Executives: Peter Majeski - Manager of IR & Finance Neil Shah - President and Chief Operating Officer Jay Shah - Chief Executive Officer Ashish Parikh - Chief Financial

Officer
Analysts: Shaun Kelley - Bank of America Merrill Lynch Bryan Maher - FBR & Co. Anthony Powell - Barclays Capital, Inc. Ryan Meliker - Canaccord Genuity, Inc. Michael Bellisario - Robert W. Baird & Co.

William Crow - Raymond James & Associates, Inc. Chris Woronka - Deutsche Bank Securities, Inc.

Operator: Good day and welcome to the Hersha Hospitality Trust First Quarter 2017 Earnings Conference Call. As a reminder, today's call is being recorded. And at this time, I would like to turn the call over to Pete Majeski.

Please go ahead.

Peter Majeski: Thank you, Tiffany. Good morning to everyone joining us today. Welcome to Hersha Hospitality Trust first quarter 2017 conference call. Today's call will be based on the first quarter 2017 earnings release which was distributed yesterday afternoon.

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 position to be materially different from any future results, performance, or financial position. These factors are detailed within the Company's press release as well as within the Company’s filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil Shah, Hersha Hospitality Trust’s President and Chief Operating Officer.

Neil, you may begin.

Neil Shah: Thank you, Pete, and good morning to all of you on today's call. To joining me this morning are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer. When we last spoke a few months ago in February, we indicated we were encouraged by improved market sentiment on lodging, but we continue to execute our strategy without the presumption of reaccelerating fundamentals in the short-term. Our base case for 2017 did not anticipate an immediate rebound and reacceleration of demand fundamentals given the more business friendly administration in Washington.

But even in the low growth environment, we were and remain confident that Hersha can meaningfully outperform given our capital recycling initiatives at 2015 and 2016. Across the last several years we completed over $1.3 billion in hotel transaction. Diversifying the portfolio away from New York and more stabilized suburban hotels and into higher growth locations in Washington D.C., Boston and the West Coast. Our portfolio has kept pace with travelers evolving tastes and preferences and our hotel portfolio today is clearly of a higher quality than only a few years ago. But we've remained steadfast in our commitment to driving results at the property levels through our unique alignment with the operator and our intensive revenue and asset management system.

Our refined portfolio and our tireless teams in the field produce solid results this quarter. Our comparable portfolio delivered 3.1% RevPAR growth driven by a 1% increase in ADR to $200.48 and 157 basis point rises in occupancy to 78%. If we exclude our South Florida cluster, our comparable portfolio reported an impressive 6.4% RevPAR growth. We grew EBITDA by 3.5% in the quarter. Washington D.C.

was very strong with the inauguration, but our strength was broad-based. We also registered 11.1% growth in Philadelphia, 8.2% growth in Boston, and our largest market, the West Coast produced 4.3% RevPAR growth. We do believe that the lodging sector at large will benefit from a combination of rebounding corporate profit, potential federal corporate tax reform and infrastructure spending, accelerating GDP, full employment and even ongoing shifts in consumer spending towards experiences [over time]. As demand firms and accelerates, we will all benefit from the macro trends, but in the meantime, we are confident that our refined portfolio can produce meaningful EBITDA growth by taking share in our local markets and driving profitability at each hotel. Let's take a deeper look at our six markets, starting with Washington D.C.

which was our best performing market in the first quarter as a result of the presidential inauguration in late January and increased activity overall in the district characteristic of a new administration. Our carefully assembled portfolio branded and independent hotels across the upscale to luxury segment and diversified across Washington's most dynamic sub-market, reported rate driven RevPAR growth of 15.4% with each of our five CPT hotels reporting double-digit RevPAR growth during the period. Our urban D.C. cluster generated hotel EBITDA of approximately $5.6 million and 300 basis points of margin growth. As we've discussed since 2015 when we began acquiring more hotels in the market, we expect Washington D.C.

to be one of the country's best markets in 2017 due to strong citywide activity in addition to increase legislation and activity on the Hill. Our portfolio will also benefit from renovation tailwinds at the well located St. Gregory Hotel in the West End, as well as continued stabilization at the Hilton Garden in M-Street and the Ritz Carlton Georgetown, where we will continue to implement aggressive revenue management and plan to expand and update the hotels F&B programming. Our Boston portfolio reported 8.2% RevPAR growth and contributed $1.5 million in hotel EBITDA during the quarter, outperforming both the competitive set and the greater Boston Market. RevPAR growth was driven by the Courtyard Brookline, and our Boston clusters largest asset for RevPAR increased 39%, as a hotel was under a major renovation during last year's first quarter.

Now while the market continues to absorb new supply, which increased to 3.4% in 2016. Boston possesses a strong convention in calendar and citywide activity for the balance of 2017. In the second quarter, there is a large citywide that will not repeat in June, however the market's convention activity remains healthy, with our second quarter group pace ahead of last year by approximately 150,000 across the portfolio. In addition our portfolio will further benefit from continued ramp at The Envoy as we work closely with our operated implement and execute a more rate driven strategy, leveraging the strong and growing corporate transient demand within the submarket as companies relocate and grow in Boston's dynamic Innovation District. Not only does The Envoy continue to find its putting in the market, the hotel also continues to win accolades.

