Executives: Greg Costa - Manager, IR Neil H. Shah - President and COO Jay H. Shah - CEO Ashish Parikh -

CFO
Analysts: Michael Bellisario - Baird Shaun Kelly - Bank of America Anthony Powell - Barclays Jeff Donnelly - Wells Fargo Bryan Maher - B Riley FBR Chris Woronka - Deutsche

Bank
Operator: Good day. And welcome to the Hersha Hospitality First Quarter 2018 Conference Call. All participants will be in listen-only mode.

[Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Greg Costa, Manager of Investor Relations. Please go ahead.

Greg Costa: Thank you, Nicole, and good morning to everyone joining us today.

Welcome to the Hersha Hospitality Trust first quarter 2018 conference call. Today’s call will be based on the first quarter 2018 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 H. Shah, Hersha Hospitality Trust’s President and Chief Operating Officer. Neil, you may begin. Neil H.

Shah: Great. Thanks, Greg. Good morning and thank you all for joining us on today’s call. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

For the second quarter, we enjoyed better market conditions that resulted in robust operating performance for our portfolio. We are especially pleased by the results from our South Florida and Manhattan portfolios, which generated RevPAR growth of 20.3% and 7.1% respectively and grew EBITDA margins by 790 basis points and 120 basis points respectively. In South Florida, the market is benefiting from a combination of increased domestic and international leisure demand, along with less supply deliveries, while in New York City, strong demand fundamentals from business and leisure transient along with a robust forward pace is encouraging for the overall market and for our assets. Although the positive momentum during the first quarter yielded growth in most of our core markets, significant renovations limited our portfolio-wide comparable RevPAR growth. If we exclude assets under renovation, our comparable portfolio experienced approximately 4.6% RevPAR growth in the first quarter, which showcases a more accurate view of the performance of our hotels during the quarter.

In addition to our South Florida and New York clusters, our outperformance in the first quarter benefited from the continued ramp-up of our newly acquired assets. The past two quarters have clearly shown the merits of our capital recycling efforts, as our most recently acquired hotels produced outstanding results in the fourth quarter and continued to ramp in the first quarter. Our six most recently acquired hotels yielded weighted average RevPAR growth of 13%, which follows 13.9% RevPAR growth for these assets in the fourth quarter. Margins at these hotels were also strong and grew by 335 basis points, benefiting from a combination of cost containment initiatives, and innovative pricing and distribution strategies. Across the last two years, we acquired high-quality hotels in sub markets where we believe we could drive meaningful EBITDA growth.

We funded these acquisitions with the sale of lower growth assets in secondary locations. Since 2015, we disposed 19 mature, stabilized hotels for approximately $900 million. We executed the sales very efficiently and we are able to transact for an average 15 times EBITDA multiple or a 6% cap rate. This transformative recycling of capital has been accretive to our growth rate, our quality, and our free cash flow profile. Let’s take a deeper dive into our markets, beginning with our South Florida portfolio, which reported 20.3% RevPAR growth in the first quarter.

Four of Hersha’s six hotels opened shortly after Hurricane Irma and continue to experience a boost in property operations since their reopening. While the portfolio received an influx of occupancy related to hurricane relief in the fourth quarter, we believe this quarter’s operational results were driven by a resurgence of the Miami lodging market. Our optimism is supported by strong leisure and corporate travel trends, less new supply, continued upside from disruption in the Caribbean and Puerto Rico, and the return of some of the traditional international travelers to the market. International room revenue at our Miami Beach properties grew 20% during the quarter. More specifically, booking data showed a 20% increase in travelers from Brazil to Miami and the 30% plus bump in travelers from United Kingdom.

For the second quarter, our most recent acquisition in Miami, the Ritz-Carlton Coconut Grove was our best performing asset, as we achieved 29.5% RevPAR growth and over 1,300 basis points of EBITDA margin growth. This continued outperformance was driven by the increased strength of transient and group guests, leading the F&B profit margin growth of 550 basis points year-over-year. This strong transient and group pace remains on track thus far in the second quarter. The Residence Inn Coconut Grove, adjacent to our Ritz, achieved 14.7% RevPAR growth and 240 basis points of EBITDA margin growth. The property completed a significant renovation back in 2014, including a full guestroom and exterior renovations, and sustainability initiatives, installation of solar panels on the roof, LED lighting, and the guestroom energy management system.

This has reduced our overall electricity usage at the hotel as 14% of hotel electricity is actually supplied by solar. Overall, since acquiring this hotel, and while completing the above renovations, we experienced a 9.6% RevPAR CAGR since our acquisition in 2013, and in that time have increased EBITDA from just below $1 million to over $3 million at the end of 2017, a 33% EBITDA CAGR through the end of 2017. Renovations can be transformative and yield above market growth for many years. On Miami Beach, our two existing Autograph Collection hotels, the Blue Moon and the Winter Haven hotel also recorded double digit RevPAR growth and significant margin growth in the first quarter. Ash will go into more detail on the CapEx projects, but we made meaningful progress on our transformation of the Cadillac Hotel & Beach Club to an Autograph Collection hotel; and our upgrade of the Parrot Key Resort on Key West during the quarter.

