Pebblebrook Hotel Trust (PEB) 2013 Q1 法說會逐字稿

Good day everyone and welcome to the Pebblebrook Hotel Trust first-quarter 2013 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Raymond Martz, Chief Financial Officer. You may begin.

Thank you, Dana. Good morning everyone. Welcome to our first-quarter 2013 earnings call and webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer.

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 risks and uncertainties as described in our 10-K for 2012 and our as other SEC filings, and could cause future 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 April 26, 2013, and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contained reconciliations of non-GAAP financial measures we use on our website at Pebblebrookhotels.com.

Okay, so let's get it started. Just like last year, 2013 is off to a great start for us and the industry. Our first-quarter performance was better than we expected in all operating metrics. Same-property RevPAR growth for the total portfolio climbed 8.5%. This exceeded our outlook for RevPAR growth at 6% to 7.5% primarily due to stronger overall demand than we were expecting.

For our portfolio on a monthly basis, January RevPAR increased 12.8%, February it was up 6.8%, and March climbed 6.7% despite the negative holiday shift.

Our overall RevPAR gains in the quarter were driven by a combination of occupancy and rate gains. Occupancy rose a healthy 5% to 79.2%, and ADR grew 3.4% over the prior year to $202.

Occupancy gains outpaced rate gains in the quarter due primarily to two factors. First, with seasonally lower overall occupancy levels in the first quarter, there's more opportunity for occupancy growth and less compression to drive pricing power. And second, on a net basis, our pick-up at properties under renovation last year exceeded our loss occupancy at properties under renovation this year.

As a reminder, RevPAR and hotel (inaudible) results our same property, beginning with our date of ownership, include all the hotels we owned as of March 31 and the prior year comparisons, whether we owned them or not. We exclude Hotel Zetta since we don't have verifiable prior-year data before our period of ownership.

We don't exclude hotels under renovation from our RevPAR and hotel EBITDA results. In addition, our results reflect 49% of the performance of the Manhattan Collection, mirroring our joint venture ownership percentage.

Not surprisingly, RevPAR growth in the quarter was led by our properties that are under renovation in the first quarter last year, benefiting from easier comparisons in the recently completed renovations including Sheraton Delfina in Santa Monica, Hotel Monaco Seattle, the Argonaut in San Francisco, and the Mondrian in Los Angeles.

Many other properties also performed well in Q1, including Hotel Vintage Plaza Portland, Skamania Lodge, Viceroy in Miami, Affinia Manhattan, and W Boston.

During the first quarter, we invested $17 million in our hotels as part of our capital reinvestment program. This included $6 million at Hotel Zetta, formally Hotel Milano, which we opened in late February following a complete renovation and repositioning; $2.1 million at Sofitel Philadelphia as part of a full guestroom and corridor renovation; and $769,000 at Affinia 50 in New York as part of the comprehensive property renovation and 41-room expansion of this hotel, which started in January.

Our strong RevPAR growth of 8.5% in the quarter -- our hotels generated $25.7 million of EBITDA, a very healthy 4.4% increase over the prior year period. Total revenues increased 5.9% and, with expense growth limited to 3.8%, our same-property EBITDA margin climbed 157 basis points.

Total hotel EBITDA growth in the first quarter was Sheraton Delphina, Monaco Seattle, Mondrian L.A., and the Weston San Diego Gaslamp Quarter.

Turning to our corporate G&A line, we incurred $920,000 of hotel acquisition costs and $197,000 of costs related to changing operators. These expenses were largely related to the January acquisition of the Embassy Suites San Diego. As a result of the strong hotel operating performance and greater number of properties this year versus last, we generated adjusted EBITDA of $22 million for the quarter, an increase of $8 million, or 57%, ahead of last year's first-quarter results.

Our adjusted FFO climbed $12 million, or 20% per share, compared with $5.5 million during the first quarter of 2012, or $0.11 per share, an increase of 81.8%.

On the acquisition front -- January 29, 2013, we acquired the 337-room Embassy Suites San Diego Bay in downtown San Diego for $112.5 million. As a reminder, this acquisition and its expected operating performance were previously incorporated into our 2013 outlook. What was not reflected in our prior outlook were our more recent capital-market activities.

On March 18, we successfully raised $90 million through a referred equity offering, increasing to $100 million with the exercise of the greenshoe earlier this month. This was our third preferred equity raised since our IPO and this security provides a referred equity dividend of 6.5%, which is meaningfully below our prior two preferred equity raises that were completed in 2011, which were in a [7 7/8%] to 8% range.

We saw that -- given the recent (inaudible) declines in referred yields which we believe was overdue when compared to the prior declines in debt rates and capital spreads and credit spreads -- that this presented an attractive opportunity to take advantage of this movement and reduce our overall cost of capital; but also continuing to provide lower-risk, non-debt leverage to benefit our common equity as we significantly grow our property cash flows and values.

As a result of this preferred equity raise, we incurred $200,000 of preferred dividends in Q1, which was not previously provided in our outlook from our February earnings release.

For the year, this offering, which generally provides capital for future generations acquisitions, increases our preferred equity dividends to approximately $5.1 million which, again, were not contained in our prior 2013 outlook.

