one of the highest revenue per available room rates in the industry. REVPAR has been growing at about 6% a year and that should accelerate as the economy improves. It is not often that you can buy quality properties with strong management at 60% of book value but that is exactly what Ashford offers at this price. As a bonus the shares yield 4.9% so you get paid to wait for the stock to appreciate.
I first suggested buying shares of Chatham Lodging Trust (CLDT) back in December of 2011. The stock has jumped up about 15% since then but it is still a buy. The shares currently trade at about 75% of tangible book value and yield 5.9%. The REIT owns 18 hotels on its own and is a minority pattern in a joint venture with Cerberus Partners that own 64 hotels. The joint venture recently took out a mortgage on previously unencumbered properties and made a distribution to the partners. Chatham has now received about a third of its original investment in the properties in distributions. They will use the latest $13 million cash infusion to pay down debt outstanding under its senior secured credit line.
The wholly-owned portfolio of hotels is located in strong markets with 325 of the properties in the Washington and New York markets. Chatham's properties are primarily service hotels such as Residence Inns and Homewood Suites that will benefit form strong business travel and in these more robust markets.
The hotel market is just starting to show some signs of improvement. The smaller REITS and operating companies like Red Lion Hotels (RLH) are still very cheap and worth accumulating. As the industry improves and access to the capital markets returns to the hotel industry mergers and acquisition activity should lift the valuations for the whole sector to more normal levels.