Hersha Hospitality Trust
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good morning, ladies and gentlemen and welcome to the Hersha Hospitality Trust Third Quarter 2014 Earnings Conference. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) At this time, I'd like to turn the conference over to Pete Majeski, Manager of Investor Relations and Finance. Please go ahead, sir.

[Pete Majeski:]

Thank you, Doris, and good morning to everyone participating today. Welcome to Hersha Hospitality Trust's third quarter 2014 conference call on this, 30, October 2014. Today's call will be based on the third quarter 2014 earnings release, which was distributed yesterday. If you have yet received a copy, please call us at 215-238-1046. Today's call will also be webcast. To listen to an audio webcast of today's call, please visit www.hersha.com within the Investor Relations section. Prior to proceeding, I’d like to remind everyone that today’s conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial positions to be materially different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Jay Shah, Hersha Hospitality Trust's Chief Executive Officer. Jay, you may begin.

[Jay Shah:]

Okay. Thank you, Pete, and good morning everyone. Joining me today is Neil Shah, our Chief Operating Officer; and Ashish Parikh, our Chief Financial Officer. Let me first begin by thanking all that attended our successful Investor Day earlier this month at the Rittenhouse in Philadelphia. We thought it was a good opportunity for us to present the 15 year history of our management team and our portfolio evolution. Day was filled with meaningful interaction and gave our team the opportunity to give you an in-depth view of the Company's strategy and tactics and to share an analytical approach to understanding our EBITDA, growth potential and our total return track record. The day was well attended and we believe that the institutional investment community and the research institutions representatives found the day as informative as we intended. Let's move now to performance in the quarter. The third quarter was characterized by continued strength of industry fundamentals with demand growth reaching 4.8%, which proceeded by the first quarter's growth of 3.8% and the second quarters growth of 4.5%. Together it is building well as demand provided a favorable environment for our operators to further execute the business plans and gain pricing power. Favorable demand dynamics combined with limited supply increases drop industry ADR growth of 5.2%, the highest rate growth during the current cycle. With these positive economic fundamentals as a backdrop, Hersha's high occupancy urban transient hotel portfolio outperformed on a RevPAR basis with our comparable portfolio delivering 9.4% growth. RevPAR was consistently strong across our markets with the Boston portfolio delivering 17.7% growth, outperforming that city's growth rate of 15.6%. Our West Coast portfolio reported 15.4% growth and our comparable Manhattan portfolio delivered a robust 9.5% RevPAR growth compared to 4.3% growth for the broader Manhattan market. The quarter also marked the first quarter that the company enjoyed the early benefits of our completed development projects and our well timed early cycle renovation and value added projects. With all major development projects complete and online, and 70% of the portfolio fully renovated in the past three years, we're well positioned to leverage the embedded earnings potential from young stabilizing assets and full year contributions from completed acquisitions and developments. The result of the sale of 39 stabilized assets and lower growth markets totaling $428 million and the acquisition of 12 strategic high growth hotels per $627 million in just the last two years since 2012, combined with $149 million and capital spending since the beginning of the cycle in 2009, makes growth in the years ahead very apparent. The company's EBITDA expansion driven by industry leading margins should accelerate moving forward, offering the company greater financial flexibility to return capital to shareholders and to drive outside returns. Current macroeconomic funded manuals are indicative of a very healthy U.S. economy. Second quarter GDP growth was revised upward to 4.6% standing out as the strongest quarter of the five year economic recovery. Growth has exceeded 3.5% for three of the past four quarters and economic expand greater than 3%, which this morning - initial indication to all that the economy expanded 3.5% in the third quarter. It would mark the longest stretch of economic growth since 2004 to 2005 which were the early years of last decade recovery. As of September, the unemployment rate fell to 5.9%, the lowest level since July 2008 and consumer confidence had a seven year high in October. As this slack in the employment market tightens and consumer balance sheets continue to improve, the U.S. economy is likely to continue its expansion. As we wine down the year, the economy appears to be doing just that boosted by an accelerating business sector, a modest consumer pick-up and a very sharp reduction in oil prices which are down 20% since June. It is estimated that every $0.01 decline in gas prices sustained over a year, circulates $1.4 billion back into the economy, much of it in the form of household consumption that is typically spent on discretionary items including travel. Today gas prices are $0.25 below where they were one year ago and continuing to trend down. This is particularly relevant for