Hersha Hospitality Trust (HT) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Fourth 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 like to turn the presentation over to your host for today's conference, Mr. Brad Cohen. You may proceed.

Thank you, [Colleen]. I wanted to remind everyone that this conference call contains 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 and as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality's plans and expectations, including the Company's anticipated results of operations, joint ventures and capital investments.

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 Shah, Chief Executive Officer. Jay?

Thank you, Brad. Good morning, everyone. Neil Shah, our COO, and Ashish Parikh, our CFO, are both on the call with me.

On today's call, I'll be talking some about some of our margin preservation strategies that we've put in place to position Hersha to perform well as possible during this time and highlighting some of the attributes of the portfolio and the Company that are particularly relevant in this economic climate.

Although Hersha is not immune to this challenging environment, our hotels and our capital situation provide defensive qualities that are critical right now. Our portfolio of category killing brands has a significant upscale extended stay component and is comprised of primarily select and limited service hotels, which historically experience reduced cash volatility during downturns. Our portfolio platform combined with our franchisee managed operations model allows us to react quickly to the environment to mitigate margin erosion.

Over the last several years, we focused on acquiring high quality, newly built assets in both urban and stable suburban markets. This complimentary mix is characterized by a broad range of demand generators, good travel infrastructure, which results in a lower correlation between enplanements and hotel performance, while also providing good mix of corporate and leisure travel.

Nonetheless, industry wide demand deterioration has been alarming and to that end we are focusing a great deal of our attention on controlling costs with a de nouveaux approach to our business models, insisting that our managers create new operating paradigms to address the dynamics in the markets in which we do business.

One of the misperceptions about the select and limited service segment is that there are fewer levers to pull to cut costs as the service offering is limited. On the contrary, the studies of cost structures in our portfolio by our asset management team have led us to conclude that 50% of the costs at our hotels are controllable variable, such as portions of room labor, complimentary food and labor, administrative and general costs, sales and marketing costs, and repairs and maintenance costs.

30% of our current cost structure is categorized as non-controllable variable and includes costs that are driven by revenues generated at the hotel such as franchise costs, credit card commissions, travel agent commissions, as well as a portion of the utility costs. Only 20% of our cost structure is fixed and it includes minimum FTEs such as general managers, executive housekeepers, night auditors, and some portion of the utilities costs and basic repairs and maintenance.

Using this approach in our target of achieving a negative 50% flow through for the portfolio, we've completed a study on a majority of our consolidated hotels to show all of the cost cutting opportunities that our hotels have to achieve the negative 50% flow through target. Substantial achievement of this target will allow us to out perform our peers in margin erosion keeping the deterioration in the 200 to 300 basis point range. Our franchisee model allows us great flexibility and quick response times to market changes.

We began making cuts at the beginning of 2008 in anticipation of the impending slowdown. The results of what we term the tier one cuts were property specific and were focused on increasing efficiency in operations while at the same time continuing to drive incremental demand. The success of these initial cuts and this approach was evident in the strong flow throughs and the resulting margin growth for the first three quarters of last year when our portfolio was still generating market leading RevPAR growth.

As our growth slowed in the third quarter relative to the growth of the prior two quarters, we initiated our tier two cuts which were more aggressive, but still property specific. The outcome of these cuts are evident in our same store numbers for the fourth quarter of 2008, which reflect an 8.1% drop in RevPAR but a limited 200 basis point margin erosion.

January and February trends are even less encouraging and we have now implemented our tier three cuts, which are in the form of broad portfolio wide policy changes. At this level of cuts, the operators are charged to be primarily focused on limiting margin erosion and driving the negative 50% flow through target. We are anticipating close to an additional $5.3 million of savings just at our Hersha Hospitality managed same store hotels across the remaining 10 months of 2009.

Some examples of cuts at this level include a restructuring of the engineering function portfolio wide which results in more than $1 million of savings. In the rooms department, we've renegotiated all labor contracts and most service contracts, reduced complimentary shuttle costs, and reduced food labor and food cost, and this includes both food that's for sale and complimentary food. And these changes are as granular as reducing the breakfast meat offerings on the complimentary breakfast bars during low demand, low rate periods.

All of these rooms department policy changes results in a savings of $763,000. Additionally salary freezes, combinations of positions, suspensions of 401K contributions, reduction in human resource program fees and [Arif] produces savings of an additional $2.3 million.

Restructuring of the sales and marketing function portfolio wide without the elimination of any customer facing associates generated savings of $850,000, and reductions in associate travel and meeting expense saved $320,000.

Similarly to what Hersha Hospital management has done, LodgeWorks, Waterford and Gitan have launched comparable cost containment initiatives at their managed hotels.

Cost cutting of this magnitude typically begs the question of what impact it will have on guests and how does it affect the hotel's ability to drive share. Though the cost cutting measures are significant, most of the reduction should have relatively nominal impact to the guest experience.

