Hersha Hospitality Trust (HT) 2016 Q2 法說會逐字稿

Good day, and welcome to today's Hersha Hospital Trust Second Quarter 2016 Results Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Peter Majeski. Please go ahead.

Thank you, Noah, and good morning to everyone joining us today. Welcome to Hersha Hospitality Trust's second quarter 2016 conference call on this, the 28th of July 2016. Today's call will be based on the second quarter 2016 earnings release, which was distributed yesterday afternoon. Prior to proceeding, I would 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 position to be materially different from future results, performance or financial position. These factors are detailed within the Company's press release, as well as within the Company's filings with the SEC. With that, it's now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust President and Chief Operating Officer. Neil, you may begin.

Thank you, Peter. Good morning, and welcome to all of you for joining us. With me today are Jay Shah, our chief executive officer, and Ashish Parikh, our chief financial officer. You have heard from several of our peers already, it's definitely choppy out there. Uncertainty around economic growth in the corporate profits recession has been weighing on business travel since the start of the year, and the uncertainty caused by Brexit, currency headwinds, geopolitical risk, terrorism, and our upcoming election in the US has reset industry expectations for the remainder of the year. It is tough out there, but our teams in the field and in our offices are creating a lot of value. We actually had a solid quarter on the ground. Portfolio RevPAR was up 5% ex-New York. Despite softness in New York, Boston and Miami, we out-performed strong fundamentals in California, Washington and Philadelphia.

We were also productive allocating capital. We continue to recycle capital, closed the Seven Hotel in New York City portfolio for $571 million in April, and then the first three sales from our suburban portfolio this summer. We priced $192 million at 6.5% preferred equity and bought back 36.8 million in common shares this quarter, and we invested more of our taxable gain and 31 like-kind exchange proceeds in the Envoy, an exceptionally well located and newly built hotel in Boston. Let's start with the portfolio and market performance and then return to capital allocations.

During the second quarter our comparable portfolio reported 2.6% RevPAR growth to $187, and ADR rose 1.8% to $213.23, and occupancy increased 66 basis points to 87.7%, representing record second quarter occupancy for our comparable portfolio. When excluding our Manhattan hotels, we reported 5% RevPAR growth. In terms of performance across our market, let's begin with Philadelphia, which delivered 8.8% RevPAR growth in the second quarter. Our Hampton Inn in Center City, Philadelphia, is one of the portfolio's best performing assets during the quarter delivering 14.8% RevPAR growth and $1.5 million in incremental EBITDA, an increase of $12.4%. The hotel benefited from a more focused sales strategy, strong convention center business, as well as improved in-house group business. We expect a continuation of strong performance at our Philadelphia hotels for the balance of the year, especially in the third quarter as the city is hosting the Democratic National Convention as we speak.

Our West Coast hotels continue to benefit from strong market dynamics and pricing power. Our West Coast portfolio reported 7.4% RevPAR growth driven by a 7.3% ADR improvement. Our Courtyard in Los Angeles Westside continue to deliver impressive results. Corporate and technology-driven demand in nearby Playa Vista and Marina del Ray continue to support strong market dynamics within a submarket that has a strong group base and compression from special events. The hotel reported 17.7% RevPAR growth and a rate improvement of 16.3%. We strategically built out an asset cluster in Northern California, given the region's robust economy, the high cost of land and lends the approval on the entitlement process for new hotels.

In the second quarter our two recently acquired Northern California properties, the TPS Sunnyvale and the Sanctuary Beach Resort reported 8.3% and 11.9% RevPAR growth, respectively. Both properties continue to benefit from new revenue management and operational strategies that we put in place when we took over across the last six to nine months. The TPS gained 180 basis points of RevPAR index during the quarter due to customer and customer segmentation mix optimization, and improved performance on a weekend and shoulder periods while the Sanctuary gave 240 basis points of share. At the Sanctuary we were pulling levers to better leverage the hotel's irreplaceable beachfront location, as well as untapped corporate demand from nearby San Francisco and Silicon Valley. We continue to expect meaningful profit growth from our recent additions to our West Coast portfolio through 2017.

We have also focused investments recently in the Washington DC CBD. Our five hotel urban cluster delivered 6.1% RevPAR growth. The market benefited from midweek convention activity and special weekend events, such as the Cherry Blossom Festival. Our newly acquired and well-located Hilton Garden Inn M Street was the portfolio's largest EBITDA contributor for the quarter at $2.6 million, reporting 5.1% RevPAR growth, and EBITDA margins that now exceed 52%.

The St. Gregory acquired in June 2015 has and continues to focus on building a group base and driving transient business through direct channels to drive rates. These efforts are starting to bear fruit as the hotel reported 8.3% ADR growth, leading to a RevPAR improvement of 5.8% to 450 basis points of margin improvement. Our Ritz-Carlton Georgetown delivered the portfolio's highest RevPAR in absolute terms at $522.68, a growth of 3.9%, benefiting the strong market conditions and improved management and sales strategies. We are setting the stage for double-digit EBITDA growth in the third quarter out of the Washington DC market.

