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Executives

Nikki Sacks - ICR

Jay Shah - CEO

Neil Shah - President & COO

Ashish Parikh - CFO

Analysts

Bill Crow - Raymond James & Associates

Jeff Donnelly - Wells Fargo

Smedes Rose - KBW

David Loeb - Robert W. Baird

Dan Donlan - Janney Capital Markets

Ryan Meliker - MLV & Company

Nikhil Bhalla - FBR

Will Marks - JMP Securities

Hersha Hospitality Trust (HT) Q3 2012 Earnings Call November 1, 2012 9:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Hersha Hospitality Trust Third Quarter 2012 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

At this time, I would like to turn the conference over to Nikki Sacks of ICR. Please go ahead ma’am.

Nikki Sacks

Thank you and good morning, everyone. I want to remind you 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 to your capital investments. The forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company’s actual results, performance, or 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, CEO.

Jay Shah

Thank you, Nikki and good morning to everyone. I am joined today by Neil Shah, our Chief Operating Officer and Ashish Parikh, our Chief Financial Officer.

Before I provide color on our third quarter results, I want to take a moment to discuss Hurricane Sandy. I believe with the first hotel reporting since the storm. First, we express our concern and sincere well wishes for everyone who has been impacted by the devastation that it caused. Our thoughts and prayers are with the many individuals and families who have been impacted by the storm as they begin to recover. Our teams at our hotels in Sandy’s path have done a truly commendable job providing safety and refuge to our guest during a particularly difficult time. The communities that these hotels serve were fortunate to have the benefit of such effective professionals on hand. We thank them for their long hours, their commitment and their compassion.

In terms of Hersha’s hotels, given our concentration in New York and along the Eastern seaboard we've certainly been impacted. We are still in the process as you can imagine of assessing the damage and I don't have the full report to provide to you yet, but I will you what I can.

We have six properties in Tribeca and Lower Manhattan which have been impacted to different degrees. Because of its location, our Holiday Inn Express at Wall Street has suffered the most damage and was evacuated and has been closed since Sunday afternoon.

Our other five Downtown hotels have all lost power as at all of Manhattan below Times Square; approximately 25% of Manhattan’s buildings were without power on Tuesday afternoon. We have emergency generators at all of these properties and may have been running and we've been serving gas, but due to the issues with transportation, getting additional fuel deliveries has been a challenge to keep them going for an extended period, but we continue to manage the situation very closely.

Although the wide storm track encompassed our Philadelphia and DC market as well, we were fortunate not to have any extended disruption in those markets. In the New York, New Jersey Metro market, we currently have two properties without power, the Hyatt House Bridgewater, New Jersey and the Hampton Inn Brookhaven, New York, but they are currently operational on emergency power and maintaining relatively stable occupancy.

In terms of potential financial impact, it's really too soon to give you a good estimate. We are having conversations with our insurance providers now determining the impact of loss revenues. Property and business interruption claims will be unique to each of the effective properties and there will be some offset by spikes in occupancy during the storm and we hope to have more clarity in the coming weeks. Again we're working very hard to understand Sandy’s impact and fix the damages, but at this time, this is the most comprehensive information that I can provide.

Our third quarter results reflect another quarter of rate driven growth in majority of our key urban markets. Although the widely discussed and uncharacteristic weakness in New York City, which recorded a negative 0.9% RevPAR did have significant negative impact on our results.

Our consolidated RevPAR growth of 2.1% was impacted by New York, but excluding the New York City results, our portfolio recorded a 4.9% RevPAR growth driven by 4.7% ADR growth. While these results are certainly weaker relative to strength we have seen since the beginning of the lodging recovery, we believe that the softness is a momentary pause and has proven to be an uneven recovery cycle, but an ongoing recovery nonetheless.

The upcoming Presidential election, uncertainty around the timing and shape of the fiscal cliff compromise inspired with the challenging holiday calendar in September to slow demand for the quarter across the portfolio, but there are a number of factors giving us confidence as we look forward; namely our market leverage, the long-term resiliency and buoyancy of the New York market, the favorably muted supply environment and the embedded growth in our young portfolio of hotels.

We are very encouraged by industry leading contributions from our Boston and Philadelphia hotels and the outperformance of our recently renovated Washington DC Urban and Metro hotels. We remain confident in the strength of New York and have seen October performance supporting that confidence by posting growth significantly above that of third quarter and more in line with our expectations.

Let me move on to our major markets; New York, with more than 42% of our EBITDA from New York City urban hotels remained the firm believers that our high quality hotels will continue to outperform over the lodging cycle. However, the New York market did experienced demand weakness during the third quarter with our New York City RevPAR down 0.9% as occupancy dipped slightly to 90.2% and ADR was down 20 basis points to $206.

The two JFK properties underperformed the overall New York market and while our Manhattan portfolio was up 1.1% in RevPAR and had maintained solid hotel EBITDA margins of 45.6%. The underperformance of the market and of our New York hotels was due to timing of two Jewish holidays during September that impacted demand and weaker than anticipated demand from the UN General Assembly also in September. However, there are a number of positive indicators for New York City’s outlook for the remainder of the year including level supply growth in Manhattan relative to demand and increased booking lead times as shown by the transient pace pickup compared to the prior year; both of which has historically been a precursor to improve demand. For the market, transient booking pace as of October, for November is up 9.4% year-over-year and up 8.8% year-over-year for December. In December, the market grew pace is up 7%.

New York City remains the most visited U.S. city by travelers from Europe, Asia and North and South America. Furthermore, New York City maintained its position as the world’s leading commercial center for finance, law, advertising, fashion, television, media and increasingly technology and has a uniquely diversified economy. New York City job growth is expected to outpace the national rate over the next year and there are a number of office projects under development bringing additional demand to the market which already boast 352 million square feet of office with the second lowest vacancy rate and the second highest rental rate gains in the country.

