Hersha Hospitality Trust (HT) 2011 Q2 法說會逐字稿

Please stand by. Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust second quarter 2011 earnings conference call. Today's call is being recorded. (Operator Instructions). With that, I would now like to turn the presentation over to your host for today's conference, Nikki Sacks with ICR. 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 Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that's amended, and 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 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?

Good morning, everyone. I am joined on the call by Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. I'll begin by touching on some of the highlights from our second quarter results, and comment on some of our recently-announced acquisitions in the ongoing strategic transition of our portfolio.

We remained very active in the second quarter and made progress on raising new capital, closing and announcing several acquisitions, and moving our non-core disposition program ahead. We were active on our portfolio transformation as we added to our New York and Washington, DC footprint, expanded into the high barrier-entry sub-market of Los Angeles and disposed of a non-core asset.

Our asset-management and portfolio transition plan also resulted in a strong quarter, as we delivered not only industry-leading topline results, but also recorded hotel EBITDA margins that exceeded the margins from our prior peak years of 2007 and 2008.

During the second quarter, our portfolio of consolidated hotels achieved revPAR growth of 9.4%. This was almost entirely driven by rate growth, as we directed our revenue management team to take advantage of the strong transient demand growth during the second quarter.

This rate-led growth, combined with high portfolio occupancies of approximately 78%, resulted in gross operating profit and hotel EBITDA margins of 51% and 41.5%, respectively. As we had anticipated, our continued readjustment of our portfolio mix toward more urban properties and our ongoing focus on value-added asset management is producing attractive EBITDA growth with further upside.

We are confident that as our more recent acquisitions continue to stabilize, and as rates continue to increase, we'll be able to drive these margins even higher.

Our New York City portfolio, which consists of 14 consolidated hotels, had a strong growth during the quarter, with a sames-store portfolio revPAR growth of 8% that was entirely rate-driven, with our consolidated same-store Manhattan portfolio posting a 9.4% growth rate.

Our focus on ADR growth resulted in our New York City hotel portfolio's EBITDA margins expanding by 110 basis points to 46.5%. Despite a roughly 10% increase in room supply in New York last year, with a higher concentration being delivered in the back half of the year, we maintained occupancy at our New York City hotels at approaching 90%, and realized strong ADR growth across the portfolio.

These results clearly demonstrate the consistent and sustainable demand pressure in New York, and that the city is able to absorb the supply in high-demand quarters. The strengthening group pace and increasing business trends in demand pressure reinforces our bullish stance and our longer-term outlook as the rate of new supply meaningfully declines over the next few years.

Boston, Philadelphia, and our California/Arizona properties all showed strength in the second quarter, registering revPAR growth of 6.8%, 9.6%, and 13.7%, respectively, further supporting our urban gateway strategy. From an industry perspective, Washington, DC, however, has underperformed most of the other markets during the quarter and for the first half of this year.

Our suburban Washington, DC same-store portfolio registered solid absolute performance during the quarter, but was sequentially flat in terms of revPAR growth compared to the same period in 2012, due primarily to weaker per-diems and softer government, and, importantly, government-related bookings due to the ongoing budget battles.

Our most recent acquisitions, the Hampton Inn and the Capitol Hill Suites, are located squarely in the district, and our outlook for transient demand in the urban core of Washington, DC remains very positive in the mid-term. Longer-term, our outlook for Washington, DC also remains quite bullish as absolute occupancy and demand trends should remain strong with very little planned supply on the books until the convention center complex is scheduled to open in 2014.

We made some select acquisitions in the quarter and just subsequent to it, which expanded our presence in our northeastern market. I'm not going to go into the details of it, as we have discussed them on the last quarterly call, other than to say that we have closed on the Capitol Hill Suites in Washington, DC, and the Hampton Inn development project in downtown New York subsequent to the quarter -- subsequent to the end of the quarter.

We acquired the Marriott Courtyard West Side in Los Angeles during the quarter. This was our first acquisition in Los Angeles, and so far, we are very pleased with this extremely well-located hotel in a city with an improving revPAR profile and a highly desirable supply outlook.

Yearly to-date, our sub-market has exhibited revPAR growth of 12.7%, compared to the total, nationwide revPAR growth of 8.5%. We have identified significant value-added asset-management opportunities to drive both revPAR and margins at this property, and we are starting to realize some of these benefits in very short order.

For the month of July, this property experienced a revPAR increase of 14.5%, far outpacing the competitive set's revPAR growth of 9.6%, while we increased our revPAR index by 450 basis points to 113.4%.

We also added to our New York City portfolio, entering into an agreement to acquire the 175-room Hyatt Union Square hotel upon completion, which is anticipated to be in 2012. The addition of this extremely well-located, efficient, full-service Hyatt hotel greatly enhances our already strong presence in New York.

Beyond our core northeast urban gateway markets, we believe that a handful of attractive markets that we continue to explore, but currently maintain our focus on the northeastern corridor, and we'll continue to look for additional opportunities in Los Angeles.

Regarding our capital recycling strategy through the disposition of non-core assets, we continue to make progress. As we have discussed previously, we will continue to sell certain non-core brands and assets in the locations that we believe have less opportunity for growth in the cycle. We have approximately 20 assets that we have listed for sale, and the disposition plan is a key area of focus, and we look forward to updating you on our progress as the sale process moves forward.

