Summary
- Hersha Hospitality Trust reported AFFO of $0.34 for 4Q compared to $0.22 in 4Q 2021 on February 15.
- Guidance for 1Q 2023 is $0.04 to $0.08 AFFO, which is somewhat disappointing.
- They drastically deleveraged last year by selling nine hotels and paying down debt.
- HT currently pays a $0.05 quarterly dividend and yields 2.3%.
Hotel REIT Hersha Hospitality Trust ( HT ) had a much improved 2022, but the stock is actually down a little since my January 17, 2022 article. After selling hotels worth $650 million in 2022, they were able to significantly reduce their debt leverage and began paying a dividend again last September. Their 4Q 2022 results and 1Q 2023 guidance reported on February 15, however, were somewhat disappointing. I am maintaining my hold recommendation for HT.
Present Compared to January 2022
While there were improvements in their operations as the country recovered from Omicron in early 2022, what I find most significant from my prior article is the dramatic improvement in their balance sheet. They received about $650 million cash from selling a total of nine hotels and paid down debt by $510 million. In 2021 they also sold a number of their hotels and received $196.5 million. Hersha reported a $197.5 million pre-tax gain on the sale of the hotels in 2022 or almost $5 pre-tax per share.
Percent Change Since Jan. 17, 2022 Article
An interesting way to look at the changes from early 2022 is to compare the capital items per key/room. The total number of rooms has decreased from 5802 to 3,811, including two hotels indirectly owned. Net debt per room at year end 2022 was about $106k compared to $180k for year-end 2021. That is a very impressive improvement. Since the number of preferred shares remained the same but the number of rooms dropped, the preferred share amount per room increased from $63k in 2021 to $97k in 2022. Using $9.52 stock price in January 2022 and the latest price of $8.54, the common equity per room increased from $65k to $89k because of the drop in the number of rooms. (Note: there was also a small increase in the number of shares outstanding.) Total capitalization actually decreased to $292k per room currently from my $308k January 2022 calculation. I will repeat basically what I stated in 2022, if you think the value per room is higher than the current total capitalization ($292k per room) you buy HT, but if you think it is less you sell.
Some recent Manhattan hotel transaction have been depressing. A closed Marriott Hotel on Lexington Ave. sold for $153.4 million or about $234k per key earlier this year. Last July the Chelsea Holiday Inn on 26th St. sold for $80.3 million or $355k per key, which is down from the $111 million purchase price in 2013.
Latest Financial Results
The latest results reported on February 15 were fairly close to expectations. The real problem is comparing them to the prior year when the pandemic was still having a major negative impact of the hotel industry and when there were nine more hotels in their portfolio.
Key Metrics 4Q and Annual
2022 4Q had an average hotel occupancy rate of 71.2%, which was up from 63.1% in the same period in 2021. The average daily rate - ADR- was $311.86 up from $238.26 in 4Q 2021 and revenue per available room - RevPAR was up to $222.10 from $150.39.
1Q 2023 Guidance Numbers
The guidance numbers were lower than I expected because during 1Q 2022 the Omicron variant had a very negative impact on the hotel industry, especially in large cities, such as New York and I was expecting stronger 2023 comparable numbers as the hotel business has become more normal since 1Q 2022. Comparing the guidance numbers below to 1Q 2022 $12 EBITDA and $0.06 AFFO per share with an average RevPAR of $135.67 there is some continued improvement. Management stated during the conference call that a few of their hotels were currently doing renovations of lobbies and rooms during the seasonally slow 1Q. In addition, there are nine fewer hotels in their portfolio now compared to 1Q 2022. Collectively after factoring in all these issues, the guidance numbers are still slightly disappointing, in my opinion.
1Q 2023 Guidance Numbers
Unlike many REITs, hotel/motel REITs are not locked into leases and in theory, should be able to adjust their nightly rates up almost immediately to protect investors against inflation. While Hersha has raised rates, many of their rates are still below 2019 after adjusting for the 15.5% increase in the CPI from December 2019 to December 2022. For example, according to their press release, "Our January results were very encouraging with our comparable portfolio RevPAR ahead of January 2019 by 3.9%. Our February month to date RevPAR is ahead of February 2019 by approximately 5.5%". At first glance this seems impressive, but the reality is that it is actually about 10% lower than in 2019 after adjusting for inflation.
Hotel Portfolio
New York Market
After Hersha sold hotels over the last few years their business model has become more focused on the New York City area with 34% of their rooms in that market area. Management often makes positive comments about how the New York market continues to show signs of significant improvement. I think they may not be factoring a very important reason for the apparent strength in the city's hotel industry and that is the city is paying to house thousands of immigrants in hotels because the shelters are full. According to a latest report the city has housing agreements with 85 New York hotels. I tried to get the actual number of hotel rooms that the city currently is paying to house the immigrants from various sources, but all I get was "thousands" of rooms each night.
