Hersha Hospitality Trust (HT) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Second Quarter 2008 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 the presentation over to your host for today's conference, Mr. Bartley Parker. You may proceed.

Thank you, Peter. Good morning, everyone. 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 within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality Trust's plan 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, 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.

Thank you, Bartley, and good morning, everyone. With me on the call today is Neil Shah, our President and Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer. Our results for the second quarter show the excellent progress that we've made, focusing our efforts on assembling a high quality portfolio of young properties in resilient urban and suburban markets.

Second quarter AFFO increased 2.4% to $0.43 per diluted share, a particularly compelling statistic in light of our issuance of 8.2 million shares and units, representing 15% of our total shares and units outstanding. We executed a 6.6 million share equity offering during the quarter to maintain growth capacity and issued approximately 1.7 million limited partnership units as partial funding of our recent acquisitions. Our AFFO continued to benefit from the continued internal growth of our same store properties and the additional contribution of our accretive acquisitions during the past year.

As you are most likely aware, buying and owning new properties is a central theme to our acquisitions and portfolio management strategy. We currently estimate that approximately 50% of our 2008 EBITDA will be generated by assets less than five years old, and that 75% of our EBITDA is generated from the top hotel brands, namely Marriott, Hilton, Hyatt, or Starwood.

Increasing our exposure to New York City over the last two years has had a significant positive impact for us. By market exposure during the quarter, our New York City hotels were strong performers relative to the industry, increasing RevPAR by 14%, compared to the 4.4% growth for the city, as estimated by Smith Travel Research.

Our two Hampton Inn properties in Manhattan produced RevPAR growth of approximately 26%, with EBITDA margins of approximately 54%. Note that our Hampton Inn, Chelsea, had over 334 basis points of EBITDA margin growth during the quarter.

In metro Philadelphia our RevPAR grew 5.3%, compared to an industry RevPAR growth of 0.9%. Our Philadelphia performance was led by our Hampton Inn, Center City, which had a 4.1% RevPAR growth and 736 basis points of EBITDA margin growth. We have also seen strong contributions from our cluster hotels in the northeast Philadelphia market. Our cluster of hotels in the Washington DC area has increased RevPAR 5.1%, compared to a RevPAR growth of 4.7% for the remainder of the market.

A few of the markets that underperformed our expectations, but still did well in the quarter, include our Boston portfolio and our West Coast markets in the San Francisco MSA and the Phoenix MSA. In Boston we had an eight-tenths of 1% RevPAR decline for our Boston metro properties and a 1.2% decline for our suburban properties there. This compares to industry RevPAR growth of 6.7% for the marketplace.

Our Summerfield properties in California had mixed results. Pleasant Hill had a slight decline in RevPAR, while our Pleasanton property had RevPAR growth of 10.5%. Industry RevPAR for the San Francisco MSA increased 9.6%. Our Summerfield Suites property in Scottsdale had a RevPAR decline of 3.3% for the quarter, while RevPAR for the market area declined 4.5%.

We believe that the remainder of the year will be a difficult one for the northern California and Scottsdale markets, but we also believe that the long-term prospects for these markets, on the basis of the variety and robustness of the demand generators, remains quite strong.

Our same store metrics for the second quarter also reaffirms the progress we've made through our aggressive management programs. Our hotels managed by Hersha Hospitality Management increased EBITDA margins across the board by approximately 100 basis points for the quarter on a same store basis for our consolidated portfolio.

As we've mentioned during the past few quarters, we've been placing more emphasis on our asset management and sales platforms and have been pursuing only the most select new acquisitions. Some examples of these include the three newly open hotels we purchased in May and June, taking advantage of opportunities to further reduce the median age of our portfolio.

We purchased all of these hotels at opening, and although the contribution from these new hotels will be minimal in 2008, it's our expectation that the inherent stabilization and long-term growth prospects for the hotels provides an additional engine for our performance in future periods.