the airline sector as jet fuels can be imagined as the airline single base expense. The price of jet fuel has fallen 15% over the past two months likely leading the lower fares and added routes which impacts consumer's intention to travel and are discretionary spending as a final destination. Our portfolio of upscale urban transient hotels leverage the strength and the economy to deliver strong consolidated portfolio performance and provided a glimpse of penitential of our future comparable portfolio performance. The consolidated hotels reported 12% RevPAR growth driven by a 6.9% increase in ADR and a 394 basis point increase in occupancy to 86.2%. Performance was driven by the contribution of our two newly opened Manhattan assets to Hilton Garden Inn Midtown East and the Hampton Inn Downtown Financial District, that continues stabilization of the high Union Square and strong result at our new properties in San Diego and Los Angeles. In terms of individual market as we previously mentioned, our comparable Manhattan portfolio delivered 9.5% RevPAR growth driven by a 4.4% increase in rate and a 444 basis point rise in occupancy to 94.5%. Supply growth of 5.7% in Manhattan during the third quarter was met with a 6.7% increase in demand. In addition, as of September 2014, Manhattan's trailing 12 month occupancy remained above 85% for the 28th consecutive month with September reporting an all time high occupancy of 87.1%, demonstrating that new supply is definitely being absorbed. Our Manhattan performance was driven by high occupancies in July and August coming from increase trends and demand while September benefited from compression related to the U.S. open, where over 40% of the attendees came from outside the New York City metropolitan area. And the United Nations General Assembly were a record breaking 130 plus hedge of state participated in this year's meeting. Especially noteworthy was the quarter's international travel contribution which accounted of 20% of our total room revenue in Manhattan during the third quarter of 2014, the highest quarterly contribution from international to our total room revenues year-to-date. We expect continued rate growth as we look ahead supported by strong trends in demand and international travel and further boosted by citywide group activity. The Boston portfolio reported 17.7% RevPAR growth during the third quarter as a result of a 10.5% increase in rate and 547 basis point increase in occupancy to 88.9%. Performance in Boston was driven by the Boxer which reported 34.1% RevPAR growth and continued to achieve strong occupancy and rate increases as a result of the rebranding completed last year. Convention activity in the market was strong with the related compression and spillover demand aiding performance. On the West Coast, the comparable portfolio reported 12.2% RevPAR growth as a result of a 5.5% increase in rate and 504 basis point increase in occupancy to 84.4%. RevPAR at the Courtyard San Diego increased 19.6% benefiting from three additional conventions and strong international demand resulting in a 17% increase in occupied room nights. The Courtyard Los Angeles West Side reported a 16.2% increase in the third quarter, driven by incremental corporate and group business resulting from the significant renovations completed earlier this year. In the fourth quarter, our West Coast portfolio is expected to show continued strength driven by citywide activity in Los Angeles and strong government and [LNR] (ph) growth and recovery in San Diego helping to offset an anticipated 40% decline in convention room nights in the San Diego market. In Washington DC, our combined portfolio reported 12% RevPAR growth driven by a 4% increase in rate and a 590 basis point increase in occupancy to 82.5%. The urban and metro portfolios delivered virtually the same performance as citywide activity and the rebound in government related demand drove the results. Despite the delivery of new supply in the DC urban market, our Hampton Inn which is proximate to the convention center reported increased RevPAR of 13.5% in the third quarter, with transient government and ecommerce driving the mix. Looking ahead to the fourth quarter, despite the absence of congress in October due to the midterm elections, year-over-year comparison is expected to be favorable due to the government shut down last year, which occurred in the first two weeks of October 2013. In addition, November is expected to be strong with 50,000 additional citywide room nights year-over-year generated by the markets second largest convention of 2014. The company's third quarter comparable and consolidated performance demonstrates the continuing in future strength of our high quality, geographically focused urban transient hotel portfolio. We remain confident in our outlook for the remainder of 2014 given the combination of increasing transient demand in our markets, increasingly ADR weighted growth and the continued preference for urban transient hotels by the traveling corporate and leisure public. Our commitment to pull the appropriate leverage to create value is based on our philosophy of prioritizing and generating total shareholder returns. Consistent with our ongoing capital allocation strategy, all major decisions will be focused on long term and sustainable value creation by leveraging our unique strategy and our operational advantage. With that, we'll bring the initial portion of the call to a close. And turn to Ashish to provide additional color in context to our financial results. Ashish?

