Executives: Pete Majeski - Manager, IR & Finance Neil Shah - President & COO Jay Shah - CEO Ashish Parikh -

CFO
Analysts: Ryan Meliker - Canaccord Genuity Bill Crow - Raymond James Chris Woronka - Deutsche Bank Patrick Schultz - SunTrust Anthony Powell - Barclays Wes Golladay - RBC Capital Markets Bryan Maher - FBR &

Company
Operator: Good day, and welcome to today's Hersha Hospitality Trust Second Quarter 2016 Results Call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Pete Majeski. Please go ahead.

Pete Majeski: Thank you, Noah.

And good morning to everyone joining us today. Welcome to Hersha Hospitality Trust's second quarter 2016 conference call on this, July 28, 2016. Today's call will be based on the second quarter 2016 earnings release which is 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 positions to be materially different from any future results, performance, or financial positions.

These factors are detailed within the Company's press release as well as with 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.

Good morning and welcome to all of you joining. And with me today are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer. You've heard from several of our peers already, it's definitely choppy out there; uncertainty around economic growth and the corporate profits recession has been weighing on business travels since the start of the year, and the uncertainty caused by Brexit, currency headwinds, geopolitical risk, terrorism and our upcoming election the U.S. has reset industry expectations for the remainder of the year. It is tough out there but our teams in the field and in our offices are creating a lot of value.

We actually had a solid quarter on the grounds. Portfolio RevPAR was up 5% ex-New York. Despite softness in New York, Boston and Miami; we outperformed strong fundamentals in California, Washington and Philadelphia. We were also productive allocating capital. We continued to recycle capital, closed the 7-Hotel New York City portfolio for $571 million in April and then the first presales from our suburban portfolio this summer.

We've raised $192 million or 6.5% of preferred equity and bought back $36.8 million in common shares this quarter. And we invested more of our taxable gain and 31 like-kind exchange proceeds in the envoy, an exceptionally well located and newly built hotel in Boston. Let's start with the portfolio of market performance and then return to capital allocation. During the second quarter our comparable portfolio reported 2.6% RevPAR growth to $187 as ADR rose 1.8% to $213.22 cents and occupancy increased 66 basis points to 87.7% representing record second quarter occupancy for our comparable portfolio. When excluding our Manhattan Hotels, we reported 5% RevPAR growth.

In terms of performance across our market, let's begin with Philadelphia which delivered 8.8% RevPAR growth in the second quarter. Our Hampton in Center City Philadelphia was one of the portfolio's best performing assets during the quarter delivering 14.8% RevPAR growth and $1.5 million in incremental EBITDA, an increase of 12.4%. The hotel benefited from a more focused sales strategy, strong convention center business, as well as improved in house group business. We expect a continuation of strong performance that our Philadelphia Hotels that are balanced for the year, especially in the third quarter as the city is hosting the Democratic National Convention as we speak. Our West Coast Hotels continue to benefit from strong market dynamics and pricing power.

Our West Coast portfolio reportedly 7.4% RevPAR growth driven by 7.3% ADR improvements. Our Courtyard in Los Angeles Westside continues to deliver impressive results; corporate and technology driven demand in nearby fly Marina del Ray continue to support strong market dynamics within a sub-market that has a strong group basically and compression from special events. The hotel reported 17.7% RevPAR growth and rate improvement of 16.3%. We've strategically built out of an asset cluster in Northern California given the regions robust economy, the high cost of land and lengthy approval and entitlement process for new hotels. In the second quarter our two recently acquired Northern California properties, the TPS Sunnyvale and Sanctuary Beach Resort reported 8.3% and 11.9% RevPAR growth respectively.

Both properties continue to benefit from new revenue management and operational strategies that we put in place when we took over across the last six to nine months. The TPS gained 180 basis points of RevPAR index during the quarter due to customer and customer segmentation mix optimization and improved performance on the weekend and shoulder periods while the sanctuary gained 240 basis points of share. At the sanctuary we are pulling labors to better leverage the hotels [ph], beach front locations, as well as untapped corporate demand from nearby San Francisco and Silicon Valley. We continue to expect meaningful profit growth from our recent additions to our West Coast portfolio through 2017. We've also focused investments recently in the Washington DC CVD.

Our five hotel urban cluster delivered 6.1% RevPAR growth, the market benefited from mid-week convention activity and special weekend events such as the Cherry Blossom Festival. Our newly acquired and well located Hilton Garden in M-Street was the portfolio's largest EBITDA contributor for the quarter at $2.6 million reporting 5.1% RevPAR growth and EBITDA margins that now exceed 52%. The St. Gregory acquired in June of 2015 as in continues to focus on building a group phase and driving transient business through direct channels to drive great. These efforts are starting to bear as the hotel reported 8.3% ADR growth leading to a RevPAR improvement of 5.8% and 450 basis points of margin improvement.

