Volatility has tremendously elevated within the inventory market this 12 months because of the surge of inflation to a multi-decade excessive and the current invasion of Russia in Ukraine. The latter has despatched the worth of oil to a 13-year excessive and thus it has raised fears of even greater inflation and an upcoming recession. Throughout such tumultuous intervals, buyers ought to establish corporations that can endure the downturn and emerge stronger within the subsequent restoration. RLJ Lodging Belief (RLJ) actually suits this description. On this article, I’ll analyze why buyers ought to be ready to purchase this high-quality REIT if the disaster in Ukraine worsens.

Enterprise overview

RLJ is a REIT that owns primarily premium-branded, high-margin, full-service motels. It presently owns 97 motels, with roughly 21,500 rooms, positioned in 22 states and the District of Columbia. RLJ generates 46% of its EBITDA in Sunbelt markets, that are characterised by superior financial development. The Hilton and Marriot manufacturers symbolize 41% and 36%, respectively, of the lodge rooms of the REIT.

Throughout recessions, leisure and enterprise demand for luxurious motels considerably decreases. Consequently, RLJ is extremely susceptible to recessions. In 2020, which was marked by the fierce recession attributable to the pandemic, RLJ incurred a loss for the primary time in a decade. It additionally reduce its dividend by 97% and its inventory value plunged 75% within the first two months of the pandemic. All these details are testaments to the excessive sensitivity of RLJ to downturns.

Nonetheless, due to the huge distribution of vaccines, the pandemic has begun to subside. As well as, the federal government has provided unprecedented fiscal stimulus packages in response to the pandemic and therefore the economic system has recovered strongly. Consequently, RLJ has returned to development mode.

Within the fourth quarter, RLJ exhibited promising indicators of a sustained restoration. Through the quarter, it benefited from a restoration in leisure demand and an enchancment in city markets. Consequently, its income per accessible room greater than doubled and reached 75% of the pre-pandemic stage, the very best stage for the reason that onset of the pandemic. The efficiency was even higher in December, when the income per accessible room reached 87% of the pre-pandemic stage. Furthermore, RLJ switched from adjusted funds from operations (AFFO) per share of -$0.28 within the prior 12 months’s quarter to $0.14.

On account of its excessive sensitivity to the course of the pandemic, RLJ has not supplied any steering for 2022. Nonetheless, analysts count on the REIT to recuperate strongly and submit AFFO per share of $1.31 this 12 months and $1.86 in 2023. If these estimates show appropriate, the AFFO per share of RLJ in 2023 will likely be simply 8% decrease than the AFFO per share of $2.03 reported in 2019.

Sadly, RLJ is presently going through one other threat. The current invasion of Russia in Ukraine has despatched the worth of oil to a 13-year excessive stage. If the worth of oil stays round such a excessive stage for a substantial interval, it could trigger a recession. The invasion has additionally triggered a steep enhance within the costs of different commodities as nicely, akin to wheat and corn. So long as this disaster stays in place, inflation will solely worsen and therefore the Fed could elevate rates of interest extra aggressively than presently anticipated. In such a case, the Fed could trigger a recession. To chop a protracted story brief, the percentages of an upcoming recession have elevated because of the Ukrainian disaster.

If a recession reveals up, the inventory of RLJ is more likely to plunge because of the excessive sensitivity of the REIT to recessions. In such a case, buyers ought to be ready to make the most of the chance and buy the inventory at a cut price value. To be clear, buyers mustn’t buy any inventory that plunges throughout a sell-off. They need to establish solely the businesses that can endure the downturn and recuperate later.

RLJ actually suits this description. It has one of many strongest stability sheets within the REIT universe, with a leverage ratio (Web Debt to EBITDA) of solely 3.1 and no materials debt maturities till 2024. Furthermore, its internet debt (as per Buffett, internet debt = whole liabilities – money – receivables) stands at $2.0 billion. This quantity is the same as the market cap of the inventory and about six instances the annual AFFO in 2019 and therefore it’s actually manageable, significantly given the absence of fabric debt maturities till 2024.

Furthermore, RLJ is within the means of capital recycling. It’s promoting some low-return motels, in slow-growth markets, and is investing in high-return motels, which a lot wider margins. This fine-grading of the asset portfolio of RLJ is more likely to enhance the long run income of the REIT considerably.

Similar to RLJ endured the fierce recession attributable to the pandemic in 2020, it is going to endure the following downturn, which can be attributable to a chronic Ukrainian disaster. Buyers also needs to observe {that a} extended Ukrainian disaster just isn’t the most definitely situation, as it is going to severely harm the economies of Russia and Ukraine and therefore the 2 international locations will do their greatest to keep away from such a situation. Notably, the 2 international locations have proven indicators of willingness to compromise someplace within the center this week.

Valuation

RLJ is presently buying and selling at a ahead price-to-AFFO ratio of 10.2. This valuation is less expensive than that of the S&P 500, which is now buying and selling at a price-to-earnings ratio of 24.4. A budget valuation of RLJ has partly resulted from the Ukrainian disaster, because the inventory has shed 13% for the reason that onset of this disaster. At any time when the disaster is resolved, the market will most likely reward RLJ with a extra affordable valuation stage. Due to this fact, the inventory is enticing proper now.

Nonetheless, those that need to have a large margin of security and pursue extreme returns could select to attend on the sidelines for a extra opportune entry level. If the Ukrainian disaster quickly worsens, RLJ will develop into less expensive as a result of its excessive beta (1.92). Total, whereas the inventory is attractively valued proper now, it could develop into even cheaper within the brief run and therefore it could supply an distinctive investing alternative.

An affordable value goal for RLJ is its pre-pandemic stage of $17, which is just 9.1 instances the anticipated AFFO in 2023. If the inventory reverts to this stage, it is going to supply a 28% revenue from its present value.

Last ideas

Durations of excessive volatility trigger stress to buyers however in addition they supply nice investing alternatives to those that can preserve a long-term perspective. The inventory of RLJ is underneath strain proper now because of the impression of the pandemic on its enterprise and the danger of an upcoming recession because of the Ukrainian disaster. Those that buy the inventory round its present value or decrease are more likely to be extremely rewarded each time the prevailing headwinds attenuate.