The micro-cap region of the market is admittedly more speculative than most, but it can also offer some interesting opportunities for the value investor—that is if you are prepared to take on the extra risk.


Supertel Hospitality is without a doubt highly speculative

Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) is without a doubt highly speculative. The company has been in consistent decline since 2007 and its stock price is now at its lowest point since, well, ever. In addition, during August the company undertook an 8 for 1 reverse split, so at pre-split prices the stock is currently trading at $0.687 cents per share, this could immediately put some investors off.

Furthermore, the company has not made a profit, or been cash flow positive since 2008. So, what’s the appeal?

Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) is a self-administered real estate investment trust, specializing in the ownership of select-service hotels. Currently, Supertel has a market cap of 15.9 million, with only 2.9 million shares in issue. However, the company is trading at a price-to-book value of 0.39 and the net asset value per share stands at $14.1. Moreover, debt is relatively low for a REIT at only 51 percent of assets, although on a debt-to-equity basis the ratio jumps to 240 percent.

Total debt has been reduced by 7 percent during the past six months and the weighted average interest rate was 5.6 percent at the close of the second quarter – a 100bps improvement on the 6.4 percent average for the same period last year.

What’s more, Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) is in the process of completely transforming its operations via disposals, acquisitions and renovations, converting the property portfolio from being value-focused, towards premium branding.

During the second quarter, the company sold eight non-core hotels and a further two after the quarter closed. Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) also re-branded four core hotels, which disrupted operations and caused revenue to decline 6.7 percent year-on-year per available room (RevPAR). Excluding these hotel changes, RevPAR only declined 0.3 percent year-on-year. Overall for the second quarter, revenues declined 3.4 percent year-on-year.

Supertel is working to create value elsewhere through acquisitions

Nonetheless, Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) is working to create value elsewhere through acquisitions. The firm signed purchase agreements to acquire six premium branded upscale hotels for $60.8 million, and two premium upper midscale hotels for $21.25 million, following the close of the quarter. These new acquisitions are set to add an additional 744 rooms to the company’s existing portfolio of 6,422 rooms across 21 states—a 12 percent increase.

The drive towards premium branding looks to be a solid move for the company. Indeed, based on selling prices alone, the company sold its eight non-core economy hotels for an average price of $12,500 per room, while the new eight premium hotels cost an average of $110,282 per room. What’s more, according to the company’s own data from the last quarter, upper midscale premium rooms commanded a 38 percent per-night revenue premium over the economy rooms. So overall, the new acquisitions should lead to a significant boost to the company’s bottom line, as long as Supertel Hospitality can keep costs down.

Note: I should mention that Supertel has financed the hotels and intends to buy back its Series A and Series B preferred stock through a $115 million, underwritten public offering of 16,700,000 shares of its common stock, which is currently underway.

Supertel Hospitality looks to be a very risky

All in all, Supertel Hospitality Inc (NASDAQ:SPPR) (NASDAQ:SPPRP) looks to be a very risky bet but one that might be worth taking as the company makes a move into the premium hotel market.