Hersha Hospitality Trust
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Third Quarter 2013 Earnings Conference Call. Today’s call is being recorded. At this time all participants are in a listen-only-mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Brad Cohen of ICR. Please go ahead, sir.

[Brad Cohen:]

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. 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 Securities and Exchange Commission filings. With that, let me turn the call over to Mr. Jay Shah, Chief Executive Officer of Hersha. Jay?

[Jay Shah:]

Thank you, Brad. Good morning to everyone on the call today. I am joined today by Neil Shah, our Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer. I will begin today's call with a review of the company's strategic transaction announced in September, provide an overview of third quarter results and conclude my portion of the call with specific market and sector commentary. Ashish with then provide detail on the third quarter's financial and after he concludes, Neil, Ashish, and I will be happy to address any questions that you may have on the third quarter as well on the Hotel Oceana acquisition that we announced yesterday evening. First, a few words on the non-core transaction announced in the third quarter. One of the company's key focus points during our organic portfolio assembly has been to limit asset specific encumbrances thereby providing the company flexibility to quickly react to changes in the market and execute strategic direction changes. Throughout our history of being nimble has allowed us to quickly recycle capital, transition the portfolio and refine Hersha's strategic focus into a pure play, superior quality urban transient portfolio with exposure to long-term, high demand gateway markets in the United States. Execution of our latest disposition highlighted this flexibility and focus as we announced the transformative portfolio sale of 16 hotels to an affiliate of Blackstone Real Estate Advisors for gross proceeds of $217 million, at an approximate 8% cap rate and a value of $125,000 per key. This asset sale will results in material improvement to our RevPAR quality and EBITDA growth potential, and if we assume the sale of these 16 assets was completed on January 1, 2013, pro forma 2013 RevPAR for the company's core portfolio is forecasted to have been approximately 70% higher than the RevPAR of the assets being sold. Based on the same time period, pro forma EBITDA margins for the company's core portfolio are forecasted to be approximately 310 basis points higher than the portfolio being sold. The transaction marks the company's exit from several markets that don’t possess the same long-term growth trajectories as our core urban markets, such as Long Island, suburban Philadelphia and the company's remaining consolidated properties in Connecticut and Rhode Island. We are pleased to have properly timed the portfolio's sales process to capitalize on private equity interest and stabilize select service assets in suburban markets. Including the anticipated sale of these 16 non-core hotels, we have sold 46 non-strategic hotels generating approximately $460 million in gross proceeds since 2008. In conjunction with the sale, the company will repay approximately $79 million of outstanding debt which will result in cash proceeds of $138 million allowing us to pursue asset acquisitions without the need to access the capital markets for the foreseeable future. The transaction is expected to close during the first quarter 2014 and is subject to customary closing condition. In addition to further reducing leverage, we expect to redeploy cash from the sales and the higher growth opportunities as evidenced by the Hotel Oceana acquisition in Santa Barbara announced yesterday. Now let me address the company's third quarter performance. Our same store consolidated RevPAR reached a new record and we exceeded our prior peak occupancy. Although the third quarter results across the majority of our markets were solid, year-over-year performance for the portfolio was negatively impacted by Washington DC and Philadelphia, where market conditions coupled with the weaker citywide convention calendars had a significant downdraft affect. Our third quarter same store RevPAR increased 3.5% to a new company record of $146.56, driven by a 2% ADR growth and occupancy growth of 120 basis points to 83.6%. This exceeded our prior peak occupancy. Our New York, New Jersey, metro and West Coast portfolios were our top performers during the quarter and reported RevPAR growth of 10.5% and 9.6% respectively. Our New York, New Jersey, metro portfolio showed an occupancy increase of 408 basis points and ADR growth of 5.5%, while our West Coast portfolio produced occupancy growth of 149 basis points and ADR growth of 7.4%. Our New York City urban and Manhattan portfolio reported same store RevPAR growth of 5.9% and 4.6% respectively. Our New York City portfolio has performed well, as both Manhattan and the outer boroughs continue to exhibit robust demand. We believe that New York will continue to exhibit strength ahead but in the coming quarters we face difficult comparisons as we approach the one-year anniversary of Hurricane Sandy, which provided a significant uplift to our operating results in the fourth quarter of 2012. Portfolio-wide occupancy in New York remains above 90% and we believe that demand will continue to outpace supply growth in the market. It is worth noting that seven of our