PHILADELPHIA—Lodging REIT Hersha Hospitality Trust (HHT) inked an agreement to sell a portfolio of non-core hotel assets to an affiliate of Blackstone Real Estate Advisors, taking HHT out of two suburban markets in New York and Philadelphia, as well as markets in Connecticut and Rhode Island.
The proceeds from the 16-property deal are anticipated at $217 million (approximately $125,000 per key), part of which would be used to pay down some $79-million in debt.
The properties include flags from Courtyard by Marriott, Hampton Inn, Holiday Inn Express, Residence Inn by Marriott, Hyatt House, TownePlace Suites by Marriott and the independent Inn at Wilmington in Delaware.
The hotels, which have been managed by HHM—the REIT’s management arm—are being sold unencumbered.
Removal of the properties leaves the REIT with 48 hotels.
“Between 2003 and 2008 we were very focused on major metropolitan markets and we were looking for opportunities both in central business districts and infill locations surrounding those markets,” said HHT President/COO Neil Shah. “We acquired assets in those markets, both in the CBD and first-ring suburbs right outside of those marketplaces and that’s what we’ve been divesting.”
Shah said the REIT’s focus over the past several years has been trained on the upscale transient segment.
“We’re looking at assets that could be classified as upscale, upper-upscale, luxury, even. But we’re focused on those assets that are smaller hotels, that are more focused on the rooms business rather than meetings or ancillary sources of revenue. We’re looking for transient guests rather than group guests.
“We’ve been focused on this strategy over the past five years or so. It’s just been more refined and with this transaction the remaining portfolio now is kind of pure play in those markets and in those asset classes,” said Shah.
Once the transaction closes, expected in first quarter, HHT will be “more focused” on six markets: New York City, Washington, D.C., Boston, Philadelphia, Miami “and what we’re calling the West Coast—it’s primarily been California and in Los Angeles and San Diego, where our most recent acquisitions have been,” said Shah. “We also have assets in Northern California as well.”
He added the REIT would continue to develop, acquire and asset manage properties in major city centers and gateway markets that not only have multiple demand generators from various commercial businesses but also have tourism and other demand generators.
“We’ve generally focused on markets that had very heavy business transient footprints so we focused on major, urban markets. We’ve recently been doing some work in markets that offer a leisure transient mix as well,” said Shah.
In a previous portfolio transaction, HHT sold 20 hotels to Starwood Capital Group and Shah said the current deal with Blackstone “was the next step in that process” of divesting.
The COO stressed the properties are in “very solid” markets, “but they are suburban markets. We are focusing our strategy moving forward on the central business districts [historically offering higher growth due to high barriers to entry as well as greater numbers of inbound international travelers]of these major markets.”
He noted, for example, the Holiday Inn Express in Hauppauge, NY.
“Long Island is a solid market but it is much more of a suburban office market than it is a true kind of central business district attracting gateway visitors from around the world. With this transaction, we’re exiting the Long Island market completely,” he said.
Shah said HHT expects to redeploy the capital raised through the transaction in the CBDs of its target six markets. “We’ll be getting back $135 million in cash proceeds,” he said.
HHT spoke to a variety of potential buyers for the portfolio during the past year; however, Blackstone eventually got the nod based on its existing relationship with HHT. “They were able to get a head start on the rest of the interested bidders. They were able to show us across the summer they were not only very interested in the hotels, but they were the quickest to get out there and study each hotel, visit and tour and do the work. And ultimately they gave us the price we were looking for as well as certainty around the process and the time frame for closing the transaction,” said Shah.
HHT also has been doing one-offs on non-core properties. Most recent was the sale for $8.5 million ($66,000 per key) to New York-based investment firm Ayer Capital Advisors and The Wankawala Organization, a hotel owner and management company, of the 127-room Holiday Inn Express that HHT acquired in June 2008 near Andrews Air Force Base in Camp Springs, MD.
“Where there’s kind of unique local market attributes to a particular asset or a deep turnaround story that requires local market expertise, we usually will discuss it with existing owners and operators in those market places. Maryland was an example of that,” said Shah.
The executive noted in divesting the properties the REIT has been assessing the best avenue for a hotel’s future success even as it lets go.
“Some assets that we’re selling are assets that have strong cash flow, strong market position but they’re just not strategic for us today, but they’re still operating and performing at strong levels. And those are very attractive to a financial buyer like a private equity group because it can acquire the assets, put leverage on, get CMBS financing in order to really boost their returns pretty significantly. But on a turnaround story with an asset that you really have to reposition and turn the needle on, you can’t get the same kind of financial leverage on those assets and that’s what will usually lead those assets to be more attractive to an owner/operator or a regional group.”
Heading into 2014, Shah said the REIT is hopeful to redeploy some of the proceeds raised from the transaction in new acquisition opportunities in Miami and Los Angeles. “That’s one of our prime objectives,” he said. “We’re very focused on trying to expand our presence in those two markets because we’re just building out our clusters…those two markets continue to be the highest growth markets in the country for the coming couple of years,” he said.
Also on the REIT’s radar in the coming year is continued internal growth, said Shah. “We have a lot of assets in our portfolio that recently went through major renovations or repositionings or they’re recently built and just opened, like the Hyatt Union Square (New York). We see a big opportunity in focusing on our existing assets and we believe we if we can put in that kind of effort and time that we should be able to grow performance in those assets at a rate at least 20%, 30% higher than the given markets in which they operate…I think this transaction strategically helps us refine the portfolio,” said Shah.