Recently, one of my REIT holdings performed well and met the investment criteria justifying the investment. Since it was a preferred series of the REITs stock and had "worked out" earlier than I had anticipated, I captured the complete capital gain I had sought earlier than expected. So I began a search for a similar opportunity and set up a basic stock screen looking at price to book value and yield. At first I set the screen to modest to high single digit yields and then opened it up to 10% and above. Lo and behold, the common and preferred stock of Supertel Hospitality (SPPR) popped up near the top of the list. As a frequent business traveler and investor in one hotel REIT, I got interested. Unfortunately, I found little that was super about SPPR, and will lay out my warnings and one possible opportunity in the stock in this article.
Supertel Hospitality is a self-directed hotel and hospitality REIT that owns 67 hotels in 21 states. Most of these hotel are focused-service hotels with many being economy or midscale properties and all are affiliated with national chains. Total property count is down from 123 properties in 2008, but this has been part of Supertel's turn-around plan that has been in progress for a few years. Currently there are common shares outstanding, two widely traded series of preferred shares (A and B series) and a privately places Series C preferred stock that were sold to Real Estates Systems in a private placement. Part of the conditions on the Series C preferred stock RES holds are 2 board seats and super-voting privileges and conditions which I will discuss in more detail below.
While Supertel Hospitality has been attempting a turn-around for the past few years, recent performance has been very destructive to shareholder wealth. Of note, the company conducted a 1:8 reverse stock split in August of 2013; yet the stock trades at $1.48 as of 5/13/2014. Total market capitalization is less than $4.4M. Additionally, in December 2013, Supertel suspended the dividend on the preferred stocks and eliminated the dividend on the common stock to preserve cash. All three preferred series are cumulative and are now incurring owed dividends. However, this may be too little too late, as the company reported very little cash on hand at its last quarterly report (approximately $45,000, yes thousand).
An additional negative is the company's revenue per employee compared to peers is startling. Supertel Holdings contracts management companies to conduct the day to day managing of hotel properties, meaning employees are singularly part of the REIT, not hotel staff. Therefore, revenue per employee directly affects the bottom line and FFO available for stockholders. Other hotel companies and REITs are covered in great detail by other contributors but here is a basic table showing a few examples of revenue per employee of SPPR and a few peers:
|Company||Revenue per Empl ($M)|
|All figures from Yahoo! Finance|
AHT = Ashford Hospitality Trust, Inc
FCH = FelCor Lodging Trust Incorporated
HST = Host Hotels and Resorts, Inc
HT = Hersha Hospitality Trust
One symptom of this low revenue per employee is reflecting in "Selling, General and Administrative" cost. For 2013 these costs were nearly $5M, and this is up $1M from 2012. It appears Supertel has a bloated structure, and while this isn't the only place to look for "fixes" with very little cash and lower revenue per employee than most peers, this is just another negative for the stock.
One aspect of the company's turn-around plan is a rebranding strategy to higher tier hotels and eliminating all independent hotels. While this progress is continuing and many non-core properties have been sold, concurrently some properties moved lower in their respective chain structure. This reduces revenue per available room (RevPAR) and also the visibility of the hotel. SPPR discussed these properties in the most recent 10-K that revenue should recover as guests realize the properties still exist and are managed by the same or similar firms, this has to be seen as a negative.
The final negative to investing in SPPR is related to what small opportunity exists in the stock. A "Poison Pill" caveat on the Series C preferred owned by Real Estate Strategies may prevent outside resource conversion. From the amended 10-K recently filed, there is this statement tied to specific approval RES holds over"the merger, consolidation, liquidation or sale of substantially all of the assets of the Company;" This makes it appear RES would be in the driver's seat of any resource conversion, and having already lost millions of dollars on their investment would likely be hostile to any outside investor structuring a deal that didn't benefit them greatly.
Is there any super, or at least good, news?
Are there any positives to counter-balance all the negatives listed above? Besides the eye-popping yields if the cumulative preferreds resume paying a dividend, I do see one. Since the stock of Supertel Hospitality has been driven so far down, the entire portfolio of hotels could be purchased fairly cheaply. I could envision another REIT or a private investor coming in and buying the entire portfolio by gaining control of the stock. Of course, this isn't a slam dunk, or it would have already been done. Complicating a hostile takeover and resource conversion are a few factors, not the least of which is the large stake held by Real Estate Strategies and their a priori position to special approval discussed above. Additionally, SPPR announced a rights offering in April but not many details are known other than holders of record of the common stock and RES's Class C preferred will receive rights in the near future that effectively double the shares outstanding. This could be both highly dilutive and make a takeover more challenging and expensive.
My advice would be to very carefully consider any investment in Supertel. The shareholders meeting is May 21, 2014 and I'd wait until afterwards to invest, and even then put a very small amount of risk capital to work.
Disclosure: I 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.
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