Hersha Hospitality Trust (HT) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust second quarter 2013 earnings conference call. Today's call is being recorded and at this time, all participants are in a listen-only-mode. Later we will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) At this time, I would now like to turn the conference over to Ms. Nikki Sacks. Please go ahead.

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, uncertainties, and other factors that may cause the Company's actual results, performance, and achievements or financial provisions to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. These factors are detailed in the Company's press release and in the Company's SEC filings.

With that, let me turn the call over to Mr. Jay Shah, Chief Executive Officer. Jay?

Thank you, Nikki. Good morning, everyone. I'm joined today by Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. I'll start with a recap of the strategic transactions that we completed this quarter, provide an overview of our second quarter results, and finish with more specific market and sector commentary. On the acquisition front, we strengthened and diversified our portfolio in Manhattan and expanded our exposure in Miami and Southern California. We're pleased to have been able to find compelling acquisition opportunities that satisfied our strict underwriting criteria in an undoubtedly competitive acquisitions environment.

At the beginning of April, as previously announced, we acquired the Hyatt Union Square. This existing brand new hotel is located in one of the most underserved and highest growth submarkets in Manhattan. We entered into a takeout contract for this asset in 2011 and have seen significant price appreciation in the market since that time. The hotel began operations in late April and completed the construction of all rooms by the end of the quarter. The hotel fully opened for business in late June and therefore we saw limited contribution from this asset during the second quarter. So far in the third quarter, the ramp up of the Hyatt Union Square is exceeding our internal forecast and we're beginning to see strong contributions to Hersha's consolidated results. At its current trajectory, we are forecasting the asset to be among the Top 5 EBITDA contributing assets in our portfolio by the fourth quarter of this year.

We also expanded our footprint in Miami and Southern California with the acquisition of the Residence Inn Coconut Grove and the Courtyard San Diego. We are already seeing positive results from several of our asset management initiatives and the transition of some property level management at these hotels. Finally, we sold additional non-strategic assets during the quarter. We completed the sale of the Comfort Inn Harrisburg, Pennsylvania and entered into an agreement for the sale of the Holiday Inn Express in Camp Springs, Maryland. Both hotels are non-essential to our strategy and represented opportunities to recycle capital into higher growth assets. As previously discussed, we've identified an additional 15 to 20 hotels in our portfolio as potential disposition candidates and are focusing more effort on exploring a potential sale of these assets to recycle the capital with the ultimate goal of driving and strengthening the Company's growth rates and RevPAR.

Operationally, the second quarter was a solid quarter for Hersha as we continued to report strong occupancy and best in class EBITDA margins across the portfolio. Our second quarter same-store RevPAR increased 3.7% driven by ADR growth of 2.4% and occupancy growth of 103 basis points to 82.2%. Second quarter trends on the West Coast were generally stronger than the East Coast and some of the previously slower recovering markets outperformed during the quarter. Our best performing hotels during the quarter were in our West Coast portfolio. We reported an impressive 11.4% increase in RevPAR in this portfolio driven by a 7.1% growth in ADR, which resulted in an EBITDA margin expansion of 170 basis points. Our strong results in this market should be further amplified in the coming quarters given our recent purchase of the fully renovated Courtyard Marriott San Diego, a refresh of our Hyatt House portfolio, and strong demand expectations in Los Angeles.

Our other top performing markets during the quarter were the Connecticut-Rhode Island and New York-New Jersey Metro markets, which posted 9.8% and 8.7% RevPAR gains respectively. Our New York City urban and Manhattan portfolio reported same-store RevPAR growth of 5.8% and 2.9% respectively. Our New York City quarterly results were negatively affected by the shift in the Easter holiday to March causing our transient focused assets in that market to be challenged. Our New York City portfolio posted 2.1% RevPAR growth in April following Easter compared to 9.9% and 5.2% RevPAR growth in May and June respectively. Occupancy in our Manhattan portfolio remained robust at 93.3%. We continue to see solid demand trends that are allowing the market to absorb new supply and thereby affording our operators the ability to continue to push ADR. Our Manhattan portfolio also realized very strong absolute EBITDA margins of 48.9% during the quarter.

The citywide convention calendars in our second and third largest markets, Boston and Philadelphia, were softer than previous years and we anticipate that these trends will continue through the second half of the year. Our Boston portfolio realized RevPAR growth of 3.8%, which was 280 basis points above the market's RevPAR growth for Boston. During the quarter, we successfully completed significant renovations and a complete rebranding and repositioning of the Boxer, previously the Bulfinch Hotel. We remain bullish on our Boston portfolio as transient demand levels remain very strong along with the stronger citywide calendar in 2014 and 2015.

