Hersha Hospitality Trust (HT) 2017 Q1 法說會逐字稿

Good day, and welcome to the Hersha Hospitality Trust First Quarter 2017 Earnings Conference Call. As a reminder, today's call is being recorded.

And at this time, I would like to turn the call over to Peter Majeski. Please go ahead.

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

Prior to proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial positions to be materially different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

Thanks, Pete, and good morning to all of you on today's call. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

When we last spoke a few months ago in February, we indicated we were encouraged by improved market sentiment on lodging, but we'll continue to execute our strategy without the presumption of reaccelerating fundamentals in the short term. Our base case for 2017 did not anticipate an immediate rebound and reacceleration demand fundamentals given the more business-friendly administration in Washington. But even in a low-growth environment, we were and remain confident that Hersha can meaningfully outperform, given our capital recycling initiatives of 2015 and 2016. Across last several years, we completed over $1.3 billion in hotel transactions, diversifying the portfolio away from New York, and more stabilized suburban hotels and into higher growth locations in Washington, D.C, Boston and the West Coast.

Our portfolio has kept pace with travelers evolving tastes and preferences. And our hotels portfolio today is clearly of a higher quality than only a few years ago. But we've remained steadfast in our commitment to driving results at the property level through our unique alignment with the operator and our intensive revenue and asset management discipline.

Our refined portfolio and our tireless teams in the field produced solid results this quarter. Our comparable portfolio delivered 3.1% RevPAR growth, driven by a 1% increase in ADR to $200.48 and a 157 basis point rise in occupancy to 78%. If we exclude our South Florida cluster, our comparable portfolio reported an impressive 6.4% RevPAR growth. We grew EBITDA by 3.5% in the quarter. Washington, D.C. was very strong with the inauguration, but our strength was broad based. We also registered 11.1% growth in Philadelphia, 8.2% growth in Boston, and our largest market, the West Coast, produced 4.3% RevPAR growth.

We do believe that the lodging sector, at large, will benefit from a combination of rebounding corporate profits, potential federal and -- federal corporate tax reform and infrastructure spending, accelerating GDP, full employment and even ongoing shifts in consumer spending towards experiences over things. As demand firms and accelerates, we will all benefit from the macro trends. But in the meantime, we are confident that our refined portfolio can produce meaningful EBITDA growth by taking share in our local markets and driving profitability at each hotel.

Let's take a deeper look at our 6 markets, starting with Washington, D.C., which was our best-performing market in the first quarter as a result of the presidential inauguration in late January and increased activity overall in the district, characteristic of a new administration. Our carefully assembled portfolio of branded and independent hotels across the upscale to luxury segments and diversified across Washington's most dynamic submarkets reported rate-driven RevPAR growth of 15.4%, with each of our 5 CBD hotels reporting double-digit RevPAR growth during the period. Our urban DC cluster generated hotel EBITDA of approximately $5.6 million and 300 basis points of margin growth.

As we have discussed since 2015, when we began acquiring more hotels in the market, we expect Washington, D.C. to be one of the country's best markets in 2017 due to strong citywide activity in addition to increased legislation and activity on the hill. Our portfolio will also benefit from renovation tailwinds of the well-located St. Gregory Hotel in the West End as well as continued stabilization at the Hilton Garden Inn M Street and the Ritz-Carlton Georgetown, where we'll continue to implement aggressive revenue management and plan to expand and update the hotel's F&B programming.

Our Boston portfolio reported 8.2% RevPAR growth and contributed $1.5 million in hotel EBITDA during the quarter, outperforming both the competitive set and the greater Boston market. RevPAR growth was driven by the Courtyard Brookline, our Boston cluster's largest asset, where RevPAR increased 39% as the hotel is under a major renovation during last year's first quarter. Now while the market continues to absorb new supply, which increased to 3.4% in 2016, Boston possesses a strong convention calendar and citywide activity for the balance of 2017. In the second quarter, there is a large citywide that will not repeat in June. However, the market convention activity remains healthy, with our second quarter group pace ahead of last year by approximately 150,000 across the portfolio.

In addition, our portfolio will further benefit from continued ramp at the Envoy as we work closely with our operator to implement and execute a more rate-driven strategy, leveraging the strong and growing corporate transient demand within the submarket as companies relocate and grow in Boston's dynamic Innovation District. Not only did the Envoy continue to find its footing in the market, the hotel also continues to win accolades. Just this month, the Envoy was recognized by Yankee Magazine as the best new hotel in New England for 2017.

