Hersha Hospitality Trust (HT) 2007 Q2 法說會逐字稿

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

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

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

Thank you, Amanda. Before we begin today'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 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 with 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 President and 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 the remainder of 2007.

After we conclude, we'll be happy to answer any questions that any of you may have.

We are very pleased with our overall results for the second quarter of 2007 and the many metrics that came together to help us report a 20% year-over-year growth and adjusted FFO per diluted share.

Total revenue increased 72%, with total adjusted EBITDA up 63%, as compared to the second quarter of 2006.

A portion of this performance was related to the addition of 13 high-quality hotels with premium revenue per available room in key markets, such as New York and Northern California.

Our performance was also enhanced by better unit performance of the existing hotels in our portfolio, the stabilization of our younger assets, and our ability to increase our revenues primarily through growth in average daily rate.

RevPAR for our consolidated hotels grew nearly 17%, with approximately 82% of this growth coming from increased average daily rates.

Our strategy continues to focus on the ownership of limited service and extended stay hotels in high barrier to entry urban and strong secondary markets.

The Metro New York City market is now our largest, as measured by EBITDA, with approximately 40% of our consolidated EBITDA coming from this market, including our development loan program.

This quarter, RevPAR for our metro New York City hotels increased approximately 12%, with approximately 90% of that coming from rate and the remainder of that growth coming from increased occupancy, which is a very strong 87%. A key driver of this performance has been the quicker-than-expected ramp-up of our newer Manhattan hotels.

Our core Philadelphia market is also a bright spot for us. The consolidated RevPAR for us of 11.3% that we are experiencing in this market is similar to the growth we are experiencing in Metro New York City, in that it is mostly rate-based growth. The 79% occupancy of our properties in Philly is also very strong.

We have a unique opportunity to further increase shareholder value by purchasing the remainder of our joint venture investment in the Hampton Inn, Center City, Philadelphia.

Our strategy to expand our expand our extended stay portfolio continues to yield excellent results, as well. Our upscale extended stay portfolio had an average RevPAR of approximately $105, and yielded EBITDA margins of approximately 45%.

Our West Coast Summerfield Suites assets, which we purchased at the end of last year, have performed slightly above our expectations, particularly in ADR, but also with respect to occupancy. We believe that the continued focus on this brand by Hyatt will yield strong results for the years to come.

Second quarter results also included several notable accomplishments. First, we purchased the Hotel 373, which is located at 373 5th Avenue at 35th Street in Midtown, Manhattan, directly across the street from the Empire State Building. This independent boutique hotel is our 13th hotel in the New York City metropolitan market.

In addition to being located in what we think is the best hotel market in the country, this asset is in a prime spot and carries a higher RevPAR relative to the other hotels in our portfolio, making it a very financially attractive addition.

We also bolstered our presence in New York with several investments in our development loan program.

We purchased two land parcels in Brooklyn, New York, one of which closed just after the quarter, which will be used for an all-suite hotel development, and we also issued a $15 million mezzanine loan for an upscale select-service hotel in lower Manhattan. Importantly, we were able to redeploy nearly all of the funds from some of our other development loans, which were repaid during the quarter.

As is the case with our other development investments, these transactions provide us a first right of offer on the completed hotel developments.

And, lastly, we completed our percentage ownership in two of our unconsolidated joint venture hotels in Glastonbury, Connecticut, a Homewood Suites and a Hilton Garden Inn, to 48% each, from 40%.

Going forward, we'll continue to opportunistically increase our percentage ownership in our unconsolidated joint venture hotel as a means of simplifying our structure. With that on the overview of our performance and activity, let me now turn the call over to Ashish.

Thanks, Jay. We were very pleased with the revenue and profitability performance for the quarter as a whole. I'll start by discussing our revenues.

For our consolidated portfolio, the acquisitions we've made over the last year and the improved rate-based performance of our existing hotels were the primary drivers of the 66% total revenue growth for our consolidated portfolio.

In the key performance indicator sheet of our supplemental schedules, you can see that for our total portfolio of consolidated hotels, our quarterly ADR increased 14% as compared to the same period last year.

We currently estimate that approximately 25% of our EBITDA from consolidated hotels is generated from assets less than three years old and the stabilization of these assets also drove our occupancies higher by 230 basis points during the quarter.

As our portfolio continues to mature, we are in a great position to grow our average daily rate given our strong occupancy level of approximately 80% during the second quarter.

Our newly acquired hotels and our ability to drive ADR had a positive impact on our overall margins and allowed us to generate additional EBITDA during the quarter.

Our consolidated portfolio had EBITDA margins of 40.6% in the second quarter, up 110 basis points from the same period a year earlier.

The revenue performance for our same-store consolidated portfolio, which is slightly less than half of our total portfolio, was also quite strong, with total RevPAR growth of 8.8%.

