Hersha Hospitality Trust (HT) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Hersha Hospitality Trust Fourth 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 presentation over to your host for today's conference, Ms. Nikki Sacks. You may proceed.

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, and 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. Joining me today on the call are Neil Shah, our President and Chief Operating Officer and Ashish Parikh, our Chief Financial Officer.

I'll touch briefly on our fourth quarter and full year results, highlight some of our significant accomplishments for 2010 and discuss the ongoing strategic transition of our portfolio.

During the fourth quarter we were pleased to deliver strong industry leading results which can be seen in all of our metrics. At our consolidated hotels, RevPAR was up 19% driven by a 15.5% ADR growth. In addition to such meaningful rate growth we realized 190 basis points of occupancy expansion. Furthermore, I believe these results are somewhat muted relative to what we might have otherwise achieved due to harsh winter weather conditions that persisted in the northeast during the fourth quarter and have continued into the first quarter of 2011.

Performance from a margin perspective was strong. We expanded our hotel EBITDA margin by 168 basis points year over year to 35.6%. This margin improvement was largely driven by the market leverage in our portfolio that has allowed us to push ADR early in this recovery.

Additionally in the fourth quarter, we began several initiatives which impacted our results but should enhance our performance and returns as the improvement in the lodging cycle accelerates.

First, we began renovation projects at nine stabilized and strong EBITDA producing properties including assets in New York, metro Philadelphia, and Washington, DC. We accelerated our renovation schedules in order to capitalize on the ongoing lodging cycle recovery and expect to have the properties largely back online for our stronger second and third quarters. The majority of these renovations are truly value-add renovations including full prototype lobby renovations for The Courtyard and Hampton Inn brands and should lead to higher revenue and profits as these enhancements directly impact the guest experience.

Second, we transitioned the management of three underperforming properties -- The Courtyard Alexandria and the Hyatt Summerfield Suites in White Plains, New York and the Hyatt Summerfield Suites in Gaithersburg, Maryland -- to Hersha Hospitality Management in order to improve their operating results.

We have also transitioned the restaurant and bar concept at our Duane Street boutique hotel to a leased restaurant concept with a highly recognized restaurateur.

Third, we made certain investments required for new sustainability brand standards at our Hampton Inns and we implemented our first payroll increase in bonus awards in two years for hotel level employees to ensure retention during this recovery.

While these capital initiatives and transitions created a short term drag in the fourth quarter, we believe they are smart ROI projects and another positive step in our repositioning for accelerated and long term growth.

Turning briefly to our full year results, the key again was that our growth was primarily rate driven which helped drive our profitability. We grew RevPAR by 13.2% driven by an 8% ADR growth and 330 basis point expansion in occupancy to 71%. It is this consistent industry leading occupancy that has allowed us to get a jump on the competition and to push ADR growth, resulting in strong margin performance during the year.

Importantly, I'm confident that we still have room for significant margin expansion during this recovery cycle. In many of our core urban markets our rates are still approximately 20% below our peak ADRs that we achieved in 2008 but we are within 200 basis points from our peak EBITDA margins. We anticipate that with the steps we have been taking over the past few years to realign our portfolio to focus on high barrier gateway markets such as New York City and Washington, DC, our aggressive asset management and cost controls and our ongoing ADR growth, we should approach our peak margins and exceed them over time.

In both the fourth quarter and full year our consolidated portfolio outperformed our same store portfolio, further illustrating the strength of our acquired assets. Furthermore, given their young age, as these properties stabilize and increase their market share we expect a higher proportion of our revenues and EBITDA to be contributed from these assets.

We started transitioning our portfolio in mid 2009 when we sold four non-core assets and advanced the strategy with the purchase of our three Times Square hotels in February of 2010. We acquired a total of seven hotels and one mortgage note all in our core markets, deploying over $300 million in New York City, Boston, and Washington DC. These are the three strongest markets in the country with growth that has clearly been higher than the rest of the country and together they make up approximately 65% of our EBITDA. It is the strength of these core markets and the simultaneous wave of urbanization that gives us confidence in our strategic position.

We again enhanced our portfolio with our first acquisition in 2011 and our eighth Washington, DC asset. In January we signed a definitive agreement to purchase the 152 room Capitol Suites Washington DC for approximately $47.5 million or $312,000 per key excluding closing costs. The Capitol Hill Suites is centrally located in the Capitol Hill District and benefits from a wide variety of corporate, government, and leisure demand generators related to the nation's central legislative and judicial institutions that are within blocks of the hotel.

