Pebblebrook Hotel Trust (PEB) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Pebblebrook Hotel Trust second-quarter 2011 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Mr. Ray Martz, Chief Financial Officer. Please go ahead, sir.

Thank you, Miranda. Good morning, everyone, and welcome to the Pebblebrook Hotel Trust second-quarter earnings 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 second quarter, we will provide highlights on our activities during the quarter, our updated 2011 outlook for the industry and for Pebblebrook, and we will briefly discuss our recent acquisitions and the acquisition market in general.

But before we begin, I would first like to make the following remarks. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks or uncertainties over which the Company may have no control. Factors that may cause actual results to differ materially are disclosed in the Company's 10-K for 2010, 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 second-quarter net income to common shareholders was $1.8 million compared with a $3.8 million net loss for the prior-year period. Adjusted Funds from Operations, or adjusted FFO, increased $11.6 million or $0.23 per diluted share.

We generated adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, of $18.3 million. Both our adjusted FFO and adjusted EBITDA excluded $1.7 million of acquisition costs, $0.4 million for the non-cash amortization of our IPO-related founder LTIP grants, and $55,000 related to non-cash ground lease amortization.

Pro forma RevPAR for the total portfolio increased 6.6% to $146.97, ahead of our 2% to 4% outlook. All of our RevPAR increase was a result of increased ADR. RevPAR leaders in the quarter include the Argonaut in San Francisco, Sofitel Philadelphia, the Grand Hotel Minneapolis, the Mondrian Los Angeles, and Viceroy Miami; all generated double-digit RevPAR growth. But you should note that the Viceroy Miami and Minneapolis Grand were not included in the pro forma RevPAR for the quarter. By month, RevPAR increased 1.3% in April, 6.2% in May, and 11.9% in June.

Total pro forma hotel revenues increased 6.3% and total expenses increased 5.6%. As a result of our hotel -- hotels portfolio generated $19.5 million of pro forma hotel EBITDA during the second quarter, which represents an increase of 8.2% over the prior-year period. RevPAR and EBITDA growth would have been substantially higher but for the impact of renovations at DoubleTree Bethesda, Sir Francis Drake and Westin Gaslamp.

Year to date, RevPAR increased 7.3%, again, all of the result of increased ADR and despite all the negative renovation impact in both quarters. While revenues were up 7%, expenses rose 5.3% and hotel EBITDA was 12.8% higher.

Our pro forma hotel EBITDA margin was 27.1% for the quarter, an increase of 48 basis points over the prior year. Property and taxes at our California acquisitions took 67 basis points off margin growth alone. Year-to-date, EBITDA margin is up 123 basis points to 23.9%, with property taxes reducing margin growth by 38 basis points.

EBITDA margin growth is forecasted to accelerate dramatically in the third and fourth quarters, as evidenced by the increase in our outlook to growth of 240 to 300 basis points for the year.

Pro forma operating data for the second quarter includes all hotels we owned as of June 30, but excludes Viceroy Miami and W Boston, as we acquired these hotels during the latter half of the quarter, and the Grand Hotel in Minneapolis, because the prior-year financial results are not auditable.

Now let's turn to our capital market activities. On April 6, 2011, we generated $226.3 million net proceeds from a secondary equity offering. On June 3, we restated and amended our senior credit facility. Our facility was converted from a secured line to an unsecured line, and we increased availability on the credit facility from $150 million to $200 million, with an accordion option to increase the availability up to $400 million. We also reduced the pricing on the line and substantially improved our financial covenants.

And just after the end of the quarter, we sold 600,000 shares of our Series A preferred equity shares directly to an institutional investor, which generated net proceeds of approximately $15.1 million. As part of this reopening of our Series A preferred equity shares, we also have the ability to sell an additional 3.4 million shares of our Series A preferred equity either directly or through a marketed offering.

In the quarter, we also remained extremely active on the acquisition front, completing $870 million of new hotel investments in major gateway cities on both coasts. In the quarter, we acquired directly from Starwood the 450-room Westin Gaslamp Quarter in San Diego for $110 million, which is currently undergoing a $25 million comprehensive renovation, which will be completed by early 2012.

Next, we acquired the 189-room Hotel Monaco Seattle, which is located in the heart of downtown Seattle, for $51.2 million. Shortly thereafter, (technical difficulty)

(technical difficulty) Ladies and gentlemen, please remain on the line as we reestablish the audio for the presentation.

(music playing)

Ladies and gentlemen, once again, we are reestablishing the audio for today's conference. Please remain on the line.

(music playing)

And you have rejoined the conference. Please continue.

Thank you, and we apologize for that. We had some technical difficulties here in Bethesda.

On April 6, 2011, we raised $226.3 million in net proceeds from a secondary equity offering. On June 3, we amended and restated our senior credit facility. Our facility was converted from a secured line to an unsecured line, and we increased availability on the credit facility from $150 million to $200 million, with an accordion option to increase availability up to $400 million. We also reduced the pricing on the line and substantially improved our financial covenants.

And just after the end of the quarter, we sold 600,000 shares of our Series A preferred equity shares directly to an institutional investor, which generated net proceeds of approximately $15.1 million. As part of this reopening of our Series A preferred equity shares, we also have the ability to sell an additional 3.4 million shares of our Series A preferred equity either directly or through a marketed offering.

In the quarter, we also remained very active on the acquisition front, completing $870 million of new hotel investments in major gateway cities on both coasts. In the quarter, we acquired directly from Starwood the 450-room Westin Gaslamp Quarter in San Diego for $110 million, which is currently undergoing a $25 million comprehensive renovation which will be completed in early 2012.

Next, we acquired the 189-room Hotel Monaco Seattle, which is located in the heart of downtown Seattle, for $51.2 million.

