Pebblebrook Hotel Trust (PEB) 2010 Q4 法說會逐字稿

Good day and welcome to the Pebblebrook Hotel Trust fourth-quarter and year-end earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead, sir.

Thanks, Michelle. Thank you, operator. Good morning, everyone, and welcome to the Pebblebrook Hotel Trust fourth-quarter and year-end 2010 earnings web call and webcast. Here with me today is Jon Bortz, our Chairman and Chief Executive Officer.

In addition to providing the key financial results for the fourth quarter and full year, we will review the acquisition to be completed during the quarter in addition to our most recent acquisition, the Argonaut Hotel, which we announced just last week. Finally, we will provide the current 2011 outlook for the industry and briefly discuss the acquisition market in general.

But before we begin, I would first like to make the following remarks. Any statement that we make today are about future results or performance or plans and objectives and are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties over which the Company may have no control.

Factors that may cause actual results to differ materially are discussed in the Company's 10-K for 2010 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, www.pebblebrookhotels.com and our most recent 8-K and yesterday's press release include reconciliations of non-GAAP measures such as funds from operations. Now, let's get started.

The Company's 2010 adjusted funds from operations or adjusted FFO was $7.3 million or $0.25 per diluted share. Our 2010 adjusted EBITDA was $8.9 million or $0.31 per diluted share.

Both our adjusted EBITDA and adjusted FFO excluded $6.6 million of acquisition costs, $1.6 million of non-cash amortization of IPO-related (inaudible) and $70,000 related to non-cash ground lease amortization.

Pro forma RevPar for the total portfolio increased 1.9% in 2010 to $123.43. The gain was primarily a result of an increase in pro forma occupancy of 3.2% to 73.5%.

Pro forma ADR declined 1.3% to $167.99. Our hotel EBITDA generated $36 million of pro forma hotel EBITDA in 2010 which was down 0.9% over the prior year pro forma hotel EBITDA of $36.3 million.

Our pro forma hotel EBITDA margin was 21.9% for the full year 2010, a decrease of 80 basis points over the prior year. All pro forma operating data excludes The Grand Minneapolis.

In addition, the outlook we provided during our third-quarter conference call and press release did not assume the acquisitions of the Sheraton Delfina or the Sofitel Philadelphia. Excluding the impact of these two acquisitions, our financial and operating results were in line with our previous outlook.

Fourth-quarter 2010 adjusted FFO was $3.8 million or $0.10 per diluted share. Adjusted EBITDA for the quarter was $4.9 million while the adjusted EBITDA and adjusted FFO exclude $1.8 million of acquisition costs, $0.4 million of non-cash amortization of IPO-related (inaudible) and approximately $70,000 related to non-cash amortization of ground lease expenses.

The $1.8 million of acquisition related expenses were approximately $1.4 million higher than the outlook we provided during our last quarterly conference call since our prior outlook did not include the costs associated with the Sheraton Delfina and the Sofitel Philadelphia acquisitions. Excluding these expenses, our results were in line with our prior outlook.

Pro forma RevPar for the total portfolio increased 2.7% in the fourth quarter 2010 to $118.35. Pro forma occupancy was flat at 68.2% and pro forma ADR decreased 2.7% to $173.52 from the fourth quarter of 2009.

Our operating results were partly impacted by the renovation that we commenced during the fourth quarter at the DoubleTree by Hilton Bethesda - Washington, DC. And due to the significant noise from the garage improvements, we elected not to book group business at the hotel after November.

Our hotel portfolio generated $8.6 million of pro forma hotel EBITDA in 2010, a decline of 6.6%. Pro forma hotel EBITDA margin was 20.9% for the fourth quarter of 2010 which is a decrease of 235 basis points while pro forma operating data excludes the Grand Hotel Minneapolis.

Our capital markets activities in the fourth quarter included originating three new loans during the fourth quarter, two of which actually closed just last month. We secured a 4.88% fixed rate $52.5 million loan on the InterContinental Buckhead, a 5.44% fixed rate $31 million loan on the Skamania Lodge and a 5.28% fixed rate $36 million loan on the DoubleTree by Hilton Bethesda - Washington, DC.