Our Ritz Carlton, Georgetown deliver the portfolio of highest RevPAR in absolute terms at $522.68, a growth of 3.9% benefiting from the strong market conditions and improved revenue management sales strategies. We're setting the stage for double-digit EBITDA growth from the third quarter out of the Washington DC market. In South Florida, our hotel cluster reported 1.2% RevPAR growth, negatively impacted by the closure of the Miami Beach Convention Center, new supply in Miami Beach and the strong dollars effect on international devout [ph] clearly reduced compression and pricing power. While Miami Beach will continue to be challenging into 2017, we are encouraged by performance that are more recent acquisitions, the residents in Coconut Grove and the Parrot Key Resort in Key West. The Residents Inn reported 14.1% RevPAR growth and 770 basis points of margin improvement while Parrot Key delivered ADR driven RevPAR growth of 9.5% and $1.9 million in incremental hotel EBITDA.

Our cost controls have been impressive across the cluster including Miami Beach and we are positioned well for 2017 when headwinds subside on the beach. In Boston, the market and our hotels were negatively impacted by too large non-repeating City wide conventions which contributed approximately 75,000 room nights in the second quarter 2015. Brookline also has some renovation impact in April and the portfolio as a whole in Boston had an 11% percent plus year ago comp. As a result, our Boston portfolio reported flat RevPAR in the second quarter. I want to highlight our repositioned hotel, The Boxer was recently recognized as the best quick hotel in Boston.

It reported 2.5% RevPAR growth and margins approaching 48%, i.e. 2.5% growth on top of 27% last year second quarter and 37% two years ago same quarter. After several years of outsized growth in Boston we've had two challenging quarters. The outlook for EBITDA growth strengthened from the back half of the year, comps do get easier in the fourth quarter, the convention calendar is better in 2017 than 2016, new supply is reasonable and the employer base in domestic and international visitation continue to grow at the highest levels in the country. Finally, New York City, the operating environment remains difficult due to the delivery of new supply.

Our Manhattan cluster reported a 5.5% RevPAR decline driven by 3.1% increase in ADR evidencing the lack of pricing power. Demand remained robust as demonstrated by portfolio-wide operative of 92.5% percent, however, results were weaker than anticipated as operators in the marketplace continue to lack the confidence to push rate despite 4.4% demand growth in the trailing 12 month period. As of June 2016, Manhattan trailing 12 month occupancy levels remained above 85% for the 49th consecutive months. These occupancies combined with the aforementioned demand growth and rates 10% below their 2008 peak should be a welcome environment for revenue managers. We had been working with our operators to test more aggressive rate strategy but our strategy didn't work this quarter; we lost share and had to ultimately give up rates and occupancy to catch up.

We are middling now taking a bit more defensive posture as we've discussed our ability to test variant strategies and make changes quickly as a hallmark of our operating model; nine quarters out of the last ten, it drove our outperformance in New York. Our consolidated portfolio in New York today is newly built, according to tastes and preferences and located in some of the best up-markets in New York like Tribeca, Union Square and Midtown East. We believe the hotels are well positioned to grow as the outlook for New York improves in 2017 and 2018; we call it the great absorption. After the Great Recession, Manhattan was one of the few markets to attract construction financing due to its demand fundamentals although hotel demand increased over 40% since 2009, supply grew by 26% and delivery led to a muted ADR recovery in New York. Supply growth is now clearly decelerating, Airbnb inventory maybe cut in half, the moratorium on condo conversions of hotels will lapse next year and older less efficient hotels like the Waldor [ph] will ultimately find a better and higher rates.

Transitioning now to capital allocation and specifically capital recycling. During the second quarter we closed our transformative joint venture with Cindat for a total purchase price including closing and capital equipment costs of $571.4 million or $526,000 per key inclusive of closing cost, the sale price representative trailing 5.4% economic capitalization rate and an EBITDA multiple of 16.8 times. Cindat's investment in expertise in global gateway market real estate combined with our 15-year track record of owning and operating hotels in the most valuable liquid real estate markets of the world form a strong foundation for a long-term partnership, and we expect to pursue additional transactions with our new partners across the coming years. Subsequent to the end of the second quarter, we acquired the award winning waterfront Envoy Hotel in Boston for $112.5 million. Our acquisitions of the Hilton Garden Inn M Street, the Ritz Carlton, Georgetown, and The Sanctuary Beach Resort in Northern California; and now the ongoing Boston shelter $160 million of the $177 million gain we undertook through 1031 exchanges on five of the seven Cindat JV transactions.

While it's true we possessed qualified in new mediary funds to deploy, our purchase of Envoy reflects our very real long-term conviction in unencumbered Boston real estate. But also the hotel of gateway location, the burgeoning Innovation District in the Seaport. We are thrilled to acquire this newly built waterfront hotel in arguably the highest growth new sub-market in the United States and growing 6.3% yield that we will stabilize above 8%, the hotel is in a creative trait compared to the 5.4% cap rates in Cindat assets. The Envoy will also be immediately accretive to our EBITDA growth rate as it ramps up from its debut in June 2015, and our hands-on operational asset management strategy. In previous conference calls and during meetings with investors in 2016, we stated our intention to sell hotels in The New York City in the first half of 2016 and then suburban hotels in the second half of 2016 and into 2017.

