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Hersha Hospitality Trust (NYSE:HT)

Q1 2010 Earnings Call Transcript

May 5, 2010 9:00 am ET

Executives

Nikki Sachs [ph]

Jay Shah – CEO

Ashish Parikh – CFO

Neil Shah – President and COO

Analysts

Bill Crow – Raymond James

Will Marks – JMP Securities

Smedes Rose – KBW

John Evans – Edmunds White Partners

Operator

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust first quarter 2010 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 would now like to turn the presentation over to your host for today's conference, Ms. Nikki Sachs [ph]. Please go ahead.

Nikki Sachs

Thank you, and good morning, everyone. I want to remind everyone that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

These forward looking statements reflect Hersha Hospitality Trust's plans and expectations; including the company's anticipating results of operations through capital investments.

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 positions 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 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, Nikki. Good morning, everyone. Joining me today on the call are Neil Shah, our President and Chief Operating Officer, and Ashish Parikh, our Chief Financial Officer. We started off 2010 by leveraging the efforts that we undertook across the last year to increase our financial flexibility, de-leverage our balance sheet and improve our liquidity position by accessing the capital markets and moving forward on attractive acquisitions. We remained on strategy and further fortified our select service focus in the urban gateway markets of the Northeast at historically attractive prices.

In the first quarter we saw the early signs of a rebound in demand and our operators were able to capitalize on the reemergence of the corporate traveler. Our total portfolio consolidated assets delivered industry leading RevPAR growth of 4% during the quarter.

These results were driven by our well-located assets and some of the highest performing markets in the Northeast, our creative acquisitions during the past 12 months, and the continued stabilization of our young portfolio.

Additionally, our operators continued to do an outstanding job and are responding to continuous market shifts on a real time basis.

Our growth in the quarter was occupancy-driven, as it increased by more than 7%, partially offset by 3.1% decline in rate. As we stated on our year-end call, we have focused our strategy on driving occupancy and gaining market share, and the combination of our markets and revenue management strategies have allowed us to maintain high levels of occupancy through this downturn.

As demand continues to firm up in our markets, we are instructing our mangers to take rate risk in their pricing strategies as we move forward in an effort to recapture rate. Rate growth combined with increasing market share and the cost containment initiatives that we have implemented across the last year, will contribute to our continued ability to deliver industry-leading RevPAR results and margin growth.

We have a disproportionate exposure to transient demand; we estimate that our market mix consists of 90% transient business that is not really reliant upon group business. This mix avoids our having to displace low-rated group business that many of our peers have layered into their hotels to maintain cash flow.

We also don't have to rely on the return of group occupancy to effectively manage yields of our room inventory at our hotels. We have flexibility to re-price, substantially, all of our inventory on a daily basis to take advantage of improving demand trends.

Our growth, due to our focus on limited and select service hotels in key urban gateway markets will continue to contribute to our growth. A key attribute of this class of hotels is that their high barrier to entry urban locations allows us to drive robust rate recovery, and correspondingly strong flow-throughs during economic expansion.

We are in markets that, historically, come back first in the country and New York is, once again, leading the RevPAR recovery as it typically does. New York City, our most important market posted a first quarter year-over-year RevPAR increase of 5.7%. This was driven by occupancy improvement of 7.3% to 77% which was a third quarter in a row of improvement, partially offset by an ADR decline of only 80 basis points. Our accretive acquisitions in the New York market along with our cost control strategies led to an expansion of our New York EBITDA margin by about 670 basis points.

While New York continues to lead the cycle turn, our geographic region focus is also contributing to our results. Beyond New York – Boston and Connecticut, Rhode Island, helped to lead – Connecticut, Rhode Island helped to lead our portfolio growth, with Boston posting 13.4% growth and our Connecticut, Rhode Island cluster posting 5.4% RevPAR growth.

Our most challenged remains Washington, DC with a 6.7% RevPAR decline. This was because we were comparing against an inauguration year, as most of you know. This year, even with the unprecedented weather impacting that market's results, occupancy was actually up in this market. We continue to find the dynamics of the DC region compelling, and with government and business activity maintaining its growth trajectory we believe in the long-term viability of the market.