In South Florida, our hotel cluster reported 1.2% RevPAR growth, negatively impacted by closure of the Miami Beach Convention Center, new supply in Miami Beach, and the strong dollar's effect on international demand, clearly reduced compression in pricing power. While Miami Beach will continue to be challenging into 2017, we are encouraged by performance of our more recent acquisitions, the Residence Inn Coconut Grove, and the Parrot Key Resort in Key West. The Residence Inn reported 14.1% RevPAR growth and 770 basis points of margin improvement, while Parrot Key delivered ADR driven RevPAR growth of 9.5% and $1.9 million in incremental hotel EBITDA. Our club controls have been impressive across the cluster, including Miami Beach, and we are positioned well for 2017, when headwinds subside on the beach.

In Boston, the market and our hotels were negatively impacted by two large nonrepeating citywide conventions, which contributed approximately 75,000 room nights in the second quarter 2015. Brookline also had some renovation impact in April, and the portfolio as a whole in Boston had an 11% plus year-ago comp. As a result, our Boston portfolio reported flat RevPAR in the second quarter. One highlight, our repositioned hotel, the Boxer, was recently recognized as the best boutique hotel in Boston. It reported 2.5% RevPAR growth and margins approaching 48%. That is 2.5% growth on top of 27% last year second quarter, and 37% two years ago same quarter. After several years of outsize growth in Boston, we have had two challenging quarters. The outlook for EBITDA growth strengthens in the back half of the year. Comps do get easier in the fourth quarter. The convention calendar is better in 2017 than 2016. New supply is reasonable, and the employer base and domestic/international visitation continue to grow at the highest levels in the country.

Finally, in New York City, the operating margins remain typical due to delivery of new supplies. Our Manhattan cluster reported a 5.5% RevPAR decline driven by a 3.1% decrease in ADR, evidencing the lack of pricing power. Demand remained robust as demonstrated by portfolio-wide occupancy of 92.5%. However, results were weaker than anticipated as operators in the marketplace continue to lack the confidence to push rates despite 4.4% demand growth in the trailing 12-month period.

As of June 2016, Manhattan trailing 12-month occupancy levels remained above 85% for the 49th consecutive month. These occupancies combined with the aforementioned demand growth and rates 10% below their 2008 peak should be a welcome environment for revenue managers. We have been working with our operators to test more aggressive rate strategy, but our strategy didn't work this quarter. We lost share and had to ultimately give up both rate and occupancy to catch up. We are admittedly now taking a bit more defensive posture since we've discussed our ability to test varying strategies and make changes quickly as a hallmark of our operating model. Nine quarters out of the last 10 drove our outperformance in New York.

Our consolidated portfolio in New York today is newly built according to today's taste and preferences and located in some of the best submarkets in New York, like Tribeca, Union Square, and Midtown East. We believe the hotels are well positioned to grow as the outlook for New York improves in 2017 and 2018. We call it the great absorption. After the great recession, Manhattan was one of the few markets to attract construction financing due to its demand fundamentals. Although hotel demand increased over 40% since 2009, supply grew by 26%, and its delivery to a muted ADR recovery in New York. Supply growth is now clearly decelerating. Airbnb inventory may be cut in half. The moratorium on condo conversions of hotels will last next year, and older, less efficient hotels, like the Waldorf, will ultimately find a better and higher use.

Transitioning now to capital allocation and specifically capital recycling. During the second quarter we closed our transformative joint venture with Cindat for a total purchase price including closing and capital improvement costs of $571.4 million, or $526,000 per key. Inclusion of the closing costs, the sale price represented a trailing 5.4% economic capitalization rate and an EBITDA multiple of 16.8 times. Cindat investment expertise in global gateway market real estate combined with our 15-year track record of owning and operating hotels in the most valuable and liquid real estate market in the world form a strong foundation for a long-term partnership, and we expect to pursue additional transactions with our new partners across the coming years.

Subsequent to the end of the second quarter, we acquired the award-winning waterfront Envoy Hotel in Boston for $112.5 million. Our acquisitions of the Hilton Garden M Street, the Ritz-Carlton Georgetown, and the Sanctuary Beach Resort in Northern California, and now the Envoy in Boston, shelter $160 million of the $177 million gain we undertook through 1031 exchanges on five of the seven Cindat JV transactions. While it is true we possess qualified intermediary funds to deploy, our purchase of the Envoy reflects our very real long-term conviction in unencumbered Boston real estate, but also the hotel's gateway location in the burgeoning Innovation District in the Seaport. We are thrilled to acquire this newly built waterfront hotel in arguably the highest growth new submarket in the United States. At a going in 6.3% yield that we will stabilize above 8%, the hotel is an accretive trade compared to the 5.4% cap rate sales in Cindat assets. The Envoy will also be immediately accretive to our EBITDA growth rate as it ramps up from its debut in June 2015 and our hands-on operational asset management strategy.

