Operator: Good morning and welcome to the Hersha Hospitality Trust second quarter 2019 conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will 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, sir.

Greg Costa: Thank you Cole and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust second quarter 2019 conference call.

Today's call will be based on the second quarter 2019 earnings release which was distributed yesterday afternoon. Prior to proceeding, I would 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 considerably 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: Thank you Greg and good morning and thank you 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. Our comparable portfolio which excludes the Cadillac and Parrot Key Hotels reported 3% RevPAR growth, largely in line with expectations as our market share gains offset choppiness in our markets and we were able to maintain our industry-leading margins of 37.8% despite a challenging expense growth environment. However, portfolio results in the second quarter and quarter-to-date confirm that while we continue to see strong consumer confidence, job creation and wage growth driving leisure demand, we are seeing slowing demand from the individual business transient consumer. This deceleration appears to be driven by slowing GDP in corporate profit growth, the prolonged trade dispute and less international demand.

These negative trends are particularly impactful when combined with elevated levels of supply growth. The second quarter proved to be more challenging than anticipated for our sector with nearly flat RevPAR growth in major urban markets. June, in particular, was flat to negative. We outperformed meaningfully each month, but with market weakness in the business transient segment in June and continued uncertainty in July, we are reducing our full year outlook. Q3 looks difficult for several of our markets.

Q4 looks better for most, but we will proceed with caution. Before walking through each of our markets, let's quickly revisit our three pillars of growth. Last quarter, we outlined three company specific catalysts for outperformance, Our recent acquisitions, our seven ROI generating renovations and our two redevelopment projects in South Florida damaged by Hurricane Irma. Two out of the three catalysts delivered this quarter. First I want to highlight the seven hotels we acquired since June 2016, which reported weighted average RevPAR growth of 4.5% for the second quarter.

These hotels provided a strong tailwind in 2018 as well, but their performance was obscured by the disruptive renovations occurring throughout the year. We expect these hotels to continue to drive meaningful outperformance as they ramp and garner the competitive advantages of our cluster strategy throughout the year. The second pillar of growth and the primary driver of our second quarter results are our seven newly repositioned hotels. We invested $77 million into these legacy assets where we added hotel rooms, activated restaurants and bars and created event space, all while delivering upgraded guest experience. These hotels posted a weighted average RevPAR growth of 19% with 470 basis points of EBITDA margin growth in the second quarter.

These assets have not only recaptured their position in the marketplace, but have established themselves as leaders within their respective comp sets. We anticipate continued outperformance from these hotels to drive meaningful growth for our portfolio for the foreseeable future. And finally, our two major redevelopment projects, The Cadillac Hotel and Beach Club on Miami Beach and the Parrot Key Hotel and Villas in Key West, which both reopened late last year and are among the largest hotels in our portfolio. Both enjoyed a very strong first quarter during the high season in South Florida, but following the strong quarter, demand, particularly on Miami Beach, began softening in mid-April and lasted throughout the quarter, resulting in market-wide pressure on occupancy and ADR. This, coupled with expense growth, hindered EBITDA production in the second quarter.

The second and third quarters in Miami Beach attract value-oriented leisure traveler that was drawn to new hotel openings in South Florida, Puerto Rico and the Caribbean that were closed last year for Hurricane Irma. At the Cadillac, despite the aforementioned market-wide pressure on demand, the hotel was able to generate sequential rate growth in the second quarter, 17% above our prior peak year in Miami for the quarter. The third quarter is typically soft on Miami Beach. But we remain constructive on our projections for the fourth quarter as we are seeing strong transient pace for November and around notable events such as Art Basel and holiday week in December. In Key West, the market continued its upward trajectory from Q1, but saw slowdown towards the back half of Q2 impacting occupancy in June.

However the Parrot Key continued to take market share during this [indiscernible] with ADR and RevPAR for the month surpassing prior peak levels. These results indicate the property is reestablishing itself among the comp set as a leading high quality lifestyle hotel in the Keys and should continue to gain share en route to achieving its forecasted potential. Similar to the Cadillac, this asset is very much in ramp up mode and the margins will stabilize a little slower than the topline. We maintain our expectations around $20 million to $25 million of EBITDA production from these two hotels at stabilization but are experiencing a slower ramp in lower demand periods like this summer. I will now focus on the outperformance of our clusters versus their respective markets, beginning here in Philadelphia.

