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Hersha Hospitality Trust (NYSE:HT)

Q3 2010 Earnings Conference Call

November 5, 2010 9:00 AM ET

Executives

Brad Cohen – Senior Managing Director, ICR

Jay Shah – CEO

Ashish Parikh – CFO

Neil Shah – President and COO

Analysts

Shaun Kelley – Bank of America – Merrill Lynch

Will Marks – JMP Securities

David Loeb – Robert W. Baird

Bill Crow – Raymond James

Smedes Rose – KBW

Jeffrey Donnelly – Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust third quarter 2010 earnings conference call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

With that, I would now like to turn the conference over to your host for today’s conference, Mr. Brad Cohen with ICR. You may proceed.

Brad Cohen

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 trends and expectations, including the company’s anticipated results of operations to 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

Thanks Brad. Good morning, everyone. Joining me today on the call are Neil Shah, our President and Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer.

Our performance in the third quarter continued to demonstrate the strength of our platform. We delivered another industry leading quarter as we benefited from our market leverage, and our strategically assembled portfolio of upscale and select service hotels focused on the highest barrier to entry urban markets in the northeast. The combination of our markets and portfolio along with our revenue management and cost containment strategies has positioned us for a continued out performance.

In the third quarter, our performance was strong with our solid metrics at our consolidated hotels. We increased our average daily rate for ADR by 8.9% and grew occupant stay by 346 basis points resulting in RevPAR growth of 13.9%.

We closely tracked the economic activity in our four major metropolitan areas in the northeast and the related gross metro product to rooms ratio. A historical GMP of our four key markets has exceeded overall growth of the country’s GDP growth over the past one, three, five and 10-year periods, and we expect this out performance to continue.

Based on our research, the ratio of the GMP in these four core markets as compared to the rooms’ inventory is more than twice that of the national average. The high barriers to entry that these markets possess also leads to favorable supply pictures compared to the overall economic activity.

These indicators show the relative strength of our core markets and the ability of our portfolio to outperform do the recovery. For the lodging industry, the third quarter of 2010 marked another inflection point as the industry recognized its first quarter of ADR growth since the third quarter of 2008. According to Smith Travel, industry RevPAR increased 8.8% in the quarter, still largely driven by occupancy gains up 7.1% along with 1.6% growth in ADR.

As I’ve discussed, a larger percentage of our RevPAR growth was driven by rates during the quarter, and we aggressively managed our revenue management strategies to optimize our mix between occupancy and rate.

Our portfolio has maintained a high level of occupancy at approximately 78% over the past two quarters and more than 90% occupancy in our New York City portfolio. With this level of occupancy, we were able to focus on driving rate, allowing us to achieve our primary goal of expanding our margins and improving our flow through to EBITDA from incremental revenues.

The rate driven recovery that we had predicted is clearly materializing resulting in continued market improvements. During the quarter, we improved our margins by a 148 basis points year-over-year to 39.3%. We’re pleased with this progress but believe there is further room for expansion for several reasons.

First, in looking at where we are now compared to our historical peak, our overall hotel EBITDA margins are approximately a 100 basis points below the level in 2008, but our rates are still more than 15% lower than at the same time in most of our markets and over 20% lower in the New York City portfolio.

Furthermore, our portfolio has evolved since 2008, and with our younger more urban focused assets along with our more efficient expense structure we believe margin improvement should continue for several years.

The second reason for optimism is based on the strength of our core markets and the simultaneous wave of urbanization. Our acquisition efforts are focused on the best urban markets in the country with a particular focus on New York and Washington DC as you know.

Growth in relative and nominal RevPAR in these markets has clearly been higher than the rest of the country and is expected to outpace that of the majority of the country throughout the cycle. Even within these markets Hersha has outperformed. RevPAR growth of 16.1% at Hersha’s same-store Manhattan portfolio was a 170 basis points better than Manhattan overall.

Manhattan as a whole absorbed rate increases with ADR up 12.3% both in our portfolio and in the market, but we captured more than our share driving more occupancy growth 3% versus the market at 1.6%, and maintaining a higher level of occupancy 92.2% versus 89% in Manhattan overall. These results illustrate our portfolio’s ability to meet or exceed the overall performance in Manhattan is [ph] recovering.

From a supply demand perspective, the dynamic in most of our markets including New York is very attractive. The vast majority of the expected new supply and select service was delivered in 2009, and in early 2010. Current trends have clearly proven that there is enough demand to absorb the new assets that have come on line.

