Hersha Hospitality Trust (HT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Third Quarter 2009 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 Miss [Nikki Facts]. Please go ahead.

Thank you, good morning everyone. I want to remind everyone that this conference call contains forward-looking statements within the meaning of Section 27A of the Security 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 plans and expectations including the Company's anticipated results of operation through adventures 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 SCC filings.

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

Thank you. Good morning, everyone. Joining me today on the call are Neil Shah our Chief Operating Officer and Ashish Parikh our Chief Financial Officer. I'm pleased to report that we've made progress with our previously announced plans to enhance our liquidity and capital position in addition to our ongoing asset management initiatives. Let me first focus on our core operational results.

On a relative basis we delivered industry leading results with respect to both RevPAR and EBITDA margins. Although the economic environment remains challenging, the initial stabilization we started to see in the second quarter continued in our key markets, as the year-over-year declines in RevPAR moderated further during the second and third quarter of this year.

Consolidated hotel RevPAR for the third quarter, including new acquisitions completed in 2008, declined 14.8% as occupancy declined by 2.8 percentage points, and the rate fell 11.6%. Total consolidated same store RevPAR declined 17.1% in the quarter, and was comprised of a decrease in rate of 12.9% and a 3.7 percentage point reduction in occupancy.

Turning to our most important market, New York City, the year-over-year rate of decline also improved in the third quarter, compared to what the Company experienced in the second quarter. In the third quarter of this year our same store New York was down 22.7% on a rate decline of 26.7% and a 4.7% occupancy increase to 91.6%.

The key is that for the third quarter in a row we have posted occupancy in excess of 91%. By sustaining strong occupancy, we have positioned the hotels to be able to drive rate as we look ahead. This speaks volumes to the benefit of owning select service assets in one of the strongest growth markets in the country.

Our hotels have been able to continue to generate demand demonstrated by the solid occupancy that we've posted for the last three quarters. Additionally, we have a number of newer properties with still growing market share, which is further contributed, to our industry leading RevPAR results.

We are well positioned to benefit from continued demand stabilization and initial return of pricing power because of our exposure to transient business. 90% of our market mix consists of transient business versus group business, avoiding the need for us to displace low rated group business that many of our peers have layered into their hotels as a defensive measure when the consumer has had overwhelming bargaining strain. We have the ability to re-price almost all of our inventory on a daily basis.

The advantageously high transient mix in this environment, combined with the smaller sizes of our individual hotels and our yield management efforts, will allow us to respond efficiently to even slight fundamental recovery in the markets in the months ahead.

Additionally, in our same store New York portfolio, despite an almost 23% decline in same store RevPAR, in the third quarter we delivered an EBITDA margin of 39.1%. Excluding the impact of property taxes we limited the year-over-year margin decline to 158 basis points.

Looking beyond New York City, our diversification geographically is contributing to our results. Our properties in the California, Arizona, Connecticut, Rhode Island, and mid-Atlantic markets, outperformed the rest of our portfolio during the quarter with RevPAR declines in the 8% 10% range. In seven out of our nine markets we maintain occupancy levels at approximately 70% or higher in the quarter led by New York, New Jersey, Boston, California, Arizona, Central Pennsylvania, and the Mid-Atlantic.

We are encouraged by the start of what we hope will be a trend, as we experience stabilization in occupancy that has continued through October at many of the hotels. As this extends, we still anticipate that over the next few quarters we will begin to test our pricing power. Furthermore, as I mentioned earlier, our total portfolio products makes us heavily weighted towards transient guests, approximately 90% of the portfolio, and with transient leading recoveries historically Hersha is well-positioned to benefit early from a recovery in demand.

One of the key attributes of select and limited service hotels is that they experience less cash flow volatility during downturns, and the limited fixed cost structure allows us to react quickly to the environment to mitigate margin erosion. As we have discussed previously, our asset management team has worked very closely with all of our operators in implementing cost containment strategies to limit our operating margin erosion.