Our Philadelphia portfolio was our best performing cluster for the second consecutive quarter, achieving 11.8% RevPAR growth. Our performance this quarter was led by the Rittenhouse which generated 20.4% RevPAR growth capturing group and transient business after completing its major renovation during the first half of 2018. Up the block at the Westin Philadelphia, our revenue management initiative yielded 11.2% ADR growth, which led to 14.5% RevPAR generation for the quarter. Now in its third year of ownership, we continue to achieve our underwriting expectations for this well-located asset in the strongest business submarket with in Philadelphia. Our Hampton in Philadelphia also delivered impressive 9.7% RevPAR growth capturing rate and occupancy on compression periods around peak convention nights.

We continue to have conviction on the long term fundamentals of Philadelphia as the city's expansion in technology and innovation complements its already established foundation in healthcare and education. And our clear operating advantage allows us to capitalize on this growth as we have outperformed the Philadelphia market by 2,500 basis points in Q1 and 720 basis points in Q2, respectively. Despite a softer convention calendar this year in Boston, demand to the city was strong in the second quarter and our cluster outperformed again, growing RevPAR by 5.7%. The Envoy, which we acquired in June 2016, continues to be one of the best performing assets in our portfolio and the market. During the period, the hotel generated 9.5% RevPAR growth exclusively driven by ADR growth and we were able to operate efficiently growing margins by 170 basis points.

Even with inclement weather during the quarter, demand at the Rooftop remained strong and we expect additional revenue generation in the third quarter during Boston's temperate season. We expanded the Rooftop in the second quarter of 2018 increasing our capacity by over 30%. And this along with the continued stabilization of this new asset has resulted in significant F&B revenue growth year-to-date for the Envoy. Boston was one of the few urban markets in the country with clearly higher demand than new hotel supply growth. This positive fundamental environment led to mid single digit growth at the Boxer, the Courtyard Brookline and the Holiday Inn Express Cambridge.

The Celtics and Bruins playoff success increased compression nights offsetting any falloff in corporate transient demand in the back half of the quarter. The Washington DC market experienced another quarter of headwinds with the Easter shift resulting in Congress out of session for two full weeks in the middle of April, one major convention versus three last year and new supply continuing to enter the market. However, our comparable portfolio generated slightly positive RevPAR growth and outperformed the market by 170 basis points, bolstered by our St. Gregory Hotel which underwent a holistic transformation during the first half of 2018. The hotel generated 11% RevPAR growth driven by 730 basis points of occupancy growth and continued to gain share following the hotel's upgrade to an upper upscale lifestyle offering.

The past few years have been very challenging for the Washington DC lodging market but transient and group booking pace is looking stronger than anticipated and we believe the market is poised for a long overdue rebound beginning in the third quarter. With a weaker comp in the back half of the quarter due to Hurricane Florence in September of last year, the Jewish holiday shift leading to a strong corporate booking window in September, the return of the IMF in October and an easier comp in November without midterm elections, demand fundamentals are looking robust leading us to believe that DC will be one of the stronger markets in our portfolio for the back half of the year. Out on the West Coast, we had mixed results in the face of new supply. Our Sanctuary Beach Resort near Monterey was our best performing asset during the second quarter generating 15.5% RevPAR growth on 13.6% ADR growth, benefiting from compression around the U.S. Open in June.

Down in Los Angeles, despite the market experiencing new supply and inclement weather throughout the quarter, our Ambrose Hotel continued to capture market share, delivering 9.2% RevPAR growth driven by 5.4% ADR growth and 323 basis points of occupancy growth to 91%. Reviews following the hotel's public space renovation in 2018 continue to bolster occupancy and rate from both business and leisure guests. Our select service hotels in Los Angeles, San Diego and Sunnyvale, all face new supply and with weaker corporate and international demand led to flat to slightly negative results. Seattle was the most challenging market from a supply perspective, but demand remains very strong. In Seattle, year to date market demand as of June increased 8.4%.

