Hersha Hospitality Trust (HT) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust first-quarter 2013 earnings conference call. Today's conference 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 conference over to Nikki Sacks with 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 Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

These forward-looking statements reflect Hersha Hospitality Trust's trends and expectations, including the Company's anticipated results of operations through capital investments. 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 the call over to Mr. Jay Shah, CEO.

Thank you, Nikki, and good morning, everyone. Welcome to our first-quarter 2013 earnings call. Neil Shah, our Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer, join me on the call this morning. As we typically do, I'll begin by discussing our first-quarter results and then provide some specific market and industry commentary.

We were very pleased by the strength of our portfolio in the first quarter, as we outperformed the competitive sets in virtually all of our markets and delivered industry-leading results. Our first-quarter consolidated and same-store RevPAR increased by 12% and 12.4%, respectively, driven by gains in both occupancy and rate.

As we discussed on our year-end call, we took advantage of the typical first-quarter seasonal softness in our portfolio by completing the majority of our 2013 renovation plans in the quarter. Our results reflect the impact of the ongoing renovations at 10 of our hotels and the disruption from the new tower construction at our Courtyard Miami Beach. Excluding the renovation and construction disruption, our first-quarter consolidated and same-store RevPAR was up 14.4% and 16%, respectively.

Also interesting to note is that during the quarter 24 of our 56 consolidated hotels, or 42% of our portfolio hotels, realized double-digit RevPAR growth. Equally encouraging was the distribution of these 24 hotels across our markets, including properties in Boston, Washington, DC, and Philadelphia, in addition to New York. These strong results continue to validate our strategy of assembling a portfolio of young, urban transient hotels in US gateway markets. Our hotels, combined with our aggressive management and value add ROI projects, position us for many strong quarters in the years to come.

In New York City and Manhattan, we reported same-store RevPAR growth of 14.1% and 7.8%, respectively. And New York City urban results were driven by the strength of our Manhattan properties and also benefited from the residual effects of Hurricane-Sandy-related relief efforts at our JFK properties. The Manhattan portfolio did not derive material from the Sandy relief efforts in the first quarter, and was further negatively impacted by the renovations at two of our Manhattan hotels. Excluding the renovation hotels, Manhattan same-store growth was 10.6%, with 130 basis points increase in EBITDA margin.

Year to date, the overall New York City results have been quite encouraging and, although group pace is flat to down in quarters 2 and 3, we are seeing strong business transient and leisure demand across all segments. The New York area airports have experienced strong year-over-year growth led by international arrivals, which are up 4.9%, while domestic arrivals increased by 2.5% in the first quarter of 2013.

Our hotels benefited from this strong international demand and we estimate that approximately 19.3% of our total room revenue in New York City was driven by demand from international travelers, up 14% from last year's first quarter. Top revenue-generating countries for our portfolio include the UK, Brazil, Canada and France, with the contribution from Brazil increasing by over 100% in the last 18 months. The Eurozone represented approximately 3% of total New York room revenue in the first quarter of '13 and the weakness out of these regions is being absorbed by the Asian and South American travelers, as record numbers of families emerge into the middle class for the first time and view New York City as a primary international destination.

From the standpoint of supply growth, we anticipate that 2013 growth in New York will range between 2.5% and 3%. We monitor supply growth in New York very carefully and believe that New York construction delays are consistently underestimated. We are also beginning to see developable land parcels becoming more attractive to multifamily developers rather than hotel developers, given the strength in the residential market in Manhattan. We track land prices and, based upon most recent trades, we estimated that quality land parcels are being priced at approximately $350 to $400 per billable square foot, with premium parcels north of $500 per square foot.

Finally, we're pleased to report that our brand new, 178-room Hyatt Union Square had a soft opening last week and the hotel is scheduled for a full opening on May 13. The Union Square market is extremely vibrant and has seen no new inventory in the past 10 years. We are very pleased by the reception that the hotel has received so far and believe it will be a strong contributor to our portfolio for years to come.