A few of our more challenged markets during the quarter were the secondary markets of Central Pennsylvania and Metro New York, New Jersey that were down 3.8% and 5.2%, respectively.

Improving our efficiency and expanding or margins has been an important area of operational focus. Although our RevPAR growth in the quarter was occupancy-driven, and average daily rates remained under pressure, we were able to generate EBITDA margin expansion of approximately 78 basis points for our consolidated portfolio.

Our asset management team and our operators remain focused on expense control measures and believe the cost structure adopted across last year is a sustainable one and one that will lead to attractive EBITDA growth as the market continues to recover.

I think the best way to think about the power of our model currently, is that for every additional dollar of ADR that we capture 60% to 80% was through to the EBITDA line. We know we're still early in the cycle, but given the more efficient expense structure that we put in place in 2009, combined with more rate-driven RevPAR growth that we expect, and the continued stabilization of our newer assets, we're confident in our ability to deliver meaningful expansion of the bottom line.

Another attribute of our portfolio that's worth noting as the cycle turns, and one that is a true differentiator for Hersha, is that our properties are quite young. 30% of our portfolio EBITDA comes from assets that have been opened for less than three years, and are still in the early stages of stabilization.

While other owners will have to take inventory out of service, or at least disrupt to catch up on deferred maintenance, we will not. With our young portfolio, and our discipline and timely maintenance CapEx spending, we will have far less room to as a percentage of inventory out of service than many of our peers.

As the properties stabilize and continue to gain market share and push rate, we expect that they will deliver above-market growth results as the years continue. As we discussed on our year-end call, we significantly increased our exposure in New York City over the past 12 months, and continue to monitor the acquisitions environment for opportunities to capitalize on the current dislocation in the markets.

As the largest publicly traded select service hotel owner in our key markets, we believe we have unmatched access to creative opportunities to be very selective in our strategy. Unless an acquisition opportunity is at or above our current portfolio metrics, or accretive to our portfolio growth rate that acquisition is unlikely to make sense for us, considering the strong recovery fundamentals inherent in our portfolio that has already built up a strong head of steam.

We are very excited that the portfolio of hotels we have assembled over the last decade is well positioned to outperform. With our alignment with industry-leading hotel brands combined with a balance sheet that's the healthiest it's been in years and a vastly improved liquidity profile, we feel that we are very well positioned to take advantage of opportunities and drive value for our shareholders.

Let me now turn the call over to Ashish to go into some more detail on our financial position. Ashish?

Ashish Parikh

Thanks, Jay. I'm going to focus on our balance sheet, liquidity, financing initiatives and financial outlook for 2010.

Management's key focus over the past several quarters has been to enhance our financial flexibility and position ourselves to take advantage of opportunities presented by the dislocation in the capital markets.

Since the beginning of the credit crises we have refinanced approximately $264 million of debt at a weighted average interest rate of 4.94% and have simultaneously amended our credit facility to provide us with additional flexibility.

In the first quarter of 2010 we continued to make progress by refinancing the outstanding debts on our Hilton Garden Inn located in Tribeca, New York, with new non-recourse financing on the property, a larger principal balance of 32 million and a lower interest rate, while simultaneously extending the term of the loan.

Furthermore, in the first quarter we sold a total of 79.35 million common shares in two separate public offerings raising gross proceeds of approximately 272.6 million. As of today, we have approximately 138.3 million common shares and 8.9 million limited partnership units outstanding.

Utilizing our fully diluted share count and based upon yesterday's closing price, our equity market capitalization now approaches 835 million and our enterprise value is approximately 1.7 billion. This increase in shares outstanding will have an impact on our per-share results going forward. However, these offerings have allowed us to pursue and closed on several accretive acquisitions and have provided us with a number of ancillary benefits.

We have improved our leverage profile, reducing our net debt to adjusted EBITDA ratio to approximately 6.5 times from above 9 times prior to the offering. This in turn, has removed any entity level risk and has allowed us to purchase assets at a great time in the cycle by capitalizing on the current turbulence in the lodgings sector.

As of the end of the quarter, we had no outstanding borrowings on our 135 million committed line of credit. $40 million in cash in escrows and no debt maturities for the remainder of 2010. Approximately 92% of our debt is fixed or capped with the weighted average interest rate of 6.2% and a weighted average maturity of seven years.