In previous conference calls and during meetings with investors in 2016, we stated our intention to sell hotels in New York City in the first half of 2016, and then suburban hotels in the second half of 2016 and into 2017. We have made great progress on these sales. With New York now closed, we are working our way through the suburban portfolio. In May we sold the 129-room Hyatt Place in King of Prussia for $13 million, or approximately $101,000 per key for a 7.8% cap rate. And with yesterday's press release we disclosed a definitive agreement to sell the Residence Inn Framingham and the Residence Inn Norwood for a combined $47 million, or approximately $213,000 per key, or a 7.7% cap rate. The sale of these three suburban hotels reflect a continuation of our capital recycling strategy as well as the strong interest with foreign capital and local real estate investors in stabilized select service assets in the best suburban markets.

We also continue to market an additional five to seven suburban hotels and expect to generate between $150 million and $175 million in net proceeds from these sales. Most of our sales will trigger significant capital gains, and we will continue to partially offset the 1031 exchanges. We believe this gives us a unique opportunity to take advantage of a much less crowded acquisitions market in an operating environment where our local market expertise allows us to add significant value. This said, with the many sales transactions we anticipate across the next 6 to 12 months, we also expect to distribute special dividends and use additional proceeds to reduce leverage.

Prior to passing the call to Ashish, I also want to briefly discuss our share repurchase activity this quarter. Fundamental to our absolute return philosophy and commitment to total shareholder return, we believe opportunistic share repurchases at deep discount to NAV are an effective way to return capital to shareholders. In the second quarter we repurchased approximately 2 million common shares for an aggregate purchase price of $36.8 million, or nearly 4.5% of our float. As we discussed across the last two years, we do not consider acquisitions and buybacks mutually exclusive. We bought back nearly 17% of our float while buying and selling many hotels across the last two years. With that, let me turn the call over to Ashish

Great. Thank you, Neil, and good morning. I'll start my comments today with a deeper dive into our operating results and then expand on Neil's comments on our second quarter transactional activity and how it affects our financial position, as well as our full year outlook and guidance. During the second quarter our portfolio delivered adjusted EBITDA of $55.5 million, a 2% increase compared to second quarter 2015. Regards to EBITDA margins, GOP and EBITDA margins, we reported strong absolute, comparable portfolio GOP and EBITDA margins of 51.4% and 41.7%, respectively. GOP margins increased 20 basis points while EBITDA margins were flat compared to last year's comparable quarter as a result of increased property tax.

Looking at the back half of 2016, we expect to not only maintain our high absolute margin, but we're forecasting margin growth by leveraging pricing power across our high occupancy market, as well as benefiting from renovations completed earlier this year and a lack of meaningful renovation disruption for the remainder of 2016.

On the transactional front, let me start with the Cindat transaction. We are extremely pleased to have closed complex transaction with a credible, sophisticated, long-term offshore partner. Sale of our seven Manhattan properties and subsequent JV formation resulted in net proceeds of $375 million, $275 million from the sale of 70% interest in the seven property portfolio, and $100 million from the origination of debt by the joint venture. The $375 million of net proceeds is after our contribution of $43 million in preferred equity to the joint venture at a 9% coupon, and a pay-down of property level mortgage debt at two properties which totaled approximately $56 million.

We utilized approximately $231 million of the net proceeds to pay down all of our outstanding revolver balance and approximately $40 million to pay down one of our outstanding term loans. In 2016, as we previously communicated, we will lose approximately $14 million to $15 million of FFO and between $27 million to $28 million of EBITDA in our consolidated results, and expect to receive between $6 million and $6.5 million in FFO, and between $9 million and $9.5 million in EBITDA from the Cindat joint venture, which will be reflected within our unconsolidated joint venture results.

In terms of optimizing our balance sheet during the second quarter, we tapped the best preferred market in years, redeeming $115 million of our 8% Series B preferred, and raising $192.5 million through the issuance of 6.5% Series D preferred shares, the lowest preferred cost of capital in Company history. This low cost perpetual capital in addition to a new $200 million term loan that we are in the process of completing addresses our 2016 and 2017 debt maturities and positions us to benefit from opportunities created by ongoing volatility should buying opportunities emerge for high quality assets in higher growth markets, or from additional stock buybacks.

As a result of the aforementioned series of capital transactions along with the sale of our Hyatt Place in King of Prussia, we possess significant financial flexibility with approximately $236 million of cash and cash equivalents as of quarter-end. We have full capacity on our senior unsecured credit facility with 54% of our consolidated debt fixed or hedged through swaps and caps, while our total consolidated debt had a weighted average interest rate of approximately 3.7% and a weighted average life to maturity of approximately 3.6 years. Our fixed charge coverage ratio of approximately three times, and we continue to target our debt-to-EBITDA ratio to be below five times by year-end with the completion of our pending sales.