Shortly thereafter, we acquired directly from Morgans the Mondrian Los Angeles for $137 million, which is a 237-room luxurious full-service boutique-style hotel located in West Hollywood, California, along the Sunset Strip. In late May, we acquired the 148-room Viceroy Miami, located in Brickell in downtown Miami, for $36.5 million from a group of lenders.

And on June 8, we acquired the 235-room luxury full-service W Boston for $89.5 million. The W is located in the theater district of downtown Boston, Massachusetts, and opened in late 2009. The hotel was acquired out of bankruptcy at a substantial discount to its recent development costs.

And just two days ago, we announced the acquisition of a 49% interest in a joint venture valued at $910 million with affiliates of the Denihan Hospitality Group that owns six upper upscale and luxury hotels in Manhattan. This portfolio, which we refer to as the Manhattan Collection, includes Affinia Manhattan, Affinia Shelburne, Affinia Dumont, Affinia 50, Affinia Gardens and The Benjamin, all located in midtown Manhattan.

The Manhattan Collection is comprised of 1640 guest rooms, but will be increased to 1730 guest rooms following the completion of a comprehensive renovation and reconfiguration of the Affinia Manhattan this fall. This renovation will not only significantly upgrade the positioning of the hotel, but also add 90 guest rooms.

Under Denihan's ownership, all of the Manhattan Collection hotels were renovated in a contemporary, boutique style and have been very well maintained. Each hotel boasts some of the largest guest rooms and suites in New York City, averaging 489 square feet as a portfolio.

In addition to the Affinia Manhattan expansion, we are also evaluating the opportunities to increase the guest room count at The Benjamin, Affinia 50, Dumont and Affinia Gardens. Given the estimated development costs of similar quality hotels in midtown Manhattan of more than $750,000 per room, adding rooms relatively inexpensively through a reconfiguration is a valuable potential opportunity within the Manhattan portfolio and one which we did not underwrite, but are evaluating.

To give you an example of the impact of adding 90 guest rooms to the Affinia Manhattan, this will increase the available room nights by 5.5% for the entire Manhattan Collection portfolio, or almost 33,000 additional available room nights over the course of a year. Factoring in the hotel's current occupancy and average room rate, this represents an opportunity of over $7 million of additional room revenue, clearly a very meaningful increase.

Factoring in the more than $3 million negative impact to rooms revenue in 2011 from the renovation, Affinia Manhattan offers an opportunity to increase room revenues by $10 million or more before also factoring in the positive impact of the renovation and the growth expected in the New York marketplace.

The acquisition of the Manhattan Collection includes the assumption of the Company's 49% pro rata share of $596.6 million of nonrecourse debt, which has a current floating rate of 3.4%. This debt matures in February, 2013.

For the successful closings of these acquisitions and capital market transactions, we now have $294 million of debt on our balance sheet at an average interest rate of 4.2%. This includes $42 million drawn under our $200 million unsecured credit facilities.

Including our pro rata share of the nonrecourse debt that was assumed as part of the Manhattan Collection, we have $586 million of debt compared to $1.6 billion of invested assets, or approximately 37% of investment basis before renovations and other capital investments. In addition to the $158 million currently available on our credit facility, we have eight hotels representing $650 million combined purchase prices that do not have mortgages on them.

Although we have increased our 2011 outlook for FFO, adjusted FFO, EBITDA and adjusted EBITDA to reflect the better-than-expected results of our hotel portfolio during the first half of this year and our improved outlook for the second half of the year, I would like to point out that our current 2011 outlook does not assume any additional acquisitions for the remainder of the year.

I would now like to turn the call over to Jon to provide a little color on the recently completed quarter. Jon?

Thanks, Ray. Since our last quarterly call with you, following the acquisitions Ray described, we now own or have a joint venture interest in 20 hotels located in major cities in the US, including New York City, Boston, Philadelphia, Washington DC, Miami, Sam Francisco, LA, Seattle, and San Diego, all major US gateway cities, as well as Buckhead, Bethesda, Minneapolis and our conference resort in the Columbia River Gorge.

Our portfolio now consists of 5542 rooms; almost all are upper upscale, and all but 252 rooms of the Skamania Lodge are urban hotels. Pro rating our 49% ownership of the Manhattan Collection, our room count is 4660 rooms, with both numbers including Affinia Manhattan's additional 90 rooms.

We have now invested just under $1.6 billion since our IPO. We estimate that we have acquired our portfolio of hotels at, on average, just under a 33% discount to replacement cost, a first-year underwritten average cash shield after a 4% FF&E reserve of right around 6%. And we have conservatively underwritten unlevered five-year internal rates of returns averaging over 11%. And our properties are outperforming our underwriting, a clear indication of our conservative assumptions, at least so far.

We are extremely excited about our acquisitions, not only the ones made in the last quarter, but all of them since our IPO. With the strong support of our shareholders, we have been able to take advantage of a unique time in history where we have seen a large number of high-quality hotels in major cities available for acquisition at historically attractive values and projected returns, with a relatively limited number of qualified competitors.

And the portfolio we have assembled has tremendous upside, well beyond the improvement that will come from a cyclical recovery and growth in the economy in our markets. I would now like to talk a little bit about that.

Regardless of how the industry performs and our markets perform on a go-forward basis, we believe there is very significant upside in both the top line and the bottom line in our current portfolio. First, renovations and repositionings at many of our hotels, including the DoubleTree Bethesda, Grand Minneapolis, Westin Gaslamp, Sir Francis Drake, Seattle Monaco, Sheraton Delfina and Affinia Manhattan, offer very significant growth in RevPAR beyond increases that will occur in the markets and their competitive sets.

Some of this comes from the enhancement of each property's positioning versus its competitors from renovations, and some of it comes from no longer having the negative impacts from the renovations.