We're certainly pleased with the progress we have made on our balance objectives, and will continue to seek ways to fortify our liquidity position. One tool that we had used effectively in 2009 was our at-the-market equity offering program. While we have remaining capacity under the ATM program, we do not anticipate using it for the foreseeable future.

Additionally, we continue to simplify our model by moving away from our development loan program and deemphasizing joint ventures so we can – more effectively focus on driving hotel EBITDA and margin growth. To that end, we recently purchased the outstanding mortgage obligation from a third party lender to one of our unconsolidated joint venture partnership that owns a Courtyard by Marriott in South Boston.

The Courtyard, South Boston, was opened in 2005, is one of our core urban holdings and based upon the purchase price of the note, our basis and last dollar exposure in 164-room asset is very attractively priced at 13.75 million or approximately 84,000 per room. We will remain a 50% partner in the asset, but as the lender to the joint venture earning an interest rate of 10% we will be receiving all of the economic benefits from the property. Therefore we will now be recording the results of this asset in our consolidated portfolio reducing our JV holdings to 12 unconsolidated assets, nine of which are in our Mystic Partners joint venture.

As we have mentioned previously, we will continue to seek ways to reduce our joint venture holdings and as market conditions improve we believe that we will see a more robust transaction environment for some of these unconsolidated joint venture properties, in addition to some of our targeted non-core consolidated assets.

As Jay mentioned previously, our first quarter RevPAR growth was occupancy driven and we still face headwinds as we try to push rates. Even with this less favorable growth mix we were able to drive EBITDA margin growth in the quarter and our total hotel EBITDA exceeded our estimates.

Due to our timing difference we have booked certain computation accruals in the first quarter of 2010 that were related to 2009 and would have, historically, been booked in the fourth quarter of the previous year. Our total company EBITDA would have been approximately $1.3 million higher excluding this accrual, and our SG&A run rate would be more in line with previous quarters for the remainder of the year.

Our first quarter and April results do indicate that the recovery is in process, yet our visibility remains very limited. Our second quarter results to date show that the steady pace of RevPAR improvement has sustained, particularly in our New York City portfolio which continues to outperform our broader portfolio.

When looking at recovery prospects for our portfolio, it's important to remember that we are in the very early stages of recovery and we have a long way to go to get back to levels that we saw in 2007 and 2008.

An example of the inherent growth built into our portfolio is evident when you look at our New York City portfolio's historical results. New York City RevPAR for our same store portfolio was $116.78 versus our 2009 first quarter RevPAR of $110.12, which is an increase of 6.1%. However, our first quarter 2008 RevPAR for the same set of hotels, was $164.50 which is almost 40% above our 2010 RevPAR. In addition to the prospect of a general economic recovery, we're confident that our portfolio will outperform the broader industry in the recovery due to its high quality, primarily urban location exposure, and young average age, with a number of assets still in the early stages of stabilization.

Looking to the remainder of 2010, we're certainly optimistic as economic and consumer sentiment indicators continue to improve and the recovery of the lodging sector appears to be slightly ahead of where industry analysts believed it would be by this point in the year.

That being said, the first quarter is typically our least profitable quarter due to seasonality, and represents less than 15% of our total EBITDA. So we are not extrapolating our results into the balance of the year.

We had previously provided only same store guidance that we believe was realistic and, in general, more optimistic than industry consensus. It's important to remember that our same store portfolio and industry-wide RevPAR realized growth in March, for the first time in almost 18 months.

We will remain focused in driving our industry leading operational result and believe that we will be much better positioned to provide updated guidance on both our total portfolio which will include our acquisition and our same store assets after the completion of our second quarter.

We are, therefore, maintaining our prior expectations for 2010 of same store RevPAR in the range of a 2% decline to a 1% increase versus 2009, and same store hotel EBITDA margin deterioration of 100 basis points to 200 basis points.

Regarding our capital expenditures, we expect our capital investment in the near term to be limited to critical capital maintenance, but we do intend to initiate several deferred initiatives towards the end of 2010 including lobby renovations for some of our urban Courtyards.