Our most challenging market during the second quarter was Washington DC. While our urban DC portfolio was essentially flat for the quarter, our metro DC portfolio recorded a RevPAR decline of 10.5%. As we discussed on our first quarter call, we started seeing the effects of sequestration and the resulting government travel cutbacks in April, but these travel restrictions had a much more profound effect on the market and on our results in May and June. The lack of compression from the drop-off in government and group travel hampered our ability to push rate and while there are several positives such as the IMF Meeting in the back half of the year, we still foresee a challenging lodging environment in the metro DC submarkets as government related demand is projected to remain solid. We remain firm believers in the long-term viability of this market and in our DC portfolio and have implemented several asset and revenue management strategies to offset some of the ongoing downward trends.

Finally in Miami, we continue to experience disruption from the new tower construction pool closure at the Courtyard Miami Beach, which resulted in negative RevPAR growth of 12.7%. The majority of the disruptive construction is now behind us, the swimming pool is back in service, and the third quarter is looking stronger for this asset. We expect the new tower to be fully operational in the fourth quarter and are pleased with our ability to bring this project to completion on time and on budget. Furthermore, given the strength of the Miami hotel market, we're very well positioned to drive growth in this market in 2014.

International travel continues to be a bright spot for the industry and our portfolio continues to benefit disproportionately from an increase in inbound travel. Year-over-year, all seven of the airports in our top gateway markets have experienced growth in international enplanements and overall year-to-date, enplanements are up 3.7% across our markets. New York is the largest beneficiary of improving international travel and year-to-date we estimate that approximately 20.8% of our total room revenue in New York City was driven by demand from international travelers, up 12.4% from last year. Top revenue generating countries for our portfolio include the UK, Canada, Brazil, and France. Year-to-date the Eurozone represents approximately 3.7% of total New York room revenue representing a modest improvement in terms of contribution from the Eurozone travelers from the prior year.

Finally, I'd like to briefly discuss the implication of rising interest rates to our overall strategy and outlook. We don't intend to shift either our acquisition or disposition strategy in the face of rising rates at this time. Although the specter of sudden interest rate increases has caused significant volatility in the capital markets, we view rising rates as a positive sign of a strengthening economy from which we can yield significant benefit. Hotels are one of the few asset classes in real estate that benefit in the long-term from rising rates as demonstrated by statistically strong correlation between ADR growth and rising interest rates over a multi-year period. In addition, the short-term nature of our leases at our urban business transient hotels affords us the ability to quickly re-price our inventory to leverage stronger demand in a real-time basis. We continue to see positive signs of growth in the economy, particularly with regard to increases in home prices and a declining unemployment rate, all of which serves to fuel consumer confidence. We believe Hersha's well positioned to be an outsized beneficiary of these improving conditions.

I'll now turn the call over to Ashish, who'll discuss our operating and financial results. Ashish?

Great. Thanks, Jay. I will begin with additional details on our operating results, discuss balance sheet activity during the quarter, and finish with our outlook for the remainder of the year. Gross operating profit or GOP margins for the Company's same-store consolidated hotels improved 80 basis points to 51.5% and were driven by the strength of our GOP margins in the New York City portfolio, which also improved 80 basis points to 58.5%. Our GOP flow through for the quarter was a very strong 79.7% and allowed us to expand our same-store EBITDA margins to 42%. On a same-store basis, our consolidated EBITDA margins expanded by 30 basis points and were impacted by significant property tax increases at several of our larger New York City hotels in addition to a purchase price reassessment at our Courtyard Los Angeles. Property taxes and insurance expense increases had a negative impact of approximately 55 basis points on our same-store EBITDA margin growth for the quarter. We believe that our continued focus on cost containment strategies and asset management initiatives in addition to the benefits we're realizing from our capital investments over the past few years should allow us to continue to post best in class portfolio-wide and same-store EBITDA margin.

Adjusted funds from operations or AFFO in the second quarter increased by $2 million to $28.7 million compared to $26.7 million in the second quarter of 2012. AFFO per diluted common share was $0.14, in line with the same quarter in 2012. AFFO during the quarter was impacted by a higher share count as compared to the prior year in addition to several factors that Jay mentioned. The Hyatt Union Square was purchased in April of this year, but ongoing construction at the hotel prevented us from having all rooms online until the end of the quarter. Our quarterly results were also impacted by construction delays along with start-up costs and pre-opening expenses at the Hyatt Union Square. In addition, AFFO was negatively impacted by the ongoing renovations at the Courtyard Miami Beach and the Rittenhouse Hotel in Philadelphia during the quarter. On the other hand, AFFO for the quarter was positively impacted by the addition of the Courtyard San Diego, Residence Inn Coconut Grove for a portion of June.

