Pebblebrook Hotel Trust (PEB) 2011 Q4 法說會逐字稿

Good day and welcome to the Pebblebrook Hotel Trust fourth-quarter 2011 earnings conference. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Raymond Martz. Please go ahead, sir.

Thank you, Tricia. Good morning, everyone, and welcome to our fourth-quarter 2011 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

As always, before we get into the discussion of our results, let me first remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings and our 10-K, which we also filed last night, and could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release that we issued last night, along with our comments today, are effective only today, February 22, 2012, and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures including EBITDA, adjusted EBITDA, adjusted FFO, pro forma RevPAR and hotel EBITDA referred to in our remarks and our website at www.PebblebrookHotels.com.

Well, we had a terrific fourth quarter to complete a fantastic year for the Company. In the fourth quarter pro forma RevPAR for the total portfolio climbed a very strong 12.8% to $168.58. This exceeded our outlook for RevPAR growth of between 8% and 10% primarily due to better-than-expected performance at many of our recently renovated hotels.

For our portfolio the fourth quarter gained strength as we progressed. October RevPAR increased 11.1%, November was up 13.1% and December was up 15%, which made it the strongest month of the year for portfolio as measured by the percentage of RevPAR growth.

Our overall RevPAR gains in the quarter were driven by healthy increases in ADR, which rose 6.1% over the prior year, and in occupancy, which grew 6.3% during the quarter to 77.4%. This marks the first quarter during the year that our portfolio occupancy growth outpaced our ADR growth and the second quarter in a row that our occupancy gain was positive. This is principally due to significant occupancy gains at several properties including the Grand Minneapolis, Sir Francis Drake, and the Viceroy Miami as well as several of the Manhattan Collection hotels.

As a reminder, our RevPAR and hotel EBITDA results include all the hotels we own as of the end of the year including 49% of the results for the Manhattan Collection. RevPAR growth leaders in the quarter included the Grand Minneapolis, Sir Francis Drake, Viceroy Miami and Affinia Manhattan.

During the fourth quarter we invested approximately $20.2 million into our hotels as part of our capital reinvestment program. This included $3.6 million at Westin Gaslamp, $3.2 million at Sheraton Delfina, $2.2 million at Sir Francis Drake and $2.2 million at the Argonaut Hotel in San Francisco.

With our robust RevPAR growth in the quarter our hotel portfolio generated $31.1 million of pro forma hotel EBITDA, a 39.1% increase over the prior year period. Total revenues increased 11.6% with an expense growth limited to 3.5%. And our hotel EBITDA margin climbed a robust 562 basis points. The hotel EBITDA growth leaders in the fourth quarter were Affinia Manhattan, Viceroy Miami, and Sir Francis Drake.

Because of the strong performance of our portfolio in a greater number of properties this year versus last we generated adjusted EBITDA of $28.1 million for the quarter, an increase of $23.3 million versus last year's fourth quarter. Our adjusted FFO was $16.5 million or $0.32 per share compared with just $3.8 million during the fourth quarter of 2010 or $0.10 per share.

For the year our RevPAR was up a strong 10.3%, again largely driven by increased ADR. This is despite all of the negative renovation impact we experienced throughout the year which negatively impacted our results by approximately 170 basis points.

Our RevPAR leaders for the year were Viceroy Miami, the Grand Hotel Minneapolis and our two San Francisco hotels, Sir Francis Drake and the Argonaut Hotel. This was despite both the Grand and Sir Francis Drake being under renovation for most of the first half of 2011.

Our hotels generated $88.3 million of pro forma hotel EBITDA for the year, with pro forma hotel EBITDA margins improving 318 basis points to 26.7%. The hotels that generated the highest EBITDA growth rate for 2011 were Viceroy Miami, Sofitel Philadelphia, Sir Francis Drake, and our Sheraton Delfina in Santa Monica.

Please refer to the reconciliation table we provided in yesterday's press release detailing which hotels are included in which periods of 2011 for operating statistics. Now while we had no capital market activities in the fourth quarter of 2011, it's appropriate to mention our capital market activity so far in 2012 in case you missed the press releases.