Each of these loans is non-recourse and has a five-year term. In addition, as part of the Sofitel acquisition, we were able to assume and extend a non-recourse $56.1 million floating rate loan which has a current interest rate of 1.5%. The loan matures in February 2012 and is forecasted to save us about $2 million or $6500 per room due to a very attractive interest rate.

Following the closing of these financings and the acquisition of the Hotel Argonaut last week, we assumed $42 million of debt as part of the acquisition. We currently have $252.6 million of debt on our balance sheet at an average interest rate of 4.51%. We have approximately $240 million of cash and cash equivalents on our balance sheet and nothing drawn on our $150 million credit facility.

With our existing cash and low leverage, we believe we are well positioned to take advantage of acquisition opportunities as they become available. We currently estimate we have between $300 million and $350 million of additional acquisition capacity.

And I also wanted to mention that in December of 2010, we instituted a quarterly dividend of $0.12 per share to our common shareholders. This is well ahead of our expectations and was due to the more rapid execution of our investment strategy.

I would now like to turn the call over to Jon to discuss the recently completed quarter as well as our outlook for 2011. Jon?

Thanks, Ray. Good morning, everyone, and thanks for joining us today.

As Ray mentioned, during 2010 we made a lot of progress building a high-quality portfolio of hotels located in high barrier-to-entry urban and drive-to resort markets and we've accomplished this over a relatively short period of time. Since our initial public offering in December 2009, we've acquired nine hotels totaling $700 million.

This was well ahead of expectations we outlined during our IPO process and was a result of a more rapid ramp-up in the number of acquisition opportunities in our targeted markets as well as our ability to successfully execute on both marketed and off-market opportunities. Many hotel owners continue to be faced with significant problems including non-refinanceable debt maturities and capital needs.

And lenders and special servicers are only just beginning to make some headway in addressing these problems. As a result, as each month passes, we have seen an increase in the number of high-quality acquisition opportunities in our targeted markets and believe we will be very active on the acquisition front in 2011.

Now let me spend a few minutes discussing our three most recent acquisitions. In November, we acquired the 310-room Sheraton Delfina for $102.8 million or about $330,000 per key.

This upper upscale property is no ordinary Sheraton. When it became a Sheraton six years ago, it was renovated in a high design boutique style.

It is located in the highly desirable high barrier-to-entry Santa Monica market which is a year-round hotel market and one that has exhibited double-digit RevPar growth in prior recovery cycles. The hotel features over 10,000 square feet of meeting space and has a 4500 square foot ballroom on the top floor with views of both Santa Monica and the Pacific Ocean.

The hotel performs extremely well. It ran an occupancy rate of 87% in 2010 and it continues to be managed by the Viceroy Hotel Group which is headquartered in Santa Monica.

We expect significant growth in ADR at the hotel with the property's primary market competitors already averaging 80% plus year-round occupancy and the market's strong base of corporate and leisure travelers recovering. We also expect the $8 million guest room refurbishment that will commence at the end of 2011 will enhance the property's competitive position, its operating performance and its value.

In December, we acquired the 306-room upper upscale Sofitel Philadelphia hotel for $87 million or $284,000 per key for an estimated 30 to 35% discount to replacement costs. The hotel is a high style luxury quality physical property with over 15,000 square feet of meeting space.

It was created in 2000 as a hotel out of the former Philadelphia Stock Exchange building and an addition that was built at the same time. It is located in downtown Philadelphia at the corner of 17th and Walnut, two blocks from Rittenhouse Square.

It is a terrific location in the heart of Philadelphia which is a city that continues to benefit from its Northeast corridor location between New York City and Washington, DC; from its strong and growing university and medical institutions, it's live-work-play environment; and from its significant business, leisure, entertainment and tourist attractions. Philadelphia's lodging market should also see a significant lift from the expansion of the Philadelphia Convention Center which is currently increasing its meeting and exhibit space by over 60% with completion expected in the second half of this year.

We see substantial operating upside at the Sofitel through the implementation of best practices and active asset management. And although the hotel's had a consistent track record of achieving more than 100% of its RevPar market share, it lost over 6 points of share in 2010. We believe we should be able to recover this lost share with revised strategies and tactics.

Last week, we acquired the 252-room upper upscale Argonaut Hotel for $84 million or $333,000 per room. This hotel is truly special.

It was converted in 2003 out of a historic building originally built in 1907 and it's now a national historic landmark. It's located in San Francisco in the Fisherman's Wharf area which is an area well-known around the world.