top ten EBITDA producing assets were in our Manhattan portfolio this quarter, and with the exception of the recently opened Hyatt Union Square, all of these hotels reported occupancy exceeded 90% during the third quarter. New York remains the largest beneficiary of improving international demand and year-to-date we estimate that approximately 21% of our total room revenue in New York City was driven by demand from international travelers. Top revenue generating countries for our portfolio include the U.K., Canada, France, Italy, Australia and Brazil. Year-to-date the Euro zone represents approximately 3.9% of total New York room revenue representing a modest improvement in terms of contribution from Euro zone travelers from the prior year. Continuing with the discussion of our core market, Boston, our second largest market faced convention calendar compared to 2012, as well as disruption related to the repositioning and re-launch of our newest hotel there, The Boxer. In Boston, RevPAR growth of 3.2% was entirely driven by rate growth which rose 4.2%. We are encouraged by the transient demand in Boston which continues to be strong and the more active citywide convention calendar in 2014 and 2015. The Philadelphia market also had a softer citywide convention calendar which coupled with the significant renovation disruption at The Rittenhouse Hotel, drove negative RevPAR growth of 4.8%, all of which was rate driven. With the lack of compression in the market and reduced demand levels, hotels had to increase occupancy at lower rates which resulted in weaker flow-through and lower margins. We look forward to completing the renovations at The Rittenhouse including the newly opened Park Suites, as we move forward through 2014. Not surprisingly, our most challenging market during the third quarter was Washington DC, which reported a third quarter RevPAR decrease of 5.7%, entirely driven by a 6.8% decline in ADR. The across the board decline in rate embodies the overall weakness of the market as hotels took on occupancy at lower rates to maintain a base of business. Nevertheless, it's worth highlighting the two divergent stories playing out in the DC market characterized by distinct performances of our DC urban and DC metro portfolios. On an annualized basis, our DC urban properties which represent approximately 65% of the EBITDA contribution from our DC cluster and approximately 6% of our consolidated EBITDA, reported a RevPAR decline of only 1.7%. Our DC metro properties, which represent approximately 35% of our total DC EBITDA and 4% of our consolidated EBITDA, reported a 9.7% decline. Core DC urban hotels were more resilient to the lack of demand from government business with the DC metro properties far more vulnerable to slack government room night demand and therefore disproportionally affected by the lack of compression in the market. To provide some context regarding the performance of the rest of our hotels excluding all Washington DC properties, the company's same store consolidated portfolio reported 5.1% RevPAR growth. Unfortunately we do not see improvement in the near term in Washington as the government shut down during the first 16 days of October significantly impacted the region. Washington DC will remain a tough market given government dysfunction, some increased supply and tough comparisons due to the re-inauguration which took place in the first quarter of 2013. Despite the near term headwind, we remain confident in the long-term viability of the Washington DC market based on its high occupancy and variety of demand generators. Before turning the call over to Ashish, I wanted to highlight a noteworthy distinction that our newest New York hotel property has earned. The Hyatt Union Square received in early October Fodor’s 100 Hotel Awards within the Popular Urban Address category. Having one of our important New York properties among such iconic hotels -- recognized among such iconic hotels, is a testament to the vision of our team and the daily execution that makes the Hyatt Union Square as a new icon in the New York City market. We are equally pleased with the ongoing ramp up at the Hyatt Union Square. In the short six months since its opening, the hotel continues to ramp up at a very healthy pace and is projected to be a top ten EBITDA producing asset in our portfolio during the fourth quarter. Let me close by saying that the company is well positioned for future growth as we leverage the benefits of a streamlined portfolio concentrated in high RevPAR markets that will permit us to drive superior ADR and further expand our already industry leading margins. We believe the company's gateway markets are more economically resilient and attract a higher percentage of business and leisure transient travelers along with a growing base of international travelers. The continued ramp up of our recently acquired hotels, the completion of renovations at The Rittenhouse and the delivery of the new tower at the Courtyard Miami Beach, not to mention the company's young, transient focused New York portfolio, will driven the company to capture growing travel demand for years to come. As we move forward in the near term, we are certain to face some macroeconomic volatility and challenging market conditions. We remain confident that our strategic direction will allow us to deliver strong organic growth through a focused and responsive strategic model. I will turn the call over to Ashish who will discuss the quarter's financial performance.