I'll now turn to the balance sheet and our recent capital markets activity. During the quarter, we received the full balance on the development loan outstanding on the Hyatt 48Lex and with the acquisition of the Hyatt Union Square hotel, our development loan on this asset was converted to equity. With the completion of these transactions, we no longer maintain any development on exposure. Additionally, we've modified our $30 million loan on the Courtyard Los Angeles in April. This loan modification provides us the option to advance an additional $5 million in principal, reduces our interest rate by 85 basis points to LIBOR plus 3% and extends the loan maturity by two years until September 2017. Finally, during the quarter we repaid $7.9 million on our mortgage outstanding on the Residence Inn, Tysons Corner, Virginia with cash on hand.

Company's balance sheet remains strong and our refinancing efforts over the past few years have allowed us to reduce our year-to-date interest expense despite the fact that our asset and revenue base has grown significantly from new hotel acquisition. In terms of financing, the majority of our debt is fixed rate debt or is hedged through slots and caps. We have minimal exposure to floating rate financing and all of our floating rate debt is LIBOR based, which has seen minimal volatility as compared to US treasuries. At the end of the quarter, the Company maintained significant financial flexibility with approximately $29.3 million of cash and cash equivalents and $183.8 million available on our revolving credit facility.

Regarding capital spending, the Company has two significant capital projects ongoing with the Courtyard Miami Beach and Rittenhouse and both are expected to experience some disruption through the end of the third quarter and we're building in this disruption from these projects into our guidance figures for the remainder of the year. We anticipate our full-year capital spend to remain between $30 million to $32 million and with the completion of these two aforementioned projects, we're bringing closure to the extensive renovation programs we've had in place during the past few years and we look forward to leveraging our investments to produce incremental growth for the portfolio.

Finally in terms of guidance, we continue to see a positive economic outlook for the remainder of the year with recent indicators for both consumer confidence and CEO sentiment showing a healthy uptick. Transient demand trends remain strong in the majority of our markets and we share the view that the US lodging industry's sustained recovery will be driven in large part by the business transient and leisure transient traveler in the near and medium term with group business recovering slower than in typical recovery cycle. Our forecast for the remainder of the year in large part driven by our outlook for stronger third quarter results from our New York City urban portfolio while our fourth quarter results are forecasted to be challenging due to difficult fourth quarter comparison as a result of post Hurricane Sandy strength in New York in the fourth quarter of 2012.

With that backdrop, we're maintaining our forecast for full year 2013 of total consolidated RevPAR growth in the range of 6% to 7.5% and same-store RevPAR growth in the range of 5.5% to 7%. Additionally, we're maintaining our margin outlook for consolidated hotel EBITDA margin expansion 25 basis points to 50 basis points and for 25 basis points to 75 basis points of margin expansion on a same-store basis. As always, we will update these expectations if there is a material change as we continue to monitor our portfolio's performance throughout the year.

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

Operator, we can open the line for questions.

Thank you. (Operator Instructions) Jeffrey Donnelly, Wells Fargo.

Good morning, guys. Ashish, I apologize, I just missed your remark on Hurricane Sandy. Can you isolate for us the EBITDA benefit or impact that you actually ultimately captured from Sandy and maybe how that sort of sorts out ahead? I just want to be sure we're capturing that right in our models.

Sure. Jeff, do you mean for this year in 2013?

Yes. Just thinking ahead, I guess I'm wondering how much you think you might have benefited in '12 and how we begin to think about how it anniversaries just to make sure we're not --.

Sure. We saw benefits from post Hurricane Sandy strength in Manhattan as well as in the metro New York-New Jersey market in the fourth quarter of last year. When we came to the first quarter of this year, it was really the metro market; Long Island, JFK, some parts of New Jersey; that we saw strength. But we didn't see too much strength where we can isolate anything in Manhattan because most of our hotels ran pretty consistent occupancies and ADRs as we had forecasted. So I think that probably in the fourth quarter of '12 we estimated somewhere in the range of $4 million of EBITDA that came out of Hurricane Sandy strength and I would say in the first quarter of this year it's probably closer to $2 million.

Okay. That's helpful. And maybe just to switch gears, considering the government impact in Washington DC that you guys referenced, I think the thinking was that maybe select service hotels or lower-priced hotels might have fared relatively better in the face of government trying to rethink how it spends its travel dollars. I recognize there is an impact on the market broadly, but did your hotels gain share relative to the rest of the market in your view? Did it sort out that way or is that maybe not the correct thinking?

