After a steep slump in mid-2011, shares of RLJ Lodging Trust (RLJ - Free Report) have dramatically turned the tables since October, aided by a strengthening supply/demand imbalance in the industry. With an earnings surprise of 35.0% in the first quarter of 2012, this hotel REIT (real estate investment trust) attained a Zacks #1 Rank (Strong Buy). A forward P/E multiple of 10.33 and an impressive P/B multiple of 1.03 further offer a promising value proposition to investors.
Strong First Quarter
RLJ Lodging reported solid first quarter results on May 10, with an 8.9% year-over-year growth in total revenues to $183.2 million. Adjusted EBITDA increased 6.6% year over year to $49.1 million. Pro forma RevPAR (revenue per available room) increased 3.8% to $84.40, primarily due to a 4.9% rise in the average daily rate to $124.84, partially offset by a 1.1% decrease in occupancy to 67.6%.
Adjusted funds from operations (FFO) came in at $28.5 million, surpassing the year-ago tally by 42.8%. Adjusted FFO for the quarter was 27 cents per share and exceeded the Zacks Consensus Estimate by 35.0%.
RLJ Lodging paid a cash dividend of 16.5 cents per share in the first quarter of 2012, which marked more than a two-fold increase over the year-ago quarter. The current dividend payment affirms a solid yield of 3.8%.
Based on healthy first quarter results, management raised the consolidated hotel EBITDA guidance for 2012 to between $270 million and $290 million from the earlier range of $265 million to $285 million. Pro forma RevPAR is anticipated to grow between 6.0% and 8.0% compared with the earlier projection of 5.0% to 7.0%.
Earnings Estimate Revisions Move Higher
Over the past 90 days, the Zacks Consensus Estimate for 2012 increased 5.6% to $1.69, implying a year-over-year jump of 14.4%. For 2013, the Zacks Consensus Estimate has increased 4.8% to $1.98 over the same time period, representing a year-over-year rise of 16.9%.
Although shares of RLJ Lodging nosedived in late July 2011, it recovered to a growth trajectory by early October. Going by the usual indicator of a P/E ratio below 15.0 and a P/B ratio under 3.0 for a value stock, RLJ Lodging looks undervalued with a forward P/E multiple of 10.33 and a P/B multiple of 1.03.
The PEG ratio of the stock is 0.66 based on a 5-year FFO growth rate of 15.6%. The PEG ratio is at a 34% discount to the generally-accepted yardstick of 1.0 for a fairly valued stock. This further implies a strong future growth potential for RLJ Lodging.
Based in Bethesda, Maryland, RLJ Lodging operates premium upscale full-service hotels across the U.S. Most of the properties of the company are located in major urban and dense suburban markets that have significant barriers to entry. The property portfolio of the company includes 141 hotels in 20 states and the District of Columbia, with over 20,600 rooms. The company currently has a market cap of $1.9 billion.