Hersha Hospitality Trust (HT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Third 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)

With that, I would now like to turn the conference over to your host for today's conference, Mr. Brad Cohen with ICR. You may proceed.

Thank you, and good morning, everyone. 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 as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality Trust's trends and expectations, including the company's anticipated results of operations through capital investments.

These forward-looking statements involve unknown and known risks, uncertainties and other factors and 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?

Thanks, Brad. Good morning, everyone. Joining me today on the call are Neil Shah, our President and Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer. Our performance in the third quarter continued to demonstrate the strength of our platform. We delivered another industry-leading quarter as we benefited from our market leverage and our strategically-assembled portfolio of upscale and select service hotels focused on the highest barrier to entry urban markets in the Northeast. The combination of our markets and portfolio along with our revenue management and cost containment strategies has positioned us for continued outperformance. In the third quarter, our performance was strong across all metrics at our consolidated hotels.

We increased our average daily rate, or ADR, by 8.9%, and grew occupancy by 346 basis points, resulting in RevPAR growth of 13.9%. We closely tracked the economic activity in our four major metropolitan areas in the Northeast and the related gross metropolitan product to rooms ratio. The historical GMP of our four key markets has exceeded overall growth of the country's GDP growth over the past one, three, five and ten-year periods. And we expect this outperformance to continue. Based on our research, the ratio of GMP in these four core markets as compared to the rooms inventory is more than twice that of the national average. The high barriers to entry that these markets possess also leads to a favorable supply picture as compared to the overall economic activity. These indicators show the relative strength of our core markets and the ability of our portfolio to outperform through the recovery.

For the lodging industry, the third quarter of 2010 marked another inflection point as the industry recognized its first quarter of ADR growth since the third quarter of 2008. According to Smith Travel, industry RevPAR increased 8.8% in the quarter, still largely driven by occupancy gains, up 7.1%, along with 1.6% growth in ADR. As I've discussed, a larger percentage of our RevPAR growth was driven by rate during the quarter, and we aggressively managed our revenue management strategies to optimize our mix between occupancy and rate. Our portfolios maintain a high level of occupancy at approximately 78% over the past two quarters, and more than 90% occupancy in our New York City portfolio. With this level of occupancy, we were able to focus on driving rate, allowing us to achieve our primary goal of expanding our margins and improving our flow-through to EBITDA from incremental revenue.

The rate-driven recovery that we had predicted is clearly materializing, resulting in continued margin improvements. During the quarter, we improved our margin by 148 basis points year over year to 39.3%. We're pleased with this progress, but believe there's further room for expansion for several reasons. First, in looking at where we are now compared to our historical peak, our overall hotel EBITDA margins are approximately 100 basis points below the level in 2008, but our rates are still more than 15% lower than at the same time in most of our markets, and over 20% lower in the New York City portfolio. Furthermore, our portfolio has evolved since 2008, and with our younger, more urban-focused assets, along with our more efficient expense structure, we believe margin improvements should continue for several years.

The second reason for our optimism is based on the strength of our core markets and the simultaneous wave of urbanization. Our acquisition efforts are focused on the best urban markets in the country with a particular focus on New York and Washington, DC, as you know. Growth in relative and nominal RevPAR in these markets has clearly been higher than the rest of the country, and is expected to outpace that of the majority of the country throughout the cycle. Even within these markets, Hersha has outperformed. RevPAR growth of 16.1% at Hersha's same-store Manhattan portfolio was 170 basis points better than Manhattan overall. Manhattan as a whole absorbed rate increases, with ADR up 12.3%, both in our portfolio and in the market. But we captured more than our share, driving more occupancy growth -- 3% -- versus the market at 1.6%, and maintaining a higher level of occupancy -- 92.2% -- versus 89% in Manhattan overall. These results illustrate our portfolio's ability to meet or exceed the overall performance of Manhattan in a recovery.

From a supply-demand perspective, the dynamic in most of our markets including New York is very attractive. The vast majority of the expected new supply and select service was delivered in 2009 and in early 2010. Current trends have clearly proven that there's enough demand to absorb the new assets that have come online. Looking ahead to 2011, most of the new supply is anticipated to be in the luxury and boutique categories. And given the market's continued demand growth, we believe that New York will continue to have a favorable supply-demand imbalance for the foreseeable future.

