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Executives

Nikki Sacks - ICR

Jay Shah - CEO

Ashish Parikh - CFO

Neil Shah - President & COO

Analysts

Shaun Kelley - Bank of America

David Loeb - Baird Investments

Bill Crow - Raymond James

Will Marks - JMP Security

Smedes Rose - KBW

Jeffrey Donnelly - Wells Fargo

Hersha Hospitality Trust (HT) Q2 2010 Earnings Call August 5, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust second 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). One final reminder, today’s call is being recorded.

With that, I would now like to turn the presentation over to your host for today's conference, Ms. Nikki Sacks of ICR. Please go ahead.

Nikki Sacks

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 anticipated 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 provisions 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 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 every, here with me today on the call are Neil Shah, our President and Chief operating officer and Ashish Parikh, our chief financial officer.

Since March our portfolio has experienced positive RevPAR and our second quarter results clearly demonstrate that the recovery in lodging is underway and that the strategic course that we continue to pursue positions Hersha very well to outperform in this environment. Our strategy of concentrating ownership on high quality select service hotels in urban gateway markets in the northeast such as New York and Boston is intact and our focus is being rewarded in our results. These are markets which typically turn positive first and as expected as leading in this recovery.

The early signs of a return in demand that we first experienced in the third and fourth quarter of last year and that continued into the first quarter, noticeably accelerated in the second quarter when we were able to capitalize on the return of the corporate transient traveler

During the second quarter, we again delivered industry leading RevPAR growth of 13.3% along with industry-leading margins of 40.8%, a 160 basis point increase over last year’s second quarter. Hersha benefits from significant positive market leverage with 78% occupancy across our consolidated hotels and 90% in our New York city hotels, we were able to employ aggressive revenue management strategies driving ADR growth which flows disproportionately to the bottom line and positively impacts our margins. A good example of the impact of our revenue management strategy is the performance of our Manhattan Hotels.

During the second quarter, our consolidated Manhattan portfolio realized a 13.1% growth in RevPAR driven by a 13.2% increase in ADR and relatively stable occupancy at 92%. This positive market leverage resulted in an expansion of EBITDA margins of 329 basis points to 47%. This represents an 85% flowthrough of incremental revenues to the company’s gross operating profit.

Additionally, the performance of our consolidated portfolio over prior year demonstrates in our recent acquisitions are having a positive impact on our results. The acquisitions that we’ve made over the last 12 months have significantly increased our portfolio’s RevPAR and EBITDA and have been transformative to the portfolio’s net asset value. Their performance and growth were higher than our portfolio average in the second quarter and given their young age as these properties stabilize and increase market share, we expect increasing contributions from them.

Given the seemingly bright fundamental shift for us in the industry in this quarter, we are well aware that this economic recovery is prone to fits and starts, but we are comfortable that we see a consistent fundamental improvement in our key strategic markets. From a market perspective, Manhattan undoubtedly remains our strongest region, but the other areas that are exhibiting strength and contribution to our growth include the Boston in Mid-Atlantic regions, along with Philadelphia, Connecticut and Rhode Island.

On the other hands, regions that have yet to stabilize relative to the others in our portfolio are California and Arizona and New York, New Jersey metro. Our Washington D.C. metro portfolio consists of some very attractive suburban office markets such as Alexandria and Tysons Corner, Virginia and Green Belt, Maryland which were relatively stable last year, but because we don’t have exposure to the Washington D.C. CBD yet, our Washington portfolio underperformed the market average there.

Through this downturn, we have concentrated on enhancing our portfolio and our operations and as we have discussed before, our asset management team and our operators have been very focused on cost containment measures. We have adopted a more efficient cost structure that we believe is sustainable moving forward. We are very focused on limiting our expense growth over the next few years and believe that these initiatives along with a sustained market recovery will generate attractive EBITDA growth in the coming quarters.

