Hersha: portfolio sale largest in REIT's history
Aug 22, 2011
PHILADELPHIA—Hersha Hospitality Trust entered into an agreement to sell 18 hotels to Starwood Capital for US$155 million—the most hotels the real-estate investment trust has ever sold at one time.
The deal is right in line with most transaction experts’ expectations for the remainder of 2011—portfolio sales will lead the transactions market recovery. Panelists at the third annual Hotel Data Conference in Nashville, Tennessee, earlier this month predicted more portfolio sales with buyers, especially REITs, broadening their interest to secondary and tertiary markets.
The 18 hotels transacted with Starwood Capital are all in secondary and tertiary cities in the eastern U.S. states. Hersha CFO Ashish R. Parikh told HotelNewsNow.com the REIT’s future plans are to concentrate its portfolio to only urban, high-barrier-to entry markets.
“These hotels are very good assets in very good locations, but the company over the past five years has gone from being secondary and tertiary owners to owning assets in the highest barrier-to-entry markets,” he said. “Most of these assets are considered non-core because they’re not in urban markets.”
Parikh said the hotels were brought to market, but the decision to sell to an affiliate of Starwood Capital was built on a close relationship and was strategic in nature.
“We did have brokers involved, but Starwood has a deep understanding of what we do,” he said.
Upon news today in the Wall Street Journal that Innkeepers USA Trust proposed buyer Cerberus Capital Management has put off closing the deal due to recent volatility in the financial markets, Parikh expressed confidence this portfolio sale will close.
“As much as Starwood selected these assets, we selected Starwood Capital as the buyer in large part due to the fact that we felt the most comfortable with them,” he said. “Clearly there is a lot of volatility in the market, and we still have to get through the lender assumption process—there is a lot of work still to get done. But as much as we could feel comfortable (about the deal closing), we do with them.”
Most of Hersha Hospitality Trust’s portfolio is operated by Hersha Hospitality Management, which is a separate, private entity, although it is 34% owned by trustees and officers of Hersha Hospitality Trust. Fourteen of the 18 hotels sold to Starwood Capital were managed by Hersha Hospitality Management and the remaining four were operated by Waterford Hospitality Group.
Starwood last year purchased a 49.9% stake in Hersha Hospitality Management for an undisclosed amount.
Parikh said the sale was not conditional on keeping current management contracts and he wasn’t privy to information on whether Starwood Capital would break the existing management contracts or uphold them.
“We don’t know who Starwood going to select,” he said. “The deal was really looked at more as a purchase and sale.”
Hersha’s plans for the near future include selling more non-core assets, but the REIT also will eye key acquisitions.
“Typically we’ve been net buyers,” Parikh said. “We’ve never entered into an agreement to sell this many assets at one time. We’ll continue to look for acquisition opportunities, but we’ll selectively sell assets when they don’t fit our plan.”
Hersha said the 18 hotels are being sold at a trailing 12-month net operating income capitalization rate of approximately 8.4% and a trailing 12-month hotel earnings before interest, taxation, depreciation and amortization multiple of approximately 10.3 times. The average age of the non-core hotels to be sold approximates 11.5 years, and average daily rate for the consolidated non-core hotels in the second quarter of 2011 was US$107.01. That ADR is 32.2% less than the ADR for the remainder of Hersha’s consolidated portfolio of 53 hotels.
Parikh said the deal is a win for both parties involved. “It’s strategically a good move for us and Starwood Capital is buying them at a good price,” he said. “Those hotels have a lot of life left in them.”
The 18 hotel properties to be sold are as follows:
Hilton Garden Inn, 150 rooms, Glastonbury, Connecticut
Holiday Inn, 134 rooms, Norwich, Connecticut
Residence Inn, 78 rooms, Danbury, Connecticut
Residence Inn, 133 rooms, Mystic, Connecticut
Residence Inn, 94 rooms, Southington, Connecticut
Springhill Suites, 80 rooms, Waterford, Connecticut
Residence Inn, 108 rooms, Williamsburg, Virginia
Springhill Suites, 120 rooms, Williamsburg, Virginia
Residence Inn, 96 rooms, North Dartmouth, Massachusetts
Summerfield Suites, 135 rooms, Charlotte, North Carolina
Hampton Inn, 97 rooms, Carlisle, Pennsylvania
Hampton Inn, 72 rooms, Danville, Pennsylvania
Hampton Inn, 75 rooms, Selinsgrove, Pennsylvania
Holiday Inn Express, 88 rooms, Malvern, Pennsylvania
Courtyard by Marriott, 120 rooms, Scranton, Pennsylvania
Hilton Garden Inn, 132 rooms, Edison, New Jersey
Fairfield Inn, 103 rooms, Bethlehem, Pennsylvania
Fairfield Inn, 109 rooms, Laurel, Maryland
This article orginally appeared in Hotel News Now.