The Argonaut sits adjacent to San Francisco Bay and features views of Alcatraz, the Golden Gate Bridge and the Transamerica Pyramid building. Due to the hotel's historical significance, it houses the San Francisco Maritime Park Visitor Center.

The property has over 8000 square feet of meeting space, including a 4200 square-foot ballroom. The hotel also features the Blue Mermaid Chowder House and Bar as well as retail outlets for Starbucks, Ben & Jerry's, Blazing Saddles bike rentals and tours, and a Winery Collective tasting room. Kimpton Hotels & Restaurants continue to manage the hotel.

The Argonaut is the market leader in the Fisherman's Wharf hotel market and should continue to benefit from strong expected increases in ADR due to the high occupancies that already exist in the submarket. The hotel ran 87% occupancy in 2010 with an ADR of $185, and we estimate a first year cash yield after a 4% [FF&E] reserve of 5% to 5.6%.

In addition, the San Francisco market and Fisherman's Wharf in particular should benefit in 2012 and 2013 from the recent announcement that the 2013 Americas Cup will be held in San Francisco Bay with the headquarters for the July through September event just several blocks away. I would now like to turn briefly to our 2011 outlook for the hotel industry.

2011 is shaping up to be a very good year fundamentally for the hotel industry in the US. Hotel supply growth will likely be less than 1% in 2011 and we expect supply growth to remain at low levels for the next several years.

We expect hotel demand will continue to recover due to the gradual improvement in overall economic fundamentals with corporate profits at all-time highs, companies beginning to hire again, consumer confidence growing and a weak dollar encouraging more foreign travel to the US. We anticipate that corporate [trending in travel] which saw a significant rebound in 2010 will continue to improve throughout 2011.

But demand growth in the year will also benefit a recovery in group travel as companies continue to lessen their travel restrictions for conferences and conventions and reinstate many in-house training, planning, sales, cultural and incentive meetings. Not only should we see an increase in the overall number of meetings, but we expect the number of people attending meetings and their length of stay to increase as well.

Overall, we expect industry demand to increase 3 to 4% in 2011 following an unexpectedly strong 7.7% growth in demand in 2010. We are forecasting healthy ADR gains for the industry in the 4 to 5% range primarily as a result of the continued recovery in corporate travel.

This improvement in ADR is a result of both real pricing power and an improvement in the mix of our customers with growth from corporate travel coupled with less discounting and less business from the online travel distributors.

Combined, we expect 2011 industrywide RevPar growth to be between 6% and 8% with urban markets continuing to outperform suburban markets. We expect 60% to 70% of this RevPar gain to be driven by rate increases which should help offset the return of certain operating expenses that were reduced or deferred in 2009 and 2010.

As it relates to our portfolio, which is predominantly in the high barrier-to-entry urban locations, we expect RevPar to increase between 6 and 8% with most most of this RevPar growth coming from increases in ADR. This is despite the negative impact from several major renovations and repositionings underway in the first half of this year including the Sir Francis Drake in San Francisco, The Minneapolis Grand and the DoubleTree by Hilton Bethesda hotel.

As a result, we expect that our RevPar growth will underperform the industry during the first half of the year, but the renovations will allow us to outperform during the second half. To give you a sense of the impact from these reinvestment programs, we expect portfolio RevPar gains of 4 to 6% during the first half of the year, increasing to 8 to 10% during the second half of the year.

Overall, we continue to be very encouraged by the performance of the hotels we've acquired to date and are very optimistic that we will be able to enhance revenues and reduce expenses as we actively asset manage our properties and implement our best practices through cooperation with our operators. We look forward to a terrific 2011 and beyond.

That completes our remarks. We would now be happy to take your questions. Operator?

(Operator Instructions) David Loeb, Baird.

Ray, just a quick clarification. If I heard you right, you said you have $300 million to $350 million of acquisition capacity.

It seems like you have closer to $500 million of cash and availability under the line of credit plus some unencumbered assets and really very, very strong credit statistics today. How do you get that number and how do you look at capacity?

Well in general, a couple of things. One is we look at our -- overall our debt placement and our capital structure. We look at our -- given our current balance sheet, we have about $700 million of equity we believe on -- where we want to place debt. That's about in the $300 million to $350 million range of debt of which we have about $250 million outstanding today.

