Hersha Hospitality Trust (HT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust fourth 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) At this time, I would like to turn the call over to Nikki Sacks of ICR. Please go ahead.

Thank you and good morning, everyone.

I want to remind you 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 Security Exchanges Act of 1934, that is 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. The forward-looking statements involve known and unknown risks and uncertainties, and other factors that may cause the Company's actual results, performance, or 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 to call over to Mr Jay Shah, CEO. Jay?

Thank you, Nikki. Good morning everyone, I am joined on the call today by Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. As is our practice, I'll touch on some highlights from our fourth quarter and 2011 results and then discuss our successful transition to an urban pure play portfolio, our recent transactions and the long-term positive impact on our results. During 20111, we continued to make tremendous progress on our strategy to transform our portfolio as we added five high quality hotels in strategically located urban gateways and entered into an agreement to purchase the Hyatt Union Square in New York City. We further concentrated our presence in our four key Northeastern cities and diversified our holdings by entering into the highly desirable growth markets of Los Angeles and Miami.

Simultaneously, we entered into a transaction to divest 18 assets that we considered non-core and we are pleased to announce that just yesterday afternoon, we closed on 14 of those assets. We anticipate that we will complete the divestiture of the remaining four assets by the end of the first quarter of 2012. With these transactions, the portfolio transformation that we envisioned in 2009 has been largely completed. The result is a portfolio with greater earnings power and growth prospects. Approximately half of our EBITDA now comes from New York City which continues to be one of the strongest markets in the country for us and more than a third from California, Miami, Boston, and Philadelphia, which are all projected to be among the top five markets for RevPAR growth this year. With our presence in these strong growth markets and given the young age of the assets as the hotels continue to mature, we expect we'll drive outsized RevPAR and EBITDA margin performance through this cycle.

In 2011, we recorded the highest EBITDA margins in our history, but there's still room for further margin expansion during this recovery cycle. In many of our core urban markets our rates are still below our peak ADRs that we achieved in 2008. Just as an example, our rates in New York City remain roughly 16% below our previous peak rates while occupancy is approximately the same level as it was in the prior peak. As we get further into this lodging cycle recovery, we anticipate that the majority of our growth across the portfolio will be driven by ADR leading to continued margin expansion. In addition, EBITDA margins should continue to benefit from the stabilization of our young portfolio along with our continued focus on yield management, aggressive asset management and cost controls.

Now, looking at our performance by market, our New York City portfolio and particularly the Manhattan cluster demonstrated its ongoing strength. During the fourth quarter, our same-store Manhattan portfolio realized RevPAR growth of 6.9%. 50% EBITDA margins, that was the result of EBITDA margin growth of 340 basis points. Our broader New York City hotels which includes the five Burroughs realized 6% RevPAR growth. Margins there weighed down by the bankruptcy of American Airlines and the related bad debt expense charge that impacted our two hotels at JFK airport. Nonetheless, we had resulting margin growth of 180 basis points there, the further impact of which will be discussed later in our remarks. There are certainly differing views on New York City's potential to continue at that performance this year, but we think the key is the location, the brand and execution that can really contribute to our performance. To that end, since the end of the first quarter of 2011, the Manhattan sub market has realized RevPAR growth of approximately 7%, while our Manhattan portfolio has realized RevPAR growth of 8.3%.

The first quarter of 2011 was marked by severe weather disruptions and significant renovation activity on our portfolio and our performance was directly impacted by these events. We're recognizing the benefits of these renovations already in 2012 and we have seen very strong results out of our Manhattan cluster thus far in 2012. Year-to-date, our same-store New York hotels have seen RevPAR growth of approximately 17%, and our properties at JFK and Brooklyn are also experiencing significant gains. Even stripping out the renovations properties, the RevPAR growth stood roughly at 12%. While this performance may level off as the year continues on, it is a very strong start to the year. Beyond New York, our best performing markets in the fourth quarter were Boston and Philadelphia which realized RevPAR growth of 16.8% and 16.3% respectively, while growing EBITDA margins by 590 basis points and 420 basis points, respectively. Although the Washington DC cluster only recorded RevPAR growth of 2.9%, we were able to push EBITDA margins by 190 basis points.

