Hersha Hospitality Trust (HT) 2016 Q3 法說會逐字稿

Good day, and welcome to today's Hersha Hospitality Trust third quarter 2016 results call. (Operator Instructions).

At this time, I would like to turn the call over to Pete Majeski. Please go ahead.

Thank you, Cynthia. And good morning to everyone joining us today. Welcome to Hersha Hospitality Trust third quarter 2016 conference call on October 26th, 2016. Today's call will be based on the third quarter 2016 earnings release, which was distributed yesterday.

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 position to be materially different from any 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 Shah, Hersha Hospitality Trust President and Chief Operating Officer. Neil, you may begin.

Thanks, Pete. And good morning to all of you. Joining me today are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

Before I start, I want to take a moment to thank all of you for joining the call. It is a challenging and uncertain environment, not only for lodging but for the investment community broadly. Your team at Hersha has been grinding through it productively, and we really appreciate your interest.

Global volatility, domestic uncertainty and a corporate earnings recession have clearly resulted in a more muted operating environment. Decelerating RevPAR growth, peaking supply growth and a less liquid transaction market drive not only negative investor sentiment and lodging but also weak managerial confidence. We can't hide mistakes with broad market growth or inflation.

Our team at Hersha believe that these low-interest rate, low-growth environments favor the nimble and the differentiated. Location, age and quality, and operations matter. Management can add value.

In the third quarter, our team has been focused in four main areas. Operations -- despite a tough 6.9% comparable portfolio growth last year in the third quarter, our team in the field was still able to deliver 3.4% RevPAR growth for the portfolio, driven by strong performance from our California, Washington, DC and Philadelphia hotels. 86.8% at $207.29, $179 RevPAR.

Balance sheet -- the Company closed on a new $200 million senior unsecured term loan in the third quarter, extending the Company's unsecured borrowing capacity to $1 billion. The Company's total debt has a weighted average interest rate of approximately 3.4%, and we have the financial flexibility to sell hotels without encumbrance and buy hotels without contingency.

Recycling capital -- we entered into agreements to sell eight stabilized suburban hotels for over $240 million and are redeploying proceeds into three higher-growth, higher-quality hotels in Boston, Sunnyvale and Santa Monica. We're as focused on navigating today's environment as we are preparing for the future. Our refined portfolio is young and well positioned to outperform today and into the next cycle.

And fourth, capital allocation -- our low CapEx requirements and our internal free cash flow growth allows us to return capital to shareholders. We have among the lowest AFFO payout ratios in the sector, providing ample cushion for a more severe recessionary scenario.

As we have across this year, we opportunistically repurchased $9.9 million in shares in the third quarter, 49 million, or 6% of shares outstanding year to date. And our board authorized a new $100 million repurchase program.

A productive quarter -- I'm going to run through operational performance in each of our six markets before returning to capital allocation. Our young, high-quality and differentiated hotel portfolio and our best-in-class teams in the field overcame a tough 6.9% comp to deliver 3.4% RevPAR growth for the third quarter. If we exclude our New York City portfolio, our comparable portfolio reported even more impressive 6.4% RevPAR growth and 150 basis points of margin improvements.

California contributed 23% of our EBITDA for the quarter, even more than Manhattan, testament to our diversification efforts across the last several years. Our West Coast cluster reported 8.4% RevPAR growth to $181.31, as ADR increased 5.5% and occupancy rose 231 basis points to 88.1%.

In northern California, our recently acquired Sanctuary Beach Resort has benefited from our hands-on asset management and revenue management approach as RevPAR increased 7.5% to $340.10. The hotel, which contributed over $1 million in hotel EBITDA this quarter, was the portfolio's highest EBITDA per-key asset in the third quarter, at $17,300 per key for the quarter.

In Sunnyvale, our key PS also delivered strong results from new revenue management strategies of 7.6% ADR growth. In Santa Barbara, our Oceanfront Hotel Milo delivered 5.5% RevPAR growth and should accelerate in 2017.

In Los Angeles, we have a particularly location at our Courtyard LA Westside, in the midst of the growing media and technology quarter of Playa Vista and Marina del Rey and Culver City. It was the portfolio's number-two EBITDA-producing asset in the third quarter, contributing $2.4 million. The Courtyard was aided by strong transient demand within the submarket, resulting in rate-driven 10.1% RevPAR growth and hotel EBITDA margin improvement of 330 basis points to 45.3%.

Moving down the coast, to San Diego, our Courtyard in the Gaslamp benefited from large citywide events such as the MLB All-Star game and Comic-Con, reporting 6.8% RevPAR growth and 230 basis points of margin improvement to 42.9%.

In Washington, DC, we have strategically assembled a truly unique portfolio in the very best locations of the CBD. Our five-hotel portfolio includes both branded and independent hotels in the upscale to luxury segments. During the third quarter, our DC urban cluster reported 5.9% RevPAR growth, to $187.95, as ADR increased 3.9% and occupancy rose 171 basis points to 87.1%.

