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Hersha Hospitality Trust (NYSE:HT)

Q1 2014 Earnings Conference Call

May 2, 2014 9:00 AM ET

Executives

Peter Majeski – Manager, IR

Jay Shah – CEO

Ashish Parikh – CFO

Neil Shah – President and COO

Analysts

Bill Crow – Raymond James

Ryan Meliker – MLV & Company

Chris Woronka – Deutsche Bank

Nikhil Bhalla – FBR

Anthony Powell – Barclays

Smedes Rose – Evercore

Robert Higginbotham – SunTrust

David Loeb – Baird

Operator

Good morning, ladies and gentlemen and welcome to the Hersha Hospitality Trust First Quarter 2014 Earnings Conference Call. Today’s call is being recorded. 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).

At this time, I would like to turn the conference over to Peter Majeski of Hersha. Please go ahead, sir.

Peter Majeski

Thank you, Kyle and good morning to everyone participating today. Welcome to Hersha Hospitality Trust’s first quarter 2014 conference call on 2 May, 2014. Today’s call will be based on the first quarter 2014 earnings release, which was distributed yesterday afternoon. If you have yet received a copy, please call us at 215-238-1046. Today’s call will also be webcast. To listen to an audio webcast of today’s call, please visit www.hersha.com within the Investor Relations section.

Prior to proceeding, I would like to remind everyone that today’s conference call may contain forward-looking statements as defined within Section 27A of the 1933 Securities Exchange Act, Section 21E of the 1934 Securities Exchange Act, and as amended by the 1995 Private Securities Litigation Reform Act.

These forward-looking statements reflect Hersha Hospitality Trust’s trends and expectations, including the company’s anticipated results of operations. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company’s actual results, performance or achievements of financial provisions to be materially different from any future results, performance, achievements or financial positions. These factors are detailed within the company’s press release as well as within the company’s filings with the SEC.

And with that, it is now my pleasure to turn the call over to Mr. Jay Shah, Hersha Hospitality Trust’s Chief Executive Officer. Jay, you may begin

Jay Shah

Thanks, Pete and good morning to everyone. This morning I’m joined by Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer. As is our practice, I’ll start the morning’s call by reviewing our first quarter operating results and providing specific market and sector commentary, I will also discuss our portfolio positioning and capital recycling and other capital management issues that we undertook in the first quarter.

Following those comments, Ashish will provide addition color on our first quarter financial results and outlook looking forward.

Improving economic fundamentals and consumer confidence levels provided a good backup to support our positive view of lodging fundamentals for the remainder of the year. And gives the industry operators additional confidence in establishing rate strategies focused on driving NDR growth.

In addition, the return of group business bode well increasing both compression, pricing power in our high occupancy markets. These factors resulted in demand increasing 3.8%, an industry-wide RevPAR growing 6.8% during the first quarter. These figures reinforced the view that the recovery is in the middle innings with ample runway remaining in the cycle.

As discussed on our conference call in February, we recognized first quarter 2014 operating results would be subject to headwinds in our New York and Washington DC portfolios, and we think it’s a holiday shift in March to April, and inclement weather in the Northeast.

We also noted that renovation activity at several of our hotels would impact first quarter operating results. Despite these factors, we’re pleased with the portfolio’s performance for the first quarter which delivered 3.9% RevPAR growth to $125 supported by 1.8% ADR increase to $164.67 and occupancy growth of 157 basis points to 76%.

Excluding the previously mentioned renovations, our consolidated portfolio delivered 6.6% RevPAR growth, very much in line with industry despite the unique challenges faced in markets for the quarter.

Our consolidated hotel EBITDA increased approximately 24% year-over-year driven by strong growth in several of our markets, contributions from several of our new properties on the West Coast and the new tower at the Cadillac, Miami Beach and the benefit from the sale of the non-core hotels.

The company’s best performing markets during the first quarter for the West Coast, Philadelphia and Boston. The West Coast reported 10.8% RevPAR growth driven by a 6.3% increase in ADR and the 317 basis points increase in occupancy to 77.6%.

Occupancy in ADR growth at our Northern California high asked properties were especially strong supported by improved business mix which enabled the properties to drive rate and replace more price sensitive business with higher rated accounts and strong growth.

Renovation disruption at the Courtyard Los Angeles, negatively impacted the strong performance on the West Coast. Excluding the renovation asset, West Coast portfolio RevPAR rose 22.5% during the quarter. With renovations at the hotel now largely complete, our cluster of hotels in California is positioned well to leverage a strong market dynamics on the West Coast. Indicatively, the portfolio posted 25.7% year-over-year RevPAR growth in April.

Excluding the renovation activity at the residence in Framingham, our Boston portfolio reported a 9.7% increase in RevPAR. Our Boston portfolio results were driven by 77% RevPAR growth at the recently rebranded and repositioned Boxer Hotel which continues to achieve high occupancy and rate growth following it’s renovation and rebranding.

Looking ahead, the outlook for the Boston market is very positive with stronger city-wide activity expected to drive transient ADR across the entire region. April results again were encouraging in Boston, with RevPAR increasing by 18% inclusive of Framingham which posted flat results in the final month of its renovation.

In New York City, our Manhattan portfolio reported 2.9% RevPAR growth driven by 1.4% increase in ADR and 129 basis points increase in occupancy to 85.4%. Year-over-year, first quarter demand in Manhattan increased 3.4% offset by a supply increase of 5.9%.