During the last year we have undertaken significant efforts to refinance our 2006 and 2007 vintage 10-year CMBS loans, and we currently forecast that less than 10% of our debt outstanding will consist of CMBS loans by year-end. The elimination of this debt provides further flexibility to sell assets without any debt encumbrances and allows us to sustain our capital recycling efforts. Our capital recycling efforts and balance sheet engineering affords us the opportunity to maintain the lowest dividend payout ratio in our history and provides a significant cushion to maintain our dividend if industry trends were to decline in the future.

In addition, our young, purposeful built room-focused hotels require minimal capital investment thereby maximizing free cash flow in IRRs. During the second quarter we spent $5.8 million in CapEx and property improvements. The majority of these funds were allocated towards exterior work and food and beverage enhancements at our Duane Street Hotel and the St. Gregory Hotel, along with guestroom renovations at Hotel Milo in Santa Barbara and at the Rittenhouse. These renovations do not have a significant impact on the room side of the business and further improved asset quality in the overall guest experience. For full year 2016, we continue to target consolidated CapEx in the $25 million to $27 million range.

Within yesterday's earnings release we published our updated 2016 guidance, which takes into account our 2016 operational performance and our updated view for the remainder of the year. Our updated guidance also incorporates all the transactional activities completed to date as well as the anticipated closing of the two suburban Boston assets.

Our updated forecast for 2016 now anticipates comparable RevPAR growth to be in the range of 2.5% to 3.5%, with 40 to 60 basis points of margin growth. Adjusted EBITDA outlook is now in the range of $171 million to $177 million, with FFO per diluted share between $2.38 to $2.51 per share. Outside of operational performance, the primary impact items affecting our EBITDA range is the acquisition of the Envoy, which should contribute approximately $3 million of EBITDA for 2016, but is in large part offset by the sale of the Hyatt Place King of Prussia and the suburban Boston assets. Our EBITDA contributions from our JV portfolio is also reduced by approximately $1 million from our prior expectations with the majority in Cindat JV.

In addition to these transactions, our FFO guidance is impacted by the forecasted dividends on the Series D preferred of approximately $7.3 million, or $0.15 per share for 2016, which are partially offset by our stock buyback activity and reduction in share count. Which showed approximately $0.07 per share of additional FFO along with lower income taxes on the TRS, which should also contribute $0.07 of additional FFO for the remainder of the year.

In terms of our portfolio's performance quarter to date in July, we continue to see solid growth in several of our markets, such as the West Coast, Washington DC and Philadelphia, while New York continues to see challenging trends during the quarter, leading to overall RevPAR growth of approximately 4.5% for the month of July. Now this concludes the portion of my call. We can now proceed to Q&A, where Jay, Neil and I are happy to address any questions that you may have. Operator?

Thank you. (Operator Instructions) We'll take your first question from Ryan Meliker with Canaccord Genuity.

Just real quickly, just make sure I heard that correctly, Ashish. Did you just say that RevPAR in July was up 4.5% across your portfolio?

Yes, that's correct.

Okay, that's helpful, thanks. That's a nice rate of acceleration. That's good. I just wanted to talk a little bit about, you know, obviously the guidance cut on the top line on RevPAR was pretty substantial. You gave us some color throughout your prepared remarks. Can you just give us any more detail that you guys might be seeing from a transient standpoint? Is there anything specific? Is it isolated on corporate? Is it isolated on your branded properties, independent properties? Where are you seeing kind of the biggest challenges, I guess, aside from the markets you've identified?

Ryan, I think it really is the markets we identified. It's just the challenges in New York. We're expecting Boston to improve as the year goes on, but we have heavy exposure New York, Boston and Miami, which are having some challenging quarters right now. As you know, our portfolio is truly a transient portfolio for better or for worse. And in terms of visibility for the fourth quarter we just don't have a lot of it. And without a lot of visibility into our fourth quarter and the uncertainty that we're seeing in the overall macro environment, we're just -- we felt like it was prudent to bring down guidance a bit. We can't point to any particular kind of metric, but it was really just a mathematical calculation of what it would take to hit our prior midpoint, and our conclusion that that would be banking a lot on the fourth quarter where we just don't have visibility yet.

Okay, that's helpful. So, it's not isolated on corporate transient or leisure transient or shorter term bookings or longer or further out bookings, anything like that? There's no real trends that you're seeing other than the particular markets that are underperforming?

That's right.

Okay, that's helpful.

Same problem as in New York. So far in July, things have been better than they've been in the last several months, but we need a very strong August to have better confidence about the leisure market. And on the corporate side we just don't have (inaudible).

Okay, that's helpful. And then just real quickly and then I'll jump back in the queue with anything else. The Envoy, obviously it's a great hotel, good acquisition up in a target market. But it's another full service hotel, if you will, upper upscale brand with the autograph collection. Can you talk a little bit about what your appetite is for those types of assets? I know it's quasi-independent but also quasi-branded. And then, also, give us a reminder of what the remaining capital gains you guys have left from the asset sales that you've executed that you'd like to deploy in the acquisitions for the remainder of the year.

