Hersha Hospitality Trust will sell a portfolio of seven non-core, urban, select-service properties outside of New York for gross proceeds of $505 million.
The deal was announced just hours before the hotel real estate investment trust’s first quarter 2021 earnings call. During the call, Hersha President and Chief Operating Officer Neil Shah said the transaction will allow the company to further refine its portfolio.
“By divesting our non-core, urban, select-service portfolio, we are sharpening our focus on our luxury and lifestyle portfolio, where we have been generating excellent operational and financial results as demonstrated in our first quarter financial results announced today and where we see great opportunity for growth,” he said.
Hersha is keeping its exposure in New York because the executive team believes the market is at the beginning of a strong recovery and executives see significant untapped value and “upside in those assets,” he said.
The sale includes the Courtyard by Marriott Brookline in Boston; the Hampton Inn, Center City/Convention Center in Philadelphia; the Hilton Garden Inn M Street in Washington, D.C.; the Hampton Inn Washington, D.C.; the Courtyard by Marriott Sunnyvale in Sunnyvale, California; the Courtyard by Marriott Los Angeles Westside in Los Angeles, California; and the TownePlace Suites by Marriott Sunnyvale in Sunnyvale; California.
The deal is expected to close in the third quarter of this year, leaving the company with a portfolio of 26 hotels in six destination markets across the U.S. Hersha will use the proceeds of the sale to provide immediate liquidity for a net debt reduction of about $460 million to $480 million and for about $75 million of mortgage debt associated with the urban select-service portfolio.
On a pro forma basis, the remaining portfolio’s total revenue per available room, based on 2019 performance, will increase from $206 to $219, Shah said. Its average daily rate will grow from $247 to $262. The earnings before interest, taxes, depreciation and amortization per key will rise from about $32,000 to $33,000.
“We're very excited about this transaction and what it means for Hersha moving forward,” he said.
Improving Performance Trends
Since the company’s last earnings call, the rapid acceleration of the hotel industry’s recovery from the pandemic exceeded expectations, Shah said. Hersha’s hotels significantly outperformed internal forecasts for the first quarter for both top-line and profitability metrics, he said.
“This accelerating demand recovery took hold across our entire portfolio, and it’s continued into April, and we expect this trend to gain further momentum throughout the year,” he said.
Property-level cash flow sequentially improved from $3.8 million in January to $12.1 million in March, the company’s most profitable month since the start of the pandemic, he said. Hersha’s revenue managers were successful in driving rates, growing ADR by 10.5% compared to the first quarter of 2019.
“Rate integrity has remained one of the hallmarks of this recovery for the industry and is key to the recovery for lodging,” he said. “Based on year-to-date performance, from our resorts to our urban clusters, we believe strongly ADRs will not only prove sustainable but continue to improve throughout the year and across our high-quality portfolio.”
Shah is encouraged to see RevPAR closing the gap to 2019 levels even before the full recovery of business transient and group demand. Gateway markets saw a dramatic sequential improvement in urban demand in March, and the continued demand growth seen in April coupled with second quarter projections should push RevPAR higher.
“The rapidly improving operating environment we are seeing in our markets provides a clear trajectory of growth for our portfolio as we move into the second quarter,” he said.
Hersha’s resort portfolio saw continued robust performance throughout the quarter, with occupancy just shy of 70%, he said. RevPAR grew by 28.6% relative to the first quarter of 2019, generating $15.2 million in EBITDA, a 21% increase over the prior quarter and 80% increase over the same time in 2019.
The urban gateway hotels are seeing strong demand growth even with the return of business travel only in its early stages, Shah said. The delta and omicron variants of COVID-19 disrupted urban hotel demand over the last year, but there’s more momentum now than before. He cited companies returning to their offices, more conferences taking place and Transportation Security Administration data.
“While the sequential growth acceleration I mentioned earlier has positively impacted our entire portfolio, it has been most pronounced in our core urban markets,” he said.
Hersha has maintained pricing power across the markets most severely affected by omicron, he said. Its urban hotel ADR of $218 in March was down only 2.5% compared to March 2019, driven by Boston’s ADR of $228, flat compared to 2019, Philadelphia’s $241 only being down 1.2% and Manhattan’s $212 down just 2.5%.
By the Numbers
Hersha reported a net loss of $22.5 million during the quarter compared to net income of $2.8 million for the first quarter of 2021, according to the company’s earnings report. Total revenue amounted to $81.8 million, up from $47.1 million a year ago.
Hersha's earnings before interest, taxes, depreciation and amortization for real estate totaled $17.3 million, up from a loss of $4.1 million in the first quarter of 2021. Hersha’s property-level EBITDA in March was $12 million, its highest since the start of the pandemic. The comparable portfolio EBITDA margin of 28.3% exceeded its first quarter 2019 margin by 373 basis points.
Hersha's portfolio of 33 hotels achieved 58% occupancy during the quarter with an average daily rate of $233.85, resulting in revenue per available room of $135.67. The company’s resort portfolio saw RevPAR grow 28.6%, driven by 38.3% growth in ADR, compared to the first quarter of 2019.
Hersha ended the quarter with about $88 million in cash and cash equivalents and deposits. It had about $46 million of capacity on its $250 million senior revolving line of credit. Its consolidated debt had a weighted average interest rate of 4.46% with a weighted average life-to-maturity of almost two-and-a-half years.
As of press time, Hersha’s stock was trading at $9.48, up 1.3% year to date. The NYSE Composite Index was down 8.6% for the same period.