Pebblebrook Hotel Trust (PEB) 2012 Q2 法說會逐字稿

Good day and welcome to the Pebblebrook Hotel Trust second-quarter 2012 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead, sir.

Thank you, Cynthia. Good morning, everyone. Welcome to our second-quarter 2012 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk and uncertainties, as described in our 10-K for 2011 and our other SEC filings, and could cause results to differ materially from those expressed in or implied by our comments. Forward-looking statements that we make today are effective only as of today, August 3, 2012, and we undertake no duty to update them later.

You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures we use, on our website at www.PebblebrookHotels.com.

Okay, so the good news is we have another great quarter to talk about. Second-quarter performance was better than we expected on almost all of our operating metrics.

Pro forma RevPAR for the total portfolio climbed 12.9% to $186.32. This exceeded our outlook for a RevPAR growth of 10% to 12%, primarily due to better than expected performance in many of our recently renovated hotels, the July 4 holiday shift that benefited the last week of June, and continued strong transient demand in most of our urban markets. For our portfolio on a monthly basis, April RevPAR increased 12.1%; May was up 13.4%; and June climbed 13.1%.

As a reminder, our RevPAR and hotel EBITDA results include all the hotels we owned as of June 30 except for the Milano, but do include 49% of the results for the Manhattan Collection. The Vintage hotels in Seattle and Portland are not included in these second-quarter results because we didn't acquire these hotels until July 9.

RevPAR growth in the quarter was led by our properties benefiting from their recent renovations, including the Affinia Manhattan, Sir Francis Drake, and The Grand unit in Minneapolis, as well as the W Boston. During the second quarter we invested approximately $13.4 million into our hotels as part of our capital reinvestment program, which included completing our renovations at the Westin Gaslamp, Sheraton Delfina, Monaco Seattle, and the Mondrian Los Angeles. Year-to-date we have invested over $30 million into our hotels as part of our capital reinvestment programs.

With our healthy RevPAR growth of 12.9% in the quarter, our hotel portfolio generated $35.9 million of pro forma hotel EBITDA, an extremely strong 28.6% increase over the prior-year period. During the second quarter, rooms revenue increased 13.9%, which was greater than our RevPAR growth due to the added rooms from the Affinia Manhattan reconfiguration.

Our food and beverage revenues were disappointingly flat to last year. This is primarily due to the renovation of the outdoor deck and pool area at the Mondrian in West Hollywood.

It significantly disrupted operations of the Skybar, which was closed from March through May, as well as our restaurant, Asia de Cuba, which lost all of its outdoor seating during the deck replacement. Overall, this renovation resulted in food and beverage revenue declining about $1.2 million or almost 30% versus the prior-year quarter.

So as a result of our hotels' strong performance combined our additional acquisitions, we generated adjusted EBITDA of $32.9 million in the quarter, an increase of $14.6 million or 80% versus last year's second quarter. As a reminder and as we previously discussed, our adjusted EBITDA adds back the $1.1 million of one-time charges associated with the change in hotel management companies at the DoubleTree by Hilton Bethesda Hotel. This expense is recorded in the G&A line item in our income statement.

Our G&A expense is also greater in the quarter from higher than expected, hopefully nonrecurring, legal costs; some additional non-capitalized expenses related to the reconcepting and relaunching initiatives at several of our recently renovated hotels and restaurants; and higher than expected corporate and business use taxes. Combined, these items have caused us to increase our corporate G&A estimate for the year to $12 million to $12.5 million, which represents an increase of about $2 million from last quarter. We believe roughly $1.5 million of these G&A expenses are one-time in nature, so we don't expect those expense levels to represent our run rate in the future.

Year-to-date our adjusted EBITDA is up 90% or $22.2 million versus last year. Again, this reflects not only the increased number of hotels in our growing portfolio but also higher rating growth in same-store EBITDA of our existing hotels, which we believe will continue during the next several years.

Turning to the acquisitions side of our business, on April 9 we acquired the 108-room Hotel Milano in San Francisco for $29.8 million. This hotel is located in the growing South of Market and Convention Center sub-market of San Francisco.

Based on our current plans we now expect to close the hotel in early November for a comprehensive renovation and repositioning. This hotel is expected to reopen near the end of Q1 2013 and will be renamed at that time.

In the development of our plans, we found a way to add an additional eight rooms to the hotel, which was not originally underwritten, for an additional $1.5 million. As a result, we now expect to invest between $11 million and $12 million in the complete renovation and repositioning of what will now be a 116-room hotel; and we now also expect to lease out the restaurant and all food and beverage activities in the hotel.

On July 9, we acquire the 125-room Hotel Vintage Park Seattle for $32.5 million and the 117-room Hotel Vintage Plaza Portland for $30.5 million. The Seattle and Portland hotels are high-quality, AAA, four-diamond hotels in excellent downtown locations and were acquired at a 25% to 35% discount to replacement costs. The 125 rooms at the Vintage Park Seattle already reflects one additional guestroom as a result of retasking an unutilized meeting room.

Now, let's shift our focus to capital market activities for the second quarter and through July. The capital markets were extremely attractive and we were very active in taking advantage of them.

On the debt side, we completed a 5-year $50 million nonrecourse loan at a fixed interest rate of 3.9% secured by the Sofitel Philadelphia. And in July we amended and restated our senior unsecured credit facility. In the process, we increased our facility to $300 million, lengthened the maturity of the revolving credit line out to July 2017, and increased the accordion option of the line up to $600 million.

