Hersha Hospitality Trust
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Second Quarter 2013 Earnings Conference Call. Today’s call is being recorded and at this time all participants are in a listen-only-mode. Later we will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) At this time, I would now like to turn the conference over to Ms. Nikki Sacks. Please go ahead.

[Nikki Sacks:]

Thank you, and good morning, everyone. I want to remind everyone that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the Company's actual results, performance and achievements or financial provisions to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. These factors are detailed in the Company's press release and in the Company's SEC filings. With that, let me turn the call over to Mr. Jay Shah, Chief Executive Officer. Jay?

[Jay H. Shah:]

Thank you, Nikki, good morning everyone. I am joined today by Neil Shah, our Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer. I’ll start with a recap of the strategic transactions that we completed this quarter provide an overview of our second quarter results, and finish with more specific market and sector commentary. On the acquisition front, we strengthen and diversified our portfolio in Manhattan and expanded our exposure in Miami and Southern California. We are pleased to been able to find compelling acquisition opportunities that satisfied our strict underwriting criteria and undoubtedly competitive acquisitions environment. At the beginning of April as previously announced, we acquired the Hyatt Union Square. This existing brand new hotel is located in one of the most underserved and highest growth submarkets in Manhattan. We entered into a take out contract for this asset in 2011, and have seen significant price appreciation in the market since that time. The hotel began operations in late April and completed the construction of all rooms by the end of the quarter. The hotel fully opened for business in late June and therefore we saw limited contribution from this asset during the second quarter. So far in the third quarter the ramp up of the Hyatt Union Square, is exceeding our internal forecast and we’re beginning to see strong contributions to Hersha’s consolidated results. At its current trajectory we’re forecasting the asset to be among the top five EBITDA contributing assets in our portfolio by the fourth quarter of this year. We also expanded our footprint in Miami and Southern California with the acquisition of the residence in Coconut Grove and the Courtyard, San Diego. We’ve already seen positive results from several of our asset management initiatives and the transition of some property level management at these hotels. Finally, we sold additional non strategic assets during the quarter. We completed the sale of The Comfort Inn, Harrisburg, Pennsylvania and entered into an agreement for the sale of the Holiday Inn Express, in Camp Springs, Maryland. But hotels are nonessential to our strategy and represented opportunity to recycle capital into higher growth assets. As perviously discussed, we’ve identified an additional 15 to 20 hotels in our portfolio as potential disposition candidates. And are focusing more effort on exploring the potential sale of these assets through a cycle of the capital with the ultimate goal of driving and strengthening the Company’s growth rates and RevPAR. Operationally, the second quarter was a solid quarter for Hersha as we continue to report strong occupancy and best-in-class EBITDA margins across the portfolio. Our second quarter same-store RevPAR increased 3.7% driven by ADR growth of 2.4% and occupancy growth of 103 basis points to 82.2%. Second quarter trends on the West Coast were generally stronger than the East Coast and some of the previously slower recovery markets out performed during the quarter. Our best performing hotels during the quarter were in our West Coast portfolio. We’ve reported an impressive 11.4% increase in RevPAR and this portfolio driven by 7.1% growth in ADR, which resulted in an EBITDA margin expansion of 170 basis points. Our strong result in this market should be further amplified in the coming quarters given our recent purchase of the fully renovated Courtyard, Marriott, San Diego. The refresh of our Hyatt House portfolio and strong demand expectations in Los Angeles. Our other top performing markets during the quarter were the Connecticut, Rhode Island and New York, New Jersey metro markets which posted 9.8% and 8.7% RevPAR gains respectively. Our New York City urban and Manhattan portfolio reported same-store RevPAR growth of 5.8% and 2.9% respectively. Our New York City quarterly results were negatively affected by the shift in the Easter holiday to March causing our transient focused assets in that market to be challenged. Our New York City portfolio posted 2.1% RevPAR growth in April following Easter compared to 9.9% and 5.2% RevPAR growth in May and June respectively. Occupancy in our Manhattan portfolio remain robust at 93.3%. We continue to see solid demand trends that are allowing the market to absorb new supply thereby affording our operators to be able to continue to push ADR. Our Manhattan portfolio also realized very strong absolute EBITDA margins of 48.9% during the quarter. The citywide convention calendars in our second and third largest markets, Boston and Philadelphia were softer than previous years, and we anticipate that these trends will continue through the second half of the year. Our Boston portfolio realized RevPAR growth of 3.8%, which was 280 basis points above the market’s RevPAR growth for Boston. During the quarter, we successfully completed significant renovations and a complete rebranding and repositioning of The Boxer, previously the Bulfinch Hotel. We remain bullish on our Boston portfolio as transient demand levels remain very strong along with a stronger citywide calendar in 2014 and 2015. Our most challenging market during the second quarter was Washington DC. While our urban DC portfolio was essentially flat for the quarter; our metro DC portfolio recorded a RevPAR decline of 10.5%. As we discussed on our first quarter call, we started seeing the effects of sequestration and the resulting government travel cutbacks in April that these travel restrictions had a much more profound effect on the market, and on our results in May and June. The lack of compression from the drop off in government and group travel hampered our ability to push rates, and while there are several positives such as the IMF meeting in the back half of the year, we still foresee a challenging lodging environment in the metro DC sub markets as government related demand is projected to remain strong. We remain firm believers in the long term viability of this market and then our DC portfolio, and has implemented several asset and revenue management strategies to offset some of the ongoing downward trends. Finally in Miami, we continue to experience disruption from the new tower construction, pool closure at the Courtyard Miami Beach, which resulted in negative RevPAR growth of 12.7%. The majority of the disrupted construction is now behind us, the swimming pool is back in service, and the third party is looking stronger for this asset. We expect a new tower to be fully operational in the fourth quarter, and are pleased with our ability to bring this project to completion on time and on budget. Furthermore, given the strength of the Miami hotel market, we are very well positioned to drive growth in this market in 2014. International travel continues to be a bright spot for the industry and our portfolio continues to benefit disproportionately from the increase in inbound travel. Year-over-year, all seven of the airports in our top gateway markets have experienced growth in international employment and overall year-to-date employments are up 3.7% across our markets. When you look at the largest beneficiary of the improving international travel, and year-to-date we estimate that approximately 20.8% of our total room revenue in New York City was driven by demand from international travelers, up 12.4% from last year. Top revenue generating countries where our portfolio include the UK, Canada, Brazil and France. Year-to-date, the Euro zone represents approximately 3.7% of total New York room revenue representing a modest improvement in terms of contribution from the Euro zone travelers from the prior year. Finally, I’d like to briefly discuss the implication of rising interest rates to our overall strategy and outlook. We don’t intend to shift either our acquisition or disposition strategy in the face of rising rates at this time. Although the spectra of sudden interest rate increases has caused significant volatility in the capital markets, we view rising rates as a positive sign of strengthening economy from which we can yield significant benefit. And those are one of the few asset classes in real estate that benefit in the long term from rising rates, as demonstrated by statistically strong correlation between ADR growth and rising interest rates over a multi-year period. In addition the short term nature of our leases at our urban business transient hotels has the ability to reap – to quickly reprise our inventory to leverage stronger demand in a real time basis. We continue to see positive signs of growth in the economy, particularly with regard to increases in home prices and a declining unemployment rate, all of which served to fuel consumer confidence. We believe Hersha is well positioned to be an outsized beneficiary of these improving conditions. I’ll now turn the call over to Ashish, who’ll discuss our operating and financial results, Ashish?