Despite the first quarter challenging comparables that we’ve discussed, an increases in supply, we were very encouraged by the performance of our Manhattan portfolio during the quarter. It seems to our Manhattan portfolio reported occupancy of 87%, an increase of 295 basis points from 2013 and nearly 900 basis points higher than the greater Manhattan market as reported by Star.

These strong occupancy figures took place during the year’s weakest quarter and demonstrate the Manhattan market’s ability to absorb supply increases. These results also point to stronger performance for the remainder of the year. The second quarter started very strong with the portfolio achieving 14.6% RevPAR growth with occupancy increasing 752 basis points to 95.1%, and ADR growing by 5.6% to $240.

As we look at the supply picture in New York, we believe 2014 will be the high water mark in terms of supply growth, with 2015 and 2016 coming in at a more manageable pace. We continue to maintain our positive near and long-term view of the market.

Transitioning now to recently acquired hotels and those that are in the process of ramping up, we are very pleased with the performance at the new tower in Miami Beach. The number of room nights sold increased approximately 24% with room revenue increasing 26% or approximately $1.2 million year-over-year, contributing $800,000 increase in EBITDA at the hotel.

With ramp-up at the new tower well underway, strong international inbound travel and a favorable city-wide calendar in the second and third quarter, we look forward to the Cadillac being one of our portfolio’s top EBITDA producing assets in 2014.

When we sold the two non-core portfolios across the last two years, we committed to redeploying the capital from the sales in the hotels that would offset the lost EBITDA from the two portfolios and to do so, in strategic markets that had higher growth rates than our portfolio average.

And further to that strategy during the first quarter, we closed on the purchase of the hotel Oceana in Santa Barbara, California, which was officially repositioned and rebranded as the Hotel Milo yesterday.

Following our acquisition of the hotel, we have implemented new revenue management strategies to further improve performance, this includes a new CRS platform which is driving improved production from higher rated channels and driving more direct bookings to the hotel’s website.

The Hotel Milo would be absorbed into our successful independent collection allowing for additional cross-selling and promotional opportunities across the IC’s 10-Hotel platform. We’re pleased with our progress at this high quality independent oceanfront hotel and look forward to harvesting returns from one of the best RevPAR markets in the country.

Also according to strategy, yesterday we announced that we entered into a definitive agreement to purchase the 148-room Parrot Key Hotel & Resort in Key West, Florida for $100 million and a forward economic cap rate of 7.5%. This oceanfront hotel was fully renovated in 2012 and requires no immediate capital.

In terms of market dynamics, the Florida Keys is one of the strongest and most resilient lodging markets in the United States due to a combination of year-around demand, limited new supply and high barriers to entry.

With the acquisition of Parrot Key, our EBITDA contribution from South Florida will increase from 10% to 14%, with our strategic growth markets of South Florida and California expected to contribute approximately 26% of the company’s EBITDA. The Parrot Key transit action is expected to close during the second quarter.

Also this week, we closed on the sale of the Hotel 373 for $37 million at $529,000 per room. The successful closing of Hotel 373 provides a strong comparable for the remaining hotels in Hersha’s New York City portfolio and demonstrates the strong interest from public and private groups, both domestic and international, seeking well located cash flowing real-estate in top U.S. gateway markets.

In anticipation of the sale, during the first quarter, we repurchased approximately 2.6 million shares recycling $15.2 million of capital at a weighted average cost of $5.80 per share. We believe that opportunistically, repurchasing undervalued shares is an attractive use of capital and we’ll continue to consider share repurchases during periods of price volatility and the price doesn’t appropriately reflect value.

In closing, the 2014’s weakest quarter behind us and an expectation of acceleration in the second half of 2014 due to easy comparisons in New York and Washington DC, we have a positive view for the remainder of the year.

From 2012 through today, the company sold 39 stabilized assets totaling $430 million while purchasing 12 high growth hotels for $627 million. While the strategy has taken a bit of time and it’s been disruptive to our EBITDA growth, our portfolio as it stands today possesses greater exposure to the high-growth South Florida and West Coast markets, along with our already profitable core markets at Boston, New York City and Philadelphia and Washington DC.

We believe there is a very clear line of site to value, and we’re confident in our strategy. We have a very positive outlook as we look ahead in 2014.

With that, I’ll turn the call over to Ashish, who will discuss the quarter’s financial performance.

Ashish Parikh

Thanks, Jay. I’ll concentrate my remarks on our EBITDA margins during the quarter, capital spending, balance sheet activity and provide some color on quarter-to-date results for the second quarter as well as our outlook for the remainder of the year.

We reported consolidated hotel EBITDA margins of 30.2% representing a 40-basis point improvement in the first quarter of 2013. Our margin growth benefited from strong operating results in several of our West Coast markets, and the recent addition in Miami.

EBITDA margins during the quarter were significantly impacted by the strength of our New York City and Washington DC portfolios, which registered EBITDA margin growth of 250 basis points and 640 basis points respectively in the first quarter of 2013.

Although occupancies at our New York City hotels remain very strong 85% during the first quarter, the mix of business was significantly different through a loss of higher rated FEMA and other Hurricane Sandy related efforts which was replaced by demand at lower, more seasonally typical price point.

Margin performance in New York was also negatively impacted by approximately $270,000 of cancellation fee revenue, during the first quarter of 2013, which has no associated cost.

Our EBITDA margins were further impacted by the renovation activity that we undertook during the quarter at five of our hotels. This renovation activity affected our consolidated EBITDA margins by 40 basis points and excluding these renovations, the portfolio would have registered 80 basis points of growth during the quarter.

We’ve completed the majority of the disruptive capital expenditure projects during the first quarter on outside of the Residence Inn Coconut Grove, we’re forecasting minimal disruptions for the remainder of the year.