Yes. Jeff, this is Jay. It's interesting most of the impact for sequestration we saw was in the metro DC hotels and in those comp sets, I think most of the hotels were in the same boat so I don't know that we gained share that much. Anecdotally, one story that really kind of resounded with us was one of the sales agents at one of the hotels was talking about how an agency that stayed with the hotel for years was talking about an 80% cutback in their travel budget. And so when you've got cutbacks of that magnitude, it's going to affect that whole submarket and it affects it not only from a direct business standpoint, but that gives out so much compression in the market that it's really difficult to make up for it or offset it much if any way at all. But I don't know that our hotels necessarily gained or lost share relative to peers, but it was a pretty significant impact we thought out there.

That's understood.

We don't think it's a sustainable pullback, it's just hard to know when those budgets will come back to some degree. I think right now there was a significant pendulum swing sort of to the right and everyone was just cutting back almost indiscriminately. We would expect that as the year moves on and certainly into 2014, you'd see a little bit of a thoughtful, but increased spend in travel by the agencies.

And just probably one last question not to be too much of a softball. But can you talk about where you think pricing is in the market in Manhattan and maybe (inaudible). I know even around the island of Manhattan it can vary by neighborhood. But I'm just curious where you think transaction prices are going off today and how you think that compares to replacement cost?

Jeff, this is Neil. The last transaction that's been recorded in Manhattan for a select service hotel was around $500,000 a key for the Holiday Inn in Chelsea and that exceeds replacement cost for that kind of location if you don't consider the time it takes to build and all the capitalized interest cost as well as the equity carry costs throughout that time, but that's the latest kind of transaction we have. So at that level, I think the buyer still found it to be a 6% to 7% kind of cap rate just to buy at that price, which is slightly above replacement cost. I think we've seen a handful of other transactions at much larger numbers kind of in the upper upscale set. We saw the James trade at about $750,000 a key earlier this summer where an upper upscale hotel, I think that is very close to replacement cost. And then in kind of forever locations or A-plus kind of locations, we've seen the latest trade was I guess the Park Lane at about $1.1 million a key where people are valuing that land and the development rights so significantly that they're even considering not only complete repositioning, but probably even a teardown there. So I think in A-plus kind of locations or in A locations, the land values are very high and continue to increase at a very high rate just driven by both residential as well as hotel opportunities there. So that's where we're at, kind of $500,000 $750,000, and then over $1 million on the luxury side for New York City.

If I could just stick there with Manhattan for select service, I mean do you think that that $500,000 a key becomes somewhat of a ceiling on pricing for assets?

I hope it's not a ceiling. I think what we're going to see in New York is moderate continued growth across the next several years and in certain submarkets I think you'll see very strong growth. And so I think in the select service world, a lot of investors are really driven by yield. And if you can earn a 6%, 7% cap on a $500,000 per key asset today, I think people will be interested in purchasing that same kind of asset at a 7% cap two years from now and if the market develops as we expect it to across the next several years, they would have 10% to 15% more EBITDA than they do today and that would lead to an extra $90,000 a key in pricing or something. So I think early to mid-cycle value is a good comp.

Thanks, guys. I'll yield the floor.

Andrew Didora, Bank of America.

Hi. Good morning, guys. It was nice to see some sort of non-core asset sales in the quarter. Jay, I think you mentioned you have 15 to 20 assets that you could be looking to market and I was just curious how active do you plan to be? How long do you expect these dispositions to take? And I guess on the assets that you've sold, what kind of interest are you seeing in these non-core assets right now?

Sure. Andrew, the grouping of assets I was talking about, as I mentioned, we are beginning to focus a lot more attention on our strategy of what to do with those assets. I think that currently what we're seeing in the acquisitions and disposition market suggests that there is fairly strong interest for these kind of assets, particularly by well-capitalized institutions, mainly private and so it's an approach that we're going to continue to pursue. I think that transaction times not specifically speaking about this portfolio, but just generally what we're seeing, I think if we're going to be working with a significant enough institution or any seller is working with a significant enough institution, I think the ability to close and the execution risk is generally pretty limited. So I would imagine that it could be say a three to four month period to get to a closing. Let me say you get three to four months to get the due diligence and get to a point where you are working on some of the longer lead items such as assumption of debt, franchise transfers, et cetera, et cetera. I guess let me just give you the short answer. I would imagine that you get hard on something like this in three to four months and then you probably have another four to six months to close and I would imagine it to be sort of a three quarter process.