Industry-wide demand clearly strengthened as the year and even as the second quarter progressed. To-date most of the industry RevPAR growth was occupancy driven with rate only recently turning positive. The group business appears to be slowly stabilizing as convention and meeting bookings are starting to pick up, However the industry still needs to cycle through much of the reduced rate business that was booked in 2009 and early 2010. Because 90 % of Hersha’s mix is transient demand, we don’t have to rely on the return of group occupancy to effectively manage yields of our room inventory. The company has the flexibility to repay substantially all of its inventory on a daily basis to take advantage of improving demand trends real time.

Throughout the recession, the transient segment has remained stronger than the group segment. The company’s market leverage has enabled us to lead in transient performance. When comparing the company’s results to the industry’s transient results, we outperformed with a 13% growth in RevPAR compared to the industry growth of 6% with 8% of our growth from rate compared to the relatively flat ADR growth for the industry. From a portfolio perspective, over the past six quarters, we have added seven highly strategic assets to our consolidated portfolio and have sold five lower growth assets.

We’ll remain very selective in pursuing further acquisitions and the company is likely to only pursue new acquisitions if we believe that the acquisition can deliver growth rates that will exceed the portfolio average growth rate, be accretive to our NAV and will be strategically added up to the company. We will also continue our strategy of selectively divesting assets which are slower growth and no longer fit our strategy.

To that end, we recently closed on the sale of the Holiday Inn Express in New Columbia, Pennsylvania. The asset was approximately 13 years old and was in a non-strategic market for the company. We sold this asset 11 times its trailing EBITDA and avoided an additional capital investment of $1million for brand mandated capital expenditures. We will continue our efforts to divest these types of non-strategic assets at optimal times during this recovery.

Even though, the company’s growth in the quarter was attractive, we are still very early in the cycle with a long runway. Our ADRs are still 15% below where they were in 2008 and even more so in key markets such as New York where they still remain more than 21% below our 2008 rates. It’s a deep hole to dig out from, but it’s not atypical for New York City to string together several years of back-to-back double-digit RevPAR growth. In the last cycle for example New York experienced four years of double-digit growth with one particular year in the series delivering more than 20% growth.

It is particularly encouraging considering the high levels of occupancy that we are currently seeing and the favorable supply demand dynamic across the recovery, when viewing the company’s significant market leverage and our improved cost structure relative to the last cycle, we are optimistic about the flow through and our earnings growth potential portfolio-wide in the future quarters.

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

Ashish Parikh

Thanks Jay, I am going to focus on our balance sheet, liquidity capital transaction and increased financial outlook for 2010. Our financial profile has been secure and continuing its improving position. With the refinancing, amended credit facility and equity offering that we completed over the past several quarters, we have significantly enhanced our financial flexibility and taken energy level risk off the table.

This improved financial position allows us to concentrate more fully in driving earnings growth, further progressing our strategic plan, upgrading our portfolio and capitalizing on opportunities created by the current turbulence in lodging and capital markets. Over the past year, we have significantly improved our leverage ratio by several turns and are making steady progress in stated goal to bring our debt-to-EBITDA ratio to five times and to maintain the debt-to-enterprise value below 45%.

As of June 30, we have $44.7 million of our $135 million committed line of credit. $35.4 million in cash in cash and escrows and no debt maturities for the remainder of 2010. Approximately 92% our debt is fixed or capped and our weighted average interest rate of 5.97% and weighted average life to maturity of 6.8 years.

As of June 30th 2010 we had approximately $51.5 million of trust-preferred securities for which the fixed rate period has now expired and these securities have converted the floating rate instrument. The weighted average interest rate on this debt is therefore been reduced from approximately 7.25% to 3.4% today and we have simultaneously purchased an interest rate cap to ensure that the total interest rate on this instrument does not exceed 5% over the next two years. Depending on the interest rate environment over the next few years, our annual savings on this conversion will result in an interest expense reduction of between $1 million to $2 million per year.

