Hersha Hospitality Trust (NYSE:HT) isn't the biggest real estate investment trust, or REIT, around. In fact, it owns just 55 properties. However, it has dramatically reshaped its portfolio over the last few years... and for the better. That will serve the company well if the market it serves is strong, but, perhaps more important, the changes it's made should also help it better survive the next downturn.
Hersha owns hotels. It's primary focus is owning high-end hotels in markets that it thinks have some of the best prospects for growth. That includes New York, Boston, Philadelphia, Washington, DC, Miami and some West Coast markets. Basically it wants to own good hotels in high-demand markets. Today the breakdown between markets is fairly diversified, with New York making up about 27% of EBITDA, Washington, California, and Florida each in the mid to high teens, and Boston and Philly each at around 10%.
That's a far cry from the situation that existed before Hersha entered into a joint venture with Cindat Capital Management Limited for seven of Hersha's Manhattan hotels. Cindat controls 70% of the joint venture and Hersha 30%. The most important part of the deal, however, was that it reduced Hersha's exposure to New York City by nearly 40%.
Hersha generated around $570 million from this deal, which involved it selling assets to the joint venture. But this isn't the only thing the REIT has been doing. In addition to the Cindat deal, the company has also been selling less desirable, mature hotels in non-core markets. In total, since 2012, the company has closed or is expecting to close deals worth around $1.3 billion.
It's used that money for a number of things, all of which are positive for the company's long-term future. For example, so far in 2016 it has trimmed its debt by just over $100 million. It has repurchased $43 million or so worth of common stock (about 5% of the outstanding shares). And it has invested nearly $260 million in three new properties that are younger and better positioned than much of what it sold.
These are exactly the types of things you'd like to see a company do. Add in a roughly 6.2% yield and dividend that has increased in four of the last five years and there's a lot to like here.
However, an even bigger takeaway from all the change isn't how it can prepare the company for growth, but how it can prepare the REIT for the next downturn. Go back far enough in Hersha's history and you'll see that the deep 2007 to 2009 recession was not kind to the company or its shareholders.
That downturn resulted in a nasty top line decline and, more to the point, a dividend cut. However, this isn't surprising at all on many levels. For starters, hotels are somewhat unique in that they lease out rooms for just one day at a time. That makes their revenues the most susceptible to downturns since their rental rates adjust daily. And then add the previously more concentrated portfolio and you can see where Hersha would have a tough time in a downturn.
There's nothing Hersha can do about its hotel focus; however it has made strides to protect itself and its shareholders. For example, refocusing on newer hotels should help support occupancy since these hotels will likely be in higher demand than older ones. And the diversification the company now has means that no one market can do too much damage (though New York City is still the company's largest exposure). Moreover, being in prime markets should lend further support to occupancy. And, based on the company's full year adjusted funds from operations guidance, the payout ratio is expected to be a comfortable 50% or so (not including the dividends it has to pay on its preferred stock).
Not great, not bad
With the current economic expansion getting a bit long in the tooth, I can't say that I would feel comfortable running out and buying a hotel REIT. The next downturn, which I would expect to happen sooner rather than later, will likely lead to a better opportunity to buy. That said, if you are looking at hotels today, Hersha's not a bad option. It appears to be doing the right things to prepare for a future that could include either positive or negative developments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.