RLJ Lodging Trust (RLJ) 2014 Q2 法說會逐字稿

Greetings and welcome to the RLJ Lodging Trust second-quarter 2014 earnings conference. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Hilda Delgado, Vice President, Finance. Thank you. You may begin.

Thank you, operator. Welcome to RLJ's second-quarter earnings call. On today's call, Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. Leslie Hale, Treasure and Chief Financial Officer, will discuss the Company's financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that can cause the Company's actual results to differ materially from what has been communicated. Factors that may impact the results of the Company can be found in the Company's 10-K and other reports filed with the SEC. The Company undertakes no obligation to update forward-looking statements.

Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. I will now turn the call over to Tom.

Thank you, Hilda. Good morning, everyone, and welcome to our 2014 second-quarter earnings call.

I am very pleased to report that we once again generated strong operating performance. Our consistently strong results continue to validate our guiding principles of operational excellence, smart capital allocation, and prudent balance sheet management.

This quarter our RevPAR grew 6.6%, and EBITDA margins grew 95 basis points to 38.5%, which is an all-time quarterly high for our margins since our IPO. The execution of our proven investment strategy coupled with our active asset management continues to yield impressive results.

Our strong performance this quarter is especially notable given that during the same time last year, our portfolio generated an impressive 8.7% RevPAR growth and margin expansion of 124 basis points. Our ability to continue to generate such strong top- and bottom-line growth in light of difficult comps and margin pressure from labor and fixed expenses is a testament to the quality of our portfolio.

Not only were we able to generate another quarter of strong growth, but we also successfully completed several significant transactions. In the second quarter, we executed our second follow-on offering that resulted in net proceeds of more than $230 million, which we then deployed into assets that further expanded our coastal presence.

Our acquisitions have enhanced our overall RevPAR and broadened our geographic footprint into high-growth markets. We are very pleased by the upgrades we have made to our overall portfolio through our acquisition and capital recycling program.

We continue to closely monitor movements in the economy and potential impact to our overall outlook. We see second-quarter's initial GDP growth of 4% as a positive sign of future expansion. Overall, the employment picture continues to improve, and businesses continue to increase their investment spending. Also, trends in consumer confidence remain positive.

We expect that as a result of these positive economic improvements, demand will continue to grow and outpace supply as we move further into the lodging cycle. We see increases in airline travel to several of our key markets as encouraging signs of improvement in demand. Furthermore, we expect international travel will increase over the upcoming years and provide an additional catalyst for the lodging sector.

Overall, we are very pleased with demand growth in our markets and in the US, where we are seeing a slight uptick in supply growth. We remain optimistic in the long-term demand outlook.

In the last 12 months, US demand has outpaced supply growth by 240 basis points. In May, RevPAR growth hit a new monthly record high, and June had the highest occupancy in the last 15 years. These positive indicators are very encouraging for lodging and especially for future rate growth. We expect that an improving economy will stimulate greater demand and help maintain positive lodging fundamentals over the next several years.

For our portfolio, we generated RevPAR growth of 6.6% and EBITDA margin expansion of 95 basis points. This marks our 13th consecutive quarter of consistent, solid RevPAR growth. Our steady growth is the result of our strategic efforts to upgrade our portfolio through operational excellence, thoughtful execution of accretive acquisitions, and sales of non-strategic assets.

As I move on to our top markets, I will start with Houston, which has consistently outperformed due to a vibrant oil and gas industry. Our portfolio generated RevPAR growth of more than 12% for the second quarter. Several properties which completed recent renovations are gaining market share. We are continuing to see healthy convention activity.

The market benefited from several citywide events, such as the Offshore Technology Conference, Iron Man, and Microsoft. Going forward, we expect the market to continue to generate high single-digit growth for the remainder of the year.

Our Denver market also continues to perform exceptionally well, with a 9.7% RevPAR growth this quarter. Our hotels saw a return in government business and strong business demand from local projects.

We also continue to see increased leisure demand in the region. Passenger traffic at Denver International Airport continues to increase, as both April and May were at record passenger levels. We are very pleased with the results year to date, but we do anticipate growth will moderate for the rest of the year because of tough comps from last year's historic flooding in the fall of 2013.

In Austin our hotels continue to outperform the market. This quarter we had RevPAR growth of 7.3%. We benefited from strong corporate demand as well as from the increase in leisure demand generated by well attended events at the Circuit of the Americas track, such as MotoGP and the inaugural ESPN X Games. We are confident that the market will continue to outperform for the remainder of the year.