The pricing grid on this amended line was reduced to a range of 175 to 250 basis points over LIBOR, which was a significant reduction from our previous pricing grid of 250 to 350 over LIBOR. Based on the Company's current leverage ratio, the current interest rate on the revolving facility is 2%.

As part of this financing, we also completed a $100 million 5-year term loan maturing in July 2017. We entered into a fixed-rate interest swap agreement on this term loan; and based on our Company's current leverage, our 5-year fixed-rate will be 2.4% when we draw down the $100 million term loan on August 13.

On the equities side, we raised $139 million in net proceeds through an overnight equity program as well as our ATM program. As a result of our capital market activities during the quarter and through July, we currently have cash, cash equivalents, and restricted cash of approximately $130 million, plus another $18 million of unconsolidated cash, cash equivalents, and restricted cash from our 49% pro rata interest in the Manhattan Collection.

I would now like to turn the call over to Jon to provide a little color on the recently completed quarter as well as our outlook for the remainder of 2012. Jon?

Thanks, Ray. So, as Ray said, the lodging industry continues to recover at a strong pace in 2012. When we look at the second quarter's overall industry trends, performance continue to be driven by strength in both business transient and leisure travel. Demand in the US rose a very healthy 3.5% in the quarter; and with almost no supply growth, occupancy grew 3.1%.

With solid industry occupancies and ongoing positive momentum, ADR growth continued its slow march higher, increasing 4.7% in the quarter, up from last quarter's 4% rise. Combined, industry RevPAR climbed 7.9% in the quarter and now 8% for the first half, at the top end of our prior 6% to 8% outlook for the year. While transient demand growth demonstrated ongoing strength, group travel also continued to recover at a similar pace this quarter, though ADR growth for group continued to lag transient, which is typical for this early in a recovery cycle.

One note of caution about July and the third quarter that Ray touched upon earlier, we believe that the unusual timing of the July 4 holiday -- that is, falling on a Wednesday this year, not that it fell on July 4 -- caused some fairly dramatic changes in both group and transient usage patterns that significantly benefited June by up to 200 basis points of RevPAR growth to the detriment of July's performance, which we expect to be reduced by 200 basis points or more from the current industry trend line.

So we now expect to RevPAR growth for July for the industry to range between 4% and 6%. This of course will depress third-quarter industry RevPAR growth as well.

Supply in the second quarter increased just 0.4% and we expect it to remain at sub-1% levels through at least 2014, a key part of the strong industry fundamentals we expect for at least the next several years.

At Pebblebrook, as Ray said, we had another terrific quarter. RevPAR increased a very strong 12.9%.

We benefited significantly from the properties we renovated last year, but strong RevPAR growth was again widespread in our portfolio. We had 10 properties that grew RevPAR above 7%. Like the first quarter, we gained significant RevPAR share in all three month of the quarter, as we began to recapture competitive share lost during prior ownership periods, when they suffered from a lack of both capital investment and third-party asset management.

Our performance in the quarter was far from perfect, with a number of challenges impacting our business, including some of our own making. Food and beverage revenues in the portfolio increased just 0.3%, significantly underperforming our strong occupancy growth and our own expectations for the quarter.

Food and beverage revenues were dragged down by the $1.2 million decline at Mondrian, as Ray discussed earlier. We are now focused on relaunching our business there; but it may require some reconcepting and concentration on attracting new clientele. We are also evaluating our restaurant concept at Mondrian, and we are beginning to review potential alternatives that could be put in place next year if we do decide to make a change.

Food and beverage performance was also negatively impacted by renovations of public areas, meeting space, and restaurant and bar facilities at both Westin Gaslamp and Delfina for a portion of the quarter. And we suffered significantly at Viceroy Miami, particularly at our open-air rooftop club on the 50th floor, due to consistently bad weekend weather as well as generally from a lack of success in our banquet and catering sales efforts.

These property-specific challenges masked generally positive underlying food and beverage trends and success at many of our other properties, including The Benjamin; DC Monaco; the Argonaut; InterContinental Buckhead, including Southern Art, our new restaurant there; as well as at Sofitel Philadelphia, Skamania Resort, and W Boston.

The vast majority of the CBD markets in which our hotels are located were also generally strong in the second quarter. RevPAR in San Francisco's Fisherman's Wharf/Nob Hill sub-market was up a robust 14.8%. LA's West Hollywood/Beverly Hills climbed 13.7%.

Philadelphia's City Center increased 13.3%. Downtown Boston was up 12.3%.

Santa Monica rose 12%. Downtown San Diego and San Francisco's Market Street area were both up 11.6%. Downtown Seattle climbed 10.3%.

Downtown Miami increased 9.9%. New York's Lower Manhattan was up 8.9%; and Buckhead was up 7.5%. We expect to continue to benefit from the overall strength and high-occupancy levels of these markets on a going-forward basis.

Transient revenue drove our strong RevPAR performance in the second quarter as we shifted some group to higher-paying transient business. Transient revenues increased 15.3% in the quarter, with room nights up 10% and ADR increasing 4.9%.

Group performance was healthy as well, with room nights up 2.9% and ADR up 5.6%. Group represented 26% of our room nights in the quarter, down slightly from last quarter's 28% despite the second quarter generally being a stronger quarter for group.

Our overall transient ADR is $22 higher than our group ADR, so we benefit from shifting more business to the transient segment as transient demand growth remains healthy. In addition, with our overall portfolio running at high occupancy levels, 84.9% in the second quarter, and a forecast of over 80% for the year, we continue to be focused on shifting more group business to higher-paying transient, doing less discounting, and generally pushing our rates higher.