Our weakest cluster during the quarter was our Northern California and Arizona cluster, where we had negative RevPAR growth of 3.4%. The operating results for this cluster were negatively impacted by the ongoing renovation work related to the conversion of several of our Hyatt Summerfield Suites properties to the new Hyatt House concept. In terms of our most recent market acquisition the Courtyard Miami a terrific fourth quarter with pro forma RevPAR up almost 22% and our 2012 results for this asset have also remained quite robust. Miami has been and is poised to be one of the top five growth markets in 2012 and our asset management and revenue management capabilities in high demand markets are yielding terrific results at this property. As we have maintained since 2010, our strategy has been to expand our footprint in high barrier, stronger growth gateway cities which are expected to demonstrate above average RevPAR growth in 2012 and beyond. As a result, in addition to our strong New York presence, our collective EBITDA from Boston, Philadelphia, Miami, Washington DC and Los Angeles will now generate approximately 40% of our EBITDA, and we believe our exposure to these markets will clearly further distinguish us from our peers.

Now as we turn to our portfolio activity, with the sale of our non-core portfolio, the bulk of our portfolio transformation has been completed, but we'll continue to monitor our portfolio for other potential dispositions. Just as we have for the past several years, we'll continue to be selective as we seek attractive acquisition opportunities within our urban gateway markets. Looking ahead, while there certainly continues to be some volatility in the macroeconomic environment, albeit at mitigated levels compared to 2011, we remain very encouraged by our prospects. We have an attractive portfolio with very attractive market exposure, strong earnings potential and expanded financial flexibility allowing us to capitalize on the ongoing lodging recovery. I'm now going to turn the call over to Ashish to provide some more details on our operating results and financial position. Ashish?

Thanks, Jay. I'll start by providing some additional detail on operational results for our portfolio. During the fourth quarter, our consolidated hotels realized a RevPAR increase of 8.8% to $116.79. This was driven by ADR growth of 4.1% and a 309 basis point increase in occupancy. These strong top line numbers resulted in a 280 basis point expansion in hotel EBITDA margin and a 26% increase in hotel EBITDA. For the full year, RevPAR for our consolidated hotels was up 7.9% to $113.66, driven by ADR growth of 6.7% and 82 basis points of occupancy growth. In both the fourth quarter and full year, our consolidated portfolio outperformed our same-store portfolio further illustrating the strength of our acquired assets and highlighting the disruption caused by some of the renovation activity in the early part of 2011.

On a same-store basis, RevPAR at our 46 consolidated hotels was up 8.4% to $118.75 driven by a rate increase of 3% and a 368 basis point growth in occupancy. Hotel EBITDA increased 15.6% to $26.8 million and EBITDA margins expanded 260 basis points to 39.7%. As we have for the past several quarters, this EBITDA margin percentage of 39.7% is the highest fourth quarter hotel EBITDA margin that the Company has recorded in our history and it far surpasses the prior peak margin from the fourth quarter of 2007. Excluding the effect of the American Airlines bankruptcy and the related bad debt expense primarily at our two JFK assets, our same-store margins would have increased by an additional 30 basis points to 40% during the quarter. As Jay mentioned, we believe there is still a lot of capacity to drive further margin expansion with rate driven RevPAR growth, our aggressive asset management strategy and the stabilization of our young portfolio.