Helping to drive our industry leading margins is our focus on high barrier to entry urban and suburban clusters in the northeast that benefit from multiple demand generators and drive high occupancies for our portfolio; these markets are well leveraged to the recovery and will see strong growth rates. Additionally, the smaller size of our hotels relative to big box hotels is a distinct advantage that allows to yield manages more effectively.

Taken together, our relatively stable level of occupancy combined with a property by property cost containment program is resulting in margin, both gross operating and EBITDA that are the highest in the industry. For our consolidated portfolio, gross operating margin was 47.6% and EBITDA margin was 37.7% in the third quarter, which is the highest of all peer-lodging rates.

Since we've begun curtailing costs in 2008 we have further improved the effectiveness of our operations. Our largest cost areas, engineering and sales administration, were down about 19% and 10% respectively in the quarter, and overall expenses were down 14% for the quarter relative to a year ago. We're absorbing higher property taxes however, and we continue to pursue abatements, but again this will not impact us for several quarters if we're successful.

All of this translated to a third quarter FFO of $14.1 million or $0.23 per share and unit, as compared to adjusted FFO of $21.9 million or $0.39 per share and unit in the third quarter of last year.

Before turning the call over to Ashish, I'd like to discuss the strategy around our development loan portfolio. The turmoil in the financial markets has caused credit to significantly tighten, making it more difficult for hotel developers to obtain financing for development projects; this will lead to little to no new construction in the near to medium term.

While we believe long-term value remains in this program and in the assets that we hold, we think the most effective way for us to add value at this time is by focusing on our core markets and our operating results, and seeking out opportunities in existing assets. To that end, we have reclassified our own land parcels as held for sale on the balance sheet, and do not intend to expend resources seeking development loan opportunities for at least the next couple of years.

We do intend, however, to take advantage of the existing asset opportunities that arise from the current dislocations in our markets that will emerge in the coming years. As Ashish will discuss, we have meaningfully improved our balance sheet flexibility, which along with our relatively low cost of debt, of which 92% is fixed at an average weighted cost of 6.1% with an average maturity of eight years, positions us well to be opportunistic as we move ahead. We believe that the safety of our portfolio and balance sheet and the upside in our portfolio EBITDA in the recovery makes this a very attractive entry point in our stock.

Let me now turn the call over to Ashish, to go into some additional detail on our financials. Ashish?

Thanks, Jay. I'm going to focus on our balance sheet, liquidity, development loan portfolio, and financial outlook for the remainder of 2009. Increasing our financial flexibility remains a primary objective, and we've taken a number of steps to fortify our balance sheet and improve our liquidity position.

During the third quarter we successfully closed on the sale of four non-strategic assets at attractive multiples, refinanced two land parcels and two operational hotels, and brought on a new strategic capital partner, IRSA, all of which we discussed on our last quarterly call. We also initiated a cost effective at the market or APM equity offer program.

These initiatives have allowed the Company to reduce our borrowing under our credit facility by approximately $33.5 million since the end of the second quarter, and reduced our overall debt balance by $54.2 million. As of September 30, 2009 we had approximately $55 million available under our $135 million committed credit facility, and approximately $28 million of cash and escrow deposits.

With respect to our line of credit we have strong relationships with our bank group, and have been in active discussions with the lending group to obtain additional flexibility going into 2010. Our refinancing efforts have also provided us with a more favorable debt maturity profile. We currently have no consolidated debt maturing in 2009, and our 2010 and 2011 debt maturities approximate at $15 million and $18 million respectively. We have commenced our refinancing efforts, and have established plans to address all of these maturities.

During the quarter, we further improved our liquidity by utilizing our at the market equity offering program. This equity program is intended to allow the Company to opportunistically and cost effectively, issue equity based on current market conditions. During the third quarter, we sold 1.48 million common shares at a weighted average offering price of $3.07 per share, generating net proceeds of approximately $4.4 million.

