Hersha Hospitality Trust
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust first quarter 2013 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Nikki Sacks with ICR. Please go ahead.

[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, and as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality Trust's trends and expectations, including the company's anticipated results of operations through 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 everyone. Welcome to our first quarter 2013 earnings call. Neil Shah, our Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer, join me on the call this morning. As we typically do, I'll begin by discussing our first quarter results and then provide some specific market and industry commentary. We were very pleased by the strength of our portfolio in the first quarter, as we outperform the competitive set in virtually all of our markets and delivered industry-leading results. Our first quarter consolidated and same-store RevPAR increased by 12% and 12.4% respectively, driven by gains in both occupancy and rate. As we discussed on our yearend call, we took advantage of the typical first quarter seasonal softness in our portfolio by completing the majority of our 2013 renovation planned in the quarter. Our results reflect the impact of the ongoing renovations at 10 of our hotels and the disruption from the new tower construction at our Courtyard Miami Beach. Excluding the renovation and construction disruption, our first quarter consolidated and same-store RevPAR was up 14.4% and 16% respectively. Also interesting to note is that during the quarter 24 of our 56 consolidated hotels or 42% of our portfolio hotels realized double-digit RevPAR growth. Equally encouraging was a distribution of these 24 hotels across our markets, including property in Boston, Washington D.C., and Philadelphia, in addition to New York. These strong results continue to validate our strategy of assembling a portfolio of young urban trend in hotels in U.S. gateway market. Our hotels combined with our aggressive asset management and value-add or our live projects position us for many strong quarters in the years to come. In New York City and Manhattan we reported same-store RevPAR growth of 14.1% and 7.8% respectively. Our New York City urban results were driven by the strength of our Manhattan properties and also benefited from the residual effects of Hurricane Sandy related relief efforts at our JFK properties. The Manhattan portfolio did not derive material benefit from the Sandy relief efforts in the first quarter and was further negatively impacted by the renovations at two of our Manhattan hotels. Excluding the renovation hotels, Manhattan same-store growth was 10.6% with a 130 basis points increase in EBITDA margin. Year-to-date the overall New York City results have been quite encouraging, and although group pace is flat-to-down in quarters two and three, we are seeing strong business transient and leisure demand across all segments. The New York area Airports have experienced strong year-over-year growth led by international arrivals, which are up 4.9%, while domestic arrivals increased by 2.5% in the first quarter of 2013. Our hotels benefited from the strong international demand and we estimate that approximately 19.3% of our total room revenue in New York City was driven by demand from international travelers, up 14% from last year's first quarter. Top revenue generating countries for our portfolio include the U.K., Brazil, Canada and France, with the contribution from Brazil increasing by over a 100% in the last 18 month. The Eurozone represented approximately 3% of total New York room revenue in the first quarter of '13, and the weakness out of these reasons is being absorbed by the Asian and South American travelers, as record numbers of families emerge into the middle class for the first time, and view New York City as a primary international destination. From the standpoint of supply growth, we anticipate that 2013 growth in New York will range between 2.5% and 3%. We monitor supply growth in New York very carefully and believe that New York construction delays are consistently underestimated. We are also beginning to see developed land parcels becoming more attractive to multi-family