This, of course, only affects our FFO and adjusted FFO, and not our corporate EBITDA or adjusted EBITDA.

In addition to our preferred equity raise, on April 4 we successfully originated a new $50 million nonrecourse, interest-only loan secured by Affinia Dumont. This five-year loan has a fixed interest rate of 3.14% and is the lowest interest rate we've executed on a secured nonrecourse basis in this cycle, which we are thrilled about.

As you know, the Affinia Dumont is one of the six hotels in the joint venture that comprises the Manhattan Collection and was not part of the five-property Manhattan Collection financing that we completed in late December at 3.67%. As a result of this [that] financing, we will incur approximately $600,000 of additional interest and financing amortization expenses during 2013, which represents our pro rata share. This expense was also not in our previous 2013 outlook.

Of all of these capital market activities, we have cash, cash equivalents, and restricted cash of approximately $143 million plus an additional $50 million in unconsolidated cash, cash equivalents, and restricted cash from our 49% pro rata interest in the Manhattan Collection. We have no outstanding balance in our $200 million unsecured credit facility, and we have no debt maturities until 2016.

Our net debt EBITDA ratio as of March 31 was 4.5 times, and our fixed charge ratio was 2.2 times. On an unconsolidated basis -- meaning excluding the joint venture -- our net debt to EBITDA ratio was 3.9 times, and our fixed-charge ratio was 2.3 times.

I'd now like to turn the call over to John to provide more insight on the recently completed quarter as well as an update on our outlook for 2013. John?

Thanks, Ray. So as Ray said, 2013 is off to another strong start for both the lodging industry and for Pebblebrook. When we look at the first quarter's overall industry trends, performance continues to be driven by strength in both business transient and leisure travel. Demand in the US rose a healthy 2.6% in the quarter, and with little supply growth occupancy grew 1.8%. This provided the foundation for ADR to grow a very healthy 4.5%, resulting in a twelfth straight quarterly increase in industry RevPAR of 5% or more. This quarter, the increase was 6.4%, even with the negative impact of the Easter-Passover holiday shift that stifled March's growth.

So let me repeat that. Since the second quarter of 2010, through thick and thin, annual scare after annual scare, quarterly RevPAR has grown at least 5% in every quarter for 12 straight quarters. More impressively, it's increased at least 6.2% for every quarter since the second quarter of 2010, with the exception of the third quarter of last year, which suffered in September from the negative impact of the holiday shift. And while annual demand growth has moderated to a more sustainable 2% to 3%, average daily rate growth continues to gradually trend upwards as occupancies rise, supply growth remains muted, compression days increase, and customer mix continues to improve.

In the first quarter, while transient demand was strong, group travel also continued to recover, though the recovery was temporarily interrupted by the negative effects of the holiday shift that pushed groups from March to April.

We continue to believe that the recovering groups, while much slower and more modest than transient, will follow employment growth, as it has so far and should accelerate whenever their competition for people heats up.

At Pebblebrook, we had another terrific quarter. RevPAR rose 8.5%, driven primarily by growth in transient occupancies and rates. We estimate the renovations of Sofitel Philadelphia and Affinia 50 cost us over $1 million in room revenue, which represents a loss of roughly 110 basis points of RevPAR growth. We expect the impact at Affinia 50 to be much more substantial in the next two quarters, with more rooms out of service and the renovations moving to the lobby and entrance.

But short-term pain will result in long-term gain as we significantly improve both of these hotels. We also estimate that the portfolio benefited by about 50 basis points in the quarter from the inauguration in DC.

As has been the case in prior quarters, positive performance was widespread throughout the portfolio. 10 properties grew RevPAR over 10%, and while our portfolio properties performed very well, the CBD markets in which our hotels are located were also generally pretty strong. RevPAR in downtown Miami led the way -- up 18.1%. DC rose 11.3%, aided significantly by the inauguration.

New York's Uptown-Midtown market rose 11%, continuing to benefit from post-Sandy additional demand and strong growth in inbound international travel. Santa Monica increased 10.6%, benefiting from the entertainment industries and an increasingly tight market. Lower Manhattan rose 9.2% and Minneapolis grew 8.5%. Our hotels in these markets all benefited from this ongoing strength.

One further comment worth mentioning is that you'll notice San Francisco did not make the list of one of the best performing markets for the first time in quite some time. Demand actually rose in Q1, but a weaker convention calendar including lower-rated conventions, on average, led to RevPAR growth in both the Market Street area and the Fisherman's-Nob Hill Market of 6.2%. We expect RevPAR growth numbers in San Francisco to be substantially higher for the balance of the year.

Our mix of business at our hotels tracked the overall industry statistics. Transient revenue growth made up all of the room revenue growth in the portfolio. Transient revenues rose 9.5% in the quarter, with group revenue flat. Groups suffered, like the rest of the industry, from the negative holiday shift and generally weaker convention calendars this year. Total room revenues grew 7.4% in the quarter below the 8.5% rate of RevPAR growth, due to having one fewer day this year.