[Ashish Parikh:]

Thank you, Jay. So we are very encouraged with our third quarter results, confident that the industry's underlying trends as well as our portfolios ability to outperform will continue through the fourth quarter and into the 2015. Hotel EBITDA for the consolidated portfolio increased 31.2% or $10.4 million to $43.7 million in the third quarter. This substantial increase was the result of the strong operating performance at our existing properties and EBITDA contributions from several of our new hotels. As we discussed previously, the third quarter was the first full quarter of operations at our two new Manhattan asset along with the Parrot Key Hotel & Resort in Key West. These three properties contributed approximately $4 million and additional EBITDA during the quarter. In addition, the Cadillac Courtyard at Miami Beach generated approximately $1.5 million in EBITDA during the quarter aided by market strength and the new Ocean Tower. Our New York City portfolio generated $19.1 million in hotel EBITDA during the quarter, driven the Hyatt Union Square which reported a 23% of RevPAR gain as it continued to stabilize and gain shares versus the competitive set In addition, our Manhattan Times Square [indiscernible] reported strong third quarter results, demonstrating the strength of the Times Square sub-market which has seen an influx of new supply but has also been positively impacted by strong domestic and international demand that helped to offset the new supply. These assets reported RevPAR growth of 8.6% driven by ADR growth of 4.8% and a 330 basis point increase in occupancy to 96.3% for the quarter. Strong comparable portfolio occupancy of 86% allowed our operators to drive ADR growth during the quarter. And as a result, our comparable hotel EBITDA margins increased 150 basis point to 38.5%. Especially noteworthy with EBITDA margin growth in our metro DC and Boston portfolio registering 610 and 440 basis point growth respectively. Metro DC margins in addition to easy comps were aided by cost control initiatives and RevPAR recovery in the suburban market, while margins in Boston benefited from continued stabilizing at the Boxer and improved retail production at the Courtyard Brookline and the Holiday Inn Express Cambridge. EBITDA margins in our comparable Manhattan portfolio was strong at 43.5% or remain unchanged during the quarter. Our flow in volume performance in Manhattan was negatively impacted by approximately 314,000 of onetime cancellation revenue reported in third quarter 2013, a shift from a least in-house F&B operation at one of our assets and increased travel agency commissions due to the higher ecommerce revenue. These negative impacts will partially offset by improved labor controls which contributed to a decline in room labor cost. We are projecting stronger margin growth from Manhattan portfolio in the fourth quarter, as the majority of our growth is ADR driven and we will not be challenged by the aforementioned one time event. Moving to capital expenditures and development activity which at present are at minimal levels, is only disruptive renovation activity that remains ongoing is at the Residence Inn Coconut Grove which we anticipate completing by the end of November in time for high season in the South Florida market. Our capital spending budget for the year remains between $19 million and $20 million with approximately $2 million to be spent in the fourth quarter. Turning to our balance sheet. We finished the third quarter with $37.9 million in cash and approximately $223 million of capacity under our unsecured credit line. As we discussed at our Investor Day earlier this month, we have minimal debt maturities over the next year but we are pursuing opportunities to refinance some of our secured financings during the remainder of 2014 and into 2015. To that end, we have commenced refinancing of our Hilton Garden Inn Tribeca and Residence Inn in suburban DC and what is currently a very favorable financing environment from a rate, duration and proceeds point of view. Our ability to remain nimble and quickly respond to opportunities are changes within the market has focused well during the current cycle. Our balance sheet is in very good shape providing the company a high degree of flexibility to execute our business supply in moving forward. At our September, Board of Trustees meeting, our Board brought it to increase the quarter cash dividend 16.7% to $0.07 per share which going forward represents an annualized dividend rate of $0.28 per share. Our increased common share dividend reflects cash flow growth from the ramp up and stabilization of strategic acquisitions and development projects delivered into the company's consolidated portfolio. As we have discussed, the completion of our ground ops development project and the majority of our large scale renovation projects undertaken in the early part of the cycle has accompanied well position to harvest cash flow, leverage rate driven revenue growth, and return capital to our shareholders. Prior to discussing our updated guidance, I’d like to first discuss what we’re currently seeing as far our major markets in the fourth quarter. Our positive view for the remainder of 2014 remains in tact based upon our October results. Quarter-to-date our comparable portfolio RevPAR is up 7.6%, while our consolidated portfolio is up 9%. To-date the best performing markets in our portfolio are DC Metro, Philadelphia, West Coast and Boston Properties which registered comparable property RevPAR growth of 40.9%, 15.5%, 13.6% and 8.8% respectively in October. So clearly our DC properties are aided by easy comps due to the government shutdown during October 2013. However we are seeing a nice pick-up in government group demand which is helping fly performance in this market and should continue for the remainder of the quarter. In terms of our guidance, earlier this month we increased our consolidated and comparable RevPAR guidance. To reiterate those ranges we expect RevPAR growth of 7.5% to 8.5% for the full year 2014 for our consolidated portfolio, and 5.5% to 6.5% for our comparable property. Excluding the first quarter which was impacted by very difficult comps in DC and New York, our increased guidance range if either comparable RevPAR growth from quarters two to four will be in the range of 7% to 8%, which is more indicative of the strength of our existing portfolio. These updated figures incorporate our year-to-date performance as of September 30th, and a continued improvement in operating and economic fundamentals. We are also increasing our EBITDA and FFO guidance for the year and we now expect total adjusted EBITDA to be in the range of $160 million to $163 million with FFO per diluted share between $0.47 to $0.49. We anticipate our G&A expenses to remain consistent with 2013 in the range of $14.25 million to $14.5 million for the fiscal year. And one item to know is that, based on the likelihood of achieving our pre-establishing center metrics for earnings, we booked an additional incentive approval in the third quarter that impacted our earnings by approximately 900,000. In the previous year this expense was booked in the fourth quarter. So therefore we are forecasting our 2014 fourth quarter G&A expense to be below our 2013 portfolio expense by approximately the same amount. As we've done in the past, we’ll provide our expectations for 2015 during our fourth quarter earnings call to be held early next year. That concludes my portion of the call. We can now proceed to Q&A where Jay, Neil and I, will be happy to address any questions that you may have. Operator?