[Ashish R. Parikh:]

Thanks, Jay. I’ll begin with additional details on our operating results, discuss balance sheet activity during the quarter, and finish with our outlook for the remainder of the year. Gross operating profit or GOP margins for the company same-store consolidated hotels improved 80 basis points, a 51.5%, and were driven by the strength of our GOP margins in the New York City portfolio, which also improved 80 basis points to 58.5%. Our GOP flow through for the quarter was a very strong 79.7%, and allowed us to expand our same-store EBITDA margins to 42%. On a same-store basis, our consolidated EBITDA margins expanded by 30 basis points, and were impacted by significant property tax increases at several of our larger New York City hotels in addition to a purchase price reassessment at our Courtyard, Los Angeles. Property taxes and insurance expense increases had a negative impact of approximately 55 basis points on our same-store EBITDA margin growth for the quarter. We believe that our continued focus on cost containment strategies and asset management initiative in addition to the benefits we’re realizing from our capital investments over the past few years should allow us to continue to post best-in-class portfolio-wide and same-store EBITDA margin. Adjusted funds from operations or AFFO in the second quarter increased by $2 million to $28.7 million compared to $26.7 million in the second quarter of 2012. AFFO per diluted common share was $0.14, in line with the same quarter in 2012. FFO during the quarter was impacted by a higher share count as compared to the prior year in addition to several factors that Jay mentioned. The Hyatt Union Square was purchased in April of this year, but ongoing construction at the hotel prevented us from having all rooms online until the end of the quarter. Our quarterly results were also impacted by construction delays along with startup costs and pre-opening expenses at the Hyatt Union Square. In addition AFFO was negatively impacted by the ongoing renovations at the Courtyard Miami Beach and The Rittenhouse Hotel in Philadelphia during the quarter. On the other hand, AFFO for the quarter was positively impacted by the addition of the Courtyard, San Diego; Residence Inn Coconut Grove for a portion of June. I’ll now turn to the balance sheet and our recent capital markets activity. During the quarter, we received the full balance on the development loan outstanding on the Hyatt 48 Lex and with the acquisition of the Hyatt Union Square hotel, our development loan on this asset was converted to equity. With the completion of these transactions, we no longer maintain any development loan exposure. Additionally, we modified our $30 million loan on the Courtyard Los Angeles in April. This loan modification provides us the option to advance an additional $5 million in principle, reduces our interest rate by 85 basis points to LIBOR plus 3 and extended the loan maturity by two years until September 2017. Finally, during the quarter we repaid $7.9 million on our mortgage outstanding on the Residence Inn, Tysons Corner, Virginia with cash on hand. Company’s balance sheet remained strong and our refinancing efforts over the past few years have allowed us to reduce our year-to-date interest expense despite the fact that our asset and revenue base has grown significantly from new hotel acquisition. In terms of financing, the majority of our fixed rate debt is hedged through swaps and caps. We have minimal exposure to floating rate financing and all of our floating rate debt is LIBOR based. We’re just seeing the minimal volatility as compared to U.S. treasury. At the end of the quarter, the company maintained significant financial flexibility with approximately $29.3 million of cash and cash equivalents and $183.8 million available on our revolving credit facility. Regarding capital spending, the company has two significant capital projects ongoing with the Courtyard Miami Beach and Rittenhouse and both are expected to experience some disruption though the end of the third quarter, and we’re building in this disruption from these projects into our guidance figures for the remainder of the year. We anticipate our full year capital spend to remain between $30 million to $32 million, and with the completion of these two aforementioned projects, we’ll bring the closure to the extensive renovation programs we’ve had in place during the past few years. And we look forward to leveraging our investments to produce incremental growth for the portfolio. Finally, in terms of guidance, we continue to see a positive economic outlook for the remainder of the year. But recent indicators of both consumer confidence and CEO sentiment showing the healthy uptick. Transient demand trends remained strong in the majority of our market and we shared the view that the U.S. lodging industry’s sustained recovery will be driven in large part by the business transient and leisure transient traveler in the near and medium term. With group business recovering slower than in typical recovery cycles. Our forecast for the remainder of the year and large part driven by our outlook for stronger third quarter result from our New York City urban portfolio, while our fourth quarter results are forecasted to be challenging due to difficult fourth quarter comparison as a result of post hurricane Sandy storm in New York in the fourth quarter of 2012. With that backdrop we are maintaining our forecast for full year 2013 of 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%. Additionally, we are maintaining our margin outlook for consolidated Hotel EBITDA margin expansion 25 basis points to 50 basis points. And for 25 basis points to 75 basis points of margin expansion on a same-store basis. As always we’ll update these expectations if there is a material change as we continue to monitor our portfolio’s performance throughout the year. That concludes my formal remarks. And I will now turn the call back to Jay.