In terms of the supply, we expect 2012 supply growth of 1.8% to be followed by 4.4% supply growth and 3.5% supply growth in 2013 and 2014 respectively. For 2013 and 2014 the growth figures are above the historic average in New York, but the average growth in supply across the three years from 2012 to 2014 of 3.2% remains well below the average anticipated RevPAR growth for the three years of 7.7%.

Hersha’s New York City properties are currently at their highest occupancy levels indicating that the market demand is more than sufficient to fully absorb new supply and to continue to deliver revenue growth in the market. Despite the noise in the quarter around performance and concerns of supply growth, it’s important to remember that through the third quarter year-to-date, our Manhattan portfolio is up 9.2% in RevPAR and our New York City urban portfolio is up 6.4%.

Outside of New York, we have assembled a portfolio of high quality hotels in key urban gateway markets with a variety of demand drivers and our rate driven RevPAR growth in the quarter is indicative of the strength of the markets and our assets. Continuing on trend from last quarter, seven of our top 10 properties by EBITDA contribution had occupancy of approximately 90% or higher and eight out of 10 delivered ADR led RevPAR growth during the third quarter.

Now let me give you a little color on each of our markets outside of New York. Our Washington DC hotels had a strong quarter relative to the market with RevPAR growth of 5%. We have been able to drive rate increases and are certainly outperforming the market there. We completed the renovation of six DC area hotels earlier this year and are now benefiting from our investment. While the DC lodging market experienced some early October weakness due to cancellation of a week of the congressional calendar, we remain optimistic as we are benefiting from significant renovation activity that we had completed previously, and we have not seen any material demand changes in the market from our forecast.

As we look ahead to next year, we are anticipating a robust first quarter with the Presidential inauguration, and more active congressional calendar throughout the year and a better overall outlook for demand growth next year in DC. Boston is another area where we have out indexed the competitive set with RevPAR growth of 7.2%, including rate growth of 6.8%, our strongest rate increase in the quarter. Boston’s resilient economy with high exposure to the technology, biotech and healthcare sectors will also help drive continued rate growth. Our Philadelphia hotels were among the top performers in our portfolio and our Philadelphia urban hotels contributed RevPAR growth of 15.6%.

We continue to make strides at the Rittenhouse Hotel which continued its position as the highest RevPAR generating asset in Philadelphia, with a RevPAR premium of almost $70 over its competitive set. Our performance in the quarter benefited from six city-wide conventions with attendees up approximately 5% year-over-year, as well as an uplift in group business booked at the property level.

Finally turning to our two newest markets, Los Angeles and Miami, the Courtyard LA Westside achieved a RevPAR growth of 5.3% and starting September we've seen our momentum accelerate relative to the peer set. The concept dynamic is changing the area with a significant repositioning of a competitive hotel that was buying share with discounted rate, but our recent return of pricing power along with an extremely muted supply environment should lead to continued favorable results.

In Miami renovations on the Courtyard Miami ocean-front are progressing nicely and we continue to anticipate delivery by the fourth quarter of 2013. Despite recording one of the rainiest summers on record, the Miami market continued to outperform in the national averages and we feel confident in the long term strength and sustainability of our demand at the hotel. We are excited for delivery of the new 93 room tower and remain bullish on the market. But this construction and the disruption that we had anticipated had a significant impact on our hotel during the quarter, as our RevPAR declined 12.9% there.

We also rounded on our portfolio with the purchase of two hotels. We acquired the remaining 50% interest we did not previously own in a 130 room Courtyard by Marriot located in Ewing, a desirable submarket of Princeton, New Jersey. Not only is this a well located, high quality hotel that we expect to perform well as the recovery continues. But with the completion of this transaction, our portfolio of unconsolidated joint ventures is down to seven assets as a part of our ongoing efforts to simplify our capital structure.

Additionally in October we announced that we are under contract to acquire the 205 room Hilton Garden Inn in New York City located in Midtown Manhattan at 52nd Street near Third Avenue for $74 million or approximately $361,000 per key, a basis that is approximately 25% below the average price per room through recent comparable transactions. This asset is under construction and expected to deliver in the fourth quarter of 2013 and will be only the second hotel to open in this submarket in the last 15 years. It is situated in a 55 million square foot office market that boasts the highest office rental rates in Manhattan.

The hotel is an excellent example of our focus on making acquisitions at an attractive basis in prime submarkets within our gateway markets. Our acquisition costs will lead to strong yield and the high barrier submarkets allows for pricing power and superior residual real estate value.

As we look ahead to 2013, our primary objective is to realize our EBITDA growth opportunities. We now intend on undertaking new development projects on our renovation activity is largely behind us or nearing completion. The majority of our renovation activity will be completed in the first quarter of 2013 and outside of the Rittenhouse and the Courtyard Miami, there should be minimal renovation activity after Q1, including nothing in our Washington DC or New York portfolios.

We also have two new hotels in Manhattan, representing a $150 million of asset value that are expected to deliver by year-end 2012 in Union Square in the mid-town south submarket and the Hampton Inn Wall street near the New York stock exchange. Given the location, quality and earnings potential of our existing portfolio, we're extremely selective in considering additional acquisitions. Moving forward, and only those which can deliver a growth rate at or above the portfolio average in terms of EBITDA and RevPAR in one of our targeted urban market and can be accretive within our first year of ownership.