From a capital perspective, we continue to evaluate our best use and highest return options for our capital investment. This includes paying down debt, acquisition and investing in our existing asset. During the second quarter, we retired approximately $8.2 million of debt that carried an interest rate of 8.94% without any defeasance or pre-payment costs.

This debt paydown encumbers an additional three properties from any debt. We also added two asset to our consolidated portfolio during the quarter. In April, we purchased these outstanding mortgage loans of one our unconsolidated joint ventures that owned the Courtyard By Marriott in Boston, in which we own a 50% interest. Our basis in the 164 room asset is $13.8 million or approximately $84,000 per room.

The Courtyard South Boston was opened in 2005 and remained a core urban holding for the company. Then in May we purchased a Holiday Inn in Wall Street in New York city for approximately $34.8 million or $308,000 per key including closing costs and fees. This 113 room hotel was previously run as an independent hotel, but was recently converted to Holiday Inn and including a lobby level restaurant that is leased to a third party.

We had previously provided this development loan on this hotel project that was converted to equity as part of the acquisition. This acquisition demonstrates the benefits we are still accruing from our development loan program and its off-market opportunities and at the same time reduces our overall development loan exposure as we focus on our core market and our operation. Our development loan balance now approximates $40 million and represents approximately 3% of our total asset base.

On an ongoing basis, we’ll also evaluate our existing portfolio to determine any high-return rebranding or redeveloping opportunities. During the second quarter, we began renovation to convert two of our existing adjoining hotel properties in King of Prussia, Pennsylvania, The Sleep Inn and Mainstay suites into Hyatt Place as we believe the prior brands weren’t optimizing the assets.

We anticipate opening the Hyatt Place later this month. And this renovation has required us to completely shutdown the asset since April impacting our operating results during the second quarter and third quarter of this year. Regarding our capital expenditures, we expect our capital investments in the near term to be limited to critical capital maintenance, but we do intend to initiate several deferred initiative towards the end of 2010 including lobby renovations for some of our urban courtyard and to accelerate some our capital spending in core urban market.

In 2010, we expect to spend between 14 and $15 million to maintenance CapEx and we currently maintain approximately $11.1 million in CapEx reserves that can be utilized towards future expenditures. As Jay mentioned, we also intend to pursue selective dispositions where an asset no longer fits, in order re-deploy the capital and resources to higher return opportunities. We will continue to be diligent and deliberate in our pursuit of these dispositions.

However we believe that the difficult lending environment for hotel asset will result in a somewhat lengthy disposition time line.

Let me now turn to our guidance and expectations for the remainder of the year. While our visibility still remains limited and after a brief uptick, consumer confidence has again declined. There appears to be a flow and methodical improvement in our key strategic market. The recovery in the lodging sector has not uniformly benefited all segments or geographic areas within the US lodging market. We however have become increasingly optimistic with the strength of the ongoing recovery in our core market and we expect continued RevPAR growth for the second half of the year driven by rate-led growth off of a strong and stable occupancy base.

We are therefore optimistic about the balance of 2010 and are introducing total portfolio guidance and are increasing our full year 2010 same-store guidance. For our total portfolio of consolidated asset, including all of new acquisition, we expect that full year RevPAR could be in the range of 10 to 12% versus 2009. And for our operating margin to improve by between a 150 and 250 basis points.

For increasing our expectations for full-year RevPAR growth on a same-store consolidated basis to be in the range of 3% to 5% versus 2009. With this higher RevPAR assumption that along with greater expected flow through from stronger ADR growth in the back half of the year, we are increasing same-store hotel EBITDA margin guidance to an improvement of between to 50 to a 100 basis points.

This concludes my formal remarks, and I will turn the call back to Jay for his closing comments.

Jay Shah

At this point, operator we can open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first go Shaun Kelley, Bank of America.

