Hersha Hospitality Trust (HT) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust third-quarter 2013 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time, I would like to turn the conference over to Mr. Brad Cowen of ICR. Please go ahead, sir.

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 and 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.

These 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 Securities and Exchange Commission filings. With that, let me turn the call over to Mr. Jay Shah, Chief Executive Officer of Hersha. Jay?

Thank you, Brad, and good morning to everyone on the call today. I'm joined today by Neil Shah, our Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer. I will begin today's call with a review of the Company's strategic transaction announced in September, provide an overview of our third-quarter results, and conclude my portion of the call with specific market and sector commentary. Ashish will then provide detail on the third quarter's financial and after he concludes, Neil, Ashish, and I will be happy to address any questions that you may have on the third quarter as well as on the Hotel Oceana acquisition that we announced yesterday evening.

First, a few words on the non-core transaction announced in the third quarter. One of the Company's key focus points during our organic portfolio assembly has been to limit asset specific encumbrances thereby providing the Company flexibility to quickly react to changes in the market and execute strategic direction changes. Throughout our history, being nimble has allowed us to quickly recycle capital, transition the portfolio, and refine Hersha's strategic focus into a pure play, superior quality, urban transient portfolio with exposure to long-term, high-demand gateway markets in the United States. Execution of our latest disposition highlighted this flexibility and focus as we announced the transformative portfolio sale of 16 hotels to an affiliate of Blackstone Real Estate Advisors for gross proceeds of $217 million at an approximate 8% cap rate and a value of $125,000 per key.

This asset sale will result in material improvement to our RevPAR quality and EBITDA growth potential. And if we assume the sale of these 16 assets was completed on January 1, 2013, pro forma 2013 RevPAR for the Company's core portfolio is forecasted to have been approximately 70% higher than the RevPAR of the assets being sold. Based on the same time pro forma EBITDA margins for the Company's core portfolio are forecasted to be approximately 310 basis points higher than the portfolio being sold. The transaction marks the Company's exit from several markets that don't possess the same long-term growth trajectories as our core urban markets such as Long Island, suburban Philadelphia, and the Company's remaining consolidated properties in Connecticut and Rhode Island. We are pleased to have properly timed the portfolio sale process to capitalize on private equity interest to stabilize select service assets in suburban markets.

Including the anticipated sale of these 16 non-core hotels, we have sold 46 non-strategic hotels generating approximately $460 million in gross proceeds since 2008. In conjunction with the sale, the Company will repay approximately $79 million of outstanding debt, which will result in cash proceeds of $138 million, allowing us to pursue asset acquisitions without the need to access the capital markets for the foreseeable future. The transaction is expected to close during the first quarter of 2014 and is subject to customary closing conditions. In addition to further reducing leverage, we expect to redeploy cash from the sale into higher growth opportunities as evidenced by the Hotel Oceana acquisition in Santa Barbara announced yesterday.

Now let me address the Company's third-quarter performance. Our same-store consolidated RevPAR reached a new record and we exceeded our prior peak occupancy. Although third-quarter results across the majority of our markets were solid, year-over-year performance for the portfolio was negatively impacted by Washington DC and Philadelphia where market conditions coupled with the weaker citywide convention calendars had a significant downdraft effect. Our third quarter same-store RevPAR increased 3.5% to a new Company record of $146.56, driven by a 2% ADR growth and occupancy growth of 120 basis points to 83.6%. This exceeded our prior peak occupancy.

Our New York, New Jersey metro, and West Coast portfolios is where our top performers during the quarter and reported RevPAR growth of 10.5% and 9.6% respectively, and New York, New Jersey metro portfolio showed an occupancy increase of 408 basis points and ADR growth of 5.5%, while our West Coast portfolio produced occupancy growth of 149 basis points and ADR growth of 7.4%. Our New York City urban and Manhattan portfolio reported same-store RevPAR growth of 5.9% and 4.6% respectively. Our New York City portfolio has performed well as both Manhattan and the outer boroughs continue to exhibit robust demand. We believe that New York will continue to exhibit strength ahead, but in the coming quarters we face difficult comparisons as we approach the one-year anniversary of Hurricane Sandy, which provided a significant uplift to our operating results in the fourth quarter of 2012.