However, the new supply that has come online in the last few quarters continues to have a significant impact on rate growth. With nearly 13% year-over-year supply growth in the CBD of Seattle, we lost nearly 12% in ADR at the Pan Pacific as the market continues to absorb big-box openings such as the 1200 room Hyatt near the Convention Center. But again, demand fundamentals remain very strong in the city and there is no new supply expected for the third quarter, which should help to stabilize our occupancy following a disruptive first half of 2019. Tech growth continues to be prolific in Seattle as companies such as Uber, Apple, Google and Facebook have all recently announced expansions in the city, many of which will have a positive impact in our South Lake Union submarket. Most notable is Apple's recently announced lease of 630,000 square feet of office space just blocks away from the Pan Pacific.

Occupancy remained robust in New York City during the second quarter as our portfolio registered 96% occupancy. However, for the second consecutive quarter, we bumped up against a difficult comp. Last year, we registered 5.7% RevPAR growth during the second quarter. This year, our cluster's 1.5% RevPAR loss was primarily driven by a challenging rate growth environment during peak compression periods around industry conferences and graduations, many of which overlapped with Memorial Day. These peak events typically result in high-rated compression throughout much of Manhattan and this timing impacted our pricing strategy during the quarter.

Supply remains in the 3.5% level we expected, but there has been a deceleration in corporate and international demand in the second quarter and quarter-to-date which we believe will continue to pressure ADR and prevent RevPAR growth in 2019. Supply will remain elevated in Midtown West and Downtown in 2020 and 2021. But recent announcement by Google, Uber, Facebook and Amazon do give us confidence in an accelerating corporate demand market in the coming years. We discussed South Florida in regard to our non-comp Cadillac and Parrot Key properties, but our comparable South Florida portfolio felt the headwinds as well. We realized a 1.5% of RevPAR loss in the face of a tough hurricane comp beginning this quarter.

Last year this quarter, we were up 9.5%. Our one bright spot during the second quarter in the region was in Coconut Grove at our Ritz-Carlton where we recently completed repositioning of the hotel and generated a 16.8% RevPAR growth, while growing occupancy by 700 basis points for the quarter. Despite a more challenging operating environment this summer, our thesis on the reacceleration of South Florida remains intact. Near term performance will continue to be hampered by new supply and less international demand in a seasonally low third quarter. That said, hurricane related comps have nearly lapped and the redeveloped Miami Beach Convention Center is attracting high profile events including the Super Bowl in 2020 and the BCS Championship Game in 2021.

In 2020 alone, convention room nights are expected to increase by 80% year-over-year. Two quick comments on capital allocation. First, although we believe that we are trading at over a 30% discount to our NAV, we did not purchase any stock this quarter as we remain focused on reducing leverage. Second, we are not targeting any dispositions or acquisitions at this time. Our management team owns over 10% of our shares outstanding and we are committed to driving total return for our shareholders.

In today's environment, we believe in operations focus rather than a deal-making or repositioning focus is required to deliver quality long term results. We expect our portfolio to meaningfully outperform our markets and competitive sets in the coming quarters, but nearly every market is expecting slower growth than forecasted at the start of this year. In this choppy environment, all of our resources are focused on gaining market share and realizing the embedded EBITDA growth from our recent acquisitions, renovations and our two South Florida redevelopment projects. With that, let me turn it over to Ash to discuss in more detail our margin performance, balance sheet and our updated guidance for the year.

Ashish Parikh: Thanks Neil and good morning everyone.

As we have discussed, fundamentals in the second quarter resulted in greater margin pressure than was anticipated. And in the face these challenges, we remain encouraged that our portfolio was able to drive EBITDA margin growth to 37.8%, which remains one of the highest amongst our peers. Our focus on expense control and aggressive asset management initiatives allowed us to limit our operating costs and drive 22 basis points of GOP margin growth with a 53.3% flow-through. With labor expenses increasing above 4% to 5% in most markets and occupancy driven RevPAR growth, we believe that the resiliency of our business model and the cash flow profile of our assets will continue to drive EBITDA growth even if fundamental results remain muted in the near term. Our unique operating model affords us the ability to work directly with our management companies to adjust staffing in real time, providing us flexibility to control labor costs that have been increasing steadily for several years.