We are encouraged by the amount of interest that we have received from potential buyers that are typically private-equity firms, as well as regional firms that are looking to invest in a strong cash-flowing portfolio such as this. I would say that out of the non-traditional buyers of hotels, probably half are pure private-equity groups, with the balance comprising the operator, private-equity partnerships, and regional operators.

Based on the current progress, we still believe we should be able to get at least half of the sales closed by the end of the year, and based upon the current pricing of the portfolio, we believe that these sales would be completed at 2011 cap rates, ranging from 8.5% to a 9% cap rate, and free up approximately $50 million of cash, if all of the assets were to be sold wholesale.

Clearly, the summer came in slightly softer this year than anticipated, but we are seeing fundamentals trends accelerating from September through the end of the year. It appears that mid-week urban transient is the sweet spot for the market today, and we have positioned ourselves to play well to those trends. Our mix is very different from the national markets.

We have transitioned to urban markets, with hotels in locations that capture the most robust business-transient demand in the country, and although we can't overcome the economy, we certainly can outperform the industry.

Let me now turn the call over to Ashish, who will provide more details on our operational results and financial outlook. Ashish?

Thanks, Jay. I'm going to start by providing some more detail on the operational results of our portfolio. During the second quarter, our total consolidated portfolio recorded a revPAR increase of 9.4%, driven almost entirely by rate growth as ADR increased 8.9% and occupancy remained relatively stable at approximately 78%.

This ADR-driven growth, along with the portfolio repositioning, led to hotel EBITDA margin expansion of 140 basis points, and increased our portfolio-wide margins to 41.5%. For those of you who have followed us for a few years, you may recall that our second quarter hotel EBITDA margins peaked at approximately 40.9% in 2008 and 2007. We are very pleased to report portfolio-wide margins in excess of our past peak margins, even with ADR for many of our core markets, including New York, still between 15% and 20% below where they were during those peak periods.

We believe that there is further margin-expansion potential through continued aggressive asset management and rate-driven revPAR growth. We also believe that margins will be positively impacted as our portfolio mix continues to gravitate towards urban markets and as our young assets continue to stabilize during the cycle.

As a point of reference, the median age of all of the acquisitions that we have completed since 2008 is still less than 2.5 years old. On a same-store basis, our portfolio recognized revPAR growth of 6.3%, driven almost entirely by ADR growth of 6.1%. This ADR-driven growth translated into hotel EBITDA margin expansion of 40 basis points to 41.1%.

The benefit of ADR-driven revenue growth in our same-store portfolio was partially offset by property-level payroll and benefits cost increases that have been enhanced and added to our property-level staffing as part of our recovery plan.

Margins were also impacted by rising food and beverage expenses that are difficult to pass on, due to the complementary nature of breakfast offerings at many of our mid-scale properties, and by higher repair and maintenance expenses as the Company has continued to significantly increase investment in ROI and maintenance projects in anticipation of an ongoing recovery.

From a capital-raising standpoint in the second quarter, we continued to solidify a liquidity position, and issued $4.6 million Series B perpetual preferred shares in an underwritten public offering. The Series B preferred shares were issued at a yield of 8%, and net proceeds to the Company after offering the lived expenses were approximately $111 million.

As a result of this transaction and our previous common share offerings, we have significant capacity for additional investments, with only $28 million of borrowings against our $250 million line of credit, $93.5 million in cash in escrows, and only $17.9 million of debt maturities in 2011. In addition, the Company's current unencumbered asset base is estimated to be valued at approximately $300 million.

With the continued growth in earnings and cash flow, our balance sheet and leverage ratios are in very good shape, and we continue to be mindful of maintaining a leverage level that provides us the financial flexibility and liquidity necessary to execute our business plan. Subsequent to quarter-end, we also made further progress in our asset-recycling strategy. We sold the Comfort Inn in West Hanover, Harrisburg, Pennsylvania, for $5.25 million, and recorded a gain of approximately $1 million.

As we have previously discussed, the proceeds from sales such as these will help us continue to fund our growth and to reduce our debt as we redeploy our capital and resources into higher-return opportunities. We also continue to make progress on streamlining our business model and reducing our development loan portfolio. At the end of the second quarter, our development-loan balance was approximately $43 million.

Pro forma for the completed acquisition of the Hampton on Pearl Street and the planned acquisition of the Hyatt Union Square, our development loan balance would be $21.7 million, which would represent approximately 1% of our total asset base.

During 2011, we plan to commence or complete approximately $24 million worth of capital improvements for the full year as we catch up on upgrades we chose to forgo during the recession, and undertake additional ROI projects.

Through the second quarter, we have spent approximately $14 million, and although there is some renovation work ongoing in several of our properties, we don't foresee any significant renovation disruptions at our properties for the remainder of this year.

Let me finish by turning to our outlook for the remainder of 2011. Although the macro-economic environment provides limited visibility as to the strength and duration of the economic recovery, we're pleased at the bookings pace and pick up in demand we are experiencing as the year has progressed.

Based upon our July results and our forecast for the remainder of the third and fourth quarters, we continue to forecast strong results in New York, as the city is clearly demonstrating its ability to absorb new supply during the high demand months of the year. For the month of July, our same-store New York City portfolio is up approximately 6.4%, and the pace of growth has increased, as the last two weeks in July have been up 10.7% and 13.3%, respectively. Similar to the second quarter, almost all of this revPAR growth is rate-driven growth.

We are also forecasting continued ADR-led revPAR growth in Boston, Philadelphia, Los Angeles and the other California and Arizona properties, leading to significant margin expansion opportunities for the remainder of the year.