A guest may have to wheel their own bag into the hotel where bellmen have been eliminated, or wait to have someone come by to pour their coffee, or they may no longer trip over a USA Today as they leave their room, but we work with experienced franchise operators and their practiced in making these cuts virtually opaque to the guests.

We don't believe that these reductions in cost will weaken our ability to drive share during this period. When the hotels are once again able to drive demand and premium rate, the eliminated services and positions can be easily reinstated if and when we deem it necessary.

In addition to controlling costs, we continue to pursue business traffic that is trading down given budget constraints across corporate America. There are signs that these strategies are gaining traction as evidenced by our recently being added to the preferred vendor list of a Fortune 50 company that previously had only used full service hotels. In the entrepreneurial spirit, we will continue to explore all avenues of incremental demand and create opportunities where possible.

From a capital and liquidity perspective, we have a strong balance sheet with little in the way of maturity risk until 2013. Our balance sheet flexibility is an asset in the current liquidity crisis and serves as an additional defensive measure in this uncertain market. We are evaluating our portfolio for the potential sale of non-core assets that no longer fit our strategic objectives to free up additional liquidity and improve our portfolio.

Even in this environment we believe that there are assets in our portfolio that are likely disposition candidates given their assumable financing. Additionally, the relatively smaller size of many of assets make them attractive investments for potential buyers who can access local or regional bank financing to acquire them.

As a part of this evaluation process, we may choose to compel a sale of some of underperforming joint venture assets. Most of our JV assets performed in line with expectations during the fourth quarter except for the Mystic joint venture. These assets significantly under perform the portfolio average and their operating performance illustrates the dramatic difference in margin sensitivity between full service assets and our predominantly select and limited service hotels. The full service assets in this joint venture experienced a 1200 basis point margin decline as a result of a 20% RevPAR decrease.

As was the case industry wide, our markets faced declining occupancy and rate trends during the quarter. We do believe, however, that our mix of markets helps mitigate the current stress impacting the financial services and pharmaceutical sectors. Additionally, our markets are less reliant on air travel, corporate group meeting business, or pure leisure travel.

In New York City, our urban assets faced an overall RevPAR decline of 16% in the quarter. Relative performance was challenging, but it's important to remember that we are coming off of three prior years of tremendous growth. In actual dollars, our fourth quarter 2008 RevPAR was 15% higher than the same quarter in 2006.

Despite the negative bias currently surrounding the New York City market, we continue to believe our properties in New York City will be among the more resilient during this downturn given their solid locations and their select and limited service operational models, which historically have been less susceptible to RevPAR declines.

Additionally, the smaller size of our hotels relative to the big box hotels in the marketplace has a distinct advantage that allows us to yield manage more effectively during periods of marginal demand.

As we mentioned on our last quarterly earnings call, we believe that the supply picture in New York City metro area is in better shape than some suspect and this helps set the stage for a strong recovery when the cycle eventually turns.

With that overview of the quarter, let me now turn the call over to Ashish to go into some additional financial detail. Ashish?

Okay, thanks, Jay. I'd like to provide a little more detail about our hotel operating metrics during the fourth quarter and for the full year, and then focus on our balance sheet, liquidity and financial outlook for 2009.

During the fourth quarter, our core consolidated portfolio remained resilient in the face of unprecedented economic uncertainty and deteriorating fundamentals. Although the majority of the portfolio did experience deterioration in RevPAR and EBITDA, our consolidated portfolio delivered better relative performance when evaluated by property type or geography. Rev par at our same store consolidated portfolio fell by 8.1% during the fourth quarter as occupancy declined 290 basis points and rate fell 4.1%, yet we were able to hold margin erosions to only 200 basis points as our aggressive property level controls helped to offset these RevPAR declines.

Consolidated hotel RevPAR for the fourth quarter, including new acquisitions completed in 2008, declined 7.3% as occupancy declined roughly 3.6% and rate fell 2.3%. Consolidated hotel EBITDA fell 5% in the fourth quarter while our operating margin in the quarter declined 264 basis points to 34% compared to 36.4% last year in the comparable quarter.

The total portfolio margin decline was primarily driven by lower margins at the six new hotels we acquired in 2008. It is our estimate that new assets take approximately 24 to 36 months to stabilize under normal operating conditions and potentially longer in difficult environments such as this. As Jay mentioned, outside of our ramp up hotels, we believe our ability to rapidly cut costs at the property level helped us maintain margins better than industry average.

Although our consolidated core portfolio performed as expected, our unconsolidated joint ventures under performed during the fourth quarter and the majority of the loss was related to the three large full service assets within our Mystic Partners joint venture which is comprised of nine properties in the Connecticut and Rhode Island markets.

Due to the severe drop off in group demand and pharmaceutical related training business during the fourth quarter, the three full service boxes realized RevPAR decreases of approximately 20% with corresponding margin deterioration of almost 1200 basis points. Although our preferred equity position in this joint venture affords us some downside protection, the fourth quarter loss had a significant negative impact on our FFO for the quarter and the majority of the underperformance in our fourth quarter results was directly related to this loss.