And we are excited for both properties to begin welcoming guests this summer. These two hotels are our largest properties in South Florida and we have missed our EBITDA contribution over the last few quarters, as these two hotels have historically combined to generate over $10 million of EBITDA during the first two quarters of the year. Recent construction related delays required us to push back the opening of the Cadillac until June and Parrot Key until July. These transformative projects and our existing Miami portfolio are positioned for substantial growth in the back half of 2018 as the convention center reopens on Miami Beach and the Key West market stabilizes. Our New York City cluster was our best performing portfolio outside of South Florida and experienced 10.3% RevPAR growth during the first quarter, aided by ADR growth of 3.3%.

Strong business and leisure transient demand led to increased occupancy by 577 basis points to 91.6%, the highest first quarter occupancy for our New York City portfolio in our history. We drove 8.7% RevPAR growth at the Hyatt Union Square and also experienced strong growth in Midtown East, Tribeca and Chelsea. In total, our six high-quality Manhattan properties registered 7.1% RevPAR growth to $181 during the first quarter. Our Manhattan portfolio contributed $3.6 million in EBITDA to our total comparable hotel portfolio, a 17% year-over-year increase in EBITDA. Demand for the city is on the rise with forecasted growth for 2018 and 2019 at 5.1% and 5%, respectively.

We are forecasting supply growth of less than 3% for 2018. Looking back to prerecession levels for New York City when demand regularly outpaced supply on an annual basis, it led to double-digit RevPAR growth for the market. And we remember well that we remained 10% below prior peak 2008 RevPAR in Manhattan 10 years ago. We are seeing significant growth in business transient room nights and the leisure market remains robust in New York. Over the quarter, we also saw an 8.5% uptick in inbound international travelers to Manhattan due to a weakening U.S.

dollar and a shift in the Easter holiday, most notably originating from the United Kingdom, which grew by 12%. We are also encouraged by Chinese visitation, if not investment. Chinese inbound travelers doubled this quarter for us to over 5% of our international visitors in our New York hotels. Manhattan more broadly also saw a greater than 10% growth in arrivals from Brazil and Italy over last year. Our Boston portfolio continued its outperformance in the first quarter, registering RevPAR growth of 6.1%, 350 basis points above the market.

We continue to benefit from ramp-up at our most recent acquisition in Boston, the Envoy Hotel, which registered RevPAR growth of 13.3% and EBITDA margin growth of 260 basis points. We acquired the hotel two years ago with high expectations to drive meaningful rate, margin and loyalty from this exceptionally located property in the heart of Boston Seaport Innovation District. Our thesis on this asset remains intact, with an increase in local corporate accounts driving LNR growth for the foreseeable future. Looking ahead, the Envoy is positioned to continue to benefit from its location in the Seaport as well as increased activity from guests and locals at the lookout rooftop bar, one of the most sought after outdoor rooftop locations in the city. We are currently expanding the rooftop bar to occupy an additional 2,000 square feet, which will include a new bar with an awning to extend the bar season, the addition of the kitchen and a covered space for rooftop catering and events.

This expansion will allow the rooftop to increase capacity by over 50% and should yield a substantial IRR on our investment. On the West Coast, our portfolio consists of eight hotels from Seattle to San Diego and reported RevPAR growth of 5.5%, driven by 1.3% ADR increase to $216. The portfolio is our largest EBITDA generating market, delivering 32% of our consolidated EBITDA distribution. For the second consecutive quarter, the best performing asset was the Sanctuary Beach Resort. Following two years of ownership, we have successfully transitioned the business mix, attracting more midweek corporate business and enhancing our restaurants, bar and event space.

In the first quarter, the Sanctuary Beach Resort increased RevPAR by 19%, aided by a 17.5% ADR growth to $263. Over the past several years, we have focused on acquiring hotels in growing innovation districts on the West Coast. This strategy is proving quite productive in Sunnyvale, in the heart of Silicon Valley, on Silicon Beach, Playa Vista in Southern California and in booming South Lake Union in Seattle. Our Sunnyvale assets had combined RevPAR growth of 9.9%, driven by capturing a steady mix of midweek corporate and transient demand. Fundamentals in Sunnyvale continue to pace ahead of forecast, most notably with a large Google conference taking place in Mountain View during May that will drive performance at our hotels.