In 2010 we expect to spend between 13 and 14 million in maintenance CapEx, and we currently maintain approximately 11.4 million in CapEx reserves that can be utilized towards future expenditures.

This concludes my formal remarks. And I would like to turn the call back to Jay, for closing remarks.

Jay Shah

Okay, thank you, Ashish. As we have mentioned, the first quarter turned positive for us in a meaningful way, driven largely by our performance in March. Indications for April and May appear positive as well and we will continue to focus on property level results with our operators knowing that it's our fundamentals that will drive and sustain value in our stock.

Given our solid presence in New York and our hotels in the gateway markets of the Northeast, we feel very confident in meeting and possibly exceeding the guidance that Ashish just set forth, and we look forward to updating you as we move ahead through the year.

Operator, we can open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Bill Crow with Raymond James.

Bill Crow – Raymond James

Hi, good morning, guys.

Jay Shah

Good morning, Bill

Bill Crow – Raymond James

A heck of a five months here – to start the year. I guess my question is more on guidance, and that's probably where the Street is going to focus their questions today, but could you maybe translate your same store RevPAR guidance into a consolidated hotel, sort of, guidance that would reflect the newer acquisitions and the larger presence in New York?

Jay Shah

Bill, you know, a lot of the consolidated, a lot of the gains and consolidated kind of 0come from New York. I think – it's a difficult thing for us to do sitting here in the first quarter, I think we're probably better prepared to do that as we get a few more – a few more months of operations behind us.

You know, the first quarter as we have mentioned, not only in this call but in past years, you know, is a light quarter for us, is a light demand quarter and it's tough to extrapolate much off of that. But I will say this, I mean, I don't know that we feel any hesitation about the remainder of the year and with our same store portfolio or with our consolidated portfolio. I think the solid presence in New York, the focus on the urban markets, you know, I think we feel very confident being able to reach the guidance that we have set forth, if not exceeding it, as we move through the year.

But it's very difficult – we really have an inability to predict the pace of what the macroeconomic factors are going to be, the rate of global recovery with a lot of these scary buzz words out there, and so that combined with having only results for a quarter of the year, and it being the first quarter in a long time that's been positive, it's real difficult for us to predict where things will be. You know, we'll certainly update the Street as often as we can, so long as we can do it meaningfully. You know, I just think we don't want to be willy-nilly about it.

Bill Crow – Raymond James

Any update you can give us on results in April and May?

Jay Shah

Yes, sure. Ashish, do you want to talk a little bit about that?

Ashish Parikh

Bill, just to your first question, just to add to what Jay said. I think you saw the gap in the first quarter of about 400 basis points on RevPAR from consolidated to same store, so where same store was flat it was about 4% up, I think that would at least maintain, if not expand as the year goes on, as the New York Trio and other New York acquisitions start to really gain steam throughout the year.

Bill Crow – Raymond James

That would seem to be more in line with what we're hearing out of some of the other lodging companies, at least from a guidance perspective. And then, April and May?

Ashish Parikh

And then revenue-wise, we have closed out April at this point, I think that what we are seeing is, you know, April is positive from a RevPAR perspective. It's not as good as March at this point, but it is positive from a RevPAR perspective, and New York continues to be quite strong with more focus on rate, we're seeing most of the growth in April coming out of rate in New York, and pretty much flat in occupancy, which is great.

Bill Crow – Raymond James

Okay, and then finally, for me, any update on the external growth pipeline out there and do you still have some dry powder from the second equity raise? What do the prospects look like from an acquisition perspective?

Neil Shah

You know – Bill, this is Neil. I think it's fair to say that we have one asset firmly in our crosshairs in Manhattan that we have been working on for the last several months, but beyond that we're still having – we're not seeing, you know, an avalanche of opportunities that would make sense for us.

I think we have been, in the main, focusing on New York and DC, which we believe will cross the three to five-year horizon will be the higher growth markets, and we're trying to – you know – while there's – you know – we're just emerging from the most volatile markets since the 1930s so it's hard for us to assume a broad-based even recovery. So we're really focusing on longer term markets for us, not really trading opportunities.

