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Hersha Hospitality: The Preferreds Are Still Attractive (NYSE:HT.PE)

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Introduction

Hersha Hospitality Trust (HT) preferred stocks continue to trade at a discount to their par value.

  1. Hersha Hospitality Trust, 6.875% Series C Cumulative Redeemable Preferred Shares (HT.PC)

  2. Hersha Hospitality Trust, 6.50% Series D Cumulative Redeemable Preferred Shares (HT.PD)

  3. Hersha Hospitality Trust, 6.50% Series E Cumulative Redeemable Preferred Shares (HT.PE)

While the preferreds are up at least 180% since my first article early April, in my opinion, there is still more upside for patient investors, in the form of capital gains, unpaid distributions and future yield.

While preferred distributions are still suspended, I believe the measures taken by the company to reduce cash burn and the positives from the pursuit for new normal travellers have put the company in a good position to sustain the pandemic until the vaccine distribution reaches an optimal point.

Image Source: Annapolis Waterfront Hotel, MD – TravelAddicts.net

Background

Hersha Hospitality Trust is a hotel REIT that operates 48 upscale to luxury hotels in premium markets of New York, Washington, D.C., Boston, Philadelphia, Miami, Seattle and California.

Travel Volumes Steadily On the Rise

Passenger throughput numbers from TSA show steady growth since the March-April period. I believe progress with the vaccine distribution is only going to improve these numbers.

Data Source: Statista.com

Business travel may begin responsibly in 2021, with members of the C-suite, salespeople and essential workers expected to be early adopters. I expect business travel to remain far below 2019 levels at least for the next two years, since the effectiveness and cost benefits of virtual meetings are being evaluated by many companies.

Looking into leisure travel, popular surveys reveal eagerness among the general public, in being able to travel. A Zapier report reveals that since March 2020, 39 percent of American knowledge workers have canceled or shortened their time off:

  • 33%- it’s a waste to take time off from work right now because of travel restrictions.

  • 24% – it is hard to justify taking time off from work because they’re already working from home.

  • 13% – they likely won’t take any time off from work until the pandemic is over.

An overwhelming majority of US and Canadian travelers (99 percent) are eager to travel again, with 70 percent stating that they plan to take a holiday in 2021, according to a Travel Leaders Group survey of nearly 3,000 frequent travelers – WTTC survey.

Operation Warp Seed’s director of supply chain, production and distribution believes that everyone in the US who wants a COVID-19 vaccine will have one by June 2021. Though experts are not confident with that timeline, I believe the travel industry will see sharp recovery as the vaccine distribution ramps up.

Any improvements in leisure travel will improve occupancy rates for hotel operators like HT. Since the shutdown in March-April, HT has been steadily reopening their properties. As of November, 38 hotels were fully open and operational, with 32% occupancy and average daily rate of $149.55 (source: Q3 conference call)

Image Source: Investor presentation

When leisure travel and business travel have been slim, the company has been looking for alternative opportunities to keep the business going.

During the summer, HT began providing accommodation to new normal travellers:

  • Elective healthcare workers and patients

  • Construction teams outfitting offices to become COVID compliant

  • Professional sports teams quarantining during their abbreviated seasons

  • Personnel related to content and entertainment production

During fall:

  • New York – Success with staycation packages in Brooklyn.

  • New York – Accommodation for production teams in Tribeca hosting virtual fashion week events.

  • New York – Accommodation for government census workers in White Plains

  • New York – pickup in higher rated corporate business from financial services and consulting firms

  • California – relief business related to the wildfires

  • Washington D.C. – increased bookings from elevated Supreme Court and congressional activity.

  • Washington – contracted with various media outlets for increased coverage leading up to the election in November

Insider Buying Still Strong

Company insiders have continued buying the company’s common stock since the beginning of the pandemic. Despite the fact that common dividends remain suspended, insider buying activity tells us that management is confident of getting through this difficult patch.

Data Source: GuruFocus

Data Source: Insider Monitor

While we are not out of the woods yet on the pandemic, but for preferred investors to be rewarded, it is important to remember that HT only needs to survive the pandemic.

Reducing Burn

Empty hotels burn cash. Since May, steady rise in occupancy levels as a result of management’s pursuits in catering to new normal travelers resulted in a reduction of the company’s cash burn across the portfolio.

Image Source: Investor Presentation

What is going on with the preferred shares?

The dividends are suspended for 3 quarters now. Since these distributions are cumulative, HT must pay the unpaid dividends prior to paying any common stock dividends. Due to suspended dividends, HT-C. HT-D and HT-E shareholders would have accrued 6.32%, 6.34% and 6.36% of the yield (based on current preferred stock values).

Data Source: Author’s calculation

Prior to the pandemic, Hersha Hospitality was a high-quality REIT pick. HT Preferreds have always traded above their par value due to the strength in their business and the fact that their distributions have been consistently covered by their FFO.

The pandemic impacted the entire travel industry and created uncertainties in the company’s survival. As the preferreds have recovered from their March lows, they continue to trade ~30% below their par value.

Image Source: Seeking Alpha

For investors who don’t have a problem waiting for the preferred distributions to be restored, HT preferred shares offer a high yield potential. Moreover, there is 22-30% upside in the preferreds themselves, which I believe will be attained as the distribution of the vaccine ramps up.

Change of Control Situation

The three classes of preferred stock are redeemable and cumulative. The call dates are different, with HT-C trading post call date. The one area where they differ is the redemption in the event of a change of control.

The situation is quite specific if HT is acquired by a private company.

Image Source: Pricing Terms

So, if HT is acquired by a private company, then the preferred shareholders will get the lesser of:

The share cap of the preferred stocks are as follows:

  • HT-C – 9.6

  • HT-D – 2.87687

  • HT-E – 2.80584

In my opinion, the change of control as defined above is unlikely. Yet, with this data, and a series of HT common stock prices, it is seen that preferred investors will end up in the green at and above the current common stock price.

Data Source: Author’s calculation (values do not include the unpaid, but accrued preferred distributions)

Conclusion

HT preferred shares present a relatively low-risk, high-reward opportunity. There is still at least 22% upside (30% for HT-E) in the stock and since distributions are cumulative, patient investors can lock in high yields. It is my opinion that as the vaccine distribution makes more progress, the preferreds will trade closer to their par value, even before the dividends are restored.

Insider buying of the common stock increases my confidence on the preferred stock. The company has done a great job with targeting new normal travelers and reducing cash burn. I recommend HT preferred stocks for a long-term position.

Disclosure: I am/we are long HT.PE, HT.PC, HT.PD. 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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