Hersha Hospitality Trust (HT) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust second quarter 2014 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

At this time, I'd like to turn the conference over to Peter Majeski, Manager of Investor Relations and Finance. Please go ahead, sir.

Thank you, Noah, and good morning to everyone participating today. Welcome to Hersha Hospitality Trust's second quarter 2014 conference call on this, August 6, 2014. Today's call will be based on the second quarter 2014 earnings release, which was distributed yesterday afternoon. Today's call will also be webcast which can be accessed via www.hersha.com within the Investor Relations section.

Prior to proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial positions to be materially different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Jay Shah, Hersha Hospitality Trust's Chief Executive Officer. Jay, you may begin.

Okay. Thank you, Pete, and good morning to those on today's call. This morning I'm joined by Neil Shah, our Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer.

This quarter's conference call marks the culmination of numerous strategic initiatives we've undertaken to drive value so far in the cycle. With many of the headwinds facing New York and Washington D.C. now in the rear view mirror, along with the delivery of our development pipeline and the completion of our large scale renovation projects, our second-quarter results show the strength of our transformed portfolio. The combination of these factors is especially meaningful as we continue to see sustained strength in our gateway markets and enter that part of the cycle when growth is driven primarily by rate.

We are well positioned to leverage the embedded earnings potential from our young stabilizing assets and full-year contributions from completed acquisitions and development, while the disposition of 39 secondary asset markets

valued at $430 million over the past two years

allows a clearer view of our EBITDA growth in the years ahead.

While the country's GDP growth remains lukewarm from a historical perspective, the economy grew at a seasonally adjusted annual rate of 4% in the second quarter, driven by an acceleration of consumer spending and an increase in inventories. Employers have added more than 200,000 jobs per month for six straight months, decreasing the unemployment rate from 7.3% in July 2013 to 6.2% in July 2014 and consumer spending, accounting for two-thirds of the country's economic output, advanced modestly in June providing confidence that the current recovery is on track.

While Hersha's consolidated portfolio does not rely on large group concentration, the continued rebound in group business benefits our portfolio, potentially -- particularly with our core high occupancy urban markets due to the compression and relating pricing power that it creates. These factors combined with healthy transient demand led to a continued acceleration of RevPAR growth from the first quarter while overall trends appear to be accelerating as we enter the back half of the year.

Across-the-board strength in our markets delivered RevPAR growth of 6.6% at the company's comparable hotels. On a consolidated basis, recent acquisitions in high-growth markets such as South Florida and the West Coast, combined with a three stabilizing Manhattan hotels help to drive an 8.2% RevPAR increase in the second quarter, comprised of a 4% increase in ADR, and a 335 basis points increase in occupancy to a strong 86.6%.

Hotel EBITDA for the consolidated portfolio rose 25.5% or $9.5 million to $46.7 million in the second quarter, driven by the increase in ADR, the continued ramp up at the Hyatt Union Square and the new tower at the Cadillac Miami and from contributions from newly renovated and acquired assets. In addition, as the company has repositioned the portfolio and increased exposure to high-growth markets in South Florida and the West Coast, our EBITDA contribution has shifted.

During the second quarter, our South Florida and West Coast portfolios collectively produced 20% of our consolidated EBITDA versus just 12% in the second quarter of 2013. With the completion of our development projects and greater visibility with regard to earnings, we'll be providing expanded guidance included comparable store RevPAR and hotel EBITDA margins as well as FFO and EBITDA forecast which will be discussed later in the call.

In terms of markets, I'll start with Manhattan where our performance was noteworthy on several levels. Our comparable Manhattan portfolio reported 8.2% RevPAR growth outperforming the market's 5.9% growth. Our performance was driven in large part by a 4.6% increase in ADR and a 321 basis points increase in occupancy to 96.5%, representing the highest Manhattan occupancy recorded in any quarter in the company's history.

As of June 2014, Manhattan's trailing 12-month occupancy levels have remained above 85% for 25 consecutive months. And during that time period, our Manhattan portfolio has consistently run occupancies nearly 500 basis points above general Manhattan market levels. High occupancies in Manhattan and within Hersha's portfolio suggest that new supply is being absorbed and that demand at our hotels is more than adequate to absorb the declining future supply growth. This is further supported quantitatively by industry consultants who reported that Manhattan supply increase of 5.3% during the second quarter was outpaced significantly by demand growth of 8.8%.

While we acknowledge the new supply entering the market, our long-term conviction on Manhattan remains firm, given the city's continued preeminence as a financial, cultural and technological hub. It's placed at a highly sought after international tourist destination and the rapidly increasing real estate values which continue to surpass record levels.

During the second quarter, we opened two Manhattan properties, the 205-room Hilton Garden Inn in Midtown East on 52nd Street, off of 3rd Avenue, and the 81-room Hampton Inn Downtown-Financial District on Pearl Street, just two blocks from Battery park.