After an uptick last quarter, our DC hotels were hampered by a softer citywide calendar. However, strong corporate demand, especially from insurance business at our non-CBD properties helped our hotels outperform the market by 20 basis points. Looking ahead, we are encouraged by the strong booking pace for the rest of the year and an increase in citywide activity.

As expected, our hotels in New York were up slightly to prior year. Last year we had a large group of businesses associated with Superstorm Sandy. While we expect the market's performance to continue to be fairly flat for the second half of the year, we remain confident in New York's ability to absorb new supply and in its long-term growth potential.

Over the last 12 months, occupancy in New York has averaged more than 84%. We were very pleased to see an increase in international travel this quarter in light of the World Cup. According to the Office of Travel and Tourism, New York has surpassed Miami as the primary port of entry for international travelers.

In Chicago, RevPAR growth was relatively flat to last year. While our airport hotels continued to outperform due to weather delays, our growth this quarter was tempered by the loss of business demand generated from two large projects that concluded in the fourth quarter of last year. However, we are encouraged by the pickup and a stronger citywide calendar for the second half of the year and expect our hotels' performance will pick up meaningfully.

In addition to strong performance from several of our top six markets, our diversified portfolio is reaping the benefits of a broader economic and lodging recovery. Demand has been strong for travel to South Florida, and airlines continue adding international and domestic flights to the area. As a result, our hotels in South Florida and Tampa generated RevPAR growth exceeding 15%. Our South Florida assets have generated consistent double-digit RevPAR growth every month since the beginning of the year.

Our West Coast properties are also performing very well, with RevPAR growth of 10%. Our most recent five conversions continue to ramp up, with another quarter of double-digit RevPAR growth of 12.7%. We expect to see additional growth from these assets, in particular from our Hotel Indigo in New Orleans.

And finally, we are excited about our three major renovation projects that will be completed later this year and early next year. We expect that once our projects in Atlanta, Houston, and San Francisco open, these assets will drive further growth for the portfolio in 2015 and beyond.

With regards to our transaction activity, during the quarter we acquired three assets for almost $200 million. We acquired the Courtyard Portland City Center, and the Embassy Suites Irvine Orange County in an off-market portfolio transaction.

I am also very pleased to announce that we also closed on our highly anticipated acquisition of the Hilton Cabana Miami Beach hotel, which is a new oceanfront property in the heart of North Miami Beach. The market's growth and position as an international destination has driven strong real estate values. We are very excited that we were able to acquire this highly desirable asset at a huge discount to replacement cost.

Shortly after the quarter's close, we completed another exciting acquisition in Atlanta. We acquired a newly converted Hyatt Atlanta Midtown for $49.5 million. We believe the hotel's central location in Midtown Atlanta and the Hyatt brand, which is underrepresented in the market, will position it for exceptional long-term growth.

In total we have acquired more than $550 million of assets since the beginning of the year, more than half of which are located on the West Coast. These assets are expected to be strong contributors to our growth for the year.

In fact, the acquisitions that we owned as of quarter end recorded RevPAR growth of 10.8%. We have been able to fund several of these high-quality assets through dispositions of non-strategic hotels, including the Holiday Inn Austin hotel, which we sold this quarter for $13.5 million.

We have sold in total 15 hotels for approximately $130 million. These 15 assets were originally part of a 100-hotel portfolio we acquired in 2006. Several of these assets were aging assets that required extensive capital and were located in markets where we wanted to either reduce our market exposure or in markets that no longer fit our investment strategy.

Their combined RevPAR for 2013 is more than a 30% discount to the overall portfolio. We are very pleased by the interest we have seen in the hotels we have marketed and expect to recycle additional capital this year.

Our acquisition pipeline remains very active, and we have another $100 million in assets under contract or letter of intent. Over the years we have cultivated strong relationships and a reputation of being able to execute. As a result, we've been able to source high-quality, off-market deals, such as those that we recently closed on. We will continue to leverage these relationships and maintain our discipline to ensure that all new acquisitions create long-term shareholder value.

In summary, our portfolio continues to deliver strong results. I am excited about the platform that we have built and our position as a leader in the lodging industry. We have laid the groundwork for outsized growth. While economic risks remain, our outlook for the year has been bolstered by improving economic conditions.

