Hersha Hospitality Trust (HT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Second Quarter 2010 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)

One final reminder, today's call is being recorded. With that, I would now like to turn the presentation over to your host for today's conference, Ms. Nikki Sacks of ICR. Please, go ahead.

Thank you, and good morning, everyone. I want 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 that's amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality Trust trends and expectations, including the Company's anticipated results of operations through 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 provisions 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 in the Company's SEC filings.

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

Thank you, Nikki. Good morning, everyone. Here with me today on the call are Neil Shah, our President and Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer. Since March, our portfolio has experienced positive RevPAR, and our second quarter results clearly demonstrate that the recovery in lodging is underway, and that the strategic course that we continue to pursue positions Hersha very well to outperform in this environment.

Our strategy of concentrating ownership on high-quality, select service hotels in urban gateway markets in the northeast such as New York and Boston is intact, and our focus is being rewarded in our results. These are markets which typically turn positive first and, as expected, are leading in this recovery.

The early signs of a return in demand that we first experienced in the third and fourth quarter of last year and that continued into the first quarter noticeably accelerated in the second quarter when we were able to capitalize on the return of the corporate transient traveler.

During the second quarter, we again delivered industry-leading RevPAR growth of 13.3% along with industry-leading margins of 40.8%, 160 basis point increase over last year's second quarter. Hersha benefits from significant positive market leverage. With 78% occupancy across our consolidated hotels and 90% in our New York City hotels, we're able to employ aggressive revenue management strategies driving ADR growth, which flows disproportionately to the bottom line and positively impacts our margins.

A good example of the impact of our revenue management strategy is the performance of our Manhattan hotels. During the second quarter, our consolidated Manhattan portfolio realized a 13.1% growth in RevPAR, driven by a 13.2% increase in ADR and relatively stable occupancy at 92%. This positive market leverage resulted in an expansion of EBITDA margins of 329 basis points to 47%. This represents an 85% flow-through of incremental revenues to the Company's gross operating profit.

Additionally, the performance of our consolidated portfolio over prior year demonstrates that our recent acquisitions are having a positive impact on our results. The acquisitions that we've made over the last 12 months have significantly increased our portfolio's RevPAR and EBITA, and have been transformative to the portfolio's net asset value.

Their performance and growth were higher than our portfolio average in the second quarter, and given their young age, as these properties stabilize and increase market share, we expect increasing contributions from them.

Given the seemingly bright fundamental shift for us in the industry in this quarter, we're well aware that this economic recovery is prone to fits and starts, but we're comfortable that we see a consistent fundamental improvement in our key strategic markets.

From a market perspective, Manhattan undoubtedly remains our strongest region, but the other areas that are exhibiting strength and contributing to our growth include the Boston and Mid-Atlantic regions along with Philadelphia, Connecticut and Rhode Island. On the other hand, regions that have yet to stabilize relative to the others in our portfolio are California and Arizona, and the New York/New Jersey Metro.

Our Washington, DC Metro portfolio consists of some very attractive suburban office markets such as Alexandria and Tyson's Corner, Virginia and Greenbelt, Maryland which were relatively stable last year. But because we don't have exposure to the Washington, DC CBD yet, our Washington portfolio underperformed the market average there.

Through this downturn, we have concentrated on enhancing our portfolio and our operations, and as we've discussed before, our asset management team and our operators have been very focused on cost containment measures. We've adopted a more efficient cost structure that we believe is sustainable moving forward.

We're very focused on limiting our expense growth over the next few years and believe that these initiatives, along with the sustained market recovery, will generate attractive EBITDA growth in the coming quarters.

Industry-wide demand clearly strengthened as the year and even as the second quarter progressed. To-date, most of the industry RevPAR growth was occupancy driven with rate only recently turning positive. The group business appears to be slowly stabilizing as convention and meeting bookings are starting to pickup.

However, the industry still needs to cycle through much of the reduced rate business that was booked in 2009 and early 2010. Because 90% of Hersha's mix is transient demand, we don't have to rely on the return of group occupancy to effectively manage yields of our room inventory. The Company has the flexibility to reprice substantially all of its inventory on a daily basis to take advantage of improving demand trends real time.

