Hersha Hospitality Trust (HT) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Third Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

With that, I would now like to turn the presentation over to your host for today's conference, [Bartley Parker]. You may proceed.

Thank you, Karen. Good morning, everyone, and thank you for joining us on such a busy day. Before we get into the discussion, management has asked me to make a cautionary comment regarding forward-looking statements. This conference call may contain forward-looking statements that reflect Hersha Hospitality Trust's plans and expectations including the company's anticipated results of operations, joint ventures and capital investment.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance, achievements or financial position to be materially different from any future results, performance, achievement or financial position expressed or implied by these forward-looking statements. These factors are detailed in the company's press release, and from time to time, in the company's SEC filings.

With that, let me turn the call over to Mr. Jay H. Shah, Chief Executive Officer. Jay?

Thank you, Bartley. Good morning, everyone. As Bartley said, thank you for joining us on a busy day. Our comments today are relatively brief. With me today is Neil Shah, our President and Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer. I'll start the call today with some remarks about our quarter, turn the call over to Ashish, who'll provide some additional financial detail. And after some concluding comments, Neil, Ashish and I will be happy to answer any questions that you may have.

As you have probably already read from our press release this morning, our consolidated hotels recorded another quarter of double-digit RevPAR growth and strong EBITDA increases and margin expansion leading to 33% growth in adjusted funds from operations or AFFO per share. This was driven by both internal growth and the substantial external growth that we have achieved through our timely and accretive acquisitions.

During the quarter, we issued approximately 4.34 million shares of common stock, including the over-allotment and a very well received overnight offering resulting in net proceeds of approximately $40 million. This capital helped to fund our growth by contributing to the completion of two strategic acquisitions at the end of the quarter and by allowing us to repay a portion of our debt. What's worthwhile to note is that we deployed the capital we raised from investors within a couple of weeks of the raise into quality assets.

The third quarter, again, kept us busy as we completed five transactions including the purchase of four hotels with a total of 593 rooms and the buy-out of our partners' interests in one of our joint venture assets. The slower pace of acquisitions from previous quarters signals that the majority of our portfolio assembly is behind us. And while we are not entirely done building out our portfolio, we expect to be more focused on the internal growth that our portfolio can generate and on reducing the number of JV assets that we have.

We expect to drive our internal growth from the maturation of our development-stage hotels, which will deliver increased occupancy in tandem with average daily rate increases at both of our developing and stabilized assets. We expect that the acquisitions that we undertake moving forward will be consistent with our market strategy and be accretive to our net asset value.

Year-to-date, we have been involved in 18 transactions, including the purchase of 17 hotels with a total of 2,523 rooms. 16 of the 18 transactions are for assets that count in the total of 49 hotels in our consolidated portfolio at the end of the quarter. Going forward, the majority of our deals will be for hotels that can become wholly owned assets or for opportunities to purchase the remaining interest of the hotels in our joint venture portfolio.

Let me highlight the company's third quarter transactions. In late July, we purchased the Residence Inn in Norwood, Massachusetts. We were pleased to be able to acquire this newly built property, which is our tenth in the vibrant Boston marketplace through an off-market negotiation with one of our key development partners in New England. This is our second transaction in 2006 where the developer's provided a vote of confidence in our strategy by electing to accept consideration in the form of Hersha Hospitality operating partnership units. This is also the second brand new hotel we've taken ownership of since June.

We expect this transaction to provide an unlevered yield of 8% at the outset but rise to 11% after stabilization. This property also complements our existing portfolio of 12 upscale, extended state hotels, a segment that we'll remain focused on due to its compelling revenue and margin economics as well as its performance resiliency. In July, we also completed the acquisition of two Long Island assets, the 161-room Hampton Inn in the Brookhaven, Farmingville area and the 133-room Holiday Inn Express in Hauppauge. Both of the hotels are well located with diverse corporate government and leisure demand drivers.