Our fourth quarter adjusted FFO was $9.1 million or $0.16 per share in unit which compares to adjusted FFO of $12.1 million or $0.26 per share in unit in the fourth quarter of last year. Adjusted FFO per diluted common share was $1.15 for the full year in 2008 compared to $1.22 in 2007.

In addition to the fourth quarter performance, the 2008 per share adjusted FFO results were impacted by the issuance of $6.6 million additional common shares and $2.5 million additional operating partnership units issued in the first half of 2008.

Turning to our balance sheet, our overall capital structure remains favorable with respect to near term maturities as well as our ability to execute our long term growth plan. As we outlined to you during our last earnings call, increasing our financial flexibility remains a primary objective and we are taking steps to enhance our balance sheet and liquidity.

We have included an additional supplemental schedule regarding recent refinancing activities that the company has undertaken to extend out the term of our debt maturities. First, our credit line was increased from $100 million to $135 million and including our one year extension option, this credit line now matures at the end of 2012. We have a further according feature that allows us to potentially increase this line of credit to $175 million.

We also refinanced three of our properties in the fourth quarter of 2008 and first quarter of 2009. We were able to extend out the term of one of these debt pieces from 2009 until 2023 and another from 2009 until 2012. The market for debt refinancing remains extremely challenging, but there is still the semblance of a debt market for well located limited and select service assets requiring debt of less than $20 million.

Our weighted average debt maturity currently approximates eight years. We currently have $32.4 million of consolidated debt maturing in 2009 that does not have unilateral extension options. This balance is spread out across four assets with the largest loan balance being $13.25 million. We believe that we can renew the majority of these loans with the existing lenders or with other regional and community banks; however, as we outlined to you on our third quarter call, our credit facility allows us the flexibility to refinance these maturities using proceeds from the facility if we needed a contingency plan.

Let me now transition over to our capital expenditures for 2008 and 2009. Over the past five years, we have focused our acquisition efforts towards new assets and we currently maintain the youngest portfolio among the publicly trading lodging REITs. The young average age of our portfolio enables us to be more cost effective operators and allows us great flexibility in terms of timing from major capital projects. We expect that this will enable us to limit capital investments in 2009 at our properties to those related to life safety and critical capital maintenance.

For the fiscal year 2008, the company's total CapEx spend on our consolidated properties was approximately $19.3 million. Of this amount, approximately $6 million was directly related to the up fit in construction of the new hotel in Brooklyn. We would estimate that our capital spending will be between $8 million and $10 million for 2009.

And we would estimate that in 2009 we will add approximately $9 million to the $5.5 million we have in CapEx reserves through our normal course of operations. These funds can be utilized towards all expenditures that we anticipate and we're only anticipating two large renovation projects during 2009 which will at our Courtyard in Brooklyn and our Courtyard in Langhorne which is northeast Philadelphia.

We have decided to delay several other projects and to maintain this liquidity for future purposes. We believe that we will be able to realize a higher NOI on these projects if undertaken at future date.

Regarding our development loan portfolio, we ended the fourth quarter with approximately $82 million in development loans to 11 separate hotel development projects.

We have decided to recognize an impairment on our Gold Street development loan where we have one second mortgage and mezzanine loan aggregating $20 million. This project is a residential, retail and hotel mixed use development in Brooklyn, New York, and as we previously disclosed to you we stopped recognizing interest on these loans in the third quarter as the developer was unable to obtain further construction financing.

At this point, while the project has been assumed by a new developer, we think the collectability of the loans are at risk and we have decided to impair the full amount. As a reminder, this is the only project we have with this developer and we have no further development risk or any further financial commitments related to this loan.

Of the total development loan balance approximately 40% of the loans that we currently have outstanding relate to operational hotels, 35% relate to projects that are in construction, and the remainder relate to hotel construction projects in early stage design. We continue to view our debt platform as a good source of off market transactions and for the majority of our development loans we have the right of first refusal on these projects but we generally do not have any capital commitments beyond the loans unless we choose to make an investment.

Let me now turn to our financial outlook for 2009. As we contemplate the balance of 2009, there is little to no visibility on the demand side while we can predict with some degree of accuracy our costs across the portfolio and the corporate level. We are operating under the assumption that the operating environment will remain historically challenging and property level occupancy and rate metrics will remain under pressure and show little improvement against what are upcoming easier comparisons.

We continue to believe that the portfolio characteristics such as our high occupancy levels and proximity to multiple demand generators should help us as we move through this period, but we are currently operating our business and making our cost control decisions based upon the following set of assumptions for our portfolio in 2009.

We are estimating that RevPAR for our consolidated portfolio will deteriorate between 12% and 15% for the full year. In terms of quarterly progression, the company expects that the first half of 2009 will experience RevPAR declines in the mid to high teen range and moderate in the third and fourth quarters.

With this level of revenue loss, we are projecting operating margin deterioration of 200 basis points to 300 basis points for the full year and would anticipate that margin deterioration will be more severe during the first half of the year. 2009 will receive the benefit of full year operational results for the six assets purchased in 2008 and the stabilization of assets opened and purchased in 2007.

