PHILADELPHIA– Hersha Hospitality Trust (NYSE: HT) (“Hersha” or the “Company”), owner of upscale hotels in urban gateway markets, today announced results for the first quarter ended March 31, 2017.
First Quarter 2017 Financial Results
Net income applicable to common shareholders was $18.7 million, or $0.44 per diluted common share, in first quarter 2017, compared to a net loss applicable to common shareholders of $11.3 million, or $0.26 per diluted common share, in first quarter 2016. The increase in first quarter 2017 net income and net income per diluted common share was primarily due to an increase in operating income, as well as gains related to the disposition of hotel properties and joint ventures undertaken during the period.
Adjusted Funds from Operations (“AFFO”) in the first quarter 2017 was $13.5 million. AFFO per diluted common share and OP Unit in the first quarter 2017 was $0.30, a 7.1% increase from AFFO per diluted common share and OP Unit of $0.28 in the same quarter in 2016 due to an improvement in operating fundamentals, and a reduced share count. The Company’s weighted average diluted common shares and OP Units outstanding were approximately 44.7 million for the three months ended March 31, 2017, compared to approximately 46.9 million for the three months ended March 31, 2016. An explanation of certain non-GAAP financial measures used in this press release, including, among others, AFFO, as well as reconciliations of those non-GAAP financial measures, to GAAP net income, is included at the end of this press release.
Mr. Jay H. Shah, Hersha’s Chief Executive Officer, stated, “During the first quarter, Hersha remained very active with its capital recycling strategy, continuing to improve the Company’s high-quality, transient-focused portfolio and positioning it for strong growth. In early January, we closed on the sale of two suburban Washington, DC properties for $62.0 million, and agreed to a 6-month extension to close on the sale of three suburban West Coast hotels for $130.5 million, a $7.5 million increase from the original purchase price. We also entered the dynamic Seattle market through the purchase of the Forbes Four Star, AAA Four-Diamond Pan Pacific Hotel, and capitalized on market dislocation in Miami by acquiring The Ritz-Carlton, Coconut Grove at a very attractive basis. Finally, we liquidated our Mystic joint-venture, adding the high-quality Mystic Marriott Hotel & Spa to our consolidated hotel portfolio and further simplifying our balance sheet. Successfully recycling capital and upgrading our portfolio quality and growth profile across the last two years positions us well for continued growth and outperformance. Looking ahead, we will focus our portfolio strategy on hotels that generate consistent cash flows and provide attractive asset value growth in the country’s highest demand urban gateway and destination markets.”
Mr. Shah continued, “Excluding the Company’s South Florida portfolio, which continues to be affected by headwinds, our comparable portfolio delivered an impressive 6.4% RevPAR growth. Rate‐based gains, and robust performance in our Washington, DC cluster from January’s inauguration drove a Hotel EBITDA increase of 3.5% to $32.5 million. We are constructive on the cycle’s duration based on an improving macroeconomic environment and healthy employment, coupled with positive demand trends and solid convention calendars across the majority of our markets. As we move through 2017, close alignment with our operators and hands-on asset and revenue management strategies will drive profitability. We are confident that our best-in-class capital allocation and scaled operational capabilities across our unique portfolio of well-located, transient-oriented hotels creates significant value.”
First Quarter 2017 Operating Results
The best performing market during the first quarter was the Company’s Washington, DC Urban portfolio, which reported 15.4% revenue per available room (“RevPAR”) growth. The Company’s Washington, DC Metro, Philadelphia and Boston portfolios reported 11.9%, 11.1% and 8.2% RevPAR growth, respectively, in first quarter 2017.
The Company’s consolidated EBITDA contribution in the first quarter 2017 continued to shift given the re-positioning of the portfolio. The West Coast (33%), South Florida (25%) and Washington, DC (18%) portfolios contributed approximately 76% of total consolidated EBITDA in the first quarter 2017 compared to approximately 70% in the first quarter 2016. New York City contributed 13%, Boston contributed 5%, while Philadelphia contributed 3% of consolidated EBITDA in the first quarter 2017.
RevPAR at the Company's 44 comparable hotels increased 3.1% to $156.43 in first quarter 2017. The Company’s average daily rate (“ADR”) for the comparable hotel portfolio increased 1.0% to $200.48, while occupancy increased 157 basis points to 78.0%. Hotel EBITDA margins for the comparable hotel portfolio decreased 30 bps to 29.4%. Excluding Hyatt Union Square and The Sanctuary Beach Resort, which reported disproportionate margin deterioration due to renovations in connection with the re-concepting of the restaurant and bar at both hotels, the Company’s comparable Hotel EBITDA margins increased 50 basis points.