Both hotels complement the quality and net asset value of Hersha's Manhattan hotel portfolio and will be immediately accretive to our earnings. These properties have ramped up well with the Hilton Garden Inn Midtown East reporting July occupancy of 90%, and the Hampton Inn in Downtown-Financial District reporting July occupancy of 78% in its first full month of operation. Based on Manhattan's continued strength and our stabilizing assets there, we expect our Manhattan portfolio to report outsized growth with the comparable Manhattan portfolio's 9.9% RevPAR growth in July serving as an indicator.

Our Boston portfolio reported 14% RevPAR growth driven by strong rate growth of 7.3% and a 520 basis point increase in occupancy to 88.7% outperforming the markets 12.8% RevPAR growth. Remaining on trend, the Boxer continues to achieve strong occupancy and rate increases as a result of its rebranding with RevPAR increasing 36.7% in the second quarter far outperforming the competitive set. The Boston market benefited from a very strong convention calendar with two additional citywides and a 36% increase in citywide room production versus second quarter of 2013.

The comparable South Florida portfolio reported 10.4% RevPAR growth as a result of a very strong 12.5% increase in rate. Our second quarter RevPAR growth was underpinned by the strength of the Courtyard Cadillac Miami Beach which delivered a 26.3% RevPAR increase driven by higher rates at the new ocean tower and a strong group base at the hotel. The ocean tower to your is commanding high rates in just it's first six months of operations reporting 85% occupancy in June and maintaining a rate premium over the original Cadillac Tower of between $50 to $70.

For the remainder of the year, our South Florida portfolio will benefit from compression in the Miami Beach markets stemming from numerous citywides and special events although we do expect renovations at our Residence Inn Coconut Grove to negatively impact occupancy.

Our comparable West Coast portfolio delivered 10.6% RevPAR growth as a result of a 6.9% increase in ADR and a 272 basis point increase in occupancy to 82.1%. These results were driven by performance at the Courtyard San Diego and our two Northern California properties. RevPAR at the Courtyard San Diego increased 24.6% benefiting from the solid market and favorable year-over-year comparisons as the hotel completed its room renovation in May of 2013.

Despite a decline in citywides during the second quarter, the number of room nights generated compared to the second quarter of 2013 increased resulting in similar room night consumption creating additional market compression. Additionally, government business in San Diego has returned to pre-sequester levels improving overall conditions within the market.

Our two northern California Hyatt houses continue to benefit from favorable year-over-year comparisons in April and May due to renovations in the prior year and improved business mix. Our West Coast performance was partially offset by the Courtyard in Los Angeles Westside where RevPAR declined 80 basis points due to renovation disruption early in the quarter, a decrease in group business, as well as new hotel supply in Downtown Los Angeles.

July RevPAR was up 7.7% in our comparable West Coast portfolio due to a continuation of positive market trends in San Diego, mix improvement at the Courtyard Los Angeles Westside and continued rate and occupancy gains in Northern California.

In Washington DC, our combined DC portfolio reported 1.7% RevPAR growth fully driven by a 288 basis point increase in occupancy. Our suburban DC portfolio benefited from improved government demand and the return of corporate group in the suburban market whereas our urban properties were negative impacted by a weak convention calendar in the second quarter.

The company suburban DC properties reported a 9.4% RevPAR increase driven by an ADR growth of 3.1% and occupancy gains of 468 basis points to 81.4%. As we look ahead, our DC urban portfolio will benefit from stronger city-wide calendar in the third quarter, with approximately 64,000 additional room nights from city-wide conventions compared to the third quarter of 2013.

The DC Metro portfolio's outlook is also positive due to increased government transient and the return of group business as a result of the government pickup. During July our DC urban portfolio was up 1.4% while our DC Metro portfolio was up 5.9%. As we get later into 2014, we'll be coming up against easier comps due to the government shutdown which took place in October 2013 and negatively impacted last year's fourth quarter.

Our overall second quarter performance demonstrates the growth potential of our high-quality geographically focused urban transient hotel portfolio. We remain optimistic about the remainder of 2014 and our ability to outperform, given the strength in our core markets, management strategies, and our willingness to pull appropriate levers to create shareholder value. With the appropriate transformation and its attendant disruption of the previous three years now behind us, our sight line and path to growth is quite clear.

I'll now turn the call over to Ashish to give us some additional detail. Ashish?

Thanks, Jay. We were pleased with our second-quarter performance and even more encouraged by our third-quarter results to date and our portfolio outlook for the back half of the year. Let me start by providing some more color on the second-quarter results.