Based upon these operating assumptions, we continue to project that our fixed charge coverage and interest coverage levels would provide sufficient coverage for our debt service covenants.

Let me finish with some discussion regarding our dividend. The company announced and paid its fourth quarter common share dividend of $0.18 per share and unit and our Series A preferred share dividend of $0.50 per share. The company has an unblemished record of paying a consistent quarterly dividend since our initial public offering ten years ago and we believe that a strong dividend policy bolstered our relationship with both our preferred and common shareholders.

Our Board of Trustees, in conjunction with management, is closely monitoring our financial results and will ensure that the company will not put undue pressure on our liquidity or jeopardize our covenants if operational results were to deteriorate more than forecast.

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

Thanks, Ashish.

Let me finish by saying that despite the economic deterioration, our properties remain resilient and we expect to out perform as we move forward for several reasons. Our portfolio consists primarily of smaller hotels which allow to better manage yields during periods of weaker demand. Our mix of urban and stable suburban markets will help to offset the volatility that the industry is currently experiencing.

We have value oriented brands. At our hotels we are aligned with the category leading limited and select service brands which historically benefit from trading down. Our portfolio is located in solid markets that are served by a broad range of demand generators and are not overly reliant on air travel.

And finally, we believe supply growth in general will remain tempered through this cycle which will allow for a steeper recovery when demand eventually returns. The current environment offers very little visibility, but our balance sheet has virtually no debt maturities until 2013.

During this time, we will continue pursuing our strategy of driving margins to successfully navigate through the headwinds. We recognize that these unprecedented times will call for unprecedented measures, but we will remain committed to out performing and building value for our shareholders throughout.

Operator, that concludes our remarks. Let's open the line for questions.

Thank you, Mr. Shah. The question answer session will be conducted electronically.

(Operator Instructions)

And we will take our first question from Bill Crow with Raymond James.

Hey, good morning, guys.

Good morning.

A couple of questions here. Let me just make sure I got your statement correct. If your RevPAR is down 12% to 15% and your margins are down 200 to 300 basis points as per your expectations the dividend to common and preferred shareholders is expected to be retained? Is that what I take away from your statement?

That's correct, Bill.

Okay, I just wanted to make sure. You mentioned that you believe the covenants are not at risk this year again based on those assumptions. Can you just remind us of the covenant, maybe the main one or two covenants that we should be watching?

Sure, Bill. This is Ashish.

Ashish.

Our primary covenants are really the EBITDA to debt service and adjusted FFO to debt service as well as our dividend payout which would be our common dividends and OP unit dividends divided by the adjusted FFO and that payout cannot exceed 95%.

So the adjusted FFO is as you report, is that correct?

That's correct. It's as we report not taking into account CapEx reserves or anything like that.

That's right. It's not AFFO as we refer to it, it's FFO but yes, I understand -- after your adjustment. And that's a 95% payout limit on that. And then I'm sorry the EBITDA -- the debt service coverage is what multiple that you're ...?

Sure, the EBITDA is 1.4 times and adjusted FFO is 1.35 times.

1.35 times. And that's EBITDA as reported in your statements? Or is -- are there some adjustments?

Right, EBITDA on a consolidated basis over our debt service for the consolidated properties.

Okay. So it excludes the JB?

That's correct.

Okay, terrific. All right. The mezz loan or development loan portfolio, what percentage is to related party interest?

I'm going to say related party development loans are right around 25% to 30%.

25% to 30%. Okay. And then of the entirety of your loans, should we assume that you've really gone in and scrubbed these things? You don't see other impairment issues looming out there? Is that fair or ...?

Yes, that is fair, Bill. I mean as you can imagine that is the hot button right now with external auditors and within the entire financial community it's really impairments on assets as well as development loans. So we're -- we've undertaken a very detailed analysis. You know we will continue to do that as the year progress as well.

Okay. And then one final question I guess for me right now is that the cost cutting that you're implementing is that being helped by relaxed brand standards? Are you getting any push back from your consumer for these changes? Are they noticing the changes yet? Or do you risk violating brand standards by some of your much needed and certainly prudent activities?

You know, Bill, the brands have been actually extremely responsive in relating standards to some degree. I think the level of cuts that we're making in some cases aren't related to brand standards at all. In some cases, there is the risk that it impacts guest satisfaction. But you know during this kind of time I don't expect that brands are going to be messing with these kind of things too much. At this point you know everybody's working more towards bank satisfaction than guest satisfaction.

Again, as I mentioned, I think the guests -- the impact that they'll feel will be relatively limited and I think during this time contraction -- there's some expectation in any business traveler's mind that there are cuts everywhere. And so I think when you combine their lessened expectation with some of the things we're doing, I don't think we're far off from where they would want us to be.

Fair enough. I'll let some other people ask questions. I may circle back. I appreciate it.

Thank you. We'll take our next question from David Loeb with Baird.

