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The owner of some of America’s most ritzy hotels did something unusual last Friday. It announced a huge 44% increase in its dividend.
The company is Pebblebook Hotel Trust (NYSE: PEB). This type of dividend increase is great news for investors. In fact, many hotel stocks like Hilton (NYSE: HLT) and Hyatt (HYSE: H) don’t even pay a dividend.
With its dividend increase, the stock now yields 2.7%. But don’t scoff at the low yield: this dividend stock also offers investors something much more…
You’ve probably never heard of Pebblebrook Hotel Trust until today. I wasn’t familiar with the company until news of the dividend increase showed up in one of my news screens.
Pebblebrook is a real estate investment trust or REIT that owns upscale hotels and resort properties in the U.S. The company is structured for the benefit of its shareholders, and is required to distribute most of its cash flow in the form of dividends.
Unlike most hotel companies, Pebblebrook doesn’t operate or manage the hotels. The company isn’t responsible for booking rooms, welcoming guests, or managing the front desk. In fact, the company has just 24 employees. That’s less than one employee per hotel property.
Instead of operating hotels, the company owns the hotel properties. It leases the buildings to some of the top hotel chains, including Intercontinental, Sofitel, W Hotel, and Westin. That means that Pebblebrook benefits from the success of hotels serving affluent guests, but doesn’t have the same operational risks.
Since its IPO in 2009, Pebblebrook has bought 29 hotel properties at a cost of more than $2.1 billion. The company’s properties with 6,416 hotel rooms are in 12 metro areas, including New York, Washington D.C., San Francisco, and Los Angeles.
As the travel business rebounded nicely in recent years, hotels that cater to the upper class have fared best. That’s because affluent customers are traveling more for both business and pleasure.
One key metric in the hotel business is known as revenue per available room. In the hotel industry, they call it RevPAR. Without getting into all the details, the company’s revenue per room increased 6.4% last year.
Pebblebrook aims to buy properties when they are attractively priced. The company then makes renovations to improve the properties and justify higher room rates. Last year, the company invested nearly $47 million on renovations at five properties.
Those investments will continue this year. As a result, Pebblebrook expects revenue per room to rise at a faster clip. With RevPAR expected to be $195 this year, Pebblebrook hotels earn nearly three times the industry average of $72.
Growing demand for high-end hotel rooms has been a nice tailwind for this company. But it’s management’s execution that is delivering the profits and growth.
From 2011 through 2014, the company expects to grow its funds from operations from $1 to $1.82 per share. That equals an impressive annual growth rate of 24%.
Not surprisingly, that strong financial performance has translated into higher dividends. While the latest quarterly increase is dramatic, it’s nothing new. In the last three years, the company’s dividend has increased 92%.
The striking performance at Pebblebrook hasn’t gone unnoticed. Over the last year, PEB stock has risen 36%. Over the same period, the Vanguard REIT Index ETF (NYSE: VNQ) is flat and the SPDR S&P 500 (NYSE: SPY) is up 19%.
Top Hotel REIT Crushes The Market
Source: Yahoo! Finance
Pebblebrook stock goes ex-dividend on March 31. That means that investors must own the stock by the end of the month to collect the quarterly dividend on April 15.
Many income investors will overlook this hotel REIT due to its relatively low 2.7% yield. But that would be a mistake. With annual cash flow expected to grow by more than 20%, this stock could continue to reward shareholders with higher dividends next year. And handsome dividend growth is likely to propel this stock higher in the years ahead.
As you know, I’m a fan of dividend growers. For investors seeking superior overall returns, stocks that grow their dividends are the best place to invest. I just discovered Pebblebrook, and thought you would want to hear about this unique opportunity to invest in America’s booming luxury travel business.
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