In mid-January we successfully refinanced the $35 million CMBS loan secured by the Monaco DC with a new $46 million nonrecourse loan at a fixed interest rate of 4.36% for five years. In early February we paid off the $56.1 million loan secured by Sofitel Philadelphia with proceeds from our credit facility. And last week we successfully refinanced the $42 million CMBS loan secured by the Argonaut Hotel in San Francisco with a new $47 million nonrecourse loan at a fixed interest rate of 4.25% for five years.

As a result of these debt transactions we have no further debt maturities in 2012. Presently we have $226.3 million of debt on our balance sheet which includes $15 million outstanding on our $200 million credit facility. In addition, we have $282.4 million in unconsolidated debt which represents our 49% interest in the Manhattan Collection.

We currently have cash, cash equivalents and restricted cash of approximately $40 million plus another $17.2 million in unconsolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in the Manhattan Collection. Our net debt to EBITDA ratio as of December 31, 2011 was 5.0 times and our fixed charge ratio was 2.6 times.

As a reminder, for GAAP purposes our 49% pro rata interest in the $908 million Manhattan Collection joint venture is not consolidated on our financial statements. However, we believe it is useful to provide highlights of the balance sheet and income statement impact to our Company from the Manhattan Collection since this is in fact how we approach a joint venture as well as how we manage our overall balance sheet.

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

Thanks, Ray. So as Ray said, we had a dynamite second year as a public company. In 2011 we made $950 million of investments through the acquisition of six 4 Diamond quality hotels in six different gateway cities including the urban markets of San Francisco, San Diego, West LA, Seattle, Miami and Boston, and through the joint venture of the six hotel Manhattan Collection last July when we added a major presence in midtown New York.

Three of our acquisitions were off market transactions and a fourth was acquired in bankruptcy. And thanks to a trusting and supportive investment community we were able to raise $461 million of equity to support these efforts.

We're extremely pleased with the portfolio that we've been able to assemble, not just because of the high quality of the assets, not just because of the attractive pricing, not just because of their terrific locations in major gateway cities, but because the portfolio has so much operational upside that will drive outsized growth for years to come. And we didn't underwrite or pay for the vast majority of that additional upside potential.

The portfolio is already begun to benefit from the implementation of best practices and the operational efficiencies that we've been able to put in place, as evidenced by the 318 basis point improvement in portfolio EBITDA margin that we were able to accomplish in 2011 even though we didn't own many of the hotels for the full year and many of our contemplated operational and physical improvements take significant time to execute.

In the fourth quarter we drove EBITDA margins up 562 basis points as many of our best practices began to kick in. While this level of year-over-year improvement cannot be expected each quarter, we do expect to increase EBITDA margins in the portfolio by 250 to 300 basis points in 2012 given our expectations of both 8% to 10% RevPAR growth and 8% to 10% revenue growth in the portfolio. And there should be significant additional margin growth in future years from our asset management efforts.

A couple of standout margin performers that are worth mentioning -- the Viceroy Miami's EBITDA margin increased 2,457 basis points in the fourth quarter, going from minus 1.6% to plus 23% as we took roughly $1.5 million of annualized costs out of the hotel through our asset management's cooperative efforts with our operator. EBITDA went from negative $64,000 in 2010's fourth quarter to a positive $1.1 million in 2011's fourth quarter on a $716,000 or 17.4% increase in revenues.

Fourth-quarter EBITDA margin at the Affinia Manhattan increased by 1,030 basis points, or $3.2 million on a $4.1 million increase in revenues. At the Minneapolis Grand EBITDA margin in the fourth quarter increased by 1,127 basis points as RevPAR increased 44.3% on the heels of the full renovation of the property in the first half of 2011. At Skamania Lodge EBITDA margin increased 1,140 basis points in the fourth quarter versus the same period in 2010.

Despite the great margin performance of these properties our fourth-quarter margin increase was not driven by just these few properties. In total 12 properties out of 20 grew EBITDA margin by 400 basis points or more in the fourth quarter, a pretty incredible achievement by our asset managers and our operators and one certainly to be applauded.