Hey, Ryan, this is Jay. Neil alluded to it in his prepared remarks; the Envoy is positioned from a rate standpoint in the upper upscale and maybe even a bit higher where it's performing in its first full year of operations. It's already in a competitive set with more lifestyle hotels that operate at a higher rate than a typical upper upscale hotel. But I think what's important to remember that the hotel is still very much a transient hotel. It has some F&B component to its revenues, of course, but it is primarily a rooms-driven business plan there.

So, when we -- as we're taking a look at potential investment in hotels, we're looking for hotels that are similar in profile to what we've always owned, and those are hotels which are driven by a quick combination of corporate and leisure demand and are very much transient hotels where we can drive rate. I imagine the question is on a lot of folks' minds on the Envoy. Its price per key made it seem like potentially it's a more complicated business plan than it is. When we took a look at this and the way we assessed it was that we're in a market in one of the -- it's a waterfront location in one of the major gateway cities in the United States. The land value here entitled for the hotel we estimated to be around $250,000 to $300,000 a room, and you would imagine the construction costs here for this quality of hotel, around $450,000 to $500,000 a room. So, we most likely paid somewhere between a 10% and 15% premium to replacement cost, but when you consider that land today is selling in this market that's well off the water and much deeper into the Seaport District north of $30 million an acre, we feel pretty comfortable with the real estate value, particularly with the location, superior location that the hotel holds.

The investment I'm referring to where it's performing today, but from a -- you know, we've put together a comp set, as I mentioned, where the hotel is comfortable performing in today. And it is currently outperforming in occupancy because it is a seven-day location compared to some of the other hotels with similar rates that are probably a bit more midweek heavy. And we have a rate stabilizing at something less than the comp set. So, for us to get in three years to north of $10 million in EBITDA is not that much of a stretch. The property is going to run a 47% gross -- it runs a 47% operating margin within its second year of operation. And so compared to some of the hotels in the comp set, it's far more profitable. And the reason I wanted to mention the operating profit in the EBITDA margin is because these are -- the food and beverage component at the hotel are limited and they're very beverage-heavy. And we're really not anticipating that -- and the hotel has no meeting space. So, these are very, very much retail FC outlets that have a strong capture for the hotel, but because of its location they do very well even with the general public. The hotel, you know, the stabilization we anticipate will do $67,000 a room in NOI. It is currently doing -- in its first year of operation it's already doing around $40,000 in NOI.

So, I guess when we take a look at this hotel and relative to your question, we were -- we looked at it as a generational real estate opportunity that was accretive to earnings and gives us a growth profile that is well above our portfolio average and probably one of our best growth profiles in the country. So, I don't know that we're really departing from our strategy. We get that question a lot. I think it's not about segments for us, it's not about what kind of hotel and whether it serves food or not. I think it's more about its investment profile and the customer base that it caters to, and this feels very, very comfortable for us.

Okay. No, that is helpful. It seems like we should be focusing more on the transient orientation of the properties than the chain scale but it falls under. And then can you just quickly remind us how much capital gains from the Cindat transaction you guys still have remaining to deploy in the back half of the year?

Hey, Ryan. So, from a capital gains perspective we have $16 million left of gain to debt has been sheltered by a 1031. Just as a little bit of a reminder, on 1031s it's the value of the debt and equity of the replacement property has to be higher than the value and debt or equity and debt on the relinquished property. So, our acquisition won't be for $16 million, but if we do decide to buy something it probably has to be closer to $40 million to $50 million to offset the full 1031.

That's helpful. All right, thanks.

We'll take our next question from Shaun Kelley with Bank of America.

Hey, guys. This is actually Dan [Asot] on for Shaun. I was just going to touch on supply real quick. You know you guys talked about 4% outlook for supply in New York in 2016 and 2017. Is there any change to that, and could you maybe give us a little bit more color in some of your other markets?

Sure. This is Jay. Let me talk about New York. Right now, based on what we're seeing, our expectation for New York for 2016 is about 5.3% RevPAR growth, so not insignificant -- supply growth, I'm sorry, and about 2.8% for 2017 supply growth. Neil referred to the headwinds that that causes from an absorption standpoint. The bulk of this year, about three-fifths of 2016 supply is coming in the second half of the year, and so that will make the second half somewhat challenging, and we expect that that continues into 2017. After 2017, our expectation for supply growth in New York is around 3.8%, and that combined with expectations for demand growth across 2017 and 2018 makes us feel a little better. That's not to suggest that New York won't continue to be a bit of a lagging market in our portfolio, but we think the dynamics do moderate a bit.

As far as other markets, in Boston supply growth has been moderate and manageable, and absorption has remained pretty robust. Miami, of course, has been hit with a lot of supply in addition to a couple of significant demand headwinds, the convention center being one. And, secondly, there has been a bit of moderation in demand elasticity internationally. Even though we're seeing international grow as a percentage of revenue, pricing power has been a little more difficult. Interestingly, Boston's international demand growth has remained extremely strong and enplanement data is very strong across-the-board. So, we are feeling pretty good about these markets from a supply-and-demand standpoint other than New York, where the challenges have been pretty well documented.

