The firm also reduced its price target to $8 from $10 on shares of the Bethesda, MD-based hotel real estate investment trust.
"DRH is trading at 11x our 2018e EBITDA, despite our expectation that adjusted for asset sales, EBITDA will be flat in 2017 before declining 4% in 2018. We expect the stock to de-rate closer to a 10x multiple, implying a $8 price target and 15% downside," Morgan Stanley wrote in an analyst note.
The company owns a high quality urban portfolio with about 90% of assets in luxury and upper upscale. But the exposure means greater risk from alternative accommodations, strength in the U.S. dollar and other unique industry headwinds, the firm noted.
Additionally, high exposure to New York City, which is about 10% of EBITDA, is a headwind as the market continues to underperform, according to Morgan Stanley.
"While DRH's well covered $0.50 annual dividend would imply 6.25% dividend yield at $8, LHO currently trades at a 7% dividend yield while still growing RevPAR / EBITDA, in contrast to where we expect DRH to be in a year," the firm added.
Separately, TheStreet Ratings Team has a "Buy" rating with a score of B- on the stock.
The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and growth in earnings per share.
The team believes its strengths outweigh the fact that the company has had somewhat disappointing return on equity.
Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author.
You can view the full analysis from the report here: DRH