Hersha Hospitality Trust
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good morning, ladies and gentlemen, welcome to the Hersha Hospitality Trust Third Quarter 2015 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'd like to turn the conference over to Mr. Pete Majeski, Manager of Investor Relations and Finance. Please go ahead, sir.

[Peter Majeski:]

Thank you, Dena. Good morning to everyone participating today. Welcome to Hersha Hospitality Trust's third quarter 2015 conference call on this the 29 October, 2015. Today's call will be based on the third quarter 2015 earnings release, which was distributed yesterday. If you have not yet received a copy, please call us at 215-238-1046. Today's call will also be webcast. To listen to an audio webcast of the call, please visit www.hersha.com within the Investor Relations section. Prior to proceeding, I’d like to remind everyone that today’s conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the Company's actual results, performance or financial positions to be materially different from any future results, performance or financial positions. These factors are detailed within the Company's press release as well as within the Company's filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

[Neil Shah:]

Thanks, Pete. Good morning to those rejoining the call today. With me are Jay Shah, Chief Executive Officer and Ashish Parikh, Chief Financial Officer. [indiscernible] what I believe is the most prevalent question on investors mind and then hand it over to Ashish to provide details regarding our third quarter financials and our view for the remainder of 2015. What’s going on with lodging and where are we in the cycle? As we approach the end of 2015, investors sentiment has changed materially not just from earlier this year but even since we’ve reported second quarter results in late July less than three months ago. It is syncratic issues that some of peers a very late Labor Day shifts in the holiday calendar and weakness in markets driven by the energy boom like companies. Like companies have guide expectations downward for the third quarter and the back half of 2015 and subsequently driven negative sentiment from an investors perspective. From Hersha’s perspective however, we continue to believe that it a great time to be a hotel owner. Our view of the economy, lodging fundamentals and the cycles duration as well as the ability of our well assembled, young and geographically diverse portfolio to continue with outperformance remains positive and unchanged. Nationwide, RevPAR increased by 0.9% solid growth considering was in the context of 9.2% growth last year’s third quarter. Demand increased 2.5% during the third quarter outpacing supply growth by 70 basis points propelled by a strong job market increased consumer spending and construction activity as well as growing stability in the housing market. Our potential headwinds which is stronger U.S. dollar and slower emerging market growth particularly in China do exists, we’ve remain encouraged by the domestic economies trajectory. Based on what we are seeing on the ground, we believe the demand and pricing power is in all time high and is a time of our industry to separate noise from the macro environment from the drivers of lodging demand on the street corner. And refocus on the businesses core operations. Demand growth is expected to outpace supply growth through 2017 consultants and national brands forecast 4% to 6% RevPAR growth in the years ahead. With occupancy levels already at an all time high accelerating group demand then the resurgence of the American consumer revenue management techniques, our core capability of Hersha’s unique owner operator model will be at critical lever to drive ADR. Given record occupancies across the country the industry is extremely well positioned to raise rates and rate base games will lead to record profitability for our owners in the coming years. In this environment, it is helpful to not be distractive or disrupted by major capital projects or brand changes. As you know, we spent the last several years selling lower growth assets, reinvesting in higher growth markets like Miami and California completed our development pipeline and renovated nearly 75% of the remaining portfolio. Our management team is now clearly focused on executing in the field, revenue management, guest satisfaction, [faster efficiencies], training, ecommerce initiatives and we are focused on delivering outperformance from this carefully assembled portfolio over the next several years. We are pleased to report that our teams delivered in the third quarter. Our portfolio reports 6.9% RevPAR growth. Occupancy increased 95 basis points to 87.4%, while ADR increased 5.7% to $199.34. We’ve reported 10.5% hotel level EBITDA growth to $48.2 million in the third quarter. Let’s take a deeper look at our six core markets to see what drove our results. In Boston, HT’s properties achieved RevPAR growth of 11.7% with ADR up 9.9% and occupancy increasing 141 basis points to 90.3%. Despite one last citywide and the 33,000 decrease in room nights compared to Q3 2014, demand in Boston actually increased 1.3% during the quarter. Higher demand combined with increased [L&R] business contributed to revenue growth of $1.3 million