Hersha Hospitality Trust (HT) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust third quarter 2014 earnings conference. As a reminder, today's call is being recorded.

(Operator Instructions)

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

Thank you, Doris, and good morning to everyone participating today. Welcome to Hersha Hospitality Trust's third quarter 2014 conference call on this, the 30th of October, 2014.

Today's call will be based on the third quarter 2014 earnings release, which was distributed yesterday. If you have not yet received a copy, please call us at 215-238-1046.

Today's call will also be webcast. To listen to an audio webcast of today's call, please visit 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 everyone. Joining me today is Neil Shah, our Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer.

Let me first begin by thanking all that attended our successful Investor Day earlier this month at The Rittenhouse in Philadelphia. We felt that it was a good opportunity for us to present the 15-year history of our management team and our portfolio evolution.

The day was filled with meaningful interaction and gave our team the opportunity to give an in-depth view of the Company's strategy and tactics and to share an analytical approach to understanding our EBITDA growth potential and our total return track record. The day was well attended, and we believe that the institutional investment community and the research institutions represented found the day as informative as we intended.

Let's move now to the performance in the quarter. The third quarter was characterized by continued strength of industry fundamentals, with demand growth reaching 4.8% , which, preceded by the first quarter's growth of 3.8% and the second quarter's growth of 4.5%, together this building well of demand provided a favorable environment for operators to further execute their business plans and gain pricing power. Favorable demand dynamics combined with limited supply increases drove industry ADR growth of 5.2%, the highest rate growth during the current cycle.

With these positive economic fundamentals as a backdrop, Hersha's high-occupancy urban-transient portfolio outperformed on a RevPAR basis, with our comparable portfolio delivering 9.4% growth. RevPAR was consistently strong across our markets, with the Boston portfolio delivering 17.7% growth, outperforming that city's growth rate of 15.6%. Our West Coast portfolio reported 15.4% growth, and our comparable Manhattan portfolio delivered a robust 9.5% RevPAR growth, compared to 4.3% growth for the broader Manhattan market.

The quarter also marked the first quarter that the Company enjoyed the early benefits of our completed development projects and our well-timed early cycle renovation and value-add projects. With all major development projects complete and online and 70% of the portfolio fully renovated in the past three years, we are well positioned to leverage the embedded earnings potential from young, stabilizing assets and full-year contributions from completed acquisitions and developments.

The result of the sale of 39 stabilized assets in lower growth markets totaling $428 million and the acquisition of 12 strategic high-growth hotels for $627 million in just the last two years since 2012, combined with $149 million in capital spending since the beginning of the cycle in 2009, makes growth in the years ahead very apparent. The Company's EBITDA expansion, driven by industry-leading margins, should accelerate moving forward, offering the Company greater financial flexibility to return capital to shareholders and to drive outsized returns.

Current macroeconomic fundamentals are indicative of a very healthy US economy. Second quarter GDP growth was revised upward to 4.6%, standing out as the strongest quarter of the five-year economic recovery. Growth has exceeded 3.5% for three of the past four quarters, and should the economy expand greater than 3%, which this morning initial indications are that the economy expanded 3.5% in the third quarter, it would mark the longest stretch of economic growth since 2004 to 2005, which were the early years of last decade's recovery.

As of September, the unemployment rate fell to 5.9%, the lowest level since July 2008, and consumer confidence hit a seven-year high in October. As the slack in the employment market tightens and consumer balance sheets continue to improve, the US economy is likely to continue its expansion.

As we wind down the year, the economy appears to be doing just that, boosted by an accelerating business sector, a modest consumer pickup and a very sharp reduction in oil prices, which are down 20% since June. It is estimated that every $0.01 decline in gas prices sustained over a year circulates $1.4 billion back into the economy, much of it in the form of household consumption that is typically spent on discretionary items, including travel.

Today gas prices are $0.25 below where they were one year ago and continuing to trend down. This is particularly relevant for the airline sector, as jet fuel, as can be imagined, is the airlines' single biggest expense. The price of jet fuel has fallen 15% over the past two months, likely leading to lower fares and added routes, which impacts consumers' intention to travel and their discretionary spending at their final destination.

Our portfolio of upscale urban-transient hotels leveraged the strength in the economy to deliver strong consolidated portfolio performance and provided a glimpse of the potential of our future comparable portfolio performance. The consolidated hotels reported 12% RevPAR growth, driven by a 6.9% increase in ADR and a 394-basis-point increase in occupancy, to 86.2%.