And then in addition to that, we have $240 million of cash. So that's the range. We want to operate at a conservative lending level. Certainly we could borrow more and we will certainly evaluate that, but right now, that's the range at which we're operating the Company.

I guess I get that, but deploying equity, deploying the cash would give you more cash flow. I guess you're not really looking at that. You're looking at equity relative to debt. Is that a fair way to characterize that?

Yes.

Yes, David, we're looking at an overall leverage level of running the Company between 30% and 40%.

Right, not relative to cost, but relative to total capital?

Correct.

So the cash you have is in the total capital number, right? Because essentially you're saying that cash was backed by the equity?

Well think of it this way. You have got $700 million of common equity that we've raised, but $300 million of total debt gets us to about $1 billion to [$1.050 billion] of total invested capital and running the business at let's call it 35% leverage is about $350 million of debt.

Okay, that makes sense.

The other thing I would mention is, and we've we talked about this before, on top of that debt, we believe in placing ultimately somewhere between 10% and 15% perpetual preferred. That gives us a little additional leverage on top of our common equity without the risks that come along with debt.

No covenants related to the perpetual, no maturity related to the perpetual. So if we were to do a perpetual raise at some point this year, that would give us additional acquisition capacity on top of the 300 to 350 that Ray mentioned.

That makes sense also. It's still very conservative, but I hear where you're coming from.

Yes, and I think conservative is appropriate. It's important for folks to understand -- yes, it looks like we are early in the cycle, but we don't know how long the cycle will last and we certainly learned that we don't understand all the risks in the world. And clearly things like what are going on in the Middle East right now indicate -- and I doubt that this was on a lot of folks' radar six months ago or a year ago -- about how disruptive it could be to the global economy.

Quite a fair point. Great, thank you for your help.

Jim Sullivan, Cowen and Company.

Jon, I'm curious about how you look at the Santa Monica market, particularly of course the Delfina asset where you're -- I guess when you're finished with the investment there, it will probably be the biggest investment in the portfolio. Question, in your bullish view for the second half for the portfolio relative to the industry as a whole, there is going to be some disruption at the Delfina in the second half. I just wondered when that work is going to start and when you expect it to be finished.

Yes, Jim, the work won't start until late in the year, probably after Thanksgiving, and so its impact will be fairly limited in 2011.

Okay, and then in terms of the Santa Monica market, with your investment when you're finished with the Delfina, as I said, that would be the largest investment I think in the portfolio, and I'm curious what your appetite would be to look at other assets in our market. There have been one or two assets that are I guess currently in the market sizable transactions. Would you have an appetite to add to that, the Santa Monica market?

Yes, I think we would. We view the Santa Monica market as one of the best in the United States. Its barriers to entry are extremely high.

It's very, very difficult to get any new development approved or built in land -- what little land is there has historically traded when it has treated at very, very high prices per billable square foot. So yes, we wouldn't look at the concentration issue based upon our current size of the portfolio. We would be looking at concentration in Santa Monica or any other market that we're focused on more as a much larger company, $2 billion plus, if you will.

Okay and then in connection again with that asset, it currently is franchised -- it's a franchise share in product. Given the occupancy rates in the market and I guess there's only a couple years left in that franchise agreement, maybe you could share with us your thoughts for whether you're going to continue at that franchise or what you would -- or is it likely that you'll terminate that?

Yes, there's about three years left on the franchise. We do have a termination at will right with a payment of a certain level of fees which would be affordable.

Right now our plan is to keep it as a Sheraton. We will evaluate how it does. We'll see whether it's a limiting factor in the marketplace from a rate or a catering and banquets perspective, understand where the opportunity might be without the flag down the road.

Certainly Santa Monica is a market that there are many independent hotels that do very well in the marketplace. And so it will be a financial decision that we make and we've got plenty of time to make it.

Okay, and then final question for me, Jon, in terms of the acquisition opportunities, maybe you could give us an update on where pricing is trending and what you are seeing in terms of the assets that have been in special servicing.

Sure, well pricing on a per-room basis continues to increase as operating fundamentals continue to improve. We haven't really seen a change in average yields in the markets or first-year yields from what we were expecting a year ago.