As such, we are again reiterating our full-year guidance of total consolidated portfolio revPAR growth for 2011 in the range of 6% to 8%, same-store revPAR growth is between 5% and 7%.

The rest of the details of our existing guidance can be found in our earnings release. That concludes my formal remarks, let me turn the call back to Jay.

Thank you, Ashish. That concludes our prepared remarks. Operator, we can open the line up for questions.

(Operator Instructions). And we'll take our first question from Shaun Kelley with Bank of America Merrill Lynch.

Hey, good morning, guys. I just wanted to spend a little bit of time on just kind of -- first of all, you talked a lot about the margins, and the color was really helpful, and being back above peak already is, obviously, impressive, so I guess one question that we get a lot from investors is trying to understand where do you think those margins can go, both based on (inaudible) and obviously on kind of the acquisitions that you've done.

So, could you give us a sense of either your thoughts as you look at the portfolio that stands today, where do you think that the 41.5% could kind of trend towards over time if you were to make it back to peak?

Yes, absolutely. Shaun, this is Ashish. I can tell you, when you look at our urban properties like New York, for instance, New York for the quarter ran an EBITDA margin of about 46.5%. In general, the urban properties run EBITDA margins anywhere from 5 to 700 basis points, with New York being even above that, then some of the more secondary markets, like Central Pennsylvania and the mid-Atlantic markets.

So, if you think about disposing of a lot of those secondary market properties, as well as stabilization in New York, and New York's EBITDA should be 50% or more in 2012 and going forward, I think that you can kind of walk your way up to the 400 basis points pretty easily.

That's helpful, Ashish. And then, just kind of wanted to also get your thoughts on LA, right? You guys made an acquisition there. It sounded like the market is doing exceptionally well, so, first of all, your characterization is how much of that is the market, versus how much of that is some of the -- your value-add, and then secondarily, just kind of what's your -- what are you guys seeing on the acquisition front there, and is it important to you to gain some critical mass out there?

Sure, Shaun. This is Jay. The market in LA is doing extremely well as well. The market did about a 10% growth, high 9s. 9.7%, if I'm not mistaken, and our property, we exceeded that by almost 400 or 500 basis points.

So, I think we'll certainly take the momentum that the market gives us, but that being said, I think this asset, particularly, had some real opportunities to professionalize management, and for us to bring some of our management strategies to bear on the asset.

So, I think this was a case of us using the momentum in the market and really leveraging it for a 400 to 500 basis point premium.

That's helpful, and then just your thoughts again on just what you see coming forward. Are there deals out there, things that would be interested in, and how important is it for you to kind of try and get maybe more than one hotel in the market, to get some scale?

It's a fair question. We continue to look at some acquisition opportunities in Los Angeles, and I think there are some opportunities there that could fit within our investment criteria. We're not in a position to move on anything yet, but generally speaking, we are looking within -- we are kind of looking on the west side of LA in the main, so, sort of Santa Monica to Manhattan Beach stretch, Century City, Beverly Hills, we like West Hollywood and Brentwood, so those are some of the sub-markets that we continue to look in, and like I said before, I think there -- that we're finding that there's going to be some interesting opportunities out there.

To what extent are we going to build out that cluster? That's difficult to say. I think we'll continue to apply our investment criteria and do the ones that make sense.

Thanks, Jay. I'll jump back in queue so some other people can ask. Appreciate it.

We'll move on to Ryan Meliker with Morgan Stanley.

Good morning, guys. Just a couple of quick questions. First, just about margins, again, that was really good color that you gave us. I just wanted to talk a little bit about same-store margins. Obviously, margins were up about 40 BPs in the quarter on basically 6% rate growth.

I'm wondering -- you gave some color as to some of the challenges that you saw in the quarter with regards to margin growth from some of the operating expenses that were a little bit higher, but your guidance for the back half of the year seems to be over 200 BPs of margin growth.

I'm just wondering if you can give us some color on your comfort behind being able to push rate and get that margin growth, given that we haven't seen it yet this year.

Absolutely. Ryan, this is Ashish. When we look at the kind of the midpoint on our guidance and where we need to be in the back half, you're right, we need to be sort of in the 200 to 225 basis points of margin growth, and as we've looked at the third and fourth quarter results, similar to second quarter, almost all of our growth is going to be rate-based, but what's really impacted margins in the first quarter was clearly renovation weakness in New York.

Second quarter, we had, last year, for the first time in September, provided property-level employees cost-of-living adjustments that weren't there for the past two years. We also bolstered our staff. There were a lot of open positions that weren't being filled, so those were filled last year when the economy looked like it was turning, so clearly there was strength in New York.

So, we're comparing in Q2 against quarters that we probably weren't fully staffed. In addition to that, we really saw some food and beverage expense increases starting up about mid-year last year going into third quarter.

So, all of those things combined with just stabilization of some of the newer properties and things like the New York City Trio coming online and stabilizing, we're looking at the back half of the year to be able to achieve those kind of 200 to 225 basis points in margin growth.

Great, that's helpful, and then switching gears, just one last question. You talked a little bit, you mentioned that the summer came in a little lighter than you were expecting. I'm just wondering if you can talk a little bit about trends that you have seen, particularly over the past month or so, have transient booking windows narrowed or expanded?

Are you having more difficulty pushing rate? Obviously, the macro-environment seems to have changed materially over the next couple of months, and given that you're more short-term bookings in nature, I want to know if you have seen any impact of that yet?