I think, generally speaking on acquisitions, the market is around a 5 to 8 cap for higher quality assets. To get any more yield than that you'll have to really drop into secondary markets and older lower-quality assets. And in that kind of environment, we're just not in a hurry to make a lot of acquisitions, but we do have one or two things that where we have been pursuing across the last month or two.

Bill Crow – Raymond James

Great, thanks for the color, guys, appreciate it.

Operator

Moving on to Will Marks with JMP Securities.

Will Marks – JMP Securities

Thank you. Good morning, guys. Just to add a little bit onto Bill's question. So in terms of modeling, would a good way to start be, for example, in the June quarter last year RevPAR was about 92.50 for your consolidated hotels, and basically increase that by 4% and then have that be your base? Is that what you're kind of saying, or by the level of what we saw in the first quarter?

Ashish Parikh

So if you were looking from a modeling perspective, you're looking at second quarter of last year.

Will Marks – JMP Securities

Maybe you have the number, what the RevPAR was based on the new portfolio?

Ashish Parikh

So our second quarter last year – for the quarter that consolidated assets had a RevPAR of $109.73 and, I guess, since that period we have added on five assets, four of which are New York assets. So that I think that if you just look at our total consolidated portfolio from last year to this year, because of those particular assets, the total consolidated portfolio should move up stronger than – stronger than the consolidated same store portfolio because of all of the New York assets and the size of the assets that we have added on.

Will Marks – JMP Securities

Okay. But that 109.73 was the base RevPAR for your consolidated portfolio?

Ashish Parikh

That was the base RevPAR for the consolidated portfolio, yes.

Will Marks – JMP Securities

Okay, in the second quarter?

Ashish Parikh

In the second quarter, that's correct.

Will Marks – JMP Securities

Okay, thanks. Okay on –

Ashish Parikh

I'm sorry, Will – I'm sorry, that was second quarter of '08, I thought that was what you were asking.

Will Marks – JMP Securities

Yes, sorry, I had – I'm sorry to get so detailed but I had a number of 92.48 and –

Ashish Parikh

Right, that sounds about right for second quarter of last year.

Will Marks – JMP Securities

Moving on. Do you have a number for same store in New York in the first quarter?

Ashish Parikh

Same store New York for the first quarter, RevPAR was up 6.1% and the same store the RevPAR itself for New York for the first quarter was, let's see – I mentioned it in on the call, it was $116.78.

Will Marks – JMP Securities

Okay. And in terms of growth, you know, you gave some stats for the quarter, how should we look at the guidance in terms of various markets?

Jay Shah

Go ahead, Ashish.

Ashish Parikh

From various markets – I think you'll see similar trends – as far as the outperforming markets in the second quarter it would be New York and Boston. I think the markets that have probably performed to the national averages would be Central Pennsylvania, Connecticut, Rhode Island and Philadelphia, and I think the underperforming markets for us remain Washington, DC, California and Arizona.

Will Marks – JMP Securities

Okay. And are you saying for the second quarter or for the year, I guess it's hard to look out for the year – ?

Ashish Parikh

Yes, just for the second quarter.

Will Marks – JMP Securities

Okay, and just a final question, it's repetitive, but the number of shares you gave, current share count would helpful. I know you said that already.

Ashish Parikh

Sure, so as of today we have 138.3 million common shares outstanding, and 8.9 million in limited partnership units.

Will Marks – JMP Securities

Perfect. Thank you.

Jay Shah

Thanks, Will.

Ashish Parikh

Thanks, Will.

Operator

And moving on to Smedes Rose with KBW.

Smedes Rose – KBW

Hi, thanks. I'm just curious – so you talked a little bit about the acquisitions, it sounds like you maybe have one, sort of, in the works, but how about dispositions, you have talked, you know, previously about getting rid of some of your non-core assets and it seems like that market might be picking up, any color there?

Jay Shah

Yeah, we continue to – we continue to make efforts in that regard, nothing to report this quarter, at this time, but we are working on a handful of assets throughout the portfolio that we hope in 2010, we will be able to bet appropriate pricing for. But the acquisitions market is clearly heating up; I think there are more buyers that have more commitment than they did a year ago. So I do expect that we'll have more success this year in trading out of some of our non-core assets. But as we have mentioned in the past, these are not distressed kind of sales, these are good, strong cash flowing assets that carry Hilton and Marriott kind of flags, but that might be seven to ten years old and have, you know, moderate growth expectations across the next three to five years.