Group represented 26% of our room nights in the quarter; transient made up 74%. We expect this breakdown to be roughly similar for the rest of 2013.

Now let me talk a little bit about EBITDA growth and margins. As we reported, portfolio revenues grew 5.9%, yet same-property EBITDA grew 14.4% as we limited the growth in operating costs to 3.8%. And while the rate, on the surface, of expense growth may not sound that great in terms of limiting cost increases, consider that we have 3.8% more rooms occupied in Q1 compared to last year. And property taxes increased by 15.8% primarily due to increases at our hotels on the West Coast, especially in California that were acquired and reassessed in the last year, including W Westwood, Palomar San Francisco, and Embassy Suites San Diego. Property taxes at these three properties alone reduced our margin growth by 32 basis points.

As a result, EBITDA margins increased a healthy 157 basis points as we continue to be successful, working very closely with our operators, identifying and implementing our best practices. As of today, we've now identified over $15 million of cost savings and enhancements. We expect this process of identifying, and then implementing, and then annualizing these EBITDA and margin enhancements will continue for several years to come. Our margins are far below stabilized margins for our portfolio, and in addition, as we acquire hotels with significant opportunities to improve subpar performance, we refill the pipeline of higher growth in EBITDA for future years.

So let me provide a quick update on our property renovations.

During the quarter, 2 properties were undergoing significant renovations that had a big negative impact on their performance. The largest of them all -- the comprehensive renovation, reconfiguration, and expansion of Affinia 50 -- began in January and continues to be on schedule and without any budget surprises.

We've completed the first several floors of rooms and they are back in service, but we're now in the heaviest phase of rooms out of service, with the greatest negative impact on revenues and EBITDA. This will continue through the third quarter when we renovate the lobby and exterior -- the most disruptive, visible, and financially impactful part of the improvement project.

We're very pleased with the newly renovated rooms have been well received by the property's customer base, and we're very optimistic about the hotel's performance next year as a fully renovated, repositioned, and expanded hotel.

At the Sofitel in Philadelphia, all of the rooms are renovated and back in service as of earlier this month, though we continue to have furniture arrivals and minor work being completed. Customer feedback has been great here as well. As we look out into 2014, we see a fairly limited renovation program amongst the existing portfolio, as the vast majority of our properties have been renovated.

We expect to begin a comprehensive renovation of the Vintage Park Hotel in Seattle as we reposition that small property to a higher level. That work should start late this year and be completed early in the second quarter next year.

And at the W Westwood, the renovation of the ground floor public areas, both inside and out, is being pushed to next year as we align the project with the re-concepting of the indoor and outdoor restaurants and bars. We expect both of these projects to have only a minor impact on our performance in 2014.

Now let me turn to a quick update on our outlook for 2013. We continue to expect 2013 to be a great year for both the industry and Pebblebrook. For the industry, based on a better than expected first quarter, we're increasing the lower end of our RevPAR growth range by 50 basis points, so it's now at 5% to 6.5%. We continue to expect the RevPAR growth rate to be relatively even throughout the year.

And I'd like to make one comment about the second and third quarters. While the holiday shift of Easter-Passover has added significantly to April's RevPAR growth, we shouldn't forget that June last year benefited from July 4 falling on a Wednesday last year, which pushed significantly business, particularly groups, into the last two weeks of June. This is likely to reverse this year with June subject to difficult comparisons, while July should be aided by much easier comparisons with the holiday falling on Thursday this year.

So as a result, we expect June for the industry and Pebblebrook to be a lower-growth month, while July should be in hand. And with September having fairly easy comparisons and a better holiday calendar, Q3 is likely to be a pretty good quarter, assuming no unexpected negative events.

For our portfolio, we're also increasing the lower end of our RevPAR outlook for the year by 50 basis points, based on a better-than-expected first quarter and our current comfort with our pace for the rest of the year. That brings our outlook for RevPAR growth to a range of 5.5% to 7%, with about 100 basis point negative impact from the renovation of Affinia 50.

We're also raising the lower end of our range for portfolio EBITDA and adjusted EBITDA by $1 million, reflecting our better-than-expected performance in Q1.

The second quarter looks healthy based on current trends and business on the books, so we're forecasting RevPAR to increase by 5% to 6%, which reflects about 150 basis point negative impact from Affinia 50's renovation.

For our FFO outlook, we are raising it at the lower end by the additional $1 million of EBITDA, but we're also adjusting it for the additional preferred dividends from our $100 million series C offering, as well as $600,000 for our share of the interest related to the JV financing of the Dumont in New York.

All other assumptions for our outlook remain as previously provided in February.

Economic trends, travel trends, and business on our books continue to support our forecast of healthy growth for 2013. As of the end of March, total group and transient revenue on the books for the last three quarters of this year was up 9.3% over same time last year.

Portfolio-wise for the remaining nine months of 2013, group room nights were up 1.6%, with group ADR up 1.9% for a total of 3.6%.

Transient room nights on the books for quarters 2 through 4 were up 9.5%, with transient rate up 5.4%, and total transient revenues on the books up 15.4%. To wrap up, we continue to expect 2013 to be another terrific year for the lodging industry and an even better year for Pebblebrook.