The third element expected to contribute to the growth is the stabilization of our recently acquired hotels. Over the past year we've taken advantage of market dislocation and have enhanced our portfolio with newly-built New York and Washington, DC assets. Given their young age, as these properties stabilize and increase their market share, we expect a higher portion of our revenues and EBITDA to be contributed from these assets. Finally, we expect attractive growth as a result of our enhanced operations. Through this downturn, our asset management team and our operators focused on expense control measures, and we've adopted a more efficient cost structure that we believe is sustainable moving forward. We're focused on limiting our expense growth over the next few years, and believe that these initiatives, along with the sustained market recovery, will generate further EBITDA and margin expansion in the coming quarters.

Based on the drivers I've just described, we're optimistic there is substantial organic growth potential in our portfolio. We also believe there are external growth prospects, and we've been pursuing many to enhance those prospects in our portfolio. We will continue to be selective as we pursue acquisition opportunities, but we do believe that attractive opportunities still exist in our target markets, and are likely to continue to present themselves across the next several years. Our balance sheet is stronger than it has ever been in the company's history, giving us the capacity to pursue these acquisitions, while prudently managing our financial leverage. We're pleased with our progress in executing our long-term strategy of increasing our presence in the highest growth markets in the nation. The improving market and economy is attracting added attention from capital to the area.

But we will remain disciplined and do not plan to chase properties that don't meet our strict underwriting standards. We'll continue to pursue assets with similar economics as the transactions that we completed this year. Of the eight hotels we have acquired over the past two years, seven were not widely marketed deals. Through our network of relationships as the largest owner of select service hotels in urban Northeastern markets we've been able to identify and pursue attractive, accretive deals and will continue to selectively pursue such acquisitions. The outlook for Hersha is solid, and we are still in the early stages of the economic recovery. Our attractive portfolio with an increased presence in the strongest gateway markets in the country, combined with an improved cost structure and expanded financial flexibility shall allow Hersha to drive robust growth as the recovery accelerates. Let me now turn the call over to Ashish to go into some more detail on our financial position. Ashish?

Thanks, Jay. I'm going to focus on our balance sheet, liquidity, capital transactions, and increased financial outlook for 2010. One of the company's primary objectives over the past few years has been to strengthen our balance sheet in order to position ourselves to take advantage of the current market dislocation. To that end, our financial position and access to capital is stronger than it has ever been in Hersha's history. We have continued to make meaningful progress toward our goal of bringing our debt to EBITDA ratio to five times or below, and our debt to enterprise value below 45%. With our latest equity offering, new credit facility and strengthening of the secured debt market, we believe that we are very well positioned to capitalize on opportunities as they arise, and to remain focused on driving our organic growth.

Our October equity offering significantly bolstered our financial position, as we sold 28.75 million common shares for gross proceeds of approximately $166.8 million. We used the net proceeds to repay a significant portion of our outstanding line of credit and secured debt on several of our assets. We intend to use the remainder of the offering proceeds for acquisitions and for other general corporate purposes. We're also continuing our effort to improve the age of our portfolio and locations of our properties through the strategic sale of hotels that do not fit our growth profile. The proceeds from these sales will also help us continue to fund our growth and reduce our debt as we redeploy the capital and resources into higher return opportunities.

Although we do not have any definitive contracts on these assets, we are entertaining several letters of intent, and are encouraged by the additional transaction activity that we have witnessed over the past few quarters. From an acquisition perspective, we added the Hampton in Washington, DC to our portfolio on September 1st. The September results for the asset were very encouraging, as the asset recorded a primarily ADR driven RevPAR growth of 10.7%, and a 52% EBITDA margin for the month. We also recently finalized negotiating and documenting a new $250 million senior secured revolving credit facility, which will replace our current $135 million facility. We expect to execute the new credit agreement in the next few days. And this new credit facility matures in three years, with an additional one-year extension option. The new facility significantly increases our financial flexibility and will help us continue to execute on our growth strategy.