Okay. And then just when I think about disposition activity going forward, given some of the cost basis in maybe some of your urban assets and where we are in the cycle, do you have any plans on potentially marketing maybe some more stabilized urban assets into the current environment?

Andrew, I think our short answer to that would probably be not so much. When we look at New York and look at the growth that's anticipated across the remainder of the cycle, I don't know that we're going to be able to match that kind of CAGR with any other acquisition in any of the other markets. I mean New York still remains extremely strong and I don't know that we would be looking to sell anything significant in New York. We have looked at some of the smaller assets that we believe had stabilized to a point, but we're not going to see sort of above market growth rates, but most of our assets we expect that we will continue to see above market growth rates and we hold on to those.

I think in some of the other markets as I mentioned, we're seeing some headwinds in Boston and Philadelphia right now. I don't know that we'd consider an asset there to stabilize under the existing market conditions, I don't know if we'd really pursue those. And we find Miami and the West Coast to just have very, very strong growth prospects here across the next couple of years and I think we would be looking more if anything if the opportunity presented itself and the capital situation was appropriate to expand into those markets. I think the sale of some of these non-essential assets that we talked about earlier, the 15 to 20, would allow us to recycle close to approximately $300 million of capital, which is a pretty significant slug of capital for us. And I think just by doing that continuing to refine the portfolio and redeploying the proceeds from that kind of a sale would allow us to hold on to more of our core assets and enjoy the growth that we expect in those markets.

Got it and that makes a lot of sense. I guess final question from me just in terms of the quarter and the outlook. You gave some color on your expectations for the back half and just curious given that you didn't change your outlook at all, how did 2Q perform relative to your internal budgets and has your outlook for the back half changed at all since the last call?

Hi, Andrew. This is Ashish. I think that we were affected more than we anticipated in both the DC market and from the Easter shift. So from our internal forecast, we had an extremely strong first quarter as you remember, we were up a little bit more than 12% and I think a lot of questions were hey, why aren't you're raising your guidance at this point for 2013. We did see some weakness going into April, which carried over a little more than we anticipated in May and June. I think at this point when you look at same-store, we're up about 8% year-to-date so in order to hit our guidance ranges, we just need to come in somewhere in the 3.5% to 6% range for the year and we feel pretty good with that range for the remainder of the year. I mean it's pretty clear that the first half is going to be stronger than the second half just because of some of the comparables especially in the fourth quarter, but that was really our thinking behind not raising in the first quarter and kind of keeping the range where it is today.

Okay. That's great. Thanks, guys.

Smedes Rose, Evercore.

Hi, thanks. You kind of touched on this, but I wanted to ask you the two hotels that you did sell, the non-core hotels, it looked like they were something like $60,000 a key. Is that kind of a good metric for the assets that you would look to sell going forward or is that maybe a little bit on the low end? And then I just wanted to ask you for maybe an update on your Pearl Street Hampton Inn and then any thoughts just generally on kind of the supply in New York as well.

Smedes, this is Neil. In terms of the non-cores the couple of assets that we mentioned so far, those would be outliers in the portfolio. The first, the Comfort Inn, was one of the original assets from the 1999 IPO at Hersha so it's just a much older asset in a truly secondary market and that's leading it to trade at that kind of number. Camp Springs has been a market that's just been very significantly impacted by sequestration and by just some allays in the DC metro markets across the last several years and so I would consider those just on a per key basis to be significant outliers versus our remaining kind of secondary market assets. Our secondary market assets you'll remember are still very strong cash flow producing assets in high barrier to entry secondary markets that we're in in Long Island, in New Jersey, in Connecticut, in Rhode Island, those kinds of markets. And the kinds of brands that we have in those hotels or in those markets are probably a multiple of at least kind of 1 to 1.5 times the kind of value that we've seen so far.

On Hampton, what was the question on Hampton Inn Pearl Street?

I should probably know this, but is it open yet or what is the timing if it's not open?

Yes. Smedes, this is Ashish. The Holiday Inn Express down in Water Street, that did open in April. That was operating prior to Sandy and it was significantly damaged. Hampton Inn Pearl Street, we predict kind of a late fourth quarter more likely kind of first quarter of '14 opening for that hotel.

Okay, great. And then I just was wondering you guys are always good at kind of just updating us on what you're seeing on the supply side. For Manhattan, are you seeing hotels opening on time, later, earlier than you had initially expected; kind of any thoughts around that?