We've made great progress on these sales. With New York now closed, we are working our way through the suburban portfolio. In May we sold 129 room high placed in single pressure for $13 million or approximately $101,000 per key or a 7.8% cap rates. And with yesterday's press release we disclosed a definitive agreement to sell The Residence in Framingham and The Residence in Norwood for a combined $47 million or approximately $213,000 per key or a 7.7% cap rate. The sale of these three suburban hotels reflect a continuation of our capital recycling strategy, as well as the strong interest from foreign capital local real estate investors in stabilized service assets in the best suburban markets.

We also continue to market an additional five to seven suburban hotels and expect to generate between $150 million and $175 million in net proceeds from these sales. Most of our sales will trigger significant capital gains that we will continue to partially offset with 1031 exchanges. We believe this gives us a unique opportunity to take advantage of a much less crowded acquisitions market and an operating environment where our local market expertise allows us to add significant value. This said, with many still transactions we anticipated across the next 6 to 12 months, we also expect to distribute special dividends and use additional proceeds to reduce leverage. Prior to passing the call to Ashish I also wanted to briefly discuss our share repurchase activity this quarter.

Fundamental to our absolute return philosophy and commitment to total shareholder returns, we believe opportunistic share repurchases at deep discount to NAV are an effective way to return capital to shareholders. In the second quarter, we repurchased approximately 2 million common shares for an aggregate purchase price of $36.8 million or nearly 4.5% of our float. As we've discussed across the last three years, we do not consider acquisitions and buybacks mutually exclusive. We've bought back nearly 17% of our float while buying and selling many hotels across the last two years. With that let me turn the call over to Ashish.

Ashish Parikh: Thanks, Neil and good morning. I'll start my comments today with a deeper dive into our operating results and then expand on Neil's comments on our second quarter's transactional activity and how it affects our financial position, as well as our full year outlook and guidance. During the second quarter our portfolio delivered adjusted EBITDA of $55.5 million, a 2% increase compared to second quarter 2015. Regards to EBITDA margins -- GOP and EBITDA margins, we reported strong absolute comparable portfolio GOP and EBITDA margins of 51.4% and 41.7% respectively. GOP margins increased 20 basis points while EBITDA margins were flat compared to last year's comparable quarter as a result of increased property tax.

Looking at the back half of 2016, we expect to not only maintain our high absolute margins but we're forecasting margin growth by leveraging pricing power across our high occupancy markets, as well as benefiting from renovations completed earlier this year, and the lack of meaningful renovation disruption for the remainder of 2016. On the transactional front, let me start with the Cindat transaction. We're extremely pleased to have close to complex transaction with incredible, sophisticated long-term offshore partner. Sale of our 7 Manhattan properties and subsequent JV formation resulted in net proceeds of $375 million; $275 million from the sale of the 70% interest in the 7 property portfolio, and $100 million from the origination of debt by the joint venture. The $375 million of net proceeds is after our contribution of $43 million in preferred equity to the joint venture at a 9% coupon, and the pay down of property level mortgage debt at two properties which totaled approximately $56 million.

We utilized approximately $231 million of the net proceeds to pay down all of our outstanding revolver balance and approximately $40 million to pay down one of our outstanding term loan. In 2016 as we've previously communicated, we will lose approximately $14 million to $15 million of FFO and between $27 million to $28 million of EBITDA in our consolidated result and expect to receive between $6 million and $6.5 million in FFO, and $9 million and $9.5 million in EBITDA from the Cindat joint venture which will be reflected within our own consolidated joint venture results. In terms of optimizing our balance sheet during the second quarter, we tapped the best preferred market in years redeeming $115 million of our 8% Series B preferred and raising $192.5 million through the issuance of 6.5% percent Series B preferred shares, the lowest preferred cost-of-capital in company history. This low cost perpetual capital in addition to a new $200 million term loan that we're in the process of completing addresses our 2016 and 2017 debt maturities and positions us to benefit from opportunities created by ongoing volatility, should buying opportunities emerge for high quality assets in higher growth markets or from additional stock buybacks. As a result of the aforementioned series of capital transactions along with the sale of our Hyatt Place in King of Prussia, we possess significant financial flexibility with approximately $236 million of cash and cash equivalent as of quarter end.

We have full capacity on our senior and secured credit facility with 54% of our consolidated debt, fixed or hedged through swaps in cap while our total consolidated debt had a weighted average interest rate of approximately 3.7% and a weighted average like the maturity of approximately 3.6 years. Our fixed charge coverage ratio of approximately three times and we continue to target our debt-to-EBITDA ratio to be below five times by year end with the completion of our pending sales. During the last year we've undertaken significant efforts to refinance our 2006 and 2007 vintage 10-year CMBS loan and we currently forecast that less than 10% of our debt outstanding will consist of CMBS loan by year end. The elimination of this debt provides further flexibility to sell assets without any debt [ph] and allows us to sustain our capital recycling efforts. Our capital recycling efforts in balance sheet engineering affords us the opportunity to maintain the lowest dividend payout ratio in our history and provides a significant cushion to maintain our dividend if industry trends were to decline in the future.