Ryan, this is Jay. The trends for the summer, as I mentioned, were a little -- they were a little inconclusive. I think what we're starting to see, however, is that since the July 4th holiday, we have started to see some firming up in booking trends. As we look into August, we are starting to get a little more confidence that there is, in fact, some firmness coming, and then when we look into September and October, which is about as far out that we can meaningfully make any sort of -- have any sort of real opinion on transient booking trends, we're starting to feel much better.

We're seeing, just to give you a for instance, in one market we were talking about yesterday, specifically, Washington, DC, we are seeing committed rooms booked for September and October to be up 40% over last year, which is a pretty attractive statistic for us. It suggests that the booking pace is very strong.

When we look into New York, we are seeing similar strength heading into the back half of the year. That's generally, traditionally, how we see it, so that was probably less of a surprise for us, or less of a -- a positive surprise for us, but seeing that kind of firmness come up in Washington was certainly very encouraging.

As far as booking windows widening out, we haven't really seen that yet. I think as we move closer into the fall and get into the fall proper, I think we'll probably see the booking windows expand out by another 3 or 4 days. Right now, I think we are looking at booking windows of about -- the bulk of the booking window -- where we've seen the bulk of bookings is probably about a week to a week and a half.

That's really helpful, and just as a follow-up, on the commentary on DC, it sounds like you guys are seeing pretty strong bookings in 4Q for DC. I'm wondering, you mentioned that there might be a little bit of a divergence between the urban and suburban markets within DC, and we've heard that from other companies as well.

Is that 40% across the -- evenly spread out across both the urban and suburban markets, or maybe more specific to the urban markets?

Yes, the -- let me be specific on that. Yes, that is urban. That is urban, and it is -- it's actually for the whole fourth quarter, it's October, November, December, where we're seeing 40% committed -- 40% up on committed bookings, but that's for the entire fourth quarter, and that's urban.

I don't have the numbers here on hand for what we're seeing suburban, from a suburban booking pace standpoint, but I will tell you that Washington, DC, we expect the fourth quarter for Washington, DC, both urban and metro, meaning the -- our close-in suburban markets, as well as the metro, to be in the high single digits.

That's really helpful. Thanks a lot.

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

Good morning, gentlemen.

Good morning, Dave.

A little more detail on the dispositions, if you wouldn't mind. You're clearly giving more color with cap rates. It sounds like you're getting further along in the marketing process, where you've got a feeling for what the yields are likely to be, where the pricing is. Can you give us an idea about the geography of the ones that you think you're more likely to sell, will it be individual transactions or portfolios, and I have a follow-up on that about the proceeds when you're done with that.

Sure. Let me -- Dave, this is Jay, let me talk to you about how we're looking at the transaction generally. As you can imagine, we would favor a wholesale transaction on the entire portfolio. We have -- we have been pursuing the marketing and tranches of assets, but have gotten some interest for larger groupings, so if -- we did it in four tranches, and here have been groups out there that are looking at multiple tranches.

I think we're -- from a pricing standpoint, I think we are getting a sense of where the market is -- you know, for these assets to clear the market, and we shared that with you.

Right now, just as we're working through the process with several groups, and with several of the intermediaries, it's not the best time for us to be commenting on it, but that being said, we feel confident that we'll get at least half of this portfolio, 20, maybe even slightly more than half of the portfolio of 20 closed by the end of the year.

So, we're working pretty hard on that. It remains a real important area of our focus of energy and time, to some degree. But we're encouraged by what we're seeing. We feel pretty good about things.

As far as proceeds, we're anticipating, if this were to transact on a wholesale basis at the cap rates I mentioned, taking the mid point of that, we would probably free up about $50 million of cash.

And there would be a substantial amount of additional debt repayment as well, right? Because the secure debt on those assets would also get paid off or go away?

Yes, we would be paying down about $125 million of debt.

Okay, and just, Ashish, relative to your leverage target, does that put you kind of where you want to be, or do you see putting secure debt on other assets, being able to acquire more given that $175 million of gross proceeds?

Yes, I think that the way we've looked at it is, with proceeds from this potential sale, if they were to go into debt reduction, we would still have -- we would still kind of target that 5 times debt-to-EBITDA type of range for next year, somewhere in the 5 to 5.5 times, and we still believe that would give us that $200 million or so of acquisition capacity.

Okay, that makes a lot of sense. A couple more items, if you don't mind. LodgeWorks -- you have 5 LodgeWorks-managed hotels. How does the Hilton acquisition of that team impact you? (inaudible)?

David, this is Neil. We -- I think, net-net, I think it's pretty good news for the Summerfield brand, and for the high select-service platform, where we do have some significant exposure. I think the added distribution for Summerfield through the LodgeWorks transaction is very significant.

We've always had kind of high-revPAR assets in the Summerfield Suites brands, with our White Plains and our Northern California assets and the like, so it's going to be great to have some company at kind of the top in terms of some good, high-quality, extended-stay hotels coming into the brand that will, I think, allow the brand to have some legs and to increase the power of distribution from the global brands.

I think the announcement being more than just an asset acquisition, an the Hyatt bringing on Tony and his team, I think that's great news, too. We have worked with these guys for the last five years pretty closely, we admire them, think they do a very good job, and I think they will be great additions to what's already a very strong Hyatt management team.

Can Hyatt be your operator?