Performance was driven by the contribution of our two newly opened Manhattan assets, the Hilton Garden Inn Midtown East and the Hampton Inn Downtown Financial District, the continued stabilization of the Hyatt Union Square, and strong results at our new properties in San Diego and Los Angeles.

In terms of individual markets, as we previously mentioned, our comparable Manhattan portfolio delivered 9.5% RevPAR growth, driven by a 4.4% increase in rate and a 444-basis-point rise in occupancy, to 94.5%. Supply growth of 5.7% in Manhattan during the third quarter was met with a 6.7% increase in demand. In addition, as of September 2014, Manhattan's trailing 12-month occupancy remained above 85% for the 28th consecutive month, with September reporting an all-time high occupancy of 87.1%, demonstrating that new supply is definitely being absorbed.

Our Manhattan performance was driven by high occupancies in July and August stemming from increased transient demand, while September benefited from compression related to the US Open, where over 40% of the attendees came from outside the New York City metropolitan area, and the United Nations General Assembly, where a record-breaking 130-plus heads of state participated in this year's meeting.

Especially noteworthy was the quarter's international traveler contribution, which accounted for 20% of our total room revenue in Manhattan during the third quarter of 2014, the highest quarterly contribution from international to our total room revenue year to date. We expect continued rate growth as we look ahead, supported by strong transient demand and international travel and further boosted by citywide group activity.

The Boston portfolio reported 17.7% RevPAR growth during the third quarter as a result of a 10.5% increase in rate and a 547-basis-point increase in occupancy, to 88.9%. Performance in Boston was driven by The Boxer, which reported 34.1% RevPAR growth and continued to achieve strong occupancy and rate increases as a result of the rebranding completed last year. Convention activity in the market was strong, with the related compression and spillover demand aiding performance.

On the West Coast, the comparable portfolio reported 12.2% RevPAR growth as a result of a 5.5% increase in rate and a 504-basis-point increase in occupancy, to 84.4%. RevPAR at the Courtyard San Diego increased 19.6%, benefiting from three additional conventions and strong international demand, resulting in a 17% increase in occupied room nights. The Courtyard Los Angeles Westside reported a 16.2% increase in the third quarter, driven by incremental corporate and group business resulting from the significant renovations completed earlier this year.

In the fourth quarter, our West Coast portfolio is expected to show continued strength, driven by citywide activity in Los Angeles and strong government and L&R growth and recovery in San Diego, helping to offset an anticipated 40% decline in convention room nights in the San Diego market.

In Washington, D.C. our combined portfolio reported 12% RevPAR growth, driven by a 4% increase in rate and a 590-basis-point increase in occupancy, to 82.5%. The urban and metro portfolios delivered virtually the same performance, as citywide activity and the rebound in government-related demand drove results. Despite the delivery of new supply in the D.C. urban market, our Hampton Inn, which is proximate to the Convention Center, reported increased RevPAR of 13.5% in the third quarter, with transient, government and ecommerce driving the mix.

Looking ahead to the fourth quarter, despite the absence of Congress in October due to the midterm elections, year-over-year comparisons are expected to be favorable due to the government shutdown last year, which occurred in the first two weeks of October 2013. In addition, November is expected to be strong, with 50,000 additional citywide room nights year over year generated by the market's second-largest convention of 2014.

The Company's third quarter comparable and consolidated performance demonstrates the continuing and future strength of our high-quality, geographically focused urban-transient hotel portfolio. We remain confident in our outlook for the remainder of 2014, given the combination of increasing transient demand in our markets, increasingly ADR-rated growth, and the continued preference for urban-transient hotels by the traveling corporate and leisure public.

Our commitment to pull the appropriate levers to create value is based on our philosophy of prioritizing and generating total shareholder returns. Consistent with our ongoing capital allocation strategy, all major decisions will be focused on long-term and sustainable value creation by leveraging our unique strategy and our operational advantage.

With that we'll bring the initial portion of the call to a close and turn to Ashish to provide additional color and context to our financial results. Ashish?

Okay, thank you, Jay.

So we're very encouraged with our third quarter results, confident that the industry's underlying trends as well as our portfolio's ability to outperform will continue through the fourth quarter and into 2015.

