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Hersha Hospitality Trust (NYSE:HT)

Q4 2008 Earnings Call Transcript

February 27, 2009 9:00 am ET

Executives

Brad Cowen [ph] – IR

Jay Shah – CEO

Ashish Parikh – CFO

Neil Shah – President and COO

Analysts

Bill Crow – Raymond James

David Loeb – Robert W Baird

Will Marks – JMP Securities

Jeff Donnelly – Wachovia Securities

Smedes Rose – Keefe, Bruyette & Woods

Operator

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust fourth quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer-session towards the end of this conference. (Operator instructions) With that, I will like to turn the presentation over to you host for today’s conference, Mr. Brad Cowen [ph]. You may proceed.

Brad Cowen

Thank you. I want to remind everyone that this conference call contains forward-looking statements within the meaning of Section 27 and the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that amended by the private Securities Litigation Reform Act of 1995. These forward looking statements reflect Hersha Hospitality’s earns and expectations, including the Company’s anticipating results of operations, joint ventures, and capital investment. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance, achievements, or financial predictions to be materially different from any future results, performance, achievements, or financial position expressed or implied by these forward-looking statements. These factors are detailed in the Company’s press release and prove from time-to-time in the Company’s SEC filings. With that let me turn the call over to Mr. Jay Shah, Chief Executive Officer. Jay?

Jay Shah

Thank you Brad good morning everyone. Neil Shah our COO and Ashish Parikh, CFO are both on the call with me. On today’s call I will be talking about some of our margin preservation strategies that we put in place to position Hersha to perform well as possible during this time and highlighting some of the attributes of the portfolio in the company that are particularly relevant in this economic climate. Although Hersha is not immune to this challenging environment, our hotels and our capital situation provide defensive quality that are critical right now. Our portfolio of category killing brands has a significant upscale extended stake component and is comprised of primarily select and limited service hotels, which historically experienced reduced cash flow volatility during downturns. Our portfolio platform combined with our franchise managed operations model allows us to react quickly to the environment to mitigate margin erosion. Over the last several years, we focus on acquiring high quality newly built assets in both urban and stable sub-urban markets. This complementary mix is characterized by a broad range of demand generators, good travel infrastructure, which results in a lower correlation between entailments in hotel performance while also providing good mix of corporate and leisure travel.

Nonetheless, industry demand deterioration has been alarming and to that end we are focusing a great deal of our attention on controlling costs with a de nova approach to our business models, insisting that our managers create new operating paradigms would rest the dynamics in the markets in which we do business. One of the misperceptions about the select and limited service segment is that there are fewer legalist pull to cut cost as the service offering is limited. On the contrary the studies of cost structures in our portfolio by our asset management team has led us to conclude that 50% of the cost at our hotels are controllable variable, such as portions of groom labor, complementary food and labor, administrative and general costs, sales and marketing cost, and repairs and maintenance costs. 30% of our current cost structure is categorized as non-controllable variable and includes costs that are driven by revenues generated at the hotel such as franchise cost, credit card commissions, travel agent commissions, as well as the portion of the utility cost. Only 20% of our cost structure is fixed and it includes minimum activities such as General Managers, Executive Housekeepers, Night Auditors and some portion of the utilities cost and basic repairs and maintenance. During this approach and our target of achieving a negative 50% flow through for the portfolio we have completed a study on a majority of our consolidated hotels to show all of the cost cutting opportunities that our hotels have to achieve the negative 50% flow through target.

Substantial achievement of this target will allow us to out perform our peers in margin erosion, keeping the deterioration in the 200 basis point to 300 basis points rank. Our franchise model allows us great flexibility in quick response times to market changes. We began making cost at the beginning of 2008 in anticipation of the impending slow down. The results of what we term the tier 1 cost were property specific and we are focused on increasing efficiency in operations, while at the same time continuing to drive incremental demand. The success of these initial cuts in this approach was evident in the strong flow-throughs and a resulting margin growth for the first three quarters of last year, when our portfolio was still generating market meeting RevPAR growth. As our growth slowed in the third quarter relative to the growth of the prior two quarters we initiated our tier 2 cuts, which were more aggressive, but still property specific. The out come of these cuts, revenue in our same-store numbers for the fourth quarter of 2008, which reflect an 8.1% drop in RevPAR that are limited 200 basis point margin erosion. January and February trends are even less encouraging, we have now implemented our tier 3 cuts, which are in the form of broad portfolio wide policy changes. At this level of cuts the operators are charged to be primarily focused on limiting margin erosion and driving the negative 50% flow-through target. We are anticipating close to an additional $5.3 million of savings just at our Hersha Hospitality managed same store hotels across the remaining ten months of 2009. Some examples of cuts at this level include a restructuring of the engineering function portfolio wide, which resulted in more than a million dollars of savings. In the rooms department we renegotiated all labor contracts and most service contracts, reduced complementary shadow cost and we did a food labor and food cost and this includes both food that is for sale and complementary and these changes are as granular as reducing the breakfast new offerings on the complementary breakfast barging low demand low rate periods.