Our West Coast cluster was the portfolio's biggest EBITDA contributor during the period at $10.7 million, or 33% of our consolidated EBITDA. Our West Coast portfolio reported 4.3% RevPAR growth during the period. Performance was primarily driven by our Courtyard in San Diego's Gaslamp, where RevPAR increased 13%.

In Los Angeles, our Courtyard faced a difficult 22.1% comp to last year's first quarter, primarily driven by market compression from the Porter Ranch gas leak and citywide activity that did not repeat. Despite a 2% RevPAR decline during the first quarter for our Courtyard, the hotel was a big producer and contributed over $2 million in hotel EBITDA, the portfolio's third largest EBITDA producer. Tremendous performance, really, against a very difficult comp.

In Northern California, the market faced difficult comps as a result of last year's Super Bowl in Santa Clara. Our 7 high-quality Manhattan properties, diversified across dynamic submarkets, registered 1% RevPAR growth during the period, outperforming the Manhattan market by 330 basis points, 11 -- the 11th out of the 13th -- out of the previous 13 quarters of outperformance. If we exclude the Hyatt Union Square, where we are in the process of reconcepting the hotel's restaurant and bar, our Manhattan cluster reported 2.2% RevPAR growth and 150 basis points of margin improvement.

While the overall operating environment remains challenging, there are pockets of strength. And looking ahead, we expect topline growth in the low to mid-single digits in the second quarter for our Manhattan cluster.

We do believe that New York hoteliers can regain pricing power this year. Given trailing 12-month occupancy levels that have exceeded 85% for 58 consecutive months, Manhattan has long benefited from high occupancies, suggesting the market continues to displace unaccommodated demand, especially during compression period. And we believe there is certainly ample room for rate growth as trailing 12-month ADR remains 11.7% below the 2008 peak, particularly with less supply growth.

During the first quarter, market-wide demand growth in Manhattan outpaced supply by 30 basis points. We anticipate new supply growth to increase 3.2% in 2017 based on the current construction pipeline. This represents a deceleration from the greater than 4% annual supply growth over the last 5 years. Although we expect submarkets in Times Square, Midtown West and downtown financial district to remain difficult, our young, well-located, purpose-built New York hotels are expected to continue their outperformance, leveraging the robust and multifaceted demand in the Manhattan market and our exceptional locations in Midtown East, Tribeca and Union Square.

Finally, in South Florida, our portfolio reported a 10% RevPAR decline as a result of the market's numerous headwinds. Newer supply and the strong dollar had already reduced growth in Miami by 2015, but 2016 and early 2017 have been very difficult with the closure of the Miami Beach Convention Center and ongoing vehicle-related fears among corporate meeting planners and domestic leisure travelers. But January may have been the bottom for the market. We did see some improvement in February and March and have noted additional stabilization in April, as well. We see additional pickup in May and June. By the third quarter, comps will get a bit easier.

In this environment, we work diligently with our operators in Miami on cost containment and responsive revenue management strategies to preserve our cluster's EBITDA. Despite a 10% decline in RevPAR, the portfolio still produced a 40% EBITDA margin, and our Miami portfolio contributed over $8 million of EBITDA. We have a lot of conviction in South Florida's longer-term fundamentals and feel very good about our locations and hotels, not to mention our cost basis. To prepare for the market's eventual recovery and leverage this slow period productively, we will undertake the majority of our ROI projects in Miami during 2017. As previously discussed on our February call, we will reposition the Courtyard Miami Beach to an Autograph Collection Hotel, the Cadillac Hotel and Beach Club.

At our newly acquired Ritz-Carlton Coconut Grove, we intend to breathe fresh air into this unique urban resort. We will add 3 rooms, reinvent the restaurant with an exciting new operator, recreate a destination cocktail bar, enhance the spa and refresh the guestroom experience. Post renovation, our bases in the hotel will remain far below replacement cost. We believe the Ritz-Carlton Coconut Grove offers a great location, a very high-quality hotel and a clear line of sight to increase profitability and a higher profile within the best submarket in Miami for the next several years.