Throughout the recession, the transient segment has remained stronger than the group segment. The Company's market leverage has enabled us to lead in transient performance. When comparing the Company's results to the industry's transient results, we outperformed with a 13% growth in RevPAR, compared to the industry growth of 6%, with 8% of our growth from rate, compared to the relatively flat ADR growth for the industry.

From a portfolio perspective over the past six quarters, we've added seven highly strategic assets to our consolidated portfolio and have sold five lower-growth assets. We remain very selective in pursuing further acquisitions, and the Company is likely to only pursue new acquisitions if we believe that the acquisition can deliver growth rates that will exceed the portfolio average growth rate, be accretive to our NAV, and will be strategically additive to the Company.

We will also continue our strategy of selectively divesting assets which are slower growth and no longer fit our strategy. To that end, we recently closed on the sale of the Holiday Inn Express in New Columbia, Pennsylvania. The asset was approximately 13 years old and was in a non-strategic market for the Company.

We sold this asset at 11 times its trailing EBITDA, and avoided an additional capital investment of $1 million for brand-mandated capital expenditures. We will continue our efforts to divest these types of non-strategic assets at optimal times during this recovery.

Even though the Company's growth in the quarter was attractive, we are still very early in the cycle with a long runway. Our ADRs are still 15% below where they were in 2008, and even more so in key markets such as New York where they still remain more than 21% below our 2008 rates. It is a deep hole to dig out from, but it's not atypical for New York City to string together several years of back-to-back double-digit RevPAR growth.

In the last cycle, for example, New York experienced four years of double-digit growth, with one particular year in the series delivering north of 20% growth -- particularly encouraging considering the high levels of occupancy that we're currently seeing, and the favorable supply/demand dynamic across the recovery.

When viewing the Company's significant market leverage and our improved cost structure relative to the last cycle, we're optimistic about the flow-through in our earnings growth potential portfolio-wide in the future quarters.

Let me now turn the call over to Ashish to get into some more detail on our financial position. Ashish?

Great, thanks, Jay. I'm going to focus on our balance sheet, liquidity capital transactions, and increased financial outlook for 2010. Our financial profile is in a secure and continually-improving position. With the refinancings, amended credit facility and equity offerings that we completed over the past several quarters, we have significantly enhanced our financial flexibility and have taken entity-level risk off of the table.

This improved financial position allows us to concentrate more fully on driving earnings growth, further progressing our strategic plan, upgrading our portfolio and capitalizing on opportunities created by the current turbulence in the lodging and capital markets. Over the past year we have significantly improved our leverage ratio by several turns, and are making steady progress in our stated goal to bring our debt to EBITDA ratio to five times, and to maintain the debt to enterprise value below 45%.

As of June 30th, we have $44.7 million of borrowings on our $135 million committed line of credit; $35.4 million in cash in escrows; and no debt maturities for the remainder of 2010. Approximately 92% of our debt is fixed or cap, with a weighted average interest rate of 5.97% and a weighted average life to maturity of 6.8 years.

As of June 30, 2010, we had approximately $51.5 million of trust-preferred security for which the fixed rate period has now expired, and these securities have converted to floating rate instruments.

The weighted average interest rate on this debt has therefore been reduced from approximately 7.25% to 3.4% today, and we have simultaneously purchased an interest rate cap to insure that the total interest rate on these instruments does not exceed 5% over the next two years. Depending on the interest rate environment over the next few years, our annual savings on this conversion will result in an interest expense reduction of between $1 million to $2 million per year.

From a capital perspective, we continually evaluate our best use and highest return options for our capital investments. This includes paying down debt, acquisition, and investing in our existing assets. During the second quarter, we retired approximately $8.2 million of debt that carried an interest rate of 8.94% without any defeasance or prepayment cost. This debt pay-down unencumbers an additional three properties from any debt. We also added two assets to our consolidated portfolio during the quarter.