All of these rooms department policy changes results in a savings of $763,000. Additionally, salary freezes, combinations of physicians, suspensions of 401K contributions, reduction in human resource program fees and a rift producer savings from an additional $2.3 million. Restructuring of the sales and marketing function portfolio-wide without the elimination of any customer facing associates generated savings of $850,000 and reductions in associate travel and meeting expenses at $20,000. Similarly to what Hersha Hospitality management has done, large works water floated [ph] Japan have launched comparable cost containment initiatives at their managed hotels. Cost cutting of this magnitude typically bags a question of what impact it will have on guests, and how does it affect the hotels ability to drive share? Though the cost cutting measures are significant, most of the reductions you have relatively normal impact of the guest experience. I guess we have the wheels are unbanning to the hotel rabblement has been eliminated, a wait to have someone come by to pour their coffee or they may no longer trip over USA today as they leave their room. But we work with experienced franchise operators and their practice in making these costs virtually uptake to the guest. We don’t believe that these reductions in cost will weaken our ability to drive share during this period.

When the hotels are once again able to drive demand in premium rate, the eliminated service is in position and be easily reinstated if and when we deem it necessary. In addition to controlling cost, we continue to pursue business traffic that is trading down given budget constraints across Corporate America. There is signs that these strategies are gaining traction as evidenced by our recently being added to the preferred vendor list of the Fortune 50 company that previously had only useful service hotels. In the entrepreneurial spirit, we will continue to explore all avenues of incremental demand and create opportunities were possible. From a capital and liquidity perspective we have a strong balance sheet with little in the way of maturity risk until 2013. Our balance sheet flexibility is an asset in the current liquidity crisis that serves at an additional defensive measure in this uncertain market. We are evaluating our portfolio for the potential sale of non-core assets that no longer have been our strategic objectives to free-up additional liquidity and improve our portfolio. Even in this environment we believe that there are assets in our portfolio that are likely disposition candidates given their assumable financing. Additionally, the relatively smaller size of many of our assets make them attractive investments for potential buyers who can access local or regional bank financing to acquire them. As a part of this evaluation process, we make use to compel a sales and our underperforming joint venture assets.

Most of our JV and assets performed in line with expectations during the fourth quarter, except for the Mystic joint venture. These assets are significant – These assets significantly underperform the portfolio average and their operating performance illustrates the dramatic difference in margin sensitivity between full-service assets and are predominantly selecting the mid-service hotels. The full-service assets in this joint venture experienced 1,200 basis point margin decline as a result of a 20% RevPAR decrease. As was the case industry wide, our market space declining up you can see – in rate trends during the quarter. We do believe however that our mix of markets helps mitigate the current stress impacting the financial service in pharmaceutical sectors. Additionally our markets are less relying on air travel corporate group meeting business or pure leisure travel. In New York City our urban assets space in overall RevPAR declined 16% in the quarter. Relative performance was challenging. It is important to remember that we are coming off of three prior years of tremendous growth. In actual dollars, our fourth quarter 2008 RevPAR was 15% higher than the same quarter in 2006. Despite the negative buyers currently surrounding the New York City market, we continue to believe our properties in New York City will be among the more resilient during these downturn given their solid locations and their selecting the limited service operational models, which historically had been less susceptible to RevPAR declines.

Additionally, the smaller size of our hotel is relative to the big box hotels in the marketplace at a distinct advantage that allows us to yield manage more effectively during periods of marginal demand. As we mentioned on our last quarterly earnings call we believe that the supply picture in New York City metro area is in better shape in some suspect and does offset the stage for a strong recovery when the cycle eventually returns. With that overview of the quarter, let me now turn the call over to Ashish to go into some additional financial details. Ashish?

Ashish Parikh

Okay, thanks, Jay. I will just provide a little bit more detail about our hotel operating metrics during the fourth quarter and for the full-year and then focus on our balance sheet, liquidity, and financial outlook for 2009. During the fourth quarter, our core consolidated portfolio remained resilient in the phase of unprecedented economic uncertainties and deteriorating fundamentals. Although the majority of the portfolios did experience deterioration in RevPAR and EBITDA, our consolidated portfolio delivered better relative performance when evaluated by property type for geography. RevPAR in our same-store consolidated portfolio fell by 8.1% during the fourth quarter and occupancy declined 290 basis points and rates fell 4.1%, yet we were able to hold market erosion down a 200 basis points as our aggressive property level controls helped offset these RevPAR declines. Consolidated hotel RevPAR for the fourth quarter including the new acquisitions competed in 2008 declined 7.3% as occupancy declined roughly 3.6% and rate fell 2.3%. Consolidated hotel EBITDA fell 5% in the fourth quarter while our operating margin in the quarter declined 264 basis points to 34% compared to 36.4% last year in the comparable quarter. The total portfolio margin decline was primarily driven by lower margin at the six new hotels we acquired in 2008. It is our estimate that new assets take approximately 24 to 36 months to stabilize under normal operating conditions and potentially longer and difficult environment such as this. As Jay mentioned outside of our ramp-up hotel we believe our ability to rapidly cut cost at the property level helped us maintain margins better than industry average.