In July we commenced operations at the Nu Hotel in Brooklyn. The Nu is an independent, upscale hotel we developed after purchasing an interest in a mixed use building. The location within the Brooklyn sub market is excellent, with many demand drivers and limited supply, particularly for a boutique asset of this style and positioning.

Lastly, let me also highlight our continued focus and success of the development loan and the development land lease portfolio. We initiated several additional development loans during the quarter and were able to source both the Sheraton JFK acquisition and our recent acquisition of the Hampton Inn in Smithfield, Rhode Island, from our development loan program. The program remains not only a great source of off market transitions for attractive properties, but also a good use of shareholder capital with the strong cash yields that these loans generate during their term.

With that overview of the quarter, let me now turn the call over to Ashish to go into some specific detail on our financials before we open the call up for questions. Ashish?

Thanks, Jay. I'd like to focus my comments today on our hotel operating metrics, our balance sheet, and then wrap up with our updated guidance.

Our RevPAR growth of 4.3% for our portfolio of 59 consolidated hotels was driven entirely by a 6.1% increase in ADR. Our same store performance for our consolidated portfolio followed similar trends, exhibiting RevPAR growth of 4% and 5.1% growth in ADR, and an occupancy decline of 1.1%.

During the quarter, the Company's hotel managers chose to aggressively maintain rate levels in order to optimize operating margins, resulting in a decline in occupancy, which slightly contracted to 78.63% from approximately 80% in the second quarter of 2007. The strong occupancy levels in our portfolio are conducive to our strategy of optimizing RevPAR through a rate led growth, and we continue to be encouraged by the resiliency of our average daily rates for the majority of our markets and assets.

Our quarterly results also benefitted from the stabilization of several of our joint venture assets, most notably our Holiday Inn Express in Chelsea, New York, and the Homewood Suites in Glastonbury, Connecticut. All of our JV assets produced positive cash flow for distribution for the second quarter. Including our joint venture assets, our second quarter 2008 RevPAR grew by 4.1% on an ADR growth of 5% and a 90 basis point decline in occupancy growth.

Looking at our margins, there is a temporary difference in EBITDA margin trends between our Hyatt Summerfield Suites portfolio and the remainder of the consolidated assets managed by Hersha Hospitality Management, and our other independent operators.

Let me first start by discussing the consolidated properties exclusive of this portfolio. Our consolidated EBITDA margins expanded approximately 100 basis points during the quarter. This growth in EBITDA margins was primarily due to expense control measures that our asset management group and operators have been focused on during the past year. We were pleased to see that our per occupied room cost for items that have shown the highest growth rates over the past few years, such as utilities, payroll, and benefits costs, did not experience any significant increases from the same period in 2007.

Turning to the Hyatt Summerfield Suites portfolio, similar to what we experienced in the first quarter of this year, this portfolio of seven assets performed marginally better on a year over year basis from a RevPAR perspective.

The portfolio EBITDA margins, however, have been impacted due to the commencement of Hyatt's brand initiatives and costs related to the implementation of the guest related rewards programs. Most of these initiatives went into effect during the third quarter of 2007, and we believe that our EBITDA margins will be more comparable for future periods.

Turning to our balance sheet, we ended the second quarter with approximately $73 million in development loans and approximately $23 million in development land leases outstanding to 13 hotel development projects. We utilized some of the proceeds from our recent equity offering to enhance our development loan program and focused our allocation on several assets located in Manhattan.

Our overall capital structure profile remains favorable with respect to our ability to execute on our long-term growth plan. We have a very high percentage of our debt at rates significantly below the yields on our properties and development loan investments. Our weighted average maturity is a comfortable eight years, not including the credit line, and only 12% of our debt comes due within the next two years.

We have recently refinanced one of the two loans due in 2008 and have made significant progress with our existing bank group, in not only renewing but also expanding our current credit line. We remain confident in our ability to renew or refinance any of the loans that may be maturing in the near term.