Portfolio-wide occupancy in New York remains above 90% and we believe that demand will continue to outpace supply growth in the market. It is worth noting that 7 of our top 10 EBITDA producing assets were in our Manhattan portfolio this quarter and with the exception of the recently opened Hyatt Union Square, all of these hotels reported occupancy exceeding 90% during the third quarter. New York remains the largest beneficiary of improving international demand and year to date, we estimate that approximately 21% of our total room revenue in New York City was driven by demand from international travelers. Top revenue generating countries for our portfolio include the UK, Canada, France, Italy, Australia, and Brazil.

Year to date, the euro zone represents approximately 3.9% of total New York room revenue representing a modest improvement in terms of contribution from euro zone travelers from the prior year. Continuing with a discussion of our core markets, Boston, our second largest market, faced a difficult convention calendar compared to 2012, as well as disruption related to the repositioning and relaunch of our newest hotel there, the Boxer. In Boston, RevPAR growth of 3.2% was entirely driven by rate growth, which rose 4.2%. We are encouraged by the transient demand in Boston which continues to be strong and the more active citywide convention calendars in 2014 and 2015. The Philadelphia market also had a softer citywide convention calendar, which coupled with the significant renovation disruption at the Rittenhouse Hotel, drove negative RevPAR growth of 4.8%, all of which was rate driven. With a lack of compression in the market and reduced demand levels, hotels had to increase occupancy at lower rates, which resulted in weaker flow-through and lower margins. We look forward to completing the renovations at the Rittenhouse including the newly opened Park Suites as we move forward through 2014.

Not surprisingly, our most challenging market during the third quarter was Washington DC, which reported a third-quarter RevPAR decrease of 5.7%, entirely driven by a 6.8% decline in ADR. The across the board decline in rate embodies the overall weakness of the market as hotels took on occupancy at lower rates to maintain a base of business. Nevertheless, it's worth highlighting the two divergent stories playing out in the DC market characterized by distinct performances of our DC urban and DC metro portfolios. On an annualized basis, our DC urban properties which represent approximately 65% of the EBITDA contribution from our DC cluster, at approximately 6% of our consolidated EBITDA, reported a RevPAR decline of only 1.7%. Our DC metro properties, which represent approximately 35% of our total DC EBITDA and 4% of our consolidated EBITDA, reported a 9.7% decline. Core DC urban hotels were more resilient to the lack of demand from government business with the DC metro properties far more vulnerable to slack government room night demand and therefore disproportionately affected by the lack of compression in the market.

To provide some context regarding the performance of the rest of our hotels, excluding all Washington DC properties, the Company's same-store consolidated portfolio reported 5.1% RevPAR growth. Unfortunately, we do not see improvement in the near term in Washington as the government shutdown during the first 16 days of October significantly impacted the region. Washington DC will remain a tough market given government dysfunction, some increased supply, and tough comparisons due to the re-inauguration which took place in the first quarter of 2013. Despite the near-term headwind, we remain confident in the long-term viability of the Washington DC market based on its high occupancy and variety of demand generators.

Before turning the call over to Ashish, I wanted to highlight a noteworthy distinction that our newest New York hotel property has earned. The Hyatt Union Square received in early October Fodor's 100 Hotel award within the popular urban address category. Having one of our important New York properties among such iconic hotels -- recognized among such iconic hotels is a testament to the vision of our team and the daily execution that makes the Hyatt Union Square a new icon in the New York City market. We are equally pleased with the ongoing ramp-up at the Hyatt Union Square in the short six months since it's opening. The hotel continues to ramp up at a very healthy pace and is projected to be a top 10 EBITDA producing asset in our portfolio during the fourth quarter.

Let me close by saying that the Company is well-positioned for future growth as we leverage the benefits of a streamlined portfolio concentrated in high RevPAR markets that will permit us to drive superior ADR and further expand our already industry-leading margins. We believe the Company's gateway markets are more economically resilient and attract a higher percentage of business and leisure transient travelers along with a growing base of international travelers. The continued ramp-up of our recently acquired hotels, the completion of the renovations at the Rittenhouse, and the delivery of the new tower at the Courtyard Miami Beach, not to mention the Company's young transient focused New York portfolio, will drive the Company to capture growing travel demand for years to come.

As we move forward in the near term, though we are certain to face some macroeconomic volatility and challenging market conditions, we remain confident that our strategic direction will allow us to deliver strong organic growth through a focused and responsive strategic model. I will turn the call over to Ashish. He will turn discuss the quarter's financial performance.