In Washington, DC, which accounts for roughly 11% of our EBITDA, we recorded same-store growth of 22.6% and 11.3% RevPAR in our DC urban and metro portfolio. Respectively, these strong results were driven by demand associated with the presidential inauguration and a positive year-over-year comparison, as a majority of our DC hotels were under renovation during the first quarter of 2012.

We are extremely pleased with our hotels' performance during the quarter, but the outsized growth is not indicative of our expectations for the full year in Washington, DC. For the past several quarters the tepid economic environment in Washington has been impacting budgets, and although we didn't realize any impact from sequestration in the first quarter, we are seeing some small group cancellations from federal- and state-funded agencies. Despite our offsetting revenue management strategies, we are likely to see less robust growth from Washington for the remainder of the year.

On the topic of sequestration, outside of our urban and metro DC markets, only 2% to 3% of our business is government or government-related and therefore we anticipated limited impact from sequestration across the rest of our portfolio.

The Boston market has remained strong, as we recorded RevPAR growth of 10.7%, which was 540 basis points above the competitive set. Boston remains a growth market for us and, while group pace is down due to a weaker convention calendar, we have limited group exposure in this market and we believe that the city's diverse economy and transient demand will fuel continued growth there.

In Philadelphia we realized RevPAR growth of 5.5% in both our urban and metro portfolios. Although second-quarter transient demand should be bolstered by the US Open golf tournament at Merion in June, the group pace is inconsistent, which takes away the opportunity for us to drive pricing during compression nights. And, therefore, we believe that the portfolio in Philadelphia will perform roughly in line with the broader market.

Now to Southern Florida and Southern California. In Miami, the new tower construction for our Courtyard Miami Beach remains on schedule and on budget, and we expect a fourth-quarter opening for the new tower. The Miami market realized a very strong RevPAR growth during the quarter and is one of the few major markets in the country where both occupancy and ADR are significantly above prior peak, with ADR being approximately 14% above the prior peak.

In our California/Arizona region we achieved RevPAR growth of 12.8%, which includes strong performance at our Courtyard Los Angeles Westside, which realized 7.8% RevPAR growth and is expecting double-digit RevPAR gains for the second quarter.

As we move forward in 2013, we remain focused on our aggressive asset management program and anticipate additional benefits from completion of the renovation projects in our portfolio. Based upon the trailing 12-month results in our 6 major markets, we are at or above the prior occupancy peak in all of our markets, while only Boston and Miami are above prior peak in ADR. New York, Los Angeles, Philadelphia and DC are all below prior peak in ADR, with New York having the most runway as it remains almost 10% below the prior peak ADR in that market.

We believe our young, well located portfolio positions us well to capture the growing demand in the American urban gateways, and we look forward to another robust year in 2013.

With that, I'll turn the call over to Ashish to discuss our operating results and financial position. Ashish?

Great. Thanks, Jay. I'll start by providing some additional details on our operational results, transition over to balance sheet activity, and provide some color on our revised guidance for 2013.

On a consolidated basis our hotels realized RevPAR increase of 12%, driven by ADR growth of 5.8% and portfolio-wide occupancy of 69.7%, which was an increase of 385 basis points from the prior year. On a same-store basis, our consolidated portfolio RevPAR increased 12.4%, also driven by ADR growth of 5.3% and an increase of 447 basis points in occupancy to 70.2%. We drove positive RevPAR growth in all but one of our markets and, excluding hotels under renovation, were also able to drive positive rate growth in all of our major markets.

Demand levels and corresponding occupancies were strong across our portfolio, with New York City recording some of the highest first-quarter occupancies in recent history. Occupancy for our urban New York portfolio was 84.8%, while our Manhattan portfolio, excluding the two hotels under renovation, registered 87.6% occupancy during the weakest demand quarter of the year.