Shaun Kelley - Bank of America

Quick question for you on the margin front. Just kind of interested to understand a little bit more on the rest of the portfolio. You gave some good color on what happened in New York city. If we did our math right, just on the percentage of EBITDA, it kind of implies that maybe the rest of the portfolio still had a little bit of margin pressure. So, could you give us just a sense of kind of magnitude of how the rest of the portfolio's margins are trending outside of New York city, and kind of how you see that shaping up for the back half of the year?

Ashish Parikh

To give you some color on some of the different market, I think that what we saw in New York was clearly market leading, other markets where we saw pretty healthy margin growth for Boston, Philadelphia and we saw some pretty decent margin growth in the Mid-Atlantic where we continue to be pressured on margin or in the Connecticut Rhode Island market, Central Pennsylvania or New York New Jersey metro which is really the compression markets of Long Island, Central Jersey, White Plains and California Arizona with the hardest hit market that we still sort of negative RevPAR in the 6% range and EBITDA margin in the high single digit loss, so about 700 to 800 basis point loss in that market. Those markets really brought down the overall margin that we benefited from New York Boston Philadelphia.

Jay Shah

Yeah, Shaun if I can just add to that, some of these challenged markets where you’re still seeing negative RevPAR and unfortunately we only have a few of those left, you’re obviously going to have a significant EBIDTA margin pressure there. But even some of the once that were positive for us, Connecticut Rhode Island that was very much driven by occupancy, the RevPAR growth there and as we’ve said before, when you get the occupancy driven growth, you don’t have as robust as expansion in EBITDA margin and so as successful as we were at expanding margins in the markets that were robust where we’re still seeing occupancy stabilization and some markets where we’re still having challenges getting to positive RevPAR, that really weighed down the same-store EBITDA margin number.

Shaun Kelley - Bank of America

That's helpful. And then I guess could you talk a little bit about your initial observations on July? At this point, you kind of mentioned that there's been some movement in consumer confidence. With 90% of your business being transient, have you seen any changes to customer behavior, anything that would kind of stand out to you? Or has the trend remained kind of directionally what you saw in the portfolio through the end of June?

Jay Shah

Right now we are seeing July, obviously can’t go into too much detail about it, but we haven’t seen any significant shifts in July, relative to what we saw in the last quarter. So, that’s pretty encouraging, despite the headwinds that we are seeing out there, there seems to be a certain level of recovery that our markets are experiencing despite all of that and it seems to be consistent and sustaining through the uncertainty.

Shaun Kelley - Bank of America

Jay, on the acquisition front. Kind of what are you seeing out there right now in terms of opportunities, particularly in maybe New York, Boson, D.C.? We continue to hear from our contacts on the private side that the market activity has picked up. Are you seeing increasing opportunities? Do you think there's more opportunity for you guys today or do you think a lot of people are just testing the market, but these assets aren't priced to actually trade?

Neil Shah

Yes Shaun, there is absolutely been a flurry of brokered opportunities, hotel investment opportunities since the spring. I’d say that there have been more institutional assets brought to market this summer than we have seen all of last year for example. So there’s a lot of volume, pricing has been tough, but there seems to be multiple bidders this time, this summer at least. So as challenging as it is for us to make the numbers work on the acquisition, there seems to be buyers at some of these prices.

I think we are seeing kind of five to six caps in most markets around the country. I think for best markets like New York, DC you will see a handful of transactions below that, maybe in the three to four cap range, there is a little bit of a repositioning story to it as well. I think people are pricing at that level because there are expectations high single digit kind of RevPAR growth in a lot of markets and then the flow through it, that might come out of that.

I think the pricing is kind of towards the low teens un-leveraged return and that rate you can get some deals done it seems like. For us, they remain a little bit pricey. We still feel that our internal portfolio provides higher kind of EBITDA CAGR than what we were seeing out in the market place. In New York, in particular there’s been a couple of assets that are similar to what we own and operate in New York that have been on the market.