at the Boxer which continues to benefit from the early cycle repositioning improved revenue management strategies and a strong group base. RevPAR increased 21.5% and contributed $859,000 in hotel EBITDA. The Courtyard Brookline reported 13.1% RevPAR growth with rate up 12% and was the number 1 EBITDA producing asset in the portfolio contributing $2.5 million for the quarter. Similar to the Boxer, the Courtyard was driven by strong corporate demand along with increased group in L&R business. In the fourth quarter renovations, the Courtyard Brookline will hindered group in transient bookings of the hotels in the first quarter but despite this disruption we expect our Boston portfolio to continue to deliver above the average growth in the 2016. Miami continue to perform well, delivering 11.1% RevPAR growth the Blue Moon and the Winter Haven Hotels in South Beach that we acquired nearly two years ago are hitting their stride and achieved nearly 12% RevPAR growth for the quarter. The Cadillac Miami Beach grew 7.3% as the Ocean Tower continues to find its optimal rate position. In addition, third quarter results were positively impacted by the Residence Inn Coconut Grove due to favorable comparison does the hotel is under extensive renovations last year. This robust third quarter performance in South Florida was despite [indiscernible] to America as the Parrot Key and Miami Beach properties did register a high number of cancellations during the storm leading to significant lost revenue during that weekend. In the fourth quarter as we look forward Miami Beach will benefit from citywide events in putting the jewelers, showcase to South Florida auto show or basel and key vessel fee increased demand also from several events including the Super Boat show, New Year’s Eve and other events. This factor lead us to forecast double-digit RevPAR growth in the fourth quarter for our South Florida portfolio. On the West Coast, we’ve reported 10.5% RevPAR growth. In Los Angeles, our Courtyard LA Westside tallied 19.8% RevPAR growth benefiting from compression standing from several citywide including the Special Olympics. And San Diego, despite the decline in convention room nights our downtown Courtyard delivered 5% RevPAR growth as ADR increased 9.2% over $200. Our two Northern California Hyatt houses reported combined RevPAR growth of 21.9% a strong corporate demand in Northern California provides strong base, low group contribution and increased trend in activity in the market has allowed us to yield strong results across the last year. Our sales team expect significant rate increases next year. Our best performing market in the third quarter was actually Philadelphia which reported a 15.6% RevPAR increase. Philadelphia benefited significantly from the folks visit and World Meeting of Families in September. Although lodging demand during the Papal Visit did not live up to the market’s expectations we did capitalize on the demand by employing unique and diverse strategy the Rittenhouse Center City Philadelphia Hotel. This allowed us to fully sell out the Hampton Inn to a large group for the entire week while we took more ADR driven transient strategy at the Rittenhouse which allowed us drive performance of that hotel and contributed to 41.8% RevPAR growth of the hotel for the quarter. Our expectations looking to the fourth quarter remained very strong for the Rittenhouse and for Philadelphia. Now the Manhattan, where young stabilizing portfolio reported 4.2% RevPAR growth to $236.77 in the third quarter. ADR rose 2.1% to $246.63, while occupancy also rose to 190 basis points to an impressive 96%. HT’s Manhattan performance outperformed the wider Manhattan market by 410 basis points marking the seventh consecutive quarter of outperformance. We attribute our portfolios’ ability to outperform carefully selected locations and diverse submarkets close engagement and alignment with our operators and younger room focused hotels transient oriented well tuned to the travelers taste and preference today. A good example of these characteristics is our Hilton Garden Inn Midtown East which reported 16.5% RevPAR growth and contributed $2.3 million in hotel EBITDA. Since opening in June 2014, the property has quickly established itself benefiting from limited new supply in Midtown East. Our high Union Square delivered 10.2% RevPAR growth to $319.51 and contributed $2.3 million in hotel EBITDA in addition to improving the EBITDA margins by 520 basis points. High Union Square continues to ramp with rate gains attributable to increased L&R and retail production within the dynamic submarket possesses multiple corporate leisure transient demand generators. Our New York remains the challenging market, our revenue and asset management expertise is a critical tool that drives our unique portfolio of that performance. Aggressive revenue management strategies are tweak daily and the times hourly based on what we see on the ground. We have and continue to direct our revenue management teams to remain disciplined and the hold line on rates given our portfolios very high occupancy. We are of the opinion that other operators and revenue managers in New York have failed to capitalize on demand that has increased 2.6% in the trailing 12 months period. Occupancies have been and