Smedes, in terms of just the continued progress of some of the projects, we continue to see them progressing and in fact just as you mentioned we do see them moving a little bit slower than some of the other consultants' forecasts. Our supply forecast for 2013 is around 3.8%. In 2014, we're still holding a pretty large number here of 6%, 6.5% kind of supply growth. We are increasingly feeling like that will be significantly less just from the delays we're seeing in their progress so far, but we have not adjusted our number yet for 2014. But our 2015 number, if you remember, is about 2% so pretty low. So I think between '14 and '15, there will be a little bit of a shakeout and so maybe it's 5% in '14 and 3%, 3.5% in '14 and '15.

But for this year, we have seen some new hotels open and they do continue to make great growth challenging in a handful of our submarkets. It's things that we've expected and we've been seeing coming online so we are making what we consider the appropriate revenue management decisions and strategies to kind of manage that supply growth and we are still able to show growth generally. But to your question, we do see some of the 2014 expectations we're starting to believe that they're going to flip and we'll see a little less new supply towards the end of the year than we might have originally.

Alright. Thank you.

Bill Crow, Raymond James.

Good morning, guys. Can you give us an update on what July trends look like?

Sure. Generally speaking, looks like trends are improving for us in July. Just as we saw in the second quarter though, Bill, we expect the trends to be somewhat non-linear. We're expecting still some lumpiness in the third quarter. I think we're feeling pretty good about New York City as September comes up just based on the way the holidays are going to be calendar placed and then we're expecting a much stronger [NGA] that's going to be a better comp to last year. But again like I say, broadly speaking the trends are improving and we're feeling a lot more optimistic in July, but things do still remain kind of volatile and not with a lot of visibility.

Since you mentioned comp so I want to go there. We know DC weakness is going to extend for a while. Your comps coming up in the fourth quarter I think are up 12% and then the first quarter of next year you're up against 12%. Would it be surprising if the comps pushed you into negative RevPAR growth or RevPAR decline sort of period for a couple of quarters?

It's true that the comps are going to be pretty difficult. I think in Manhattan specifically, the third and fourth quarter occupancies are so high so despite being up against a significant comp, I think we're going to have enough demand that will keep us in positive territory so I don't expect going negative there, but I also don't expect very robust growth because of the difficult comps. But when you're running 90% plus occupancy, the question will just become how much pricing power is there in the market and how best do we leverage that to determine sort of where we end up. But I think there should be enough demand to stay in positive territory.

(multiple speakers)

Metro New York probably concerns me, Bill, more than anything because there you don't run that kind of demand. So in Manhattan I have a lot less of a concern and as we discussed it, we know that Manhattan will be able to show some moderate growth. It's just when you get to markets like Long Island and JFK where you really don't have as much demand to backfill it. So I would imagine that some of the metro New York markets that we have will be negative, but we're counting on there being enough demand coming out of that Manhattan that we're able to stay in positive territory. But it's very difficult to foresee that right now, Bill, so we're kind of taking it week by week.

Understood. On the acquisition front, I think you talked about the very competitive landscape. Can you tell us what's out there that would fit your portfolio? Is there much in the way of assets that you could even bid on these days? What's that look like?

There has been some good product out in the market really frankly this year. From the start of the year and even this summer, the summer generally activity slows down, but the handful of assets that have been marketed through the summer process, several of them were interesting and we've spent a lot of time underwriting assets across the last six to eight months. So there are assets in our key markets, our kind of Top six markets, there are hotels available. What we're finding is that the bidding environment continues to be very challenging. We're finding bidders just a bit more optimistic than we are today on performance and the spreads between the winning bid and where we're coming out of are relatively significant, it's kind of 10% to 15% kind of spread, sometimes even more than that. And so at that point, we don't have any regrets about how we're approaching these opportunities, I think we're fairly underwriting them. They are interesting, they could have some strategic value, but not at the prices that they're trading at today. Today in our pipeline, we've been looking at a handful of opportunities in South Florida and Miami and in Los Angeles. Unfortunately, nothing that is even close to imminent, but there is activity in there. We do expect there to be more assets coming to market again in September.

I was going to say one could argue that given a normal cycle and let's assume it's normal and we don't end up with a [100-year] flood for the third time in 15 years. There's a certain amount of urgency to buy assets before we get too late into the cycle and yet you may be eight months away from realizing significant proceeds on sales. Is there a thought to lever up in the interim if the acquisition opportunities became more interesting in order to buy earlier and then worry about the sales later? Is that a possibility?

Just from my perspective, how we've been viewing it on the acquisition side of it is that we have about $100 million of capacity today to make acquisitions just using cash on hand and a reasonable amount of leverage on those. And so we've been kind of working under that constraint and then assuming that we would have other non-core sales to help fill the gap in the future. We're not seeing that level of activity in our pipeline that we've had to really strongly consider levering up or doing anything like that. Although we are early in the cycle and there's great opportunity in growth, we do have a great portfolio already assembled that we think gives us great exposure to a lot of these high growth markets. And so the handful of acquisitions that we think could fit, I think we'll be able to manage without levering up significantly.