So you know we are price sensitive, but we do view that as an opportunity to create some liquidity and reduce some debt in the portfolio this year.

Smedes Rose – KBW

Okay. And then – you might have this in your release, sorry if it's repetitive, but what was the occupancy in New York on a same store basis?

Ashish Parikh

Sure, for the first quarter, Smedes?

Smedes Rose – KBW

Yeah.

Ashish Parikh

Yeah, first quarter occupancy for our New York portfolio same store was 79% this quarter compared to 72.5% last year in the first quarter.

Smedes Rose – KBW

Okay. And then just portfolio-wide, just for New York City portfolio of overall?

Ashish Parikh

Overall portfolio wide was 77.3% compared to once again compared to 72.5% last year.

Smedes Rose – KBW

Okay, and then my final question, it just looks like there was a particularly large bump in your F&B revenues on a same store consolidated basis of up over 20%. I mean was there anything just in the quarter that would have driven that up so much, or just coming off?

Neil Shah

Yes, there was, it's really all related to – most of it is related to one particular asset in Connecticut that we had previously leased out the restaurant operation, and so we weren't recording any F&B revenues and this, about midway through the second half of last year we now record all F&B revenues, and we terminated the lease and we took control of the restaurant.

Smedes Rose – KBW

And did your Airport Hotel benefit from the Iceland volcano stuff? Don't you have a Sheraton out of JFK?

Ashish Parikh

We do, we have a Hilton Garden Inn and a Sheraton out at JFK, and you know, that market has been one of our best performing markets all year. We benefited, but most of the rooms are already sold out there, I think our JFK properties are up somewhere in the range of 15% to 18% this year, and the reason – a big reason for that is – was it the (inaudible).

Neil Shah

Yes, there is closure of 17% of the rooms in the market, yes.

Ashish Parikh

So the market was already doing very, very strong. I'm sure that it added a little bit of extra returns to the asset across the period of the event, but it's hard to strip out the effect of it because the market has been producing very well, partly because of reduced supply as well as continued international demand.

Smedes Rose – KBW

And so you said those hotels are running up like 15% year-to-date in

RevPAR?

Ashish Parikh

Yeah.

Smedes Rose – KBW

Okay, great. Okay, thank you.

Operator

(Operator Instructions) We’ll move on to John Evans with Edmunds White Partners.

John Evans – Edmunds White Partners

Could you put a little bit more finer point I guess, on April for New York City. You said that basically occupancy was running flat, but that RevPAR was up in New York and it was primarily driven by rate, so can you give us a sense kind of what RevPAR is up for April, and then can you talk a little bit about do you feel like, you know, the big boxes are starting to push price and that you can push price more significantly in New York?

Jay Shah

Do you want to just give him stats –

Ashish Parikh

Sure.

Jay Shah

And then I'll talk about rate a little bit.

Ashish Parikh

As far as New York goes, New York City for us, I just mentioned, occupancy was about flat, and our RevPAR was up in the range of about 8% to 8.5% for the month, and it was all rate driven –

John Evans – Edmunds White Partners

Thank you. And it was all rate driven. So help me understand, if you look at your first quarter, you put as a headline that your margins in New York expanded 670 basis points, and that was on rate going down, so if we think about that just from a sequential standpoint, I mean, if that trend continues and RevPAR is all driven by rate, how much of that rate goes to the margins? Is it $0.80 on the dollar, or what?

Ashish Parikh

We think it could be, $0.80, I mean the range we have given, the range that Jay has mentioned, was between $0.60 and $0.80 to the dollar if it's all rate driven.

John Evans – Edmunds White Partners

Okay. Got it; and so, I mean, just logically we could think that if that trend continues we you would see New York EBITDA margins continue to expand from kind of where they were in Q1, is that a fair assessment?

Jay Shah

That's correct.

John Evans – Edmunds White Partners

Okay. And then, there have been analysts that have been very concerned that there's some supply coming into the New York, can you talk a little bit about what you're seeing and your thought process, relative to that?