[Jay H. Shah:]

Operator, we can open the line for questions.

[Operator:]

(Operator Instructions) And we’ll take our first question from Jeffrey Donnelly with Wells Fargo

[Jeff J. Donnelly:]

Good morning guys.

[Jay H. Shah:]

Hi, Jeff.

[Jeff J. Donnelly:]

I apologize, I just missed your remark on Hurricane Sandy, I was curious, can you isolate for us the EBITDA benefit or impact that you actually ultimately capture from Sandy and maybe highlights sort of source (inaudible) can be sure capturing right at the normal.

[Jay H. Shah:]

Sure. Jeff, do you mean for this year in 2013?.

[Jeff J. Donnelly:]

Yes, just thinking ahead, I guess I’m wondering how much you think, you might have benefited in 2012, and how we be in and think about how about anniversaries just to make sure…

[Jay H. Shah:]

Sure. We saw benefits from post hurricane Sandy storm in Manhattan as well as in the metro, New York, New Jersey markets in the fourth quarter of last year. When we came to the first quarter of this year, it was really the metro market, the Long Island, JFK, some parts of New Jersey that we saw strength, but we didn’t see too much strength. We couldn’t isolate anything in Manhattan because most of our hotels, ran pretty consistent occupancies in ADRs as we had forecasted. So I think that probably in the back in the fourth quarter of 2012, we estimated somewhere in the range of $4 million of EBITDA that came out of Hurricane Sandy storm. And I would say in the first quarter of this year is probably closer to $2 million.

[Jeff J. Donnelly:]

That’s helpful, maybe just to switch gears concerning there is a government impact in Washington D.C. that you guys referenced. I think the thinking was may be, select service hotels or lower price hotels kind of faired relatively better in the face of government trying to rethink, how its spend of travel dollars. I recognize that there is an impact in the market broadly did your hotels gained share relative to the rest of the market in your view, because it’s sort of that way or is that maybe not the correct thinking.

[Jay H. Shah:]

And Jeff, this is Jay, it’s interesting but most of the impact from sequestration we saw was in the metro D.C. hotels, and in those comp sets, I think most of the hotels were in the same boat. So I don’t know that we gain share that much. Anecdotally one story that really kind of resounded with as was one of the sales agent, one of the hotels was talking about how an agency that stayed with the hotel for years was staking about an 80% cut back in their travel budget. And so when you’ve got cut backs of that magnitude it’s going to affect that whole submarket and in an effects it not only from a direct business standpoint. But, it just back gives out so much compression in the market. That it is really difficult to make up further offset in not too much way at all. But I don’t know that our hotels necessarily gained or lost share relative to peers. But it was a pretty significant impact we saw out there.

[Jeff J. Donnelly:]

It’s understood.

[Jay H. Shah:]

We don’t think it’s a sustainable pull back, it’s just hard to know when those budgets will come back to some degree, I think right now there was a significant pendulum swing sort of to the right and everyone was just cutting back, almost indiscriminately we would expect that as the year moves on and certainly at 2014 you would see a little bit more of a thoughtful, a little bit of a thoughtful, but increased spend in travel by the agencies.

