Pebblebrook Hotel Trust (PEB) 2013 Q3 法說會逐字稿

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

Thank you, Devona. Good morning, everyone. Welcome to our third quarter 2013 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

Before we start, let me remind everyone that many of her 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 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, October 25, 2013, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain a reconciliations of non-GAAP financial measures that we use, on our website at pebblebrookhotels.com.

Okay, so the good news is we have another solid quarter to talk about. Lets get started.

Same property RevPAR for the portfolio climbed 6.2% to $202. This exceeded our outlook for RevPAR growth of 5% to 6%, primarily due to the strong transient and group demand and better than expected performance at many of our West Coast properties, which has been consistent throughout the year. This was offset by weaker performance in DC and the negative impact at Viceroy Miami from out of order rooms due to a repair that Jon will discuss in more detail later.

Our overall same property RevPAR gains in the quarter came exclusively from growth in rate. Our 6.2% RevPAR increase was driven by 6.3% increase in ADR, while occupancy decreased 0.1% to 86.8% demonstrating pricing power in the portfolio and the very high occupancy levels we have already achieved with the majority of our markets above prior peak occupancy levels.

As a reminder, RevPAR and hotel EBITDA results are same property and include all the hotels we owned as of September 30, whether we owned them or not the prior-year period, except for Hotel Modera, since we didn't acquire this hotel until the second half of the quarter. We don't exclude hotels under renovation from our RevPAR and EBITDA hotels in our results. In addition, our results reflect 49% of the performance of the Manhattan Collection mirroring our joint venture ownership percentage.

For our portfolio on a monthly basis, July RevPAR increased 7%, August was up 8.2%, and September climbed 3.5%, reflecting softness we saw in the first two weeks in September due to the Jewish holidays. At the Affinia 50, RevPAR declined by 22% in the quarter as a result of the ongoing comprehensive renovation, expansion, and repositioning, which continues to be on budget with substantial completion expected in November. The RevPAR decline at Affinia 50 negatively impacted our same property RevPAR growth for the portfolio by 69 basis points in the quarter.

Compared to last year, third quarter same property total revenues increased 5% and expense growth was 4.8% resulting in a same property EBITDA margin increase of 11 basis points. Without Affinia 50, our same property EBITDA margin growth would have been 42 basis points, which is more indicative of the overall success in continuing to drive margins upward. Property tax increases at our four most recent California acquisitions, due to automatic reassessments, also took 18 basis points off our margin growth in Q3.

The 11 basis point increase was below our outlook of the 25 to 75 basis point increase due to weaker than expected margin performance at Le Meridien Delfina due to the disruption related to the up-brand conversion from the Sheraton brand, which negatively impacted our overall margin growth by 32 basis points. At DoubleTree Bethesda, continued cutbacks in government travel and the government shutdown, which affected bookings in September, negatively impacted margins 18 basis points. At The Benjamin, poor expense management at the National impacted our margins by 21 basis points.

In addition, or portfolio also faced tough year-over-year comparisons as we grew EBITDA margins 283 basis points in last year's Q3. As a result, our hotel portfolio generated $47.3 million of same property hotel EBITDA, a 5.4% increase over the third quarter of last year. Healthy growth rates at our recently renovated properties, including Hotel Zetta, Monaco Seattle, and Argonaut San Francisco, as well as overall continued robust performance through our West Coast markets, was offset by softness we experienced in the Washington, DC market, as well as the negative impact caused by the renovation of the Affinia 50.

EBITDA at Affinia 50 declined 62% in the quarter, which reduced our same property EBITDA growth rate 159 basis points. EBITDA percentage growth leaders in the third quarter include Hotel Zetta, Monaco Seattle, Vintage Plaza in Portland, Vintage Park in Seattle, the Argonaut San Francisco, and W Westwood. You'll note that all these hotels are located on the West Coast, which again highlights in the continued strength in this part of the country. In addition, 10 properties grew EBITDA at double-digit rates compared to the same period last year.

As a result of our solid hotel operating performance during the quarter, as well as greater number of properties this year versus last year, we generated adjusted EBITDA of $44.4 million for the quarter, an increase of $9 million or 25.5% as compared to last year's third-quarter results. Our adjusted FFO climbed to $28.3 million or $0.46 per share compared to $22 million during the third quarter of 2012 or $0.37 per share, representing a 24.3% increase per share.