The Capitol Hill Hotel is the closest hotel to the Capitol Building, the Supreme Court and the House. It delivered 11.3% RevPAR growth and 260 basis points of margin improvement to 40.2%. The St. Gregory hotel in Dupont Circle recently completed a lobby renovation and a re-concepting of the hotel's F&B program. It reported 9.3% RevPAR growth driven by 6.5% improvement in rate, and 221 basis points of occupancy growth.

Our Ritz-Carlton in Georgetown reported the portfolio's highest RevPAR in absolute terms of $392.43, driven by 6.1% ADR growth to $477.31. Our aggressive revenue management positioning at the Ritz-Carlton has focused on increasing VAR and corporate business, as well as strengthening our L&R relationships.

As we look ahead to 2017, Washington, DC is expected to have a very strong year, given the presidential inauguration and strong convention activity throughout the year. Our portfolio is poised to capture more than its fair share of this growth.

Our Boston hotel cluster reported the highest ADR across the portfolio at $238.94 and produced very strong absolute results during the third quarter, contributing 18% of consolidated EBITDA. But as has been the case throughout the year, we did face a tough 11.7% comp in Boston, given the market's record performance in 2015.

During this year's third quarter, our Boston portfolio reported a 50-basis point increase in RevPAR, to $204.86. In July, we added the exceptionally well-located and newly built 136-room Envoy Hotel in Boston's Innovation District to our Boston portfolio. The Envoy reported 16.3% RevPAR growth at an ADR exceeding $351, as the hotel continues its strong ramp after opening in only June of 2015. More impressive was the hotel's $2.6 million in hotel EBITDA, the portfolio's top EBITDA contributor during the period.

In Philadelphia, the market and our hotels benefited from July's Democratic National Convention. The event attracted approximately 50,000 visitors to the city, resulting in significant compression. Comps were not easy with last year's Pope visit. Our Philadelphia portfolio reported 15.4% RevPAR growth in 2015 third quarter. But Philadelphia has had broad demand growth for several years leading up to each month of this past quarter. For the third quarter 2016, our Philadelphia portfolio reported 19.2% RevPAR growth, to $177.31, with an 8.5% increase in ADR and a 723-basis point improvement in occupancy.

The five-star Rittenhouse Hotel posted a 16.2% RevPAR improvement to $346, the result of 18.9% ADR growth, to $479.64, the portfolio's second-highest ADR in absolute terms for the quarter. Our well-located mid-priced Hampton Inn also reported a banner quarter due to increased demand from the DNC and a favorable convention calendar broadly, delivering 21.4% RevPAR growth on the back of 8.7% rate growth.

Miami and New York remain our most challenging markets, and we will continue to face headwinds in operational performance for the next 12 months. From looking out several years, we continue to be confident in the long-term demand growth in both markets and believe that our locations and hotels can outperform until new supply decelerates. Miami will continue to be challenging due to a myriad of factors including the closure of the Miami Beach Convention Center, the strong dollar's effect on international demand, and new room supply on Miami Beach (inaudible). Add to that concern surrounding the Zika virus and you have a market that lacks compression and pricing power.

While we experienced some cancellations in Chile at our Miami Beach properties due to Zika, especially at the Cadillac, given it's more family and leisure focus, we've seen cancellations subside as media attention surrounding Zika ebbs.

That said, we have heard large group [boxes] are suffering, with large group cancellations as corporate event planners are hesitant to send employees to Miami Beach. The entertainment and production markets are also reportedly in decline through the fourth quarter.

Our South Florida team is outperforming in this challenging environment. In South Florida, our portfolio generated a 2.9% RevPAR increase to $133.80 as a result of 1.3% ADR growth and occupancy improvement of 127 basis points to 83%. Our Cadillac Courtyard Miami Beach delivered 4.1% RevPAR growth as the hotel took on a more occupancy-driven strategy. The hotel contributed $1.5 million in hotel EBITDA during the quarter. In South Beach, the Winterhaven was up 8%, also following a more conservative occupancy-based strategy. In Key West, the Parrot Key Resort reported 2.9% RevPAR growth and $1.3 million in hotel EBITDA.

Looking ahead, we expect South Florida, particularly Miami Beach, to remain difficult. We look to Coconut Grove in Key West to partially offset the challenges on the beach in the fourth quarter and in 2017.

Moving now to New York City, where supply remains elevated -- we have adopted a more defensive posture in terms of our rate strategy portfolio-wide, layering in a variety of the L&R and small groups to continue to outperform. This strategy has started to bear fruit vis-a-vis our more aggressive rate strategies earlier in 2016. However, new supply and lack of pricing power are and will remain difficult headwinds to overcome in the short to medium term.