Based upon our current run rate, we are maintaining our pip in capital maintenance, and maintenance capital spending budget to be in the range of $18 million to $20 million for the year.

With the majority of these non-recurring banks and renovation activity behind us, we face less obstacles and continuing to drive industry-leading margins. Over the past several years, we have increased our focus on energy management and sustainability initiative to drive operating results across the portfolio.

Since the implementation of our EarthView sustainability platform, these initiatives have helped us reduce our cost by approximately $2 million over the past two years. During the quarter, we also completed the installation of a guestroom energy management system across the entire portfolio. This initiative is projected to produce $850,000 of energy savings during 2014, and the ROI and the capital dollars spent on this system provide a very short-term payback with a high rate of return.

We will continue to seek ways to leverage our sustainability platform and our aggressive asset management practices to drive margins and profitability.

Turning to our balance sheet during the quarter, we amended our senior unsecured credit facility which reduces our weighted average cost to debt while allowing us to garner the benefits and flexibility provided by an expanded unsecured facility immediately.

The total facility size has increased from $400 million to $500 million and we have a built-in according feature which allows us to expand the facility up to $850 million. The benefits of the term loan expansion are already coming to fruition as we plan to draw $100 million of the new term loan facility to purchase the Parrot Key Hotel and resort that Jay highlighted.

The new term loan will have a five-year maturity date and we priced at LIBOR plus 235 basis points or approximately 2.55%. This alleviates any need that we may be right now to raise additional capital in the markets and we have no plans to do so.

We also ended the quarter with approximately $24 million of investible cash, $227 million of capacity on our revolver and only one small debt maturity for the remainder of the year.

Moving on to our outlook, performance to date in the second quarter has been encouraging as we faced a difficulty Sandy and inauguration comparisons in the rear-view mirror and recover from a very disruptive winter that affected all of our Northeast markets.

These factors combined with improving economic indicators evidenced by this morning’s strong jobs report, reinforce our positive view of the second quarter and the remainder of the year.

As of the end of April, the consolidated portfolio RevPAR is up nearly 10%, as expected our West Coast portfolio is leading the way with RevPAR growth approaching 26% and our Boston portfolio also posted a very strong 18% RevPAR growth for the month.

April has also been a very strong month for our Miami portfolio which registered year-over-year growth of 8.4% and we are very encouraged by the ramp up of the new tower at the Cadillac Courtyard Miami Beach.

Our same-store Manhattan portfolio was also up 7% driven by a better mix of ADR growth and occupancy gains highlighting the resilience of the market in the face of new supply.

In addition, the market and our Manhattan portfolio have benefited from the Easter shift as the weakest traditionally strong for leisure related demand.

In Washington DC, the market remains challenged with a decrease in citywide activity and reduced congressional activity forecasted in the second quarter, as well as the new Marriott opening at the convention center.

Although we are seeing some encouraging transit, several of our DC properties, April results have produced minimal RevPAR growth. We’re forecasting a stronger back half for 2014 for our DC portfolio, with a pick-up in governmental groups and related travel, which will be aided by easier comps due to the impact of sequestration and the government shutdown which severely impacted 2013 results after the first quarter.

Taken together these factors reinforced the guidance provided on our fourth quarter conference call. Our forecast for full year 2014 consolidated RevPAR growth remained in the range of 5% to 7%, for our consolidated hotel EBITDA margins, we expect margins to increase to 25 basis points to 75 basis points and EBITDA margins for the remainder of 2014 should benefit from the items I highlighted but will be impacted by the ramp-up and stabilization of our three new development projects in 2014 along with increases in property taxes at several of our hotels.

As Jay stated, although still early in the year, we have a clear and in turn a positive view of 2014. Our upgraded portfolio, which will include full year contributions from our 2013 acquisitions and major renovations on assets, totaling $322 million as well as full and partial contribution from 2014 acquisitions and developments totaling $371 million.

With the addition of the high-quality Parrot Key Hotel, incremental revenue from the new tower at the Cadillac Courtyard and the expected delivery of two brand new assets in Manhattan, all of the EBITDA from the 18 assets we sold in 2013, as well as the Hotel 373 has effectively been replaced.

These actions clearly demonstrate the execution of our strategic vision and provide a strong platform for growth moving forward.

With that, let me turn the call back to Jay for his closing remarks.

Jay Shah

Thanks, Ashish. Operator we can open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Bill Crow with Raymond James.

Bill Crow – Raymond James

Hi, good morning guys.

Jay Shah

Good morning, Bill.

Jay Shah

Jay, your company was kind of built on select service best in class brands courtyards and the like. And you’ve increasingly gone to more of a I would say the independent focus or unbranded focus over the last year or two.

Talk about how you see this playing out over the next couple years as you reshape the portfolio, and does that involve additional risk, we know that managing those assets and getting the bookings without the brands is more challenging. So, is Hersha management the right company to manage those independent brands or is there any thought process there?

Jay Shah

Sure. Bill, we’ve been attracted to independent hotels across the last several years and have at this point put together a portfolio close to 10 independent hotels. What we found as we have studied them and as we continue to build our experience with them is that relative – as long as you’re in the market that we operate in, which are very high demand markets, with lots of compression.

We find that these kinds of hotels will typically operate at a RevPAR premium to a similarly situated branded hotel by about 10% to 15%. And a significant margin benefit as well as you can imagine.

The, I think in order to pursue them as independent hotels there is a capability that is required. And I think HHM that has managed most of the independent hotels for us this last hotel that we purchased is going to be managed by Northwood hospitality which is the current manager at the hotel, who also manages many other almost exclusively independent hotels in their portfolio.