Our growth in adjusted FFO and strong financial results also continue to have positive implications for our credit statistics and dividends coverage levels. We are pleased to have a stable platform and substantial earnings growth supporting our dividends.

Based upon our 2008 forecasted results, we expect our adjusted FFO, less a maintenance capital expenditures reserve, to exceed our dividend payments by approximately 1.6 times, with a payout ratio of approximately 65%. Our strong dividend continues to be a priority and an integral part of our overall thesis of providing investors with earnings growth and sustainable income during challenging times.

As we work through our models of expected financial performance for the full year 2008, in addition to the first half operating results, we considered the operating characteristics of our own portfolio, along with a number of factors, including [the] current forecast of continued slowdowns in travel spending and airline capacity cutbacks.

We continue to derive a significant portion of our EBITDA from some of the better performing urban markets in the Northeast, and although we continue to [seek] resilient performance from the majority of our portfolio, we do expect the more challenging operating environment [for] RevPAR growth in the second half of 2008, as compared to the last several quarters. Therefore, we are reducing our RevPAR forecast for the full year ended December 31, 2008, to 4% to 5% for our same store portfolio and 5% to 6% for our aggregate portfolio.

Given our current margin expectations and the accretive asset acquisitions completed to date, our EBITDA is expected to be between $124.5 million to $126.5 million, and our adjusted FFO is expected to between $1.26 and $1.30 per diluted share. This concludes my formal remarks. Now I'd like to turn the call back to Jay.

Thanks, Ashish. I'd like to reiterate that our current level of earnings and expectation for future growth, albeit at a more modest pace, puts us in a great position to support our dividend, with excess capital to be used for growth purposes. Our growth platform continues to be one of ramping up our newer assets and improving our portfolio with select purchases.

We're excited for the future, having assembled a portfolio [in high bearing] entry markets, such as New York City, Boston, Philadelphia, Washington D.C., and northern California, where in total we derive 75% of our EBITDA. We'll continue to aggressively asset manage our properties to derive optimal yields for strong performance, despite the headwinds our industry is currently facing. Operator, let's open the line for questions.

Yes, thank you. (OPERATOR INSTRUCTIONS). We'll take our first question from Ken Ho, KeyBanc.

Hey, guys. Just have a quick question for you.

Okay.

On looking at your guidance for the full year, and you guys are coming in with 5% to 6% for your portfolio. When I looked at some of your competitors, they are a little more gloomish. They're looking at around zero to, I guess, negative one or two percentage points. Can you tell me, if you expect the economy to slow down, are you guys being a little overly optimistic, or how did you come up with this forecast?

Well, I'll tell you. [It's a] number of factors that goes into our forecast, and I think some of the drivers for our renewed guidance is what little visibility that we have in our sector seems to suggest that the guidance we're giving is pretty prudent.

This is based on, I think, a variety of things. It's the markets that we're in, the supply/demand in those markets, the variety of demand generators in those markets, and then you can add to that the size of the hotels in our portfolio are generally not six, seven, eight hundred thousand room boxes, and we're better able to yield those from an operating standpoint in order to crank out performance that we believe is, relative to the market, somewhat stronger.

I see. Okay. And just two quick questions for Ashish. Ashish, do have the available rooms for the quarter?

Sure. On which -- total consolidated hotels base?

Yes. Just total consolidated.

Right. For the quarter, we had 583,570 rooms available.

Okay. Thank you. And do you also -- do you guys have any capitalized interest for the quarter?

We did have some capitalized interest on the Nu Hotel, and that went into service in July of this year, and then we had some other capitalized interest for some ongoing [PIP] renovations and things like that.

Okay. Great.

[Just] to also touch back on your first question, our trends for the year. We had first quarter portfolio growth of about 9.7%, and then our six month RevPAR growth is, [kind of] 6.5%. So when you look at the new assets we've acquired in mainly New York and ramp up we're going to see in the second half of this year, it gives us a little more comfort with the 5% to 6% range.