So let me provide a few examples. Due to the negative effects of our renovations over the last 12 months, the DoubleTree Bethesda lost 520 basis points of RevPAR penetration, meaning it underperformed its direct competitors in the market. We lost 720 basis points of occupancy penetration, which means ADR outperformance made up for a little bit of the negative impact of the renovation.

In June, following the completion of the renovation, RevPAR penetration rose by 550 basis points, indicating a positive reaction to the renovation, since June 2011 compares to June last year, when there was no renovation underway. This is just one month, but an early positive indication, nevertheless, of the potential upside.

We experienced a similar impact at the Sir Francis Drake. Due to our renovation that commenced early this year, RevPAR penetration year-to-date for the hotel has fallen 850 basis points, with a 1440 basis point decline in relative occupancy. In June, even though the rooms portion of the renovation was not completed until mid-month, the hotel outperformed on a RevPAR basis by 300 basis points, despite losing 900 basis points of relative occupancy due to the renovation.

At the Minneapolis Grand, which we bought from the lender last September, RevPAR penetration has declined 1250 basis points year-to-date through June, and declined a massive 4200 basis points since 2008. However, as an initial very positive indication, the hotel's RevPAR increased 40.4% in June, the first month following the renovation, outperforming its competitive set by 1120 basis points.

The Affinia Manhattan, which has been under renovation since November of last year, has lost 1470 basis points of RevPAR penetration over the last 12 months and 2900 basis points since 2009. The current renovation and expansion is expected to be complete in mid-October, when the hotel should begin to substantially benefit from this very significant renovation and the additional 90 rooms.

The Westin Gaslamp, which is undergoing a comprehensive full-building renovation, has lost 1050 basis points of penetration this year and over 1700 basis points since 2006, a steady decline as a result of capital deprivation and, more recently, the negative impact from the renovation.

While the rooms renovation is now complete, the meeting space is currently under renovation and the entire ground-floor, both inside and out, will be completely torn up, reconfigured and fully rebuilt beginning in November. Upon completion at the end of next year's first quarter, this property should experience tremendous benefits and begin to regain its lost competitive performance.

All of these properties combined represent a truly large financial opportunity.

In addition to the impact from renovations, many of the hotels we have acquired have underperformed on a RevPAR basis over the last couple of years. In total, the portfolio excluding the W Boston and Viceroy Miami, which were both just opened in the last couple of years, but including the Manhattan Collection, has underperformed on a RevPAR penetration basis by a weighted average of almost 400 basis points since 2009.

This happened for many reasons, including being in foreclosure or receivership, from becoming tired due to capital deprivation or a lack of asset management or just neglect. We expect to be able to recover this lost RevPAR and more over the next two to three years.

In addition, because the W Boston and Viceroy Miami are new and not yet ramped up to stabilized performance, these hotels should continue to outperform their competitive sets over the next 12 to 18 months. Mondrian LA should also continue to benefit from a recovery in its competitive positioning on the heels of the $165,000 per room renovation previously completed by Morgans. And the Affinia Shelburne should also benefit from the $83,000 per room renovation completed by Denihan in 2009.

When we look at our margins, the EBITDA margin for the portfolio is currently extremely low for the quality and performance of the properties and the markets they are in. If you compare the EBITDA margins for the portfolio of 14 properties for 2010, excluding the Manhattan Collection, with LaSalle Hotel Properties portfolio for 2010, our portfolio EBITDA margin is over 800 basis points lower, while ADR and RevPAR are very similar.

There is a lot of opportunity here and a lot of work to do over the next several years to dramatically narrow this gap. Implementation of high-return best practices and a collaborative asset management approach that was proven in the past while I was at LaSalle is well underway here at Pebblebrook for all of the properties we have acquired.

We have a great team of experienced asset managers, and we have already identified over $5 million of potential annualized cost reductions and efficiencies that should be in place by the end of this year. That excludes the Manhattan Collection, where we believe there are also significant best practice and efficiency opportunities that we will begin to implement immediately.

As we live all of these properties over the next several years, we expect we will be able to further improve our margins significantly and narrow the gap between our low current EBITDA margins and much higher potential EBITDA margins.

Finally, as a portfolio, our EBITDA margin should benefit on an outside basis over the next few years, since we expect the vast majority of RevPAR growth on our portfolio will come from increases in average daily rates, which generate great flowthrough.

We also expect to drive further growth and create additional shareholder value through our continuing efforts on the acquisition front. While the overall number of hotel properties on the market is currently robust, there are significantly fewer properties in our markets and at the quality level we seek than there were three months ago. We don't think this is a trend, and we do expect it to reverse sometime soon, but don't expect much acquisition activity from us until this does reverse.

Now I would like to provide a little color on the second quarter, both in the industry and for our portfolio. Demand throughout the industry continued to grow strongly in the second quarter. While natural disasters abroad and global geopolitical events, including the craziness here in Washington, provided economic headwinds, transient and group travel continued to recover, allowing occupancies to increase at a very healthy rate and ADR growth to accelerate modestly during the quarter.

Industry RevPAR climbed a strong 8.1% in the quarter, driven by very healthy demand growth of 5.2%, which was higher than we expected. Supply grew just 0.7% and ADR increased 3.5%. This strong RevPAR growth in the quarter occurred despite a holiday shift that negatively impacted April.

In the quarter, we saw strong growth in business transient and high-end leisure travel, a continuing modest recovery in group travel and strong growth in international travel to our gateway cities. These trends continued in July.

As Ray described, Pebblebrook's RevPAR growth was significantly better than we expected, up 6.6% in the quarter, driven entirely by strong rate growth. Our hotels were aggressive in pushing rate for both group and transient. In the quarter, our group rates were up 5.6%, while our transient ADR was a very strong 9.3%.