In Santa Monica, we saw continued success at our recently acquired Ambrose hotel, which grew RevPAR by 14.8%. During the quarter, the Ambrose is able to grow occupancy and push rate, taking advantage of a number of citywide events, including NBA All-Star weekend and the LA Marathon. We anticipate strong corporate activity at the hotel for the foreseeable future as the property is located among some of the leading gaming and entertainment related tech businesses, and Oracle’s cloud computing headquarters is within close proximity to the Ambrose. Lastly, at the Penn Pacific in Seattle, 12.1% RevPAR growth for the first quarter was primarily driven by an occupancy increase of 905 basis points. Since acquiring the hotel in 2017, Hersha has implemented a rate oriented revenue management strategy, compressing with locally negotiated corporate rates and capturing the high ADRs of bar and consortia guests.

This strategy was effective yet again in the first quarter as LNR was the strongest segment, growing over 10% year-over-year. The Pan Pacific occupied exceptional real estate with a high profile location in South Lake Union. We see continued upside in rate and margins despite new supply in this market. Our Philadelphia portfolio was negatively impacted by renovations during the first quarter as both The Rittenhouse and Hampton Inn convention center underwent significant ROI generating capital projects. At our recently acquired Philadelphia Westin, we recorded 7.2% RevPAR growth, which was driven by an ADR increase of close to 21%, at the expense of occupancy, as we shifted segmentation from OTA channels to a mix of LNR and other group business since our acquisition last year.

Fundamentals in Philadelphia remained quite strong with a growing technology and innovation sector downtown and a very strong growth in leisure-oriented visitation. Overseas travelers are expected to grow 22% from 2017 to 2022, nearly twice the growth rate between 2012 and 2017 as more non-stop international routes and carriers are being added in the market. Washington DC faced a difficult comp with the inauguration and Women’s March taking place in the first quarter of 2017. And this year, it experienced a decline in transient due to the government shutdown this past January. It was a tough quarter with RevPAR down 18%.

Despite a challenging operating environment year-to-date in the market, our sentiment remains positive for Washington DC. The second quarter should yield greater demand for the market with a more robust convention calendar and Congress in session an extra week compared to the second quarter of 2017. We have also begun to see early signs of diplomatic and international travel returning to Washington DC, which will benefit the Ritz-Carlton Georgetown. And in the back half of the year, our upgrade of the St. Gregory Hotel should provide further benefit.

Before I turn the call over to Ash to dig a bit deeper into margins and our updated guidance, I wanted to quickly touch on capital allocation. In the first quarter, we repurchased $10.8 million in stock at an average price of $17.03. We consider opportunities to purchase our existing portfolio at these levels quite attractive with balanced buybacks with ROI oriented investments, and leverage levels in our existing portfolio. Since 2014, we have repurchased $241.1 million in common shares, representing nearly 23% of the flow. Last month we also acquired the Annapolis Waterfront Hotel.

We were able to purchase the hotel at a very attractive basis and going in yield, and expect to improve the hotels operations and pricing strategies in the coming years. It is the only Autograph Collection hotel on the Chesapeake Bay and the only waterfront hotel in Annapolis. We’ve had success investing in regional resort destinations within driving distance of our major gateway markets like the Hotel Milo in Santa Barbara near LA, the Sanctuary Beach Resort in Monterey near Silicon Valley or the Parrot Key Resort in Key West near Miami. These small resorts leverage the strength of the leisure transient customer and also serve the premium small group market. The autograph Annapolis is also proximate to a number of local demand generators including the United States Naval Academy, St.

Johns College, Annapolis Yacht Club and the State Capitol Complex. Like all of our acquisitions across the last three years, we funded the acquisitions with proceeds from our previously announced property sales. Following several years of well-timed dispositions, calculated acquisitions and ROI-generating renovations, our collection of hotels is uniquely in tune with the tastes and preferences of today’s traveler. Following another resurgent quarter of lodging fundamentals and leading indicators for continued economic growth in 2018, we remain confident in the value of our portfolio, the markets where we are focused and our team’s ability to drive meaningful EBITDA growth in the coming years. With that, let me turn it over to Ash to discuss some other aspect of the first quarter [technical difficulty]

Operator: Pardon me.

This is the operator. We seem to have lost connection with the speakers. Give us one moment. Please stand by. You may continue your call.

This is the operator, we have joined the speakers. You may continue your call.

Ashish Parikh: Okay. Great. Well, thank you, everyone.

So, as Neil mentioned, the performance of our non-disruptive comparable portfolio and recent acquisitions exceeded our forecast, resulting in us exceeding our internal projections for the quarter on RevPAR and margin performance. From a margin perspective, excluding properties under renovation, our comparable portfolio ex-DC grew margins by 250 basis points. Our South Florida properties had the strongest EBITDA margin performance as the portfolio saw margin surge 790 basis points in the first quarter. Our Ritz-Carlton Coconut Grove asset was the best performer across our portfolio as margins grew over 1,300 basis points, primarily driven by stronger transient and group demand. At our Autograph Collection hotels in Miami Beach, The Blue Moon and the Winter Haven also performed very well, growing EBITDA margins by 810 basis points and 470 basis points respectively.

