Pebblebrook Hotel Trust (PEB) 2009 Q4 法說會逐字稿

Good day everyone and welcome to the Pebblebrook Hotel Trust initial earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ray Martz, Chief Financial Officer.

Thank you, Mark. Good morning, everyone, and welcome to the Pebblebrook Hotel Trust first earnings call and webcast. Here with me today is Jon Bortz, our Chairman and Chief Executive Officer. In addition to briefly reviewing the financial results of our pro rated year ending December 31, 2009, we will discuss our outlook for the hotel industry for 2010 followed by an update on the acquisition market and opportunities we are seeing. We would like to spend most of our time answering questions that you may have.

Before we begin, I would first like to make the following remarks. Any statements that we make today about future results and performance, our plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties over which a company may have no control. Factors that may cause actual results to differ materially are discussed in the Company's 10-K for 2009 which we filed last night as well as other reports filed with the SEC. The Company disclaims any obligation or undertaking to update or revise any forward-looking statements. Our SEC reports as well as our press releases are available at our website at www.pebblebrookhotels.com and our most recent 8-K in yesterday's press release includes reconciliations of non-GAAP measures such as funds from operations, or FFO.

As you know, we successfully completed our initial public offering on December 14, 2009, that we legally formed on October 2, 2009, affecting our weighted average shares outstanding. We reported net loss and negative FFO of $147,000 for the period of October 2, 2009, through December 31, 2009. Since we did not own any properties, our income statement consisted primarily of interest income totaling $115,000. This was generated by net offering proceeds of $389.1 million which were invested in cash and cash equivalents and interest bearing short-term investments following the completion of our IPO on December 14 through the end of the year. This translates into a weighted average yield of approximately 77 basis points for this period.

Our expenses for the year consisted primarily of post IPO general and administrative expenses such as payroll, non-cash amortization of our LTIP units and audit fees. We incurred $184,000 in cash, G&A expenses for the period, and $79,000 of non-cash expenses associated with the amortization of our LTIP units.

Now turning to our balance sheet, we had total assets of $389.4 million at December 31 and, of course, no debt. Assets consisted entirely of cash, cash equivalents, and short-term interest bearing investments. In 2010, we are forecasting our cash, corporate general and administrative expenses to be between $5 million and $5.5 million. In addition, we expect non-cash corporate, general administrative expenses to be between $2.1 million and $2.4 million and this includes primarily restricted stock and LTIP amortization. For 2010 we are expecting our total weighted average shares outstanding to be 20.3 million, and this assumes no additional common shares issued or LTIP units converted into common shares. I would new like to turn the call over to Jon to discuss our outlook for 2010. Jon.

Thanks, Ray. First, I would like to thank all of our investors for joining us on the call this morning. We appreciate the supporting confidence that you have shown in our management team and, of course, we wouldn't exist today without your trust and your faith.

Not much has changed in our view of our opportunities since the road show. As we discussed with you then, we continue to believe it is likely that we will see an increasing number of purchase and sale transactions in the lodging industry over the course of the year and we expect to participate. The enormous problems facing our industry created by bubble prices, significant overleverage, and dramatically reduced cash flows have not gone away. While the economy has begun to recover and lodging trends are less bad, 2010 will still be a challenging year for lodging industry. We believe unemployment will remain stubbornly high throughout the year and consumer spending will remain relatively restrained.

Consumer confidence has risen from very low levels but remains relatively weak and while corporate profits have begun to grow begin and businesses have begun traveling more, they do remain cautious. Nevertheless, we are relatively positive about demand recovery and demand growth in 2010. We believe that demand will bounce back significantly from the unprecedented drops experienced in late 2008 and all of 2009. In particular, we see a healthy rebound in corporate trends in travel under way while group volume is likely to struggle to grow much in 2010. Many corporations continue to limit the number of meetings, the number of people attending meetings and conventions as well as their length of stay, fairly typical for this point in an economic recovery.

Pricing power and average daily rate remain the big hurdles to overcome in 2010. At such low current occupancy levels, rooms and meeting space remain readily available everywhere leading to continuing price competition. While this pressure will likely abate somewhat over the course of the year, it will continue to be a drag on the recovery of RevPAR in 2010. Overall, we expect demand for rooms to increase 3% to 5% from 2009 levels offset by a supply increase of roughly 2%. On the rate side, we expect a decline in ADR of 2% to 4% pressured mostly by lower group rates and continuing leisure price sensitivity. Combined, we expect RevPAR to be somewhere between flat and down 2% in 2010 for the US industry. We believe US urban is likely to outperform the industry by 100 to 200 basis points driven by a rebound in business trends and travel.

