Hersha positions portfolio to achieve $200m EBITDA goal
 
Hersha positions portfolio to achieve $200m EBITDA goal
20 FEBRUARY 2019 8:42 AM

Hersha Hospitality Trust’s Neil Shah shares his company’s goals, strategy and hotel industry insights with HNN at the Americas Lodging Investment Summit.

LOS ANGELES—Hersha Hospitality Trust set a sizeable goal for itself to achieve by 2020: $200 million in adjusted earnings before interest, taxes, depreciation and amortization.

Neil Shah, president and COO of Hersha, sat with HNN during the recent Americas Lodging Investment Summit, to talk about his company’s strategy and progress toward that goal as well as how his company will manage its portfolio over the coming years.

Market insights
Hersha makes a long-term commitment to the markets in which it invests, Shah said. There are always ups and downs in the short term, and those are caused by supply, demand issues, shadow supply, the regulatory environment and convention calendars.

For the short term, the company is feeling positive about Miami and Key West, Florida, as the markets are experiencing post-hurricane and post-Zika recoveries, he said.

“We forget about that, but it had a very significant impact on Miami in 2016,” he said.

Miami’s convention center has also reopened after being closed for renovations for the past two and a half years, Shah said. As the convention center starts to get more traction and more bookings, he expects Miami to return to its peak conditions, similar to 2014 and 2015.

Key West is a small market, Shah said. There aren’t many hotels, and it’s difficult to get there because of airlift. The area received significant damage from the hurricane and was slower to recover, he added.

“Even after most of the hotels reopened there early last year, it was still a slow market to get people to come back to start driving down again from other parts of the Southeast,” he said.

However, the company saw that the market was getting back to its prior peak performances starting in December and January, he said.

Philadelphia, which is Hersha’s hometown, is setting up for the busiest year of the Pennsylvania Convention Center’s history, and the city should see some breakout demand for the next few years, Shah said.

Boston and Washington, D.C., will likely be challenging markets, Shah said. Boston has been a phenomenal market all cycle, but it’s difficult to keep growing at 5% to 7% every year. The city might be reaching the point where customers aren’t willing to pay that extra bit more, he said.

The two main challenges in Boston are a weaker convention calendar this year, which removes compression days, and new supply, he said.

“Boston’s a very hard market to build in, a heavily unionized market, very high cost of land and construction,” he said. “But a few deals finally got done, and they’re delivering right now. A few opened in late 2018 and we’ll have a couple more openings in 2019, which we think is going to make it a little bit harder to push rates, which we’ve been really successful in Boston over the last few years.”

New York had some “really tough years,” but last year was a solid recovery year, he said. Hersha expects New York to continue its moderate level of growth. There is new supply coming to the market, but it’s not nearly at the same level it was two to three years ago while demand continues to be high, he said.

Hersha has seen great growth in Los Angeles, northern California and Seattle all cycle, Shah said. The story there is less about supply given the high barriers to market. Instead, it’s about how far hoteliers can push it if they’ve already been growing at 5% to 10% a year, so that means they’ll likely become moderate growth markets, he said.

Industry opportunities and challenges
This cycle has been full of fits and starts, Shah said. The conditions in 2008 and 2009 were so devastating, but 2010 had a nice, sharp recovery. However, there was a big pullback in 2011 and 2012 and later again in 2015 and 2016. In 2018, Hersha’s stock price fluctuated by nearly 30% from bottom to top with little impact or change to its EBITDA outlook throughout the year, he said.

“Capital markets volatility is separate and distinct from hotel performance,” he said. “Now that said, volatility does create fear and it does create uncertainty for corporate meeting planners, for businesses looking to invest.”

While Hersha is always concerned about volatility and the effect it could have on the ground at its hotels, looking back at 2018, it was “a pretty solid year,” Shah said. The back half of the year started to fall off a little, but it had a good start and ended with around 3% growth for the full year, he said.

There are a couple more dark clouds in 2019 compared to last year, but there are some potential catalysts on the other side. Overall the year should be similar to 2018, he said.

In 2018, consensus on another potential recession pointed to 2020, but by the end of the year, much of the talk moved to the last half of 2019, Shah said. If there is a true kind of corporate-led recession, that would be concerning and would lead to weakness in business transient travel, he said. However, everything on the ground, such as locally negotiated rates with large companies in Silicon Valley, New York and Los Angeles, indicates the signs of the recession aren’t there yet.

“So we believe that what we’re seeing is much more capital markets volatility,” he said. “There is fear out there. But right now on the ground, the business environment still seems very solid.”

There are also a few factors in support of a continuing cycle, he said. The U.S. hotel industry is operating at its highest level of occupancy ever, and Hersha is operating in some markets with 92% and 93% occupancy. In that environment with decelerating supply in most of its markets, most of the company’s revenue-per-available-room growth is coming from rate, he said.

That will create better flow-through on the profits and on the margins of hotels, Shah said. But that won’t offset wage growth and some materials cost increases. However, companies with newly renovated assets in the right submarkets should be able to push rate and offset at least some of these cost increases.

“It’s early in the year, so we’re not yet ready to give our guidance for the year,” he said. “But where we sit today, and as we look back to the fourth quarter, which was a very solid quarter for most of our markets and most of our hotels, we’re feeling pretty good about the year ahead.”

Innovation in the industry
A key part to innovation in the hotel space is distribution, Shah said. Hotel owners care a lot about the cost of distribution, so hoteliers have ceded a lot of that innovation to online travel agencies and other tech startups. Although he can’t conceive of it fully yet, Shah said he’s looking for something that will allow hoteliers to own their own customers again.

Another area of innovation involves resorts, he said. Hersha has been investing in resorts and independent hotels where there’s a lot of ancillary spend by customers. The use of amenities that fit into the Internet of Things and similar technology will allow hoteliers to better connect with their guests and provide anticipatory services, he said.

“I think there’s a great opportunity for additional revenue from those kinds of innovations, but I also think that you can get real customer intimacy that way, more so than with frequent-stay programs,” he said.

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