Our balance sheet continues to be strong as our leverage ratios and cash on hand gives us financial flexibility and liquidity necessary to continue to execute on our business plan. As of December 31, we had $51.9 million in cash and escrow deposits and $51 million drawn on our $250 million line of credit. With the recent refinancing of the Capitol Hill Suites in Washington DC, we have only $52 million of debt maturities in 2012, and our current unencumbered asset base is estimated to be valued at approximately $300 million. Yesterday, we closed on the previously announced sale of 14 of the 18 non-core assets and we expect to complete the sale of the remaining four assets by the end of the first quarter, pending completion of the CMBS loan assumption process. The sale of the 14 assets generated net proceeds of $40.5 million, reduced our consolidated mortgage debt by $42.5 million and reduced our proportionate share of unconsolidated mortgage debt by $13.8 million. We estimate that the four remaining assets will yield another $13.5 million of equity proceeds to us and further reduce our consolidated debt by $19.5 million.

Regarding our capital expenditures for 2011, we completed approximately $26.2 million of capital improvements and ROI projects. As Jay mentioned, we have 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 of recovery. We're currently forecasting our 2012 capital expenditures to be in the range of $25 million to $27 million and approximately 50% of these expenditures are being spent in our Washington DC cluster to capitalize on a soft first and second quarter of 2012. Approximately 65% of our renovation activity is anticipated to be completed by the end of the first quarter and we anticipate that almost 90% of our renovation project will be completed by the middle to end of the second quarter. Although there is likely to be some disruption in the Washington DC cluster due to these renovations, we do not anticipate that the other clusters will be materially impacted during this time period.

In summary, 2011 was a very successful year for Hersha. We have assembled an extremely attractive portfolio, primarily urban assets which generates industry leading EBITDA for room. As our assets continue to mature, we expect that we will extend this out-performance as the cycle progresses. Let me finish by addressing our outlook for 2012. The outlook for the broader macroeconomic environment remains somewhat muted, however, we believe we're extremely well positioned to continue to drive and prove results. Our core urban gateway portfolio now accounts for 90% of our EBITDA and is the strength of these core markets and the quality of our assets that gives us confidence in our outlook. We're introducing our full year 2012 guidance of total consolidated portfolio RevPAR growth in the range of 6% to 8% and same-store RevPAR growth between 5% and 7%. The stronger relative performance of our consolidated portfolio compared to our same-store portfolio further illustrates the benefits of our portfolio evolution strategy and our accretive acquisition.

On a same-store basis, we expect hotel EBITDA margin improvement of 75 to 125 basis points for the year, and these figures do anticipate some disruption from the renovation activity that I previously discussed. In terms of margins for our total portfolio which were industry-leading at 38.6% in 2011, we expect total consolidated portfolio hotel EBITDA margins to be roughly flat as our anticipated improvement in our same-store assets and higher margin acquisitions will likely be offset by the impact of the Hyatt Union Square and Hampton and Pearl Street coming online later this year, in addition to the commencement of operation and ramp up at the Sheraton Wilmington South which came online late in the fourth quarter of 2011. Excluding these three items, we would be forecasting portfolio margin expansion of between 100 to 125 basis points for the total consolidated portfolio. That concludes my formal remarks. Let me turn the call back to Jay at this time.

Okay, thank you Ashish. With that, operator, we can open the line for questions.

(Operator Instructions) Bill Crow, Raymond James.

Start with Ashish. Can you outline uses of capital in 2012 as you see it? I know you referenced CapEx spending for renovations. Can you go through a couple of the large buckets of capital?

Bill, as thought from the CapEx standpoint, do you want me to go to further detail on that or other items?

No, just other items. You have got some commitments for take-out of acquisitions, et cetera.

Yes. Okay, as far as outside of capital expenditures we have -- when we acquire the Hyatt Union Square, we are planning to either assume the $55 million of debt that is on that project and we will need to lay out another $15 million to complete that acquisition of that property. Also the other large financing activity that will require some capital is the commencement of the tower construction in Miami. The total cost on that is about $25 million. So currently, the Miami asset has about $30 million of debt on a roughly $95 million acquisition. Our plan is to refinance that asset. We believe that we could easily refinance in the $60 million to $65 million range. So the refinancing of Miami would really take care of all the proceeds necessary for the tower construction. We are planning to sell one parcel of land that we have in New York. That should free up somewhere between $6 million to $7 million of capital and the only other piece of debt that we have coming due this year is Hotel 373. There's about $22 million outstanding and we anticipate that we would be able to refinance that pretty easily with the same amount of proceeds.