RevPAR growth was negatively impacted by roughly 120 basis points due to the renovations at Westin Gaslamp, DoubleTree Bethesda and the Sir Francis Drake. Had we owned the W Boston and Viceroy Miami for the quarter and included them, portfolio RevPAR growth would have been 140 basis points higher, or at 9.2%, including the renovation impact.

As we look out into Q3 and the rest of the year, we believe that industry demand growth will remain at healthy levels, albeit not as strong as in the first half. In particular, while we previously thought demand growth would moderate more than it did in Q2, we think demand growth will moderate more meaningfully in the third quarter, primarily due to the traditional seasonal business travel slowdown in the summer months, mixed with the typical seasonal increase in summer leisure travel, which is more price-sensitive and generally has lower rates.

Based upon better-than-expected industry performance in the first half, we are raising our industry demand forecast by 100 basis points to an increase of 4% to 5% for all of 2011, with supply growing less than 1%. And we are slightly lowering by 50 basis points our ADR forecast to growth of 3.5% to 4.5%. That means our updated industry RevPAR growth forecast is now a strong 7% to 8%, up 100 basis points at the bottom of our previous range.

For our portfolio of 20 properties, we are increasing our RevPAR growth range from a previous 6% to 8% to our current forecast of 7.5% to 9%. We expect the vast majority of our growth to come in the form of increased ADR.

Our RevPAR outlook for the third quarter is for RevPAR growth of 6% to 8%, resulting in a nominal Q3 RevPAR range of $170 to $173. This outlook includes our pro rata share of the Manhattan Collection.

Our increased RevPAR forecasts are supported by the business on the books for 2011 as compared to what was on the books at the same time last year for 2010. Excluding the Manhattan Collection, for which we don't yet have final information, our pace, combined for both group and transient on a revenue basis, was up 9.6% as of the end of June, with rooms up 1.1% and ADR up 8.4%. This is a significant improvement from where we were at the end of March, when total group and transient revenue pace for 2011 was up 6.7%.

Group room nights were down 0.7% at the end of June, with rates 6.2% higher than same time last year, for a positive pace variance for group revenue of 5.5%. Transient revenue on the books was up a robust 12.2%, driven by ADR 9.6% higher, while transient rooms are up 2.3%. Pace for each of these segments is better than at the end of March, but it's transient that has improved the most.

If we just look at the back half of the year by quarter, you will understand the strength we are looking at for our portfolio and what is giving us the confidence to increase our outlook. Combined group and transient pace on a revenue basis as of June 30 -- again, excluding the Manhattan Collection -- was up 9.9% over the prior year for Q3, and up a very robust 17.6% in the fourth quarter. Q4 group is up 11.6% in rooms on the books, with ADR up 6.4%, which puts total group revenue ahead by 18.7%. All of these numbers are a significant improvement over where we were three months ago.

Our pace for 2012 is even more encouraging, though not as meaningful, since group currently on the books only represents about 30% to 35% of expected total group rooms for the year. As of the end of June, group revenue for 2012 for the portfolio -- again, excluding the Manhattan Collection -- was up 33.1%, with group room nights 22.6% ahead and ADR 8.6% higher.

In the second quarter of this year, our properties booked 22.3% more group rooms for 2012 at a 15.8% higher ADR, for 50.6% more group revenue than what was booked in the second quarter of 2010 for 2011. 2012 should be a good year for us, with better convention calendars in many of our markets, including Boston, Philadelphia, San Francisco, Atlanta and San Diego.

As indicated by these numbers and their improvement in the last three months, our properties succeeded in achieving very healthy short-term and long-term bookings for both group and transient. We think it is indicative of the improved quality of many of our properties, our active involvement in booking and pricing strategies and the strength of the markets we are in. Many of our markets have no new supply and are operating at high and increasing overall levels of occupancies, with a growing number of compression days.

We have also significantly increased our outlook for hotel EBITDA margin growth for the portfolio, from a range of 150 to 230 basis points previously to our current forecast of an increase of 240 to 300 basis points. This increase is due primarily to our active involvement in the properties from an asset management perspective and the increase in our RevPAR outlook discussed earlier.

This overall portfolio EBITDA margin growth has been negatively impacted by the renovations at the DoubleTree Bethesda, Sir Francis Drake, Westin Gaslamp and Affinia Manhattan, along with an estimated 21% increase in property taxes for 2011, which is due primarily to automatic reassessments from our acquisitions of our California properties. For the third quarter, we're forecasting our portfolio EBITDA margin to increase between 200 and 250 basis points.

Based on these forecasts, and as I mentioned earlier, we are substantially exceeding our underwriting for most of our hotels. We believe this comes from a combination of conservative underwriting, having chosen to be in better and stronger urban markets, buying properties that have underperformed in the past, and the success we have been having with our asset management efforts to substantially improve performance. We have not changed our underwriting standards or return criteria, so we hope and expect that our most recent acquisitions will outperform as well.

We continue to be extremely excited about the future fundamentals of the lodging business and the unique internal growth opportunities we see in the portfolio and the external growth opportunities we see in the marketplace. We believe we are very early in the recovery and growth phase of this economic and lodging cycle, and we expect many years of strong performance to come.

We thank you for your continued interest, for your confidence and for your support. We would now be happy to answer whatever questions you may have. Operator?

(Operator Instructions) Michael Salinsky, RBC Capital Markets.

Good morning, guys. Jon, you touched a little bit upon the acquisition pipeline there, seeing a little bit less attractive opportunities. What do you think is the driver for that at this point?

I just think it is chance, Mike. I think we were fortunate to see a lot of good quality assets over the last 12, 15 months on the market. And I think for whatever reason, right now there is a pause. And while there is certainly not a pause in the number of properties available overall, there seems to be a pause in what we are looking at.