Just this month The Envoy was recognized by Yankee Magazine as the best new hotel in New England for 2017. Our West Coast cluster with a portfolio’s biggest EBITDA contributor during the period at $10.7 million or 33% of our consolidated EBITDA. Our West Coast portfolio reported 4.3% RevPAR growth during the period. Performance was primarily driven by our Courtyard and San Diego's Gaslamp where RevPAR increased 13%. In Los Angeles, our Courtyard faced a difficult 22.1% comp to last year's first quarter, primarily driven by market compressions in the Porter Ranch gas leak and citywide activity that did not repeat.

Despite a 2% RevPAR decline during the first quarter for our Courtyard, the hotel was a big producer and contributed over $2 million in hotel EBITDA, the portfolio’s third largest EBITDA producer, tremendous performance really against a very difficult comp. In Northern California, the market faced difficult comps as a result of last year's Super Bowl in Santa Clara. Our seven high quality Manhattan properties diversified across dynamic submarkets registered 1% RevPAR growth during that period, outperforming the Manhattan market by 330 basis points, 11 out of the previous 13 quarters about performance. If we exclude the Hyatt Union Square, where we're in the process of re-concepting the hotels, restaurant and bar. Our Manhattan cluster reported 2.2% RevPAR growth and 150 basis points of margin improvement.

While the overall operating environment remains challenging, there are pockets of strength and looking ahead, we expect topline growth in the low-to-mid single-digits in the second quarter for our Manhattan cluster. We do believe that New York hoteliers can regain pricing power this year, given trailing 12-month occupancy levels that have exceeded 85% for 58 consecutive months. Manhattan has long benefited from high occupancy, suggesting the market continues to displace and accommodated demand, especially during compression. And we believe there is certainly ample room for rate growth as trailing 12-month ADR remains 11.7% below the 2008 peak. Particularly with less supply growth, during the first quarter market-wide demand growth in Manhattan outpaced supplied by 30 basis points.

We anticipate new supply growth to increase 3.2% in 2017 based on the current construction pipeline. This represents a deceleration from the greater than 4% annual supply growth over the last five years. Although we expect submarkets in Times Square, Midtown West and Downtown financial district to remain difficult, our young well located purpose built New York hotels are expected to continue their out performance, leveraging the robust and multi-faceted demand in the Manhattan market and our exceptional locations in Midtown East, Tribeca and Union Square. Finally, in South Florida, our portfolio reported a 10% RevPAR decline as a result of the market's numerous headwinds. New supply in the strong dollar that already reduced growth in Miami by 2015, but 2016 and early 2017 have been very difficult with the closure of the Miami Beach Convention Center and ongoing Zika related fears among corporate meeting planners and domestic leisure travelers.

But January may have been the bottom for the market. We did see some improvement in February and March and have noted additional stabilization in April as well. We see additional pick up in May and June. By the third quarter comps, we will get it bit easier. In this environment, we worked diligently with our operators in Miami on cost containment and responsive revenue management strategies to preserve our clusters EBITDA.

Despite a 10% decline in RevPAR, the portfolio still produced a 40% EBITDA margin, and our Miami portfolio contributed over $8 million of EBITDA. We have a lot of conviction in South Florida's longer term fundamental and feel very good about our locations and hotels not to mention our cost basis. To prepare for the market's eventual recovery and leverage this slow period productively, we will undertake the majority of our ROI projects in Miami during 2017. As previously discussed on our February call, we will reposition the Courtyard Miami Beach to an autograph collection hotel, the Cadillac hotel and Beach Club. At our newly acquired Ritz-Carlton, Coconut Grove, we intend to breathe fresh air into this unique urban resort.

We will add three rooms, reinvent the restaurant with an exciting new operator, recreate a destination cocktail bar, enhance the spa, and refresh the guestroom experience. Post-renovation, our basis in the hotel will remain well below replacement cost. We believe the Ritz-Carlton, Coconut Grove offers a great location, a very high quality hotel, and a clear line of sight to increase profitability and a higher profile within the best sub-market in Miami for the next several years. Before we turn the call over to Ash to dig a bit deeper into margin of the balance sheet, I want to quickly touch on capital allocation. Much of this is in the rearview mirror as we discussed the majority of our activity on our last call.

However, we did sustain momentum from an active 2016 during the first quarter of 2017. In January, we liquidated our Mystic Partners joint-venture and assumed full ownership of the high quality Mystic Marriott Hotel & Spa without any additional cash payment and eliminated our exposure to two full service hotels in Hartford, Connecticut. We also closed on the sale of two suburban Washington D.C. hotels for $62 million at a trailing 7.4% cap rates, utilizing sales proceed and deferring taxable gain to acquire the luxury Ritz-Carlton and Coconut Grove capitalizing on market dislocation in Miami. In addition, we entered the dynamic Seattle market through the acquisition of the exceptionally located Pan Pacific Hotel located in the heart of the South Lake union sub-market across the street from Amazon's global headquarters and surrounded by transformational office, retail and residential developments.