We're still kind of working through that right now. We do have concerns about the level of focus that a larger management company or a larger brand-managed portfolio or company would have on our individual assets. We're really focused on the recovery in Northern California and Scottsdale, and on the East Coast, we're really looking for outside performance from the renovation dollars that we're putting into these assets across the last year, so we're still working through that with Hyatt.

Is there any kind of contractual opportunity for you to take some of those and give them to other managers or HHM?

We're still working through that David, if you don't mind --

No, of course. And then a couple more housekeeping things. How come the (inaudible) goes to unconsolidated, Ashish? What's behind that accounting treatment change?

So, if you remember back in -- I guess it was now April, HHLP had actually taken out the note that was outstanding on that unconsolidated JV, so we were the lender. That note has now been refinanced with a CMBS loan, so we go back to the original structure of being an unconsolidated JV.

Okay, that makes sense. I think this time in April, you thought that you were going to end up (inaudible) that outright, but instead it got refinanced.

Yes. A little bit of a proxy to, I guess, the strength of the CMBS markets. We refied out our note for more than what we had purchased it for just last year.

So, that's a good outcome.

It is, a very good outcome.

Okay, and then finally, it looks like you're left with just four development loans, all to related parties. It really looks like the 48 Lex Hyatt is not going to come into the REIT, so I'm assuming that will be paid off at some point soon. Is that correct, and what's your outlook for the other three?

The -- with 48 Lex, that hotel is about to open in the next couple of weeks, and so we would expect that there would be, within short order, an opportunity for repayment of that loan. The -- as far as the other hotels go, those -- the markets that those hotels are operating in, I think we're probably going to be in a holding pattern on those for a while longer. Refinancing opportunities in those markets, because the fundamentals haven't recovered as strongly as we would have liked, are somewhat limited.

So, I think those are going to be -- those might be out there for a while longer, say, another 12 to 18 months. Outside of Lexington, the number becomes relatively small.

Outside of Lexington, you're down to $8 million, and those are all cash-pay, so, I think Jay's comment, probably 12 to 18 months is out is about reasonable.

But unlikely to be acquired.

At this point, there's no plans to acquire any of those assets.

Got it. Okay.

Unless we see some change for the positive in the market. They're not necessarily -- they're not necessarily exhibiting growth rates that I think would be attractive for us.

That makes sense. I've exhausted my question list, and hopefully have not exhausted you guys.

We'll take our next question from Smedes Rose with KBW.

Hi, thanks. I was just wondering if you could go back to your CapEx budget for second -- I was just wondering how much of that is to finish out the construction remaining, I guess, at the Pearl Street asset and also, I think, one in Delaware that you're finishing up construction on, and then, as you think about next year, presumably as that finishes up and some of your renovation programs or catch-up programs are finished up, what would be sort of the more normalized rate of spending, I guess, when you think about next year?

Sure. Assuming just -- we had put out a $24 million number. As of the end of the second quarter, $14 million was completed. As of today, about $18 million has been completed. That number is just on existing assets and not on new assets.

On Hampton Inn Pearl Street, we have a very minimal amount that we need to fund now. I think we're down now to somewhere between $2 million to $2.5 million that's remaining, so that's pretty -- and then also Delaware Park, we're probably less than $2 million to $3 million or so that we still need to fund on that.

That is exclusive of the $24 million number that I gave you. When you look at what just is being finished right now, it's really the renovation work in Scottsdale and the renovation work in Courtyard, Alexandria, and then there's just TBs and so forth that will go in in the fourth quarter.

For next year, though, we do believe that the CapEx budget, and we think that it will be pretty similar to this year's CapEx budget, give or take $20 million at this point is what we're forecasting, and the majority of that work, once again, would be started in the fourth quarter of this year and try to be completed by the end of the first quarter of next year.

Okay, thanks, and I just wanted to ask you -- on your last conference call, you talked about some of the competition coming into the market in New York. I think you said that Sheraton was giving away meal vouchers, and some competition in Brooklyn, and I was just wondering, is that pretty much going away, and would you expect it to come back as we get into the seasonal low periods again in New York, or kind of how do you think about that?

Are we just going to see sort of more swings as more and more competition comes into the market, or --

I think with that -- Smedes, this is Neil -- I think with what we mentioned the last time, I think it's -- I don't know if it's really the seasonally low period that was leading to that, or just startups. So, it's those first few months, the first three to six months of a hotel's life in New York, we find that they have become -- that they are trying much harder to fill their box and to start building a base of business.

So, we're -- we have been pleased that the Sheraton Tribeca, for example, or some of these other directly-competitive hotels have already now started to push rates pretty significantly, or we have been able to adjust our strategy and focus on the right customer segments within those markets.

In Brooklyn, we had these two very large hotels open, the Sheraton and the Aloft, and interestingly, our new hotel there has just been having record months across the last three to four months.

So, it took a few months for it to adjust to the competition, but we have been able to carve out our unique niche in the market, and we're producing kind of double-digit growth at that asset today.

So, it creates some choppiness when they first open, but we believe that after three to six months of operation, either we can adjust to it, or those hotels are ramped up enough that they're not significantly impacting our rate-driving potential.

Okay, great. That's helpful. Thank you.

We'll move on to our next question with Bill Crow from Raymond James.

Good morning, guys.

Good morning, Bill.

Just a few questions here. On the potential portfolio sale, has that timing changed or cap rate expectations changed over the last 60 days or so? Has that gotten pushed out a little bit?