Regarding our capital expenditures, our primary capital investments over the past few years have been limited to critical capital maintenance, but we did initiate several deferred initiatives, including lobby renovations, for some of our urban Courtyards earlier this year. As the recovery progresses, we are evaluating several larger capital projects for the fourth quarter and for 2011 at the remainder of our Courtyards and for some of our larger Philadelphia and New York City assets. We will be very focused on utilizing our capital dollars for the highest ROI projects, and look to bolster our assets' penetration and market share in our core Northeast gateway markets through these capital projects.

Excluding the Hyatt Place conversion, we have spent approximately $5.5 million through the end of the third quarter, and we expect to spend an additional $6 million to $7 million in capital expenditures during the fourth quarter of this year. We currently maintain approximately $5.5 million in CapEx reserves that can be utilized towards future CapEx. Let me now turn to our guidance and expectations for the remainder of the year. Consumer spending and GDP growth remains muted across the country, but the recovery in the lodging sector is benefiting our core markets disproportionately. We are optimistic about the remainder of the year, and have increased our expectations for the portfolio.

For our total portfolio of consolidated assets, we now expect RevPAR growth to be in the range of 12% to 13% compared to our prior expectations of 10% to 12% growth. We also anticipate hotel EBITDA margin expansion of 200 to 300 basis points, compared to the prior expectation of 150 to 250 basis point increase. On a same-store consolidated basis, we still expect RevPAR to increase between 3% and 5% and margin improvement of between 50 to 100 basis points. This concludes my formal remarks. Let me now turn the call back to Jay.

Operator, at this point we can open the line for questions.

(Operator Instructions)

And we'll go first to Sean Kelly with Bank of America Merrill Lynch.

Hi, good morning, guys.

Morning.

So, quick question. First of all, I think in the prepared remarks you mentioned the strategic sale process of some of the, I guess the non-core assets and a couple of LOIs on the front. Could you give us a little bit more color there, [there's on] specific assets and kind of how do you think about the potential for a portfolio sale over the next six or nine months?

Sure, Sean. This is Ashish. I'll address that one. When we look at the dispositions that we've done to date over the last 12 to 16 months, most of them have been one offs. We've sold five assets, primarily in the central Pennsylvania market, and a couple in the mid-Atlantic, other mid-Atlantic markets. We have a few LOIs on one-off opportunities, but we are currently entertaining one LOI on a portfolio of between six and eight assets. We're encouraged by that particular group. They seem to have done a lot of due diligence on the assets to date. There's still no certainty that there is going to be a purchase and sale. But we've seen renewed activity from larger groups as the secured debt markets have improved.

And just to be clear, that activity is coming primarily from the private side? Is that a fair assessment?

That is a fair assessment. It's coming primarily from regional owner-operator groups or private equity funds that are looking to acquire in the Northeast.

Got it. And then just one on the New York portfolio. Because obviously the results there kind of -- continue to, you know, to trend higher. When you had originally purchased those assets -- you bought them, I think, generally speaking, in eight cap -- I'm thinking of the, you know, the [thirty-eight three] hotels. But you had talked about stabilization in the 12 cap range. Have those expectations changed at all? I mean, do you think you can, I mean, kind of -- if you were to be doing it today, like what would your assessment be for where those assets stabilize versus your expectations, call it nine months ago?

Sean, this is Jay. You know, it's difficult to say. I think, you know, we're certainly very encouraged by the recovery in New York. And it's shown some signs of strength. And there seems to be a clear sustainability to the recovery. It's just, I don't know that we're all that, or have that much clarity on exactly what the magnitude of the recovery is going to be. I think if we were to look at an acquisition today and look at some of the growth rates we've achieved, I don't know that I would be all that quick to imagine that we're going to do even better than a 12 cap at this stage, just 'cause it's early.

You know, to some degree we had a sense that we were going to have a strong recovery in this market and it was a part of our underwriting. And we're encouraged that it's coming to pass as we expected. But how much outperformance beyond our expectations we'll have is still unclear. You know, I've mentioned before that in the past cycle we had four years of double digit RevPAR growth in New York with one year being north of 20%. Now certainly the magnitude of that recovery wasn't expected to be that high. Now whether we have that again this time or not, it's just unclear. But I think, even in the conservative case, I think our expectations are very realistic.