So we’re going to have HHM and Northwood as the two managers of most of our independent hotels. But they have built up a capability for that. And primarily what does that capability consist of, there’s obviously the significant distribution that brands provide is probably one of the strongest drivers in an argument for going with the brand.

And so when it comes to distribution, sales and marketing and revenue management, those are important elements to run an independent hotel. And yes, I think across the last several years, HHM has built up a very strong capability in that area and Northwood has a very strong capability in that area. That’s sort of demonstrated by the premium that these hotels run to their brand and peers in this space.

I think as we like forward the independent hotel segment is very interesting to us. Often times you’re able to be in an asset as I mentioned that is very similarly situated as a branded asset but you’re just getting much stronger economic return from it.

So, we would continue to explore those as we go forward. But it’s not at the exclusion of continuing to pursue branded assets as well.

Bill Crow – Raymond James

Well, I guess that was going to be my next question which is, has the pricing of the – for the core asset risen so much that it’s not as appetizing to you anymore? They’re starting to price you out from an acquisition perspective?

Jay Shah

A little bit. I mean, I think we have a bit of – we have in branded hotels there’s probably more competition for those assets. And so it makes it a little bit more competitive of a process. With independent hotels there, is fewer owners and operators with that capability.

And so there has been on the margin I think we have an advantage in the independent space. But again across the last several years, we probably balanced, on balance it’s probably been even between branded and independent hotels.

Bill Crow – Raymond James

All right. And then, final from me, and I guess you touched on this a little bit in the prepared remarks. But your comps get materially easier as the year goes on at least the next couple of quarters. So you almost have to average what 6% RevPAR growth in the next three quarters, maybe a little better than that to hit your numbers. How much of that is, are you depending on the markets to improve versus just this very easy comp in order to look at your numbers?

Ashish Parikh

Hi, Bill. I think that when you think about the markets that are going to have easier comp. Certainly, DC will have an easier comp in the back half of the year. But in New York, will be a straight up comp, because it really had a difficult comp from the year before in the fourth quarter and in the first quarter of this year.

Most of our other markets they performed pretty well last year as well. I think Boston just has an easier, or has a better convention calendar this year. So, it’s a good mix of growth not just from easier comps but also from the assets stabilizing and from the new additions that we brought in.

Jay Shah

Bill, let me add on to that. Our view is that this is the 2014 after this first-quarter is going to be for us the first very clean set of three quarters that we’ve had in the last couple of years. And so, I think most of this will be driven just by property performance and markets.

Certainly the easier comps help but as Ashish mentioned, there has been a – there were winners and losers in the markets last year. So, I went on balance consider that pretty even.

Bill Crow – Raymond James

Okay. And then, finally from me, it just feels like we’re at a point of stability within the company that same-store reporting would be more practical and maybe a better analysis tool than consolidated portfolio. But that would just be my suggestion. Thanks guys.

Jay Shah

Yeah, thanks, Bill.

Operator

We’ll take our next question from Ryan Meliker with MLV & Company.

Ryan Meliker – MLV & Company

Hi guys, good morning. Just a couple of questions. First, your Manhattan portfolio was up 3% in the quarter but the broader New York City portfolio was down considerably. What was going on at those three hotels that are outside of Manhattan, was that entirely just the Sandy comp or those properties had a lot of Sandy demand in the comparable quarter or was that the impact of the increasing supply in Manhattan and the lack of compression demand out of boroughs?

Ashish Parikh

Hi Ryan, the three hotels that we have that are outside of Manhattan are the Hilton Garden in the Sheraton at JFK and then the new hotel in Brooklyn. Outside, so the Sheraton and the Hilton Garden were purely Sandy demand related and no impact from new supply.

As the new hotel in Brooklyn, that asset was actually under renovation during the quarter. So, that asset had somewhere around a 30% RevPAR loss because we had significant number of rooms out of service during the quarter.

Ryan Meliker – MLV & Company

So would you expect those three asses to perform similar to what you’re expecting from Manhattan in the remainder of the year, based on what you saw in 1Q or?

Jay Shah

Yes. I think new hotel, I mean, if I look at April for the new hotel it’s up 10% in RevPAR from the previous year. The Sheraton and the JFK asset are still flat to negative and because those benefited from Sandy all the way through the third quarter.

Ryan Meliker – MLV & Company

Got you. So, a little bit of impact through 3Q. Okay, that’s helpful. And then the second question I had was with regards to the Parrot Key acquisition, I guess two questions in regards to that. First of all, that looks like a pretty attractive forward cap rate of 75, so congratulations on being able to win that deal.

First, it sounds like this a new asset that’s been recently renovated. So, help me understand why the forward cap rate is not a stabilized cap rate were you’re assuming that the stabilized yield would be 150 basis points higher, what are you planning to do to drive that incremental NOI?

And then second, why was this the asset that you guys chose to go after with regards to the fact that we’ve now seen several other assets trade in the past 12 months in Key West?

Neil Shah

Ryan, this is Neil. Yeah the first question regarding growth of the asset, the hotel was originally developed as condominium timeshare and then was reformatted and reprogrammed as a hotel in 2012 throughout the year of 2012. And so there is some ramp-up still left in the asset. I think, when we think of ramp-up, it’s almost ramp-up like we experienced in New York where you’re getting up to market occupancy levels very quickly. But then it’s a matter of finding the right rate and finding the right revenue management strategy for the asset longer-term.