Looking ahead to 2011, most of the new suppliers anticipated to be in luxury and boutique categories, and given the markets continued demand growth we believe that New York will continue to have a favorable supply demand and balance for the foreseeable future.

The third element expected to contribute to the growth is the stabilization of our recently acquired hotels. Over the past year, we’ve taken advantage of market dislocation and have enhanced our portfolio with newly built New York and Washington DC assets.

Given their young age as these properties stabilize and increase their market share, we expect a higher portion of our revenues and EBITDA to be contributed from these assets.

Finally, we expect attractive growth as a result of our enhanced operations. Through this downturn our asset management team and our operators focused on expense control methods and we’ve adopted a more efficient cost structure that we believe is sustainable moving forward. We’re focused on limiting our expense growth over the next few years and believe that these initiatives along with this sustained market recovery will generate further EBITDA and margin expansion in the coming quarters.

Based on the drivers I just described, we’re optimistic there is substantial organic growth potential on our portfolio. We also believe that our external growth prospects and we’ve been pursuing they need to enhance those prospects in our portfolio. We will continue to be selective as we pursue acquisition opportunities, but we do believe that attractive opportunities still exist in our target markets, and are likely to continue to present themselves across the next several years.

Our balance sheet is stronger than it has ever been in the company’s history, giving us the capacity to pursue these acquisitions, while prudently managing our financial leverage.

We’re pleased with our progress in executing our long-term strategy of increasing our presence in the highest growth markets in the nation. The improving market and economy is attracting added attention from capital to the area, but we will remain disciplined and do not plan to chase properties that don’t meet Hersha’s underwriting standards.

We’ll continue to pursue assets with similar economics as the transactions that we completed this year. Of the eight hotels we have acquired over the past two years, seven were not widely marketed deals. Through our network of relationships as the largest owner of select service hotels and urban northeastern markets, we’ve been able to identify and pursue attractive accretive deals, and we’ll continue to select as we pursue such acquisitions.

The outlook for Hersha is solid and we are still in the early stages of the economic recovery. Our attractive portfolio with an increased presence in the strongest gateway markets in the country combined with an improved cost structure and expanded financial flexibility shall allow Hersha to drive robust growth as the recovery accelerates.

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

Ashish Parikh

Great, thanks Jay. I’m going to focus on our balance sheet, liquidity, capital transactions and increased financial outlook for 2010. One of the company’s primary objectives over the past few years has been the strength in our balance sheet in order to position ourselves to take advantage of the current market dislocation.

To that end, our financial position and access to capital is stronger than it has ever been in Hersha’s history. We have continued to make meaningful progress toward our goal of bringing our debt-to-EBITDA ratio to 5 times or below and our debt enterprise value below 45%.

With our latest equity offering, new credit facility, and strengthening of the secure debt market, we believe that we are very well positioned to capitalize on opportunities as they arise and to remain focused on driving our organic growth.

Our October equity offering significantly bolstered our financial position as we sold 28.75 million common shares for gross proceeds of approximately a 166.8 million. We used the net proceeds to repay a significant portion of our outstanding line of credit and secured debt on several of our assets. We intend to use the remainder of the offering proceeds for acquisitions and for other general corporate purposes.

We’re also continuing our effort to improve the age of our portfolio and locations of our properties through the strategic sale of hotels that do not fit our growth profile. The proceeds from these sales will also help us continue to fund our growth and reduce our debt as we redeploy the capital and resources into higher return opportunities.

Although we do not have any definitive contracts on these assets, we are entertaining several letters of intent that are encouraged by the additional transaction activity that we have witnessed over the past few quarters.

From an acquisition perspective, we added the Hampton in Washington DC to our portfolio on September 1st. The September results for the assets were very encouraging as the asset recorded a primarily ADR driven RevPAR growth of 10.7% and a 52% EBITDA margin for the month.

We also recently finalized negotiating and documenting a new $250 million senior secured revolving credit facility, which will replace our current $135 million facility. We expect to execute the new credit agreement in the next few days and this new credit facility matures in three years with an additional one-year extension option. The new facility significantly increases our financial flexibility and will help us continue to execute on our growth strategy.

Regarding our capital expenditures, our primary capital investments over the past few years have been limited to critical capital maintenance, but we did initiate several deferred initiatives including lobby renovations for some of our urban courtyards earlier this year.

As the recovery progresses, we are evaluating several larger capital projects for the fourth quarter and for 2011 at the remainder of our courtyards and for some of our larger Philadelphia and New York City assets.

