Are There Safe Dividends in Hotel REITs?

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Sometimes, people are more interested in receiving regular dividends from their investments than the other potential benefits of their investments. Unfortunately, if they are interested in receiving regular dividends from their investments, hotel REITs are probably not the best choices, as opposed to retail, healthcare or residence, though it should be mentioned that Hersha Hospitality Trust is an exception to this rule.

In short, hotel REITs don’t include many long dividend paying companies. Maybe because the short leases of hotel tenants (also known as ‘daily rates’) make hotels one of the most volatile REIT sectors. For example, hotel REITs such as FelCor Lodging Trust and Pebblebrook Hotel Trust tend to have betas that are higher than 1.0, meaning that their prices move more than the S&P500. This is particularly notable because REITs, especially the ones with safest dividends, tend to have betas lower than 1, meaning that their prices move less than the broad stock indexes.

chart02Furthermore, it should be mentioned that a lot of hotel REITs fall in extremely competitive segments, which include but are not limited to upper-upscale, upscale, and even midscale because new competitors are entering said segments all the time. Upper-upscale and upscale are particularly competitive as far as these segments go, as shown by how STR’s February stats revealed that two-thirds of the rooms under construction belonged to one of the two rather than the rest.

chart06.pngIn spite of these challenges, Hersha has managed to provide regular dividends for 16 years, which is particularly impressive because the majority managed a period of no longer than 7 years. Moreover, with a beta of 1.3, Hersha has managed to do this investing in a portfolio based in upper-upscale and upscale hotels, thus making its accomplishment that much more impressive.

Can Hersha Hospitality Trust’s Dividends Be Considered Safe Dividends?

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With that said, Hersha has suffered the same hammer blow as the other hotel REITs when it comes to its share price. For example, it has lost more than 40 percent of its share value in February compared to its 52-week peak. This is not a particularly unusual situation since investors currently believe that the peak in hotel REITs is in the past, which has caused sustained selling that has in turn, fueled further selling for fear of further losses.

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However, it is important to note that there are persuasive reasons to believe that Hersha will be able to maintain its record when it comes to its dividends. First, it is established in cities such as Boston, New York City, Philadelphia, San Diego, and Washington DC, which have high barriers to businesses that might be interested in entering the market. In fact, its holdings in Boston, New York City, and the West Coast represent more than half of its portfolio.

Second, Hersha’s occupancy rate, the average daily rate, and the revenue per available room have all increased in Q4 of 2015, which should come as welcoming news, particularly considering that its EBITDA margin has increased as well. Third, while Hersha has been paying a respectable average dividend yield of 5.3 percent, its dividend payout is at a low 42 percent, meaning that it has a sizable cushion in case something goes wrong with its revenue-earning operations.

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Finally, it should be mentioned that Hersha’s management has taken a very proactive approach to dealing with their falling share price. For example, they have reduced the number of outstanding shares via buybacks as well as a recent reverse split at a 1:4 ratio for issued and common shares. Similarly, they have been selling mature hotels and buying new hotels in new markets with better potential growth. Summed up, while there is no guarantee that Hersha will continue paying similar or increasing dividends, all signs suggest that it will have no problems doing so for the current year.

Source: Hersha Hospitality Trust(NYSE:HT)

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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