[Jeff J. Donnelly:]

And just a one last question not be too much of the soft ball, but can you talk about where you think pricing is in the market? In Manhattan or maybe at various barrows, I know it can – even on the Island of Manhattan it van vary by neighborhood, but I’m just curios where you think transaction prices are going off today and how do you think that compares to replacement cost.

[Neil H. Shah:]

Jeff this is Neil. The last transaction that’s been recorded in Manhattan for a select service hotel was around 500,000 a key for the Holiday Inn in Chelsea and that exceeds replacement cost for that kind of location, if you don’t consider the time it takes to build and all the capitalized interest costs, as well as the equity carry cost throughout that time. But that’s the latest kind of transaction we have so at that level I think the buyer still found it to be a 6% to 7% kind of cap rate and that justified that price, which is slightly above replacement cost. I think we’ve seen a handful of other transactions at much larger numbers, kind of in the upper up scale set, we saw the James traded about 758 key earlier this summer, we’re in upper up scale hotel, I think that is very close to replacement cost. And then we’ve seen in kind of forever locations are A+ plus kind of locations we’ve seen the latest trade was I guess the Park Lane at about 1.1 million a key where people are valuing that land and the development right, so significantly that they are even considering not only complete repositioning, but perhaps even a tear down there. So, I think the big in A+ kind of locations or in A locations the land values are very high and continue to increase at a very high rate just driven by both residential, as well as hotel opportunities there. So that’s where we are at, kind of 500, 750 and then over a million on the luxury side for New York City.

[Jeff J. Donnelly:]

If I could just stick there with Manhattan for select service, I mean do you think that 500,000 a key becomes somewhat of ceiling on pricing for assets?

[Neil H. Shah:]

I don’t think it will be a – I hope it’s not a ceiling, I think we are going to see New York quite the next couple of years is continued, if moderate continued growth, across the next several years and then certain submarkets I think you will see very strong growth and so if – I think in the select service world a lot of investors are really driven by yield and if you can earn a 6, 7 Cap on a 500,000 per key asset today, I think people will be interested in purchasing that same kind of asset at a 7 cap two years from now and that would, if the market develops as we expect it to across the next several years that would be, they would have 10% to 15% more EBITDA then they do today and that would lead to an extra 90,000 a key in pricing or something. So, I think mid-cycle value or kind of early to mid-cycle value it’s a good comp.

[Jeff J. Donnelly:]

Thanks guys. I’ll leave the floor.

[Operator:]

And we’ll take our next question from Andrew Didora with Bank of America.

[Andrew Didora:]

Hi good morning guys. It is nice to see some none core asset sales in the quarter. Jay, I think you mentioned you have 15 to 20 assets that you could be looking to market. I was just curious how active do you plan to be, and how long do you expect these dispositions to take and I guess on the assets that you’ve sold what kind of interest are you seeing in these non-core assets right now?

[Jay H. Shah:]

Sure. Andrew the grouping of assets that I was talking about, as I mentioned we are beginning to focus a lot more attention on our strategy of what to do with those assets. I think that currently what we are seeing in the acquisitions of dispositions in the market suggest that there is fairly strong interest for these kind of assets, which is by a well-capitalized institutions, mainly private. And so it’s been a approach that we are going to continue to pursue, I think that transaction times and not specifically speaking about this portfolio, but just generally what we’re seeing I think if we’re going to be working with the significant enough institution or any sellers working with the significant enough institution, I think the ability to close and the execution risk is generally pretty limited. So, I would imagine that it could be a say 3 months to 4 months period to get to a closing, I guess let me say you get 3 months to 4 months to get through a due diligence and get to a point where you are working on some of the longer lead items such as assumption of debt, franchise trans, et cetera, et cetera. I guess let me just give you the short answer, I would imagine that you get hard on something like this in 3 months to 4 months and then you probably have another 4 months to 6 months to close, then I would imagine it would be sort of a three quarter process.

[Andrew Didora:]

Okay. And then just kind of just when I think about disposition activity going forward, given some of the cost basis in maybe some of your urban assets, [then] where we are in the cycle do you have any plans on potentially marketing maybe some more stabilized urban assets into the current environment?

[Jay H. Shah:]

I think, Andrew, I think our short answer to that would probably be not so much. When we look at New York and look at the growth that’s anticipated across the remainder of the cycle, I don’t know that we are going to able to match that kind of CAGR within the other acquisition then any the other markets. I mean New York still remains extremely strong and I don’t know that we would be looking to sell anything significant in New York. We have looked at some of the smaller assets that we believe had stabilized to a point, but we are not going to see sort of above market growth rates, but most of our assets we expect that we will continue to see above market growth rates and we hold on to those. I think in some of the other markets as I mentioned, we are seeing some headwinds in Boston and Philadelphia right now. I don’t know that will consider an asset that is stabilized under the existing market conditions. I don’t know we really pursue those. We find Miami in the West Coast to just have very, very strong growth prospects here across the next couple of years and I think we would be looking more of anything as the opportunity presented itself in the capital situation as appropriate to expanding those markets. I think the sale of some of these non-essential assets that we talked about earlier was 15 to 20 will allow us to recycle close to approximately $300 million of capital, which is a pretty significant slug of capital for us and I think just by doing that continuing to refine the portfolio and redeploying the proceeds from that kind of a sale would allow us to hold on to more of our core assets and enjoy the growth that we expect from those markets.