Fortunately Bill didn't ask all of mine. I wanted to go back a little deeper on the dividend and just make sure I understand what the Board's policy is, how that policy is impacted by taxable income.

Okay, sure. Well, David, I mean the way we are projecting our 2009, we don't believe that -- we've already paid a fourth quarter dividend in the first quarter. That dividend in and of itself would cover our taxable income for 2009. So I don't think the Board will be making its dividend decisions based upon re-compliance; we're already in compliance based upon just what we paid in January.

So is the Board's attitude that as long as your payout is no greater than 95% of as reported FFO or what you guys would call adjusted FFO that you will continue to payout that full $0.72 dividend?

You know, David, this is Jay. Let me explain. You know some of this Ashish detailed, but let me reiterate some of it. As far as we can tell the forecasts -- the assumptions that we've placed for the year on RevPAR are a negative 12% to negative 15% and based on our operational experience and the plans we've put in place we believe we can keep our margin deterioration down as we said to 200 to 300 basis points.

On that basis, when we do our internal close looks at everything, you know we don't have a lot more visibility going beyond a couple of months, but at those levels we feel comfortable that this dividend is sustainable for the next couple of quarters. Ashish mentions and I mention it because it's something that is really -- that the Board is sensitive to. We know the marketplace is sensitive to it. And we do continually review it and we will continue to review it on a quarterly basis and keep everyone updated on where we believe we are.

Ashish mentioned we've paid this dividend consistently for ten years since we've -- since we have become public. It's a very important factor in many of our institutional investor's investment decision. It certainly is an important factor in the strong retail base that is attracted to our stock. And if we find that there is a reason that we want to cut it in order to protect our position or to maintain our liquidity we'll do it. We're just very, very resistant to do it just to follow the herd.

Okay. I'm trying to translate that from political speak which by the way was very good, very eloquent into kind of what we can expect for the next couple of quarters and even beyond that.

It sounds like -- and Bill sort of asked this I think pretty directly -- if you hit these basic assumptions that you outlined, the Board plans to continue to pay the dividend and the only requirement relative to covenants is that you have about $0.76 of adjusted FFO that you report such that your covenants don't limit that debt payout. Is that fair?

I'll give you a shorter answer, yes.

Good. And if you were to cut it because it looks like you won't hit those targets that you gave us, if you were to cut it because you're limited by covenants, would you cut it to zero or would you cut it perhaps as much as half, or less?

I do not anticipate that we would need to eliminate the dividend altogether. It would probably be some percentage of a cut. You know whether it be 25%, 30%, I'm not certain -- we would then be responding to a situation that we haven't currently foreseen.

That is very fair. If I can jump into the three full service assets you own, two of those assets have large mortgages coming due in the next 13 months. The Hartford Hilton is the soonest. You've written down your equity investment in that asset as part of that joint venture. Does that mean that it's possible that the most expedient thing to do might just be to do a deed in lieu of foreclosure, essentially give the keys back to the lender when that comes due?

David, this is Ashish. If the lender was to accept the deed, I think that would be the most expedient thing to do. We've taken our $1.9 million write off and we're not anticipating that even on a sale that we would recover that $1.9 million so that's why we've taken a full write down.

And you only own 8% of that hotel.

That's right.

And the Marriott in Hartford you own 15% of that hotel. What's your book equity exposure there and what's your thought -- Jay used the word compel a sale -- the phrase compel a sale. Can you just talk about what your options are with that one?

Sure. We have -- there's $45 million of debt on that asset. We -- our book equity is about $6.7 million, so we own 15% and then our partner's book equity is somewhere north of $36 million on that particular asset.

If we were to get into a position where we could not refinance and that asset is actually performing fairly well and we don't see that there's potential impairment on that asset, but if for some reason that it came into that situation we fell that at our last dollar exposure we would for sale that asset.

Okay. And then the last -- the remaining full service hotel is the Marriott Mystic. You own a sizable percent of that -- 66.7%. How is that doing, what's the long term outlook for that asset?

Sure. I think the long term outlook is still favorable. Short term it is challenged and the primary demand generator for that asset is a large pharmaceutical company based across the street which is in the middle of a merger. Talks are that they are the acquiring company, that they would move a lot of the training business to that particular site. But the next say one to two years will be challenging. That asset is pooled with another six limited and select service assets so we receive a preferred return across all seven of those assets, not just individually on that asset.

Well, yes. And just looking at the -- your disclosure by the way that the debt disclosure is very helpful and I think this quarter in particular that page 12 of the supplement that gives the unconsolidated joint venture EBITDA is very interesting.

It looks like your share of the EBITDA from all nine of those hotels, including the two full services we started the discussion with, is substantially greater -- like a couple hundred thousand dollars greater than the total EBITDA for all nine of those hotels. So clearly it looks like the preferred return is working. Am I reading that correctly?

You are, you are. And the primary reason for that is -- actually the Hartford assets -- one of them has negative EBITDA for the year. So our percent of the EBITDA was greater than the actual venture's EBITDA.