We consistently evaluate our portfolio for recycling opportunities by selling hotels that have growth rates below our portfolio average and are otherwise non-core to our strategy. We completed a meaningful divestiture earlier in the year and we are likely to continue to evaluate our assets in the market for favorable timing for monetizing stabilized hotels. We have a young portfolio that still has meaningful runway as it reaches stabilization. Approximately 30% of our EBITDA is from hotels that are less than three years old and 45% of our EBITDA is from hotels that are less than five years old.

During the downturn and through the first part of the recovery, while we expanded our portfolio, we also remain focused on enhancing operational efficiency and are optimizing our portfolio. We already have industry leading margins in RevPAR, but with aggressively asset management as the portfolio matures, we are confident that there is room for further improvement.

Finally over the past few years, we have significantly transformed and strengthened our balance sheet. We intend to continue to delever organically from the significant portfolio EBITDA growth in the coming years to allow for enhanced financial flexibility. Despite the economic and political crosswinds, we continue to see good strength in lodging fundamentals. Year-to-date, the lodging sector has meaningfully outpaced GDP growth and with the favorable supply/demand outlook, we anticipate that to continue. Our already strong balance sheet continues to become stronger and we remain confident in the location and quality of our hotels along with the growth investments we have already made from embedded growth that has yet to be realized.

With that I am going to turn the call over to Ashish now to provide some more details on our operating results and financial position. Ashish?

Ashish Parikh

Thanks Jay. I will start by providing some additional detail on the operational results and transition over to our recent balance sheet activity and end with our updated outlook in light of the destruction caused by the hurricane.

On a consolidated basis, our hotels realized RevPAR increase of 2.1% comprised of ADR growth of 2.3% and strong portfolio wide occupancy approximating 81%. As we have discussed the portfolio was significantly impacted by results from our New York City assets. By excluding these assets our consolidated portfolio saw RevPAR growth of 4.9%, with almost all of that growth coming from increases in ADR.

With the changes in our portfolio related to some of our newer acquisitions as well as specific issues affecting the New York market, we wanted to provide more color on our operational margins for the quarter. While our consolidated EBITDA margins were 38.6% in the third quarter of 2012 compared to 41.7% in the same quarter of 2011, negative variance was primarily driven by the addition of the Rittenhouse Hotel and the Sheraton Wilmington South, which were acquired or opened within the past year and are full service hotels with a meaningfully lower average operating margin than the portfolio average.

Hotel EBITDA margins were also impacted by the ongoing construction of the new tower at the Courtyard Ocean front Miami Beach which proved to be more disruptive during the drop given in the third quarter as the work accelerated on the site. We are confident that the performance of all three of the assets should help drive RevPAR growth and margin performance in future periods.

On a same store basis, hotel EBITDA margins for the company's same store consolidated hotel decreased by 110 basis points to 40.9% in the third quarter of 12, compared to 42%. Hotel EBITDA margins were meaningfully impacted by revenue losses in our New York City portfolio, which has a disproportionate impact on our quarterly results due to the relative contribution of this portfolio to our earnings.

Excluding the New York City portfolio, our same store consolidated hotels realized hotel EBITDA margin growth of 70 basis points to 39.4% on modest RevPAR growth of 3.1% from a previously year sector leading margin of 38.7%. Despite the relative weakness in RevPAR performance, the New York and Manhattan portfolio remained strong absolute hotel EBITDA margin of 42.9% and 45.6% respectively.

The majority of the margin loss in our New York portfolio was directly correlated to ADR driven RevPAR losses, while our occupancies remained close to 90%. With our occupancies remaining relatively stable and no material changes for the cost structure for one month. The resulting revenue loss has directly impacted our bottom line and caused the deterioration of hotel EBITDA margins for the quarter.

As we have seen historically in our New York City portfolio, the majority of gains in RevPAR have come from growth in ADR which can lead to growth operating profit margin closer of 80% and higher.

Our operations are very efficient and with high average occupancies greater than 90%, the ability to achieve further margin expansion is very sensitive to ADR growth or loss. For the variety of growing demand generators continued growth in international travel, young portfolio that continues to mature and the fact that New York is still approximately 12% behind its 2008 RevPAR peak, we are optimistic that there is still significant room for rate acceleration in New York as the cycle continue.

Turning to our balance sheet, our financial position continues to be strong and yesterday we announced a new senior unsecured credit facility which will meaningfully reduce our weighted average cost of debt and enhance our liquidity position by over $0.5 billion.

We've currently received commitments for new $400 million senior unsecured credit facility which is expandable to $550 million. The facility will consist of $250 million senior unsecured revolving line of credit and a $150 million senior unsecured term loan that we anticipate drawing in two tranches with an initial draw of $100 million.

The interest rate for the new credit facility is based on a pricing grid with a range of 175 to 265 basis points over LIBOR based on our leverage ratio. At the end of the third quarter, we had $28 million of borrowings on our existing credit facility and $83.1 million in cash and escrows.

With respect to our capital plan, we remain on track with the plan we communicated earlier in the year. We spent approximately $23 million through the end of the third quarter and continue to expect our 2012 capital expenditures to be in the range of $26 million to $27 million.

As we look out to 2013, we will continue to target the majority of our renovation work to be completed by the end of the first quarter as it is seasonally the weakest quarter for the majority of our portfolio. We've already seen the positive impact from our capital expenditures over the past year and we are confident that we are continuing to position our portfolio to gain additional market share by reinvesting in our assets.

I'll finish with our outlook for the remainder of the year. The impact of Hurricane Sandy is still difficult to ascertain but at this time as Jay mentioned we have one asset in downtown Manhattan that has been closed since Sunday and we anticipate that this asset will be closed for the next two weeks to four weeks.