The hotel really benefits from having one-bedroom two-bedroom and three-bedroom kind of configurations. And so, we’ll continue to see some real opportunity on the revenue management side, hotels already at 91%, 92% occupancy. So, future growth is going to be ADR lead and should be able to flow to the bottom line.

Second, we are there’s not allocating a lot of capital to that. The project is in very good shape and it feels like the newest highest-quality kind of product down there right now. But we will experience just market growth in Key West, all the fundamentals there continue to look very, very strong.

And so, we’re expecting some market lift. And the hotel is very well positioned to enjoy that market lift without any capital disruption.

So, that’s the first question. I think second question was there’s been some other assets trading in the marketplace how did we build conviction on this one. We did spend a lot of time on at least two of the last three assets that have traded in the Key West market. We know the market now very, very well from those pursuits.

In the end, what differentiated this and gave us a conviction to moving forward was we were able to structure a deal or and the purchase price and the transaction that just had higher going in cash flow. That was one of the things that helps balance the significant price per key they have to pay and a market with such high various trading.

But so, that was really I think what, for us. And it was newly built. I think we generally focused on assets that are recently built so that there isn’t significant capital disruption in the future. So, those two things were probably the driving factors for us.

Ryan Meliker – MLV & Company

Great. That’s helpful. And then, just, added color on the property type, it sounds like it’s got a lot of different one-bedroom, two-bedroom and three-bedroom type suite scenarios. Is this what probably that’s going to actually be harder to revenue management because of those dynamics? And it’s going to have a lower property margins because of the cleaning is going to be a little bit more exhaustive than a typical, one of your typical independent or select service hotels?

Jay Shah

I think the elasticity, like the pricing elasticity will outweigh the size of the rooms in terms of operating expense standpoint. It will be – it’s definitely harder to revenue management something with this kind of potential, but the reward is much greater for getting it right.

We’ve develop most of our markets and we focus on these kinds of market, markets that aren’t 80% plus occupancy and that have very strong rates. And so, we have a real capability in that regard. Northwood, the operator here also operates two other hotels down in the Keys. And are actually, they’re doing a very good job here as well. But I think in combination our asset management, revenue management focus with there on the ground ops team, I think we’re going to be able to create some good results there.

Ryan Meliker – MLV & Company

All right, that’s helpful. Thanks a lot guys.

Jay Shah

Okay.

Operator

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

Chris Woronka – Deutsche Bank

Hi, guys.

Jay Shah

Hi.

Chris Woronka – Deutsche Bank

You’ve been building out the South Florida and California portfolios pretty nicely. What I think, you said you’re going to be up 26% combined. Where, do you have a target in mind of where that can get to or where you’d like it to get to?

Jay Shah

Chris, I would say we don’t have a static target for it. I think one of the things that we believe is an advantage for us is our portfolio is at a size where we can be nimble and responsive to where market momentum lies. And so, I think for now and for the foreseeable future, we are seeing growth out of both of those marketplaces that is higher than the national average, attractive growth rates.

And so, I think we would continue to look there today. But I think we don’t have a static target. I think it’s probably in any one market we would probably not want to grow to more than 20%. But, we are going to take that on a case by case basis.

Chris Woronka – Deutsche Bank

Okay, got you. And you mentioned potentially more share repurchase. What’s, how do you guys evaluate, is it looking at NAV, is it some kind of DCF based on your understanding of the cycle, or something else?

Ashish Parikh

Chris, I think we look at it fairly simply, particularly because we think the disparity between our net asset value and our current share value is so significant. So, as long as we’re 20% below NAV, we would continue to repurchase stock. And so, we will continue to look for opportunities to do that.

The question arises, so if you’re repurchasing stock, why would you buy an asset. And in our view is as I said before, we’d like to stay pretty nimble. And we don’t see those strategies being mutually exclusive. So we’ll continue to look for opportunities when we can buy stock and use the capital which we think is in a very prudent way.

Chris Woronka – Deutsche Bank

Okay, got you. Then on the RevPAR outlook, and understanding what you mentioned about April and thinking back to the first quarter on the West Coast, and I know it’s not yet a huge percentage of the portfolio. But as you look forward and we see easier comps in DC and New York, where do you see the comps in California and I’m guessing that the north of 20% growth, you guys are expecting that to moderate at some point?

Jay Shah

Yes, Chris, we are expecting that to moderate. I think yes, we definitely benefited in April by a few one-time events on the West Coast. But the growth remains very strong, certainly higher than national average growth rate. But we don’t anticipate that kind of growth to continue.

Chris Woronka – Deutsche Bank

Okay. And then just finally from me, going back to New York, we’ve certainly heard that we may kind of once again be reaching that point where you start to see some condo conversions or alternate use. What’s your guys’ understanding of that when, is that likely, in your view and if so, are you – would you monetize an asset or two if that opportunity comes around?

Neil Shah

Chris, this is Neil. Yes, in New York, you’re starting to hear a little bit about the kind of residential conversion. I think where we’re seeing it right now is just that there is on the land side, just land prices are escalating pretty significantly to the point where residential and retail office clearly kind of outweigh or look like the highest and best use versus hotels.

So, on the land side, you’re definitely seeing kind of hotel developers finding it difficult to pencil new deals moving forward. You are seeing residential trades, residential sales as prices I think none of us ever imagined. There is, it’s become pretty common place to have sellouts in the $3,000 to $4,000 a foot range in some buildings. So, it is – it’s something that’s very significant.

We haven’t started, there was the – there has been two deals so far that were actual kind of significant conversions from hotel to condominium. I think moving forward, we don’t know of any specifically. But I think we’re in the point in the market for the next few years where that absolutely can become a strategy for other developers.