Although our consolidated core portfolio performed as expected our unconsolidated joint ventures underperformed during the fourth quarter and the majorities of the loss was related to the three full-service assets within our Mystic Partners joint venture, which is comprised of nine properties in the Connecticut and Rhode Island markets. Due to the sever drop off in group demand and pharmaceuticals related training business during the fourth quarter the three hold services boxes realized RevPAR decreases of approximately 20%, the corresponding margin deterioration of almost 1,200 basis points. Although our preferred equity position in this joint venture affords us some downtime protection. The fourth quarter loss had a significant negative impact on our FFO for the quarter and a majority of the underperformance in our fourth quarter results was directly related to this loss. Our fourth quarter adjusted FFO was $9.1 million or $0.16 per share and unit, which compares to adjusted FFO of $12.1 million or $0.26 per share in unit in the fourth quarter of last year. Adjusted FFO per diluted common share was a $1.15 for the full-year and 2008 compared to $1.22 in 2007. In addition to the fourth quarter performance the 2008 per share invested FFO result were impacted by the issuance of $6.6 million of additional common shares and $2.5 million additional operating partnership unit issued in the first half of 2008.

Turning to our balance sheet, our overall capital structure remains favorable with respect to near-term maturities as well as our ability to execute our long-term growth plan. As we outlined to you during our last earnings call, increasing our financial flexibility remained a primary objective and we are taking steps to enhance our balance sheet and liquidity. We have included an additional supplemental schedule regarding recent refinancing activities that the company has undertaken to extend out the terms of our debt maturity. First our credit line was increased from a 100 million to 135 million and including our one year extension option this credit line now matures at the end of 2012. We have a further recording feature that allows us to potentially increase its line of credit to 175 million. We also refinanced three of our properties in the fourth quarter of 2008 and first quarter of 2009. We were able to extend out the time of one of these debt pieces from 2009 until 2023 and another from 2009 until 2012. The market for debt refinancing remains extremely challenging, but there is still resemblance of the debt market for well located limited and select service assets requiring debt of less than $20 million. Our weighted average debt maturity currently approximates eight years. We currently have $32.4 million of consolidated debt maturing in 2009. It does not have unit or – out of roll expansion option. This balance is spread out across four assets with the largest loan balancing 13.25 million.

We believe that we can renew the majority of these loans with the existing vendors or with other regional and community banks. However as we outline to you on our third quarter call, our credit facility allows us the flexibility to refinance these maturities using proceeds from the facility if we needed a continuity plan. Given our transition over the capital expenditures for 2008 and 2009, over the past five years we have focused our acquisition efforts towards new assets and we currently maintain the youngest portfolio among the publically trading large RIETs. The young average age of our portfolio enabled us to be most cost effective operators and allows us greater flexibility in terms of timing from major capital projects. We expect that this will enable us to limit capital investments in 2009 and our properties to those related to life safety and critical capital maintenance. For the fiscal year 2008, the Company’s total CapEx spend on our consolidated properties was approximately $19.3 million. Of this amount approximately $6 million where indirectly related to the uptick in construction of the new hotel in Brooklyn. We would estimate that our capital spending will be between 8 million and 10 million for 2009. We would estimate that in 2009, we will add approximately 9 million to the 5.5 million, which having CapEx reserves through our normal course of operation. These funds can be utilized towards our expenditures that we anticipate and we are only anticipating two large renovation projects during 2009, which will be at our courtyard in Brooklyn and our courtyard in Lankorn [ph] which is Northeast Philadelphia.

We have decided to delay several other projects and to maintain this liquidity for future purposes. We believe that we will be able to realize a higher NOI on these projects if undertaken in a future date. Regarding our development loan portfolio, we ended the fourth quarter with approximately $82 million in development loans to 11 separate hotel development projects. We have decided to recognize an impairment on a Golf Street development loan where we have one second mortgage and as a new loan aggregating $20 million. This project is a residential, retail, and hotel mixed used development in Brooklyn New York and as we previously disclosed to you we stop recognizing interest on these loans in the third quarter as a developer was unable to obtain future construction financing. At this point, while the project has been assumed by a new developer, using the collectability of the loan risk and we have decided to impair the full amount. As a reminder this is the only project we have with this developer and we have no further development risk or any financial insulated to this loan. Of the total development loan balance approximately 40% of the loans that we currently have outstanding relate to operational hotels 35% relate to projects that are in construction and the remainder relate to hotel construction project in early stage design. We continue to view our debt possible and good source of our market transaction to the majority of our development loans we have the right of course for people on these projects, but we generally do not have any capital from them as beyond the loans unless we choose to make an investment.

Let me now turn to our financial outlook for 2009. As we contemplate the balance of 2009, there is little to no visibility on the demand side, while we can predict some degree of accuracy at cost across the portfolio and at corporate level. We are operating under the assumption that the operating environment will remain historically challenging and property level occupancy and rate metrics will remain under pressure and show little improvement again for an upcoming to easier comparison. We continue to believe that the portfolio of characteristic such as our high occupancy levels and proximity to multiple demand generators should help us as we move through this period, but we are currently operating our business in making our cost control decisions, based upon the following set of assumptions for our portfolio in 2009. We are estimating that RevPAR for our consolidated portfolio will deteriorate between 12% and 15% for the full-year. In terms of quarterly progression, the Company expects that the first half of 2009 will experience RevPAR declines in the mid-to-high teen range, and moderate in the third and fourth quarters. With this level of revenue loss, we are projecting operating margin deterioration of 200 basis points to 300 basis points for the full-year and would anticipate that margin deterioration will be more severe during the first half of the year.

