– Net Income of $3.6 Million, or $0.08 Per Share –
– Comparable Portfolio RevPAR Growth of 3.4% –
– Authorizes Additional $100 Million Share Repurchase Plan –
– On Track to Close $825 Million of Dispositions –
PHILADELPHIA–Hersha Hospitality Trust (NYSE: HT) (“Hersha” or the “Company”), owner of upscale hotels in urban gateway markets, today announced results for the third quarter ended September 30, 2016.
Third Quarter 2016 Financial Results
Net income applicable to common shareholders was $3.6 million, or $0.08 per diluted common share, in third quarter 2016, compared to net income applicable to common shareholders of $10.6 million, or $0.22 per diluted common share, in third quarter 2015. The decrease in third quarter 2016 net income was primarily the result of reduced income from the Company’s unconsolidated joint venture investments, partially offset by interest expense savings from the Company’s refinancing activities.
Adjusted Funds from Operations (“AFFO”) per diluted common share and unit of limited partnership interest in Hersha Hospitality Limited Partnership (“OP Unit”) was $0.72 in third quarter 2016, a 7.5% increase from AFFO of $0.67 per diluted common share and OP Unit reported in third quarter 2015. AFFO in third quarter 2016 decreased $671,000 to $32.6 million, compared to $33.3 million in third quarter 2015.
The Company’s weighted average diluted common shares and OP Units outstanding were approximately 45.0 million as of September 30, 2016, compared to approximately 49.9 million as of September 30, 2015. See tables later in this press release for a discussion and reconciliation of net income to certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), funds from operations (“FFO”) and AFFO, as well as a discussion of Hotel EBITDA.
Mr. Jay H. Shah, Hersha’s Chief Executive Officer, stated, “During the third quarter, the Company delivered strong operating results from our carefully differentiated hotel portfolio, and continued to execute on our capital recycling and value creation initiatives from earlier in the year. Comparable portfolio RevPAR increased 3.4%, driven by continuing outperformance in Philadelphia, California and Washington, DC. Excluding the Company’s New York City portfolio, which continues to absorb new supply, our comparable portfolio delivered 6.4% RevPAR growth. Proactive asset and revenue management strategies, combined with cost cutting initiatives undertaken by our operator resulted in a 20 basis point increase in comparable EBITDA margins to 37.5%. As we look towards the remainder of 2016 and into 2017, we believe our rooms-focused hotel portfolio is positioned to outperform. While markets such as Manhattan and Miami continue to encounter headwinds, our market leading hotels in Washington, DC, Boston and California will benefit from strong market fundamentals and will drive profitability and free cash flow growth.”
Mr. Shah continued, “The Company continues to position itself to leverage opportunities in the current market. We utilized proceeds from the sale of a New York City portfolio to the Cindat joint-venture to acquire The Envoy in Boston’s dynamic Seaport Innovation District in July, and recently closed on the newly built, high-quality Courtyard in Sunnyvale, California. These purchases, combined with previously closed acquisitions in Northern California and Washington, DC, fully offset over $167.7 million of taxable gains from our transformative New York City transaction. Additionally, we announced agreements to sell 8 suburban hotels in three separate transactions and expanded the Company’s unsecured borrowing capacity to $1.0 billion, optimizing our balance sheet and providing financial flexibility to execute our business plan. Across the last 5 years, the Company has sold 55 stabilized hotels for $1.3 billion, while acquiring $1.1 billion of higher growth upscale and lifestyle hotels in our core strategic markets.”
Third Quarter 2016 Operating Results
The best performing market during the third quarter was the Philadelphia portfolio, which reported 19.2% revenue per available room (“RevPAR”) growth. The Company’s California and Washington, DC portfolios reported 8.4%, and 5.9% RevPAR growth, respectively.
RevPAR at the Company's 43 comparable hotels increased 3.4% to $179.92 in third quarter 2016. The Company’s average daily rate (“ADR”) for the comparable hotel portfolio increased 2.2% to $207.29, while occupancy increased 99 basis points to 86.8%. Hotel EBITDA margins for the comparable hotel portfolio increased 20 bps to 37.5% primarily driven by increases in ADR. 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 beverage outlets, the Company’s comparable EBITDA margins increased 100 basis points.
New York City and Manhattan
The New York City hotel portfolio, which includes the five boroughs, consisted of 10 hotels as of September 30, 2016. The Company’s comparable New York City hotel portfolio reported robust 93.0% occupancy. RevPAR decreased 3.9% to $220.36 due to a 1.3% ADR decline to $237.01, as new supply continued to impact rate growth.
The Manhattan hotel portfolio consisted of 7 hotels as of September 30, 2016. The Company’s comparable Manhattan hotel portfolio reported 92.4% occupancy, reflecting the demand resiliency characteristic of the Manhattan market. RevPAR declined 5.5% to $239.20 as new supply hindered rate growth, driving a 2.2% ADR decline to $258.76. The Company’s Manhattan portfolio reported Gross Operating Profitability (“GOP”) and EBITDA margins of 52.7% and 38.9%, respectively.