Year to date, same property RevPAR has increased 6.9%, same property EBITDA has climbed 8.6%, EBITDA margin is up 80 basis points and adjusted EBITDA is up 32.8% or $27 million versus last year. Without Affinia 50, year-to-date RevPAR would have been up 7.7%, same property EBITDA would have increased 10.5% and EBITDA margin would have grown 113 basis points.

Now, let's shift our focus to our acquisitions and capital reinvestment activities that we completed in the third quarter. On August 8, we acquired that award winning Redbury Hotel at Hollywood and Vine in the heart of Hollywood, California for $34 million. This 57 room, all suite, luxury, full-service hotel is managed by SBE and marks our fourth acquisition in the West LA market. We acquired this hotel with cash on our balance sheet.

On August 28, we acquired the Hotel Modera and downtown Portland, Oregon for $47.5 million. This 174 room, urban boutique, upper upscale hotel is now managed by OLS and marks our second acquisition in the going downtown Portland market. As part of this acquisition, we assumed a $23.7 million loan, which matures in July 2016.

During third quarter we invested $8.9 million into our hotels as part of our capital reinvestment program, and year to date we've invested $37.6 million into our portfolio. These investments, though disruptive to performance in the near term, are expected to lead to out performance in 2014 and beyond, which is consistent with the improved performance we've regularly seen following our previously completed capital reinvestment programs. As of September 30, we had cash, cash equivalents and restricted cash of $126 million plus another $12.7 million in unconsolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in the Manhattan Collection.

I'd now like to turn the call over to Jon to provide a little color on the recently completed quarter, our outlook for the balance of the year, and some initial thoughts on 2014. John?

Thanks, Ray. As Ray discussed, the third quarter was another terrific quarter for Pebblebrook despite some fiscal and economic headwinds and both forecasted and non forecasted disruption in the quarter. A solid quarter of industry fundamentals and high occupancy levels at our properties and in our markets allowed us to drive healthy increases in average daily rates, which represented all of our RevPAR growth in the quarter.

When we look at the third quarter's overall industry trends, performance continued to be driven by strength in transient travel, both business and leisure, while group demand across the industry continued to be weak and negatively impacted by federal government travel cutbacks and the beginning of the government shutdown.

Overall demand in the US rose a healthy 2.1% in the quarter, the same rate of growth as in the second quarter. Supply growth in the US continued to be constrained at just 0.7%, down very slightly from the 0.8% in Q2, certainly very encouraging. As a result of demand growth that continues to exceed supply growth, occupancy for the industry increased 1.4% and ADR grew healthy 4% up from Q2's 3.6%. The result was a RevPAR increase of 5.5% and acceleration from the second quarter's 5% RevPAR growth and the fourteenth straight quarterly increase in industry RevPAR of 5% or more. According to Smith Travel, group continued to significantly underperform transient with group RevPAR up just 1.6% in the third quarter while transient carried the industry with RevPAR increasing a strong 7.9%.

At Pebblebrook, our West Coast properties again significantly outperformed our properties located along the East Coast. RevPAR at our hotels located in Seattle, Portland, San Francisco, LA, and San Diego, climbed 11.5% on a combined basis in the quarter, with occupancy up 1.5% to 89% and ADR climbing a very strong 9.8%.

On the East Coast, excluding Affinia 50, our properties in Boston, New York City, Philadelphia, Washington, DC, Buckhead and Miami grew RevPAR by 0.6% with occupancy declining 1.7% while ADR increased 2.3%. RevPAR growth at our East Coast properties was negatively impacted by the large numbers of rooms out of order in the quarter at Viceroy Miami, as we repaired the leaks in all of our guest bathrooms discovered from defective original construction, as well as lost business that occurred primarily in DC from government cutbacks in travel in the government shutdown.

RevPAR at the Viceroy Miami declined 21.2% in the quarter, as occupancy declined by over 30% as a result of the reduced available inventory. It knocked off almost 50 basis points from the same property RevPAR growth in the quarter.

If we look a little more closely at the individual markets and their performance the quarter, it continues to highlight the ongoing fundamental strength and better psychology of the West Coast cities compared to the East Coast markets. On the West Coast, in the third quarter, RevPAR increased by 14% in San Francisco's urban market. In downtown Seattle, RevPAR grew by 13.4%. In downtown Portland, RevPAR rose 10%, Hollywood Beverly Hills 6.9%, Santa Monica 6.7% and downtown San Diego 6.1%.