This unique strategy yielded margin expansion last quarter in several of our clusters. In Boston, our portfolio generated 90 basis points of margin growth driven by the Boxer, which reduced labor and amenity expenses and coupled with 6.8% ADR growth resulted in 420 basis points of margin growth. And down in Washington DC, our portfolio grew margins by 60 basis points led by the Hampton Inn, which generated 440 basis points of margin growth on labor and e-commerce savings and the St. Gregory, which increased margins by 320 basis points as it continues to reestablish itself as the market-leading boutique independent upscale offering in DuPont circle. Additionally, fellow independent collection asset, the Capitol Hill Hotel was not only able to monitor and adjust labor expenses in real time to control costs but was also able to drive growth through recently instilled ancillary revenue initiative, which led to 270 basis points of margin growth.

In 2018, we allocated $77 million to enhance and reposition seven of our legacy assets and their performance in the first quarter led to 470 basis points of margin growth for these hotels. One of the best performers in this bucket was the Ritz-Carlton Coconut Grove, which grew margins by 920 basis points. The hotel continues to gain share and has firmly established itself as the leader in the market driving ADR and occupancy to achieve notable topline growth in the second quarter. Our restaurant and bar Isabelle's and the Commodore were repositioned at the end of last year and their ramp-up has provided a substantial tailwind to F&B revenue thus far in 2019. Additionally, our Mystic Marriott and Hyatt House White Plains continued their margin growth momentum from the first quarter generating 830 basis points and 600 basis points of margin growth, respectively in the second quarter following their holistic renovation in 2018.

At both assets, significant room revenue growth coupled with newly implemented expense controls resulted in positive flow-through. Before moving to our capital expenditures, I want to spend a minute on our margin performance at the Cadillac and Parrot Key. As Neil mentioned, these assets continue to be in the ramp-up period. And as such, margins will stabilize at a slower rate than our topline result. After being closed for over a year to complete the Parrot Key remediation work and full rebranding of the Cadillac, we remain encouraged by their topline stabilization and recognize that margins will follow as we continue to ramp.

The staffing, marketing and operating expenses incurred to drive revenues are critical to reestablishing these properties. And even though the short-term impact is substantial to our earnings, our ability to stabilize these assets over the next 24 months will be driven by these significant investment and our operating expertise at these hotels. When comparing our second quarter margins at the Cadillac with the hotel's best second quarter performance in 2015 when we ran a 40.5% EBITDA margin, we came in approximately 1,600 basis points below that level with equivalent revenues. And at the Parrot Key, compared the same quarter in 2015, we were roughly 1,800 basis points lower than prior peak second quarter EBITDA margin of 52% on higher revenues. As discussed last quarter, the majority of our large capital funding are behind us and we continue to forecast limited renovation related disruptions over the next few years, allowing us to focus on our asset management initiatives and driving free cash flow.

During the second quarter, we allocated $12 million to capital projects versus $32 million in the second quarter of 2018. As we look out into 2019, we anticipate our total capital spend, including maintenance CapEx but excluding deposits for 2020 capital projects to be in the range of $30 million to $32 million versus $90 million in 2018, with a very limited number of renovations resulting in rooms out of order or operational disruption. With the reduction in CapEx spending and stabilization of assets that have undergone large-scale renovations, our free cash flow continues to increase allowing us to further reduce the payout ratio, which is currently targeted at approximately 50% for 2019 and remains one of the lowest dividend payout ratios in the sector. We also been active in the debt market with what appears to be a more accommodating interest rate environment forecasted in the near term. During the quarter, we took advantage of the strength of the debt market as we refinanced the existing debt on our Hyatt Union Square at a fixed interest rate of 4.17% with a 2023 maturity.

In addition, last week, we completed the refinancing on our Hilton Garden Inn Tribeca debt which now matures in July 2024 at a fixed rate of 4.02%. We have started refinancing efforts on several of our 2020 maturities and look forward to updating you on the progress of these on our third quarter call, if not earlier. With the refinancing of these near-term maturities, we continue to improve our financial flexibility and have ample capacity with cash on hand and our $250 million revolver to execute our business plan and to take advantage of opportunities as they arise. I will finish with our updated full year guidance for 2019, which we presented in the earnings release published yesterday. As we have discussed, second quarter trends the lodging industry underperformed mostly less than forecast along with our expectations.

