It is axiomatic that insiders know their company well and keep close tabs on investment opportunities in the company they manage. Investors also take keen notice when there is evidence of strong insider-buying in a company, especially when hundreds of thousands of shares are purchased in an abbreviated time frame during a crisis. This has definitely been the case for Hersha Hospitality trust (NYSE:HT) recently, a REIT specializing in luxury and upscale hotels.
The global COVID-19 pandemic has had a terrible effect on the hospitality and tourism industry. Lobbyists for the industry have said that its “financial picture was worse than the Great Recession and post-Sept. 11 combined” (Pandemic Threatens Long-Term Job Security After Hospitality Industry Layoffs, by Laura Benshoff, September 29, 2020)
Charts of unemployment from the Federal Reserve bear this out.
It is estimated that 50% of all travel-related jobs could be lost by this December, 2020. (See: Hotels Face a Dire Winter Without More Aid From Congress, by Elise Schoening & Michael J Shapiro, October 7, 2020)
Six months have passed since the hospitality crash. Unemployment in the sector has been reduced by half (as of October 1,2020 ). Yet unemployment still hovers around 19%, higher than at any time for hospitality in the last 20 years (including 9/11). The previous high for unemployment was 14% at the height of the Financial Crisis (see chart below).
Nevertheless, a nascent recovery is now in place, and the hospitality industry is emerging from the downturn. It behooves investors to look for skilled management who has been here before, and who are now leading their company out of crisis. Hersha Hospitality is such a one.
Hersha Hospitality Trust (HT) is a self-advised real estate investment trust [REIT]. It has been a publicly-traded company for 22 years, survived 3 recessions, and grew stronger after each one. Its business is luxury and lifestyle hotels in key urban “gateway” markets and in coastal, domestic resort areas.
The company has 48 hotels (7,644 rooms) located in New York, Washington, DC, Boston, Philadelphia, South Florida, and select markets on the West Coast. The West Coast hotels are in Seattle, San Francisco Bay, Silicon Valley, Santa Barbara, Santa Monica, and San Diego, CA. (See: Investor Relations, Hersha Facts).
Thirty-nine of their hotels are wholly-owned. These hotels are unencumbered of ground leases, are newly-built or recently refurbished, and require very little capital expenditures in the immediate future. Only 4 of their hotels do a meaningful level of group business, and remain closed because of this.
Approximately 25% of Hersha’s EBITDA generation is from its leisure-oriented assets in drive-to destinations. Occupancy rates at these hotels have steadily risen since the April lows. Its drive-to hotels had a 72% occupancy rate over the Labor Day Weekend, 2020.
Under normal conditions these hotels have extremely high occupancy rates (85-90%). If asset sales were necessary (because of the COVID Pandemic extending longer than expected), management estimates that discounted properties would be sold for no less than 80-85% of pre-COVID levels. [See: Hersha Hospitality Trust (HT) CEO Jay Shah on Q2 2020 Results – Earnings Call Transcript, Q&A, Answer to Question from Michael Bellisario (Baird), August 6, 2020].
On February 25, 2020, Hersha announced a binding sales contract for two of its hotels and two unconsolidated joint ventures. The purpose of the sale was to reduce debt by $97 million and add cash to the balance sheet. The proposed sale included the Blue Moon Hotel on Miami Beach, the Duane Street Hotel in downtown New York City, and an exit from a 50% ownership in two South Boston hotels: Courtyard South Boston and Holiday Inn Express South Boston.
At the August 6, 2020 Earnings call, CEO Jay Shah updated the negotiations on this sale to include a new offer of a 10% discount to the prospective buyers, leaving a net $70 million profit for Hersha from the asset sale, while still reducing $97 million in long-term debt. If the contract is successfully re-negotiated, he expects it to finalize in Q4’2020, or Q1’2021. The effect on the balance sheet (and share price) would be immediate and salutary.
INSIDER BUYS AND SELLS
The purpose of this article is to assess the symmetry in charts and insider buying patterns for Hersha Hospitality during the periods of 2007-14, and compare those stats to buying activity in 2020.
The insider trading data is taken directly from the SEC’s website for Form-4 filings , and is public record.