[Ashish Parikh:]

All right, thank you. Since Jay has provided a fair amount of commentary on our operating results and markets, I will focus my comments on third quarter operating margins, some of the non-recurring items that are forecast to affect fourth quarter results. I will conclude with an updated outlook for the remainder of 2013 and touch upon our initial outlook for 2014. In terms of margins, there were several items that negatively impacted EBITDA margins during the quarter. While we maintained industry-leading absolute margins of 36.9% on a consolidated basis, and 39.8% on a same store basis, we did experience some year-over-year compression during the third quarter. From an operational standpoint, margin declines in DC metro and Philadelphia portfolios were primarily related to lack of compression in these markets which required our operators to maintain occupancy at the expense of significantly lower average daily rate. The overall occupancy percentages in both DC metro and Philadelphia increased during the quarter but we saw ADR declines of 11.2% and 6.9% respectively in these markets. This ADR based loss resulted in significant margin loss in both markets. Due to the challenging environment we envision in both DC and Philadelphia over the short-term, our asset management team and operators have put in place numerous cost cutting initiatives to try to preserve margins moving forward. Property taxes at the company's same store consolidated hotels also had a meaningful impact on our margin. Overall, for our same store portfolio property taxes increased $619,000, or 14.2% from the prior year resulting in a negative 20-basis point impact to our margin. We saw a similar increase of 14.4% in our New York City portfolio, which significantly affected an otherwise very strong quarter in New York as this portfolio had extremely high GOP margins of 58.1% with almost 70% GOP flow through. The overall rate of increase in property taxes was significantly higher than our compounded annual growth rate of 4.8% since 2007, and we would anticipate that future increases will be more in line or below this historical average and we will continue to challenge on many of the reassessments that we received during the third quarter. Also affecting our EBITDA margins during the quarter were startup expenses at the Hyatt Union Square in addition to renovation disruptions at the Courtyard Miami, The Boxer in Boston and The Rittenhouse in Philadelphia, which in aggregate negatively impacted EBITDA by approximately $500,000. I will now turn to the balance sheet which continues to reflect the company's strong and flexible financial position. At the end of the quarter the company maintained significant financial flexibility with approximately $46.6 million of cash and cash equivalents, and $170 million outstanding on our revolving credit facility. As previously mentioned, the sale of the non-core portfolio will further reduce debt by approximately $79 million and provide us with net cash after closing cost of approximately $130 million, which would allow us to fully pay down our credit facility and further enhance our flexibility. With regard to capital spending, the company's two significant ongoing capital projects, the Courtyard Miami Beach and The Rittenhouse remain on track with disruption projections built into our revised guidance figures. We currently anticipate the Miami Beach tower construction to be fully completed in December with The Rittenhouse renovations to be completed during the second quarter of 2014. Excluding these two projects, we anticipate full year capital spending to be between $32 million to $34 million with a significant reduction in 2014. With the completion of these projects, the company will bring to a close the majority of the expensive renovations undertaken during the past few years. Moreover, we also look forward to leveraging these investments and producing incremental portfolio growth in 2014 from the delivery and stabilization of the Hilton Garden Inn on 52nd Street and the Hampton Inn on Pearl Street, which we anticipate delivery by the end of the first quarter of 2014. Finally in terms of guidance. We are updating our guidance for the full year 2013 outlook to reflect year-to-date operating results, expected renovation disruptions, the exclusion of the 16 hotels held for sale from our operating statistics, in addition to several items that we believe to be non-recurring during the fourth quarter. As previously discussed, our guidance projected a difficult fourth quarter in our Manhattan and metro New York markets, based on the Hurricane Sandy relief effort that significantly bolstered operating results in the fourth quarter of 2012. As a reminder, our Manhattan portfolio registered RevPAR growth of 11.5% and EBITDA margin growth of 250 basis points in the fourth quarter of 2012. While our metro New York portfolio registered RevPAR growth of 31.5% and over 1000 basis points of margin growth during the same period. In addition, we received approximately $680,000 of cancellation fee from disaster relief agencies during the quarter for rooms that were never utilized and consequently incurred minimal to no expenses related to these revenues. These onetime benefits are clearly not replicable and we have built this into our guidance range. Also impacting our operational guidance for the remainder of 2013 are the negative effects of the government shutdown in October coupled with the ongoing weakness in the metro DC market. Given this backdrop and excluding the assets held for sale, our forecast for full year 2013 is for a consolidated total RevPAR growth in the range of 4.5% to 5.5% and same store RevPAR growth in the range of 4% to 5%. Additionally, we are altering our margin outlook for consolidated hotel EBITDA margins contraction between 100 and 150 basis points, and for a 50 to 100 basis point contraction on a same store basis. As we look out into 2014, in addition to the organic growth of the portfolio that was highlighted, we are optimistic as to the prospects of continued growth for the lodging industry and specifically for our portfolio. On a macro basis, most economists are looking at a stronger GDP environment in 2014 for the U.S. as well as for Europe and many of the emerging economies that drive inbound travel. Also encouraging is the fact that group pace for the U.S., specifically for several of our markets such as Boston and New York, also point to improving trends for 2014. Although we are not heavily exposed to group, the compression created by increased group travel provides numerous benefits to transient focused hotels located in high occupancy markets in the form of higher pricing power and corporate negotiations. Similar to prior years, we will provide more extensive 2014 guidance during our year-end earnings call in early 2014. That concludes my formal remarks and let me turn the call back to Jay.