We have in May kind of second round bids on a lot of those because they are getting priced kind of around 400,000 per key, where it seems to be stabilizing for kind of select service assets and at the upper upscale level in New York, I think that even the new step that’s coming online being built is all in that 750,000 to 1 million a key range. So I don’t think pricing on an acquisitions market is going fall below that right now.

It’s challenging but I think we'll see more deals close this summer than we have seen so far in this recovery.

Shaun Kelley - Bank of America

And I guess maybe just one last follow-up on that. You kind of mentioned the internal portfolio and your returns on that. I mean, does that imply that you'll be investing more on the internal side and you see less on the acquisition front, or I think your CapEx guidance was up a little bit in terms of initiatives to the back half. But how are you kind of weighing what you can do, but without the development loan portfolio, what you've got in the unconsolidated JVs versus those external opportunities?

Jay Shah

I think you got the part about the acquisition. If we are not seeing attractive growth in the acquisitions that are the potential acquisitions that we are looking at that are matching up portfolio growth or exceeding it, we are probably not going to move ahead with that. I don’t know that the alternative for us is to use all of that money and allocate it for capital refresh, but I think we are going to selectively start putting money back into specific properties where we think we are going to get a good return on it.

Now the magnitude of capital expenditures that we have to refresh properties is somewhat limited, we'll go back and in some cases we have done two lobby refreshments at two of our at Philadelphia property and the Boston property and within a couple of months of doing them, we are seeing 5% jump in RevPAR and almost 8% or 9% of another and we’ve sort of benchmarked it against other existing properties of the same brand what we haven't spent that money and that’s incremental over the set, so there is clearly upside that we had from doing it. And I think you can drive rate from deploying capital that way, but we don’t have that many opportunities to deploy significant amounts of capital into the portfolio.

Neil Shah

Like those two lobby for refreshes, I think we are both less than $800,000. Yes, they are not big ticket items, but there are some opportunities to drive earnings growth that we are really focused on our acquisitions team is the same as our asset management team. So, we are looking for opportunities for our portfolio.

Operator

And from Baird Investment, we'll go to David Loeb.

David Loeb - Baird Investments

Can you drill down a little bit more on the Hyatt Place conversion in King of Prussia? Particularly interested in the cost of that and what the returns are likely to be. And also, Ashish, can you just talk about how that was reported relative to same-store and total portfolio and things like that?

Ashish Parikh

Let me just start of with how it is reported and maybe Neil will get some color on the actual renovation progress. As far as we have taken it out of same store and out of consolidated for the quarter David, the asset was closed as of April 2nd or 3rd for those that asset will not be reflected, the first time it would be in our same store going forward would be the fourth quarter of next year. The assets post open some time later in this month and the way we recorded our same stores as long as it’s in the quarter for the first day of the month on the quarter that it will into the same store. So, should be up and running at the end of the third quarter, it will be in same store next year for the first time. As far as the asset itself, it was a 156 room dual branded asset in King of Prussia that we fully closed and have started the conversion.

Neil Shah

It’s pretty remarkable transformation really, we have taken these two small midscale assets and transformed it into a single upscale asset that has very high curb appeal. Actually it looks really good and it's in a notoriously expensive and difficult to permit Philadelphia submarkets, so it makes sense to go through the effort. The total project cost it’s still being finalized, but somewhere around $7.5 million, highest provided $1.2 million in key money and they were really great to work with as well as we went through this process, but we took the 157 rooms and reduce it to 129 suites and so our new base is in the asset, we held it at 9.5 million originally or something like $70,000 per key. Now we own the 129 keys at about a $122,000 per key basis.

ADR on this asset in 2009 as the two midskill brands was $80. In 2011 at a higher place, we expect it to be at about $128 and we expect the asset to be a little stabilized around the $145 in ADR ultimately. So, the NOI goes from 2009 was $633,000. In 2013, we expect the stabilization to be well above $2 million in NOI, 2.5 million actually.