As we proceed through 2017, we are on track to close on the remaining three suburban West Coast hotels in early July. This will result in net proceeds of $130.5 million inclusive of the additional $7.5 million we negotiated for the delay closing. Given our low basis in these hotels, our February acquisition of the Pan Pacific will set up as a reverse 1031 asset and sheltered a portion of the gains. Over the past year, we've sold 13 assets for $702 million in total proceeds and have successfully utilized 1031 exchanges and other strategies to defer over $205 million in taxable gains. In order to fully shelter the remaining gains, we only need to acquire an additional $50 million of assets by year-end.

Our strategy clearly prioritized the recycling of investment capital to upgrade portfolio quality by selling mature lower growth hotels and redeploying the appreciated capital into younger higher quality hotels and locations. Our ability is to successfully execute the strategy through complex and large scale transactions as both the buyer and seller while delivering consistent returns is a distinguishing hallmark of our success. But after two years of a lot of moving parts, the result today is a truly differentiated portfolio clustered in the most dynamic markets in the country with sturdy current income and tremendous growth potential. And the cycle tested management team, very focused on driving operating results and creating value for shareholders. With that Ash, let’s discuss the first quarter's financial performance.

Ashish Parikh: Great. Thanks Neil, and good morning. My comments will focus on our comparable portfolio's EBITDA margin, consolidated CapEx spend, balance sheet as well as our performance today in 2017 compares to our full-year 2017 outlook. During the first quarter, we reported comparable hotel EBITDA margins of 29.4%, a decline of 30 basis points. However, if we exclude the Hyatt Union Square and Sanctuary Beach Resort, which continue to support disproportionate margin deterioration did a renovation and a shift from a third party lease model to a management model.

Our comparable EBITDA margins increased 50 basis points in the first quarter. In our Manhattan portfolio we delivered 150 basis points of margin improvement, in GOP flow through of 195.2%. To our ability to drive margin growth during the period was especially impressive given the 300 basis point margin decline within our South Florida portfolio. We attribute our ability to maintain hotel EBITDA margins to aggressive asset management, the strength of our flexible operating model and the alignment that we have with our operating partners. We have and continued to work closely with our operating partners to implement expense control and revenue management strategies to sustain our high margin at this stage in the cycle as we face the combination of tepid RevPAR growth and increasing wage pressure across all of our markets.

In the face of these cost increases, we have put forth aggressive expense control measures throughout the portfolio. In the first quarter, we work closely with our brand to drive direct bookings to reduce commission expenses. In our New York property, our commissions expense as a percentage of revenue decline 90 basis points in the first quarter a 20% reduction equivalent to $130,000. In addition, we have revalued numerous spend of contract and non-payroll related areas such as operating supplies will realize the 17% cost reduction. We've also reexamined our food purchases and third party laundry cost and have seen significant per occupied room cost saving from all of these initiative.

Finally, we continue to leverage our EarthView sustainability program to reduce utility costs, which represent the portfolio’s fourth highest operating expense after payroll, franchise fees, and commissions. Over the past year we have rolled out LED lighting and energy management systems across the portfolio and are focused on implementing these initiatives at our existing and newly acquired asset. Last year our energy usage per occupied room declined 19% compared to our base line year 2010 when we started EarthView. We also continue make progress on utility and water consumption across the portfolio. From a revenue management perspective, we look to increase group business during slow demand period to compress our hotel.

Along those lines, we have instructed our revenue management team to closely evaluate forward pace, international travel and non-repeating citywide further out in the booking window to best understand where to strategically place group. This initiative will help to reduce commission expenses by avoiding the use of high cost online channel to fill rooms during periods of flat demand. As we proceed through the year it will continue to undertake new initiatives to drive our industry leading margins within a challenging operating environment. Regarding capital expenditures, we spent approximately $10.5 million and consolidated CapEx and redevelopment projects during the first quarter. Our largest projects during the period were at the Rittenhouse where we completed renovations to the ballroom and break out areas as well as renovations to the Spa and Fitness Center at the Ritz Carlton Georgetown.

Finally, we completed the rooms’ corridor and public space renovation at our TownePlace Suites in Sunnyvale as well as lobby work at the St. Gregory and Hotel Milo during the quarter. We continue to anticipate spending between $50 million to $52 million in CapEx in ROI projects in 2017 with the majority taking place in Miami. We have focused our ROI projects in market experiencing short-term challenges in addition to markets where we can enjoy better returns on invested capital versus acquisition opportunities that currently exist. Our hurdle rates for these ROI projects are in the mid-to-high teens, which is in line with our historical return on these types of investment.

