Hospitality Industry and Shareholders

Hersha Hospitality is a real estate investment trust (REIT) that operates a number of small hotels in major gateway cities in the United States. The company is based in Philadelphia and has 46 employees (Hersha.com, 2016), which indicates the nature of its business -- it is a real estate firm that leaves the actual management of each hotel to a partner company.

Hersha's main business drivers, therefore, lie with its ability to understand broader hospitality trends and identify underpriced properties that fit within the trend, and then develop those properties for a healthy return on investment. There are several strengths that Hersha has. The first is that the company has assembled a strong, experienced team that can effectively identify properties and then work with the partners to ensure that the properties retain their value through the third-party management.

A directory of the Hersha management team can be found on its website, and many are experienced in the industry for decades. Another strength lies with the strategy itself. Hersha targets hotels in major gateway cities. It cites on its website that the reason for this is because these cities have multiple traveler draws -- business, pleasure and convention traffic all. As such, these locations are poised for longer-term growth than might be expected of hotels in smaller centers.

Further, the geographic strategy has retained a focus on the United States, which allows Hersha to understand the local market better, and not have to deal with the differences in laws and cultures that come with trying to be an international company. In essence, they know who they are and what they are good at, and stick with that. They cite having a small geographic focus as a strength in their 2015 Annual Report. A third strength for Hersha is that they have kept their operation small.

Their objective is to return a strong investment for their shareholders. The small size of their operations allows Hersha to carve out a niche, rather than seeking to be an major player. They are able to focus on high-return properties, and not dilute their returns by spreading out to lower-value properties. A fourth strength lies with their partners -- Hersha typically works with major brands.

This allows them to ensure that their properties are going to be subject to controls, and because these are often high-profile properties in major cities, Hersha can expect that they will be run well, by the best managers that these international hotel brands have to offer. A fifth strength is innovation. As a complementary sideline to its core business, Hersha has developed Earthwise, which is a program to encourage sustainable practices in the hospitality industry.

The key for the Earthwise initiative is whether Hersha can take it beyond its own properties -- if Earthwise gains traction, this is a huge opportunity for Hersha, that could be spun off to tremendous benefit for the shareholders. There are a few weaknesses for Hersha, however. While operating in a fairly narrow geography has its advantages, it also can be a weakness because it exposes Hersha to the economic conditions, particularly along major cities on the U.S. Eastern seaboard.

Should the regional economy in that Boston-DC corridor (and its southern cousin, Miami) struggle, the company will have little on which to fall back. Hersha is simply not that well-diversified, by its nature as a niche player it is betting on a particular segment of business that it knows well. Another internal weakness at Hersha is again related to its small size. The company has good managers, but it may well be overly dependent on a handful of its best people.

At 46 people, Hersha is a fairly lean operation, but that leaves little backup when someone leaves, and it may be difficult to replace an executive with a high level of knowledge. There are further issues with the management team -- three Hershas are at the top of the company. While this is perfectly reasonable for a privately-held company, a publicly-traded company that is beholden to shareholder interests should be seeking to hire the absolute best people available, not engaging in nepotism. In terms of opportunities, there are many.

Hersha could shift its strategy and start looking at other parts of the world, or other types of hotels, but it actually does not need to. There is probably enough room for growth just within its core areas, as most of those cities are continuing to experience growing economies. A quick pop across the border to places like Toronto or Vancouver could provide even more growth at a relatively low level of risk, should the U.S. market for some reason be deemed insufficient.

Another opportunity for Hersha lies with become more aggressive in Earthwise. There is potential for certifications of sustainability. The concept has been somewhat slow to gain traction in hospitality, but there is potential for this innovation to really expand the Hersha brand, and to bring in a lot of new income. A third potential opportunity might be to acquire another REIT, which might make a significant addition to Hersha's portfolio, delivering rapid growth albeit at something of a price.

It is probably worth looking at, for the benefit of Hersha's shareholders. Otherwise, the company is still delivering a decent ROI relative to its peers (2015 Hersha Annual Report), and it can do well enough just continuing along its current path. There are a few threats that Hersha should take into consideration. The biggest has already been touched on -- it is rather dependent on the health of the overall economy, particularly along the Eastern seaboard. A lack of geographic diversification may cause it problems if there is another economic downturn.

Further, Hersha can be affected by competition. While it partners with major hotel chains, it faces competition in the quest for quality properties. This is especially an issue given the company's lack of geographic diversification -- it is not the only hotel company to have expertise in those cities. Any sort of bidding competition for properties can have a negative impact on ROI, as could the development of other, alternative properties to the ones that Hersha owns. A last threat is with respect to interest rates.

Hersha has done well over the past eight years, but that was in a low-interest rate environment that has not only allowed for a healthy economy but has allowed companies to invest in hotel properties. The company has a balanced capital structure, but if borrowing costs increase, this could negative affect its financial health. b) There are a couple of approaches that companies typically take with respect to strategy.

They can use their strengths to take advantage of market opportunities, or they can shore up weaknesses that expose them to threats. In this case, there are a couple of recommendation that can be made that would basically do both. The first is that the company should expand its geographic scope. The limited geography in which it operates is a double-edged sword. It should consider either moving into the south (Charlotte area, Atlanta, Houston, Dallas) or the Midwest (Chicago, Minneapolis) in order to seek another geographic cluster.

It knows how to do this -- hire local experts and move into multiple properties, and would successfully parry the risk associated with a lack of geographic diversification. Or it could expand its Miami hub out to Tampa and Orlando. There are options, but the company should use its expertise to expand into other major.