What Happens When Manhattan and Beijing Band Together

chart01 What happens when you have a group of Chinese investors who crave a safe haven on one side and a small cap Manhattan hotel centered REIT who can’t raise the equity funds they need to tap into new opportunities on the other side? It’s simple. They enter into a partnership in which the REIT sells stakes of the Manhattan hotels and uses the proceeds to go shopping elsewhere. This is an example of two groups, Chinese Cindat Capital Management and the lodging REIT, Hersha Hospitality Trust, who have perfectly matched their aspirations to create a win-win situation.

Every REIT investor is well aware that China has been in trouble lately. Just two months into 2016, due to a slowdown in the Chinese economy, volatility in the U.S. financial markets has increased and depressed stocks, including REIT stocks. In fact, with so many outflows of capital, Chinese investors have been looking for a safe haven. The amazing twist is that some of this foreign capital has ended up in the REIT world, which has raised Hersha Hospitality’s profile.

In addition, lodging REIT stocks have decreased significantly over the past twelve months. Hersha stock decreased by 31% compared to SNL’s US REIT Hotel index of 34%. Also, it’s AFFO multiple has been at 9.4x, which is below the peer average. Hersha took advantage of the stock being priced so low and purchased 10% of its shares outstanding in 2015.

chart03.png For the Chinese, it doesn’t seem to really matter that they might be buying in the peak. Hersha recently said that their Manhattan hotels have enjoyed increased occupancy and although supply was a threat in 2014-15, this doesn’t appear to be the case moving forward. It’s more about making a stable investment in an area that will always attract a buyer’s interest if they want to sell.

It is also interesting to note that the Chinese are not buying 100% stakes of the properties. For foreign investors, it’s crucial to have a local partner who knows the ropes. Hersha mentioned that revenue management in Manhattan has been very hands-on, so I believe that the Chinese welcome this kind of help from their U.S. partners. Also, Hersha is not entirely disposing of the properties, so they must see some upside. 43% of their EBITDA has been generated in Manhattan, so I believe that must have a good bit of intelligence regarding the local market.

chart02
Hersha before the sale

The end result is that Hersha’s exposure to Manhattan will decrease 25% of their total EBITDA and they will be able to buy properties in Washington D.C. They’ve been bullish on DC due to an increase in government spending, an increase in the number of conventions held in the city and this year’s elections.

Hersha’s share price spiked by 13% when this announcement was made last week. Although the stocks appear undervalued and they invest in upscale properties in gateway markets, I’d be very cautious about entering now. This is because of a strong dollar decreasing revenues from international travelers, as well as lingering investor sentiment against lodging.

Source: Hersha Hospitality Trust(NYSE:HT), Fast Graphs, Yahoo!Finance

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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