Hersha Hospitality Trust (HT) 2011 Q3 法說會逐字稿

Please stand by. Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust third quarter 2011 earnings conference call. Today's call is being recorded. 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 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 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's trends and expectations, including the Company's anticipated results of operations through capital investments. These forward-looking statements involve known and unknown risks and 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, CEO. Jay?

Thank you, Nikki. Good morning, everyone. I'm joined on the call by Neil Shah, our President and Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. I'll touch upon some of the highlights of our strong third quarter results, and discuss the ongoing strategic transition of our portfolio and the long-term positive impact on our results from it.

Our portfolio and our balance sheet look notably different today than they did only a couple of years ago. We've improved our portfolio with respect to quality, location, age and management efficiency and just as importantly, we've also simultaneously solidified our balance sheet.

First, in terms of our quarterly results, in the third quarter, our portfolio delivered industry-leading results with strong ADR-driven revPAR growth and solid EBITDA margin expansion, resulting in EBITDA margins that were amongst the highest in our industry. Hotel EBITDA grew by an extremely strong 24% and we expanded our Hotel EBITDA margins by 220 basis points to 41.7%. These margins are evidence of the evolution of our portfolio and I'm confident that we still have significant runway for further improvement as our young portfolio stabilizes and as the lodging recovery continues.

The strength in the quarter was broad based and stretched across the majority of our portfolio. Our New York, Boston, Philadelphia and Los Angeles clusters all registered revPAR growth in excess of 8% and our same-store New York City hotels grew revPAR by 9.7% versus the New York City market growth of 8.2%. As our New York City hotels stabilized, we expect continued out-performance from them, given the strength of the city. The Washington, DC, cluster, however, was challenged, but was in line with market growth rates for that region.

The steps we have been taking over the past few years to realign our portfolio to focus on high-barrier urban gateway markets, along with aggressive asset management and cost controls, positions us well to continue to outperform.

During the quarter, we took another meaningful step in this evolution, as we announced the expected sale of 18 non-core assets for approximately $155 million. This ongoing realignment of our portfolio towards urban gateway markets with higher growth opportunities is resulting in higher revPAR, improved hotel EBITDA margins, lower [set], and a higher net asset value for the entire portfolio.

For the third quarter, ADR for the non-core hotels being sold was approximately 30% less than the ADR for the remainder of the consolidated portfolio, while hotel EBITDA margins were approximately 700 basis points less than the hotel EBITDA margins for the remainder of the consolidated portfolio.

From a quality, location and age perspective, we are pleased with our portfolio and pro forma for the non-core disposition. Our five key urban gateway markets will comprise approximately 86% of our annualized EBITDA.

We took advantage of the volatility during the recession to fortify our purpose-built urban-centric portfolio and the existing market conditions at that time allowed us to add to our portfolio at an extremely attractive basis. It's a portfolio with significantly higher earnings potential and we are confident that great value is yet to be unlocked. We have significant operating leverage in our model and will continue to realize its benefits in the improving lodging environment.

Let me turn to the macro environment before I hand it over to Ashish to provide more financial details. While there certainly have been fits and starts in the overall economy, we're encouraged by the improving levels of capital investment and corporate profit in our markets. The demand outlook continues to remain positive.

Corporate transient guests are a high proportion of our mix and we are encouraged by the relative strength we are seeing in this segment.

In terms of supply, new lodging supply across the country is minimal, with less than 1% new supply expected to come online in 2012. Specific to our biggest market, New York, on the surface, the supply picture looks slightly less attractive. However, when examined closer, there are several reasons why it does not give us significant concern. First, last year, New York City absorbed a 10% increase in supply. At the same time, Hersha's New York portfolio maintained occupancy near 90% and delivered revPAR growth of almost 13% and this was during an arguably more uncertain lodging environment.

Outside of the first quarter, the absolute demand levels for hotel rooms in New York remains very high and the number of sellout nights in New York tend to under-represent and obscure the true demand growth in New York.

Second, although there is new supply coming online over the next two years, we believe that some of the delivery dates and the projections are somewhat aggressive. Over the next two years, we believe that new supply growth should approximate between 2% and 3% and we believe that it will be at the lower end of that range. We believe that it will be quickly absorbed, as we've seen in the past.