Now let me talk a little bit about EBITDA margins and provide some highlights. As we reported, portfolio-wide hotel EBITDA grew 28.6% on a 9.5% growth in total revenue. As is always the case with our reporting, these are comparable numbers.

In other words, same-store, whether we owned them last year or not and whether they were being renovated or not in either year. We don't remove hotels when they are being renovated unless they are closed.

Our hotels are benefiting from an implementation of our best practices and the very successful efforts of our asset managers and our hotel operating partners. Together they managed to hold expense growth in our portfolio to just 2.6% in the quarter. Maybe that doesn't sound that great in a world of 2.5% inflation, but consider we had a whopping 8% more occupied rooms in the quarter compared to last year.

Undistributed expenses played a big role. They increased just 1%, with energy leading the way with a decline of 13.7% to last year or a reduction of $467,000 as we continue to see substantial returns from our energy-saving capital investments.

Departmental expenses increased just 4.2%, with departmental margins increasing 200 basis points, despite our challenges with growing food and beverage revenues that also negatively impacted our F&B margin, which worsened by 82 basis points.

Nevertheless, we are extremely proud of our overall increase of 461 basis points in our portfolio-wide EBITDA margin, which occurred even with property taxes increasing by 17.8%. Again, this high percentage increase in property taxes was discussed last quarter, was primarily a result of our California acquisitions, and should continue to moderate over the course of the year. Had property taxes increased 5%, our margin improvement would have been another 45 basis points higher.

On a year-to-date basis, portfolio-wide comparable hotel EBITDA increased 28.8%, and EBITDA margin is up 402 basis points on a total revenue increase of 8.4%, revenue growth of 10.9%, and expense growth of just 2.8%, despite 8% more occupied room nights in the first half.

In the quarter, healthy margin growth was also widespread throughout the portfolio. 12 of our hotels or 60% of the portfolio grew EBITDA margin by 250 basis points or more. Five of our properties drove up EBITDA margin by more than 500 basis points -- The Minneapolis Grand, W Boston, Sir Francis Drake, Skamania Resort, and the Affinia Manhattan.

The six-property Manhattan Collection increased EBITDA margin by 732 basis points on a 14.9% RevPAR increase. Year-to-date, RevPAR at the Manhattan Collection is up 13.2% with EBITDA margin up 705 basis points.

For our whole portfolio for the first half of the year, 12 of our properties increased EBITDA margins by more than 250 basis points, with eight of them over 500 basis points.

Now let me provide a quick update on our property renovations. Overall, there was far less impact in the quarter than in the first quarter, around 60 basis points in RevPAR, though a much more significant impact in food and beverage revenues, as previously mentioned.

In April, we completed the $25 million comprehensive renovation of the Westin Gaslamp San Diego which began back in November 2010. We take our hats off to the Starwood property team, which did an incredible job managing the business during a very complicated, disruptive, and lengthy renovation. It's been a long and difficult 19 months, but the new product is truly transformational, and we now have a huge opportunity to gain back significant share in the market lost over the last five or six years.

At the Seattle Monaco, we completed the rooms, lobby, and meeting space portion of the renovation in April and the entrance and exterior work in May.

At Sheraton Delfina, we also completed the guestroom portion of the full renovation of that hotel in April. The meeting space, lobby, exterior, and pool areas were completed in May. At the Mondrian LA, the renovation of the pool, pool deck, and outdoor restaurant and lounge areas started in March and were completed in mid-May.

With the completion of all of these renovations and the upcoming Milano repositioning, we expect significant improvement in performance throughout the remainder of 2012 and for 2013 and 2014, as we recapture RevPAR market share lost in prior years. In addition, we expect to see a continuing significant lift in performance from our other recently completed renovations and repositionings, including Minneapolis Grand, DoubleTree Bethesda, InterContinental Buckhead, Affinia Manhattan, and Sir Francis Drake.

As far as upcoming renovations, in addition to the previously discussed Milano San Francisco renovation and repositioning, we are in the process of completing a renovation of all of the meeting space and pre-function areas of InterContinental Buckhead which is being accomplished without disruption or lost business. This last phase completes the full renovation and refurbishment of the entire property since our acquisition in 2010.

At Sofitel Philadelphia, we expect to begin a rooms renovation late this year, a continuing into the first quarter of 2013. This renovation includes soft goods and some case goods in the guest rooms and quarters, and should be only modestly disruptive overall due to the typically lower occupancy levels during the planned Winter renovation period.

Finally, I would like to discuss a major upcoming renovation opportunity we're in the process of planning with our partners in the Manhattan Collection. As we mentioned previously when we acquired our interest in the six properties in New York with the Denihan Group, we believed there were some potential opportunities to reconfigure a large number of very sizable suites in several of the hotels to add a meaningful number of rooms on a very attractive cost basis.

We are in the process of planning and designing a very exciting full renovation and reconfiguration of the 210-room 22-floor Affinia 50 hotel located at the corner of 50th and Third Avenue in midtown, which would add 41 new guest rooms or 20% to our existing room inventory. This plan involves extending the hotel's third elevator up through the tower from the fifth floor to the hotel's 22nd floor, converting guestroom kitchens to bathrooms, and reconfiguring a number of the rooms and corridors. This program will be far more disruptive to operations than a typical rooms renovation and as a result is expected to occur between January and the third quarter of next year.

While we don't yet have a full evaluation of the financial impact on next year's results, on a preliminary basis we expect the overall renovation and reconfiguration to represent an investment of between $16 million and $20 million and likely impact EBITDA in 2013 of somewhere between $4 million and $5 million. As we complete a more detailed schedule, budget, and displacement analysis, we will be sure to share with you our updated estimates. However, we believe the long-term value created through the additional rooms and the full renovation will effectively pay for the vast majority of the full cost of the entire renovation and reconfiguration.