Many of our hotels prior to acquisition also suffered from significant deferred capital maintenance or lack of honor attention due to capital constraints, bankruptcy, receivership or foreclosure. As a result they significantly underperformed from a competitive perspective in prior years. With the implementation of renovation, repositioning and refurbishment programs at the majority of our hotels, we've begun to recapture some of that lost competitive RevPAR penetration.

As a portfolio we lost RevPAR penetration in 2010 and then in every month but one of 2011 through August. But we've now increased penetration for every month since. In fact, we picked up so much penetration in the last four months of 2011 that we ended the entire year flat to 2010.

I'd like to highlight a few examples of the increased penetration we've been achieving at properties that completed renovations in 2011. At the Sir Francis Drake where our renovation encompassed a complete redo of all the rooms, the entrance, lobby and bar and a full renovation and repositioning of the Starlight Lounge on the top floor of the hotel, we've already seen the hotel pick up significant RevPAR share on a year-over-year basis.

Through June the hotel ran a RevPAR penetration that equaled 77% of its competitors' RevPAR. From July through December the hotel ran on average a 91.5% penetration in RevPAR and it was trending to the mid-90s by the end of the year.

At the Minneapolis grand where we renovated the entire hotel, RevPAR ran at 85% of its competitors' RevPAR which are all of the top hotels in the downtown market through the first six months of 2011. With the completion of the renovation in May we averaged 111% RevPAR penetration through the second half of the year, an incredible turnaround.

And the hotel went from last in its competitive set of six hotels to first. Its competitive set includes the Ivy, a Starwood luxury collection hotel, the W, the Westin, a boutique Hilton and the Graves, a high-end boutique hotel. We expect further improvement from these renovations throughout 2012.

In addition, we expect a significant lift in performance from our other renovations and repositionings in the portfolio, including the recently completed renovations at Affinia Manhattan and the Argonaut in San Francisco, the final phase of the comprehensive full building renovation underway at the Westin Gaslamp in San Diego, and renovations underway and also to be completed in the second quarter of this year at Sheraton Delfina in Santa Monica and Seattle Monaco.

These improvements, coupled with our extensive revenue management efforts and the underlying strength of our markets, should result in a 200 basis point outperformance of our hotels to the industry in 2012. As we mentioned earlier, and as we previously released, we expect our RevPAR to increase 8% to 10% versus a strong industry performance of 6% to 8% for the year.

However, despite our positive RevPAR outlook for 2012 for our portfolio, there will be a meaningful negative impact from renovations in the first four months of the year that is built into our numbers. We estimate the impact at almost 400 basis points primarily at Sheraton Delfina, Westin Gaslamp, Seattle Monaco and the Argonaut. As a result we're forecasting RevPAR growth of 5% to 7% in the first quarter, the lowest of any quarter for the year.

The strength of our portfolio in 2012 and beyond is certainly also partly due to the high occupancy levels of most of the cities in which our hotels are located. Many of our markets are at, near or above prior peak occupancies, but yet most are still far from prior peak levels and average rates.

For example, our urban or CBD markets that now have trailing 12-month occupancies at or above the last cycle's prior peaks include San Francisco, Washington DC, Miami, West Hollywood and Boston. Our markets that are nearing last cycle's peak occupancies include Santa Monica, San Diego, Seattle and Minneapolis.

Many of these markets are likely to meet or exceed the prior peak occupancy levels in 2012 due to strong underlying corporate, leisure and convention business in each of these markets. On the other hand, only the Fisherman's Wharf submarket of San Francisco has gotten back to prior peak average daily rates.

With occupancies at these high levels it should allow properties in these markets to reduce discounting and promotions, take less online travel agency business, negotiate higher increases in corporate rates and group rates and, due to more sell-out nights overall, drive greater rate growth over these compression nights.

When we look at last year's overall industry trends, performance was driven by strength in business travel, particularly transient travelers. The recovery in group travel was more modest, so there's more to go in 2012 and beyond.

I think what went somewhat unnoticed in 2011 was the strength of the recovery in leisure travel, particularly in the second half of the year. With the haves and have-nots economy that we lived through in 2011, our leisure customer base showed significant confidence in their economic well-being as evidenced by strong weekend demand and RevPAR growth in the second half of 2011.