Third is the composition of our portfolio, both type and location. Much of the anticipated new supply is not in our sub-markets, nor is it in our limited and select service asset type. We continue to watch supply growth closely, but believe the overall supply-demand dynamic in our sector is very favorable across the coming cycle.

With respect to new growth opportunities, we continue to believe that the market volatility and continued capital market turbulence may provide additional opportunities in the coming year and we'll continue to be extremely selective and disciplined in approaching those.

We are pleased with our recent move into the Los Angeles market and we'll continue to be opportunistic for the right assets in similar types of markets.

While I anticipate there might still be some near term volatility quarter-to-quarter, as macro factors are being resolved, I'm very encouraged by Hersha's prospects. We have an attractive portfolio, an improved cost structure, and expanded financial flexibility, making Hersha ideally positioned to capitalize on the ongoing lodging recovery.

Now, let me turn the call over to Ashish to provide some more details on our operating results and financial position.

Thanks, Jay. Let me start by providing some additional detail on the operational results of our portfolio. As a reminder, the operating statistics and guidance that I'll discuss excludes the results for the 18 assets currently held for sale and accounted for as continued operations.

RevPAR for our total consolidated portfolio increased 8.3% during the third quarter, primarily driven by rate growth as ADR increased 6.9%, while occupancy improved 104 basis points to 80.7%. On a same-store basis, we also drove revPAR growth of 8.3% in the third quarter, once again primarily driven by ADR growth of 6.5%, as occupancy increased 129 basis points to 81.6%.

The encouraging results of this high occupancy and ADR-driven growth (inaudible) to our portfolio is the positive impact it continues to have on our Hotel EBITDA margins. Our total portfolio margins expanded by 220 basis points to 41.7%, while our same-store margins expanded by 240 basis points to 42.3%.

Our urban focus portfolio high occupancy rates and ADR-led growth have allowed us to surpass the prior peak margins in our same-store EBITDA margin of 42.3%. It's the highest operating margin we've registered in any quarter in our history. We believe that the portfolio still has significant runway to drive margins, as the cycle progresses. Our margin growth should benefit from our changing portfolio mix of hotels that runs higher absolute margins, in addition to the growth that is forecasted to come from the stabilization of our newer and renovated assets, especially in New York City.

In addition, as the portfolio mix continues to change, quarters two, three and four should now have occupancies close to, or north of, 80%, leading to ADR-driven revPAR growth and stronger flow-throughs.

One example of our potential to drive margins is evident when you look at the seven New York City hotels that we owned in the third quarter of 2008 that are still in our portfolio today. For the third quarter of 2011, those seven assets are running in ADRs that is still 14.3% lower than in 2008 and their hotel EBITDA margins are 270 basis points lower than their peak margins in the third quarter of 2008.

Turning to our financial position, the balance sheet continues to be strong and our leveraged profile allows us the financial flexibility and liquidity necessary to execute on our business plan. We have significant capacity for additional investments, should the opportunity present itself, with $94.8 million in cash and escrow deposits, and only $29 million drawn on our $250 million line of credit. Additionally, there are no current debt maturities due for the remainder of 2011 and our 2012 maturities are very manageable. We currently estimate that the Company's current unencumbered asset base is estimated to be valued at approximately $300 million.

In terms of financing activity during the quarter, we entered into a $30 million mortgage loan secured by the Courtyard in Los Angeles. The new mortgage loan bears interest at a fixed rate of approximately 4.95% and matures in 2015. We also refinanced the $11.9 million land loan on our 8th Avenue land parcel in New York City for two additional years.

For 2011, we plan to complete approximately $24 million of capital improvements and we've spent approximately $21 million through the end of the third quarter. We've already seen the positive impact from these expenditures in our operating results and we will continue to pursue additional renovations and ROI projects in 2012 in order to gain market share and to drive operating results as we get deeper into the lodging cycle recovery.

We currently anticipate our 2012 capital expenditures to be in line with that of the current year and we'll seek to minimize the disruption from these renovations as much as possible. Based upon the seasonality in our portfolio and the low level of EBITDA contribution form the first quarter, we are currently mobilizing our capital expenditures team to ensure that a substantial portion of our capital spend is commenced in the fourth quarter and completed by the end of the first quarter of 2012.