[Andrew Didora:]

That makes a lot of sense. And I guess even final question from me just in terms of the quarter and the outlook, you gave some color on your expectations for the back half and just curious given that you didn’t change your outlook at all, how did Q3 perform relative to your internal budgets and how is your outlook for the back half change at all since the last call?

[Ashish R. Parikh:]

Hi Andrew, this is Ashish. I think that we were affected more than we anticipated in both the DC market and from the Easter shift, so from our internal forecast we had an extremely strong first quarter as you remember we were up a little bit more than 12% and I think a lot of the questions were hey why aren’t you raising your guidance at this point for 2013. We did see some weakness going into April, which carried over a little more than we anticipated in May and June. I think at this point when you look at same store we are up about 8% through year-to-date. So in order to hit our guidance ranges we just need to come in somewhere in the 3.5% to 6% range for the year. And we feel pretty good with that range for the remainder of the year. I mean it does, it’s pretty clear that the first half is going to be stronger than the second half just because of some of the comparables especially in the fourth quarter but yeah that was really our thinking behind not raising in the first quarter. We kind of keep in the range where it is today.

[Andrew Didora:]

Okay. That's great, thanks guys.

[Jay H. Shah:]

Thanks.

[Operator:]

And we will take our next question from Smedes Rose with Evercore.

[Smedes Rose:]

Hi, thanks. You kind of touched on this but I wanted to ask you the two hotels that you did so are the non-core hotels looks like they were something like $60,000 a key is that kind of a good metric for the assets that you would look to sell going forward is that maybe a little bit on the low-end and then I just wanted to ask you for maybe an update on your Pearl Street, Hampton Inn and then any thoughts just generally on the kind of the supply in New York as well?

[Neil H. Shah:]

Smedes, this is Neil. In terms of the non-cores that couple of assets that we mentioned so far those are – those would be outliers in the portfolio. The first Comfort Inn was one of the original assets from the 1999 IPO at Hersha is just a much older asset in a truly secondary market that, and that's leading into trade effect kind of number. Camp Springs has been a market that just been very significantly impacted by sequestration and by just the [malaise] in DC Metro markets across the last several years. And so I would consider those just on a per key basis to be significant outliers versus our remaining kind of secondary market assets. Our secondary market assets if you remember are still very strong cash flow producing assets than high barrier to entry secondary markets. So we are in Long Island in New Jersey and Connecticut, Rhode Island those kinds of markets and the kinds of brands that we have in those hotels or in those markets are probably a multiple of complete one to two – kind of one to 1.5 times the kind of value that we’ve seen so far.

[Smedes Rose:]

Okay.

[Neil H. Shah:]

In terms of on Hampton what was the question on Hampton Inn, Pearl Street?

[Smedes Rose:]

I just you probably know this but is it opened yet or what was the timing on if it’s not open?

[Ashish R. Parikh:]

Yes. Smedes this is Ashish. The Holiday Inn Express down on Water Street that did open in April that was operating prior to Sandy that was significantly damaged Hampton Inn, Pearl Street we predict kind of a late fourth quarter more or like the kind of first quarter 2014 opening for that hotel.

[Smedes Rose:]

Okay. Great and then I just was wondering you guys are always good at kind of just updating us on what you’re seeing on the supply side for Manhattan, I mean are you seeing hotels opening on time. Later earlier than you continuously expected kind of any thoughts around that?

[Ashish R. Parikh:]

Smedes in terms of just the continued progress of some of the projects we continue to see them progressing but just as you mentioned we do see them moving a little bit slower than some of the other consultants forecasts. Our supply forecasts for 2013 is around 3.8%. In 2014 we are still holding a pretty large number here of 6%, 6.5% kind of supply growth, we are increasingly feeling like that will be significantly less just from the delays we are seeing in their progress so far but we have not adjusted our number yet for 2014 but our 2015 number if you remember is about 2% so pretty low. So I think between 14% and 15% there will be a little bit of a shakeout so may be a 5% in 2014 and 3%, 3.5% in 2014 and 2015. But for this year we have seen some new hotels opened and they do continue to make great growth challenging in a handful of our submarkets. It's things that we have expected and we have been seeing coming online. So we are making what we consider the appropriate revenue management decisions and strategies to kind of manage that supply growth. And we are still able to show growth generally but to your question, we do see some of the 2014 expectations, we’re starting to believe that they are going to slip and we will see a little less new supply towards the end of the year than we might have originally.

[Smedes Rose:]

All right, thank you

[Operator:]

And we will take our next question from Bill Crow with Raymond James.

[William Crow:]

Hey, good morning guys.

[Jay H. Shah:]

Good morning.

[William Crow:]

Jay, can you give us some update on what July trends look like?