In addition, our young purposeful filled rooms focused hotels require minimal capital investment thereby maximizing free cash flow in IRRs. During the second quarter we spent $5.8 million in CapEx and property improvement. The majority of these funds were allocated towards exterior work and food and beverage enhancements at our Twin Suite Hotel and the St. Gregory Hotel along with guest room renovation at Hotel Milo and Santa Barbara and at the Rittenhouse. These renovations do not have a significant impact on the room side of the business and further improved asset quality in the overall guest experience.

For full year 2015 we continue to target consolidated CapEx in the $25 million to $27 million. Within yesterday's earnings release, we published our updated 2016 guidance which takes into account our 2016 operational performance and our updated view for the remainder of the year. Our updated guidance also incorporates all of the transactional activity completed to-date as well as the anticipated closing of the two suburban Boston assets. Our updated forecast for 2016 now anticipates comparable RevPAR growth to be in the range of 2.5% to 3.5% with 40 basis points to 60 basis points of margin growth. Adjusted EBITDA outlook is now in the range of $171 million to $177 million with FFO per diluted share between $2.38 to $2.51 per share.

Outside of operational performance the primary impact items affecting our EBITDA range in the acquisitions of the Envoy which should contribute approximately $3 million dollars of EBITDA for 2016, budget in large part offset by the sales of Hyatt Place King of Prussia and the suburban Boston assets. Our EBITDA contributions from our JV portfolio has also reduced by approximately $1 million from our prior expectations with the majority in that JV. In addition to these transactions, our FFO guidance is impacted by the forecasted dividends on the Series B preferred of approximately $7.3 million or $0.15 per share for 2016 which are partially offset by our stock-buyback activity and reduction in share account which should approximate $0.07 per share of additional FFO along with lower income taxes on the TRS which should also contribute $0.07 of additional FFO for the remainder of the year. In terms of our all is performance quarter-to-date in July, we continue to see solid growth in several of our markets such as the West Coast Washington DC and Philadelphia while New York continues to see challenging trends during the quarter leading to overall RevPAR growth of approximately 4.5% for the month of July. Now this concludes my portion of the call.

We can now proceed to Q&A where Jay, Neil and I are happy to address any question that you may have. Operator?

Operator: Thank you. [Operator Instructions] And we'll take our first question from Ryan Meliker with Canaccord Genuity.

Ryan Meliker: Good morning, guys. Just real quickly, just to make sure I heard that correctly, Ashish did you just say that RevPAR in July was up 4.5% across your portfolio?

Ashish Parikh: Yes, that's correct.

Ryan Meliker: Okay, that's helpful. Thanks. That's a nice acceleration, that's good. I just wanted to talk a little bit about, what -- obviously, the guidance cut on the top line on the RevPAR was pretty substantial. You gave us some color throughout your prepared remarks, can you just give us any more detail that you guys might be seeing from a transient standpoint? Is there anything specific -- is it isolated on corporate, is it isolated on your branded properties, independent properties -- where are you seeing kind of the biggest challenges I guess, aside from the markets that you've identified?

Neil Shah: Ryan, I think it really is the markets that we identified, it's just the challenges in New York.

We're expecting Boston to improve as the year goes on but we are -- we have heavy exposure in New York, Boston and Miami which are having some challenging quarters right now. As you know, our portfolio is truly a transient portfolio for better or worse, and in terms of visibility for the fourth quarter, we just don't have a lot of it and without a lot of visibility into our fourth quarter and the uncertainty that we're seeing in the overall macro environment we're just -- we felt like it was prudent to bring down guidance a bit. We can't point to any particular metric but it was really just a mathematical calculation of what it would take to hit our prior midpoint and our conclusion that -- that would be banking a lot on the fourth quarter where we just don't have visibility yet.

Ryan Meliker: Okay, that's helpful. So it's not isolated on corporate transient or leisure transit or shorter term bookings or longer -- further out bookings, anything like -- there is no real trend that you're seeing other than the particular markets that are underperforming?

Neil Shah: That's right.

Ryan Meliker: Okay, that's helpful.

Neil Shah: And same problem is in New York City. We'll see -- so far it July, things have been better than they've been in the last several months but we need a very strong August to have better confidence about the leisure markets and on the corporate side we just don't have visibility today.

Ryan Meliker: Okay, that's helpful. And then just real quickly and then I'll jump back in the queue if anything else.

Donvoye [ph], obviously it's a great hotel, good acquisition in a target market but it's another full service hotel if you will -- opera upscale brand with the autograph collection. Can you talk a little about what your appetite is for those types of assets? I know its independent but also quality branded. And then also what -- just give us a reminder of what the remaining capital gains you guys have left from the asset sales that you've executed -- that you'd like to deploy in the acquisition during the year?

Jay Shah: Ryan, this is Jay. Neil referred to in his prepared remarks, the envoy -- it is positioned from the rate standpoint in the upper upscale, and maybe even a bit higher. We're performing in its first full year of operations, it's already in a competitive set with more lifestyle hotels that operate at a higher rate than typical upper upscale hotel.