Our Manhattan portfolio experienced EBITDA margin growth of 120 basis points helping to offset wage pressures and tight labor conditions. Our revenue management initiatives implemented over the past several quarters to offset rising expenses, were also integral in our ability to drive RevPAR and consequently grow margins. At the core of all of these initiatives is our franchise operating model, which allows a significant flexibility to adjust purchasing strategies and staffing model while quickly adapting to changing market conditions. Now, shifting to transactional activity. During the first quarter, we sold two assets and acquired the Annapolis Waterfront Hotel.

Starting with the dispositions. In February, we closed on the sale of 140-room Hyatt House in Gaithersburg, Maryland for $19 million. This disposition was initiated during our 24-month recycling campaign but the sale took additional time to close as the hotel was repurposed by the buyer into an alternative real estate use, requiring special zoning from municipality. Additionally, in March, we closed on the sale of the 81-room Hampton Inn Financial District in Manhattan for $32.4 million. We remain bullish on the Manhattan lodging market.

However, this was an opportunistic sale, and allowed us to redeploy proceeds into stock buybacks at very attractive pricing, pay down debt and make a strategic acquisition at a more favorable cap rate. The blended economic cap rate and EBITDA multiple on the sales of both hotels was 4.3% and 19.9 times respectively. Later in March, we purchased 150-room Annapolis Waterfront Hotel for $41.5 million. This acquisition is executing at an attractive economic cap rate of 8.7%, a 10.4 times EBITDA multiple. Shifting over to CapEx.

We spent approximately $26.7 million in CapEx and development projects during the first quarter. At our Cadillac Hotel & Beach Club, we are in the final stages of conversion from a Courtyard to an Autograph Collection Hotel. Our teams are completing their final work in conjunction with the reviews from city officials with an anticipated opening in late June. In Key West, at the Parrot Key Hotel & Resort, we continue to make progress on renovation and are targeting an early to mid-third quarter reopening. Lastly, in South Florida, we commenced renovations at the Ritz-Carlton where we plan to transform the hotel guestrooms and public spaces to cater to the taste and preferences of our guests and local delights [ph] in Coconut Grove.

Phase 1 of this renovation, the transformation of the bar and lounge Commodore was completed in the first quarter, while guestroom and public space renovation has been accelerated to 2018. In Philadelphia, we are in the final stages of completing guestroom renovation at the Rittenhouse and Hampton Inn Convention Center. While in Washington DECLINED, upgrades to the guestrooms at the St. Gregory and DuPont Circle will also be completed later in second quarter. With the acceleration of the work at the Ritz Coconut Grove, our range of CapEx spend for 2018 is now between $72 million and $76 million.

And this amount is evenly split between lifecycle, PIPs and ROI projects. We anticipate 80% of the spend to occur during the first two quarters of the year. So, I’ll finish with our updated full-year guidance for 2018. Building of another strong quarter, we remain encouraged by our 2018 operating results to-date, as we are seeing strong fundamentals and mid single digit RevPAR growth thus far in April in many of our core markets including South Florida, Boston, Washington DC, and the West Coast. This performance has helped to offset the renovation disruption seen at our Philadelphia properties and the negative impact of the Easter shift on our New York portfolio.

We’ve presented our updated 2018 guidance in the earnings release published yesterday. In addition to our first quarter operational results, the primary changes to the guidance were driven by the acquisition of the Annapolis Waterfront Hotel, close-out of our preferred interest in the Cindat joint venture, retrospective gain recognition in simultaneous elimination of all deferred gains related to the asset contributions into the Cindat joint venture and adjustments for renovation-related delays. With the forecasted openings of the Cadillac and the Parrot Key Resort over the next few months and the ramp-up of the remainder of our properties currently underway renovation, we continue to anticipate significantly stronger RevPAR growth and EBITDA production from the portfolio in the back half of 2018. I will not go into detail on all of the numbers presented in our earnings release but a few of the highlights include increasing the lower end of our RevPAR growth range with comparable portfolio RevPAR growth of 1.5% to 3%, AFFO per diluted share of $1.96 to $2.14 per share, and EBITDA to be in the range of $162 million to $170 million. From an EBITDA margin perspective, we are maintaining our forecasted EBITDA margin growth rate to a range from minus 50 basis points to positive 50 basis points for 2018.

So, this 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: [Operator Instructions] Our first question comes from Michael Bellisario of Baird. Please go ahead.

Michael Bellisario: Good morning, gentlemen.

Just first question for you, maybe on the business transient front. I know you guys noted some improvement in the few markets, but [technical difficulty]. How much of that do you think is actual strength in the markets versus what you’re doing on the revenue management front potentially leading to better results?
Jay H. Shah: Michael, this is Jay. It’s probably a difficult question to quantify 100%.