So if you -- if you were to end up with seven assets in that venture instead of nine, you might have a little less book equity but you'd probably not have substantially less EBITDA. Is that fair?

That is fair. We get a return on all of the capital, a preferred return on all of the capital during the entire existence of the venture unless the assets are sold off.

Right. Okay. One more this round and then maybe I'll come back. I don't know if Neil is with you but there was a report recently about the number of rooms coming in New York. I think it -- I don't know who the supplier was -- it's not somebody that we look at. But they said 8,000 rooms are going to open in New York City in 2008. Can you tell us what your view is on that?

Yes, David, this is Neil. Yes, I'm not sure where all these -- where all the consultants are coming up with their numbers. I think at the very least they're sensationalizing a story here to sell reports or I'm not sure what the intent is. But we do look at it on a quarterly basis. We review the new supply inventory. It is -- there's definitely more supply than there has been in New York in five to seven years. And so it is concerning, but it's not nearly as onerous as some of the reports that we see flying around in the marketplace.

In 2008, we see 2,230 rooms added to New York City, so about 3.4% supply growth. In 2009, we think it could be kind of as much as 4,000 rooms added to New York which would be somewhere between 5% and 6% supply growth. As we get into 2010, 2011, 2012, we have less clarity about the numbers there.

If I had to make some sense out of that last report which suggested 8,000 new rooms this year in New York, I would say that those 8,000 rooms might make it to Manhattan but they're going to take three to four years to actually open.

As operators we are preparing for significant new inventory into New York City this year, in 2009. But frankly, I don't believe they're going to come in on time and I think we'll have many incomplete hotels or hotels changing use to student housing or to senior living or to other uses.

Okay. So it sounds like at least some of the projects that all of the data suppliers are calling under construction it sounds like there isn't really progress going on there. People are just trying to keep their permits alive. Is that fair?

Yes, I think for the vast majority of those -- for the big numbers there are. That said there are buildings going up in New York. We look at them on a quarterly basis and in 2009 we do expect to see as much -- as many as 4,000 new rooms in New York.

Got it. Okay. Thank you very much. I'll come back with more later.

We will take our next call from Mark Wills with JMP Securities.

Hi, it's Will Marks. That happens all the time. Anyway, a couple of questions here. One, is -- can you give a little bit of indication of what you're seeing year to date by market and is the New York market particularly in ...?

Hey, Will, you cut off at the end. What I heard ... Will? Operator?

Yes, I don't see him here either. Mr. Marks if you could re-queue please.

You know let me answer his -- I probably should wait if his line's been cut.

He's now back up with an open line. Mr. Marks?

Thanks. Can you guys hear me?

Again.

Okay, sorry about that. I don't know what happened. But my question -- I'd like to have a better understanding of year to date. I don't care so much about fourth quarter but RevPAR by market -- is New York taking the biggest hit? Any thoughts would be helpful.

Yes, we can shed some light on that. Our year to date RevPAR in the portfolio is tracking in the negative 18% to 19% range -- portfolio wide. And New York is off approximately 25% for the first quarter -- for the first couple months.

Our whole portfolio it's important to remember was up 9.7% in the first quarter of 2008 -- last year. And New York City last year in the first quarter was up 19.4%. So the comparable analysis looks very dire on a relative basis, but on an absolute basis the total portfolio is performing between '05 and '06 numbers in absolute dollars of RevPAR. And New York City is slightly up to 2006 numbers in absolute dollars of RevPARt.

Got it. Okay, that's helpful. Can you talk a little bit about the concept of trading down and how that maybe is benefiting you or are you expected to?

Yes, sure. I can talk about that. You know this is something that we experienced in the last downturn and we would expect that we will see at least as much of this effect if not more in this downturn. But typically we find that as -- one of the cost cutting measures that many corporations employ during periods like this are changes to their travel policies.

And the policies change, preferred vendors change and so whereas their corporate travelers may at one time have been permitted to stay at full service hotels -- in some cases luxury hotels -- in order to make savings in this line item in their budgets they're constraining the policies and making them stay at hotels that are of limited service or select service natures, extended stay.

And so I made a reference to our being added to a preferred vendor list of a Fortune 50 company and it's a company that we've been knocking of the door of for the last several years and we just weren't even eligible to be a preferred vendor. Towards the end of last year, in one of our attempts to make contact with them again, lo' and behold we were not only eligible but we were named to the preferred vendor list.

So this is -- we expect that this is going to generate significant room nights for us across 12 of our hotels throughout our region and it's just a great example of what I'm talking about. Does that make that more clear?

Yes. Sure, that's great. On -- back to New York one second. The number you gave were for New York City or Manhattan?

Those were our -- those were Manhattan numbers.

Those were Manhattan numbers -- I kind of juts wanted to clarify. And my final question can you give me some ideal of what you're seeing with construction costs? Is there any downward pressure you're seeing at all?