Okay. And just to clarify one more, and I'll pass the floor along -- but at the very beginning you talked about, I think, for the New York portfolio -- I just want to make sure I got the numbers right -- you're still 20% below -- was it RevPAR or rate that you were talking about in terms of the 20% number?

Sure, Sean, we're -- from the third quarter of '08 to the third quarter of 2010 -- on a RevPAR basis we are 22.7% below. And on an ADR basis, about 21.8% below.

And that's with the New York portfolio exclusively, not for the overall company, right?

That's correct. That's just for our same-store New York assets.

Okay, and it's -- and corresponding margins for the overall portfolio, you know, what I was referring to in my remarks, is that we're about 100 basis points off of our peak, our last third quarter peak. When you consider Q3 '08 which was the highest Q3 margins we've had, that was at about 40.3% for the portfolio. And as you know, the consolidated portfolio was 39.2% for Q3 of 2010. So we've got a lot more RevPAR and rate runway, and we're actually extremely close to our past margin peak. So that leads us to be optimistic about margin growth.

I think we follow. Thanks, guys. Really appreciate it.

Okay, great, thanks.

We'll move next to Will Marks with JMP Securities.

Thank you. Hello, Jay. Hello, Ashish. Just taking that last margin question/comment a little further. So I'm sorry, the margin you gave for '08, that is including -- that would include the assets you bought since then? So that's on a pro forma basis?

No, Will, that was the actual margins of the portfolio in 2008. Most of the assets we've purchased since then weren't open at that time.

So wouldn't then the pro forma number be actually higher because you have more of a concentration in New York?

Absolutely. I think that's kind of what we're saying is, you know, we are, on a portfolio basis, very close to our peak EBITDA margin in '08. But since then we've acquired so many assets that have higher margins and higher RevPAR, we would anticipate much higher overall EBITDA margins for the company going forward.

Yes, sorry, I'm not -- it's early here in the West Coast. Okay. So next question, on the guidance, I'm a little confused. So if we think about what has changed since you gave your last guidance, it's really, it's one asset. And if I think about it that way, you have raised the total but you haven't raised the same store. So is it just that one asset that moved the guidance? Or is actually the environment better than what you saw last quarter? If it is better, then why wouldn't you have raised the same store?

Sure. Well, it's the -- the same store for the full year, Will, would include all of the assets that we've purchased in 2010. So it's starting in January, you know, the trio in New York -- Holiday Inn; Wall Street; Hampton Inn, Washington, DC -- are all bolstering the growth of the total portfolio. None of those assets would be considered same store until really next year, until the second quarter of next year.

Right. I understand that. But you had those assets. You knew about those assets when you reported the second quarter. And so now here we are a quarter later, you've made one additional purchase, and you've moved up the total but you haven't moved the same store. So does that imply that the total has moved up just because of the DC asset?

No. The total is for the year, Will. So the total -- Yes, it's all of the -- it's the New York and DC assets that's helping it. So it's the 12 to 13 goes from 10 to 12 for the entire year, 2010.

Okay, okay --

It's not a quarterly guidance number.

Right, no, okay. I understand. I can call you if I have further questions on that. I mean, I'll still be a little confused. But let me just move on. On your G&A, it seemed to move up a little bit. Should we consider third quarter a good run rate?

I think it is.

Okay. And then on CapEx, you gave $6 million to $7 million numbers for the fourth quarter. I mean, any thoughts on next year?

You know, when we look at this year, so our total spend will be somewhere in that, let's say, $12 million, $13 million range, we do expect next year's number to be higher than that. We don't have a final number yet, but I would anticipate probably somewhere in the $17 million to $20 million range, based upon some of the larger New York assets that we're looking at putting some CapEx dollars into.

That'd be a total CapEx including any maintenance?

Yes, total CapEx including maintenance.

Great, okay. That's all for me. Thank you very much.

Thanks, Will.

And the next question will come from David Loeb with Baird.

Ashish, just to try to clarify from Will's perspective, Will's question -- you're basically saying that the five that you've acquired this year are looking better than they were a quarter ago?

