Summary
- Proceeds from asset sales to optimize the portfolio following the merger with Felcor Lodging Trust have strengthened RLJ Lodging Trust’s balance sheet.
- Growth forecasts for the hotel industry have recently slowed, negatively impacting hotel REIT shares.
- Additional asset sales and reduced interest expense will improve RLJ’s distributable cash flow even in a low-growth environment.
- The sustainability of the dividend should provide downside protection to shares in the near term, with upside potential as the company completes its optimization strategy.
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Introduction
RLJ Lodging Trust (RLJ) has been making improvements to its balance sheet by selling non-core assets and paying down debt following its 2017 merger with Felcor Lodging Trust. As RLJ looks to complete this portfolio optimization in 2019, growth has slowed in the hotel business. The market seems to have taken this low-growth forecast as a reason to sell shares. As a result, the company's dividend yield is high relative to its peers and its own history.
While a high yield can indicate a lack of confidence in a dividend’s safety, the market’s apparent skepticism is misplaced in this case. Management expects to complete its post-merger portfolio optimization in 2019, which will allow the company to demonstrate improved free cash flow even in an uncertain operating environment. I expect RLJ to remain range-bound for the next 6-12 months as the company completes its portfolio and balance sheet optimization strategy. In the meantime, shareholders are paid to wait with a near-best-in-class yield. Beyond the next year, I expect RLJ's share price to improve as the benefits of optimizing the portfolio fully show up in reported earnings and distributable cash.
