Supertel Hospitality Inc. (SPPR) is a self-directed hotel REIT that owns and leases via hotel management agreements 56 limited service hotels in 20 states. For the past few years, SPPR has been divesting and re-branding many hotels to improve operating cash flow. Liquidity has been a challenging issue since the market downturn in 2009 and continues into 2015 as the main challenge facing SPPR and investors. The company suspended all dividends in December of 2013, which will be addressed in this analysis. Earlier in March, SPPR appointed a new Chief Executive Officer, Mr. William Blackham. Mr. Blackham is a hospitality industry veteran and his biography cites experience building other hotel chains. This is a distinct positive for SPPR as he comes from outside the company but inside the industry and can be seen as a CEO to help rebuild the company, not simply being a caretaker CEO to take the company private or sell it to another REIT. While the appointment should be seen in this light, this change alone doesn't make SPPR common stock an attractive investment in the classic Graham meaning of the term. However in concluding this article I will make two cases for speculative trades that could pay off for a trader or the high-risk/high-reward portion of a portfolio.
Recent results show improvement but also some remaining difficulties
For the fourth quarter of 2014, SPPR showed improvements across continuing operations. Highlights include a 9.7% revenue increase and 10.2% Revenue Per Available Room (RevPAR) increase from the fourth quarter 2013. Both of these are significant positives, especially RevPAR. This is an essential metric in the hospitality industry, and SPPR has been below industry averages. Mr. Blackham's remarks in the earnings press release acknowledges this shortcoming, stating that while SPPR's full-year RevPAR increase trailed the industry's by 1.5%, during the fourth quarter SPPR expanded their RevPAR more rapidly than industry average. Various factors cited included improvements in the Washington D.C. and Alexandra VA markets, reduced vacancy rate, and hotel improvements and re-branding efforts beginning to produce more revenue among the remaining properties. Evidence the turn-around is working is encouraging. However, there is still a long way to go before SPPR becomes one of the cream of the crop REIT investments.
Liquidity and one of the elephants in the room
SPPR has ongoing liquidity issues. Specifically, construction-related travel has affected Supertel as many of the hotel brands owned cater to this market. While Supertel is working to broaden the brands in the portfolio, liquidity and financing issues limit this effort. Of note, the purchase of one Hilton Garden Inn in 2012 is still highlighted in the latest annual report while warnings about liquidity, inability to fully fund operations for 2015, and financial shortfalls limiting conversions of existing hotels to higher-tier brands or purchase additional hotels continue for many pages.
Besides a failed stock offering in 2013, other efforts are ongoing to raise capital and ease the liquidity crunch. SPPR has sold 60 hotels over the past 5 years. While these divestments have positive aspects, like reducing concentration in the Midwest market, they also reduce the size and scope of the company. The other main effort made to save cash was the suspension of all dividends payable as of December 31st of 2013. While this likely enabled Supertel to operate through 2014, it makes the common stock dividend highly unlikely for at least 2015 and maybe longer. Supertel has three classes of preferred stock outstanding, and all are cumulative preferred, building up a backlog of unpaid dividends. The A and B shares are publicly traded, while the C preferred is a convertible cumulative share class completely owned by one shareholder, RES. $3.5M in unpaid dividends accumulated to these preferred stock classes during 2014 and quarterly dividends will continue to accrue per each class' interest rate. Using Graham's terminology, an investment should be conservatively financed, hold a strong market position and return cash to its "business owner" responsibly and consistently. Supertel common fails in this regard.
Traders and speculators can continue reading, but with caution
As I earlier wrote when Supertel first came to my attention, there are some concerns about the company surviving as an independent business. RES, the company that holds the entire preferred C class shares has 34% voting rights, seats on the board and control over any major changes in ownership and structure. In my mind, this limits the ability of any outside investor other than RES to engage in a resource conversion despite a glaring price to book of .39 and an enterprise value nearly 10x greater than market value (per Yahoo! Finance Key Statistics, March 29th 2015). So what trades could work out for the high-risk trader?
While not a technical trader or chartist, long ago I read some of Carleton Sheets' books. (Not an endorsement.) One technique he talks about is banding stocks and trading them while they maintain the band. Having tracked SPPR for nearly a year I have seen the price move from the 1.48-1.55 range up to 1.80 or above a number of times. Recently I took a 1000 share position at 1.57 and shortly thereafter entered a 1.70 sale order. This trade was executed in a few days for a small but profitable trade on cash that otherwise would have earned 1/100th as much in interest-for the entire year. The drawback to this strategy is SPPR is trading less than 10,000 shares a day most days, so taking significant positions will either drive the market or take a number of days. The latter may not be possible if thin trading volume moves the stock up before a full position is established. My entire trade earlier this month was only $1,700 with a correspondingly small profit, which might not "move the needle" in many readers' main portfolio.
The second speculation is the opposite of the short-term trade I just employed. For a patient speculator who can take the risk presented by SPPR's concentrated markets, lack of liquidity and now preferred stock dividend overhang, the company has been selling at depressed prices long into the turn-around effort. If the new CEO Mr. Blackham continues the successful sales made to date and RevPAR and FFO continue to improve, the stock could increase 300% to approximate book value and potentially even further due to the high enterprise value. Of course, this is a risky speculation, as the liquidity issue may wipe Supertel common out. This potential upside seems appealing to me for a small portion of a higher risk portfolio, or a small flyer balancing out a conservative, value-oriented one.
Best wishes for investing and life success!
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