We have sold 2.74 million shares through our controlled equity program since implementing it in June, including 1.19 million shares sold in the fourth quarter at a weighted average price of $3.09.

Regarding our capital expenditures in 2009 we expect our capital investments in the near term to be limited to critical capital maintenance. The young average age of our portfolio allows us to limit this spending without a measurable impact to the experience of our hotel guests or to the quality of our properties. Through the end of the third quarter we have spent $4.9 million, and expect to spend between $6 million to $7.5 million for all of 2009. We also maintain approximately $8.7 million in capital expenditure reserves that can be utilized towards future expenditures.

Turning to the non-cash impairment charges we recorded in the quarter, during the quarter we reclassified one operational hotel asset and two land parcels for sale, and we are now carrying these assets as discontinued operations on the balance sheet. The land parcels are located in Manhattan and Brooklyn, and in conjunction with this reclassification we performed an impairment analysis to determine the fair value of these land parcels.

As Jay mentioned, in this environment the opportunity to construct new hotels is moderated, and the Company has recorded an impairment charge on these assets in order to approximate the likely sale prices of these assets to their fair value. The Company will be actively marketing these assets in the near future.

We also performed an impairment analysis on our development loan portfolio, and took an impairment charge on our two early stage development loans. These are the only two development loans in our portfolio where the hotels are not in operation, or where the projects had not commenced construction and did not have full construction financing in place.

It's important to note that the first mortgage loan on these parcels are in good standing, and the developers are actively working to complete the hotels. We are still confident that these hotels will be developed in the future, but with uncertainty on timing we felt it was prudent to impair these loans to their current fair value.

Based on the results of this analysis the Company is recognizing a non-cash impairment charge of $17.7 million on its assets held for sale and a non-cash impairment charge of $21.4 million on the two mezzanine loans in it's development loan portfolio. In addition to these assets, which we intend to market, we believe there will be other opportunities for capital recycling. Even in this environment there are non-strategic assets in our portfolio that are potential disposition candidates.

The relatively smaller size of many of our assets make them attractive investments for potential buyers who can access local or regional bank financing to acquire them. Additionally, we are more actively evaluating our markets for selective acquisition opportunities. We intend to maintain a strict discipline in our approach, looking for attractive multiples, and we expect to continue using our dispositions to enhance liquidity and strengthen our focus on key markets.

Let me finish with our financial outlook for 2009. Visibility on the demand side of our business remains cloudy and difficult to predict but as we mentioned, we believe we are beginning to see early signs of stabilization as the year-over-year declines moderated for the second straight quarter. That being said, we also believe that operating conditions will remain challenging through the remainder of 2009.

We're updating our financial assumptions and now expect RevPAR to decline by 15% to 18% for the full calendar year, compared to our prior assumption of 14% to 20%. Our estimate for full year operating margin deterioration is now 300 to 350 basis points, compared to our prior assumption of 200 to 400 basis points. We remain confident that the characteristics of our portfolio should help us as we move through this difficult time, and we will continue to focus on fortifying our balance sheet and looking for selective opportunities.

This concludes my formal remarks. I'd like to turn the call back to Jay for some final thoughts, before opening the line to questions.

Thanks, Ashish. On the operations front the climate remains challenging given the ongoing effects of the recession that continue to stifle demand for lodging. However, we believe our strategic positioning with select service hotels, coupled with our predominately New York and east coast corridor locations and ongoing cost containment efforts, will help us to continue to post improved results.

We have a solid portfolio of high quality, newly built assets in both urban and stable suburban markets; these are markets that attract significant business and leisure demand. We have a young portfolio, with the average age of our overall portfolio of seven years with 40% of the portfolio at less than five years, which means that our hotels will require less capital investment over the next several years, and as these hotels continue to ramp, they will deliver premium growth over the markets they're in.

Combined with our cost containment plans, which are expected to generate significant savings in 2009, we are quite well positioned to drive margin improvement further as the market turns. We believe that as a recovery starts to emerge, our hotels will be able to generate even stronger profit margins, as a result of our more efficient operating structure currently.