Underlying fundamentals are very healthy. We've got tremendous opportunity in the existing portfolio to recapture significant RevPAR loss in prior years, and to dramatically improve margins through the implementation of best practices and lots of focus and hard work by our operators in our team. And we continue to be successful executing on both of these major opportunities.

So that completes our prepared remarks. We now would be happy to answer whatever questions you have. Operator?

(Operator Instructions) Andrew Didora, Bank of America.

Jon, just one question. I just want to get your thoughts on the demand environment here. You know, the recent Smith Travel data has had a lot of noise of late just given some of the calendar shifts we've been seeing, and then the airlines have been telling us that business travel is slowing, but it doesn't seem to be flowing into the hotel industry yet. Have you seen any change in any of your booking patterns or anything like that in terms of your business travelers? And are you seeing anything major on the group side in any of your -- any group cancellations in any of your big group markets?

Andrew, no. We're really not seeing any change in the trends. The scary thing about daily or weekly Smith Travel data is it often leads -- the business bounces around. We can have holiday shifts; we big convention shifts from year to year, like happened this quarter in markets like Philadelphia, and San Diego, and even to a lesser extent, San Francisco.

And so we haven't seen a change in trends at all in the last month. The first quarter was a great booking month for 2013 on both the group and the transient side, so the trend was very favorable.

We have been seeing cancellations and -- in government, and government groups, and government tentatives not going to definite when the government group we're dealing with -- whether it's in DC, or San Diego, or Seattle, or LA, or any market that we're in -- when they don't get funding. And there's less funding for groups than there was a year ago at this time.

Government began to put a lot of pressure last year on reducing travel spend in general, and so we are continuing to see that. And you know, it's a fairly immaterial impact, I think, on the industry and for us.

We went back and looked at what our government business was last year, and as a percentage of room revenues, government was 2.2% in the portfolio and probably even less of total revenues, because government spend tends to be less on a per occupied room than private business. So we think it's probably around 2% of total revenues, and any impact, whether it's 10%, 20%, 30% is fairly immaterial and seems to be being absorbed because of the strength of the markets we're in by other business.

That's helpful, Jon. Just to follow up, can you remind us when you first started seeing some of those government cancellations coming through? I believe you talked a little bit about it maybe in the back half of last year. Just curious if you could remind us when you first started seeing those come through? And for how long have you been seeing that kind of trend there?

It's been since the third quarter of last year, and I would say there's probably been a little bit more of it in the last month, probably as a representation of the austerity measure passed by the government.

Okay, thank you very much.

Jeff Donnelly, Wells Fargo.

Good morning, guys. First question, and I apologize if I missed this in your earlier remarks. But what has been your early experience with the Zeta as it relates to pricing? Are you finding the property is getting traction at the price point and the position you had originally hoped?

Yes, it is. We did a soft opening, so we have been working a little bit more on getting some trial on top of the demand that wants to be at the property because of the buzz. But we are -- we feel good about where we positioned it from a corporate rate perspective, which is at or above the Palomar. And from a public market pricing perspective, we ultimately are going to be pricing it above the Palomar. We should average rates above the Palomar.

I would guess that we should be getting there probably by the third quarter of this year as we open the restaurant and the bar at the hotel, which are under construction right now by the third-party lessee. So great response so far to the property, and the reviews even without the restaurant open have been really tremendous since we completed the property.

It's been a big change, for sure. Actually, two questions as it relates to Washington, DC, and the government travel issues. I guess if you accept the thinking that is going to be some sort of a defined step back on government spending, and then the city will eventually resume a more normalized growth pace at some point, perhaps next year, where do you think we are in that pullback stemming from austerity? Do you think we're halfway through it? Do you think we're largely through it? What is your sense?

You know, it's hard to predict something that's based upon what people in Congress decide to do or not do. But based upon what we know right now, Jeff, I would say we're certainly well more than halfway through it. It's been going on now for probably 10 months, and our guess is it probably rolls through the early part of next year. And then we're adjusted down, and we generally grow from there.

But that's -- considering that we have not lived through this specifically, that's a gut outlook versus being able to look back at history with any particular guidance.

Here's another, then, gut question for you, I guess. Could you hazard a guess as to maybe how much of the -- I'll call it potential decline in DC room demand that we could see stems from direct government spending cuts to travel and events they host versus -- I'll call it indirect impact, such as private companies hosting fewer trips to DC because of reduction in government outlays.

Do you think that's an evenly balanced proposition? Because, obviously, maybe one segment maybe favors different chain scales than another. I'm just trying to think, if that every dollar of government cutbacks in spending might relate to another dollar in private spending? Or do you think it's --

Well, that's a really tough one, because it's all mixed up here in DC when it comes to that. I mean, it's a fairly thin line between private -- for a lot of reasons. Not making a political statement here, but it's fairly cloudy.

There's a lot of users in the market that do business with the government to get per diem rate, but they're private companies, but they're working on a government contract. So what do you call that? On our books it shows up as government per diem in some cases; in other cases it shows up as corporate rates. So it's really hard to differentiate the two.