I see. Okay, great. Thanks a lot.

We'll go next to Wong Kim, JMP Securities.

Hi, guys. Thanks for taking the call. A couple questions. The first question is kind of a little bit related to the RevPAR question just asked. You guys change -- you guys upped your RevPAR guidance after first quarter, and now you've lowered it back to, I think, your original range that you guys first decided at the beginning of the year. I was just wondering if you can walk me through what was going on then, and what's going on now? Is it that drastically different that (technical difficulty) take it back down again?

And then the second question is you upped your EBITDA guidance, but you lowered your FFO guidance. I just want to -- walk me through that as well.

Wong, let me talk about the RevPAR guidance, and then Ashish can talk a little bit about the EBITDA and FFO. Different drivers motivating the change in guidance in those two baskets.

The RevPAR guidance -- and as we mentioned earlier, our booking windows, based on the majority of the assets in our portfolio, is quite a bit a bit shorter than most of our peers. Having the bulk of our properties in the upscale, select service segment and then a significant portion of the portfolio in the midscale segment, we've noticed that the booking windows have contracted from the first quarter to the second quarter from, say, 10 to 12 days down to three to four days.

And so we are staying very much on top of the trends that we see, taking into account the emerging trends and relying also on the foresight and the intuition of our operators that have a lot of historical operating track record in the markets that they're in. When we combine all of that -- when we -- and we looked at the first quarter.

As Ashish mentioned, our growth in the first quarter was extremely strong. We outperformed the peer set significantly and exceeded our expectations, but, as we reported for the second quarter, we did see a softening in fundamentals, and with that in mind and as we take into account the visibility that we have into the third quarter, we feel more comfortable with where we have guided the marketplace.

If you have more questions on that, I can answer them after we're done, but let me let Ashish talk a little bit about the EBITDA and the FFO.

Well, Wong, when you look at our EBITDA and the adjustment upwards on the EBITDA guidance, it's impacted by a few things. First off, we have finished four acquisitions that will come on line in the second quarter -- I'm sorry, in the third quarter. Nu Hotel, which will come -- which came on line in July. We finished the acquisition of the Sheraton JFK. We finished the acquisition of the Holiday Inn Express at Andrews Air Force Base and also recently a Hampton Inn in Smithfield, Rhode Island, so those would all be EBITDA contributors for the remainder of the year.

Offsetting that will be some weakness we've seen, and we've touched upon, at the Hyatt Summerfield Suites portfolio and some weakness we're anticipating in the general Connecticut markets, as we see some reduction in groups on that front. The per share numbers have declined just slightly because of the, roughly, 8.3 million shares in units, that Jay touched upon, that we've issued over the last 60 days.

Got it. Thanks. One more question, if I could. In terms of demands, are you guys still seeing strong international? Where do you think the softness is coming (inaudible question - multiple speakers)?

Where is the softness?

Yes.

I think we -- how -- this is Neil. On the international side we haven't seen any softness yet, that we can report on with any clarity, in the New York, Boston, and Philadelphia markets that have been significant contributors to our growth there the last several years. We haven't seen a softening on the international side. I think where we are seeing softening is corporate travel and, to a certain degree, leisure destination travel.

On the corporate side, in our extended state portfolio, we've seen a lot of consistently repeat trading business that's come to our hotels on annual basis to be cut back at this time, and that was -- we've seen that in California. We've seen that in New Jersey, and we see that in Connecticut as well.

All right, thank you.

(OPERATOR INSTRUCTIONS). And there appear to be no further questions at this time. I would like to turn the call back over to Mr. Shah for any additional or closing remarks.

I don't have any additional remarks. I just want to thank everyone for being with us this morning. If any questions occur to folks on the call or afterwards, please feel free to call us at the office. We'll all be available. And once again, thank you.

And this does conclude today's conference. Thank you for your participation.