We believe that our stock presents an attractive entry point when considering the safety of the balance sheet, our favorable debt, and that EBITDA would have to go approximately 45% to 55% to return to stabilized levels through the recovery.

That concludes our prepared remarks, operator we can open the line for questions.

Thank you.

(Operator Instructions)

We will take our first question from David Loeb with Baird.

Hi, Jay and Ashish, I wanted to ask about the impairments, first on the land value in the one hotel. Where is the hotel that you impaired, and what's the marketing outlook for selling that?

Sure, David, this is Ashish. The one hotel that we've impaired is a Comfort Inn and it's in North Dartmouth, Massachusetts. We are currently marketing that hotel; I believe the marketing price on that is just slightly above where we marked the asset down to at this point. The asset is quite small, it's an 81-room hotel and we believe that with the debt that's in place that is assumable, there's a good chance that we will trade that asset in the next few quarters.

Okay. And the two land parcels that are now up for sale, those were both subject to land leases before were they not?

Yes, they were both subject to land leases. There's very cloudy outlook whether those actually get developed and if the leases stay current. So, we think it's a more prudent move to just dispose of those land pieces at this time.

And do you sell them with the leases in place?

No, those leases will be terminated.

Okay, and who are those leases with? Were either of those related party or were they both Sam Chang or someone else?

One of them was a related party and one of them was with Sam Chang.

Okay, so if I'm hearing this right, you took a write off on a related party -- essentially on a related party transaction because you're basically saying since the related party can't develop the hotel in the near term, it's better just to sell the land. Am I putting that together right?

Yes -- no, that's accurate.

And then, so basically three Sam Chang developments you also took a write off, one land piece and then the high place in the Greenwich Courtyard, which were both Sam Chang properties? And you actually think those may go forward at some point later in the future just not right away?

We do. We do believe those will go forward in the future. The developer is still working with both of the franchise companies, the franchises have been secured on those, the zoning, the entitlement, everything is in place. It's just a matter of obtaining the construction financing on those parcels. So we still feel confident that they will ultimately get built, it's just from a timing perspective there's no polarity on that.

And presumably if they get built you'd be able to recover your investment?

Yes, absolutely. We still have our mezzanine position and we are not, in any way, walking away from those positions. But we don't have any capital requirements to fund any of the development or to fund any of the existing land loans on those parcels.

Which is why you wouldn't take control of them because that would just leave you with obligations and not with potential cash flow? Is that fair?

That's right, we're just effectively maintaining our options on those parcels. But we're not in any way required to fund any of the debt or in any way putting ourselves at risk on these projects.

One more question on the land impairments, what's the split between how much of the land was with Sam Chang and how much was Hersha interests?

The only parcel that was a related party was the Nevin Street parcel in Brooklyn. That, out of the total impairment, I believe the impairment on that was about $4 million, so it's a very small part of the total impairment.

Okay, that certainly helps. Can you just talk - this is probably better for Jay - a little bit about pricing in New York, if you're over 90%, when are you going to start to really unwind the discounting? And maybe a little bit more detail on how you were able to keep costs down so much. You were able to reduce costs, really, in the face of number one difficult comparisons and number two still declining rate.

Yes, let me answer the question about pricing first. The -- we are starting to see, in New York since Labor Day, since September say, we're starting to see our mid-week demand to be at least flat if not somewhat up. And we're starting to see some pricing power return there. I hesitate to talk about that as something solid that we can get traction off of because it is extremely early.

But I think, David, I don't have much more visibility than that. We continue to test it on a weekly basis and just as soon as we can get some traction on it, the one thing I do know is that we'll be the first to be able to capitalize on that just because of our transient exposure, but we continue to test it. We're finding that the amount of the distressed inventory that we're putting out to the OTAs is moderating; we're having less and less distressed inventory just because the demand is returning.