[Jay Shah:]

Okay. Thank you, Ashish. Operator, we can open the line for questions.

[Operator:]

(Operator Instructions) We will go to or first question from Andrew Didora with Bank of America.

[Andrew Didora:]

Ashish, I appreciate the color on the 4Q '12 comps, but just curious if maybe you can walk us through some of your key markets and give us a sense for what you would expect in 4Q for each of them. I guess I am thinking about New York, DC, Boston and probably, as well as West Coast. And also maybe if we could do the same for 2014 too, I think that could be helpful to folks.

[Ashish Parikh:]

Sure. You know Andrew I can give you some ranges for the fourth quarter of '13. We are really not in a position just yet, we are still working through the budget for '14. I think directionally we can talk about some of the markets. But for the fourth quarter of this year, obviously, New York will be a challenged market because of Hurricane Sandy. I think we have discussed that. We still anticipate pretty strong growth in the Boston and urban and metro. The trends appear to be very good. October has shaped up nicely in that market and we are looking at stronger group calendar for the fourth quarter as well as a nice recovery -- I am sorry, a nice stabilization at The Boxer, which brought down some of our results in the third quarter. Still looking fairly healthy growth in the West Coast markets, in California and Arizona. Sort of trending towards the high-single digits in those markets. Overall, DC urban is actually anticipated to be slightly positive for the fourth quarter based on more days, more congressional days this fourth quarter. Based on several groups that have come in. And also, if you remember, Hurricane Sandy provided no benefit to DC last year. DC metro, however, will continue to see very weak results due to government shut down, due to the continuing effects of sequestration. I think that covers kind of most of the markets for the fourth quarter of '13. Thinking right now into '14, we still look at a very healthy demand pickup in New York in the first quarter, should offset a lot of the Sandy weakness. From the Super Bowl, we believe that it would be a net positive and offset most of the reversal of Sandy effects. I think that the West Coast remains strong. Boston is expecting to have a much better convention calendar for 2014 as well. I think the challenged markets will continue to be, DC, obviously, faces a very difficult inauguration comp in the first quarter. And Philadelphia looks to be relatively flat for next year.

[Andrew Didora:]

Okay, that’s helpful, Ashish. And then my second question here is just on the Santa Barbara deal. Just curious how you guys source this transaction and was it one that you saw a lot of competition for? I mean it just seems like between the location and the yield, it seems like it would have attracted a number of different buyers. Just curious how this all came about. Thanks.

[Neil Shah:]

Sure. Andrew, this is Neil. This was a brokered deal. It was I think a limited market. The sellers and the brokers targeted a handful of potential owners for it. We did have a prior relationship with the owner and were able to kind of fast track the process through and prevent a long bidding process. But it was shown to other folks in the industry. We felt like it was a very strong deal. We have been looking actively at a lot of markets in Southern California including Santa Barbara for the last three-four years and felt this was a very strong in-place yield as well as offered some very strong growth in the coming years, due both to market as well as some operations efficiencies that we will be able to bring to bear.

[Operator:]

We will go to Smedes Rose with Evercore.

[Smedes Rose:]

I wanted to ask you on the Santa Barbara as well. As you look at acquiring on the West Coast, are you strategically trying to not concentrate too much in any one city, or is the San Diego, LA, Santa Barbara acquisition more a function of maybe what's for sale. And then if you could just tell us on a pro forma basis, what percentage of EBITDA is coming from California now and kind of where would you be -- where would you want it to be, I guess, over the next year or so as you continue to make acquisitions.

[Jay Shah:]

On the second question, we are probably tending for next year towards 10% to 15% of EBITDA coming from the West Coast. In West Coast we are including Northern California and our Arizona Hyatt House as well. I think strategically seeing it rise to as much as 20% in the portfolio over time would be reasonable and something that we are not necessarily targeting on a daily basis, but that’s within, I think, the realm of possibility across the next few years. In terms of Santa Barbara as a market, we view very much like the west side of Los Angeles. That was the first acquisition we made in the West Coast a couple of years ago and do wish that we were able to, across the last few years, find more compelling opportunities that offered both yield as well as longer-term growth prospects right in the west side of LA. But it's been difficult to keep that narrow of a, kind of target zone, and find good, quality exposure to the market place. So we have expanded the realm of what we are looking at. And the West Coast includes certain markets in San Diego as well as some other markets in Los Angeles. I think Los Angles, we can continue to focus on kind of the west side of LA, so starting at Manhattan Beach and then going up north through the west side of LA. Santa Barbara extends that road an extra 70-80 miles of the road, but is still, we feel that kind of Santa Barbara to Manhattan Beach kind of run in Los Angeles is somewhere that we will be able to find other opportunity.