In addition, some hotels in the city still remain closed because of the pandemic and many of these are in litigation or in bankruptcy. According to Vijay Dandapani , president of Hotel Association of New York City, 11,000 rooms remain closed in the city. NYC & Company, the official marketing organization for the city, stated last December that the city "remains on pace to attract 61.7 million visitors in 2023". This compares to 66.6 million in pre-pandemic 2019. Offsetting this fairly rosy forecast is the reality that only about 49% of workers have returned to their offices in Manhattan. I just don't see a strong demand for business travelers if there are few workers in offices to visit or to have in-person business meetings with.
Looking longer-term there could, in theory, be fewer new hotel built in New York City because of a new hotel permitting process adopted by the city in December 2021. This permitting process does not, in my opinion, mean that it will actually have a major negative impact on any new hotel construction. It basically means there will be additional hoops needed to be jumped through and additional legal fees that will have to be paid to get a new hotel built. The number of new hotels will depend on supply/demand and not regulations.
At some point there could be significantly less immigrants housed in hotels as new large shelters are opened and currently closed hotels could reopen as their legal/financial issues are finally resolved. This decrease in demand and increase in supply of hotel rooms could have a significant negative impact on daily hotel rates in the city.
Hotel Portfolio
investors.hersha.com
Florida Market
Their Florida market is important with a total of 665 keys/rooms. Success of this market depends very heavily on the weather during the extremely busy winter season. Except for few days, this season has been very warm and sunny - exactly what attracts visitors. I worry, however, if there is going to be a repeat of the extremely disruptive weeks in March that caused extensive violence right next to their SOBE hotels that even spread up Collins Ave. to near their Cadillac Hotel.
Three of their Miami Beach hotels with a total of 402 rooms are very old buildings built in the 1930s, except for an addition to the Cadillac Hotel that was built in 1956. Based on my own prior experiences investing in structures near these hotels, challenges and expenses to maintain these hotels keep increasing significantly with time. The two hotels in the Art Deco District are protected and that makes it almost impossible to demolish them. This could mean that maintenance and future renovation costs could rise faster than any increase in revenue, which would have a very negative impact on future profits.
Remaining Luxury and Lifestyle Hotels
I don't have any direct experience with the remaining luxury and lifestyle hotels. Most of them are aimed at the high end of the consumer market. They are located in Washington, D.C., Boston, Philadelphia, and California.
Potential Future Hotel Sales
According to statements made during their recent conference call they are considering selling two properties later this year. I am assuming the two are the Blue Moon Hotel in SOBE and the Hilton Garden Inn at JFK. The 75 room Blue Moon was on the market for $30 million in 2020 before the pandemic hit. Currently there is a fairly similar hotel nearby on Collins Ave with a $16 million listing for the 40 key/room hotel or $400k per key/room. It is, therefore, reasonable to expect that they might be able to get $30 million for the Blue Moon. I really don't have a feel for the pricing of the 175 room JFK Hilton Garden Inn, but management did state they were hoping to get a total amount of about $100 million for the two hotels. (Again, I am assuming it is these two hotels they would be selling.)
Dividends
Hersha declared a special dividend of $0.50 last December using some of the cash from hotel sales. It currently pays $0.05 quarterly after the reinstatement of the quarterly dividend last September and based on the latest price of $8.54 yields 2.3%. While I do not currently consider HT as an attractive income investment, Hersha's 6.875% series C ( HT.PC ), 6.5% series D ( HT.PD ) and 6.5% series E (HT.PE) preferred shares, however, are on my watch list for potential future purchases when I conclude that interest rates have peaked after additional raises this year by the Federal reserve. The preferred shares currently yield about 7.5%.
(Note: Their Winter Haven Hotel is the 4th building up from the bottom on Ocean Drive in the SOBE picture.)
Conclusion
While Hersha Hospitality Trust's results have improved, there are a few major issues that keep me from recommending this hotel REIT. First, the New York market seems stronger than it really is because the city is housing thousands of immigrants in hotels and there still are many closed hotels that are in litigation because of the pandemic. Second, I question the long-term quality of their Miami Beach hotels because of the age of the structures.
With all their prior underperforming hotel sales and paying down debt, one has to wonder if Hersha is positioning itself to be purchased, but that is purely speculation on my part. I rate HT a neutral/hold and their preferred shares I have on my watch list as potential buys when I think interest rates have peaked.
For further details see:
Hotel REIT Hersha Hospitality Trust Results Greatly Improved In 2022