Hotel EBITDA for the consolidated portfolio increased 31.2%, or $10.4 million, to $43.7 million in the third quarter. This substantial increase was the result of the strong operating performance at our existing properties and EBITDA contributions from several of our new hotels.

As we discussed previously, the third quarter was the first full quarter of operations at our two new Manhattan assets, along with the Parrot Key Hotel & Resort in Key West. These three properties contributed approximately $4 million in additional EBITDA during the quarter. In addition, the Cadillac Courtyard in Miami Beach generated approximately $1.5 million of EBITDA during the quarter, aided by market strength in the new Ocean Tower.

Our New York City portfolio generated $19.1 million in Hotel EBITDA during the quarter, driven by the Hyatt Union Square, which reported a 23% RevPAR gain, as it continued to stabilize and gain share versus the competitive set. In addition, our Manhattan Times Square three-pack reported strong third quarter results, demonstrating the strength of the Times Square submarket, which has seen an influx of new supply, but has also been positively impacted by strong domestic and international demand that helped offset the new supply. These assets reported RevPAR growth of 8.6%, driven by ADR growth of 4.8% and a 330-basis-point increase in occupancy, to 96.3% for the quarter.

Strong comparable portfolio occupancy of 86% allowed our operators to drive ADR growth during the quarter, and as a result our comparable Hotel EBITDA margins increased 150 basis points, to 38.5%. Especially noteworthy was EBITDA margin growth in our metro D.C. and Boston portfolios, registering 610- and 440-basis-point growth, respectively. Metro D.C. margins, in addition to easier comps, were aided by cost control initiatives and a RevPAR recovery in the suburban market, while margins in Boston benefited from continued stabilization at The Boxer and improved retail production at the Courtyard Brookline and the Holiday Inn Express Cambridge.

EBITDA margins in our comparable Manhattan portfolio were strong, at 43.5%, but remained unchanged during the quarter. Our flow in margin performance in Manhattan was negatively impacted by approximately $314,000 of one-time cancelation revenue reported in the third quarter 2013, a shift from a lease to in-house F&B operation at one of our assets, and increased travel agency commissions due to higher ecommerce revenues. These negative impacts were partially offset by improved labor controls, which contributed to a decline in room labor costs.

We are projecting stronger margin growth for our Manhattan portfolio in the fourth quarter, as the majority of our growth is ADR driven, and we will not be challenged by the aforementioned one-time event.

Moving to capital expenditures and development activity, which at present are at minimal levels, the only disruptive renovation activity that remains ongoing is at the Residence Inn Coconut Grove, which we anticipate completing by the end of November, in time for high season in the South Florida market. Our capital spending budget for the year remains between $19 million and $20 million, with approximately $2 million to be spent in the fourth quarter.

Turning to our balance sheet, we finished the third quarter with $37.9 million in cash and approximately $223 million of capacity under our unsecured credit line. As we discussed at our Investor Day earlier this month, we have minimal debt maturities over the next year, but we are pursuing opportunities to refinance some of our secured financings during the remainder of 2014 and into 2015. To that end we have commenced refinancing of our Hilton Garden Inn Tribeca and the Residence Inn in suburban D.C. in what is currently a very favorable refinancing environment from a rate, duration and proceeds point of view.

Our ability to remain nimble and quickly respond to opportunities or changes within the market has served us well during the current cycle. Our balance sheet is in very good shape, providing the Company a high degree of flexibility to execute our business plan moving forward.

At our September Board of Trustees meeting our Board voted to increase the quarterly cash dividend 16.7%, to $0.07 per share, which going forward represents an annualized dividend rate of $0.28 per share. Our increased common share dividend reflects cash flow growth from the ramp-up and stabilization of strategic acquisitions and development projects delivered into the Company's consolidated portfolio.

As we have discussed, the completion of our ground-up development projects and the majority of our large-scale renovation projects undertaken in the early part of the cycle has the Company well positioned to harvest cash flow, leverage rate-driven revenue growth and return capital to our shareholders.

Prior to discussing our updated guidance, I'd like to first discuss what we're currently seeing across our major markets in the fourth quarter. Our positive view for the remainder of 2014 remains intact based upon our October results. Quarter to date our comparable portfolio RevPAR is up 7.6%, while our consolidated portfolio is up 9%. To date, the best-performing markets in our portfolio are D.C. Metro, Philadelphia, West Coast and Boston properties, which registered comparable property RevPAR growth of 40.9%, 15.5%, 13.6% and 8.8%, respectively, in October.

