When it comes to hotels, we like to insulate ourselves from the natural volatility with preferred shares, suggests income expert Rida Morwa, editor of High Dividend Opportunities.
The preferreds pay a fixed dividend that has to be paid in full before the common shares can get a penny. Furthermore, these dividends are cumulative, meaning that if they are suspended due to a Black Swan like COVID, the amount owed accumulates and then is paid out when the company recovers.
Hersha Hospitality Trust (HT) is a hotel REIT that has three preferred shares outstanding:
1. Hersha Hospitality Trust, 6.50% Series E Cumulative Redeemable Preferred Shares (HT.PE) — yielding 6.6%
2. Hersha Hospitality Trust, 6.50% Series D Cumulative Redeemable Preferred Shares (HT.PD) — yielding 6.6%
3. Hersha Hospitality Trust, 6.875% Series C Cumulative Redeemable Preferred Shares (HT.PC) — yielding 6.9%
Remarkably, these preferred shares are still trading below par. When one remembers 2020, it has kept many investors away, but we need to look forward not backward for these investments. Let's talk about why.
The hotel market was hit extraordinarily hard by COVID. The recovery has been slow as travel restrictions, the Delta Variant, and businesses relying on virtual meetings continued to be headwinds through the summer.
These headwinds are dissipating. Fully vaccinated travelers can start traveling since the Biden administration recently lifted its travel ban on 33 countries, including the European Union, China, Iran, South Africa, Brazil, and India. Furthermore, the number of Delta cases is on a clear downward trend.
Plus, acquisition activity among hotels is starting to pick up. RLJ Lodging Trust (RLJ), another of our hotel preferred holdings, recently amended its credit facility to increase the amount that could be used for acquisitions from $300 to $450 million. Hyatt Hotels (H) is spending $2.7 billion to acquire Apple Leisure Group. Condor Hospitality Trust (CDOR) is having its entire portfolio acquired by Blackstone (BX).
Large money is starting to move into hotels, and we can expect the pace to speed up. HT itself is a potential takeover target, but even if not, big money moving in the hotel sector is bullish for their mid to long-term outlook.
HT's financials are improving one step at a time. They were able to resume preferred dividends and are cash flow positive at the property level. With each step forward, the risk to the preferred shares decreases. Buy now while they are still under par.