These strong portfolio-wide occupancies allowed us to drive rate-based RevPAR gains, which resulted in an expansion of our EBITDA margins by 100 basis points during the quarter. As Jay discussed, our portfolio was impacted by renovation activity during the quarter and on a same-store basis, excluding these hotels, our EBITDA margins expanded by 250 basis points. On a normalized run rate of revenues and margins we estimate that the EBITDA impact from renovation-related disruption was between $1.25 million and $1.5 million for the first quarter.

Our portfolio of urban-transient-focused hotels generates the highest absolute EBITDA margins amongst our peer set, and our ability to drive ADR-based RevPAR growth should continue to allow us to post margin growth as we get deeper into the recovery and as our portfolio stabilizes. Approximately 40% of our 2013 EBIDTA is forecasted to be generated by hotels that are less than 5 years old. And we believe that by the end of 2013, when we are able to see the benefits of the newly constructed tower at the Courtyard Miami Beach, the Hilton Garden Inn 52nd Street, the Hampton Inn Pearl Street, as well as the stabilization of the Hyatt Union Square, we'll continue to drive further margin expansion.

Transition over to the balance sheet and recent capital raising activity. During the quarter we made further progress on our efforts to simplify our balance sheet, selling our 66.7% JV interest in a 92-room Courtyard by Marriott located in Warwick, Rhode Island to our joint venture partner. Subsequent to quarter end, we received full payment for the development loan on the Hyatt 48 Lex. And with the acquisition of the Hyatt Union Square hotel, our development loan on this asset was converted to equity.

The development loan program was instrumental in providing Hersha an ancillary acquisition pipeline, and since its inception we've purchased approximately 20 assets with a total acquisition value of over $750 million as a direct result of this program. However, with these two aforementioned transactions, we have no further development loans outstanding and no plans to reinstate the program at this time.

Additionally, during the quarter we completed a public offering of 3 million Series C cumulative redeemable preferred shares at a coupon of 6.875% and raised net proceeds of approximately $72.5 million. The strength of our balance sheet allowed us to raise this new series with a coupon rate which is more than 100 basis points lower than our last two preferred issuances. Our ability to raise this equity at one of the lowest coupons ever for an unrated preferred speaks volumes to investor confidence in our outlook and strategy.

We subsequently redeemed all of the outstanding 8% Series A preferred at the end of March. The timing overlap between issuing the Series C and redeeming the Series A resulted in additional preferred dividends of approximately $344,000, which impacted our FFO during the quarter.

At the end of the quarter we had $83.1 million of cash and cash equivalents and no borrowings on our $250 million senior unsecured revolving line of credit.

Regarding our capital spending, we're on track and as of the end of April have completed the majority of our significant renovations for 2013. We've increased the scope of renovations and ROI projects at several of our hotels, and for the full year we now anticipate our capital spend to be in the range of $30 million to $32 million. With the completion of these projects, we're bringing closure to the extensive renovation programs we have had in place the past few years and look forward to leveraging the investments to produce incremental growth for the portfolio.

Let me finish with our revised guidance for the full year 2013. General economic climate and GDP outlook has not changed materially from where we were when we issued our initial 2013 guidance approximately two months ago. We continue to forecast strength in transient business and leisure travel for the remainder of the year, and are optimistic about our prospects.

We were quite pleased to see that Congress took action to resolve the furlough for air traffic controllers, as a prolonged furlough could have served as an unanticipated headwind for our industry. Any congressional action is encouraging and provides hope for an eventual resolution to the budget standoff, which is generally regarded as one of the largest overhangs on the economy.

With the strength of our first-quarter results and our second-quarter pace, we're tightening our guidance for RevPAR growth, raising the lower end of our expectation. We now expect 2013 total consolidated RevPAR growth in the range of 6.0% to 7.5% and same-store RevPAR growth in the range of 5.5% to 7.0%.

We anticipate ongoing industry-leading EBITDA margins and are maintaining our margin outlook for consolidated hotel EBITDA margin expansion of 25 to 50 basis points and for 25 to 75 basis points of expansion on a same-store basis.