Before I turn the call over to Ash to dig a bit deeper in the margin with the balance sheet, I want to quickly touch on capital allocation. Much of this is in the rearview mirror, as we discuss the majority of our activity on our last call. However, we did sustain momentum from an active 2016 during the first quarter of 2017. In January, we liquidated our Mystic Partners joint venture and assumed full ownership of the high-quality Mystic Marriott Hotel and Spa without any additional cash payment, and eliminated our exposure to 2 full-service hotels in Hartford, Connecticut.

We also closed on the sale of 2 suburban Washington, D.C. hotels for $62 million at a trailing 7.4% cap rate, utilizing sales proceeds and deferring taxable gains to acquire the luxury Ritz-Carlton and Coconut Grove capitalizing on market dislocation in Miami.

In addition, we entered the dynamic Seattle market through the acquisition of the exceptionally located Pan Pacific Hotel located in the heart of the South Lake Union submarket across the street from Amazon's global headquarters and surrounded by transformational office retail and residential development.

As we proceed through 2017, we are on track to close on the remaining 3 suburban West Coast Hotels in early July. This will result in net proceeds of $130.5 million, inclusive of the additional $7.5 million we negotiated for the delayed closing. Given our low basis in these hotels, our February acquisition of the Pan Pacific was set up as a reverse 1031 asset and sheltered a portion of the gains. Over the past year, we have sold 13 assets for $702 million in total proceeds and have successfully utilized 1031 exchanges and other strategies to defer over $205 million in taxable gains. In order to fully shelter the remaining gains, we only need to acquire an additional $50 million of assets by year-end.

Our strategy clearly prioritizes the recycling of investment capital to upgrade portfolio quality by selling mature lower-growth hotels and redeploying the appreciated capital into younger, higher-quality hotels and locations. Our ability to successfully execute the strategy through complex and large-scale transactions as both the buyer and seller, while delivering consistent returns is a distinguishing hallmark of our success.

But after 2 years of a lot of moving parts, the result today is a truly differentiated portfolio, clustered in the most dynamic markets in the country with sturdy current income and tremendous growth potential, and the cycle-tested management team, very focused on driving operating results and creating value for shareholders.

With that, Ash, let's discuss the first quarter's financial performance.

Thanks, Neil, and good morning. My comments will focus on our comparable portfolio, EBITDA margins, consolidated CapEx spend, balance sheet as well as how performance to date in 2017 compares to our full year 2017 outlook.

During the first quarter, we reported comparable hotel EBITDA margins of 29.4%, a decline of 30 basis points. However, if we exclude the Hyatt Union Square and Sanctuary Beach Resort, which continue to report disproportionate margin deterioration due to renovation and a shift from a third-party lease model to a management model, our comparable EBITDA margins increased 50 basis points in the first quarter. In our Manhattan portfolio, we delivered 150 basis points of margin improvement and GOP flow through of 195.2%.

So our ability to drive margin growth during the period was especially impressive, given the 300 basis point margin decline within our South Florida portfolio. We attribute our ability to maintain hotel EBITDA margins through aggressive asset management, the strength of our flexible operating model and the alignment that we have with our operators. We have and continue to work closely with our operating partners to implement expense control and revenue management strategies to sustain our high margins at this stage in the cycle as we face a combination of tepid RevPAR growth and increasing wage pressure across all of our markets.

In the face of these cost increases, we have put forth aggressive expense control measures throughout the portfolio. In the first quarter, we worked closely with our brands to drive direct bookings to reduce commission expenses. In our New York properties, our commissions expense as a percentage of revenue declined 90 basis points in the first quarter, a 20% reduction equivalent to $130,000. In addition, we have reevaluated numerous vendor contracts in non-payroll-related areas, such as operating supplies, where we realized a 17% cost reduction. We've also reexamined our food purchases and third-party laundry cost and have seen significant per-occupied room cost savings from all of these initiatives.

Finally, we continue to leverage our EarthView sustainability program to reduce utility costs, which represent the portfolio's fourth highest operating expense after payroll, franchise fees and commissions. Over the past year, we have rolled out LED lighting and energy management systems across the portfolio and are focused on implementing these initiatives at our existing and newly acquired assets. Last year our energy usage per occupied room declined 19% compared to our baseline year of 2010 when we started EarthView. We also continue to make progress on utility and water consumption across the portfolio.