[Smedes Rose:]

Okay. I just wanted to ask, Ashish, you have mentioned I think on your last call that you guys thought about $4 million came in the fourth quarter from Hurricane Sandy, kind of net benefit. Would that have included the $680,000 in cancellation fees that you have mentioned? Or is that in addition to this?

[Ashish Parikh:]

Yes, that does include the $680,000.

[Operator:]

Our next question is from Nikhil Bhalla with FBR.

[Nikhil Bhalla:]

Just a couple of questions. Going back to the tax increases, is that something that was raised specific to just your hotels in New York or is that kind of a more broader phenomenon in New York, you know just for tax rates adjusting up for most hotels.

[Ashish Parikh:]

It's the latter. Nikhil, I think that we have seen tax increases and other companies have reported, they have noted much higher adjustments in New York. In New York, and almost all municipalities look back, you know backward looking from assessment standpoint. And the whole process is very convoluted. I mean I would say that at any given time we probably have 40 ongoing assessments that we were fighting. You always get a assessment up and then you fight it and try to get it reversed. The sheer percentage growth was much higher then we have ever seen in the pas and it was New York. It was also reassessments at several of our West Coast properties and the Miami property from the municipalities catching up on the purchase prices. So we don’t think it's isolated to our hotels by any means but we do think it's not something that would be a run rate by any means.

[Nikhil Bhalla:]

Got it. And just in terms of acquisitions going forward. Obviously the sales will free up a lot of cash. How is your pipeline trending right now in terms of how quickly you might be able to deploy the cash straight from the sales?

[Neil Shah:]

This is Neil. Just in terms of the pipeline. The pipeline is, there are some of our assets that we are spending time on and underwriting. But it's been a pretty tight acquisition pipeline for the last three to six months. I think there was expectation that the second half of this year would bring a lot of more assets to the market and more opportunities for acquisitions. But it's been a little bit choppier then that. I think kind of fundamental performance and things have probably led some owners to wait another year or wait another six months. So it's not a robust pipeline, but we do have a handful of opportunities in these strategic markets that we are focused on on the West Coast as well as in Miami. That we may be in position that through the first half of next year that we would be able to deploy these proceeds strategically in the right market.

[Nikhil Bhalla:]

Okay. And so would it be rational to assume that your next set of acquisitions are more than likely either on the West Coast or in Miami.

[Neil Shah:]

Yeah, that would be fair to assume. We remain opportunistic and we do still find some markets in -- the markets that we are present in on the East Coast there would still be strong opportunities and for the right yield we could look there. But right now most of our acquisitions pursuits are on the West Coast or in Miami.

[Nikhil Bhalla:]

Thanks for that, Neil. One final question, I think this is for Ashish. Ashish, you mentioned about the CapEx trending down next year. Any reasonable range that we should expect that to be in? I mean would it be on the $20 million, or just any color would be helpful.

[Ashish Parikh:]

Yes. I think excluding the one project that we have ongoing would be the Residence Inn Coconut Grove and of course the carry over that’s been held. So excluding those I think $20 million is a very reasonable number.

[Operator:]

Our next question is from Ryan Meliker with MLV & Company.

[Ryan Meliker:]

I apologize if I missed this, I got on a little late. But with regards to the fourth quarter guidance, can you break down what you believe the impact was from the government shut down?

[Ashish Parikh:]

Sure. Hey, Ryan. The government shutdown for us probably results in somewhere between, we have estimated say $375,000 to $450,000 of EBITDA loss just from the shutdown itself.

[Ryan Meliker:]

So in terms of your RevPAR, any ballpark of what that equates to? I am just trying to reconcile how your same store RevPAR and book pro forma RevPAR versus our expectations prior to the government shutdown.

[Ashish Parikh:]

Sure. I think that we would look at the government shutdown probably impacting RevPAR somewhere in the 50 basis point range. Just because -- when you look at the two to three week period and then just the ongoing cancellations that aren't going to come back for the rest of the quarter. So I think it's probably in that 50 basis point range.

[Ryan Meliker:]

Okay. That makes sense. And then with regards to 1Q, can you give us any thoughts on how things are trending for you guys with the impact of the Super Bowl? What you guys are looking at from a pricing standpoint? If you think that benefits from the Super Bowl will offset Sandy or not offset Sandy etcetera?