Our New York City portfolio reported a 3.9% RevPAR decline to $220.36, as rate fell 1.3% to $237 and occupancy declined 254 basis points to 93%. It's worth noting that demand for New York City hotel rooms has never been higher. Room demand in the trailing 12 months ended September 2016 is 13.1% greater compared to three years ago and 23.5% greater compared to five years ago. This sustained demand, combined with New York's preeminence as a financial, cultural and technological hub provides us with confidence that our portfolio of new purpose-built hotels and dynamic submarkets, which is Midtown East, Union Square and Tribeca, are well-positioned over the medium to long term.

Now, before I turn the call over to Ash, I want to delve a little deeper into our capital recycling efforts across the quarter. During the third quarter, we continued to successfully execute our disposition program. We entered into a contract to sell to suburban Residence Inns outside of Boston for a combined $47 million or approximately $213,000 per key. In addition, we signed a definitive agreement to sell a five-hotel suburban portfolio for $185 million, or $244,000 per key. Finally, we also closed on the sale of the Hawthorn Suites outside of Boston in late September. We expect the disposition of these eight stabilized suburban hotels to result in net proceeds of approximately $160 million.

As we've previously discussed, we sold the seven-hotel select service portfolio in Manhattan to Chinese asset manager Cindat earlier this year. To offset this $167.7 million of taxable gains from this transformative transaction, we undertook a series of reverse 1031 exchanges that included the Hilton Garden and the Ritz-Carlton in Georgetown, the Sanctuary Beach Resort in Monterey, as well as the acquisition of the Envoy in Boston. Last week, we acquired the 145-room Courtyard in Sunnyvale, California for $75 million, which fully deployed the remaining cash proceeds from our New York City sale.

The Courtyard is located in the heart of Sunnyvale, at the corner of El Camino Royale and Matilda, equidistant to Google's headquarters and the Apple campus. The hotel opened in late 2014 and requires no immediate capital expenditures to drive increased market share and EBITDA growth. The hotel is of truly exceptional quality and is poised to be the market leader in Sunnyvale for years to come. The hotel is also proximate to our TPS in Sunnyvale, which will allow for scale and scope efficiencies, as well as increased visibility into the market's demand patterns. We acquired the asset in an off-market transaction.

Yesterday, we also announced an agreement to acquire the 77-room Ambrose Hotel in Santa Monica, California, one of the highest-barrier markets in the United States and a true seven-day-a-week lodging destination. The Ambrose was completely renovated in 2015 and occupies a highly desirable location within Santa Monica's 7,900,000-square foot office market in Silicon Beach, home to the highest concentration of technology, advertising, media and entertainment firms in the west side of Los Angeles. The acquisition includes a two-level 82-space parking garage and an underutilized outdoor venue for events for F&B. The acquisition of the Ambrose is expected to close prior to year end and will be funded with 1031 exchange proceeds from the Company's previously mentioned sale of two suburban Boston hotels.

The acquisitions of the Courtyard Sunnyvale and the Ambrose Santa Monica reflect our confidence in the fundamental strength of these submarkets, the quality of the hotels and their locations, and our team's ability to drive EBITDA growth. Like most acquisitions we consider, the hotels are expected to generate a 7.2% on-leverage return in 2017 and will grow EBITDA at a faster pace than our existing portfolio, while upgrading overall portfolio quality in age, EBITDA per key, and market exposure.

Across the last five years, we've sold 55 stabilized hotels for $1.3 billion. Across the same five years, we've acquired 18 higher-growth upscale and independent lifestyle hotels totaling $1.1 billion in markets core to our strategy. Since 2014, we've also repurchased approximately 20% of the float for $192 million, demonstrating our belief that hotel acquisitions and accretive buybacks are not mutually exclusive. The net result of our activity is a young and truly differentiated portfolio of hotels, with high absolute RevPAR and sector-leading margins in the very most valuable locations in the country -- prepared to outperform today and lever to the recovery tomorrow.

Now, let me turn it over to Ash for more details on margins, 1031s, tax-free exchanges and the balance sheet.

Great. Hey, thanks, Neil, and good morning.

During the third quarter, the Company reported adjusted EBITDA of $47 million, a 3.1% decline, primarily related to additional disposition activity, operational weakness in certain markets, and reduced income from the Company's own consolidated joint ventures. Our comparable portfolio EBITDA margins increased 20 basis points to 37.5%, driven by a 2.2% ADR growth in addition to cost-cutting initiatives across the portfolio. Two of our properties had a disproportional impact on EBITDA margins during the period.

If we exclude the Sanctuary Beach Resort, where we have reprogrammed guest amenities, closed the restaurant for renovation, and are in the process of replacing the operator as well as the Hyatt Union Square, where we also decided to replace a tenant and are in the process of re-concepting the entire F&B program, our comparable portfolio reported 100 basis points of margin improvement. Portfolio-wide, our margins have benefited from pricing power across our high-occupancy markets, aggressive asset management, in addition to minimal renovation disruption to best leverage the point in the cycle where rate growth is most meaningful.