2009 results will receive the benefit of full year operational results for the six assets purchased in 2008 and the stabilization of assets opened and purchased in 2007. Based upon these assumptions we continue to project that our fixed coverage and interest’s coverage level would provide sufficient coverage for our debt service covenants. Let me finish with some discussion regarding our dividend. Company announced and stated fourth quarter common share dividend of $0.18 per share and unit and our Series A Preferred Share dividend of $0.50 per share. The company has an unblemished record of spending consistent quarterly dividend since our initial public offering ten years ago and we believe that a strong dividend policy bolsters our relationship with both our preferred and common share holders. Our board of trustees in conjunction with management is closely monitoring or financial results and will ensure that the company will not put undue pressure on our liquidity or jeopardize our covenant if operational results were to deteriorate more than forecast. This concludes my formal remarks. I would like to turn the call back to Jay then.

Jay Shah

Thanks, Ashish. Let me finish by saying that despite the economic deterioration our properties remain resilient and we expect to outperform as we move forward for several reasons. Our portfolio consists primarily of smaller hotels, which allow us to better manage yields during periods of weaker demand. Our mix of urban and stable sub-urban markets will help to offset the volatility that the industry is currently experiencing. We have value orient brands and our hotels we are aligned with the category leading limited and select service brands, which historically benefit from trading down. Our portfolio is located in solid markets that are served by a broad range of demand generators that are overly relied on air travel. And finally we believe supply growth in general will remain tempered through this cycle, which will allow for a steeper recovery when demand eventually returns. The current environment offers very little visibility that our balance sheet has virtually not debt maturities until 2013. During this time we will continue pursuing our strategy of driving margins to successfully navigate through the headwinds. We recognize that these unprecedented times will call for unprecedented measures, but we will remain committed to outperforming and building value for our shareholders throughout. Operator that concludes our remarks, let’s open the line for questions.

Question-and-Answer-Session

Operator

(Operator instructions) We will take our first question from Bill Crow with Raymond James.

Bill Crow – Raymond James

Good morning guys.

Jay Shah

Good morning.

Bill Crow – Raymond James

Couple of questions here, let me make sure that the statement is correct, if your RevPAR is down 12 to 15 and your mergers are down 200 to 300 basis points as per your expectations to common and preferred share holders is expected to be retained, is that what I takeaway from your statement.

Jay Shah

It is correct.

Bill Crow – Raymond James

Okay. I just want to make sure. You mentioned that you believed that covenants are not at risk this year again based on those assumptions, can you just remind us of the covenant of – maybe the main one or two covenants that we should be watching?

Ashish Parikh

Sure. This is Ashish.

Bill Crow – Raymond James

Hi Ashish.

Ashish Parikh

Our primary covenant is really the EBITDA to debt service and adjusted FFO. Floated end service as well as our dividend payout which would be our common dividends and OT unit dividends divided by the adjusted FFO and that count cannot exceed 95%.

Bill Crow – Raymond James

So, for the adjusted FFO is as you report, is that correct?

Jay Shah

That is correct, it is as we report, not taking into account CapEx reserves or anything like that.

Bill Crow – Raymond James

That’s right it is not – AFFO was – as we referred to it at as FFO, but I understand is after your adjustments and that is a 95% payout limit on that and then the EBITDA, that that service coverage is, what multiple you are –?

Jay Shah

Sure the EBITDA is 1.4 times and the adjusted FFO is 1.35 times.

Bill Crow – Raymond James

1.35 times. And that is EBITDA as reported in your statements or are there some attachments?

Jay Shah

EBITDA on a consolidated basis over our dense service for the consolidate property.

Bill Crow – Raymond James

So, it excludes the JV?

Jay Shah

That’s correct.

Bill Crow – Raymond James

Okay terrific. Alright. The mess loan of development loan portfolio, what percentage is to related party interest?

Ashish Parikh

The related parties on the loans have right around 25% to 30%.

Bill Crow – Raymond James

And then of the entirety of your loans, should we assume that you have really gone in and scrub these things, you don’t see other impairment issues looming out there? Is that fair or –?

Ashish Parikh

That is fair. I mean – as you could imagine that is the hot button right now with external auditors and the entire financial community is really entitlement on assets as well as development loans. So, we’ve undertaken a very detailed analysis either with – we will continue to do that as the year progresses as fall [ph].

Bill Crow – Raymond James

And then one final question I guess from me right now is that, the cost cutting that you are implementing is that being helped by relax brand standards or are you getting any push back from your consumer for these changes are they noticing the changes you have to – or do you risk violating brand standards by some of your much needed – certainly prudent activities?

Ashish Parikh

The brands have been actually extremely responsive again relaxing standards of some degree. I think the level of cuts that we are making in some cases on related brand standards at all. In some cases there is the risk that it impacts guest satisfaction, but you know, during this kind of time I don’t expect that brands are going to messing with these kind of things too much. At this point you know everybody is working more towards bank satisfaction and guest satisfaction and again as I mentioned, I think the guest, you know the impact that they feel will be relatively limited and I think during this time of contraction there is some expectation in any business travelers mind that there are cuts everywhere. And so I think when you combine their lessened expectation was some of the things that we are doing. I don’t think we are far of from where they would want us to be.