I think we take a really close look at New York for obvious reasons and some of the forecasts that we see, really, they vary wildly with one another and it's very difficult to really understand what methodology is being used. Our methodology is pretty basic. We go take a look at sites, and what we are seeing is that several sites that are documented as potential hotel openings have really -- they really are inactive. And our view is that with today's fundamentals in New York and the way the debt markets have been, it's not clear when some of these projects will get restarted. And our expectation is it will probably be much further in the future if not being changed to an alternative use.

Got it. And then just one more for me. On the remaining assets for the suburban portfolio, are you able to maybe just give us any updates or maybe just discuss like what the pricing environment looks like out there for those kinds of assets in terms of just pricing or maybe the kind of buyers that are out there for it?

Sure. I think the sales that we've announced so far from the suburban portfolio are pretty indicative of pricing. Our suburban assets, our remaining suburban portfolio, we sold a large noncore suburban portfolio in 2012 and then another one in 2013. This remaining portfolio is the highest quality suburban select service portfolio that would be available in the market today. And so we expect pricing in that kind of 7.5% to 8% cap range. These are primary suburban office markets in the first ring outside of the CBD, the Boston, Washington DC, Philadelphia, Scottsdale. And so that kind of pricing is probably fair to assume.

In terms of the buyer pool, we mentioned when we really started on this process nearly -- started discussing it at least two to three quarters ago and then have been actively in the market now for the last quarter or so, there is still significant demand from two primary kinds of buyers for these assets. We broke it up into individual assets versus smaller portfolios because big, kind of opportunity fund aggregator bid is not active. But there's two very active bids. One is private equity capital that is partnering up with regional managers and operators to acquire assets and like individual one or two asset kind of transactions. And for these kinds of hotels there's a lot of debts (inaudible) still available, and so there is very strong growing in yields for that buyer community.

Second, there's been a lot more international interest than we might have suspected six to nine months ago in the suburban assets. The headline transactions from the international market are trophy assets or truly urban gateway assets, like the ones we sold earlier in New York. But we're finding there are other pockets of international capital in Asia and the Middle East that are very interested in stabilized suburban select service assets. And so we're seeing a lot of interest particularly from Middle Eastern Sharia-compliant funds that have a real interest in having exposure to assets that don't have significant food and beverage and don't serve alcohol and can make more Sharia-compliant investments.

It's a pretty -- there is an active market for them. There's probably less bidders than there were a few years ago. There's probably less kind of aggregators in the budding process that make transactions really easy. So, it's taking a lot more effort and time, but there is good -- for high quality assists, there's good bidders out there.

Thank you very much. That's very helpful. That's it for me.

We'll take our next question from Patrick Scholes with Suntrust.

I wonder if you could just give a little more color. You said month-to-date you're up 4.5%. That compares to sort of the industry at flattish. What is really out-performing for you specifically in July? Thank you.

Sure, Patrick. For the month of July, I mean, to start with, obviously in Philadelphia with the DNC is going to be our best-performing market. But other markets that are performing well and even above the 4.5 that I mentioned are West Coast, our South Florida properties are doing better, as well as our DC properties, the DC urban properties with some of the newer assets that we purchased. We continue to see strong growth from Capitol Hill Hotel and the Hampton Inn in DC. So, those markets are really outperforming. As I mentioned, the underperformed markets continue to be New York and Boston, which are underperforming our 4.5%.

Got it. Thank you.

We'll take our next question from Anthony Powell with Barclays.

Could you go into maybe the differences in business travel demand between some of your markets between, I guess, the stronger performing markets, like Philadelphia and DC, and weaker commercially Boston and New York City?

It's clear that on the West Coast, Northern California as well as in Southern California, we are benefiting on the corporate side from continuing strength in technology-based companies. Today technology companies are half technology-half media, and there's a lot of kind of entertainment-related and gaming-related business growth in both Southern California and Northern California that's been very positive for our kind of corporate contribution in those markets. In other markets around the country for us, in DC it's a pretty diversified kind of strength we're seeing. We're seeing it in the private sector corporate demand, we're seeing it in the kind of the recovery which continues in kind of government spending for the last several years has a real impact on travel for a lot of the contractors, the consulting firms and the defense contractors. And so we're continuing to see good growth on that side.

In Boston, I wouldn't point to any kind of corporate weakness. There is really, that's where coming up against very tough comps in the first half of this year versus the prior couple of years, and a convention calendar which, although is strong, it's just not as strong as it was year prior. And so I think that any weakness we're seeing in Boston is more related to convention calendar and just some level of kind of price ceiling in some of these markets.

In New York, again, we don't view it as a -- we can't point to particular industries that are slowing down travel. We've been talking about, actually, for two or three quarters ow we've been having more success in the L&R front. So, with our locally negotiated accounts around our hotels in New York, we've actually continued to have growth both in room nights as well as in rates. But it's the folks that aren't booking through locally-negotiated rates and are price shopping that may be bringing it down, so it's hard to point to an industry there.