But I think what's important to remember that that the hotel is still very much a transient hotel. It has some F&B component to its revenues of course but it is primarily rooms driven business plan there. So when we -- as we're taking a look at potential investments in hotels, we're looking for hotels that are similar in profile to what we've always owned and those hotels are driven by a good combination of corporate and leisure demand and are very much transient hotels where we can drive rates. When we -- just -- I imagined the question is on a lot of books, minds on the envoy, it's price per key makes it seem like potentially more complicated business plan than it is but when we took a look at this and the way we assessed it, it was -- we're in a market in one of the -- it's a waterfront location and one of the major gateway cities in the United States. The land value here entitles before hotels, we estimate it to be around $250,000 to $300,000 a room.

And you would imagine the construction cost here for this quality run for 50 to 500 rooms. So we most likely paid somewhere between a 10% and 15% percent premium to replacement costs but when you consider that land today is selling in this market, that's well off of the water and much deeper into the seaport district at north of 30 million acre. We feel pretty comfortable with the real estate value, particularly with the location -- the superior location that the hotel holds. The investment I was referring to -- where it's performing today but from -- we've put together a comp set as I mentioned where the hotel is comfortable performing in today and it's currently outperforming in occupancy because it is a 7-day location compared to some of the other hotels with similar rates that are probably a bit more mid-week heavy. And we have our rate stabilizing at something less than the comp set.

So for us to get in three years to the north of $10 million in EBITDA is not that much of a stretch. The property, it runs at 47% operating margin within its second year of operations. So compared to some of the hotels in the concept, it's far, far more profitable The reason I wanted to mention the operating profit in the EBITDA margins is because these are the food and beverage component of the hotel are limited and they're very beverage-heavy. We're really not anticipating that – and the hotel has no meeting space. These are very, very much retail outlets that have a strong capture from the hotel, but because of its location, they do very well even with the general public.

At stabilization, we anticipate up to $67,000 a room in NOY. It's currently doing – in its first year of operation it's already doing around $40,000 a room in NOY. I guess when we take a look at this hotel and relative to your question, we looked at it as a generational real estate opportunity that was accreted to earnings and gives us a growth profile that are well above our portfolio average and probably one of the best growth profiles in the country. I don't know that we're really departing from our strategy. We get that question a lot.

It's not about segments for us, it's not about what kind of hotel and whether it serves food or not. I think it's more about its investment profile and the customer base that it caters to. This feels very, very comfortable for us.

Ryan Meliker: Okay. That is helpful.

It seems like we should be focusing more on the trends and orientation of the properties than the chain scale that it falls under. And then can you just quickly remind us how much capital gains from that transaction do you guys still have remaining to deploy in the back half of the year?

Ashish Parikh: Ryan, for a capital gain perspective we have $15 million left of gain that has been sheltered by our 1031. Just as a little bit of reminder on 1031 -- that the value of the debt and equity of the replacement property has to be higher than the value and debt or equity and debt of the relinquished property. Our acquisition won't be for $16 million, but if we do decide to buy something, it probably has to be closer to $40 million to $50 million to offset the full 1031.

Ryan Meliker: That's helpful.

All right, thanks.

Operator: And we'll take our next question from Shaun Kelly with Bank of America.

Unidentified Analyst: Hey, guys. This is actually Danny [ph] on for Shaun. I was going to touch on supply real quick.

I know you guys talked about 4% outlook for supplying New York in 2016 and 2017. Is there any change to that and could you maybe give us a little bit more color on some of your other markets?

Jay Shah: Sure. This is Jay. Let me talk about New York. Right now, based on what we're seeing, we are expecting New York for 2016 as about 5.3% supply growth, not insignificant, and about 2.8% for 2017 in supply growth.

Neil referred to the headwinds that that causes from absorption standpoint. The bulk of this year is betting above three-fifths of 2016 supplies coming in the second half of the year. So that will make the second half somewhat challenging and we expect that that continues in the 2017. After 2017, our expectation for supply growth in New York is around 3.8% and that combined with expectations for demand growth across 2017 and 2018, makes us feel a little better. That's not to suggest that New York won't continue to be a bit of a lagging market in our portfolio, but we think the dynamics do moderate a bit.

As far as other markets, in Boston, supply growth has been moderate and manageable and absorption has remained pretty robust. Miami of course has been hit with a lot of supply in addition to a couple of significant demand, headwinds, with the Convention Center being won and certainly, there has been a bit of a moderation in demand elasticity internationally. Even though we're seeing international grow as a percentage of revenue, pricing power has just been a little bit more difficult. Interestingly, Boston's international demand growth has remained extremely strong and the data is very strong across the board. We're feeling pretty good about this market from a supply demand standpoint other than New York where the challenges have been pretty well-documented.

I think we take a really close look at New York for obvious reasons and some of the forecast that we see really, they vary wildly with one another and it's very difficult to really understand what methodology is being used. Our methodology is pretty basic. We go take a look at sites and what we are seeing is that several sites that are documenting those potential hotel openings are inactive. Our view is that with today's fundamentals in New York and a way the debt markets have been, it's unclear when if some of these projects will get restarted and our expectation as it will probably be much further in the future, if not being changed to an alternative use.

Unidentified Analyst: Got it.