developers, rather than hotel developers, given the strength in the residential market in Manhattan. We track land prices and based upon most recent trades, we estimated that quality land parcels are being priced at approximately $350 to $400 per billable square foot, with premium parcels north of $500 per square foot. Finally, we're pleased to report that our brand new 178 room Hyatt Union Square had a soft opening last week, and the hotel is scheduled for a full opening on May 13. The Union Square market is extremely vibrant and has seen no new inventory in the past 10 years. We are very pleased by the reception that the hotel has received so far and believe it will be a strong contributor to our portfolio for years to come. In Washington D.C., which accounts for roughly 11% of our EBITDA, we recorded same-store growth of 22.6% and 11.3% RevPAR in our D.C. urban and metro portfolio. Respectively, these strong results were driven by demand associated with the Presidential inauguration and a positive year-over-year comparison as a majority of our D.C. hotels were under renovation during the first quarter of 2012. We're extremely pleased with our hotels performance during the quarter, but the outsize growth is non-indicative of our expectations for the full year in Washington D.C. For the past several quarters the tepid economic environment in Washington has been impacting budgets, and although we didn't realize any impact from sequestration in the first quarter, we are seeing some small group cancellations for federal and state funded agencies. Despite our offsetting revenue management strategies, we are likely to see less robust growth from Washington for the remainder of the year. On the topic of sequestration, outside of our urban and metro D.C. markets only 2% to 3% of our business is government or government-related, and therefore we anticipated limited impact from sequestration across the rest of our portfolio. The Boston market has remained strong as we recorded RevPAR growth of 10.7%, which was 540 basis points above the competitive set. Boston remains a growth market for us, and while group pace is down due to a weaker convention calendar, we have limited group exposure in this market and we believe that the city's diverse economy and transient demand will fuel continued growth there. In Philadelphia, we realized RevPAR growth of 5.5% in both our urban and metro portfolios. Although, second quarter transient demand should be bolstered by the U.S. Open Golf Tournament at Merion in June, the group pace isn't consistent, which takes away the opportunity for us to drive pricing during compression nights, and therefore we believe that the portfolio in Philadelphia will perform roughly in line with the broader market. Now, to Southern Florida and Southern California, in Miami the new tower construction for our Courtyard Miami Beach remains on schedule and on budget, and we expect a fourth quarter opening for the new tower. The Miami market realized a very strong RevPAR growth during the quarter and is one of the few major markets in the country, where both occupancy and ADR are significantly above prior peak, with ADR being approximately 14% above the prior peak. In our California/Arizona region, we achieved RevPAR growth of 12.8%, which includes strong performance at our Courtyard Los Angeles Westside, which realized 7.8% RevPAR growth and is expecting double-digit RevPAR gains for the second quarter. As we move forward in 2013, we remain focused on our aggressive asset management program and anticipate additional benefits from completion of the renovation projects in our portfolio. Based upon the trailing 12-month results in our six major markets, we are at or above the prior occupancy peak in all of our markets, while only Boston and Miami are above prior peak in ADR. New York, Los Angeles, Philadelphia and D.C. are all below prior peak in ADR, with New York having the most runway as it remains almost 10% below the prior peak ADR in that market. We believe our young well-located portfolio positions us well to capture the growing demand in the American urban gateways and we look forward to another robust year in 2013. With that, I'll turn the call over to Ashish to discuss our operating results and financial position.

