Yellow Flag on Hotel REITs

chart01

During the release of Q2 results last week, several lodging stocks relayed the weakening of corporate transient demand. This has led some management teams to be more cautious while several have decided to review their 2016 guidance figures. Hotel REITs are not saying how long this will take, but they have confirmed that the second half of the year will suffer from the lingering effect.

The main cause has been the macro environment. Many uncertainties have led many companies, regardless of their size, to spend less and also cut travel expenses. Plus, the geopolitical tensions and fears of terrorism have discouraged travelers. With domestic and global events such as Brexit, China economy, oil prices, and U.S. elections, companies are lacking a clear horizon.

Hilton Worldwide, which is planning to spin off to create ‘Park Hotels & Resorts REIT,’ has mentioned on their Q2 call that, because of corporate transient, they remain on the lower end of their guidance range. While the corporate transient segment is slowing down, the group business is still doing well.

FelCor Lodging Trust, which is significantly exposed to the business traveler customer base, has also reported they are expecting group business to remain solid. While the group business partially offsets the decline in business transient performance, they are still continuing to expect negative effects on hotel metrics.

The Dow Jones U.S. Hotel & Lodging index has dropped by 4% by Wednesday, in tandem with most hotel REITs, but it has quickly recovered. Regarding last week’s worst performers, FelCor went down by 8%, Pebblebrook fell by 5%, and Hersha dropped by 3%.

Although the softness was detected a couple of months ago, a stronger impact has recently thrown down a yellow flag on hotels, whose operational results have been doing well. While on the other hand, the softening has made a low to moderate impact on the results. Many management teams have reported that there are ways to mitigate the impact.

In conclusion, the softening is not all bad, but it still will require some monitoring.

Source: Dow Jones U.S. Hotel & Lodging (^DJUSHL), Hilton Worldwide Holdings Inc.(NYSE:HLT), FelCor Lodging Trust Incorporated (NYSE:FCH), Pebblebrook Hotel Trust(NYSE:PEB), Hersha Hospitality Trust(NYSE:HT)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 29, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report 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. 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 is long FCH, XHR, CLDT, PEB.

This Undervalued Hotel REIT is Out For Now

chart01It’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.

chart02In 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)

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.

Are There Safe Dividends in Hotel REITs?

chart01

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?

chart03

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.

chart04

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.

chart05

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.

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.