Now let me turn to a quick update on our outlook for the year. We continue to expect 2012 to be a great year for both the industry and Pebblebrook.

For the industry, we are narrowing our outlook at both ends of our previous range. We now expect industry RevPAR to increase between 6.5% and 7.5% based on an increase in overall industry demand of between 2% and 3% and an increase in industry ADR of 4.5% to 5%, a slight moderation in the upper end of our previous ADR outlook of 5.5%.

At this point, we expect demand growth to continue to moderate over the course of the remainder of the year, back down into the range just mentioned. And we expect ADR to continue its slow but consistent acceleration in its growth rate. Combined -- but including and partly because of the July 4 shift of a couple of hundred basis points of RevPAR growth from July to June -- we expect the industry RevPAR growth rate in the second half of the year to be about 100 basis points or so below the rate of the first half.

For our portfolio, we are maintaining the range of our prior outlook for RevPAR growth of 8% to 10% for the year. The second half continues to look strong based on current trends and business on the books though our portfolio also benefited unexpectedly from gains in late June as a result of the July 4 holiday that pulled significant business forward to June, to the detriment of July. So we are forecasting that our RevPAR is likely to increase between 6% and 8% in Q3, about 100 basis points below what we thought 90 days ago, which represents the same 100 basis points of performance above the top of our range for the second quarter.

We expect EBITDA margins to increase 200 to 250 basis points in the third quarter. For the year, will continue to expect EBITDA margin growth of 250 to 300 basis points. That is the same as we provided last quarter, but also incorporates lower margin growth from our most recent 2012 acquisitions.

Based on these strong underlying operating fundamentals, we expect to deliver a comparable hotel EBITDA increase of a very strong 18% to 22% for the existing portfolio for 2012. So we are increasing our hotel EBITDA by $2 million at both the low and high ends of our previous outlook, which effectively adds in the partial-year benefits of our acquisitions of the Vintage Park Seattle and Vintage Plaza Portland.

For adjusted EBITDA and adjusted FFO we are flat to our prior outlook, as the increase in hotel EBITDA due to the acquisitions is expected to be largely offset by the additional corporate G&A costs Ray discussed earlier.

Per-share numbers are down about $0.07 per share due to 3 million additional weighted average shares, and by $0.02 per share due to the additional interest on the 2.4% $100 million term loan being put in place in mid-August, despite its very attractive rate. Both of these items were not anticipated in our prior 2012 outlook but are likely to ultimately fund future acquisitions.

Economic indicators, travel trends, and business on our books continue to support our forecast of strong growth for 2012. As of the end of June, total pace for the entire year is up 11% for combined revenues, with group revenues up 5.5% and transient revenues up 13.7%.

This obviously reflects the strength of our first-half RevPAR growth of 10.9%. As of the end of June, total group and transient revenue on the books for the second half of the year was up 8.1% over the same time last year.

As discussed earlier, our focus on shifting to higher rated transient business is driving our pace increase in the second half, with transient revenues up 15.9%. Transient room nights are up 8.3%, with transient ADR up 7.1% for the second half of the year.

Group revenue for the second half is flat, with room nights on the books up 1.3% while ADR is up 1.2%. In addition to our efforts to shift some group to transient, our group pace is also negatively affected in the second half due to our renovation, reconfiguration, and expansion of all of the meeting space at the Affinia Manhattan, most of which is out of service in the third quarter.

To wrap up, we continue to expect 2012 to be another terrific year for the lodging industry and an even better year for Pebblebrook. We've got 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 our operators and our team.

Combined with the annual industry demand growth and little supply growth over the next few years, we should continue to see above-trend growth in our RevPAR, EBITDA, and cash flows. So that completes our prepared remarks. We would be happy to answer whatever questions that you may have. Operator?

(Operator Instructions) Andrew Didora, Bank of America.

Hi, good morning, guys. I guess my first question, Jon, is whether the music you chose to start out the call is a good precursor to what your next deal is going to be.

(Laughter) I wouldn't necessarily conclude that. Ray's selection of songs is always a questionable issue here. So maybe it is better for Ray to answer why he picked that song.

Andrew, if you play the music backwards, we will have our 2013 guidance in there.

Got you. I will listen to the replay again.

But I guess after factoring in the closing of the Vintage assets and the future draw on the term loan, I am coming up with about $200 million, $225 million of cash currently available, which seems like a pretty good amount of dry powder right now. I guess, can you give us some sense of what assets are you looking at on the market now? And I guess would you be open to any type of portfolio deals in other markets outside of New York?

Yes, I think what we can say is that the activity level in the second half for the industry and hopefully for us will be significantly higher than it was in the first half. We have seen very positive momentum in the number and quality of assets in the major gateway markets that we have an interest in, and we believe that we'll continue to get at least our share in both on-market and off-market transactions.

Great. I guess another question, just in terms of your margin guidance. I know 4Q you have some tough comps, but it seems like 4Q implies a pretty decent deceleration to about 150 bps.

I know you had called out, I guess, the Vintage assets might not have as strong an EBITDA growth in the fourth quarter. But is there anything else going on in the portfolio later in the year that might affect the growth there?

Are you talking about in terms of margins?

Margins, yes.

Yes, it really has to do with the fact in the fourth quarter that I think we were up well over 500 basis points in EBITDA margin in the fourth quarter last year. So the comparison is a little more challenging.