[Jay H. Shah:]

Sure. Generally speaking July is looking – it looks like trends are improving for us in July. Just as we saw in the second quarter though Bill, we expect the trend to be somewhat nonlinear. We’re expecting still some lumpiness in the third quarter. I think we’re feeling pretty good about New York City as September comes up just based on the way the holidays are going to be calendar placed and then we’re expecting a much stronger [ENGA] that’s going to be a better comp to last year. But again, like I say broadly speaking the trends are improving and we’re feeling a lot more optimistic in July, but things do still remain volatile and not with a lot of visibility.

[William Crow:]

Since you mentioned comps, I want to go there. We know DC weakness is going to extend for a while. Your comps coming up in the fourth quarter I think up 12% than the first quarter, and next year you are up against 12%. Would it be surprising if the comps push you in the negative RevPAR growth, the RevPAR decline sort of period for a couple of quarters?

[Jay H. Shah:]

It’s true that the comps are going to be pretty difficult. I think in Manhattan specifically, the third and fourth quarter occupancies are so high. So despite being up against a significant comp, I think we’re going to have enough demand that will keep us in positive territory. So I don’t expect going negative there, but I also don’t expect very robust growth, because of the difficult comps. But you know when you are running 90 plus percent occupancy, the question will just become how much pricing power is there in the market and how best do we leverage that to determine sort of where we end up. But I think there should be enough demand to stay in positive territory.

[William Crow:]

The first quarter be (inaudible).

[Jay H. Shah:]

Metro New York probably concerns me, Bill, more than anything because there you don’t run that kind of demand. So in Manhattan I have a lot less of a concern and as we discuss it, we know that Manhattan will be able to show some moderate growth. It’s just when you get to markets like Rhode Island and JFK, where we really don’t have as much demand to backfill it. So I would imagine that some of the Metro New York markets that we have will be negative, but we are accounting on there being enough demand coming out of Manhattan that we were able to stay in positive territory. But it’s very difficult to foresee that right now but also we are not, we are taking it week by week.

[William Crow:]

Understood. On the acquisition front, I think you talked about the very competitive landscape, can you tell us what’s out there for, that would fit your portfolios, is there much in the way of assets that you could even bid on these days? What’s it look like?

[Jay H. Shah:]

There is been some good product out of the market really, frankly this year. From the start of the year and even this summer, the summer generally, activity generally slows down, but the handful of assets that have been – being marketed through this summer process. Several of them were interesting and have, we’ve spend a lot of time underwriting assets across the last six, eight months. So there are assets in our key markets of our top six markets, so our hotel is available. What we’re finding is that the bidding environment continues to be very challenging. We’re finding bidders just a bit more optimistic than we are today on performance. And the spreads between the winning bid and where we’re coming out are relatively significant, it’s kind of 10% to 15% kind of spread, sometimes even more than that. And so at that point we don’t have any regrets about how we’re approaching. These opportunities, I think we’re fairly underwriting them, they are interesting, they could have some strategic value, but not at the prices that they are trading at today. Today in our pipeline we’ve been looking at a handful of opportunities in South Florida, and Miami and in Los Angeles. Unfortunately nothing that is even close to imminent, but there is activity and we do expect there to be more assets coming to market again in September.

[William Crow:]

Also one could argue that.

[Jay H. Shah:]

Yeah.

[William Crow:]

Yeah. I’m sorry. I was going to say that one can argue that given a normal cycle and let’s assume it’s normal. We don’t end with a 100 year flood for the third time in 15 years. There is a certain amount of urgency to buy assets before we get too late into the cycle, and yeah, you’re maybe eight months away from realizing significant proceeds in sales. Is there a thought to lever up in the interim, if the acquisition opportunities became more interesting in order to buy earlier and then worry about the sales later. Is that a possibility?

[Jay H. Shah:]

Just from my perspective, how we’ve been viewing it on the acquisition side of it, is that we have about $100 million of capacity today to make acquisitions just using cash on hand, and a reasonable amount of leverage on those. And so, we’ve have been kind of working under that constraint, and then assuming that we would have other non-core sales to help fill the gap in the future. We’re not seeing that level of activity in our pipeline that we’ve had to really strongly consider levering up or doing anything like that. We don’t although, we are early in the cycle and there’s great in great opportunity in growth, we do have a great portfolio already assembled that we think gives us great exposure to a lot of these high growth markets. And so the handful of acquisitions that we think could fit, I think we’ll be able to manage without levering out significantly.

[William Crow:]

Great, that’s it from me. Thank you.

[Jay H. Shah:]

Thanks Paul.

[Operator:]

And we’ll take our next question from Ryan Meliker with MLV & Co.

[Ryan Meliker:]

Hey, good morning guys. Most of my questions have answered, but I was hoping you guys might be able to get us some added color on kind of how trends played out through the quarter for your portfolio particularly, I know April was a little bit challenging for Manhattan, but then it was a little bit stronger for some of your other markets. Can you kind of walk thorough where (inaudible) was for New York portfolio by month, and then maybe how that compared to the rest of your portfolio?

