- Consolidated RevPAR growth of 8.2% from the year prior resultant from occupancy of 81% and increased ADR by 5.9%: This figure is excluding its recent acquisitions which have yet to kick in.
- Historically high EBITDA margins of 43.9%
The 2Q results were generally positive but nothing outside the scope of expectations. More pertinent information of the call was in regard to concerns of international travel, particularly from Europe.
With a portfolio heavily concentrated along the East coast, particularly in New York, the investment public has reason to be concerned about impending European conditions drastically affecting travel, and thus demand for hotels in these coastal locations. However, it seems this contingency is less substantial than it would seem as only 18.5% of its New York hotels room revenues are from international travel and under 5% from the euro region. Based on this, HT's CEO Jay Shah claims "a hypothetical decline of 20% of European business would translate to less than a 1% decline in total room revenues." As New York is the most sensitive portion of its portfolio to such a decline, the impact on the overall portfolio would be even less. Given this information, there seems to be a disparity in magnitude between the perceived risk to HT's revenue and the actual.
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If you are seeking a value play in the hotel sector, there are better options; Ashford Hospitality Trust (NYSE:AHT) and Hospitality Properties (NYSE:HPT) both present lower FFO multiples and higher yields. That being said, HT has some unique aspects, which separate it from the field.
In a world of extensive diversification Hersha Hospitality takes the opposite approach with a highly concentrated portfolio in New York, New England, Mid-Atlantic and Southeastern regions of the U.S. This provides the following unique advantages:
- Overwhelming market share in such prominent locations facilitates coordinated room price pushes for increased ADR.
- Location specificity reduces administrative burden and allows management to more deeply understand the underlying markets.
- Strong locations in big cities have such a high barrier to entry that its portfolio is largely protected from excessive supply growth. There are supply concerns with a couple of HT's hotels, but as a whole, supply issues are minimal.
- Prime locations protect asset value, so the maintained or even appreciated actual values of its assets may materially outweigh their respective depreciated book values.
Recent acquisition activity
Hersha bought out the remaining 50% of a joint venture and acquired the Bulfinch Hotel in downtown Boston, but these represent the extent of current and planned external acquisition as management indicated an intent to only acquire opportunistically in the near future. Instead, efforts can be focused on refinancing activity as HT has a couple 8% coupon preferreds. In today's environment it seems plausible to replace these with coupons well under 7%. While HT-B is not redeemable until 5/18/16, Series A can be called at any time.
Watch for refinancing activity from HT and the following bolstered cashflows. We should also keep in mind that Hersha recently issued shares at $5.60 so it still carries the benefits of raising capital well above its current market price. This company has a very strong outlook in the near future as RevPAR continues to improve.
Disclaimer: 2nd Market Capital and its affiliated accounts are long HT and HT-B. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.