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

Ryan Meliker, MLV & Company.

Hey, good morning, guys. Most of my questions have been answered, but I was hoping you guys might be able to give us some added color on kind of how trends played out through the quarter for your portfolio, particularly I know April was a little bit challenging for Manhattan, but then it was a little bit stronger for some of your other markets. Can you kind of walk through where RevPAR was for your New York portfolio by month and then maybe how that compared to the rest of your portfolio?

Yes, absolutely. Ryan, this is Ashish. Our New York City portfolio were up 2.1% in April whereas Manhattan was down 1.3%. And then May, the portfolio was up 9.9% and Manhattan being up 7.7%. And the portfolio was up 5.2% and 2.2% in June. So as Jay mentioned, very much a normal year type of quarter and clearly saw the Easter shift hurt April the most.

Any color on why June was a little softer in Manhattan. I mean obviously I think we expected Manhattan to be softer in April, but the 2.2% in June seems to be pretty low. I'm wondering if you have any color as to what drove that?

Yes. I think we definitely forecasted better numbers in June and we're seeing better numbers in July than we did in June so there is nothing particular in June that we can point to for weakness in New York.

But it doesn't seem like it's a trend one way or another, is that right?

Not big as the July trend. We saw a pretty strong DC in April with a lot more group and overall compression, but then we saw a significant decline in May and June in DC.

In urban DC, at least the third and fourth quarter has a great congressional calendar that should provide a little bit of lift going into what seems to be a pretty tough market.

Great. That's helpful. And then just a quick little update on some of the developments. Are you still expecting the Hilton Garden Inn on 52nd Street to open at some point in the third quarter and the Courtyard addition in Miami to open in the fourth quarter?

I think we're still looking at the Courtyard Miami by the fourth quarter. 52nd Street and Pearl Street we're targeting kind of end of year or first quarter '14 right now.

Okay. Great, that's helpful. That's all from me. Thanks for the color.

Nikhil Bhalla, FBR.

Hi, good morning, everyone. Just want to get sense with all the renovations that have happened in the portfolios, all the new hotels that have come online or coming online later in the year; in 2014 how much do you think your portfolio can actually outperform whatever the respective RevPAR growth might be in your major markets?

I think when you look at all of the catalysts we have in the portfolio right now, which include some of the new acquisitions and the renovations as you rightfully mentioned and even some sales of assets here as we continue to move through it, I would imagine that next year typically we see with repositioned assets and ramp-up assets that we're generally doing anywhere from 100 basis point to 200 basis point premium to what the market is delivering. So it's difficult for me to handicap the entire portfolio with sort of a premium. But for a lot of the renovated assets and some of the new assets that we purchased, the San Diego Marriott is fully renovated, and so we're going to be really enjoying a very nice ramp up off of a fully improved asset next year. I would imagine all of those assets you would see as we have typically 100 basis point to 200 basis point premium to the market. I think also this continued sale of non-essential assets that too will help to drive our RevPAR growth because these are all, as I've mentioned before, very strong income assets but they generally will have a growth rate that lags the portfolio average. So that too will add a bit of a boost I think to our overall topline and EBITDA growth rates in the coming year.

Thanks for that, Jay. Just if you can remind us the non-core portfolio that you intend to sell where the margins are relative to the portfolio that you intend to keep. Same thing with some of the normal RevPars are those $150 hotels that you'll be keeping versus $100 hotels that you'll be selling. Thank you.

Nikhil, on the margin side, the portfolio that we've identified has margins kind of closer to 32% to 34% compared to our 40% overall EBITDA margin so a significant difference between the non-essentials and the rest of the portfolio. The RevPAR differential is also pretty significant. If you look at '13, we're looking at let's say somewhere in the 130% range for RevPAR overall versus these assets, which would be kind of in the mid-80%. So this is a pretty significant difference between the two portfolios.

Okay. And just one final question, any thoughts on where the per diem rates may shake out for 2014 at this point in time?

We don't have anything particularly insightful in that area. That is one of the big fears about DC, building a per diem off of the last year is concerning.

Got it. Thank you very much.

David Loeb, Baird

Just a couple of follow-ups. On the potential asset sales; are you pursuing bulk sales, portfolio sales, or are you thinking that these are going to be one-off?

We've been looking at it as potentially a bulk sale, David. We're looking at it both as maybe small groupings of assets or as a wholesale grouping.