From a revenue management perspective, we have looked to increase group business during slow demand periods to compress our hotels. Along those lines, we have instructed our revenue management team to closely evaluate forward-paced, international travel and non-repeating citywides further out in the booking window to best understand where to strategically place groups. This initiative will help to reduce commission expenses by avoiding the use of high-cost online channels to fill rooms during periods of slack demand. As we proceed through the year, we'll continue to undertake new initiatives to drive our industry-leading margins within a challenging operating environment.

Regarding capital expenditures, we spent approximately $10.5 million in consolidated CapEx and redevelopment projects during the first quarter. Our largest projects during the period were at the Rittenhouse where we completed renovations in the ballroom and breakout areas as well as renovations to the spa and fitness center at the Ritz-Carlton Georgetown.

Finally, we completed the rooms, corridor and public space renovation at our TownePlace Suites in Sunnyvale as well as lobby work at the St. Gregory and Hotel Milo during the quarter.

We continue to anticipate spending between $50 million to $52 million in CapEx and ROI projects in 2017, with the majority taking place in Miami. We have focused our ROI projects in markets experiencing short-term challenges, in addition to markets where we can enjoy better returns on invested capital versus acquisition opportunities that currently exist. Our hurdle rates for these ROI projects are in the mid- to high teens, which is in line with our historical return on this type of investment.

Now moving to our balance sheet, where during the first quarter, we made significant progress in rebalancing our interest rate exposure from floating to fixed rate as the fed deploys to more hawkish interest rate policy. During the quarter, we entered into a swap on a recently drawn $50 million portion of our third term loan and entered into a forward step-up swap on our $300 million term loan. This swap fixes the term loan interest rate at 3.69% from the effective date to August 2018. The interest rate then steps up to 4.11% in August 2019 and then 4.3.9% (sic) [4.39%] in August 2020. On a pro forma basis, accounting for these 2 swaps, our consolidated debt will be approximately 70% hedged by caps or swaps.

In the first quarter, we also repaid property-level debt at 6 properties, totaling $120.8 million as we completed our refinancing of 2006 and 2007 vintage 10-year CMBS loan. Across the last 3 years, the transition to a more flexible, unsecured debt model has reduced our weighted average cost of debt by 140 basis points to 3.43% as of March 31. Eliminating these debt encumbrances provides the company additional flexibility to sell asset without hindering asset pricing and allows us to continually reduce our cost of debt. As a result, our balance sheet is in great shape. Less than 5% of our consolidated debt matures this year and next, while our interest coverage and fixed charge coverage ratios are forecast at approximately 4.1x and 2.6x, respectively, by year-end.

In addition, we continue to target debt to EBITDA to be in the range of 4 to 5x and remain very comfortable with our leveraged target, given our portfolio's cash flow profile and coverage metrics.

Shifting now to our guidance. We are pleased with our portfolio's performance thus far in 2017, which has been within the range forecast at the beginning of the year. Our collection of high-quality transient hotels, clustered across 6 high-demand markets, had benefited from strong results in Washington, D.C., and several of our West Coast and Northeast core markets. To date in the second quarter, we've seen strong results in our New York portfolio, partially aided by the Easter shift into April and are forecasting our comparable portfolio to be up in the range of 3% to 3.5% in April.

Our full -- our booking pace for May and June also remain positive, and we are seeing less deterioration in our South Florida cluster. As a result, we remain comfortable with the guidance we provided to the market in February.

As most of you know, the first quarter is by far our least meaningful contributor and accounts for less than 20% of our annual EBITDA. As we move past the second quarter, we will be in a much better position to potentially update our guidance range if we see a reacceleration in demand fundamentals and continued outperformance in our portfolio.

So with that, that concludes my portion of the call. We can now proceed to Q&A where Jay, Neil and I are happy to address any questions that you may have. Operator?

(Operator Instructions) We'll take our first question from Shaun Kelley with Bank with America.

Perhaps, we could start with the comment on some of the cost initiatives you guys are taking. And I was particularly interested in the commission expense savings you called out. Could you just talk a little bit more about what's driving that? When did that program start? And is it something that's brand initiated or you've been working on more hand-in-hand directly with them?