As we have in the past, we'll continue to monitor the pace and performance of our portfolio and will continue to provide adjustments to our guidance if necessary to keep it meaningful as we progress further into the year.

That concludes my formal remarks, and I will now turn the call back to Jay.

Thanks, Ashish. Operator, we can open the line for questions.

Thank you. (Operator Instructions) Andrew Didora; Bank of America.

Two questions, first on New York. I think this is the second consecutive quarter where you posted double-digit RevPAR in the market. I think 1Q New York was actually helped by the holiday shift this year. So I was just wondering if you guys would be able to quantify how much you thought this shift could have helped your New York properties in 1Q. And then, I guess also, how sustainable do you think these New York RevPAR trends can be as we progress throughout the year?

Yes. I'll let Ashish answer if we can quantify the holiday shifts. But I think generally New York has just continued to see increasing demand in the business transient market as well as the leisure transient market. We were pretty pleased with New York. Annual portfolio operated around 84% in the first quarter, which -- in 2012 we had a pretty strong first-quarter performance as well. But in years past, before that, we haven't seen that kind of demand in the first quarter. So the seasonality and the softness that we used to see in the first quarter is starting to dissipate. And I think that's driven mainly by more leisure demand coming in in the first quarter than we used to see in the past.

Our business transient pace was up and strong as well. And so, from the standpoint of sustainability, I think the trends we're seeing in New York and the trends we're seeing in leisure travel coming into New York kind of indicate to us that the strength going into the remaining quarters in New York is pretty strong and encouraging.

Ashish, I don't know if we've taken the time to quantify the first-quarter shift.

Yes. Andrew, yes, you are right. Easter falling in March, whereas it affects most of the markets negatively, it very much helps New York with spring break and with people sort of frontloading their travel. So our March results were helped by the Easter timing shift. And you see it in April. I think overall New York has been weak in April. We're starting to see the May and June pace to be very strong on the transient side, and that will make up for some of the weakness in April.

Unfortunately, I don't think I can quantify exactly how much of a boost we received, because our January and February numbers were so strong in New York. We were in the teens, in the mid-teens, for RevPAR growth. So I think March was kind of in -- is in the single digits, still strong, but it was really January and February that drove most of the gains.

Okay. That color is certainly helpful. As my last question, thinking a little bit more strategically, you guys have done a good job [thus far] the cycle in cleaning up some of your ancillary businesses. You mentioned in your prepared remarks that you have no more development loans outstanding. I think you have just 6 unconsolidated properties remaining in your portfolio. What do you see as the next strategic steps that you want to take with the portfolio and your company?

Andrew, I don't know that we have any significant shifts from the strategy we've talked about before and, basically, that is continuing to build out the market strategies that we already focus on. I think going forward Southern California and Southern Florida are significant areas of focus for us. With Southern Florida, that's sort of a later cycle recovery play and we're finding the dynamics there to be very attractive. And Southern Florida continues to remain very strong, so we'll continue to look in those areas.

I think other than that, we're getting to a point in the cycle where we're staying very, very tuned in to the market and what type of pricing and transaction we can make with the limited noncore assets in our portfolio. We think that we've got another 10 to 14 assets that are at this point getting to a point in the recovery where they might be interesting candidates for disposition.

Once we do additional noncore dispositions I think we're at that point we're going to be in a position to have some very, very strong average portfolio metrics beyond what we have today. And I think it will just continue the distillation of the story and making it that much clear and pure play.

Okay, great. Thanks, guys.

Ryan Meliker; MLV & Company.

Congratulations on a nice quarter. Just a quick question, I think -- I guess really two. First of all, can you give us any color on whether the -- seems like during 4Q and 1Q there was a lot of positive benefit from displacement caused by Hurricane Sandy. I don't know if you guys can quantify what you think that might have been, whether it was offset by some of the negative impacts on your properties. But now, with your downtown properties reopened, if we have any remaining displacement benefits from Hurricane Sandy going forward or if that story's already played out?