Every one of these urban markets of this West Coast cities exceeded the US industry RevPAR growth rate in the third quarter. Our properties, on a combined basis in these markets, outperformed the underlying West Coast markets. As a reminder, our West Coast properties represent 57% of our run rate EBITDA for 2013.

On the East Coast, the strongest markets in the quarter included Buckhead with RevPAR increasing 10.5%, downtown Miami 6.3%, and Manhattan up 4.8%. Downtown Boston was up 4.3%, while Washington, DC CBD still managed to eke out a small gain in RevPAR at 0.7%, despite struggling with government cutbacks and then the government shutdown at the end of September. To repeat, these statistics are for the urban markets described, not the metropolitan markets and not our individual properties.

While transient business led the way in the industry, our group revenues grew at a higher percentage than our transient revenues in the quarter. Group revenue grew rose 7.8% with ADR up a very encouraging 5.3%. Transit revenue grew 6.3% in the quarter with ADR increasing a strong 7.2%. Despite the outperformance, group again represented just 24% of our room nights in the quarter and transient made up 76%. Year to date, this breakdown is the same and we expect this roughly 75/25 segmentation to remain for the rest of 2013.

Now, let me provide a quick update on our property renovations. During the quarter, two properties were undergoing significant renovations that had a material negative impact on their performance and our portfolio. The largest of them, the comprehensive renovation, reconfiguration and expansion of Affinia 50 began in January and is expected to be substantially complete next month. We don't yet have the increased room count due to disruption from the elevator work and exterior hoist. We expect these rooms back in November.

Overall, lost revenues and EBITDA have run less than originally forecasted, while renovation costs are coming in well within the initial budget. We initially expected about 100 basis point negative impact on our same property RevPAR growth for the year and so far we're running about a 90 basis point impact. EBITDA at Affinia 50 is currently forecasted to be down about 60% to last year, while we originally expected it to be down closer to 75%. We continue to be optimistic about the hotel's performance next year as a fully renovated repositioned and expanded hotel.

The other major disruptive work in the quarter was not forecasted. We spoke about this at our investor day. We had been investigating the cause of leaks in a growing number of our guest bathrooms at Miami Viceroy, and after a great deal of effort and assistance, we ultimately determined that the source was defective, initial construction in every guest bathroom. We were finally able to begin restoration and reconstruction work in late August and now expect completion in November, well ahead of the commencement of the seasonally strongest period in Miami that begins at the end of the year.

Property performance has been substantially impacted, as discussed earlier, and it has reduced our overall RevPAR growth statistics. We currently expect that our business interruption insurance will substantially cover the negative financial impact.

Now, let me turn to an update on our outlook for 2013 and some initial thoughts on 2014. We continue to expect 2013 to be a great year for both the industry and Pebblebrook. For the industry, we have narrowed our RevPAR growth range to 5.25% to 5.75% taking 75 basis points off the top and increasing the bottom end of the range by 25 basis points. For Pebblebrook, we're increasing the bottom of our range by 50 basis points and taking 50 basis points off the top of our RevPAR growth range, which is now forecasted to be 6% to 6.5% for the year. Reduction at the top end relates to the impacts from the government shutdown and the disruption at Viceroy Miami.

The end of the third quarter and beginning of the fourth quarter were negatively impacted by the government shutdown. Lost business included group and significant transient cancellations, both government and those doing business with government, as well as tour groups and international travelers. The impact occurred throughout the country, though for us it was primarily in the DC market, perhaps about 80% of it. Yet, we saw group cancellations or shortfalls in government pickup in almost all of our markets. While the impact for the year is currently forecasted to be minor, we expect it to have taken about 30 basis points off our same property RevPAR growth in 2013 and about 100 basis points off of Q4, pretty much all of it in October. We estimate we lost over $1 million in room revenues, over $1.2 million in total revenues and $1 million and EBITDA.

We've dubbed it Super storm Congress and we hope it represents a one-time impact, as was the case with Super storm Sandy last year. Our endearing thoughts about our political establishment are expressed by our song selection this quarter, as we believe nothing but needless suffering was gained through the government shutdown by the jokers on the right and the clowns on the left as we were stuck in the middle with you. Our forecast for GDP growth for 2013, as a result, also declines by 25 basis points as a result of our political fiasco.