[Ashish Parikh:]

Sure. As we look at Super Bowl for first quarter, I mean, absolutely looking at it being very beneficial to the portfolio and offsetting some of the Sandy impact. As we have looked it, couple of things to be, kind of cognizant of I guess are, New York is just a much larger market when it comes to the Super Bowls than some of the traditional markets that it's held in. New York metro goes all the way down to Central Jersey, Connecticut, Long Island. We think that from a RevPAR perspective, it could add anywhere from $8 to $9 to our New York City RevPAR, and maybe $3 to $4 kind of the total portfolio RevPAR. We are looking at an incremental, anywhere from $1.5 million to $1.75 of revenues just on same store basis from the Super Bowl.

[Ryan Meliker:]

Great. And that RevPAR added [ph] was just for 1Q, yes?

[Ashish Parikh:]

Just for 1Q, yes.

[Ryan Meliker:]

Just for 1Q. All right. And any idea what Sandy added last year in 1Q? Was it about the same as now, less?

[Ashish Parikh:]

We estimate that kind of the EBITDA impact was about $2 million for Sandy this year across the New York portfolio.

[Operator:]

(Operator Instructions) We will take our next question from David Loeb with Baird.

[David Loeb:]

Ashish, I wonder if you could give us kind of a two-year comp on the fourth quarter to smooth out Sandy. I realize the government shutdown will be in that a little bit, but where do you think the results from the fourth quarter are likely to be relative to two years ago.

[Ashish Parikh:]

Yes, we have looked into that, David. I think that if you look back at 2011 to where we are today, last year total New York City portfolio was up around 14.6% with Manhattan being up 11.5%. And this is just fourth quarter. So anticipating that New York City urban goes negative by a few hundred basis points and Manhattan is about flat, we are still up from '11 through '13 somewhere in the low teens. Kind of 12% range over that two-year period.

[David Loeb:]

Great. That’s helpful. And this is for Jay or Neil, a couple of questions on New York. I guess the first is land value. Where do you see sites -- what's the highest, best [ph] use for sites today and can you give us a view on short-term supply outlook and longer-term supply outlook.

[Jay Shah:]

David, I can get started. Just on land values, there is I think two dynamics going on right now that are interesting from a land point of view. First, there is just hotel land is increasing in value across the last two-three years pretty significantly. So we are back into a environment similar to '05-'06 where $400 to $500 per square foot of buildable land for a hotel is kind of the new market price. The highest quality pieces of land can be significantly higher than that. But the kind of general market is between that $400 and $500 per foot. There continues, as you have seen and probably heard about, the residential market in New York City continues to be completely on fire. Even more so than it might have been last cycle. And so we will continue to probably see those land values continue to increase for the next -- for the foreseeable future. I think another interesting dynamic is the ground lease market. The sale of land for sale-leaseback transactions. And we are seeing a lot of transactions in that area where existing hotel-owners can sell the land underneath their assets for pretty significant valuations there as well. So we are seeing kind of $300,000 per key ascribed to land value, to be a level where we are seeing a lot of trades today. And so land value is clearly increasing and that is going to I think cause some, future outlook for supply will be curtailed pretty significantly with that land value escalation. On the other hand, existing owners in New York City do have a significant value creation opportunity in dividing the economics of their land from their hotel.

[David Loeb:]

Let me put the question now in and ask you about what you see as the value of hotels based on recent trades for land, recent trades for hotels. Where do you see the value of your portfolio in New York on a per key basis these days [ph]?

[Jay Shah:]

I think our select service portfolio in New York, we targeted kind of between $500 and $550 to $600 a key. So let's say $500 to $600 a key depending on the location and the in place yield. All about, our entire New York City portfolio is of key interest, in the land as well as the hotel. And most of them are unnumbered of debt. And so I think with those kinds of assets and that kind of yield, between $500,000 and $600,000 per key. I think interestingly the independents would probably create a higher level than that versus the brands, just for the encumbrance discount. But between that range is where we value today.

[David Loeb:]

And how would you translate that into cap rate?

[Jay Shah:]

I think that’s kind of a 5 to 6 cap rate.

[David Loeb:]

And in terms of the land value, would you consider something like that where you monetize the land value of your currently fee simple ownership?