[Operator:]

Thank you. (Operator Instructions) And we'll go first to Andrew Didora with Bank of America.

[Andrew Didora:]

Hi, good morning everyone. Ashish, thanks for the additional color on the Manhattan margins there. I was just wondering on that topic, what do you guys see kind of the longer term operating expense growth in New York. And do you think there is a theoretical cap on your margin growth in New York just given the high levels of margin that are already in that market?

[Ashish Parikh:]

Sure. I think the - on operating expenses Andrew, the real unknown is property taxes in New York which we aggressively challenged every assessment every year. But we are able to hold some levers at our property and keep the labor cost in check. We also look at variety of - whether staffing the expenses for the contractors or any other cost, utility savings, and we do asset manage our property very aggressively. So we are not seeing outside of property taxes just a surge in operating expenses. With our occupancies in New York which this year should run portfolio wise somewhere between 92% and 93%, you can imagine that almost all of the growth going forward is really rate base growth. So, I think that although there is a theoretical cap on margin, if we continue to get the type of rate base growth that we’re anticipating, we do have the ability to move margins even in New York City pretty significantly.

[Andrew Didora:]

Okay. I guess, just from a labor perspective, do you think that grows at a rate higher than inflation over the next few years?

[Ashish Parikh:]

I don't think so. We don’t think that the labor costs and the benefit expenses go up more than inflation over the next few years. And certainly not more than what we anticipate RevPAR growth to be over the next few years.

[Andrew Didora:]

Got it. And then my second question, at your Investor Day you guys spoke a little bit about the potential of you selling some land leases at some of your New York hotels. Why would you want to pull forward some of this cash? And if you were to do such a transaction, what would you use the cash for?

[Ashish Parikh:]

Andrew, the main reasons we're considering are this, first of all this is significant amount of value that we have embedded in. And it's sort of unique amongst our peers. A lot of the folks in New York are already on land leases. We own all but one asset, pretty simple. And so it's value that is embedded in the New York portfolio that may or may not be fully recognized. Secondly, the market is hot. So, from an opportunistic standpoint, it’s an opportunity to make a trade that would be very accretive for the company. And of course that backs the third question which you already asked, what would you do with the proceeds? And right now - and I am sure at some point we will give a update on the acquisitions environment, we’re not seeing that many acquisitions out there that would make sense for this company. That being said, there has been continued volatility across the last couple of months in the stock market. And we would look for opportunities perhaps to use the cash to buyback stock when the time was right.

[Andrew Didora:]

Great. Thanks a lot, guys.

[Operator:]

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

[Ryan Meliker:]

Hey, good morning guys. I just had a quick question and I apologize if I missed it early on the call, I jumped on little late. But, could you give me or give us some indication as to what Manhattan supply growth was in 3Q that you guys were able to generate such strong RevPAR on? And how you’re looking at Manhattan supply growth? I know you guys do a lot more work currently in terms of what supply is going to look like over the next four quarters? That would helpful color as well. Thanks.