But we were pleased to have shown consistent outperformance on the top and bottom line throughout our portfolio. Based on our current booking pace, we continue to see strength in consumer confidence driving leisure demand but overall business transient trends are weaker than forecasted for the quarter. For the first time since 2016, we have seen several key business indicators showed declines amid trade tensions and a softening global outlook and we saw rapid deterioration of RevPAR trends for the majority of the top 25 markets in June, which have carried into the third quarter in several market. While we do not anticipate market conditions to worsen in the back half of the year, we do not expect outsize growth to make up for lost EBITDA over the past three months. We reduced the high-end of our forecasted comparable portfolio RevPAR growth, which is now between 1% and 2.5% while we maintained EBITDA margin growth at minus 25 basis points to plus 20 basis points.

We are now forecasting FFO per share guidance to be between $2.07 and $2.19 and we adjusted our full year EBITDA range to be between $172.5 million and $177.5 million. 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]. And our first question today comes from David Katz with Jefferies.

Please go ahead.

David Katz: Hi. Good morning everyone. Neil H. Shah: Hi David.

How are you?

David Katz: I am okay. How are you?
Neil H. Shah: I am good. I must say I smiled when I read the title of your notes.

David Katz: Yes.

Then to some degree, the fact, then mission accomplished. You read it. We aim to engage. And look, a few questions about of the Parrot Key and Cadillac, right. We had been focusing on kind of a $20 million target around 2020.

How should we think about that $20 million and the trajectory toward getting to it in the context of the last night's report?
Neil H. Shah: Just to get it started on it, David, we still have great confidence in these hotels stabilizing somewhere between $20 million and $25 million of EBITDA. I think the slower ramp in the second quarter and third quarter may delay the achievement of that stabilization by a couple of quarters. And so we have no concern about getting there ultimately, but we may need a more fully booked convention center, more events in town and the lapping of all of these hurricane comps to be able to really accelerate that growth. This year, I think our expectation is, we will be at $11 million to $13 million of EBITDA from those two assets.

And so there will be meaningful growth in 2020 and perhaps into 2021 to hit our stabilized level of EBITDA.

David Katz: Got it. And then you know, I think one of the areas that we are trying to take in total or take a holistic view on is, if we look at the Pan Pacific and Annapolis, those are seeing a little bit of market weakness but it sounds like more of EBITDA reduction in the guidance is South Florida based. I guess part of the question is, how are those hotels today sitting versus what you are underwrote? And are those being included in some of the EBITDA adjustment in the guidance today also? And how do we think about the order of magnitude there?

Ashish Parikh: David, the recent acquisitions bucket, that would include Pan Pacific, Seattle and Annapolis, they as a whole continue to perform very well. We were up 4.5% on RevPAR, had margin growth and that was despite being down 12% at the Pan Pacific.

The Pan Pacific was, Seattle has been worse than we expected this year. Our ability to hold rate in the face of big-box supply was weaker than we expected. And so we have lost rate at the Pan Pacific. But the Annapolis continues to perform at expectations, if not a little above. The Westin has clearly hit our expectations, if not a little above.

The Envoy has clearly hit our expectations. Most of the recent acquisitions have. The Ambrose in Santa Monica. So the recent acquisitions driving growth for 2019 and into 2020, assuming that we remain very confident about. We had significant weakness in Seattle and that we believe will turn again as this year keeps going and into next year.

We had a tough first quarter, tough second quarter. We are hoping it will stabilize a bit in the third and fourth and then hopefully return to significant growth again next year in Seattle.

David Katz: All right. And if I can ask one more which maybe directed a bit more at Ashish. How do we think about the sensitivities for the company in the context of what may be just a straight down the middle moderate economy but may also have some variability? It may turn out to be better than we expect.

It may turn out to be worse. And how do we think about that in the context as we ask about the leverage? How have you thought about those? And whether there could be a decision to the divest an asset at some point?

Ashish Parikh: Yes. Sure David. When we look at our portfolio and at the type of assets that we have and we have been continuing to look at for a 2% type of RevPAR growth environment over the next few years similar to what we have seen. If that was to moderate, if that was to go down significantly and we had to sell assets, I think that our portfolio has the most liquid assets out of any portfolio out there.

In general, we have almost no land leases. We have almost no encumbrances. We sold $1 billion worth of assets. We paid almost nothing to terminate any of the management contracts. All of our debt is really repayable.

So from our standpoint, we could turn that speed on whenever we want. I think we could sell assets quicker than anyone else.

David Katz: Got it. I appreciate that. Thank you.

Operator: And our next question comes from Anthony Powell with Barclays. Please go ahead.