Net income applicable to common shareholders was $53.3 million or $0.27 per diluted common share for the second quarter, compared to $14.3 million or $0.07 per diluted common share. Our net income was positively impacted by a $7.2 million gain on the sale of Hotel 373 and gains that we recorded on the acquisition of the Hilton Garden Inn Midtown East, which is purchased on a forward basis for $74 million or approximately $360,000 per key. At acquisition, the property was appraised for $112 million or $546,000 per key, resulting in a purchase price gain of $13.6 million and a full recovery of the development loans with all of the accrued interest and late penalties from the time that we impaired this (inaudible).

Our portfolio performance also positively impacted our adjusted funds from operations, our AFFO in the second quarter. AFFO increased $7.1 million or 25.5% to $34.8 million while our AFFO per diluted share in OP unit was $0.17, an increase from AFFO of $0.13 in the second quarter of 2013.

As Jay mentioned, our portfolio recorded strong RevPAR and EBITDA growth across almost all of our major markets, with our Manhattan properties generating approximately $19.6 million of EBITDA for the quarter. We were also successful in recovering an additional $2.5 million of insurance proceeds related to business interruption caused by Hurricane Sandy that provided an extra benefit to our second-quarter results. We have now successfully closed the insurance claims related to this disruptive event and after the third quarter, we do not forecast any lingering effects or difficult comparisons in our New York portfolio related to the hurricane.

Robust comparable hotel occupancy of 86.7% allowed us to achieve ADR driven 6.6% RevPAR growth and consequently allowed us to increase our comparable hotel EBITDA margins by 90 basis points to 41.9%. EBITDA margin growth was especially strong in our Boston and South Florida portfolios, registering 280 basis points and 560 basis points growth, respectively. Suburban DC margins also exhibited solid growth, increasing 470 basis points, as our properties benefited from cost control initiative and a RevPAR recovery in the sub market.

EBITDA margins in our comparable Manhattan portfolio were a robust 48.7%, and our Manhattan assets generated an incremental $1.1 million of EBITDA during the quarter. Our Manhattan margins were negatively impacted by one-time travel agent credits received in the second quarter of 2013, and it changed to the restaurant concept at one of our New York hotels where we terminated the third-party restaurant lessee and brought the food and beverage operations in-house. These factors negatively impacted flow and collectively hindered second quarter margins by approximately 40 basis points.

As we look ahead, significant focus in Manhattan is being placed on revenue management initiatives to improve mix and reduce relatively expensive distribution channel. This combined with effective cost management and our positive view of the back half of the year should allow us to further improve our industry-leading margins.

Now moving to capital expenditures and our development activity. As previously discussed, we successfully completed the development and acquisition of the Hilton Garden Inn Midtown East and the Hampton Inn Financial-District during the second quarter and presently have no ongoing development projects. As we enter into the mid point of the cycle we believe our development in capital allocation strategy was very well timed as our portfolio is forecast to encounter minimal EBITDA disruption from ongoing capital expenditure projects.

As a result, we still possess ample run way to recognize cash flow growth from the ramp up and stabilization of approximately $0.5 billion of development projects delivered into the portfolio since the beginning of this cycle. At this time, disruptive renovation activity is ongoing only at the Rittenhouse and the Residence Inn Coconut Grove with our capital spending budget for the year remaining between $18 million and $20 million with approximately $6 million to be spent in the second half of 2014.

Moving on to our balance sheet, we finished the second quarter with $20.2 million in cash and approximately $225 million of capacity under our unsecured credit line. We have minimal debt maturities over the next year but have the ability to refinance a few of our secured financings during the third and fourth quarter of this year. As a result, we have started to explore refinancing opportunities for these properties in what is currently a favorable financing environment from a rate, duration and proceeds standpoint.

Our goal during this cycle to is remain nimble in order to quickly respond to any opportunities or changes within the market and to that end our balance sheet remains in good shape and continues to provide us the flexibility to execute our business plan.

Before I move on to our guidance, I wanted to provide an update on what we are currently seeing across our major markets for the third quarter.

We're optimistic with regard to our views for the third quarter and for the remainder of the year. We believe that our portfolio should outperform the industry, given an improving economy, increased business travel, rising international demand, and a geographic footprint of young transient focused portfolio in some of the country's best markets.

Quarter to date, our comparable portfolio RevPAR is up 8.1% with comparable margin growth approximating 150 basis points. To date, the best performing markets in our portfolio are Boston, New York, and the West Coast, which registers comparable property RevPAR growth of 18.8%, 9.9%, and 7.7% respectively, in the month of July. These factors, along with our first half 2014 performance have led us to increase our guidance provided earlier this year.

In addition, with the completion of our development projects, we are also able to provide more meaningful earnings guidance for the remainder of the year. As you saw in our release yesterday, we've introduced additional guidance incorporating the expected impact of the company's various development and capital improvement projects, opening up new hotels and improving economic backdrop.