Increases in ADR drove approximately 77% of this RevPAR growth, and we were quite pleased to see that our managers were able to increase our same-store occupancy percentages by almost 180 basis points.

The strength of our affiliated management companies, our markets, and our asset quality continues to drive superior performance for our portfolio.

Our quarterly same-store RevPAR compares very favorably to Marriott's system-wide limited service RevPAR growth of 5.3% in the second quarter and Hilton's mid-7% RevPAR growth for its Hampton and Homewood brands.

Marriott and Hilton properties comprise approximately 64% of our portfolio, and the RevPAR growth of our same-store portfolio outperformed both of their quarterly RevPAR metrics for the select service categories.

The same-store EBITDA margins for our consolidated portfolio were down 81 basis points relative to last year, and I would like to provide some more color on the drives of this margin deterioration during the quarter.

During this quarter, we experienced approximately 100 basis points of margin deterioration that we can attribute to renovation disruptions at our properties. The majority of these disruptions were caused by delays in construction that spilled over into the second quarter and a rebranding at one of our Wilmington, Delaware hotels.

Most of this work was completed by the end of May, and we have seen more positive flow-through in our same-store operating results since that time.

The remainder of the margin deterioration is attributed to increases in property taxes and insurance, higher utility costs and franchiser-mandated branding initiatives, such as expanded dining options at one of our select service brands.

We believe that many of the factors causing this margin deterioration at our same-store hotels are controllable and our asset management group has devoted more resources and implemented new procedures to assist our management companies.

We believe that this will help our managers to more efficiently plan and react to renovation disruptions and will allow our managers to better control cost pressures that are ubiquitous to our industry, but are ones that our managers have been able to control more efficiently in the past.

Turning to our financial position, we continue to be in good shape with respect to our resources to help finance our growth.

At June 30, 2007, we had approximately $51 million available under our line of credit and 91% of our debt is at attractive fixed rates.

Our balance sheet has improved due to strong growth in operations and refinancing efforts, which have improved our ability to finance acquisitions and property improvements and to securely fund our dividend.

Total development loan financings outstanding, including equity in our Manhattan land leases, totaled approximately $68 million at the end of the second quarter.

At this time, 93% of our development loans and land leases are being utilized to finance New York City hotel projects.

In the second quarter, we declared an $0.18 per common share dividend, or $0.72 on an annualized basis for a payout ratio of approximately 61% to 62% of the Company's forecasted adjusted FFO for the fiscal year ending December 31, 2007.

Turning to our updated guidance for 2007, as a result of our 2007 financial performance to date, we are revising our financial guidance for the full year ending December 31, 2007, as follows.

Net income available to common shareholders is now expected to be $10.25 million to $11.5 million, or $0.22 to $0.25 per weighted average diluted share outstanding.

This is revised from previous financial guidance due to completed acquisitions, increased development loans and increased depreciation and amortization from the acquisition of hotels. 2007 adjusted EBITDA is now expected to be $111.5 million to $113 million.

2007 adjusted FFO is now expected to be at the high end of our previous guidance range, and we have narrowed the range to $1.16 to $1.18 per weighted average diluted share outstanding.

Our 2007 RevPAR forecast for our consolidated and same-store portfolio remains unchanged at 12% to 14% and 6.5% to 8.5%, respectively. This concludes my formal remarks. Now I'd like to turn the call back to Jay.

Thanks, Ashish. In closing, the geographic diversity and the deliberate choice of markets in our portfolio has enabled us to produce strong financial outcomes, as is shown by this quarter's growth.

We're focused on building a strong company platform with the value-added asset management program and a disciplined capital allocation program.

Our balance sheet is in a solid position, and as we have proven, these attributes will allow us to provide generous coverage of our dividend, expand as opportunities arise and drive increases in revenues and earnings over time.

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

(OPERATOR INSTRUCTIONS). And we'll take our first question from David Loeb of Baird.

Just one, at the moment. Jay, you completed two transactions after the end of the quarter. Can you just remind us whether those were unit deals or whether the cash portion was actually funded off of your line or some other way?

Sure, David. The two transactions, one was a unit transaction and one was for cash. And let me have Ashish answer where those funds came from.

Sure. David, for the Holiday Inn Norwich transaction, we assumed the seller's loan outstanding on the property, which is about $8.2 million, and we issued roughly $7.9 million in OP units. The second transaction, in the third quarter, was the acquisition of the second parcel of land at [Nevin] Street.

We acquired that parcel for $7.5 million and received mortgage financing of $6.5 million, so we drew the remaining $1 million from our credit line.

Okay, and were both of those related-party transactions?

The Norwich one was. The Nevin Street property was purchased from an unrelated third party, but it has been leased to our affiliated development company.