You have no other acquisitions in the pipeline from related parties or anything, right? That pipeline is done?

None from the related party side at this point.

Jay, maybe you could talk about what the acquisition environment looks like for your assets and maybe address specifically Miami and whether given your bullish comments, you want to establish a bigger presence down in that market?

Sure, the acquisition market has probably been somewhat disappointing relative to where sentiment was last year. That being said, we continue to scour these markets to see if there are opportunities to be had. Perhaps as we move further into the year we'll see more opportunities cropping up. As of right now, we haven't been seeing too much product out there. That being said, we have continued to underwrite different opportunities, and we're continuing to look for hotels that fit the criteria of being in one of our strategic markets, properties where we can drive strong margin growth and bring operational advantage to the hotel and where we think that there is going to be strong residual value. So we continue to look but it has been a lot more muted than we had expected.

And as far as your appetite in Miami goes?

Our appetite in Miami is still quite strong. As we look around the Miami market, it's going to be important that we can find an asset where we think that we can really bring some value add to it. So we do continue to look closely at the market.

Then finally from me, congrats on the asset sale announcement yesterday. What are you left with, other than the four assets, as far as non-core assets, and should we anticipate additional sales in 2012?

Bill, this is Ashish. We probably have identified somewhere between 5 and 10 assets that over the next 12 to 24 months we would like to sell. I think that our focus has been, over the last couple of quarters, to really close Miami and to close the sale of these 18 assets. We're almost complete with that. So I think in the early spring we'll consider listing between three and six assets that we still consider non-core.

David Loeb, Baird.

Jay, you threw out a bunch of numbers about New York and I just want to make sure I heard things clearly. You said the Manhattan market is up 7% year-to-date?

No, 17%, that was -- David, the total of New York including Manhattan and the Burroughs is up 17%. 17%, one seven.

So your entire New York City portfolio is up 17%, same-store year-to-date.

Correct.

Okay, so what was the 7% and the 8.3% you said before you said that 17% number?

David, that was Manhattan was up 7% from April 1 through December 31 of 2011 and our portfolio was up 8.3% from April 1 to December 31.

I got it. So 17%, one seven percent for your entire New York City cluster year-to-date and you said 12% without the impact of renovations.

Correct.

That's actually very helpful and really kind of stunning. What is your thought about DC for this year?

Our outlook on DC for this year, I think we're going to be able to outperform the market because we're putting some dollars into renovations in our two -- actually half of the CapEx we're spending this year is going into the DC market. But a lot of those CapEx dollars are going into our two district properties which is the Hampton and the Capitol Hill Suites. Our expectation is to be in the mid to -- just north of the mid single-digits in growth there for the year. In addition to the renovation dollars we're spending, I think that we're going to have some very significant opportunities for share shift there as well. The one hotel, the Capitol Hill Suites, we're really repositioning that with the renovations and the branding we're doing there from a 2.5 to 3-star execution to a 4-star execution and I think that's going to allow us to really drive rate. The demand numbers are pretty good already.

The Hampton Inn, I think also we're going to be able to drive additional rate because of some of the management changes we have made in the last year. Tysons Corner and Alexander are expecting some ups later in the year as well. The BRAC facility is still only 50% occupied which is a stone's throw from the Alexandria Courtyard. We expect and what we are tracking is that it's probably going to be filling up by the second half of the year and I think that will draw some additional demand there. In Tysons Corner, some renovation dollars are going into that hotel. We expect to see some positive impact from that.

So bottom line, you're not overly concerned about that being one of the weaker markets. It sounds like you have got some property-specific stuff going on that should help. Is that the right way to read that?

I think that's right. Yes.

Will Marks, JPM Securities.

A couple things, one on the strength of New York, year-to-date. What is that -- maybe you can give us a sense of the full year outlook in New York and why it would slow from current levels.