continued to be the strength of the Manhattan hotel market. As of September 2015, Manhattan trailing 12 month occupancy levels have remained above 85% for the 40 consecutive month. High occupancies combined with the aforementioned demand growth and raised 800 basis points still behind prior peak should be a welcome environment revenue managers. With regards to international demand, we continue to see an impact from the stronger dollar but have not experienced a material impact on demand due to lower international visitation. As we have stated throughout the year, the stronger dollar plays its pricing pressure on the market and adds to the challenges of pushing rates in New York. That is the case with new hotel supply impact itself mainly in low demand period such as August. The international contribution to HT’s total room revenue in Manhattan during Q3, 2015 was 16.7%, a 270 basis point decline versus Q3, 2014. This decline was due to the increased international traveler originating from France, Italy, Canada and Germany offset by increased contributions from Argentina, Japan, the UK and China. Overall, the Eurozone contribution in international room revenue was 17.5% in Q3, 2015 down 20 basis points versus Q3, 2014. In Miami the other markets where international revenue is significant, the international contribution to HT’s total room revenue during Q3, 2015 was 14.5% this is actually up 27.2% versus Q3, 2014. Stronger international room revenue in Miami was due to increased international traveler from the UK, from the Netherland, Argentina and Norway. We haven’t discussed Washington D.C. this quarter offered a weaker convention and conventional calendar as expected we were up above 3% in the district and 2% in the metro. Year-to-date, we are still up nearly 10% in the Washington D.C. area and the fourth quarter particularly downtown does look strong. Our Capital Hill hotel benefits from a [indiscernible] pressure earlier in the year and the same [indiscernible] continues to ramp from our new management team and strategy and will drive results in 2016. We continue to be bullish about Washington in the coming years, the resumption of government spending a stronger convention calendar and the upcoming presidential change in the guard. So that’s our six markets, before I hand it off to Ash, a few more thoughts related to capital allocation. We’ve acquired two hotels this quarter and continued to out buyback activity. The acquisitions were the hallmarks of Hersha deal accretive to current cash flow, accretive to our portfolios growth rate and improves the quality of the portfolio. Great locations, great markets and an opportunity to meaningfully improved operations. Northern California remains one of the best lodging markets in the country the trust by increased demand and limited new supply which is constrained by the high cost of land and the lengthy approval and entitlement process. We increased our Northern California presence by purchasing two very high quality assets that have blended 7% trailing yield. It is important to highlight that the 94 room TPS in Sunnyvale and the 60 room ocean front Sanctuary Beach Resort in Monterey require little to no disruptive renovation and are immediately accretive to our earning. After closing on the TPS, in the third quarter and transiting management, we are encouraged with results thus far. We are optimizing the customer in segmentation mix and believe there is significant opportunity to improve performance on weekends and colder period. The sanctuary which we expect to close during the first quarter, holds a truly irreplaceable ocean front location and a fee interest in 13.2 beach front acres in Northern California. Sanctuary is the closest Monterey area luxury resort to the demand drivers in Silicon Valley and the San Francisco Bay area and benefits from strong domestic and international leisure demand. Given its privacy and proximity to world renowned golf courses, wineries, art galleries and high profile then. It's an independent resort execution much like our Hotel Milo in Santa Barbara, were [indiscernible] last year. HT's combined $67.2 million investment in Northern California firmly establish it's company's foothold in Northern California. Prior to passing it to Ashish, I also want to discuss our share repurchase activity. During the third quarter, we repurchased $41.6 million of stock at an average price of $23.69. Given the large variance between the trading price and the company's net asset value, we're very pleased with this buyback activity. To-date in 2015, the company has repurchased approximately 3.7 million common shares at an average price of $24.68, for an aggregate repurchase price of $91.8 million, representing 7.5% of our shares outstanding. We continue to believe opportunistic share buyback are an attractive use of free cash flow when the share price is temporarily dislocated and add a material discount to the company's net asset value. And as we announced a month ago, our board has authorized a new share repurchase program of up to a $100 million. A new program will commence on completion of the company's existing $100 million share repurchase program of which approximately $88.2 million remain to the end of 2015. This concludes my remarks, I'll turn the call to Ashish.