At the end of the quarter, we purchased our partners' interest in the hotel of our first joint venture making our Hampton Inn Chelsea Manhattan a wholly owned asset. We were able to purchase this asset at a price that we believe is below replacement cost for New York City and also represents an attractive forward cap rate of 9% on our blended basis in the hotel. CNL's management was terrific to work with on this project, and we look forward to working with them on future projects.

Having made our first joint venture property a wholly owned hotel, we can now look to the other joint venture assets in our portfolio as a means of generating solid shareholder value by having the option to purchase full control of these assets at compelling yields in non-competitive situations. We expect that being able to purchase our partners' interests in our unconsolidated joint ventures combined with our focus on acquiring wholly owned hotels will simplify our structure for investors.

Also at the end of the quarter, we purchased a 250-room Courtyard [in Alexandria, Virginia], our sixth asset in the metro Washington, DC market, which we believe is a strong market with very high barriers to entry. The price is at a competitive 8.3% forward cap rate for this newly renovated hotel. And, we have made Marriott our fourth third-party hotel manager with which we do business. We look forward to growing our management position with Marriott over time. With the addition of the Courtyard Alexandria have increased our leverage of the upscale segment of the hotel industry to more than half of the total rooms in our portfolio.

We have also continued to selectively prune our portfolio with strategic sales of non-core assets. Subsequent to the close of the quarter, we announced that the purchasers under the definitive agreement for the sale of our Atlanta portfolio had completed their due diligence and elected to proceed to closing, making their substantial deposits non-refundable. While we expect some incremental liquidity benefit from selling these properties, our primary objectives in their disposition is to increase our attention on our core markets and to maintain an efficient and focuses portfolio.

Our portfolio now derives 21% of its EBITDA from New York City, 20% from the Boston Metro cluster, 19% from the Philadelphia metro cluster and 15% from our Philadelphia and Connecticut assets. 50% of our portfolio EBITDA is generated from Marriott branded hotels and 29% from our Hilton branded hotels. Although our pipeline remains active, with our main interest in focusing on high barrier to entry markets in premium brands, we are also in a strong position to generate substantial internal growth leading to increased FFO.

Our internal growth opportunities stem from the potential to drive ADR growth at our high occupancy stabilized assets, and increase both ADR and occupancy at our new hotels, which are in the process of ramping up.

Now, let me turn the call over to Ashish Parikh to provide detail on third quarter performance, our financial position and to talk about our guidance for the remainder of 2006. Ashish?

Thanks, Jay. At September 30th, 2006, our consolidated hotel portfolio consisted of 49 hotels with 5,535 rooms. We also maintained an interest in 14 properties, 2,405 rooms that are accounted for as unconsolidated joint venture investments. During the third quarter, we only counted the financial performance for 47 of the 49 hotels, due to the timing of the purchase of the Courtyard Alexandria, and the buy-out of our joint venture partners' interests in the Hampton Inn Chelsea. Both of these transactions occurred on the last business day of the quarter.

RevPAR for our consolidated portfolio of 47 hotels reached $94.31, an increase of 10.2% compared to the 2005 third quarter. About three-quarters of our RevPAR growth was due to increased average daily rates. We were pleased with out EBITDA growth and margin expansion for the quarter. Our consolidated portfolio had EBITDA margins of 40.3% in the third quarter, up an impressive 256 basis points from 37.8% for the same period a year earlier. This increase in RevPAR and margins speaks volumes of the strategic direction of our acquisitions program during the past year.

As we have previously mentioned, most of the current acquisition activity has been focused on newer hotels with best-in-class franchise affiliations in central business districts and first-string suburban markets that have displayed the highest growth in the current year. This acquisition strategy has clearly had a positive impact on our consolidated hotel portfolio.

Margins were positively impacted by the strong rate increases in the stabilization of several hotels that were in our portfolio during the third quarter of 2005. On a same store basis, which includes 30 of our 63 hotels that were owned for the entire quarter, RevPAR for the third quarter increased 8.5% on a year-over-year basis to $97.61, driven by a 6.1% increase in ADR and a 2.3% improvement in occupancy. Same store EBITDA increased 11.5% to $12.6 million due to strong, rate-based revenue growth. Our same store margins expanded 116 basis points from 39.3% to 40.3% during the quarter.