In April we purchased the outstanding mortgage loan to one of our unconsolidated joint ventures that owned a Courtyard By Marriott in Boston, in which we own a 50% interest. Our basis in the 164-room asset is $13.8 million, or approximately $84,000 per room. The Courtyard South Boston was opened in 2005, and remains a core urban holding for the Company.

Then in May we purchased a Holiday Inn Wall Street in New York City for approximately $34.8 million, or $308,000 per key, including closing costs and fees. This 113-room hotel was previously run as an independent hotel, but was recently converted to a Holiday Inn, and includes a lobby-level restaurant that is leased to a third party.

We had previously provided a development loan on this hotel project that was converted to equity as part of the acquisition. This acquisition demonstrates the benefits we are still accruing from our development loan program and its off-market opportunity, and at the same time reduces our overall development loan exposure as we focus on our core markets and our operation. Our development loan balance now approximates $40 million and represents approximately 3% of our total asset base.

On an ongoing basis, we'll also evaluate our existing portfolio to determine any high-return rebranding or redeveloping opportunities. During the second quarter, we began renovations to convert two of our existing adjoining hotel properties in King of Prussia, Pennsylvania -- the Sleep Inn and Mainstay Suites into a Hyatt Place, as we believe the prior brands weren't optimizing the assets.

We anticipate opening the Hyatt Place later this month, and this renovation has required us to completely shut down the asset since April, impacting our operating results during the second quarter and third quarter of this year.

Regarding our capital expenditures, we expect our capital investments in the near term to be limited to critical capital maintenance, but we do intend to initiate several deferred initiatives towards the end of 2010, including lobby renovations for some of our urban courtyard, and to accelerate some of our capital spending in core urban market.

In 2010, we expect to spend between $14 million ad $15 million in maintenance CapEx, and we currently maintain approximately $11.1 million in CapEx reserves that can be utilized towards future expenditures.

As Jay mentioned, we also intend to pursue selective dispositions where an asset no longer fits, in order to redeploy capital and resources to higher return opportunities. We will continue to be diligent and deliberate in our pursuit of these dispositions. However, we believe that the difficult lending environment for hotel assets will result in a somewhat lengthy disposition timeline.

Let me now turn to our guidance -- guidance and expectations for the remainder of the year. While our visibility still remains limited, and after a brief uptick consumer confidence has again declined, there appears to be a slow and methodical improvement in our key strategic market. The recovery in the lodging sector has not uniformly benefited all segments or geographic areas within the US lodging market.

We, however, have become increasingly optimistic with the strength of the ongoing recovery in our core market, and we expect continued RevPAR growth for the second half of the year, driven by rate-led growth off of a strong and stable occupancy base.

We're therefore optimistic about the balance of 2010, and are introducing total portfolio guidance, and are increasing our full-year 2010 same-store guide. For our total portfolio of consolidated assets, including all of the new acquisitions, we expect our full-year RevPAR growth to be in the range of 10% to 12% versus 2009, and for our operating margin to improve by between 150 and 250 basis points.

We're increasing our expectations for full-year RevPAR growth on a same-store consolidated basis to be in the range of 3% to 5% versus 2009. With this higher RevPAR assumption, along with greater expected flow-through from stronger ADR growth in the back half of the year, we're increasing same-store hotel EBITDA margin guidance to an improvement of between 50 to 100 basis points.

This concludes my formal remarks. And I'll turn the call back to Jay for his closing comments.

At this point, operator, we can open the line for questions.

Thank you.

(Operator Instructions)

We'll go first to Shaun Kelley, Bank of America.

Hi, good morning, guys.

Good morning.

Quick question for you on the margin front. Just kind of interested to understand a little bit more on the rest of the portfolio. You gave some good color on what happened in New York City. If we did our math right, just on the percentage of EBITDA, it kind of implies that maybe the rest of the portfolio still had a little bit of margin pressure.

So, could you give us just a sense of kind of magnitude of how the rest of the portfolio's margins are trending outside of New York City, and kind of how you see that shaping up for the back half of the year?

Sure. Shaun, this is Ashish, just to give you some color on some of the different markets. I think that what we saw in New York was clearly market leading. Other markets where we saw pretty healthy margin growth were Boston, Philadelphia, and we saw some pretty decent margin growth in the mid-Atlantic.