[Jay Shah:]

Yes, we have looked at it. We have looked at it across the last year. Definitely I think the market has gotten even better for those kinds of transactions today. From our point of view I mean I think if we had a use of capital, it would be more tempting. But we are doing it over and we are seeing, from our viewpoint I think when you have the opportunity to have unencumbered assets, have the fee interest, we believe that long term that will pay for itself. And the short-term kind of proceeds that we might be able to get from a land lease may in the future lead to some cap on some of our values on the other end. But we are considering it and we are looking at it. It is a very liquid market. We are finding that the lessee, so like you sell the land, the remaining hotel if the leases are structured correctly are still very attractive platforms for debt. There's a couple of deals in the midst of securitization right now that have had pretty aggressive ground leases taken out of them and now they are in the midst of financing them on the CMBS market for the leasehold interest. And if that goes as expected, then it's something we are going to have to really look at. Because if there is a pure kind of acknowledgment by the markets that there is very little diminution in value for having a 99-year leasehold versus the fee, then we certainly will have to look at it.

[David Loeb:]

It's very interesting. And of course if you don’t do it, it might be something that a group of investors might want to do with a portfolio like yours. So value creation maybe one way or the other. Great. Thank you.

[Operator:]

We will take our next question from Anthony Powell with Barclays.

[Anthony Powell:]

Just had a question on the Washington DC market. There is another round of sequestration cuts planned in January. Do you expect those to have an incremental drag on the DC market or do you believe that the overall impact should anniversary a bit as you cross the original ramp cuts this past year.

[Ashish Parikh:]

I think in the first quarter we are going to have tough comps as it is with the inauguration not occurring versus 2012. I think the continued sequestration is going to be some added weight on the quarter.

[Anthony Powell:]

What about half the first quarter? Going in through rest of the year, the new cuts that have kind of an incremental drag on results throughout '14 and maybe beyond?

[Ashish Parikh:]

You know it's very very difficult to know what those cuts are going to look like. I think we going to see this budget come out in, we hope in the first quarter. And we are expecting that it's going to be a little more conservative around travel but to what extent the order of magnitude, we don’t know. But we are somewhat -- we are watching Washington DC very closely but I don’t know that we have got a lot of visibility for what the cuts are going to look like for the rest of the year.

[Anthony Powell:]

Okay. Just on a follow up on the use of cash. I understand that your goal is to buy new hotels in the west coast in another type of market. If you are not able to buy in the deal that you like, what would be your secondary use of cash from the proceeds of [indiscernible] deal? Thank you.

[Ashish Parikh:]

Sure. Obviously, we will immediately be paying down debt. I think for a more permanent use of those proceeds in order to mitigate the dilution from the loss of cash flow from the assets. If we don’t find other assets to deploy -- growth assets to deploy the proceeds to, I think we would very seriously consider buying back stock if the stock price continues to perform at this level, which we feel is well under where it should be.

[Operator:]

We will take our next question from Jeff Donnelly with Wells Fargo.

[Jeff Donnelly:]

Just one other follow up on Mr. Loeb's question. If, roughly call it 50% to 60% of the value is in the land that could maybe stripped off as a ground lease, what kind of yield or structure do you think the folks who are purchasing or selling those ground leases are looking for? I mean I am just curious maybe what the market comp is on that?

[Jay Shah:]

They are looking for, depending on the players, 5%, kind of 4.5% to 5%. Depending on the location and the improvement. And then depending on the deal is just how you structure the escalations, whether they are look backs [ph] based on CPI or whether they are kind of fixed yield targets. And there is also some features for kind of buyback right for either party. So you can structure it to achieve the goals of buyer and seller. But these latest ones that we have seen have been right around 5%.

[Jeff Donnelly:]

Is there a preference from your perspective as maybe a buyer of properties that might be on the ground lease that -- do you prefer the CPI-based where it's non-specific versus fixed?

[Jay Shah:]

No. We prefer fee interest when we buying assets generally, quite frankly. But I think the fixed assumption to give you at least some clarity upfront for underwriting and for business planning upfront. But obviously you can get hurt with that depending on macroeconomics CPI and things. So it's really a case by case basis. It's probably is a function of how volatile you think the hotel income stream is going to be relative to your lease payments.

[Jeff Donnelly:]

I was just curious how the ground lease works at Oceana. Maybe how you guys think about valuing it in that context, sort of fee simple versus the ground leased asset?

[Jay Shah:]

In Oceana we have a fixed stream that we are able to see a little below. There are some look back provisions but they are generally a lease that we can predict that’s on a percentage basis on what the growth is going to be on an annual basis. We do believe in this asset that we will have an opportunity to buyback the land overtime. But we are in diligence right now and still kind of coming to a view on it.