So first year into this asset will be earning it at a basis of $15.5 million and will own it at a double digit unlevered yield, something like an 11% kind of yield in its first year and its stabilization, it should be mid teens unleveraged yields. I think as a higher place to residual value has clearly improved pretty significantly, just on our cap-rate assumption but I think it also just much more marketable on sale and will drive significant earnings growth for us in the sub-market.

David Loeb - Baird Investments

Sounds like a really clever move. Clearly, the geography supports this. Are there other markets where you have mid-scale assets that you could jump to upscale? And frankly, were those mid-scale or economy brands?

Neil Shah

Well, they were mid-scale.

David Loeb - Baird Investments

The lower mid-scale and you're bringing them to?

Neil Shah

Yes, lower mid-scale. The [box] was developed, was a really good hotel and had good (inaudible). But you are right, it was under-branded for that kind of market, there is a handful of other opportunities. There is still significantly projects, so you want to make sure it’s a market that’s worthwhile to do it and because we did look at, should we sell this hotel and let someone else go through the process of converting it, should we convert it to a high place, should we convert it to a residence inn and we went through the math on this one and it made clear sense to do it. there is an asset outside of Boston, that could work also, that we are looking at, but it didn’t make sense this year, but hope we’ll see next year as an alternative to just selling it as an non-core. So there is a handful opportunities there.

David Loeb - Baird Investments

So Ashish, in the, all hotels, and the consolidated hotels, this was not in the current quarter, but it would have been in the last year quarter?

Ashish Parikh

It would have been in the last year quarter, right.

David Loeb - Baird Investments

So, basically it's 63 hotels versus 56. The 56 included those two. The 63 excludes them.

Ashish Parikh

63 excludes them.

David Loeb - Baird Investments

And Neil as you're looking at multiple bidders in certain markets, what does that tell you about your disposition opportunities? You've sold one hotel. You've got a piece of land under contract. But what about other disposition opportunities, is that, the assets that you would look at disposing, are there interested buyers and financing available for those today?

Neil Shah

Unfortunately they are not, what we are seeing a lot of interest in multiple bidders on, are large core kind of assets in the best markets around the country or at least kind of major markets in the country.

Our non-core portfolio really is I think the best pricing for that can be obtained by selling to regional operators and entrepreneurial kind of groups that require debt to make the deals work. And so we are just not seeing good pricing in that area. We have been exploring it, we are having lots of conversations about it, but right now we feel like 2011 or 2012 will probably be the better time to sell these assets. For sure right now on a wholesale kind of transaction, there isn’t the kind of market for these assets that we need, but opportunistically we keep talking about individual ones and hopefully we will be able to keep reporting one or two sales here or there.

Operator

And from Raymond James we will move on to Bill Crow.

Bill Crow - Raymond James

But one of the markets that you've mentioned as a potential entry is Miami or South Florida. Could you talk about prospects there? Is there as much competition to get into that market as you're seeing in the Mid-Atlantic and Northeast?

Neil Shah

We’ve been looking down there, but it’s been hard to make the numbers work there as well. There is, it is a market that we believe has some great five-year runway in growth and we think that there was enough distress and enough disruption in that market that you should be able to find some interesting opportunities and there is enough kind of unintentional honors that you should be able to make a deal but so far no luck.

Operator

We will move on to Will Marks, JMP Securities.

Will Marks - JMP Security

On the guidance with this total portfolio of hotel EBITDA margin improvement of 150 to 250. I just want to make sure I'm clear on, does that coincide with the first number, 40.8% margin up from 39.2% that you had in the quarter?

Ashish Parikh

That’s right, Will. If you look at the first half of this year, we had margin growth for about 157 basis points, in the total portfolio the consolidated portfolio and then for the quarter it was roughly a 160 basis points. With more of the growth in the back half coming from rates, we believe that range is 150 to 200 basis points from March.