Thank you. Since Jay has provided a fair amount of commentary on our operating results in markets, I will focus my comments on third-quarter operating margins, some of the non-recurring items that are forecast to affect fourth-quarter results. I will conclude with an updated outlook for the remainder of 2013 and touch upon our initial outlook for 2014. In terms of margins, there were several items that negatively impacted EBITDA margins during the quarter. While we maintained industry-leading absolute margins of 36.9% on a consolidated basis, and 39.8% on a same-store basis, we did experience some year-over-year compression during the third quarter. From an operational standpoint, margin declined in DC metro and Philadelphia portfolios primarily related to lack of compression in these markets, which required our operators to maintain occupancy at the expense of significantly lower average daily rates.

The overall occupancy percentages in both DC metro and Philadelphia increased during the quarter, but we saw ADR declines of 11.2% and 6.9% respectively in these markets. This ADR based loss resulted in significant margin loss in both markets. Due to the challenging environment we envision in both DC and Philadelphia over the short term, our asset management team and operators have put in place numerous cost-cutting initiatives to try to preserve margins moving forward. Property taxes at the Company's same-store consolidated hotels also had have a meaningful impact on our margins. Overall for our same-store portfolio, property taxes increased $619,000 or 14.2% from the prior year resulting in a negative 20 basis point impact to our margins. We saw a similar increase of 14.4% in our New York City portfolio, which significantly affected an otherwise very strong quarter in New York as this portfolio had extremely high GOP margins of 58.1% with almost 70% GOP flow through.

The overall rate of increase in property taxes is significantly higher than our compounded annual growth rate of 4.8% since 2007, and we would anticipate that future increases would be more in line or below this historical average and will continue to challenge many of the reassessments that we received during the third quarter. Also affecting our EBITDA margins during the quarter were startup expenses at the Hyatt Union Square in addition to renovation disruptions at the Courtyard Miami, the Boxer in Boston and the Rittenhouse and Philadelphia, which in aggregate negatively impacted EBITDA by approximately $500,000. I will now turn to the balance sheet, which continues to reflect the Company's strong and flexible position. At the end of the quarter, the Company maintained significant financial flexibility with approximately $46.6 million of cash and cash equivalent and $170 million outstanding on our revolving credit facility. As previously mentioned, the sale of the non-core portfolio will further reduce debt by approximately $79 million and provide us with net cash after closing costs of approximately $130 million, which would allow us to fully pay down our credit facility and further enhance our flexibility.

With regard to capital spending, the company's two significant ongoing capital projects, the Courtyard Miami Beach and the Rittenhouse, remain on track with disruption projections built into our revised guidance figures. We currently anticipate the Miami Beach tower construction to be fully completed in December with the Rittenhouse renovations to be completed during the second quarter of 2014. These two projects -- excluding these two projects, we anticipate full-year capital spending to be between $32 million to $34 million with a significant reduction in 2014. With the completion of these projects, the Company will bring to a close the majority of the extensive renovations undertaken during the past few years. Moreover, we also look forward to leveraging these investments and producing incremental portfolio growth in 2014 from the delivery and stabilization of the Hilton Garden Inn on 52nd Street and the Hampton Inn on Pearl Street, which we anticipate delivery by the end of the first quarter of 2014.

Finally, in terms of guidance, we are updating our guidance for the full-year 2013 outlook to reflect year-to-date operating results, expected renovation disruption, the exclusion of the 16 hotels held for sale from our operating statistics, in addition to several items that we believe to be non-recurring during the fourth quarter. As previously discussed, our guidance projected a difficult fourth quarter in our Manhattan and metro New York markets based on the Hurricane Sandy relief efforts that significantly bolstered operating results in the fourth quarter of 2012. As a reminder, our Manhattan portfolio registered RevPAR growth of 11.5% and EBITDA margin growth of 250 basis points in the fourth quarter of 2012, while our metro New York portfolio registered RevPAR growth of 31.5% and over 1,000 basis points of margin growth during the same period. In addition, we received approximately six at $8,000 of cancellation fees from disaster relief agencies during the quarter for rooms that were never utilized and consequently incurred minimal to no expenses related to these revenues. These one-time benefits are clearly not replicable and we built this into our guidance range.