I won't repeat all of the guidance provided but a few of the highlights include the increase of our consolidated RevPAR growth to 6.5% to 8%, with 100 to 150 basis points of margin growth and a comparable store RevPAR growth range of 5% to 6%, also with 100 to 150 basis points of margin growth. We have also initiated EBITDA guidance to be in the range of $157 million to $162 million, with FFO per diluted share between $0.46 and $0.48 per share.

As we've done in the past, we'll continue to monitor our portfolio performance and the economic outlook as we progress through the remainder of the year and will update our guidance accordingly.

This concludes my portion of the call. We can now turn the to Q&A where Jay, Neil and I will be happy to address any questions that you may have. Operator?

(Operator Instructions) Nikhil Bhalla, FBR Capital Markets

Hi. Good morning, Jay and Ashish.

Good morning.

Hi, good morning, Jay and Ashish. Just on your outlook for New York in 3Q and 4Q, your RevPAR guidance for the back half of the year implies some acceleration, I'm calculating more like 7% to 10% range. How are you thinking about New York overall in 3Q and 4Q?

Just specifically New York and our outlook for it in the third and fourth quarter, I think we are -- as we look into the third quarter, Nikhil, we think we're going to have some benefits in September relative to last year. There's a shift in the holiday, so only one set of the holidays will come in September. We think that the continued transient demand pickup we're seeing that's being driven by compression created by the increase in group pickup in New York is going to benefit us quite a bit, and as we look towards the UNGA, the only risk that Rosh Hashanah falls on the UN General Assembly period. But other than that, we have a very, very clean September, and just the transient pickup indicators we're seeing are pointing to a very, very strong September.

In the second half of the year our outlook is based on just initial booking trends that we're seeing. We're ahead on transient booking pace and we're noticing that the market is pacing ahead on group as well, and so we're counting on further compression in the market just from the pickup in group.

And, Nikhil, let me add to that two things. So, one, Hyatt Union Square becomes a comparable property in the back half of the year, and we're seeing very nice pickup at that particular hotel, and then adding to our consolidated results, we're also seeing a strong stabilization from the Hilton Garden Inn Midtown East and the Hampton Inn Financial-District. So with all those coming into the portfolio, that is helping our RevPAR, for sure.

Got it. And just talking about the shift of holidays, I think I think (inaudible) falls in early October. Would you imagine that maybe you see a very strong third quarter in New York, maybe a little more moderate fourth quarter?

I think, Nikhil, as we said, we've got new properties coming on board, so we believe that our performance is going to be pretty strong. I think general fundamentals in the city are looking pretty attractive. I think the fourth quarter, as usual, will benefit from a good amount of leisure transient in addition to corporate transient, and we think that based on economic indicators and booking pace, that it's likely to be fairly robust this year, and I think that's what's leading to our confidence.

Got it. Okay. Just another question on asset sales or if you're thinking about maybe another slug of asset sales at some point in the future, if you could give us some sense of that.

Nikhil, this is Neil. We continue to explore recycling, you know, across the portfolio. I think in the last couple of quarters we've been exploring opportunities in New York for asset sales, complete hotel sales or land sales. There's nothing imminent at this time but we continue to explore it and we continue to find an extremely liquid market for hotel assets in New York city. We're continue to explore and look for pricing to kind of determine how quickly we take advantage of that opportunity. Currently we don't have other kind of significant uses of capital, and we're seeing continued strong growth in New York, so we're taking our time through this process.

Got it. And just on that note, Neil, where are you seeing cap rates for select service hotels trend today?

Do you mean in New York in particular or just generally in the marketplace?

Yes. No, just New York, given all the supply that's coming in. Yes.

Yes. We're still seeing cap rates in that kind of 5 to 6 cap range, and I think there continue to be some compression even on that side. I think we're seeing in retail and in office in New York cap rates as low as 3%. And so I think that there's still room for valuations to increase in New York for hospitality despite the new supply.

Got it. Thank you very much. That's helpful.

Five to 6 cap is where we're seeing it today.

Got it. Thank you.

Andrew Didora, Bank of America

Hi. Good morning, everyone. Jay, Ashish, nice addition with the EBITDA guidance in the press release especially given all the movement in the portfolio over the last few years. When I think about the underlying growth drivers in your portfolio now, how should I think about the growth rates, the more mature assets that, say, you've owned for a few years versus those that just opened and are ramping?

Yes. Hey, Andrew. This is Ashish. I think as you look at the growth drivers for the portfolio, one thing to consider is that, outside of quarter one, we'll be running well into the 80% occupancy range for the remaining quarters in our portfolio, so as we get deeper into the cycle, it's actually going to be more of a rate-based type of RevPAR recovery and RevPAR story for us with markets in New York kind of running 90% plus, that's already evident. So we think that if you just look at fundamental outlooks foremost markets for the next few years is that leaves in the say 4% to 6% range, you should have on those mature assets at least a 1.5 times multiplier on that on EBITDA, so let's say somewhere in the 7.5% to 10% type of range for EBITDA growth.