I think where we’ve been really, I think not surprised but just the velocity of the transactions on the land side for office developers and for existing retail and New York has been very significant. You might have heard of the, there is a $400 million land purchase on 10th Avenue just last week.

The price of air rights in the last year went up 47% in Manhattan. We generally viewed kind of select service development in New York City, feels like a very good proposition when you’re buying land at $400 a foot. Today it’s very difficult to buy land at that kind of pricing.

Chris Woronka – Deutsche Bank

Sure. Got it. Very good, thanks guys.

Operator

We’ll take our next question from Nikhil Bhalla with FBR.

Nikhil Bhalla – FBR

Hi, good morning everyone. Jay, I’m not sure if you mentioned what the margins for this hotel were in 2013 relative to the rest of your portfolio and also RevPAR? So that’s my first question.

Jay Shah

Yes. The hotel is, we’re buying it on a 2013 full year ran about 50.7% in margin Nikhil.

Nikhil Bhalla – FBR

Okay. So that compares to your New York hotel margins roughly?

Jay Shah

Yes, exactly.

Ashish Parikh

Those were some of the characteristics of this asset particularly in the market. It’s a characteristic such as that that made us comfortable and puts this asset rate much in our wheel house. It’s a very, very high demand market runs at 90%. It has a very, very strong rate in the market.

And you’re able to drive strong efficiency at the properties in these kinds of high margins which is something that we have a clear capability of knowing how to do. And we’re able to generally, in these sorts of situations continue to tweak out growth, just by revenue management strategies.

Nikhil Bhalla – FBR

Got it. Are there more opportunities for margin expansion at this hotel as you see it, as this time?

Jay Shah

I don’t know that you were going to see significant opportunities from margin growth. It is very efficiently run Northwood is a strong operator. I can’t imagine that we can’t find some opportunity. So I won’t say that there is none, but I don’t know that it’s going to be so significant, that’s going to be a major driver of value.

I think the real driver of value will be to just continue to drive the mix and the rate at the hotel as it continues to ramp and just with more strategic revenue management. Kind of I think that that’s where the margin growth is going to be primarily coming from.

Nikhil Bhalla – FBR

Got it, and one final question here.

Jay Shah

As Neil mentioned, the market has had very strong growth since 2012. Since 2010, the market has posted 13.5% RevPAR CAGR. We’re not expecting, we’re not expecting that going forward but we’re certainly expecting double-digit growth for the next couple of years.

And I think we’ve described it in the press release but there is a regulated, there is a barrier to entry that is in ordinance in the city. And that is a rate of growth ordinance, it doesn’t allow for any new hotels to be built unless an older hotel is knocked down. It’s call ROGO.

And that gives us a lot of comfort that new supply is going to be – it is not going to be very quickly forthcoming in the market.

Nikhil Bhalla – FBR

Okay, and final question on that. Does this hotel perform very similar to the rest of the market, does it perform above or below, in the last maybe two or three years?

Jay Shah

Because it’s just been coming on, it’s probably performs below that. It had a very good strong year, especially this first quarter was very strong at the property. We look at it, there is kind of two comp sets that you can look at on the asset, there is a branded comp set with some of the branded properties in the area. And that said, it’s starting to achieve its fair share.

And then, if you look at more of an independent luxury set, it’s still well below that side, it’s actually way off the page right now, it’s over $100, 80-yard gap. And so, we do see an opportunity in shrinking that gap over time. But it’s ramped up to the more basic set.

Nikhil Bhalla – FBR

Got it, thank you.

Operator

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

Anthony Powell – Barclays

Hi, good morning. Good results this morning. Can you update us on the progress of your two hotels under construction in New York, are they going to be delivered in the second quarter of this year?

Ashish Parikh

Yes, Anthony, this is Ashish. We do expect both of those hotels to be delivered in the second quarter. They’re both starting to get to a point where we’re almost at the temporary certificate of occupancy. And then we’ll need a few weeks after that to open the hotel.

Anthony Powell – Barclays

Great. And on the share repurchases, you’ve raised some debt at some pretty attractive prices. How do you view your leverage right now relative to your target, and would you consider adding more leverage to repurchase shares, given the favorable outlook for the rest of the year? Thank you.

Jay Shah

Yes. When we look at our leverage on sort of a full year basis, we think that it is within our target range. We would consider adding some leverage if as Jay mentioned, if we thought that the price disparity remained as significant as it is today and buyback stock. But we just have to look at that from a need for capital. And we’ll look at it on a constant basis.

Anthony Powell – Barclays

Thanks.

Operator

And we’ll take our next question from Smedes Rose with Evercore.

Smedes Rose – Evercore

Hi, thanks. I just wanted to ask you, on your last call you had said that you thought your same-store metrics for the year would be about a point lower than the 5% to 7% for the full portfolio so 4% to 6%. And is that still your thought on the same-store? And the second part is, in your supplement on page 3, you show a 1.9% decline for 36 same-store hotels, but that 1.9 foot to the 4.6 for the year?

Jay Shah

Yes, Smedes, we think that because of first quarter results at New York and DC, and the overall same-store portfolio, the gap is probably wider. It’s probably about 200 basis points to the general portfolio. And that gap also widened up because of the acquisition of Parrot Key hotel, which has much higher RevPAR growth rate and absolute RevPAR than the rest of the portfolio.

So, I think that the gap is probably closer to 200 to 250 basis points for the remainder of the year.