And then just one more for me; on the remaining assets for the suburban portfolio, are you able to maybe just give us any updates or maybe just discuss what the pricing environment looks like out there for those kinds of asset in terms of just pricing or maybe the kind of buyers that are out there for it?

Neil Shah: Sure. I think the sales that we've announced so far from the suburban portfolio are pretty indicative of pricing. Out of suburban assets, our remaining suburban portfolio, we've sold a large non-core suburban portfolio in 2012 and then another one 2013. This remaining portfolio is the highest quality – suburban select service portfolio that would be available in the market today. So we expect pricing in that step into the half to eight cap range.

These are primary suburban office markets in the first ring outside of the CBDs of Boston, Washington DC, Philadelphia, Scottsdale. That kind of pricing is probably fair to assume. In terms of the buyer pool, as we mentioned, when we really started on this process, nearly started discussing it two to three quarters ago and have been actively in the market now for the last quarter or so, there is still significant demand from two primary kinds of buyers for these assets. We broke it up into an individual asset versus smaller portfolios. We get to see opportunity fund aggregate or a bid is not active, but there are two very active bids.

One is private equity capital that's partnering up with regional managers and operators so far assets and like individual one or two asset transactions. And for these kinds of hotel, there's a lot of debt financing still available and so they're very strong-going and yield to that buyer community. And second, there has been a lot more international interest than we might have suspected six to nine months ago in these suburban assets. The headline transactions from the international market, our trophy assets were truly urban gateway assets like the ones we've sold earlier in New York. But we're finding there's other pockets of international capital in Asia and the Middle East that are very interested in stabilized suburban select service assets.

So we're seeing a lot of interest particularly from Middle Eastern Shaira Compliance Bonds that have a real interest in having exposure to asset that don't have significant food and beverage, that don't serve alcohol, and can make Sharia complaint investments. There's an active market for them. There's probably less bidders than there were a few years ago, there's probably less aggregators in the bidding process that make the transactions really easy. It's taking a lot more effort and time, but there is good high quality asset, there's good bidders out there.

Unidentified Analyst: Thank you very much, that's very helpful.

That's it for me.

Operator: We'll take our next question from Patrick Schultz from SunTrust.

Patrick Schultz: Good morning. I wonder if you could just give a little more color. You said month-to-day, you're up 4.5%.

You know, that compares to sort of the industry at flattish. What's really outperforming for you, specifically, in July? Thank you.

Neil Shah: Sure, Patrick. We can be a little attentive for that. For the month of July, to start with, obviously, Philadelphia, with the DNC, is going to be our best-performing market.

But other markets that are performing well and even above the 4.5% that I mentioned are West Coast, our south Florida properties are doing better, as well as our DC properties -- the DC urban properties, with some of the newer assets that we've purchased, and we continue to see strong growth from Capitol Hill Hotel and the Hampton Inn in DC. So those markets are really outperforming. As I mentioned, the underperforming markets continue to be New York and Boston, which are underperforming at 4.5%.

Patrick Schultz: Got it. All right, thank you.

Operator: We'll take our next question from Anthony Powell with Barclays.

Anthony Powell: Hi, good morning, everyone. Could you go into maybe the differences in business travel demand between some of your markets, between, I guess, the stronger-performing markets like Philadelphia and DC and weaker markets like Boston and New York City?

Neil Shah: I think there's -- it's clear that, on the West Coast in northern California as well as in southern California, we are benefiting on the corporate side from continuing strength in technology-based companies. Today's technology companies are half technology, half media, and there's a lot of kind of entertainment-related and gaming-related business growth in both southern California and northern California that's been very positive for our kind of corporate contributions in those markets. In other markets around the country, for us, in DC it's a pretty diversified kind of strength we're seeing.

We're seeing it in the private sector corporate demand, we're seeing it in the kind of -- the recovery which continues in kind of government spending from the last several years has a real impact on travel for a lot of

the contractors: the consulting firms and the defense contractors. And we're just continuing to see good growth on that side. In Boston, I wouldn't point to any kind of corporate weakness. There, it's really that we're coming up against very tough comps in the first half of this year versus the prior couple of years. And a convention calendar, which, although it's strong, it's not as strong as it was years prior.

And so I think that any weakness we're seeing in Boston is related to convention calendars and just some level of cut price ceiling in some of these markets. In New York, again, we don't view it as a -- we can't point to particular industries that are slowing down travel. We've been talking about actually particular quarters how we've been having more success in the L&R properties. So we've started locally negotiating accounts around our hotels in New York. We've actually continued to have growth both in room nights as well as in rates.

But it's the folks that aren't booking through locally negotiated rates and are price shopping that may be bringing it down. So it's hard to point to an industry there.

Anthony Powell: Got it. Thanks. And on the financing front, you completed a preferred deal in the quarter at an attractive rate.

Why not tap that market even further and reduce your role in that EBITDA ratio even further?

Ashish Parikh: Anthony, you know, it is a very attractive rate at 6.5%, and who knows when we'll see it again, but we look at that rate as compared to what we're currently pricing on our credit facility. We'll be somewhere in the range of LIBOR plus 220 at the high end of the pricing grid. So even with LIBOR sitting at about 45 bids per day, it varies almost a 400 basis points difference between our preferred and where we're pricing debt today. So that's really what would prevent us from taking too much more preferred equity.