Where we continued to be pressured on margin were in the Connecticut/Rhode Island market, Central Pennsylvania, our -- New York/New Jersey Metro which is really the compression markets of Long Island, Central Jersey, White Plains.

And California/Arizona was the hardest-hit market; we still saw sort of negative RevPAR in 6% range, and EBITDA margins in the high single-digit loss -- so about 700 to 800 basis point loss in that market. Those markets really brought down the overall margin that we benefited from New York, Boston, Philadelphia.

Yes, Shaun, if I could just add to that. You know, some of these challenged markets where you're still seeing negative RevPAR -- and fortunately, we only have a few of those left -- you're obviously going to have significant EBITDA margin pressure there.

But even some of the ones that were positive for us -- for instance, Connecticut and Rhode Island that was very much driven by occupancy -- the RevPAR growth there. And as we've said before, when you've got that occupancy-driven growth, you don't have as robust of an expansion in EBITDA margin.

And so, as successful as we were at expanding margins in the markets that were robust, where we're still seeing occupancy stabilization in some markets where we're still having challenges getting to positive RevPAR, that really weighed down the same-store EBITDA margin number.

That's helpful. And then I guess could you talk a little bit about -- I mean just your kind of initial observations on July? I mean, at this point, obviously -- you kind of mentioned that there's been some movement in consumer confidence.

With 90% of your business being transient, have you seen any changes to customer behavior, anything that would kind of stand out to you? Or, has the trend remained kind of directionally what you saw in the portfolio through the end of June?

Right now we're seeing July -- obviously you can't go into too much detail about it, but we haven't seen any significant shifts in July relative to what we saw in the last quarter. So, that's pretty encouraging. So despite the headwinds that we're seeing out there, there seems to be a certain level of recovery that our markets are experiencing despite all of that. And it seems to be consistent and sustaining through the uncertainty.

And then, maybe, Jay, just kind of one on the -- on the acquisition front. Kind of what are you seeing out there right now in terms of opportunities, particularly in maybe New York, Boson, DC? We continue to hear from our contacts on the private side that the market activity has picked up.

Are you seeing increasing opportunities? Do you think there's more opportunity for you guys today, or do you think a lot of people are just testing the market but these assets maybe aren't priced to actually trade?

Shaun, I'm going to have -- Neil Shah's here with us. I'm going to have him answer that question. I think he'll have a lot of color on it.

Shaun, there's absolutely been a flurry of kind of brokered opportunities -- hotel investment opportunities since the spring. I'd say that there have been more institutional assets brought to market this summer than we've seen all of last year, for example. So, there's a lot of volume.

Pricing has been tough, but there seems to be multiple bidders this time, this summer at least. And so as challenging as it is for us to make the numbers work on the acquisitions, there seems to be buyers at some of these prices.

I think we're seeing kind of five to six caps in most markets around the country; I think for the best markets like New York, DC, you'll see a handful of transactions below that, maybe in the three to four cap range if there's a little bit of a repositioning story to it as well.

I think people are pricing at that level, because there are expectations of high single-digit kind of RevPAR growth in a lot of markets, and then the flow-through advantages that might come out of that. I think they're pricing kind of towards a low teens, unleveraged return. And at that rate, you can get some deals done, it seems like. For us, they remain a little pricey.

We still feel that our internal portfolio provides higher kind of EBITDA CAGR than what we're seeing out in the marketplace. In New York in particular, there's been a couple of assets that are similar to what we own and operate in New York that have been on the market.

We haven't made kind of second round bids on a lot of those, because they're getting priced kind of around $400,000 per key, where it seems to be stabilizing for kind of select service assets. And at the upper upscale level in New York I think that even the new stuff that's coming on line and being built is all in that $750,000 to $1 million-a-key range.

So, I don't think pricing on an acquisitions market is going to fall below that right now. So, challenging, but I think we'll see more deals close this summer than we've seen so far in this recovery.

