Hersha Hospitality Trust (HT) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Hersha Hospitality Trust First Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

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

Thank you, Alan. Good morning, everyone. Before we begin this morning's 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 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, achievements 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. With me today is Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. I'm going to start the call with some remarks about our quarter and then turn the call over to Ashish, who will provide some additional color on our financial results and talk about our financial guidance for 2007. After we conclude, we'll be happy to answer questions.

Overall, we're very pleased with the financial performance of the company in the first quarter of 2007 as we saw solid contribution from our newly acquired properties and good rate-based RevPAR growth, which helped our margins.

Consolidated total hotel operating revenues for the first quarter of 2007 increased 94% to $46.4 million, driven primarily by the acquisition of high-quality hotels and growth in room revenue, largely driven by increased average daily rates in all of our markets.

A significant portion of the dollar amount of our revenue growth was due to the addition of the Summerfield Suites portfolio, which we added at the end of the fourth quarter of 2006 and brought us a presence in California and Arizona.

Revenue per available room or RevPAR for our consolidated hotels increased 21.2% on a year-over-year basis. Our RevPAR improvement came largely from increased average daily rate, or ADR, and the better mix of hotels in our portfolio, which helped our EBITDA margins expand 449 basis points to 31.2%.

In the first quarter of 2007, we completed the acquisition of interests in five properties with a total of 551 rooms at a total cost of $147.8 million. All of these hotels have been opened for less than one year, giving us seven properties in which we have interest opened after January 1, 2006.

Our 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 has clearly had a positive impact on our consolidated hotel portfolio. Additionally, four of the five acquisitions in the first quarter were for wholly owned properties, which continues our plan of simplifying the company's ownership structure.

Another key point regarding our first quarter acquisitions activity is that we increased our presence in Manhattan with the purchase of the Holiday Inn Express, Madison Square Garden and the Hampton Inn Manhattan Seaport. We believe that New York City has attractive hotel ownership and operating fundamentals with double-digit ADR growth coupled with forecasted decrease in the city's hotel room inventory in 2007. We believe that increasing our exposure to this market will add value for our shareholders in the years to come.

Hersha now owns interest in four hotels in Manhattan Proper and earns approximately 40% of its earnings before interest, taxes, depreciation and amortization from a total of 12 properties in the New York City metropolitan market including Manhattan, Queens, Brooklyn, Long Island and northern New Jersey.

Additionally, two of the other hotels we've purchased during the first quarter are Residence Inn by Marriott assets. The purchase of these brings our total exposure to this attractive brand to 11 hotels. Like most of our other recent purchases, these properties are brand new hotels. In total, seven of our 11 Residence Inn properties are less than five years old.

Although our pipeline remains active with our main interest in focusing on high barrier to entry markets and premium brands, we are in a position to generate meaningful 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 continue to ramp up.

Now, let me turn the call over to Ashish Parikh to provide additional detail on first quarter performance, our financial performance -- financial position and then, talk about our initial guidance for 2007. Great. Ashish?

Thanks, Jay. Our growth in revenues and EBITDA during the first quarter was a result of the continued stabilization of our young, urban portfolio in addition to the contribution from hotels acquired during 2006 and in the first quarter of 2007.

At March 31, 2007, our portfolio consisted of 71 hotels with 9,191 rooms, up 29% and 33% respectively from just one year ago. Of our total, our consolidated hotel portfolio consisted of 56 hotels and 6,558 rooms, up from 41 hotels at the end of the first quarter of 2006.

We now have 79% of our total hotels owned as consolidated assets. We also maintain an interest in 15 properties with 2,633 rooms that are accounted for as unconsolidated joint venture investments.

I'd like to take this opportunity to discuss some of our key revenue and expense trends, several items that are positively impacting our revenues. First, our asset management group and our management partners are able to increase our average daily rate in almost all of our core markets and have done a commendable job in balancing the rate versus occupancy trade-off.

This ability to drive rate is directly impacting our ability to increase our margins and contributing to our ability to obtain profitability flow-through. Our consolidated portfolio had EBITDA margins of 31.2% in the first quarter, up an impressive 449 basis points from the same period a year earlier.

Second, we continue to grow occupancy at our recently purchased, newer hotels. These are often referred to as our ramp-up hotels. During this quarter, that growth was a little more than we would have liked to see, but still solid considering the seasonality in the northeast and mid-Atlantic corridor during the first quarter. We believe these assets position us very well to continue our internal growth well into the future.