Let me finish by addressing our outlook for the remainder of 2011. Despite macroeconomic concerns, we're pleased to continue strong demand in our core markets of New York, Boston, Philadelphia and Los Angeles, which should provide the opportunity for continued ADR-driven revPAR growth this year.

So we still have some short-term concerns in the Washington, DC, market, and we anticipate improved fourth quarter results there as well, due to the fourth quarter convention calendar and we remain very optimistic about the market's long-term potential.

For our portfolio of consolidated hotels, our full year guidance for revPAR growth for 2011 is in the range of 7% to 8%, while same-store revPAR growth is between 5% and 6%. The remainder of our guidance is detailed in our earnings release.

That concludes my formal remarks and I'll now turn the call back over to Jay.

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

(Operator Instructions) And we'll go first to Bill Crow of Raymond James.

Good morning, guys.

Hi, Bill.

A couple of questions for you -- when you were talking about the supply additions in New York and it's ability to withstand that, you did carve out the first quarter. Do you think it's possible that as we think about 2012, we again see that weakness in New York in the first quarter as demand kind of lags that new supply?

Bill, this is Neil Shah here. Hey, Bill, I think that first quarter is just the lightest quarter in New York and it's so significantly so that anything that is disruptive, we do feel it will have an impact on. Last year, it was kind of doubly worse because in a handful of our markets, we had highly competitive branded limited-service hotels open in our markets, so it made it doubly difficult last first quarter.

As we come into the next first quarter, depending on whether these hotels get done or not, there's two or three that are opening, a Wyndham Garden and a Holiday Inn and a Howard Johnson's, that are relatively close to some of our Chelsea and Herald Square properties.

We are not expecting to have the kind of impact we did last year from the new (inaudible). It's just less relevant new supply and our hotels, I think, at post-renovation, are in an even better position to continue to gain market share. So overall, we find, compared to the rest of the country, there's absolutely more supply in New York. If we're less than 1% across the country, I think, in New York City, we're projecting somewhere in the mid-2's for next year and mid-3's for 2013, still well underneath the expectations for demand growth in these markets.

And that goes really submarket to submarket. You have to look at it pretty carefully, but generally, at this point in time relative to six months ago, we feel confident to say that the supply picture is relatively benign relative to demand growth.

That's helpful. And I may stay with you, Neil, here or maybe Jay wants to jump on, but if you could just kind of give us an update on the portfolio sale as far as whether there's adverse material change provisions, whether there's been any discussion at all. We've seen the financing market weaken a little bit since this deal was announced and certainly, the macro clouds have at least been as strong or as dark as they were back then. And then the second part of the question is beyond the 18 assets in this sale, how many additional assets would you classify as non-core that you might look to sell?

Bill, this is Jay. I think the latter part of your question, I mean, is all very true. There certainly has been a lot of atmospheric pressure on the markets. We have been in contact with the buyers of this portfolio and as of right now, everything appears to be moving along fine. The only reason that we haven't had the pleasure of announcing a closing yet is that the financing that is being assumed on many of these hotels is taking a little longer than we would like, but not atypically so from many other financing assumptions that we've seen across the last six months to a year. So everything is moving along fine.

With regard to your question about whether or not there's a mac clause in the agreement that could be invoked in our agreement, there is no mac clause. We have a hard deposit in place and as I mentioned, we've been working very closely with the buyer and the buyer's asset management teams on closing the transaction.

Great. And then finally for me, Jay, I've got to ask you, now that we're toward the end of '11, if you could just give us your opinion on how you see the industry shaping up for '12 and maybe how you think your relative performance against that, the industry benchmark?

Absolutely. This has been an interesting year and as we've followed our fundamental growth through the year, it certainly does give rise to the question of how will things play out in the coming year. Generally speaking, I think we feel very good about the accelerating growth fundamentals that we saw through 2011. Our expectation for 2012 remains very optimistic. Our optimism is based on a few things.

I think when you look at the GDP numbers, there's clearly a possibility that that number could stay where it's at 2.5% or slip or have volatility, but when we look behind that GDP number, and look at some of the components of GDP that are drivers for us, gross private domestic investment, which is a metric that measures investment by companies in leasehold improvements, in real estate purchases for the sole purpose of single-tenant occupancy, investment in inventory, investments in capital equipment, has been very strong through the year. It's been well north of 10%.

