NEW YORK — Hersha Hospitality Trust has taken advantage of the high competition for hotel deals during the pandemic to sell off 13 of its non-core properties.
On the acquisition side, “it’s just hard to find that perfect deal right now,” said Neil Shah, president and chief operating officer for the hotel real estate investment trust, during a video interview at the NYU International Hospitality Industry Investment Conference.
Over the next six months, Shah said he expects the company will continue to be opportunistic in pursuit of both acquisitions and sales.
“Never say never,” he said. “You just never know when an opportunity comes that that can actually achieve growth rates like the rest of our portfolio and provide meaningful cash flow to offset the risk of some of these other outcomes.”
Hotel Recovery
Over the past two years, the hotel industry quickly transitioned from the “shock and awe” in 2020 when hoteliers had to make major budget cuts across their companies, Shah said. That included closing hotels — although many of Hersha’s hotels remained open to serve the medical community — or reducing operations to a few people on staff running an entire hotel in a major market.
“It was quite a bottom to start from, truly zero-based budgeting,” he said.
The strong recovery in the past year, particularly of leisure travel, has required the company to quickly staff back up to provide services in a tough environment, Shah said. The traditional business travel markets have been slower to recover, he said, noting hotels in some of those markets might be cash-flow positive but still 30% to 40% below pre-pandemic performance.
2021 was a bit of a slog both in terms of performance — affecting the public company side — as well as the capital markets, he said. Hersha has a close relationship with its hotel operating platform, HHM, allowing it to be responsive on the ground and make big, quick changes.
“We were able to really create some value there by getting some cash flow going,” he said.
The decisions made in 2020 were about people, and the decisions made in 2021 were about assets, Shah said. Instead of raising equity, diluting shareholder value or raising a lot expensive debt financing, the REIT reevaluated its portfolio. It sold the oldest hotels in each of its geographic markets.
“We weren’t making a bet on any particular geography within our portfolio, but we decided to cull our portfolio and then put our resources into our newest and highest-growth-profile assets,” he said.
Hersha’s most recent sales came in April with the disposition of a portfolio of seven non-core, urban, select-service properties outside of New York for gross proceeds of $505 million.
Operator Consolidation
Hersha has its origins as an owner/operator, Shah said. Over the past 30 to 35 years, the company morphed into a management company and a private development company. In 1999, it sponsored a REIT — and the management company, HHM, and 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 both an owner and asset manager, he said.
On June 7, HHM announced it would acquire third-party manager Urgo Hotels.
Much of the consolidation among hotel management companies is due to private equity becoming a major player in hotel deals 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 through an operational turnaround.
“They like to get their hands dirty and really work on an asset at the asset level,” he said.
Private equity owners and many regional owner/operators have moved toward the franchisee model instead of the brand-managed model, he said. That creates a real demand for third-party management companies that can help investors create value, leading to the growth in the number of management companies across the same time 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’s some diminishing returns to scale in regard to executing service levels and differentiating brand experiences, but there’s scale efficiencies in purchasing, insurance, workman’s compensation, data and tech spending as well as investing.
Consumer-facing innovations increasingly require more bandwidth from operators, Shah said.
There’s also been a clear acknowledgment that third-party franchisee operators can often drive much better profitability and very similar guest experiences as brand operators, he said.
“You’re going to probably continue to see franchisee growth across America,” he said. “You’re going to continue to see new management companies come out and grow and prosper, but I think you’ll also continue to see some consolidation in the top 10 or so managers across the country because there is an added advantage to scale in the operating business.”