We expect this strength to continue in 2012 along with the modest continuing recovery in group travel. Overall industry RevPAR growth of 8.2% in 2011 was the second-highest RevPAR growth since Smith Travel began to keeping industries statistics in 1988. Yet everybody felt terrible throughout the year due to the downturn in the stock market and lodging stocks in the second half of the year and the fear of European contagion that repeated its 2010 second-half occurrence in the second half of 2011.

Fundamentals continue to be strong for our industry. In 2012 we expect overall industry demand to grow between 2% and 3%, a range that reflects the long-term industry averages and a significant moderation from both the 5% demand growth for all of 2011 and the 4.3% growth in the fourth quarter.

Despite headwinds from European economic weakness, corporate profits in the US continue to be strong with forecasts that they'll again reach record levels in 2012. And employment growth, while subpar compared to prior economic recoveries, has shown more recent signs of a further pickup. Both consumer confidence and business confidence have also been improving over the last few months. All of these seem to bode well for at least a modest year of demand growth in 2012.

Our outlook for 2012 includes growth in industry ADR of 4.5% to 5.5%, again a modest increase in the growth rate from both 2011's 3.7% increase in the 3.9% increase in the fourth quarter.

Given higher mid-single-digit increases in negotiated corporate rates, higher government per diem rates, higher occupancies going into 2012 than those going into 2011 and industry supply growth of one half of 1% or less with stronger demand growth, meaning occupancies should continue to climb, we believe ADR growth will be modestly higher in 2012 than in 2011.

As a result we expect industry RevPAR growth in the 6% to 8% range for 2012. And we expect the growth rate to be relatively even throughout the year. And we're already off to a great start in January with industry RevPAR climbing 8.1%.

For our portfolio, as previously mentioned, we expect RevPAR to grow 8% to 10% in 2012. We expect our occupancies to increase to 80% or so, but are forecasting that our ADR growth will represent around 60% to 70% of our growth in RevPAR.

With more group business in 2012 in our portfolio due to strong convention calendars in many of our cities including Boston, Philadelphia, Atlanta, San Francisco and San Diego, and with enhanced restaurant revenues at our new restaurant at the InterContinental Buckhead we expect very healthy growth in our food and beverage revenues.

As a result we expect total non-room revenues for the portfolio to also increase between 8% and 10% in 2012. Though again due to renovations, growth in non-room revenues in Q1 will be severely stunted, so total hotel revenues are forecasted to grow only 4% to 5% in Q1. With total revenue growth on a comparable hotel basis of 8% to 10% in 2004 combined with EBITDA margin growth of 250 basis points to 300 basis points we're forecasting to deliver a very strong 17% to 22% for the existing portfolio.

With lower RevPAR and revenue growth in Q1 we expect EBITDA margins to grow modestly at only 150 basis points to 200 basis points. This 2012 forecasted performance is similar to our results for all of 2011 -- RevPAR growth of 10.3% and total revenue growth of 9.2% combined with EBITDA margin growth of 318 basis points to result in EBITDA growth of a very strong 24% last year. This was despite a 42 basis points drag from a 22.3% increase in property taxes which was primarily a result of our California acquisitions.

Unfortunately, property taxes will continue to be a drag on margin growth for the first half of 2012 due to our California acquisitions which were completed in the first half of last year.

Business trends and business on our books continue to support our forecast of strong growth for 2012. As of the end of January total group and transient revenue on the books for 2012 was up 20.5% over same time last year for 2011. While this is a very high percentage, about 250 basis points of this improvement is estimated to be a result of the increased room count at the Affinia Manhattan.

Portfolio wide group room nights are up 13.8% with group ADR up 6% for a total of 20.5%. Transient room nights on the books were up 15.2% with transient rate up 4.7% and total transient revenues on the books also up 20.5%. Again, the transient numbers are partially skewed by the additional Affinia rooms.

Of course while the pace advantage for 2012 is very significant compared to 2011, primarily due to group being booked further out, we expect this pace advantage to moderate throughout the year to our forecasted RevPAR growth range.