I think our view is that the financing markets are very attractive and well suited for kind of well-capitalized institutional buyers and this portfolio if we put it all together will likely actually be able to really get a premium value for assembling this significant of a portfolio. That's our hope that we'll make the closing process quicker and more efficient and more certain as well.

Is the debt on those assets pretty easily assumable?

It is assumable, the CMBS debt and so I think buyers will look at it in two different ways. Some buyers I think will look at it as it's an opportunity to cease the debt, most of it's coming due in a couple of years as it is. It's not bad debt, it's kind of 5% to 6% kind of fixed rate leverage coming due in a couple of years. So I think some buyers will look at it as an opportunity just to defease and then put on completely fresh new debt and the economics of that seem to work pretty well. And then assuming the debt, I think the biggest cost of that is just the time it takes to close, but they would be effectively at pretty high LTVs that CMBS debt they'd be assuming and then they could lever up the rest of the portfolio kind of with fresh new debt. So they could play it either way and they're both relatively efficient processes to do either. It's just a little shorter if you go through the defeasance route.

Thanks. That makes sense. Can you also just give us a little bit of an idea how far down the road you are and have you identified potential buyers, are you kind of in the mid-rounds bidding? Where is this process today?

We will likely kind of bring this portfolio to market in late summer.

Makes sense. And then one for Ashish, what are your thoughts on business interruption insurance proceeds or any insurance proceeds, but I guess BI is one that hits the income statement? What do you think that that timing and magnitude these days?

On the property side, David, we have a receivable of about $4.5 million so we feel very good about that, about collecting it. We've collected roughly $2 million to date so we would imagine that the rest of the proceeds from the property side come in certainly by the end of the year. On the BI side, the range is very wide and it really depends on the insurance company and the documentation that we've put together. I mean the range is pretty wide, several million dollars of what we could potentially collect or what we're claiming and even the timing on that could easily run into the first quarter of next year or the second quarter. And I say that just from our experience with Hurricane Irene, it was in almost a 18-month type of recovery process. So we really can't give you even any kind of a range on what we expect or timing, but to say that we have filed a claim and we are hoping to even settle that by the end the year.

Okay, great. Thank you.

Chris Woronka, Deutsche Bank.

Hey, good morning, guys. Ashish, you mentioned the property tax increase and I think mostly in New York, are you guys appealing that? Could you just give us an update on kind of how many tax appeals you have going right now?

Sure. Yes, absolutely. I mean we effectively appeal all of our reassessments, anything that moves up every year so I believe every one of our New York properties is being appealed at this point. New York is a very unique market so they'll increase the assessment significantly, you appeal, they'll bring it down some and the process just continues to repeat year after year. But the magnitude of it is so great that it's just part of your yearly process that we appeal all of these reassessments. We've been pretty successful in at least containing or limiting the amount of property tax increases. The problem comes in that as hotels do better every year, it gives the municipalities more wiggle room to really up your reassessment and I think at this point if I'm not mistaken, we have almost 30 appeals going on for our property taxes.

Okay. That's helpful. And then just kind of going back to Manhattan, you guys 93.3% terrific occupancy, I mean would you have expected more of a rate increase on that and I know that may have been impacted by the Easter shift a little bit. But I mean just how should we think about we always get the question of is there a rate ceiling in New York. Is there anything you're seeing out there that suggests that you're starting to bump up close to some kind of limitation?

Chris, I don't think we feel that at all. I mean we're still about 10% below peak rates that we saw in 2007, 2008 for select service assets and for our portfolio in New York. So we actually think there is a lot of room to grow and we just see continued demand in New York that it is absorbing the supply. I think it's a matter of the mix of business is different quarter to quarter, the calendar shift's affected, and I think that with just pricing knowledge and transparency through the market, small shifts in how you price your business can really affect your ability to move rate in a particular month or a particular quarter. So if I look at the portfolio, barring a couple of our Time Square assets that were really impacted by the Easter shift and by some pricing strategy, we could have easily been at 5% RevPAR growth in Manhattan for the quarter.

Okay. Very good. Thanks.

And that does conclude our question-and-answer session. I would now like to turn the conference back over to your speakers.

Okay. Thank you, everyone, for your interest in our Company and thank you to those who asked questions. Let me just close by thanking the teams of employees at our hotels for their hard work and persistence and enthusiastic commitment to our values in these varying market conditions. It's all of that that continues to drive our performance. Neil, Ashish, and I are in the office the rest of the day; if any questions occur to anyone after the call, please feel free to give us a ring. Thank you.

And that does conclude our conference. Thank you for your participation.