We've also noticed that corporate profit growth, depending on who you want to believe, is somewhere around 5% to 8% and we would expect to see strength in those numbers going into the coming year.

Unemployment obviously continues to give concern, I think, to the business community in general. However, we note that for a good amount of the business transient public, those that are over the age of 25 with a four-year college degree, the unemployment rate is extremely low, around 4.3%, what we deem to be almost full (inaudible) employment.

So quite simply put, we look at it as the people that are traveling to our hotels are in fact employed and the people that are paying the room rates and our ADRs are investing in their companies' either growth or in their companies' ability to shift market share. And so we expect into 2012, the business transient markets to hold up and we're optimistic about the coming year.

Great. Thank you.

We'll take our next question from Shaun Kelley, Bank of America Merrill Lynch.

Hi, Good morning, guys. This is actually Andrew for Shaun. I just wanted to get your thoughts here in terms of your margin structure now post the portfolio sale. Would you happen to have what your property level margins would have looked like last year excluding this portfolio and then what your margin guidance would have looked like for this year excluding that as well?

Hey, Andrew, this is Ashish. I don't have last year's numbers excluding the non-core handy with me. I think for this year, you'll see that our margin guidance was tightened for the total portfolio to 125 to 150 basis points. So that guidance is exclusive of the non-core portfolio and it's toward the high end of where we had guided to earlier in the year.

Okay, got it. And then just in terms of thoughts on where you think you can take margins in a strong rate environment over the next -- call it two years, do you still think there's a lot of improvement opportunities and is it just really from the rate side or is there more that you can get maybe on the cost side as well?

Yes, I think this goes back to some of my comments on sort of New York City assets from 2008 to today, where it is -- a lot of it is going to be driven by rates because when you're running 88%, 90%-plus occupancies in quarters two, three and four, every rate dollar, you should have a flow-through somewhere between 70% and 80% and it's very high-rated business as well.

In addition to that, you have the portfolio mix changing, so more of the EBITDA is coming from Boston, New York and LA. So if you just look at where margins could be, I mean, New York is still -- mentioned 270 basis points off from '08. We don't think that's unachievable if you look out over the next two years.

Okay. That's helpful, guys, thank you.

Thanks, Andrew.

Our next question will come from Ryan Meliker at Morgan Stanley.

Good morning, guys, just a couple of quick questions. First, with regards to the portfolio sale, can you just talk about kind of how the process went and was Starwood Capital really the only buyer you were discussing -- you were talking with or were there others? And the reason why I ask is obviously, there's an affiliation with Hersha and (inaudible) the management and I just wanted to clear the air that there was full diligence being done in terms of disposition.

And the second question I had was following the portfolio sale, you talked about 86% of your EBITDA coming from the four core gateway markets that you're focused on, but can you break it down for me the like CDD locations, urban-centric you talked about New York and some market-specific issues? I'm just thinking urban versus suburban and secondary submarkets in those gateway markets, what percentage of your EBIT is coming from those? That would be helpful also. Thank you.

Sure. Let me talk about the process that we pursued in the disposition of this portfolio and then I'll let Ashish talk to you a little bit about breakdowns on EBITDA directionally. As far as the process goes, we worked with four separate brokers and broke the non-core portfolio into sort of four sub-portfolios for marketing purposes. We received bids from numerous buyers for each of the sub-portfolios or portions of the portfolios and just for the purpose of my comment, let's call them sort of the retail buyers.

We also, at the time, received three bids for a wholesale execution and you could imagine when you're working on a disposition of so many hotels of relatively smaller value than we have been investing in recently, a wholesale execution was the preferred execution from our standpoint. We took the two bids on the wholesale execution that were coming in closest to a consolidation of all the retail bids. So in other words, if we were to conglomerate all the retail bids and assume that we would have 100% execution on that sort of a sale, what the total dollars would have been.

We worked first with a firm that was different than the current buyer of the portfolio, different from Starwood Capital Group. We had maintained all along the process that this was going to be a very short due diligence process with had money going up at the conclusion of it. The first group was a strong group. They were a private equity platform and they went through the due diligence process in about four weeks, and when the time came to make the final deposit, their capital was not committed.