As Neil mentioned, we recently closed on the acquisition of the Courtyard in Sunnyvale, California for $75 million. The acquisition of the hotel included the assumption of $40.6 million in CMBS debt that matures in 2025. The debt is interest-only until August 2020 and incurs interest at a fixed rate of 4.7%.

Since the start of 2015, we've acquired seven hotels that are expected to stabilize in the 8% to 9% range in terms of yield. This compares very favorably to the trailing 5.4% cap at which we sold the Cindat portfolio, which looks closer to a 5% cap today given market dynamics in New York City.

Yesterday's announcement of an agreement to acquire the Ambrose in Santa Monica will offset approximately $19 million of taxable gains from our sales of two Residence Inns outside of Boston. With regard to the five additional suburban hotels, we will also need to identify assets to fully shelter approximately $80 million of gains. We've structured the closing of these five hotels to allow us to bring these gains into 2017.

As we have previously discussed, the 1031 process of identifying and closing of assets is extremely complex, especially as a publicly traded REIT. That being said, we're on track to close $825 million of asset sales this year, generating approximately $550 million in net proceeds and over $264 million in taxable gains. It may be complicated, but it's a problem [we're happy] to deal with and one which clearly demonstrates the strength of our acquisitions and asset management capabilities in addition to our ability to execute accretive dispositions at opportune times in the cycle, allowing us to diversify and upgrade the portfolio.

Transitioning now to our balance sheet -- during the third quarter, we repaid nonrecourse property level debt at three properties totaling $91.6 million, continuing our efforts to refinance the 2006 and 2007 vintage 10-year CMBS loans. On a pro forma basis, we estimate by year end less than 10% of our outstanding debt will consist of CMBS loans. The elimination of this debt provides additional flexibility to sell assets without debt encumbrances and allows us to continue our capital recycling efforts.

At the end of the third quarter, we maintained approximately $136 million of cash and cash equivalents, and we have full capacity on our senior unsecured credit facilities. In August, we closed a new $200 million senior unsecured term loan. The new term loan, together with our existing term loans and revolving line of credit, expanded our senior unsecured borrowing capacity from $800 million-$1 billion. At closing, $50 million was advanced to us, with the remaining available on a delayed draw basis. As of today, we have drawn down $150 million on this new term loan. This new term loan also addresses our 2016 and 2017 debt maturities and will result in estimated interest expense savings of approximately $7 million on a full-year pro forma basis.

Our balance sheet is in great shape, with minimal debt maturities in the near term; while our interest coverage and fixed charge coverage ratios are at approximately four times and three times respectively. By year end, we continue to target net debt to EBITDA to be between 4.5 and five times.

One of the benefits of our young, purpose-built rooms-focused hotels is they require minimal capital investment, thereby maximizing free cash flow in IRR. During the third quarter, we spent $5.5 million in CapEx and property improvements and approximately 3.6 million for the new restaurant build-out at the Rittenhouse and the new lobby and restaurant at St. Gregory in Washington, DC. For full year 2016, we continue to target consolidated CapEx in the $25 million to $27 million range.

So based on our year-to-date performance, we are affirming our FFO per-share and EBITDA guidance. However, we are making slight adjustments to our full-year 2016 net income, net income per diluted share, and comparable hotel EBITDA margin outlook. The change to net income and net income per diluted share is primarily due to a change in the method of accounting for the allocation of income in the Cindat joint venture, and the timing of our fourth quarter asset disposition. The change to our EBITDA margin outlook is primarily due to the previously mentioned change in our F&B operating model at the Hyatt Union Square in the Sanctuary, where we are re-concepting and renovating the restaurant and food and beverage outlets and changing out the tenant.

We now expect full-year 2016 net income in the range of $94 million to $98 million, net income per diluted share of $2.16 to $2.25, and comparable hotel EBITDA margin to be flat to up 40 basis points for the year.

So that concludes my formal remarks. And Jay, Neil and I are happy to address any questions that you may have. Operator?

(Operator Instructions) Ryan Meliker, Canaccord Genuity.

I just wanted -- maybe this is more for Neil -- can you just kind of walk through -- you guys did a good job providing some color on the acquisitions, particularly Sunnyvale and Santa Monica, in the slide decks you provided. But if I look at Sunnyvale, it looks like the cap rate and EBITDA multiple look pretty good. But the price per key seems pretty elevated. Any thoughts on how that factored into your decision-making?

And then, on Santa Monica, it seems to be a great asset, but cap rate was low, EBITDA multiple a little high. How many more types of these, I guess, less accretive transactions on an FFO basis do you expect to do?

Hey, Ryan, this is Jay. Let me take that question.

I'll start with Sunnyvale. As you mentioned, the cap rate is pretty attractive. And that was certainly factored into our assessment. I think when it came to how we were thinking about price per key, there were a couple of things we looked at. Neil mentioned specifically that this hotel is at the corner of two major arteries in Sunnyvale, if not the two major arteries in Sunnyvale. And it's proximity to all the corporate demand generated is really strong.