[Ashish Parikh:]

Great, thanks, Neil. And good morning. During the third quarter, our consolidated hotel EBITDA increased 9.5% to $48.2 million, generating $4.6 million more into third quarter 2015 versus a comparable quarter last year. Rate driven growth combined with hands-on revenue and asset management effort alignment with our operators and continues to ramp up that new hotel, generating comparable store GOP margins of 49.9%. Our comparable hotel GOP margins were driven by a strong growth of 77.8% in our New York City portfolio, in addition to strong margin performance at our Boston and West Coast property. Our Manhattan portfolio GOP margins increased a 100 basis points, to 56.4% during the quarter. Cost containment strategy implemented earlier in 2015 continue to build our Manhattan portfolio expense model with the goal of maximizing efficiency while maintaining high service levels and industry leading margin performance. Despite the healthy GOP margin expansion, our Manhattan EBITDA margins remained essentially unchanged, as a result of increases in property taxes and a few of our newer hotels which were reassessed from construction project operation on the top. This, in addition to tax adjustment refunds received in the prior year's third quarter made EBITDA margin comparisons challenging in our Manhattan portfolio. However, as we look out to the fourth quarter, we are forecasting property tax increases and be closer to the mid-single digit range if not lower, which has significantly improved margin performance to the entire portfolio. On an absolute basis, our Manhattan portfolio EBITDA margins remain very strong at 43.3% allowing us to generate an incremental $820,000 hotel EBITDA during the quarter. As has been the case through our 2015, our portfolio clusters in Boston, South Florida and in California drew a performance and were supported by strong demand fundamental. More importantly, our portfolio continues to show broad-based trend and once again we outperformed our respective MSA competitive set in each of our major bargain. As we move forward, significant effort and intention will be placed on maintaining this our performance through a close alignment with our operating partners that allows us to leverage our assets and revenue management expertise. In Boston, favorable supply and demand fundamentals along with increased group and now and our business contributed to total revenue growth of $1.3 million during the quarter and EBITDA rose 15.1% or $810,000 to $6.2 million. We're having some conflicting reports with regards to performance in several high profile West Coast market during the quarter. We're happy to report that our portfolio had a terrific quarter on the West Coast with our EBITDA, with our outlook for continued strength in our markets unchanged. Our West Coast portfolio delivered 13.3% EBITDA growth to $8.1 million in third quarter 2015, with a 110 basis points of margin improvement, a 42.2%. We'll move on to capital expenditures. During the third quarter, we spend $5.6 million as we primarily completed non-disruptive CapEx were at several of our West Coast in South Florida property. A well timed early cycle CapEx and redevelopment continued to benefit portfolio. And for the rest of 2015, we expect to spend minimal CapEx dollars. And estimate our total 2015 CapEx spend to remain between $20 million and $22 million. Looking ahead, we have started planning for several brand mandated renovation schedule for 2015, including a refresh of the Courtyard Brookline and several of our Manhattan and Hampton Inn be undertaken during the seasonally slower first quarter. For our balance sheet remains strong for riding flexibility to respond to opportunities across our six markets, while continuing to execute our business plan. At the close of the third quarter, we reported cash and cash equivalents of $29.3 million with full capacity on a company $250 million revolving line of credit. In August, we closed on a new $300 million senior unsecured term loan and this new term loan together with the company's $500 million senior unsecured credit facility expands our unsecured borrowing capacity to $800 million. Term loans interest rate is based on a pricing grid with a range of LIBOR fetched 150 basis points to 225 basis points and matures in august 2020. At closing, $210 million was advanced at a single draw, with the company subsequently drawing $50 million for the acquisition on the TPS Sunnyvale and for share buyback. The remaining $40 million is available on a delayed draw basis until august of 2016. Our access to the unsecured debt market and our ability to efficiently refinance existing secure debt has allowed us to reduce our weighted average cost of debt significantly during this cycle, a 3.75%, a new record low for the company. As we look out over the next 12 to 18 months, we see significant opportunity to refinance our 2006 and 2007 vintage 10 years [indiscernible]. And what we anticipate will remain a very favorable and accommodating secured and unsecured debt market, thereby allowing us to continue reducing our weighted average cost of debt. Let me finish with our outlook for the remainder of the year. As per yesterday's earnings release, we are maintaining our RevPAR and earnings guidance ranges for 2015, based on our year-to-date performance acquisition in refinancing activity, capital market activities and stock buybacks. In terms of our portfolio's performance or to-date in October, our comparable hotel portfolio RevPAR has increased 6.3%. Portfolio performance remains strong in our core market. And we continue to be encouraged with our fourth quarter results to-date in booking rate. In Manhattan, quarter-to-date we registered low single digit RevPAR growth and we're anticipating another quarter of positive growth in New York for our hotel. And that concludes my formal remarks and we can now proceed to Q&A, where Jay, Neil and I are happy to address questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Neil Malkin with RBC Capital Markets.