On a GAAP basis, we recorded net income applicable to common shareholders of $4.6 million or $0.16 per diluted share compared to net income of $1.7 million or $0.09 per diluted share in the year-ago quarter. The increase in net income on a year-over-year basis is primarily due to improved performance of our existing portfolio and contribution from our acquisitions. This growth has increased the scale of our operation and has further enabled us to leverage the absorption of our general and administrative costs across a larger platform.

The increase in net income on a year-over-year basis was offset by distributions on our Series A preferred shares issued in the middle of the third quarter of 2005, increased interest expense and increased depreciation expense from the growth in the number of owned assets. For the third quarter 2006, we recorded a 33% increase in our adjusted funds from operations to $0.40 per diluted share compared to $0.30 per diluted share for the same quarter last year.

Moving to our current financial position, at September 30th, 2006, we had approximately $460 million of long-term debt outstanding, which included approximately $51.5 million of trust-preferred securities and $10.2 million of long-term debt on our Atlanta assets that are currently held for sale.

Fixed rate debt, including variable rate debt hedged by interest rate swaps, amounted to approximately 92% of our total debt. The weighted average interest rate on the company's fixed rate debt was approximately 6.47%. The weighted average life on the company's debt is approximately ten years, and at September 30th, 2006, the company's outstanding common shares in partnership units totaled approximately 32 -- 36.2 million fully diluted shares.

Total development loan financings outstanding including equity in our Manhattan land leases totaled approximately 53.7 million at the end of the third quarter. During the third quarter, we originated a new land lease of $10.1 million at a rate of 10% for a parcel of land near Times Square in New York City. This is consistent with other development loan financings we have entered into with our development partners, which is primarily funding Manhattan/metro New York-based development projects.

Our development loan program is primarily utilized to afford the company the first right of refusal to purchase newly built, strategic assets in very difficult dissourced markets. These loans, combined with our acquisition activity to date, serve as a validation of the hard work we have done in cultivating developer relationships in New York City, an area of tremendous opportunity with a robust economy and high barriers to entry, limiting future supply growth.

In the third quarter, we declared our regular $0.18 per common share dividend or $0.72 on an annualized basis for an annualized yield of 6.6% based on the closing share price as of yesterday. It was our thirtieth consecutive dividend payment at this level, dating back to September of 1999, and we are tracking to achieve a strong AFFO payout ratio going forward.

Our platform creates numerous opportunities for us, and our capacity for additional growth remains solid. Our strong relationships with developers in many high barrier to entry markets continues to provide us a proprietary pipeline from new opportunities in very difficult, dissourced markets.

I'd like to turn to our 2006 guidance at this time. And, assuming a continued strong economy in the northeast US corridor and limited supply growth, the company expects that its current portfolio, including the acquisitions concluded to date, will lead to another quarter of growth in adjusted funds from operations. Based upon our operating results in the third quarter and our current fourth quarter statistics, we are reaffirming our RevPAR guidance of between 8% and 10% across our consolidated hotel portfolio.

The company is narrowing its previously issued guidance for net income available to common shareholders for the full year ended December 31st, 2006, which is now forecasted to be in the range of $0.5 million to $1 million or $0.02 to $0.04 per weighted average diluted share outstanding. The company also expect adjusted funds from operations to be in the range of $0.99 to $1.01 per fully diluted share for the full year ended December 31st, 2006.

The range in our guidance is due to the possibility that financial results could be impacted by ramp-up of new assets opened and acquired during the current year and by the potential pay-down of certain loans that are currently outstanding under our development loan program. In our current earnings release, we have supplied supplemental schedules in order to provide additional disclosure and financial information for the benefit of analysts and investors. We have significantly expanded our disclosure regarding our unconsolidated joint venture program, and we hope that our stakeholders will come to appreciate the cash flow and accretion benefit of our participating, preferred join ventures.