Bill Crow – Raymond James

Fair enough. I will let some other people ask questions then may circle back.

Jay Shah

Okay.

Operator

Thank you. We will take our next question from David Loeb with Robert W. Baird.

David Loeb – Robert W. Baird

(inaudible) I want to go back a little deeper on the dividend and just make sure I understand what the boards policy is, how that policy is impacted by taxable income?

Jay Shah

Sure. Well David the way we are projecting our 2009, you know we don’t believe that – we have already paid a fourth quarter dividend in the first quarter. That dividend in of itself would cover our taxable income for 2009. So, I don’t think the Board will be making its dividend decisions based upon re-compliance. We are already in compliance based upon just what we paid in January.

David Loeb – Robert W. Baird

So, is the Boards attitude that as long as you are payout is no greater than 95% of as reported FFO or what you guys would call adjusted FFO that you will continue to – should payout that $4.72 dividend?

Jay Shah

This is Jay. Let me state. There is some of it Ashish detailed, but let me reiterate. As far as we can tell the forecast that we – the assumptions that we have placed on RevPAR are negative 12% to negative 15% and based on our operational experience and the plans we have put in place, we believe we can keep our margin deterioration down as we said the 200 to 300 basis points. On that basis when we do our internal close looks at everything, you know we don’t have a lot more visibility going beyond a couple of months, but at those levels we feel comfortable that this dividend is sustainable to the next couple of quarters. Ashish mentioned and I mention it because it is something that is really you know that the board is sensitive to we know the marketplace is sensitive to it and we do continually review it and we will continue to review it on a quarterly basis and keep everyone updated on where we believe we are. Ashish mentioned we paid this dividend consistently for ten years since we have become public, it is a very important factor as many our (inaudible) investors investment decision, it certainly is an important factor in the strong retail base that is attracted to our stock. And you know if we find that there is a reason that we want to cut it in order to protect our position and to maintain our liquidity will do it. We are just very, very resident to do it, just to follow the herd.

David Loeb – Robert W. Baird

I am trying to translate that from political to peak, which by the way was very good, pretty eloquent into credit what we can expect for the next couple of quarters and even beyond that. It sounds like that those are divestitures in equity [ph] directly, if you hit these basic assumptions that you have outlined, the board plans to continue to pay the dividend and the only requirement relative to covenants is that you have about $0.76 of adjusted FFO that you report, so such that your covenants don’t limit that, is that fair?

Jay Shah

I will give you a shorter answer, yes.

David Low – Baird

Good. And if you were to cut it because it looks like you won’t hit those targets that you gave us, if you were to cut it because you are limited by covenants, would be cut it to zero or would you cut it perhaps as much as half or less?

Jay Shah

Yes, I do not anticipate that we would need to eliminate a dividend altogether, it would probably be some percentage of a cut, you know whether it be a 25%, 30% I am not certain we would then be responding to situation that we hadn’t apparently foreseen.

David Loeb – Robert W. Baird

That is very fair. If I can jump into the three full service assets you own, two of those assets have large mortgage coming due in the next 13 months. The Hartford Hilton is the sternest [ph]. You have written down your equity investment in that asset as part of that joint venture, does that mean that it is possible that the most experience thing to do might just be the doing a little for closures as we give the keys back to the lender when that comes due?

Ashish Parikh

This is Ashish. If the lender was to accept the deed, I think that would be most experience thing to do, you’ve taken our 1.9 million write-off and we are not anticipating that even on a sale that we would recover that 1.9, that’s why we have taken a full write-down.

David Loeb – Robert W. Baird

And you only own 8% of the hotel?

Ashish Parikh

That’s right.

David Loeb – Robert W. Baird

And the (inaudible) Hartford did own 15% of that hotel, what is your book equity exposure there and what is your thoughts – Jay used the word compel a sale, the very things compose, so can you just about what your options over that one?

Ashish Parikh

Sure. There is $45 million of debt on that. Our booked equity is about 6.7, so we own 15% and then our partners booked equity is somewhere north of $36 million on that particular asset. If we were to get into a position where we could not refinance and that asset is actually performing fairly well and we don’t see that there is a potential impairment on that asset but if for some reason we came into that situation, we feel that at $1 less exposure we would forsake that asset.

David Loeb – Robert W. Baird

Okay. And then the last, the remaining full service hotel is the Marriott Mystic, you own a sizeable percent of that, 66.7%, how is that doing, what is the long-term outlook for that asset?

Ashish Parikh

I think the long-term outlook is still favorable. Short term it is challenged and the primary demand generator for that asset is a large pharmaceutical company based across the street which is in the middle of the merger (inaudible) started that, they are the acquiring company that moves a lot of the train business to that particular site but the next say one or two years will be challenging, that asset is pooled with another six limited in select service assets. So we see a preferred return across all seven of those assets and not just individually on that asset.