So at that point, we explained to the folks that we needed to stand hard on our due diligence expectations because of the volatility in the markets and because we wanted to have as expeditious an execution as we could, they understood and they went on standby and continued to work on pulling their capital together.

At that point, we went to Starwood Capital Group that had come into the process maybe a week or so later, but at the exact same bid. They completed a due diligence in three and a half weeks and they came in with a deposit that was 60% higher than what the first buyer was going to put down. Their capital was committed at the conclusion of the due diligence process. They made a hard deposit and that's when we selected that as the execution that we are going to pursue.

So it was -- this process started in April, if I'm not mistaken, and it was not until August that we were in a position to execute a definitive purchase and sale agreement, but the process was very robust and I think in our view, yielded a very strong result.

Great, That's helpful. Thanks a lot. It's good to hear that it was publicly marketed and Starwood Capital ended up not being the only potential buyer, given the affiliation, that there were others who were looking at (inaudible). Then on the EBITDA breakdown?

Yes, on the EBITDA breakdown, just so I understand right, I think that of the 86%, you would look at something like in New York and (inaudible) exclude the airport, the two JFK properties.

Exactly.

Is that right?

Yes.

So if you take that 86% for our five core markets, I think if you exclude like for New York JFK, Boston to Cambridge, Brookline, Boston, and keep DC into the urban core, I think we're probably around 65% to 68% comes from the urban core.

Wonderful. That's what I wanted to know. Thanks a lot.

Okay.

And moving on, we'll go to Daniel Donlan of Janney Capital Markets.

Thank you and Good morning.

Good morning, Dan.

Good morning, Dan.

Just curious, could you talk a little bit about the seasonality of the 18 held for sale assets? Is it similar to the portfolio as a whole?

Okay, and this is Ashish. Of the -- for the 18 non-core, they are much more seasonal in that probably 70% of their earnings are generated in quarters two and three. The rest of the portfolio does benefit from a strong -- New York clearly has its strongest quarter in the fourth quarter and most of the other markets, the business activity continues well into November. So I think that with these 18 assets going out, you should see a stronger quarter four going forward and quarter one still remaining pretty weak.

Okay. And then just curious, moving to New York, do you guys have the monthly revPAR growth for the quarter and do you have any preliminary indications of how October is trending?

Yes, you wanted monthly revPAR growth for third quarter?

Yes, for the New York portfolio.

For the New York portfolio, absolutely. So for the third quarter, we had revPAR growth in July of 6.2%, in August of 10.2% and in September of 12.1%.

Okay.

October at this point is probably right around 6%. It was a little bit weaker because of the Jewish holidays falling in the early part of October and I think September also benefited from that move.

Okay. And then just sticking with the New York hotels, have you started to see any tradedown impact like the business transient segment moving from some of the full-service assets into some -- into your product type? And then maybe do you have where this -- I think you said seven or eight assets that you ended 2008. Do you have kind of what their mix was in the third quarter versus kind of where the mix is now, business versus leisure.

I could start on the first part at least, Daniel. This is Neil. I would say that there's surely some tradedown happening, but I think it's more interesting. I think it's just the kind of changing customer taste and preferences kind of across the country, as well as in New York, because we're not necessarily charging that much less for our room than the upper upscale competitors or large big-box hotels, but we are finding more and more business travelers comfortable with staying in select service hotels when they're in New York.

As you know, across the nation, 35% of the room supply is limited service. In New York, it's still only 20% and I think that will continue to grow over time, or at least of our share of the business travel market will continue to grow. I think we've traditionally in Manhattan been 70%, 75% corporate and that was probably the case in 2006, 2007 as well. We may have more financial services and other kind of corporates that are using our hotels now than three or four years ago, but I don't think it's as much as of a trading-down effect as it is this is purpose-built select service hotels. Kind of -- unless you're in the luxury space, they're kind of better to stay at when you're in town for a stay.

Great, okay. That's very helpful. And then just moving to the renovations, where are those renovations going to take place in 2012? Is it still going to be in New York or is it going to be in other locales?