And then on the newer assets, you really have to bridge what we've brought into the portfolio and what we've done from a development standpoint, so you have a lot of assets that will be generating full year EBITDA next year, including Parrot Key, Hotel Milo, the Midtown East Hilton Garden Inn, the Hampton Inn Financial-District, so all of those will be delivering full first year EBITDA for the full year and then all the ramp up from assets like Hyatt Union Square and the autographs that we've done. So it's a combination of all those factors that will kind of lead us to your EBITDA.

That's great. And I guess my second question maybe more for Neil, but we've obviously been noting a lot of private equity interest coming into a limited service space over the past 18 months or so, how would you say the competitive landscape has changed for the deals that you're looking at? And then are you still interested in being a major acquirer of assets at this point in time cycle? Thanks.

Sure, Andrew. Absolutely, I think private equity continues to be a significant acquirer and increasingly, I think, are the number one acquirer in the space these days and that is led by leverage. There is a lot of great financing available today and so we continue to expect private equity to have a significant advantage in the acquisitions market.

What we're seeing, that the acquisitions opportunities out there are pretty expensive. I mentioned to Nick that it was a 5% to 6% kind of cap rates in New York. I think we're finding those kinds of cap rates in a lot of other major gateway markets as well, both on the East and the West Coast.

So if there's cash flow on an opportunity, the cap rates are pretty low. There's some deep value opportunities that require two to three-year kind of disruptive renovations where I think you can still find some value, at least on a per-key basis. But I think for cash flowing assets right now, they're pretty expensive.

That said, there are markets out there that are demonstrating very significant growth, and so there are opportunities. We continue to look at opportunities out there but we don't expect to be significant net acquirers right now.

But we continue to look for opportunities, as you've seen from the assets that we have purchased across the last six to eight months, by keeping a very sharp and focused effort on a handful of markets, we are able to uncover some opportunities that produce in place cash flow as well as significant growth swells up grading the quality of the portfolio. So we continued to be out in the market looking at opportunities, but there's nothing imminent or attractive at this time.

That's great. Appreciate the color, guys. Thanks.

Ryan Meliker, MLV & Company.

Hey, good morning, guys. I also would like to let you know that I appreciate the guidance on EBITDA and FFO I think that's helpful, given all the movement in the portfolio, so I think that's nice -- a nice quarter, and would love to see the guidance raised.

One question I have for you, though, is, earlier this year you bought Parrot Key in Key West from Northwood, and we've heard that Northwood is now looking to develop or convert an existing building into another roughly 100-room hotel on Caroline Street down in Key West. I'm assuming you guys knew about this and factored that into your underwriting. But can you give us some color on what you think of the implications of that increased supply will be in a market that doesn't usually have any increased supply? Thanks.

Ryan, yes, we were aware of that project, and are pretty familiar with it, have toured the asset, and they are generally on track, I think, for a end-of-year opening for the hotel. It is a 100-room hotel as you mentioned and it's built on the harbor, very close to Duval Street as well so it's a very strong location. It's in the sub market, closer to Duval Street and so in some way it's a little bit less of a direct impact on Parrot Key.

That said, we think that generally speaking, I think we think it's a positive addition of new supply, will likely be one want highest RevPAR assets in the marketplace because it will be -- like Parrot Key -- relatively newly built and nice large rooms relative to the existing inventory.

So we expect it to further penetrate the luxury level of that marketplace. We don't think that 100 rooms in that market is something that will cause a demonstrable impact on our performance or for the performance of the entire market, really. I think in total inventory in the market of dedicated hotel rooms is about 2600, and then including the bed and breakfast in the market and other kind of small apartment rentals, it's about 5,000 rooms in the market. So the 100 rooms, I think, will be absorbed very quickly. But it is a great hotel.

Is there concern? And help understand because this is in the Duval Street market. My understanding is that's kind of the higher -- the more attractive some market -- higher so obviously you guys have a great asset right on the beach there further out and away from Old Town. But do you think that that 100 rooms are going to have a bigger impact on you guys than it would the core sub market of Duval Street or no?

I think it would have less of an impact on --

Less of an impact.

Less of an impact.

Got you. Okay. That's helpful. That's all. (multiple speakers).

That makes sense. Thanks a lot and nice quarter, guys.

Thanks.

Smedes Rose, Evercore Partners.

Hi, thank you. I was just curious to hear your updated thoughts on the supply trends in New York over the next couple of years and if you're seeing anything? It seems like land pricing and I assume construction pricing continues to increase. I mean, would you expect maybe some of the supply to come down as people look to other maybe higher use alternatives of land or anything you're seeing on the margin there?