So, clearly our D.C. properties are aided by easy comps due to the government shutdown during October 2013. However, we are seeing a nice pickup in government group demand, which is helping to drive performance in this market and should continue for the remainder of the quarter.

In terms of our guidance, earlier this month we increased our consolidated and comparable RevPAR guidance. To reiterate those ranges, we expect RevPAR growth of 7.5% to 8.5% for the full year 2014 for our consolidated portfolio and 5.5% to 6.5% for our comparable properties.

Excluding the first quarter, which was impacted by very difficult comps in D.C. and New York, our increased guidance range implies that our comparable RevPAR growth from quarters two to four will be in the range of 7% to 8%, which is more indicative of the strength of our existing portfolio. These updated figures incorporate our year-to-date performance as of September 30 and the continued improvement in operating and economic fundamentals.

We're also increasing our EBITDA and FFO guidance for the year, and we now expect total adjusted EBITDA to be in the range of $160 million to $163 million, with FFO per diluted share between $0.47 to $0.49.

We anticipate our G&A expenses to remain consistent with 2013, in the range of $14.25 million to $14.5 million for the fiscal year. And one item to note is that based on the likelihood of achieving our preestablished incentive metrics or earnings we've booked an additional incentive accrual in the third quarter that impacted our earnings by approximately $900,000. In the previous year this expense was booked in the fourth quarter, so therefore we're forecasting our 2014 fourth quarter G&A expense to be below our 2013 fourth quarter expense by approximately the same amount.

As we've done in the past, we'll provide our expectations for 2015 during our fourth quarter earnings call, to be held early next year.

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

Thank you.

(Operator Instructions)

Andrew Didora, Bank of America.

Ashish, thanks for the additional color on the Manhattan margins there. I was just wondering, on that topic, where do you guys see kind of the longer term operating expense growth in New York? And do you think there is a theoretical cap on your margin growth in New York just given the high levels of margins that are already in that market?

Sure. I think on operating expenses, Andrew, the real unknown is property taxes in New York, which we aggressively challenge every assessment every year. But we are able to sort of pull some levers at our property and keep labor costs in check. We also look at a variety of -- whether it's F&B expenses for the comp breakfasts or any other costs, utility savings. We do asset manage our properties very aggressively. So we're not seeing outside of property taxes just a surge in operating expenses.

And with our occupancies in New York, which this year should run portfolio wide somewhere between 92% and 93%, you can imagine that almost all of the growth going forward is really rate-based growth. So I think that, although there is a theoretical cap on margin, if we continue to get the type of rate-based growth that we're anticipating, we do have the ability to move margin even in New York City pretty significantly.

Okay. I guess maybe just from a labor perspective, do you think that grows at a rate higher than inflation over the next few years?

I don't think so. We don't think that the labor costs and the benefits expenses go up more than inflation over the next few years, and certainly not more than what we anticipate RevPAR growth to be over the next few years.

Got it. Okay. And then my second question, at your Investor Day you guys spoke a little bit about the potential of maybe selling some land leases at some of your New York hotels. I guess, why would you want to pull forward some of this cash, and if you were to do such a transaction what would you use the cash for?

Andrew, the main reasons we're considering it are this. First of all, it's a significant amount of value that we have embedded, and it's sort of unique amongst our peer set. A lot of the folks in New York are already on land leases. We own all but one asset fee simple. And so it's value that is embedded in the New York portfolio that may or may not be fully recognized.

Secondly, the market is hot, so from an opportunistic standpoint. It's an opportunity to make a trade that would be very accretive for the Company.

And, of course, that begs a third question, which you already asked, like what would you do with the proceeds? And right now, and I'm sure at some point in the year we'll give an update on the acquisitions environment, we're not seeing that many acquisitions out there that would make sense for this company. That being said, there has been continued volatility across the last couple of months in the stock market, and we would look for opportunities perhaps to use the cash to buy back stock when the time was right.

Great. Thanks a lot, guys.

Ryan Meliker, MLV & Co.

I just had a quick question, and I apologize if I missed it earlier on the call. I jumped on a little late. But could you give me or give us some indication as to what Manhattan's supply growth was in 3Q that you guys were able to generate such strong RevPAR on, and kind of how you're looking at Manhattan's supply growth? I know you guys do a lot more work than anybody else in terms of what supply's going to look like over the next four quarters. But that would be helpful color, as well. Thanks.