Okay, and the other land parcel that you bought in the second quarter, that was purchased from the related party?

That was. Those two parcels are adjacent and we plan to develop an extended-stay hotel on that parcel, on those two parcels.

Okay, and what was the price for the OP units, or the number of OP units?

It was roughly 659,000 OP units and they were granted at $12 flat.

Which was basically the market price at the time the contract was signed?

That's correct. It was actually a 20-day weighted average volume adjusted price prior to the day of closing.

Okay, thanks.

Our next question comes from Bill Crow of Raymond James.

Ashish, as you look at the expectations for the third and fourth quarters, via consensus, is there anything in your geographic concentration, the increase in New York or anything, that would skew historical weighting seasonality?

Yes, I think that if you look back over the last few years, we are probably looking to have more FFO generated and EBITDA generated in the fourth quarters than we had in previous years.

Our splits are now sort of in the give or take less than 10% range for the first quarter, somewhere in the 35% to 38% in the second and third, with the remainder coming in the fourth.

And that is primarily driven by New York, as well as Northern California and Arizona, which are significant contributors in the fourth quarter, as well.

Jay, any change in the velocity of deals you're seeing and/or seller expectations on pricing?

No, we haven't really seen any changes on seller expectations on pricing, but we expect here in the near to mid term that we probably will see that as you're seeing risk and debt being repriced somewhat. But as of right now we haven't.

We've only purchased two hotels this year and one of the reasons for that is we haven't found the opportunities that we think make sense for us from a pricing standpoint, but we would expect that in the next six to eight months we might start seeing some cap rate expansion, maybe 25 basis points, maybe more.

Would you consider wrapping up your divestiture program in order to position the balance sheet for what might be a better buying opportunity?

It's an interesting question. I think the -- most of the assets that we have are delivering strong growth for us right now. We've often talked about the Central Pennsylvania portfolio, the limited service hotels, the stabilized portfolio that's been part of the REIT for many years.

What we started noticing there in the last two quarters is that even those assets were delivering slightly above industry average growth rates. So though we continue to look for opportunities to divest those, currently in the portfolio they're helping to drive our overall growth.

But we continue to look for those opportunities on a very regular basis and we would certainly not be opposed to liquidating some of those investments in order to tighten up the balance sheet.

That's all I have. Thank you.

Thanks, Bill.

We have a question now from Michelle Ko of UBS.

Hi, just one question. In terms of your unconsolidated joint ventures, it seems that some of them seem to be doing quite well now, the Courtyard in South Boston and the Mystic properties. I was just wondering, how long do you wait until you feel that the results are somewhat stabilized.

And would you pursue trying to buy out some of the its in these assets since they've been doing a lot better now?

Michelle, this is Neil. We would consider at the right price. At this time, tough, the expectations of the joint venture partners on both partnerships are still higher than what would deliver the kind of growth in earnings that we would need from the investment. So we've had discussions about them, but we're not there yet.

And what kind of measures do you evaluate these properties on, until you think that they're more stabilized.

Sure. I think that really it's a matter pricing expectation, Michelle. We would have a view of what the prices are for these hotels at this time, and if we were to be in agreement with the joint venture partners, we would look to [ply] them out. Clearly, we like the assets. We entered into them on a JV basis because they were unstabilized.

I think that we would just continue to make sure that if they can hit our IRR hurdles and we could agree on a price, we could move forward. We've been able to do that in the past on a few of these assets. We're continuing to work on like the Glastonbury properties required more of them.

So we'll continue to work with them, but it isn't something that we can force our JV partners into selling and it's one that they continue to generate development deals for us going forward, so we want to keep good relationships with them, as well.

Okay, thank you.

Our next question comes from Jeff Donnelly, Wachovia Securities.

Good morning, guys. Ashish, first off, sorry I missed this, but how much of the margin compression in Q2 was the result of the renovation disruption versus operating expense increase?

Can you repeat that for me and maybe take a guess of what the margin change might have been, had it not been for the renovation impact?

Sure. We think the renovation disruptions were about 100 basis points, so with the rate-based growth that we had, Jeff, we would have expected margin expansion in sort of the 75-basis point range.

We saw deterioration of 81, so we sort of attribute the renovation disruptions to be about 100 basis points and then the remainder is a mix of property taxes and insurance, some new franchiser-mandated brand initiatives and utility cost increases.

And I guess more broadly, why were the -- I guess why were hotels that were experiencing some degree of renovation in your same-store pool, do you not normally take them out?

We normally do not. I think our same-store pool is still about 50% of the assets, so if we were to pull -- we had about 12 properties undergoing renovation during the quarter and one sort of brand change. It's just by pulling those out then the same store becomes even sort of less meaningful, when we disclose it.