And who knows? Maybe we are just -- maybe we have gotten even pickier, given the success we have had so far with our acquisitions being done at a much faster pace than what we thought was ever possible. And so that could be a factor as well.

That's helpful. Second of all, you touched -- the expectations for the second half, you have quite a bit of margin expansion built in there, and you talk about upside over the next couple of years through asset management initiatives.

You know, you look at the margin today and you look at where you think the margin can go. How much of a Delta are we talking there?

Well, I would go back to kind of where we got to at LaSalle after many years of asset management and work with our operators. And the difference in the portfolios is over 800 basis points. We don't know enough today to know how much of that we can -- we ought to be able to make up, but we certainly have already identified over 200 basis points of improvement. A good bit of that should be in place by the end of the year and annualized for next year.

And I think as we spend more time at the properties working with our operators, making some substantial changes -- I mean, we have done things like closed the spa already at the Mondrian; we worked with Morgans, prepurchase, on their efforts to buy out Asia de Cuba in all of their portfolio. But we are very supportive of doing that for the Mondrian, because we have a restaurant that makes a lot of money --, a lot of revenues; it doesn't make much money at all at the bottom line.

And so there is much better opportunities out there in the market at that property to drive food and beverage revenues and actually make a profit on it, as opposed to making very little money.

So there is a lot of this within the portfolio. There has been significant impact from the renovations. And I think as we learn these properties and live them, we would be very surprised and disappointed if we weren't able to drive 400, 500, 600 basis points of improvement over the next three years or so.

Third question would be, with the 11 properties added here in the last four months, can you give us an update on what -- in terms of the transient versus group breakout for the portfolio?

Yes, we are -- because of the -- trying to finalize the historical numbers on the Manhattan Collection, I think what we are looking at for the portfolio, when you add the Manhattan Collection and the W and the Viceroy, I think what we are looking at now is somewhere between 25% and 27% of group, and the rest transient. So it's actually a meaningful increase from where we were before, which was about 65%/35%.

Okay. And finally, Jon, I would be curious to get your thoughts on DC. I know it has been a soft market here in the second quarter, and expectations kind of going forward are a bit challenged. I'd be interested to get your thoughts on that market.

Yes, I mean, interesting -- one of the issues that has impacted DC this year is the fact that Congress has passed no legislation whatsoever, until this most recent bill on the debt ceiling. And so that has had -- that has put a meaningful damper on overall growth and demand.

However, the market is operating at its highest occupancy level ever, on record. And so the market is in great shape. I think we may certainly see some slowdown in the growth of government over the next few years -- and I reiterate in the growth of government. I don't think we're going to actually see any shrinkage in government. And as a result of that, I think DC will continue to do just fine.

It has never been the strong upmarket in recoveries, but it has never been the downmarket, the strong volatile downmarket in down periods. And that just comes from a very strong core base of business related to doing business with government.

So we will wait to see what the per diems look like, Mike, when they come out later this month. We expect they will be up slightly for next year, and I think that will be helpful to the market.

Great. Thanks, Jon.

Jim Sullivan, Cowen and Company.

Good morning. Thank you. Jon, I wonder if you could touch on the markets which, in what has been obviously a very, very good second quarter and first half -- but the markets which have lagged where you have exposure, and what you think the outlook is going forward. I think you talked about improving citywise in Boston and some of the other markets in your prepared comments, but I'm just curious where the upside is on a market basis in your portfolio.

Sure. In general, Jim, when we look out at -- hold on one second. I think from an underperformance perspective this year, DC clearly is up there. Atlanta or Buckhead would be second. When we look at overall RevPAR to date, the other weakness that we have seen would come from San Diego.

And when we think about next year, we look at the calendars, San Diego has a much better convention calendar next year. Boston, which I think as a market was a little weaker, we are not -- we don't see that, because we are ramping up in the marketplace. But Boston overall this year has been a little bit weaker. And next year, Atlanta has a much better convention calendar. San Francisco does as well. San Diego does.

DC is worse from a convention calendar perspective, but as the conventions in DC have played out, we haven't seen the impact that we thought we would see in terms of additional room nights from that business. So we think overall, '12 is a significantly better convention calendar for our portfolio than it is this year in 2011.

And you touched on the significance of renovation spending this year. And of course, a number of these projects were completed or are going to be completed in the second half. I wonder if you could update us on your thoughts for perhaps additional renovation spending in 2012, especially with New York, whether there is anything that is close to being confirmed there or what kind of overall investment spend do you think you might commit to for next year?

Yes, we are just getting our arms around that with the Denihan folks. We are beginning to look at some of these reconfiguration opportunities within the portfolio. And so until we get a little more clarity on that, I think most of the capital will tend to be more capital maintenance within the portfolio.

Okay. Then final question from me. A lot of the improved performance is, of course, partly a result of this mix shift. And I am curious whether -- in your experience you have been through a couple of cycles in the business -- whether the mix shift in terms of a rebound in business spending in your opinion is comparable to prior cycles or if it is a little more dramatic than what you have seen in prior cycles. And the implications that has for revenue management and strategy in pushing transient rate.

Yes, that's a good question, Jim. From my experience, the recovery in business spending and business travel has been much more rapid and much stronger than in prior recoveries. Compared to what we thought when we went public in December of '09, the recovery in travel is probably a year ahead of where we thought it would be. And so we have only been surprised in a positive way, not in a negative way, by anything.

I know there has been -- we get into this micro viewing of weekly results in the industry and try to interpret trends out of weekly results, which is all natural -- maybe the negative of having weekly information sometimes. But group in and of itself has been pretty much the way we thought it would play out. We thought it would take all the way through next year to recover most of it, but not all of it. We certainly got more of it back last year than what we thought. And I would say this year is kind of on track from what we expected.