Yes. Hey, Ryan, this is Ashish. Yes, we absolutely saw a benefit in the fourth quarter in both urban New York as well as the New York/New Jersey metros. In the first quarter of this year it was really the JFK properties, Long Island and some parts of New Jersey. But once we went past about mid to late January, we didn't see any impact of Sandy in our Manhattan portfolio. I think that at this time we still have some guests at two of our JFK hotels. That is supposed to end by the middle of May. And we don't anticipate any major benefits to Sandy-related relief efforts in quarter 2 or past May 15th and then going through the rest of the year. So I think that story has pretty much played out now. Fourth quarter of this year would be some more difficult comps, of course, because of it.

Right. I don't know if you can, or if you can even if you're willing to, try to quantify what -- if you look at your same-store RevPAR was up 12%, your New York portfolio up 14% in the first quarter. How much of that was driven by some of those benefits from Sandy that you think will roll off? Are we talking 0.5 a percentage point? Are we talking 5 percentage points? Just trying to understand the magnitude of the impact on your portfolio and kind of how the same-store numbers really are run rate going forward.

Yes. I think that, look, first quarter we received a benefit from the inauguration as well. I would say it's probably in the 200 or 300 basis point range for the first quarter, from Sandy.

From Sandy. That's great. And then, given that -- and obviously the inauguration was strong in DC -- it seems like only raising the low end of guidance 50 basis points seems conservative. Can you give us some color on how you're thinking about that? I know first quarter is seasonally light for you guys, so we don't want to read too much into the RevPAR growth. But just any color on where your confidence is in the RevPAR outlook?

Sure. To start with, things really haven't changed that much since we gave guidance a couple of months ago. And you're right, our first-quarter revenues are less than 20% of our yearly revenues. I think at this point, with where we are in our guidance range, I believe we're probably the most bullish on the street. And that's probably warranted with the strength of the past few quarters. But we do feel that the range is reasonable, and we need to be mindful of the fact that we have a lot of new developments that are coming on line in our portfolio this year, in addition to the difficult fourth-quarter comparables. So, with that and being early in the year, we feel pretty comfortable with where we are from a guidance standpoint.

Got you. Thanks a lot for the color.

Will Marks; JMP Securities.

I wanted to ask about the RevPAR growth guidance and if you can give us any indication, maybe by quarter, and then also just a little color on the different markets as they relate to that RevPAR growth guidance.

Hey, Will, we haven't really given quarterly guidance. I can tell you that we are going to face more favorable comps in Quarter 3 than we did last year. As you remember, Quarter 3 was a weak quarter last year. You had the July 4th holiday falling in the middle of the week and you had a disastrous September in New York. So I would say that we're sort of moderating our guidance in Q2. It's still strong. April hasn't come in great, kind of mid-single digits for the portfolio. But we're seeing better strength in June and May, May and June. Third quarter looks good at this point. And then, as I mentioned, Quarter 4 is going to be a difficult quarter due to the strength that we saw from Sandy-related efforts last year, so probably our weakest quarter of the year by far, in Q4.

Okay, thanks. And then, just in terms of generalizing by geography for the full year, obviously not by quarter. But where is the strength? Is New York going to be above the high end? Do you see below?

Yes. I mean, when we look at our major markets I think that's right. We are seeing New York above the high end. We're seeing Boston to be another strong year. I would say -- and DC and Philadelphia probably underperformers for the portfolio, compared to our growth rate.

Okay. And what about Miami, actually?

Miami as a market is going to be one of the best markets in the country this year, we think, based on the pace. With the tower construction that we have, though, we're not seeing that growth, because of the disruptions at the property. We think that once the tower is completed it sets us up really, really well for 2014. (Multiple speakers)

Okay, makes sense.

Yes. We continue to see California/Arizona, our portfolio out there, also to be above our overall RevPAR growth.

Okay. Well, thank you very much.

David Loeb; Baird.