Okay. Thank you.

Jeffrey Donnelly, Wells Fargo.

Good morning, guys. LL Cool J is very old-school of you. I pegged Ray for more of a Katy Perry fan.

(laughter)

I guess, Jon, you always have that response concerning acquisitions. I'm curious; at what point do you do not want your fair share of acquisitions?

Because historically you guys have put a recession into your acquisition underwriting. Is that on the horizon at this point? I guess I am just curious; what signals do you look for to know when it's time to take your foot off the gas?

Yes, I mean typically what we are looking for is an overheated environment, both in capital availability and from an economic standpoint. I would say we all agree that we are a long way from there at this point. In fact, we are, if anything, slightly decelerating from an economic perspective in this pretty bumpy recovery that we are all living through.

So, we haven't built anything in. If anything, Jeff, I would say that the way this recovery is playing out and the bumpiness of it and the really modest nature of the economic recovery, the likelihood is probably greater that this recovery will take longer and will be more stretched out than prior cycles but for some event, again, where somebody drives the bus over the cliff.

So I would say right now we continue to be excited about making acquisitions. We think it is still very early in the recovery. We think in almost all markets except for select service in a couple of major cities, we are a long way from replacement cost. And, capital availability for new construction, particularly in urban markets -- again outside of New York -- is very, very limited.

I am curious, have you seen a change in the pace of group bookings or more specifically the expenditures that they are making on events? I am just curious if it gives you some foresight into maybe where consumers' heads are at, if corporations are scaling back on specific events.

Yes, in fact, we have really seen the opposite. We have seen spend actually be up on a group cover basis -- so outside of government. Government is clearly down on a spend basis.

But private industry is up on a spend basis, and what we are seeing is groups do a little better quality lunches, maybe you had a dinner, maybe you had a cocktail reception, higher-quality coffee breaks, as opposed to maybe it being a little bit tighter last year from a corporate spend perspective. So the underlying trends all right now continue to be good, and we really don't see a sign of a change in corporate behavior as it relates to travel and spend.

Then just a last question or two. In New York, we often get questions from folks about the threat of a slowdown in New York City that would stem from Europe. Can you maybe talk a little bit more macro about the nature of that demand in Manhattan?

Do you feel it is more corporate or leisure? And I guess, how significant is European demand to Manhattan? And maybe in your opinion, do you think it favors a particular price point?

New York is a very interesting market. Obviously it's very heavily transient rated versus group. It has an extremely undersized convention center for the size of the market and the number of rooms in the market. Actually there are very few large hotels that have a lot of meeting space. So, you tend to see a lot of transient business in New York.

I think with the demand growth we have seen, which is more than absorbing the supply -- in fact, interestingly, we have now passed prior peak occupancy in Lower Manhattan, and that demand is definitely being enhanced by overseas travel to the United States. It was -- we think it's moderated to some extent in the second quarter, albeit it is still growing.

We have definitely seen some reduction from Europe, particularly Western Europe. But much of it has been replaced by growth from South America, particularly Brazil and Colombia as examples. And from Asia, with 50% to 60% increases right now from China, and fairly significant increases from Japan and Australia.

So, New York continues to benefit as being sort of the gateway international market, if you will, certainly the largest. I would say that some of that international travel tends to be price-sensitive. I guess they are saving their money to fill their empty suitcases they are bringing along, because they are definitely coming to shop.

I think what that has done is it continues to cause some pressure on otherwise greater ability to raise rates in the city. That extra growth isn't coming as much from the corporate traveler as it is from international travelers, and they are more price-sensitive than the corporate traveler is.

So, historically you could look at these high occupancy levels in New York and say there would be double-digit pricing power in the market, and we are just not seeing that ability to do that in the market right now, because of the type of fill that we are seeing in New York City. So I think New York, from our view, Jeff, is playing out pretty much the way we thought at the beginning of the year, which is, it is going to be at the lower end of our industry range in overall RevPAR growth.

Just a last question on the Westin Gaslamp. How does that hotel today price out versus the Westin San Diego? And I guess how are you thinking about any impacts from the renovation of the Weston San Diego? Do you think that could nick your performance, or do they really compete in two different segments despite their proximity?

Yes, there is a pretty significant difference in rate. And in fact our rate is going to go up significantly because of the comprehensive renovation that we just undertook. So we are running I think in the mid 70s right now, but we should be running in the upper 70s into the low 80s for the hotel ultimately.

We are running about 1,000 basis points below on a RevPAR penetration basis in the first half than where we think we should be with the renovation. So we have got a lot of opportunities at this property to dramatically grow both top line and bottom line.

In terms of the other property, its location is not as attractive as ours. It's on Broadway; it is in an office complex; it is not as attractive architecture; and it is further away from the Convention Center and the Gaslamp district. So, its appeal tends to be a little bit more to the price-sensitive customer in the market than our property is.

Thanks.

Rich Hightower, ISI Group.

Thank you. Hey, guys. Actually just a couple quick follow-ups to two of Jeff's questions. First on the Gaslamp, is there any abnormal seasonality, maybe on the back of the renovation, that we should be modeling over the next four quarters?

And the second question concerns international demand, but outside of New York, let's say in some of your other markets. Are you seeing any softness in maybe some of the West Coast markets? And if you have, any insight into what is driving that? Thank you.

Sure. I don't -- there isn't any unusual seasonality in San Diego. I think it actually is much more influenced by the convention calendar and how the conventions fall each year. And they do change somewhat from year to year.

As relates to your second question, I think that deceleration in the growth rate of overseas travel isn't just affecting New York. I think it is affecting all of the gateway markets in the US.

