“Pillar one of our growth strategy is exceeding expectations for our current owners,” Kakarla explains from his office in downtown Philadelphia. “Whoever we work with, whether it’s HT, Starwood Capital Group, Lubert Adler, the Moinian Group, we’re held to a very high standard in terms of revenue generation, operating profits, and service scores, in order to maintain that we are the right choice for the owner.
“The idea of trying to institutionalize a hands-on, owner-operator approach to managing hotels is easier to say than to do. The approach, in all of the Hersha companies, has been to develop a core competency, work out the kinks, and only then do we seek externally to bring in customers. We want to have absolute confidence that we would benefit those who choose to work with us. That’s how we’ve succeeded and grown: by delivering a performance level that gets us repeat business and new business.”
Big Apple, Big Bite
Not only are the Hersha corporate structure and HHM’s role in it out of the ordinary in the hospitality space, but so too are the property types the company has worked with.
“What makes Hersha relatively unique,” says PKF Hospitality Research President Mark Woodworth, “is that they’ve employed a strategy of generally focusing on high-barrier-to-entry markets and have somehow figured out a way to get deals done. And they’ve done so largely with recognized, well-branded, proven property types, such as Hampton Inns. When I think about Hersha’s portfolio, I think of these well-branded, focused-service types of facilities that require an operating skill set that is focused on optimizing their revenue yield through good yield-management practices. I think Naveen has put together a group that has demonstrated that they’re very good at that.”
Hersha’s heavy concentration in Manhattan is a major topic of conversation among lodging industry analysts. Hanson, the divisional dean of the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at NYU, says it’s “great, but also a risk” to have a substantial percentage of the company’s income derived from one city, particularly one that is a theoretical target for a terrorist act or natural disaster. “Manhattan is great at absorbing supply,” Hanson continues, “but someday there will be enough that it starts to affect at least the rate of increase of the Average Daily Rate (ADR), and maybe occupancy, and maybe both. It’s interesting; the diversification of Hersha is one of its strengths, but the New York exposure goes against that diversification in certain regards.”
“New York is arguably the most important hotel market in the country, but some people believe that they’ve overextended in New York,” adds Jack Corgel, the Robert C. Baker Professor of Real Estate at Cornell Hotel School and a senior adviser to PKF Hospitality Research. “They’ve recently started to diversify out to purchase properties in California and other places. That suggests to me that they’re beginning to react to the demands of analysts and shareholders to maybe relax a little bit on New York.”
Responds Kakarla, “When you look at New York as a series of sub-markets—for example, the Times Square market is very different from the Lower Manhattan market—and you’re careful which sub-markets you’re picking, as long as you’re projecting single-digit growth versus double-digit growth, you are making one of the safest bets in the country over a five-to-10-year holding period. With regard to the unthinkable, some sort of tragic event, we can’t predict the future. But I would put my money on the fact that people are always going to choose to travel to dense and diverse cities that have landmarks that are irreplaceable. And no American city represents that better than New York.”