Showing posts with label LHO. Show all posts
Showing posts with label LHO. Show all posts

Sunday, April 1, 2018

LaSalle Hotel Properties my strategy to exit this position

I am more than a bit frustrated with LHO particularly in regard to their dividend policy.   LHO has announced it will reduce the quarterly dividend.  
  • LHO reduces dividend from $.45 to $.225
  • Income Investors should consider an exit LHO
  • Will call options imply LHO has upside potential
  • Exit strategy is to try to break even

Knowing that a REIT has to pay out most of its earnings,  I think LHO wants to husband its cash to (1) prepare for lower earnings or (2)  defend further acquisition threats.  

Should earnings be high enough that they did  not distribute the required amount in dividends,  LHO reserves the right to pay a special dividend in 2019 to make up the difference.

Every year LHO pays out their undistributed earnings in January.  I do not think LHO is suggesting this would be a major event; one that would make up for the dividend reduction.    This makes me think LHO is worried about earnings.   Perhaps I am reading too much into this but I see no confidence in their own plan.

An Income Investor should exit LHO

As an income investor, I cannot stomach income cuts.  I need a strategy to get out of this stock.  Should I sell everything right now.  I will receive their last $.45 dividend as the stock was ex-dividend on 3/29/18 so I can sell on Monday and still get that dividend.

But what about the implications of the PEB buyout offer.  It was a weak offer valued at about $29.95 or where LHO stock is trading. Yet this offer could suggest PEB or another company might up the offer and the value of my shares could still go up.  Selling now could be foolish.

Covered Calls could suggest upside potential

After the dividend reduction, LHO will still yield about 3%.   I am getting paid while I further determine if there is upside potential for LHO.  I still want to exit this stock.  It is one of my rules, get rid of stocks that cut dividends.   But, my rules don't say sell the day after the news.

My first move will be to place an order to sell a call on Monday.  I am aware that these calls are thinly traded and  I may not get my price. Call options can dry up quickly.  However, if other investors think their is upside potential for LHO, they will create a market in call options for LHO.  A lack of options will be a factor in my decision to sell LHO outright.

The table below uses trading prices from Thursday, March 30.

I selected the $30 strike price carefully.  I hope to sell the above call on one half of my position.   My basis, adjusted for dividends, on this lot is $31.30.  With the call premium, I will basically break even.  I can never get back the time value of the money but I will be happy to get out of this position and move it into a dividend growth stock.

I will hold the other half of my shares which are at a cost basis $36.65.  I am hoping there is positive news about acquisition interest in LHO and I can sell a call that will make me whole.  

I won't wait too long.   If the stock price deteriorates, I will sell quickly, lick my wounds and move on.  I just hope the price deterioration does not occur during the time I have to hold LHO to keep my call "covered."

M* Money Madam
Disclosure: Long LHO with open order to sell calls

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Wednesday, March 28, 2018

LHO hotel Reit rejects PEB buyout offer

Let's hope this merger rejection will do the trick for LHO, LaSalle Hotel Properties.

  • Dividend Growth does not always lead to future dividend growth
  • One or two underperforming properties in a small portfolio can cause significant financial impact
  • A strong balance sheet provides some safety to holding LHO

Dividend Growth

I bought LHO for the yield.  My basis is $33.45 above the $28.94 where LHO trades today.  Current yield is 7.22%.  Yield on my basis is 5.38%.   Look at this dividend growth chart.  This is the kind of dividend growth that makes an income investor salivate.

As soon as I bought LHO for both the yield and the dividend growth, they stopped the dividend growth.  Suspension of a dividend is devastating but holding the dividend steady is acceptable.

Small Number of Properties

This holding of the dividend is a result of reduced income which in the hotel industry is called "rev par" or revenue per available room.   Some of this is due to increased competition from a growing supply of upscale properties.  Some is due to their Key West Florida property damage from Hurricane Irma.

LHO is investing in their properties as they take on the competition.  During renovations, rev par can be affected negatively on a short term basis.  Will the renovations stimulate rev par in the future?

Solid Balance Sheet

I can live with the over 5% yield on my basis while there are few options to obtain that yield elsewhere. Moreover, I don't think the company is in jeopardy of going belly up.  D/E (debt to equity ratio) is .447 (source ycharts.)  Strength of the balance sheet allows me to continue to hold.

Pebblebrook, symbol PEB, another REIT in this space,  has made an offer for LHO at about $30 a share.   LHO rejected the buyout offer and for me I am happy about that as I would like to get back my basis.  Perhaps, PEB will up their offer or perhaps another acquirer will show up.  Or maybe LHO will stay independent and return to Rev Par growth that will feed dividend growth.

This is one holding I will watch carefully.  I am not interested in PEB with a yield of 4.53% and a much higher P/E ratio than LHO (PEB = 29 and LHO = 18.)  PEB also does not have particularly impressive revenue growth.

Clearly, in this case, dividend history was no predictor of future dividend growth.  With a solid balance sheet, risk is not huge, but I am underwater and will hope for a more robust buyout offer.  At least it is some encouraging news.

M* MoneyMadam
Disclosure:  Long LHO
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Friday, December 2, 2016

Income Investors have done well in 2016

Look at the enormous improvement in the 2015 portfolio in the last few months.

2015 M* Dividend Machine Holdings as of February 19, 2016

2015 M* Dividend Machine Holdings as of December 2, 2016

My picks increased from a negative 8.28% to a positive 11.46%.  SDY improved from a positive .41% to a positive 11.92%  and VIG rose from a positive .59% to a positive 8.03%.

What are we to make of these moves?

The individual stocks selected for inclusion in the 2015 portfolio number 19.   Their individual performance is presented below. 

SDY ,a low cost ETF that I use as a benchmark, holds about 100 stocks.  Clearly, this diversification allowed the fund to weather the difficult first quarter of 2015. 

The problem with 2015 is that we all ended up buying high.  This is always a nerve racking situation. The market does not go up in a straight line and maybe we could have waited and bought at a better price.  Eventually, you have to invest when you have money sometimes you just have to wait for your stocks to break out. 

VIG another low cost ETF that I use as a benchmark made a nice move as well.  Yet, this group of stocks concentrates more on stocks that increase their dividends and therefore, the influence of potential interest rate increases that compete with dividend growth stocks made VIG the poorest performer of the three.

Income investors should take heart in the fact that all three of these portfolios have done very well. 

M* Money Madam

Disclosure Long: CAT, CMI, COP, CVX, EMR, LHO, MDP, MHLD, PAYX, SO

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