Our track record of delivering strong operating results is evidence of our thoughtful approach to creating a sustainable platform for the long-term growth for our shareholders. We will continue to be smart capital allocators as we seek both organic and external growth.

As we look toward the second half of the year, we expect that our focus on asset management, accretive acquisitions, well-timed asset repositions, and the continued sales of nonstrategic assets will continue to drive further growth as the year progresses. As a result of improvements in the operational performance and our recent transaction activity, we are raising our guidance across the board. We are increasing our pro forma RevPAR growth to 5% to 7%; increasing our hotel EBITDA guidance to $380 million to $400 million; and increasing our EBITDA margin to 34.7% to 35.7%.

Also, I have very pleased to announce that our Board approved increasing our third-quarter dividend to $0.30, up from $0.22, for a 36% increase. I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter.

Thanks, Tom. Our results this quarter illustrate that our disciplined investment strategy and our focus on operational excellence continues to drive solid growth for our portfolio. This quarter our strong performance generated an increase of $9.4 million in hotel EBITDA, representing an 8.9% increase over the prior year. And as Tom mentioned earlier, our EBITDA margins expanded 95 basis points to a record high of 38.5%.

We were able to report strong margin growth despite pressure from real estate taxes and escalating health and welfare expenses. Our ability to maintain high margin demonstrates the strength of our focused service investment strategy and our thoughtful approach to asset management. We expect rate-driven RevPAR growth combined with our aggressive asset management initiatives to continue to yield margin expansion.

With regard to our corporate results, for the quarter our adjusted EBITDA increased $15.6 million to $107.6 million, resulting in a 16.9% increase over the same period last year. Adjusted FFO increased $18.9 million to $93.6 million, representing a 25.3% increase.

For the quarter adjusted FFO equates to $0.74 on a per-share basis. Adjusted FFO this quarter increased as result of strong operating performance and interest expense savings captured from our proactive balance sheet management. We continue to maintain a strong balance sheet that provides flexibility and a solid foundation for future growth.

Over the past few years a good portion of our growth has been self-funded. As part of our capital market strategy, we look for opportunities to access the equity markets where conditions are favorable and when we have accretive acquisitions on hand. Keeping to this strategy, we successfully executed our second follow-on equity offering this quarter, which resulted in net proceeds of $233 million.

Our offering was very well received. We saw significant demand from our existing investor base as well as from new investors.

As a result of our deal being oversubscribed, we were able to offer our shares at one of the tightest discounts for a REIT follow-on in the last two years. We believe that the interest that we garnered for both of our follow-on offerings is a result of the disciplined approach we have taken with regard to investment strategy, operational execution, and balance sheet management.

Our core balance sheet metrics remain strong. During the quarter we increased the total number of unencumbered assets to 114, representing more than 70% of our portfolio's 2013 hotel EBITDA. And with an outstanding debt balance of $1.6 billion at quarter end, our net debt to adjusted EBITDA ratio was 3.4 times.

We ended the quarter with an ownership to cash balance of $374 million. Our cash on hand along with our undrawn line of credit will provide us with ample liquidity to fund our current acquisition pipeline.

Our financial flexibility demonstrates our commitment to thoughtful balance sheet management. We will continue to monitor the capital market and pursue opportunities that further enhance our balance sheet.

Now shifting to our dividend, our external and internal growth continues to provide us with increased operating income. For the second quarter, we distributed $0.22 per share. In aggregate we distributed approximately $280 million to shareholders since our IPO three years ago.

As we continue to successfully execute our current strategy, delivering shareholder returns through dividend growth remains a key element of our investment thesis. We expect to significantly increase our third-quarter dividend by an additional $0.08, which is a 36% increase over the prior quarter. Our increase is a result of improvements in operating performance and additional income we expect to generate from the more than $550 million of acquisitions that we have completed so far this year.

It is our general policy to distribute a minimum of 100% of our REIT taxable income. Therefore, if necessary we may pay out a special dividend in the fourth quarter. However, all future dividends are subject to Board approval.

Moving onto capital expenditures, our 2014 capital plan is well underway. Several of our 26 projects were completed in the first half of the year. The remaining renovations are on target, with any potential disruption primarily concentrated in the fourth quarter. We expect disruption for the full year to be approximately 40 to 50 basis points. As always, our in-house team is working closely with our asset managers and the properties to minimize potential disruption.