Will, we are benefiting from renovation investments we made in those hotels last year. I think in addition to that, we're just seeing some very strong demand in corporate transient coming back there. We're really pleased with our first quarter performance there, but as we have said before, both when we have strong outperformance in the first quarter and sometimes when our performance of the first quarter isn't as strong, that first quarter in New York accounts for a very limited percentage of our EBITDA for the market. And for a 10% quarter, we're hesitant to make real long-term calls for that market for the whole year. I think as we move into the second quarter, booking pace looks very attractive, and we'll keep a real close eye on it. We continue to keep everyone updated and make sure that we're putting out meaningful guidance on the market, but as of right now, it's -- we're hesitant to imagine 17% being sustainable throughout the year.

Okay. Fair enough. And then on the overall guidance maybe both RevPAR and margin. Should we be thinking about any one quarter different from any other?

Will, this is Ashish. I think that obviously our first quarter margins are significantly different. Over the last couple of years, our margins in Quarters 2, 3, and 4 have pretty much leveled out. I think the one quarter where you may see just a little bit of a dip is Quarter 3. Because that is when we're anticipating the Hyatt Union Square and the Pearl Street to both come online sometime around the end of Quarter 2 beginning of Quarter 3.

The RevPAR was pretty consistent. I think there was some pretty good strength in the first quarter.

Yes. There's definitely good strength in the first quarter. Based on our forecast, the RevPAR growth stays pretty consistent throughout.

Okay, then one last question. Based on your asset sales, is there any retrue to valuing your current portfolio, or are those assets that were sold at lower values? Because that is what they were, they weren't quality property you want to hold.

Will, they are just so vastly different from the current portfolio that we have. When you look at it from across the board, really on any metric, you're talking about assets that have RevPARs almost $50 less than the current portfolio assets. Margins that are about a 1,000 basis points different. And these are 12 years old versus -- average 12 years old versus a 6 to 7-year-old asset. What we are selling is really Hersha generation one and we have clearly moved on.

Yes, from a valuation standpoint, Will, there is a significant per key -- there's going to be a significant per key jump in even the implied value based on the current enterprise value. But I think with these assets out, certainly the portfolio is such that you really just given on an overall cap rate applicable to the portfolio, you could expect a -- we would expect a shift.

Smedes Rose, KBW.

I wanted to ask you -- you mentioned that you thought without the new openings ramping up over the course of the year, that same-store margin would be up 100 to 125 basis points. But with your RevPAR guidance that seemed -- feels a little conservative maybe. I was just wondering if you could talk about some of the broader assumptions that you are making to get to those numbers? Then also I wanted to ask you, for your New York hotels, do you have a sense of what percent your customers are from Europe or maybe just outside the US overall, but specifically from Europe and any changes you're seeing from that clientele?

Sure. Smedes, in our New York portfolio, we anticipate that the percentage of foreign travelers is in the teens, and it varies somewhere between mid teens to high teens. What percentage of that is Europe it's difficult to say, but some of our strong markets out of Europe are the UK and Germany. We have been watching that very closely, and despite the events of last year and the real anemic GDP growth in Europe and the overhang in Europe with all the headline risk that was out there, we did not see any meaningful drop-off in European travel inbound. And as we look out to this year, there's been some news of Europe being -- dipping into a slight recession which has been somewhat expected for the last couple of quarters. But you are talking about going from a positive 0.2 GDP growth in the euro zone or the Euro area both, those are both about the same to maybe a negative 0.3 GDP growth. So you're talking about a total swing that is not all that significant. We're not expecting that to have that much of an impact on travel this year.