It has probably gotten pushed out a little bit. Yes, it has -- from last the time that we spoke, it has probably been pushed out by another three or so weeks. We're finding -- I'm not alarmed by it, Bill, it's just -- there's a lot of pieces to the portfolio, and just the execution is just -- it's not as push-button as -- I mean, I think we knew that it was going to be somewhat complicated, doing this many different real-estate marketings and real-estate transactions, but it's just taking a little longer than we would have liked.

Yesterday on a call, Jay, we heard that maybe the pace of assets available for sale in gateway markets such as those that you target has just kind of dried up here temporarily. Is that something you're seeing with the assets you're looking at as well, that maybe not as much is being marketed, or are you still seeing the same flow you have been?

Bill, this is Neil, from our perspective, we haven't really seen a noticeable shift in the amount of quality product in major gateway markets. I think there is, perhaps, pricing expectations and the buyers' target-pricing expectations are maybe widening a bit again, but the just amount of product, we haven't really seen it dry up.

In fact, this summer, it's hard to keep up with all the new listings in major markets, and I think these recent kind of private transactions in the higher-end luxury states, I think that's going to give at least the private side of this market a big boost, so I would think you would need -- I would expect that we'll continue to see increasing amounts of acquisitions on the market.

That's helpful, Neil, thank you. Ashish, maybe two for you here. As we think about the same-store composition next year versus consolidated portfolio composition, would we just take everything that you had bought until 12/31 of last year, and that's really the same-store portfolio, so the different rental between the two next year is going to be fairly minor, is that right?

Yes, I think that's right, Bill, for the full year. This year, you would have the Capitol Hill Suites and you would have Holiday Inn Express coming in, as well as LA. Those will only be same-store next year for certain quarters, but not for the full year.

So, I think that's accurate.

Okay, great, and then you mentioned an unencumbered asset base of $300 million. So, just digging into that number a little bit, what is the cap rate that would imply -- what is the price per key that that $300 million would imply?

Sure. I think that what we lifted is a lot of the acquisitions we've done have been unencumbered of any debt, so we've really just used acquisition price for anything that we've brought into the portfolio for the last year, and then anything else, we're kind of looking at it as a 13 times EBITDA multiple.

Okay, that's helpful. That's it for me, thank you.

We'll take our next question from JMP Securities with Will Marks.

Thank you. I just -- sorry, one quick question on New York. You mentioned how supplies impacted you in the past. Can you just give an update on how supply will directly impact you, if you have any figures over the next, let's say, 12 months?

In terms of figures, I think that the greatest amount of supply has hit our markets. I think looking forward for the next couple of years, I think assuming somewhere just shy of 4% kind of supply CAGR overall in Manhattan would be fair across the next couple of years. As we've always cautioned, I think it's best in New York to look at long kind of development cycles, and if you look at them on kind of a seven to ten-year basis, I bet that we'll be very close to the long-run supply CAGRs for Manhattan of kind of sub-2% when you stretch it out. You can't forget the condo craze from seven or eight years ago.

But it has been localized in certain markets, so there are certain sub-markets that we feel are bearing the brunt of this new supply, and those markets are primarily kind of Chelsea and Herald Square, Flatirons, those kind of -- the 20s to the high 30s, from the East to the West Side, and in those markets, it is -- you are seeing a lot more product, it's coming in various different segments, a lot of upper up-scale as well as a lot of independents and boutiques.

In those markets in particular, where we have kind of our core Hampton Inn portfolio and our Holiday Inn Express, we feel very good with our position in those markets, so undoubtedly, there is much more supply than New York has ever had, so that's significant, and does alter our revenue-management strategies and does lead to some short-term volatility when hotels open, but having kind of premium, limited-service hotels that are already at very high occupancy in those sub-markets, we're still able to push rates, and we are still well below peak ADRs in those markets, so we're feeling pretty good, even in those heavily -- heavily new-supply kind of markets like Chelsea, Herald Square, Flatirons.

I think as you look at other markets within Manhattan, there's a lot of sub-markets that still are not getting a lot of supply. I think the kind of Union Square, Greenwich Village area remains -- where demand is far outpacing new supply, Midtown and the kind of Central Park region is another very strong sub-market from a supply, demand fundamental perspective.

So, I think for the next couple of years, think about it as around 4%, but remember to think about it on the long run, and in the long run, it is very similar to long-run trends.

Okay, that's very helpful. Thank you.

(Operator Instructions). We'll move on to Dan Donlan with Janney Capital Markets.

Thanks. Just -- can you give us when you expect the Delaware Park to open up, as well as Pearl Street and the Hyatt Union Square, if possible?

Sure. Delaware Park, you may recall, we purchased that at the very end of last year. We are expecting that hotel to open in the fourth quarter of this year, and that's going to be 191 rooms. We chose to go with a full-service brand there, after taking a real close look at the hotel physical plans and taking a look at the marketplace and what we found was an underserved need in the area.

We thought from the basis that we had acquired the hotel, and the execution to make it either select-service or full-service, we felt that we would be able to get -- be able to drive a real strong basis even as a full-service hotel and drive great returns there, so we're going to be opening that as a Sheraton later this year. We'll be at about a basis of about $125,000 (inaudible).

Pearl Street -- we are expecting an opening at Pearl Street in the second quarter of 2012. Work is currently underway at the hotel, and there's a high confidence level from the contractor and the developer at the hotel that they can have it for us around mid-year of next year.