Smedes Rose – Evercore

So, okay. So it’s a 2% to 5% sort of same-store outlook for the year, and the first quarter, on that same basis, was down 1.9%. Is that correct?

Jay Shah

I think, I would probably say it’s probably close to we’re going to say, 3.5% to 5% but not to 2% to 5%.

Smedes Rose – Evercore

Okay. And then the other thing I just wanted to ask you, you had mentioned that you thought supply would, I guess in Manhattan, would peak this year. I’m just wondering, what are your supply percentage increase forecast, you guys obviously track this very closely, and I was wondering if you could share for ‘14, ‘15 and ‘16 how you see room growth?

Jay Shah

Sure. Smedes, I think in 2014, we’re at about 6.3% for the year. For 2015, we’re around 3% and around – and 2016, we’re around 4%.

Smedes Rose – Evercore

And that’s Manhattan room supply, just full percentage?

Jay Shah

Yeah, that’s right. This was, this is the high water mark for supply 2014. Q1 and Q4 will feel the worst. Next few quarters will be a slight relief just on the year-over-year data. But yes, that’s where we see supply I know we’ve seen different numbers coming out from different places. But I think for 2014 we’re at 6.3%, HPS is at 6%, Star is at 8%, PWC is at 7.5%.

So, there is a range there. We’re pretty confident about our 6.3% number. As you know Smedes, we track this kind of site by site in New York. Most of the consultants are getting their data from brands. And brands have – brands and the consultants I think have a hopeful bias in terms of inventory.

Smedes Rose – Evercore

Okay.

Jay Shah

We look back at the last few years, kind of what we were projecting and what actually happened and what the consultants were projecting. In 2013, actual deliveries were 3,850, Star was at 5,305, PWC was 5,500 and very similar kind of variance in 2012 as well.

Smedes Rose – Evercore

When you see that discrepancy between the actual and what the consultants, I guess, initially have out. I mean, is it because projects are actually coming out of the system, or is it simply that there’s, it’s just a timing issue and they just are coming up later than what’s initially anticipated?

Jay Shah

It is a bit of both. But lot of it is timing. These projects take three to five years and they’re generally projected in brand systems to be a year and half or two years. And then there is, they are entered into the supply when an application goes out or something to give confidence to the brand that there is a chance, doors is going to get open. But a lot of those deals just have natural attrition, they don’t get financed or they missed the window for their equity raise or whatever it might be.

And so, it’s a bit of both. It would take longer than they were ever projected to. And there is significant natural attrition to the projects.

Smedes Rose – Evercore

Okay. Thank you. That’s helpful.

Operator

We’ll take our next question from Robert Higginbotham with SunTrust.

Robert Higginbotham – SunTrust

Hi, it’s Robert in for Patrick Scoles. Most of my questions have been answered. But a couple of quick ones, and forgive me if you’ve covered this in the prepared remarks. But you had a little over $2 million of insurance recoveries in the quarter, presumably related to Sandy. But does that represent most of the claims that were put out there, and how much, if any, should we expect to see of that going forward?

Jay Shah

Sure. So, this is most of the business interruption claims that we had out there. We’ve now recovered all the property related damage from Hurricane Sandy. We still do have a dispute on some business interruption insurance. But the resolution of that is pretty uncertain as you can imagine. The funds we received in from Sandy were undisputed funds but still took little over 15 months to get those. So, and we’re not building in any insurance recoveries for the remainder of the year.

Robert Higginbotham – SunTrust

Got it, that’s helpful. And I heard all the April color you gave on a market basis, but could you repeat it, if you didn’t give it already, the overall portfolio trend for April, in terms of RevPAR?

Jay Shah

Yes. So, the total consolidated portfolio is up about 10%. And the same-store is 6.5% range.

Robert Higginbotham – SunTrust

Got it. Thank you. That’s all from me. Thank you.

Operator

We’ll take our next question from David Loeb with Baird.

David Loeb – Baird

I’m glad on down the list, because I’ve got a long list, if you don’t mind. I just want to make a comment that Bill’s comment that I agree that same-store is probably more relevant. Ryan asked a question about Manhattan that also seemed to blur the same-store versus the consolidated, because clearly the Hyatt Union Square is pushing up the consolidated, but not the same-store.

And Smedes kind of went to a question I wanted to ask about the impact of Key West on that. So, just to drill a little deeper on that, Ashish, you’re saying same-store is more like 3.5% to 5%. So that’s a little bit of a reduction, because if it was 100 basis point gap before that would’ve implied 4% to 6%. Are you just being conservative, or do you actually think that the same-store will actually be a little less strong than it was before?

Ashish Parikh

Well, I think based on the second, third and fourth quarters, our forecast remained the same. But first quarter for same-store was lower, or just mathematically I think it’s come down.

David Loeb – Baird

Okay. So it’s a function of the first quarter. Can you talk a little bit about the restrictions that you have on your ability to buy back shares from your credit facility and what can you do to ease those if you sell more assets?

Ashish Parikh

Sure. I mean, in our credit facility, we have a covenant which we have to stay within the dividend payout ratio. So, it’s effectively our dividends which incorporate any kind of buybacks or return to shareholders, whether that’s a special dividend or stock buyback, have to be at or below 95% of our yearly FFO.

So, our current dividend payout rate is about 50%. So, effectively there is another 45% of our FFO that we could payout in the form of dividend or in the way of stock buybacks. If there was a situation where we had a large portfolio sale, probably in excess of $100 million, $200 million, we have the ability to go back to the bank to discuss additional buybacks.