Anthony Powell: Okay.

All right, that's it for me. Thank you.

Operator: We'll take our next question from Wes Golladay from RBC Capital Markets.

Wes Golladay: Good morning, guys. Sticking with the balance sheet, what do you guys want to have leveraged down to by maybe year end 2017 and 2018? What is the ultimate game plan here with all the transactions you're doing?

Ashish Parikh: I think that we would be very comfortable, and our target is right around four times debt to EBITDA by the end of 2017.

Wes Golladay: Okay. And then looking at Philadelphia, you obviously have a really strong start to the quarter but then you've got to comp off for the Pope visit last year. What is the net effect of those two events for you? Is it going to be positive or a little bit of a headwind?

Ashish Parikh: It's going to be very positive, actually, for the third quarter in Philadelphia. For us, the DNC is a much better contributor for the hotels than the Pope's visit. It's a longer duration, higher rates, better occupancy.

The Pope's visit was really two days and Philadelphia had effectively shut down the city, so it made it very difficult when we had a lot of room cancellations across the city. So net-net, we expect Philadelphia to be our best-performing market this quarter.

Wes Golladay: Okay. And then you kind of touched upon your northern California acquisitions having about 200 basis points plus of alpha versus the market. Is that kind of a good run rate when you buy something, 200 basis points over the current performers just by switching the mix again? Is that achievable for the full year and maybe a little additional for the next year? Is that kind of how you -- we should model these acquisitions?

Neil Shah: Absolutely, Wes.

That's always our intent. In some cases, the first couple of quarters, it's hard to pull the triggers or pull the levers if there's been a lot of group dates layered in. At St. Gregory, the first quarter or two, was -- we weren't able to hit that kind of metric. But now it's starting to really kick in.

but I think that that's a very fair way to look at any new acquisition that we're making.

Wes Golladay: Okay. And then lastly, south Florida. You kind of highlighted some of the headwinds. Are you seeing any noticeable increase in cancellations from leisure being down a bit as well?

Neil Shah: No, we're not, Wes.

Wes Golladay: Okay. Thanks a lot.

Operator: And we'll take our next question from Bryan Maher with FBR & Company.

Bryan Maher: Good morning, guys. Just kind of a bigger picture question, as it relates to your kind of clustering of hotels in a handful of markets and a couple of those being weaker, obviously, than others.

Have you guys given any thought to -- and you don't need to tell us specific markets -- but expanding outside the existing clusters?

Neil Shah: We're always considering it, Bryan. And we do underwrite assets in other markets and do look at it. It's just in our existing markets, in our six markets that we're in today, we've developed such cluster advantages, not only on deal flow, but on operating performance. And so if we were going to bolt on an acquisition to our existing markets, we just have a lot more conviction about the savings and the RevPAR index gains that we can underwrite. So it's more likely for our investments to be in our existing six markets.

That said, we do continue to look at other opportunities in other markets. It would likely require some kind of scale in the market in order to -- in order for us to make a move. But that said, we often start small and then grow from that. In Sunnyvale, we bought the Town Place Suites, for example, and that's been a very strong performer for us, and that makes us really leaned in to other opportunities in Silicon Valley.

Bryan Maher: And how do you think about future acquisitions in the markets that you are already deployed in? do you lean more toward acquisitions in markets that you're in that are doing well, or do you lean toward being contrarian in markets that are underperforming in the hopes of getting a deal in advance of a turnaround at some point?

Neil Shah: Great question.

We're trying to be ahead of the marketplace, but we want our investments to be accretive in the first year. So we have to -- we can't take too contrarian of a view for where we think the market's at today and where we see our greatest opportunities in showing significant free cash flow growth. And so we balance rate turnarounds with REIT basis plays with inside of cash flow. So that's moderate -- a little bit. But Washington is a good example; we know the DC market, we've had a cluster there for many, many years; we understand demand patterns, the neighborhood and corners both developing.

And our expectation is that DC has three to five years of very solid growth. We believe that in the coming year it will be -- coming year or two it's going to be a good solid and moderate growth market but we think longer term it's going to have great growth. And so it made sense for us to start to invest there, middle part of last year when we got very focused on that marketplace. Boston is a market we've been looking at, and looking for opportunities for years, we have a very good cluster there but just -- the hotels don't come up for sale often there, especially ones that are non-union and incumbence is like land leases or management agreements. And so we've been looking for an opportunity in Boston for some time, the asset that we've acquired, the envoy, one that we actually were very close to acquiring a year and a half ago while it was still under construction; at the time we felt like we needed to see the ramp up and to see a little bit more densification and new announcements of new tenants in Seaport District to get comfortable with it, and the first year kind of yields on the assets.

But we try to be -- maybe a year ahead but we can't be too much further than that or we don't have the kind of growth that we're looking for.

Bryan Maher: Thanks, that's helpful.

Operator: We'll take our next question from Bill Crow with Raymond James.

Bill Crow: Good morning, guys. Two questions; can you tell me Neil how the pricing on the envoy changed over that time period when you first started to looking on it till today?