New York City and Manhattan
The New York City hotel portfolio, which includes the five boroughs, consisted of 10 hotels as of March 31, 2017. In first quarter 2017, the Company’s comparable New York City hotel portfolio reported occupancy of 85.5%. RevPAR increased 1.3% to $151.66, driven by a 1.1% ADR increase to $177.35.
The Manhattan hotel portfolio consisted of 7 hotels as of March 31, 2017. The Company’s comparable Manhattan hotel portfolio reported 87.7% occupancy. RevPAR rose 1.0% to $164.88 as a result of 1.5% ADR growth to $188.04. In the first quarter, the Company outperformed greater Manhattan RevPAR by 330 basis points, and has outperformed the Manhattan market in 11 of the previous 13 quarters as a result of a young, well-located, and purpose-built hotel cluster in-tune with travelers’ tastes and preferences. Excluding the Hyatt Union Square, where the Company is re-concepting the restaurant and bar, comparable Manhattan portfolio RevPAR increased 2.2%. The Company’s Manhattan portfolio reported Gross Operating Profitability (“GOP”) and Hotel EBITDA margins of 39.1% and 20.8%, respectively, in the first quarter 2017. Hotel EBITDA margins excluding the Hyatt Union Square increased 150 bps to 22.8% as a result of strong flow-through of 195.2%.
Financing
As of March 31, 2017, the Company maintained significant financial flexibility with approximately $47.6 million of cash and cash equivalents and full capacity on the Company’s senior unsecured credit facility. As of March 31, 2017, 41.0% of the Company’s consolidated debt was fixed rate debt or hedged through interest rate swaps and caps. The Company’s total consolidated debt had a weighted average interest rate of approximately 3.43% and a weighted average life-to-maturity of approximately 4.1 years.
Acquisitions
On February 1, 2017, the Company acquired the 115-room Ritz-Carlton in Coconut Grove, Miami, FL for $36.0 million. The Company funded the acquisition with proceeds from the sale of the Residence Inn Greenbelt, MD as part of a tax-deferred like-kind exchange. The AAA Four-Diamond Ritz-Carlton is prominently situated on 3.4 acres, across the street from the Company’s 140-room Residence Inn, and one-half block from the waterfront in Coconut Grove. The hotel is part of a two tower, 22-story residential-hotel condominium complex that opened in 2002. In addition to the hotel’s 115 rooms, the Ritz-Carlton features 14,000 sq. ft. of meeting space, a restaurant, bar, a destination spa, fitness center, retail space, center and approximately 8,000 sq. ft. of leasable office space.
On February 21, 2017, the Company acquired the 153-room Pan Pacific Hotel in Seattle, WA for $79.0 million. The Pan Pacific Hotel is exceptionally located in the vibrant South Lake Union submarket of Seattle’s CBD, the epicenter of the city’s growth over the past several years. The luxury lifestyle Forbes Four Star, AAA Four-Diamond Pan Pacific Hotel opened in 2006 as part of 2200 Westlake, a mixed-use development with 260 luxury condominiums anchored by a Whole Foods urban prototype and food hall. The hotel’s 153 rooms, of which 20% are premium suites, feature four fixture baths including separate glass showers and oversized bathtubs. The hotel’s amenities also include a 3-meal restaurant and bar, 9,100 square feet of meeting space, an outdoor veranda, a fitness center with a feature whirlpool spa, locker rooms and sauna and 60 designated parking spaces.
Dispositions
In January 2017, Hersha closed on the sale of the 203-room Courtyard by Marriott in Alexandria, VA, and the 120-room Residence Inn in Greenbelt, MD for $62.0 million. In addition, the Company agreed to a 6-month extension to close on the sale of three suburban West Coast hotels for $130.5 million, a $7.5 million increase from the original purchase price, valuing the entire 757-room, 5-hotel suburban portfolio at $192.5 million, or $254,000 per key. In addition to the price increase, the Company has secured a $10.0 million non-refundable deposit from the purchaser. The suburban West Coast portfolio sale is anticipated to close in July 2017.
In January 2017, Hersha redeemed its interest in its Mystic Partners joint-venture. The Company transferred to its former joint-venture partner all of its partnership interests in the Hartford Marriott and the Hartford Hilton for $11.5 million, which represented a 100% recovery of the Company’s equity investment in these assets and net cash at the Mystic Marriott. The Company simultaneously assumed full ownership of the Mystic Marriott Hotel & Spa without any additional cash payment to the joint-venture partner, and extinguished the property’s mortgage debt. The Company recognized a gain on the disposition of the Mystic Partners joint-venture of $16.2 million during the first quarter 2017.
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