At this time, we have five other assets in lower Manhattan and one in New Jersey that are without full power and are serving a limited number of guests. We do anticipate getting power back at these assets within the next week and should be able to start normal operations with minimal disruption from repair work, based on our performance year-to-date and the anticipated disruption from the storm or updating our full year guidance to a range of 5% to 6.5% RevPAR growth for our consolidated portfolio and 3% to 4.5% RevPAR growth from our same store portfolio.

As you can imagine, our guidance is based upon numerous factors that are somewhat unpredictable and we will do our best to provide transparency as the quarter progresses and as there's more visibility on the recovery from the storm.

That concludes my formal remarks and I will now turn the call back to Jay.

Jay Shah

Thank you, Ashish. Operator we would like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Bill Crow with Raymond James & Associates.

Bill Crow - Raymond James & Associates

Can you talk about where occupancy is in the New York portfolio today and I guess your back filing traditional demand with local demand is that fair?

Jay Shah

Yeah, to some degree there is, they obviously do is [build] the displacement of residence in and around New York. Most of the hotels are filled with local demand for the time being. We expect power to be restored generally across New York, across the next week or so. So we would imagine that we start seeing corporate demand start remobilizing in the second week of November.

Bill Crow - Raymond James & Associates

Hotels are full. What do you with rates?

Jay Shah

The lower Manhattan properties and the Tribeca properties, because they are operating without power, they are operating just on emergency generators which generally delivers power to the public areas and corridors of the life safety systems. We're probably operating at somewhere probably 10% to 15% below our typical rates for the month but we're operating at significantly higher occupancies or at least we did from Sunday to Tuesday.

When you think about New York above 24 Street for us, those hotels are full and are charging typical rates. They are charging markets rates because those hotels are fully operational. We are getting feedback and intelligence on a day-to-day basis, but we don’t have enough of it yet to give some sort of a consolidated view.

We are kind of going day-by-day and as you can imagine it’s pretty volatile on a day-by-day basis. Well I can’t tell you that what we noticed is as Tuesday came to an end and Wednesday rolled around the hotels that didn’t have power or operating on emergency generators started to see their occupancies goes down because people were moving out of those hotels.

Now they didn’t become completely empty because at that point whether you have power or not is relative if you don’t have shelter you are still going to stay at the hotel that doesn’t have full power. But it’s extremely fluid and we are continuing to sort it out as the day’s progress here.

Bill Crow - Raymond James & Associates

Okay, that’s helpful.

Jay Shah

Bill, while on this topic what might help give some color as to what happened around or as the impacts of the storm start to become a little more apparent in the market, we were tracking from October 1 through October 22 at 96% occupancy with ADR at $270. So we had actual achieved RevPAR of $259 for the first 26 days of October, okay. If we would have continued through the month without the disruption from the storm, we had a little softness built into the last week because of Halloween, we would have done that last week, we were down 88% to $253 or the $222 RevPAR. So we were tracking in October to really comment at 8.3% RevPAR growth and anticipating doing an overall RevPAR on October of $253.

What actually happened after the October 26 was that our occupancy dropped to 83.2% in New York and ADR dropped to $231 for the RevPAR of the $192 versus a forecasted RevPAR of 222 for that last week, okay. And that ended up bringing us in October at 6.3% RevPAR growth.

So when Ashish, mentioned, we hope to get power back here in a week and that's what we have been told by the municipalities and what we have been hearing anecdotally as well that within a week as you have the numbers backup. We are looking forward to the remainder of November being quite strong and really kind of following through with what started in October which was a very strong month relative to the third quarter.

Before the storm, the transient booking pace going into November was extremely strong and it was the November transient pace was up 9.4% same time last year. And we have an 8.8% transient booking pace up from last year for December. So we are very encouraged by some of these indicators for the fourth quarter despite the storm.

Bill Crow - Raymond James & Associates

But do you think the demand, the mergers, and remerges even after if subways, the mass transient remains closed because if its going to take you two hours or three hours to get out from the airport, isn't that a deterrent?

Jay Shah

Yeah, I mean, that most certainly is a deterrent. I think it’s hard to know when the full subway system will be back on line; as you probably know and as most people probably know. Close to two-thirds of the lines are back in service. They are using sort of bus bridges to bridge some of the lines in from the burrows and what not. So again, I'll tell you, I really, I don't know exactly, but I think the case that we were looking at going into November and what we saw in October, I guess my point is even though we've sensitized ourselves for a complete washout in November, I am optimistic that it won't be that, but we will have to wait and see.

Bill Crow - Raymond James & Associates

One more fourth quarter question and I've got one or two for 2013; but maybe you could kind of tell us, I am sure you pulled your numbers together in anticipation of this call even before Sandy hit. So where was guidance going to be based on the slower third quarter and just kind of the economic headwinds that we've seen, so we can kind of isolate how much is Sandy versus how much is just underlying conditions?

Ashish Parikh

Sure. Bill this is Ashish; we've brought down our guidance range by about 100 to 150 basis points from what we were anticipating before the hurricane; both on total portfolio and same store. So that's pretty meaningful, because it’s for the full year.

Bill Crow - Raymond James & Associates

And that was before the hurricane impact?

Ashish Parikh

Correct.

Bill Crow - Raymond James & Associates

Yeah, okay. That's what I was looking for. I know you’re not going to give guidance for 2013; we've heard from three or four folks that kind of a range of 4% to 7% seen is reasonable, any thought on that sort of range and where would you anticipate if you believe that range is reasonable, New York City coming in at the bottom end of the range, top end of the range, below the range, where do you see New York?

Jay Shah

Yeah, this is Jay, our view is that the 4% to 7% seen is reasonable driven by a couple of things, what anticipated GDP growth is for next year; we would expect that next year you see GDP growth and sort of decelerating into the end of the year starting out slow and accelerating towards the end of the year, so I think the broader range addresses some of that.