Now moving to our balance sheet we’re during the first quarter we made significant progress in rebalancing our interest rate exposure from floating to fixed rate as the Fed deployed the more [indiscernible] interest rate policy. During the quarter we entered into a swap on a recently drawn $50 million portion of our third term loan and entered into a forward step up swap on our $300 million term loan. This swap fixed is a term loan and interest rate at 3.69% from the effective date August 2018, the interest rate then stepped up to 4.11% in August 2019 and then 3.9% in August 2020. On a pro forma basis, accounting for these two swaps. Our consolidated debt will be approximately 70% hedge by a cap or swap.

In the first quarter, we also repaid property level debt at six properties totaling $120.8 million as we completed our refinancing of 2006 and 2007 vintage 10-year CMBS loan. Across the last three years, the transition to a more flexible unsecured debt model has reduced our weighted-average cost of debt by 140 basis points to 3.43% as of March 31. Eliminating these debt incumbencies provides the Company additional flexibility to sell assets without hindering asset pricing and allows us to continually reduce our cost of debt. As a result, our balance sheet is in great shape, less than 5% of our consolidated debt matures this year and next while our interest coverage and fixed charge coverage ratios are forecast at approximately 4.1 times and 2.6 times respectively by year-end. In addition we continue to target debt-to-EBITDA to be in the range of 4 to 5 times and remain very comfortable with our leverage target given our portfolio cash flow profile and coverage metric.

The shifting now to our guidance, we are pleased with our portfolio’s performance thus far in 2017, which has been within the range forecast that beginning of the year. Our collection of high quality transient hotel, clustered across six high demand markets has benefited from strong results in Washington D.C. and several of our West Coast and Northeast core markets. To-date in the second quarter, we've seen strong results in our New York portfolio, partially aided by the Easter shift into April and are forecasting our comparable portfolio to be up in the range of 3% to 3.5% in April. Our booking face for May and June, also remain positive and we are seeing less deterioration in our South Florida cluster.

As a result, we remain comfortable with the guidance we provided to the market in February. As most of you know, the first quarter is by far our lease meaningful contributor and accounts for less than 20% of our annual EBITDA. As we move fast the second quarter, we will be in a much better position to potentially update our guidance range if we see a reacceleration in demand fundamentals and continued outperformance in our portfolio. So with that that concludes my portion of the call. We can now proceed to Q&A, where Jay, Neil, and I are happy to address any questions that you may have.

Operator?

Operator: Thank you. [Operator Instructions] We’ll take our first question from Shaun Kelley with Bank of America.

Shaun Kelley: Hi, good morning, guys. Just thanks for all the detail and the rundown, perhaps we could start with the comment on some of the cost initiatives you guys are taking and I was particularly interested in the commission, expense, savings you called out. Could you just talk a little bit more about on what’s driving that, when did that program start and just something its brand initiated or you've been working on more hand in hand directly with them?

Neil Shah: Sure.

Good morning, Shaun. So over the last couple of years, we have been working very diligently with our operating team, our revenue management team to really try to shift much business delay from the online booking channel, booking.com, Expedia the high price commission model to more direct booking, utilizing our internal sales force is in just even grouping up as we did in several of our New York hotel where we were able to avoid any type of online channel at all. So it is not something that had just begun in this quarter. But I think we're really starting to see some of the result of those initiatives over the past few years, where we've taken an approach that paying the 15%, 18%, 20% commissions to these models is it where taking that type of business.

Shaun Kelley: And I mean I think the number you called out was 90 basis points change in expenses, how much overall did this kind of distribution bucket costs you and what kind of magnitude could that reach over a full-year over – kind of over a period of years?

Neil Shah: So right now we still in New York, this is to target just the New York we still around 18% of our business is coming through those channels, so we're not forecasting that, we go to zero any time soon, but if you can imagine that we could lean away even 200 to 500 basis points over the next few years.

It’s a pretty significant cost savings in just a market like New York.

Shaun Kelley: That’s great. And then just sort of one big picture, last question would just be, so you mentioned the kind of comment on April at 3 to 3.5 which sounds very consistent with what you saw in the first quarter. I guess can you just give us like any sense on what forward indicator you're seeing in May and June, any possibility of I mean other than lapping comps and portfolios to – any green shoots on the demand front as it relates to corporate volumes or bookings that are catching your eye and what you guys are looking at right now?

Neil Shah: Shaun, this is Jay. We've been encouraged by the corporate segment and I think it does give us some cause for optimism though corporate group being down in the portfolio, we were getting pricing power even though it was slightly down, so we were up 7.3% in corporate group rate.

I think what was more interesting for us was that we were able to drive our national corporate and our local negotiated rate business meaning LNRs, which were up 15% and 2.5% in revenue respectively. So the national corporate was certainly pretty strong and of course that varies market by market, but across the portfolio it was pretty significant increase. And seeing the LNR volume, the LNR rate pick up was great because we didn't do that much more in room nights from LNR, we saw that our pricing power was building there as well. And I think for us from the corporate, that's what we're really looking for is rate because our volumes are generally pretty decent already.

Shaun Kelley: Thank you very much.

Operator: Our next question comes from Bryan Maher with FBR & Co.