Neil Shah: Yes, probably we ended up probably paying a 5% to 7% premium to have the asset open in season and ramp.

It's such a high quality location, high quality assets, it's one of the more attractive hotels in the whole nation to acquire. So it wasn't the kind of asset that had a significant mission value, and the seaport only grew in that year, year and a half; General Electric announced their relocation and several other companies moved in. And so we weren't able -- are holding on for a year, year and a half, didn't get a better price but it gave us more security in this price.

Bill Crow: Was it on the market the whole time or…

Neil Shah: No, it was -- there was a broker involved but it was a very targeted kind of transaction and the relationship we developed with that developer owner -- with one that we kept warm across the last year, year and a half and then when we were ready, we were able to make a good transaction with them. I think the seller expects and we also expect that this will be something that will -- we will be able to find more opportunities with this development in future.

Bill Crow: Okay. The second question is just detail on a question that's already been asked but if you were able to break out Philadelphia from the rest of the portfolio for July, how -- when is the rest of the portfolio run?

Neil Shah: Bill, I would say we would probably lose a 100 basis points. I mean Philadelphia is our smallest cluster. So maybe it's somewhere in that 50 basis points to 100 basis points.

Bill Crow: Did New York benefit at all given your more leisure transient focus at all by that the timing during the week of the July 4?

Neil Shah: Unfortunately it didn't help us in New York for the month of July.

Bill Crow: Okay, all right. Thanks.

Operator: We'll take our next question from Chris Woronka with Deutsche Bank.

Chris Woronka: Good morning. I want to ask you little bit about distribution and what -- kind of some of the trends you're seeing in your hotels and as far as -- is there more third-party -- is the more opaque? And also is the business remixing a little bit as you navigate through little bit of softness?

Jay Shah: Chris, this is Jay.

That's a very good question, it's something we've been looking at very closely. We get pretty active with the revenue management strategy of the hotels and let me start just by talking about New York because I think there when we're seeing the softness we initially in Q1 and Q2 really tried to hold on rate as a strategy. And when you look between Q1 and Q2, we actually took OTA distribution down in Q1 by nominal percentage. In Q1 the New York -- the Manhattan portfolio total revenue through OTA was about 22%, down from the year before by 120 basis points. And in second quarter we took it down to 21.5% which was 360 basis points less than the year ago quarter.

And we were pushing bar and we were pushing LNR. And as Neil said, LNR has held in pretty well for us, flattish to slightly up, but the strategy to really kind of hold the bar rates and to try to as much original demand as we could through bar didn't work. And so if you were to look at Manhattan's bar production; in the first quarter we were off by about 550 basis points. So we were down from 2015 from 21.8% coming through our best available rate down to 16.3%. And in the second quarter we were down from 19.6% a year ago in quarter two down to 13.4%; so those are 620 basis point drop.

So I think Neil referred to it is it is remarks. We've been very aggressive, what we found is that when we studied all of this, in many cases we on many nights we've been outperforming on rate to the market but underperforming on RevPAR to the market and so that just suggests that we need to moderate our aggressiveness on the rate strategy. I don't know that that means we're going to start throwing off all kinds of inventory onto the OTA which is what I think; the sort of inelastic demand fundamentals right now and New York is crossing other operators there. But I think we need to kind of -- we need to negotiate that mix a little better and we expect to do that in the third and fourth quarter. In other markets we've seen similar trends, like for instance in Boston, in the first and second quarter we were off in our bar production as well but OTAs were kind of flat.

So there -- that's just suggesting some softness in trends and demand generally, and that is probably mostly mid-week driven. You take a look at South Florida for instance, there we've had pretty good traction with driving more bar but there has been slight increases it OTA as well, slight increase in the first quarter but a little more in the second quarter. So I guess the point or generally I think the way to think about it is -- as we're see macro trends moderated, there is a bit more price sensitivity and demand has become a bit more inelastic. And so I think revenue managers seem to be a lot more thoughtful and focused on how to layer business rather than just chasing rate because that kind of demand growth doesn't seem to be emerging.

Chris Woronka: Okay, that's really helpful color, I appreciate it.

And then I also want to ask on the on the labor front or any other -- is there anything on the horizon there as you're seeing in any of the -- whether it's New York or other markets at the select service level?

Jay Shah: I think nothing more significant than what you read about, there is clearly pressure on a minimum wages which will ultimately trickle up to the kind of inventories we have at our hotel but we're not there just yet but that is something that across the next couple of years you could see -- just wage growth rate and wage pressure. We expect that by the time we have meaningful wage growth we will also have more pricing power and higher rates to customers. But to-date that is not a pressure that is impacting our portfolio significantly.

Chris Woronka: Okay, very good. Thanks guys.

Operator: And that will conclude today's question and answer session. I would now like to turn the call back over to your Neil Shah for any additional or closing remarks.

Neil Shah: So that's it. I know a lot of you have another call to get on to but we'll be here the rest of the day and look forward to any follow-up questions. Thank you.

Operator: And that does conclude today's conference. Thank you for your participation and you may now disconnect.