Description

Humphrey Hospitality Trust, Inc. (HUMP) is a REIT engaged in the limited service hotel sector. It leases 87 hotels (over 6,000 rooms) in the Midwest and East Coast. Fifty eight of the properties are Super 8 motels.

Humphrey completed a merger with Supertel Hospitality in October, 1999. The affect of the merger, as outlined below, has been very positive.

The value propostion for this company is that it pays an 11% dividend, paid on a monthly basis, while its FFO (Funds From Operations)for the last twelve months was $1.49 per share.

The P/FFO multiple is the REIT industry's equivalent of P/E multiple for non-real estate stocks.

HUMP has a P/FFO multiple of 5.5. This is below the historical or even recent multiple of the industry as a whole or the hotel sector.

YTD HUMP has appreciated only 5% while the Wilshire REIT index is up 38% YTD and the entire REIT sector is up 25% YTD.

For the second quarter HUMP's FFO was up 22% year over year. The first quarter post-merer the FFO was up 19%. I consider these numbers to be a reflection of merger effiencies but also the cheap price HUMP got in the merger. HUMP's investment banker estimated it paid $11 for a $21 company.

The dividend is securely covered by the FFO with a ratio of 60%.

The company maintains an FFE reserve of 6% (good for the industry) and is drawing down $3.5 M for use.

The company has a policy that long term debt should not exceed 55% of total market value.

This company has a unique barrier to entry. Most of its properties are located in secondary and tertiary markets. Therefore interest rates are not the barrier to entry but simply the lack of population or developable space.

The stock is thinly traded but that has improved recently.

Management owns 23%.

Catalyst

Once the market cap crosses $100M the stock gets on the radar screen of the money managers.

HUMP hasn't participated in the REIT run up this year and yet it is the industry leader in its segment.

I doubt if there is another REIT that grew FFO 22% and 19% for the last two quarters and yet trades at a multiple of 5.5.

The company desperately needs coverage by the Street. While I used to think the symbol HUMP was unfortunate for this stock I now think that is the hook to get the attention of buyers. Along with a high dividend, strong FFO growth and cheap multiple.