If you take a look at land values generally in the Valley, the interior Valley, they're averaging around $180 a foot. And that includes some of the real estate that's out towards the highway and maybe even a little far-flung from the real ground zero of activation and density.

Based on what we've studied and through our underwriting, we believe land costs here for entitled land to build the type of asset that we've built is probably close to $300,000 to $400,000 a foot. And I think that's surprising to many people. Because when you drive through Silicon Valley, it looks like a commercial pipe with a lot of strip centers. But today, with the new zoning overlays and things, you've got a lot more density, and land values are very high. So if you're imagining a $300 to $400-a-foot price per land, then all of a sudden replacement costs at around a $400, $450 a room starts making sense.

And so to be able to buy an asset that is brand-new, delivers pretty much a full-service upper-upscale experience, we felt that the hotel really made sense at $517 a key. The hotel is going to do a $20 rate premium to its comp set.

If you take a look at some of the assets in the comp set in the market that have traded, there's 26-year-old asset that traded for around the same price. You had the Sheraton that traded at close to $100,000 more per key that needs a lot of CapEx. And that asset's 36 years old.

And so when you factor all of those things in against replacement costs and the fact that we are able to take over an asset that is already in ramp, and where we have experience just two miles down the road of knowing what the market can do, we got comfortable with the price per key there.

With the Ambrose, of course, that's also a pretty high price per key. There, we think that there's some very, very strong operating advantages that we can bring to the hotel. It is run sort of as a one-off by a multi-segment real estate developer. And it hasn't really -- I won't say that it has been professionally managed, because I think the team that's onsite is very strong. But I think some of the above property level support that we'll be able to bring from a revenue management and direct sales support standpoint, and our understanding of both the Playa Vista and the Santa Monica market with the Marriott asset that we have their already that has performed really well -- we think that despite the high price per key, this too can stabilize in the 8% to 9% yield level.

We expect at the Ambrose to be able to drive rate next year by close to $20 in ADR, and then another $10 after that. And that's a very comfortable estimate for us.

So when we put all of that together and look at it from an underwriting standpoint, the investment basis made sense to us.

No, that's helpful, I appreciate all the detail there. It sounds like the Ambrose is a little bit more of an operational upside story than necessarily just buying in at a high-quality asset at full pricing. Is that a fair assessment?

Yes, and in there also, there's new zoning regulations going in place, and actually this fall -- probably this coming month, if I'm not mistaken -- that's going to require any building that is built over 32 feet in height to require a voter referendum. And any dispensation to a developer to go outside of the existing -- so for conditional uses, special exceptions of a certain magnitude, that will also require a vote.

And so the barriers to entry from a regulatory standpoint and Santa Monica are getting tighter. And as I think we mentioned in the materials, it's already the second-highest commercial rent per square foot after Beverly Hills and West LA. And when you look at land values there as well, you're clearly talking in the $400 a buildable foot if you can find it and build it in the first place.

Okay. Thanks, Jay, that's good color.

And then, just one quick follow-up -- with regards to operating fundamentals and RevPAR growth, you guys obviously had a pretty solid quarter on RevPAR, up 3.5% or so. It looks like your guidance implies somewhere in the 2.5% to ballpark 6% range for the fourth quarter. I'm wondering, is it realistic to assume any type of acceleration in the fourth quarter with the calendar shifts that we're seeing? And if not, should we be expecting the low end of the range? And can you give us any update on how October's looking?

Hey, Ryan. I think that when we give our guidance, once again, it's for the full year. So as we look at where we're sitting today, we're sort of looking at the midpoint of the range as we get through October. October was a difficult month, with the Jewish holidays and the comparisons. So I think that for us, we're probably targeting more towards the midpoint to low end of the range then we are the midpoint to the high end at this point.

Okay, that's helpful, and that makes sense to me.

All right, I'll jump back in queue with anything else. Thanks a lot, I appreciate all the help.

Yes, thanks.

(Operator Instructions) Bill Crow, Raymond James.

Two topics to explore this morning. First of all, if you went back to, say, right before you bought the Rittenhouse, and you looked at the contribution to revenues from F&B to where it has grown today, how much has that changed?

In terms of EBITDA, we know that it's kind of less than a point or two of EBITDA. But on a revenue basis, perhaps as high as 7% to 9%, something like that, still below 10%. Our independent and kind of lifestyle hotels contribute nearly 30% of our EBITDA. But our independent and lifestyle hotels are still rooms-oriented, transient hotels that derive most of their profits from the core service of providing guests with a place to sleep at night.

So F&B is clearly something that is important to our story. It helps us achieve higher rate levels than we might in a more limited-service or select-service environment. But it's still not a significant portion of our earnings.

So higher rates, but at the expense of margins, right?

Yes, yes.