Lastly, we have shifted the mix of our portfolio so that we now own hotels that command higher rates and are in more robust locations like New York City as shown by the occupancy trends of our consolidated portfolio.

We were able to grow our occupancy 2.4% higher to 64.9%, despite our occupancy being negatively impacted by property improvement renovations at nine of our hotels during the quarter. We estimate that the renovations of these hotels cost us approximately $400,000 in lost revenue for the quarter.

On the expense side, we had seasonally higher utility costs, which was a factor in the margin growth and that we had in our same store consolidated results. Despite the renovations and the higher than forecasted utility costs, we were still able to grow our same store margins by 102 basis points during the quarter.

On a GAAP basis, we recorded a net loss applicable to common shareholders of $5.4 million or $0.13 per diluted share as compared to a net loss of $5.1 million or $0.25 per diluted share in the year-ago quarter. The increased net loss on a year-over-year basis is primarily due to increased interest expense and additional depreciation and amortization expense.

These expenses were more than offset by improved performance of our existing portfolio and contribution from our acquisitions, leading to significant growth in our operating income. Our portfolio 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.

Our financial position continues to be in good shape to help finance our growth. At March 31, 2007, we had approximately $54 million available under our credit line, and nearly all of our debt is at attractive fixed rate. We ended the quarter with $664.7 million of long-term debt, which included approximately $51.5 million of trust-preferred securities and approximately $45.6 million outstanding on our credit line.

Fixed rate debt, including variable rate debt hedged by an interest rate swap, amounted to approximately 95% of our total debt. The weighted average interest rate on the company's fixed rate debt was approximately 6.24%, and the weighted average life of the company's debt was approximately nine years.

Our balance sheet has significantly improved due to strong growth in operations, refinancing efforts and equity issuances used to assemble our portfolio. As a result, we believe we are well positioned for future growth from a balance sheet perspective and project improved dividend coverage over the coming years.

Total development loan financings outstanding between equity and Manhattan land leases totaled approximately $74.2 million at the end of the first quarter. At this time, all of our development loans and land leases are being utilized exclusively to finance New York City hotel projects.

In the first quarter, we declared our regular $0.18 per common share dividend or $0.72 on an annualized basis for a payout ratio of approximately 52% of the company's forecasted adjusted funds from operations for the fiscal year ending December 31, 2007.

Turning to our updated guidance for 2007, assuming a continued strong economy and limited supply growth in our markets, we expect that our current portfolio will lead to another year of strong growth in adjusted funds from operations.

As a result of the acquisitions we made during the end of the year and in the first quarter of 2007, we now expect an increase in depreciation and amortization expense. Therefore, we now expect to achieve net income available to common shareholders for the full year ended December 31, 2007, in the range of $8.5 million to $10.5 million or $0.19 to $0.23 per weighted average diluted share outstanding.

We are reiterating our adjusted FFO guidance to be in the range of $1.14 to $1.18 per diluted share and our adjusted EBITDA to be in the range of $110 million to $112 million for the full year ended December 31, 2007. Our guidance also continues to be based upon anticipated RevPAR growth of between 12% to 14%, across our consolidated hotel portfolio.

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

Thanks, Ashish. Let me wrap up today with a few summary thoughts. We continue to have strong financial performance, as shown by this quarter's growth. We're focused on building a strong company with a disciplined acquisitions program and a value-added asset management program. And lastly, your interests are aligned with that of the management team and trustees of the company who collectively own 9% of the shares outstanding.

With that operator, I'd like to thank everyone for being with us and open up the line for questions.

Thank you. (OPERATOR INSTRUCTIONS) And we'll take our first question from Andrew Whitman with Baird.

Good morning, guys.

Hey Andrew, how are you?

Fine. A couple of questions today, first just looking at the guidance, I saw that the -- I'm looking at EBITDA guidance. It looks largely unchanged from earlier in the year. But, it looks the mix from consolidated to unconsolidated changed. So, I was just wondering if you could provide a little bit of color on that?

Sure. When we gave our guidance for the -- at the end of year, we expected the acquisition of the Holiday Inn Express in Chelsea to be a consolidated property. In fact, that ended up becoming an unconsolidated joint venture investment, and that accounts for about $3.5 million of the move. The remainder of the move is really the ramp-up that we're seeing in our Mystic JV and in our Boston joint venture, the unconsolidated joint ventures.