Now all of that being said, we're seeing -- the largest growing market of international travel in New York has been the South American trade. And that is growing at a very strong pace, almost a double-digit pace. Our view is that even should there be any weakness coming out of Europe down the road, it will most likely be offset by the South American trade that has been growing so well. Then New York has other significant components, probably not as big as Europe and South America. But you have a lot of Asian travel coming into New York as well. From the international travel standpoint, we don't have any real significant concerns. It's giving us that much more confidence in New York. Now getting back to the question on margins. It's interesting, we wanted to be clear in our guidance that we will probably have some weight on the number of basis points of margin growth, but I think it's important to remember there that when you are anticipating a 6% to 8% RevPAR growth, even if you imagine in our portfolio with the margins we already have and the occupancy that we already have, a conservative 50% flow-through. It's easy to anticipate you're going to have EBITDA growth of anywhere from 9% to 11%. So, regardless of the basis points of margin growth, I think we can expect pretty strong absolute EBITDA growth in the coming year.

Tim Wengerd, Deutsche Bank.

I'm wondering if the hotels that are remaining in continuing operations. If you could help us understand the RevPAR for those -- what the RevPAR was for those hotels in the first quarter and second quarter? I know the hotels that you are selling have RevPAR that was quite a bit lower.

It was. I don't have the stripped-out number, Tim, but I can certainly get you that for the first quarter and second quarter of 2011.

Okay. Is there a big difference in margins as well between the hotels that you sold in those quarters?

Absolutely. The assets that we sold, once again, have the basis point difference in margins between what we sold and what's in our portfolio. It's almost a 1,000 basis points of margin.

Okay. Then as far as unconsolidated JV EBITDA for the rest of '12 and how you think about it, how much of an impact will the sale have on unconsolidated JV EBITDA through '12?

We think that by selling the four assets from non-core, it will probably be somewhere in the 10% negative for (inaudible) unconsolidated JV EBITDA. We are expecting solid growth out of our New York joint venture asset and out of some of the full service Connecticut assets and then we'll be consequently losing the EBITDA from these four assets.

Okay. Just overall, I know you mentioned the strong RevPAR in Manhattan. What is the relationship with the brand like as far as amenity creeping in New York and some of these select service assets that are doing really well?

Tim, this is Jay. Across the last several quarters we haven't noticed any significant amenity creep. Some of the amenity creep that might have been discussed or talked about happened as we initiated the recovery. We're not expecting anything extraordinary as we move through the cycle right now. Some of the renovations that we are currently doing at our Hyatt Summerfield Suites which are non-New York hotels. We don't have any Hyatt Summerfield Suites in New York. But the conversion to the Hyatt House is probably the most noteworthy and the somewhat expensive brand standard that we are having to invest in to maintain the brand. And in some of the Courtyard reinventions in the lobby have been somewhat significant dollars. But what we've found generally is that those renovations, despite being brand standards, I think in our markets where we have got a significant enough demand we are able to leverage those investments into higher ADRs. So it has been -- it really hasn't been a negative. It's been generally a net positive for us.

Andrew Didora, Bank of America, Merrill Lynch.

Two quick questions. First for Ashish, are there any additional capital commitments at the Pearl Street asset? Then second, in terms of your capital commitments in 2012 for the Hyatt Union Square and some of the renovation work that you're doing. How do you view the dry powder that you guys might have for any essential deals that might come your way this year?

Sure. Andrew, let me start with Pearl Street. Pearl Street, we acquired the building in 2011. We had about $6 million of capital that we were going to put into it. At this point, we've put about $4 million of capital in. So for the Bill Crow's question, I did forget that one, but there's about $2 million that we would still need to spend on the Hampton Inn Pearl Street. Not that material.

Union Square.

On the Union Square. (multiple speakers) There's dry powder after it, yes. Yes, I think that when you look at the money that is going to be coming, that has come in for the non-core sales and some of the money that will be coming in, I think we feel pretty comfortable that we still have significant dry powder. We're not forecasting the same level of acquisitions that we did in '11 but I certainly think we could do another $100 million of acquisition without feeling any kind of leverage pressure.

Dan Donlan, Janney Capital Markets.

Just going back to New York in 12 % RevPAR growth you guys have seen thus far, can you give us more detail on why you think -- why that's so high relative to the market itself? Are you seeing a trade-down effect given pricing in New York? Is it just that some of these hotels in your areas are under renovation? Why do you think it's so high?