Just to close the loop on Sandy, I'm glad to see that Water Street is open. What are the prospects for the business interruption insurance? How much do you expect and when do you think you'll get that?

Yes. The timing of it is very much uncertain. We actually in the first quarter just finished receiving the last of Hurricane Irene recovery funds. If you remember, that's going back almost 18 months at this point. So we're definitely not forecasting any big recoveries in quarters 2 or 3. I think that quarter 4 we may be able to recover some -- a good portion of it by the end of the year. We are still putting our claims together, David, and not really comfortable kind of putting out the number at this point.

Okay. So that's going to be, I guess, a small offset to the difficult comps. But I guess it's really hard to quantify today.

It is. It is. But it's definitely back-end loaded from a recovery standpoint.

Okay. And how about the opening of Pearl Street? How was that affected by the hurricane and where are you now in that process?

David, Pearl Street, during the hurricane the entire site flooded, like, 10 feet of water it took on. So the entire basement and all of the open construction elements had to be -- as part of the remediation everything basically had to yanked out and redone. So there was a -- we incurred a significant delay.

Our expectation is that the contractors should be able to get in there and have this -- get back onto the construction schedule. When the hurricane hit we were about 8 months from opening. So I would say the contractors have just sort of retaken the building. So it will probably another three quarters for that asset to open. In the best case it will be the fourth quarter of this year, but I would say fourth quarter of this year, first quarter of next year.

Wow. And property insurance will cover the replacement of that capital? Is that correct?

Yes, that will. That will be covered by --

The project won't cost any more?

-- the construction (multiple speakers). No, it will not.

It will just open a lot later.

It will open a lot later.

Okay. And how about the Hilton Garden Inn? Might that open first, then?

Oh, the Hilton Garden Inn will -- yes, that will almost certainly open before Pearl Street.

Okay. And then, finally, just general question, what are you seeing in terms of New York City supply trends, prospects for new developments being launched, land prices, things like that?

David, this is Neil. Jay mentioned in his prepared remarks some of the kind of metrics that we're seeing in the marketplace right now for land sales. The land market there fell pretty hard after 2009. So went from last cycle, peak of last cycle, kind of $400 to $500 per square foot for good sites. Dropped to kind of $200 mark, I think, in 2010, 2011. It's now fully recovered in terms of land prices. I think kind of the mid-block sites are in the $300s per foot. And then as you get to on-the-avenue kind of locations you're in the $400s per foot. And then if you're in a great submarket with a on-the-avenue or on-a-corner location, we're seeing prices again above $500 a foot.

Some of that is driven by the residential market just being very hot right now for both condos and multifamily, as well as for hotel developers. There is very strong performance. And construction financing has been slow to return across the country, but in major urban markets there is construction financing available. So that's why we have seen projects announced across the last few years.

In terms of our picture on new supply, we expect that this year we will receive a total of about 3% increase in new supply in Manhattan. In 2014 we are currently projecting 6.3%, and then in 2015 in the high 3% range. We believe that it is very likely that the 2014 number will shrink, due to the delays that Jay had mentioned in all construction projects. So I wouldn't be surprised if it was more like 5% and 2% in the coming couple of years but, still, significant supply. It's coming in certain quadrants of the market. There is a lot in Midtown West and there's a lot down in the Financial District.

But as we've seen from our experience, as well as from other projects, this is a very time consuming and complex task, developing hotels in New York and the kind of the two-year expectation for development in other markets around the country should be doubled in New York. So we expect there to be new supply, but for it to be -- come slower than expected by most of the consultants out there today.

And as we've also mentioned, I think, across the last several quarters, that there is still very, very strong demand in the marketplace and demand clearly outpaces new supply, as we're seeing from the performance in this marketplace. So at least for the next year, year and a half, we see a pretty strong environment for raising rates and continuing to optimize occupancy.

While I have you, Neil, just to follow up on one thing you said about construction financing being available in other markets. Are you seeing the early stages of competitive supply against your assets in other markets outside of New York?