A significant portion of our expenditures for the year are concentrated within our three major redevelopment projects, which are currently closed. I am pleased to report that these projects remain on target. Our residence in Atlanta will be the first of the three to come back online and is scheduled to open in the fourth quarter.

Given the nature, size, and duration of these three projects, our policy requires us to capitalize interests as hard costs are incurred. Starting in the second quarter, we recorded approximately $142,000. We expect that we will record additional capitalized interest over the next few quarters.

Now, in light of our strong performance and additional acquisitions, we have updated our guidance across the board. Our updated guidance reflects the addition of the three assets acquired during the quarter and the Hyatt Atlanta Midtown, which was acquired shortly after the quarter end.

We would like to highlight the following. First, we have increased our pro forma RevPAR guidance to 5% to 7%. Second, we have increased our EBITDA margins to 34.7% to 35.7%. And as a reminder, properties closed for renovations are excluded from RevPAR margin calculations for periods in which they were closed.

Third, we raised our hotel EBITDA guidance to $380 million to $400 million. Our guidance removes income from hotels sold and includes approximately $8.8 million of prior owners' hotel EBITDA that will not accrue to us and therefore will not be included in our FFO. And lastly, we would like to remind listeners that we have a forward swap on our 2012 five-year term loan that goes into effect in December of this year.

Thank you, and this concludes our remarks. We will now open the lines for Q&A. Operator?

(Operator Instructions) David Loeb, Baird.

Leslie, just to follow up on the guidance that you were just talking about, it seems pretty conservative. A lot of the raise in the second-half outlook appears to be attributed to recent acquisitions. You guys are kind of legendary in your conservatism. Is it fair to say that you are continuing that trend this quarter?

David, I will try to respond. I don't think anybody has ever referred to us as legendary, but we certainly appreciate that. Maybe we can earn that credibility over time.

I would point out a couple of things. As you certainly noted, I think year to date we are about 6.3% in RevPAR. Obviously, the fourth quarter -- we have got a couple factors there.

We have got Denver, which had a really strong fourth-quarter 2013. I think we were up 12.9% to 13%, a lot of that being driven by the floods. And I think the incremental business to us was about $1.2 million. I know we had three or four consecutive months of double-digit RevPAR growth out of that market. So, clearly, we don't expect that to continue. And that is a tough comp for us in the fourth quarter.

Also, we have a number of renovations. If you look historically, and I think our team has demonstrated a real core competency there, we have renovated about 118 hotels, about $255 million over the last three years, plus or minus.

The fourth quarter -- given the seasonality of our business, really first and fourth quarters are the best windows. This year fourth quarter will be the best, and we have got 14 assets scheduled for renovations in that quarter.

Now, none of those are what I would call major, material, terribly difficult -- other than, of course, the three major renovations/conversions that we are certainly working on. Carl Mayfield and our design and construction team are on top of it. We work closely with our operators to really minimize the amount of displacement.

But I do think that we are forecasting about 60 basis points of displacement in the fourth quarter. And as Leslie pointed out, I think it is 40 to 50 basis points on an annualized basis. But all that is really baked in.

Having said that, we did have a very strong July. So we are hoping that we prove to be really conservative once again, but we are comfortable with the guidance that we have provided so far.

Okay. And just to follow up on one point, you mentioned the de-turn renovation/conversions, which clearly is a core competency. As you look at acquisition opportunities, how do you see the trade-off between those kinds of opportunities, the kinds of opportunities like the Hilton Cabana in Miami -- the buy-on-completion versus stabilized assets? What does your pipeline look like, and what is your appetite for those slices?

It is a great question. You know, we really like the conversion opportunities. As you know, the seven that we have done all are in total exceeding expectations. The last five, as we pointed out, are up 12.7% in second quarter.

However, as you get later in the cycle, we are not likely to do as many of those conversions. Our scale provides us with the platform and the flexibility to do that. But we are going to be far more selective, and it would really have to be something unique, something really compelling.

We love Cabana. Obviously, that was a takeout. We did take the development risk there. We got in at $300,000 a key. We know that that is a significant discount to replacement cost on that particular transaction. The other transactions that are underway in Atlanta, and San Francisco, and Houston -- all of those are going to deliver the latter part of this year or early next year, and in our belief have plenty of ramp-up and running room, given what we think and hope and believe will be an extended cycle.

So we're not going to rule out a deep turn or a conversion. But it would have to be something really compelling to generate significant value for our shareholders.