David Loeb – Robert W. Baird

Yes. And just looking at the disclosure by the way the debt disclosure is very helpful and I think this quarter in particular, page 12 of the supplement that gives the unconsolidated joint venture EBITDA is very interesting. It looks like your share of the EBITDA from all nine of those hotels including the two full service we started the discussion with is substantially greater like a couple of hundred thousand dollars greater than the total EBITDA for all nine of those hotels. So clearly it looks like the preferred return is working, am I reading that correctly?

Ashish Parikh

You are. And finally, the reason for that is actually the Hartford assets one of them has negative EBITDA for the year. So, our percent of the EBITDA was greater than the actual venture’s EBITDA.

David Loeb – Robert W. Baird

So, if you were to end up with seven assets in that venture instead of nine, you might have a little less equity but you would probably not have substantially less EBITDA, is that fair?

Ashish Parikh

That is fair. We get a return on all of the capital, a preferred return on all of the capital during the entire existence of the venture unless the assets are sold off.

David Loeb – Robert W. Baird

Okay, one more that is around and then maybe I will come back, I don’t know if Neil is with you but there was a report recently about the number of rooms coming in New York, I don’t know who the supplier was, not somebody that we look at, but they said 8000 rooms are going to open in New York city in 2008, can you tell us what your view is on that?

Neil Shah

Yes, David; this is Neil. I am not sure where all the consoles are coming up with their numbers, I think at the very least there is some facializing a story here to sell reports or I am not sure what the intention is but we do look at it on a quarterly basis, we review the new supply inventory, there is definitely more supplies than there has been in New York in five to seven years and so it is concerning but it is not nearly as onerous as some of the reports that we see flying around in the marketplace. In 2008 we see 2230 rooms added to New York City so about 3.4% supply growth. In 2009, we think it could be kind of as much as 4000 rooms added to New York which would be somewhere in between 5% and 6% supply growth. As we get into 2010, 2011, and 2012 we have less clarity about the numbers there. As it makes some sense out of that last report which suggested 8000 new rooms this year in New York, I would say that those 8000 rooms might make it to Manhattan but they are going to take three to four years to actually open. As operators, we are preparing for significant enjoinment in New York city this year in 2009 but frankly I don’t believe they are going to come in on time and I think will have many incomplete hotels or hotels changing use to student housing or to senior living or to other uses.

David Loeb – Robert W. Baird

Okay. So it sounds like at least some of the projects that all of the data (inaudible) calling under construction it sounds like there is not really progress going on there, people are just trying to keep their permits alive, is that fair?

Neil Shah

Yes, I think for the vast majority of those numbers, for the big numbers there are – there are buildings going up in New York, we look at them on a quarterly basis and in 2009 we do expect to see as many as 4000 new rooms in New York.

David Loeb – Robert W. Baird

Thank you very much. I will come back with more later.

Operator

We will take our next call from Marks Wills with JMP Securities.

Will Marks – JMP Securities

Hi, it is Will Marks; happens all the time. Anyway, couple of questions here; one is can you give us a little bit of indication of what you are seeing year to date by market and is the New York market basically –

Jay Shah

Hey Will, you are cut off at the end, Will? Operator?

Operator

Mr. Marks, if you could requeue please.

Jay Shah

Let me answer it really quick as I probably should wait since his line has been cut.

Operator

He is now back up with an open line, Mr. Marks.

Will Marks – JMP Securities

Can you guys hear me?

Jay Shah

Again.

Will Marks – JMP Securities

Okay, sorry about that, I don’t know what happened. My question, I would like to have a better understanding of year to date, I don’t care so much about fourth quarter but RevPAR by market is New York taking the biggest hit, any thoughts would be helpful?

Jay Shah

Yes we can shed some light on that. Our year-to-date RevPAR in the portfolio is tracking in the negative 18% to 19% range portfolio and New York is off approximately 25% for the first quarter for the first couple of months. Our whole portfolio it is important to remember was up 9.7% in the first quarter of 2008 last year. New York City last year in the first quarter was up 19.4%. So the comparable analysis looks very dire on a relative basis but on an absolute basis, the total portfolio is performing between ’05 and ’06 numbers in absolute dollars of RevPAR and New York City is slightly up for 2006 numbers in absolute dollars of RevPAR.

Will Marks – JMP Securities

Okay that is helpful, can you talk a little about the concept of trading down and how that is going to be benefitting you or you are expected to?

Jay Shah

Yes sure I can talk about that. This is something that we have experienced in the last downturn and we would expect that we will see at least as much of this effective not more in this downturn but typically we find that one of the cost cutting measures that many corporations employ during periods like this are changes to their travel policies and the policies change, preferred vendors change, and so whereas their corporate travelers may have one time been permitted to stay at full service hotels and in some cases luxury hotels in order to make savings in this line item in their budgets they are constraining the policies and making them stay at hotels that are of limited service or select service nature is the standard today. And so I made a reference to our being (inaudible) a Fortune 50 company. It is a company that we have been knocking on the door of for the last several years and we just were not even eligible to be a preferred vendor. Towards the end of last year, in one of our attempts to make contact with them again, lo and behold, we were not only eligible but we were named to the preferred vendor list. So we expect that this is going to generate significant room nights for us across 12 of our hotels throughout our region and it is just a great example of what I was talking about. Does that make that more clear?

Will Marks – JMP Securities

Yes, it sure did, that is great. Back to Europe on STD, the numbers you gave were for New York City or Manhattan?