[Ashish Parikh:]

Great. Thanks, Jay. I'll start by providing some additional details on our operational results, transition over to balance sheet activity and provide some color on our revised guidance for 2013. On a consolidated basis, our hotels realized RevPAR increase of 12% driven by ADR growth of 5.8% and portfolio-wide occupancy of 69.7%, which was an increase of 385 basis points from prior year. On same-store basis, our consolidated portfolio RevPAR increased 12.4%, also driven by ADR growth of 5.3% and an increase of 447 basis points in occupancy to 70.2%. We drove positive RevPAR growth in all, but one of our markets, and excluding hotels under renovation were also able to drive positive rate growth in all of our major market. Demand levels and corresponding occupancies were strong across our portfolio, with New York City recording some of the highest first quarter occupancies in recent history. Occupancy for our urban New York portfolio was 84.8%, while our Manhattan portfolio excluding the two hotels under renovation registered 87.6% occupancy during the weakest demand quarter of the year. These strong portfolio-wide occupancies allowed us to drive rate based RevPAR gains, which resulted in an expansion of our EBITDA margins by a 100 basis points during the quarter. As Jay discussed, our portfolio was impacted by renovation activity during the quarter and on a same-store basis, excluding these hotels, our EBITDA margins expanded by 260 basis points. Our normalized run rate of revenues and margin, we estimate that the EBITDA impact from renovation-related disruption was between $1.25 million and $1.5 million for the first quarter. Our portfolio of urban transient-focused hotels generated the highest absolute EBITDA margins amongst our peer set and our ability to drive ADR based RevPAR growth should continue to allow us to post margin growth as we get deeper into the recovery and as our portfolio stabilized. Approximately 40% of our 2013 EBITDA is forecasted to be generated by hotels that are less than five years old. And we believe that by the end of 2013, when we're able to see the benefits for the newly constructed tower at the Courtyard Miami Beach, the Hilton Garden Inn 52 Street, the Hampton Inn Pearl Street as well as the stabilization of the Hyatt Union Square, will continue to drive further modest margin expansion. Transitioning over to the balance sheet and recent capital raising activity. During the quarter we made further progress on our efforts to simplify our balance sheet, selling our 66.7% JV interest in a 92 room Courtyard by Marriott located in Warwick, Rhode Island to our joint venture partner. Subsequent to quarter end, we received full payment for the development loan on the Hyatt 48Lex, and with the acquisition of the Hyatt Union Square hotel, our development loan on this asset was converted to equity. The development loan program was instrumental in providing Hersha an ancillary acquisition pipeline. And since its inception, we purchased approximately 20 assets with a total acquisition value of over $750 million as a direct result to this program. However, with these two affirmation transaction, we have no further development loans outstanding and no plans to reinstate the program at this time. Additionally, during the quarter we completed a public offering of 3 million Series C Cumulative Redeemable Preferred Shares at a coupon of 6.875%, and raised net proceeds of approximately $72.5 million. The strength of our balance sheet allow us to raise this new series with a coupon rate, which is more than a 100 basis points lower than our last two preferred issuances. Our ability to raise this equity at one of the lowest coupons ever for an unrated preferred speaks valiance to investor confidence in our outlook and strategy. We subsequently redeemed all of the outstanding 8% Series A preferred at the end of March. The timing overlap between issuing the Series C and redeeming the Series A resulted in additional preferred dividend of approximately $344,000, which impacted our FFO during the quarter. At the end of the quarter, we had $83.1 million of cash and cash equivalents, and no borrowings on our $250 million senior unsecured revolving line of credit. Regarding our capital spending, we're on track and as of the end of April have completed the majority of our significant renovations for 2013. We increased the scope of renovations in ROI projects at several of our hotels, and for the full year we now anticipate our capital spend to be in the range of $30 million to $32 million. With the completion of these projects, we're bringing closure to the extensive renovation programs we have had in place for past few years and look forward to leveraging the investment to produce incremental growth for the portfolio. Let me finish with our revised guidance for the full year 2013. General economic climate and GDP outlook has not changed material from where we were, when we issued our initial 2013 guidance approximately two months ago. We continue to forecast strength in transient business and leisure travel for the remainder of the year, and are optimistic about our prospect. We are quite pleased to see that congress took action to resolve the furlough for air traffic controllers, as the prolonged furlough could have served as an unanticipated headwind for our industry. Any congressional action is encouraging and provides hope for eventual resolution to the budget standoff, which is generally regarded as one of the largest overhangs on the economy. With the strength of our first quarter results and our second quarter pace, we're tightening our guidance for RevPAR growth, raising the lower-end of our expectation. We now expect 2013 total consolidated RevPAR growth in the range of 6% to 7.5% and same-store RevPAR growth in the range of 5.5% to 7%. We anticipate ongoing industry-leading EBITDA margin and are maintaining our margin outlook for consolidated hotel EBITDA margin expansion of 25 to 50 basis points and for 25 to 75 basis points of expansion on a same-store basis. As we have in the past, we will continue to monitor the pace and performance of our portfolio. And we'll continue to provide adjustments to our guidance if necessary, to keep it meaningful, as we progress further into the year. That concludes my formal remarks. And I will now turn the call back to Jay.