The thing I would point out will about DC is there's no catastrophe here in DC from our viewpoint. We have gone through these period where government has pulled back, whether it was the Reagan years, whether it was -- even the Clinton years, where the budget was balanced, finally, with rate increases and spending cuts. In general it's an adjustment period, and then it grows from there. And what often happens is it's just the dollars get redirected from one department to another, from one priority to another.

And so you're looking at a market right now running at the highest level of occupancy ever on a trailing 12-month basis through March. So DC was never an explosive market. It was always a plodder, and it had less downside.

And while I think DC is probably likely to be a below-average performer this year now, even with the inauguration, and probably below average performer next year as a combination of some spending cuts and the additional supply coming into the market, I think it gets better after that due to the adjustments. So I think it's good to be concerned about Washington, but I wouldn't overly worry about it.

Just one last question, and I'll cede the floor, then. On DC, though, do you think when the dust settles on this -- I mean, effectively by removing demand out of the market that is arguably a very low rate of demand -- I know the loss of room demand isn't necessarily good, but do you think when the dust settles we're going to end up at the market that, like you said, if we are more than halfway through this and the occupancy in the markets had a peak, you would think that the average rate in the market is effectively going to rise as a result of their removal, and if occupancy is high the industry could have eventually very good pricing power nonetheless?

I think the thing that I would comment about on rate is per diem is not low in Washington. And so I don't have -- we can look up the average rate for the DC market and even the CBD market. But my guess is the per diem is at least as good as what the market is.

So I don't know that there will be any great lift from there being less government in the market. I think it will vary a little bit between the downtown and suburban markets. Probably more attractive rate in the suburban markets. It's probably a little less attractive for most of the hotels downtown, but I think on an overall basis, it's probably a wash.

Okay, thanks, guys.

James Milam, Sandler O'Neill.

Good morning, guys. Jon, you give us some pretty good color a couple of quarters ago about your view on supply in the New York market. I was wondering if you could just maybe update us in your thought in terms of when and where you see supply being delivered, and how you think that may affect the Manhattan Collection in particular?

Sure. I think our view on New York supply hasn't changed. So probably the one development that has occurred -- and we actually, I think, talked about this last quarter and maybe the quarter before. We think there is about a 3.5% expected increase in gross supply in the market this year, offset by four properties being taken out of service as hotels being converted to residential or timeshare. And then there's one or two hotels like the Loews, which is actually closed right now for renovations; and part of the Palace, which is closed for renovations, that will reopen later this year or early next year.

So we think right now, this year, again, shapes up to be a pretty good year in New York. Demand continues to exceed the supply growth, and that's giving folks a little more confidence in the market to raise rates. And we're beginning to see that build.

I think as we run into 2014, there's more risk in the market, because are looking at somewhere between 7% and 7.5% supply growth -- not knowing, of course, whether there might be some other conversions out of hotels into residential as residential values rise. And so we'll see if anything happens in that regard.

But we think that's where the risk is in the market. It may all get absorbed; and again, the good news is, as we said before, the market is starting at its highest occupancy levels ever. I think the market is running 86.7% on a trailing 12-month basis.

So I think there's a little bit of demand for the last five months that's going to go away that relates to FEMA and the other city-displaced owner or renter occupancy programs. So we'll see a little bit -- I think they're talking about being about 2,000 rooms, which is a little bit more than 2%, maybe 2.2% of demand growth that we have seen in the last four months or so. That will go away, but we're seeing great international demand growth, particularly from Asia, Australia, China, and that's more than offsetting the weakness we're seeing from Europe.

Is there anything in terms of the mix of the business traveler, given maybe a little bit of shift in the economy, the business economy of New York, from financials toward tech and things like that?

Yes, for sure. There certainly is much more activity in those industries you mentioned -- dominated in the Midtown West, Midtown South markets, and downtown as well. I would say they tend to be a little less users of -- demand generators for hotels compared to the big financial institutions, which tend to have more meetings and more transient travel.

But the big positive in New York that we continue to see and expect it to continue for many, many years, is it's the biggest recipient of the global growth in travel that's going on as the developing world builds middle and upper classes, and those people want to travel. And when they come to the United States, the most primary destination is New York, and within New York, it's Times Square. So if you want to learn any language in the world, just go hang out in Times Square. You can pretty much hear any one you want.

Perfect, thank you, guys.

Ian Weissman, ISI Group.

Jon, just quickly, outside of New York, Miami, and even DC, what other markets do you see face the risk of future supply?

I'm not sure I would put Miami necessarily into the same category. And I think DC is pretty much concentrated right now into 2014 with the big convention hotel opening, but -- as being the predominant amount of supply coming into the market.

But I think that the markets that have the biggest exposure to supply, and therefore the way we would describe them as having greater risk from a performance perspective, would include Chicago, which has over 2,000 rooms under construction today, which represents about 6 to 7% of the market. Austin, which has 2,000 rooms under construction and is a much smaller market than Chicago, although a much faster growing from a demand perspective -- but that's a lot of rooms in Austin.