Thanks, Neil. And I guess maybe just one last follow-up on that. You kind of mentioned the internal portfolio and your returns on that. I mean, does that imply that you'll be investing more on the internal side than what -- and you see less on the acquisition front, or -- ?

I mean, obviously I think your CapEx guidance was up a little bit in terms of initiatives to the back half. But how are you kind of weighing what you can do, both out of the development loan portfolio, what you've got in the unconsolidated JVs versus those external opportunities?

You know, Shaun -- this is Jay again as far as -- I think you've got the part about the acquisitions. If we're not seeing attractive growth in the acquisitions, the potential acquisitions that we're looking at, that are matching our portfolio growth or exceeding it, we're probably not going to move ahead with that.

I don't know that the alternative for us is to use all of that money and allocate it for capital refresh. But, I think we are going to selectively start putting money back into specific properties where we think we're going to get a good return on it.

Now, the magnitude of capital expenditures that we have to refresh properties is somewhat limited. You know, we'll go back and, in some cases, we've done two lobby refreshments at two of our -- at a Philadelphia property and at a Boston property.

And within a couple of months of doing them, we're seeing 5% jump in RevPAR at one, and almost 8% or 9% at another. And we've sort of benchmarked it against other existing properties of the same brand but we haven't spent that money, and you're seeing that that's incremental over the set.

So, there's clearly upside to be had from doing it. And I think you can drive rate from deploying capital that way, but we don't have that many opportunities to deploy significant amounts of capital into the portfolio.

Yes, like those two lobby refreshes I think were both less than $800,000. Yes, so they're not big ticket items. But there are some opportunities to drive earnings growth that we're really focused on. Our acquisitions team is the same as our asset management team, so we are looking for opportunities throughout the portfolio.

Got it. Thanks, guys. I'll jump back in the queue.

Thanks.

And from Baird Investment, we'll go to David Loeb.

Can you drill down a little bit more on the Hyatt Place conversion in King of Prussia? Particularly interested in the cost of that and what the returns are likely to be. And also, Ashish, can you just talk about how that was reported relative to same-store and total portfolio and things like that?

Yes, let me just start off with sort of how it's reported, and then maybe Neil will give some color on the actual renovation process. As far as, we have taken it out of same-store and out of consolidated for the quarter, David. The asset was closed as of April 2nd or 3rd. So, that asset will not be reflected. The first time it would be in our same-store going forward would be the fourth quarter of next year.

The asset's supposed to open sometime later this month. And the way we record our same-store, as long as it's in the quarter on the first day of the month on that quarter, then it'll fall into same-store. So it should be up and running at the end of the third quarter. It'll be in same-store next year for the first time. As far as the asset itself, it was 156-room dual branded asset in King of Prussia that we closed, fully closed and have started the conversion (inaudible).

You know, David, it's a pretty remarkable transformation, really. We've taken these two small, mid-scale assets and transformed it into a single upscale asset that has very high curb appeal. Actually, it looks really good. And it's in a notoriously expensive and difficult to permit Philadelphia sub-market, so it made sense to go though the effort.

It's -- the total project cost is -- it's still being finalized but somewhere around $7.5 million. Hyatt provided $1.2 million in key money. And they were really great to work with as well, as we went through this process. But we took the 150-soome rooms and reduced it to 129 suites. And so our new basis in the asset -- we held it at I think [9.5 million] originally or something like $70,000 per key.

Now we own the 129 keys at about $122,000 per key basis. ADR on this asset in 2009, as the two mid-scale brands, was $80. In 2011 as a Hyatt Place, we expect it to be at about $128. And we expect the asset to be able to stabilize around $145 in ADR, ultimately.

So the NOI goes from, in 2009 was $633,000; in 2013 we expect it at stabilization to be well above $2 million net NOI, $2.5 million actually. So first year into this asset, we'll be owning it at a basis of $15.5 million. And we'll own it at a double-digit unlevered yield -- something like an 11% kind of yield in its first year and at stabilization, it should be mid teens unleveraged yields.

I think as a Hyatt Place, the residual value is clearly improved pretty significantly, just on a cap rate assumption. But I think it also is just much more marketable on sale, and will drive significant earnings growth for us in this market.