But I don’t think that we would get the type of traction we are getting from our strategies if there wasn’t demand in the markets where we are getting that kind of -- where we are getting that kind of traction. When we look at our markets across the board, our consortia and LNR in all markets, but let’s say Washington DC, has been pacing up very significantly. When we look at the first quarter in New York, for instance, the three sort of most significant channel contributors to our revenues were bar at the very top, which is Hotel Direct Brand.com, at the independents; their original demand created through their websites and then consortia, LNR and groups. And for us to be pacing up 28% in LNR in New York and 8% consortia in New York, I think we are pretty good at our strategies, in our revenue management initiatives, but it’d be tough to get that kind of traction without ambient demand. So, again, it’s hard to split it up.

And if we had more data on what our peers are doing, we might be able to better quantify it. But, I think, generally speaking, we feel like there is a significant recovery in business transient.

Michael Bellisario: That’s helpful. And then just on the CapEx front. You mentioned accelerate work at the Ritz and Coconut Grove.

How much of that change in plan is due to maybe an improved outlook in South Florida for you guys versus what you’re seeing on the costs, labor material side there to maybe preempt some further cost increases, as you think about spending money at that property?
Jay H. Shah: Michael, this is good point. We are seeing very significant increases in construction costs throughout the U.S. and particularly in Florida, but really across the U.S. But, that’s really not the driver here.

The driver here is simply, we would have done more of this renovation next year at the hotel, but we feel like the strength in this marketplace and the early results from some of our strategy shifts at the hotel give us confidence that we will earn great returns from the renovation of the guestrooms. And so, we’re just bringing it up because we think it will provide good returns. We would have done it six months later, otherwise.

Michael Bellisario: Got it. And then, just last one for me, just on the big picture side, maybe 30,000 figure.

What’s next for you guys as you think about the strategy and the portfolio? It kind of seems like all the buying and selling has winded down a bit. How should we think about kind of the next 12 to 18 months aside from reopening Key West and South Beach?
Jay H. Shah: Yes. Michael, as we come off of all of these renovation projects, almost all of which will be completed in the second quarter, but for Parrot Key, which is going to probably shift a bit more into the third -- beginning of the third quarter. We’re very focused on kind of pivoting, driving our performance from all of the new capital that we’ve allocated.

You see the results we’ve had with our new acquisitions and execution on those business plans both in 13.9 and 13% for all our new acquisitions in the last couple of quarters. And I think as we get into the third and fourth quarter of this year, we’re going to really focus on taking the hotels that have been disrupted by renovations and leveraging the capital that we’ve invested there to drive very strong results there as well. And I think, that’s going to be the case for us as we look into ‘19 and ‘20. We think that there is a lot of EBITDA growth to be harvested. And that’s where we’re going to focus on.

Operator: Our next question comes from Shaun Kelly of Bank of America. Please go ahead.

Shaun Kelly: Hi, guys. Good morning. Just wanted to start with New York maybe.

You guys had obviously a really strong performance there, both for Manhattan and for the boarder market. You gave plenty color on margins overall, but just kind of curious, could you give us your thoughts on what’s the leverage point in this market, meaning sort of what kind of RevPAR growth do you really need to get on your types of assets to beat cost inflation? Because it does sound like, there is still real pressure here in New York. And then, maybe same question, if you could kind of do it for the overall portfolio. I mean, just broadly, you guys are pretty concentrated in urban cores or in pretty extensive markets. So, what kind of inflation are you guys seeing out there at the operating level right now?

Ashish Parikh: Hey, Shaun.

This is Ashish. I think that in the broader portfolio, we feel as though you have to do somewhere in the range of 250 to 300 basis points of margin of RevPAR growth and a lot of that has to be ADR driven to really offset what we’re seeing as far as wage pressures, property tax increases, potential increases of insurance going forward. So, I think that for our portfolio, I would say that because of our operating model, it’s 2.5 to 3% range. I would say for others, it’s more like 3.5 to 5% to really getting kind of meaningful growth when you think about what we can do on our portfolio with the model that we run. I think in New York it’s probably closer to that 3.5 to 4% to get any type of meaningful margin growth in this environment.

Shaun Kelly: And then, sort of the other big question for me was just thinking about the cadence about renovations where there’s substantial activity this year and then some of the -- the two properties that are offline. Could you just give us a little bit of help for either modeling or outlook purposes? As we think about next year, I think you said -- I think Neil maybe said in his prepared remarks, $10 million of like either disruption or EBITDA contribution in the first half from the assets that are offline. But can we expect to get that kind of number back in the first half of next year when these properties are back? Will there be some ramp up? And maybe get started there with those two properties. Neil H. Shah: Shaun, this Neil.

There will be ramp up in the second half of this year on those properties. And that is in our guidance today. We believe that by first quarter and second quarter of next year, there will still be ramp up, and it takes several years to find your fair share, but our expectations would be to be able to get very close to that historical level of EBITDA production from the two assets by next year because they are such significant upgrades of both properties. The Cadillac is becoming an Autograph Collection hotel; it’s shifting comp sets that operate at over $50 kind of rate advantage. And at Parrot Key, the upgrades that we are putting into the guestrooms as well as the public areas in the restaurant and bar, does position it a star category above where it is today.