Sure, Shaun. So over the last couple of years, we have been working very diligently with our operating team -- revenue management teams to really try to shift large business away from the online booking channels, booking.com, CBS, the high-price commission models to more direct bookings, utilizing our internal sales force even -- just even grouping up as we did in several of our New York hotels where we were able to avoid any type of online channels at all. So it's not something that had just begun in this quarter. But I think we're really starting to see some of the results of those initiatives over the past few years where we've taken an approach that paying the 15%, 18% and 20% commission to these models isn't worth taking that type of business.

And could you -- I mean, I think the number you called out was 90 basis points change in expenses. How much overall does this kind of distribution bucket cost you? And what kind of magnitude could that reach over a full year over -- kind of over a period of years?

So right now, we still -- in New York, this is the target just in New York. We're still around 18% of our business is coming through those channels. So we're not forecasting that we go to 0 anytime soon. But if you can imagine that we could wean away even 200 to 500 basis points over the next few years, it's a pretty significant cost savings in just a market like New York.

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

Shaun, this is Jay. We've been encouraged by the corporate segment. And I think it does give us some cause for optimism, although corporate group remained down in the portfolio. It -- we were getting pricing power even though it was slightly down, so we were up 7.3% in corporate group rate. I think what was more interesting for us was that we were able to drive our national corporate and our local and negotiated rate business, meaning L&Rs, which were up 15% and 2.5% in revenues, respectively. So the national corporate was certainly pretty strong. And of course, that varies market by market. But across the portfolio, it was pretty significant increase. And seeing the L&R volume, the L&R rate pickup was great because we -- though we didn't do that much more on room nights from L&R, we saw that our pricing power was building there as well. And I think for us, from the corporate, that what's we're really looking for is rate because our volumes are generally pretty decent already.

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

Just kind of a quick question regarding outlook for new construction of competitive properties in the markets where you guys are focused. I think I read something recently about Boston breaking ground on a new big hotel there. Are there markets that you are more concerned about than others? Or is it kind of a lot more in '17 and '18 of what we've seen in '16?

Bryan, this is Neil. Not a significant difference from '16. I think 2017 supply growth kind of across our major markets is on average around 3%. On the higher side of that would be Seattle, Miami. On the lower side of that would be Washington, L.A., some of the West Coast markets. Boston is around 3.4%. The announcement that you mentioned was a new convention center hotel, not a breaking ground, but an announcement that it's been approved. And that's been in talks for -- since the Westin opened almost 10 years or so. It's still ways away from delivering, let alone breaking ground, so it's not something that, we think, is a significant threat in the next several years and particularly, as convention center hotels go it's an oft-debated issue of how much demand they actually induce versus taking share from others. But in Boston, a market like Boston, we -- there is some supply markets, like Washington, Boston, Philadelphia are in that 3% range. What do we feel about that? That's -- it's manageable in our view. Our industry went through in the '90s and the 2000s. We were growing supply consistently on a CAGR basis through the cycle at 3.5%, 4%. When you're growing supply at 3%, it is a headwind. But I think this is a case in all-time. But particularly, today, I believe there is real obsolescence in hotels. And so if you take 1% kind of those -- kind of obsolescence-related new supply, 3% supply is manageable. We think that there -- the level of demand pickup that we should see across the next several years as the economy reaccelerates, it can more than offset that level of supply in our markets.

And your move into the West Coast markets was pretty prescient. Do you continue to feel strongly about that market? And would you expect to continue to add there?

Yes, Bryan. The West Coast markets -- the West Coast covers a broad region, but we do like our existing positions in the West Coast. And if there were opportunities for cash flow and NAV accretion in those markets, in assets where we can really drive results as operators, we would be very interested in growing in them. But not all markets are the same on the West Coast. We've been very focused on some of the Innovation Districts as it were, whether that be in Boston or even in Manhattan around Union Square or in California. We've been really focused on that Silicon Beach area, in Marina del Rey, Playa Vista, Santa Monica, that corridor, which we think has great demand fundamentals with a very difficult supply conditions. We like Silicon Valley, but we really like being right in the center of the action in Silicon Valley. We think our Sunnyvale assets are poised for great success. But when we look at a lot of other opportunities that come up in Silicon Valley, they're often just -- they're a little too far outside of where would be considered kind of A locations and you just can't drive as much as premium rate and you're more susceptible to supply. I think Seattle is a great example of the kinds of locations that, clearly, an Innovation District transforming submarket and a very prominent location in that market, so that you can be the price leader in the market and sustain competition as well. But yes, the West Coast is clearly a market that we very much like. But we've -- we were also very active in 2015 buying in Washington because we expected '16 and '17 to be great years. And we think, actually, '18 and '19 will be solid as well. We think that there is opportunities in the 6 markets we've chosen this focus are -- our acquisitions as well as our operational kind of advantage in, we think there's good runway in lot of those markets. We feel very good about Boston as well.