Also impacting our operational guidance for the remainder of 2013 are the negative effects of the government shutdown in October, coupled with the ongoing weakness in the metro DC market. Given this backdrop and excluding the assets held for sale, our forecast for full-year 2013 is for consolidated total RevPAR growth in the range of 4.5% to 5.5% and same-store RevPAR growth in the range of 4% to 5%. Additionally, we are altering our margin outlook for consolidated hotel EBITDA margin contraction between 100 and 150 basis points and for a 50 to 100 basis point contraction on a same-store basis. As we look out into 2014, in addition to the organic growth of the portfolio that was highlighted, we are optimistic as to the prospect of continued growth for the lodging industry and specifically for our portfolio.

On a macro basis, most economists are looking at a stronger GDP environment in 2014, for the US as well as for Europe, and many of the emerging economies that drive inbound travel. Also encouraging is the fact that group pace for the US, specifically for several of our markets such as Boston and New York, also point to improving trends for 2014. Although we are not heavily exposed to group, the compression created by increased group travel provides numerous benefits to transient focused hotels located in high occupancy markets in the form of higher pricing power and corporate negotiations. Similar to prior years, we will provide more extensive 2014 guidance during our year-end earnings call in early 2014. That concludes my formal remarks. Let me turn the call back to Jay.

Okay. Thank you, Ashish. Operator, we can open the line for questions.

(Operator Instructions)

Andrew Didora with Bank of America.

Hi. Good morning, guys. Ashish, I appreciate the color on the 4Q 2012 comps, just curious if maybe you could walk us through some of your key markets and give us a sense for what you expect in 4Q from each of them. I guess I'm thinking about New York, DC, Boston, and probably as well as West Coast and also maybe if you could do the same for 2014, too. I think that could be helpful to folks.

Sure. Andrew, I can give you some ranges for the fourth quarter of 2013. We are really not in position just yet. We are still working through the budgets for 2014. I think directionally we can talk about some of the markets, but for the fourth quarter of this year, obviously, New York will be a challenged market because of Hurricane Sandy. I think we discussed that. We still anticipate pretty strong growth in the Boston urban and metro. The trends appear to be very good. October has shaped up nicely in that market and we are looking at stronger -- a stronger group calendar for the fourth quarter as well as a nice recovery -- I'm sorry, a nice stabilization at the Boxer which brought down some of our results in the third quarter.

Still looking at fairly healthy growth in the West Coast markets in California and Arizona, sort of trending towards the high single digits in those markets. Overall, DC urban is actually anticipated to be slightly positive for the fourth quarter, based on more days, more congressional days this fourth quarter based on several groups that have come in and also, if you remember, Hurricane Sandy provided no benefit from the DC last year. DC metro, however, we'll continue to see very weak results due to the government shutdown, due to the continuing effects of sequestration. I think that covers most of the market for the fourth quarter of 2013.

Right now, into 2014, we still look at a very healthy demand pickup in New York. In the first quarter should opt out a lot of the Sandy weakness from the Super Bowl. We believe that would be a net positive and offset most of the sort of reversal of Sandy effects. I think that the West Coast remains strong. Boston is expecting to have a much better convention calendar for 2014 as well. I think the challenged markets will continue to be DC, obviously faces a very difficult inauguration comp in the first quarter, and Philadelphia looks to be relatively flat for next year.

Okay. That's helpful, Ashish. And then my second question here is just on the Santa Barbara deal. I'm just curious how you guys sourced this transaction and whether one that you saw a lot of competition for. It just seems between the location and the yield, it seems like it would've attracted a number of different buyers. Just curious how this all came about. Thanks.

Sure. Andrew, this is Neil. This was a brokered deal. It was, I think, a limited marketing. The sellers and the brokers targeted a handful of potential owners for it. We did have a prior relationship with the owner and were able to kind of fast track the process through and prevent a long bidding process. But it was shown to other folks in the industry. We felt like it was a very strong deal.

We've been looking actively at a lot of markets in Southern California, including Santa Barbara, for the last three or four years, and felt this was a very strong in-place deal as well as offered some very strong growth in the coming years due both to market as well some operational deficiencies that we will be able to bring to bear.

Okay. Great, guys. That's it for me. Thanks.

Smedes Rose, Evercore.

I wanted to ask you on the Santa Barbara as well, as you look at acquiring on the West Coast, are you strategically trying to not concentrate too much in any one city or is the sort of San Diego, LA, Santa Barbara acquisitions more a function of maybe what's for sale? And then if you could just tell us on a pro forma basis, what percentage of EBITDA is coming from California now and kind of where would you be -- where would you want it to be I guess over the next year or so as you continue to make acquisitions?