Clearly again the per-key numbers are higher because the underlying operating fundamentals were surprisingly better in 2010 and the outlook for 2011 is significantly higher than what one would have thought six or 12 months ago. But the average cash yields, the unlevered internal rates of return continue to be attractive at this point in the cycle.

We continue to be able to find assets that meet our criteria with significant discounts to replacement cost. And I would also add that in that my career, I have never seen this many high-quality assets in major targeted markets available on the market at any point in time.

And so the problem that owners have are certainly bringing assets to the market, and we do expect to continue to see that increase over the course of the year. And as it relates to the special servicers, we're just beginning to see some assets of quality come out of the special servicers and we would expect that to continue to increase over the year into 2012 and perhaps even into 2013.

(Operator Instructions) Mike Salinsky, RBC Capital Markets.

First question in terms of -- I think you were just talking about the acquisition market and special servicers. Just curious if you still think 10% to 11% unlevered IRRs are still achievable and you are seeing transactions (inaudible)

Yes, we are still underwriting and able to achieve unlevered IRRs between 10% and 12%. We are still able to do that with assumptions that include RevPar CAGRs that are below prior recovery CAGRs and we are still able to do that without underwriting asset management improvements, and we are still able to do that with higher cap rates and effectively more mid-market cap rates on a back-end sale assumption in calculating those unlevered internal rates of return.

Okay, that's helpful. Second in terms of the [ten-year up] over the past couple of months here, have you guys have seen any upward movement in cap rates to this point?

No.

Okay, third, can you talk about your group bookings for 2011 across your portfolio, how much rate, how much occupancy, and also corporate negotiator rates and how much you're expecting growth in those?

Sure, yes, here's where we are from a pace perspective at the end of January. Group room nights on the books are up 1.1%. Rate is up 3% and revenue is up 4.4%.

Transient, and I think this is pretty interesting and it is a reflection of the higher occupancy levels we have in our portfolio and the fact that we have a number of properties that are actually trying to reduce group as opposed to increase group within the portfolio, but transient rooms on the books are up 9.1%, rate is up 7.9% and revenue is up 18.5%. So when you look at all the business on the books on a combined basis for 2011 at the end of January, room nights on the books are up 4%, rate is up 5.1% and revenue is up 9.3%.

That's encouraging. Third --

You want me to answer the corporate rate question?

Yes, if you would.

I think what we have seen through the portfolio, and I suspect is probably pretty consistent from what we understand through the industry, but for a New York market or a DC market or some select assets or submarkets, but generally I think we have seen 3 to 5% increases in corporate rates. We have seen adjustments other ways though.

We have seen accounts where we have eliminated LRA, last room availability. We have seen situations where we have eliminated either free breakfast or free Internet in the market, and so it's hard just to look at the corporate rate as an indication of the overall pricing power in the marketplace.

But I think 3 to 5 is kind of where the market generally ended up, and I think that is actually pretty encouraging given our ability to raise our bar rates and take advantage of compression as occupancy comes back particularly in midweek in the major markets.

That's helpful. Third, a question for Ray. What were the LTEs on the new loans signed in the fourth quarter and first quarter?

That average -- well, look at it loan to cost. Right now it's in the low 50s of the ones that we put mortgages on. What we've seen over -- within the baking sector through the fourth quarter, that was typically loan-to-values on the cost in the 50 to 60% range and I think that has moved up a little bit over the last 90 days.

Now also the interest rates and swaps have also increased. So although maybe spreads on new mortgages are getting narrowed a little bit, the increase in overall interest rates are -- I think it's not really a one for one trade. So we think right now the interest rates probably on mortgages out there if we were to do additional loans is probably still in the 5 to 5.5% range, although we would probably get a little more loan-to-value perhaps now but it still has to be a major urban market.

And, Mike, I think the other thing to mention there is we could have done loans higher than that level that we did. I mean we might've been able to get anywhere from 5 to 8 or 10% higher proceeds, but the cost of those incremental dollars was high single digits to low double digits on a marginal basis.

So the additional leverage is there up to today probably 60% for high-quality assets in major markets with strong sponsorship. But the incremental proceeds or higher leverage is expensive. And once you get from away from the major markets, high-quality assets, and you get into suburban markets, secondary markets, certainly tertiary markets, weaker sponsorship, not only do the terms change dramatically, in many cases there isn't financing available.