Because Hersha has had a long-standing management team over the last 2 decades, we will look at what they did the previous time Hersha fell on difficult times, the outcome of their inside buying and sales back then, and project the potential investment opportunity for investors this time around.
Although the oranges and apples may seem different here, there are common threads:
- An experienced group of officers and managers in the same company
- Buying and selling shares in their company, Hersha Hospitality
- During the worst 2 financial crises of the 21st century.
2018-2020 (11.2.18 – Present)
Year to date through July 9, 2020, Hersha insiders (management and directors) have bought 434,729 shares at an average cost of $8.27/ share. There have been NO SALES.
Preceding 2020, from 11/2/2018 to 12/9/2019, insiders bought 74,937 shares, at an average cost of $14.78.
During this same 2 year time period, there have been just 3 small sales by a single director, Thomas J Hutchinson, for 25,000 shares, at an average cost of $15.47.
2007-2014 (1.21.2007 to 10.19.2010)
From 11/21/2007 to 9/28/2010 (approximately 3 years), insiders bought 549,177 shares at an average cost of $3.39/share.
During the Financial Crisis there was just one insider sale on 9/9/2009, for 1,667 shares. Insider sales did not begin in earnest until 9/20/2010, a full one and a half years after the depths of the Financial Crisis had passed, and the stock had already doubled. After that point in time, sales were frequent into 12/30/2014.
Company officers sold 3,065,386 shares at an average price of $6.34/share, for an 87.11% return on their investment.
Millions of shares were were also purchased during the Financial Crisis by one Eduardo S Elsztain, an Argentine real estate developer, who became a Director and 10% owner.
From 11/5/2009 to 10/19/2010 (spanning a little less than one year), his fund bought 8,386,194 shares at an average cost of $3.98/share; and by 9/4/2012 had sold 5,123,712 shares at an average price of $5.68, for a 44% return.
For most of the last 20 years, the price of Hersha Hospitality has cycled between $13 to $16/share (see chart below), and with a nice dividend too (from 2015-20). This dividend was recently suspended because of the Pandemic, but should be reinstated once profitability returns.
In both 2009 and 2020, the adjusted stock price fell to the $2 mark.
In each crisis, management pursued a similar pattern in buying.
At the onset of the recession, when the stock broke below its customary price range, insiders increased their purchases. When the price bottomed and management was more assured of the business prospects ahead, they bought in great size.
This appears to be the point where we are at now. Only 6 months into 2020, many of the same insiders who were buying in 2009 have already bought hundreds of thousand of shares.
As mentioned above, for all of 2020, management has purchased 434,729 shares at an average cost of $8.27/ share, and there have been NO SALES.
Investors in Hersha (HT) have experienced a lot of volatility in price discovery this year, albeit with a steady rise of higher-lows since the bottom in March, 2020 (see chart below).
The investment thesis here is to buy along with the insiders, under $6, and to hold until Hersha once again rises to its traditional range of $13 to $16/share. As I write, the shares sit at $5.12, down 63% on the year (10.14.2020).
Hersha rallied 75% the week preceding its last earnings announcement on August 6, 2020. Q3 earnings are to be reported on Monday, November 9, 2020, three weeks from now.
A prudent strategy is to buy shares in 25 cent increments and dollar-cost average, gradually building a position over the next three weeks. In specific, that’s buys at $5.25, $5.50, and $5.75; and also down to $5.00, $4.75, and $4.50 (the August 3 lows). It is very difficult to justify a stop-loss here. Hersha (HT) is a deeply-discounted hotel chain with billions ($) in unencumbered property assets. It has already fallen -33% from its early August highs.
The primary thrust of Hersha’s (HT) recoveries in 2002-04 and 2009-10 spanned 16 months (see below). Each time, the surge began in November in the year of the low, and topped-out at $16/share. The surge in prices followed a long period of consolidation beforehand.
Hospitality investing tends to be of a cyclical nature, with investor interest diminishing before recessions and rising swiftly in the recovery afterwards. The heavy insider buying at Hersha in 2020 is a buy recommendation from those who know their company best. When insiders buy with such size and conviction, it is a compelling argument to join them.
Disclosure: I am/we are long HT, PK, RHP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.