Will, this is Neil Shah. In construction costs we do see downward pressure in secondary markets across our region for kind of typical stick built, smaller asset, low rise construction, we do see construction costs falling. Materials prices haven't adjusted that significantly yet but the -- but just the margin that the builders are able to get or are willing to cut into has changed.

In urban markets, we haven't seen a significant drop in construction pricing in New York, in particularly, or even from what we're hearing in Boston and Philadelphia. I think it's a function of these being heavily unionized markets and it's difficult for union labor wages to go backwards. Materials are still expensive, union labor pricing is sticky.

I think where you might see cost coming down from the development process in cities like New York is in the land price. Land prices will likely be in a downward trend across the next year or two and that can affect the total development cost. But again this is not India or a third world country where land makes up a 40%, 50% of a project -- it's generally less than 20% to 30%.

But more directly to your question, construction cost in the large urban markets with institutional kind of high rise construction we haven't seen significant drops in construction pricing. In less unionized environments, in suburban markets we do see a drop in construction pricing.

Perfect. Okay, thanks, Neil. Thanks, that all for me guys.

Great, thanks.

Thanks, Neil.

And we will take our next question from William Truelove with UBS.

All our questions have been answered. Thanks so much.

We have a question from Jeff Donnelly with Wachovia Securities.

Good morning, guys. I guess they can beat a dead horse on a few points. You know just concerning your overall RevPAR guidance for the company of down 12% to 15%, Will touched on this maybe a little bit.

But just given that your limited service orientation traditionally doesn't give you much visibility and I guess I'd say your high concentration in the New York City market -- you know several of your peers expect declines I guess I would say for the year on the order of the magnitude that you're already seeing year to date. I guess how conservative do you think that down 12% to 15% is? Is there -- I know there's no perfect crystal ball, but do you think there's much cushion in there given the weakness in New York?

Hey, Jeff, this is Ashish. I mean -- you know what we've looked at is outside of -- we do expect sort of high teen declines in New York. Boston is supposed to firm up a little bit as the convention calendar firms up. But some of our other markets you know the D.C. urban and metro, central Pennsylvania, overall mid-Atlantic market, we're not expecting those to fall as much as kind of Boston and New York are expect to fall.

So that does have an impact on the overall range. And this based upon what we're seeing sort of quarter to date and what we're expecting for the first two quarters and then some stabilization -- this is kind of our best -- our best estimate of where we think we'll be down in RevPAR.

You know, Jeff, if I can just add to that a little bit to what Ashish mentioned, you know I referenced a couple times that the smaller size of the hotels is now becoming a real advantage as we are driving our revenue management strategies at these hotels. Our deterioration in rate and occupancy has been significant, but we're seeing -- we're probably -- we expect to see more buoyancy there in the second and third quarters relative to our peers.

This first quarter is a traditionally very low -- low volume demand quarter for us. You know it makes up about 12% of our EBITDA across the portfolio. And the second and third quarters we expect -- and I think a lot of the industry expects -- that you will just see a general increase in demand driven by seasonality. Now I don't know that it's going to give us relative performance that's very attractive relative to prior years, but it will give us a better ability to yield is our view. And so we are counting on that also as a part of our assumptions.

And I'm curious -- sticking with the New York area -- how does the I guess it's called the New Hotel ramping up now that you guys got that opened up last year?

Jeff, this is Neil. The New Hotel opened in the middle of the third quarter of 2008 and it's first full quarter of operation -- the fourth quarter of '08 -- achieved an occupancy of 65.6% at a $236 rate. In 2009, we're expecting it to ramp up to high 70% kind of occupancy and forecast a rate maybe a little bit lower -- kind of closer to $220 or so.

Brooklyn clearly has less compression from Manhattan these days, but I think this relatively strong performance from the New Hotel does illustrate that there's still pockets of demand within these large, deep markets. The New Hotel really was designed to meet some local demand that didn't have this kind of hotel, and again it is a very small hotel -- it's only 93 rooms so we're able to yield it a lot better than the big boxes in our area.

So pretty strong performance, better than our original underwriting and it should be a pretty strong performer long-term we believe.

I'm curious. I mean who's the typical guest who's going to go over there? Is it someone who's trying to avoid higher rates in Manhattan or is there sort of an immediate demand generator around there that I'm missing?

Yes, we get compression from Manhattan that might be more rate oriented. But I'd say as much as 80% of our business is locally generated. Demand generators in Brooklyn -- and Brooklyn's one of the largest cities in the United States if you consider it as a city -- and we're within two blocks of millions of square feet of office space, all the courthouses, and two pretty major universities. So it's pretty robust local demand generators within walking distance from us.

That's helpful. Just one last question if I could circle back on the common dividend. Just -- what's you're thinking about paying a dividend in stock and cash as opposed to just purely cash to the extent you do continue to pay one as you outlined?

It's something we've reviewed very closely with the Board. I think we are more apt to reduce our dividend payment rather than pay it in stock.

Okay, thank you.

We will have a follow up question from Bill Crow with Raymond James.