[Neil Malkin:]

Hey, good morning, guys. First question is you're buying back stock, but you're also buying assets as well. It's kind of a mix message, but given where we are in this cycle, how do you and in your leverage level, how do you look at buyback stock and as well as asset. Where are the sources going to come from? I mean, do you have assets that you're planning on calling. How do you plan on funding that?

[Neil Shah:]

Just to get started with it. Neil, this is Neil Shah. We don’t think of it as a mix message. And probably importantly it's not a messaging tool to buyback the stock. We just find it to be a wonderful opportunity to acquire this portfolio of assets at this level of pricing. So, when we can buy that 20% to 30% discount to NAV, when we're buying this portfolio of assets, it's better than a seven cap, we just find it to be a great use of cash on hand. It's very much like acquisitions. In acquisitions, we're also looking for accretive opportunity. With buybacks, there is less execution risk. But to your second question in terms of funding acquisitions and buyback, we felt and communicated to the investment community across this year that we felt that we had a capacity in our balance sheet to make a $100 million of buyback and a $100 million of acquisitions across this year. And we believe we still do have capacity on the balance sheet from the kind of embedded growth in our portfolio and the pre cash flow generation that will reduce our leverage levels across the next couple of years just organically. But as we look forward and think about the next tranche of buyback that we recently authorized, and we look at future acquisition opportunities, we do believe that we will fund some of those with asset dispositions over time. I'm not sure if the timing will be just right, in terms of when a disposition is announced and when a more buybacks are executed. But across the next 12 months, we imagined that we are months, we imagined that we are net sellers, but it's just a matter of timing on it. Does that make sense?

[Neil Malkin:]

Okay. Yes, that's helpful. And then your West Coast continues to outperform which is great to see. Two things on that. Is it a function of sort of like a smaller box phenomena being easier to compress and therefore being more liberal with rates. And then also, can you just talk about in more some detail on the opportunities from the operation side from the acquisitions that you have completed or have under contract on the West Coast?

[Jay Shah:]

Hey Neil, this is Jay Shah. I think on the West Coast, if some of our boxes are probably in a 150 range, but are probably are some more significant and strongest performer in a 300 room post a full service asset that has like almost 10,000 square feet of meeting space. And so, I don’t know that you can attribute it all to the fact that the inventory size is might be more manageable. I think the fundamentals in the market are strong and I think our asset management program and the operators have done a good job of staying very sensitive and responsive to the micro trends we're seeing from week-to-week. That particular asset that I was referring to the one Marriott Courtyard Westside, has a good amount of group as well, which makes revenue managing not that much more of a sophisticated exercise. But I don’t think it's just because of inventory size. I think I really think it has to do with being a very focused on the operations, which at this point in cycle and with demand fundamentals where they are, I think it's pretty essential to drive returns. And I imagine all of our peers are doing the same thing. As far as the acquisitions are concerned, your question on those, did you just want a little more color on those or what was that, what specifically can we talk to you about?

[Neil Malkin:]

Well, I mean, you said that part of your strategy is acquiring a great asset to the accretive, but also that have opportunities either on the revenue management or cost side. So, I just I don’t know if you could talk to those things and just about --

[Jay Shah:]

Yes.

[Neil Malkin:]

This various strategies that you're seeing in and then, like for example, like Prop 13, the -- you gave a trailing and a -- like what was the Prop 13 and that duty are projected forward. And just things like that.