I think we will have a resolution around the presidential election, we will have resolution around the fiscal cliff or at least we'll make some meaningful progress in that way. So I think 4% to 7% seems to make sense for us. If we continue to see weakness obviously they are on the lower end of the range, but otherwise we would expect strength in the second half of next year.

For New York, we expect to be between, it’s hard to say right now, but I would imagine that New York comes in sort of from the midpoint range to the high-end of the range from the nationwide guidance numbers and that's driven by just our view of booking based into the next year driven by the fact that supply growth this year was about 1.8%, we expect it to be around 4% next year and we expect demand to meaningfully outpace that supply growth.

And so we are pretty optimistic about New York next year; we are going to have some meaningful job growth in New York and with all of this uncertainty that is abounding, we’ve had very strong first and second quarter already this year and indications for a decent fourth quarter. So we would expect that in an ongoing recovery cycle, New York is going to continue to follow that trend.

Bill Crow - Raymond James & Associates

And then one last one, quick one from me and I’ll leave; traditionally the first quarter has been kind of mid-teens contributor to the full-year given the development delivery, seasonality in New York, your comments about GDP ramping up, some of the renovation impact. It seems to us as the first quarter could be significantly depressed relative to where you have been historically. Is that a fair assumption?

Ashish Parikh

Bill, this is Ashish; I think that if you look at where, we had a lot of renovation activity in the first quarter of 2012 as well. I think that we will have new deliveries from a few of the New York assets and probably our Miami (inaudible), which is a little abnormal. But I would still think that first quarter is contributing around the mid-teens area for next year.

Operator

And we will go next to Jeff Donnelly with Wells Fargo.

Jeff Donnelly - Wells Fargo

I just had a few follow-ups to questions asked by my esteemed colleague there from Florida. I understand the city is saving power to return next week. Is there anything that has to transpire after the property, after the power is restored, before your properties can reopen?

Ashish Parikh

Outside of the property that was evacuated, that took a good deal of water in the basement; the other properties had no real damage, so, outside of a typical cleaning and they are ready to roll. So we expect that we would be able to mobilize seamlessly back into corporate demand. Just adding there, we are starting to receive corporate requests for rooms as early as today and so the ops teams on the property level are well prepared to kind of get the hotels in order to start bringing our typical transient demand back in.

Jeff Donnelly - Wells Fargo

And just may be I can be a bit more specific, what’s the nature and extent of the damage of the property I guess this on Wall Street that was evacuated; I guess I am curious what the timeline is to repair the few things that looks like a two day thing of pumping a basement, two weeks or is it two months that could be offline?

Jay Shah

Yeah, well Jeff, Ashish mentioned it could most likely be two to four weeks and let me explain to you what happened there, so the basement filled with water right, so there is almost 10 feet of water in the basement, but water has been fully pumped out at this point. The basement housed electrical, mechanical equipment, IT, data equipment as well. So you can imagine it filled with salt water all of that stuff is fried, so that will have to be most likely repaired; either be repaired or most likely replaced. So it’s just a matter of getting that equipment procured and getting it installed and so we think that the two to four week timeline at this stage in the game would sufficiently sort of bring fence the outside as well as the more realistic goal of getting that property back on line.

Jeff Donnelly - Wells Fargo

Okay, sorry I missed that in Ashish’s remarks. And just a question or two away from the hurricane, I recognize you guys don't have significant direct exposure to group business at your hotels. But when you think about city wide group trends in your core markets for say 2013 versus ’12, what do you think about the inflection in your portfolio, New York, Boston, DC, really, how do you think about of getting better awards well in the next year?

Ashish Parikh

Yeah, I think, we monitor group pace as well and we kind of look into it as far as quarter one of next year. Generally speaking, and I don't have that data with me, but generally speaking as we look into the coming with group demand, things look better than they have. Now I am not suggesting that is a really robust recovery across the board, but we’re generally looking at group demand recovery as a positive contributor to transient pace recovery for us.

So to give you an example, we look at Manhattan and Manhattan booking pace is for quarter one was up rather significantly, its up in double digits; I do have some of this data right here. The Boston market was down somewhat for the first quarter, but the total booking pace in Boston is up, so there is some good transient and pick up it appears. And so it’s kind of across the board, but generally as we look at it, we are considering somewhat positively next year and we’re certainly expecting more group demand next year than we've had this year, which will help drive compression for our transient mix.

Neil Shah

Just to add, I think there's been a lot of discussion and uncertainty about Washington. As we look at Washington DC in particular, we actually see perhaps a more positive story there emerging than it has been reported. I think that the convention center booking pace when you look at several years it gets less but that's kind of by design. They take some time to kind of get booked. But for the next year we are expecting a pretty strong convention calendar in Washington where its anticipating a better congressional calendar in Washington next year which will have a major impact we believe, and then obviously the inauguration should add as much as a couple of basis points of RevPAR to the overall market for the year. So I think in DC both the combination of group as well as congressional is leading us to believe that there's a pretty positive inflexion point coming in DC for us.

Jeff Donnelly - Wells Fargo

And Neil actually that sort of makes a good question, but I do think there's a split perspective on the Washington DC market. A lot of folks either think, folks in your shoes either think its going to be somewhat of a year, a little bit like the current one, now that people see a big lift, the inauguration certainly helps. But I'm curious I guess maybe ask in a different way, how do you think about the Washington DC market between second and fourth quarter and meaning outside of the first quarter benefit of the inauguration. How do you think DC compares if you will in the back half of the year compared to the back half of this year. Do you think its picking up?