In summary, we expect 2012 to be another terrific year for our industry and an even better year for our Company. We have tremendous opportunity in the existing portfolio to recapture significant RevPAR lost in prior years and to dramatically improve margins through the implementation of best practices and lots of focus and hard work by us and our operators.

While our forecast doesn't include any additional acquisitions, we do expect to be active later in the year as the transaction market picks up and quality properties in our targeted gateway cities become available either on or off the market. We'd now be happy to answer whatever questions that you may have. Operator?

(Operator Instructions). Michael Salinsky, RBC Capital Markets.

So in honor of the Zip-a-Dee-Doo-Dah song, should we assume you guys are looking into Orlando or Orange County?

(Laughter). Maybe Orange County, Los Angeles, but not Florida.

Fair enough. Just sticking on the transaction market. Can you give us an update in terms of what you're seeing in the quality of product as well as pricing, whether you've seen that back up here in the second half of the year and what your expectations are for the year in terms of how the transaction market plays out?

Sure. Mike, I think the market for quality assets right now in our target markets is relatively thin at this point. I think that's a function of the fact that the transaction market slowed fairly dramatically in the second half of last year because most of the REITs generally pulled away from the market. And as a result of that I think sellers, unless they absolutely positively have to come to market, have kind of been waiting for the REITs to come back.

And so from that perspective the indications we're getting now as we've seen a recovery in the capital markets and indications by the REITs, including ourselves, that we intend to be active this year. We're beginning to see indications that more assets and quality assets will be coming to market later in the first half, potentially by late first quarter with maybe the earliest transactions happening towards the end of the second quarter or into the early part of the third quarter.

So we think the first half of the year will be relatively slow for the industry and for us, but we think it will pick up fairly significantly in the second half. And it feels a lot like the way it felt at the end of 2009 and 2010 where sellers are kind of waiting for the market to be re-established, for the demand to come back from buyers. And from a pricing standpoint I would say that we're probably unlikely to see much of a difference in valuations and pricing that took place in closed transactions in 2011.

So with the continuing improvement in underlying operating performance since mid last year, by the middle of this year a lot of properties will have seen a fairly significant increase in bottom-line. So we think nominal values are likely to be up and cap rates are probably likely to be much more similar to potentially very slightly higher to where they were last year.

That's very helpful. Second question, the $8.7 million of savings, how much of that has been implemented and how much of a benefit do you expect to see that in 2012? And then how much of that is kind of longer term projects?

Yes, I think you can see certainly a meaningful part of those savings were implemented in the fourth quarter of last year. It probably relates much more to the assets that we bought in the first half of last year where we were able to get a head start on those savings including properties that were bought in 2010.

I think the later properties other than the Viceroy Miami; I think most of that is going to be kicking in this year. And I think by the end of the year we should have seen all of those -- that annualized rate of savings certainly would have been implemented by the end of the year, in addition to significant additional savings that should get underway with the New York portfolio and some of our later acquisitions in the second quarter and in the second half of this year.

And I think that will continue on into next year -- into 2013 because as we benchmark and we compare our assets to other similar quality assets we think there's significantly greater margin opportunity to go than just what we're going to accomplish this year.

That's helpful. Then finally, just given the strong performance of the assets in the fourth quarter there as well as the outlook for 2012, I know you guys underwrote pretty good IRRs. Can you give us a sense of as you're looking at the outlook for the next several years here how those compare?

Yes, I think we ran in '11 something like close to $7 million over our underwriting for 2011 in the portfolio. And again, keeping in mind that we didn't own the assets for all of 2011, the margins in the first half of the year were significantly worse and the expense growth was significantly worse in the first half, particularly for properties we didn't own, than in the second half. So I think we're really pleased with how far ahead we are and we hope that that will expand meaningfully in 2012.

Great. Appreciate the color, guys. Thanks.

Andrew Didora, Bank of America-Merrill Lynch.

Just wanted to touch upon I guess the dividend. As you grow into your portfolio and your cash flow accelerates here, what are your thoughts around the dividend going forward in 2012 and into next year? I guess, do you try to add a certain percentage of your cash flow or would you want to keep it low for now until you see what's happening around the transaction market?