[Ashish Parikh:]

On the third quarter specifically, we saw in New York City a 5.7% supply growth and that compared to about 6.7% demand growth, so significant supply but demand continues to outpace it. For the year, I think our initial projections were close to a 6% new supply, I think we will end happening would be a little bit less than that probably 5.5% kind of supply just because of some late deliveries. For the next couple of years we were anticipating 3% and 4% supply growth because of some of the delays from this year, next year, maybe 3.5% getting close to 4% but the year after that likely also in that 3% to 4% range. We've mentioned before that 2014 is the high watermark for new supply across this cycle and we have experienced it and it has made it more difficult to raise rates. But all of that said, I think we’re now digesting most of this high watermark supply and looking forward to some strong rate growth in the coming years.

[Ryan Meliker:]

That's great insight. That's all from me. Thanks a lot. I really appreciate the color.

[Operator:]

And we’ll go next to David Loeb with Robert W. Baird.

[David Loeb:]

Good morning. I just want to drill down a little further on the stock buyback issue. You mentioned that you might be opportunistic. Can you just give us an update on the new credit facility? Are there the same restrictions on your ability to buyback stock? And how much capacity do you have today relative to those restrictions?

[Jay Shah:]

Hey David, the credit facility that was entered into, in February, March, so that has not been amended, we still do have some restrictions on that. But with an improved EBITDA and FFO outlook for next year, we have capacity under our $75 million program right now that we could purchase a significant amount of stock in 2015 and some stock even for 2014, we have a lot of capacity left for this year. So, from a standpoint of how much could that be, right now we probably have around $60 million remaining under the $75 million cap, I think that we could purchase somewhere in that $50 million to $60 million range next year.

[David Loeb:]

Okay. And would you consider buying in stock first using the line and then proceeding to a closing on a land transaction, some short window after that?

[Jay Shah:]

We have significant cash flow growth and leverage capacity today. And so opportunistically I think we would be – we don’t consider it something that we have to wait for a land sale closing for.

[David Loeb:]

Okay. And finally on that topic, are there other sources of net proceeds? For example, upcoming refinancing where you could pull out net proceeds or some possible disposition of partner buyouts for that matter of the - mostly joint venture or other joint venture opportunities?

[Neil Shah:]

I’ll just address the refinancing, yeah, absolutely there are other sources just indicatively we’re re-financing as I mentioned, the Hilton Garden Inn Tribeca. So that’s about $31 million loan. We will refinance that for somewhere in the range of $45 million to $47 million. So there's proceeds that could be utilized, just from that particular refinancing. The residence in suburban DC, we probably could take out another extra $5 million if we wanted to. I am not sure if we will at this point. And yeah we certainly continue to look at asset sales that they make sense but there's nothing in the horizon at this time.

[Jay Shah:]

David I’ll just add a little bit more color on the land sales. If we were to consider some of these land sales, one of the use to proceeds that I didn't mention, we talked about potentially using the proceeds to buyback stock during periods of volatility. Most likely we'd use some of the proceeds also to pay down debt. And as we would pay down debt that would probably increase our ability with adjustments to facility to buyback more stock, should that remain opportunistic.

[David Loeb:]

And JV opportunities in either direction?

[Jay Shah:]

I am sorry, David I didn’t -

[David Loeb:]

Opportunities to either liquidate the joint ventures or buyout your partners?

[Jay Shah:]

The joint ventures, I don’t think that that's a significant opportunity, I wouldn’t want to be distracted by that. Our view is that there are real small part of our balance sheet, I don’t know that we’ve got that kind of dynamism with the partnerships that we have. So, I don't know see there being any imminent opportunities with the joint ventures for proceeds or buyouts.

[David Loeb:]

Okay. One last topic we've been kind of skirting around this, but can you just give us an update on where you see New York City values for select service compact full service hotels today? And how you see that value split between land and building?

[Jay Shah:]

Sure. I think there was a recent transaction David, that I think pretty good kind of indication and very similar to our select service portfolio in New York at least. The two – there was a Hampton Inn and Holiday Inn Express that traded in the last several weeks I guess. It was a Middle Eastern offshore buyer, we’re familiar with and known for some time actually, they were able to – I think it was a good deal all around really. The total price across the two hotels was $516,000 per key. The Hampton Inn traded around $543,000 a key, the Express was closer to $500,000 key. That represented six plus kind of cap rates, so I think from the buyers perspective, they're getting a very strong cash flow oriented deal and I think the from a sellers perspective, they were able to get some – they were able to get a good sale done. I think these were both fee interests and what we've seen I think a little bit earlier in the year, we saw a couple of land lease kind of sales and those were around $450,000 a key. So, once the land was stripped out, they were able to sell select service hotel very similar to our select service hotels in New York at about 450 keys. So it’s about $150,000 to $200,000 a key in land value for these kinds of select service hotels. And now we've seen across the last year and half or so we’ve seen a lot of comps that triangulate right around this kind of value of $500,000 to $550,000 a key for the entire hotel, $150,000 to $200,000 a key for the land underneath it. You mentioned the full service side, I think there has been less comps I think in that area but generally you go back to last year there was a sale of something called the James, which was a land lease union opportunity, union property, that traded around $750,000 a key. So the sub hotel trade around $700,000 a key with an encumbered by brand and management, we’ve seen – there’s several on the market right now or quietly been marketed, very close to $1 million a key, so in the $900,000 plus kind of range for 4, 4.5 star kind of hotels that are unencumbered of brand and management. So on the full service side, there's much – there’s less clarity on the comps but I would say $750,000 to a $1 million a key. And I think those are the kind of comps you should think of for kind of Union Square or some of our larger kind of more style oriented hotels. Does that address the question, David?