[Jay Shah:]

Yes, I know, absolutely. So, let me talk about the TPS in Sunnyvale first, if I were little more straightforward. There we bought the hotel that is on a ground lease, has north of 46 years remaining, when you consider the two option terms. There the lease, we purchased it I think one of the drivers of value there in addition to the opportunities on revenue management and positioning of the hotel going forward is that the lease is in our view somewhat undervalued. But the market value of the lease in our view is close to $2 million more than market value of the lease in our acquisitions analysis. There is well as we kind of mentioned in prepared remarks by Neil, we think there is some real strong opportunities on weekends. The weekend in Sunnyvale are generally not as strong but we believe that this hotel underperforms even the market and we think we've got strategies that we can put in place that will remediate that. So, that alone is probably going to drive RevPAR fairly significantly. And then secondly, even on even during mid-week when you got peak demand generally throughout the valley, there is some strategies in place on pricing A and B on balancing the mix between extended stay occupancy and shorter stay occupancy. It's not necessarily making an extended stay hotel a transient hotel but moderating that mix. And I think once we do that and are able to drive rates, then the overall extended stay rates is going to be raised as well. And I think it will be extended say model helps to drive very strong margins here and so we don't want to be abandoning that all together. So, those are the opportunities we see on the TPS. That one is very much right now in the middle of the stairway as we think the execution there fairly straightforward and most of these drivers can be put in place are already being put in place as we speak. So, we would expect strong growth from that asset into '16. When we look at the Sanctuary Beach Resort in Monterey, now this is one of two hotels that is on the sand and close to a 70 mile radius. It's protected to the North and the South by close to 11 miles of protected dunes and so it creates a very unique experience on the beach. The hotel has been owned by the same private owner for close to 20 years now. And he's done quite well with it. That being said, it's also been management has been somewhat less than active in driving topline performance. So, when we take a look at this property, you're triangulating the value. I mean, first when we look at it, is the real estate play on its own is terrific. We looked at residential comps in the area and on the 13.2 beach acres in the area like this is probably unrealistic to imagine any sort of a commercial development. But if you were to scarp the whole project and sell it for residential land value, comps would be around $4 million a key. And so you can imagine up 13.2 acres, the air cover is pretty strong. That being said we believe that the asset has a great opportunity from middle corporate retreat business that it doesn't currently do being only a mile from the Southern end of the Silicon Valley and I mean an hour from the Southern end of the Silicon valley and an hour from San Jose airport. So, we're going to be making some changes at the hotel, very not disruptive. It's really about updating meeting space, reconfiguring the F&B -- repositioning the F&B to some degree and re-configuring the F&B space. There is 7000 square foot restaurant and meeting room building that in our view is pretty inefficient and without a real heavy lift we believe that that can be made lot more attractive for middle corporate business. We noticed that peers in the comp set do a great deal of weekend wedding business, which creates a higher RevPAR weekend business versus just the pure leisure. One of the closest peers did a -- and it's not on the beach, did a 132 weddings last year, whereas this hotel did 13. So, you can imagine even if we can get to 20% of the peers wedding business, we believe that we'll be able to drive significant rates there. The hotel also doesn't have a lot of programming and really rest on just its beach location and I think with some additional programming can create more experience and a lifestyle deal which will also help in driving e-commerce demand to the building. So, that's how we think about the sanctuary. Both of these hotels even on a funded basis, if you look at it as the new sort of northern California portfolio for us bay area portfolio for us we would comfortably expect them to be stabilized at double digit yield in a matter of couple of years. The Sanctuary at Beach Resort, one of the reasons we feel comfortable with that and I think one of the notes mentioned that it felt like a bit of an outlier similar to the written house that we acquired a couple of years ago. And quite frankly the Rittenhouse has been a great success for us, I mean, since we have purchased the hotel. We've driven EBITDA by close to 300% at the hotel and that's after $15 million renovation and we still have additional value drivers there. The spa continues to ramp up on a month-over-month basis. And we have a new leasing opportunity with [indiscernible]. And this is all the while we are driving rate by close to 21% just in support teams, so the hotel now that's $413 a yard from the time we bought it. We bought the hotel around a $300 a yard. So, we have some experience with these kind of hotel. The Sanctuary of Beach Resort will be positioned as a 4-diamond, the Rittenhouse was 5-diamond hotel. That being said, I think a lot of the same levers can be pulled and dials can be turned and I think they are going to be very strong investments for us both of the northern California one. Is that helpful?