Jeff, this is Jay. The good news with the renovations there, as Ashish mentioned, we're attributing about 100 basis points of the deterioration to that. It spilled over into the second quarter from the first quarter. It was not meant to do that.

We had some delays that were not anticipated, so it spilled into the first two months of it. In June, by the time all the renovations were over, we started seeing a stronger flow through, and so the good news is that all of that renovation is done.

It's behind us and we're going to hope to leverage that in the third quarter with even higher rates, which is our peak quarter.

And I'm curious, just for modeling purposes, how many rooms do you guys expect to have out of service in Q3 and Q4 on a consolidated basis?

On Q3, we don't expect that many at all. It's just really the one property in Wilmington continues to undergo some renovations. That's a 70-room hotel. In Q4, we do have a [pips] that we'll be starting in Q4, but I don't have that number offhand, Jeff. I can get that for you.

I guess do you think it will be I guess less impactful than maybe we saw in the first half of the year?

Yes, absolutely. And, really, we wouldn't do any renovations at any of our New York properties or the real strong EBITDA-generating properties in the fourth quarter.

But the ones that -- more the central PA and other assets that do tail off in the fourth quarter, we would look to start pips in those assets.

Okay, and then I noticed in one of your filings that you guys had modified your employment agreements at the end of June to I guess indemnify management from taxes and other obligations in the event of a parachute payment.

I'm just curious, what prompted your decision to explore that change?

Jeff, that was just more to bring our agreements in line with what our peers in the sector had. It was something that had been brought to our attention by some of our advisers, that our agreements were not necessarily standard relative to our peer set, and so that was just an adjustment to bring that to market.

Okay, and just last question is that since we're a little bit into August, can you talk a little bit about maybe what you guys have been seeing in terms of RevPAR performance, I guess, as we kind of move into the third quarter and how -- maybe that compares to what you saw at the talking end of the second quarter?

I think that, Jeff, this is Ashish. For RevPAR performance, I think we continue to see real strength in the markets that have been driving our RevPAR this year.

We continue to see very good numbers coming out of our New York and Philadelphia portfolios and stable numbers in sort of the Boston and Connecticut markets. Our Northern California and Arizona properties continue to exceed budgets almost across the board.

I think the one market that we continue to see weakness in is Washington, DC, market, maybe I'll have Neil talk a little bit about that.

DC has been an interesting market. 2003 to 2005, 2006, it was just tremendous growth in both rate and occupancy. And I think that to a certain point there's just kind of a leveling off of that. There's as price-value question that comes in and that's kind of held rates down.

In our portfolio, which is primarily in kind of the major suburban office centers outside of DC, we've had not a tremendous amount of new supply, but at least one new hotel open in each of those markets, in Tyson's Corner, in Gaithersburg, in Greenbelt, Frederick.

We've had a Hilton Garden open in each of those markets, competitive to our existing hotels. They opened anywhere from nine months to 15 months ago.

So we're actually feeling like this summer things are stabilizing for those assets and they'll be able to drive further rate growth across the rest of the year, more so than we expected, more so than we saw last year or until the beginning part of this year.

So I think in D.C., although it's been kind of a mixed bag of a market, we see more reasons to be positive than we did six months ago.

Thanks, guys.

Thanks, Jeff.

(OPERATOR INSTRUCTIONS). We have a question now from Will Marks of JMP Securities.

Great, thanks. Good morning, Ashish and Jay and Neil. I have just a question on balance sheet and how you look ahead right now in terms of the acquisitions that you're making of the development deals or just acquisitions in general. What are you seeing? You mentioned cap rates maybe moving up a little bit.

Does that mean you're going to get a slightly better deal on some of these development deals, and do you expect financing to go up by about the same amount?

Let me answer firstly, as far as our balance sheet is concerned, with the development deals that we've invested in, most of those loans, as the developments mature and are available for purchase, most of the loans can convert to equity at that time.

So the need for additional equity on the development projects exercise, our ROFOs, is not that material.

As far as New York City, when I mentioned that we will see generally cap rate, we might see some general cap rate expansion, and that's our expectation. In the New York City market, we haven't seen any indication that that's going to happen there.

As you look of the properties that are coming up for sale, the cap rates there are remaining very flat, if not people fishing for even lower cap rates.

So, again, I don't know that you're going to see any changes in New York City in the acquisitions market. Does that answer your question, Will?

Yes, that's very helpful. Thank you.

(OPERATOR INSTRUCTIONS).

And at this time, we have no further questions. I'd like to turn the call back over to Mr. Parikh for any closing and final remarks.

Well, we would just like to thank everyone for being with us this morning. Thank you for your questions, and we're all available here should anything occur to you after the call. Thank you again.

That does conclude today's conference. We thank you for your participation. Please have a good day.