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The hotel owner's second-quarter results were terrible, so why did the REIT rally? It's all about the future now.
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Shares of hotel landlord Hersha Hospitality Trust (HT +0.00%) rose as much as 20% in early trading on Aug. 6. Although the real estate investment trust didn't hold on to all of those gains, by roughly 2:30 p.m. EDT it was still higher by a hefty 15% or so. The big driver of the advance was the company's earnings release, which came out after the close on Aug. 5. But the headline numbers were pretty awful. Why were investors this upbeat?
The story here revolves around COVID-19 and the government's effort to contain the illness by shutting down non-essential businesses and asking residents to, basically, stay home as much as possible. That's bad for hotels, and Hersha's second-quarter results bear that out. For example, revenue fell nearly 90% in the second quarter of 2020 compared to the same period in 2019. Adjusted funds from operations (AFFO), which is like earnings for an industrial company, came in at a loss of $0.62 per share compared to a profit of $0.77 per share in the prior year. That's brutal, but bad news was pretty much expected based on the economic/pandemic backdrop in the second quarter. Basically, investors had already written the quarter off.
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What Wall Street wanted to get a handle on was what the future might look like. On that score, it seems Hersha provided an update with which investors were pleased. At this point the REIT has 33 of its 48 hotels open for business. By mid-September it expects to have all but four hotels reopened. Many of its properties are in destinations that people would normally drive to as opposed to flying to, which is a net positive. Although a cherry-picked list, the company highlighted that some of its properties are seeing occupancy rates between 60% and 95%. That's pretty good, all things considered, and shows that well-located hotel properties are still in high demand, a fact that bodes well for the future. In addition, Hersha has worked with its hotel operators to reduce costs, minimizing the company's spending more than it had originally expected at the start of the quarter. Times are tough today, but Hersha appears to be muddling through well enough.
Investors were obviously pleased with Hersha's second-quarter update, the key being that things appear to be getting better. That said, a lot still depends on the path that COVID-19 takes, which means investors should expect continued volatility here -- likely driven by coronavirus news. And with the recent rise in coronavirus cases, it looks like it's probably too soon to call an all clear here.