So the higher growth rate in inbound international travel that we saw in the first quarter is moderating in the second, and it is going to -- how we do in the second half is really going to depend upon the dollar, the exchange rate with those currencies and the related currencies, as well as the economic activity in those international countries.

Right, I mean would you -- yes, do you have any clarity as to whether it is more of the exchange rate issue or more of just the underlying economic demand in foreign markets that is driving that? Or I mean I guess they are both related.

Yes, think they're pretty both related, Rich. It is hard enough to figure out even how many international guests we have, let alone why they are coming or not coming and what influences them. So it would even be hard to speculate the difference, the two, other than to just say they both have an impact.

Okay. Thank you. That's all.

Bill Crow, Raymond James.

Hey, good morning, guys. Jon, before you credited or blamed Ray for the music choice, I had this picture of you in your Prius at an intersection in Bethesda with a hydraulic (inaudible) and just jumping up and down in the car. But I guess we will erase that from the thought process.

A couple of questions here. Do you anticipate a pickup in the fourth quarter after a slowdown in the third quarter? Or do you think the quarters are going to run out about even with each other?

I think the fourth quarter will be better than the third quarter, primarily again because July -- the July shift. You are talking about a 400 basis point differential for the industry between June and July. June running -- June ran 9.5% and July likely running in the 5%s. So that just will make the third quarter look worse.

But I don't think the underlying trends are any different, other than really the international travel I mentioned. So I think the fourth quarter will look a little better than the third quarter.

Interestingly, one of the things we have been looking hard at is with -- the fact that holidays have seemed to be changing the way business books its meetings and travels. We are taking a harder look at the holidays in the second half of the year, and one of the things that actually is a positive that came out of this look is that the UN General Assembly meets pretty much over the Jewish holidays in New York, which would really help mitigate what would normally be a pretty tough week to two weeks in New York City on a negative basis.

So, that at least is a positive with the way that holiday falls in one of the more material markets in the US impacted by the Jewish holidays.

Right, okay. The 12.9% RevPAR growth this quarter is terrific. But I know last year you had a lot of disruptions. Do you have a number for what that would be normalized, had you not had the disruptions a year ago?

No, we don't do that, because it's -- much of the upside is not just because the rooms are back in serviced or there was disruption, but because we have a much better product and better marketing plans. And, frankly, we don't know how to separate those two.

It is really one of the reasons why we don't -- we really don't go through this taking out of properties that are under renovation. There is always something under renovation in the portfolio, typically, that has some impact. We try to estimate the negative impact, but when they come back in service it is hard to differentiate the two.

Two more quick questions from me. You've talked about the Skybar and the impact that had on F&B. Did that also hurt the room performance at the Mondrian? Have you lost some market share because of that?

Absolutely. No doubt about it. Skybar is apparently an integral part of a portion of the travel to that property, maybe a fairly meaningful portion. So it definitely had a negative impact on our market share.

The other thing that had an impact on the market share is, frankly, that our team didn't do a very good job there. We have made modifications to the team; two of the three executive members have been changed. So we have a new director of sales and marketing and a new revenue manager of the property that we're very excited about in both regards, and they seem to be doing a lot of really good things.

But we are still losing market share there and while you -- while we pretty rapidly lose business when you close Skybar or do a renovation, unfortunately it takes longer to get the business back. And it's going to take us a little while to rebuild, so we are going to suffer in the third quarter at that property on a market share basis, both on a rooms basis and on a food and beverage basis.

Okay. Then finally, Jon, as you think about external growth opportunities and acquisition opportunities, are you considering now the potential impact that the government per-diem likely reduction in rates might have on specific markets you might otherwise acquire assets in, or specific assets themselves?

I would say that of course we would take into consideration the greater risk that per-diem may not be as attractive as it has been. So, when we look at a market, particularly like Washington, and what we think the growth rate is going to be, we would definitely take that into consideration.

I would say, nevertheless, there's a lot of issues with Washington that we take into consideration. We think it is a great long-term market, obviously. But we do think that it is going to continue to be a weaker market, but for the inauguration next year and hopefully what is a little more active legislative year next year, which would be typical for a first year after a presidential election.

But it could be another deadlock year. It's definitely a slightly greater risk today, based upon what we see politically, than what it was two or three years ago.

Does your Bethesda DoubleTree have the greatest sensitivity to government demand, or --?

Yes. I mean in the portfolio, it definitely has the most government business. We do a lot of NIH business, being the closest hotel to NIH. We do a lot of business with the national Naval Medical Center. We do business with the federal drug administration and a number of the other government agencies that are out in the Montgomery County suburbs. So of all of our hotels in the portfolio, it is definitely the one that has -- that does the most government business.

Are you in the budget process for that asset right now? What are they thinking for next year?

No, we haven't started a budget process. We just did a transition of our operators. Part of our new strategies with our new operator was to broaden our sales and marketing efforts to a much greater extent to the private sector than from the public sector, which relates both to what we see going on in government -- so I am sure we are all not the only ones doing that -- but we were probably doing far less of that before than we should have been doing.

So we do think there is some opportunity there, particularly with the property being fully renovated. But it will definitely be the one ultimately that probably would have the most impact if in fact there is a change in the methodology on a per-diem basis, which I don't think is necessarily a sure thing.

Right, okay. That's it for me. Thank you.

David Loeb, Robert W. Baird.

Can I lobby you for the Ramones, or is that a little too subversive?

(laughter)

I am just showing my age. I think I know the answer to this, but you have raised a lot of capital recently. I understand the timing of the term loan. Can you talk a little bit about the timing of the raise on the ATM?