Sounds like a really clever move. Clearly, the geography supports this. Are there other markets where you have mid-scale assets that you could jump to upscale? And frankly, were those mid-scale or economy brands?

They were mid-scale. But -- yes, they were mid scale. But --

The lower mid-scale, and you're bringing them to --

Yes, the lower mid-scale. But the (inaudible) was developed -- was a really good hotel and had good bones. But yes, you're right; it was underbranded for that kind of market. There's a handful of other opportunities.

There's still significant projects, so you want to make sure it's a market that's worthwhile to do it in, because we did look at, should we sell this hotel and let someone else go through the process of converting it? Should we convert it to a Hyatt Place? Should we convert to a Residents Inn?

And we went through the math on this one, and it made clear sense to do it. There's an asset outside of Boston that could work also that we're looking at. But it didn't make sense this year. But we'll see next year, as alternative to just selling it as a non-core. So, there's a handful of opportunities there.

Okay. So Ashish, in the, all hotels, and the consolidated hotels -- this was not in the current quarter, but it would have been in the last year quarter?

It would have been in the last year quarter, right.

Okay. So, basically it's 63 hotels versus 56. The 56 included those two. The 63 excludes them.

63 excludes them. That's correct.

Got it. Okay. And Neil, one more for you. Maybe you said this when you were answering Shaun's question. I apologize. But, as you're looking at multiple bidders I certain markets, what does that tell you about your disposition opportunities? You've sold one hotel. You've got a piece of land under contract. But what about other disposition opportunities? Is that, the assets that you would look at disposing, are there interested buyers and financing available for those today?

Unfortunately, they're not. What we're seeing a lot of interest and multiple bidders on are large core kind of assets in the best markets around the country, or at least kind of major markets in the country. In our non-core portfolio really is -- I think the best pricing for that can be attained b selling to regional operators and entrepreneurial kind of groups that require debt to make the deals work.

And so, we're just not seeing good pricing in that area. We' e been exploring it. We're having lots of conversations about it. But right now, we feel like 2011 or 2012 will probably be the better time to sell these assets.

For sure, right now, on a wholesale kind of transaction, is there isn't the kind of market for these assets that we need. But opportunistically, we keep talking about individual ones, and hopefully we'll be able to keep reporting one or two sales here or there.

That's great. Thank you very much.

And from Raymond James, we'll move on to Bill Crow.

Good morning, guys.

Good morning, Bill.

Most of my questions have been addressed already. But one of the markets that you've mentioned as a potential entry is Miami or South Florida. Could you talk about prospects there? Is there as much competition to get into that market as you're seeing in the Mid-Atlantic and Northeast? And I guess that's it.

Bill, this is Neil. We've been looking down there, but it's been hard to make the numbers work there as well. It's a market that we believe has some great five-year runway in growth.

And we think that there was enough distress, enough disruption in that market that you should be able to find some interesting opportunities, and there's enough kind of unintentional owners that you should be able to make a deal. But so far, no luck, period. Yes, just no luck.

Okay, fair enough. That's it.

We'll move onto Will Marks, JMP Security.

Thank you, good morning, Ashish, Jay, Neil.

Hey, Will.

A few questions. First, just on the guidance with this total consolidated -- sorry, total portfolio hotel EBITDA margin improvement of 150 to 250. I just want to make sure I'm clear on, does that coincide with the first number that you, the -- sorry, 40.8% margin up from 39.2% that you had in the quarter -- is that the -- ?

That's right, Will. If you look at the first quarter and -- I'm sorry, if you look at the first half of this year, we had margin growth of about 157 basis points in the total portfolio, the consolidated portfolio. And then for the quarter it was roughly 160 basis points, with more of the growth in the back half come from [rate]. We believe that the range is 150 to 200 basis points of margin improvement.

Okay. I wanted to make sure that I was looking at the supplemental correctly and the numbers in terms of what that margin really means, since I don't think you had -- you hadn't shown it before, so.

That's right.