On the second question, we are probably tending for next year towards 10% to 15% of EBITDA coming from the West Coast, and in West Coast, we are including northern California and our Arizona Hyatt House, as well. I think strategically seeing it rise to as much as 20% of the portfolio over time would be reasonable and something that we are not necessarily targeting on a daily basis, but that's within, I think, the realm of possibility across the next few years.

In terms of Santa Barbara as a market, we do very much like the Westside of Los Angeles. That was the first acquisition we made on the West Coast a couple of years ago and do wish that we were able to across the last few years find more compelling opportunities that offered both yield as well as longer-term growth prospects right in the west side of LA. But it's been difficult to keep that narrow of a kind of target zone and find good quality exposure to the marketplace.

We've expanded the kind of realm of what we are looking at in the West Coast includes certain markets in San Diego as well as some other markets in Los Angeles. I think Los Angeles, we can continue to focus on how the west side of LA starting at Manhattan beach and then going up north through the west side of LA. Santa Barbara extends that road an extra 70, 80 miles up the road, but it's still -- we feel that kind of Santa Barbara to Manhattan Beach kind of run in Los Angeles is somewhere that we will be able to find other opportunities.

Okay. I just wanted to ask, Ashish, you mentioned on your last call that you guys thought about $4 million came in the fourth quarter from Hurricane Sandy kind of net benefits. Would that have included the $680,000 in cancellation fees that you mentioned? Or is that in addition to that?

Yes, does include the $680,000 in cancellation.

Okay. Thank you.

Nikhil Bhalla with FBR.

Hi, good morning, everyone. Just a couple of questions. Going back to the tax increases, is that something that was very specific to just your hotels in New York? Is that kind of a more broader phenomenon in New York, you know, just with tax rates adjusting up for most hotels?

It's the latter. I think that we have seen tax increases and other companies that have reported have noted much higher assessments in New York. In New York and almost all municipalities look back, backward looking from an assessment standpoint, and the whole process is very convoluted. I would say that at any given time, we probably have 40 ongoing assessments that we are fighting. You always get assessment up and you fight it and try to get it reversed.

In sheer percentage growth, it was much higher than we have ever seen it in the past. It was New York. It was also reassessments at several of our West Coast properties and the Miami property from municipalities catching up on the purchase prices. So we don't think its isolated to our hotels by any means, but we do think that it's not something that would be a run rate by any means.

And just in terms of acquisitions going forward, obviously the sale of those free up a lot of cash. How is your pipeline trending right now in terms of how quickly you might be able to deposit cash that you get from the sales?

This is Neil. Just in terms of the pipeline, the pipeline is -- there are assets that we're spending time on in underwriting, but it's been a pretty tight acquisition pipeline for the last three to six months. I think there was some expectation that the second half of this year would bring a lot more assets to market and more opportunities for acquisitions, but it's been a little bit choppier than that. I think kind of fundamental performance and things have probably led some owners to wait another year, wait another six months. So it has been -- it's not a robust pipeline, but we do have a handful of opportunities in these strategic markets that we're focused on, on the West Coast as well as in Miami, that we may be in position, I think -- may be in position that by -- through the first half of next year that we would be able to deploy these proceeds strategically in the right markets.

Okay. And so would it be rational to assume that your next set of acquisitions are more than likely either on the West Coast or somewhere in Miami?

Yes. That would be fair to assume. We will remain opportunistic and we do still find the markets that we are present in on the East Coast to still be strong opportunities and for the right deal, we would look there. But right now most of our acquisition pursuits are on the West Coast or in Miami.

Thanks for that, Neil. One final question. This is for Ashish. Ashish, you mentioned about the CapEx trending down next year. Any reasonable range that we should expect that to be in? Would it be under $20 million? Just any color would be helpful.

I think excluding the one project that we have ongoing would be the Residence Inn Coconut Grove, and of course the carryover from the Rittenhouse, so excluding those, I think $20 million is a very reasonable number.

Great. Thank you.

Ryan Meliker, MLV & Company.

Good morning, guys. I apologize if I missed this. I got in a little late, but with regards to the fourth-quarter guidance, can you break down what you believe the impact was from the government shut down?

Sure. Hello, Ryan. The government shut down for us probably results in somewhere between -- we've estimated, say $375,000 to $400,000 of EBITDA loss, just from the shutdown itself.

So in terms of your RevPAR, any ballpark of what that equates to? I'm just trying to reconcile how your same-store RevPAR and your [port port] from a RevPAR versus our expectations prior to the government shut down.