And does this signal that you think you will be deploying proceeds very soon, like in the next 30 days, as opposed to the next six months or five months?

I think what you should assume -- and we have a pretty predictable behavior. We have decent visibility into what our pipeline looks like, and we have historically not been a gratuitous raiser of capital. The caveat I would make is the windows are a little more unpredictable than they have been in terms of issuing equity at pricing that we are willing to issue equity at.

So you should not necessarily assume that an acquisition is right around the corner. It doesn't mean it isn't; but we are a little more sensitive to maybe looking out a little further into the pipeline than maybe we were this time last year.

Okay. That's all I had. Thank you.

Enrique Torres, Green Street Advisors.

Hi, Jon. Can you comment what change you've seen, if any, in asset values and return expectations in the last 90 days?

Wow. You know, I think asset values continue to go up as cash flows go up, and I would say that we haven't really seen a change in return hurdles. I mean I can't speak for our competitors.

I would say the market is active and we lose our share of deals as well in the market that are competitive. So I don't know what return -- what people have done to their other return hurdles. I do believe that we will continue to get our share of the market with similarly conservative underwriting that was successful last year and in 2010.

That's helpful color. Thank you.

Wes Golladay, RBC Capital Markets.

Hey, good morning, guys. You mentioned the Mondrian might have a wider food and beverage in the third quarter. I am looking at the rest of the portfolio. How will that look third quarter, fourth quarter, relative to expectations?

Why don't you give me a minute to (multiple speakers)

Okay.

A quick peak here. You know, I think the way we are looking at it right now, because we have some decent occupancy growth continuing in the second half of the year and less disruption from some of our big properties like Westin Gaslamp and Delfina that definitely negatively impacted food and beverage, that we should see some decent growth in food and beverage in the second half of the year.

Okay. You guys are also being aggressive on the guest mix. How low can you get the group mix as part of the mix?

Yes, I mean it's interesting, because there are still properties that we believe a higher group mix will be extremely beneficial in ultimately maximizing overall profitability. And that includes two of our big properties, the InterContinental Buckhead and it also includes the Westin Gaslamp, where we are actually trying to significantly push up group at both of those properties. Then with the expansion of the meeting space and renovation at the Affinia Manhattan, we are also trying to increase by about 5% to 10% the group mix at that property as well.

So I think we are probably ultimately in the range. We are going to be somewhere in this 25% to 28% range for the portfolio, with some of the middle-sized properties moving to slightly higher transient but a few of the bigger properties moving to a greater percentage of group.

Okay. Looking out towards next year for the Manhattan Collection, the debt maturity 2013, looks like the portfolio is performing well. I am trying to see how, I guess, the refinancing of that debt maturity (technical difficulty) the better performance?

Sure, Wes. We kicked off the debt financing in June in New York and we had very good attendance. We had about 30 lenders and insurance companies attending, so there's a lot of interest and we are going through the process right now.

We expect to start getting term sheets in the next several weeks, and from what we hear there is a lot of dialog, a lot of interest from both the balance sheet lenders as well as CMBS providers. So we will see how that comes out.

Looking on the call roster today, there's a number of lenders that had been at the meeting that are also on this call, so we want to make sure we don't negotiate against ourselves. But we feel pretty good for where we are at the point in time.

So, we expect, I would say, we get into the fall we will -- better clarity of what direction we are going to probably go, with either -- whether it is a balance sheet lender, or a group of lenders, or CMBS, and we will work through that.

But right now, the good takeaways are it's Manhattan; there is a lot of interest from lenders; the assets continue to perform very well and point in the right direction. So those are all the positives, and we will work through any other things that crop up.

But so far we feel pretty good at where we are, and we will I am sure have an update for you at our third-quarter call, which will be either October or early November, on where we are in that process.

Okay. Thanks a lot, guys.

Stephen Boyd, Cowen and Company.

Great. Good morning, guys. Jon, I was hoping to get your thoughts on the OTA business, and particularly interested in your view of its relevance for independent hotels and if that differs from branded hotels. Tell us how your usage of the channel is evolving here.

Yes, I think the OTAs continue to be a distribution channel that is important to the industry. We clearly hope to continue to shrink that usage over time and push more business to our brand dot-com or hotel dot-com.

I think the Internet in and of itself is extremely helpful to the independent properties or the small brand properties because of the visibility that you get for your product, the fact that it creates a level playing field visually. You now have third-party independent sites like Trip Advisor and others that provide supposedly independent third-party reviews. So the information that you have out there is so much greater for a customer today and so much more reliable than what it used to be to call a travel agent, have no visual frame of reference for what your choices were. And I think the brands tended to benefit from that process.

So I think the playing field is a lot more even today. We do drive a lot of business even on our branded properties through the OTAs when appropriate. And in all cases we'd obviously like to shrink that as well as shrink the cost over time, which we do believe will continue to happen as we get closer and closer to, at the end of the day, maybe a travel agent commission kind of model on the OTA side.

Got you. So I guess as a follow-up, do you see additional margin upside from reducing the portfolio's usage of the OTAs? And are you able to quantify it, if you do?

I think what we ultimately see is continuing rate growth, which -- as we shift more business out of the more discounted channels. Because most of the OTA channels like Expedia come through on a net basis, not on a gross basis; and so as it gets converted to a gross basis we will have both more revenue and some additional expense.

But we will have more profit per key, which is really the ultimate objective. So I think we will get more rate growth, and I think that is part of the mix shift that we talked about religiously each quarter and where a lot of our revenue management focus is within the portfolio.