Jay Shah

I think it will pick up. If you look at just the congressional calendar for the second, third and fourth quarter I think that looks better for DC relative to 2012. We just had less congressional activity on the hill, which has a pretty significant ripple effect beyond government into lobbyist and just [hospitality] in terms of compression. So the second half of the year looks more positive from our view.

Jeff Donnelly - Wells Fargo

And just a last question actually on the Rittenhouse. I know when you guys bought that property you got a lot of specific plans to kind of bolster margins and enhance value of it. I was just kind of curious where you guys were at, what's getting some of those ideas executed on staffing and other initiatives.

Jay Shah

Jeff I could answer that question. We've made some of the reductions in force there and have garnered significant savings from that, close to about $800,000 worth of expense savings and so that's been positive. We continue to look at the hotel for additional renovation opportunities both in the public areas as well as in the guest trends. We are considering, we were going to be executing on a lot of the renovations in the first quarter of this coming year.

We've decided possibly to phase it out, so that we are doing some of the renovations in the slow period from January to April and then do maybe a second phase in the slow months of July and August. The hotel is performing extremely well. As we mentioned, it maintains a rate premium of $70 in the comp set over any other hotel in the comp set. Philadelphia Center city hotels were up 12% and at the Rittenhouse our RevPAR grew there for the quarter by about 8% and we gave up a little bit of occupancy in order to maintain some rate integrity at the hotel, and so we did grow, it was a 8.4% ADR growth there; clearly, just trying to drive the entire market, hiring rate.

So when we think about renovation at the hotels, we're real centered in to what type of disruption it might cause, and the fact that with the premiums that it already runs, we don’t have a running need to cause disruption in order to freshen the hotel up right at this minute. But we do remain thoughtful about it, and we are still on track for sort of a two phase renovation there in first quarter and then again in July and August, trying to minimize disruption by not making a year’s renovation all at on time.

Neil Shah

You remember Jeff. This is Neil just adding to that. The plan here was to make the hotel less group reliant and to revenue manage it to push rate further well, kind of maintaining occupancy or even reducing it to a certain extent. And through the second quarter we were able to move rates almost 14% year-over-year as Jay mentioned, in the third quarter we've been able to do another 8%. And so we're getting rates to the level where we can flow through much more EBITDA from the property. So there is lot of operational changes beyond cost cutting and beyond simple revenue management that has started to take hold. There is a lot of group, some kind of older group bookings still on the book here at the hotel that will continue to impair our ability to move it even forward further and faster across the first couple of quarters next year. But so far, across the last year of ownership and operation where we feel like we're on plan and it’s moving in the direction we expected it to.

Operator

We’ll go next to Smedes Rose with KBW.

Smedes Rose - KBW

I wanted to ask you can you just update us on when you think these three assets that are going to [seal up] under construction when you would expect those to come online. The Hilton Garden Inn I assume is still on track for the fourth quarter of ’13, but the Union Square and the Pearl Street opening in the fourth quarter is probably optimistic?

Jay Shah

I think that’s right, the seaport asset which is I mean the Pearl Street asset which is close to Wall Street the construction site did take on water and so there that was expected to be a December opening and we are likely to sustain delays there. So that hotel is more likely to open in January. We don’t know for sure right now. It had not reached an [SS&E] stage yet and the hotel had - they are sort of working from the upstairs down. So the level of finish on the ground floor and the basement it was not that advanced.

So it is somewhat easier to kind of repair, but there is likely to be a delay there say 4 to 6 weeks. So we would be looking into January. Union Square, there was no real damage there, but it is in the zone that is without power and so we have already sustained several days of delay. By the time things get remobilized, it might delay it further, we just don’t know exactly. At this point opening in mid-December versus opening in January I don’t know that the economic impact is going to be all that significant or that much of a difference, because of the lightness of demand in January and New York as it is, but we just don't know for sure, that there is likely to be delay at both of those assets.

Smedes Rose - KBW

Okay, and then if I want to make sure. I have heard you correctly, as you suggested this for hurricane sandy you would have been revising your RevPAR down by 100 to 150 bps for both the consolidated hotel set and the same store set?

Ashish Parikh

For the consolidated set, yes. And for the same store, we would have been moving everything down by about 100 to 150 basis point.

Smedes Rose - KBW

Okay, so the incremental balance would reflect the change that post hurricane sandy?

Ashish Parikh

Post hurricane sandy, yes.

Operator

(Operator Instruction) We will go next to David Loeb with Baird.

David Loeb - Robert W. Baird

I have the couple of just quick follow ups, just very quick follow up from me. Can you just clarify that you had no construction risk, for example, if this cost for trades go up for the delays, do you got any of that risk on three of the construction hotels?

Jay Shah

We do not.

David Loeb - Robert W. Baird

Okay, and on business interruption insurance, will that only cover the closed hotel or will it cover the hotels with power out on emerging generators that they impacted because of that, and when you file claims when would you expect to actually get settlements from them?

Ashish Parikh

Yeah, obviously the evacuated hotel, we will have a very viable claim for business interruption. At the other hotels we have been advised so far that we are likely to be able to make business interruption recoveries at those hotels.

It gets a little complicated there because there's a level of forensics that has to be done to determine how much business interruption was there because the hotel continues to operate. I think we are encouraged by the fact that we heard that we will have the opportunity to recover what has, that kind of leaves us still scrambling around as to figure out what we are going to recover.

When the recoveries come in, you want me to put it real bluntly they are real slow. I mean, we are just getting recovery checks from Irene now and so we are on our second 100 year flood in a couple of years and so I don't expect that we would see these checks for a while.