Sure, Dan. There's just a few renovations happening in New York in 2012, not anywhere near the extent of what we had in 2011. We have a few properties being renovated in the Washington, DC, cluster and then a big portion of the renovations is the conversion of three of our highest (inaudible) to the new Hyde House product. So those are in [Pleasanton], Gaithersburg and Bridgewater.

Okay. So the disruption won't be nearly as much as it was last [time]?

No, we don't believe that it will be.

Okay. And then lastly, the Hyatt Union Square development, is it still looking like a mid-2012 delivery?

That's correct, Dan. We are expecting that to be a mid-2012 delivery. As of right now, our monitoring of the project shows us that they are on schedule for that date. They're ahead of schedule on the rooms tower and on schedule for the pubic areas and the restaurant space.

Okay. Thank you.

And going next to [Rushan Rushur] with JMP Securities.

Hi, actually, my questions have been answered. Thank you.

And we'll take a question from Smedes Rose of KBW.

Hi, thanks. You mentioned in your opening remarks, it sounds like you're fairly open to doing more transactions, acquiring more hotels, and I was just wondering if there's particularly markets that you're focused on at this point and what's kind of the transaction market look like out there in terms of any movement in cap rates or any other color you can provide?

Yes, Smedes, let me talk a little bit about our current thoughts on acquisitions and I can turn it to Neil to give some color generally on the transaction market. Across the last couple of years, I think we've made some terrific purchases, but we've pursued a very, very disciplined strategy and some very tight investment criteria in making those purchases. We've been extremely selective.

And I think with the volatility we're seeing in the equity markets right now, I think we've even heightened our level of selectiveness to nosebleed levels. We had been looking at several assets in existing clusters that we have and ultimately decided that we were not going to move forward with those. There were a couple of assets in the pipeline that were a little further along and we'll continue to look very closely at those across the coming weeks and months.

As far as markets that we're focused on, I think we're continuing to focus on the existing markets in our portfolio. We're seeing very strong growth there and our expectation for the demand growth CAGRs across the next three to four years in those markets gives us great conviction in them. Los Angeles, New York City, Boston are very strong.

The only additional market that we would -- that we have been looking at closely outside of our existing clusters is the Miami market. That's a market that has -- that's displayed some very strong growth fundamentals and we expect that to continue. The supply picture there is very attractive as well.

So I guess just to summarize everything I just talked about, I think we've been very selective to date. I think based on where the equity capital markets are, we're even more selective and we'll continue to focus on the markets that we're in and we continue to look at Miami.

Okay, thanks.

I might just a little bit to that, just mention that I think LA is a great kind of example for us. It took us five years-plus to make it out to the Los Angeles marketplace. We've been looking for years, but what was it that was very compelling was high barriers to entry, great growth dynamics, historically very high revPARs and the ability for us to outperform the existing kind of inherent growth in our existing portfolio.

I think we mentioned a couple of times here in the call that we're really also -- we're looking for great markets, but then we're also really looking for an operator's advantage in these markets. And that's why we've been hesitant in markets like San Francisco, for example, where we're not sure we could exert the kind of operating leverage that would be required. LA has been just kind of textbook really for us. We've only owned it for five or six months now, but for the last three months, revPAR has grown by 14%. That's by 400 basis points higher than the marketplace, and while we did that, which was through a kind of selling strategy and sales efforts, we were also able to have 76% flow-through, moving the gross operating profit margin up to like 45%.

So it's those kind of opportunities where you could have great growth, where there's an opportunity for revenue management to lead the growth and for us to be able to put in the scale efficiencies, as well as the operating rigor that we've learned on the East Coast. It helps that Culver City on the west side of LA is a great growing, booming market, but it's the operator's advantage that's very important to us.

Okay. Thank you.

And well take our next question from [Mikel Bullett] with FDR.

Hi, Good morning, guys.

Good morning, Mikel.

Good morning, thank you. A couple of questions for you -- in terms of New York City, the 1Q next year, did your hotels have some kind of -- some level of a storm-related impact on like ice storm related impact last year? So maybe 1Q may be a slightly easier comp for you. That's one. And then the second question I have is, if you just look at the demand side, if you can just help explain a little bit, the behavior of demand as it pertains to the upper upscale hotels in New York versus the select service hotels in New York. Thank you.

