KSL buys Hersha Hospitality Trust for $1.4 billion

KSL Capital Partners has acquired Hersha Hospitality Trust in an all-cash deal valued at $1.4 billion, taking the Philadelphia-based REIT to the private sector. Common shareholders will receive $10/share in cash, a 60% premium to the Friday stock close of $6.28. Closing is expected in 4Q23.

Holders of Hersha’s 6.875% Series C Cumulative Redeemable Preferred Shares, 6.50% Series D Cumulative Redeemable Preferred Shares and 6.50% Series E Cumulative Redeemable Preferred Shares will receive $25 in cash, plus any accrued and unpaid dividends to which they are entitled, for each preferred share they own.

Hersha owns 25 hotels (3,811 rooms) in New York, Washington, DC, Boston, Philadelphia, South Florida, and California. Hersha's affiliate manager HHM reportedly will remain manager of existing portfolio.

The deal's value was estimated at 14 times Hersha’s estimated year-to-date EBITDA of $99 million for 2023, according to S&P Capital IQ.

Implied portfolio valuation of ~$400,000/key (vs. prior tradition at $325,000) is a 23% premium, according to Truist Securities analysts, who also said they see the 2024 purchase multiple at approximately 12.2x EV/EBITDA (HT noted an implied 8.2% cap rate) versus the consensus 10.5x that shares were trading at on Friday. “Subsequently, we view the privatization as a positive comp for hotel REITS and may temporarily result in a higher re-rating for peer REITS, particularly smaller cap names,” they said.

R.W. Baird analyst Michael Bellisario wrote, "We view the transaction as mostly idiosyncratic from Hersha's perspective, but the broader – and more important – read-through is positive in that private equity remains interested and active in the hotel sector; plenty of equity capital is on the sidelines looking for a home," he said. "Unique to Hersha is (1) management's high insider ownership (the voting agreement with execs covers 3.8% of outstanding shares and 13.7% of outstanding units) and (2) recent executive transitions among family members, which was one likely driver of a transaction getting across the finish line, in our opinion."

Bellisario added that  KSL – and presumably other potential buyers – likely ascribed value to the optionality embedded in Hersha's portfolio with 21 of the 23 consolidated hotels managed by HHM (i.e., flexible contracts subject to a termination fee), and several hotels are fully unencumbered of brand.

“This transaction provides our shareholders with immediate and certain value at a substantial premium to our public valuation. 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,” said Hersha Executive Chairman Jay Shah.

Marty Newburger, partner at KSL, added, “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.”