Shares of LaSalle Hotel Properties were down nearly 10% on Feb. 21 after the company revealed that it is exploring its dividend options, including a potential payout reduction.
In its Feb. 20 earnings release, the company said it might lower its annual dividend to its minimum real estate investment trust distribution requirement of about 80 cents to 90 cents per common share from its current rate of $1.80 per common share, if its 2018 base case outlook plays out.
The lodging REIT provided a base case outlook for adjusted funds from operations of $2.06 per share/unit for the full year and 27 cents per share/unit for the first quarter. Its base case forecast for adjusted EBITDA is $291.0 million for the full year and $41.5 million for the first quarter.
Evercore ISI analysts Rich Hightower and Steve Sakwa said the company's dividend since 2016 has been one of the highest among lodging REITs as a percentage of AFFO, ranging from 60% to 70%, which makes the potential reduction somewhat expected. Further, the bulk of the distribution over the past two years has been in the form of capital gains, instead of ordinary income, the pair added.
Baird Equity Research analyst Michael Bellisario also believes a dividend cut is imminent, noting that demand trends must "materially surprise to the upside" to keep the payout at its current level. The potential reduction "is likely to create an overhang for investors and lead to more questions than answers until the dividend is right-sized," the analyst said in a note.
LaSalle Hotel said it could use cash savings from the dividend cut for common share repurchases, and Hightower and Sakwa estimate a minimum buyback could be in the $120 million range.
The Evercore duo said that going forward, LaSalle Hotel's trading multiple could drop relative to its peers, increasing further its existing discount to net asset value and potentially making the company an even more attractive acquisition target. With LaSalle Hotel owning some of the most valuable hotel real estate assets, there should be no shortage of potential acquirers even as the company's debt is not fully "portable," the pair said.