Very helpful. Thanks. Last one: what is your thought on additional non-core asset sales? We have noticed that White Lodging has taken some additional management contracts. Is that a prelude to being able to sell some others unencumbered?

Not necessarily. But let me ask the -- not necessarily as it relates to White Lodging. As a partnership that we have with them, and they manage a lot of hotels, there will be situations that we will sell assets unencumbered; and there will be assets that we sell that are encumbered. So we are flexible on both sides of the aisle.

Recycling capital is a high priority for us. As you know, we have sold 15 for $130 million since last November. We have got another 20-plus assets that we are currently marketing.

Again, no insurance that any or all of them will close this year. But the team is working actively to continue to recycle capital at the higher growth markets. And I think that is something that we are committed to, and I think that we have shown performance on that so far.

Great. Thank you.

Ryan Meliker, MLV & Co.

Just a couple of quick ones here. First of all, with regards to guidance, am I correct in my belief that your full-year guidance does not include any impact from the Residence Inn that is scheduled to open in 4Q?

Yes, that is correct. It is opening in the fourth quarter. And because of preopening costs, it is pretty much a wash for the year.

It will be a wash, okay. And then I apologize if I missed it in your comments earlier on, but I noticed in the press release you didn't have any G&A guidance, whereas you had historically been giving it. Is it still in the $25 million to $26 million range?

That is correct. That did not change.

Okay. Beautiful. And then the last question I had was: you talked a little bit about capital recycling, and you guys have obviously been one of the more active hotel REITs in terms of selling assets this year.

We have certainly seen some pretty eye-opening numbers from -- whether it be private equity or private REITs looking to buy large select service portfolios. Is there any interest in aggregating some of what you would call your non-core assets into a large enough portfolio that might appeal to a Northstar, or an ARC, or a Starwood Capital, or a Blackstone?

You know, Ryan, it is certainly something that we would look at. As I mentioned, we have got 20 assets plus or minus that we are currently marketing.

We will carefully look through our portfolio. And at the end of the day, you want it large enough where we think it's going to be attractive to a really broad audience. And we think that that pool of 20 plus or minus -- again, this could trade as a portfolio; it could also trade as something south of that.

So we will continue to look. I mean, as I have said many times, I think the industry should consolidate. We want to be part of that discussion either as a buyer or as a seller.

Our top 50 assets account for about 65% of our EBITDA plus or minus, which we've also talked about in the past. So we are open to whether they are small portfolios, or single assets, or a slightly larger portfolio. My gut tells me that that is really the sweet spot. It will -- given the distribution of some of the assets that we are marketing, I think you will see more single assets, small portfolios; maybe something slightly larger than that.

Do I see something in the 30 to 40 to 50 hotels? I think probably not. But we will continue to explore.

All right, that is all for me. Thanks a lot.

Jordan Sandler, KeyBanc Capital Markets.

Hi, good morning. It is Austin Wurschmidt here with Jordan.

Just wanted to touch a little bit more on the investment pipeline. And just wondering if you could give us a sense on sort of the makeup of the acquisition pipeline? You mentioned $100 million. And then curious if that includes the Key West acquisition that you had previously disclosed?

Austin, there are two assets making up that approximately $100 million. And yes, the Key West asset is one of those assets.

Again, we have got to assets under contract, a letter of intent. Obviously, no assurance that one or both assets will close, but we are in due diligence underway. No secret that we have been active in the acquisition market. A lot of that credit to Ross Bierkan, our Chief Investment Officer on our deal team.

As you know, we have acquired 14 assets this year for about $550 million. And obviously the incremental $100 million, if they move forward, would take us well north of $650 million for the year. We have acquired about 50 assets over the last four years for about $2.1 billion, and 26 of those assets since going public. So we have been active.

The Hyatt transaction, which -- we couldn't be more thrilled about the performance and expanding our relationship with them. That is a deal that we've been working on for probably the last two years, plus or minus.

So a lot of these are a long incubation period. And I think we have had great success in finding deals off-market or a limited bid. So we will continue to be surgical -- very careful, laserlike focus, finding single assets, small portfolios, or even larger portfolios that are compliant but also that are priced appropriately for us and create value for our shareholders.

Thanks. And then just a little bit more on the capital recycling side. What drove the decision? I think previously you were looking at selling another, call it, 10 to 15, around $100 million. Now you're talking 20-plus assets. What drove the decision to increase that number? And then could you just give us a sense of how much that reflects from an EBITDA standpoint?