Andrew, I think philosophically the Board and management believe that at this point while we're a net acquirer of assets and we take advantage of the opportunity at this early part of the cycle, that it doesn't make a lot of sense to tie our dividend to our available cash flow. It really makes more sense to minimize our dividend, limit it to our taxable income and then once we slow down as an acquirer, I think we'll look much more closely at tying the dividend to the cash flow growth and potentially a percentage of our cash flow or our CAD.

Great, that makes sense, thanks, Jon. And then one final question. I'd be curious to get your thoughts on what markets you feel should outperform in 2012. And maybe if you can shed a little color in terms of why we see such a dichotomy between some of the top West Coast markets and those on the East Coast?

Sure. If we go through our major gateway cities, almost all of them are going to be outperformers. We think Boston, Philadelphia, Buckhead, Miami, San Diego, West LA, San Francisco, Seattle and Minneapolis are likely all to outperform the industry. We think Washington DC will significantly underperform the industry due to the lack of governmental legislation, the weak convention market, cutbacks in government travel and discretionary spending.

And while we have a per diem increase in the market, which I think will allow for RevPAR growth, we think it will be relatively low-single-digit growth in the market with the first and fourth quarters being the weakest and the second and third quarters being a little better.

I think New York, probably the most discussed market, is probably the hardest market to forecast primarily because it's so dominated by transient, which particularly in New York tends to be very short term. There's just not a lot of business on the books beyond 60 days in New York, it's just not a big group or convention market as a percentage of the total demand.

It's hard to predict. The fascinating thing about New York is all of the supply last year, over 6% supply growth, was all absorbed in the market. And supply growth will be substantially reduced this year I think between 2% and 3% overall. And I think that it does -- unfortunately the supply growth does put pressure on the ability to raise rates as that supply has to get absorbed. And I think it also has an impact on the psychology of the market and the attitude about raising rates.

And so, while occupancies are probably going to move close to peak occupancies this year in New York, I think we'll continue to see some trepidation about raising rates as much of the demand, particularly the latter part of the absorption, is sort of softer, more rate focused demand. So we think New York will likely be at the lower end of the industry range we provided and be an average or slight underperformer.

That's very helpful. Thank you very much.

Bill Crow, Raymond James.

Jon, a couple of questions. Is it too late to make cyclical acquisitions as opposed to core acquisitions?

Good question, Bill. I think it's getting pretty close to being too late for us. We really would love to see four or five years of growth in a market before we begin to see meaningful new supply in those markets.

And I think as you probably noted, when we went public we had 20 target cities on our map, probably 12 or 13 of those are more perpetual markets and 7 of those perhaps were cyclical markets. We now have 15 cities on our map; we've taken five off including four in Texas. And you're already seeing new supply growth in places like Austin where the markets have been reasonably healthy from a demand and employment growth perspective.

So I think it's getting late. We'll probably see another city, perhaps two, fall off our map later this year if we don't find something in those markets, as that window closes and we don't feel like we have enough time for the assets to appreciate and get closer to replacement cost before we see new supply in those markets.

All right. And then two more acquisition oriented questions. Has there been any shift, even maybe a subtle shift in your thinking, towards Washington DC over the longer term?

No, none at all. In fact, we'd love to take advantage of -- if there is a change in psychology about owning hotels in DC, we'd love to be able to take advantage of that today. We think it's one of the three or four best long-term institutional quality markets, highest barriers to entry of major gateway cities in the US. We think Washington will continue to benefit from globalization from significant travel from the developing worlds.

And while we may have a short term decline in actual expenditures towards travel, or certainly a very slow growth this year, we don't think government is going to get smaller. We just think government growth rate will slow and because of the barriers to entry in the market, the high occupancy rate, we think DC will continue to be a great low risk market where we certainly want to continue to own.

All right. And then finally for me, Jon, you talked about how your underwriting has been exceeded by $7 million of property level EBITDA. I'm fairly certain given your conservative underwriting that you aren't looking for another year of 8% to 10% growth this year. Do you wish that you had been more aggressive earlier in the recovery in making bids for assets that you may have lost out on?

