Equity Fund Buys Hersha Hospitality Trust: Hotel REITs Go Wild

Wall Street reporters have a phrase to describe stocks that rise when another stock of the same sector reports excellent news. They write, "Other stocks rose in sympathy." These so-called sympathy stocks don't have any of their own news to propel them higher, but investors surmise that if one stock of a sector reports good news, others of the same ilk may soon follow suit. The result is investors buying shares and pushing the sympathy stock prices higher.

This is especially true when a company is acquired by or merges with another company. Merger fever takes over, and investors then speculate on which companies from the same sector may be next to be purchased at a price well above present levels.

An entire real estate investment trust (REIT) subsector recently rose in sympathy when one of its lower-priced companies was acquired at a substantial premium.

Hersha Hospitality Trust HT is a Harrisburg, Pennsylvania-based hotel REIT that owns 25 luxury and lifestyle hotels with 3,811 rooms in larger cities across the U.S.  

On Aug. 28, Hersha Hospitality Trust announced it will merge with KSL Capital Partners. Under the terms of the agreement, KSL Capital Partners will acquire all outstanding common shares of Hersha Hospitality for $10 per share in an all-cash transaction of $1.4 billion. This is a 60% premium over Hersha Hospitality's closing price on Aug. 25.

KSL Capital Partners is a private equity fund that invests in the hospitality, recreation, real estate and travel service sectors. It was founded and originally called KSL Recreation in 1992. KSL Capital Partners was formed in 2005, and since then it has invested in over 150 businesses across North America, Europe, Asia and Australia.

Upon announcing the merger, Hersha Hospitality's Executive Chairman Jay H. Shah said, "This transaction provides our shareholders with immediate and certain value at a substantial premium to our public valuation."

Hersha Hospitality stock stormed up 55.89% on the news and closed at $9.79, with most of that gain coming right at the opening bell.  The news triggered buying on several other hotel REITs as well. At the end of the day, five of the best 12 REIT performances were hotel REITs. Take a look at three of them.

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Braemar Hotels & Resorts Inc. BHR is a Dallas-based REIT that invests in luxury hotels and resorts across the U.S. and in Puerto Rico. Braemar Hotels & Resorts now has investments in 16 properties with 4,184 rooms.

On Aug. 2, Braemar Hotels & Resorts reported mixed second-quarter operating results. Funds from operations (FFO) of $0.20 per share was in line with estimates, but 45.95% below FFO of $0.37 per share in the second quarter of 2022. However, revenue of $186.71 million beat the consensus estimate of $173.87 million and was a 6.76% increase over revenue of $174.89 million in the second quarter of 2022.

On Aug. 14, B. Riley Securities analyst Bryan Maher downgraded Braemar Hotels & Resorts from Buy to Neutral and lowered the price target from $7 to $3.50. 

"As it relates to Braemar's luxury resort hotels, we have been writing about RevPAR (revenue per available room) weakening for several quarters," Maher noted. 

Following the news on Hersha Hospitality, Braemar Hotels soared 15.57% in one day.

Ashford Hospitality Trust Inc. AHT is another Dallas-based hotel REIT that owns 100 hotels with 22,316 rooms across 26 states. It focuses on upscale full-service and select-service hotels. Ashford Hospitality Trust is externally advised by Ashford Inc. AINC.

Ashford Hospitality was one of the worst-performing REITs throughout 2022, with a total return of negative 56.73%. Year to date it has continued to perform poorly, with a total return of negative 30.72%.

On July 10, Ashford Hospitality announced it will surrender ownership of 19 hotels across the U.S. as a means to halt worsening debt. Ashford Hospitality ceased making mortgage payments on two hotels in Newark, New Jersey, one in Oakland, California, and one in Walnut Creek, California. Ashford Hospitality estimates it will save $700 million by not paying these mortgages and then paying down debt on other mortgages. 

But on Aug. 2, Ashford Hospitality announced second-quarter FFO of $0.78, beating the consensus estimates by $0.31. Revenue of $375.75 million also beat the Street estimates by $5.72 million and was 7.9% higher than revenue during the second quarter of 2022. RevPAR for all hotels was up 6.7% from the second quarter of 2022 to $144.25.

Following Hersha Hospitality's announcement, Ashford Hospitality was up 10.29% on the day.

Chatham Lodging Trust CLDT is a West Palm Beach, Florida-based hotel REIT that owns 39 upscale extended-stay hotels with 5,914 rooms across 16 states and Washington, D.C. Its portfolio includes Residence Inn by Marriott and Homewood Suites by Hilton.

On Aug. 2, Chatham Lodging Trust reported its second-quarter operating results. Adjusted funds from operations (AFFO) of $0.43 per share beat the estimate of $0.39 by 10.26% and was above AFFO of $0.41 per share from the second quarter of 2022. Revenue of $84.48 million beat the estimate of $84.06 and was 3.32% above revenue of $81.76 million in the second quarter of 2022. RevPar has improved from $157 to $189 over the past seven months.

Despite a year-to-date loss of over 13%, on the heels of Hersha Hospitality's announcement, Chatham Lodging rose 6.19% on the day.

Other Hotel REITs with notable sympathy price changes were Summit Hotel Properties Inc. INN, up 6.07%, Xenia Hotels & Resorts Inc. XHR, up 5.75%, and Diamondrock Hospitality Co. DRH, up 5.2%.

Hotel REITs have struggled since early 2020 when COVID-19 first hit the U.S. The growing popularity of Airbnb, Vrbo and other short-term rental properties have put a dent in hotel REIT earnings, especially in a post-COVID era of consumer wariness.

On July 20, analyst Tylor Batory of Oppenheimer & Co. Inc. downgraded Chatham Lodging Trust, along with Braemar Hotels & Resorts and Hersha Hospitality Trust, from Outperform to Perform.

But apparently, merger fever has taken over with the acquisition of Hersha Hospitality, and investors seem to be disregarding the analysts and betting that other hotel REITs are grossly undervalued and primed for lucrative takeovers as well. If nothing else, those stocks clearly outperformed for one day.

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