[Jeff Donnelly:]

Okay. You were mentioning before about looking for assets in Miami. I know a lot of your peers have been frustrated with assessing Miami, specifically Miami Beach, because many of the hotels there are small. Do you think there is an opportunity to aggregate, maybe a complex of smaller hotels in the Miami Beach are to capture some operating efficiencies. It doesn’t seem like anyone has really explored that like they have in other markets.

[Jay Shah:]

Yes, we have been exploring it, Jeff, for some time. I think the reason we haven't made an acquisition on some of the smaller hotels in that area, because you just need to have enough scale to do it, I think. We have looked at several 50 and 70 room hotels, that if they were all available at the same at the right price, it should be compelling. But as standalones, it is still very difficult to kind of drive the economics that we are looking for from these assets. But that is something that we are very focused on and we do believe kind of that south of 15th street or south of 20th street, there is a lot of assets there that with professional management and with a little bit of capital, you could really generate some premium returns to what they are performing at today. But it's not for the faint of heart. There is some of these older buildings and small hotels that require a lot of capital and a lot of time in executing those kinds of plans. So we have been very sensitive to making sure if we are going to go through a redevelopment that is one that has a significant EBITDA stream to pay it off. I hear you that you could put together three, or four, or five and get that EBITDA stream but we are waiting until we can find ones that are solid enough that we don’t have to count on the bolt-ons to make it work.

[Jeff Donnelly:]

Understood. And I am curious just for your perspective on this as it relates to the New York City market. What implications do you think the change in the New York City mayor is going to have for you guys? There is certainly a lot of talk out there that he is, for lack of a better term I guess I will call it pro-taxation. And are you concerned that could lead to higher hotel or property taxes? I am just curious for your perspective.

[Jay Shah:]

You know it's interesting. We haven't had a chance to meet him but what we have read about him, he is on social issues, very very liberal. I just read a headline, I haven't had a chance to read the article, but he actually named a significantly important real estate entrepreneur, business person, that was a part of the Bloomberg administration, to head up his transition team which was an interesting choice. So I guess the short answer is, the jury is still out. I do know that even the one week before the primaries he was spending a lot of time with several real estate leaders in the city and having sort of forums and one-on-one meetings with a lot of real estate folks. I think, like I said, I think he is going to be liberal on social issues and I think we are on good with that for having better quality of life in New York and better education in New York is good for all of us property owners there. I think he is going to be pretty smart though about taxation and I think he has a pretty good sense of where the bread is getting buttered. Now that being said, we have seen property taxes jump a little bit. So I don’t that we are going to see property taxes go backwards with the new mayor but I am just hoping that we don’t exceed the long-term CAGR or the long-term run rate that we have seen and that is more status quo.

[Jeff Donnelly:]

Understood. And maybe one last question just on flood insurance. Similarly there is a lot of talk out there like FEMA looking to expand the areas that are subject to flood insurance, at the same time they are increasing premiums pretty markedly. I know that maybe for consumers or residential users it's probably sharper than maybe for commercial. I know you don’t have a lot of waterfront properties but you do have some properties, you could say were in areas that were affected by Sandy. Just curious if you guys have any sense of, is there any impact to your flood insurance cost going forward, whether it's Oceana or some of your East Coast assets.

[Ashish Parikh:]

Hey, Jeff, this is Ashish. I think that the insurance market has been pretty soft over the past few years and then with Sandy and some of the other natural disaster, we did see across the industry increases in property insurance this year. Flood insurance, certainly in many type of properties in downtown New York, Miami, coastal markets has gone up but I don’t know if it's gone up at the headline numbers that you see for residential as you mentioned. It's been more sort of high single-digits not the 30% type of increases.

[Operator:]

We will take our last question from Smedes Rose with Evercore.

[Smedes Rose:]

I just wanted to ask you one more New York question. Are you surprised that there is not more kind of hotel to condo conversion going on now versus the last, I would say kind of real estate boom in New York we actually a lot of supply going out to condos. Is there something different that you see kind of in this cycle or is there something legislatively that’s different that would prevent that.

[Jay Shah:]

I don’t know if there is anything legislatively that’s different. But in terms of why we haven't seen it as much yet, I think it's building and I think we will start to see it now. I think we start with Central Park South, the Park Lane. There is an asset on the market right now in lower Manhattan, a luxury hotel that will likely be a condo conversion as well. So I think we are at the point in the market, at a point in the cycle that we will start to see more of that.

[Operator:]

That concludes today's question-and-answer session. Mr. Jay Shah, at this time I would turn the conference back to you for any additional or closing remarks.

[Jay Shah:]

Okay. Well, thank you, operator. I don’t have any further remarks. I will thank everyone for joining us this morning.

[Operator:]

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