As we expand our presence in the region we expect to achieve operational synergies while also benefiting from the ongoing recovery and we currently anticipate closing on this asset by the end of the first quarter. We are pleased with our current portfolio and we feel we have the right assets in the right locations to capitalize on the recovery. However, we have an opportunity to further capitalize on this expansion and disposition strategy to further strengthen the Company. We will be very selective in the acquisition of additional assets and we'll focus our efforts on only the best urban markets in the country, particularly New York and Washington, DC and select other markets with similar characteristics.

Also driving our transition will be some strategic dispositions. We will look to continue to sell certain non-core brands and assets, both consolidated and joint venture, in locations that we believe have less opportunity for growth in the cycle. In 2009 and 2010 we sold five assets and we believe going forward there will be stronger demand and favorable market conditions for sales. Not only does this asset disposition program for non-core properties provide us with additional liquidity, it more importantly further concentrates our portfolio in markets with higher anticipated RevPAR growth.

2010 was a very important transitional year for Hersha. We have assembled an extremely attractive portfolio of urban select service assets which generates industry leading EBITDA per room. As our assets continue to mature and as our portfolio progresses further towards an urban concentration we expect that we'll extend this outperformance into the cycle.

Hersha is in a better position than ever before and I'm excited about our opportunity as the recovery continues to progress. 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 financial outlook for 2011.

Fourth quarter was another active one for us in terms of our balance sheet. In October we completed a common stock offering, issuing 28.75 million common shares with gross proceeds of approximately $166.8 million. We used the net proceeds to repay a significant portion of our outstanding line of credit and repay secured debt on several of our assets. We intend to use the remainder of these offering proceeds primarily for opportunistic acquisitions in 2011.

For the full year 2010, the Company raised gross proceeds of approximately $440 million and we significantly strengthened our balance sheet and financial flexibility during the year. As of December 31, 2010 our debt to EBITDA ratio of 6.6 times was materially better than our ratio of 9.1 times as of the end of 2009 and we're confident that the organic EBITDA growth in our portfolio will allow us to get this ratio below our stated goal of five times, in the near term.

During the fourth quarter we also increased our financing capacity with the closing of a new $250 million revolving credit facility which replaced our prior $135 million credit line. With a syndicate of 11 financial institutions participating in the facility, we have the support of a notable group of commercial and investment banks, providing us with greater access to capital, allowing us to pursue attractive external growth opportunity.

During the quarter we also refinanced our two joint venture properties in Hartford, Connecticut. We own minority stakes in these assets and we are pleased at the results that were achieved in these refinancing efforts. For the Hilton, the City of Hartford and HUD provided a $7 million, 20 year financing package in place of the existing $22 million loan that previously encumbered the asset. The joint venture entered into a forbearance and participation agreement for the remainder of the principal balance and for the accrued interest of approximately $1.35 million that was recognized during the quarter. The loan on the Hartford Marriott was extended with the existing lender for an additional three years with a maturity of December 2013 and we also received two one-year extension options that could potentially allow for a five year term on this loan with a maturity of 2015.

As Jay discussed, we're continuing our efforts to improve the age, location, and performance of the properties within our portfolio through the strategic sale of hotels that do not fit our growth profile. The proceeds from these anticipated sales which include both consolidated and unconsolidated properties will also help us continue to fund our growth and to reduce our debt as we redeploy our capital and resources into higher return opportunities.

Turning to our renovations and capital projects for 2011, as we've discussed previously we have significantly reduced our capital expenditures program over the past two years to focus on essential repairs and maintenance projects and for renovations necessary to remain in compliance with brand standards.

In 2009 and 2010 we spent approximately $6.2 million and $13.9 million, respectively, on capital expenditures and expect to significantly increase our capital spend during 2011.

We began renovations on nine high profile assets during the fourth quarter of 2010 and we anticipate our capital expenditure budget to be in the range of $24 million for the full year. With these investments we'll increasingly capitalize on the ongoing lodging cycle recovery and ensure that our hotels maintain their leading position relative to their comp set.

Turning to our outlook for 2011, the recovery in the lodging sector is continuing to steadily progress particularly in our core urban gateway markets. We're optimistic about our ongoing ability to outperform but macroeconomic headwinds and visibility into sustained improvement in consumer confidence and spending remains limited.