Bryan Maher: Good morning, guys. Just kind of a quick question regarding outlook for new construction of competitive properties in the markets where you guys are focused, I think I read something recently about Boston breaking ground on a new big hotel there. Are there markets that you're more concerned about than others or is it kind of a lot more in 2017 and 2018 of what we've seen in 2016?

Neil Shah: Bryan, this is Neil. Not a significant difference from 2016, I think 2017 supply growth kind of across our major market is on average around 3%.

On the higher side of that would be Seattle, Miami. On the lower side of that would be Washington, LA, some of the West Coast market. Boston is around 3.4%. The announcement you mentioned was a new convention center hotel not a breaking ground, but an announcement that it's been approved. And that's been in talks since the Western open, so almost 10 years or so.

It's still ways away from delivering [indiscernible] breaking ground, so it's not something that we think is a significant threat in the next several years. And particularly as convention center hotels go, it's half debated issue of how much demand they actually induced versus taking share from others. But in Boston, a market like Boston there is some supply market, but Washington, Boston, Philadelphia are in that 3% range. What do we feel about that? It’s manageable in our view. Our industry went through in the 90’s and the 2000’s we were growing supply consistently on a CAGR basis through the cycle at 3.5%, 4%.

When you're growing supply of 3%, it is a headwind, but I think – and this a case in all time, but particularly today I believe there's a real obsolescence in hotels. And so if you take 1% kind of those – kind of obsolescence related new supply, 3% supply is manageable. We think that the level of demand pick up that we should see across the next several years as the economy reaccelerates. It can more then offset that level of supply in our markets.

Bryan Maher: Thanks to that.

And you're moving to the West Coast market was pretty pricey and do you continue to feel strongly about that market and would you expect to continue to add that?

Neil Shah: Bryan, the West Coast markets, the West Coast covers a broad region, but we do like our existing positions in the West Coast and if there were opportunities for cash flow and NAV accretion in those markets in assets that where we can really drive results as operators we would be very interested in growing in them. But not all markets are the same on the West Coast. We've been very focused on some of the Innovation Districts as it were whether that be in Boston or even in Manhattan around Union Square or in California, we've been really focused on that Silicon Beach area and Marina del Rey, Playa Vista, Santa Monica that quarter into our which we think has great demand fundamentals with a very difficult supply condition. We like Silicon Valley, but we really like being right in the center of the action in Silicon Valley. We think our Sunnyvale assets our poised for great success, but when we look at a lot of other opportunities that come up in Silicon Valley, they're often just – they're a little too far outside of where would be considered kind of A locations and you just can't try this much premium rate and you're more susceptible to supply.

I think Seattle is a great example of the kinds of locations that clearly an Innovation District transforming submarket and a very prominent location in that market, so that you can be the price leader in the market and sustain competition as well. But yes, the West Coast is clearly a market that we very much like, but we were also very active in 2015 buying in Washington because we expected 2016 and 2017 to be great years and we think actually 2018 and 2019 will be solid as well. We think that there's opportunities in the six markets we've chosen to focus our acquisitions as well as our operational kind of advantage and we think there's a good runway in a lot of those markets. We feel very good about Boston as well.

Bryan Maher: Okay thanks.

That’s helpful.

Neil Shah: Okay great.

Operator: Our next question is from Anthony Powell with Barclays.

Anthony Powell: Hi, good morning, guys. You mentioned that you're trying to focus your revenue management strategy on replacing lost citywide and international travel with a more groups? Is that something you're pursuing for maybe the summer months when you have more uncertain regarding international travel?

Neil Shah: I think it summer and it's really been throughout.

And I think we've mentioned it on calls and with investors before it's really since - we've had seen a fall-off in international kind of at least the growth rate in international demand since late 2014 you know that when the strong dollar showed up it was late 2014 early 2015 and since then we have been trying to shift our mix. Shifting our mix to more domestic consumers, domestic leader, trying to provide better opportunities for corporate demand and LNR kind of business and we've been grouping up in New York any time we feel there's weakness in the market. So the first quarter good example where we did last year really focused on trying to group up we knew the first quarter is always challenging in New York. And so I wouldn't it's not purely for the summer, but it's a strategy that will help us through the summer.

Anthony Powell: Got it.

Thanks and what's the latest update on the impact of Airbnb across your markets, we've got a few recalls and obviously but kind of update on your perspective would be very helpful?

Neil Shah: I think it's a benefit out there I think the regulatory interventions have been significant it's clearly reduced the number of listing in many cities across America, New York a very significant reduction in listings and particularly listings that might be competitive to business transient hotels like so like the listings from professional operators that owned a lot of apartments and higher quality buildings. Those have been shut down and so now it's gone back to being a shared economy kind of product and that's one that is more leisure oriented. So I think the reduction in supply or kind of shadow supply from Airbnb has been helpful in Manhattan. We're very encouraged by other jurisdictions taking the baton and pushing hard as well. We've talked before about some of our West Coast markets just outlawing Airbnb in Miami Beach extremely high fines and fees that are required to play an Airbnb.

So we think that that headwind is less significant today and for this year.

Anthony Powell: Thanks for that. That's all from me.