David Loeb – Baird

Okay. Thanks. And it sounds like your available capital today pretty much matches your upcoming capital needs for the Hilton Garden Inn acquisition and the debt maturity you referred to. If you found more acquisitions, would you then go out and raise equity to fund those?

Jay Shah

David, this is Jay. I don’t – we would not. As I mentioned before the – at this point I think it would be difficult to find an asset that’s going to have such a significant growth rate that it would offset the discount that we believe we’re trading relative to our NAV.

And so, for that reason alone, amongst a couple of other ones, we would not – we would not be raising, we would not be raising capital at this point. We would probably sacrifice an acquisition for it. It’s just, in our view that from a capital standpoint, it would be difficult to justify to ourselves.

David Loeb – Baird

Okay. So, that’s a great segue into my questions about Key West. As you looked at Key West, did you see that one with a higher cap rate, higher growth rate, as a better deal than buybacks, at this point?

Jay Shah

Yes. It was $100 million asset with in-place cash flow EBITDA of $7.5 million, which was attractive from the standpoint of offsetting the lost EBITDA from the non-core sales that we have gone through across the last couple of years.

I think in addition to that we were given confidence by the fact that the top line growth rates in the market are very, very strong. And we think we’re going to be able to flow through of the strong EBITDA growth there as well.

So, I guess the bottom line is, in this case, I don’t know that we made a decision. As I mentioned before, we liked the Parrot Key acquisition, if we were forced to make a decision between that and stock buybacks, I think we would have bought Parrot Key. From a strategic standpoint it really goes a long way and allowing us income stream from higher growth markets and the asset itself meets all of our criteria.

But going forward, I think it’s really important to understand that our view is that, an acquisition like Parrot Key and buying back stock are not mutually exclusive. Parrot Key is pretty opportunistic, 7.5 cap rate is not something that we see often. And it was something that we were able to get our heads around and figure out.

And so, we like the acquisition, we thought it was a very good use of capital. As Ashish mentioned, we’re limited to some degree currently as to how much stock we can buyback anyways. So, to be able to buy $100 million of accretive asset versus a limited amount of stock, it is again, I mean, it’s just a more – it’s more significant impact to the company to buy Parrot Key.

We’ll continue to look for ways to discuss with the bank group on how we can address some of these limitation issues that we have on buying back stock. As we move forward if we were to go through another recycling sale of an asset, we would at that time also consider repurchasing stock with proceeds. So, I hope that gives you some color on how we’re thinking about it.

David Loeb – Baird

Yes, that’s very helpful. Okay. Last one, I promise, for Neil, so you don’t feel left out. What were your competitive advantages in this Key West transaction? We’ve been hearing from a lot of REITs that they would love to own more in Key West. LaSalle, Ashford Trust, Ashford Prime, they’ve all been active there. How were you able to beat them on this transaction and still get what looks like a very attractive return?

Neil Shah

I don’t know specifically kind of how the kind of the final rounds and things went on the asset. I don’t have that much color from the broker but there was several private equity firms and likely a couple of our public peers looking at the asset. Our competitive advantage I think is a few things.

One was that we have been studying this market and looking at this market for the last several years. So, we did have conviction on the marketplace and had a lot of kind of unique knowledge for that market that we were able to bring the bear. It was not a fire sale by any means but the sellers wanted a quick and expedient transaction I think from the moment it was brought to market to the moment it will close, it will be about 90 days or so.

And we were able to offer that kind of execution. We’ve known the sellers for a long time and have worked on things in the past. So I think there was some level of relationship that also helped. Probably one of the most significant ones though is that we were retaining Northwood as operator. And I think that gave us more confidence on the in-place cash flow as well as gave us unique insight into what the next 12 months and the next 24 months looked like in the marketplace in partnership with Northwood. So, speed, conviction and flexibility on operator.

David Loeb – Baird

Great. Thank you, all.

Jay Shah

Thanks David.

Operator

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

Bill Crow – Raymond James

Hi guys, just a follow-up. You talked about the stock being at a 20% discount to NAV. And obviously, that’s important when you decide on the repurchases versus the asset purchases. How do you calculate your NAV, or specifically, what cap rate do you think your portfolio should be valued at?

Neil Shah

Hi Bill, we actually have a section in our investor presentation where we go through our markets and we go through in some cases even assets on an asset-by-asset basis, but alternative figure. So, we look at it from a kind of right now replacement cost as well as what these assets are trading at in the private market.

And on a cash flow basis, we’re looking at sort of stabilized EBITDA multiples and these assets have 13 to 13.5 times.

Bill Crow – Raymond James

And where do you think replacement cost is overall for the portfolio, I understand you do it asset by an asset?

Jay Shah

I think we’re north of 375 to 385 right now.

Bill Crow – Raymond James

Okay, that’s helpful. Thank you.

Operator

We have no further questions in queue. I would now like to turn the call back over to Jay Shah for any additional or closing remarks.

Jay Shah

Okay. Thank you operator. Thank you all for joining us again today. As our remarks probably indicate, we have great optimism as we look into 2014. When we began the portfolio transformation process a couple of years ago, and even as late as three or four quarters ago, we had mentioned that as we reach the second quarter of 2014, we were going to be at a point where we’d be able to really push on our portfolio.

Again some very clean quarters and a very, very refined group of assets. And we’re very pleased to be there at this point. And we happen to be on time. And so, as we look across the remainder of 2014, we’re very encouraged by our prospects.

Neil, Ashish and I are in the office for the rest of the day. If anybody has any questions that occur to them after the call, please feel free to call us. Thank you again.

Operator

And this does conclude today’s conference call. Thank you all for your participation. You may now disconnect.

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