Our next question is from Anthony Powell, Barclays.

You mentioned that you're trying to focus your revenue management strategy on replacing lost citywide and international travel with more group. Is that something you're pursuing for maybe the summer months when you have more uncertainty regarding international travel?

I think it's summer and it's really been throughout. We've -- and I think we've mentioned it on the calls and with investors before. It was really since -- we have had seen a falloff in international -- kind of at least the growth rate in international demand since late 2014. When the strong dollar showed up, It was late '14, early '15. And since then, we have been trying to shift our mix -- shifting our mix to more domestic consumers -- domestic leisure, trying to provide better opportunities for corporate demand and L&R kind of business. And we've been grouping up in New York any time we feel there is weakness in the market. So the first quarter, good example where we did last year really focused on trying to group up. We knew the first quarter is always challenging in New York. And so I wouldn't -- I -- it's not purely for the summers, but it's a strategy that will help us through the summer.

Got it. And what's the latest update on the impact of Airbnb across your markets? We've gotten fewer calls in recently, but kind of an update on your perspective will be very helpful.

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

Our next question is from Ryan Meliker with Canaccord Genuity.

I wanted to drill into a couple of things that you said earlier. First, with regards to New York, I think you said you're expecting 2Q to be up in the low to mid-single digits. Is that for your specific portfolio? Or is that across the broader market?

Ryan, that's for our specific portfolio just based on what we're seeing right now through April and bookings for May and June, so we're expecting a better environment in Q2.

But similar to what we saw in 1Q, you guys were like -- are likely to outperform the broader market. Is that the expectation again in 2Q?

Yes. I think that's fair. I think that's fair.

Okay, that's helpful. And then shifting to, say, Seattle, I just wanted to get some color from your thoughts on Seattle and you talked a little bit about it as a kind of an example of an Innovation District. But LaSalle Hotels just exited Seattle selling their last asset. Obviously, they highlighted it in their call. They're a little bit concerned about supply growth. We all know supply is substantial there. We know you brought -- you bought a Marquis asset into this quarter with pricing upside given its location and its quality. But when we think about Seattle, how much does supply concern you? And do you expect the results at that property to be pretty choppy over the next couple of years as a lot of that supplies starts to get absorbed?

Ryan, we -- I think the supply picture deeply influences our acquisition strategy in Seattle. I think there is new supply coming into Seattle like kind of a 3% to 4% CAGR across the next several years. And the markets experience a lot of new supply in the last few years as well. But demand is extremely robust as well and is outpacing supply growth pretty significantly. But in the market where you have a lot of new supply coming online, it influences our acquisition strategy in really focusing on truly differentiated assets that have A locations, high-quality built to the kind of current taste and preferences of today's traveler and very manageable or low-capital profile -- CapEx profile, so that you're not going to have be disrupted or try to catch up to others. And so I think that a lot of the -- other assets in the market, I think we mentioned this last call, as we've been looking around in that market for several years looking for assets, there is -- there's a lot of new select service hotels being delivered. They're generally in kind of B locations close to the kind of main demand generators, but B locations. And then there's a lot of existing inventory. And a lot of the existing inventory in Seattle is old and dusty, quite frankly. And so they, I think, commoditized or less than the best quality hotel and location will be more challenged in that market. Our expectation for South Lake Union in that submarket, in particular, is very constructive. Just the amount of new office being delivered every few months is really just remarkable, the amount of new office coming in, new tenants. We often talk about Amazon because you see their headquarters right across the street, but it's a -- it's the full basket of major technology companies and innovation-oriented companies, combined with the whole health care complex and the cancer research centers in the area. And so it's just a really great mix of demand. And on the supply function in that submarket, you just -- it's very difficult to make hotel development work. And so you see a lot of residential going up. And you see a lot of office going up. We think that the supply that will be competitive to our hotel will deliver late 2018, maybe even into 2019. In 2018, we expect the SLS to deliver, nowhere near our kind of location, but similarly high-quality asset, current taste and preferences. There is a Cheerio Hotel also planned. The Pike Place Market, again, a very different location from a corporate perspective to ours, but that will also be a current modern kind of hotel. So those are -- those 2 or 3 hotels that are slated in '18, '19, '20, that would be more competitive. But in the coming couple of years, it's going to be a lot of infill-select service, which is at nearly a $60, $70, $80 delta to our rate today. And so we really do believe that we can have really solid growth coming out of that asset for the next year or 2.