Nashville has a lot of rooms. I think 2,000 rooms there as well. Those are really the big -- the markets with the big exposure. At this point in time, the West Coast is generally almost 0 in most of those markets, and while it will come, and we're beginning to hear of announcements, there's very, very little that's actually started yet in the major West Coast markets.

Do you think just given the endless supply of QE money, are banks and lenders opening their pocketbooks a little bit easier in just ground-up development at this point?

It's interesting, Ian. I think there's obviously some more that is coming from the banks. It continues to be, I would say, expensive. It is expensive from an equity perspective.

They're still requiring a lot of equity, and so you need a very, very well-financed development in order to get even 50%, 60% construction financing. So you need a lot of equity, which is restraining the markets and should continue to restrain the markets for some time.

It's being augmented by alternative lenders. So, you know, there actually is a much more rational approach to construction lending right now. I mean, I come from the development business all the way back to the early 80s, and I never really understood why construction financing was priced so low, given the risk involved and the extra cost involved on the part of the lender in terms of administration.

And today, it's actually much more expensive than it used to be, and it's -- a lot of what you're seeing, particularly any of the large projects, a lot of them are being financed by alternative capital -- whether it's the opportunity funds, the mezz lenders, the Starwood Capitals of the world, the Ackman-Ziffs. It's a different market that's providing the capital, and it's much more expensive.

And so there's stuff that can happen, although it has to have great sponsorship, needs to be in one of the major markets, I think. And so I think we're going to continue to see supply growth and new construction build gradually, just like what we have been seeing. I think that goes on for another year at least, and then we'll look around again and see if economic activity and if the spigots have opened any more. Clearly, that will happen as we get closer and closer to replacement costs, and you can justify to a lender the underlying value of what you're building.

Just final question. In the Gateway cities in your markets, you consistently hear that many of the markets are back to peak occupancy. I would say that the consensus is that rate growth has been a bit disappointing to this point. A lot of people point to the job picture and unemployment rate. Have you been surprised by the inability to push rate as aggressively as you'd hoped at this point in the cycle? And when you think that inflection point occurs?

I think, you know, our view has been that there is a lack of confidence in a lot of the markets to push pricing. I think if you look historically -- and by the way, that lack of confidence -- it is not really surprising, given the media are reporting and the headwinds that we see on these sort of events that seem to be more globally interconnected today, whether it's Europe, or Cyprus, or other events that are going on in the world that seem to worry people in the US. I think after what happened in 2008 and 2009, everybody sees their shadow pretty quickly when they hear something bad and are worried about a significant decline economically -- and obviously that flowing into the lodging business.

So I think there's been a lack of general lack of confidence -- again, we have stated this before -- more so on the East Coast than there is on the West Coast. I think we see much stronger pricing power on the West Coast in general. I think it comes from slightly stronger economies, but a better attitude overall.

So I do think that the underlying occupancy and the strength of the markets, particularly the Gateway cities -- because of what you said, it being past prior peaks in some unprecedented levels. There is a lot of potential for upside growth when we begin to gain more confidence, and that can be shown in some of the markets out West. Like in San Francisco, where interesting -- last year, there wasn't any demand growth in the market, but we had double digit ADR growth in the market. So no lack of confidence in raising rates and in them sticking in the market.

Okay. Thank you very much. Helpful.

Bill Crow, Raymond James.

I have a couple of questions, Jon, following up on the cyclical kind of analysis. Where are we from a group perspective compared to prior cycles? It feels like we're maybe a year behind schedule from that perspective.

We're probably well more than that behind on group. Group demand is still off, I think, 13% -- I'm sorry, 11.5% from the peak in '06. Now, interestingly, obviously that peaked before the downturn in the economy. So that would suggest that there are some other things that work in terms of, maybe, low -- particularly things like training that might be being done on the Internet, as that's become a lot easier to do.

But I think that we are still a ways off in the recovery in some big pieces of demand, like the cultural meetings that companies have, the incentive trips, the rah-rah -- some might call them boondoggles. We in the business call them alternatives to cash compensation. I think that will come at some point as the employment markets strengthen and there's more competition for people, and companies need to be more proactive in growing loyalty and trying to keep people happy.

But I can't tell you when that's going to be. It's likely to be a gradual process like it's been, and so I think we've got several years to go, Bill, it seems like in the recovery of group demand.

Okay, that's helpful. On the Affinia in the Manhattan Collection, any success at moving guests down the street to the Benjamin with rooms out of service at the 50?

That's definitely happened to some extent. The Benjamin is doing very well. Part of that has been from moving a guest from Affinia 50 or them choosing to go down there. Part of that is due to the closure of the Loews and the Palace -- the tower there, and us being able to take some corporate business that was at those properties into the Benjamin.

The other benefit that we've had at the Affinia 50 -- we've had very strong rate growth beyond the market, because with basically half the house available, we've got 100-room hotel. A lot of the business we've been able to avoid has been lower-rated, discounted, promoted business, which we haven't had to take yet. So it's actually done a little bit better than what we have thought so far, but we haven't gotten into the very visible disruptive phase.