Will Marks - JMP Security

I wanted to make sure that I was looking at the supplemental correctly and the numbers in terms of what that margin really means, since you hadn't shown it before, so. And then thinking about the back half of the year, third quarter versus fourth quarter, I just did a quick check. In the last two years, it had been exactly 58/42 in terms of percentage mix in the third quarter versus fourth. Does your larger exposure to New York change that at all, or does anything else impact that?

Ashish Parikh

The larger exposure to New York does change our fourth quarter pretty significantly. I think that overtime although the second and third quarter will be almost exactly the same, I think fourth quarter numbers will start to get closer to the second quarter numbers. So not there, but you could have higher rates in the fourth quarter, overall for the portfolio and just a little bit of occupancy because the rest of the portfolio does drop off after early part of November.

Will Marks - JMP Security

As we look at this year, third quarter fairly similar to second, and then fourth quarter over time should get that level, but that maybe not quite there this year?

Ashish Parikh

I think that’s accurate. It’s tough to say that, ever get to the third quarter, but it will get closer to the third quarter.

Will Marks - JMP Security

And then just lastly, I heard your maintenance CapEx number of 14 to 15. Did you give a dollar number of non-maintenance spending you're doing this year?

Ashish Parikh

At that 14 to 15, maybe maintenance isn’t the right word, that does include the lobby renovation that we discussed as well as some potential with making sure that all the TV is in the hotel are, the new high definition TV, so that really compensates all of our CapEx.

Operator

And from KBW we will move on to Smedes Rose.

Smedes Rose - KBW

But I was hoping maybe you could just talk a little bit about any transaction activity you're just seeing in New York for limited service assets maybe some color on what you're hearing about supply additions this year? It’s kind of like if you have any actual numbers of how many rooms you think will end up being added in the second half?

Neil Shah

In terms of supply, we are expecting in 2010 to have 6.4% increase in supply. In 2009, we experienced 4.9%. In 2011, we expect 4% so compared to kind of other national statistics you may have seen, we probably are little lower in 2010 and a higher little in 2011 because as we go out and look at all these sites, that’s where we see the opening dates looking like. So far this year we have already had nearly 5% of that 6% in your supply already occur.

And that is a significant amount of supply, above the historic CAGR for this market like 1.3%. The rooms that have opened, so it’s been about 2800 rooms that have opened so far. They have, out of that over 65% of those rooms have been luxury or kind of very high end boutique rooms, so they are serving a slightly different market in our properties. I wouldn’t suggest that we are insulated from the impact of this kind of supply, but I would say that we continue to believe that purpose-filled, high quality mid-priced hotels less than 200 rooms is still a highly underserved segment in New York and we will continue to win market share from other kinds of hotels in town.

The new supply, it’s something we’ve been experiencing now I think on the mid-scale side and the upscale hotels, the more of that product opened in 2009 and a lot of it opened in some of our existing core sub markets like Chelsea and Tribeca and the like. But New York is absorbing it. In 2010 we’ve had, we are expecting to have more sellout dates than we had in the peak year of 2008 for example. So the market is absorbing the new supply.

Smedes Rose - KBW

Well, just asset selling in the market now if there are any sort of per key pricing you're hearing about similar assets to yours?

Neil Shah

Similar assets are kind of around that 400,000 a key as I think the is the bid that kind of gets the deal done right now in this segment. I think there’s a lot of sellers that are expecting much higher than that, but I think right now there is multiple bidders around that price. There’s two assets that kind of did that mould that are on the market right now being marketed and will likely close before too long.

Operator

(Operator Instructions) [Brian Meekler] from Morgan Stanley.

Unidentified Analyst

Maybe you might be able to give us a little color. It looked like you had about 1.4% same-store ADR growth in the quarter across your portfolio. I'm wondering if you can give us any insight into how much of that you think was driven by a demand mix shift or at least a channel mix shift away from some of the OTAs, and how much of that might have been driven by actually the same customer paying more this year versus last?