(Inaudible). And then, the second half of that question would be all of the portfolio changes -- have they left you in a position where you're more vulnerable today to higher labor inflation, especially California, for example?

Well, all owners in California are definitely exposed to wage growth in the marketplace, as are other markets around the country that are enacting minimum wage legislation and the like. But in terms of our portfolio mix, we do have, at some of the luxury hotels and some of the hotels where restaurants are operated by the hotel revs and leased out, we do have some additional service employees and the like.

But again, in the grand scheme of our portfolio, it's still a very marginal amount relative to most hotel portfolios at this level of RevPAR.

Okay.

The second topic is really on the share repurchase into the buyback, and the fact that you have now bought back, I think you said, 20% of the float. Stock hasn't done much; it's still attractive, I'm sure, from evaluation perspective in your eyes. How far are you willing to take that buyback? How much of the float are you willing to buy back? Is this a slow-motion management-led buyout? How should we think about this?

We, I think, are -- the opportunism with which we look at buyback is moderated by leverage. And it's something that we feel comfortable in this four to five times debt-to-EBITDA range for our portfolio at this point in the cycle. But we are -- we are sensitive to those boundaries. And so I think that's the biggest impediment to further buybacks and further repurchasing.

That said, we do produce a lot of internal free cash flow growth. And so we're always going to have enough capital to be opportunistic in the market on buybacks. We think that, when you are trading at 30% kind of discount to private market values or NAV, that it's a very good use of excess capital and excess cash flow to opportunistically buy back shares.

But to your point, there is a limit to it. And that limit is set by leverage levels and what the environment Outlook might be.

Great. Appreciate the color. Thanks, guys.

Yes.

Shaun Kelley, Bank of America.

Was just wondering if -- and Jay, I think in the prepared remarks you alluded to this a little bit, but could you give us a little bit of an overview with these acquisitions and dispositions, sort of what kind of EBITDA contribution on a pro forma basis we should be looking at a cross the portfolio for your major markets now? So kind of how much is New York, Boston, California and Southern Florida?

Hey, Shaun, this is Ashish.

As far as -- as we look into 2017, right now we are looking at New York being in that 25% to 27% range of EBITDA contribution. California will be coming up pretty close to that, maybe just slightly below that level. We're still looking at DC to be in the probably 15% to 18% range for next year, Boston to be around 10%, Philadelphia probably 6% to 8% or so for the full year. In South Florida, I think we're looking at around 12% now. So that's (multiple speakers) -- that's assuming all the dispositions close on time as we expect to, and no further acquisition activity.

Okay, great, Ashish, that's perfect.

And then, my follow-up would be -- can you help us think about some of the puts and takes in those markets for next year? So specifically, in California, we know we've got the issues with the Moscone Center, but you guys aren't really -- or most of your assets are not in San Francisco proper. So how are you kind of thinking about that market? New York I think we can all probably surmise is going to remain a little soft. But specifically, what you're expecting for probably California in your portfolio specifically? And then maybe Philly -- how should we think about lapping sort of this really difficult two-year stat comp given the DNC and the Pope?

Shaun, this is Neil.

On California, we feel pretty good about our California market exposure. As you mentioned, we're not in San Francisco, so we don't have any significant impact from closing the Moscone Convention Center. Our exposure in northern California is in Sunnyvale, with our Courtyard and TownePlace Suites a mile apart from each other there, and our sanctuary Beach Resort on the sand in Monterey. Those three markets we expect to have still very strong fundamental market performance as well as above-average performance from operations as Sunnyvale continues to ramp and the Sanctuary Beach Resort continues to reposition as we have planned across the last year or so. The repositioning is primarily in the F&B, but the impact on room rates and on margin is very significant from an asset management standpoint. So Northern California we feel like will be a very solid growth market for us.

In Southern California, we have -- in San Diego, the Courtyard has a pretty strong convention calendar ahead for fourth quarter and for 2017. And the market has taken new supply across the last few years. But next year, demand will outpace supply, and we're expecting kind of solid moderate growth out of San Diego.

And in LA, as we've mentioned, we're in a -- we have a really special location there by Dell Vista, Marina del Rey, Culver City. We're also still very close to Century City and Beverly Hills and the LAX. So our performance there will continue to grow. The supply that's coming into LA is in downtown LA. And a lot of the weakness from international demand has been in West Hollywood and in downtown. We believe that our LA Courtyard will continue to grow next year despite great performance across the last couple of years.

California will remain one of our strongest growth markets next year. Washington, DC will be an extremely strong growth market for us. That's been our expectation for this year while we've been assembling our portfolio in DC across the last couple of years.

Boston has a better convention calendar in 2017 than it has this year in 2016. We've had really good performance there in 2014 and 2015. 2016 has been mixed. I think we'll return to solid growth in Boston in 2017.