Absolutely. You know, we continue to expect this year to be the kind of high watermark for new supply in Manhattan. We are expecting 6.1% supply growth in this year, and we expect that to decline in the coming years down to mid 3's -- 3.8% and then 3.1% in 2015 and 2016. That's based on just current projects under development in our review of sites block by block.

I think that we could see further declines as we look out in the future because of land pricing in Manhattan. Land pricing continues to increase in New York, and it's being driven by the values for residential, for retail, for office, as well as for hospitality to that point.

For hospitality sites and land, it's around $450 to $500 a buildable square foot. I would say -- let me expand that range to include kind of corner sites so it's kind of $400 to $600 of buildable square foot. I think that, when you calculate, with current construction prices, and how much land you need for different kinds of hotels, I think for a select-service hotel today, costs for construction and costs for land and construction should get you to somewhere in between, $500 to $550 a key for select service new hotel construction. I think for larger hotels or for corner sites or full service opportunities, it's probably like closer to $750 to $1 million a key for development costs.

But I think you're absolutely right, we're seeing really significant price acceleration for retail, residential, and office in New York, and we do believe that they can generally pay for built outbuildings. I mean they can pay $1,700 to $2,000 a foot and for it to still be a very compelling opportunity, and generally hotels aren't the highest and best use when you get into that range. And so we do believe that future outlook for supply will be significantly less than it's been for the last five years.

Thank you. The other thing I wanted to ask you guys, do you see any change with the current mayor in the way that New York City is being marketed to other cities in the US or, you know, to Europe or other countries? I know that was sort of a big thrust under Bloomberg and I'm just wondering if you see any change there.

Smedes, this is Jay. I don't know that we have noticed anything significantly different from the prior administration. That being said, I think the momentum in New York is very strong. and so, I think it's continuing to build on itself. International demand continues to just increase at incredible levels there, and capital coming into the city continues to grow. You know, I think there's just been a recognition from a real estate value standpoint that New York is number five or number six amongst major international gateway cities, including London, Paris, Hong Kong, et cetera. And so I think the flight capital keeps coming in.

That being said, I think as we continue to see globalization trends and continued increase in travel globally, huge tailwinds in the city. So, the mayor hasn't done anything necessarily unkind to the travel industry. I don't know that he's doing anything particularly to drive it, but I think the city's momentum is really continuing to build on itself.

Okay. Great. Thanks for the color.

David Loeb, Baird.

Good morning. If I can just echo the appreciation of the guidance and also the clarity on the same-store RevPAR numbers, that is really much appreciated, so thanks for that.

Ashish, just to clarify, are you saying that the insurance recovery is pretty much done or that you might have a little more in the third quarter? I guess I'm asking what's in your brand new guidance?

No, David, we actually signed our settlement agreement so we are 100% done, so we will not be recovering any more funds from Hurricane Sandy.

That was done in the second quarter.

Done in the second quarter. Correct.

Okay. Great. And, Neil, you've been asked this a lot about New York City values so I want to just ask kind of a different question. Are you seeing any spillover from the valuations achieved by New York, by Manhattan hotels, into either outer burough markets or other markets like Boston and Philadelphia?

I'm not sure if -- I don't know how much it's driving it, but the fact is that -- and today in major Gateway markets in the US, cap rates are in that kind of 5 to 6 cap rate range, which to some could argue that makes it New York a lot more compelling because -- there's, over a long period of time -- there's likely going to be a higher growth rate and higher residual values, so I'm not sure if it's driving it one way or the other, but today that 5 to 6 cap rate range seems applicable to more than just New York. It seems applicable to about the top five markets in the country.

Okay. That certainly makes sense. Where do you see per key values in some of those other markets? You were (multiple speakers) --

Significantly less. That's a good point. I should probably have drawn that out. Yes, that leads to per key values in New York that are a lot higher still than other markets because there is significantly more EBITDA per key generated from these New York City assets (multiple speakers).

We're confronted with that issue often when we look at opportunities in other markets, knowing that our New York portfolio is so liquid, you know, would we take -- would we sell a 5 to 6 cap in New York in order to buy a 5 to 6 cap in one of our other six core gateway markets, and to our view right now, that's not a great trade. We need a little bit more in-place cash flow in other markets to justify sales in New York because there's a higher compounded growth rate and higher residual values in New York today.

You know, David, if I could add a little more color to what Neil's saying, I think it's -- and I hope we're getting to the heart of your question. But when you consider -- when you talk about residual real estate values and how that drives general economics, obviously driven by supply and demand dynamics in the market, but looking at the average development site in New York was recently cited at being about $41 million. It was a study (inaudible), $41 million compared to San Francisco's average development site being $21 million.