Got you. If I could just switch gears, the Affinia 50 renovation, I am not sure I caught all the numbers. But I heard adding about 41 rooms with the midpoint of the spend about $18 million. My rough math, that works out to about $430,000 per room.

I understand there are some systems upgrades you need to make. But the figure struck me as a little bit high. I was just wondering if you could comment on that or your thoughts.

Well, yes, well, it includes a complete renovation of the other 210 rooms.

Okay, okay.

So that is the differential. Those -- that full renovation of those rooms would probably be running us $30,000 to $35,000 a key, maybe $40,000 a key on their own because of the size of the rooms.

We are also doing -- it is really a complete hotel. So we are the configuring the ground floor. We are actually expanding the lobby. We are creating transportation between the ground floor and the second floor lounge.

So it's -- the cost that we would allocate to the increased room count, which would relate to the reconfiguration work, the conversion of the kitchens to bathrooms, and the extension of the elevator, our estimate is that that's somewhere in the vicinity of about $175,000 to $200,000 a key.

Okay, perfect. That's what I was looking for. Then just last question, I guess for Ray. It sounds like you're creating a lot of value here, or at least have the opportunity to. Are you going to be able to capture some of that in the refinancing? How does this impact your thoughts on refinancing the Manhattan Collection, I guess?

Well, you hit the head on the nail on this one because that is exactly it. Because as we are working through the process, on one hand every quarter we go by -- and you see from the numbers -- the Manhattan Collection, and this is largely the Affinia Manhattan renovation, but the RevPAR growth and then EBITDA growth is pretty tremendous quarter-to-quarter.

So, in a perfect world, we would wait till the last day of the -- when the loan matures and finance it then, because you'd probably get the best in execution (inaudible) mature in '12. So we are trying to balance that in terms of the benefit from the renovation on the Manhattan and improving operating fundamentals and what is going on at the -- we are seeing The Benjamin and the national and all those sort of things.

That is one. The other side is on the renovation of Affinia 50, we are working through that. That is where ultimately I think some of the balance sheet lenders will probably be able to work through that a little bit easier than on the CMBS side, just because the CMBS is a little bit more programmatic with how proceeds are provided, more based on a trailing 12 versus a prospective basis.

But we are going to work through all that, I think. So you'll see the [best] lenders, see the value there, so there are some creative structures we have to handle that, and we are working through that.

Got you.

I think the other thing I would say about it is, that the capital, that $16 million to $20 million, is being put in by the partners. We are not seeking to borrow that capital. So the value that ultimately gets created is additional security and upside, frankly, as collateral for the lenders.

So I think it's viewed as a big positive. It shows our confidence in the opportunity. We have a track record with the Denihan executing two prior reconfigurations and renovations within the portfolio, and we have some incredibly successful numbers from that that relate to both the Affinia Manhattan and the Shelburne that tell that story, that we are laying out in front of them with the Affinia 50.

Yes, and Stephen, also -- and Jon mentioned in his prepared remarks -- but the disruption in 2013 with the Affinia 50 renovation we noted is between $4 million and $5 million. Of course, we are going to incur 49% of that with our pro rata interest. So as you model out and start looking at 2013, that should just be something you make sure you model in.

So I guess at this point, given the capital you are putting in and current valuations in the market, do you think there will be a need to put some additional equity in? Or do you think the valuations support the refinancing?

We don't know at this time. We will see how we progress into the fall.

We are going to look at what is the best execution for the properties on the debt side. So we don't know if it's going to be the same proceeds as us, or more. We don't know.

But we will -- as we progress through this, we will update you on the situation.

I would say that -- I mean both -- we have talked about this before. Both partners are prepared to put additional capital in if that is the right road to go down.

Great. Thanks a lot, guys.

Jeffrey Donnelly, Wells Fargo.

Good afternoon or good morning again. Thanks for letting the call run a little longer. I just had one question, Jon, because in your remarks you made reference to -- you thought select-service hotels were getting a little full on their pricing I think on a per-key basis. Are there cities in particular where you would fight them for getting a little toppy?

Well, I don't think I used the language toppy. I think basically I think it is pretty clear that select-service hotels in New York and DC, as two examples, are selling above replacement costs. And for us, that just takes us out of the market for those because that from our view creates greater risk and -- as a result of that, and ultimately less upside, even though you can make an argument that clearly the business model in and of itself probably has lower risk than the full-service model does.

Got it. That's helpful. Thank you.

Dan Donlan, Janney Capital Markets.

Thank you. Just one question on amenity creep. We haven't heard much talk about that. Just was curious what you're seeing from the brands. I know in the past you have talked about certain costs not coming back that were associated with the recession. Just curious your thoughts there, Jon.

Yes, I mean we may not be the best party to ask, because right now I don't think we have a broad enough portfolio to all of the different major brands. But at least from our view of the brands that we are dealing with, we are not seeing amenity creep.

So the brands have been working extremely well with us, in fact, on reducing costs and staff and management levels and actually trying to reengineer some of the brands, in order to provide services and amenities that the customer is really willing to pay for, and taking away things that they really don't care about that cost us money. So we can either put those dollars somewhere else to generate more business, or it just comes to the bottom line. So, so far we really haven't seen an amenity creep like has happened in prior cycles.

Okay, thank you.

Gentlemen, at this time there are no further questions. Mr. Bortz I will turn the conference back over to you for any closing comments.

Thanks very much, Cynthia. Thank you all for participating in our second-quarter call. We look forward to our next update at the end of the third quarter. Thank you.

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.