Philadelphia is going to be a tougher market for us. There isn't significant new supply yet; that's coming in a couple of years. But there's just been kind of tough comps that we'll be facing. That said, the demand in Philadelphia has changed very significantly across this cycle. What used to be a real [eds and meds] kind of marketplace is now -- is a very strong leisure destination among international and domestic travelers, as well as a growing media hub with Comcast growth.

So Philadelphia will be a tougher market, but we think it will continue to be a positive growth market. And I think what was implied in your question is true -- New York and Miami will continue to be our hardest markets.

Perfect. Thanks for the rundown, Neil.

And then, last question for me, and hopefully at a high level, to not take up too much time, would just be sure general view on kind of your weighted average supply growth for next year across your portfolio. You guys have, I think, a pretty specific viewpoint towards what's going on in your submarkets. So however you count it, where do you think that weighted average growth is coming in next year, and how does that stack up relative to this year?

We're at about 2.5% to 3% across the portfolio. New York will be around that 3% range for this year, considering the delays and openings that moved into this year from last year, and vice versa. And in Boston and in Washington, DC, we're expecting around that 2% kind of range. And these are broad market kind of figures of 2% to 3%. We do have a handful of assets that I think we're more vulnerable to.

In Boston, for example, we're expecting to have very strong growth, continued very strong growth from the Envoy return to growth for the Boxer and the Express Cambridge. But in Brookline, we are facing new supply for the first time in a while.

And so there are a few spots in the portfolio that will be a little tougher. But by and large, we're at a level where demand in most of our markets will continue to exceed supply.

Perfect. Thank you very much.

Jeff Donnelly, Wells Fargo.

I know you touched on this a little bit in prior questions. But you've certainly been one of the more pronounced sellers of assets this year and strongly focused on reinvesting those proceeds in the assets and the shares. How do you think about that prospect as we roll on to 2017? Do you think you're going to be able to maintain maybe not a comparable pace of sales, but you'll continue to be an active net seller? And I guess, to the extent you are, how do you weigh the prospect of special dividends versus repurchases or capital recycling at this juncture?

In terms of the first part of the question, of sales -- we do have a handful more dispositions that we're targeting for 2017. There's a couple of remaining suburban hotels in our portfolio. We have some joint venture assets that we may be able to recycle the capital from. And there's a handful of other properties that we're going to continue to look at next year for sale.

We think that when we sell hotels, often there will be gains from those sales. And we will remain open to either using the proceeds from the sales to shelter gains through a 1031-like kind exchanges, or special dividends. To date, we've found very strong opportunities to redeploy the capital. And the opportunities there -- not only is it an opportunity to get higher, faster-paced EBITDA growth into the portfolio, but it's also a benefit to leverage, to add incremental EBITDA versus payout of special dividends.

That said, we've been very -- we've explored special dividends throughout 2016; it doesn't look like it's going to be required with how our transactions are playing out. But the Board will still consider it, because we are generating excess cash flow. And next year, we'll see what the opportunities look like to determine whether it's a special dividend or further 1031 exchanges.

So just to add on to that (multiple speakers), the pressure for the special dividends will certainly be less. I mean, as I mentioned, we're tracking at about $825 million of asset sales. It's very unlikely that we come anywhere near that number for the next year.

Okay, that's helpful.

And [just because] he mentioned some of the joint venture assets, I was curious -- a handful of properties, particularly those in Connecticut, where you do have a partial interest and you get a preferred return -- I'm just curious, how are those hotels performing in this environment, just because of more secondary markets? And specifically, I'm just wondering what the coverage looks like for your preferred return after their debt service. Is there any concern that those properties might not be able to meet that preferred distribution on sort of a current basis?

Jeff, we only have three assets left in that venture. One of them is the Marriott Mystic. And we had our operator take over that property last year. We've been able to grow EBITDA and NOI about 25% from an operator change there. I think that the other properties we own, of the 15% and 10% interest that are preferred is very well covered at both assets.

As Neil alluded to, we are looking at potentially breaking up that joint venture. It could be a full, outright sale, it could be them buying a few and is buying one; some type of an asset swap. But it's very unlikely we would take over the Hartford assets. I think we'd more likely than not sell it to our JV partner and maybe taken the Mystic property.

Okay.

And just one last question, actually on the Ambrose -- I was curious, if you had the data handy -- I'm just curious, how does a hotel like that, which is a little bit more to the east in Santa Monica, perform on maybe like an index basis versus, say, the hotels in Santa Monica that probably many people know along the beachfront? I guess I'm wondering what kind of the gap is on a RevPAR or rate basis there.

Jeff, this is Jay.

This hotel, as you mentioned, is about a mile and a half from the water. It's kind of located on the one street in between Santa Monica and Wilshire. So for what it is not, as far as being oceanfront, beachfront as a hotel, it's actually -- it's in the center of and very close to and in the center of this eight million square feet of corporate office in that area. And so it does a very, very strong midweek business. And I think we can drive better -- even more demand through the midweek.