I think that we would look at the government shut down probably impacting RevPAR somewhere in the 50 basis point range just because when you look at the -- it's the two to three-week period and then just the ongoing kind of cancellations that aren't going to come back for the rest of the quarter. I think it's probably in that 50 basis point range.

Okay. That makes sense. And then with regards to 1Q, can you give us any thoughts on how things are trending for you guys with the impact of the Super Bowl? The way you guys are looking at from a pricing standpoint, if you think the benefits from the Super Bowl will offset Sandy or not offset Sandy, et cetera.

Sure. As we've looked at the Super Bowl for first quarter, absolutely looking at it being very beneficial to the portfolio and offsetting some of the Sandy impact. As we've looked at it, a couple of things to be kind of cognizant of are New York is just a much larger market when it comes to the Super Bowl than some of the traditional markets that it's held in. The New York City Metro goes all the way down to Central Jersey, Connecticut, Long Island. We think that from a RevPAR perspective, it could add anywhere from $8 to $9 to our New York City RevPAR and maybe $3 to $4 kind of total portfolio RevPAR. We are looking at sort of an incremental anywhere from $1.5 million to $1.75 million of revenues just on a same-store basis from the Super Bowl.

Great. And that RevPAR dynamic was for 1Q, yes?

Just for 1Q. Yes.

Just for 1Q. All right. Any idea what Sandy added last year in 1Q? Was it about the same amount? Less?

We estimate that kind of the EBITDA impact was about $2 million for Sandy last year across the New York portfolio.

Okay, great. That's helpful. That's all for me. Thank you.

(Operator Instructions)

David Loeb with Baird.

Good morning. Ashish, I wonder if you could give us kind of a two-year comp on the fourth quarter to smooth out Sandy. I realize the government shutdown will be in that a little bit, but what do you think that the results from the fourth quarter are likely to be relative to two years ago?

Yes. We have looked into that, David. I think that if you look back at sort of 2011 to where we are today, last year, total New York City portfolio was up around 14.6% with Manhattan being up 11.5%. And this is just fourth quarter. So anticipating that New York City urban goes, you know, negative by a few hundred basis points and Manhattan is about flat, we are still up from 2011 through 2013 somewhere in the low teens, kind of 12% range over that two-year period.

Great. That's helpful. And this is for Jay or Neil. A couple of questions on New York. I guess the first is land value. Where do you see sites? What's the highest best use for sites today and can you give us a view on short-term supply outlook and longer-term supply outlook?

David, I can get started. Just on land values, there is I think two dynamics going on right now that are interesting from a land point of view. First, there is just hotel land is increasing in value across the last two, three years pretty significantly. So we are back into an environment similar to kind of 2005, 2006 where $400 to $500 per square foot of buildable land per hotel is kind of the new market price. The highest quality pieces of land can be significantly higher than that but the kind of general market is between that $400 and $500 per foot. There is continues as you've seen and probably heard about the residential market in New York City continues to be completely on fire even more so than it might have been last cycle.

So we will continue to probably see those land values continue to increase for the foreseeable future. I think another interesting dynamic is just the ground lease market, the sale of land for sale/lease transactions. We are seeing a lot of transactions in that area where existing hotel owners can sell the land underneath their assets for pretty significant valuations there as well. So we are staying at a $300,000 per key ascribed to land value, to be a level where we are seeing a lot of trades today. And so land value is clearly increasing and that is going to, I think, cause some future outlook for supply will be curtailed pretty significantly with that land value escalation. On the other hand, existing owners in New York City do have a significant value creation opportunity in dividing the economic of their land from their hotel.

Let me flip the question now and ask you about what you see as the value of hotels based on recent trades for land, recent trades for hotels. Where do you see the value of your portfolio in New York on a per key basis these days?

I think our select service portfolio in New York, we target it kind of between $500,000 and $550,000 to $600,000 a key. So let's say $500,000 to $600,000 a key depending on the location and the in-place yield. Our entire New York City portfolio is a fee interest in the land as well as the hotels and most of them are unencumbered of debt. And so I think that with those kinds of assets and that kind of yield, between $500,000 and $600,000 per key. I think interestingly, the independents would probably trade at a higher level than that versus the brands just for this kind of encumbrance discount. But between that range is where we see value today.

And how would you translate that into cap rate?

I think that's kind of a 5% to 6% cap rate.

And in terms of the land value, would you consider something like that where you monetize the land value of your currently fee-simple ownership?