Got it, thanks. And on the financing front, you completed the preferred deal in the quarter at an attractive rate. Why not tap that market a bit further and reduce your enrollment, that EBITDA ratio even further?

Yes, it is a very attractive rate at 6.5%, and who knows when we see it again. But when we look at that rate as compared to what we're currently pricing on our credit facility, we'll be somewhere in the range of LIBOR plus 220 at the high end on the pricing grid. So, even with LIBOR sitting at about 45 BPS today, there is almost a 400 basis point difference between our preferred and where we're pricing debt today. So, that's really what would prevent us from taking much more preferred equity.

Okay. All right. That's it for me, thank you.

We'll take our next question from Wes Golladay with RBC Capital Markets.

Good morning, guys. Sticking with the balance sheet, what do you guys want to have leveraged down to by maybe year-end 2017 and 2018? What is the ultimate game plan here with all the transactions you're doing?

Yes, I think we would be very comfortable in our target right around four times debt-to-EBITDA by the end of 2017.

Okay. And then looking at Philadelphia, you obviously have a really strong start to the quarter, but then you got comp off of the pope visit last year. What is the net effect of those two events for you? Is it going to positive or a little bit of a headwind?

It's going to be very positive, actually, for the third quarter in Philadelphia. For us, the DNC is a much better contributor to the hotels than the pope's visit. It's a longer duration, higher rates, better occupancy. The pope's visit was really two days and Philadelphia had effectively shut down the city, so it made it very difficult, and we had a lot of room cancellations across the city. So, net-net we expect Philadelphia to be our best-performing market this quarter.

Okay. And then you kind of touched upon your Northern California acquisitions having about 200 basis points plus of alpha versus the market. Is that kind of a good run rate when you buy something 200 basis points over the current performance just by switching the mix a bit? Is that achievable for the full year and maybe additional the next year; is that kind of how you should model these acquisitions?

Absolutely, Wes. That's always our intent. In some cases the first couple of quarters it's hard to pull the triggers, or pull the levers if there's been a lot of group base layered in. So, the St. Gregory the first quarter we weren't able to hit that kind of metric, but it's now starting to really kick in. But I think that's a very fair way to look at any new acquisition that we're making.

And then, lastly, South Florida, you kind of highlighted some of the headwinds. Are you seeing any noticeable increase in cancellations from the (inaudible) and leisure down a bit as well?

No, we're not, Wes.

Okay. Thanks a lot.

And we'll take our next question from Bryan Maher with FDR & Company.

Good morning, guys. Just kind of a bigger picture question. As it relates to its kind of clustering of hotels in a handful of markets and a couple of those being bigger obviously than others, have you guys given any thought to -- and you don't need to tell us specific markets -- but expanding outside the existing clusters?

Well, we are considering it Bryan, and we do underwrite assets in other markets and do look at it. It's just in our existing markets, in our six markets that we're in today, we've developed such cluster advantages, not only on deal flow but on operating performance. And so if we are going to bolt on an acquisition to our existing market, we just have a lot more conviction about the savings that the RevPAR index gains that we can underwrite. So, it's more likely for our investment to be in our existing six markets. That said, we do continue to look at other opportunities in other markets. It would likely require some kind of scale in the market in order for us to make a move. But that said, we often start small and then grow from that. In Sunnyvale we bought the TownePlace Suites, for example, and that's been a very strong performer for us. And then that makes us really leaned into other opportunities in Silicon Valley.

And how do you think about the future acquisitions in the markets that you are already deployed in? Do you lean more toward acquisitions in markets that you're in that are doing well, or do you lean towards being contrarian in markets that are underperforming in the hopes of getting a deal in advance of a turnaround at some point?

Great question. We're trying to be ahead of the marketplace, but we want our investments to be accretive in the first year. So, we have to -- we can't take to contrarian of a view for where we think the market's at today and where we see our greatest opportunities in showing significant free cash flow growth. And so we balance great turnaround or great basis plays with in-place cash flow, so that moderates it a little bit. But Washington is a good example. You know, we know the DC market, we have had a cluster there for many, many years. We understand demand patterns and the neighborhoods and the corners most developing, and our expectation is that DC has three to five years of very solid growth ahead. We believe that in the coming year it will be -- coming year or two it's going to be a good, solid, moderate growth market, but we think longer term it's going to have great growth. And so it made sense for us to start to invest there. The middle part of last year is when we got very focused on that marketplace. Boston is a market we've been looking at and looking for opportunities, and for years we've had a very good cluster there, but just hotels don't come up for sale often there, especially ones that are nonunion and unencumbered of encumbrances like land leases or management agreements and the like.

And so we've been looking for an opportunity in Boston for some time. The asset that we've acquired, the Envoy, is one that we actually were very close to acquiring a year and a half ago while it was still under construction. At the time we felt like we needed to see the ramp-up and to see a little bit more densification and new announcements of new tenants in the Seaport District to get comfortable in a first year kind of yield on the assets. But we try to be maybe a year ahead, but we can't be too much further than that or we don't have the kind of growth that we're looking for.

Thanks, that's helpful.