Operator: Our next question is from Ryan Meliker with Canaccord Genuity.

Ryan Meliker: Hey guys, I wanted to drill into a couple of things that you said earlier.

First with regards to New York, I think you said you're expecting 2Q to be up in the low-to-mid single-digits. Is that for year’s specific portfolio or is that across the broader market?

Neil Shah: Ryan, that’s for our specific portfolio is based on what we're seeing right now through April and bookings for May and June...

Ryan Meliker: But similar to what we saw in 1Q, you guys are likely to outperform the broader market, is that the expectations again in 2Q?

Neil Shah: Yes, I think that’s fair.

Ryan Meliker: Okay, that's helpful. And then shifting to Seattle, I just want to get some color from your thoughts on Seattle and you talked a little about it as kind of an example of an Innovation District, but LaSalle hotel just existed the Seattle, selling their last asset, obviously they have [indiscernible] they are a little bit concerned about supply growth.

We all know supply is substantial there. We know you brought mark key asset this quarter with pricing upside given its location and its quality. But when we think about Seattle, How much does supply concern you? And do you expect results if that property to be pretty choppy over the next couple years, a lot of that supply starts to get absorbed?

Neil Shah: Ryan, I think the supply picture deeply influences our acquisition strategy in Seattle. I think there is new supply coming into Seattle that kind of a 3% to 4% CAGR plus next several years and the market experienced a lot of this by the last few years as well, but demand is extremely robust as well and there's outpacing supply growth pretty significantly. But in a market where you have a lot of new supply coming online.

It influences our acquisition strategy and really focusing on truly differentiated assets that have a locations high quality, built to the kind of current tastes and preferences of today's traveler and very manageable or low capital profiles, CapEx profile, so that you're not going to have to be disrupted or try to catch up to others. And so I think that a lot of the other assets in the market I think we mentioned this last call as we've been looking around in that market for several years, looking for asset. There's a lot of new select service hotels being delivered. They are generally in kind of B locations close to the kind of main demand generators, but B location and then there's a lot of existing inventory and a lot of the existing inventory in Seattle is old and dusting quite frankly. And so I think commoditized or less than the best quality hotel and location will be more challenge in that market.

Our expectation for South Lake Union in that submarket in particular is very constructive. Just the amount of new office being delivered every few months is really just remarkable. The amount of new office coming in, new tenants, we often talk about Amazon because you see their headquarters right across the street, but it's the full basket of major technology companies and innovation oriented companies combined with the whole healthcare complex, and the cancer research centers in the area and so it's just a really great mix of demand. And on a supply function in that submarket you just – it's a very difficult to make hotel development work. And so you see a lot of residential going up and you see a lot of office going up.

We think that the supply that will be competitive to our hotel will deliver late 2018 maybe even into 2019. In 2018, we expect the SLS to deliver nowhere near our kind of location, but similarly high quality asset, current tastes and preferences. There's a Curio hotel also planned near the Pike Place Market, again a very different location from a corporate perspective to ours, but that will also be a current modern kind of hotel. So those are – there is two or three hotels that are slated in 2018, 2019, 2020 that would be more competitive, but in the coming couple of years it's going to be a lot of infill select service, which is at nearly $60, $70, $80 dealt to our rate today. And so we really do believe that we can have really solid growth coming out of that asset for the next year or two.

Ryan Meliker: Okay. That's helpful. Thanks. And then just real quickly as you see strong margins, you guys were able to drive RevPAR in excess of your annual guidance in the first quarter, but margins were still down 30 basis points. I know that 1Q was a light quarter for you guys and you talked about a lot of the things that you're doing to drive margins, but do you still feel confident that if you're able to hit RevPAR at the high end of your range you're likely to see flat margins and not down?

Ashish Parikh: Yes.

I think that if we – only if we're at the high end of the range that we would see flat margin. It’s a combination of wage pressures. And then really in the third quarter what we face is our point of our biggest assets that Courtyard going into a deep renovation as well as losing the Democratic National Convention that happened here in Philadelphia at our margins as well, but when you take away the Union Square and Sanctuary asset, we are very pleased that we're able to drive 50 basis points of margin growth in the first quarter. And I think that as those comp lap starting in the third quarter, it will make it that much easier for us.

Ryan Meliker: Gotcha.

That’s helpful. That’s it for me. Thanks guys.

Operator: Our next question comes from Michael Bellisario with Baird.

Michael Bellisario: Good morning, everyone.

Ashish Parikh: Hey, Michael.

Michael Bellisario: Just wanted to focus a little bit more on the revenue management and revenue management strategies. First on your kind of group up strategy, what groups are coming to your hotels and do you think this is incremental business coming to a city or is it really just a share shift in a market that you're staying?

Neil Shah: I don't know if we could classify the group as any one exact time, but these are typical groups on the leisure side, a lot of local kind of social related business. They might be in town for weddings or events somewhere that they are looking for a hotel that’s a little more in a neighborhood or value oriented price case might be. There's corporate group business that's as you'd imagine just corporate meetings related business, training related business.