Relative to 2010 we anticipate total consolidated portfolio RevPAR growth of 6% to 8% and hotel EBITDA margin improvement of 100 to 150 basis points. For our same store portfolio we anticipate RevPAR growth of 5% to 7% and margin improvement of 75 to 125 basis points. In terms of G&A we expect a run rate between $9.25 million and $9.75 million in 2011 versus G&A expenses of $10.2 million in 2010.

In 2010 we recorded an expense in the first quarter for the approval and granting of incentive compensation related to the 2009 calendar year and also recorded a fourth quarter accrual in 2010 for incentive compensation earned for the 2010 calendar year. In 2011 we anticipate this expense only in the fourth quarter.

Built into our guidance are a few items that will impact our first quarter results. These include the persistent severe winter weather conditions that have impacted operations across the northeast and the renovations that we've discussed at several of our assets in New York, metro Washington, DC and Philadelphia. Based on our experience we believe that it is best to complete as many of these renovations in the first quarter as possible and to restart other renovation programs in the fourth quarter of 2011. Due to the seasonality of business and leisure travel in the northeast, our first quarter provides the lowest contribution in terms of EBITDA and FFO. Consequently, we anticipate that first quarter 2011 FFO will continue to be the lowest contributor for the full year with the second and third quarters being the largest and contributing approximately 70% of the annual FFO.

That concludes our formal remarks and I would like to turn the call back to Jay at this time.

Thank you. Operator, at this time we can open the line for questions.

(OPERATOR INSTRUCTIONS)

Bill Crow, Raymond James and Associates.

A couple of questions -- let's start with dispositions. Jay, what's your goal for '11, if you had to set a goal for how much you might sell?

We have about 20 properties listed currently. If we could sell ten to 12 of them I think we would be pretty pleased with that result. That being said, the assets that have been listed, they're in four separate groupings and the intermediary, the broker that we're using on one of those groupings, before even having sent out full marketing materials has already received requests for 50 CAs. So there seems to be strong interest but I think conservatively speaking, if we could dispose of ten to 12 of the 20 we would make some meaningful progress in our disposition strategy and we'd be pretty pleased with that.

You talked about the acquisitions, how you wanted to focus on really the top tier markets. How does the Delaware acquisition kind of fit within that?

Delaware is certainly a good northeastern market. It is not in the CBD of Wilmington but it is very close to the Wilmington CBD. It happened to be a very opportunistic acquisition for us. We purchased that asset at about $76,000 per room. We believe to complete it as a hotel which is primarily at this point FF&E and internal work, will have us all in at a full service Sheraton level hotel at about $100,000 a room. So it was extremely opportunistic for us. We think it's going to drive an extremely strong IRR and I think we were very attracted by the basis in the hotel. I would think the replacement cost for a full service hotel in that region would be likely in the $160,000 to $170,000 a room. It was a real value driver in our estimation and then the IRRs looked very attractive.

It is adjacent to our cluster. We have two hotels within five, six miles of that property in the Wilmington marketplace and from Philadelphia it's still kind of 20, 25 miles from here so it's firmly within our existing cluster here so easy to integrate and create value from.

Right, that's helpful. Finally for me, on the capital spending front, $24 million that you alluded to was higher than maybe what we were thinking, kind of a high teens sort of number. Is the mid $20 million run rate, is that fair to think of going forward given the changes to your portfolio and second part of the question is how hard are the brands pushing for you guys to update, not just you guys but owners of the assets, to update hotels not that we've kind of come through the downturn? Are you getting a lot of pressure from the brands?

I think the $24 million as a run rate at least for the next couple of years is very realistic. I think some of the, why it might have exceeded which it had anticipated is just because across the last couple of years we've been doing out best to hoard cash and we felt that this is a great time to deploy it for some of these capital projects in order to take the upside as we're getting deeper into the recovery.

I think what we're finding, the brands are most certainly going to be applying pressure to owners to update products. I think the brands have been extremely cooperative across the recession and worked with owners to delay or defer some of these projects but I think as we start seeing a recovery gaining a head of steam, they're going to be wanting the owners to use that momentum to put money back into the hotels.

I'll tell you from our standpoint, not only do the brands think it's prudent, we believe that in our markets we're going to be able to drive stronger RevPAR growth with more updated products and I think it's a good time to do it and in order to continue to consolidate market share and to drive ADR growth we feel that it makes a lot of sense for us right now.

Okay, thank you.

Sure.

(OPERATOR INSTRUCTIONS)

And we will take our next question from the line of Smedes Rose with KBW.