Anthony Powell: Hi. Good morning guys. The question of supply growth, on the Hilton call last week, Chris Nassetta talking about launching a new upscale lifestyle brand with hundreds of hotels.

Marriott continues to grow the Moxy brand. What's the risk of another wave of supply growth impacting your urban markets, say, in 2022 and beyond?
Neil H. Shah: Anthony, yes, anything's possible. If debt financing remains very low end and if the economy remained stable and has some reacceleration, maybe we see more construction lenders get back into the business. If there are new brands out there that can capture market share, that does attract developers.

So it is possible. It just feels like where we are today, where we see kind of declining performance in a lot of markets, we see peaking supply growth. Most construction lenders we speak to are lenders that have in the past been in the construction market are generally shying away from urban construction. But that could change. So it is possible, Anthony.

It's not something that we think is going to be meaningfully impactful to our urban markets in the next two to three years. But could it start a wave again in year 2023 and 2024, it could. If the markets are very strong and you can build for below what you think you will be able to trade an asset for, hotels get built.

Anthony Powell: Thanks. And maybe a similar question there.

There are these concepts like Sonder that are out there that are, I guess, leasing apartments or buildings in urban markets and releasing them out as either short term or medium term lodging stays. Are these concerts having any impact on your RevPAR outlook? And how do you think they evolve over the next few years?
Neil H. Shah: Yes. It's kind of like Airbnb or like a lot of these, Sonders or Stay Alfred or there is a bunch of them out there that are alternatives. And I think the kind of alternative supply is something that I think is not as -- it's not something that's accelerating or getting harder and harder, but it entered the market the last three to four years and it's clearly making harder to push rates in a lot of these markets.

We still rely on kind of a good regulatory regimes that creates an even playing field. And that has had some benefits across the last few years in some urban markets. But net net, I think it is another competing kind of source of supply. We have actually had some conversations with a couple of these folks about even leasing parts of our hotels and things. If they are raising a ton of money and there is a good opportunity for it and they can provide that.

So we explore it as an alternative, not only as an alternative for consumers, but it is an alternative for owners as well. But right now, we don't think it's sole market to be one of the main drivers of the challenges in the market right now. We still think it's primarily real hotel supply and choppiness on the corporate demand front.

Anthony Powell: Great. Thank you.

Operator: And our next question comes from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario: Good morning everyone. Neil H. Shah: Hi Michael.

Michael Bellisario: Can we dig a little bit deeper on the Cadillac? Can you maybe give us a sense of the market share assumptions that you guys have embedded in the ramp-up over stabilized year and how you are thinking about that progressing? And then maybe where you are missing on underwriting in terms of ADR, occupancy and margin?
Jay H. Shah: Michael, this is Jay. Let me talk a little bit about, I mean I can talk a little bit about the Cadillac and its performance. When we were originally doing the underwriting on the Cadillac, we were and most of our competitors are against 2016 which was sort of the last peak year at the hotel. And we had anticipated by this time in the year to have stabilized at an occupancy that was going to be close to where we had been in 2016.

And we are falling short on occupancy from 2016 by about 1,500 basis points. Our rate is actually 17% ahead of 2016 quarter two. So the hotel is performing on rate. We are close to $30-plus ahead in rate of where we were in the last stabilized year. And so the thesis on the positioning of the hotel is still intact.

I think it's the occupancy that we are struggling with here in quarters two and three. Neil mentioned in his prepared remarks, the first quarter came in very much in line with our underwriting. Our underwriting is set at our hotel performing at 85% to 90% of the new comp set which is a higher position comp set. So I think getting back to what has happened in quarter two and quarter three, I think the softness in demand, the alternatives that travelers have for other destinations in the warmer climates and I think just the additional supply that we continue to see not only on the Beach but in the rest of the market is creating some headwinds on [indiscernible]. We would imagine that when we get back into season and there is a lot more compression in the marketplace, I think we are going to be looking a lot closer to underwriting again in the fourth quarter.

I think these two quarters, the second and third quarter when there is soft demand, we might have overestimated our ability to penetrate against the comp set in the broader market.

Michael Bellisario: And that 85% to 90% relative occupancy, is that what you guys are forecasting for this year? Or is that your assumption for the stabilized year, call it two years out?
Jay H. Shah: Well, it's what we were projecting for this year. I think that we are certainly not going to hit that this year now. I would feel pretty comfortable that we are able to hit in 2020.