Outside of New York we are -- the construction financing is just starting to come back. And so we are not seeing a significant amount of supply in our areas outside of New York City. There's none that is of concern or worry right now. But I would expect that across the next 12 to 18 months there will be new projects announced in some suburban markets out there. But right now the construction financing remains very tepid in markets outside of New York or Washington and they require very large equity checks. And that's leading to a different class of developer.

In Miami, as I think everyone's been hearing about, all of the new projects being announced in Miami Beach, a lot of them are kind of conversions of existing hotels and the, like, upgrading of hotels, repositioning of hotels. And there's been a handful of kind of new construction kinds of projects. But that market, very much like New York, has plenty of demand to absorb the kind of supply that we're projecting right now.

Great. That's it for me. Thank you.

At this time we have one question remaining in the queue. (Operator Instructions) Bill Crow; Raymond James.

Can you comment on the profitability of international guests as they come to New York? And I guess -- I haven't spent a lot time thinking about it, but how do they book? Do they use rewards programs? Is it better or worse to have them in your hotel than your traditional corporate client? Can you kind of give us some ways to think about that?

Yes. Sure. The international guest comes from a couple of different channels. The direct sales efforts at the properties and above property book a lot of FIT groups into the hotels. And these foreign individual traveler groups that come in are actually very attractive to us because they're very flexible on days of the week and to somewhat where they stay in the city. So we're able to strategically drop that kind of business into the hotels to create compression on nonpeak nights, or on nonpeak periods, when we otherwise wouldn't have compression.

The rates -- as you rightfully mentioned, the leisure-traveler-from-abroad's rates are going to be less than the business transient rates that we normally get at the hotels. But, like I said, it allows us to create compression and drive pricing for other segments at the hotel.

Beyond that, we see that a lot of travelers will book directly through the hotel.com websites and then through the electronic distribution channels that we manage pretty closely. And, again, we put inventory on these channels very, very judiciously. And when it's out there it's when we can use it to fill otherwise soft periods, or, like I said before, to create compression. So the electronic distribution channels are probably the biggest source of international demand coming into the hotels. And that is something that we control. It's inventory that we control and decide how we put it out and at what pricing.

And so it's actually a very attractive dynamic. It's not really this matter of international traveler or US leisure traveler or business transient. We try to kind of balance and juggle all three in order to optimize the inventory at the hotel. So it's actually very additive and it's been a very positive dynamic. And we were really happy to see the increase in the first quarter of international travelers.

So if you threw a blanket on it and you say, okay, the rates are typically a little bit lower -- I understand backfilling weaker periods during the week or a month -- is the profitability lower as well? Or can you reduce costs, maybe less frequent guest usage, or anything else that might drive up -- or drive down costs to match the lower revenues? Or is it just it's a lower-margin, lower-profit business but one which bolsters results in the end by filling in weak periods?

Well, the way we think about it, it's incremental revenue and it is coming from occupancy. So, versus being able to drive additional rate on the business transient segment, it's going to be somewhat less profitable. But it's still incremental profitability. The flow-through to the EBITDA is still pretty strong at these occupancy levels.

Now we manage it pretty closely. If we find that the rate is getting to be so low that you would rather just leave the inventory free to be able to take advantage of whatever incidental demand is in the market, we would do that. But at this point the rate is high enough that the flow-throughs, though they're not as much as an incremental dollar from rate would be, the incremental occupancy and rate is -- I would say it's probably a 40% to 50% flow-through to the bottom line, versus being 60% to 70% were it coming just from additional BT rate. But the BT demand has to be there in the first place to be able to drive that rate. And I think some of the compression we create with the international travelers allows us to do that with the BT.

Okay. Well, that's helpful. Thank you.

At this time there are no further questions in the queue. I'd like to turn the call back over to Mr. Shah.

Okay. With that, we'll conclude the call this morning. If any other questions occur to anybody, feel free to call us in the office. And we'll thank you all for joining us this morning.

And that concludes today's conference call. Thank you for your participation.