Hersha Hospitality Well Positioned For A Turnaround
Summary
- Hersha insiders have been buying shares in the open market in a consistent manner even during the peak of the lockdown.
- Occupancy levels steadily increased across the 27 hotels that were open in April and May.
- The Sanctuary Beach Resort in California generated 84% occupancy in May.
- Hersha received a full covenant holiday for five quarters, amended its credit facility to draw an additional $100M through the covenant waiver period, and there are no debt maturities until 2021.
- These initiatives bought Hersha substantial time and the positive occupancy trends make me hopeful for a swift turnaround.
Hersha Hospitality (NYSE:HT) is poised to surge as the economy reopens and things go back to normal. However, this is a process that will take some time. Therefore, discipline and patience is required, especially if we go through a large second wave of the virus. HT made a comeback following the financial crisis of 2007-08 and I am confident that it will make a comeback this time round as well.
The hotel market was significantly impacted by the lockdowns. As a result, HT, along with other hotel owners, is going through a very rough time. This is reflected in the share price. On a YTD basis, HT has fallen more than 50% versus declines of ~7.9% and ~3.7% for the Dow and S&P 500, respectively.
Data by YCharts
Not so long ago (in 2018), HT traded in the $20s. If we ever return to those levels, we are talking about three times upside from the current share price, and almost five times upside from my entry point (low to mid $4s). Rebounding to $15-20 is certainly possible unless there is permanent value destruction (e.g. dilution at rock-bottom prices). The following events make me feel confident about HT's prospects.
1. Insiders are buying
Insiders are buying shares in the open market in a consistent manner despite already owning a substantial stake (10%+ ownership):
Source: OpenInsider (SEC filings)
It is very comforting seeing insiders "chasing" the share price down, buying all the way to the all-time lows ($3 zone). While insider purchases are a nice confidence booster, the following events are way more important.
2. Notable improvement in operating metrics
Occupancy levels steadily increased across the 27 hotels that were open in April and May (note as of June 1st, 31 out of the company's 48 hotels are open). As illustrated in the graph below, for the week ending May 30th, occupancy was 37.9%, ~1,900 bps higher compared to the trough in late March.
Source: HT Investor Presentation, slide 4
Of interest, the seven New York City hotels that were open in April generated occupancy of 55%, and occupancy increased by more than 1,200 bps during May. These occupancy metrics are quite impressive considering the situation in New York.
Another interesting metric is the performance of the company's resorts. Around 25% of HT's EBITDA generation (11 hotels in total) is derived from leisure-oriented assets in drive-to destinations. While many of these hotels are still shuttered due to government-mandated closures (as of the end of May, 5 of these 11 hotels were still closed), there are encouraging signs of an early recovery. For the week ending May 30th, occupancy at drive-to resorts was 41.2%, ~2,500 bps higher compared to the trough in early April.
Of particular interest is the Sanctuary Beach Resort in California, which generated 84% occupancy in May with an average daily rate of more than $300.
3. Sufficient liquidity to weather the storm
The company received a full covenant holiday for five quarters (next covenant measurement on 6/30/21). Importantly, there are no debt maturities until 2021. In addition, HT amended its credit facility and is now able to draw an additional $100M through the covenant waiver period. This provides HT with significant breathing space until the storm is over.
What's more, the company has outlined various cash burn scenarios:
- Assuming less than 10% occupancy, the monthly burn rate across the portfolio is $11M
- Assuming 20% to 30% occupancy, the monthly burn rate is $9M
- The property-level breakeven is 40%-50% occupancy and corporate-level breakeven (including interest expenses) is 55%-60% occupancy
Based on the above, I believe the company, with its quality properties, is well positioned for a turnaround. We are finally seeing some bright spots now that the economy is starting to reopen. It is very positive that even during the peak of the lockdown, occupancy trends at some hotels were resilient. It is also very positive that insiders were buying shares in the open market in a consistent manner even during the peak of the lockdown. One has to be mindful that the situation is still fluid and it will take some time until things get back to normal. Even though we are in a much better situation today compared to when the lockdowns began, uncertainty is still high and a potential second wave of the virus will keep investors on alert mode. The good news is that the company bought itself substantial time with its liquidity initiatives and covenant waivers.
This article was written by
Analyst’s 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.
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Comments (18)
Can HT survive till end of 2021 with partial recovery in occupancy rates and not print more shares?
Management buying at this price is giving me confidence.