And Jon, with the completion of Affinia 50, think about Affinia as a brand, whether it is or not -- but let's think of it as a brand. Is the quality now such that guests that might go to one one month might go to the other and not be disappointed or surprised?

I think so. I mean, the properties have either been recently renovated or they have been gradually renovated over the last few years. All of the properties are in pretty good shape.

And I would say this -- the size of the rooms, even following a reconfiguration, we still have probably some of the largest rooms in the market at Affinia 50, on average. For anyone who's gone through the model room or will go through the model room, you'll see how large the room is after being reconfigured.

So I think there's a lot of consistency between the five Affinias that are in New York. And even -- interestingly, I believe with the completion of the full renovation of Affinia 50 from a physical product perspective, it is nicer than the Benjamin.

Right. Jon, one final question from me. When you started putting together the budget and the outlook for this year, and thinking about the industry, thinking about Pebblebrook, where did you see the highest risk? Was it early in the year because of calendar issues?

It seems like -- and you touched on some of these items -- the shift in the Fourth of July, the September in New York last year. You got some easy comps coming up. Is it fair to think that the risk to the outlook was really front-end loaded, and if we kind of get through the second quarter, it should be smoother sailing? Or is that the wrong way to think about it?

I think from a micro perspective that's true, Bill. The specific supply/demand fundamentals and the holiday shifts and such. I mean, it's interesting, because I think as the year goes on, we continue to build occupancies in all the markets. We move into the higher-compression periods, and yes, I think from a micro perspective, there's less risk.

I think from a macro perspective you can make an argument that there's more risk just because of the fiscal drag aspect and people saying that maybe the first quarter is the strongest quarter of the year from an economic growth perspective. I don't really know. But I think they're a little bit offsetting, and so maybe the macro risk is -- continues to be a little bit more second half of the year focused, but the micro risk probably was more in the first half of the year.

Great. Thanks, guys.

Jim Sullivan, Cowen Group.

Jon, in your prepared comments you touched a little bit on the outlook for San Francisco for the balance of the year. I just wonder if you could spend a few minutes talking about your expectations over the balance of the year for both San Diego and the Pacific Northwest?

Sure. I mean, they're two very different markets. The Pacific Northwest is very strong. Seattle is running a couple hundred basis points higher on trailing 12 occupancy than its historical peak. You have very strong corporate growth in that market.

You have some of that in Portland; it's like the little brother or little sister. And so you have some strong corporate growth, though maybe not as deep, in Portland. And so we see both of those markets as very good for the balance of the year.

I think San Diego is a bumpy year. Its convention calendar bumps around but is generally a little bit weaker than last year. A little bit weaker in rooms and a little bit weaker in the rated types of conventions it is.

So we saw some of that in the first quarter, when the city had a great January and a not-so-great March. And we're going to see that in the second, third, and fourth quarters. There's some really good months, and there's some pretty bad months in San Diego because of the convention calendar.

But I think San Diego continues to grow from a demand perspective because of the weather and the desirability of the market. And as we begin to look out into future years, the convention calendar -- which doesn't move a lot between years; it's a little better, a little worse each year -- definitely gets a lot better in 2015 and 2016. I think part of that is anticipation of the expansion of the convention center, though that's probably not likely to happen until at least 2016 at this point.

And Jon, just continuing on the West Coast, your portfolio has a significant weighting in the West Coast already, and you touched earlier on your outlook for supply generally being a lower level coming in the West Coast. And as you think about acquisition opportunities for the balance of this year, how do you think about either putting more capital to work in a West Coast, number one? Number two, how do you risk-adjust or factor that lower risk of new supply into the cap rates you are willing to pay in the market?

I think we look at each market individually and things -- when we're forecasting the next five years, we're looking at supply and demand in the market, and it will factor itself into what we think the growth rates are going to be.

So that's certainly part of it, and that effectively, in a way, gets factored into the risk side of it. So we do look at the risk and take that into account. It perhaps gets a little more built into what the growth expectations are in the market, assuming we're being honest with the future, which there is no reason for us not to be in our own underwriting. So yes, that is pretty much is how we take it into account. And it would vary by market, depending upon what we see as the supply/demand specifics of that market.

In terms of your weighting in the West Coast generally, are you -- would you be happy to increase it if the valuation is right?

Yes, a fair question. Yes, we're not uncomfortable with the weighting on the West Coast becoming larger. We think the trends that we see today of supply coming later and it being lower are the same trends we have seen for the last 25 years.

It's harder to build out there; it takes longer; it's more expensive, in many cases. And so, yes, as a company we are very comfortable with the weighting on the West Coast being higher than the weighting on the East Coast, and that weighting growing from where it is right now.

And two other quick questions. For the Boston W hotel, can you give us kind of an update on what's happening at the lower level there, the Club level, as well as the potential for signage revenue at the asset?

I didn't follow -- what do you mean by at the Club level?

Well, the nightclub, I believe, is closed.

Yes, we closed the nightclub at the end of last year. It's leased to a local third-party with experience -- very successful experience in the nightclub business. And I think it's due to reopen -- I think next month. They're just finishing out some modifications to the space and getting their permits and approvals. So we've turned something that was losing a significant amount of money into something that's going to pay a significant amount of money through the lease.