Jay Shah

Those were Manhattan numbers

Will Marks – JMP Securities

Those were Manhattan numbers, I just wanted to clarify, okay and my final question, can you give some idea of – we will just assume construction cost and is there any downward pressure you have seen at all?

Neil Shah

This is Neil Shah. In construction, we do see downward pressure in secondary markets across our region who are kind of typical state built smaller asset low rise construction we do see construction cost falling, material prices have not adjusted that significantly yet but just the margin that the builders are able to get or willing to cut into has changed. In urban markets we have not seen a significant drop in construction pricing in New York in particular or even some overhearing in Boston and Philadelphia, I think it is the function of these being a heavily unionized markets and it is difficult for union labor wages to go backwards. Materials are still expensive, union labor pricing is sticky; I think where you might see costs coming down from the development process in cities like New York is in the land price. Land price will likely be in a downward trend across the next year too and that can affect the total development cost but again this is not India or a third world country where land makes up 40% or 50% of the project, it is generally less than 20% to 30%. But more directly to your question construction cost in the large urban markets with institutional kind of high rise constructions we have not seen significant drops in construction pricing and less unionized environment in suburban market we do see a drop in construction price.

Will Marks – JMP Securities

Perfect, okay, thank you. Thanks for talking to me guys.

Neil Shah

Okay, that is excellent.

Operator

We will take our next question from William Truelove with UBS.

William Truelove – UBS

No, all our questions have been answered. Thanks so much.

Operator

We have a question from Jeff Donnelly with Wachovia Securities.

Jeff Donnelly – Wachovia Securities

Good morning guys. I guess I can beat a dead horse on a few points, Just comparing the overall RevPAR guidance that the company is down 12% to 15%, you will perhaps only think a little bit but given that your limited service orientation traditionally does not give you much visibility and due to your high concentration in the New York city market, it appears that you expect declines like I said for the year on the order of the magnitude that you are already seeing here to date, how conservative do you think that down 12% to 15% is, I know no one has a perfect crystal ball but you can’t use much cushion in there given the weakness in New York.

Ashish Parikh

Hi Jeff, this is Ashish. Yes, what we have looked at is outside of what we could expect sort of high teens that will be fine to New York, Boston is supposed to firm up a little bit as the promotion calendar comes up but some of our other markets, the DC, urban and metros Central Pennsylvania, overall mid Atlantic markets we are not expecting those to fall as much as Boston and New York are expected to fall. So that does have an impact on the overall range. This is based upon what we are seeing recorded today and what we are expecting in the first two quarters and then some stabilization. This is kind of our best estimate of where we can group it down in RevPAR.

Jay Shah

Jeff, if I could just add to that a little bit to what Ashish mentioned, I reference a couple of times that the smaller size of the hotel that is not becoming a real advantage as we are driving our revenue management strategies at these hotels, our deterioration in rates and occupancy have been significant but we expect to see more (inaudible) in the second and third quarters relative to our peers. This first quarter is a traditionally very low volume demand quarter, for us it makes about 12% of our EBITDA as the cost of the portfolio. In the second and third quarters we expect and I think a lot of the industry expects that you will just see a general increase in demand driven by seasonality. Now I don’t know that it is going to give us relative performance that is very attractive relative to prior years but it will give us a better ability of the yields is our view. And so we are counting on that also as a part of our assumptions.

Jeff Donnelly – Wachovia Securities

And Jay, speaking with the erect area, how is the new hotel ramping up now, they must have opened up last year?

Neil Shah

This is Neil. The New hotel opened in the middle of third quarter of 2008 and in its first full quarter of operation, the fourth quarter of 2008, we achieved an occupancy of 65.6% at a $236 rate, and in 2009 we are expecting it to ramp up to high 70s kind of occupancy and forecast a rate maybe a little bit lower kind of close to $220 or so. Brooklyn clearly has less compression from Manhattan these days but I think this relatively strong performance from the new hotel does illustrate that there is still pockets of on-demand within these large eight markets and their hotels really were designed to meet some local demand that did not have this kind of hotel and again it is a very small hotel probably 93 rooms, so we were able to use it a lot better than the big lobsters in our area. So pretty strong performance, better than our original underwriting and it should be a pretty strong performer long term weakly.

Jeff Donnelly – Wachovia Securities

I am curious, who is the typical guest who is going to go over there, is it someone who is trying to avoid higher rates in Manhattan or is there an immediate demand generator around there that I am missing?

Ashish Parikh

Yes, we did compression from Manhattan that might be more rate oriented but I say as much as 80% of our business is locally generated. Demand generators in Brooklyn, your Brooklyn is one of the largest cities in the United States to be considered as a city and we are within Q blocks of 1 million square feet of office space, all the port houses and two pretty major universities, so it is a pretty robust local demand generators within walking distance from us.

Jeff Donnelly – Wachovia Securities

Just one last question if I could talk about a common dividend, it is just what you are thinking about paying a dividend in stock and cash as opposed to purely cash. You do need a payment view outlined.

Ashish Parikh

It is something we have reviewed very closely with the board, I think we are more apt to reduce our dividend payment rather than pay it in stock.

Jeff Donnelly – Wachovia Securities

Thank you.

