KSL deal for Hersha Hospitality could trigger further public/private M&A

Twenty-five years after Hersha Hospitality Trust went public it’s now coming off the board.

The real estate investment trust and its 25 hotels are going private, having been acquired by KSL Capital Partners at $10 a share in an all-cash transaction valued at approximately $1.4 billion, which represents a 60% premium over Hersha’s closing share price on August 25, 2023.

Hersha owns 25 hotels totaling more than 3,800 rooms and located in coastal markets, including New York, Boston, Washington, D.C., Miami and along the California coast.

The hotels range in type from resort and lifestyle to select-service and luxury. These include The Rittenhouse in Philadelphia, Hyatt Union Square in New York, Sanctuary Beach Resort in Marina, Calif., and The Ritz-Carlton Georgetown in Washington, D.C.

The transaction, which is expected to close in the fourth quarter of 2023, is unique in that there hasn’t been one of its ilk in some time. In 2015, Blackstone acquired Strategic Hotels & Resorts for $6 billion, before turning around and selling the portfolio to China’s Anbang three months later for $6.5 billion.

“This is the first time in several years we can recall that private equity has been interested in a full-service hotel public REIT buyout,” wrote Patrick Scholes, managing director lodging and leisure equity research, Truist Securities, in a morning note on the deal, which also referenced the last time there was interest in a transaction of this sort, when Blackstone kicked the tires on RLJ in 2017. RLJ’s board rejected the offer.

KSL’s deal for Hersha could signal more to come, said Ryan Meliker, president and co-founder of Lodging Analytics Research & Consulting (LARC). “This transaction highlights the disparity in existence today between public market values and private ones,” he said. “If the disparity remains, we should see more transactions like this one.”

He added that U.S. hotel real estate values have “generally” recovered to pre-pandemic levels, which, if that’s the case, makes it curious that Hersha would look to sell now and not ride the potential upswing. (An investor rights law firm is already investigating whether the sale is fair to Hersha shareholders.)

The Rittenhouse in Philadelphia is part of KSL’s $1.4-billion deal for Hersha Hospitality Trust.

Still, for its owners, the Shah family, the time was right, and its ultimate divestment, according to Executive Chairman Jay Shah, was not quickly arrived at, but part of a longer process. “Following a multi-year comprehensive review by the independent Transaction Committee of Hersha’s Board of Trustees, the Board and management team are confident this step will allow us to deliver value for our shareholders while refocusing on growing the business over a longer period of time,” he said.

Added his brother and CEO, Neil Shah, “This transaction is a result of our deliberate actions to focus on key gateway markets and lifestyle and leisure properties, as well as our work to create a concentrated portfolio consisting of some of the highest quality hotels in their respective markets.”

Further color from Truist reveals what they believe was a rather surprising deal, especially in today’s challenging and vacillating macroeconomic climate. “While REIT valuations have been depressed in our view and major hotel industry leaders have speculated at conferences about the likelihood of potential buyouts, the high-interest-rate environment combined with Blackstone’s disposition activity had been deemed a factor in the low current likelihood of privatization,” the note wrote, alluding to Blackstone’s recent sales, for example, of the JW Marriott San Antonio Hill Country Resort & Spa for $800 million to Ryman Hospitality Properties and a sale of a minority stake in the Bellagio in Las Vegas.

The deal did not include Hersha’s affiliate management arm, Hersha Hospitality Management, which will remain the manager of Hersha’s existing properties.

For KSL, it’s another notch in what has been an accretive phase. In July, it acquired an interest in Italy’s Sereno Hotels and, in February, it acquired the Martin Resorts Collection of five independent boutique hotels along California’s central coast.

Another of its recent and larger deals was in 2016 when it acquired Outrigger Hotels & Resorts.

KSL also owns the select-service and extended-stay focused Mission Hill Hospitality.

On the Hersha deal, Marty Newburger, partner at KSL, said, “Hersha and its team have built an impressive, curated portfolio of experiential luxury and lifestyle hotels and resorts in strategic markets. With KSL’s extensive track record investing in high-quality assets in dynamic metropolitan markets across North America and around the world, we are uniquely suited to position the business for further success over the long term.”