So, our expectation is that these properties are going to stabilize at a significant premium to our historical record, but year one, we think we should be able to hit our historical numbers in ‘19.

Shaun Kelly: And then, like for excluding those two properties but for the rest of the portfolio, obviously there is a lot of reno activity. So, sort of same question. As we think year-on-year, what kind of total disruption number do you think we are seeing for this year that we can or will get back in ‘19 when things are a little bit more balanced? I mean, they are always going to be lifecycle renovations and whatnot. But, is there sort of a number that -- or a range that you could kind of point us to of, just general disruption from reno activity excluding those two properties in the portfolio for this year?

Ashish Parikh: For the first quarter, we looked at reno disruption o about $3 million and then in the second quarter probably somewhere between to $1 million and $1.5 million.

So, somewhere in the $4 million to $5 million range for 2018 is our renovation disruption. As you mentioned, we will always have some renovations going on, but we would look at that to be decreased by at least 50%, if not more next year.

Operator: Our next question comes from Anthony Powell of Barclays. Please go ahead.

Anthony Powell: You mentioned strong international demand growth a few times in your prepared remarks.

How far are you from peak international demand in terms of room nights, revenue mix in your portfolio? Do you think the travel industry as a whole is doing a better job this year of drawing more international visitors to the country?
Neil H. Shah: Anthony, international demand data, as we’ve mentioned in previous calls as well, is often kind of a lagging reporting cycle. And there’s a lot of, I’d just call, diversity in different research providers in the space. But we look at our existing properties and kind of where our customers are coming from. And then, we look a lot at kind of Expedia data and then we look at enplanement data and the like.

What we’re seeing and what we’ve kind of been talking about is that there is a weakening dollar and that does lead to increased demand, we believe will lead to increased demand. And I think that’s been probably the biggest driver of it. And for certain countries like Brazil, Argentina traditionally big and active countries and travel, they’ve gone through a couple of years of very difficult domestic issues. Brazil is starting to come out of it and we’re starting to see travel from it. Italy for example which also has been a strong contributor in New York, this quarter for us was -- has been living through a recession but it’s typically been very big travelers to the United States and the New York, and they’re now starting to come back with the benefit of either their recession being kind of the new normal for them and because the dollar has dropped and makes it a little more attractive.

In terms of policy, our industry, the American Hotel and Lodging Association, Visit USA, there is a lot of organizations that are spending a lot of efforts and time trying to reverse some of the narrative that’s coming out of the administration regarding travel. But, I think it’s probably too early to point to that as the reason for the uptick in travel so far. I think, it’s -- travel generally is a -- it’s going to be a long-term demand growth I think. It just depends on which countries it’s going to be coming from. And to your first question, I actually don’t have the data with me in terms of room nights.

It’s for us and our own portfolio. We are often shifting between international channels and other channels. And so, I wouldn’t make a conclusion based on us being a 10% international contribution today versus 20% two or three years ago, because there are different kinds of international consumers going in our hotel at different price points. But we’re seeing clear signs really across the board in our portfolio for increases in international travel.

Anthony Powell: Thank you.

And you mentioned that you expect supply growth in Manhattan to be 3% in 2018. It’s a bit lower than in recent years. Is that just due to hotels are being pushed out to later years or are you seeing for your construction starts, and what’s your kind of medium-term outlook for supply growth in Manhattan?

Ashish Parikh: We see 3% as a result of project delays and fewer construction starts in 2014. There is -- we are at a point of clear deceleration in supply growth in Manhattan. We had a couple of years of 5 to 6% supply growth and it’s now coming back to kind of 3 to 4% for the next couple of years before it stabilizes at below 2%.

Judging new potential construction starts today, there is just not many of them. And so, we anticipate getting back to New York’s historical less than 2% supply growth within two to three years. And as you know, demand growth has remained very strong throughout the cycle and the diversity of that demand also gives us a lot of confidence relative to previous cycles; there is financial services; there is technology and the leisure market. And so, we do anticipate meaningful RevPAR growth as a direct result of decelerating supply.

Operator: Our next question comes from Jeff Donnelly of Wells Fargo.

Please go ahead.

Jeff Donnelly: Good morning, guys. Back on your comments about the improvement in transient demand. Can you maybe delve in a little bit and maybe talk about, as you look across these channels, is it sort of a willingness to pay more, is it greater guest volumes or a little bit of both. I guess, I’m just wondering, if this is leading to an expansion in the advanced booking window in your eyes?
Jay H.

Shah: Yes, this is Jay. If we take a look at -- we look at most of the growth, the pace is up. Generally in most markets, it’s still primarily been driven by some occupancy growth, but we are starting to see rates in the business channel, grow. And when we see, like in New York, we saw in the first quarter, a pretty significant growth in bar and brand contribution, and that was almost all rate driven. So, I think there is a willingness to pay more.

