Already buoyed by strong leisure travel to its resorts, Hersha Hospitality Trust reported a “robust recovery” of demand for its urban hotels has yielded higher daily rates.
During the hotel real estate investment trust’s third-quarter earnings call, Hersha President and Chief Operating Officer Neil Shah said the comparable portfolio recorded average daily rate growth of 16% as nearly all of its markets saw double-digit ADR growth compared to 2019.
“We are clearly experiencing a robust recovery in demand in our urban portfolio as midweek occupancy builds month over month in each of our gateway markets,” he said.
Improving Performance
During the third quarter, Hersha’s hotels reported 72% occupancy with ADR of $289.75. Their comparable portfolio revenue per available room growth of 3.7% in September beat out September 2019 thanks to 16.5% ADR growth compared to the same period. The trend has been accelerating in October with increased business transient demand, with record RevPAR growth of approximately 8% compared to 2019, driven by 20% ADR growth.
“Our view on rate integrity remains unchanged from prior calls, as we are currently experiencing robust ADR growth for October — both to 2019 and to the prior month,” Shah said.
The comparable hotel portfolio generated nearly $31 million in earnings before interest, taxes, depreciation and amortization during the quarter, an 8% increase from 2019 with an EBITDA margin of 32%, a 249-basis-point increase.
Demand at Hersha’s non-resort portfolio accelerated during the quarter as EBITDA contribution from this segment grew from nearly 54% in July to 77% in September, averaging to 64% by the quarter’s end, Shah said.
“This trend bodes well for the portfolio as roughly 60% of our pro-forma room count is located in urban gateway markets,” he said.
Non-resort weekday RevPAR grew by 33% from July to September, including gains of about 38% in Washington, D.C., and Philadelphia and nearly 12% in Boston, he said. From August to September, the weekday to weekend RevPAR premium decreased in each of those markets, with Boston achieving RevPAR parity in September.
The REIT’s New York urban portfolio generated nearly $10 million in EBITDA during the quarter, the highest contribution of any market where the company has a presence, Shah said. The EBITDA margin was 38.1%, an increase of 180 basis points over 2019. During September, the New York portfolio exceeded 2019 RevPAR by 1.8% despite reduced occupancies.
Excluding the Holiday Inn Express Chelsea due to a subset of rooms being offline for renovations, Hersha projects RevPAR and EBITDA growth to be over 2019 levels in its New York urban portfolio for each month in the fourth quarter, he said.
During the leisure-heavy third quarter, Hersha’s resort portfolio generated 24% RevPAR growth over the third quarter of 2019 due to 29.5% ADR growth, Shah said. In what’s usually a slower quarter, the South Florida portfolio posted nearly 35% RevPAR growth compared to 2019 thanks to 25% ADR growth.
The South Florida portfolio did not sustain any material damage from Hurricane Ian, he said. There were cancellations in the last week of September and early October because of the storm, resulting in approximately $500,000 in lost revenue.
Portfolio Strategy
Earlier this week, Hersha announced it had closed on the sale of its Hotel Milo Santa Barbara and the Pan Pacific Seattle for a combined $125 million. The sale of these hotels combined with the portfolio sale of urban select-service hotels earlier this year and the pending sale of the leasehold interest in the Gate Hotel JFK Airport will generate approximately $650 million in gross proceeds, Shah said. The cash proceeds from these deals will reduce Hersha’s total debt by about $500 million, generating unrestricted cash of almost $120 million. That leaves the company with a forecasted cash balance approaching $225 million by the end of the year.
“The result of our strategic disposition strategy is a streamlined portfolio, comprised of differentiated luxury and lifestyle offerings located on premium real estate in gateway urban and resort markets and a purpose-built New York City cluster,” he said.
Hersha’s portfolio is generating profitability levels greater than before the pandemic and will not require major capital infusions or disruptions in the near term, he said. The comparable portfolio is positioned to generate significant cash-flow growth over the next year as it will disproportionately benefit from the long runways in the recovery of business transient, small group and international travel on top of strong leisure demand.
The REIT’s most efficient cost of capital has been realized by hotel sales at or near net asset value, Shah said. The deals it has made and their timing have been strategic and aligned with executives’ vision of minimizing the public-to-private market value disparity within the portfolio while maximizing shareholder value.
The first set of hotel sales in 2021, generating $215 million, reduced Hersha’s exposure in each of its markets and sold off some of its older and slower-growth hotels that needed capital in the near to medium term, he said.
“Our decision to hold the next tranche of dispositions into 2022 allowed us to benefit from the increased hotel cash flows in the first half of the year as market valuations approached our internal NAV,” he said.
By the Numbers
Hersha’s portfolio of 26 hotels reached 71.7% occupancy in the third quarter, an 18.9% year-over-year increase, according to the company’s earnings report. It achieved $289.75 in ADR, a 25.5% year-over-year increase, and reached $207.66 in RevPAR, a 49.2% year-over-year increase.
The REIT’s net income was approximately $115.5 million compared to a loss of about $19.5 million in the third quarter of 2019. Its comparable earnings before interest, taxes, depreciation and amortization were $30.89 million, an 8% increase compared to the same period of 2019. Its EBITDA margin was 32%, a 249-basis point increase compared to 2019.
At the time it closed on the first tranche of its urban select-service sale, Hersha entered into a new $500 million credit facility in early August. That includes a $400 million term loan and an undrawn $100 million revolving credit line, bearing interest at 2.5% over the applicable adjusted term SOFR. The full credit facility matures in August 2024 with one 12-month extension option subject to certain conditions.
The REIT used an existing swap to hedge $300 million of the new term loan at a fixed rate of about 3.93%. After its refinancings, 72% of Hersha’s outstanding debt is fixed or hedged through various derivative instruments. Its third quarter weighted average interest rate was about 4.38% across all of its debt with an average life-to-maturity of about two and a half years.
As of press time, Hersha’s stock was trading at $8.82, down 3.8% year to date. The New York Stock Exchange Composite Index was down 15.3% for the same period.