And that will put us a couple of quarters behind on our underwriting from an EBITDA standpoint, getting to stabilize value.

Michael Bellisario: That's helpful. And then just on the same topic, the $6 million guidance reduction. It sounds like $3 million came from South Florida. Can you piece together where the other $3 million came from?

Ashish Parikh: Sure.

Michael, when we look at that $6 million from the viewpoint, about $1.8 million or so of it was in the second quarter. So that's we he realized we have, as you mentioned, about some leeway between Q2 and Q3 in South Florida. We took down our fourth quarter a bit for the South Florida ramp up as well, about $750,000 and the remainder of it is really just conservatism bringing down the low-end just from what we are seeing in the markets, trade tensions, potentially, probably Brexit, things to that effect.

Michael Bellisario: That's helpful. Thank you.

Operator: [Operator Instructions]. And our next question comes from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka: Hi. Good morning guys.

Neil H. Shah: Hi Chris.

Chris Woronka: Morning. I wanted to ask you on, you have made a lot of helpful commentary about kind of South Florida and that kind of being a source of weakness. I guess the question for me is, I always think of that as being a little bit more on the leisure side of things and it sounds like painting with broad strokes, you are talking more about weakness in corporate transients.

So can you help us kind of square South Florida, is that actually more corporate than we think? And in those are hotels of leisure and everywhere else, it's corporate? Or how do you, what do you say about that?
Neil H. Shah: Chris, they are kind of two different things. South Florida is much more of a leisure market place and the weakness that we are seeing there is from competing new supply for that leisure customer in the region. And kind of being in the low demand quarters, any kind of hick up in demand, it shows bigger in those quarters in Miami. But we have seen corporate weakness in Seattle, I mean in the West Coast and in New York.

And so for us, we did not achieve the expectations that we had for New York City in the second quarter and we don't believe we will achieve what we had initially laid out at the beginning of the year for the third quarter and that is driven by corporate transient demand. We are seeing that same kind of weakness in some West Coast markets as well in Los Angeles and even in Sunnyvale, we saw a bit. And so we do think that that is the kind of major macro headwind. But in addition to that, we have ramping hotels in a market that is a little weaker this summer.

Chris Woronka: Okay.

Helpful. And then just to follow up on that is, in your estimation are we seeing booking windows compressing? Or is it just a fact -- I know transient is always somewhat short term in nature, but have you seen any change? Does that impact your confidence in second half at all?
Neil H. Shah: Absolutely. The booking window, we used to be one of the few companies that had a very transient portfolio. So we are kind of used to pretty sure booking windows with kind of more of a rooms oriented portfolio.

But I think now even on the group side, the booking window is much tighter and it does feel like the booking window has come in again this year as well. There are alternatives for it in terms of new supply and other kinds of lodging that I think are giving consumers the feeling that it's okay to wait until the last minute and you will find something at potentially a better price.

Chris Woronka: Okay. Helpful. And just one last one for me.

You talked about greater confidence in DC looking out. I know you have looked at the convention calendars and things like that. But it seems as if we have heard people getting were positive on DC for a couple of years now and it seems like at the last minute it just changes. So I guess, again, confidence level and what would make you worry about not seeing the uptick?
Neil H. Shah: Yes.

Chris, I kind of chuckled when you said that because we have been feeling like DC was bottoming out last year and this year it's been pretty tough as well. We have to benefit clearly of the St. Gregory, which is ramping up. And so that does give us a significant boost in the market. But even our existing, our select service hotels in the marketplace and our independent hotels are booking into the third and fourth quarter right now.

And in Annapolis, we have seen some strong growth as well on our bookings for the coming couple of quarters. So this isn't purely based on, hey, it can't get any worse. We actually have some positive pace numbers.

Ashish Parikh: Chris, let me jump in and I will share some pace numbers as Neil was just referring to. In DC, our transient pace for the third quarter is going to be off by room nights right now.

But that might be slightly by design, because we are seeing some pretty strong rate performance in forward pace. We are close to $7.29 in rate. And so, I think from a holding rate, sometimes that impacts slower transient pace as you are waiting for demand to come in. But generally speaking, the transient pace currently is off of last year slightly but up in rate. So we are off in room nights slightly but up in rate.