[Jay Shah:]

Thanks Ashish. Operator, we can open the line for questions.

[Operator:]

(Operator Instructions) We'll take our first question from Andrew Didora of Bank of America. Andrew Didora - Bank of America Two questions, first on New York. I think this is the second consecutive quarter, where you posted double-digit RevPAR in the market. I think one cue in New York was actually helped by the holiday shift this year. So I'm just wondering if you guys could be able to quantify, how much you thought the shift could have helped your New York properties in one cue. And then I guess also, how sustainable do you think these New York RevPAR trends can be as we progress throughout the year?

[Jay Shah:]

I'll let Ashish answer, if we can quantify the holiday shift. But I think generally, New York has just continued to see increasing demand in the business transient market as well as the leisure transient market. We were pretty pleased with New York and New York portfolio operated around 84% in the first quarter. In 2012 we had a pretty strong first quarter performance as well. But in years past, before that, we haven't seen that kind of demand in the first quarter. So the seasonality and softness that we used to see in the first quarter is starting to dissipate. And I think that's driven mainly by more leisure demand coming into the first quarter than we used to see in the past. Our business transient pace was up and strong as well. And so I think from the standpoint of sustainability, I think the trends we're seeing in New York and the trends we're seeing with leisure travel coming into New York, kind of indicated to us that the strength going into the remaining quarters in New York is pretty strong and encouraging. Ashish, I don't know, if we've taken the time to quantify the first quarter shift.

[Ashish Parikh:]

Yes, Andrew, you are right. I mean these two are falling in March, whereas it affects most of the markets negatively, very much helps New York with spring break and with people sort of fun loading their travel. So our March result where helped by the timing shift, and you'll see it in April, I think overall New York has been weak in April. We're starting to see the main June pace to be very strong on the transient side and that will make up for some other weakness in April. Unfortunately, I don't think I can quantify exactly how much of a boost we have received, because our January and February numbers were so strong, in the mid-teens for RevPAR growth. So I think March was kind of in the single-digit, still strong, but it was really January and February that drove most of the gain. Andrew Didora - Bank of America And my last question, I think more a little bit strategically. You guys have done a good job for this cycle in cleaning up some of your ancillary businesses. You mentioned in your prepared remarks that you have no more development loans outstanding. I think you have just six unconsolidated properties remaining in your portfolio. Kind of what do you see as a next strategic step that you want to take with the portfolio in your company?

[Jay Shah:]

Andrew, I don't know that we have any significant shifts for the strategy. We've talked about before and basically that is continuing to build-out the market strategies that we already focus on. I think going forward Southern California and Southern Florida are significant areas of focus for us. With Southern Florida, that sort of a later cycle recovery play and we're finding the dynamics there to be very attractive, and Southern Florida continues to remain very strong. So we'll continue to look in those areas. I think other than that, we're getting to a point in the cycle where, we're staying very, very tend into the market and what type of pricing and transaction we can make with the limited non-core assets in our portfolio. We think that we've got another 10 to 14 assets that are at this point, getting to a point of recovery, where they might be interesting candidates for disposition. Once we do additional non-core disposition, I think at that point we're going to be in a position to have some very, very strong average portfolio metrics beyond what we have today. And I think it will just continue the distillation of the story and making it that much more clear and pure play.

[Operator:]

We'll take our next question from Ryan Meliker with MLV & Co. Ryan Meliker - MLV & Co. Just a quick question, I guess really two. First of all, can you give us any color on whether there's anything like, during 4Q and 1Q there was a lot of positive benefit from displacement caused by Hurricane Sandy. I don't know if you guys can quantify what you think that might have been, whether it was offset by some of the negative impacts on your properties? But now with your downtown properties reopened, if we have any remaining displacement benefits from hurricane Sandy going forward or if that story is already played out?