As it relates to be signage I think you were mentioning, we have gotten local approval as part of being in the theater district to add a digital sign on the exterior of the building, large digital sign on the exterior of the building. I think there are some final state approvals required. We expect to get those, and we look to have -- we have a lease in place with a billboard operator, and we would expect that we begin receiving rent towards the end of the year. That rent is probably -- it ramps up over time, but it certainly becomes fairly substantial in a couple of years in the $200,000 to $300,000 a year range.

Okay. And then finally for me, in the first quarter Miami was exceptional market, and your asset did well. How much of that first-quarter number do you attribute to the international inward demand, and where do you see that going over the balance of the year?

I think a good bit of it, Jim -- we've seen strength in Brazil coming back in travel due to the strength of the economy improving and the exchange rate with the real. I think Miami has also got a -- it's got a buzz to it as sort of a hot destination.

March had some great festivals and events, including the Ulta music festival, which stretched from historically one weekend to two weekends in March this year and really helped drive occupancy and rate in the marketplace. So Miami is well past the prior peak from an occupancy perspective, and we think it's going to continue to improve dramatically from a demand perspective so long as South America and the South American economies continue to be healthy.

Okay. Thank you.

Wes Golladay, RBC Capital Markets.

Looking at the wider group on the books versus transient business, is some of this a result of electing to allocate more of the rooms to higher-paying transient customers?

Yes, there's definitely some of that. Particularly in San Francisco, there's a few of our properties like the Argonaut, where that's been a specific strategy. We're also finding in that market, as an example, that some of the group is still price sensitive, and our rates have just outgrown their ability to afford us.

So where -- even with that, at the Argonaut, as an example, we're going to run at much higher occupancies than last year as we continue to try to drive rate. But we look like right now we are going to run into the low 90%s for the year. We're trying desperately to raise our rates to lower that, but we're not having -- I guess we are not desperate enough.

Okay. Now looking at the furloughs of the air traffic controllers, will this have any impact on the business in your mind?

I don't know, Wes. I don't know how much longer it's going to last. The Senate passed the bill last night. The House is expected to take it up and pass it today. Those guys don't like to be inconvenienced when they travel, and they've certainly had a lot of pressure on them just in five days.

It seems like that's going to go away anyway, but even if it didn't, we have gone through periods historically in this industry where they have changed the security measures and it's caused significant delays, and it hasn't really impacted travel demand. I wouldn't expect it to be material, even if the folks in DC didn't give the FAA more flexibility.

That's a good point. I forgot they were being inconvenienced as well. Now looking at the acquisition pipeline, most of the REITs are at 52-week highs. Cost of debt, cost of preferred is pretty attractive. Do you see the deal pipeline improving right now?

I think you know the deal -- the acquisition market, the transaction market I think will continue to be as active as last year, particularly in the second half. And so a lot of times, the years are a little slow getting going, because properties don't come to market until the first quarter, and they take time to go through the process.

And then I think in sort of more cases this year than maybe last year, more of them will involve assumption of debt, and that process can take 90 days or 120 days. Much of that is added to the overall process. So it seems like deals are taking a little longer on average than they have historically -- the deal we did in San Diego, Wes, we started that deal in September and didn't close until the end of January because of the loan assumption.

So I would expect -- I mean, there's a decent number of assets on the market. We know there's a decent number of deals getting done. You're beginning to see some of those with announcements in the market, and I think that will accelerate over the course of the quarter and the rest of the year, just like it did last year.

And has pricing moved materially from, say, when you were buying the W Los Angeles last year?

I think the pricing continues to move up from a nominal basis because the underlying cash flows continue to move up. I don't think we've had a drop in cap rates, and I don't think we have seen, really, an increase in cap rates, if you will, in first year yields -- although that obviously is not the basis for valuations in our industry. But it often is the mathematical result of underwriting.

So I think what happened is, in general, you have had a slight increase in prices and values because of underlying cash flows. You have most underwriting showing lower CAGRs than they were a year ago, and you've probably seen another 100 basis point -- probably seen 100 basis point decline in unlevered IRRs in the past year.

Okay. Thanks for the color, guys.

Lukas Hartwich, Green Street Advisors.

Thank you. Hey guys, just a quick one. What are the plans with the Delfina when that franchise contract rolls in November?

A good question. We are in the process of evaluating alternatives there. There really are three.

We can keep it as a Sheraton and renew the franchise arrangement with Starwood. We can rebrand it as a big brand, and our desire would be to up-brand it because of the quality of the property and the strength of the market. And so that's a second alternative.

And the third is to de-flag it and make it independent and run it as an independent hotel. All of which would be done with the existing operator, which is the Viceroy Group. So, no final decision has been made. The arrangement is up in November -- the current franchise agreement -- and we'll let you know soon as we make a final decision.

Great. Thank you.

And there are no further questions in the queue at this time.

Thank you all for taking the time to participate today, and we look forward to another terrific quarter in Q2 and to updating you following that quarter. Thanks.

Again, that does conclude today's presentation. We thank you for your participation.