This is Neil. I'm just going to add something that -- I think we have talked about most of the issues, but I think part of it goes to our strategy in New York. One is that the sub-markets that we're in have been relatively strong. Lower Manhattan has been stronger than other parts of Manhattan. Times Square has been stronger than other parts of Manhattan. The second part of strategy is to invest in very new hotels. So we still have a significant amount of ramp-up although New York is a high occupancy market and you can move your occupancy up to 80% within 12 months. To get to your right RevPAR, to get to your right ADR it takes still several years and we have seen that across the last 10, 12 years of investing in New York City that it still does take three, four years to get to a truly stabilized level of performance in New York. So as you look through our Manhattan portfolio, we still have the Times Square trio that is less than two years old and in lower Manhattan our assets, two of our assets there, the Holiday Inn Wall Street and the Holiday Inn Express Wall Street are less than 1.5 years old. So you have a very significant ramp-up affect. And then finally the third thing is that we invest in smaller hotels. These are transient-oriented hotels and they're primarily business transient hotels. And so our experience in New York will be different than the big boxes. There is no room for tour buses on our blocks or in front of our hotels. So it's just a different -- there's no group, there's no -- that lowest end of the leisure market we are not attracting. So it's value-conscious, business transient, and then the leisure transient that is starting to come back in good order domestically. Those three things are driving our out-performance beyond what you might see from our peers.

Is there a [comfortability] with the limited select service hotels being in Manhattan, given that they weren't there for the most part five years ago. Are you starting to -- do you think that is also helping you out a little bit as well?

Absolutely. I think that this strategy, this -- it's not just a great investment strategy. I think it's an amazing opportunity for consumers that they haven't had in New York City in the last -- across the last decade or two. So absolutely, there's a secular shift in business transient customers preferring these smaller hotels where they're not competing with tour groups and conventions to get to their room and have free internet and have the gym and have a new hotel. Absolutely. I think there is a -- people finally in New York now know what a Hampton Inn is or what a Hilton Garden is.

Right.

It's relatively new.

There's been some recent land deals in Manhattan that are supposed to support hotel development. Do you have any idea what these developments are assuming on a price per key basis and maybe what that implies for your value, your Manhattan portfolio?

On the land deals?

Yes.

Let me take one step -- there's the land deals and then there's just the transactions that have been happening on assets. We have seen a lot of limited service and select service assets trade across the last six to nine months in between $400,000 and $500,000 a key. There was a trade at $425,000, a trade at $460,000 and a trade at $480,000 in that select service space. That is a good comp probably for our Hampton Inns and the select service hotels we have there. Independence and upscale assets have been trading. We have seen trades anywhere from $600,000 to $850,000 a key. That's probably a good comp for our independence and our newer upper upscale assets there. Land deals. It's all over the place. You're seeing land deals happen at between $300 and $400 a foot per buildable square foot, depending on whether you're mid block or whether you're on a corner or whether it's on the avenue and what sub market it's in. And that is much better -- it's much more expensive than it was just 1.5 years ago in the throes of the recession. It's very similar to where pricing was in '05 perhaps for land. The cost of construction continues to be better than it was at the peak but still, it is edging up because there is some residential construction happening in New York. From a replacement cost metric, I still think for select service, unless it's a -- unless you bought the land for particularly below market, it is still that $400,000 to $500,000 a key range.

Okay, that's very helpful. A couple more here. New York, the contract with unions, the hotel workers. Jay, I think all your hotels are non-union, just curious how that is going to impact your results versus maybe what you had expected six months ago and how you guys look at your margins relative if they were union verses non-union.