[Ashish Parikh:]

We absolutely saw benefit in the fourth quarter in both urban New York as well as the New York/New Jersey metros. In the first quarter of this year, it was really the JFK properties, Long Island and some parts of New Jersey, but once we went past about mid-to-late January, we didn't see any impact of Sandy in our Manhattan portfolio. I think that at this time, we still have some guests at two of our JFK hotels that is suppose to end by the middle of May. And we don't anticipate any major benefits to Sandy related relief efforts in quarter two or past May 15, and then going through the rest of the year. I think that story has pretty much played out now. Fourth quarter of this year would be some more difficult comps of course, because of it. Ryan Meliker - MLV & Co. And I don't know if you can or if you can, even if you're willing to sort of quantify, if you look at your same-store RevPAR it was up 12% and New York portfolio up 14% in the first quarter. How much of that was driven by some of those benefits from Sandy that you think will roll-off. Are we talking 0.5 percentage point, are we talking 5 percentage points, just trying to understand the magnitude of the impact on your portfolio and kind of how the same-store numbers really are and run rate going forward?

[Jay Shah:]

I think that, look first quarter we received a benefit from the inauguration as well. I would say it's probably in the 200 to 300 basis point range for the first quarter from Sandy. Ryan Meliker - MLV & Co. And then given that and obviously the inauguration was strong in D.C., it seems like only raising the low-end of guidance 50 basis points seems conservative. Can you give us some color on how you're just thinking about that? I know first quarter is seasonally light for you guys, so we don't want to read too much into the RevPAR growth, but just any color on where your confidence is in the RevPAR outlook?

[Ashish Parikh:]

I mean, at this time, things really haven't changed that much since we gave guidance, a couple of months ago. And you're right, our first quarter revenues are less than 20% of our yearly revenues. I mean, I think at this point with where we are in our guidance range, I believe we are probably the most bullish on the street and that's probably warranted with the strength for the past few quarters. But we do feel that the range is reasonable and we need to be mindful of the fact that we have a lot of new developments that are coming online in our portfolio this year, in addition to the difficult fourth quarter comparables. So with that and being early in the year, we feel pretty comfortable with where we are from the guidance standpoint.

[Operator:]

We'll take our next question from Will Marks with JMP Securities.

[Will Marks:]

I want to ask about the RevPAR growth guidance. And you can give us any indication maybe by quarter, and then also some little color on how that on the different markets as they relate to that RevPAR growth guidance?

[Ashish Parikh:]

Well, we haven't really given quarterly guidance. I can tell you that we are going to face most favorable comps in quarter three than we did last year. As you remember, quarter three was a weak quarter last year, you had the July 4 holiday, following on the middle of a week, and we had a disastrous September in New York. So I would say that we're sort of moderating our guidance. In Q2 it's still strong. April hasn't come in great kind of mid-single digits for the portfolio. But we're seeing better strength in May and June. Third quarter looks good at this point. And then as I mentioned, quarter four is going to be a difficult quarter due to the strength that we saw from Sandy related efforts last year. So probably our weakest quarter of the year, by far, in Q4.

[Will Marks:]

And then just in terms of generalizing by geography for the full year and obviously not by quarter, but where is the strength? Is New York going to be above the high end, D.C. below?

[Ashish Parikh:]

I mean, when we look at our major market, I think that's right, we are seeing New York above the high-end. We're seeing Boston to be another strong year. I would say D.C. and Philadelphia probably underperformers for the portfolio compared to our growth rate.

[Will Marks:]

What about Miami actually?

[Ashish Parikh:]

Miami as a market is going to be one of the best markets in the country this year, we think based on the pace. With the tower construction that we have though, we're not seeing that growth because of the disruptions at the property. We think that once the tower is completed, it sets us up really, really well for 2014. We continue to see California/Arizona our portfolio out there, also be above our overall RevPAR growth.

[Operator:]

Take our next question from David Loeb with Baird.

[David Loeb:]

Just to close the loop on Sandy, I'm glad to see that Water Street is open, what are the prospects for business-interruption insurance, how much do you expect and when do you think you'll get that?