Sure. Mikel, last year, we did have significant weather-related disruptions in our first quarter demand patterns. In addition, we had a lot of renovations going on at the same time. I think that your point is accurate. I think coming into the coming first quarter, we certainly don't expect to have the same weather disruptions and that will make the comp somewhat easier. I think it'll be made -- I think we have the opportunity also to have an easier comp because we have a lot less renovations going on.

That being said, the first quarter -- and I caution everyone, in our markets that first quarter is a light-demand quarter generally for us. It comprises only about 12% or so of our annual EBITDA and so you tend to see real amplifications of any disruptions in demand patterns, but certainly, barring the storms of last year and the renovations that we were executing in New York last year, we look forward to a more eventless first quarter.

As far as demand patterns at the upper upscale peers of ours in New York City particularly, and as well as elsewhere, what I think your question was, can you talk about the distinction in demand patterns? I think there's a couple of points to mention. First of all, the upper upscale peers still have a pretty heavy reliance on group business and I think a lot of the ability to yield the larger upper upscale houses and to drive operating leverage at those properties comes from the ability to really boost their group booking patterns and the group guest mix that they have.

So when we look at our hotels, I think the advantage that we have is that our houses are generally -- they're generally smaller by -- relative to inventory sizes and they're fully transient. We have a very low reliance on group booking patterns. So we're able to yield our inventory a little more responsibly because we're not relying on group business to build a base and then yielding the remainder. We're yielding the entire house from the date the inventory is available on our systems.

And second of all, I think the business transient customer is something that we're able to take advantage of on a real-time basis. As their demand grows, we see a very direct correlation in how we do.

Got it. Thank you very much.

And we'll go next to David Katz of Jefferies & Company.

Hi, Good morning. If we can just go back to the issue of respectively selling more properties, and I know the posture is to keep trading the portfolio up, but if you can tie that in with what you're seeing out there in the environment and how you think about timing any further divestitures, that would be helpful, please.

Sure. David, we have -- even before we marketed this non-core portfolio for sale, we were selling two to five hotels a year, non-core hotels a year in individual transactions or in sort of onesies and twosies-type transactions. I think as we move forward into 2012 and the subsequent years in the cycle, we'll likely continue that pattern, three to five hotels a year, if we continue to dispose of, I think, in the next two to three years, we'll have really tightened our pure-play focus even further.

As far as market timing goes, we're seeing very, very robust growth in our gateway markets and that's apparent from our numbers. That being said, even the non-core markets are seeing some growth and I think we're going to have -- certainly, it's not as robust as 7%, 8%, 9%, but there is growth there and I think if we were able to sell a couple of hotels a year across the last three years at very attractive cap rates, I think we're going to have even a better opportunity to do that in the coming two to three years.

Got it. So a few hotels a year over the next couple of years. And I asked the question from the perspective that we've heard different messages specifically about the limited service transaction market. Some have been quite a bit more positive about the opportunity to trade than others, but it sounds like you would consider it relatively fertile at this point.

Yes, exactly. I mean, it's certainly not the most fertile markets we've seen in the past and, yes, it has to do with how much leverage folks are able to put on these assets, but on the other hand, we're noticing that a lot of private equity and private buyers are seeing values in the secondary markets and markets that we deem to be non-core with brands that we deem to be non-core.

I think the view there is you're able to buy it at an attractive yield, even if you're underwritten growth rate is sort of mid-to-low single-digits, when the debt markets come back, these assets present themselves as very strong debt platforms and you can actually [sell] for private equity type of return on equity numbers and IRRs.

Got it.

Yes, a fully functioning CMBS market will increase values in this space probably, so there is reason to wait a little bit, but I think there are buyers today. I think absolute return buyers, I think we'll probably see more hedge funds get into the space as well because there is good cash flow characteristics which just aren't available in other marketplaces right now.

Got it. Thank you very much.

And since there are no further questions, I'll turn it back over to management for closing remarks.

Thank you, Operator. Once again, let us thank you all for being with us this morning and we appreciate your continuing interest. Neil, Ashish and I will be available for the remainder of the day. If any questions occur to anyone after the call, please feel to ring us herein the office. Thank you and have a great day.

And once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.