Okay. And then thinking about the back half of the year, third quarter versus fourth quarter -- I just did a quick check -- in the last two years it had been exactly 58/42 in terms of percentage mix in the third quarter versus fourth. Does your larger exposure to New York change that at all, or does anything else impact that?

Yes, if the larger exposure to New York does change our fourth quarter pretty significantly. I think that over time -- although second and third quarter will be almost exactly the same -- I think the fourth quarter numbers will start to get closer to the second quarter numbers -- still not there, but you could have higher rates in the fourth quarter overall for the portfolio and just a little bit lower occupancy because the rest of the portfolio does drop of after sort of the early part of November.

As we look at this year, third quarter fairly similar to second, and then fourth quarter over time should get that level, but that maybe not quite there this year?

Yes, I think that's accurate. I think it may -- it's tough to say that it'll ever get to the third quarter, but it'll get closer to the third quarter.

Okay. And then just lastly, I heard your maintenance CapEx number of 14 to 15. Did you give a dollar number of non-maintenance spending you're doing this year?

You know, Will, that 14 to 15 -- maybe maintenance isn't the right word -- that does include the lobby renovations that we discussed, as well as some potential -- making sure that all the TV's in the hotels are the new high-definition TVs. So, that really encompasses all of our CapEx.

Okay, great. That's all for me, thanks.

Thanks, Will

Great, thank you, Will.

And from KBW we'll move on to Smedes Rose.

Hi, thanks. I think you've got most of them. But I was hoping maybe you could just talk a little bit about any transaction activity you're just seeing in New York at other -- for limited service assets, or just -- and maybe some color on what you're hearing about supply editions this year? Sort of like if you have any actual numbers of how many rooms you think will end up being added in the second half.

I can get started. This is Neil. I'll start with the second question. In terms of supply, we're expecting in 2010 to have a 6.4% increase in supply. In 2009 we experienced 4.9%. In 2011, we expect 4%. So compared to kind of other national statistics you may have seen, we probably are a little lower in 2010, and a little higher in 2011.

Because as we go out and look at all these sites, that's where we see the opening dates looking like. So far this year, we've already had nearly 5% of that 6% new supply already occur. And that is a significant amount of supply, above the historic CAGR of this market of like 1.3%.

The rooms that have opened -- so it's been about 2,800 rooms that have opened so far -- they've, out of that, over 65% of those rooms have been luxury -- luxury or kind of very high-end boutique rooms. So, they're serving a slightly different market than our properties.

I wouldn't suggest that we're insulated from the impacts of this kind of supply. But I would say that we continue to believe that purpose built, high-quality, mid-priced hotels, less than 200 rooms, is still a highly underserved segment in New York, and will continue to win market share from other kinds of hotels in town.

The new supply, it's something that we've been experiencing now I think on the mid scale side in the upscale hotels; more of that product opened in 2009. And a lot of it opened in some of our existing core sub markets like Chelsea and Tribeca and the like.

But New York is absorbing it. In 2010, we're expecting to have more sell-out dates than we had in the peak year of 2008, for example. So the market is absorbing the new supply.

I think your second question was on --

Well, just asset selling in the market now, I mean, if there are any sort of per key pricing you're hearing about similar assets to yours?

Similar assets are kind of around that $400,00 a key, is I think the bid that kind of gets the deal done right now in this segment. I think there's a lot of sellers that are expecting much higher than that, but I think right now there's multiple bidders around that price. There's two assets that kind of fit that mold that are on the market right now, being marketed, and will likely close before too long. Yes.

Okay, thank you.

(Operator Instructions)

[Brian Meekler] from Morgan Stanley. Please, go ahead.

Good morning, guys. I think most of my questions have been answered. I was just hoping you might be able to give us a little color. It looked like you had about 1.4% same-store ADR growth in the quarter -- across your portfolio, that is.

I'm wondering if you can give us an insight into how much of that you think was driven by a demand mix shift or at least a channel mix shift away from some of the OTAs, and how much of that might have been driven by actually the same customer paying more this year versus last?