I just was wondering if you could be maybe just a little more specific on the amount of disruption you think is going to be concentrated into the first quarter? Is there any way you can just quantify it, rooms out of service or anything like that, in terms of being able to more accurately forecast our numbers for the year?

Yes Smedes, I don't know that I could quantify it exactly but I'll give you a sense. Let me give you a sense of some of the renovation and repair and maintenance impact from the fourth quarter and maybe you can extrapolate from that a little bit.

We anticipated a direct basis point decrease or a direct basis point drag from renovations and repairs and maintenance of about 21 basis points that was directly tied to rooms being out of service and disruptions from renovations. That's sort of the direct impact. There's collateral impact when you're doing renovations from just not being able to drive as high an ADR or a RevPAR just because of what's going on at the hotel.

But beyond that it's sort of difficult to tell because it's going to be a matter of taking a look at what the impact of the renovation is with what the demand at the hotel is looking like. In the fourth quarter there were a lot of different things at play. We had weather. We had accelerated renovation projects. We had transitions with management. So there was multiple factors that we felt needed some of our margin expansion that we could have achieved otherwise and we would expect in the first quarter we're going to see still some disruption from weather. And weather, I can list all the direct costs of weather related cancellations but as you can imagine, when the forecast talks about as much snow as we've gotten you just have folks just changing their plans and that's very hard to capture or quantify.

And then you've got somewhat on the other side of the storm, people still a little slow to get moving again. The short answer is I can't quantify it very well but I would imagine similar to the first quarter. I think the impact -- I mean similar to the fourth quarter. I think the impact in the first quarter might be -- the reason that we mentioned it is the first quarter is generally our lowest demand quarter and so some of these disruptions might be a little more apparent.

And just to add to that Smedes and we can follow up with you with specific out of order rooms, the two assets in the first quarter I think that we're most focused on are the Chelsea Hampton Inn and the Madison Square Garden Hampton Inn and those two, there will be an impact in the first quarter from those renovations not being complete. We're spending all of our time trying to get the renovations complete but we'll be able to quantify at least on those two hotels, for you.

Okay and then the other thing I just wanted to ask you, I think if my memory is correct you had talked about a portfolio of something like six to eight assets that were under letters of intent on your last call. Is there anything going on with those or --?

Smedes, that transaction did not ultimately come to pass. As I mentioned, we have listed 20 non-core assets.

So these are back in that pool?

They're back in the pool.

Okay, thank you.

Dan Donlan, Janney Capital Markets.

I guess first question as it pertains to the sales, what type of buyers are looking at these assets to your knowledge?

This is Neil. Primarily it is regional owner operator groups. These are relatively smaller hotels, kind of less than $15 million in total value. They are in secondary markets in the regions that they're in and the best buyer for those are owner operators. Generally they can drive higher margins from it and they can run these hotels very well.

Unfortunately for owner operators and for entrepreneurial regional groups, debt financing hasn't come back for these kinds of assets to the level that would make these easy sales so it's still difficult but there are many regional groups, sometimes backed by private equity but generally kind of friends and family kind of capitalizations that are our primary buyer for these assets.

I think the reason that while we are marketing 20 some hotels we're still expecting only ten to 12 to really close this year is because -- one, because of this financing risk or the lack of financing for this kind of group but also they are individual groups so we're going to be negotiating these deals and working with multiple groups to take these down. I don't think there will be even -- there are few of these that will be clustered together in a kind of portfolio, maybe three to four hotel portfolios at best so the execution risk is pretty significant in getting these done.

Okay that's very helpful and I guess given those comments, I guess there has been some talk that the limited select service segment would see the most new supply in more suburban locations given the lower cost to build and the availability of land. Do you really believe in that given what you just said about financing and how few people there are out there that are able to buy these things much less develop these type of assets?

You see that probably more likely than in major urban markets just because, in major urban markets even though they're very attractive and there's a lot of capital chasing after it, there still is no significant construction financing for institutional grade urban assets above $30 million. Local banks in smaller markets will be willing to do $10 million to $15 million construction loans quicker than they will in major markets with institutional lenders so it is possible that we will see new supply in these secondary markets but we don't see it starting now by any means. I think we're still at least a year away from people really closing on land, buying land to build a hotel.

Okay and you talked about how New York urban was about 40%, 43% of your EBITDA in 2010. Could you maybe talk about where you think that's going to wind up in 2011?

Sure Dan, this is Ashish. We think it'll be, right now we think it'll be right around that same number. We have added more product in Washington, DC so Washington as a percentage will go up and New York year over year will stay right around that 42%, 43% range this year barring any other new acquisitions that we do.