[Ashish Parikh:]

The timing of it is very much uncertain. We actually in the first quarter just finished receiving the last of Hurricane Irene recovery funds, if you remember that's gone back almost 18 months at this point. So we're definitely not forecasting any big recoveries in quarters two or three. I think that quarter four we maybe able to recover a good portion of it by the end of the year. We are still putting our claims together, David, and not really comfortable kind of putting out the number at this point.

[David Loeb:]

So that's going to be a, I guess, a small offset to the difficult comps, but I guess it's very hard to quantify today?

[Ashish Parikh:]

Yes, it is. But it is definitely back-end loaded from a recovery standpoint.

[David Loeb:]

And how about the opening of Pearl Street, how is that affected by the hurricane? And where are you now in that process?

[Jay Shah:]

David, Pearl Street during the hurricane, the entire site flooded like 10 feet of water it took on, so the entire basement and all of the open construction elements had to be as part of the remediation, everything basically had to be yanked out and redone. So we incurred a significant delay. Our expectation is that the contractor should be able to get in there and get back on to the construction schedule. When the hurricane hit, we were about eight months from opening. So I would say the contractors have just sort of retaken the building. So it will probably be another three quarters for that asset to open. In the best case, it will be the fourth quarter of this year, but I would say, fourth quarter of this or first quarter of next year.

[David Loeb:]

And property insurance will cover the replacement of that capital, is that correct?

[Jay Shah:]

Yes, that will. That will be covered by the construction.

[David Loeb:]

The project?

[Jay Shah:]

No, it will not. It will open a lot later.

[Neil Shah:]

It will open a lot later.

[David Loeb:]

And how about the Hilton Garden Inn, might that open first then?

[Jay Shah:]

The Hilton Garden Inn, that will almost certainly open before Pearl Street.

[David Loeb:]

And then, finally, just general question. What are you seeing in terms of New York City supply trends prospects for new developments being launched, land prices, things like that?

[Neil Shah:]

Jay mentioned in his prepared remarks some of the metrics that we're seeing in the marketplace right now for land sale. The land markets there sell pretty hard after 2009 and so it went from peak of last cycle kind of $400 to $500 per square foot for a good site, dropped to kind of $200 mark, I think in 2010-2011. It's now fully recovered in terms of land prices. I think kind of, the mid-block sites are in the $300 per foot. And then as you get to on the avenue kind of locations, you're in the $400 per foot, and then if you're in a great submarket on the avenue or on a corner location, we're seeing prices again above $500 a foot. Some of that is driven by the residential market, just being very hot right now for both condos and multi-family as well as for hotel developers, there is very strong performance. And construction financing has been slow to return across the country, but in major urban markets there is construction financing available, so that's why we have seen projects announced across the last few years. In terms of our picture on new supply, we expect that this year we will receive a total of about 3% increase in new supply in Manhattan. In 2014, we are currently projecting 6.3% and then in 2015 in the high 3% range. We believe that it is very likely that the 2014 number will shrink due to the delays that Jay had mentioned in all construction projects. So I wouldn't be surprised if it was more like 5% and 2% in the coming couple of years. But still significant supply, it's coming in certain quadrants of the market. There is a lot in Midtown West and there is a lot down in the financial district. But as we've seen from our experience as well as from other project, this is a very time consuming and complex task developing hotels in New York and kind of the two-year expectation for development in other markets around the country should be doubled in New York. So we expect there to be new supply, but were to be come slower than expected by most of the consultants out there today. And as we've also mentioned, I think across the last several quarters that there is still very, very strong demand in the marketplace and demand clearly outpaces new supply as we're seeing from the performance in this marketplace. So at least for the next year, year-and-a-half, we see a pretty strong environment for raising rates and continuing the optimize occupancy.

[David Loeb:]

And one I had, Neil, just a follow up on one thing you said about construction financing being available at other markets, are you seeing the early stage as of competitive supply against your assets in other markets outside of New York?