Okay, great. Thank you.

Business travel has been very strong. And I would say the other piece worth commenting on that has been a more recent surprise is, particularly at our West Coast properties that are very leisure-oriented in the summertime -- and in fact, a lot of our West Coast properties, their strongest quarters are the third quarter -- we have seen very strong short-term, high and leisure -- high-rated leisure traveler pickup, much stronger than our properties thought we would see. And that is a big part of the outperformance in the second quarter and what we have seen for July already.

Bill Crow, Raymond James.

Good morning, guys. A couple of questions for me. Jon, have you seen any pickup in short-term group cancellations? Or on that parallel thought, whether you have seen a failure to pick up short-term business that you might have thought you would have had.

No. We haven't seen any negative trends on the group pickup side or cancellation side.

All right. You talked about the number of acquisitions in your market slowing down, potential acquisitions. How important is it to make additional acquisitions? I know $1 billion of investment was an important threshold for you. Where do you get to the point where you are comfortable that, given G&A and efficiencies you might be able to gain property management wise, how big do you want to get over the next couple of years?

We are comfortable -- from an efficiency standpoint, we are comfortable with where we are right now. So at this point, the way we look at acquisitions, and frankly, the way we have looked at acquisitions, is if we can find acquisitions where we can underwrite conservatively here at the early part of the cycle, and increase value for the shareholders through the capital that we need to raise in order to do acquisitions on an ongoing basis, we will do that.

And to the extent that we can't find them, whether short-term, intermediate or long-term, we are very comfortable with the portfolio, because we have incredible growth within the existing portfolio and a lot of valuation opportunity within the existing portfolio.

Okay, and then maybe one for Ray. As we think about the contribution from the New York portfolio, from Miami, how should we think about seasonality next year, of kind of the quarterly breakdown percentage of EBITDA, for example, as we progress through 2012?

Sure, obviously, this is going to be changing as we get -- I don't think you can look at the run rate for seasonality for 2011, obviously, because we have some of the renovation impact at several of our hotels.

But I think it should be generally in line with what you have seen for the industry, which is third quarter is typically stronger, followed by the second quarter in revenues. And then the first and fourth being slightly weaker.

Now, I think for this year, on a year-over-year basis, you are going to see fourth quarter being a little bit stronger because of additional room count at the Affinia Manhattan that we touched upon. But we will provide more clarity as we get into January and we go through the budgeting process with a lot of these hotels that have been renovated or finishing up renovations, and we expect better growth there and some better clarity at that point.

And, Bill, you can take a look at one of the tables that we release, is the historical pro forma RevPARs and EBITDA for the portfolio in 2010 by quarter. I would use -- for now, I would use that seasonality as a reasonable approximation of the way the portfolio plays out.

Great. And then, Jon, going back to your earlier comments about the renovation disruption and the upside that you are already starting to see, how confident are you that whatever the industry does next year, you will be in a position to outperform?

Yes, I mean, we are pretty confident. If we have a recession, then our confidence goes down significantly, because the business travel tends to cut back, again, more than leisure travel does. And of course, that is where we are, we're in the major cities with a lot of business travel in our portfolio.

But I think but for that, whether it is a continuing slow recovery or ultimately some more modest or accelerated pace, we feel good that the assets we have have underperformed and should outperform their competitors going forward; that the markets we are in, which are primarily the gateway cities, will outperform the industry; and that the urban markets within those gateway cities will outperform those markets.

So I think we are kind of in the sweet spot with what we've bought and a typical recovery.

Great. That's it for me. Thank you, Jon.

Andrew Didora, Bank of America.

Hi, good morning, Jon. Good morning, Ray. Two quick questions for you. First, Jon, just in terms of your commentary regarding the deal environment out there, and you are saying there [are] a lot of deals out there on the market. But is it the fact that they are not in your target markets or is it really just the quality of hotel within your target markets that kind of gives you a little bit more pause here?

It is really both of those things. It's -- there is a lot more suburban product. There is a lot more secondary city market. There has been a lot written about either private equity or maybe even the REITs moving to sort of B markets from A markets and the gateway markets, which, by the way, we will not do; not part of our investment strategy. But that is part of it.

And then I think within the markets, there are select service properties that we at this point don't have an interest in because in many of the gateway cities, they are trading higher than replacement cost.

And then there will be an occasionally very large asset that just doesn't fit our criteria because it is too big a concentration in any one asset, or at least our view of why take that risk when we have such a terrifically diversified portfolio of hotels.

Great. That's helpful. And then just secondly, now that you have closed the Denihan deal, just curious what your longer-term thoughts are on New York, as there have been near-term supply pressures, mostly in the limited service segment of the market. Can you kind of give us a sense of how you see the New York market playing out? Is it really just the difference between Midtown versus kind of the outskirts that make you comfortable with the market, or is there some other dynamic there that you are looking at?

Yes, I will give you a general view. I will start with the statement there is no city in the world like New York. New York has incredible demand generators. As we see growth in global travel, particularly from the developed world, we have seen increasing travel growth from Europe as well, South America, the first city they generally go to is New York City. And frankly, the first place they go in New York City is Times Square, where you can't even move anymore. But if you want to become multilingual, it is a great place to do it.

I think New York will continue to benefit from the strength of all the different businesses that are in New York, their growth, the leisure orientation of the city, the convention center, which is forever sold out and fully utilized. And so we will continue to see the supply get absorbed in New York.

We think New York is a little different -- will be a little different over the next 10 years. We don't think it will have quite the dramatic compound annual growth in RevPAR that it has had in prior cyclical recoveries, primarily because we've forecasted there will be about an average of just under 4% supply growth over the next five years in the market. And that comes from really the city getting better. It is safer, there are a lot more areas that people are willing to shop and eat and stay.