[David Loeb:]

Exactly what I was looking for. Thank you. That's all I had.

[Operator:]

And we’ll go next to Bill Crow with Raymond James & Associates

[Bill Crow:]

Hey, good morning guys. I have three questions on New York but I want to start with the follow up to David’s question. I think in the answer, Ashish to his question about share repurchase, you talked about an improved 2014 and 2015 outlook. Maybe you guys could take a few seconds and just talk about the evolution of your viewpoint towards 2015, maybe how that has changed over the last 90 or 120 days?

[Ashish Parikh:]

Yeah, absolutely Bill. We gave some ranges on EBITDA for next year as well, but I think our outlook for 2015 is, predicated on a couple of items, number one is that we now have clarity on all of the developments that has been delivered and what type of run rate we should expect from those projects. So, we didn’t know how some of these projects were going to come out of the ground. And how they’re going to ramp up, but that has provided – with third quarter behind us and our fourth quarter trend, that has given us a lot of clarity on what they’re going to be able to contribute to EBITDA next year. The existing portfolio, we actually have very minimal disruption next year. So, we’re looking at - CapEx to be probably in the $20 million to $25 million range down from $40 million this year. So that limited disruption also is giving us a lot more clarity for next year. And then just overall market growth, we have been bullish in our New York City portfolio. And in all of our other market we’re seeing great strength going into 2015, some obviously better than others but we’re at the middle of budgets right now. And as we finalize those and talk to Street, I don't think there’ll be a real change of outlook based upon what we’re seeing today. So, I think all of those things really give us more confidence about 2015.

[Bill Crow:]

Great. Shifting to New York, and you guys have been more right than others on kind of some of the market dynamics and the demand growth that you’ve seen there. But let me ask you three questions, first of all, the Hyatt, how much business do you think you’re picking up from the closing – temporary closing at the InterCon across the street?

[Ashish Parikh:]

It’s interesting. The InterCon has been closed for a pretty short period at this point. I think we'll have a much better sense of how much we’re picking up from it as we get into the fourth quarter. Midtown East is a very strong market, as it continues to pose some of the highest demand growth as far a sub-market in New York is concerned. So, just in the third quarter Midtown East, Uptown Midtown East had demand growth of 5.8%, which was second on to the Time Square which was 9.3% demand growth. So, the demand growth there is strong. One other thing that we continue to struggle with in Midtown East however is that, it's a lighter weekend market, and it’s not a seven day market. You get to the weekend this is not as much pricing power available and there’s plenty of supply for the weekend demand. The Barclay [Guest] (ph) service, its 700 rooms and was always positioned at a rate significantly lower than the 48 lags. And so, we compete because we’re geographical approximate to another but on the other hand it was mostly leisure and more lower rated business. All that being said, I think we’re going to have a better understanding in the fourth and first quarter of the impact of that closing. You take 700 rooms out of a neighborhood that's not insignificant. So, if we could, we'd love to answer that question a quarter from now.

[Bill Crow:]

We might bring it up again then. Next question New York, I think everybody is trying to handicap with the stronger dollar, Ebola fears all those other things, and then the weaker Europe it might do to inbound international travel. And I think we’re also and still the fact that December is really important from that perspective. Are you hearing anything from a property level of concerns that business might not materialize from international originations?