The weekend are laggards compared to the rest of the concept. But we believe that the gap in ADR, the 77-room hotel compared to a lot of the other hotels that are in the 300-or-so-room neighborhood, is too wide. So we believe that $80 gap can be -- even if we can close it by 30%, which is, in our view, very comfortable to do -- and if we can close it even more than that, I think we'll be -- will have a very successful return here.

How to drive some of that weekend business is just with a little bit more programming. And I think the way it's communicated and the weekends are distributed is going to make a difference.

That's helpful, thank you.

David Lowe, Baird.

I want to pull the camera back and ask some bigger-picture questions. Neil, at the beginning of your prepared remarks, you mentioned peaking supply growth. Do you think we have seen, or we're close to seeing, about as rapid a pace of supply growth in most of your markets as we are likely to see? And do you see that supply growth slowing down in the future?

Yes, David. I'll try to answer it well.

Peaking supply growth -- yes, in our market -- the national data may not show a peak for some time, because I think we are now in the period in the cycle where we will see a lot more suburban development across the country, and our brethren at the brands continue to come up with new concepts that will lead to further suburban development.

But we believe that the mass of urban gateway market kind of development in our markets is on the decline. We'll have some peaks yet to be had in some of our smaller markets like Philadelphia. But in Miami, Miami Beach has taken a lot of supply across the last several years, and it's on its way down. And Boston hasn't had a lot of supply this cycle. But it's not meaningfully significant, at least in the coming years.

And so we do believe we're at a point where -- I don't know if it's going to be this quarter, next quarter, or towards the end of next year, but I do believe that we will very soon have some good visibility on deceleration and supply in our key markets.

And I think that's a significant catalyst for us. It's what's held back rates so significantly in New York and in other markets. You can imagine that when you have 90% to 93% occupancy, and you get pricing power back, the impact on profitability is going to be very significant, and this recovery could be very steep in a lot of these markets that have heretofore been very difficult.

And one last topic -- I'm following up on New York -- what do you think about the changes in Airbnb, both the signing of the recent legislation, but also the Airbnb decision to begin to pull multiunit operators off of their site [as sent]? Have you seen any impact to that? Do you expect to over the next year or so?

I think it's too early to see the impact. We were delighted to see the governor signed the legislation; less delighted that they've decided to wait on enforcement. But we think that the trend is a good one. We think that Airbnb's response is -- besides the lawsuit, but their response of trying to provide some support to these activities is rational. We're very appreciative of all the efforts from the American Hotel Lodging Association and a lot of the other constituencies that have really put their energy behind addressing this issue.

And this issue is truly that these are -- it's an unfair playing field. And in the case of New York and markets like Santa Monica, it's absolutely illegal. And so we think that that's a -- it's had its day, and we think it's going to have less impact on our business and on pricing power in our markets in the future.

I wish it was as clear kind of how much impact it's had or what it will have in the future. But it's still a -- we still look in New York and think of the hard new hotel supply as being our biggest challenge. But it's clear that there is some impact from this Airbnb growth. Whatever that impact is, it's on the decline.

Great. Thank you.

Bryan Maher, FBR & Company.

I know we're running a little short on time. But I do want to kind of address the fact that two of your regional markets are kind of underperforming. You are very active in the capital recycling. And I think I touched upon this in the last call. But are you continuing to look at other MSAs? And you don't have to tell us which MSAs specifically, but are you warming up to other MSAs that you might expand into, and why? Would that be from a pricing standpoint opportunistically, or more from a growth standpoint?

We are always looking at opportunities really all across the country. And we do spend a lot of time on some of the other higher-growth MSAs in the country, like we've looked at a lot of opportunities in Seattle, for example, or a handful of other markets around the country. But to date, we're finding enough runway in our core six markets. And in those core six markets, we have significant portfolios already, which give us unique market insight, give us truly more operating leverage to bring to bear on these assets, and so real advantage on the buy side as well as on the execution site.

And so we have tended to focus on these markets where we can underwrite more clearly, and we have real conviction about various submarkets in these markets.

Now, you don't want to -- it's hard to fight a declining market, and so you've seen us put most of our investment dollars across the last few years in markets that we expect to have above-average market growth in the coming years -- California, Washington and Boston -- while we have been less acquisitive in Miami or New York.

But that said, we want to be careful not to be chasing lagging indicators. And there are opportunities to create value in even challenging markets. Assets often get mispriced when investor sentiment is the lowest. And so you do have to take your steps before the turn, like we did in Washington, DC.

And so we're focused on our six markets. We're open-minded to other MSAs. But to date, we've found enough strong opportunities for the amount that we're acquiring, which is really -- it sounds like a lot, but there are a handful of assets in markets we know very, very well. And we're comfortable with that approach for now.

Thank you.

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

Thank you. No more closing remarks. But we well -- Jay, Ash and I will all be here in the office the rest of the day and look forward to any further follow-ups. Thank you all for your time.

That concludes today's conference. Thank you for your participation. You may now disconnect.