Most of the discounting that we are still doing is based on advance bookings and so on and so forth. So all of the signs are getting better, but I don't have anything quantitatively to point to to suggest that there will be pricing power in the next quarter or the following. And it also depends on that quarters demand, so we're not really certain about what we're going to see. We feel better about the fourth quarter, but we're still very uncertain about the first quarter of next year.

To drill a little deeper on that, as you approach the actual travel date or the nights that you're selling, are you selling out more of your rooms further in advance then? And is this -- I'm trying to kind of understand the way you guys think about revenue management and what you sell at a discount versus what you hold for last minute higher rate. Are you able yet -- is there enough strength in the market that you're able to hold more until the last minute?

If we expect demand to be increasing, we'll hold rooms going into sort of peak periods of demand. And that is very much based on, obviously, what events are going on in the city and what, sort of, near term trends we've been seeing in mid-week bookings. So it really varies based on what we're seeing in the market, on the ground, during that week.

Some of the advanced bookings have been for as much as three weeks out, and so when we do some of that we make our best guess based on assumptions of where we think demand is going to be and we'll hold back inventory if we think that we're going to be able to drive higher demand at a slightly higher pricing. But it is not as much a quantitative exercise as it might sound like.

There is a qualitative element to it and it requires the yield managers to really know the marketplace, to know it somewhat historically, but more importantly to understand the booking patterns that are going on currently on the ground, in the field there.

Yes, that makes sense. And finally, margins.

Yes. With margins I've said on the call in the last quarter that we're getting down to the fine strokes, I don't know that we're going to see that much more margin improvement from where we are. What I have been encouraged by is that the operating model that we've now put in place and is now part of our run rate, is holding steady.

We're finding that a lot of our salaried associates are becoming much more productive than they've ever been in the past, and we continue to really leverage off of that. The folks in the field are working very hard, and I think our operators are doing a great job. We do continuously monitor it to make sure we don't have excessive burn out levels with our associates but big hats off to them, they've really been helping to hold down the fort.

Two of our big areas of cost savings that I mentioned are, engineering and our sales administration areas and with sales administration this is just not - you know you normally have a lot of sales going on to do one of two things; either to retain existing market share and to drive incremental market share.

And in this kind of an environment right now, the sales administration has been doing a very good job at retaining our share and building a little bit but in this kind of environment there's not that much market share to build. And so, that's an area where we've seen great savings and the staff is doing great things, but it's an area that we're not really suffering from cost cuts in.

Engineering is a real big area for us and we've transitioned into a regional -- we've transitioned the bulk of our engineering function into a regional function and that has been working out very well. During this period, because of the age of the assets, the R&M at the hotels has not been as significant and we haven't needed somebody on a full time basis at every one of our hotels.

And so that has been a significant savings and we, obviously, continue to monitor our assets to make sure that we're not deferring R&M that should be done more currently and so on and so forth. And our satisfaction scores from our brands are still coming in quite strong. So, I think we're getting through that very well, but people are working hard and they're clear a big part of the equation.

That's great. Very helpful. Thank you.

And we will now move to Will Marks with JMP Securities.

Thank you. Good morning, Jay, and Ashish. First question on - did you mention covenants? I don't recall hearing about it in -- I was trying to find information in the supplemental, I'm not sure if you usually put it -- but can you just update us on covenants.

Yes. Absolutely. We've done our covenant calculation for the third quarter; we are not in default of any of our covenants. We are currently discussing our covenants under the line of credit with our bank group, and we're just in the final stages of negotiations to obtain some flexibility going into 2010 and 2011. We think that we're pretty close to getting some covenant relief under our line of credit at this time.

Okay. So you don't anticipate it being any kind of a serious issue in terms of your interest payments or your interest payments or your [discharge] payments?

No. No. Not at all. And once again, we're not in default on any of our covenants, we're not forecasting to be in default by the end of the year, but we certainly are aware of just the overall lack of visibility going into 2010, and want to be sure that we're positioning ourselves properly.