And as a result of that, you are seeing a lot of this select service, small, full-service or boutique style development that has gone on in a lot of these second -- previously secondary and undesirable areas of the city. But they are now safe, and they are up-and-coming areas. And so we will continue to see supply there, where land costs are dramatically lower. And while the product being developed is of lower quality, it still absorbs demand growth. You have such great transportation in New York that staying downtown versus staying in Midtown for people who are price-sensitive is a much better solution than staying in Newark or LaGuardia or JFK or Hoboken or any of the surrounding markets.

So we are still very bullish on New York. We wouldn't have made such a large investment in the market. We think Midtown still gets impacted by the development downtown. It is still more rooms in the market, and that will dampen some of the growth, but we think the growth will still be very attractive over the next five years. And there is no place like New York, and it is a good place to make hotel investments, particularly at such large discounts to replacement costs.

Great, Jon. That's very helpful. That's it for me.

David Loeb, Baird.

Good morning. Just a couple of questions. Jon, on the margins, in the second quarter, you obviously had pushed rate really hard in a very high occupancy quarter, to the point where occupancy went down a little bit. But the margins increased only 48 basis points.

Can you sort of tease out the combination of factors on that, and how much of that do you think was related to the renovation disruption, and how much of that to the fact that you are just still rolling out your best practices and other asset management initiatives? What other factors might be in there?

Yes, there were a number of factors, much of which, actually, had more to do with prior ownership than it did with us within the portfolio. So there were a number of kind of unique situations.

The biggest impact on the margins in the quarter were the 67 basis point impact from property tax increases. And that was all California, the four properties in California that get reassessed on an acquisition at their current purchase price.

There were some corporate allocation or corporate charge issues. As an example, at Mondrian, which added significant ANG, all of which we underwrote, but on a year-over-year comparison, they weren't charging themselves corporate reimbursements at the property level. And so therefore, on a year-over-year basis, it looks bad. But it wasn't a surprise to us.

Same thing with the renovations. There was nothing -- they had a meaningful impact, particularly at Gaslamp and Sir Francis Drake, but they weren't a surprise to us. It is why we had forecasted zero to 100 within the portfolio.

So frankly, it is not something I want to just dismiss, but I do think you ought to dismiss it, because it is not recurring stuff, other than the property taxes, and it is built into our numbers. And we wouldn't have raised our margins significantly if we weren't confident that we could hold expenses in the last two quarters to 3% to 3.5% growth overall.

Right. And the property taxes, clearly recurring, but is a one-time reset that everybody expects, and that makes perfect sense. And the corporate allocation charges at the Mondrian, that is not something that you factor into your pro forma history?

That's correct. We don't readjust the GAAP historical numbers by putting those expenses in there.

Okay. And then second and last, you have answered a number of specific questions and a few more general questions, but I'm just wondering if you could go -- kind of pull back the camera and talk a little bit about the economic weakness we have seen in the first half, what we are seeing now, all of the disruption related to the recent political wrangling or Kabuki theater, whichever you prefer, in Washington.

Are you seeing any impact on hotel demand in your markets? You did talk a little bit in the release about corporate profits continuing to grow and other favorable macro factors. But I wonder if you could just kind of give us a little broader on in how you see the economy impacting the business today.

Yes, I mean -- I would tell you that we have had a lot of asset management meetings in the last 30 days, including our own full-day ops review with our asset managers. And we really searched for weakness -- early weakness within the demand numbers, and we couldn't find any. It doesn't mean it isn't going to happen, but we just haven't seen it yet.

And so, how do we explain that? I guess there is a couple of ways to look at it. And, obviously, we all speculate, just as the newspaper speculates, on why the stock market goes up and down on any given day, which has all been proven to be kind of a random [walk].

But I think we do have a little bit of a bifurcated economy right now. We have a lot of industries -- a lot of companies that are doing exceedingly well, as evidenced by second-quarter numbers that are up, with both guidance and performance, up from expectations, both at the bottom line and the top line. And I think what we see in a lot of the unemployment numbers is it's -- you have a lot of unemployment in the construction industry, which has historically not been a big travel industry, a big user of hotels in general.

And then I think there is sort of a haves and have-nots from an economic perspective, where clearly the upper end of the market, of the socioeconomic spectrum, is doing very, very well. And they are traveling and they are spending, and that is one of the things that we saw on the West Coast over the last month and through July and into our August bookings.

So to me, the reason that demand has been so much stronger than what we thought from a business travel perspective is directly correlated to corporate profits, and global growth being obviously significantly higher than domestic growth.

That's very helpful. Thank you.

Jeffrey Donnelly, Wells Fargo.

Good morning, guys. Jon, a handful of markets out there are facing new and returning supply growth in 2012 and '13. Among your markets, which do you think will maybe face competitive supply issues in the next year or two?

Well, New York will continue to face new supply. And as I have mentioned, I am not a big believer in bifurcating competitive supply from supply. To me, it is all the same, because the lower end impacts the middle end, the middle end impacts the upper middle, and the upper middle impacts the luxury end. And so I think it all does have an impact on the market.

You know, really outside of New York, we really -- most of our markets don't have any new construction in them -- or very, very little. The market -- DC has the biggest hotel under construction of our markets, but it doesn't deliver until the first quarter of '14, and that is an indication of just how long it takes to build a big hotel in a market like DC.

So we feel great from a supply perspective and we really don't think that is an issue for the next three years.

I am curious, because you have always said that you thought the lower-end hotels sort of weigh on the chain scale above them. How do you think about it in a market when -- if you are sort of a mid-priced property and you have supply at the luxury end?