[Neil Shah:]

Outside of New York, the construction financing is just starting to come back and so we are not seeing a significant amount of supply in our areas outside of New York City. There is none that is concern or worry right now, but I would expect that across the next 12 to 18 months there will be new projects announced in some sub-urban markets out there. But right now the construction financing remains very tepid in markets outside of New York or Washington and they require very large equity checks and that's leading to a different class developer. In Miami, I think everyone has been hearing about all of this kind of new projects being announced in Miami Beach, a lot of them are kind of conversions of existing hotels and the like, upgrading of hotels, repositioning of hotels and there has been a handful of kind of new constructions kinds of projects, but that market very much like New York has plenty of demand to absorb the kind of supply that we're projecting right now.

[Operator:]

We'll take our next question from Bill Crow with Raymond James.

[Bill Crow:]

Can you comment on the profitability of international guest as they come to New York and I guess I haven't spend a lot of time thinking about it, but how do they book? Do they use rewards programs? Is it better or worse to have them in your hotel than your traditional corporate client? Can you kind of give us some ways to think about that?

[Jay Shah:]

Yeah, the international guests comes a couple of different channels. Our direct sales efforts at the properties and above property book a lot of FIT groups into the hotels and these foreign individual traveler groups that come in are actually very attractive to us because they are very flexible on days of the week and somewhat where they stay in the city, so we're able to strategically drop that kind of business into the hotels to create compression on non-peak nights or on non-peak periods when we otherwise wouldn't have compression. The rates is right what I mentioned, the leisure traveler from abroad rates are going to be less than the business transient rates that we normally get at the hotels, but like I said it allows us to create compression and drive pricing for other segments at the hotel. Beyond that we see that a lot of travelers will book directly through the hotel.com websites and then through the electronic distribution channels that we manage pretty closely. And again, we put inventory on these channels very, very judiciously and when it's out there, it's when we can use it to fill otherwise soft periods or like I said before, to create compression. The electronic distribution channels are probably the biggest source of international demand coming into the hotels. And that is something that we control, its inventory that we control and decide how we put it out and at what pricing. And so it's actually a very attractive dynamic. It's not really this matter of international traveler or U.S. leisure traveler or business transient and we try to have kind of balance and juggle, all three in order to optimize the inventory at the hotel. So it's actually very additive and it's been a very positive dynamic and we were really happy to see the increase in the first quarter of international travelers.

[Bill Crow:]

So if you threw a blanket on it and you say, okay, the rates are typically a little bit lower. I understand you fill it, backfilling weaker periods during the week or a month, is the profitability lower as well or can you reduce costs maybe less frequent guest usage or anything else that might drive up or drive down costs to match the lower revenues or is it just a lower margin lower profit business, but one which bolsters results in the end by filling in weak periods.

[Neil Shah:]

Well, as the way we think about it, it's incremental revenue and it is coming from occupancy. So we're just being able to drive additional rate on the business transient segment, it's going to be somewhat less profitable. But it's still incremental profitability, the EBITDA, that the flow through to the EBITDA is still pretty strong at these occupancy levels. Now, we manage it pretty closely. If we find that the rate is getting to be so low that it rather it leaves the inventory free to be able to take advantage of whatever incidental demand is in the market we would do that. But at this point the rate is high enough that the flow through as though there is not as much as an incremental dollar from rate would be, the incremental occupancy and rate is, I would say it's probably a 40% to 50% flow through to the bottomline versus being 60% to 70% where coming just from additional BT rate. But the BT demand has to be there in the first place to be able to drive that rate. And I think some of the compression we create with the international travelers allows us to do that with the BT.

[Operator:]

At this time there are no further questions in the queue. I would like to turn the call back over to Mr. Shah.

[Jay Shah:]

With that, we'll conclude the call this morning. If any other questions occur to anybody feel free to call us in the office. And we thank you all for joining us this morning.

[Operator:]

And that concludes today's conference call. Thank you for your participation.