We have also expanded our EBITDA disclosure for both our consolidated properties and our unconsolidated joint venture properties in order to clearly present the company's EBITDA run rate for the year. This EBITDA run rate however, does not build in the EBITDA that the company can expect from a full year's worth of operations from properties that have been acquired during 2006 and for the ramp-up of certain new properties.

This concludes my formal remarks, and I'd like to turn the call back to Jay.

Thanks, Ashish. Again, let me say that the quarter continued a very deliberate portfolio assembly program further strengthening our portfolio of premium branded hotels in markets with high barriers to new competition. Since the beginning of 2003, we have purchased interests in a net 47 hotels with a combined 6,535 rooms, enabling us to transition from a Pennsylvania focused owner of mid-scale hotels to an owner of predominantly upscale hotels situated in the New York, Austin, Philadelphia and Washington, DC metros.

In the event that I stumbled over my words earlier and was not clear, let me reiterate that our portfolio now derives 21% of its EBITDA from New York City, 20% from the Boston metro cluster, 19% from the Philadelphia metro cluster, 14% of its EBITDA from our Washington DC metro cluster and the remaining 25% is from our Connecticut and Pennsylvania assets. 50% of the portfolio EBITDA is generated from Marriott branded hotels and 29% from Hilton branded hotels.

The growth that we have executed across the last several years positions us to deliver share price appreciation and secure our secular-leading dividend and allow for potential increases in future pay-outs.

With that Operator, I'd like to open the line up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll take our first question today from David Loeb with Baird.

Hi. Jay, I wondered if you could just give a little more color on your statement about acquisition priorities? Does this relate to your perception of cap rates in the market? Specifically, are properties getting too expensive for you to look at continuing to focus on de novo acquisitions versus buying in your joint ventures? Or, is it more related to the way you see your cost of capital relative to those returns?

Yes. That's a great question, David. I think we -- for us, we're driven somewhat by the latter. Most of the acquisitions that we make here at Hersha are in assets that are delivering pretty strong growth. And, we want to make sure that any acquisitions that we make have a growth rate that offsets what we believe might be a discount to our share price currently.

And so, we -- as we mentioned, as Ashish mentioned and I mentioned, we continue to find some very attractive acquisition opportunities that deliver growth rates that exceed the average. And, we'll continue to pursue those acquisitions. But, I think wholesale acquisitions -- just being in acquisitions mode for acquisitions sake, is probably something that is behind the entire industry, and particularly for us.

Okay. It makes a lot of sense. On the balance sheet, in addition to selling Atlanta and obviously continuing to grow your cash flow, what other strategies do you have to reduce the leverage? What's sort of your comfort level to the level of leverage that you would like to have going forward?

Our leverage relative to our peer set is probably on the higher side of the range, and we understand that. We do have a greater level of comfort, maybe, than our peers, because of the markets that we operate in and the segments that we own assets in. We find that our assets in the markets that we're in are going to -- are very resilient relative to the vagaries of the marketplace.

That being said, we are on a campaign to reduce our leverage. Unfortunately, there's not a silver bullet that's going to solve the problem. And so, we will continue to whittle away at it across the next 12 to 18 months by making future acquisitions with lower levels of property level debt. We have a decent amount of flexibility in our corporate level debt. We've got a $100 million line, and that can always be paid down. But again, it's -- like I said before, there is no silver bullet for it. We'll continue to whittle away at it.

I think the share price appreciation that we've seen here across for the last several months has also helped to write that leverage ratio, and I expect that to continue. But, it's going to be a -- the sum of a lot of different strategies rather than one main -- in one main [effort and] campaign.

Great, thank you.

Thanks.

[OPERATOR INSTRUCTIONS]

Mr. Shah, it appears that we have no further questions at this time.

All right. Well, great. Karen, thank you for your assistance, and I'd like to thank everyone again for joining us this morning. I know it's a very busy day, and there's probably a lot of people traveling. But, thank you again, and we'll speak to you all soon.

Thank you. This does conclude today's conference call. Thank you everyone for joining us, and have a great afternoon.