With RevPAR flat to down and expenses likely to increase in 2010, most hotels will struggle with declining operating fundamentals and cash flows. As a result, we expect owners and lenders to continue to be challenged. So far this year we have seen a meaningful increase in the number of potential acquisition opportunities from brokers and distressed owners as well as bank controlled assets and we continue to be encouraged by the number of conversations we are having with potential sellers. Of course, it doesn't mean these conversations will necessarily lead to transactions for us or others, but we continue to believe there will be a growing number of transactions as the year progresses.

Regarding acquisition pricing, we believe pricing has moved slightly more than we thought it would in the last 90 to 120 days, reflecting a more pronounced improving outlook in both the economy and lodging industry. Our forecast for industry RevPAR for 2010 has improved by more than 100 basis points and we believe GDP is likely to grow 3.5% to 4% in 2010, both are higher than we thought three to four months ago. Pricing remains attractive and we continue to believe we will acquire hotels at 30% to 50% discounts to replacement costs with very attractive long-term returns. We remain confident that we will be successful with our fair share of acquisitions and we are encouraged by the recent trends in potential acquisition opportunities. I want to thank you again for investing with us and for your continued support. That completes our brief remarks and Ray and I would be very pleased to address any questions that you may have. Operator.

Thank you. (Operator Instructions). Our first question today will come from Michael Salinsky from RBC Capital Markets.

Morning, John, Ray.

Morning.

First, talking about opportunities in the market here. I think on the road show you guys talked about late 2Q, early 3Q in terms of proceed deployment. Is that something you are still looking at and feel pretty confident with at this point?

Yes, Mike. What we said is we think that's a rational set of expectations for both us and for the investment community. And I would reconfirm those. I think those still remain realistic expectations.

Okay. You said a meaningful increase to quote your words there, in terms of the pipeline. Can you put any numbers behind that in terms of how much you are kind of looking at at this point, and also just be curious as to the state of the assets that you are looking at at this point, whether they're cash flowing and whether you are seeing really good opportunities entering the pipeline. Several of your peers have mentioned that still the majority of stuff they're see is non-cash flowing assets or assets being significant CapEx to bring up the standard at this point.

Yes, I think that -- well, a significant increase comes off of obviously very low levels of activity last year. To put a number on it, I think what you will probably see over the course of the next three to six months is I would say you are probably likely to see 10 to 20 transactions in the industry in sort of the full service category. Some of those will be assets that fit our criteria both from quality and geographic criteria perspective and some of those will be suburban assets or in secondary markets that we wouldn't have an interest in.

I think in terms of the asset that is we are seeing, I would say that the majority of them are assets that are cash flowing. There are some markets that are more particularly challenged, like New York and San Francisco, from a cash flow perspective, and some luxury resorts and some properties in Hawaii that are cash flow challenged. I would say the bulk of the other markets in the US still support cash flow assets in the urban environments even though they're at much reduced levels.

Okay. Finally, just a question for Ray there. Can you give us an update of where you stand on the credit facility? And also what you are seeing in the debt markets right now?

Sure. As we discussed on the road show, we anticipate having discussions with the credit facility with our bank group and our bank relationships and we continue to have the discussion. We just want to make sure as we balance out there has been an improvement in the banking environment over the last 90 days, and we are weighing that improvement with a line versus other opportunities on the debt financing side, but we continue work and have discussions and whatever point we have a facility in place, we will certainly announce that.

Thank you.

Our next question will come from [Sean Kelly], Bank of America/Merrill Lynch.

Hi. Good morning, guys. Just wanted to ask a little more about valuation, Jon. Can you just give us a little bit of thought, if the pricing environment has moved up a little bit more than you kind of originally expected, how does that impact your kind of IRR threshold and how should we think about that?

Sure. I think what we talked about on the road show was an IRR, unlevered IRR hurdle rates we expect to be able to achieve in the 10% to 12% range, and they -- the bottom end of that is probably moved about 50 basis points. So, we think the market for good quality assets in the markets that we are looking at could be down as low as 9.5% of achievement up to still that 12% level. That sort of results in a going in yield for most markets. Again, there are some that are 0 but for most markets and most assets down also about 50 basis points from where we thought. I think, what we talked about on the road show was first year yields in the the 6% to 7.5% range and we think those are probably somewhere between 5.5% to 7% today. So those are -- that's the bulk of what -- of the differences that we have seen from the road show.

That's helpful. And would you look at I mean replacement value as the key criteria you guys are kind of thinking about at this point and would you be willing to do -- how much would you stretch that going in yield if you thought the recovery potential was there from a kind of other criteria standpoint?

We are looking at all of them, Sean, because obviously lack of cash flow suggests that there's more risk in your ability to earn your returns, some of that risk gets offset by how big the discount to replacement cost is, and so that might push us into a different area of that range that we gave for the required returns that we are looking for. But I think we said on the road show we are fully prepared to buy assets at a 0 cash flow if they are the right assets in the right markets, and those unlevered returns meet our risk adjusted return criteria which would again would push us probably in the middle to the upper end of the ranges I talked about for unlevered IRRs.

