Real estate investment trusts, also known as REITs, offer both quarterly payouts and stock price appreciation potential. In fact, we've got a REIT for you today that delivers both of those things.
The best REIT right now pays more than the average S&P 500 yield, and the value of its shares is going up significantly over the next few months.
REITs fall under a broad category of "alternative investments" with others like hedge funds and private equity. Investors typically enter these spaces as an alternative to stocks.
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Now, a lot of retail investors can't access hedge funds or private equity. Many hedge funds require very high net worth or income to invest. And other alternative investments have stringent regulations and stipulations about accredited investments.
Real estate, however, is booming in many areas, and retail investors can easily access the REIT market. Since interest rates have been cut three times this year, more investors have left stocks and bonds for a higher yield in REITs.
REITs are traditionally a way to offer investors steady and high quarterly payouts. REIT dividends generate income from real estate assets such as apartment buildings, hospitals, offices, and other institutional working real estate.
They can outperform in the stock market. And they also offer unique tax advantages that not every stock (or bond, or cash) does.
Here's the best REIT to watch now, which has done just that.
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A Strong REIT to Watch Now
Florida-based Xenia Hotels & Resorts Inc. (NYSE: XHR) became publicly traded four years ago. The company has been operating since 2007. It has a strong business model, focusing on the top 25 lodging markets in the United States.
It owns 40 hotels across 17 U.S. states, all of them focusing on luxury and lifestyle in urban locales. About 98% of the properties are categorized as upper-upscale or luxury properties.
The operators and licensees include such well-known names in lodging as Hyatt, Fairmont, Marriott, Kimpton, and Hilton.
XHR owns, for example, the Ritz-Carlton in Arlington, Va., the Ritz-Carlton in Denver, and the Waldorf Astoria in Atlanta's Buckhead area.
The company's portfolio holds 11,167 hotel rooms.
Roughly 52% of the properties are operated by global lodging titan Marriott International Inc. (NYSE: MAR). Hyatt Hotels Corp. (NYSE: H) operates an additional 25%.
The company recently focused on a large capital investment round and on optimizing its properties going forward.
It's spent roughly $200 million in upgrading food and beverage outlets over the past two years and has purchased eight hotels. These new properties have an average 32% GOP margin, versus the average 39.8% GOP margin at the remaining 32 properties.
If the eight relatively new hotels can reach the nearly 40% GOP margin of the other properties, the company could see its bottom line jump upward. The margin improvement alone could add $30 million to EBITDA over the coming three years.
In 60% of its top 10 markets, XHR has indicated that economic developments should be positive. Currently, only Boston faces difficult economic times in the lodging industry, primarily due to a slackening of conference business and the Boston Red Sox's underperformance.
Hotels are growing in popularity as a real estate space. In addition to that, XHR is very cheap as a stock.
Its price/earnings ratio is only 17.2, about 60% below the 42.2 industry average P/E.
Its price/sales ratio is currently 2.1 times, very much lower than the 9.7 P/SR of the industry.
To top that all off, the book valuation is also very low. While the average hotel REIT trades at 4.9 times book, Xenia trades at just 1.4 times book value.
All those measures are reasons to watch the stock. Undervaluation means stock price growth if average valuation can be reached.
But it's our own proprietary metric that indicates that the top REIT to watch now is positioned for a profit breakout. That's the Money Morning Stock VQScore™.
Why Xenia Has Considerable Upside
It's not that interested investors have a dearth of REIT choices. The U.S. Securities and Exchange Commission indicates that there are 225 registered REITs in the United States. Their total market capitalization combined is more than $1 trillion.
Choosing them can be complicated, given the plethora.
The VQScore screens all of them, determining a score ranging from 0 to 4.9 for each.
The higher the score, the greater the likelihood of a significant breakout in the future.
Xenia Hotels & Resorts gets a score of 4.4, the equivalent of a "Strong Buy" rating.
Given dropping interest rates and the fact that private equity firms are spending billions of dollars to invest in real estate, Xenia's portfolio is very likely to keep climbing in value.
Even if economic risk grows worldwide, the luxury hotel business is insulated from those trends. Wealthy clientele will continue to go to luxury hotels, regardless of what the overall economy does.
XHR shares currently trade at $20. But the stock could soar to $30 over the coming 12 months.
The current dividend is 5.25%. Add in the potential of 50% appreciation, and the best REIT to watch now could beat the broad market averages going forward.
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