Ryan, on the third quarter specifically, we saw in New York City a 5.7% supply growth, and that compared to about a 7%, 6.7% demand growth, so significant supply but demand continues to outpace it. For the year I think our initial projections were close to a 6% new supply. I think what will end up happening will be a little bit less than that, call it 5.5% kind of supply, just because of some late deliveries.

For the next -- for the forward couple of years we were anticipating 3% and 4% supply growth. Because of some of the delays from this year, next year may be 3.5%, getting close to 4%. But the year after that likely also in that 3% to 4% range.

We've mentioned before that this is -- 2014 is the high water mark for new supply across this cycle, and we have experienced it and it has made it more difficult to raise rates. But all of that said, I think we are now digesting most of this high water mark supply and looking forward to some strong rate growth in the coming years.

That's great insight. That was -- that's all for me. Thanks a lot. I really do appreciate the color.

David Loeb, Robert W. Baird.

I just want to drill down a little further on the stock buyback issue. You mentioned that you might be opportunistic. Can you just give us an update on the new credit facility? Are there the same restrictions on your ability to buy back stock, and how much capacity do you have today relative to those restrictions?

Hey, David. The credit facility that was entered into in February or March, so that has not been amended. We still do have some restrictions on that. But with an improved EBITDA and FFO outlook for next year, we have capacity under our $75 million program right now that we could purchase a significant amount of stock in 2015, and some stock even for 2014. We have a lot of capacity left for this year.

So from a standpoint of how much could that be, right now we probably have around $60 million remaining under the $75 million cap. I think that we could purchase somewhere in that $50 million to $60 million range next year.

Okay, and would you consider buying in stock first using the line and then proceeding to a closing on a land transaction in some short window after that?

We have significant kind of cash flow growth and leverage capacity today, and so opportunistically I think we would be -- we don't consider it something that we have to wait for a land sale closing for.

Okay. And finally on that topic, are there other sources of net proceeds, for example, upcoming refinancings where you could pull out net proceeds or some possible disposition of or partner buyout, for that matter, of the Mystic joint venture or other joint venture opportunities?

I'll just address the refinancings. Yes, absolutely, there are other sources. Just indicatively, we're refinancing, as I mentioned, the Hilton Garden in Tribeca. So that's about a $31 million loan. We will refinance that for somewhere in the range of $45 million to $47 million. So there are some proceeds that could be utilized just from that particular refinancing.

The Residence Inn in suburban D.C., we probably could take out another -- an extra $5 million if we wanted to. I'm not sure if we will at this point. And, yes, we certainly continue to look at asset sales as they make sense, but there's nothing on the horizon at this time.

David, I'll just add a little bit more color on the land sales. If we were to consider some of these land sales, one of the use of proceeds that I didn't mention -- we talked about potentially using the proceeds to buy back stock during periods of volatility -- most likely we'd use some of the proceeds also to pay down debt. And as we would pay down debt that would probably increase our ability with adjustments to facility to buy back more stock should that remain opportunistic.

And JV opportunities in either direction?

I'm sorry, David, I didn't --

Opportunities to either liquidate the joint ventures or buy out your partners?

The joint ventures, it's -- I don't think that that's a significant opportunity. I wouldn't want anyone to be distracted by that. I think the -- our view is is that they're a real small part of our balance sheet. I don't know that we've got that kind of dynamicism with the partnerships that we have. So, yes, I don't see there getting any imminent opportunities with the joint ventures for proceeds or buyouts.

Okay. One last topic -- we've been kind of skirting around this -- but can you just give us an update on where you see New York City values for select-service, compact full-service hotels today and how you see that value split between land and building?

Sure. I think there was a recent transaction, David, that is, I think, a pretty good kind of indication and very similar to our select service portfolio in New York, at least. The two -- there was a Hampton Inn and a Holiday Inn Express that traded in the last several weeks, I guess. It was a Middle Eastern offshore buyer who we're familiar with and have known for some time, actually.

They were able to -- I think it was a good deal all around, really. The total price across the two hotels was $515,000, $516,000 per key. The Hampton Inn traded around $543,000 a key. The Express was closer to $500,000 a key. That represented a 6-plus kind of cap rate. So I think from the buyer's perspective they're getting a very strong, cash flow-oriented deal. And I think from the seller's perspective they were able to get some -- they were able to get a good sale done.