Again, I think it all has a market. Because when you sit down and you look at this from an operational perspective as opposed from a real estate perspective, each of the teams at hotel properties are going to sit down and say, okay, this is what is going on in the market, here is how the dynamics are going to change, and here is how we need to change to adapt to whatever is going on in the marketplace. And so I think at the end of the day, it has an impact.

Now, I think that question, Jeff, tends to be generally not very significant in terms of its impact, because luxury properties tend to be very small. And you don't tend to see many of them develop at any one time, let alone in the long term, because they generally don't make economic sense. And you see them because a brand has decided that it is going to -- it needs distribution in a market. Or you get to a later point in the capital cycle where capital is so readily available, or trophy buyers -- trophy builders are willing to build something that doesn't make economic sense.

But generally, they don't have much of an impact on a market. You can add a 300-room super luxury hotel in New York, and with 90,000 rooms in the market, it is irrelevant.

And just one last question is, given the ramp in your cash flow from acquisitions and improving results, how are you thinking about the dividend recommendation of the Board? And perhaps -- Ray, I don't want to leave you out -- maybe you could tell us what you think your taxable net income run rate might be for the back half of 2011.

Well, I'll take the first half, let Ray take the second half, Jeff. I think from an overall perspective, our view is that the dividend is going to follow cash flow over time on a per-share basis. And so as we have success in significantly growing our cash flows, we should see a meaningful increase in the dividend, kind of regardless of what the taxable income side looks.

While we have been in certainly heavy acquisition mode and for however long that continues, we really don't see a reason to distribute substantially above taxable income, even with cash flow, because then we just need to go back to the market and pay fees to raise capital, and so we would rather not do that.

But I think over time, certainly over the intermediate to long-term, Jeff, the dividend is going to track the very significant growth in cash flows that we are forecasting. Ray, you want to comment on taxable net income?

Sure. As you know, there is a lot of factors in when we put in capital into work when the renovation projects come online. Currently, when we set our dividend, it's -- we set it at a rate we believe it is -- first is sustainable and meets 100% of taxable income.

Currently right now, based on our outlook for the year, that will remain in line with our goals in terms of our $0.12 per quarter and $0.48 per year. That is in line with generally our outlook on our -- what our ultimate tax income will be for the year. But we will certainly evaluate it on a number of factors, including what our outlook for 2012 will be. Because we will sort of go evaluate that and at that point in time make those adjustments.

Okay. Thanks, guys.

Dan Donlan, Janney Capital Markets.

Thanks. Good morning. First question for you, Ray. You guys have got about three mortgages coming due in the first quarter of next year. Can you talk about your plan and how you are going to address those?

Sure. Well, we are going to evaluate either something on the CMBS side or maybe on the bank loan or insurance company. Depends what is most attractive for us. And I think certainly the Monaco DC and Argonaut are two properties that will and have garnered a lot of interest from the lending community, so we feel great about that. And certainly Sofitel Philadelphia is also another great asset that will get attention. So we are going to evaluate that. We are in the process of having those discussions.

As you may know, the CMBS world has changed dramatically in the last 30 days, in light of what is happening in Europe and what is happening domestically here. In fact, several of the CMBS folks that we talked to -- these are folks that are very active in the market -- effectively right now, they are not quoting CMBS debt.

So while that is certainly not good if you were trying to finance properties, I think that is great if you are in the market for buying properties, if you're a cash buyer like us. That's the silver lining there. But obviously, the CMBS market is still a little choppy with some of that -- I think it got ahead of itself the last 90 days.

But ideally, we are going to look at something on like a five- or seven-year basis on the debt side for the Monaco and the Argonaut. We will be active on that; the loans there mature in March of 2012 for both Argonaut and the DC Monaco, and then it's in February for Sofitel Philadelphia. So we'll evaluate that.

And we are looking at loans that are on a fixed-rate basis, and obviously the best terms we can garner, we will go after.

Dan, the one other thing I would add there is that all three of those properties have -- are doing exceedingly well on an operating basis. And so we would certainly expect in total, even at very conservative leverage levels, to be able to borrow significantly greater than what is currently outstanding on them.

Okay. And then just going back to the margin guidance for the third quarter. I think you guys said it was going to be up 200 to 250 basis points. What is the margin that you are basing that off of, the nominal margin?

Last year's margin on a comparable basis?

Yes.

That is -- that was about 30% last year, 30% to 31% last year.

Okay. All right. That's it for me. Thanks.

Enrique Torres, Green Street Advisors.

Hey, Jon. Hey, Ray. Building off that last question, assuming there is no changes in the portfolio, how would you -- is the capital structure roughly stabilized or would you expect to do some rebalancing?

And then going forward, if you do find an acquisition or two that does kind of fit your underwriting criteria, what menus from the capital source would you expect to tap in order to fund that?

I mean, I think our approach to capital for the Company is -- we have a long-term target of roughly 35% debt, 35% to 40%, 10% to 15% preferred and the rest common equity. And what we have said in the past, Enrique, is we will continue to evaluate each of those capital markets and do whatever is most advantageous at the time in order to finance the Company and to finance future growth.

Okay. So it sounds like it is not really a change there. And I guess your -- your capital structure seems to be sitting mostly within that framework right now.

That's correct, and really the only difference might be that because so much of our leverage is over on the joint venture side and protected from a nonrecourse basis, that the overall leverage of the Company might run slightly higher for some period of time because it is so much lower on the rest of the Company.

All right. That clarification is helpful. Thanks.

And we have no further questions. I'll turn the conference back over to management for any additional or closing comments.

Thank you all for participating here in the second quarter. We again apologize for the issues of our conference communication company. And we look forward to updating you again in the third quarter, in about 90 days.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We would like to thank you all for your participation.