I mean, I understand that it makes sense to be proactive in this regard up to a certain cost, and I guess you're implying that the cost wouldn't be that great.

That's correct.

Okay. Perfect. And just one big picture question, you talk a lot about New York, and we hear a lot about trading up in this environment and yet you're still maintaining good occupancies. Just wondering if this means good upside -- I guess I'm throwing you a softball here, but what happens when people start coming back?

Well, as much trading up as might be going on driven by discounting, I think when -- soon enough -- I think two dynamics apply. Soon enough, the discounting will moderate and prices will return, and so all of those folks that were trading up because it fit into their budge won't be able to do so.

And secondly, I think, we're sort of in this era of corporate thrift right now and we're seeing probably more trade down effect than there is trade up effect going on in the marketplace. So I guess my point is, is that travel budgets are not necessarily static. Folks, if they can get a lower rate are happy to get a lower rate rather than moving around with the static room night budget.

I also mentioned another point is, I think we're continuing to see great demand and our market share is good in New York, we're running very strong market share numbers there amongst our peer set. And I think we're benefiting from some lack of compression, in other words when we had really peak demand and peak pricing in New York, we were seeing the markets around New York City benefit significantly just from the compression coming out of Manhattan.

And I think what we're seeing because of the sustained demand in New York, we're probably taking share from those compression markets that benefit during peaks.

Okay. Great. Yes, that's very helpful. One final question, on your at the market offerings. What is approximately the cost of these versus doing a great offering all at once?

Sure, the overall cost on these, you know there is no discount on the sale of the stock and the underwriting costs are in the range of 2.75%.

Okay. That's all from me. Thanks, guys.

We will now take a question from David Katz from Oppenheimer.

Hi, good morning. On the mezzanine loans that I think you took you impaired in the quarter, as I recall the strategy was perceptively more than one hotel, if you could just tell us which hotel that was associated with, and is there still the strategy in place that you could ultimately wind up taking over those hotels should the circumstances dictate that? Please.

Hey, David, I'm sorry. Could you repeat that?

Sure. In your release and I apologize, we've got a few going on this morning. You took, I believe it was $21 million of an impairment on two mezzanine loans in the Company's development loan portfolio, $21.4 million, non-cash. Right? As I recall, unless you need to correct me, those were associated with specific hotels. If you could tell us which hotels they are?

And then the second part of the question was, I think we usually understood the strategy to be that, should those situations dictate, you would consider taking over those assets -- full ownership of those assets, and that this was essentially a loan to prospectively own strategy. And is that still the case?

Okay, sure. Sorry, about -- understood. The two loans that we impaired at this time, once again, these were the only two loans that they were in the early stage of construction, so they were just -- the demolishment was going on and just land values, so there was no operational hotel, no full construction and construction financing in place. This was the Hyatt Place on 52nd and 2nd, as well as the Courtyard down at the World Trade Center.

So we don't -- the strategy of the program is still certainly that we monitor the operational hotels and the in construction hotels, and if there was a problem that we would take over those particular hotels. These two, we didn't want to take them over because at this point that would mean taking the land on our balance sheet, taking the debt on our balance sheet and effectively putting our balance sheet at risk for future construction on these assets.

These two hotels represented roughly 30% of our development loan program. The remainder of the program consists of about $48 million of development loans, 35% of it is on operational hotels so hotels that are cash flowing, and the other 65% is on hotels that are under construction and have all of their construction financing in place.

So we've looked at the entire portfolio, we have performed our discounted cash flow analysis on the operational and construction hotels and concluded that those were being held at fair value but due to the uncertainty on the timing of the construction and construction financing for the Hyatt Place and Courtyard, we've decided to impair those two assets.

Okay, perfect, thank you. The second question I had was about land lease revenue and expense and it looks like you're adjusting some of those. Should we be thinking about land lease revenue and expense going away entirely at this point or will there still be some that's included in ongoing operations?

Not in ongoing. Those would just be on discontinued operations and upon sell of these two land parcels that we've classified that would go away all together.