I think this -- these were both fee interests. And what we've seen, I think, a little bit earlier in the year we saw a couple of land lease kind of sales, and those were around $450,000 a key. So once the land was stripped out, they were able to sell select-service hotels very similar to our select-service hotels in New York at about $450,000 a key. So it's about $150,000 to $200,000 a key in land value for these kinds of select-service hotels.

And now we've seen -- across the last year and a half or so we've seen a lot of comps that triangulate right around this kind of value of $500,000 to $550,000 a key for the entire hotel, $150,000 to $200,000 a key for the land underneath it.

You mentioned the full-service side. I think that's -- there has been less comps, I think, in that area. But generally you go back to last year there was a sale of something called The James, which was a land lease union opportunity, union property that traded around $750,000 a key. We saw the Sofitel trade around $700,000 a key with an encumbered by brand and management. We've seen -- there's several on the market right now, or quietly being marketed, very close to $1 million a key, so in the $900,000-plus kind of range for 4-, 4.5-star kind of hotels that are unencumbered of brand and management.

So on the full-service side there's much -- there's less clarity on the comps, but I would say $750,000 to $1 million a key. And I think those are the kind of comps you should think of for kind of Union Square or some of our larger kind of more style-oriented hotels. Is that -- does that address the question, David?

Exactly what I was looking for. Thank you. That's all I had.

Bill Crow, Raymond James & Associates, Inc.

I have three questions on New York, but I want to start with a follow-up to David's question. I think in the answer, Ashish, to his question about share repurchase you talked about an improved 2014 and 2015 outlook. Maybe you guys could take a few seconds and just talk about the evolution of your viewpoint towards 2015, maybe how that has changed over the last 90 or 120 days.

Yes, absolutely, Bill. We gave some ranges on kind of EBITDA for next year, as well. But I think our outlook for 2015 is really predicated on a couple of items. I mean, number one is that we now have clarity on all of the developments that have been delivered and what type of run rate we should expect from those projects. So we didn't know how some of these projects were going to come out of the ground and how they were going to ramp up, but that has provided -- with the third quarter behind us and our fourth quarter trend, that has given us a lot of clarity on what they are going to be able to contribute to EBITDA next year.

The existing portfolio we actually have very minimal disruption next year, so we're looking at CapEx to be probably in the $20 million to $25 million range, down from $40 million this year. So that limited disruption also is giving us a lot more clarity for next year.

And then just overall market growth. We have been bullish on our New York City portfolio and in all of our other markets. We're seeing great strength going into 2015, some obviously better than others.

But we're in the middle of budgets right now, and as we finalize those and talk to the Street I don't think there'll be a real change of outlook based upon what we're seeing today. So I think all of those things really give us more confidence about 2015.

Great. Now, shifting to New York, and you guys have been more right than others on kind of some of the market dynamics and the demand growth that you've seen there, but let me ask you three questions. So first of all, the Hyatt on Lex, how much business do you think you're picking up from the closing, temporary closing of the InterCon across the street?

It's interesting. The InterCon's been closed for a pretty short period at this point. I think we'll have a much better sense of how much we're picking up from it as we get into the fourth quarter. Midtown East is a very strong market and has just continued to post some of the highest demand growth as far as a submarket in New York is concerned, right? So just in the third quarter Midtown East -- Uptown, Midtown East had demand growth of 5.8%, which was second only to Times Square, which was 9.3% demand growth. So the demand growth there is strong.

One of the things that we continue to struggle with in Midtown East, however, is that it's a lighter weekend market. It's not a seven-day market. You get to the weekends it's just not as much pricing power available, and there's plenty of supply for the weekend demand.

The Barclay across the street, it's 700 rooms and was always positioned at a rate significantly lower than the 48 Lex. And so we compete because we're geographically proximate to one another, but on the other hand it was mostly leisure and more lower rated business.

All that being said, I think we're going to have a better understanding in the fourth and first quarter of the impact of that closing. You take 700 rooms out of a neighborhood, that's -- it's not insignificant. So if we could we'd love to answer that question a quarter from now.

We might bring it up again, then. Next question on New York, I think everybody's trying to handicap what the stronger dollar, Ebola fears, all those other things, and then a weaker Europe, it might do to inbound international travel. And I think we're all sensitive to the fact that December is really important from that perspective. Are you hearing anything from the property level of concerns that business might not materialize from international originations?