[Neil Malkin:]

Yes. Thank you very much for the color, I appreciate it.

[Operator:]

We will go next to Michael Cuthbert with Canaccord Genuity.

[Michael Cuthbert:]

Hey, good morning, guys. Thanks for taking my questions here. Just a couple of from us. So, the valuation on these two acquisitions looks pretty compelling. And so I guess I was just wondering if you guys could talk a little bit about how you won these assets. Thanks.

[Jay Shah:]

Yes, happy to do that. Sanctuary Beach Resort, I think both of these assets, we had a -- I think we've taken the opportunity to take advantage of a time when capital markets have taken some buyer interest off of the market. And so, both of the assets, well, the Sanctuary of Beach Resort was marketed. It was marketed fairly narrowly and I think we were able to get into the property, do the work, figure out that we want to buy it and make a commitment on it to the seller quite early. And I think they felt that execution risk with us would be mitigated relative to other field buyers and so that's how we got that deal. It was, yes, I think that's right, our Sanctuary of Beach Resort, TownePlace Suite, there wasn't intermediary, that was probably closer to an off market deal. It was very not even marketed but we were one of the few people that were talked to about it and there again we were able to get our arms around it pretty quickly just by benchmarking other assets that we have. Our operators have exposure in East bay and the Silicon Valley area and using benchmarking data, we felt that their projections for this hotel, we could have confidence in, and that it would present a good investment for us. And so we moved on that rather quickly as well committing to the buyer very early in the process -- committing to the seller very early on in the process. So, I guess --

[Michael Cuthbert:]

That's very helpful.

[Jay Shah:]

That is a long answer. I think the short answer is we are just, we remain very active on the acquisitions front, I mean, whether we're going to be net buyers or sellers notwithstanding, I think with acquisitions in this kind of marketplace I think if you look closely enough and stay very active, I think there are still opportunities particularly in our view in demand markets like we just bought in is a great opportunities. And those are a lot of people backed off with market.

[Michael Cuthbert:]

Thanks, guys. And then just on the sanctuary, are you expecting that to close before the Super Bowl or is that kind of up in the air at this point?

[Ashish Parikh:]

It's really -- Michael, this is Ashish. It really depends on the loan assumption process. There is CMBS loan on this property. So, we would anticipate that it should be done by Super Bowl, like done, yes, obviously that process is in services hand more than in our hand.

[Michael Cuthbert:]

All right, thanks. And then finally I apologize if I missed this on the prepared remarks earlier, I got dropped from the call. But what kind of, you talked a little bit about Manhattan out-performance and some of the drivers behind that. Can you just maybe talk a little bit about your expectations for Manhattan going forward?

[Ashish Parikh:]

I think, broadly, we're getting with the biggest challenge in the Manhattan marketplace for the last several years has been supply. The high watermark of new supply was 2014. 2015, we expect the supply to come in a bit less than 4%, that's coming off of the year of 5.5 kind of percent, 2014. So, meaningfully less supply. It's never pleasant to have supply in a market but it's on its way down. Our expectations for 2016 are also in that kind of 4% area. And so with less supply and less individual hotels opening in sub markets around town, we expect that the entire market will have an easier time pushing rates. And I think what we're seeing this quarter and in the next quarter is some stabilization in the marketplace and the ability to push rates. Our expectation in 2016 is still tempered by the fact that you have 4% kind of supply in the marketplace but we do believe that we can have a stronger year than we have this year in Manhattan. And we believe that our peers will too. I think, our portfolio is unique. We acquired each of these locations one by one. We built many of the hotels. We are active recyclers of capital, so we've sold kind of the lower growth assets. We've refreshed all of these assets. They are in great condition and meet today's kind of taste and preferences. And we are really hands-on operator. So, we expect to be able to continue to outperform the market but we expect the market will improve from this year's performance next year.

[Michael Cuthbert:]

Great, thanks. That's all from me.