And, Mike, also it's not just loan to cost we're looking at if you look at the 50% to 60% range we are talking about. That's one factor for the lenders.

The others, they're still focused on debt yield. We have seen debt yield come down from where it was a year ago.

We are looking at probably a 13% to 15% range back into summer. Now we're hearing quoting in the 11% to 13% range again in major markets. So even though they may say a 50% or 60% loan to value, in reality [you still only have] that debt yield of 11% to 13% which brings you down to the lower level that Jon mentioned.

That's all for me, guys, I'll yield the floor here. Thanks.

Shaun Kelley, Bank of America.

Just wanted to ask a question on the margin front actually. If you look at the portfolio today as it is constructed, you're kind of operating in the low 20s, and I think you gave some fairly solid guidance for how you thought margins were going to look in 2011 over 2010.

But that would still only probably get you to the low to mid 20s. And as you benchmark that against, Jon, your former company in particular, could you help us think a little bit about how you might narrow that gap into the low 30s?

Because if we look at the occupancy that you are already operating at today or the rate that you're already operating at today, it feels like you should be able to achieve some margins that are closer to where that company operated in the past. So just kind of wanted to think about that trajectory a little bit if you could help us out there.

Sure, a couple things I would mention. The EBITDA margin for the portfolio of the nine hotels actually the eight excluding the Grand for 2010 was 22.6% as the EBITDA margin.

That's -- the way we look at it, that's certainly -- there's a lot of opportunity to improve those margins even based upon the existing business that were in place and that is the implementation of best practices, that's active cooperative asset management. A lot of the things that we did at LaSalle over the last three or four years, at many of these properties in the portfolio, those best practices haven't been implemented, those asset management opportunities haven't been taken advantage of.

So we think there's at least a couple hundred basis points in the portfolio. As we roll through our best practices, we implement them, we make some capital investments particularly on the energy side that will have fairly quick and significant paybacks. And then the second thing I would add is you are right about the fact that the portfolio in 2010 was just under 75% occupancy. And so while there is still some occupancy opportunity in the portfolio over the next couple of years, we're really going to be driving rate in the portfolio which is also going to drive our margins.

So you would have to do the comparison as to where other companies are in the portfolio including LaSalle. It's obviously never apples to apples, but the quality of the assets, the ADRs, the occupancy levels are fairly similar and in general, they're fairly similar breakdowns between group and transient. We are about 35 to 36% group, the rest being transient.

And so there's some comparability shown, but obviously these aren't commodities and every hotel, every market, union markets are different as it might impact your margins. But there's very significant much opportunity within the portfolio as we move forward. And it's going to take us 12 to 18 months at a minimum to really roll through and implement all of the best practices to take advantage of the expense opportunities in the portfolio.

That's helpful. And just maybe one on the renovation impact because there's a lot of different things going on this year. So just -- I don't know if it's possible to quantify what you think either the RevPar or the margin impact is in 2011, but could you -- any sense of magnitude in terms of just kind of what that is doing? Because [the guide] actually looks pretty good when you factor in -- like you said, there is some -- probably going to be some ongoing disruption there.

Yes, there's about 200 basis points of impact in the first half of the year that comes from the properties. That probably represents somewhere between $700,000 and $1 million of lost revenues, and probably something on the order of $500,000 to $700,000 of EBITDA in the portfolio. These are obviously guesses in terms of what is ultimately -- what we ultimately expect to be lost.

And you do expect that to be more weighted towards the first half, right?

Yes, and within the first half, a little bit more weighted in the first quarter than the second. Although the one thing I would mention with the way the holidays fall, when you look at both the industry and our portfolio, March is going to be a pretty strong month in the industry and in our portfolio, and April is going to be a much weaker month both in the industry and in our portfolio.

That's helpful. And then I guess the last question is simply just thinking about I guess kind of the markets that you guys are looking to to purchase in, clearly you've been ahead of the curve in deploying capital early.

Is there a point -- as you kind of outlined the prospectus for the Company, you saw it -- you were looking at a little bit of a broader target than maybe what you had done at LaSalle. Could you give us a sense in terms of I mean is now the time you start looking at -- I don't know if it's suburban markets per se, but you start kind of looking at smaller places to kind of get in our world kind of a little bit more alpha and looking for opportunities that might not be as uncovered?