I suppose with perfect vision of course. Clearly there would have been more assets we could have bought, I believe, and been a little more aggressive on to grow the portfolio more quickly. In retrospect we all have 20/20 vision. We were pretty aggressive in the market; I mean we certainly were accused by lots of folks for overpaying consistently in the market. And by the way, we don't mind that reputation because I think it helps us particularly in off-market transactions.

So I think what we've been is disciplined. I think we've drawn lines in the sands on acquisitions where we have a point of indifference from a pricing perspective, where we've been able to buy a lot of assets without having to underwrite meaningful improvement in margins, without having to underwrite a recovery as strong as prior recoveries.

And as long as we can do that we'd rather buy fewer assets with more cushion for error and more upside in returns. And I think we'll continue the same strategy that we utilized in the last two years, Bill.

Great. Thanks. Congratulations.

Dan Donlan, Janney Capital Markets.

Thank you. Jon, was just curious if you can weigh in on the new contract with the Labor Union in New York City and maybe how that turned out relative to your underwriting or expectations?

Yes, I mean -- unfortunately it turned out in line with our expectations. We believe that actually most of our union markets we've underwritten fairly significant increases in labor, wage rates and benefits just based upon the history in those markets. And so, it's a great contract for New York and the employment base in New York and we're, I guess, proud to be supportive of it. Everything else has kind of been said in the press already.

Okay. And then moving on to the balance sheet, and I guess this is for Ray. The $16 million that you have in restricted cash within the Manhattan Collection JV, what are the contingencies on how you guys can spend that?

Well, Dan, as you know, that loan matures in February of 2013. Our view is after we go through the refinancing of that and we'll start gearing that up in the spring and we'll have a very comprehensive process, as we did with our last two loans that we successfully refinanced.

When we go through and we refinance and pay off that debt, the idea is the majority of that cash will either be used to contribute to we expect a pay down or other needs. But we expect some of that to come back to us or [use] of the pay down.

And Dan, there's no restriction on using the reserve capital for capital expenditures at the asset. So everything that we want to do with the assets from a physical perspective that we're prepared to do this year we're able to do.

Okay. Thank you, that's it for me.

David Loeb, Baird.

I wonder if you could talk a little bit about international tourism and what you think is driving that, any changes you expect during the year. And do you expect the Visa Reform stuff to have a meaningful impact in the coming quarters or is it going to take a little longer?

Yes, good question, David. I think we almost have to look at the last 10 years to put it all in perspective. That there's been huge international travel growth throughout the world in the last 10 years and the United States has basically not participated in it to any meaningful extent. So our share of global travel has declined significantly since the events of 2001.

And I think the government, the administration, the industry has begun to appreciate the benefits of allowing more of that travel into the United States. We've seen significant growth; I think growth was upwards of 6% in 2011 in terms of international inbound travel. The growth markets are clearly South America and Asia. And that's where the nominal -- the big nominal increases are coming from and certainly the huge percentage increases are coming from.

And of course those travelers are going to the major cities in the United States and primarily a few of the gateway cities that would include certainly New York, which is often the first stop for anybody coming to the United States, then Times Square in New York. And if you ever try to walk around Times Square you'll appreciate that.

Cities like Miami, which is the key gateway city from South America, LA, San Francisco being the two primary beneficiaries from Asian travel and to a lesser extent Seattle. So I think we're going to continue to see very significant growth in demand that comes from international travel. It's the best travel there is, they stay longer, they spend more money, they go to the major gateway cities which of course benefits us and is a part of our strategy.

And I think as we do loosen up the Visa restrictions we make -- we add more review agents and interviewers, as we make more countries Visa waiver countries I think we will participate to a much greater extent. I mean the US government is forecasting over the next five years between a 6% and 8% annual increase in inbound international travel. Who knows whether those forecasts are going to turn out to be right. But I think it's going to be a significant positive over the next five years.

Very helpful, thank you.

Enrique Torres, Green Street Advisors.

Just a follow-up question on the transactions. Do you expect to fund the next round of deals any differently than what your balance sheet is currently structured at? And if you're going to raise equity would you consider raising equity before you have the deals in place or would you time it to coincide with any deal that you're looking at acquiring?