[Ashish R. Parikh:]

Yeah. Absolutely Ryan, this is Ashish. Our New York City portfolio were up 2.1% in April, where Manhattan was down 1.3% and then May the portfolio was up 9.9% and Manhattan being up 7.7% and portfolio was up 5.2% and 2.2% in June. So, as Jay mentioned, very much endowment (inaudible) and clearly saw the Easter shipped to April the most.

[Ryan Meliker:]

Yeah. I mean any color on why June was a little softer in Manhattan. I mean obviously and we expected Manhattan to be softer in April, but 2.2 in June seems to be pretty low, I’m wondering if you have any colors to what drove that.

[Jay H. Shah:]

Yeah I think we’ve definitely forecasted better numbers in June and we are seeing better number in July that we did in June. So there is nothing particular in June that we can point to for weak in New York.

[Ryan Meliker:]

But it doesn’t seem like it’s a trend one way or another?

[Jay H. Shah:]

Yeah not based on July trend. Yeah, we saw very strong a pretty strong D.C. in April with a lot more group and overall compression, but then we saw a significant decline in May and June in D.C.

[Ryan Meliker:]

All right, great.

[Ashish R. Parikh:]

We see, we had some great, in urban D.C. at least the third and fourth quarter has a great congressional calendar that should provide a little bit of lift going into what seems to be a pretty tough market.

[Ryan Meliker:]

Great. That’s helpful, and then just a quick little update on some of the developments. Are you still expecting the Hilton Garden Inn on 52nd Street to open at some point in the third quarter, and the Courtyard, addition in Miami to open in the fourth quarter?

[Jay H. Shah:]

I think we are still looking at the Courtyard, Miami by the fourth quarter, 52nd Street and [Cross Street] we’re targeting kind of end of year first quarter 2014 right now.

[Ryan Meliker:]

Okay great. That’s all from me. Thanks for the color.

[Jay H. Shah:]

Thanks Ron

[Operator:]

And we will take our next question from Nikhil Bhalla with FBR.

[Nikhil Bhalla:]

Yeah. Hi good morning everyone.

[Jay H. Shah:]

Hi.

[Nikhil Bhalla:]

Hi, good morning. Jay, just want to get a sense of with all the renovations that have happened in the portfolios of the new hotels that have come online or coming online later in the year. In 2014, how much do you think your portfolio can actually out perform, whatever the respective RevPAR growth might be in your medium markets?

[Jay H. Shah:]

I think when you look at all of the catalyst we have in the portfolio right now, which includes some of the new acquisitions and the renovations as you rightfully mentioned. And even some sales of assets here as we continue to move through it. I would imagine that next year, we typically see with re-position assets and ramp up assets that were generally doing anywhere from 100 to 200 basis point premium to what the market is delivering. So, it’s difficult for me to handicap the entire portfolio with sort of premium, but for a lot of the renovated assets and some of the new assets that we’ve purchased in San Diego Marriott is fully innovative and so we’re going to be really enjoying a very nice ramp up off of a fully improved asset next year. I would imagine on all of those assets you would see, as we have typically 100 to 200 basis point premium to the market. I think also discontinued sale of nonessential assets, that too will help to drive our RevPAR growth, because these are all, as I’ve mentioned before, very strong income assets, but they generally will have a growth rate that lags the portfolio average. So that too will add a bit of a boost I think to our overall top line and EBITDA growth rates in the coming year. Nikhil Bhalla – FBR Capital Markets Thanks for that, Jay. And just if you can remind us the non-core portfolio that you intent to sell where the margins are relative to the portfolio that you intend to keep, same thing with the nominal RevPARs, are those $150 hotels that you’d be keeping versus $100 hotels that you’d be selling. Thank you.

[Jay H. Shah:]

Nikhil, on the margin side the portfolio that we’ve identified as margins is kind of closer to 32% to 34% compared to our 40% overall EBITDA margin, so a significant difference between the nonessential and the rest of the portfolio. The RevPAR differential is also pretty significant. You look at 13%, we’re looking at about a 1%, let’s say, somewhere in the 1.30% range for RevPAR overall versus these assets, which would be kind of in the mid-80s. So this is pretty significant difference between the two portfolios. Nikhil Bhalla – FBR Capital Markets Okay. And just one final question. Any thoughts on where the per diem rates may shake out for 2014 at this point in time.

[Ashish R. Parikh:]

We don’t have anything particularly inside one that area. That is one of the big fears about D.C. Building a per diem off of the last year is concerning. Nikhil Bhalla – FBR Capital Markets Got it. Thank you very much.

[Jay H. Shah:]

Sure. Thanks, Nikhil.

[Operator:]

And we’ll take our next question from David Loeb with Baird.

[David Loeb:]

It’s just a couple of follow-ups. On the potential asset sales, are you pursuing book sales, portfolio sales or you’re thinking that these are going to be one-offs?

[Jay H. Shah:]

We’ve been looking at it as potentially a bulk sale, David. We’re looking at it both as maybe a small group income assets or as a wholesale grouping.

[Ashish R. Parikh:]

I think our view is that the financing markets are very attractive and well suited for kind of well-capitalized institutional buyers and this portfolio, if we put it all together, will likely actually be able to really get a premium value for assembling this significant portfolio. That’s our hope. It will make the closing process quicker and more efficient and more certain as well.