So all things being equal, there's a suggestion that raw land values are twice as high in New York as they are in San Francisco. And what drives that, I think, there's obviously a whole host of things that we're all familiar with. But when you just take a look real close look at supply of unimproved land in New York and where can New York go, at the end of the day if you imagine New York -- Manhattan has a total available land supply to be developed of only 3% of the total land area of Manhattan. It starts making a lot more sense. Brooklyn has about 3.5% of its land area available for development versus some of the other buroughs in some other cities, it's about one-third to even of less of a percent percentage than most other markets.

Yes. That's actually really interesting. Let me just ask about the specific example. You don't have to give me a specific answer. But a hotel like the Windmills, obviously you paid a really good price for that in the hotel component of that even better, but where would you say luxury hotel values are in a market like Philadelphia especially with the new Four Seasons being built?

Yes. It's interesting. I think in Philadelphia, we don't have a lot of luxury product. That being said, the market rate for our hotel, I would imagine is in the $550 to $650 a key at the Rittenhouse. We bought it at a time when it was at $550 to $650 a key. I think the new Four Seasons that's going to be built -- is rumored it's going to be somewhere between $750 and $900 a room.

So when you start looking at values of these assets that are being built today at today's luxury standards and today's construction cots and today's economics, I think in cities like Philadelphia, Boston, New York, you're getting to be in the similar zip code for values per hotel room. And, again, going back to what Neil said, it makes New York that much more compelling in many ways.

And the Rittenhouse, you're talking about just the hotel component or the whole thing?

No. Just the hotel component.

Yes. (multiple speakers) --

Our basis is far better than that but we bought it at a market where that was probably the going market rate for the hotel.

Yes. Okay. Great. Thank you.

Chris Woronka, Deutsche Bank.

Hey, good morning, guys. I wanted to ask about your New York market, given your extensive exposure there. It's interesting, we looked at the Smith Travel data year to date June 2008 versus year to date June 2014 and New York is running about 200 bps higher on occupancy but the rate is still about 6% lower. But then we looked at Boston, Miami, and even DC and they're all above prior peak occupancy as well but their rates are also higher which I thought was really interesting. Is there -- guys, what do you think are some of the reasons why the New York rate has not yet caught the prior peak?

Yes. I think it's surely driven by the supply bulge that we've had over the last several years, Chris. We see that being -- so you mentioned 6% we think it might be as high as 7% discount on average across the board to prior peak ADR levels. And that's what gives us confidence here in a handful of years ahead is that as that supply growth number begins to decelerate and the demand trends remain consistent, if not accelerate across the next couple of years, we've still got some great runway to close the gap between prior peak. New York, it's studied across the last 20 years has always on a nominal basis exceeded the prior peak ADR and I think all the circumstances are setting up for the same sort of situation again this cycle.

Okay. So your view wouldn't be that there's some notion because it's of the highest absolute rate that there's some notional peak or -- it's not a big group market so it's not like group market groups are being priced out.

No. No, no, no, not at all. We don't have concerns like that at all. We just think that -- obviously, and it's been discussed often, there's been -- we have had above historical average supply growth. It's been significant. It's the only market that was getting any supply growth coming out of the downturn. And I think in the process of absorbing that some pricing power was given up the last couple of years. But as we mentioned, we're starting to see that reaccelerate.

Okay. Understood. And then just on Philadelphia, I guess to kind of follow up on David's question, do you guys still view that as a core market? I mean, it's a small percentage of your portfolio. I guess the follow-up question is, if you think the prices are as strong as they are is that it's not a core market, should we look for some recycling there?

It's a fair question. I think we have some conviction in Philadelphia that would suggest we hold onto the market for a while longer. The city doesn't necessarily have a significant corporate demand base. That being said, the private sector here is comprised significantly of education -- ed and meds type of a city and we see what that can do when you take a look at a city like Boston. The eds and meds component there has been a strong driver.

That, in addition to the fact that we've seen some real significant changes at the Convention Center, and, you know, the Convention Center is a significant demand driver in the city and has gone through probably close to six to seven years of a lot of administrative and managerial turmoil. There were a lot of union issues there.

SMG was recently brought in to take over management of the Convention Center, which formerly was self-managed so you can imagine a Convention Center managed by committee. With union issues, it just wasn't as efficient as it could be.

But SMG has come into place and there has been labor settlements there. And so while not immediate, the outlook at the Convention Center is very strong. And in addition to the eds and meds, there is some technology that's coming out of the eds and meds segment.

And so I think the basis that we're in Philadelphia is extremely attractive and we think the longer term outlook in Philadelphia could be very strong. And so just for the optionality of that of upside, I don't know that we've got so much invested here that it would be a meaningful recycling, relative to the upside optionality that we have by holding onto the assets here.