David Loeb - Robert W. Baird

Can you talk a little bit about your acquisition at the (inaudible) aside from the stuff that the three that are due to open and be acquired upon opening. What's your thought about pursuing further acquisitions or are you done for a while?

Neil Shah

I think generally we are, as we've been for most of this year there's been some kind of exceptional opportunities to consolidate some joint venture properties earlier this summer with the Express in Manhattan and then this 52nd Street opportunity which from a pricing and a yield point of view as well as just a strategic asset was absolutely a very attractive deal for us but generally we have found the acquisitions environment for kind of marketed transactions to be less than attractive and our appetite satiated I guess at this time. You know, what we are finding out in the acquisitions environment is that there is pricing today, call it kind of between six and eight caps.

They are often forwards six to eight caps which often ends very frequently ignore the capital required to get from the six to eight kind of cap and so what we are finding is there is a lot of extensively there's more opportunity today or this quarter than there was in the first half of the year. But really there is no discernable change in the kind of quality of deals that are out there and whether the yield is truly achievable in the near-term.

You know, if you look back at the hotels that we have acquired across the last few years, we are generally looking for hotels that in their very first year will be accretive, will be kind of seven to eight cap producing assets and then have the potential across three years to four years to achieve 10% to 12% on leverage yields from the assets.

Today, we are not finding that kind of asset available on the marketplace.

David Loeb - Robert W. Baird

Final one for you Neil on the New York City supply issue, the numbers that [JK] were much lower than the numbers that Jon Bortz mentioned on his call, can you just talk about where you get your data and what makes you confident in those numbers?

Neil Shah

We do, as we have mentioned before we do go kind of block-by-block and walk the city and walk the projects on a quarterly basis and so we feel very confident in our outlook for supply because it’s kind of verified by our understanding and knowledge of the marketplace and true primary research.

What gives us a lot of confidence beyond our own self esteem is that most of the consultants’ numbers are actually very close to the numbers that we are projecting at about 2% for ’11 and ’12 and then 3% to 4% in 2013 and another 4% in 2014.

As I look through our lists we have, we have specific lists of hotels that are opening in those given years and as I just look down anecdotally in the 2014 list, I see two hotels with a 1,000 rooms or kind of 10% of 2014 supply that I actually believe will likely be one years to two years later than expected but we still kept those kind of 4% number because that’s what we've been carrying out for sometime.

So, we feel very confident in the numbers that we're projecting for new supply. I am not sure how some of the others have calculated the new supply but I think it's very important to know that there is, when you hear, even today you see, in the last week or two, there has been some more announcements of potential new hotel projects, but I think it's just very important to keep in mind that in New York and in most major urban markets from announcement to opening is at a very minimum three years process and in markets like New York and in environment of such uncertainty from a capital point of view, I think that the likelihood and the timeline is actually much longer than that.

So, at least until 2014, we're not seeing anything more than a 4% blip. And to give you some kind of relativity to that, in the worst times in new supply for New York 2009 and 2010, we had about 6% new supply in each of those years and that as you remember, in 2011 and 2012, that level of supply did make pushing rates pretty difficult and so we are cognizant of the new supply.

We're very careful and sensitive to it but we believe that we're on the downward slope of that supply coming on.

Operator

We will go next to Dan Donlan with Janney Capital Markets.

Dan Donlan - Janney Capital Markets

Thank you very much for the color on the New York supply. Really just have one question, as it pertains to your recent acquisition I think about 360,000 per [key] seems a lot lower than where some of your competitors have bought and what you guys have actually bought assets before, is there something specific to this asset in terms of the seller, is it something with the market or could you may be give some commentary on why that’s little bit below some recent transactions have occurred?

Ashish Parikh

I think we have followed this project for some time, as mentioned this was one of our original mezzanine loans from our development loan program from nearly five years or six years ago and over the course of the last four years to five years we had to impair that mezzanine loan but fortunately we were able to stay with the program, the asset and the kind of location was such A plus location that the lenders kind of hung on and as the market improved for capitalizing the project it was one of first ones to be able to regain construction financing. And because of our earlier position in the asset we were able to negotiate a good transaction on an off-market basis. But I think it’s from our being in the deal for so long and having participated in the process from five years, six years ago.

Operator

We will go next to Ryan Meliker with MLV & Company.

Ryan Meliker - MLV & Company

Most of my questions have been answered by now, but just I was wondering if you give some color with regards to 3Q results, obviously as you put it out the Jewish holiday calendar disparity have an impact (inaudible) along with the UN cancellation general assembly. Can you just give some color of what RevPAR would have been in the third quarter for New York and for your overall portfolio backing that out, could I get idea what the real run rate was?

Jay Shah

Yeah, Ryan. This is Jay. Let me talk a little bit about September and then I will have Ashish talk about what the forecast was for that period. I think it’s become kind of the headline that there was the calendar dynamic with the two holidays in September along with the light UNGA, it was also and particularly rainy US open.

We had a fashion that we [didn’t] deliver the type of demand that we expected. I think when you combined all of those and sort of exacerbated with the fact that September consistent with typical Septembers in the past, we black out the month for most of our locally negotiated corporate rates.

And so you will also didn't have your typical corporate demand coming into New York at the hotels as you would otherwise and I think it’s a practice that most companies follow, but we are looking at September, we got, as late as September 3, we were looking at occupancy on the books in our portfolio 67% in the New York market and that was about 400 basis points higher than occupancy on the books for September and October 2011.

A transient pace going into September had looked pretty strong. We were on the books at a $257 rate versus a $251 rate in 2011. So with that kind of strength going into September, we were forecasting doing at $257 RevPAR versus a $243 RevPAR for September in the prior year which would have been a growth of about 6% forecasted. What ended up happening is that after September 3rd we started seeing some weakness in the second week. We expected that there would continue to be pick-up as we moved into the UNGA and we kind of maintain rate integrity. By the time we got into the third week, we realized that it wasn’t going to come at all and at that point it was too late really to do much of anything other than to really lower our rate in order to get as much demand as we could.