[Jay Shah:]

We’re not, Bill. We’re still pretty bullish on the international outlook mainly because it’s so broad based. We’re finding that international travel isn’t just concentrated. When you look at the top 20 contributors to international demand in the U.S., easily they’re highly concentrated amongst the top five contributors. And now we’re seeing that sort of spread out across the top 20 a little bit – at least across the top 10. And so we feel like if there is any slack in demand coming from Europe, we think that there is sufficient other sources of international demand that can pick that up. I mentioned in the prepared remarks that we saw in San Diego, a significant jump in international demand. We’re just seeing more carriers and routes coming into market that we didn’t use to see. And as we mentioned with the price of jet fuel trending down we think that we’ll continue to see that. And I think that air lift is probably the single most if not one of the most significant cost to international travel and as long as that stays in check, I think we’ll continue to see international demand.

[Bill Crow:]

Great. That's helpful. Finally from me, can you remind us how many of your New York hotels are unionized? And then just remind us what happens if you were to sell an asset to an owner that already has union exposure up in that market?

[Jay Shah:]

Currently we’re non-union operator in New York. The implication to union-operator, or union-owner buying the hotel, somewhat depends on the type of agreement that they have in place. Most typically you would imagine that they would be – that they would have clauses in place that would require them to convert the property to a union operation. That being said, we’ve talked about this urban transient model and whether it be urban select service or compact full service where F&B is not necessarily is part of the business operation. When you look at the exposure, it's very limited. You just don't have a significant staffing model. Certainly there would be an economic impact but it wouldn't be necessarily as significant as one would imagine with a different segment property. So, I surely don't have to quantify but we've been a non-union operator of the market for many years and I think it’s just because the properties that we operate are not necessarily as – I guess, they're not as attractive from a union standpoint.

[Bill Crow:]

Do you think there's maybe 25 basis point cap rate differential if you were to stay non-union versus value if you were to sell it and became union? Is that fair 25 or is that more than that, less than that? I know it’s tough to answer, it’s just a guess here, but -

[Jay Shah:]

Yeah. I wouldn't hassle to guess. If we can we’ll follow up with you afterwards.

[Bill Crow:]

Okay. Very good. Next quarter, guys. Appreciate it.

[Jay Shah:]

Thank you.

[Operator:]

Our next question comes from Nikhil Bhalla from FBR & Company

[Nikhil Bhalla:]

Hi, good morning. Ashish, the first one is for you, from a margin standpoint this is the strongest quarter we’ve seen this entire year of course. Looking forward, what is the progression of margins? How should we think your margins in terms of run rates what they could look like in 1Q, 2Q, 3Q or 4Q next year? Which quarters you think maybe strong or which quarter you think maybe below the baseline that you established here in the third quarter?

[Ashish Parikh:]

Yeah, absolutely. Well I think that we feel pretty good about fourth quarter this year. First quarter is always the most difficult quarter for us because obviously being in – having a lot of North East exposure, there is a significant difference in our ADRs between Q1 and Q2, Q3 and Q4. So, I think that with Q1 next year, we do have a shift in mix. So we do have more Florida and more West Coast property that should help us but we have to look at New York facing a superior comp in the first quarter and had to be a little hesitant to think that we get a lot of margin growth. We did have a really bad winter from a weather standpoint. So, if we don’t have that type of weather disruptions, we could get a little bit of benefit. I'd say first quarter is the one where we'd probably have a little more hesitation. We feel very good about the remainder of the year. If you look at this year from Q2, Q3, occupancies were north of 85%, Q4 will be north of80%, so we feel very good in those type of high occupancy period, we should be able to get rate growth translating to margin growth.

[Nikhil Bhalla:]

Okay. So, that’s good. Just in terms of New York City demand overall, Ashish we always talk about the supply side of things which we - I think now know what it is. In terms of demand growth, what about office space construction? Have you looked at some of the other areas of demand growth? How well they are ramping up over the next couple of years? Any stats that you’ve looked at that you can provide us? Thank you.

[Neil Shah:]

Nikhil this is Neil. Frankly we have looked at it quite a bit. We just don’t have some of those stats very handy right now. I think – but the punch line is that, tremendous amount of office development happening in Manhattan, Hudson Yards, Lower Manhattan, the Bio-Tech Corridor on the East Side, there's millions of square of feet office coming in. I am sorry, I don’t have the numbers here but it’s pretty significant increase in office development in Manhattan. I think that what's most remarkable about it and what we find so impressive about New York City, this cycle versus last cycle is just the diversity of office tenants in this market. Last cycle New York City was also a very strong demand, high demand market. But it was highly reliant on financial services. And what we're seeing across the last five years, is a lot of growth in media, in technology, and in – and actually in bio-tech and education. So I think it’ s not only a great increase in office demand but the kind and quality and diversity of it, is also something very notable and will lead to outperformance in the coming years.