Part of it is, again, obviously the debt markets are very attractive. There is plenty of equity, whether it is high net worth; whether it is private equity. Clearly, I think the benefit and the financial rewards of investing in limited-service hotels, which has been our core strategy and our core competency, we are as passionate about today as ever.

But again, we want to continue to recycle capital out of slower-growth markets, or in some situations really to lighten our exposure to other markets, where we have got really a good presence today. So that combination -- and then really the demand for the product offering has encouraged us to really broaden the pool of assets that we're looking to sell -- I would say of 20 plus or minus where we are today, and it is probably about 6% of our EBITDA, plus or minus.

Thanks for the color there. And then just one last one. During the quarter, looking at the 3.6% occupancy increase versus 2.8% on the ADR side, is it fair to say you may have left some rate growth on the table? Or is there something that the operators are seeing that might explain the differential there?

I wouldn't say that there is anything unusual. We were up -- ADR accounted for about 42% of the increase. As you know, we have got a large portfolio, very well distributed across 21 states, 23,000 rooms.

The other side of that, which I think is even more important, is looking at our flow-through and looking at the margin growth. I mean, we were up 95 basis points. And again, we had a record EBITDA margin, 38.5% as a public company.

So our asset management team are working very closely with our operators to continue to drive rate. And we are cautiously optimistic that you are going continue to see further improvements in that over time.

Great. Thanks for the time.

Anthony Powell, Barclays.

Regarding your dispositions, are there any particular markets that you're looking to reduce your exposure to over time?

I think it is pretty well dispersed. Clearly, there are assets in the Midwest. There are some in parts of Florida; there are parts of the Midwest and in the Southwest.

So again, we have looked at assets. Generally this pool of assets -- they were about RevPAR that is about 30% lower than the portfolio average. And these are also assets that are, candidly, going to require additional capital.

We don't think that is the highest and best use. Again, I think we have demonstrated time and time again that we are a prudent and smart capital allocator. So as we sort of look at individual assets that don't fit our strategy long-term, so we have been thoughtful; and it is pretty broad across the portfolio.

We have been really focused, as you have seen, on more of a coastal bias and getting more and more urban investments. And again, we will use those proceeds in large part to continue to expand in those more desirable markets.

Thank you. And just one on the outlook for the rest of the year, especially in New York. We are seeing some of your peers being very kind of optimistic on the New York market in July and for the rest of the year. I think your comments were relatively more conservative. Are you seeing anything different in the market that gives you a bit more pause?

No, we have got five assets in New York, obviously four of those in Manhattan. Great assets. We are still -- you know, we had tough comps as you look at second quarter. We did very well in the post-Sandy and FEMA business, and so, clearly, that impacted a little bit of our performance the second quarter.

Long-term we are very bullish on New York. The supply is getting absorbed. I think the market is still running 84% to 85% occupancies.

The RLJ portfolio -- I think we ran north of 97% the second quarter, with an ADR in the $265 million to $270 million range. And a lot of the growth that you're seeing with our peers has really been in occupancy. And candidly, we already have a lot of occupancy, again, being at that 97% level. So we will continue to work on mix and continue to push rate. But very happy and very pleased with the quality of our assets in Manhattan.

Great, that is all for me. Thank you.

Wes Golladay, RBC Capital Markets.

When you look at the acquisition pipeline, do you have enough in there to deploy all the capital you raised this year? I am looking at the cash balance, about $373 million. You closed about $150 million - or identified post-quarter-end. But that is still a pretty large cash balance. So what are you seeing in the pipeline?

Well, it is a great question, Wes. And obviously, one of the strengths of our strategy -- and we talk about this with investors, and particularly when I'm on non-deal roadshows; and I'm not sure we get a lot a credit -- but the amount of free cash flow. I mean, if you look at last year as an example, our AFFO, if memory serves me correctly, was about $210 million. But our free cash flow after everything was about $68 million. So about 32% of that free cash flow.

I would respectively submit to listeners very few, if any, of our peers are even close to anything like that. So we have got plenty of cash. We will deploy again, if we proceed with $100 million in assets under contract/letter of intent. We will use most of the proceeds from the follow-on.

That gives us still a lot of dry powder, probably $150 million to $200 million plus or minus, coupled with the fact that we have got a credit facility of $300 million that is really largely undrawn at this point. So Ross Bierkan and the deal team are working hard.

