As Memorial Day weekend draws closer - along with the unofficial start of summer - the time is ripe for investors to take advantage of expectations for strong travel demand. As noted by leading domestic carrier Delta Air Lines (DAL) in its latest quarterly results, neither flight scares due to the recent Boeing (BA) fiasco nor persistently high inflation have dampened demand for travel among the public. Data from Expedia (EXPE) seems to confirm those signals, with searches for summer flights up 25% year-over-year.
For investors looking to benefit from this trend, here are two high-yielding real estate investment trusts (REITs) that look well-positioned to tap into a hospitality boom. Plus, to complement their generous dividends, analysts have given them both “Buy” ratings, with mean price targets that indicate healthy upside potential from current levels.
1. Apple Hospitality
Apple Hospitality (APLE) is a publicly traded REIT that invests in a portfolio of upscale, select-service hotels. These are typically limited-service hotels that offer comfortable accommodations at a competitive price point - including primarily Marriott (MAR) and Hilton (HLT) brands. Its market cap currently stands at $3.6 billion.
Although Apple Hospitality stock is down 11.4% on a YTD basis, income-minded investors may want to buy the dip. APLE pays dividends monthly, and offers a dividend yield of 6.46% - above the sector median of 4.7%. Notably, REITs pay out 90% of their earnings as dividends. During Q1, APLE recorded operating income of $71,615, and distributed $70,156 to shareholders.
APLE's Q1 results, reported on May 6, surpassed expectations on the top line, as revenues for the quarter came in at $329.5 million, up 5.8% from the previous year. Funds from operations (FFO), a key measure of profitability for REITs, arrived at $83.2 million, or $0.34 per share. Moreover, average occupancy was 72% in the quarter.
Overall, over the past 10 years, the company's revenue has grown at a CAGR of 12.15%.
Apple Hospitality's focus on upscale and rooms-focused segments helps to buffer the REIT from the impact of high inflation, as it can more effectively pass on price increases to its customer base. Further, its healthy portfolio of 224 hotels located across 87 markets in 37 states with about 29,601 rooms adds geographical diversity, further cushioning the stock from location-specific risks.
Analysts have an average rating of “Moderate Buy” for APLE stock, with a mean target price of $18.17. This denotes an upside potential of about 23.5% from current levels. Out of 8 analysts covering the stock, 3 have a “Strong Buy” rating and 5 have a “Hold” rating.
2. Host Hotels & Resorts
Maryland-based Host Hotels & Resorts (HST) is a REIT that invests in luxury and upscale hotels and resorts located in the United States, with a portfolio featuring names like Marriott, Hyatt (H), Four Seasons, Ritz-Carlton, and more. They acquire ownership interests in these properties and manage them through long-term agreements with leading hotel brands. It currently commands a market cap of $13.2 billion.
HST stock is down 6.4% so far in 2024. The stock offers a dividend yield of 4.27%, paid on a quarterly basis.
In its quarterly earnings report last Wednesday, Host beat Wall Street's estimates on both revenue and FFO. Revenues rose by 6.5% from the previous year to $1.47 billion, while FFO stood at $426 million, or 60 cents per share. Further, the company closed the quarter with a cash balance of $1.35 billion, up by 18% from the beginning of the year. Moreover, average occupancy was 68.4% in the quarter.
Apart from its focus on high-end customers who are less affected by price hikes, Host Hotels' initiatives have garnered praise. In a major win for sustainability, a global environmental non-profit, CDP, awarded the company a very high 'A-' grade for its climate change initiatives.
Notably, these sustainability efforts are translating to financial gains for the REIT. The company reports that its investments in sustainable practices are generating impressive returns between 15% and 20%. Additionally, they've achieved significant cost savings, reducing utility bills by around $20 million annually. These figures demonstrate that environmental responsibility can go hand-in-hand with strong financial performance.
Overall, analysts have deemed HST stock a “Moderate Buy,” with a mean target price of $22.70 - which indicates an upside potential of about 24.2% from current levels. Out of 16 analysts covering the stock, 11 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 3 have a “Hold" rating, and 1 has a “Strong Sell” rating.
