ROOMS TO GROW Hersha's profitable hotel niche The Shah family makes its mark in hotels

Posted: August 30, 2006

More than half of the nation's budget-priced hotels have owners of Indian descent, and many of them started like Hasu P. Shah and his wife, Hersha, who bought their first lodging in Harrisburg 22 years ago.

But few of the hoteliers have gone from owning a single independent motel, as the Shahs did, to where their sons, Jay and Neil, are today: They command a portfolio of 60 hotels, most of them in highly competitive and high-priced large cities in the Northeast.

Along the way, the Shah family has extended its reach into four aspects of the hotel business: owning them, building them, managing them for themselves and others, and supplying them with furniture and equipment. The four lines of work are in separate family-controlled companies, all starting with the name Hersha.

"It's been a very considered growth plan," said Neil Shah, 33, chief operating officer of Hersha Hospitality Trust, a real estate investment trust, or REIT, and the only public company among the four. "It wasn't a venture-capital-backed enterprise. It was built by the bootstrap."

Hersha has attracted more attention from Wall Street this year than in the past, mostly because of its acquisition of two dozen hotels since the start of 2005, including its first in Manhattan.

Even with those purchases, Hersha remains firmly in the middle of the small group of REITs that specialize in owning hotels. Hospitality Properties Trust in Newton, Mass., owns 310 hotels, the most of any in the sector. Host Hotels & Resorts Inc., of Bethesda, Md., is the biggest in terms of total assets: $11.6 billion as of June 30.

The Hersha companies' strategy is to buy mostly new or recently built limited-service, mid-priced hotels, said Jay Shah, 38, the chief executive officer. Hersha owns predominantly Hampton Inns, Hilton Garden Inns, Marriott Courtyards, Sheraton Four Points, and Holiday Inn Expresses, in the Boston, New York, Philadelphia, Baltimore and Washington areas.

The trust also is buying newer extended-stay hotels, which have kitchens and more living space in each unit, including Residence Inns, Springhill Suites and MainStay Suites. In the Philadelphia area, it owns the Hampton Inn at 13th and Race Streets and eight other hotels in the New Jersey and Pennsylvania suburbs.

Hersha also is considering building and running an aloft hotel, a new brand being developed by the W Hotels division of Starwood Hotels & Resorts Worldwide, in Philadelphia's Old City neighborhood.

Hersha's corporate headquarters remains in the Harrisburg suburb of New Cumberland, but most operations now are run from offices in the Penn Mutual Tower in Center City.

In the Northeastern cities' central business districts and close-in suburbs, the cost of real estate and construction is higher and local government approval to build takes longer, but the rewards are greater, Jay Shah said.

"In markets with a higher barrier to entry, you can drive higher average daily rates" that guests are willing to pay, he said. "It's about how much revenue you can get from the box, and the value of the box itself."

Analysts who track real estate investment trusts generally like the Hersha strategy and the way the companies are managed.

"We believe the ownership of limited-service and extended-stay hotels in and around major urban markets on the East Coast is an interesting operating niche that should allow the company to outperform its direct peers on the top and bottom line," Jeffrey J. Donnelly, senior analyst with Wachovia Capital Markets L.L.C., said in an Aug. 16 investor report.

Warren Marr, a lodging consultant and director of PricewaterhouseCoopers L.L.P.'s Philadelphia office, said Hersha had built its businesses steadily while still taking risks in pricey urban markets some others avoided. "The risk-reward is what you're always looking at," he said. "The higher risk means fewer people are doing it."

Hersha has been growing at a time of relatively good health for the hotel business. After a weak period from 2001 through 2003, occupancy and daily rates over the last 2 1/2 years have gone up, especially in the Northeast. Hersha said that the average daily rate at its hotels increased 16.2 percent last year over 2004, compared with an 8.5 percent average for all lodgings.

Hotel real estate investment trusts such as Hersha use different accounting rules than other public companies. Their revenue comes only from renting or leasing buildings to hotel operators. They are not allowed to keep retained earnings, instead returning them to shareholders as dividends, which tends to make them attractive to those seeking income-producing stocks.

But unlike most real estate trusts, Hersha has its Hersha Hospitality Management unit, which operates about three-quarters of its investment-trust-owned hotels, directly serving guests and paying the bills for labor, laundry, supplies and utilities. That helps keep executives at all the Hersha companies attuned to what the hotel business is really about, Jay Shah said.

"It's still a Main Street business, and each hotel has to cater to its original base," he said. "You need to hire the right people to do that."

Hersha is hiring seasoned hotel professionals at a steady pace to keep up with the growth of both the real estate and hotel-operating sides of the business, Neil Shah added.

The Shah brothers said their next big challenge was a long way from their parents' first motel, the Riverfront Inn, which was sold in 2001. They want to own and run hotels not affiliated with major chains such as Hilton or Marriott, in New York City, one of the toughest markets to enter because of astronomical real estate prices.

Hersha plans to open one boutique hotel in the Tribeca section of Manhattan and an extended-stay boutique hotel at 48th Street and Lexington Avenue in Midtown.

Jay Shah said the Lexington Avenue hotel would be surrounded by investment-banking offices that should offer a steady supply of well-heeled guests who need to stay three or more days. He said he was not concerned about drawing business without the help of a national chain.

"When you're on a corner like that," he said, "your address is your brand."

Contact staff writer Tom Belden at 215-854-2454 or tbelden@phillynews.com.

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