Got it.

Revenue and expenses.

Got it. Got it. Okay, thank you.

We will now move to Smedes Rose with KBW.

Hi, good morning. On your New York assets, could you talk a little bit about their performance if they're branded versus your independent properties, which I think are a little more upscale typically versus your -- in the brands, you're mostly Hampton Inn's.

And on that, is it your sense that the weak dollar is helping boost a lot of demand from tourists, or do you really sort of feel you have business travel is coming back? You mentioned some mid-week occupancies are flat or slightly up year-over-year. What's kind of your sense of, I guess, your customer mix?

Smedes, let me just give you some sense, in the third quarter our - the Manhattan branded versus Manhattan independent; the independent out performed the branded slightly. I would say by about 10% -- maybe slightly better than 10%. So what we saw was a variance in the branded hotel versus the independent hotels, mainly in -- it was a little of both, occupancy and ADR at the independent hotels was generally better, but it varied hotel by hotel.

Now getting to the second question, where is all this demand coming from? As I mentioned earlier, what we're seeing particularly since September is that the mid-week demand has gone flat to slightly positive. Generally, that is driven by business travelers so that's one of the reasons we're feeling more encouraged because we're starting to see some of that business transient traffic come back.

And for us it tends to have a decent impact just because of the size of our individual hotels are smaller and we're able to yield that better. And that also suggests that we'll have more flexibility in rate going forward because that's historically what we have experienced with business transient travelers.

You see a lot less flexibility in rate with leisure transient, and that's been making up the bulk of it. So, we're starting to see a bit of a shift from it being overwhelmingly leisure transient to more business transient coming back.

Okay, thank you.

(Operator Instructions)

And we will now move to Steve Mazda with Mazda Capital Management.

Hi, Ashish, and Jay. How are you?

Good. How are you, Steve?

Good. I got most of my questions answered by the other guys, but I guess I have to go back to my retailing roots when we used to own Nationwide Discount Sleep Centers and we'd do the free box spring ad. Buy the mattress at the regular price; get the box spring for free. Okay?

It seems -- and again, I guess as the other gentlemen asked in terms of drilling down to the point where the operations guy on the premises says, you know, we're seeing enough here. I think we can bump the rates. Maybe we need the free box spring concept where the rates go up but the guy on the ground there has the ability to discount it at the desk to a certain degree if he needs to, to get the sale.

I guess what I'm trying to get at it is how do you take data from the man on the street who's running that particular store, the ability to get you the pricing power to bump it $5 or $10 a night? And would something like this make sense?

You know it's interesting, I think for the type of booking patterns that we experience at our hotels, this probably doesn't work as well and I'll explain why. Generally speaking, our hotels -- you don't have a lot of walk-in business, so you're not going to have the person at the desk making all that many decisions that are going to impact a large portion of the mix of guests at the hotel.

We do give some leeway on reservations, but we've got so many offerings already as a part of our distribution systems that any conceivable combination or discounting type of offer we want to give is already kind of preconceived and in the form of a package. And I think when you're just trying to manage this many hotels we don't like to have our operators -- as owners we like to have a clear understanding of what types of discounting and offering is going on with some predictability on what volume of the business is going to be discounted just in order to maintain control over our assets and the revenue stream.

So I think your idea works real well for owner/operators or smaller portfolios, but here we typically have desk clerks or desk agents at the hotels that may or may not be as versed in pricing strategy relative to our asset managers, and so we try to keep that discretion to our asset managers.

Okay. Other than occupancy, what are you guys - your finger from corporate standpoint, how do you really keep your finger on the pulse of the pricing? Is it really just based on occupancy? Determining pricing power in the future, what are you looking for?

We sort of measure sort of denials that we have from our 800 reservation systems, from the different brands that we use, and we'll look for pricing denials and shopper calls and kind of see where the resistance point on pricing is.

I see.

