I have been following Hersha Hospitality Trust (NYSE:HT) for a number of years, and have to admit, the stock price performance has been disappointing for the past two years. The company seems to be performing as well as it has in my experience with the stock but for some reason is stuck at the lower end of its range. I believe this is a mispricing in the market, an inefficiency if you will, and the patient investors could see capital gains of 10+% over the next 12-15 months while earning a nearly 6% dividend yield with limited downside risk.
HT continues to have good REVPAR and ADR numbers across its portfolio, two of the key numbers for a hotel REIT. These numbers continue to be solid if not spectacular-the company's historic Manhattan concentration and tough comps have affected the way the numbers "look". Ongoing strategies to reduce the NY/Manhattan concentration are taking effect. Another ongoing positive management decision is to focus on their targeted upscale hotels in urban gateway markets. Recently, the company announced the planned sale of 5 suburban properties to further execute the company's strategy; a positive move. Some companies could focus on the recent weakness in stock price and fear the impact of the reduction in their top line number. HTs management team avoided this trap and showed good execution in two ways. From a "what" perspective, these hotels did not perform at the level of the entire portfolio. Their RevPAR was 34.1% below the company average per the news release announcing the sale. From the larger "how" perspective, Hersha does not want to operate hotels in that market sector, nor seeks out purchases and expertise in it. I find this a highly positive move-instead of keeping top line revenue on the income statement and wasting energy and emotions trying to eke out small gains in these properties, the hotels were sold, and the cash will likely be recycled into 1031 exchanges to offset some of the tax liability. Both the most recent quarterly report and a presentation to the BAML conference, mentioned this targeted sale. When analyzing this sale during the quarterly conference call, Neil Shah, President and COO, mentioned this sale and others over the next year the company "could expect to distribute special dividends and use additional proceeds to reduce leverage."
This sets up a number of positive ways to benefit from purchasing the common stock or continuing to hold the common and DRIP additional shares. Yes, I have owned the preferred shares in the past, and recommended them here (Note-the article is nearly three years old, and was my first look at HT). Recently HT replaced their outstanding preferreds with a new issue with a coupon of 6.5%, only about .7% more than the common, and doesn't have two major potential upsides I see.
First, the common stock trades at the lower end of its two-year range, despite ongoing strong performance, a near 6% yield, and an ongoing common stock buyback program that is reducing outstanding share count at good prices. I see all three of these as being under-represented in the current stock price. The presentation I cited above, and linked here, summarizes that across the portfolio of hotels, some are having strong years while others face headwinds. This is to be expected, but the cyclical nature of the hospitality business must be taken into account and Hersha seems to be managing this well-some markets underperform one year to bounce back the next. To keep this article from being even longer, detailed portfolio discussion is available in both the recent quarterly conference call and the BAML presentation that shows that some clusters are underperforming this year with better performance expected in the near future (NY, Boston and Miami) while others are having strong years (Philadelphia) and some are growing and expected to contribute strongly later this year and next (D.C., West Coast). Additionally, new properties are both diversifying the company's geographic mix and producing strong RevPAR and ADR returns.
A second strong positive in my opinion is even without the potential special dividend/distribution Mr. N. Shah mentioned, the current 5.9% yield seems safe, as HT has reduced leverage and cost of capital as evidenced by the reduction of the preferred "cost" (i.e. yield) from 8% to 6.5% among other actions (yes, the face amount was greater, but the additional debt was put to good use reduce other leverage.) On top of this, over 17% of the outstanding shares have been bought back in the past 24 months, while recycling property sales into 1031 exchanges and reducing leverage. While I would like my personal shares in HT to be appreciating, as a long-term holder I am reassured that management continues to buy back shares at relatively low prices instead of the all-to-common practice among other companies of paying a premium to historic valuations to purchase back shares.
I am convinced that while patiently awaiting either a significant special dividend, or "Mr. Market" recognizing HT as a solid if not leading player in the hotel REIT space, a safe and solid near 6% dividend would continue as the payout ratio is at a historic low. On top of this, I see significant upside potential as the company continues to execute their strategy, buyback shares, and potentially issue a special dividend in 2017. Without a crystal ball, I can't be certain, but net gains of 15% by the end of 2017 seem more likely than not, and even with zero capital gain or dividend, 15 months of 5.9% yield are worth giving HT the time to potentially hit that return.
As always, do your own research, please comment with your thoughts, and follow me as a contributor if you find this analysis and my other articles useful. Practically, that will encourage me to research stocks and write more often.
Best wishes for investment success!
Disclosure: I am/we are long HT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not an offer of securities in any jurisdiction, nor is it specifically directed to a resident of any jurisdiction. As with any security, request company financial reports and/or prospectus from your registered representative or the company before investing. Read them carefully before making an investment decision.