We're not, Bill. We're still pretty bullish on the international outlook, mainly because it's so broad-based. We're finding that international travel isn't just concentrated. When you look at the top 20 contributors to international demand in the US, it used to be very highly concentrated amongst the top 5 contributors, and now we're seeing that sort of spread out across the top 20 a little bit, at least across the top 10. And so we feel like if there is any slack in demand coming from Europe, we think that there's sufficient other sources of international demand that can pick that up.

I mentioned in the prepared remarks that we saw in San Diego a significant jump in international demand. We're just seeing more carriers and routes coming into markets that we didn't used to see. And, as we mentioned, with the price of jet fuel trending down, we think that we'll continue to see that. And I think that air lift is probably the single most if not one of the most significant costs to international travel, and as long as that stays in check I think we'll continue to see international demand.

Great. That's helpful. Finally for me, remind us how many of your New York hotels are unionized, and then just remind us what happens if you were to sell an asset to an owner that already has union exposure up in that market.

Currently we're a nonunion operator in New York. The implication to a union operator or a union owner buying the hotel somewhat depends on the type of agreement that they have in place. Most typically you would imagine that they would be -- that they would have a -- they'd have clauses in place that would require them to convert the property to a union operation.

That being said, we've talked about this urban-transient model, whether it be urban select service or compact full service, where F&B is not necessarily a part of the business operation. When you look at the exposure, it's very limited. You just don't have as significant of a staffing model. Certainly there would be an economic impact. But it wouldn't be necessarily as significant as one would imagine with a different segment property.

So I certainly don't have it quantified. But we've been a nonunion operator in the market for many years, and I think it's just because the properties that we operate are not necessarily as -- I guess they're not as attractive from a union standpoint.

Do you think there's maybe, what, a 25-basis-point cap rate differential if you were to stay nonunion versus the value if you were to sell it and it became union? Is that fair, 25, or is it more than that, less than that? I know it's tough to -- it's just a guess here, but --

Yes, you know what? I would -- I wouldn't hazard a guess. If we can we'll follow up with you afterwards.

Okay, very good. Nice quarter, guys, appreciate it.

Nikhil Bhalla, FBR & Co.

Ashish, the first one's for you. From a margin standpoint this is the strongest quarter we've seen this entire year, of course. Looking forward, what is the progression of margins? How should we think your margins in terms of run rates, what they could look like in 1Q, 2Q, 3Q and 4Q next year? Which quarters do you think may be stronger? Which quarters do you think may be a little bit below the baseline that you established here in the third quarter?

Yes, absolutely. Well, I think, look, we feel pretty good about fourth quarter of this year. First quarter is always the most difficult quarter for us because, obviously, being in -- having a lot of Northeast exposure, there is a significant difference in our ADRs between Q1 and Q2, 3 and 4. So I think that with Q1 next year we do have a shifting mix, so we do have more Florida and more West Coast properties that should help us. But we have to look at New York facing a Super Bowl comp in the first quarter and kind of be a little hesitant to think that we could get a lot of margin growth.

We did have a really bad winter from a weather standpoint, so if we don't have that type of weather destruction we could get a little bit of benefit. So I'd say first quarter's the one where we probably have a little more hesitation.

We feel very good about the remainder of the year. If you look at this year from Q2, Q3 occupancies were north of 85%. Q4 will be north of 80%. So we feel very good that in those type of high-occupancy periods we should be able to get rate growth translating to margin growth.

Okay, so that's good. Just in terms of New York City demand overall, Ashish, we always talk about the supply side of things, which we, I think, now know what it is. In terms of demand growth, what about office space, construction? Have you looked at some of the other areas of demand growth, how well they are ramping up over the next couple of years, any stats that you're -- you've looked at that you can provide us? Thank you.

Nikhil, this is Neil. Frankly, we have looked at it quite a bit. We just don't have some of those stats very handy right now. I think -- but the punch line is that a tremendous amount of office development happening in Manhattan -- Hudson Yards, Lower Manhattan, the biotech corridor on the East Side. There's millions of square feet of office coming in. I'm sorry I don't have the numbers here, but it's pretty significant increase in office development in Manhattan.