And then there's government group business as well that we actively pursue particularly in New York. But it's what you would imagine.

Michael Bellisario: And then do you think that’s incremental business coming to a particular city or is it really just you taking group market share within a sub-market or market?

Neil Shah: I think we're taking market share for that. This is a business that is coming to a city. For Manhattan there's hundred thousand visitors coming every day and our hundred thousand folks to stay in hotels and we're just – we're choosing to take them at our hotel instead of them going somewhere else.

Ashish Parikh: Hey, Mike. And I think that's reflective, when you look at our New York portfolio in Q1, we ran occupancies around 88%, it’s a 1000 basis points better than what the market did in the first quarter is really us taking share from others.

Michael Bellisario: Got it. That’s helpful. And then on that same topic, any way you can quantify maybe the net ADR impact, are you shifting from the OTA transient business to the non-OTA group business and how that might impact the bottom line or your net ADR?

Neil Shah: Little challenging, I mean we look at it and say for regular commission structures are probably closer to 10% or so on travel agent and other channels versus sort of a high-teens on the OTAs that's probably short of our best way to look at is it better to just take lower ADR by maybe 3% to 5% if you can save that kind of commission structure.

Ashish Parikh: And it's also difficult Michael, because a lot of times, the OTA business we have in the mix in our revenue mix is we're actually very pleased with that it's probably a low relative to our peers considering also that our mix of independent hotels are so high, but a lot of that OTA business is driven by high demand markets, the redemption cost of the brands frequent today’s programs. And so it kind of use – we use OTA strategically to create compressions in some case and some cases we use it to be able to get past thresholds so that the number of redemption that we get in high demand markets are redeemable at a higher rate. And so it's really – it's one of those – it's sort of the strategic tool that we used to generally overall drive our RevPAR and our rates. So it’s real hard to isolated and quantify versus other channels.

Michael Bellisario: And then just one more for you Jay, you mentioned the Corporate Group and LNR comments about them taking rate, any particular markets showing more strength than is what industries are willing to take increased rates that we've heard so much about price sensitive corporations and business travelers, it seems that your numbers are bucking the trend a little bit.

Neil Shah: Yes, they are and I don't have those specific numbers Michael, but I think it would be fair for you and others to assume that it does kind of overlay with the market strength that we've seen generally in the first quarter. So when you consider West Coast, Boston, D.C. to some degree and I would add New York to that as well even though it wasn't one of our leading markets in the first quarter – some of the numbers I mentioned are New York was accretive to those in the first quarter. The Neil is mentioned it, as we move the portfolio mix as well we're getting in the positions with different segments that allow us to have some revenue management leadership in the market that's why if you see us relative to our concepts, we're doing pretty well and I think that all feeds into some of the pricing power that we're gaining with our LNR and some of the corporate group were able to drive in markets that are focused on a lot of innovation technologies and industries generally.

Michael Bellisario: That’s helpful.

Thank you.

Operator: Our next question is from Bill Crow with Raymond James.

William Crow: Hey, good morning. You mentioned that you thought Miami may have hit bottom or bounced up bottom I'm just curious we're hearing that maybe Brazil has also bounced up the bottom economically and I'm wondering how much of what you're seeing Miami has to do with inbound international travel whether that's European or South America?

Neil Shah: I think that's definitely a part of it. There has been stabilization in Brazil.

There's been some level of stabilization in Argentina and so that that is a benefit to the market. We haven't seen on the European side, we continue to see and I think we mentioned this last call was there's clearly been a drop off from the UK all over the country. I think most meaningful actually even on the West Coast. But all over the country we've seen a big drop off from the UK. In Miami we've seen that some real significant gains from Northern European countries.

So Netherlands, Germany continues to travel, but we've seen a lot of countries from other parts of Europe that weren't growing. We've had some our first flight to South Florida from Asia, actually through the Middle East, but really accessing a lot of the Asian business that has been some growth on the international side. But I think the bigger driver of the firming of the marketplace really it is – international is getting better, but it's the – is Zika being a little bit further removed and we still have an impact from it. Weddings are being scheduled. Certain meeting planners are still hasn’t into book there, but now it is six to eight months in the past and there's been a lot of other news to take the media's attention.

And so I think we do see less impact from Zika as this year is gone on and that will hopefully continue. The convention center is going to be still under renovation. We think really through most of even next year, our hope with first quarter, second quarter at this stage, we're starting to assume that it may be even later than that and so we're not counting the convention center. But in Miami Beach, there was a lot of new supply in 2015 and 2016. So that's also been absorbed a little bit more.

So I think it's all of those factors. I wouldn't put it all on international, but that's a piece of it.

William Crow: Is it fair to say Neil that we really have to wait until the warm rainy season to see what whether Zika reemerges as a big headline or not? I mean it’s kind of been going through the winter months and you're right, the attention to this has been much lower?

Neil Shah: Yes, that's why we remain cautious about Miami. We've shared that we do see some real firming and some better demand fundamentals in Miami in the short-term. But Zika and this convention center being closed are still significant risks out there.