[Operator:]

[Operator Instructions] We will go next to Anthony Powell, Barclays.

[Anthony Powell:]

Hi, good morning, guys. Just on the capital allocation, you've invested a lot this year on acquisitions and share repurchases. How do you look at those two options relative to debt repayment and how do you look at your leverage as you get to this later on in this cycle?

[Jay Shah:]

Anthony, we did touch on that a little bit with the first call. But basically we bought about $100 million $110 million of hotels this year and we've deployed about $90 million on the buyback program this year. So, about $200 million. You will remember then the beginning of the year we said that we had $200 million to $300 million of balance sheet capacity, while still keeping within our target goals. And our target goals are by 2017 to be in that kind of four to 4.5 times debt to EBITDA level. And we see ourselves getting there primarily through free cash flow generation. Our portfolio is renovated, it has much less CapEx coming in the coming years and so we're going to use a lot of proceeds in the future to pay down leverage. I think if we were to get more aggressive on acquisitions or buybacks across the coming months and into next year, then we will consider some more disposition. We've now sold kind of the non-core parts of our portfolio, so we're dividing into the core. But when the opportunity exist, the buyback the company at these levels, we are willing to sell some of our core assets. And we've talked in prior calls about the kind of categories of asset that we might consider. We do have some -– we still continue to have some limited service suburban assets outside of Washington and outside of Boston, outside of Philadelphia, that could be sale candidate. In New York City, we've explored some of our more stabilized assets in New York, the ones that we -- they are still young assets but there are some that we now own for 10 years or so or eight years. And so, there is some assets in New York that we are keeping in touch with potential buyers on and [indiscernible]. And even some of our high growth markets there is assets that have achieved their business plans and are registering great growth rate right now, but maybe a good time to consider some sales there too. So, we are, Anthony, we feel comfortable with our balance sheet today, expect free cash flow to help us bring leverage down to our target level, but we are actively exploring some potential asset sales as well.

[Anthony Powell:]

Got it. And on that topic, I'm sorry if you addressed this already but have you seen any change in the buyer uptake for these types of the assets over the past three months with the lot of the volatility in the lot, these days?

[Ashish Parikh:]

In the kind of the suburban select service base, I think we have seen some impact from the volatility in the macro environment. I think debt levels are still pretty good. But I think last year they were better and there was an expectation they could get even, we're still not the kind of debt levels where they were in 2005, 2006. And I still do believe that will come this cycle. But today I think right now we're in a period where that kind of aggregating select service story in suburban locations has slowed down. And so the kind of the big buyers, Blackstone, Starwood Capital Group, Lone Star, they've all accumulated very large portfolios of suburban select service assets. They are not necessarily acquiring at the same pace as they were in the past. There are some new players that are coming right behind them like a lot of the non-traded read, read probably about how continues to grow and some of the others continue to grow. So, there is some others that are going to take that space a little bit but right now feel like that suburban select service asset bid has got less deep and would likely transact at lower price than it did last year. On the urban side and in major gateway markets, at least on the urban side we haven't seen much of an impact. Rates, public rates weren’t as active in that space to begin with, so the fact that a lot of the public retry the market today hasn't had a noticeable impact on gateway market transactions. Gateway market transactions have been driven by offshore capital from China, from Asia, from the Middle East, and from other parts of the world. For that kind of capital, the volatility in the markets are having underscored the reason why they are looking for opportunities in the U.S. than in these major gateway markets. So, if anything the volatility has made Chinese investors and Asian investors even more aggressive than they may have been in the past or at least more committed to it. That capital is still forming and it's going to have an immense impact on our industry in the future. But we are starting to see more and more transactions not just in the trophy space but in kind of cash flow yield oriented investments as well. So, on the urban side not much impact. On the suburban side it is less deep of a market than it was.

[Anthony Powell:]

All right, that's it from me. Thank you.

[Operator:]

[Operator Instructions] And with no further questions in the queue, I would like to turn the conference back over to Mr. Neil Shah for any additional or closing remark.

[Neil Shah:]

No, I think that does it. Jay, Ash, and I will be here in the office the rest of the day and we look forward to any follow-ups. But thank you for your time today.

[Operator:]

Again that does conclude today's presentation. We thank you for your participation.