I think that what's most remarkable about it and what we find so impressive about New York City this cycle versus last cycle is just the diversity of office tenants in this market. Last cycle New York City was also a very strong market, high-demand market, but it was highly reliant on financial services. And what we're seeing across the last five years is a lot of growth in media, in technology, and in -- and actually in biotech and education. So some -- so I think it's not only a great increase in office demand, but the kind and quality and diversity of it is also something very notable and will lead to outperformance in the coming years.

That's great. Thanks for that color, Neil. And just one final question for me, as you think about the asset -- the land sales here that's been previously talked about, could you just remind us how much -- what would be the dollar amount that you may be considering?

Nikhil, I mean, if you look at -- we don't know if we're going to do something wholesale, if we're going to do it on a few assets, but I think that if you look at the total land value of the entire Manhattan portfolio you could be north of $425 million to $450 million. If we did it on select assets we could do something as little as $75 million to $100 million. So that's probably the range. And we have not definitively decided how much or when we're going to do this.

Okay. That's great. Thank you very much.

Wes Golladay, RBC Capital Markets.

Can you break down the demand growth that you're seeing in Manhattan and how much of it is driven by business, domestic leisure and then the overseas segment?

Sure. One of the reasons we've been able to continue to push rate as well as we have in face of the growing supply is, as Neil mentioned, the corporate sector is very strong. In addition to the variety of demand generators coming into the market, office absorption rates remain extremely strong. So corporate still remains in our portfolio by far and away the strongest contributor of the mix.

So generally in New York we've always run sort of 80% to 85% corporate, with the remainder being the leisure. Now, I think what has happened because of significant international demand -- it's very difficult for us to break down international demand between corporate international and leisure international, so let's just assume for purposes of your question that all of the international is leisure, is it's coming in individual bookings and small groups, foreign individual traveler series, etc.

So I would say that it's probably shifted slightly more to leisure because of the jump in international demand, so say 80% corporate to 20% leisure. I would say on the outside 75% corporate to 25% leisure depending on the submarket (inaudible).

Okay, and then, I guess, one for Ashish. What are you looking at as far as term for the debt you're going to issue? Are you seeing much difference between a five-year note and a seven-year mortgage or (inaudible) mortgage?

Yes, sure. Wes, we have only been doing balance sheet loans and unsecured debt over these last five to six years. We don't really tap the CMBS market. So we will likely do here five-year term that gives us a lot of flexibility.

Okay, thanks a lot, guys, and nice quarter.

(Operator Instructions)

Anthony Powell, Barclays.

Could you quantify the impact of a citywide event in the third quarter in your major markets? We've heard some of your peers talk about how the citywide calendar was very strong in the third quarter and that may not be as beneficial in 2015.

Yes, Anthony, as we look at citywides right now, there's, I think from a standpoint of market exposure, we -- obviously New York is not a big kind of citywide compression market, so we don't really feel that it impacts New York at all. When we look at the Washington, D.C., it isn't that robust next year. We are looking at a much better calendar in 2016 and 2017.

Boston looks very good for 2015, as it has been for 2014. And I think San Diego is also looking good, but looking better into 2016 and 2017. So we're not faced with any market that we're seeing a real drop-off in good calendar. And, as you know, our properties just aren't that exposed to citywides. We certainly benefit from compression, but we don't have any direct group hotels.

All right, great. Thank you. And you mentioned in your New York comments that there were some increased OTA conditions in that market. Are you seeing a higher percentage of OTA bookings as more international visitors stay at your hotels, and how is that going to trend going forward? Thank you.

I think we -- we aren't just seeing it from international. I think that there's just a high reliance on OTAs. And we continue to work with revenue management and our operators to see how we can shift our business mix to reduce those commissions. So we're very focused on that because of the high commissions that you pay on some of this business.

All right. That's it for me. Thank you. Oh, go ahead, sorry.

All I was going to say is that being said, we haven't noticed any market increases in OTA commissions. We are able to negotiate portfolio-wide somewhat better rates than a typical owner might get. That being said, it's used as a strategic revenue management tool by the operators. They use it to fill in periods where you've got slack demand. And I think overall it's more than offset by the increase in revenues and EBITDAs that we have generating from the market.

And at this time there are no further questions in the queue. I'll turn the call back to Jay Shah for any closing or additional remarks.

Well, I think that concludes our time this morning. Neil, Ashish and I are in the office. If any questions occur to anyone after the call, please feel free to give us a ring. But I'll thank everyone for being with us this morning, and we'll look forward to updating you on our year-end performance in the next several months. Thank you again for joining us.

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.