And then the Hyatt Union Square?

Hyatt Union Square is also a 2012 opening. That's a relatively larger hotel, but we would expect that also to be -- I think the safest way to think about that and Pearl is sort of midpoint of the year.

That being said, we have these -- our basis in these assets goes down should they not be delivered by the end of first quarter. That's the deal that we've struck with both developers, and so we expect that that sort of incentive and alignment to get the asset done early will probably bring them in earlier, but I think just from a modeling standpoint, it's probably safe to peg them at the midpoint of the year.

Can you quantify how much your basis drops if they are delivered mid-year?

I don't have the specifics here.

I don't have that with me, but we can certainly get that to you after the call.

Sure.

But it's -- but it's -- I mean, for a developer, it's a motivating sum.

Sure. Sure. And them -- I'm sure if I missed this, but did you give details on who you sold the Comfort Inn to and what type of cap rate that was?

Hey, Dan. This is Ashish. We sold it to a local owner-operator group in Central Pennsylvania. The asset was sold for kind of just slightly above $50,000 a room. It was a very low-cap rate, it was right around a five-cap, but a lot of that was just market deterioration. So, we sold more on a per-pound basis than it was a cap-rate basis.

Okay, and then moving on to the portfolio itself, what was the consolidated revPAR growth outside of Manhattan?

[crosstalk]

Portfolio-wide, if you strip out the New York properties, consolidated growth was around 10.7%.

Yes, 10.7% on a consolidated -- excluding New York City.

So, that's New York including JFK and Brooklyn.

Okay, and then what did New York do in May and June, because I was a little bit surprised that it was just 8%, because I think you guys had said in the last call that you did 14% revPAR growth in April in New York.

Yes, April came out mainly because of the winter being so harsh and some of the renovation activity being done, April came out very, very strong. I don't have it in front of me, but I would venture to guess somewhere in the 6% to 7% range to get it down to 8%.

Okay, and you think that accelerates from me here in September, October, November?

Yes, we do. July, as Jay mentioned, overall started off a little weaker than everybody anticipated, but after the July 4th holiday and sort of past mid-July, it's been doing very well, and New York has been one of our best markets since then, and when you look at the group-booking pace in the fourth quarter, really even into September, it's extremely strong.

Okay, and then from an occupancy standpoint, I think that you're trying to (inaudible) occupancy for the consolidated portfolios at about 71% or so. Your 2007 peak was 73.7%. Is that something you can get back to, obviously with New York operating around 90%, I'm not sure how much more room there is to grow there, but in the other markets, are you kind of holding back occupancy to grow rate, or what's your perspective from that standpoint in getting back to that number?

When you look at the asset mix today versus what it was back in the peak, I don't think it's a stretch to get back to that number or exceed it, especially if you once again build in if the portfolio is going to continue to change as non-core comes out, I think that it's very attainable.

Okay.

I think -- Dan, this is Jay -- I'll just add to what Ashish was mentioning, in some of these markets, trying to -- trying to -- it's a (inaudible) trying to get the occupancy down so that you can drive even more rate. I think sometimes that's very difficult to do because of the -- you just -- that would leave you unable to optimize the demand in the market.

So, at some point, running the high-occupancy is what's allowing the -- to drive the rate, and I think if you try to lower that down, your overall revPAR is going to significantly come down, because you won't have a proportionate increase in rate from keeping the occupancy down. Does that answer your questions?

Absolutely. I just didn't know if some of that occupancy at 73%, was that in some of your suburban markets, where there's a lot of supply growth, in which case maybe it's going to be tough to get back to that level.

I just -- it seems like it would be achievable simply because you've got much more New York properties right now in the portfolio.

We agree with that, yes, that's right.

Okay, and then from a margin perspective, I know you touched on this a little bit, but I'm just kind of curious -- where did you -- for the hotels that you owned in New York City, in 2005, 2006, I think your Holiday Inn Madison Square Garden, and the Hampton Inn Chelsea and the Herald Square, you said New York's had 46% EBITDA margins, now, where were those hotels at the peak in 2007 from a margin standpoint, if you have that available?

I don't have it front of me, Dan, but I can tell you that a lot -- some of those assets were just being brought into the portfolio at that time, so we can certainly go back, and I'll give you a call and let you know what those were, but I think that in the peak quarters in New York, some of these branded assets, you can run mid-50%s to 60% type of GOPs, with mid-40%s to approaching 50% EBITDA margins, and that's on sort of a stabilized basis.

After that point, there's incremental growth, and it's all based on the rate mix, is it rate or occupancy. So, with New York, it's all rate, you should be able to drive kind of 75, 100 basis points as you continue to drive rate.

Okay, and then, just moving to the balance sheet, it looks like you have some land -- some mortgages on some land, Nevins and 8th Avenue. What is your plan there, and then just looking a little farther out to the new hotel mortgage that's coming due at the beginning of next year, is your plan to just put those on the line, or are you going to try to refinance any of that, or just any detail there would be helpful.

Sure. For 8th Avenue, we're in a -- almost the later stages of just refinancing that for the next two years, really extending the current loan for the next two years. Nevins street, we're in negotiations to potentially dispose of that asset, so there's nothing firmed up, but we look at probably just extending it out with the current bank until we can sell it, which we think could be in very short order, and the new hotel loan is also one that we're in the later stages of refinancing that asset for sort of a five-year term.