We'll take our next question from Bill Crow from Raymond James.

Good morning, guys. Two questions. Can you tell me, Neil, how the pricing on the Envoy changed over that time period, when you first started looking at it until today?

It's probably -- we ended up probably paying a 5% to 7% premium to have the asset open at season and (inaudible). It's such a high quality location, high quality asset. It's one of the more attractive hotels in the hotel nation to acquire, so it wasn't the kind of asset that had a significant diminution value. And the Seaport only grew in that year, year and a half. General Electric announced their relocation; several other companies moved in. And so we weren't able -- our holding on for a year, year and a half didn't get us a better price but it gave us more security (inaudible) price.

Was it on the market the whole time?

No, there was a broker involved but it was a very targeted kind of transaction and the relationship we developed with that developer-owner was one that we kept warm across the last year, year and a half and then when we were ready we were able to make a good transaction with them. I think the seller expected, we also expected this will be something that will -- we will be able to find more opportunities with this developer in the future.

Gotcha. Gotcha. Okay. The second question is just detail on a question that's already been asked. But if you were able to break out Philadelphia from the rest of the portfolio for July, what is the rest of the portfolio running?

Bill, I would probably say we would probably lose 100 basis points. Philadelphia is our smallest cluster, so maybe it's somewhere in that 50 to 100 basis point range.

Did New York benefit at all given your more leisure transient focus at all by the timing during the week of the Fourth of July?

Unfortunately, it didn't help us in New York for the month of July.

Okay. All right. Thanks.

We'll take our next question from Chris Woronka with Deutsche Bank.

I want to ask you a little bit about distribution and what kind of some of the trends you're seeing in your hotels as far as is there more third party? Is there more opaque and also is the business remixing a little bit as you navigate through the little bit of softness?

You know, Chris, this is Jay, that's a very good question. It's something we've been looking at very closely. We get pretty active with the revenue management strategies at the hotels and let me start just by talking about New York, because I think there, where we're seeing the softness, we initially in Q1 and Q2 really tried to hold on great as a strategy. And when you look between Q1 and Q2, we actually took our OTA distribution down in Q1 by a nominal percentage. In Q1 the New York, the Manhattan portfolio total room revenue for OTAs was about 22%, down from a year before by 110, 120 basis points. And the second quarter we took it down to 21.5%, which was 360 basis points less than the year-ago quarter. And we were pushing BAR and pushing L&R. As Neil said, L&R has held in pretty well for us, flattish to slightly up. But the strategy to really kind of hold for all rates is to drive as much original demand as we could through BAR in the work. And so if you were to look at Manhattan's BAR production, in the first quarter we were off by about 550 basis points, so we were down from 2015 from 21.8% coming through our best available rate down to 16.3%. And in the second quarter we were down from 19.6% a year ago in quarter 2 down to 13.4%. That was a 620 basis point drop.

So, I think Neil referred to it in his remarks. We've been very aggressive. What we found is like when we studied all of this, in many cases, on many nights we've been outperforming on rate to the market but underperforming on RevPAR to the market. And so that suggests that we need to moderate our aggressive in the rate strategy. I don't know that means we're going to start growing all kinds of inventory onto the OTAs, which is what I think the sort of inelastic demand fundamentals right now in New York is causing other operators to do. So, I think we need to kind of negotiate that mix a little better, and we expect to do that in the third and fourth quarter.

In other markets we've seen similar trends. Like, for instance, in Boston in the first and second quarter we were off in our BAR production as well. OTAs were kind of flat, so there that's just suggesting some softness in demand generally, and that is probably mostly midweek driven. You take a look at South Florida, for instance, there we've had some pretty good traction with driving more BAR, but there has been slight increases in OTA as well. You know, slight increase in the first quarter but a little more in the second quarter. So, I guess the point generally, I think the way to think about it is as we're seeing macro trends moderating, there's a bit more price sensitivity and demand has become a little bit more inelastic. And so I think revenue managers just need to be a lot more thoughtful and focused on how to layer in business rather than just chasing rate, because that kind of demand growth doesn't seem to be emerging.

Okay. That's really helpful color. Appreciate it. And then I also want to ask on the labor front or any other, is there anything on the horizon there that you're seeing in any of the -- whether it's New York or other markets at the select service level?

Nothing more significant than what you read about. There's clearly pressure on minimum wages, which will ultimately trickle up to the kind of (inaudible) we have at our hotels, but we're not there just yet. But that is something that across the next couple of years you could see just wage growth and wage pressure. We expect that by the time we have meaningful wage growth we will also have more pricing power and we can pass on higher rates to customers. But to date that is not a pressure that is impacting our portfolio significantly.

Okay, very good. Thanks, guys.

And that will conclude today's question-and-answer session. I would now like to turn the call back over to Neil Shah for any additional or closing remarks.

That's it. I know a lot of you have another call to get onto, but we'll be here the rest of the day and look forward to any follow-up questions. Thank you.

And that does conclude today's conference. Thank you for your participation and you may now disconnect.