We've looked at it. We've looked at it across the last year. Definitely I think the market has gotten even better for those kinds of transactions today. From our point of view, I think if we had a use of capital, it would be more tempting. But we are noodling it over. From our viewpoint, I think when you have the opportunity to have unencumbered assets, have the fee interest, we believe that long term that will pay for itself and the short-term kind of proceeds that we might be able to get from a land lease may in the future kind of lead to some cap on some of our values on the other end. But we are considering it and we are looking at it because it is a very liquid market.

We are finding that the lessees, so like the So there is a couple of deals in the midst of securitization right now that have had pretty aggressive ground leases taken out of them and now they are in the midst of financing them on the CMBS market for the leasehold interests. And if that goes as expected, then its something we're going to have to really, really look at. Because if there is a pure kind of acknowledgment by the market that there is very little diminution in value for having a 99-year lease, leasehold versus the fee then it will be something we'll have to look at.

That's very interesting. Of course, if you don't do it, it might be something that a group of investors might want to do with a portfolio like yours. So the value creation may be there one way or the other. Great. Thank you. That's all I had.

Anthony Powell, Barclays.

Hi. Good morning. I have a question on the Washington DC market. There's another round of sequestration cuts planned in January. Do you think those to have an incremental drag on the DC market or do you believe that the overall impact should be able to anniversary it as you cross the original round of cuts this past year?

I think in the first quarter, we are going to have tough comps as it is, with the inauguration not occurring versus 2012. I think that continued sequestration is going to be some added weight on the quarter.

Great. What about past the first quarter going into the rest of the year? Do you expect the new cuts to have a kind of an incremental drag on results throughout 2014 and maybe beyond?

You know, it's very, very difficult to know what those cuts are going to look like. I think we are going to see this budget come out in, we hope in the first quarter, and we are expecting that it's going to be a little more conservative around travel but to what extent, the order of magnitude, we don't know. But we are somewhat -- we are watching Washington DC very closely, but I don't know that we got a lot of visibility for what the cuts are going to look like for the rest of the year.

Okay. Just a follow-up on I guess the use of cash. I understand that your goal is to buy new hotels on the West Coast and in other high-growth markets. If you are not able to find the deal that you like, what would be secondary use of cash from the proceeds of the Blackstone deal? Thank you.

Sure. Obviously we are immediately paying down debt. I think for a more permanent use of those proceeds in order to mitigate the dilution from the loss of cash flow from the assets, if we don't find other assets to deploy, growth assets to deploy the proceeds to, I think we would very seriously consider buying back stock if the stock price continues to perform at this level, which we feel is well under where it should be.

Thanks a lot for the answer.

Jeff Donnelly with Wells Fargo.

I just wanted to follow-up on Mr. Loeb's question. If roughly call it 50% to 60% of the value is in the land, and that can be stripped off as a ground lease, what kind of yield or structure do you think the folks were purchasing or I should say selling those ground leases are looking for? I'm just curious what a market comp is on that.

You're looking for, depending on the players 5%, kind of 4.5% to 5% depending on the location and the improvement. And then there depending on the deal, it's just how you structure the escalations, whether they are look backs based on CPI or whether they are kind of fixed yield targets. And there's also some features for kind of buyback rights for either party. So you can structure it to achieve the goals of buyer and seller, but these latest ones that we've seen have been right around 5%.

Is there a preference from your perspective as maybe a buyer of properties that might be on ground lease that -- do you prefer the CPI-based where it's nonspecific versus fixed?

We prefer fee interest when we're buying assets generally, quite frankly, I think that it's the fixed assumption that gives you at least some clarity up front for underwriting and for business planning up front. But obviously you can get hurt with that depending on macroeconomics and [fees guy] and things. So it's really a case-by-case basis. It is probably a function of how volatile you think the hotel income stream is going to be relative to your lease payment.

I was going to say, I was curious how the ground lease works at Oceana and how you guys think about valuing in that context versus a fee simple versus a ground lease asset.

In Oceana, we have a kind of -- we have a fixed stream that we are able to see. It's a little below -- there are some look back provisions, but they are generally it's a lease that we can predict just on a percentage basis on what the growth is going to be on an annual basis. We do believe in this asset that we will have an opportunity to buy back the land over time. But it's a -- we are in diligence right now and still kind of coming to -- coming to a view on it.