Enrique, I think any acquisitions -- any equity raise that we do, any debt arrangement that we do is not going to be done until we have a clear -- some clarity on our pipeline of acquisitions. We are a believer in effectively match funding our growth. And so, while it may precede the actual closing of the transactions and the public announcements of those transactions, as it has historically for us at Pebblebrook, it will not precede our clarity of our pipeline.

So I think we feel good about the structure of the balance sheet, I think our preferred equity is towards the upper end of our targeted 10% to 15% range. But I think as we continue to grow our EBITDA rapidly, our debt to EBITDA is coming down dramatically and I'm sure, as you've noticed, the debt to EBITDA on the consolidated portfolio excluding the joint venture is extremely low.

So we have cash, we have availability on our line, we have a lot of unencumbered assets. And so, depending upon the extent of our pipeline, it will depend upon whether there's an equity raise that's appropriate or not.

That actually was helpful, thank you. That's all I have.

Ian Weissman, ISI Group.

Maybe you could address the disconnect between your view of the lodging recovery this year, 6% to 8% whereby everyone else is closer to 4% to 6%. What do you think is the differential between your view and everybody else?

You know, it would be speculating a bit, Ian, but I'll try to answer the question nonetheless. I think a lot of the models used by forecasters are based upon historical correlations to GDP. And I think what's happened in this cycle, and in fact often happens at the transition points or the transition years in the cycle, is that there's a disconnect between GDP growth and demand growth.

And so, I think we saw that very clearly last year that the correlation last year is much more closely tied to corporate profits, both the nominal level and the corporate profit growth rates, as well as to corporate investment and business investment overall.

And so I think that disconnect from our view will continue in 2012. And so while we too have a very low growth forecast for GDP of 2% to 2.5% in 2012, we think demand will be more meaningful and we think the industry will have a very modest acceleration in ADR growth due to much stronger occupancy levels, better corporate rate growth than the prior year, per diem rate growth, more sellout nights, a lot more markets with -- where we're getting back to peak or better occupancy levels.

So we just see the year better fundamentally than we see for 2011. And I think a lot of the -- perhaps the psychology of the some of the other forecasts are maybe trying to do a risk -- perhaps doing a risk-based average where they're taking into account the possibility of a contagion from Europe or a double dip recession. I don't know.

But we're looking at the most likely scenario and we think that even when we think about that range of 6% to 8% we think it's more likely to be in the upper half of that range than it is to be in the bottom half of that range.

And how much of that would be rate? I mean, we did -- I think the industry did just under 4% rate growth last year. Do you think you'll see an acceleration this year?

For the industry --?

For rate growth. Yes, just for the industry overall.

Yes, I mean our forecast is for 4.5% to 5.5% of the 6% to 8%. So we do think it will be an acceleration of the component, the percentage component of RevPAR growth.

Okay. And finally, I know you touched on a little bit acquisitions, it's been a dry market. But when you think about return hurdles today and the Fed's commitment to keeping late rates low indefinitely it feels like, do you believe that institutional investors, because we've seen it in other property types, have compressed their return hurdles for lodging?

No, I don't think that's happened at all in our sector.

Do you think -- do you anticipate it happening at all or --?

You know what, I'm not that smart. I think it wouldn't be unreasonable to think that might happen except for the fact that we have a much more limited buyer base in our space than exists in the other real estate segments.

When you think about office or retail or apartments you're talking about core real estate investment on a direct basis for institutions. We don't have any of those institutions in lodging. Pension funds just don't invest.

In lodging -- pension fund advisors generally don't invest in lodging. And probably for good reason, they're very complex businesses. So I think we'll probably -- we probably won't see that this year and I think it will continue to be very attractive particularly on a relative basis.

When we look at returns that we've been underwriting where we've averaged an 11 unlevered IRR with below trend forecasts for growth, I think those are relatively unique and will likely continue to be unique particularly as the debt markets continue to be a challenge for lodging. And we do think that will be the case for at least the first half of the year and perhaps even all of the year.

Okay, thank you. Very helpful.

Thank you and that will conclude today's question-and-answer session. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks, operator, thank you all for participating. We look forward to our next quarter when we can announce hopefully another quarter of terrific results.

Again, ladies and gentlemen, thank you for your participation. This will conclude today's conference call.