And it’s probably just being driven by the fact that there is more compression in these markets. As we look out -- particularly in New York, let’s say you take in New York just for example, when you’re running the kind of occupancies, we are running there, most of the growth is going to have to come from ADR, particularly if supply begins to moderate and then taper down. So, it’s our view that the growth going forward is going to come from rate. And we are just starting to see in our rate negotiations for LNRs as we did towards the end of last year, and as we are looking at LNR bookings going forward we are going to be getting to a point from an occupancy standpoint where you’re yielding down some of the LNR rates and that’s why you are starting to see consortia pacing up as well. And that’s going to be primarily rate driven growth.

Jeff Donnelly: And maybe outside of New York, are you seeing demand on I guess some of weaker nights [ph], improve as well, whether that’s compression driving guests there or just maybe a willingness to seek out better rates or is it still kind of heavily concentrated in I guess sort of the peak nights?
Neil H. Shah: So, if you take, let’s just look at Boston and Sunnyvale outside of Manhattan; DC is tough to draw any conclusion from right now in Miami. It just doesn’t have as much, LNR, meaningful LNR data for us. So, if you look at Sunnyvale and Boston, Boston for the second quarter is pacing up 14% for us in LNR and about 4% in consortia, Sunnyvale, LNR is pacing at 28% for us across both properties. And this is all primarily midweek corporate driven and that’s significantly rate driven.

Jeff Donnelly: And then, maybe switch gears on Miami Beach. You mentioned Miami Beach Convention Center but it’s a market change in the scale of that center. But I think establishing a new center as a destination can take a little time. Do you have a sense of how that center might impact you guys in 2018 or 2019? I was just curious how you’re thinking about it in terms of how its ramp might help you?
Jay H. Shah: The calendar -- when you open a new convention center, it definitely takes several years to get a really robust convention calendar going.

I think, Miami can probably shorten that ramp-up on their convention calendar because they did keep parts of the center open throughout construction. So, our basal has been held at convention center, despite all the renovations and construction, and there has been other events being held, smaller events that can be managed around the construction. So, there is -- I think there will be that kind of baseline level of convention activity. For us, we expect it to get back to kind of the contribution that the convention center was providing us back in 2014 and 2015, within couple of years. The delays in construction in Miami are very commonly known in hotels and other real estate asset classes and I’m sure among meeting planners for the convention center as well.

And so, I think there will be a soft kind of booking window for a couple of quarters. But, we think it will start to really ramp up in late 2019 and in 2020, and get back to kind of previous levels of activity by 2020, 2021.

Jeff Donnelly: That’s helpful. And then, just one last question. Neil, you certainly have been active in the market.

So, I’m just curious what your perspective is. In light of the M&A that we all know about that’s proposed in the space. Do you think there is a bid for large portfolios in the private market or do you feel that the debt and equity capital availability is maybe strong for individual assets but isn’t quite there yet for portfolios?
Neil H. Shah: On the debt side, the debt side is very attractive right now for privatizations or for any kind of scale, lodging investments. The big wall of maturities in 2017 past and now there is great demand for new lodging paper and lodging credits in the capital markets.

And so, there is significant appetite. Pricing has gotten even better than middle of last year or the fall of last year, which we took advantage of on our New York City refinancing on the kind of $400 million kind of loan or $350 million loan. But there is appetite out there for couple of billion dollars, $3 billion, $4 billion of great debt capital that’s pricing very attractively, like in the mid-200s over and maybe can get depending on the cash flow profile of an asset, could get from 60 to 70% kind of financing. And so, the debt capital is there. It’s not the kind of debt capital that was around in 2006 and 2007 where you were getting up to 90% and you were paying just a couple of hundred basis points of spread over the base rate back then for that level.

But it’s -- so, it’s still kind of reasonable leverage levels but it’s open and available. On the equity side, we all read about how much equity is on the sidelines. And we know of the major opportunity funds that make a lot of lodging investments have raised some very significant new funds. International capital, even outside of China, we’ve seen great activity out of Korea and out of European pension funds. So, their equity capital is there, it just hasn’t seen the conviction yet; we just haven’t seen major privatizations in lodging yet.

And I think the biggest challenge is that a lot of the public companies are big companies. And when you are having to aggregate and have the conviction on a $2 billion, $3 billion check, that’s tough. There is only a handful of players in the space that can operate. So, I’m sorry, it’s a long-winded, Jeff, but not sure about the equity. It exists.

I don’t know if they the conviction yet. But, the debt is there and available.

Jeff Donnelly: I guess it’s a hypothetical, but if one of your peers ends up transacting privately rather than company become public to public, maybe it goes private. If it ends up say arousing interest from the private market, it looks sub six rates, does that give you guys conviction maybe to explore your options or alternatives, or is it too soon to make that statement?
Neil H. Shah: No, absolutely.