That's correct.

So that's really what's behind that?

The five -- that's right. And we didn't have DC last quarter. So the four are looking better and then DC is also helping.

Adding to that? Okay. And on the margin comments, is it fair to assume then that the potential peak margin is substantially higher for the portfolio given that you're a ways from peak RevPAR in New York but your margins are already pretty close to peak?

I think -- you know, we believe that RevPAR and margins at their peak this cycle will be higher than the previous cycle. And again, by how much, David, I'm not certain of that. You know, we will have -- costs will increase somewhat. You know, we've got some cost containment measures that are slowly unwinding, mainly around the area of payroll, which is our biggest expense. And you know, it deals with management incentives and it deals with wage increases and so on and so forth. But generally speaking, it's going to be higher. I just don't have a lot of clarity on exactly how much higher it'll be. But we'll certainly keep on being very aggressive with our operators through our asset management program. We continue to look for ways to create more efficiency at the operational level. And we'll keep on it.

To kind of turn that around though, Jay, as you look at flow-through, incremental flow-through from incremental rate increases, where do you expect that to be for the whole portfolio? For every dollar of increased revenue over the next year or two how much of that do you think you can flow through to the bottom line?

We expect, when it's a purely, when it's a purely rate-driven incremental dollar, our expectation is that that's going to be a 65% to 70% flow-through to the bottom line. And that's obviously a very exciting number. But you have to kind of balance it against operator and markets that don't always get to that level. So we've got assets right now in Scottsdale, in Northern California, where we're seeing negative flow-throughs that are significant. And we're continuing to work with those managers to change that. And so when I say 65% to 70%, I think realistic expectations should probably be around 50% until we make some changes in the portfolio.

And that 50% would take into account you're still going to have some occupancy gain as well?

You have some occupancy gain as well. When we consider a purely op-driven incremental dollar, it's probably a 40% to 50% flow-through. When it's -- you know, after you've achieved a certain level of occupancy, and a purely, a purely rate-driven incremental dollar is, like I say, 65% to 70%.

So, this one's for Neil. Neil, we've seen some kind of eye-popping cost per room for recent developments in New York that don't seem to be causing any developers to flinch. What do you think that is doing to the market for existing hotels in New York? And I guess I'm wondering your hotels, what are the implications for the value per room of your assets, but also for, in light of acquisitions, in future acquisition potential?

Yes, you know, it's -- I think last quarter we talked about kind of our view on value to be, in the marketplace, to be around -- for our asset class -- somewhere in between, around [$400,000] a key. I think after the recent kind of transactions, both in the acquisitions marketplace as well as the eye-popping development number that you mentioned -- $1.6 million, $1.8 million per key for luxury assets -- I think that, we believe that the value of the portfolio is going up in New York, and think that what we see from, kind of on off-market transactions is for our asset class, it's edging closer to [$500,000] a key. And that makes it hard for us to continue to acquire in New York. Is that helpful? It's just we see it --

Yes, sure.

Yes.

Does that mean you're done in New York? Do you think you'll -- ?

I don't think we're done, but we've just got to work a little bit harder to find these deals.

Faster.

And faster, I guess, yes. But it's been challenging. We've been work -- you know, we spend a lot of time with owners and developers in New York. And it looks like the -- the easy pickings are definitely done in New York. And there's increasing expectations on value by all owners in New York.

What a difference a year makes, huh?

Yes.

In a lot of ways. So are you concentrating your acquisition effort then on Boston, Philadelphia, Washington?

Yes, we're still spending a lot of time in New York. But we've been trying to really get local in Washington. The entire management team's been spending a lot of time down there meeting owners, developers and potential partners in some cases. And we, I think we'll have -- I don't know. We're pursuing a bunch of deals there right now. But I think we'll probably be more productive in Washington than we will in New York in the next 12 months. Boston, Philadelphia are absolutely target markets. But we're not seeing, we're not seeing product available. There's just not a lot of sellers in those markets right now.

Okay. Great. Thanks. Very helpful, thanks.

We'll move next to Bill Crow with Raymond James.