Okay, great. And then, and just in terms of the margins and just looking at the non-same store RevPAR bumps and margin increases, they looked very substantial. It clearly indicates that your strategy is having -- going towards higher rated hotels. I was just wondering, besides the Summerfield, if there's anything notable there that we should be aware of that's causing that or any specific markets or hotels?

In the first quarter Andy, Summerfield's definitely contributed, mainly because of the California and Arizona presence that we now have. In addition to that, it is New York that's primarily driving it. And we also saw very strong rate growth in Philadelphia and the sub markets.

Yes. I think Ashish's first point is a point of note. By diversifying our geographic concentration, by including some west coast, we were able to drive stronger rates during a period. And we wouldn't normally have been able to do that with our former geographic concentration. So, that flowed through.

Okay. So, that's not necessarily a market -- well probably market, but then seasonality. Is that what I'm hearing here?

That's right. It's a combination of the two, because the first quarter is the strongest quarter, let's say, in Arizona and one of the stronger quarters in California as well.

Okay, great. And then, I guess my final question has just to do with the share count and the plan that's in place. I think you -- correct me if I'm wrong, but I thought it was 2 million share offering that could happen time to time. I was just wondering, could you give us an update on the status of that and how much may have come out already or how much we could expect?

Sure. We have not sold any stock. And at this time, we don't have any current plans to sell any stock. That was put into place more as -- in the even that we ever needed to issue stock through this continuous offering program. But, none has been issued at this time.

Okay, great. Thanks.

And we'll go next to Michelle Ko of UBS.

Hi, good morning,

Hi.

Hi Michelle, how are you?

Good, good quarter, just a couple of questions. I was wondering if you could give us more details on the performance at the Courtyard Ewing, the Courtyard South Boston and the Holiday Inn Express, South Boston on the unconsolidated JV side? It seems that the EBITDA appears to be down year-over-year for the first quarter.

I was wondering if you could give us a little more color on that, and also if you could tell us of your JVs, unconsolidated and consolidated? Would it be possible to buy out the remaining interest? Or, would it be able to freely sell your interest? Or, are there any lock-ups for any of the particular properties? And then, the last question would be, given the acquisition environment, are you considering selling some of your more suburban assets in order to delever?

Let me start with the three individual assets, and then I'll have Jay or Neil add some color on some of our plans for the -- on the consolidated JVs. As far as the -- those three assets that we saw, the -- we saw very good growth in the Courtyard, South Boston. The Holiday Inn Express in South Boston was a little weaker than last year, which mirrors really what we saw in Boston is general.

We saw -- in Boston as a quarter, it was our weakest quarter for the quarter. We don't know what drove that so much. It was partly weather related, partly just softness in some of the sub markets in Boston. And Holiday Inn Express, South Boston was in line with that.

Our Courtyard in Ewing continues to perform well. I think last year, we may have had some additional short-term business in the fourth quarter, but we're not expecting -- we're expecting to hedge that up for the remainder of the year in our Courtyard in Ewing.

As far as plans to buying in the development, the unconsolidated JVs, I'll turn it over to Jay.

Yes. You know Michelle, let me talk about the unconsolidated JVs. At this point, the FFO generated by the unconsolidated JVs is down to about 15% from 25% last year. We continue to look for opportunities to buy interest down from our JV partners. We've done that this year with the Glastonbury asset where we purchased an additional 8% of the ownership interest in the asset. And we'll continue to look for opportunities to do that.

We have made significant progress toward reducing the concentration of JV FFO, and we'll continue to do that, generally as a part of our acquisitions program. I don't know that there's going to be a silver bullet or that I can suggest that this year, we have plans to buy out X number of dollars of JV interest. But, as soon as the opportunities present themselves, assets ramp up and our partners are so inclined to do so, we are buying more interest when we can.

As far as some of our suburban assets, Neil has been spending some time with those and thinking about those. So, let me let him answer the question on suburban assets and the potential for disposition.

Yes, Michelle, we -- there's not much to say here beyond that we have started exploring either a sale or a formation of a joint venture on a group of our lower-growth, suburban assets throughout the portfolio. Those discussions have -- began across the last few months, and they continue today.

