Check into this Hotel Trio

11/13/2013 10:00 am EST

Focus: INDUSTRIALS

George Putnam

Editor, The Turnaround Letter

Turnaround specialist George Putnam sees long-term potential in the hotel sector; the editor of The Turnaround Letter highlights three companies showing improving fundamentals.

Steve Halpern: We're here with George Putnam, editor of The Turnaround Letter. How are you today?

George Putnam: Fine, thank you Steve.

Steve Halpern: Each month in your newsletter, you look into a number of market sectors, looking for the best turnaround opportunities. You recently reviewed the hotel industry, where you see improving fundamentals. What's your overall outlook for the hotel sector?

George Putnam: Well, the hotel sector looks favorable because, while business travel, and in fact, all travel is improving (therefore, there's higher demand for hotel rooms), the supply of new hotel rooms has really been stagnant since the financial meltdown in 2008.

It remains hard to get financing for new hotel projects, so when you have a market with increasing demand and steady supply, that usually means higher prices for the rooms, which goes right to the bottom line.

Steve Halpern: Most of the stocks in this sector are structured as real estate investment trusts. How would that impact the decision for an investor looking at these selections?

George Putnam: Well, it means, not only can the stock price increase if the result improves, but a REIT has to pass through 90% of the earnings to the stockholders in the form of dividends, so you'll also see dividends increase as the results improve.

Steve Halpern: You would view this as a favorable group for income-oriented investors, as well as growth?

George Putnam: Yes.

Steve Halpern: Now, one of the positions that you've looked at is FelCor Lodging (FCH). Could you tell us a little about that?

George Putnam: Sure. Well, it grew fairly rapidly before the downturn in 2008 and didn't really have a great focus. With the new management team after 2008, they have sold off a lot of non-core properties and are focusing on more upscale properties and strong markets, and they've used the proceeds from asset sales to help the balance sheet. They have paid down a lot of high-priced debt, which also helps the bottom line.

Steve Halpern: Now, you've also looked at a company called Hersha Hospitality (HT). How are they involved in the industry?

George Putnam: Well, Hersha, again, has been refocusing its business. It was a little unfocused before. It had both a suburban and urban market, and it's recently agreed to sell the last of its suburban properties.

And it's used the proceeds from earlier sales to buy properties in some strong markets like San Diego and Miami. As a result of this transformation, it's a focused urban operator with properties in some of the best performing markets in the US.

Steve Halpern: Like the general real estate mantra, location is very important for these holdings.

George Putnam: Yes, location, location, location, as they say.

Steve Halpern: Now, another pick that you have is Sotherly Hotels (SOHO). Could you tell us about that company?

George Putnam: Sure. This is a small-cap name. Like many others in the industry, it had to struggle a bit from 2008 and has devoted most of its attention to getting its balance sheet back in order, and some of its existing hotels fixed-up and repositioned.

But it's now largely completed that and is on a much sounder financial footing, so they can go back to what they've always done well, which is buying somewhat troubled properties and fixing them up, and if they can successfully do that in this environment, I think it could really help results a whole lot.

Steve Halpern: Now, finally, just in terms of your time prospective for listeners who are looking at these ideas, you're not generally expecting these to turn around immediately, but you take a longer term view on where the sector and these companies are going, in fact, looking out sometimes over years.

George Putnam: Yes, that's right. It's very hard to predict how a stock will move in the short-term, but when you've got industry fundamentals going the right way, even a stock that's out of favor at the moment, eventually investors will see the merit in it, and the stock should do quite well.

Steve Halpern: Well, thank you very much for joining us today. We appreciate your time.

George Putnam: Thank you Steve.

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