Good morning, guys. Couple of questions. Let's stay with New York. First of all, can you kind of give us your thoughts on what the market might do from a RevPAR perspective next year? Not your hotels, per se, but just where you think the market is heading. Obviously tougher comps in the rest of the country as you think about next year. But also a better market.

Yes, I'll tell you, driven mainly by the fact that we've been batting around here that we are, you know, we're 22% off of peak RevPARs, I would expect you're going to see, despite the difficult comp, I would expect you're going to see, you know, low -- you're going to see double-digit growth next year. You know, whether it's, whether it's low teens or 11%, 12%, or whether it's mid teens, I don't know. But I suspect it's going to be double digits next year.

Okay, that's great. And then the announcement, I guess it was earlier this week, between Hyatt and Hersha Development on a couple of assets -- I believe it was a couple of assets in Midtown -- what does that do to your pipeline? Is there any implications as far as the REIT goes?

Well, you know, Bill, on those we have -- we have the mezzanine position on both of those assets, so we feel real good about the fact that the mezzanine position's even more secure with the branded assets. So I think that was positive. From a pipeline standpoint, we have the option to -- we have the first right of offer on those assets. And so we'll basically have a pretty good look at what those assets are going to trade at, and we'll be in a position to make a decision on that I would say sometime around the middle of next year on one, and towards the end of the year on the other.

The assets are going to be very attractive. I think they're going to have great growth prospects. But I think we'll have to take a look at what the market is doing at that time, and what type of growth we believe we'll be able to generate from those assets. I think they're going to be very attractive to a wide array of buyers, including other institutional buyers, other foreign buyers and even private groups. Because, you know, just because they're new, they'll be unencumbered of long-term management; they'll be a branded asset, and they're in terrific locations. So I think the pricing on them is going to be pretty heavy. And I don't know if it's something the REIT will pursue or not. It might not be a good economic fit. But again, depending on what the market's doing, we'll see.

Can you disclose, ballpark, what it costs per key to build those?

We are -- you know, Bill, we haven't done that to date, just as a -- for the sake of the private developers and Hyatt's sake. But as we get closer to discussing the eventuality of those assets, we'll talk about it then.

Fair enough. Then finally, the LOI on the asset sales -- I think it was mentioned maybe, was it eight hotels that are involved?

That's right.

And did you disclose, or maybe I missed it, the price or the amount of the LOI?

We haven't, Bill. It's sort of -- the LOI is still, it's been six and eight assets. The group is still doing their due diligence. So from a negotiating standpoint, we'd rather not disclose the price.

Seven hundred, 800 rooms, somewhere in that ballpark? Seven hundred, 900, I should say?

Yes.

Somewhere in there?

That's in the range.

When that gets done, is it fair to assume that that is a representative sample of your suburban or non-core, whatever you want to call, portfolio -- when we look at the pricing on that transaction?

I think when you see the pricing on a transaction, that'll be probably be a lower price portion of the portfolio. Because they're more secondary markets. Most of our suburban portfolio is still sort of in primary suburban office markets. And this core portfolio is a little more secondary market. There's some highway transient in there. I mean, there's some highway assets in there. And some of them are just secondary markets with lower barriers to entry. So I think you would -- you know, you would see that the value of some of our other non-urban assets is higher than these ones that we're talking about. That being said, people are paying okay cap rates for cash flow. And so, you know, we think we'll do just fine. And there's a market emerging for them, so it's a great time for us to ski some of our metrics upward by strategically selling these.

Yes, no, I completely agree. And I think it's a great time to be aggressive in asset disposition, so. Very good. Appreciate it, guys.

Great, thanks.

And our next question will come from Smedes Rose with KBW.

Hi, thanks. I was just wondering if you'd think about New York, supply coming on in New York? You guys usually have a very good handle on that, and I was just wondering if you could maybe talk about what you think -- where we are now kind of in the surge of supply and kind of how that looks for next year? And because things are going so well, would you be surprised to see another round of significant development of folks trying to develop hotels in New York? And then I guess on that, I understand in DC it sounds like the convention center has finally gotten everything lined up to build an Anchor Hotel there. And I know it's probably a few years out. But you know, does that have implications for your recent acquisition which is also near the convention center?