And the hotel industry has some very good research on local markets so you can tell on kind of a weekly basis exactly how your competitive set has done with what may be a different strategy. So you're able to really -- you're able to get a pretty quick idea from the corporate office on what's happening in a local market.

Okay, that's all I have. Thanks.

You know I'd like to, if I can, follow up on a question we had earlier from Smedes. There was a question on the independent versus the branded portfolio (inaudible) from [Smedes].

I was just digging up through the numbers that I have here and I have sort of specifically in quarter three the independent hotels in New York actually saw an occupancy increase of 11.6%. That was so varied across the three hotels it's tough to drive a pattern. But, it was north of an 11% increase in occupancy with a 25% decrease in price for an independent portfolio negative 16.5% RevPAR in quarter three on a relative year ago basis. And the branded was about a negative 26.3% in RevPAR driven, as I mentioned earlier, mainly by rate with less than a 1% occupancy increase.

We will now move to Bill Crow with Raymond James.

Jay, a philosophical question. The conflicts that are inherent in the structure were pretty easy to overlook in the good times, and I'm sure they will be again as the industry recovers but now that we're heading the other direction they kind of become more obvious that they can be also a headwind, whether it's a dividend decisions or write-offs or potential write-offs. I'm sure wondering whether you've thought about whether this might be a good time to kind of shift the corporate governance a little bit.

You know it's an interesting question, Bill. We've talked about it quite a bit, and we consider a lot of these development loans -- I'll take them sort of in parts. But a lot of the development loan program, it was productive. You know we generated some great assets that drove a large portion of our growth in the last cycle. You know 14 terrific assets came out of it and all of them are stabilized at great cap rates in our portfolio, even today.

So there was good pricing and I think our shareholders all benefited but they were related party transactions. I think when we were a smaller enterprise and growing scale I think some of those legacy programs created a lot of value for the REIT. I think going forward, our focus is going to remain the same strategically on the portfolios, on our portfolios, on the markets that we pursue, and the types of hotels that we pursue.

But I fully expect that there's going to be a de-emphasis on development loan programs as far as our discussions go now, we have no expectation of pursuing anything further in the development loan program with related parties or otherwise anytime in the near future.

As the Company continues to grow, the existing legacy loans that are on the books and are productive will continue to become a small portion of our overall enterprise value and that is certainly being done intentionally and it's a considered directional change.

When it comes to the dividend, you know the dividend is an interesting question and we've been asked about it so much as to why we continue to pay it. And you know the dividend, as I mentioned before, is very much a Board and management issue. We continue to feel that a dividend is an important part of an investment in a real estate investment trust.

We think that income production is going to be an attractive attribute of companies as we move into the recovery and we just feel strongly about a dividend policy. The dividend where it is today is at an extremely responsible level, not very aggressive. But I think it signals a certain level of health and it signals just a certain commitment to the dividend policy and it's our belief that that's going to drive some benefit, if not now, at least in the future.

So, that's sort of how we think about those two things. I think -- but a lot of these legacy issues with the development loan program is something that we will see being de-emphasized as we move forward.

But no thoughts of shifting composition of the Board make-up, for example, to eliminate some of those conflicts over the near term?

Well, the Board is currently made up of five independents and myself and two other insiders. So currently, it is generally a very independently weighted Board, and all related party transactions all insiders are not even a part of the decision making process.

All right. Thanks.

We will now take a follow up from Smedes Rose.

Hi. On your development loans you mentioned that the 35% that's on hotels that are cash flowing. What's the service coverage there from those hotels on those loans?

Smedes, I don't have that number off hand, but I can certainly get it for you.

Okay. Great. Thanks. That was it. Thank you.

(Operator Instructions)

And there are no further questions at this time. And now, we'll turn it back to management for closing remarks.

Okay. Let me thank everyone for being with us this morning. I know it's a busy time, a lot of companies reporting. We appreciate your interest. We'll be around all day, if any questions occur to you after the call please feel free to give our offices a call. Thank you.

That does conclude today's conference. Thank you all for your participation.