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

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

Our next question comes from Michael Bellisario with Baird.

Just wanted to focus a little bit more on the revenue management strategies. First, on your kind of group-up strategy, what groups are coming to your hotels? And do you think this is incremental business coming to a city? Or is it really the share shift within the market that you're seeing?

I don't know if we could classify the group as anyone exact kind, but these are -- they're typical groups on the leisure side. There's a lot of local kind of social-related business. They might be in town for weddings or events somewhere that they are looking for a hotel that's a little more in the neighborhood or value-oriented, or whatever the price case might be. There's corporate group business that's, as you'd imagined, just corporate meetings-related business, training-related business. And then there's some -- there's government group business as well that we actively pursue, particularly in New York. But it's what you would imagine.

And do you think that's incremental business coming to a particular city? Or is it really just you taking group market share within a said market or market?

I think we're taking market share for that. This is business that is coming to a city for Manhattan. There's 100,000 visitors coming every day and -- or 100,000 folks to stay in hotels. And we're just -- we're choosing to take them at our hotel instead of them going somewhere else.

And Mike, I think that's reflective of when you look at our New York portfolio in Q1, we ran occupancies around 88%. So it's 1,000 basis points better than what the market did in the first quarter. So it's really us taking share from others.

Got it. That's helpful. And then on that same topic, anyway you can quantify maybe the net ADR impact by you shifting from the OTA transient business to the non-OTA group business and how that might impact the bottom line or your net ADR?

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

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

Got it. And just one more for you, Jay. You mentioned that corporate group and L&R comments about them taking rate. Any particular markets showing more strength? And then is -- what industries are willing to take increased rates that we've heard so much about price-sensitive corporations and business travelers? It seems that your numbers are bucking the trend a little bit?

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

Our next question is from Bill Crow with Raymond James.

You mentioned that you thought Miami may have hit had bottom or bounced up, bottom up. I'm just curious we're hearing that maybe Brazil has also bounced off the bottom economically. And I am wondering how much of what you're seeing in Miami has to do with inbound international traveler, whether that's European or South American.

I think that's definitely a part of it. There has been stabilization in Brazil. There's -- in some level of stabilization in Argentina. And so that is a benefit to the market. We can't -- we haven't seen -- on the European side, we continue to see -- and I think we mentioned this last call was there's clearly been a drop off from the U.K. all over the country, I think most meaningful actually, even on the West Coast. But all over the country, we've seen a big drop off from the U.K. In Miami, we've seen some real significant gains from Northern European countries. So Netherlands, Germany continues to travel. But we've seen a lot of countries from other parts of Europe that weren't growing. We've had some -- our first flights to South Florida from Asia, actually through the Middle East, but really accessing a lot of the Asian business, that has been some growth on the international side. But I think the bigger driver of the firming of the marketplace really is international is getting better, but it's the Zika being a little bit further removed. We still have an impact from it. Weddings aren't being scheduled. Certain meetings planners are still hesitant to book there. But now, it is 6, 8 months in the past and there's been a lot of other news to take the media's attention. And so I think we do see less impact from Zika as this year has gone on and that will hopefully continue. The convention center is going to be still under renovation, we think, really through most of even next year. But our hope was first quarter, second quarter. At this stage, we're starting to assume that it may be even later than that. And so we're not counting on the convention center, but in Miami Beach, there was a lot of new supply in '15 and '16, so that's also been absorbed a little bit more. So I think it's all of those factors. I wouldn't put it all on international, but that's a piece of it.