Well, the new contract. I don't know that is going to have any real impact on us. I think generally just from a wages and benefits standpoint, and the reason I don't think it impacts us so much is a lot of the -- there's a significant amount of cost from the these contracts that comes from work rules and various other non-direct economic factors. Because our wages and benefits are at very similar levels to what the union contract would suggest for a select service hotel. But it's all of those work rules. But because we don't have a lot of -- we don't have the complexity in our operations as some of the larger hotels do, the work rules wouldn't really apply to us anyways. So as we look at it, our wages will continue to increase. I think our wages are probably increasing around the same rate as inflation. Benefits are slightly higher. They are growing at a slightly higher rate than inflation. But that is all part of our expectation already. It's built in. That being said, that the impact of a contract on one of these hotels -- we have had various estimates but I don't know that it impacts margins by -- it would certainly be noticeable but it wouldn't be as material as one would imagine just because we don't have the work rule issues.

Okay. That's helpful. And then just last question for Ashish here. Really appreciate the disclosure on page 4. I was just hoping -- I know you have already given us two different metrics for RevPAR growth for 2012, but as we look at your pro forma statistics here, what type of pro forma RevPAR and margin growth are you guys assuming in your outlook?

If you -- when you take a look at page 4, Dan, the numbers pro forma from a RevPAR and margin standpoint are pretty similar to what we did record for 2011 full year. So we believe that the 6% to 8% captures our total portfolio and on a pro forma basis because they're just not that different. The absolute level of RevPAR and the absolute level of margin.

Okay. From a growth standpoint, should we assume that it's going to be flat? With what you've provided there as well or is that going to be up a little more?

From a margin standpoint?

Yes.

Yes. I think that the margins would stay relatively flat in that 38.6% type of range mainly because of the drag of those three assets. So if you took those three assets out we think that we could be almost reaching 40% for the total portfolio.

Right. I guess what I'm saying wouldn't the two hotels since you haven't even -- they're not even up and running, that wouldn't be included in that 38.6% though?

For full year 2012, once they do open they would go into that bucket. Because it will be total portfolio and it will include all assets.

Right. I guess what I'm saying is, taking them out, you would probably have to see margin growth.

Oh, yes, taking them out, we would see 100 to 125 basis points of margin growth.

Nikhil Bhalla, FBR & Company.

Just a follow-up question on the $100 million, Ashish, that you talked about that you have, and available dry powder without stretching the leverage any more. Do you assume any asset sales in there? You talked about two to six assets that may go on the block sometime in spring.

Not so much, Nikhil. I'm just looking at it from a pure swap perspective. We're losing roughly $60 million of consolidated debt when we sell non-core and we're getting in about $54 million of equity. So just from that, we would feel comfortable buying $100 million. It's almost an even swap.

Got it. And if you did sell an additional two to six hotels would you think you'd use the proceeds to de-lever a little bit?

I think so. It wouldn't be generating that much in proceeds. If we sold three to six you may generate $15 million to $25 million.

Okay, and most of that would be probably used to pay down the encumbered debt on those assets.

Yes. You'd use a lot of it. Well, I'm saying net proceeds to us. Equity of $15 million to $25 million. But you can pay down line, you can use it for capital expenditures or some of the capital commitments that we've discussed. So, I think that it's meaningful, but it's not something that we're banking on to really move ahead with our strategic plan.

Then just beyond these three to six assets I think you did mention another number of the number of hotels that you intend to sell. How much was that again?

I think in totality we have identified between 10 and 12 assets.

10 and 12.

Dan Donlan, Janney Capital Markets.

Sorry to be a pest here. But Ashish, going back to page 4, do you happen to have what that is on a quarterly basis for 2011 in front of you and maybe just to be quick here, just give us what the RevPAR would have been by quarter, the EBITDA and the EBITDA margins?

Unfortunately, Dan I don't have pro forma by quarter in front of me, but we can certainly get that to you.

And at this time with no further questions, I would like to turn the conference back to Jay Shah for any additional or closing remarks.

Okay, thank you. I want to thank everyone for your continued support and thank you for being with us this morning. Neil, Ashish and I will be in the office all day if any questions occur to anybody post-call. Please feel free to call us at the office. Thank you again.

This concludes today's conference call. We thank you for your participation.