Financing
In August, the Company closed on a new $200 million Senior Unsecured Term Loan (the “Term Loan”). The new Term Loan, together with the Company’s existing term loans and revolving line of credit, expanded the Company’s senior unsecured borrowing capacity from $800 million to $1.0 billion. The Term Loan’s interest rate is based on a pricing grid with a range of 145 to 220 basis points over LIBOR, based on the Company’s leverage ratio, and matures in 5 years.
As of September 30, 2016, the Company maintained significant financial flexibility with approximately $136 million of cash and cash equivalents and full capacity on the Company’s senior unsecured credit facility. As of September 30, 2016, 45.0% 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 3.4% and a weighted average life-to-maturity of approximately 3.8 years.
Acquisitions
In July, the Company acquired the fee simple 136-room Envoy hotel in Boston for $112.5 million. The Envoy’s location straddles downtown Boston and the Seaport, proximate to significant and diverse corporate demand generators in Boston’s Financial District and the flourishing Seaport Innovation District.
Dispositions
In July, the Company entered into a definitive agreement to sell the 125-room Residence Inn in Framingham, MA and the 96-room Residence Inn in Norwood, MA for a combined $47.0 million, or approximately $213,000 per key. The sale is anticipated to close in November, subject to customary closing conditions.
In September, the Company announced a definitive agreement to sell a 5-hotel suburban portfolio totaling 757 rooms for $185.0 million, or $244,000 per key. Based upon the sales price and debt payoffs, the Company anticipates approximately $105 million in net proceeds, with taxable gains on the sale approximating $78 million. The portfolio sale is anticipated to close in early 2017, subject to customary closing conditions.
In addition, during September, the Company closed on the sale of the 100-room Hawthorn Suites in Franklin, MA for $8.9 million.
Subsequent Events
On October 20, 2016, the Company closed on the fee simple 145-room Courtyard by Marriott in Sunnyvale, CA for $75.0 million, or $517,200 per key. The acquisition includes the assumption of $40.6 million in CMBS debt that matures in 2025. The debt is interest only until August 2020, incurring interest at a fixed rate of 4.7%. The purchase price reflects a 7.7% economic capitalization rate and a 12.2x EBITDA multiple for the full-year 2017.
Today, the Company signed a definitive agreement to purchase the fee simple 77-room Ambrose hotel in Santa Monica, CA. The investment is expected to yield a 6.4% economic capitalization rate and a 14.2x EBITDA multiple for the full-year 2017. Closing is expected by year-end 2016, subject to customary closing conditions.
Share Repurchase Activity
On October 3, 2016, the Company announced a new share repurchase program of up to $100 million of the Company’s outstanding common shares. This new program commences upon completion of the Company’s existing $100 million share repurchase program, of which approximately $23.1 million remained available as of September 30, 2016 for repurchases of the Company’s outstanding common shares through the end of 2016. The new repurchase program expires on December 31, 2017, unless extended by the Board of Trustees.
In the third quarter, the Company repurchased approximately 534,000 common shares for an aggregate repurchase price of $9.9 million. Year-to-date through September 30, 2016, the Company repurchased approximately 2.6 million common shares for an aggregate repurchase price of $49.0 million, which represents 5.9% of the Company common shares outstanding.
Dividends
Hersha paid a dividend of $0.4297 per Series C Preferred Share and $0.40625 per Series D Preferred Share for the third quarter ending September 30, 2016. The preferred share dividends were paid October 17, 2016 to holders of record as of October 1, 2016.
The Company also declared quarterly cash dividends of $0.28 per common share and per OP Unit for the third quarter ended September 30, 2016. The common share dividend and OP Unit distribution were paid October 17, 2016 to holders of record as of October 3, 2016.
2016 Outlook
Based on year-to-date performance through September 30, 2016, the Company is reaffirming its Comparable Property RevPAR Growth, Adjusted EBITDA, Adjusted FFO and Adjusted FFO per share guidance, while adjusting Net Income, Net Income per share and Comparable Property EBITDA Margin Growth outlooks. The adjustment to Net Income and Net Income per Share is primarily a result of the allocation of residual income in the Cindat joint venture, and the timing of the Company’s fourth quarter dispositions, while the change to Comparable Property EBITDA Margin Growth is related to renovations in connection with restaurant re-concepting at two hotels. Based on management’s current outlook and assumptions, the Company’s full-year 2016 operating expectations are as follows:
Previous 2016 Outlook Updated 2016 Outlook ($’s in millions except per share amounts) Low High Low High Net Income $99.0 $105.0 $94.0 $98.0 Net Income per share $2.27 $2.41 $2.16 $2.25 Comparable Property RevPAR Growth 2.5% 3.5% 2.5% 3.5% Comparable Property EBITDA Margin Growth 40 bps 60 bps 0 bps 40 bps Adjusted EBITDA $171.0 $177.0 $171.0 $177.0 Adjusted FFO $109.0 $115.0 $109.0 $115.0 Adjusted FFO per share $2.38 $2.51 $2.38 $2.51
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