Okay, and then just lastly, kind of on the CMBS market, some of your competitors have said that some of the lenders out there are not even giving them quotes any more, and we've heard some chatter from private equity guys that they are no longer getting quotes either from even larger CMBS lenders, just kind of your thought process there, and do you think this potentially leads to less growth in New York City in the interim, and what you think this does for some of your potential asset sales down the line?

Most -- I mean, as far as -- let me go backwards. As far as asset sales go, almost all of the debt that's going to be assumes is CMBS, but any kind of short-term blip in CMBS market we don't think affects current asset sales. As far as the buyers, they're not looking, with the debt that they have, that they can assume, there's not a lot more debt potential that they could place on these assets, so I think that it won't really impact our current sales.

It certainly could, if the CMBS markets continue to be shut down, it could impact future sales market-wide, as I think a lot of private equity has come in with the hope that CMBS comes back and that the lending environment improves.

We are looking at it right now as something of a short-term blip. I think the market may have gotten a little ahead of itself in the CMBS world. Last time we checked there were 42 lenders on the street offering CMBS loans, and everybody sort of building up their stats, so there may have been just a little too much, too soon.

Okay, that's very helpful.

And we do have one question left in the queue. We'll take that from David Katz with Jefferies and Company.

Hi, morning all.

Hey, Dave.

How are you?

Good. Maybe going back to an issue that's been discussed a little bit, but I wanted to try to think about it a different way. We've seen the more assertive (inaudible) of yours acquire relatively aggressively through this, and clearly it has been the right thing to do, but we have started to hear from some the idea of being more of a net-seller, and it just, to my mind, begs the question about how will we know when it is time to become the seller rather than the buyer, and recognizing that no strategy is necessarily that absolute or black-and-white, how are you thinking about making sure that when it is time to sell and be in that seller, that you're prepared and ready, willing and able to do that?

Sure, Dave. David, let me answer that question. Our perspective on being -- whether we're a net buyer or a net seller in this environment, I think it very clearly -- we're a net buyer today. We do obviously have a strategic disposition that we're working on, but generally, when we're talking about our strategic portfolio, we are a net buyer, and the reason that we feel very confident about that position is, I think that when you apply selective investment criteria, as we believe and feel good about what we've done so far in this cycle, namely buying assets with a yield, buying assets that have EBITDA growth rates that are likely to exceed your portfolio average, you're positioning assets in more urban markets where you're going to driver stronger margin growth and assets that are ultimately going to be accretive to your NAV, I think if you -- as long as you remain a very disciplined buyer, I think it's a great time to be assembling a portfolio.

Generally, most of the markets that we have targeted and continue to focus on look like they've still got a lot of legs as far as revPAR growth is concerned. We would expect that the markets that we operate in today and have the most exposure to will likely continue to have significant revPAR growth through 2014 into '15.

Now, when we start seeing the revPAR growth decelerating, that's probably going to be time for us to start thinking about what next steps are and if we should be shifting our focus from being a net buyer to a holder or a net seller, for that matter, and I think those kind of strategic alternatives is something we'll certainly look at when we see these trends shifting.

But right now, we feel relatively confident, despite the soft patches, and the fits and starts we've had in this cycle, we're still pretty early in the cycle. I'm not suggesting that it's going to last another five years, but I think we've got several good years ahead of us.

If I might add to that, David, just that in terms of the net seller, net buyer, I think in terms of number of assets, Jay, that actually in number of assets we might be selling many more, but it's just the value of the assets. You take our non-core one portfolio, which we consider to be in the market today, and you consider that $180 million to $200 million of hotel value, it's 20 hotels, so if we were to sell that and replace it with three assets in Washington, LA and New York, like the last three we bought, that amounts to about the same amount of capital, but we're selling 20 hotels.

We've identified kind of a non-core two and even a non-core three within our portfolio, so number of assets, we will be very aggressive sellers, I think, across the next couple of years, it's just that we will be likely reloading in some of these very key markets that we think can offer significantly higher growth in our existing portfolio.

Right, and I know we're a minute or two over, but if I can follow that up quickly, when I -- when we saw the most recent acquisition, in terms of size and segment, we were struck by it, the Hyatt Union Square, and I just wanted to hear your thoughts about whether that was opportunistic or whether we should consider that a shift or an evolution of your target strategy in terms of the things you would own?

Would it be reasonable for us to expect another one like that within the next 12 or 18 months?

I think the short answer to the question was that it was very opportunistic. The asset is likely to operate at rates that are more reflective of an upper-upscale or maybe even just slightly below luxury level hotel, and that's going to be largely market-driven, as well as the product is a very attractive product.

But, interestingly enough, the asset, at just under $600,000 per key, fit very, very nicely into our investment criteria. That particular sub-market in New York has a deficit of supply relative to the demand coming into the marketplace. It's a -- the area is growing in importance and convenience as a business location, but despite all of that, I think what's key to remember is, though that asset has a food and beverage operation, it has a lobby lounge and a rooftop bar, it does not have meeting space, and the entire S&B function is most likely to be leased to a well-recognized operator.

So, we're going to be operating the rooms, and I suspect that the margins that we're going to see there are going to be skewing our portfolio up just because of the level of rates we're going to be able to achieve at that property, and the fact that the S&B function is going to be leased.

Great, okay. Thanks very much, guys.

We have no further questions at this time.

Okay, well, I'll thank everyone for being with us this morning. We are around for the remainder of the day if any questions occur to anybody following the call, please feel free to give us a ring here at the offices. Thank you again.

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