It’s hard to know when to invest in a specific stock, even if it’s fairly undervalued. The hotel REIT Hersha Hospitality Trust Class A is no different. Despite the good dividend paying record, Hersha’s share prices fell over 35% in the last year alone. Now, this specific stock is averaging trades around 7 times its projected AFFO for 2016 (putting it below its closest peers). Despite this upside, we still don’t think it’s time to invest.
The problem is that the property portfolio Hersha owns is exposed to challenging locations. Many of their hotels are fairly well rated, but there are many factors working against them. For example, New York (which has been flooded by new supply of hotels) accounts for 28% of company’s entire EBITDA.
In 2015, supply in Manhattan grew more than the demand. Notwithstanding, last quarter was the opposite, what led the management team to a more positive outlook on the situation. That being said, Hotel News Now’s Sean McCracken reported that a challenging year is ahead of us, as New York City remains a sore spot in the industry (click here).
Furthermore, the hotels classified as upscale and upper midscale amount to 75% of Hersha’s EBITDA. This further tips the scales that will affect the profitability of Hersha Hospitality in the future. In fact, STR’s new supply stats for February reported that most of the construction in the hotel was associated with either upper midscale or upscale accommodations rather than other scales.
There are a few things going for Hersha right now, however. First and foremost, over 20% of the market share value for the company’s overall EBITDA comes from the West Coast (which has been a bright spot in the industry). The company is further selling seven Manhattan hotels to a joint venture with Chinese investors.
Hersha has provided investors relatively stable rates for more than 16 years, so it’s not time to pull out your money yet. In fact, the company has continued to demonstrate dividend yield over 6%, paying out below 50% of its AFFO.
When it comes to choosing stock, it’s about choosing businesses with the most potential for growth; and it’s hard to say that there’s enough potential to entice investors this year.
Source: Hersha Hospitality Trust (NYSE:HT)
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.