Right. I guess lastly, can you talk about the distressed versus is non-distressed inventory you are starting to see? It feels like the two headline or benchmark transactions we have seen in Washington DC and then up in Boston have been less on the distressed side of the world. So, do you think you are starting to see a pick up in those kinds of assets as buyers -- as cap rates kind of move lower and buyer's expectations for recovery have improved?

Yes. I think -- I mean I think we will continue to see all kinds of assets come to market. I think that we are seeing assets and I think you are right in categorizing both of those two. I don't think either of those were distressed. I think at least in one case they were motivated from a time perspective but I think neither of them represented distress. I think we are seeing assets that they themselves might not be in distress other than suffering these pretty dramatic declines in cash flows, but still have equity, don't have debt service issues, aren't delinquent but the owner has issues elsewhere.

And I think what a lot of owners are finding with their CMBS debt is in order to negotiate anything that's meaningful other than an extension, they really need to pay down that debt and that requires capital. So that's pushing some of these folks to deal with assets in their portfolios that might be their good assets where asset that have equity and ultimately cash in them that they can gain that cash and liquidity through a sale. So I think we are going to see all kinds. We are seeing CMBS foreclosures through the UCC process where we are beginning to work our way through the different junior positions, the equity is getting foreclosed out, the junior equity is getting foreclosed out or being forced to file for bankruptcy, and then we will ultimately see transactions that come out of most of those bankruptcies unless there's significant equity invested to pay down debt.

Thanks.

(Operator Instructions). Next we'll hear from Jeff Donnelly, Wells-Fargo.

Good morning, guys. Jon, I was curious on your outlook for demand, I think 3% to 5% growth, what is it going to take from the economy or within the industry in your view to swing you towards the upper end of that to drive demand up 5% in 2010?

I think, Jeff, we need to continue to see healthy GDP growth and we need to see some descent employment growth. We are of the opinion today if you forced us into one end of that range or the other, I would tell you we would probably select the upper end of that range but we tend to be pretty optimistic about the sustainability of this recovery. We think continuing forecasts for the economy continued to trend upwards and we get much more focused on the trend of the forecast than we do the specific data of the forecast. So, to the extent we continue to see those upward trends in forecasts and obviously those forecasts get actualized on a quarterly basis, I think we are likely to believe that demand is going to be at that upper end. I mean, a lot of what we lost was clearly not typical of a normal recession. And so we had a capital markets meltdown that really caused companies to freeze their activities and I think what we are seeing is a snap back of some of that frozen activity right now and hopefully that will continue.

I know it is not the, I guess we will call it preferred end of your forecast but it's a lower end, the 3% increase. I am a little surprised you weren't expecting more of a rate decline because that would imply, given your supply number, only about 100 basis point move in occupancy which should put us, I would say, in the top markets then at a point below where we were even after 9/11 and at that point those occupancy level, rates were still falling 4% to 5%. So I guess I would have expected you at a 3% demand growth to see RevPAR down 3%, 4%, 5% potentially. Do you think there's more rate growth here because maybe hotels cut unnecessarily far last year?

I think it probably relates more to the fact we believe the recovery in demand this year is primarily business travel, and that business travel tends to be at higher rates, and so we are getting some benefit from mix change on the transient side in particular, Jeff. So minus 4 in ADR is pretty bad. That's bottom end of our ADR forecast range. It just translates into, we could have gone flat to minus 3. We just tend to be sort of gravitating towards the upper end of both of those ranges right now, and that's why we only believe RevPAR is likely to be down 2 in sort of the worst case scenario.

Just one last question, I will let you guys go, I know you don't have a base of hotels to talk about on comp basis from 2009 to 2010, but are you able to articulate for us how dramatic you think that next shift could be? Hypothetically you said the industry was a third, a third, a third, the different major segments of demand, how you think they can move around when it comes to 2010 and 2011?

Yes. I think we could see our view on group and leisure this year is that group is probably going to be relatively flat, it could be a little up or a little down. We think leisure is probably flat to a little bit up as the upper end of the consumer base sort of begins to travel back to a little more normal levels and they can afford to, and then we think the bulk of that demand increase, that 3 to 5, is all corporate trends and so that is going to shift trends up a little bit and it is going to shift the corporate trends and higher payer guests up a bit from where they were last year, and then I think, Jeff, by 2011 we begin to see a healthy recovery in group. We had a 15% to a 20% decline in group demand last year which is obviously unprecedented and it wouldn't surprise us to see up to half of that return in 2011.

Okay. Great. Thanks, guys.

Pleasant travels, Jeff.

Thank you.

(Operator Instructions) We have no questions in queue at this time. I will turn the conference over to our host for any closing or additional remarks.

Thank you, Operator. Thanks, everyone, for listening in and we look forward to speaking with you again after the first quarter and hopefully we will have more to talk about at that time. Thank you.

That does conclude our conference call. Thank you for your participation.