[David Loeb:]

Is the debt on those assets pretty easily assumable?

[Ashish R. Parikh:]

It is assumable and it is CMBS debt. And so there is – I think buyers will look at it in two different ways. Some buyers, I think, will look at it as it’s an opportunity to seize the debt. Most of it’s coming due in a couple of years as it is. It’s not bad debt. It’s kind of 5%, 6% kind of fixed rate leverage coming due in a couple of years. So I think some buyers will look at it as an opportunity to just to seize and then put on completely fresh new debt and the economics of that seem to work pretty well. And then assuming the debt, I think the biggest cost of that is just the time it takes to close, but the kind of they would be effectively at pretty high LTVs that CMBS debt that they’d be assuming and then they could lever up the rest of the portfolio kind of with fresh new debt. So I think it plays either way and they’re both relatively efficient processes to do either just a little shorter if you guys do the (inaudible).

[David Loeb:]

Thanks. That makes sense. Can you also just give us a little bit of an idea how far down the road you are and have you identified potential buyers, are you kind of in the mid rounds bidding, where is this process today?

[Jay H. Shah:]

We would likely bring this portfolio to market in late summer.

[David Loeb:]

Okay. Makes sense. And then one for Ashish. What are your thoughts on business-interruption insurance proceeds or any insurance proceeds, but I guess [BI] is on fixed-income statement.

[Ashish R. Parikh:]

Yeah.

[David Loeb:]

What do you think is bad timing and magnitude these days?

[Ashish R. Parikh:]

On the property side, David, we have a receivable of about $4.5 million. So we feel very good about that, about collecting it. We’ve collected roughly $2 million to-date. So we would imagine that the rest of the proceeds from the property side come in certainly by the end of the year. The [BI] side, the range is very wide and it really depends on the insurance company and the documentation that we’ve put together. I mean the range, it’s pretty wide, several million dollars of what we could potentially collect or what we’re claiming and even the timing on that could usually run into the first quarter of next year or the second quarter. And I say that just from experience collecting, I mean, it was almost 18 months type of recovery process. So we really can’t give you even any kind of a range on what we expect or timing, but to say that we have filed the claim and we are hoping to even settle that by the end of the year.

[David Loeb:]

Okay. Great. Thank you.

[Jay H. Shah:]

Thanks, David.

[Operator:]

And we’ll take our last question from Chris Woronka with Deutsche Bank.

[Chris J. Woronka:]

Hey, good morning, guys.

[Jay H. Shah:]

Good morning.

[Chris J. Woronka:]

Ashish – are you guys planning on, you mentioned the property tax increase and I think mostly in New York. Are you guys appealing that and can you just give us an update on kind of how many tax appeals you have going right now?

[Ashish R. Parikh:]

Sure. Yeah, absolutely. I mean, we effectively appeal all of our reassessment, anything that moves up every year. So I believe every one of our New York properties is being appealed at this point. New York is a very unique market. So they’ll increase the appeal significantly. They will increase the assessment significantly. You appeal, they will bring down some and the process just continues to repeat year after year, but the magnitude of it is so great that it is just part of your yearly process that we appeal all of this reassessment and we’ve been pretty successful in at least containing or limiting the amount of property tax increases. So the problem that comes in as it tells to better every year it is the municipalities, more – little room to really up the reassessment. And I think at this point around the state we have almost 30 appeals going for our property taxes.

[Chris J. Woronka:]

Okay. That’s helpful. And then, just kind of going back to Manhattan, 93.3% to risk occupancy, I mean would you have expected more of a rate increase on that and I know that may have been impacted by the Easter shift a little bit, but I mean just how should we think about, we always get the question of is there a rate appealing in New York, is there anything you’re seeing out there that suggests that you’re starting to pump up close to some kind of limitation?

[Jay H. Shah:]

Chris, I don’t think we feel that at all. I mean, we’re still about 10% below peak rates that we saw in 2007, 2008 for select service assets and for our portfolio in New York. So we absolutely think there is a lot of room to grow and we just see continued demand in New York that is absorbing the supply. I think it’s a matter of the mix of business is different quarter-to-quarter, the calendar shifts affected and I think that with just pricing knowledge and transparency through the market smaller ships and how you price your business can really affect your ability to move rate in a particular month or particular quarter. So if you look at the portfolio we’re buying a couple of our Times Square assets that were really impacted by the Easter shift and by some pricing strategies. We could have easily been at 5% ADR growth in Manhattan or have 5% growth in Manhattan for the quarter.

[Chris J. Woronka:]

Okay. Very good. Thanks.

[Operator:]

And that does conclude our question-and-answer session. I would now like to turn the conference back over to your speaker.

[Jay H. Shah:]

Okay. Thank you for your interest in our Company and thank you to those who asked questions. Let me just close by thanking the (inaudible) employees at our hotels for their hard work and persistence and enthusiastic commitment to our values in these varying market conditions, it’s all about that continues to drive our performance. Neil, Ashish and I are in the office the rest of the day. If any questions occur to anyone after the call, please feel free to give us a ring. Thank you.

[Operator:]

And that does conclude our conference. Thank you for your participation.