Yes, let me start with the New York questions. The first question -- let me answer your second question first, because it's kind of an easy one. Do we expect there to be a lot of new supply in New York? You asked in addition to --

Yes, well, I was just saying -- I mean, we know what's coming on now pretty much. I mean, we can see the Smith Travel numbers. I guess I would be interested in your sense of, you know, as -- all of that as far -- you know, that sort of in the pipeline, do you think it's on schedule too, it looks like it probably will open now, and I'm wondering, I guess, the availability of construction financing for folks to come in and do another round of hotels from here? But as far as I can tell, it should peter out next year.

Yes, no, that's exactly right. You know, Smedes, so let me -- I will hit them in the order you gave them to me. I think generally the bulk of supply in our competitive segment and our competitive geographic market has in large part been developed already. When I say sub -- I'm saying geographic sub markets within Manhattan -- has largely been delivered in 2009 and the early part of 2010. That being said, there's still some more delivery expected. There's another hotel towards the end of the year. And then in 2011, there's more assets coming online. But they're generally more luxury and lifestyle boutique hotels, and are not directly competitive with our portfolio in New York. And that being said, it is additional inventory in a rather -- on Manhattan. Which is, which is, if not directly competitive, derivatively competitive. So we do have some more as it's coming on board.

What we're encouraged by is the strong occupancy numbers that we've been able to maintain throughout the period of all of the supply being delivered. And I think that has suggested to us that there is an inherent level of demand for New York, and that that's not going to go away. Secondly, looked at, when we think about the supply-delivery question, is what are we doing with rate? So we're maintaining a 90% occupancy and we're driving rates as -- at the rate that we are -- double-digit rate growth -- then you know, we believe that the new supply has already been absorbed, and that we will be able to absorb whatever else comes into the marketplace. So that's our view on supply in New York. So I think that supply bullet was dodged.

And I've said also before, you know, the supply, when considered in totality across this last seven-year supply cycle, is not all that different from the previous seven-year supply cycle. It's about a 2% supply growth CAGR, a 2.1% supply growth CAGR between 2003 and 2010. And after -- in the previous seven years, from '96 to '03, it was about 2% CAGR.

So it's -- like I say -- it's very similar. And even after that kind of supply delivery in the last cycle, we had, as I mentioned earlier, four years of double-digit growth. So I think we're going to see, we're going to see a fairly strong recovery in New York, as has been expected, despite the fears that the industry held for supply coming into New York. I think new supply coming into New York, despite the strong recovery numbers this time, is going to be very constrained. Construction financing -- we're just now starting to see acquisition financing, and acquisition financing's coming out at very, relatively low LTVs when you consider where hotels are with their EBITDAs and NOIs.

And so when you take a look at the type of LTVs folks are getting -- and if it's 55%, 60% today -- that's likely to look like 35% or 40% in a year and a half, two years. That suggests to us that the acquisitions financing market still isn't -- it's reemerged, and it's a good thing -- but it still has some time before it gets seasoned and becomes more robust. And you normally don't see a construction financing market reemerge until after you've seen the acquisition financing market firm up a little bit. So that's why we're not that worried about new supply in New York in the cycle for at least the next, I would say -- I don't think you start seeing construction loans hitting the New York streets for at least another 24 months, 18 to 24 months, say -- at the earliest.

That's helpful. Thank you.

And then you've got four-year development cycles. So I mean, they'll be outside of this cycle. And then Washington, DC -- you know, the convention center is -- there has been an announcement of the Headquarters Hotel being built at the convention center. You know, you're asking your question, I know, because our hotel is about a block and a half from the convention center on Massachusetts Avenue. We feel very -- we feel pretty good about the fact that there's a Headquarters Hotel coming. We think it's generally good for the convention center business and the convention center market.

I think you're going to attract -- you're going to have the ability to attract stronger and larger conventions by having a large Headquarters Hotel that is adjacent to the center. And we generally benefit before, during and after large citywide -- and even non-citywide -- conventions in that market. So we're pretty bullish on that hotel. But it's going to be a -- that's likely to be, you know, a 40-month construction project. So once again, even though it's been announced, I don't know that we're going to see much effect from the Headquarters Hotel in this cycle. But it's a good long-term factor of the hotel.

