Hotel owner Hersha Hospitality Trust announced results for the first quarter, and despite losses, CEO Jay H. Shah is confident in the company’s ability to navigate through COVID-19 and the resulting economic crisis.
First Quarter 2020 Financial Results
Net loss applicable to common shareholders was approximately ($29.1 million), or (76 cents) per diluted common share, in the first quarter 2020, compared to net loss applicable to common shareholders of approximately ($13 million), or (34 cents) per diluted common share, in the first quarter 2019. In spite of a strong start, the decrease in first quarter 2020 net income and net income per diluted common share is largely due to the unprecedented impact on the travel industry from the COVID-19 pandemic.
Adjusted funds from operations in the first quarter 2020 decreased $8.7 million, or 138.1 percent, to ($2.4 million), compared to $6.3 million in the first quarter 2019. AFFO per diluted common share and operating partnership unit in the first quarter 2020 was (6 cents).
Jay H. Shah, Hersha’s CEO, put the blame squarely on the COVID-19 pandemic’s catastrophic impact on the lodging industry.
“The first two months of 2020 exceeded our high expectations for our portfolio, generating strong incremental [earnings before interest, taxes, depreciation and amortization] from the holistic renovations we undertook over the last few years, led by our two largest EBITDA-producing assets in South Florida,” he said. “January and February gave us a glimpse of the profitability of our newly aligned comparable portfolio, which grew RevPAR by 3.9 percent during that period. However, in March, the novel coronavirus outbreak led to a near immediate shutdown in travel, resulting in an unimaginable impact to the lodging sector. The deep and pervasive effects led us to immediately pivot to a near-term operating strategy of curbing expenses and boosting our liquidity.”
Hersha, in alignment with its independent third-party management partners, implemented significant on property cost cuts in real time, Shah said.
“We also made extensive corporate cost cuts expected to yield approximately 25 percent in savings in [Selling, General and Administrative] expenses on an annualized basis for 2020. At the hotel level, the suspension of operations at 21 of our 48 hotels has resulted in an 80 percent reduction of on-property labor costs. Employing a select-service model at the majority of our assets allows us to efficiently operate our hotels with a skeleton crew, leading to a significant reduction in expenses while also generating revenue through unique channels with medical personnel, government agencies, emergency first responders and law enforcement.”
According to Shah, Hersha reached an agreement with its bank group to amend the company’s existing bank credit facility to access an additional $100 million on its $250 million senior revolving credit facility.
“Our amendment also includes a financial covenant holiday through March 31, 2021, yielding operational and financial flexibility for the portfolio through June 30, 2021. This liquidity, in addition to the revocation and suspension of our common and preferred dividends, and our expense mitigation strategies we have implemented, has significantly boosted our liquidity profile,” he said. “Despite uncertainty for the lodging industry, we are confident in our ability to navigate through this crisis to the other side with a more efficiently operated portfolio in the most valuable, sought-after real estate markets in the country and we remain ready to welcome guests when demand for travel re-emerges across the coming months.”
First Quarter 2020 Operating Results
The company’s portfolio markets were significantly hampered by shelter-in-place orders and travel bans enacted during March and led to double-digit RevPAR loss across its clusters, excluding South Florida.
Revenue per available room at the company's 38 comparable hotels decreased 22.4 percent to $127.25 in the first quarter 2020. The company’s average daily rate for the comparable hotel portfolio decreased 0.8 percent to $206.38, while occupancy fell 1,714 basis points to 61.7 percent. Occupancy-driven RevPAR loss for the quarter resulted in EBITDA margin loss of 840 basis points to 17.2 percent.
On a regional basis, the South Florida portfolio was Hersha’s best performing market during the first quarter with RevPAR loss of 1.2 percent, highlighted by the Cadillac Hotel & Beach Club in Miami Beach, which generated 11.7 percent RevPAR growth for the quarter. The hotel was able to capture significant rate growth during January and February before the impact on travel from the COVID-19 pandemic exacerbated in March, which resulted in 17.5 percent ADR growth to $327.64 during the first quarter.
The company successfully amended its existing bank credit facility and borrowing base of assets to access an additional $100 million on the company’s $250 million senior revolving line of credit without any changes to the interest rate on the facility. The amendment also resulted in the company obtaining waivers on all financial covenants through March 31, 2021, yielding additional operational and financial flexibility. The company’s next financial covenant test will take place on June 30, 2021.
The company completed the first quarter 2020 with approximately $23.9 million of cash and cash equivalents. As of March 31, 2020, 87 percent 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 3.87 percent and a weighted average life-to-maturity of approximately 3.5 years.
As a part of plans to preserve cash, the company suspended dividend distribution on its common shares, 6.875 percent Series C Cumulative Redeemable Preferred Shares, 6.50 percent Series D Cumulative Redeemable Preferred Shares and 6.50 percent Series E Cumulative Redeemable Preferred Shares. Unpaid dividends on Hersha’s preferred shares shall accrue without interest.
The company will continue to review taxable income on a regular basis and take measures, if necessary, to ensure that it continues to meet the minimum distribution requirements to maintain its status as a real estate investment trust.
Full-Year 2020 Outlook
Due to the uncertainty surrounding the lodging industry stemming from the COVID-19 pandemic, the company has suspended its full-year 2020 guidance.