On the other hand our group forecasts and pace for the third quarter in Washington is looking pretty strong and it's driven a lot by September. But even our August variance and pace is very positive. And so group is looking pretty good in Washington. And our business transient pace, interestingly, there is up slightly. And so you know, when you take a look at these three different segments, these three different parts of the business mix, we haven't been seeing this kind of positive pace for an entire quarter in any one of these segments for a little while.

And so I think that's where some of our optimism for Washington is coming from. We are starting to see some return of demand. Again, this could change and we look at it very cautiously, but looking into the third quarter right now, Washington seems to be relatively stable to positive.

Chris Woronka: Okay. Neil H.

Shah: Chris, it seems like so long ago but there was Hurricane Florence really had an impact in September in DC last year. We lost at least few hundred grand on that. So look, we have a couple of seasonal and calendar kind of adjustments and then we have a better convention calendar and we are seeing it in our pace.

Ashish Parikh: And we also, at the back-end of last year we had the midterm elections and then in the beginning of the year, we had the government shutdown. So it's been one long line of just headwinds in DC, which we finally seem to be benefiting from some of those weaker comps over the last year.

Chris Woronka: Okay. Very helpful. I appreciate all the color guys.

Operator: And our next question comes from Bryan Maher with B. Riley FBR.

Please go ahead.

Bryan Maher: Good morning. Most of my questions have already been asked and answered. But shifting gears a little bit, I think you mentioned in your prepared comments labor costs up around 4% or 5%. Can you tell us what the trend is there? Is it just steady at that pace? Is it trending up? Is it trending down? And also what's going on with property tax expense? Are you seeing any changes there?
Neil H.

Shah: Sure. Bryan, we have been seeing sort of 4% to 5% for the last few years. We don't think it's increasing at this point. A lot of that was the significant jump in minimum wage in a lot of these urban markets, which now seems to be stabilizing at $1 a year for the next few years. So the big jump, especially in places like New York and LA and Seattle, well it's gone up to you $15 already is behind us.

So we think that stabilizes. We have certainly put expense controls in place looking at not filling positions really doing a lot of belt-tightening on that side of things. Overall, for property taxes, we are seeing sort of low to mid single digit growth rates in most markets. Property taxes are usually a year, if not two to three years behind. So as NOI and EBITDA level stabilizes we are not looking at a year where you have to [indiscernible], those assessments also become a little more flatlined as well.

They are not going down in any case but certainly not seeing the high single digit type of growth rates we were a few years ago.

Bryan Maher: All right. And then going back to your comment on the liquidity of your portfolio, which I don't think many people would disagree with, are you actually getting any inbound calls to buy any of your assets? And what are your thoughts as it relates to selling a few assets to pay down debt if RevPAR continues to just kind hangout at 0% to 1%?
Neil H. Shah: Bryan, we do get a lot of inbound inquiries on the portfolio, on the entire portfolio, on individual hotels, on the select service hotels, on the independent hotels, on the New York City hotels. And as we have shown across the last few years, when it hits the number that we feel like we cannot achieve without disruptive CapEx or without waiting for several years, we will take the opportunity.

And so over the last couple of years, we have sold a couple of assets. We continue to have conversations. But at this time, it's just we have sold the hotels that we have concerns about competitive pressures in a market. We have sold or reinvested in the hotels that needed capital. And so at this stage, our hotels are generally in good shape and can outperform their existing markets.

And so for the time being, we are pretty focused on just driving that EBITDA growth. If the market got a lot worse, we absolutely would consider changing that view. If a particular market got worse and we felt like it was going to be sideways for three, four years, we could be more aggressive on a particular geographic market. If it was a segment, if it was an asset. So I think we have maintained that flexibility.

But as disappointed as we are in the level of growth in major urban markets this year, it hasn't gotten to a level where we feel like it makes sense to begin selling assets. To make an impact on leverage on a debt to EBITDA metric, it's pretty significant amount of sales to really drive that kind of change right now. And so we think we are better off having the EBITDA grow and then take another look as the year progresses.

Bryan Maher: Okay. Thanks.

That's all for me.

Operator: And this will conclude our question-and-answer session. I would 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 everyone for your time this morning.

And if we can answer any further questions throughout the day today, we are all here at the office. So please do call. We will speak to you soon.

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

You may now disconnect your lines at this time and have a good day.