I'll try and make this quick. It's getting a little long here. The development loans coming due this year, what's your anticipation for those and you know just as we think about modeling this year? And what is your desire to put up more mezz at this point given the capital constraints?

Hey, Bill. We would expect that things coming up this year that we would be extending them.

Yep.

As far as our appetite for new mezz, I mean at this time I don't -- it would have to be extremely compelling ...

Yep.

... in order for us to put any additional mezz out. You know the project would have to be imminently open in a few months or just an ability for us to acquire it at a deep, deep discount. So it would be pretty difficult to originate new loans unless we were to get paid off on several of them and if we could really find a compelling value.

Yep. And then the final question, and this is something that Will hit on earlier in the call which is the split between the greater Manhattan area and your overall portfolio -- if you could just broaden that discussion for kind of your full year outlook?

I mean should we assume that things -- that hotels outside of the greater New York area are going to be down less than 10% and New York's going to be 20%? Or how should we think about that?

You know, Bill, in a normal -- in a normal year we would probably talk about that with a lot more depth. I think right now our visibility is so limited and we've chosen to limit our guidance to the assumptions we've put out there. And I really -- I don't know that we're even appropriately prepared to talk about that.

Fair enough. Maybe next quarter we can get more in depth and get some more clarity.

Let's keep our fingers crossed.

Right. Appreciate it, thanks guys.

Okay.

And we have a follow up question from David Loeb with Baird.

Hi, one more about the same store -- the key performance indicators -- page 2 of the supplement. It's always been a bit of a puzzle because you have 76 hotels, 61 of them are consolidated, 55 are same store consolidated, 70 are same store, total, but including unconsolidated.

I just -- I really want to understand what's driving your EBITDA. So I guess relative to the same store hotels, 55 hotels that were down 8.1% -- 200 margin basis point of margin decline; whereas the 70 hotels were minus 10.3% and much worse margin -- minus 373.

I assume that those three full service hotels and Jay your comments about the RevPAR and margins of those really are telling, I'm assuming that they have a big impact on the total same store but a pretty small impact on your EBITDA particularly given the impact of the preferred return from the Mystic venture. Am I correct in that? Are we at a point now where to really look at what's driving this company -- the same store portfolio described that better?

It does, David. I mean if you -- and that's a very good point. And if you remember back to probably 2005 and 2006, the unconsolidated JVs were a much larger portion of our EBITDA and FFO than they are today. And because of the preferred nature of the Mystic joint venture, the EBITDA volatility isn't nearly as much as is when we show the same store for all of our assets and the margin. The company's EBITDA and FFO is truly driven by its consolidated portfolio now.

Okay. And I guess over the next few months that 55 will grow to 61 and essentially be everything?

By the end of the year assuming no other acquisitions, yes.

Right, okay. And then the only difference will be all of the JVs which again have less of an impact. That makes perfect sense. Thank you. That's all I have.

We will take our next question from Smedes Rose with KBW.

Hi, thanks. I just wanted to ask you -- you guys have touched on this some, but given the limited visibility and even the bigger brand companies really don't know what's going to happen with RevPAR, would you consider I mean potentially just truing up your dividend at the end of the year in order to conserve capital across the balance of the year and then paying out -- you know if you wanted to meet your current dividend doing it all at once as a way to kind of be prepared if the downturn is much worse than what anyone's expecting so you're not sort of caught needing to do something more drastic?

Smedes, we've -- you know again from what -- from the analysis that we've done and based on where we are to date in the year, in where our capital position is, where our cash position is, we feel relatively comfortable that the dividends going to be sustainable for the next quarter or two. I think it would take -- you know should there be a more severe shock than we're seeing now certainly the analysis will change.

But as of right now we feel pretty comfortable for the next couple of quarters maintaining a quarterly dividend. If the time comes when that -- when our impression changes -- we'll certainly consider at that point suspending it and possibly truing it up with a special dividend at the end of the year. It is something that we've considered. But as of right now, we plan on just maintaining the dividend policy as it's been with a higher level of scrutiny and review of it.

Okay. And I just wanted to ask you, New York -- so New York City RevPAR according to Smith Travel was down around 16% in the fourth quarter which is about what you said your hotels in New York were down. And so during the first quarter New York is tracking down 30%, so is it fair to assume your hotels would be tracking in line with the overall market at this point in the quarter?

So far we are -- we're experiencing about a 25% down scenario, so we're tracking slightly -- we're tracking better than the market.

Okay.

I think the fourth quarter we did absolutely perform in line. I think -- I think we as well as most people were caught very unawares and that the strategies were in the process of changing then and I think now we're starting to see the benefit of some of those shifts in strategy.

Okay. All right, thanks a lot. Thanks, guys.

Thanks.

And that concludes the question and answer session for today. At this time, Mr. Shah, I will turn the conference back over to your for any additional or closing remarks.

Well we have no further remarks. I just want to thank everyone for joining us this morning and for your continued support. Thank you.

And, ladies and gentlemen, that is the conclusion of today's conference. We thank you for your participation. Have a great day.