We will be very focused on utilizing our capital dollars for the highest ROI projects and look to bolster our assets penetration in market share in our core northeast gateway markets through these capital projects. Excluding the higher place conversion, we have spent approximately $5.5 million through the end of the third quarter and we expect to spend an additional $6 million to $7 million in capital expenditures during the fourth quarter of this year.

We currently maintain approximately $5.5 million in CapEx reserves that can be utilized towards future CapEx. Let me now turn to our guidance and expectations for remainder of the year. Consumer spending in GDP growth remains muted across the country but the recovery in lodging sector is benefiting our core markets disproportionately. We are optimistic about the remainder of the year and have increased our expectations for the portfolio.

For our total portfolio of consolidated assets, we now expect RevPAR growth to be in the range of 12% to 13% compared to our prior expectations of 10% to 12% growth. We also anticipate hotel EBITDA margin expansion of 200 to 300 basis points compared to the prior expectation of 150 to 250 basis point increase. On a same-store consolidated basis, we still expect RevPAR to increase between 3% and 5% and margin improvement of between 50 to 100 basis points.

This concludes my formal remarks. Let me now turn the call back to Jay.

Jay Shah

Operator at this point we can open the line for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) And we’ll go first to Shaun Kelley with Bank of America – Merrill Lynch.

Shaun Kelley – Bank of America – Merrill Lynch

Hi good morning guys.

Jay Shah

Good morning Shaun.

Shaun Kelley – Bank of America – Merrill Lynch

So quick question first of all I think in the prepared remarks you mentioned the strategic sale process of some of the, I guess the non-core assets and a couple of LOIs on that front. Could you give us a little bit more color there, are those on specific assets and kind of how do you think about the potential for a portfolio sale over the next eight or six to 10 months.

Ashish Parikh

Sure. Shaun, this is Ashish. I’ll address that one. When we look at the dispositions that we’ve done to-date over the last 12 to 16 months, most of them have been one-off. So we’ve sold five assets primarily in the Central Pennsylvania market and a couple in the other mid-Atlantic markets.

We have a few LOIs on one-off opportunities, but we do – we are currently entertaining one LOI on a portfolio of between six to eight assets. We’re encouraged by that particular group. They seem to have done a lot of due diligence on the assets to-date, there is still no certainty that there is going to be a purchase and sale, but we’ve seen renewed activity from larger groups as the secured debt markets have improved.

Shaun Kelley – Bank of America – Merrill Lynch

And just to be clear Ashish, that activity is coming primarily from the private side, is that a fair assessment?

Ashish Parikh

That is a fair assessment. It’s coming primarily from regional owner-operated groups or private equity funds that are looking to acquire in the Northeast.

Shaun Kelley – Bank of America – Merrill Lynch

Got it. And then just one on the New York portfolio, so obviously the results are clear, kind of continued to trend higher. When you had originally purchased those assets, you bought them I think generally speaking in 8 cap the 38th Street hotels. But you had talked about stabilization in the 12 cap range. Have those expectations changed at all, I mean do you think you can, kind of if you were to be doing it today, like what would your assessment be for where those assets stabilized versus your expectations call it nine months ago?

Jay Shah

Shaun, this is Jay. It is difficult to say. I think we’re certainly very encouraged by the recovery in New York. And it’s showing some signs of strength and there seems to be a clear sustainability to the recovery, just I don’t know that we’re all that, have that much clarity on exactly what the magnitude of the recovery is going to be. I think if we were to look at an acquisition today and look at some of the growth rates we’ve achieved, I don’t know that I would be all that quick to imagine that we’re going to do even better than a 12 cap at this stage, just because it’s early.

To some degree we had a sense that we were going to have a strong recovery in this market and that was a part of our underwriting. And we’re encouraged that it’s coming to pass as we expected, but how much outperformance beyond our expectations, we’ll have is still unclear. I’ve mentioned before that in the past cycle, we had four years of double-digit RevPAR growth in New York with one year being north of 20%.

Now certainly the magnitude of that recovery wasn’t expected to be that high. Now whether we have that again this time or not, it’s just unclear. But I think even in the conservative case, I think our expectations are very realistic.

Shaun Kelley – Bank of America – Merrill Lynch

Got it. And then just to clarify one more and I’ll pass the floor along. But at the very beginning you talked about I think to the New York portfolio, and I just want to make sure I got the numbers right. You’re still 20% below, was it RevPAR or rate that you were talking about in terms of the 20% number?

Ashish Parikh

Sure. Shaun, from the third quarter of ‘08 to the third quarter of 2010, on a RevPAR basis we are 22.7% below and on an ADR basis about 21.8% below.

Shaun Kelley – Bank of America – Merrill Lynch

And that’s for the New York portfolio exclusively, not for the overall company, right?

Ashish Parikh

That’s correct. That is just for our same-store New York assets.

Jay Shah

Yes, and its – in corresponding margins for the overall portfolio, what I was referring to in my remarks is that we’re about 100 basis points off of our peak, our last third quarter peak. When you consider Q3 ‘08 which was the highest Q3 margins, we’ve had, that was at about 40.3% for the portfolio. And as you know the consolidated portfolio was 39.2% for Q3 of 2010. But really we’ve got a lot more RevPAR and rate runway and we’re actually extremely close to our past margin peak. So that leads us to be optimistic about margin growth.

Shaun Kelley – Bank of America – Merrill Lynch

I think we’ll follow-up. Thanks guys. We really appreciate it.

Jay Shah

Okay, great. Thanks.

Operator

And we’ll move next to Will Marks from JMP Securities.

Will Marks – JMP Securities

Thank you. Hello Jay, hello Ashish.

Jay Shah

Hi Will.

Will Marks – JMP Securities

Just taking that gross margin question comment a little further. So I’m sorry, the margin you gave for ‘08, that is including – that would include the assets you’ve bought since then so that’s on a pro forma basis?

Jay Shah

No well, that was the actual margins of the portfolio in 2008. Most of the assets we’ve purchased since then weren’t open at that time.

Will Marks – JMP Securities

So wouldn’t then the pro forma number be actually higher because you have more of concentration in New York?

Jay Shah

Absolutely, I think that’s kind of what we’re saying is we are on a portfolio basis, very close to our peak EBITDA margin in ‘08, but since then we’ve acquired so many assets that have higher margins and higher RevPAR. We would anticipate much higher overall EBITDA margins for the company going forward.

Will Marks – JMP Securities

Okay. Yes sorry, I know it’s early here in the West Coast [ph]. Okay, so next question. On the guidance, I’m a little confused, if we think about what has changed since you gave your last guidance, it’s really, it’s one asset. And if I think about it that way you have raised the total but you haven’t raised the same-store. So is it just that one asset that moves the guidance or it’s actually the environment better than what you saw last quarter. If it is better, then why wouldn’t you have raised the same store?

Jay Shah

Sure, well it’s the – the same store for the full year Will, would include all of the assets that we have purchased in 2010. So it’s starting in January the pre-owned New York Holiday Inn, Wall Street, Hampton Inn, Washington, D.C. are all bolstering. So none of those assets would be considered same-store until really next year, until the second quarter of next year.

Will Marks – JMP Securities

Right, but I understand that so you had those assets, you knew about those assets when you reported the second quarter and so now, here we are a quarter later, you’ve made one additional purchase and you’ve moved up the total but you haven’t moved the same-store. So does that imply that the total has moved up just because of the D.C. assets?

Ashish Parikh

No, the total is for the year Will. So, (inaudible) yes it’s all of the assets, it’s the New York and D.C. assets that’s helping it. So it’s the 12% to 13%, goes from 10% to 12% for the entire year of 2010.

Will Marks – JMP Securities

Okay.

Ashish Parikh

It’s not a quarterly guidance number.

Will Marks – JMP Securities

Right, okay. I understand. I can call you if I have further questions on that, I mean still we are little confused. But remind me on your G&A, it seemed to move up a little bit. Should we consider third quarter a good run rate?

Ashish Parikh

I think it is.

Will Marks – JMP Securities

Okay. And then on CapEx you gave $6 million to $7 million for the fourth quarter, any thoughts on next year?

Ashish Parikh

When we look at this year. So our total spend will be somewhere in that let’s say $12 million to $13 million range. We do expect next year’s number to be higher than that. We don’t have a final number yet, but I would anticipate probably somewhere in the $17 million to $20 million range based upon some of the larger New York assets that we’re looking at putting some CapEx dollars into.

Will Marks – JMP Securities

So that would be a total CapEx including any maintenance?

Ashish Parikh

Yes, total CapEx including maintenance.

Will Marks – JMP Securities

Great, okay. That’s all for me. Thank you very much.

Jay Shah

Thanks Will.

Operator

And the next question will come from David Loeb with Baird.

David Loeb – Robert W. Baird

Ashish, just to try to clarify from Will’s perspective – Will’s question. You’re basically saying that the five that you’ve acquired this year are looking better than they were a quarter ago.

Ashish Parikh

That’s correct.

David Loeb – Robert W. Baird

So that’s really what’s behind that?

Ashish Parikh

The five, that’s right, and we didn’t have D.C. last quarter. So the four are looking better and then D.C. is also helping.

David Loeb – Robert W. Baird

Adding to that, okay. And on the margin comments, is it fair to assume then that the potential peak margin is substantial higher for the portfolio given that you’re ways from peak RevPAR in New York but your margins were already pretty close to peak?

Ashish Parikh

I think we believe that RevPAR and margins at their peak this cycle will be higher than the previous cycle. And again by how much David, I’m not certain of that. We will have – costs will increase somewhat, we’ve got some cost containment measures that are slowly unwinding, mainly around the area of payroll which is our biggest expense. And it deals with management incentives and it deals with wage increases and so on and so forth. But generally speaking, it’s going to be higher, I just don’t have a lot of clarity on exactly how much higher it will be, but we’ll certainly keep on being very aggressive with our operators through our asset management program.

We continue to look for ways to create more efficiency at the operational level. And we’ll keep on it.

David Loeb – Robert W. Baird

To kind of turn that around Jay, as you look at flow through, incremental flow through from incremental rate increases, where do you expect that to be for the whole portfolio, for every dollar of increased revenue over the next year or two, how much of that do you think you can flow through to the bottom line?

Jay Shah

We expect when it’s a purely rate driven incremental dollar, our expectation is that that’s going to be a 65% to 70% flow through to the bottom line. And that’s obviously very exciting number, but you have to kind of balance it against operators and markets that don’t always get to that level. So we’ve got assets right now in Scottsdale at Northern California where we’re seeing negative flow throughs that are significant and we’re continuing to work with those managers to change that.

And so when I say 65% to 70%, I think realistic expectation should probably be around 50% until we make some changes in the portfolio.

David Loeb – Robert W. Baird

And that 50% would take into account if there (inaudible) some occupancy gain as well?

Jay Shah

Yes, some occupancy gain as well. When we consider a purely op driven incremental dollar is probably a 40% to 50% flow through, when it’s after you’ve achieved a certain level of occupancy in a purely rate driven incremental dollars. It’s like I say 65% to 70%.

David Loeb – Robert W. Baird

So this one is for Neil. Neil we’ve seen some kind of eye-popping cost per room for recent developments in New York that don’t seem to be causing any developers to fringe. What do you think that is doing to the markets for existing hotels in New York, and I guess I’m wondering your hotels, what are the implications for the value per room of your assets but also for in-light of acquisitions and future acquisition potential?

Neil Shah

I think last quarter we talked about kind of our view on value to be – in the marketplace to be around for our asset class somewhere in between 400 – around 400 a key. I think after the recent kind of transactions both on the acquisitions place – acquisitions marketplace as well as the eye-popping development number that you mentioned $1.6 million, $1.8 million per key for luxury assets. I think that we believe that the value of the portfolio is going up in New York and think that what we see from kind of on off-market transactions is for our asset class edging closer to 500 a key and that makes it hard for us to continue to acquire in New York. David, is that helpful?

David Loeb – Robert W. Baird

Yes, certainly.

Neil Shah

Yes.

David Loeb – Robert W. Baird

Does that mean you’re down in New York, do you think you (inaudible).

Neil Shah

Actually little bit down but we just have to work a little bit harder to find these deals.

Jay Shah

And faster.

Neil Shah

And faster I guess. But it’s been challenging. We’ve been working – we’ve spend a lot of time with owners and developers in New York and it looks like the easy pickings are definitely done in New York. And there is increasing expectations on value by all owners in New York.

David Loeb – Robert W. Baird

What a difference in your mix?

Neil Shah

Yes.

David Loeb – Robert W. Baird

In a lot of ways. So are you concentrating your acquisition effort then on Boston, Philadelphia, Washington?

Neil Shah

Yes, we’re still spending a lot of time in New York, but we’ve been trying to really get local in Washington, the entire management team has been spending a lot of time down there, meeting owners, developers and potential partners in some cases. And I think we’ll have, I don’t know, we’re pursuing a bunch of deals there right now, but I think we’ll probably be more productive in Washington than we will in New York in the next 12 months. Boston, Philadelphia are absolutely target markets but we’re not seeing products available. There is just not a lot of sellers in those markets right now.

David Loeb – Robert W. Baird

Okay, great. Thanks. It’s very helpful, thanks.

Operator

We’ll move next to Bill Crow with Raymond James.

Bill Crow – Raymond James

Good morning guys. Couple of questions, let’s stay with New York first of all. Can you kind of give us your thoughts on what the market might do from a RevPAR perspective next year, not your hotels per se but just where you think the market is heading, obviously tougher comps in the rest of the country as we think about next year but also better markets?

Jay Shah

Yes, I’ll tell you driven mainly by the fact that we’ve been adding around here that we are 22% off of peak RevPAR, I would expect you’re going to see despite the difficult comps, I would expect you’re going to see low double-digit growth next year, whether its low-teens or a 11%, 12% or whether or mid-teens, I don’t know but I suspect it’s going to be double-digits next year.

Bill Crow – Raymond James

Okay, that’s great. And then the announcement, I guess it was earlier this week between Hyatt and Hersha Development on a couple of assets, I think it was couple of assets in midtown. What does that do to your high flying, is there any implications as far as the [inaudible]?

Jay Shah

Well on those we have mezzanine position on both of those assets. We feel real good about the fact that the mezzanine positions even more secure with the branded assets. So I think that was positive.

From a pipeline standpoint, we have the option to – we have the first right of offer on those assets. And so we’ll – we’ll basically have a pretty good look at what those assets are going to trade at and we’ll be in a position to make a decision on that I would say sometime around the middle of next year on one and towards the end of the year on the other.

The assets are going to be very attractive. I think they’re going to have great growth prospects, but I think we’ll have to take a look at what the market is doing at that time and what type of growth we believe we’ll be able to generate from those assets. I think they’re going to be very attractive to a wide array of buyers, including other institutional buyers, other foreign buyers and even private groups, because just because they’re new, they’ll be unencumbered of long-term management, there will be a branded asset in a terrific location.

So I think the pricing on them is going to be pretty heavy and I don’t know if it’s something that REIT will pursue or not. It might not be a good economic fit, but again depending on what the market is doing, we’ll see.

Bill Crow – Raymond James

Do you have any – can you disclose ballpark what it costs for you to build those?

Jay Shah

We are – Bill, we haven’t done that to date, which is for the sake of the private developers and Hyatt sake. But as we get closer to discussing the eventuality of those assets, we’ll talk about it then.

Bill Crow – Raymond James

Fair enough. And then, finally, the LOI on the asset sales, I think it was mentioned maybe it was at eight hotels that are involved.

Jay Shah

That’s right.

Bill Crow – Raymond James

And did you disclose and maybe I missed it, the price or the amount of the LOI.

Jay Shah

We haven’t Bill. It’s sort of – the LOI is still it’s between six and eight assets. The group is still doing their due diligence. So from a negotiating standpoint, we’d rather not disclose the price.

Bill Crow – Raymond James

700, 800 rooms, somewhere in that ball park. 700, 900, I should say, somewhere in there.

Jay Shah

Yes, that’s in the range.

Bill Crow – Raymond James

But when that gets done, is it fair to assume that that is a representative sample of your suburban or noncore or what do you want call portfolio you’ll be looking to pricing in that transaction?

Jay Shah

I think when you see the pricing on the transaction, it’ll probably be a lower priced portion of the portfolio, because they’re more secondary market. Most of our suburban portfolio are still sort of in primary suburban office markets, and this core portfolio is a little more secondary market. There is some highway trends add in there.

I mean there is some highway assets in there and some of them are in secondary markets with lower barriers to entry. So I think you would see that the value of some of our other non-urban assets is higher than these warrants that we’re talking about. That being said, people are paying okay cap rates for cash flow. And so we think we’ll do just fine and there is a market emerging for them, so it’s a very pretty great time for us to skew some of our metrics upward by strategically selling these.

Bill Crow – Raymond James

Yes, no, I completely iterate and I think that’s a great time to be aggressive in asset dispositions Very good, appreciate it guys.

Jay Shah

Great, thanks.

Operator

And our next question will come from Smedes Rose with KBW.

Smedes Rose – KBW

Hi, thanks. I was just wondering as you think about New York supply coming on and New York you guys usually have a very good handle in that, and I’m just wondering if you could maybe talk about what do you think where we are now kind of in the surge of supply and kind of what how that’s look for next year. And because things are going so well, would you be surprised to see another round of significant development of folks trying to develop hotels in New York.

And then I guess on that, I understand in DC, it sounds like the convention center has finally gotten everything lined up to build at anchor hotel there and I know it’s a few years out, but does that have implications for your recent acquisition which is also near the convention center?

Jay Shah

Yes, let me start with the New York questions. The first question, let me answer your second question first, because it’s kind of an easy one. Do we expect there to be a lot of supply in New York? You asked in addition to –

Smedes Rose – KBW

Yes, I was just saying, I mean we know what’s coming on now pretty much. I mean we can Smith Travel numbers. I guess I would be interested in your sense of, is all of that is for – that’s sort of in the pipeline, do you think it’s on-schedule too, it looks like it probably will open now, and I’m wondering I got to see availability of construction financing for folks to come in and do another round of hotels from here.

Jay Shah

Right.

Smedes Rose – KBW

Because as far as I can tell, it should peter out next.

Jay Shah

Yes, no, that’s exactly right. So let me – I will hit the menu order you gave them to me. I think generally the bulk of supply in the – in our competitive segments and our competitive geographic markets has in large parts been developed already. When I say sub, I’m saying geographic sub markets within Manhattan has largely been delivered in 2009 and in the early part of 2010.

Having said, there is still some – there are some delivery expected, there’s another hotel towards the end of the year. And then in 2011, there is more assets coming on line. But they’re generally more luxury and lifestyle boutique hotels and are not directly competitive with our portfolio in New York. And that being said, it is additional inventory in a rather on Manhattan which is if not directly competitive, derivatively competitive. So we do have some as it’s coming onboard.

What we’re encouraged by is the strong occupancy numbers that we’ve been able to maintain throughout the period of all this supply being delivered. I think that has suggested to us if there is an inherent level of demand for New York, and that’s not going to go away. Secondly, when you looked at when we think about the supply delivery question is what are we doing with rates. So if we’re maintaining a 90% occupancy and we’re driving rates at the rate that we are, double-digit rate growth. Then we believe that the new supply has already been absorbed and that we will be able to absorb whatever else comes into the marketplace. So that’s our view on supply in New York.

And so I think that supply board was dodged. And I said also before that supply when considered in totality across this last seven-year supply cycle is not all that different from the previous seven-year supply cycle, it’s about a 2% supply growth CAGR, they’re 2.1% supply growth CAGR, between 2003 and 2010.

And after – in the previous seven years from ‘96 to ‘03, it was about 2% CAGR, so like I say it’s very similar. And even after that kind of supply that [inaudible] in the last cycle, we had as I mentioned earlier four years with double-digit growth. So I think we’re going to see – we’re going to see a fairly strong recovery in New York as has been expected despite the fears the industry held for supply coming into New York. I think new supply coming into New York despite the strong recovery numbers this time is going to be very constrained.

Construction financing, we’re just now starting to see acquisition financing. The acquisition financing is coming out at very relatively low LTVs, when you consider where hotels are with their EBITDAs and NOIs. And so when you take a look at the type of LTVs folks are getting, if it’s a 55%, 60% today that’s likely to look at 35% or 40% in a year-and-a-half, two years.

So that suggest us that the acquisitions financing markets still isn’t – it’s re-emerged and it’s a good thing, but it still has some time before it gets seasoned and becomes more robust, and you normally don’t see a construction financing market reemerged until after you’ve seen the acquisition financing market firm up a little bit. So that’s why we’re not that worried about new supply in New York in this cycle for at least the next I would say, I don’t think you’ll start seeing construction loans hitting the New York streets for at least another 24 months, 18 to 24 months say at the earliest.

Smedes Rose – KBW

That’s helpful, thank you.

Jay Shah

And then you’ve got four-year development cycle. So they will be outside of this cycle. And in Washington DC, the convention center is – there has been an announcement of a headquarters hotel being built at the convention center. You’re asking your question I know because our hotel is about a block and a half from the convention center on Massachusetts Avenue. We feel very – we feel pretty good about the fact that there is a headquarters hotel coming. We think it’s generally good for the convention center’s business and the convention center market.

I think we’re going to attract – if any of the ability to attract stronger and large conventions by having a large headquarters hotel that is adjacent to the center and we generally benefit before, during and after large city wide and even non-city wide conventions in that market.

So we’re pretty bullish on that hotel, but it’s going to be – that’s likely to be a 40-month construction project. So once again even though it’s been announced, I don’t know that we’re going to see much effect from the headquarters hotel in this cycle, but it’s a good long-term fact for the hotel.

Smedes Rose – KBW

Okay thank you.

Operator

At this time we have on question remaining in the queue. (Operator Instructions). We will take our next question from Jeffrey Donnelly with Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Good morning, guys.

Jay Shah

Hi Jeff.

Jeffrey Donnelly – Wells Fargo

I just wanted to follow up on some of the earlier questions, I think the one that Bill had asked about New York. I’m curious what markets you think you see RevPAR actually accelerate in the 2011 from where we’ve been running and I call it the back half of 2010 moving from like a 5% growth to whatever 6% or 8% growth, and conversely where you think there could be some signs of deceleration because of difficult comparisons?

Jay Shah

I think we’re early enough in the cycle that I don’t expect that there could be that many markets that have deceleration in RevPAR growth. I think – I’ve looked at – as we look at a lot of the other top 25 markets and as we’re checking out their growth rates, in some cases, you see some big RevPAR growth numbers, but when you take a look at the nominal RevPAR in those markets, they’re off of very small basis. And so there I think the comps become a little more difficult because, A, it didn’t move up that much in dollars and cents in the first place, and you’re in a market that’s still facing a lot of headwinds.

So, I think when you take a look at markets that have low nominal RevPARs, I think those you got to take a really close look at and wonder if you’re going to have a similar trajectory that you would in markets that have generally higher nominal RevPARs and stronger metropolitan demand generators.

Jeffrey Donnelly – Wells Fargo

It’s helpful. And then I guess to building on I think Smedes’ question, I’m happy to delve into the prospects if supply goes outside of New York City. Generally speaking, I think select service profitability is certainly below peak, but then again so are land prices and construction costs.

So I would think that development yields spreads to borrowing costs are approaching probably where they were maybe 2005, 2006, so again it would seem like outside of markets of New York development certainly could accelerate in 2011, and at least I’m seeing more instances – seems like every week as construction lending is picking up. I guess how realistic is that view, and I guess first question? And second is how deep do you think the pipeline of projects is that was stalled in 2007 or 2009 that maybe could quickly come back to activity?

Jay Shah

I think your point about development in non-urban more secondary markets on select service is accurate, and is one of the reasons we really focused our portfolio the way we have in urban markets. When we talk about the debt markets re-emerging, obviously we’re talking about larger lenders national, international lenders, institutional lenders. But when you get into the secondary and tertiary markets for that matter, a lot of the relationship – I mean a lot of the lending is on a relationship basis. You’ve got community banks where there is a group that owns a hotel or two and a couple of strip malls, and as you know has always paid their bills on time and they will get loans.

So I think you’ll probably see some of the stuff that was stalled in the secondary markets and in the smaller urban markets come back. With that being said, it’s still not – there’s only so many loans the community banking sector in this country can make. So I think you’re still going to see a more attractive supply dynamic for those secondary market limited service hotels than you have in the past. But it’ll certainly be more growth I think than you’ll see in the urban markets.

Jeffrey Donnelly – Wells Fargo

All right. I don’t think you necessarily [inaudible] instantly, but have there been any incremental suppliers arguably not ideal, but –

Jay Shah

Right.

Jeffrey Donnelly – Wells Fargo

I’m curious is that – maybe leads you to think that in some of those cases you are nearing a point where construction make sense that it might cause you to, I guess, I’ll call accelerated rethink, how you get out of some of the markets that you’re in parts of Pennsylvania or elsewhere.

Jay Shah

I’m not as concerned about new supply growth in those markets, because generally speaking, they are not – they didn’t go down that much and they haven’t gone up that much, and they’ve had generally pretty stable supply pictures across a long period of time, so I’m not as concerned about that.

The fact that we want to accelerate the disposition of these assets is driven by a lot reasons, but I’m less concerned about that. I don’t think we have that kind of a threat. I think it’s just a lost opportunity to recycle some of the capital that’s – the equity that’s tied up in these assets, and I think we have an opportunity to sort of take off – take the weights off some of our EBITDA growth and our RevPAR growth.

Jeffrey Donnelly – Wells Fargo

Okay great, thanks guys.

Jay Shah

Thanks.

Operator

And it appears there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Jay Shah

Thank you, operator. Let me just thank everyone for being with us this morning. As we always are we’re available in the office here if anything occurs to you after the call. Thanks again.

Operator

And that does conclude today’s conference call. We’d like to thank you for your participation.

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