If there is that kind of conviction in the equity markets, we’ve often said that we have created this platform and we have created this kind of portfolio in order to have great value in either the public markets or the private markets. The size of our company is probably -- would be attractive and the kinds of assets and the kinds of locations that we have. And I think very importantly, the cash flow profile, the free cash flow profile and the minimal CapEx disruptions that exist in our portfolio would be attractive. We do expect very meaningful growth in EBITDA across the next couple of years. And so, value would have to reflect that, obviously.

But, at the kind of the levels of valuation that you mentioned that kind of 15 times area like that is -- that’s where we’ve been selling hotels. We sold our lowest growth assets at 15 times multiple. We believe that the portfolio that we have here today is clearly worth more than that. But, we are -- as always where we receive inbound inquiries and we have those conversations and do explore them.

Operator: Our next question comes from Bryan Maher of B Riley FBR.

Please go ahead.

Bryan Maher: So, kind of following a little bit on Jeff’s line of discussion. You’ve been kind of winding down the capital recycling for a little while but yet you still are making acquisitions like Annapolis. Is there an ongoing acquisition appetite of some level? And how deep would you say your pipeline is of properties that you are looking at?
Neil H. Shah: Bryan, we don’t have a very deep pipeline of opportunities right now.

But, we are always actively looking and exploring sales of assets or acquisitions of assets, particularly in our existing core markets. But today, the pipeline isn’t particularly deep. And we feel pretty good about the organic growth that’s built into our portfolio. In addition to the recently acquired hotels across the last couple years that will continue to grow at a significant premium to their market growth, we have these renovation assets. Nearly 25% of our EBITDA is under -- is either closed or under very significant renovation.

So, those hotels are also going to provide very significant EBITDA growth and organic growth above the market. And so, we feel like our energy is better put today on driving results of those properties. But that said, we are opportunistic. And when we can find opportunities to buy hotels like in Annapolis where we can have immediate accretion from a cash flow perspective and clear opportunity to move the needle on performance across the next three to five years, we will take advantage of opportunities like that. And we would fund them with property sales.

Bryan Maher: And when you look at your six clusters that you have now, is there one or two to jump out at you that you wish you had a little bit more exposure to?
Neil H. Shah: We like our portfolio and our markets, but Boston would be a market that we would like to have more of a presence in, if we could find our kinds of hotels. They are very hard to come by in Boston, relatively newly built hotels, free of encumbrances and real opportunity to drive EBITDA growth while also having some going in cash flow. But that’s a market that we continue to look carefully at. But, all of our existing six markets we’re actively and always looking at opportunities in those markets because at the right price and the right yield, we’d be willing to add to any of our six existing markets.

Operator: [Operator Instructions] Our next question comes from Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka: Hey. Good morning, guys. I wanted to ask you -- you talked a lot about kind of capital allocation and how you’ve kind of wound down your buying and selling activity for a while.

But on the debt front, I know you’re still a little bit levered compared to your peers. And I just wanted to kind of get your thoughts on whether we see more of a maybe a pivot to debt reduction going forward.

Ashish Parikh: Hey, Chris. This is Ashish. As we’ve potentially discussed with you in the past, once we get through 2018, we believe that just the internal growth and portfolio cash flow profile improves dramatically where we should be able to pay down anywhere from 30 to $50 million of debt per year as the acquisitions are ramping down, as the renovations are coming to close.

So, our goal over the few years is to really improve the EBITDA profile, also to continue to sort of bring the leverage closer to that 4 to 5 times debt-to-EBITDA that we’ve been targeting. And we could do some additional property sales along the way as well to accelerate that.

Chris Woronka: Okay. That’s helpful. And I want to kind of ask you how the first quarter maybe unfolded.

I mean, I know your call was in last week of February. You came out pretty well head on, if we just look at EBITDA. Was March significantly stronger than you thought? And was any of that maybe related to Easter shift not being as disruptive?

Ashish Parikh: Yes. March was stronger than we anticipated, Chris. I think that we did get a benefit from the Easter shift not affecting us as much.

We did get a benefit in certain of our markets from all of the storms in the Northeast and really Boston and New York especially the JFK market. So, March did come in better but the fundamental in March just overall business trends and as Jay spoke to, were also better than anticipated.

Chris Woronka: And maybe if you want to comment on April, maybe if it’s relative to March, stronger or about the same on kind of on the transient side?

Ashish Parikh: As far as April goes, we are seeing better results out of markets like DC and Boston on the transient side. And Miami, South Florida continue to be very strong. West Coast also has started off April in a very positive manner.

I think, the weakness that we are seeing in the portfolio is from the Easter shift is really affecting just New York and then Philadelphia with some of the renovations taking a little bit longer. So, New York and Philly are probably the only market where the transient pick-up hasn’t been as good in April as in March but as it comes out just the Easter shift and the renovation.

Operator: This concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks. Neil H.

Shah: With no more questions, we would like to take a moment to thank you all for your time this morning. As always, feel free to call, Jay, Ash or I if you have any further questions today. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation.

You may now disconnect your lines.