Hersha Trust takes an opportunistic approach to hotel deals

NEW YORK — Hersha Hospitality Trust took advantage of stiff competition for hotel deals during the pandemic to sell 13 of its non-essential properties.

On the acquisition side, “it’s just hard to find the perfect deal right now,” Neil Shah, president and chief operating officer of the hotel property investment trust, said in a video interview with the NYU International Hospitality Industry Investment Conference.

Over the next six months, Shah said he expects the company to continue to be opportunistic in pursuing acquisitions and sales.

“Never say never,” he said. “You never know when an opportunity arises that can actually achieve growth rates like the rest of our portfolio and provide significant cash flow to offset the risk of some of these other results.”

Over the past two years, the hospitality industry has moved rapidly from “shock and awe” in 2020 when hoteliers had to make major budget cuts to their businesses, Shah said. This included closing hotels – although many hotels in Hersha remained open to serve the medical community – or reducing operations to a few staff people running an entire hotel in a major market.

“It was a low point to start with, true zero-based budgeting,” he said.

The strong recovery over the past year, particularly leisure travel, has forced the company to quickly re-staff to provide services in a challenging environment, Shah said. Traditional business travel markets have been slower to recover, he said, noting that hotels in some of those markets may be cash flow positive but still 30% to 40% below performance. before the pandemic.

2021 has been a bit difficult both in terms of performance – affecting the public company side – as well as in capital markets, he said. Hersha maintains a close relationship with its hotel operations platform, HHM, which enables it to be responsive in the field and to make significant and rapid changes.

“We were able to really create value there by getting cash flow,” he said.

Decisions made in 2020 were about people, and decisions made in 2021 were about assets, Shah said. Instead of raising equity, diluting shareholder value, or raising very expensive debt financing, the REIT reassessed its portfolio. It sold the oldest hotels in each of its geographic markets.

“We weren’t betting on any particular geographic area within our portfolio, but we decided to eliminate our portfolio and then put our resources into our newest and fastest growing assets,” he said. declared.

by Hersha most recent sales came in April with the disposal of a portfolio of seven select non-essential, urban and serviced properties outside of New York City for gross proceeds of $505 million.

Hersha has its origins as an owner/operator, Shah said. Over the past 30 to 35 years, the company has evolved into a management company and a private development company. In 1999, she sponsored a REIT – and the management company, HHM, and the REIT, Hersha, grew side by side for years.

HHM has gone through several private equity capitalizations over the past 10 years, demonstrating the value of management companies as an asset owner and manager, he said.

On June 7, HHM announced it would acquire third-party manager Urgo Hotels.

Much of the consolidation of hotel management companies is because private equity has become a major player in hotel transactions over the past five to 10 years, Shah said. Often when private equity buys a hotel, investors are looking to create value through renovations or an operational turnaround.

“They like to get their hands dirty and really work on an asset-level asset,” he said.

Private equity owners and many regional owner/operators have moved to the franchise model instead of the brand management model, he said. This creates a real demand for third-party management companies that can help investors create value, leading to growth in the number of management companies over the same period.

Over the past five to seven years, there’s been a lot of consolidation among existing management companies because there’s a scale advantage in operating hotels, Shah said. There are diminishing returns to scale in executing service levels and differentiating brand experiences, but there are economies of scale in purchasing, insurance, accident compensation work, data and technology expenses, and investments.

Consumer-facing innovations require more and more bandwidth from carriers, Shah said.

It was also clearly recognized that third-party franchise operators can often generate much better profitability and very similar customer experiences to branded operators, he said.

“You’re probably going to continue to see the growth of franchisees across America,” he said. “You’re going to continue to see new management companies emerge, grow and prosper, but I think you’ll also continue to see some consolidation among the top 10 managers across the country, because there’s an added benefit to moving into the operating company.

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