Okay. That's great color. And then to the extent that you guys do sell additional assets, wherever they may be and obviously it would depend on exactly what you sell. But how do you view Re investment in additional acquisitions relative to where we are in the cycle and your tax basis maybe versus share repurchase or something like that?

Well, I think it's a great question. I think obviously the two sides of recycling are selling something and then reinvesting the proceeds. And as Neil mentioned, we don't have anything imminently in our sights from an acquisition standpoint. We think the acquisitions landscape has become competitive. And so selling assets in markets that at this point we believe are very strong growth markets, have great prospects for the remainder of the cycle and even beyond that may not be as attractive an alternative.

Now, that being said, buying back stock is always an option. And I don't know that we would increase our leverage or use additional available cash that we have today at this very moment to do that. But if we had proceeds from the sale of an asset, we would very seriously consider buying back stock.

But it's one of the alternatives that we continue to weigh. And I think Neil and Ashish on or about both mentioned we've been very diligent about pursuing various strategies to drive share value across the last several years and we are always looking for opportunities like that and will continue to do so. No reason that we won't.

But I think at this time in the cycle, when we're seeing a reacceleration in fundamentals across all of our markets, we want to weigh some of those moves that we make carefully against just reaping the growth that the markets are going to provide and that our more streamlined portfolio is going to generate.

So, again, we do take a very close look at everything and I would tell everyone on the call that we continue to look at things actively but we're not necessarily feeling trigger happy at this moment. We're being very considered about which strategy we pursue to make sure that it makes sense here in the near term as well as sort of in the mid to long-term for the portfolio.

Okay. Got you. Great. Thanks very much.

(Operator Instructions) Anthony Powell, Barclays Capital.

Hi. Good morning, everyone.

Good morning.

Good morning.

Good morning.

The initial occupancy rates at the new Manhattan Hotel is pretty solid. Do you think you'll be able to ramp up your margins more quickly at those hotels given the strong demand there?

Yes, Anthony, I'll tell you, interestingly enough, we find -- normally it takes about a year to really stabilize occupancy, and then we spend sort of the second year stabilizing rate. Yes, we are very encouraged by the July numbers at 52nd Street and at Pearl Street. I think we need to -- before I think we can meaningfully answer that question, we have to take a look at a handful more months. I think all indications are that New York is going to have a lot of strength in the third and fourth quarter. If that strength that we're seeing in July persists as we expect that it will in the third and fourth quarter, then there will be upside in the margin stabilization there, which will have a positive impact on the portfolio.

All right. Great. And just on, I guess, asset prices generally across the nation, are you seeing the competitive landscape for acquisitions drive up prices to the point where the rival replacement cost and do you think that can lead to any -- tick up in supply in the near term in any of your markets outside of New York?

Based on where supply growth rates are today, we've only got a couple of markets that have marginally above historical average supply growth happening. I think, we're starting to see prices creep up. The supply -- the development cycle in most of the markets where we operate is somewhat protracted. From the time that you conceive of a development to going through entitlements, the approval process, putting a shovel in the ground and getting something open, it's generally going to be about three years on the low side and can be significantly longer than that, depending on developer's ability to acquire financing, et cetera, et cetera, and how difficult the site is.

So generally speaking, despite our seeing significant increase in values of assets, I don't know that we consider that something that could imply a spike in supply for the remainder of this cycle. I mean, certainly not until -- like I said, if it's three years on the low side, we wouldn't expect to see big supply bubbles appearing for at least another three to four years.

All right. Great. And as one final I guess (multiple speakers) -- Sorry, I've got one -- yes (multiple speakers) --

I was just going to add that maybe there's -- we remain very focused kind of on our six markets or on some of these major urban gateway markets. I wonder if in the suburban markets we might start seeing supply creeping up a little bit sooner than that just because the development cycle would be shorter.

Thanks. I guess one final on the transaction values overall. Are you seeing your competitors from a PE side being more aggressive on the actual cap rates? Or are they just -- with their ability to lever up, maybe going slightly lower in cap rate but driving the benefits from their leverage ability? Thank you.

Yes, I think it is driven by leverage. I think private equity is always motivated by high teens IRR and close to a two times equity multiple, and today levering something at 75% to 80% even in the sub 5% range can allow private equity to pay lower cap rates than they ever have.

Well, we've seen, really, is that they've been paying lower cap rates more in the sub markets and the secondary markets because they can still buy at a better cap rate -- obtain that type of mid teens IRR that they're looking for.

All right. Great. Thank you.

And with no further questions, I'd like to turn the call back over to Jay Shah for any additional or closing remarks.

Okay. Well, let us conclude just by thanking go everyone for being on the call with us this morning. Neil, Ashish and are in the office the remainder of the day. If any questions occur to anyone after the call, please feel free to call us at the office and again thank you for being with us.

And this does conclude today's conference, thank you for your participation.