Okay and then as it pertains to and I hate to put you on the spot here but what do you think replacement cost is for your portfolio or maybe it makes more sense to break it out kind of by New York urban, then kind of your major metros and then everything else. Is there any, can you give us any type of indication there?

Dan, what we've found is that the asset is just so varied between New York which you're hearing replacement costs in the $450,000, $500,000 range for most of the assets today. I would say that all the major urban centers are well in excess of $250,000 to $300,000 and then you have the secondary markets which could be kind of in that $125,000 to $175,000 range and the tertiary maybe in the $100,000 or few range.

Okay that's very helpful. And then lastly as it pertains to acquisitions and you guys have talked about New York and DC but have you started to look at assets on the west coast, namely a San Francisco or an LA, within the urban locations keeping with the limited select service hotels?

Yes, we do continue to look at markets outside of our existing core markets. We've been looking in San Francisco and pursuing some acquisitions there. We've been pursuing some acquisitions in southern California in the Los Angeles market and we've been pursuing some opportunities in south Florida as well so those are the -- and we've pursued some things in Seattle as well. So those are four markets that are not in our existing group of core markets but they're markets that in the right location and the right submarket for the right asset and the right pricing we'd be willing to go. So absolutely, we are spending some time in some of these other markets.

Okay, thank you very much.

Thanks Dan.

(OPERATOR INSTRUCTIONS)

And our next question comes from the line of [Roshen Richer] with JMP Securities.

I just had a question related to the guidance that was offered, the 5% to 7% RevPAR growth on a same store basis. Other companies, it was kind of offered in the 6% to 8% range. Is that attributable to the renovations or perhaps limited service versus full service or a combination of both? I don't know if you could speak to that.

Sure, this is Jay. I'll tell you, I think the guidance on same store is related more to macro factors as well as possibly some renovations interruptions in the first quarter but I think on the same store, it has very little to do with limited service versus full service. I think the market leverage in the portfolio answers that rather well but when we take a look across some of the major indicators that we track -- you take a look at GDP, consumer confidence, the employment statistics, travel statistics such as employment and supply growth, at best you're looking at anemic metrics in 60% of those indicators. Three of the five indicators are not as strong as you would typically see in a recovery and you combine that with the fact that there's geopolitical disturbances going on as we speak, you've got a financial system that has undergone a lot of change across the last two years and we're not sure exactly what a recovery curve looks like after all of that. It just gives us pause when we think about our outlook going forward and we're always very hesitant to give numbers that we don't believe we can meaningfully support because of a lack of visibility and so from where we sit today we feel real comfortable with the numbers that we've given. Should things change as we progress through the year we're certainly open to adjusting the guidance but I think as of February of 2011 we felt that this was a prudent place to set guidance.

Okay and then in terms of margins, I believe in your prepared remarks you mentioned that you were 200 basis points away from peak EBITDA margins and perhaps can exceed the peak margins at some point in time. Where do you kind of envision that margin range going to or those margins going to, rather?

Sure, we described our 2008 margins were just slightly in excess of 38%. When you look at the portfolio and if you just look at it from a standalone basis we're very comfortable that we could exceed it in the near term but when you look at the portfolio and think about potentially selling ten to 15 assets over the next few years, additional asset acquisitions and the stabilization of New York City and Washington, DC assets, we feel very comfortable that we could be well into the low 40s in the next few years.

And then finally, I think this was asked in some form but I think you mentioned for New York City in terms of EBITDA contribution around the 43%, 42% to 43% range but then I think with New York City, DC, Boston being 65% of 2010, where do you envision those three locations in terms of 2011?

For 2011, as we mentioned we think that New York holds very similarly to 2010 so sort of in the low 40s and then our DC cluster goes up to around 15% with Boston also being somewhere in that 10% to 12% range so give or take you're probably looking at 67% to 70% for the year between those three markets.

Okay and just finally, related to dispositions I think it's ten to 12 dispositions I guess with ideal conditions could be expected for 2011. What's kind of the range for capital that could be raised from those dispositions?

From the ten to 12 I think that we would probably look at somewhere in the $30 million to $40 million range of equity and then the pay down of $80 million of debt or something. It depends on which ten, 12 obviously but --

Right, sure.

But that's what we'd project.

Okay perfect, thank you.

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

I think we will just close with thank you for everyone to take the time to be with us this morning and as usual we will be in the office if any questions occur to anyone after the call. We will be more than happy to talk offline. Thank you again.

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