Because I guess what I'm seeing or hearing from a lot of your competitors is obviously buying urban core whether it's San Francisco, Chicago, New York, everyone now seems in the REIT world seems to be chasing that.

And just kind of wondering how you're thinking about the strategy. Are you willing to kind of broaden out a little bit more to get into kind of -- try and get a little bit more return as the cycle kind of works into year two here? That's it for me.

Shaun, I think our investment strategy remains the same. It's a strategy that I have overseen for the last 15 years, 17 years at this point in the industry and I think departing from the major cities in we would say top 15, 16 cities today; we probably said maybe top 20 when we went public.

So we have narrowed it very slightly and it's again probably some of the southern cities or Texas cities that might fall out of the opportunity. But we think to outperform in the long term to create the most value for our shareholders, I think sticking to our strategy is the best approach.

The other thing I would say is we continue to see a relatively small amount of true qualified competitors in the marketplace, and that is allowing us to continue to be successful in both marketed opportunities and off-market opportunities. We're not going to win every marketed opportunity and we're not going to see every off-market opportunity and there will be situations where someone in the market says I want to own that hotel whether they see something different than we do, they're willing to pay significantly more, and they may look at us the same way, that's okay. But the ability to continue to grow a very high-quality portfolio, that would take many, many years to otherwise assemble, we think the opportunity is now and we continue to believe that the opportunity to execute on the original strategy with the returns we outlined continues to exist.

(Operator Instructions) Dan Donlan, Janney Capital Markets.

Jon, could you talk a little about Atlanta and kind of how that asset is performing there in Buckhead and kind of what your expectations are for this year?

Sure, I'm going to talk about Buckhead and not Atlanta because they're two very different markets. In fact there are probably many different markets in Atlanta whether downtown or the more typical suburban assets in Perimeter and other markets down there.

But in Buckhead what we are seeing is a very, very strong recovery in corporate travel and demand. I think last year demand in Buckhead was up about 13%.

We saw very, very significant improvement from what we underwrote to what actually happened at the InterContinental. Our property outperformed by over $1 million from what we underwrote in 2010 for the year.

Some of that took place before our ownership as we were finalizing the transaction, but a lot of it took place in the second half of the year. And we think Buckhead will have a good year in 2011.

I don't think it is as dynamic as a New York or a DC, but I think it's going to continue to see strong recovery in both demand, particularly business travel, as well as rate growth which is really just beginning to kick in in the latter half of last year into 2011.

Okay, and then on your Bethesda asset, I think the Walter Reed Army Medical Center is going to be merging with the National Naval Medical Center. I think that's happening this year. Have you seen any benefit from that or when do you expect that benefit would potentially kick in?

That happens much later in 2011, and so the benefit is likely not to -- we're not likely to see significant benefit from that until at the earliest the second half of the year and perhaps late in the year.

And then lastly on kind of acquisitions, are you starting to see more private equity coming into the mix or the public REITs seem to have continued to dominate kind of the major markets. What is your sense for who you're bidding against right now and when do you expect private equity to get a little bit more aggressive going forward?

Well, I can only tell you what we have seen, and I think you see it in the transactions that are happening. I think the public REITs continued to dominate the transaction market, particularly the larger properties, the major market opportunities in the marketplace.

We would expect that to continue through the better part of the year, if not the whole year. And I think private equity, certainly the larger opportunity funds are probably more focused on portfolios or corporate opportunities or on the debt side where they're buying into stacks related to portfolios or companies that are distressed.

We really haven't other than the one or two dedicated private REITs, the private REITs dedicated to the lodging like in RLJ, we really haven't seen much private equity be competitive in the marketplace on a consistent basis. So they may be bidding. I honestly can't tell you.

We don't really focus on who all the bidders were. We really only care who gets to the final table and I can tell you that the vast majority of the time that anybody is at the final table is likely to be one of the public REITs and on an occasion or in other certainly special situations, you might see a private equity player there.

There are no further questions. I will turn the call back over to Mr. Martz for any additional or closing remarks.

Well thank you, everyone, for attending our fourth-quarter and year-end 2010 earnings call. We look forward to our next call in the first quarter and we will update you on our progress with the Company. Thank you.

That will conclude today's call. We thank you for your participation.