Okay. You were mentioning before about looking for assets in Miami. I know a lot of your peers have been frustrated with accessing Miami, specifically Miami Beach because many of the hotels there are small. Do you think there is an opportunity to aggregate maybe a complex of smaller hotels in the Miami Beach area to capture some operating efficiencies? It doesn't seem like anyone's really explored that like they have in other markets.

We have been exploring it, Jeff, for some time. The reason we haven't made a acquisition on some of these smaller hotels in that area, you just need to have enough scale to do it, I think. We have looked at several kind of 50 and 70 room hotels that if they were all available at the same time at the right price, it could be compelling. But as a standalone, it is still very difficult to kind of drive the economics that we are looking for from these assets. But that is something that we're very focused on and we do believe kind of that south of 15th Street or south of 20th Street there is a lot of assets there that with professional management and with a little bit of capital you could really generate some pretty near returns to what they're performing at today. But it's not for the faint of heart.

Some of these older buildings and smaller hotels, they require a lot of capital and a lot of time in executing those kinds of plans. So we've been very sensitive to making sure that if we are going to go through a redevelopment, that it's one that has a significant EBITDA stream to pay it off. I hear you, that you could put together three or four or five and get that EBITDA stream, but we are waiting until we can find ones that are solid enough that we don't have to count on the bolt on to make it work.

Understood. I'm curious just for your perspective on this as it relates to the New York City market, what implications do you think the change in the New York City mayor is going to have for you guys? There is certainly a lot of talk out there that he's for lack of a better term I guess I'll call it pro-taxation. Are you concerned that could lead to higher hotel or property taxes? I'm just curious for your perspective.

You know, it's interesting. We haven't had a chance to meet him, but we have read about him. He is on social issues very, very liberal. I just read a headline this morning, I haven't had a chance to read the article, but he actually named a significantly important real estate entrepreneur, business person, that was a part of the Bloomberg administration to head up his transition team, which was an interesting choice. And so -- I guess the short answer is that the jury is still out. I do know that even the one week before the primaries, he was spending a lot of time with several real estate leaders in the city and having sort of forums and one-on-one meetings with a lot of real estate folks.

Like I said, I think he is going to be liberal on social issues, and I think we are all good with that. I think having better quality of life in New York and better education in New York is good for all of us property owners there. I think he's going to be pretty smart, though, about taxation, and I think he has a pretty good sense of where the bread is getting buttered. Now that being said, we have seen property taxes jump a little bit. So I don't know that we are going to see property taxes go backwards with the new mayor, but I'm just hoping that we don't exceed the long-term CAGR or the long-term run rate that we have seen. That it's more status quo.

Understood. And one last question just on flood insurance. Similarly there is a lot of talk out there, it looks like FEMA is looking to expand the areas that are subject to flood insurance at the same time that they are increasing premiums pretty markedly. I know that maybe for consumers or residential users, it's probably sharper increases than maybe for commercial, but I know you don't own a lot of waterfront properties. You do have some properties that are certainly were in areas that were affected by Sandy. I'm just curious if you guys have any sense of -- is there any impact to your flood insurance costs going forward whether its Oceana or some of your East Coast assets?

This is Ashish. I think that the insurance market has been pretty soft over the past few years and then with Sandy and some of the other natural disasters, we did see across the industry increases in property insurance this year. Flood insurance, certainly in many type of properties in downtown New York, Miami, coastal markets, has gone up. But I don't know if it has gone up at the headline numbers that you see for residential, as you mentioned. It's been more sort of high single digits, not the 30% type of increases. That's great. Thank you.

Smedes Rose, Evercore.

Thanks. I just wanted to ask you one more New York question. Are you surprised that there's not more kind of hotel to condo conversion going on now versus kind of the last, I would say, kind of real estate boom in New York where you actually saw a lot of supply going out to condos. Is there something different that you see in this cycle or is there something legislatively that's different that would prevent that?

I don't know if there's anything legislatively that's different. But in terms of why we haven't seen it as much yet, I think it's building. I think we will start to see it now. We saw with Central Park South, the Park Lane, there is an asset on the market right now in lower Manhattan, luxury hotel that will likely be a condo conversion as well. So I think we are at the point in the market and point in the cycle that we will start to see more of that.

Okay. Interesting. Okay. Thank you.

That concludes today's question-and-answer session. Mr. Jay Shah, at this time I will turn the conference back to you for any additional or closing remarks.

Thank you, operator. I don't have any further remarks. I will thank everyone for joining us this morning.

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