On Zika in particular you have the summers when we will see what happens overall federal state and local authorities have been really focused on it through the off season in Miami. With prevention programs as well as some new technologies that are being used to more quickly intervene if there is an issue. In the end, it was never a widespread transmission. It was a small what they call a small case cluster and that led to this much kind of noise. We think that if government – if the authorities are ready to intervene sooner, which they are more hotels and more just local real estate owners are putting in prevention programs around their properties we are hopeful that this will be much less of an issue, but you never know.

Just maybe to give you a little bit of color on kind of why we're feeling more confident, in our portfolio itself we were down in South Florida in January by nearly 20% that got by February we were down to 8% down and by March we were down 4%. April is looking pretty good right now. Looking good like flat to maybe positive even and so that's what's giving us some confidence. But your point is well taken, which is we can't – we're not out of the woods yet and we'll see as the summer develops.

William Crow: Perfect, that’s helpful.

Thank you.

Operator: The last question comes from Chris Woronka with Deutsche Bank.

Chris Woronka: Hey, good morning, guys. I want to ask about your remaining independent properties and if there's any incremental thought to maybe soft brand and some of those and – the genesis of the question is really I suppose in certain submarkets you might be aware of other competing independent hotels that they might be considering going soft brand and at some point you lose that option if you wanted it, so any thoughts there?

Neil Shah: Yes, we always do consider it and as you know we do have a lot of soft brand in our portfolio, but at this point for the hotels that we have in our portfolio that are independent. We do not have plans to soft brand any of them today.

Our independent hotels today are they hold special enough locations kind of A locations prominent visible, and there are hotels that already have a loyal base of customers and have some reputation to continue to draw new ones. And the economics of adding a distribution channels like a soft brand are questionable, when you have a very successful hotel as it is. It's just the economics of paying fees and then starting to open up your hotel to redemption policies and things rather frequent state programs it's just hard to make the numbers work for some of our independent hotels. As you know our independent hotels are smaller. We're kind of generally less than 200 rooms, many of them less than 150 rooms.

And our independent hotels are big performance, so I don't have the data here with me, but I remember we mentioned on the call last time it was – our independents I think have a 10%, 12% kind of rate premium or RevPAR premium to the rest of our portfolio and 600 basis point margin premium to our portfolio. And so these are hotels that are hitting on all cylinders and we do not feel susceptible to soft brand competition in most of those cases, but we continue to look at it and we'll review it and they're all built to great institutional grade standards, so they could all be soft branded or hard branded for that matter with four plus star kinds of brands.

Chris Woronka: Great. That's helpful. Just a question on the – I guess on your, how you're looking at the Manhattan supply picture, maybe it's a question of how you're – if you're defining competitive supply or overall supply, I mean I know with the Waldorf coming out that's a big number, but there's also a lot of I guess what we call upscale branded products coming in.

I think you said 3.4% was your – or something, 4% maybe with your estimate for the year. Is that competitive supply is that your overall Manhattan market view?

Neil Shah: That's overall Manhattan. And our view is that 3.2% supply growth in Manhattan in 2017, 4% was the past several years. For past several years it's been kind of a 5% CAGR, if you take the last five years it was a 4% plus CAGR. And this year we're down to 3%.

That does net out the Waldorf for sure, but otherwise it is all Manhattan supply just relative to the consultants or the brand pipeline records, ours is based on reviewing construction underway and actual visible type work and our estimates on opening.

Chris Woronka: Okay. Very good. Final question for me is just is there any key money involved with either of the South Florida renovation projects?

Neil Shah: There is not key money involved in either of those. But we didn’t focus on it, tremendously really we've often found that key money is small dollars and it comes with a big commitment, it’s usually much longer agreements.

Often they come with requirements of management and things and so we don't believe that that was something that would have been meaningful for our renovations. The one that the Cadillac where going from a Courtyard to an autograph. We feel great about the ROI potential in that deal. We think of it as a 20% IRR on the capital that we're going to invest there. And it will go to a soft brand with autographs.

And our Ritz-Carlton and Coconut Grove, a lot of our renovation dollars there are going into the restaurant where we're going to be bringing in an outside operator, outside of Ritz to run the restaurant and bar, and so that’s a case where it would be very difficult for them to justify providing key money for that kind of transaction.

Jay Shah: And Chris, this is Jay. In addition to what Neil say, key money is just one of the ways you can derive value with brand partners. What we will get since we're going to forward load such a significant capital investment of both of those properties, there probably will be some relaxation in FF&E Reserve requirements moving forward and supporting marketing and promotional dollars for portions of our marketing fee that we pay. So it's not direct dollars coming back at us, but it's reallocation of fees or reserves that we would be responsible otherwise to think that would be more helpful to us.

Chris Woronka: Okay. That's helpful. Very good. Thanks guys. End of Q&

A
Operator: And this concludes our question-and-answer session.

I would now like to turn the call back over to Neil Shah for any additional or closing remarks.

Neil Shah: Well, thank you very much. Our team will be here in the office. We can answer any further questions, but we appreciate your time on the call and your support. Thank you.

Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.