We have got a very active pipeline, again, I think as this year has indicated, despite the fact that it's more and more competitive. We have bought 14 assets for $550 million, all of those cap rates have been in the 7% to 8.5% range. And we are very excited about all of the assets that we've acquired so far.

Okay. So it looks like you still have a lot more going on there, especially when you factor in the additional asset sales, and the free cash flow, and the equity raise.

All of that. And again we have been very thoughtful about when and how we do follow-ons. We're oversubscribed, both at very tight ranges. Management owns a good portion of the Company, and our interests are aligned with shareholders. And we are going to be very thoughtful about when and how we raise capital.

Okay. And looking at the New York portfolio, I mean, it was a little bit soft relative to the market. And you did correctly identify the occupancy build the other people had. But did you see any improvement as the Sandy business burned out, or should we expect maybe a 3%, 4% number for the year going forward?

I would think in that 3% to 4% range seems most reasonable. Wes, again, when you look at our portfolio and you are running 97% occupancy, keep in mind -- and I think some of the other CEOs pointed out as well -- you had a lot of renovations last year in New York, I think about 9% of the inventory, at least 9% of the inventory.

So a lot of people had easier comps. And some of the Smith travel data is somewhat misleading, because it is not comped. So we are very pleased. Our assets are well positioned; they are well located; they have done well. We will continue to work for ways to continue to push rate.

We believe in New York long-term. It is great, special city. And we will continue to selectively look for opportunities.

You also have to keep in mind that we had our Courtyard Upper East Side under renovation in the first quarter. So that will affect the overall RevPAR performance for the year.

Okay. Well, excellent quarter. Thanks for taking the questions.

Lukas Hartwich, Green Street Advisors.

Tom, how much upside do you see in your portfolio's margins?

If you look at prior peak, Lukas, we were -- and it's a little misleading, because we only -- we had the 79 hotels plus or minus that we owned back in 2006, I think, peaked at about 35.2%. To get back to those hotels is about 85 basis points in additional running room.

Please keep in mind that we have transformed the portfolio, again, with the 50 assets that we have acquired over the last four years, 26 of those since being a public company. We have expanded guidance today for a new range of margins from 34.7% to 35.7%.

So we think without question we would easily eclipse the prior peak. Also, a lot of those assets are assets -- candidly, are the ones that we have partially sold or will be looking to sell in the future. So we think there is considerable more running room in our portfolio.

There are some margin pressures. Obviously utilities, wages, real estate taxes, but that is not unique to us. That is unique to -- certainly everybody in the industry is facing that. But we feel very good about the complexion and makeup of our portfolio and the results. And I think the results speak for themselves.

Yes. That is really helpful. Just one other question. Can you remind us how long it takes to develop a limited service hotel? And when do you kind of see supply starting to become an issue for the limited service segment?

It is a great question, Lukas. I think you really have to look sort of market by market. Clearly, if you're trying to get an urban limited service or a compact full service, or even a larger full-service hotel down in an urban environment, you are a few years out from getting it entitled, planning, raising financing, construction. And what we all find is that it always takes longer and always costs more.

So to get at the underlying question you had there, I think we are safe through at least 2016. And by that I mean supply that is really going to be below our long-term average of 2%.

Even now, some of the forecasts, people are pulling back. I do think that you will see limited service get done sooner in some of these secondary/tertiary markets. And as I recall from the Marriott call and some of the others, a lot of the growth is really coming in select service in those areas.

Those are not areas, Lukas, as you know, where we are really spending our time and energy. Far more focused on major urban, top 30, coastal bias. And I think the demand/supply dynamics in the industry are very favorable right now. As we pointed out on our call, it is about a 240 basis point over the last 12 months.

And, clearly, if you look over the last quarter, I think demand was up about 4.5%, and supply was only up about 0.8%. So there is a real tailwind in the business. And I think you can make a strong case, and we would support it, that we are going to run into extra innings in this cycle. Typically, a cycle trough to trough is about 11 years. Trough to peak, about 6.7 years. And I think this could run into extra innings.

That is it for me. Thank you very much.

There are no further questions at this time. I will turn the conference back to management for closing remarks. Thank you.

We appreciate all of you taking time. Wish you a great ending to the summer and look forward to speaking with you again in the fall.

This concludes today's conference. All parties may disconnect. Have a great day.