After a difficult two years, the hospitality sector is bouncing back. Most of the U.S. population is vaccinated with more countries opening up their borders. Now could be a prime time to buy undervalued hospitality real estate investment trusts (REITs) with high growth potential. These types of REITs can provide diversification from typical stocks and a hedge against inflation.
Related: Tired of Wild Market Swings? Discover The Advantages of Non-Traded REITs
Apple Hospitality REIT
Apple Hospitality REIT Inc. (NYSE:APLE) has been in business since 2007, and its portfolio consists of 219 hotels across 36 states. This REIT has exposure to famous hotel brands like Marriott International Inc. (NASDAQ:MAR), Hyatt Hotels Corp. (NYSE:H) and Hilton Hotels Corp. (NYSE:HLT). It prides itself on diversifying its portfolio across various U.S. markets and by maintaining low debt levels.
It’s currently trading at $17.16, which is 8.19% lower than its 52-week high of $18.69. Aside from this price, it has a price to funds from operations (FFO) per share multiple of 11.83x. This ratio uses the 2022 estimated FFO per share of $1.45, which is expected to grow by 17.24% to $1.70 in 2023.
The current price to FFO multiple is lower than the average equity REIT’s multiple, which has historically ranged from 15x to 20x. With an increasing FFO per share and lower price to FFO ratios, this REIT is undervalued with apparent room to grow.
Unlike other REITs, it has a reasonable debt-to-equity ratio of 0.46. Investors can feel confident knowing that this company can manage its debt load. Because of a manageable debt load and other factors, this REIT has a respectable forward yield of 3.78%. A low payout ratio of 35% shows that this yield can be sustained.
The payout ratio is calculated by dividing dividends per share by FFO per share. The lower the payout ratio, the more likely the yield can be maintained.
Ryman Hospitality Properties RHP
Another promising hospitality REIT is Ryman Hospitality Properties Inc. (NYSE:RHP), which specializes in upscale convention center resorts and country music venues.
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This REIT provides multiple streams of income and client bases compared to a REIT that just specializes in one type of hotel. Its holdings include a network of five of the top 10 largest non-gaming convention center hotels in the United States, with many of which being managed by Marriott International.
RHP is currently trading at $94.40, which is 5.72% lower than the 52-week high of $101.19. It also has a price to FFO multiple of 16x, which is on the lower end of the historical average for equity REITs.
This figure also uses the 2022 estimated FFO per share of $5.96, which is projected to increase by 31.38% to $7.83 in 2023, meaning it has plenty of room to grow.
Final Note
During the COVID-19 pandemic, many sectors, especially hospitality, were hit hard. Currently, this sector is recovering from its pandemic lows. Investing in hospitality REITs could be a prudent move since many are still undervalued and have room to grow. Aside from being undervalued, these two REITs also provide a hedge against inflation and diversification from standard stock ETFs.
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