Neil Shah

Sure, this is Neil again. You know, there's absolutely – has been a lot of supply coming into the market across the last several years, I would say that 2010 will be the biggest year of new supply, it could be anywhere from call it – depending on when hotels actually open – could be anywhere from 4,500 to 6,000 rooms that could open across 2010.

So this will be the last, big supply year, and for the forecast for the next three years is that it's falling again below the long-term average of less than 2% supply growth. But across 2008, 2009 and 2010 we have had significant amount of supply and that has caused us challenges in increasing rate, as new hotels ramp up, particularly in markets close to our – or sub-markets close to our existing assets, it has been more challenging to move rate.

You know, that said, we do believe that the fundamentals of the Manhattan marketplace are still very strong, there is growth and demand and the supply will get absorbed, but I guess the good news is that this is the last big year of supply and from now on we'll see much – less than the, you know, the 20-year, 30-year average in Manhattan moving forward.

But this year we'll continue to have challenges I think in pushing rate as you have new, competing hotels.

John Evans – Edmunds White Partners

So is it fair to say then that you think this kind of – or this price that you're pushing in April, is not sustainable then, or do you think it potentially could be sustainable? I guess that's the big question, right?

Neil Shah

That is the big question; it depends on how demand reacts across this year. Generally, in Manhattan this kind of supply could be absorbed, but it really depends on the macro demand trends for Manhattan.

Jay Shah

Yeah, if you were to aggregate the supply increase across the last seven years and compare it to the prior seven years before that, and take a look at the recovery fundamentals, after that prior supply cycle, it was still very robust, right, that was the last recovery cycle and New York was very strong.

So I think, as we look forward into this recovery cycle it's a similar supply growth, it just happens to be very back-ended. And I think that's why it looks so much more ominous, but on a longer-term dynamic it's not – it's not that atypical.

And so, you know, in as much as you would wish it wasn't there in the first place, so that we could, you know, have rocketing numbers, you know, it is there but I don't know that that's going to put a real big overhang on our growth prospects there. It's just, you know, it's harder work.

John Evans – Edmunds White Partners

Okay, and then so you gave us that finer point on April, so if you think about the rest of your portfolio, can you give us what the rest of your portfolio was up and it sounded like that was primarily driven by occupancy as opposed to rate, I just want to make sure, is that correct?

Neil Shah

I think, no. For the rest of the portfolio, what we saw was – it was a more even mix of rate and occupancy, it wasn't primarily rate-driven, and same store would be in the range of, say, 2.5%.

John Evans – Edmunds White Partners

Okay, and so if I think it's just about rate in April, would rate be up year-over-year or is it still down year-over-year?

Neil Shah

Rate in April is going to be just slightly up.

John Evans – Edmunds White Partners

Slightly up, okay. So can you help me understand, and I know the first quarter is not a big piece of your business, but just – you gave this guidance for EBITDA margins to deteriorate by 100 to 200 basis points, so you have this positive mix shift that's going on with New Your, as New York is becoming a bigger piece of your pie, you're getting pricing in New York.

New York was up 670 basis points on rate being down in Q1 and now you have occupancy basically flat, and rate driving it, which should substantially, you know, increase margins in New York if that trend continues. So why do you think your margins are going to be down? I'm just trying to understand, is that you just think the world is going to turn negative and your RevPAR is going to go down, or what?

Jay Shah

I think, you know, you mentioned the real operative fact, and that is if these trends continue, and I think, you know, we put this guidance out earlier in the year, and we feel it's for us the right decision not really to shift it yet.

But as we mentioned before, we certainly are looking towards this year very optimistically. The fundamentals are strong, I think if we can string together several more months of positive trends, then, you know, we'll be in a very fortunate place to come back and update the market then.

John Evans – Edmunds White Partners

Okay, great. Hey, thank you for your time.

Jay Shah

Sure.

Operator

And there are no further questions at this time. Mr. Jay Shah, I turn the conference back over to you.

Jay Shah

Well, great. If there is no other questions, I'll thank everyone for being with us this morning, we'll be in the office here if any questions occur to anyone afterwards, please feel free to give us a ring. Thank you.

Operator

And that does conclude today's conference; we thank you for your participation.

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Source: Hersha Hospitality Trust Q1 2010 Earnings Call Transcript
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