Yes, I think some of that is certainly a demand mix shift. We have seen, as I mentioned in my prepared remarks, we have clearly seen mid-week demand firming up. So that is an indication that we are seeing more of the corporate transient traveler at our hotels than we're seeing leisure traveler. And that's certainly encouraging, because the corporate traveler is obviously the price taker, whereas a leisure traveler can be a price shopper.

The question about OTAs is an interesting one. And it's something that we have also been encouraged by in the second quarter. We're starting to see two things. We're starting to see that the booking window on some of the OTAs is widening out. And because it is widening out, we have better rate control on the online electronic channels.

A lot of our partners, meaning the brands, are also being a lot more judicious in what kind of rates they're loading. And so overall, you're seeing just generally less of a discount. So you're also seeing, on top of having a demand shift, we're not necessarily seeing that much volume shift out of the channel, but we're seeing the pricing coming through the electronic channels going up as well. So, they're attractive dynamics, but both contributing to some of the ADR growth.

Now you asked about the same-store ADR growth and why it's low. Ashish referenced before our California and Arizona market is still having significant challenges in getting the positive RevPAR. It's very much driven by the fact that they're still struggling quite a bit with rate.

When you get to, for us -- our central Pennsylvania market is still stabilizing in occupancy, seeing close to no change in rate, very flat in rate. Connecticut and Rhode Island, which is a bright spot by way of growth, in the same-store, again, it was driven largely by occupancy. And we actually saw a little bit of negative rate there. So generally speaking, the lower rates growth in the same-store is just from markets that are still trying to stabilize by way of occupancy.

Great, that's helpful color. Thanks a lot.

And we'll move next to Jeffrey Donnelly with Wells Fargo.

Good morning, guys.

How are you, Jeff?

I'm good. Really, just -- most of my questions have been answered as well. I have really just kind of a more general question. I was curious what you're hearing and seeing from the brands on brand standards. Because increasingly you're seeing some signs that assets are coming to the market -- not necessarily in your markets, but where a select service or full service hotel is getting kicked out of a system.

Are you seeing brands get more aggressive on these standards? And I guess any major shifts or initiatives that you think we should be aware of that might be in the pipeline for the next one to two years?

Yes, I don't know. You know, across the next one to two years, I think you still see them tightening up on brand standards and asking that some of the things that have been deferred across the last couple of years be executed on, as we move forward.

And I think I've mentioned before -- the brands were very good to work with through this last downturn. I think they're very sensitive to owners' needs, and made a lot of accommodations on capital expenditures.

But I think moving forward, they're going to make the argument that, you know, you're going to be able to drive incremental RevPAR because of this. And, in a recovering market, it's a little easier to do. That being said, with the debt market still as tight as it is, that still will pose a challenge I think to many owners and buyers alike.

And so, the question becomes, even though we're going to see the push, is a lot of it going to get done? And that, I don't necessarily have the answer to. But I think it's going to be -- you're certainly going to have more of an ask than you have across the last couple of years.

Do you think that there'll be situations, maybe in your target markets or even some assets that you're looking at, where it's not necessarily the -- I'll say the only straw -- but perhaps the final straw that might lead some assets to come to market that you guys could take a look at? Or, do you think that's not going to be as pressing say in New York or Boston or DC?

Yes, no, I mean, I think it can be a great potential source for acquisitions. These hotels are all at varying levels of -- they're in varying capital conditions. And there are certain hotels where this very well could be the tipping point.

It would generally be though, Jeff, it would probably be more likely in kind of full service hotels that are 15 plus years old. So it's not our typical terrain. If it creates a phenomenal opportunity, obviously we would be underwriting it. But I think for kind of purpose, built in the last five to seven years, select service hotels, I don't know if TVs or new lobbies will be the straw that breaks the camel's back or whatever.

You hope it wouldn't be.

That's right.

Well, thanks, guys. Appreciate it.

Sure.

And gentlemen, there are no further questions at this time. Mr. Shah -- Jay Shah; I'll turn the conference back over to you.

Okay, well, thank you. I'll thank everyone for being with us this morning. We are all in the office. If any questions occur to you after the call, please feel free to give us a ring. And we have nothing further. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.