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

Yes, yes, that's why we remain cautious about Miami. We've just -- we've shared that we do see some real firming and some better demand fundamentals in Miami in the short term, but Zika and this convention center being closed are still significant risks out there. On Zika, in particular, yes, the summers when we will see what happens. Overall, the federal, state and local authorities have been really focused on it through the off-season in Miami with prevention programs as well as some new technology that are being used to more quickly intervene if there is an issue. In the end, there was never a widespread transmission. It was a small -- what they call a small case cluster. And that led to this much kind of noise. We think that if government -- if the authorities are ready to intervene sooner, which they are, more hotels and more just local real estate owners are putting in prevention programs around the property. We are hopeful that this will be a much less of an issue. But you never know. Just maybe to give you a little bit of color on kind of why we're feeling more confident. In our portfolio itself, we were down in South Florida in January by nearly 20%. That got by February, we were down to 8% down. And by March, we were down 4%. April is looking pretty good right now, looking good like flat to maybe positive, even. And so that's what's giving us some confidence. But your point is well taken, which is we can't -- we're not out of the woods yet. And we'll see as the summer develops.

The last question comes from Chris Woronka with Deutsche Bank.

Want to ask about your remaining independent properties and if there's any incremental thought to maybe soft branding some of those. And the genesis of the question is really, I suppose, in certain submarkets, you might be aware of other competing independent hotels, that they might be considering going soft brand and at some point, you lose that option if you wanted it. So any thoughts there?

Yes. We're always -- we always do consider it. As you know, we do have a lot of soft prints in our portfolio. But at this point, for the hotels that we have in our portfolio that are independent, we do not have plans to soft brand any of them today. Our independent hotels today are -- they hold special-enough locations, kind of A locations, prominent, visible, the hotels that already have a loyal base of customers and have some reputation to continue to draw new ones. And the economics of adding a distribution channel, like a soft brand, are questionable when you have a very successful hotel as it is. It's just the economics of paying fees and then starting to open up your hotel redemption policies and around frequent stay programs. It's just hard to make the numbers work for some of our independent hotels. As you know, our independent hotels are smaller. We're kind of generally less than 200 rooms, many of them less than 150 rooms. And our independent hotels are big performers. I don't have the data with here with me, but I remember we mentioned on the call last time, it was -- our independents, I think, have a 10%, 12% kind of rate premium -- or RevPAR premium to the rest of our portfolio and a 600 basis point margin premium to our portfolio. And so these are hotels that are hitting on all cylinders. And we do not feel susceptible to soft brand competition in most of those cases. But we continue to look at it, we'll review it and they're all built to great institutional-grade standards, so they could all be soft branded or hard branded for that matter with 4-plus star kind of brands.

Great. That's helpful. Just a question on the -- I guess, on your -- how you're looking at the Manhattan supply picture and maybe it's a question of how you're -- if you're defining competitive supply or overall supply. I mean, I know with the Waldorf coming out, that's a big number, but there's also a lot of, I guess, what we call, upscale branded product coming in. So -- in your -- I think you said 3.4% was your -- or something -- 4% maybe was your estimate for the year. Is that competitive supply? Or is that your overall Manhattan market view?

That's overall Manhattan. And our view is that 3.2% supply growth in Manhattan in 2017. The 4% was the past several years. The past several years has been kind of a 5% CAGR. If you take the last 5 years, it was a 4-plus percent CAGR. And this year, we're down to 3%. That does net out the Waldorf for sure. But otherwise, it is all Manhattan supply. Just relative to the consultants or the brand pipeline reports, ours is based on reviewing construction underway and actual visible site work and our estimates on opening.

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

No. There is not key money involved in either of those. We didn't focus on it tremendously, really. We've often found that key money is small dollars and it comes with a big commitment. It's usually much longer agreements. Often, they come with requirements of management and things. And so we don't believe that, that was something that would have been meaningful for our renovations. The one at the Cadillac, we're going from a Courtyard to an Autograph. We feel great about the ROI potential on that deal. We think of it as a 20% IRR on the capital that we're going to invest there. And it will go to a soft brand with Autograph. And our Ritz-Carlton in Coconut Grove, a lot of our renovation dollars there going into the restaurant where we're going to be bringing in an outside operator -- outside of Ritz to run the restaurant and bar. And so that's the case where it would be very difficult to them to justify providing key money for that kind of transaction.

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

And this concludes our question-and-answer session. I would now like to turn the call back over to Neil Shah for any additional closing remarks.

Well, thank you very much. Our team will be here in the office if we're going to answer any further questions. But we appreciate your time on the call and your support. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.