But the entire September conundrum was, it was all about rate and not occupancy; I mean the demand was there. I think, I don't know that we did anything differently for September than we would otherwise, but I think in hindsight, what we could have done as we saw sort of group pace slowing or being slow as it was and seeing transient pace, the pace itself slowing even though there was good business on the books. We've seen the booking pace slowing at the rate that it did, we would have most likely layered some group business into the hotels or taken some early transient business at less than the rates we were expecting in order to just create some compression within the houses.

So that's kind of what happened in September generally. I think we, you know I think a lot of folks kind of talk about the counter-dynamics and the UNGA’s 40 to 45 cancellations pretty generically, but it was a little more complicated than that and the trends there really did deviate from typical booking patterns for September. But outside of all of that, Ashish you want to talk about what our forecast was?

Ashish Parikh

Sure, just to reiterate so excluding New York the total portfolio was at 4.9% RevPAR growth and same store excluding New York was around 3%. I think when you bring in New York for July, Manhattan was running at 7.9%. For August it was running at 3.6%. You know as Jay mentioned, we anticipated Manhattan to be at around 6% plus for September before we saw the weakness. So I think that we probably would have been closer to in the same store probably closer to that 3.5% to 4% range for the quarter.

Ryan Meliker - MLV & Company

And with regard to that plus 6% for Manhattan you guys were seeing heading in to September, you guys said where Manhattan actually came out in September for your portfolio.

Ashish Parikh

Manhattan came out at a negative 5.6%.

Ryan Meliker - MLV & Company

So it was a pretty monumental 1200 bps. So going into the month what came out. That would be helpful.

Ashish Parikh

Yeah because I mentioned we had forecasted a 257 RevPAR to a prior year 243 and what actualized was 231 RevPAR. So.

Ryan Meliker - MLV & Company

And then from what you guys obviously saw in October it looks like the trends picked back up obviously Sandy will have some impact going through the rest of 4Q. But other than Sandy do you guys feel pretty confident that the trends that you saw in October would persist.

Ashish Parikh

We did say, we saw a very healthy booking pace going into last week. As Jay mentioned we were forecasting about 8.2% RevPAR growth in Manhattan for the month which came in around 6.3%. But there is nothing on the calendar which gave us any cause that we would be able to do high single-digit type of growth in New York and December was tracking very well, even stronger than October.

Ryan Meliker - MLV & Company

Okay, that’s helpful, thanks a lot.

Operator

We will next go to Nikhil Bhalla with FBR.

Nikhil Bhalla - FBR

In prior situations like this where you have hurricane related impacts, say in New Orleans back in ‘05, one would expect that the recovery efforts also helps hotels. Do you have any view on that?

Ashish Parikh

Yeah, we're likely to have compression at these hotels from business related to the recovery. You know, after Irene, in which Irene caused severe flooding and a lots of parts of central Pennsylvania, we had some recovery business for as long as 8 months at some of the hotels. So we anticipate that we will have some recovery business that is going to be positive for these hotels. It’s just at this point difficult to know how much of it there will be and for how long it will last. The potential upside to it is that it could be helpful if it's there for several months. It could be helpful in what is an otherwise slow demand quarter in the New York, New Jersey region.

Nikhil Bhalla - FBR

So, there is a possibility that if recovery efforts really pick up, you have contractors, you have maintenance crew coming in New York City, especially the lower Manhattan area. There maybe possibility that some of those, the slower growth periods and the first quarter, might see some benefit from that.

Ashish Parikh

Yes.

Operator

We will go next to Will Marks with JMP Securities.

Will Marks - JMP Securities

Two quick questions, first just to be clear the comparable hotel or consolidated RevPAR growth expected for the year includes those hotels that shut down and the ones that are compared right now?

Ashish Parikh

The revised guidance does.

Will Marks - JMP Securities

It does include them even though they are not…

Ashish Parikh

What we have tried to do well is we have not, we have tried to sort of put a barrier around the Holiday and Express is going to be closed from anywhere from two weeks to four weeks and we anticipate disruption in the portfolio for the month of November especially from the five assets that are running on limited power in Manhattan at this point. Once you get into December, we haven’t built in much in the way of disruption because we would anticipate that by then sort of Manhattan running back to normal levels and some of the other markets are probably benefiting from some of the compression.

Will Marks - JMP Securities

My other question was just on I feel like I heard two different comments on the RevPAR change one, that it was down the new guidance is down 100 to 150 basis points due to Sandy and the other was prior to Sandy is that can you just restate it one more time exactly what the change?

Ashish Parikh

Yeah, with the results from the third quarter prior to Sandy, we were going to revise guidance down 100 to 150 basis points both the [internal] portfolio and in same-store and we have revised it to the new levels based up on the impact from Sandy.

Operator

That will conclude today’s question-and-answer session. At this time, I would like to turn the conference back to Mr. Shah for any additional or closing remarks.

Jay Shah

Okay, thank you all for your questions. As I mentioned before, the trends going into the fourth quarter at this point seem positive and we’ll continue to follow them as we move through November and look forward to updating everybody on our progress. I think the impacts of the storm are going to continue to reveal how, there are magnitude here across the next couple of weeks and we are hoping for the best. And I think with that, I will conclude our call today. Thank you all for being with us. We will be in the office if anything should occur to anybody feel free to give us a call here, thank you.

Operator

And again that does conclude today’s conference. We thank you for your participation.

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