Real Insight. Real Estate.

Jay H. Shah currently serves as Hersha Hospitality Trust’s (NYSE: HT) Chief Executive Officer and as a member of its Board of Trustees.  Mr. Shah is involved in all areas of the business with a particular emphasis on investor relations, capital transactions and acquisitions. Previously, Mr. Shah served the Company as President and Chief Operating Officer and prior to that he served as the Managing Director of the Hersha Group, a private affiliate of Hersha Hospitality Trust that provides hotel management, development and construction management services to hotel owners.

Prior to joining the Hersha organization, Mr. Shah was principal in the law firm of Shah & Byler, LLP, a real estate and construction specialty practice, which he founded.

Q: As a company, tell me about the niche you have carved out for yourself and how you feel you are different from the competition. Why do you find this product type more appealing than alternative real estate asset classes?

A: Hotels are divided into 5 categories or market segments: luxury (includes luxury brands such as the Four Seasons and Ritz Carlton); upper upscale (includes full service brands such as Marriott, Hilton, Westin); upscale (includes select service brands such as Marriott Courtyard, Residence Inns, Hyatt Place, Hilton Garden Inns); midscale (includes limited service brands such Hampton Inns, Holiday Inn Express) and economy (includes budget brands such as Econo Lodge, Rodeway Inn, Days Inns, Super 8).

We focus on the upper upscale, upscale and midscale segment in our portfolio and have concentrated our portfolio in high barrier to entry urban markets.  Approximately 25% of our portfolio is upper upscale, 50% is upscale and the remaining 25% is midscale.  Approximately 35% of our EBITDA comes from the New York City metro, 15% from the Boston metro, 10% from each Washington, DC and Philadelphia and about 5% from Northern California.  This places our portfolio in a position to outperform during periods of strong fundamentals by driving rates in the some of the country’s best real estate markets and benefiting from operating leverage, but also to deliver defense outperformance during cyclical contractions as our fixed cost structure is far more limited than that of a luxury hotel or a sprawling full service hotel which allows for relative margin defensibility.

Q: How has your strategy changed as a result of the credit crisis?  Have you expanded/narrowed your acquisition criteria? If so, to what, and why?

A: This type of a credit crisis leaves no one unchallenged, but relatively speaking our maturity ladder, line of credit covenants and cash flows are not presenting any imminent liquidity concerns for us.  We have no significant maturities between now and the end of 2012, our fixed charges are well covered and we expect EBITDA margin deterioration to be inside of 400 bps and we ran roughly 37% last year.  That being said, there is no question that capital remains scarce for everyone and we are no exception. We have seen no substantial thawing in the credit markets and we feel that accessing the equity markets isn’t attractive as REITS are trading on trough fundamentals.  Companies that had serious liquidity concerns have raised equity, but they have done so by creating a heavy cash flow dilution overhang.  I don’t think any of this changes for hotel REITs until we see some shift in hotel fundamentals or at least see a meaningful deceleration in the rate of decline.

Until a reasonable capital market re-emerges, we don’t anticipate doing many acquisitions at all.  We also believe that it will take some time to close the bid ask spread on assets as well.  Currently, sellers don’t have enough motivation to think more realistically about pricing and buyers don’t have capital that justifies higher pricing.  We are not worried about being the first buyer in and buying at the absolute bottom.  That is the realm of private equity funds and without debt, I can’t imagine they have any conviction.  I don’t expect to see much asset trading for another 3-4 quarters.  We are currently looking at various opportunities, but to be compelled to act right now, the opportunity needs to present with high strategic value in addition to true trough economics.

Q: Real estate is cyclical. In terms of the specific asset classes you look to acquire, where in the cycle do you think we are right now?  How long do you think it will take before we are at par again?

A: In our sector, I expect that we will see demand trends stabilize to flat or substantially flat by the end of this year or early next year, but I think we will continue to see rate deterioration into next year.  This means that the best we can hope for next year are flat or slightly negative top line fundamentals.  When national hotel RevPAR flattens, which I believe will be around the second to third quarter of next year, we can consider ourselves in the first inning.  Right now, I feel like we’re somewhere between waiting for the first game to end or we’re in a rain delay.  I think we will see hotel values peak in the next cycle in 2014.

Q: What three adjectives would you use to best describe yourself as a business person?

A: Company builder, strategically-focused, independent

Q: Pretend for a second that investors/shareholders and returns don’t matter. Tell me about your dream commercial real estate project and why you would love to do it.

A: I would be very interested in a complete reprogramming and redevelopment of the Waldorf Astoria Hotel.  I recently was camped in a suite there for a week for the NYU Hotel Investment Conference which was immediately followed by the NAREIT conference.  It occurred to me while I was there, how sub-optimal the hotel was in its current state considering that it occupies one of the most valuable city blocks in the world.  It is bounded by Park Avenue to the west, 50th Street to the north, Lexington to the East and 49th Street to the south.  I believe when Blackstone bought Hilton, the Waldorf was allocated $1 bn in value.  I believe that a meaningful reprogramming and redevelopment would carry a price tag of $3 bn.  It’s difficult to imagine a hotel project or even a mixed use project that could generate sufficient returns across that many square feet to justify the investment.

Q: If you weren’t in real estate, what would you be doing with your life?

A: Teaching or writing or both.

Q: What keeps you up at night?

A: The fact that I can’t sleep.

Q: What organizations, charities etc are you a member of? Why are they important to you?

A: I’m the Vice Chairman of the Please Touch Museum and Chair the Property Development Committee.  We recently, at the end of last year, completed the restoration of and our move to Memorial Hall.  I am strong supporter of the museum’s mission: “Enriching the Lives of Children through Play”.  I think the museum does a terrific job in encouraging self-directed exploration which helps children develop awareness, creativity and confidence.  As Chair of the Property Development Committee, I had the pleasure of being involved with the restoration of beautiful Memorial Hall which was a great real estate development experience in itself.

I have also recently joined the Board of Trustees of the Episcopal Academy.  Though I am very new to the Board there I am looking forward to being a part of charting the future of an educational institution that has already built a 225 year legacy of excellence in the development of children in all aspects.

Q: What do your weekend activities include?

A: I prioritize spending time with family.

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