As you know, we need to balance -- we need to balance the consideration we get with the fact that there is very great cash flow coming off of these assets. They're in very stable markets that don't have much new supply coming in. So, it's really a pricing issue and a structuring issue.

But, they do perform -- they do provide -- all that cash flow does provide a great platform for debt, which would make it attractive to the marketplace today. So, we're in the midst of those discussions.

Okay. And if you did sell some of those assets, would you use the proceeds to delever? Or, would you use it to fund further growth?

I think the plan is to delever with that -- with those proceeds.

Okay, great. Thank you.

Sure.

(OPERATOR INSTRUCTIONS) We'll go to [Juan Kim] with JMP Securities.

Hi, guys.

Hi.

I know you guys don't provide Q2 guidance, but I was wondering if in terms of seasonality, if you look at your previous year, is that kind of indicative of how this year would play out as well?

Yes, I think that's right. I think if you look at previous years and the type of seasonality we had, we usually look at the first quarter being somewhere right around the 10% of our earnings range, the next two quarters to generate somewhere around -- almost equally 35% or so of our earnings, and then the fourth quarter for the remainder of that 20%.

Okay, great. Thank you, very much.

Sure.

(OPERATOR INSTRUCTIONS) And we'll go to Smedes Rose with Calyon Securities.

Hi, good morning.

Good morning, Smedes.

Could you just talk a little bit in general about what you're seeing cap rate-wise or just pricing-wise for hotels out there as you look? Is it similar to where prices were a year ago, up, down, kind of just maybe a little bit of color around that?

Smedes, this is Neil. We found pricing to be pretty much in line with last year. We were expecting that cap rates would start to move up this year. And we have unfortunately, not seen that happen in the marketplace.

They're in that kind of 7 to 8 range depending on quality and depending on market. In New York City, things are priced below a 5 cap in a lot of cases. But, generally across the country and in most of our markets, it's somewhere in between a 7 and an 8 cap and closer to the 7. It makes it very difficult for us to be competitive in the acquisitions marketplace. It's their -- it's the private equity buyers that are levering assets up to 80% that can make the numbers work.

And did you say at the beginning of the call that you would actually expect room supply in New York to come down this year still?

Yes. We have -- the Hotel Pennsylvania, which is across from the -- from Madison Square Garden is about 1,500 rooms. And that has just been purchased by Vornado. And they're planning on razing the building and replacing it with an office building. So, 1,500 rooms in a market in a sort of district of New York where we've got several rooms, we believe is a very attractive for us.

Smedes, you may be asking as there's been a lot of reports recently about the amount of new supply coming into New York.

It seems there's a lot of talk about smaller, more limited service properties kind of like the ones that you guys are in now of people trying to open those, particularly in the downtown area.

That's right, yes.

I don't know where they are in the --

Yes. There's a lot of those in planning. There's a handful under construction, and there's a lot more in the pipeline. So, as we look through those numbers and we look through them very carefully, we don't estimate it -- we don't project them to have a significant impact on our business in the next year or two.

I think the numbers that you see out there, we've -- by knowing the developers that are involved or the sites that are involved, we just don't expect them to be opening any time soon. I think there -- it is likely that there will be a 2% to 3% kind of increase in supply across three years. But, in that time, you'll have big boxes like the Hotel Pennsylvania leave the inventory.

And so on balance, I think we'll still be in a very strong fundamental environment. I think where you're seeing most of the new supply being announced or discussed is in the West Chelsea and Garment District and even closer to Jacob Javits Center where land values have been a little bit more justifiable than other parts of Manhattan.

So, there will be new supply in those areas, and there will be new hotels opening. But, they are as you said, very small. They're 100-room kind of boxes, which we don't think will have a substantial impact on our business.

But, you'll note that our development loan program, that assets that we're pursuing and the developments we're pursuing right now in Manhattan are in areas that aren't -- are not in Midtown West or neither in the garment district. We're looking in Midtown East and Lower Manhattan and Union Square.

Great, okay. Thank you.

And gentlemen, it appears we have no further questions at this time. I'd like to turn the call back to Jay Shah for any closing remarks.

Well, let me just close again. Thank everyone for taking time with us this morning. We will be available after the call if anybody has questions that occur to them after we disconnect. Thank you, again.

And ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect.