Hersha Hospitality Trust's CEO Presents at Bank of America Merrill Lynch 2012 Global Real Estate Conference (Transcript)

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 |  About: Hersha Hospitality Trust (HT)
by: SA Transcripts

Andrew G. Didora – Bank of America/Merrill Lynch

Welcome to the second last panel of this year’s Real Estate Conference. Checking in or out with our four distinguished Lodging REIT CEO’s. For those of you who don’t know me, my name is Andrew Didora and I cover the Lodging REIT from the equity research side for Bank of America Merrill Lynch. And at the other end of the panel is Shaun Kelley, the Head of Bank of America Merrill Lynch’s equity research coverage in the Gaming and Lodging space.

From the company today, we have CEO, Mark Brugger of DiamondRock Hospitality. Jay Shah, CEO of Hersha Hospitality; Michael Barnello, CEO of LaSalle Hotel Properties, and Ken Cruse, the CEO of Sunstone Hotel.

So gentlemen not certainly an interesting time in the hotel space, and Ken, I think you mentioned this to me in one of our most recent conversations that the industry is now in its the 30th month of the RevPAR recovery, ever since turning positive in the beginning of March of 2010. The last cycle we showed a RevPAR recovery that’s about 60 months average cycles, of the last 70 months or more. So ever since turning positive this cycle, overall RevPAR has been pretty steady in the 7% to 9% range. Ken, just curious, what you attribute this steadiness to?

Kenneth E. Cruse

Well, this recovery has been interesting the steadiness to date; it has been a product of business trends more than anything for our portfolio, and just in the business trends, the recovery actually occurred before the recovery in RevPAR for our industry. So the business trends probably is going on for greater than 12, 35, 40 months. What we have is today and what we are now starting to see over the last three, or four quarters is the Group business. So strength in the business has been very good. Now we’re seeing an added layer of strength and demand trends on some good business.

We’ve talk about peer some and all of our peers have said similar statistics, where pace of the industry is up 6%, pace for the team is up 13% and more importantly productivity, which is our Group room focused our future period, year-to-date is up 20%. That is a hugely positive background, I think we’ve got, good urban growth of continued growth in the industry, but to answer your question directly that to-date trend is larger than field by business trends and for those travelers are cutting back on their own.

Andrew G. Didora – Bank of America Merrill Lynch

Okay. Mark how does aligned with what you’re seeing, I mean you guys also have a number of larger Group boxes Marriott 20 year preferred partners and currently, they have a little line on the Group side so, are you seeing the same trends that Ken seeing and kind of did you guys see a bit of difference going into the second half in terms of some of that booking behavior because a we know a lot of it’s really tied and be forth in we’re locked into book for the route, but it seems like that might be starting to change?

Mark W. Brugger

This is trying to came back, we’re seeing in the Group side this is the best year, if you look at the kind of normal recovery of Group the trend lines over the last couple of cycles, it’s a little later in the cycle coming back in some of the other cycles we've seen particularly in the last two. So Group is coming back, now you’re seeing the pace increased throughout this year, it is market-by-market, it is quarter-by-quarter.

We're seeing what we saw a lot of strength in our portfolio in the second quarter particularly Chicago, Boston, we’re seeing a lot of strength in the fourth quarter, Q3 for us this summer a little bit extended. To this last group compression, but as we kind of finish out the year, we’re seeing very strong results and booking pace in a number of our markets; I would say five or six different markets are showing very good growth in the fourth quarter.

So we’re seeing the positive trends in Group, but this trends remains strong and we are just seeing again it’s market-by-market, we just hanging then there as well.

Andrew G. Didora – Bank of America Merrill Lynch

On the Group scene market and if you find our business most exposure have the panel to group. Where do you see outside the room spending to it?

Mark W. Brugger

Outside of interesting for us have been lighting as well not only had the Group’s productivity been weaker, (inaudible) up to cause at the beginning of 2011, that started to improve, but even through the course of 2011, you heard us talk about ancillary spend, those are the revenue streams that Group rooms are usually producing. So we are nowhere near where they should have been based on historical norms.

Year-to-date 2012, we’ve seen an equal recovery in that. Now our [B] spend is picking up other ancillary revenue streams related to Group room, is also picking. I mean that’s fairly typical, you are now later on the cycle people feeling a little bit better about balance sheet, our businesses have a little bit of additional pent-up demand in terms of whether it’s incentive travel, or product launch travel, or just commerce driving group meetings, and so all of those things, I think are resulting in a little bit healthier relationship between not only just Group rooms, Group revenue on the books, but also F&B stand and ancillary revenue.

Unidentified Company Representative

Andrew, I’ll just add that I think our ancillary spend is behind our expectations, last year was very poor, this year we had hoped we come back more robust, and it’s still live, we hope that will be a better story in 2013. But we are seeing increase, and I think it’s a function of a couple of things; one is corporations are feeling better there using the first streams a little bit to have ancillary spell with these groups. But that’s we are being more selective about the kind of groups, as we had more compression hotel. We can be more selective as we sell in, and we’re booking the group that tend to spend more on F&B and tend to have the dinner or banner 10 day.

To spend in other ways at the hotel, first is during the downturn we are putting really any group, that’s exaggeration, but we’re putting a lot of groups that had virtually no ancillary spending, because we needed to sell some of that space. As we move through the cycle, we are now peak demand that we can kind of revenue manage those types of groups who are taking place, we’re going to see ancillary spend increase, more and more I think as we move through the.

Andrew G. Didora – Bank of America Merrill Lynch

And Mike or Jay, you guys are a little bit more focused on the type of the impact that’s getting the type and nature of your hotel. So any of you, can give us a sense more your thoughts on kind of measuring the performance so far, but where we are in the cycle and kind of what you’re seeing out of the trend you’ve got?

Jay H. Shah

Okay. Well from our perspective we are in a good part of the cycle. We spend three years the recovery after a couple of years of serious downturn, so we clear of where we are. When we break out our group in transient, I expect we have the lower component in group than Mark and Ken do, we’re about 30%, but even that it’s little misleading relative to our plenty of hotels, because it’s really in five or six of our big hotels, make up of overall majority in that group business.

So we always give the data, but I don’t know if it’s anything relative to landscape and what’s going on the industry. I would agree with these guys relative to what we see in the month they start reports where group has come back. For us, it follows more of a trajectory of what’s going on with the city.

So it’s interesting when you look at our group business has been strong, and definitely this year, the city wants most of our markets were actually that pretty big. The downside of that, and we saw it in the first couple of quarters is that our food and beverage is not as strong. We would rather have in-house group, than provide more of the in-house food and beverage spend with the city wide you just don’t see the same type of pick up.

So as the city wide are not as strong in those markets cross country next year, all we anticipate that we see a greater lift in F&B spending. But so far, our bread and better is in the transient.

Shaun C. Kelley – Bank of America/Merrill Lynch

When do you expect that would be the case, couple of years any way?

Unidentified Company Representative

For us, Shaun, you kind of right, where I mentioned, we’re very, very nominal and reliant on group, but again, I would imagine in this group, it’s de minimis really, but we do track group trends, because at the end of the day whether it’d be convention group that’s in our markets or you’re seeing general business group filling up larger group houses, you’re creating great compression in the markets. And so we’ve been attacking it pretty well and I don’t that we’re seeing anything different from what that’s being mentioned up here. I think generally for the transient market any recovery in group is going to make us somewhat healthy recovery, that much more strong. We’re finding that as group paces are increasing we’re seeing more elasticity in demand that’s coming into the market, and so allowing us to get a lot more pricing power at our hotel.

So generally speaking we feel like the cycle still has some significant legs left to, we think we’re in a good point in the cycle, all of the hotels in our portfolio have reached peak occupancies, so at this point most of the growth that we’re experiencing is coming largely from rate, and for us that is a very good sign and to just we’re going to have very strong flow through moving through the remainder of the cycle.

Andrew G. Didora – Bank of America Merrill Lynch

So we had the business transient customer has been there for a number of years, now were beginning to group in, beginning to come back as well, just like it take a survey up here, just in terms of where you guys simply are in the current cycle and how much model do we have. Start up with Mark.

Mark W. Brugger

It’s impossible to know how long the cycle was, if we see the trends now, supply is clearly the number one thing we’re focused on watching its flying numbers, it’s very low. It does take up for a while, all these full service hotels in particular niche markets, takes several years before you can actually come on line. So our view is we’re before the middle, optimistically you think this cycle is going be longer than the last two, and perhaps it’s kind of the next downturn eight year cycle, these things are impossible to forecast.

Jay H. Shah

Yeah. I think, I don’t disagree with Mark, it’s very hard to know just what we do know is that generally consumer confidence is relatively fragile, GDP is unclear, the slowing in the second half of this year was, I would imagine pretty unexpected by those of the folks in this room and even those of us are peer when we were sitting two quarters prior. we would have expected we’d see a little smoother GDP growth for the year. That being said, I think with some of the uncertainty clearing up based on the administration change, I think that might have an impact on business investment in the United States and for us, that’s a very strong indicator of how our portfolio performs.

So again, it’s a tough one to call. I haven’t marked my day planner yet when to bail, but I would imagine, I would imagine with surprise, at the end of the day, we’re still at real estate business. And so supply demand dynamics are probably the strongest governor in the business and supply growth, I would imagine it is going to stay low; I mean even with the reemergence of some debt in the top markets and you guys are the top sponsors, it’s still not robust. So I think so long as the price stays low, supply growth I think we can expect to slightly more protracted cycle than in past cycles.

Unidentified Company Representative

We’re doing exactly we’re on the cycle, we just not a lot to say. So I would echo with what Mark and Jay said, I guess I would add a couple of things relative to questions we get a lot of our people saying where are you relative to peak, and we obviously have an answer for our portfolio in terms of our EBITDA, but if you look at the markets in terms of the CBDs, a number of the markets LA, D.C., San Francisco, there are already above peak RevPARs. But only one of them San Francisco is above peak rate, the other one's experience stronger occupancy growth, and so for the rest of the market, there is still a long way to go to get back to what they achieve in 2007 and that's not counted factoring in any CPI and our inflationary growth that you would normally have with the rates.

So we still have a long way to go before we get back to those levels and our feeling is that peak is just an old number, I mean there's no reason why we can't go beyond that in terms of our grade, so and we fully expect to. But we just have a long way to climb up, so if anything that gives us hope, that the recovery will last longer, because we haven’t gone back where we're yet and then our expectation is to just to pass that.

Kenneth E. Cruse

You know I’ll just carry on your comments and translate that rates comments and which I think are grade, down to bottom line implication, and also for our portfolio we kind of know where we are; we're about 5% below peak prior peak on a same-store basis in terms of RevPAR. We're about 150 to 200 basis points below in margin and so we're looking at achieving peak RevPAR and peak margins probably in the next 12 months to 18 months for our portfolio, and as Jay and Mark and others noted, this is likely to be a longer cycle, a much more long cycle, so far in the first third – to first half of the cycle and once we re-attain prior peak levels in terms of top line, our expectation is that we'll meaningfully exceed prior peak profitability levels for our hotels over the course of the remainder of the cycle.

A lot of that the product have – that we've got and I know all of us have done the same thing to other portfolio in terms of redefining operations and coming up with new operational efficiency throughout our portfolio. To the point where our portfolio on a same-store basis generated profit margins during this last trough that were 200 basis points higher than those same-store debt at the trough – the other trough and so that’s a great indication of how much more productive our assets are currently, and given all the initiatives that I know, many of us have under way in terms of identifying and unlocking new means of profitability in hotels. Our expectation is that you are going to see a much, much higher profitability level over the course of this cycle, especially before we are (inaudible), but this is a much more protracted, prolong cycle plays itself out. So you have an another five, six years of up cycle you could see some amazing profitability to all of our hotels that Mike said, renders prior-peak profitability in revenues just a data points.

Unidentified Company Representative

I believe, I just tell you what Ken is saying, because, it’s an important point. Ken was mentioning, where relative to last peak where the portfolio is performing, when we take our same-store portfolio from last peak to this peak, we’re probably add about 9%, it might be a little less by now, we’re still a significant away from peak performance relative to the last cycle, but our occupancy as I mentioned before have returned to prior peak, and margins generally for the consolidated portfolio now are past prior peak.

And so this idea that Ken started and I want to finish because I think it’s a really great indicator for our sector, is even within additional year or two in this cycle, the company is going to have a real opportunity to drive EBITDA growth, that’s probably significantly higher from a CAGR standpoint than it was in the last cycle despite not having such a significant RevPAR jump year-over-year in this cycle.

So it’s a, we can do that a real positive set of circumstances for the sector.

Unidentified Analyst

Maybe one on the demand topic, still talking about the transaction environment right on, Jay you mentioned you business confidence and the business investment, one question we get from investors consistently is the impact of the Fiscal Cliff and, how this has been factored into corporate confidence. So you guys are dealing with negotiations for business travelers around the country, have any of you seen this come up in discussions or people holding back or thinking about holding back as they are looking into the uncertainty right now around what’s going to happen in November, and then probably much more positive to happen in early January, unless the political situation changes.

Jay H. Shah

Yeah, I think it’s the negotiations for corporate grades for the coming years is always an interesting time of year, and certainly every company is always pushing back. It’s just what kind of bullets do they have to support their arguments as to why they only want to be up to 2% to 3%, when we think they should be up 5% to 6%. And I think the Fiscal Cliff is in all of the uncertainty, it’s something that does play a factor, but I think it’s hard to imagine that regardless of which administration is in place that we’re not going to feel an immense impact from Fiscal Cliff because something is going to be done to mitigate whatever facts of it are, regardless of which party wins, I think there is going to be accommodations made.

So when you take that into consideration, but are also take into consideration is general economic malaise we have been in, we kind of look at 2013 as just almost reflective of what 2012 was, we don’t expect it to be significantly worse or that much significantly better. So that being the case, we think that the negotiated rates need to go up to 5% to 7% as I said. And you probably need push back around the 2% to 3% except we end up somewhere in between or to the higher side of that range. Because I think hotels are feeling more confident going in this coming year, with the increase in group and with the pricing power we are getting from our advance bookings. So we feel good about it.

Unidentified Company Representative

Remember last year, the RBC has incurred after that date around August 5, the entire world realized that there was a Fiscal Cliff right and thinking about the stock market and that’s a good indicator of general investor and consumer sentiment. All of our stocks were getting pummeled last year as expectations were those are massive issue that has to be dealt with, not just in Europe, but in the United States. So what’s happened over the past year, have these much needed mid-term fiscal reforms been implemented, have we elected a new President, none of it has happened yet. And yet now the markets are much more irrational in terms of how things are being valued equity wise, sentiment has improved meaningfully over the past year. It’s certainly concerning, it’s well founded as it relates to the need for fiscal reform, but I think the mindset as the businesses that our hotels are negotiating with is much healthier, and there is a much more balanced conversation taking place right now. Such that I agree with Jay, we’re going to end up with negotiated rates, as the counter parties last year had a lot of leverage, and a lot of fear and sound inferior this year they don’t have that. So we should see nice percentile especially as we’ve indicated. Our operations are all running towards peak occupancy levels. So we’ve got that much more pricing power in the conversation.

Unidentified Analyst

May be switching gears a little bit moving on to the hotel transaction market, the markets 10 year prior been a little bit more active of late now relative to what Jay and Mike have been doing, and Ken in particular some still kind of took a little bit of high yielded in the deal market, for a little bit of time there, and you’ve certainly jump back in the last few months, what has changed out there to give you a little bit more confident, I’d be buying assets right now ?

Mark W. Brugger

Yeah I think. In order to transact, you have to have capital availability, right now to have deal availability. I think I can’t remember the time when there wasn’t an opportunity to acquire quality assets that would really fit our target profile, and affect the prices, if you can sits often negotiates with the counterparties significantly and effectively price the deal, or calculate the price deal. The problem for us has been capital availability; I think we’re in a similar situation.

again, reflects back a year ago, out stock was 50% of where it is currently today, and that was not a product of changing fundamentals in our industry or anything other than just negative broader market sentiment. So we’re certainly disinclined to issue equity capital in an environment where our stock is that under price. We feel and I’m sure my team, colleagues feel the same way that all of our stocks are undervalued right now. And the valuation themselves have come much closer to warrant the value, to the point where we can issue equity like we’ve done around the couple of years, yes we’ve done this year, and do it in a way where we can acquire an asset, issue our equity even at a discontinuity, but acquire an asset at a greater discount to warrant its value and create value in that way.

And the most recent example for us is Hilton Garden Inn in Chicago, across the street from a hotel that we own there. Same brand family, we have an opportunity to complex management, opportunity to share the revenue management strategy between our two hotel, clearly some upside potential there. We are able to acquire that hotel though at multiple, that’s a full multiple turn inside of where we issued equity to buy the hotel, so (inaudible) of discount, to buy that hotel at a greater discount those types to be work all day along. And it’s obviously the type of thing that we want to do going forward. You can only do that when your equity is approaching a reasonable valuation, I think we’re all getting closer to that maybe at a good point.

To address the fact that we bought $0.5 million portfolio from Blackstone earlier this year, it kind of goes back to the earlier comment you have, where are we in the cycle? We’re firm believers that were still got a long way to run this cycle. We’re very excited about it. So if you can buy high quality real estate in good markets for reasonable prices that’s something we should be doing and that has to work on your cost of capital, but you have five good opportunities I think now it probably means a great time to be a buyer.

On the flip side, we’re seeing private equity. we’re seeing financed markets, so a lot of things come back that are good supporting the disposition markets as well. So early this year, we sold about $250 million of assets that I think you’ll see people be able to both sell and buy in this environment and make sense about that manipulation.

Andrew G. Didora – Bank of America/Merrill Lynch

And Mike, maybe you can give us sense on some of the markets that at least working here, you have a pretty narrow definition on – typically in terms of what you’re usually considering, but the opportunities out, there are other places that are starting to kind of look outside of the class like San Francisco, New York. Can you just kind of give a sense of in what markets you see opportunities right now?

Mark W. Brugger

Aftermarket the Blackstone deal list, can you tell me that you got to do a deal with Blackstone, because all (inaudible) you’re doing it. So I guess I should be on our road, we’re still certifying really the seven to eight markets that you touch down for years. we continue to look at a lot of deals there, some of it, some will, we did deal in D.C. area and a deal on (inaudible) in Santa Monica in July. and so, we’d like to do more deals this year and next year, the answer is yes. We know, we’re currently looking for the deals that set our eyes, and but thereafter, so we’re not going to get back and grow, we assume no reason to do that as far as any changes in markets.

now we still focus in the same markets; I mean I don’t think there’s one market with higher volume than the other. I think each market has, it’s particularly relative to how you would underwrite in those markets whether it’s particularly the supply and demand in those markets or if there’s anything else going out particularly with that. But I don’t think that’s very harder, I think the harder part is actually since those markets finding somebody who wants to sell in those markets.

There’s a lot of folks have been focusing on that and a lot of sellers who are experiencing the same thing that they’re experiencing in terms of growth, how their perspectives on, see they’re ahead on to the asset for a longer period of time, I’m not interested, so if I do want to sell, but I consider a very healthy approach otherwise not going to be policy asset.

and so you’re here really active in the beginning part of the cycle, building up your portfolio kind of slowdown a little bit in terms of buying activities, but based on your kind of turnaround where you think we are in the cycle. How does that kind of change your view on, it’s not a very fancy buying or it’s not a very fancy, maybe you’re putting a portfolio a little bit.

Jay H. Shah

Yeah. I think as Mark and somebody out in the panel said, there is a little more liquidity in market. So it’s a great time to be selling it, if you have non-strategic assets that you want to exit, I think it’s a great time to do that. I don’t know that that applies across the board or markets, because different markets at different points in their recovery cycle. I think from an acquisition standpoint, I still think it’s terrific time to buy, because I think we have a good point in the cycle. I think one of the reasons that we sled down probably AAA, we just haven’t been finding assets in our strategic markets that were priced at a number that we felt we could defend.

and as Mark said, you’re in markets that are having significant or at least very, very acknowledgeable uptrends. and so, you’ve got sellers that have expectations on were this asset is going to be, not only 12 months out, but always going to be 24 months out and certainly no one is going to be spending money that way. I think the second reason that we’d really start that our acquisitions is, we have about, we have been had a significant pipeline better within our companies about $350 million worth of assets, for us, a significant number that are going to be contributing full year EBITDA in the coming year.

They’ve all been relevant partial EBITDA producers, and I think that hasn’t been recognized as well by our price and because of overall prices, it’s making the cost of capital arithmetic, give us pause right now. I think a lot of the acquisitions we made earlier in the year even vis-à-vis cost of capital were very attractive, because of the basis that we were buying them out. But as we got further into the year, we thought pricing to get significantly more rich without seeing our cost of capital changing. And so that’s one of the reasons that we did slow down towards the second half of this year and probably into the rest of the year.

Andrew G. Didora – Bank of America Merrill Lynch

(Inaudible) we have to take?

Jay H. Shah

No, I think you guys have cost of capital; I think values in your portfolio might be better recognized. I think we’re probably at a point where some of values that you have to be recognized, which I think there’s some of the new EBITDA begins to deliver, you’ll start seeing that.

Andrew G. Didora – Bank of America/Merrill Lynch

I think you bid.

Jay H. Shah

I don’t think, I think you guys never overbid.

Andrew G. Didora – Bank of America/Merrill Lynch

so one thing we’d talk about more recently kind of larger industry compensated the quality of the deals that are available, and I think they have to go back this time the last year throughout the fall. The quality of the institutional assets that were coming from you guys or maybe as high as some of you want it. We started to get a little bit more about that there were some, I think some better assets. We kind of wanted an update, they’re happy about in terms of what you’re seeing from whether it’s the brokers community, even if there are off-marketing that they are considering to have at the buying and selling sides as the liquidity environment, you’ve got – are you seeing at least higher quality kind of what you’d consider higher quality assets that are available to you now maybe six months ago and just kind of how would you say, give a sense of what’s out there.

Unidentified Company Representative

Sure. I’ll tell you that one. I think yes, the quality of the deals that are available to us today are slightly higher than what we saw a year ago, obviously that’s a product [that you guys] are buying, the reason to see it as being applied for that it’s likely to see more sellers that have some discussion on the timing of the sale of the new things to market, I think there’s some folks that provide the most liquidity in terms of the deal slow. and so we’ll get on it kind of the pace of transactions.

So at that is point as asset qualities have recovered a little bit, we’re seeing more deals coming to market. and I would expect that over the next year or so you’ll likely see even better opportunity to present themselves, but once again the broker channel, they’re probably negotiated as it is right now referring 90% to 95% of their market real estate, I mean U.S is not owned, but it’s probably vehicle. So there’s plenty of assets out there and seller that may not know that there are sellers right now that’s going to be convinced.

Andrew G. Didora – Bank of America/Merrill Lynch

can you guys build some deals with dropdown might be, point that and move your next, give us a sense of where do you think private equity sits in the cycle right now? They have been – you guys in general have been moving the M&A piece of the cycle across the policies there. Is that we’re going to continue? do you think private equity can get more competitive with where the debt markets are starting to take (inaudible) how you guys see the private equity community?

Unidentified Company Representative

Yeah. I think we do get from two perspectives. So private equity at sellers, I think you’d see more of it over the next two years. And we’re the bigger driver there is that a lot of these assets are getting no longer in the two third of funds. So a typical private equity owner wants to own for five to seven years, I’m sure that they can think about the last cycle, they’re very active in kind of five, six nearly seven, they’ve got this now, have been held for a long time. they want to return capital to investors. There has been a recovering value in a lot of these hotel assets, so the better situation is to do that now than they had been in the last several years. So I think you’ll see them bring a lot of those assets to market over the next 12, 24, 30 months. Just because of that concept that they need to return the capital to their owners. And maybe somewhere it’s returned, but I think the fact that they would point new capital, they need these cycles. I think we’ll see more of that.

As far as private equity being a buyer clearly they have more access to debt today than they did a year ago. There have been several large funds raised, Boston being largest in the last year. So we’ll see some of that capital come into the market and compete with us. Firstly, harder (inaudible) their return requirements are higher than REITs and the leverage that they would price to obtain and they can obtain in the marketplace there’s (inaudible) kind of 55%, 60% round the value, but I think that’s very financed, very expensive and it’s very difficult to make the amount work for these private equity buyers for the prime assets that we might be chasing.

So as a group, you may see them focus more probably on what private equity strategy is, but more on the secondary markets for this probably more yield that we had, more opportunities for them to get more leverage on this higher yielding assets. And then ultimately that always does conferred doing that, being more and more competitive to agree.

Andrew G. Didora – Bank of America/Merrill Lynch

And Ken, just to finish up the transactions discussion here, probably you mentioned before you let the hotel down in Chicago earlier this year until it’s already heavily meant this above the limited service segment of the markets with all the competition for full service hotels and called the top 10 gateway markets, everybody talks in terms of maybe going down to more urban kind of services that going to be opened to?

Kenneth E. Cruse

From our perspective we have…

Unidentified Company Representative

Of course, it’s a great idea.

Kenneth E. Cruse

If we can get the deal 260,000 a key in Manhattan is at the bottom of the chart, I’m going to replicate that, great transactions. Terrific, so yeah, we are certainly from our perspective, it is okay – from our perspective, we have some Sunstone out there; we want to keep our story very simple. We are typically about scale branded, also the business trends and assets that are located in urban cores. That applies as it’s typically, so there are opportunities to deviate from that core set of criteria, most of ideas that will be a step-up deal for anything.

We haven’t got, and the Chicago was a great example where we had a total family invented hotel across the street, we have an obvious (inaudible) that acquisition, which we’re going out, so all that wanted to get it very well, so certain instances we deviate from our core abrupt sales strategy. We do think urban limits, like service as the Ethernet we got is a great model. It really does well and very efficient especially in markets where you have more highly unionized or high labor cost environments. So we’ll continue to look at those, but the most of our screening criteria will deviate more towards the abrupt, yeah.

Andrew G. Didora – Bank of America/Merrill Lynch

Mike, what do you think about that’s the category in your – all entities you generally have, you don’t have many of the matter I’ll start with branded properties and more of the independent managers. So how does that category appeal to you or not kind of given you’re under any criteria?

Mark W. Brugger

Ken said very accurate, very efficient ways to get hotel investments in the and of course, we reduced. so that’s been successful. If you get back to our IPO in 1998, we actually didn’t say that there would be a category that we would consider. and we didn’t have that opportunity in the first four to 10 years that we’re – republic meeting did. And then since that time, we find this strategy to be focused on the full service abrupt scales, properties. and so we stuck to that. It doesn’t really mean they’re getting along with categories and things actually you’ve been very successful. It means so for us, we’ve told our investors, we’re sticking with their full service model, and it’s more important for us to stick with our story than to deviate and go to some other things that we’re not quietly familiar with. So that has been successful.

Andrew G. Didora – Bank of America/Merrill Lynch

All right. Maybe a highlight topic here (inaudible) just in terms of what you’re seeing in terms of capital markets that kind of that process. At the time, it’s one of the best companies that have the term loan markets than the private hotel, how is the capital markets doing to the past 12 months just in terms of availability of capital and maybe in terms of LTVs as well. Where really capital has gotten much better? not just in terms of the availability, but there’s also credit compressed pricing. So I mentioned the term loans to know person and his team where compared to the others in great term loans, and we have seven year money that’s less than 4%, we have five year money that’s less than 3%. We think that’s incredibly attractive. And so it does seem that over the last three year pricing can be come down.

We haven’t seen much movement in the LTVs first time, and used loans or more portfolio loans, so corporate loans, I wouldn’t necessarily tag them with an LTV issue, but if you do look at the LTVs where that we’ve had to get pricing just for research sake as we haven’t put any individual loans and the properties recently, the customers that we take in the same categories, 55%, 60% category.

Partially, because we don’t really have to go anything above that, so we know we’re not looking to price something far. but within that category, the price is continued to come down, which is obviously good. It’s great now, but probably the sweet spot in some respect, because as it goes lower and lower that the thing we worry about is ultimately lenders turn to other avenues to get the bigger banks and bulk ultimately in hotels, turns to new development, new development is like for all of us. and so we are, there’s that fine line of being created very, very low, and we don’t take advantage of it to go into, and are looking for development deals in which place we’re all going to suffer, so some of your plans not to do development deals.

Andrew G. Didora – Bank of America/Merrill Lynch

Jay, you guys have historically been little conscious to development (inaudible) system development, I mean where kind of, how would you characterize that particularly here in New York where there is one to two markets that you actually see how the development occurring?

Jay H. Shah

You asked me about just the development…

Andrew G. Didora – Bank of America/Merrill Lynch

Development to anything available is it available in New York and kind of, how would you compare the environment today versus a year ago?

Jay H. Shah

Yeah. I think compared to a year ago; it’s deceivably better market for debt catalog for development projects. I think the rates on development projects are pretty good, I mean that’s certainly not going to be, they certainly do reflect the risk premium for what they are. But they still generally know where LTV logs, LTC logs. So we’d imagine that the folks out there that are considering development or having the real earnest task from that with a significant amount of equity in order to do it. So it’s a lot of equity to put at risk for a development period that could be anywhere from three to four years. So I think though the market has gotten better, I still think it’s a far way from creating any sort of a significant development-friendly.

and as Mike said, I think that’s a good sign, good sector, but it’s true when banks are getting that comfortable with hotel rooms, cash flow or not, you’re kind of getting south of 3% money, you make sure one that is now going to find a more lucrative line of business development would be that. So…

Andrew G. Didora – Bank of America/Merrill Lynch

Mark, you’ve done that traditionally, they have a much more conservative with their balance sheet, recently called Boston as you mentioned in the portfolio from Blackstone. And in deals going forward, how do you view the financing of those deals are taking advantage of the term loan markets or something of almost one interesting to you or you’re going to stick with the condition of your asset level, mortgage debt revolver and equity?

Mark W. Brugger

It’s a great question. So traditionally (inaudible) by speaking more or like a real estate company than a corporate finance institution, so it has been almost our entire lifespan, it has been 100% non-recourse profit specific non-craft loans. So they have 27 hotels, 16 has no debt at all on them. And the idea is, if you take like a real estate person is, you have throughout most optionality about doing well that is, but having unencumbered assets and having non-recourse set of assets that have been filed. So a lot of the best risk profile you possibly had for a real estate company. It is very tempting when you look at a lot of these corporate deals and these term loans at 2.8% profit money to go that round. Our advice is not has been to keep it simple, very straightforward capital structure, and minimize the risk, because you never know how the work is going to play out, and you try to avoid the recourse too to the extend we can.

So that’s going to be our bias going forward as well. it doesn’t mean we may not do something like that, but [propounded] it’s about capital structure is going to based non-recourse step.

Andrew G. Didora – Bank of America/Merrill Lynch

Okay. and how do you think about financing going forward, and like Mark, your issued equity terms of one of your companies here buying from, just with your revolver. How do you think about financing going forward?

Unidentified Company Representative

Well, our strategy is a little different from our peers and that trends to be probably higher leverage than the group. Our leverage ratio right now is very good in our opinion getting where we are on the cycle. We’ve got a very well staggered maturity schedule, and that will be coming here in 2015 in a very well staggered schedule thereafter, related guidance was under 5% interest rate on the mortgage as well. As Mark has mentioned, our asset non-core secured debt, but for a minor sponsored corporate that comes in January, we’ve got the cash to be paid out, waiting till that helps repayable.

Going forward, that we’re going to grow the company versus some strategy by including the quality scale of our portfolio, I mean gradually deleveraging. so most of us will be new to equity, I mean it’s more gradually deleveraged our portfolio and grow into our capital structure if you will, they have equitized acquisitions, we do get some of the opportunity to present themselves with regard – as I mentioned before access their pretty capital that’s priced attractively, relative to the to the target itself.

And then right now as several others mentioned (inaudible) right pace in this cycle to execute on that type of the strategy, once we achieve our credit metrics, which over the long-term and by long-term and into the course of this cycle, there’s similar type of peaks in the 2016 timeframe. we want to be at top two and a half to three and a half times net debt-to-EBITDA that includes the first.

So we can certainly have a lot of relative jobs from our current levels, which is almost six times debt-to-EBITDA. Once we get to the peak of this cycle and once we’ve achieved those credit objectives, then we have flexibility to ask, outsource the different types of capital. You guys there much said exactly right. You don’t want to currently step out for many opportunities in terms of capital.

but it’s amazing to me how inefficient certain forms of capital can be at different points in this cycle. And so all of a sudden, I think there are more buyers to have a strategy where we’re going to take advantage of this price list at different points in the capital step when there is opportunity to present themselves. So that’s a little bit longer term objective for the company given that right now it’s very simple, equity funded acquisitions to grow into our current capital structure.

Andrew G. Didora – Bank of America/Merrill Lynch

And well said, we have ten seconds up. So I guess, we’ll leave with that. Thank you everyone.

Jay H. Shah

All right, Andrew. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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