A chance encounter in Washington, D.C., proved to be the defining moment of Naveen Kakarla’s professional life. It was there in the early aughts that he met Neil Shah, now the president and COO of real estate investment trust Hersha Hospitality Trust, a company that Shah’s father started in 1984 before taking it public in 1998. Kakarla, a lawyer by training, was curious about the hospitality industry, particularly the operating side of the business versus ownership and how to build out a professional services culture.
Kakarla didn’t know real estate, investment banking or Big Four accounting, but he knew Shah. Hersha Hospitality Trust launched with five separate but core businesses, one of which was an operating platform. “I spoke to Neil about what I wanted to build and realized that it was sitting there right under his nose,” Kakarla said.
Kakarla today is president and CEO of HHM, which operates the bulk of Hersha Hospitality Trust's 36 mostly coastal city properties, but in total has 235 hotels under management, from branded to independent, with names such as The Rittenhouse Hotel and Westin both in Philadelphia, The Joule Hotel in Dallas and Hilton Daytona Beach, Fla.
Historically, HHM’s focus was on the so-called “Amtrak corridor” of Boston to Washington, D.C. It has since moved farther south and west, picking up hotels in South Florida, Texas, California and Washington.
It’s an expansion that was part of Kakarla’s ultimate plan and journey to develop that professional services model. He decided in 2009 that it had to work with other high-end institutional clients and forged alliances with the likes of Starwood Capital, allowing them to scale up nationally.
He credits Barry Sternlicht, CEO of Starwood Capital and former CEO of Starwood Hotels, with a pinch of tutelage on how to run a successful business. “He was very captured by Six Sigma and we were able to build something that was scalable with a low error rate that multiple people could come in and run well,” Kakarla said. Six Sigma is a data-driven approach designed to improve the capability of a business by reducing the likelihood of error by reducing defects that hinder profit. “We found the right people, we built the right process and then we put technology behind it,” he said. “That got our phone ringing as opposed to us making the calls.”
HHM works with a roster of private equity companies, such as Blackstone, KKR and PIMCO, and a slew of REITs and family offices. “One of our differentiators is that we have been successful in holding onto hotels when they change hands,” Kakarla said. “The ultimate is when a hotel transfers—we call it relinking—from owner A to owner B, and owner B sees the value and you continue to run that hotel.”
HHM like most was not immune to the pandemic. “We spent three to six months kind of licking our wounds,” Kakarla said. But in his estimation, the pandemic separated the stronger operators from the weaker. “We went from running a P&L to running a balance sheet,” he said. “It was cash management, vendor management and, today, we're two or three times closer to our owners. You started to see a flight to quality.”
Operate to Own
Kakarla around this time saw further opportunity to diversify beyond pure management and into hotel investment and pulled the trigger on a couple of M&A transactions. It was further acceleration of HHM’s plan to move beyond the solely operator model, something that Kakarla has been working to get to over the past decade. “If my ability to drive results is a core competency, how can I put more money behind that ability?” he said. “Our value-add is finding off-market opportunities. It is being able to see upside through operations.”
HHM typically acts as the sponsor on deals, bringing them to capital partners, who put up the majority of the equity. In this sense, HHM does the leg work, ponies up a smaller amount of equity and becomes the hotel’s manager while also having skin in the game.
Kakarla relies heavily on his CFO and head of investments, Shawn Tuli, to source the deals. “We're maniacal about two things: serving our owners and serving our GMs and that ethos plays through into the deal side,” Tuli said. “We've always been really clear that we want to manage hotels, but we're really a real-estate-forward company, where we care about the real estate we're managing and are very aligned with owners and how they think about the assets.”
The genesis of the investment platform came partially as a result of having geographic clusters of hotels, where HHM had visibility into deal flow. “We should put our money where our mouth is,” Tuli said. HHM’s operational know-how allows it to then implement operational improvements where necessary or reposition assets.
Beyond investing in one-off deals, HHM’s most recent big splash was its June acquisition of Urgo Hotels & Resorts, which added some 50 hotels in the U.S. and Canada. This was HHM's second M&A transaction in 2022, after it closed earlier in the year on its purchase of 25 long-term management agreements from White Lodging.
Changing Dynamics
HHM’s next moves will likely be impacted by the continuing market fluctuations, as the Federal Reserve pulls the strings on interest rates that have seen the cost of capital rise as debt rates increase to tamp down the economy with the intent to slow inflation. “Things are shifting so quickly right now,” Tuli said. “We are watching the credit markets shift and the investment community is not clear yet on where price discovery should land. It starts with what type of debt is available for what type of deals to determine where the capital might flow.”
Tuli expects transaction volumes to be slimmer through the summer than it was in the first half of the year.
Beyond the branded segment, HHM also operates an Independent Collection of hotels that numbers more than 30 properties. “We took our experience in revenue management through urban markets and poured all of that into the distribution platform for our independent hotels,” Kakarla said.
HHM is also in the process of launching and assembling a luxury and lifestyle division. Of it, Kakarla has a very methodical approach. “Whereas a lot of people might want to market how cool or interesting their hotel is, we tend to talk a lot more about the segmentation and the direct bookings and the guest loyalty that we're able to drive across our platform,” he said. “Of course, we want to be cool, too.”