Operator

We will have a follow up question from Bill Crow with Raymond James.

Bill Crow – Raymond James

The developmental loans coming due this year, what is your anticipation for those as we think about modeling this year and what is your desire to put up more METS [ph] at this point given the capital constraints?

Ashish Parikh

We would expect that things coming up this year that we would be spending them. As far as our appetite for new METS, I mean, each time it would have to be extremely compelling in order for us to put any additional METS out and the project would have to be incidentally open in a few months or just an ability for us to acquire it at a deep, deep discount. So it would be pretty difficult to originate new loans unless we already got paid off on several of them and if we can really find a compelling value.

Bill Crow – Raymond James

Then the final question and this is something that we hit on earlier in the call which is the split between the greater Manhattan area and your overall portfolio if you could just broaden that discussion connected to your full year outlook, it should be assumed that hotels outside of the greater New York area are going to be down less than 10% and New York is going to be down 20%, how should we think about that?

Jay Shah

In a normal year we would probably talk about that with a lot more depth. I think right now our visibility is so limited and we have chosen to limit our guidance to the assumptions we have put out there, I don’t know that we are even appropriately prepared to talk about that.

Bill Crow – Raymond James

Fair enough, maybe next quarter we can get more depth and get some more clarity.

Jay Shah

Let’s then keep our fingers crossed.

Bill Crow – Raymond James

Right, I appreciate it. Thanks guys.

Operator

And we have a follow-up question from David Loeb with Robert W. Baird.

David Loeb – Robert W. Baird

I have one more about the same story that key performance indicators page 2 of the supplement, it has always been a bit of a puzzle because you have 76 hotels, 61 of them are consolidated, 55 are same-store consolidated, 70 are same-store total but including unconsolidated, I really want to understand what is driving your EBITDA. So I guess relative to the same-store hotels, 55 hotels were down 8.1%, 200 basis points of margin declined whereas the 70 hotels were minus 10.3 and much worse margin minus 373, I assume that those three full service hotels in Jay your comments about the RevPAR and margins of those are really telling, I am assuming that they have a big impact on the total same store but a pretty small impact on your EBITDA particularly given the impact of the preferred returns. Am I correct in that but we had a point now where to really look at what is driving the company the same-store portfolio describes that better?

Ashish Parikh

It does David, it is a very good point and if you remember back all the way to 2005 and 2006, the unconsolidated JV grew a much larger portion of our EBITDA and FFO than they are today and because of the preferred nature of the Mystic joint venture, the EBITDA volatility is not nearly as much as it when we showed the same store for all of our assets in the margin. The company’s EBITDA and FFO is really driven by its consolidated portfolio now.

David Loeb – Robert W. Baird

Okay and I guess over the next few months that 55 will grow to 61 and essentially beat everything.

Ashish Parikh

At the end of the year assuming no other acquisitions, yes.

David Loeb – Robert W. Baird

Right. Then the only other difference would be all of the JVs which again have less of an impact. Does that make perfect sense? Thank you.

Operator

We will take our next question from Smedes Rose with Keefe, Bruyette & Woods.

Smedes Rose – Keefe, Bruyette & Woods

Hi thanks. I just wanted to ask you, you guys has touched on this somewhat, given the limited visibility and even the bigger grand companies really don’t know what is going to happen to its rest part, would you consider potentially just chewing up your dividend at the end of the year in order to conserve capital across the balance of the year and then paying out, if you want you can meet your current dividend doing it all at once as a way to kind of be prepared if the downturn is much worse than what anyone can be experiencing, so you have not put a cost needing to do something more drastic.

Ashish Parikh

From the announces that we have done and based on where we are today in the year, and where our capital position is and our cash position is, we feel relatively comfortable that the dividend is going to be sustainable for the next quarter or two. I think it would take – should there be a more severe shock than we are seeing now, certainly the analysis will change. But as of right now, we feel pretty comfortable for the next couple of quarters maintaining a quarterly dividend if a time comes when our impression changes, we will certainly consider at that point suspending it and possibly turning it up with a special dividend at the end of the year. It is something that we have considered. As of right now, we plan on just maintaining the dividend policy as it has been with a high level of scrutiny and review of it.

Smedes Rose – Keefe, Bruyette & Woods

Okay I just wanted to ask you, New York city RevPAR according to travel [ph] was down around 16% in the fourth quarter which is about what you said your hotels in New York were down and so during the first quarter New York is tracking down 30% and so is it fair to assume your hotels would be tracking in line with the overall market at this point in the quarter?

Ashish Parikh

So far we are experiencing about a 25% down scenario, so we are tracking better than the market. I think in the fourth quarter we did absolutely perform in line I think we as well as most people were caught very unaware the strategies were in the process of changing then and I think now we are trying to see the benefit of some of those shifts in strategy.

Smedes Rose – Keefe, Bruyette & Woods

Okay, thanks a lot guys.

Operator

That concludes the question-and-answer session for today. At this time, Mr. Shah, I will turn the conference back to you for any additional or closing remarks.

Jay Shah

We have no further remarks. I just want to thank everyone for joining us this morning and for your continued support. Thank you.

Operator

Ladies and gentlemen, that is the conclusion of today’s conference. We thank you for your participation, have a great day.

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