Jay Shah

Yes, I think some of it is certainly a demand mix shift. You know we have seen as I mentioned in my prepared remarks. We have clearly seen mid-week demand firming up. So, that is an indication that we are seeing more of the corporate transient travel at our hotels and we are seeing leisure traveler and that’s certainly encouraging because the corporate traveler is obviously the price taker or is a leisure traveler is a price shopper. The question about OTA is an interesting one, and it’s something that we have also been encouraged by in the second quarter.

We are starting to see two things. We are starting to see that the booking window on some of the OTAs is widening out, and because it is widening out, we have better rate control on the online electronic channels. A lot of our partners, meaning the brands are also getting a lot more and been a lot more judicious in what kind of rates they are loading.

And so, overall you are seeing just generally less of a discount. So you are also seeing on top of having a demand shift, you’re not necessarily seeing, we are not necessarily seeing that much volume shift out of the channel, but we are seeing the pricing coming through the electronic channels going up as well. So, they are attractive dynamics, but both contributing to some of the ADR growth.

Now you asked about the same-store ADR growth and why it’s low. Ashish referenced before our California and Arizona market is still having significant challenges in getting the positive RevPAR very much driven by the fact that they are still struggling quite a bit with rate. When you get to our Central Pennsylvania market is still stabilizing and occupancy seeing close to no change in rate, very flat in rate. Connecticut, Rhode island which is a bright spot by way of growth in the same-store again was driven largely by occupancy and we actually saw a little bit of negative rate there. So, generally speaking the lower rate growth in the same store is just from markets that are still trying to stabilize by way of occupancy.

Operator

And we'll move next to Jeffrey Donnelly with Wells Fargo.

Jeffrey Donnelly - Wells Fargo

I was curious what you're hearing and seeing from the brands on brand standards. Because increasingly you're seeing some signs that assets are coming to the market, not necessarily in your markets, but where a select service or full service hotel is getting kicked out of a system. Are you seeing brands get more aggressive on these standards? And I guess any major shifts or initiatives that you think we should be aware of that might be in the pipeline for the next one to two years?

Jay Shah

I don’t know, across the next one to two years. I think you will see them tightening up on brand standards and asking that some of things that have been differed across the last couple of years be executed on as we move forward. I think I have mentioned before the brands were very good to work with through this last downturn, I think they are very sensitive to owners needs and made a lot of accommodations on capital expenditures.

But I think moving forward, they are going to make the argument that you are going to be able to drive incremental RevPAR because of this and in a recovering market, it’s a little easier to do. That being said, with the debt markets still as tight as it is, that still will pose a challenge I think to many owners and buyers like and so the question becomes, even though we are going to see the push is a lot of it going to get done and that I don’t necessarily have the answer to. You are certainly going to have more then ask then you have across the last couple of years.

Jeffrey Donnelly - Wells Fargo

Do you think that there'll be situations, maybe in your target markets or even some assets that you're looking at, where it's not necessarily the only straw but perhaps the final straw that might lead some assets to come to market that you guys could take a look at? Or, do you think that's not going to be as pressing say in New York or Boston or DC?

Jay Shah

I think it can be a great potential source for acquisitions, these hotels are all at varying levels, varying capital conditions and there are certain hotels where this very well could be the tipping point.

Neil Shah

It would generally be there, Jeff, it probably more likely and kind of full service hotels that are fifteen plus years old. So it’s not our typical terrain, if it creates a phenomenal opportunity obviously we would be underwriting it, but I think for a purpose built in the last five to seven years, select service hotels, I don’t know if TVs or new Lobbies will be the straw that breaks the camel’s back.

Operator

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

Jay Shah

Okay, well thank you. I'll thank everyone for being with us this morning. We are all in the office, if any questions occur to you after the call, feel free to give us a ring and we have nothing further. Thank you.

Operator

Ladies and gentlemen, that does concludes today's conference. We thank you for your participation.

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