I have been a long-term bull on Hersha Hospitality Trust (HT), having owned both preferred stock in the past and currently having a modest position in the company. Last fall, I was able to stay in one of the company's properties in Philadelphia and visit Investor Relations, having a nice visit that confirmed my basic long thesis. I have written on the company in the past, and while some themes in this article will be redundant, they bear repeating. I will also incorporate some tidbits from the recently published June 2019 Investor Presentation from the company's website.
Hersha Hospitality Trust is a hospitality REIT that grew out of a family-owned hotel business. Hersha is the name of the founder's wife, and the mother of the CEO and COO. Both generations are still involved in the company, have major investments in the stock, and are net buyers of equity in general. Additionally, many of the Board and non-family executives have significant tenures with the company. Originally, Hersha was very centralized in the northeastern U.S., primarily Manhattan and Philadelphia. While both cities still have a large presence in the portfolio, over the past years the company has made a focused effort to diversify, primarily in south Florida and on the West Coast. The properties in south Florida were impacted by hurricanes a few years ago, yet Hersha took the opportunity to recapitalize two properties significantly with the insurance proceeds and some corporate capital. Both of these properties are back on-line and show increased RevPAR compared to pre-hurricane levels. In short, the diversification, capital investment, and focused management has led to increased RevPAR, occupancy rates and, therefore, AFFO, yet the stock price has not recognized the well-run nature of the company. Recent negative price action has resulted in a dividend yield above 6% and a discount to company NAV. A recovery to merely average prices of the past year would result in double-digit returns, and 20% plus returns might not be unreasonable.
Bright Spots from the Investor Presentation
The most recent Investor Presentation reinforces my core thesis about HT. The company is executing on its "cluster" strategy, having gone from a regional REIT in the northeast to a geographically diversified gateway and resort market portfolio with clustered properties sharing management best practices to grow RevPAR and EBITDA. Capital has been recycled into new properties that can be recapitalized and management improved, leading to YoY improvements in RevPAR and margin. Slide 4 of the presentation (below) shows the major clusters as West Coast, Miami/Key West, Washington, D.C., Philadelphia, Boston and New York City.
(Source: Hersha Hospitality Trust June 2019 Investor Presentation, accessed June 6, 2019)
The portfolio now consists of 48 properties. During my visit late last year, a strategy of pausing new acquisitions and driving performance improvements for a brief period was discussed. However highly accretive purchases were not ruled out - yet, market conditions made (and continue to make) that unlikely. This strategy is paying off, which is the next positive in the presentation.
Slide 7 of the presentation outlines the company's growth thesis: "Sector Leading, Organic EBITDA Growth" (HT Investor Presentation, June 2019). The first column on the slide is "Ramp Up of the Cadillac and Parrot Key Hotels," two Florida cluster properties that were impacted by Hurricane Irma. While nothing to hope for as a REIT investor, the damage to the hotels presented an opportunity to make major improvements and, in the case of the Cadillac property, rebrand the property to a more upscale marque, driving increased RevPAR and food and beverage income. Both properties began accepting reservations and "soft open" business in 2018 and will be fully stabilized in 2019, fully contributing this year. Opportunistically, the Miami Convention Center was also expanded following Hurricane Irma, which will drive higher occupancy throughout the market. Bringing both these properties up to full performance with the increased RevPAR from the improvements is forecasted to increase total company EBITDA by up to 10%.
Continuing the positive takeaways from the company's ongoing strategy is the forecasted performance of the 7 additional properties renovated in 2018. Excluding the two properties detailed above, $77 million CAPEX was spent on these 7 properties. One of these properties was the Hampton Inn Center City in Philadelphia, the first hotel I have gotten to stay in that I "own." (OK, in all fairness, I probably owned two tiles in the foyer, but I finally have stayed in a property owned by a REIT in my portfolio!). Indicative of Hersha's strategy, I found this property to be very well-maintained, courteously and professionally staffed, and having above-brand features, including a food and beverage operation on par with the higher branding at a Hilton Garden Inn or above. The property is the closest hotel to the Philadelphia Convention Center - literally right across the street, and within easy, year-round walking distance to a great assortment of dining options. I could easily see convention travelers flying into Philadelphia, ride-sharing to the Hampton Inn and realizing this was an optimal property for business travel. It is also near historic sites for tourism. And the Hampton Inn is the downscale property of the three in the Philadelphia cluster. Overall, the 7 renovated properties are forecast to contribute $8-10 million to EBITDA in 2019, an immediate double-digit return on the CAPEX investment.
My third takeaway is my ongoing bull thesis and positive for the company that is reinforced again in this presentation. Buybacks and a conservative payout ratio with high yield continue to be undervalued in the market, allowing more accumulation for the long-term investor. Yes, the company's stock price has been flat overall despite spikes over the past few years. For the long-term investor acquiring a position for future income, these spikes have shown some paper gains, but the dips allow acquisition at a discount to NAV and the option to DRIP dividends into a growing position. At the same time, the company has executed buybacks totaling nearly one-quarter of the outstanding equity since 2014 - all at a discount to NAV. While the company is understandably hesitant to declare its calculation of NAV, the presentation states the targeted discount to NAV for repurchases is 25-30%. Walking this back to the average price over the past few years of $17.44 per the presentation, a very rough estimate of NAV is $23. As someone intending to hold HT for the long term, buying solidly performing assets at $17 a share (today's close was $16.91) that are valued at $23 and getting a 6% yield waiting for them to appreciate sounds reasonable to me. Insiders are more aggressive in their agreement than I am - they have purchased $1.9 million of company common and preferred stock since 2016. I wish I had $1.9 million to invest in HT and other companies performing this well!
The Bottom Line
The bottom line is the company's bottom line is solid and growing, with EBITDA growing toward $200 million (a goal discussed in my meeting this fall), a conservative capital structure with staggered, fixed or hedged interest rates, a reasonable CAPEX plan and opportunistic acquisition strategy and a forecasted payout ratio of 50% of AFFO in 2019. The yield on the common is currently just above 6% and the stock is trading at depressed levels, so I feel there is a margin of safety in the stock price. I feel confident and content DRIP'ing at 6%, while float continues to be reduced by company and insider buybacks. When "Mr. Market" prices HT closer to estimates of NAV, my long thesis might change, but currently I am happily accumulating shares.
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: Investors should do their own research and invest through a registered securities dealer. This article is written to update my thoughts on the company mentioned and is neither specific advice to a specific investor nor an offer to buy or sell any securities in any jurisdiction.