Okay, thank you.

And at this time, we have one question remaining in the queue.

(Operator Instructions)

We will take our next question from Jeffrey Donnelly with Wells Fargo.

Good morning, guys. I just wanted to follow up on some of the earlier questions, I think one that Bill had asked about New York, and I think -- I'm curious what markets you think you see RevPAR actually accelerate into 2011 from where we've been running in, you know, I'll call it the back half of 2010 -- you know, moving from like a 5% growth to whatever -- 6% or 8% growth? And conversely, where you think there could be some signs of deceleration because of difficult comparisons?

I think we're early enough in the cycle that I don't expect there to be that many markets that have deceleration in RevPAR growth. I think -- I've looked at -- you know, we look at a lot of the other top 25 markets, and as we're checking out their growth rates, in some cases you see some big RevPAR growth numbers. But when you take a look at the nominal RevPAR in those markets, they're off of very small bases.

And so there I think the comps become a little more difficult, because, A, it didn't move up that much in dollars and cents in the first place, and you're in a market that's still facing a lot of headwinds. So I think when you take a look at markets that have low nominal RevPARs, I think those you've got to take a really close look at, and wonder if you're going to have a similar trajectory that you would in markets that have generally higher nominal RevPARs and stronger metropolitan demand generators.

That's helpful. And then -- and I guess building on I think Smedes' question, I'd love you to delve into the prospects of supply growth outside of New York City. Generally speaking, I think select service profitability is certainly below peak, but then again, so are land prices, construction costs. So I would think that development yield spreads to borrowing costs are approaching probably where they were in, you know, maybe 2005, 2006.

So again, it would seem like outside of markets like New York development certainly could accelerate in 2011 and the -- you know, at least I'm seeing more instances, it seems like every week, with construction lending picking up. I guess, how realistic is that view, I guess first question? And second is, how deep do you think the pipeline of projects is that was installed in 2007 and 2009 that maybe could quickly come back to activity?

I think your point about development in non-urban, more secondary markets on select service is accurate. And it's one of the reason we really focused our portfolio the way we have in urban markets. You know, when we talk about the debt markets reemerging, obviously we're talking about larger lenders -- national, international lenders, institutional lenders. But when you get into these secondary and tertiary markets, for that matter, a lot of the relationships -- I mean, a lot of the lendings on a relationship basis -- you've got community banks where there's a group that owns a hotel or two and a couple strip malls and has, you know, always paid their bills on time, and they will get loans.

So I think you'll probably see some of the stuff that was stalled in the secondary markets and in the smaller urban markets come back. But that being said, it's still not -- there's only so many loans the community banking sector in this country can make. So I think you're still going to see a more attractive supply dynamic for those secondary market limited service hotels than you have in the past. But it'll certainly be more growth I think than you'll see in the urban markets.

Right. I don't think you'll necessarily hit an over building wave instantly. But on the other hand, any incremental supplies are really not ideal. But I'm curious, does that maybe lead you to think that, you know, in some of those cases you are nearing a point where construction makes sense, that it might cause you to, I guess I'll call it accelerate or rethink how you get out of some of the markets that you're in, in parts of Pennsylvania or elsewhere?

You know, I'm not as concerned about new supply growth in those markets? Because generally speaking, they are not -- they didn't go down that much, and they haven't gone up that much. And they've had generally pretty stable supply pictures across a long period of time. So I'm not as concerned about that. The fact that we want to accelerate the disposition of these assets is driven by a lot of reasons. But I'm less concerned about that. I don't think we have that kind of a threat. I think it's just a lost opportunity to recycle some of the capital that's -- that, you know, the equity that's tied up in these assets. And we think we have an opportunity to sort of take off, take the weights off some of our EBITDA growth and our RevPAR growth.

Okay, great. Thanks, guys.

Thanks.

And it appears there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, Operator. Let me just thank everyone for being with us this morning. As we always are, we're available in the office here if anything occurs to you after the call. Thanks again.

This does conclude today's conference call. We'd like to thank you for your participation.