[Nikhil Bhalla:]

That's great. Thanks for that color Neil, and just one final question from me. As you think about the asset, the land sales here that's been previously talked about, could you just remind us how much - what would be the dollar amount that you maybe considering?

[Jay Shah:]

Nikhil, if you look at - we don’t know if we’re going to do something wholesale, or if we’re going to do it on a few assets. But I think that, if you look at the total land value of the entire Manhattan portfolio, you could be north of $425 million, $450 million. If we did on select assets we could do something as, little as $75 million to $100 million. So that's probably the range. And we have not definitively decided how much or when we’re going to do this.

[Nikhil Bhalla:]

Okay. That’s great. Thank you very much.

[Operator:]

And our next question comes from Wes Golladay with RBC Capital Markets.

[Wes Golladay:]

Good morning, guys. Can you breakdown the demand growth that you’re seeing in Manhattan? How much of it is driven by business domestically here and in the overseas segment?

[Jay Shah:]

Sure. One of the reasons we may have to continue to push rate as well as we have in face of the growing, in face of the growing supply is as Neil mentioned the corporate sector is very strong in addition to the variety of demand generators coming into the market, [indiscernible] remain extremely strong. So, corporate still remains in our portfolio by far and away the strongest contributor of the mix. So, generally in New York we've also run sort of 80% to 85% corporate with the remainder being leisure. Now, what has happened because of significant international demand, it’s very difficult for us to breakdown international demand between corporate international and leisure international. So, let’s just assume for purpose of your question that all of the international is leisure, because it’s coming in individual bookings and small groups, foreign individual traveler series et cetera. So, I would say that it's probably shifted slightly more to leisure because of the jump in international demands or say 80% corporate to 20% leisure, I would say on the outside 75% corporate to 25% leisure - with depending on the sub-market math.

[Wes Golladay:]

Okay. And then, I guess one for Ashish. What are you looking at as far as comp for the debt you’re going to issue? Have you seen much difference between five year note and a seven year mortgage?

[Ashish Parikh:]

Sure. Wes we has only been doing balance sheet loans and unsecured debt over these last five to six years. We don’t really have to see MBS market. So we will likely do here a five year term that gives us a lot of flexibility.

[Wes Golladay:]

Okay. Thanks a lot guys and nice quarter.

[Ashish Parikh:]

Thank you.

[Operator:]

(Operator Instructions) And we’ll go next to Anthony Powell with Barclays

[Anthony Powell:]

Hi, good morning everyone. Could you quantify the impact of a citywide events in the third quarter in your major markets? We've heard some of your peers talk about how a citywide count was very strong at third quarter and that may not be a beneficial in 2015?

[Jay Shah:]

Yeah. Anthony, as we look at citywide's right now, I think from a standpoint of market exposure, obviously New York is not a big citywide compression market. So, we don’t really feel that it impacts New York at all. When we look at Washington DC, it isn't that robust, next year we are looking at much better calendar in 2016 and 2017. Boston looks very good for 2015 as it has been for 2014. And I think San Diego is also looking good but looking better into 2016 and 2017. So, we’re not faced with any markets that we’re seeing a real drop-off in this calendar. And as you know, our properties [indiscernible] to citywide to certainly benefit from compression but we don’t have any direct proof hotels.

[Anthony Powell:]

All right. Great, thank you. And you mentioned in your New York comments that, there were some increased OTA commissions in that market. Are you seeing a higher percentage of OTA bookings as more international visitors stay at your hotels? And how is that going to trend going forward? Thank you.

[Jay Shah:]

We aren't just seeing it from international, I think that, they're just a high reliance on OTAs and we continue to work with revenue management and our operators see how we can shift our business mix to reduce those commissions. So, we’re very focused on that because of the high commissions that you pay on some of this business.

[Anthony Powell:]

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

[Jay Shah:]

What I was going to say that being said, we haven’t noticed any market increases in OTA commissions. We are able to negotiate portfolio wide somewhat better rate than typical owner might get. That being said, it's used as a strategic revenue management tool by the operators. They use it to fill in periods where you’ve got slack demand. And I think overall it’s more than offset by the increase in revenues and EBITDAs that we have generating from the market.

[Operator:]

And at this time, there are no further questions in the queue. I’ll turn the call back to Jay Shah, for any closing or additional remarks.

[Jay Shah:]

Well, I think that that concludes our time this morning. Neil, Ashish and I will be in the office if any questions occur to anyone after the call, please feel free to give us a ring. But I'll thank everyone for being with us this morning. And we look forward to updating you on our year-end performance in the next several months. Thank you again for joining us.

[Operator:]

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.