For the year, we are increasing our outlook range for both adjusted EBITDA and FFO, primarily to reflect the Redbury and Modera acquisitions, yet partially offsetting it by the negative impact of Super storm Congress. For the fourth quarter we are now forecasting same property RevPAR growth of between 3% to 5% with same property EBITDA margin forecasted to increase between 125 and 175 basis points. Our RevPAR range for Q4 is lower by 100 basis points as a result of Super storm Congress.

As of the beginning of October, total group and transient revenue on the books for the fourth quarter was up 8% over same-time last year. While these numbers predate the effects of the government shutdown, which is impacted October by about 300 basis points, we feel comfortable that are favorable pace supports our fourth quarter and now full-year outlook.

We're increasingly encouraged about our outlook for the industry and Pebblebrook for 2014. We believe the economy is likely to perform better without the substantial fiscal headwinds resulting from the payroll and income tax increases and the sequester cutbacks and shutdown that have negatively impacted 2013. Of course, this presumes that we don't have a repeat of what just occurred here in Washington.

Economic forecast for GDP growth are currently 100 basis points or more higher for 2014 than for 2013. This expected improvement in economic growth, should it transpire, should provide for improved employment growth, and when combined with continuing increases in inbound international travel and a more favorable convention calendar in general for the industry and in many major US cities, should all lead to higher demand growth in 2014. Higher demand growth would more than offset slightly higher industry supply growth next year, which we are now forecasting between 1.1% and 1.3%. That's about 30 basis points lower than we were forecasting earlier this year and well below the long-term industry average of 2% plus.

Finally, our pace for 2014 is extremely encouraging. Total revenue for the portfolio is pacing up 13.6% on a same property basis with room nights up 8.8% and ADR up 4.4%. Both group and transient are looking very positive. Group revenue on the books is up 12.1% with room nights up 9.2% and ADR 2.6% over the same time in 2013. Transit revenue on the books is ahead 22.5% with transient room nights up 5.8% and transient ADR higher by 15.8%.

Despite these very favorable numbers, we would caution that the percentage increases on total revenues are certainly not achievable for the year and group room nights on the books represent only roughly one-third of our expected group room nights for 2014. Nevertheless, being well ahead is much better than being well behind, and the transient ADR premium is certainly positive.

To wrap up, we continue to expect 2013 to be another terrific year for the lodging industry and even better year for Pebblebrook. Underlying fundamentals remain healthy and we are very encouraged about the outlook for 2014. With the completion of our renovations, we've got tremendous opportunity in the existing portfolio to continue to outperform as we recapture significant RevPAR lost in prior years and dramatically improve margins through the implementation of best practices. Quarter after quarter, working collaboratively with our operators, we expect further success executing on both of these major opportunities.

That completes our remarks. We'd now be happy to answer whatever questions you might have. Devona?

(Operator Instructions)

Andrew Didora, Bank of America.

Certainly appreciate some of the color that you gave on the east-coast versus west-coast markets. I think your recent deal activity shows what you think about the continued growth out on the west coast. I was curious -- do you see any other markets out there that you think might have some similar characteristics emerging that would attract you to them?

I know when you first brought Pebblebrook public, there were a few other target markets that you were considering. I was just wondering if your thoughts have changed at all in terms of the markets you'd go after?

Not really, Andrew. If anything -- obviously, since our IPO we've significantly reduced the number of our target markets, and really removed the markets that we believed were cyclical markets or those that had economic barriers to entry back at the beginning of the cycle. If anything, I would expect probably our viewpoint to continue to narrow about our target markets as we become probably more -- continuing to be more successful in markets that have higher barriers to entry and supply that's coming later in the cycle than those where supply has come or is coming here earlier in the cycle.

Got it. Then, switching to a market where -- you've been a little bit worried about the supply growth in New York. Just wondering -- as you are finishing up the expansion at Affinia 50, it seems like you could have a good, built-in pipeline here with the Manhattan Collection. Is there any willingness on your part to maybe eventually try to buy out Denihan and consolidate those properties, or is the supply growth in New York too much of a risk right now?

I don't think the supply growth would influence our decision to own a greater percentage of the joint venture than what we own today. What would influence is that we certainly don't have any rights to buy them out, and we don't expect them as a multi-generational owner to look to sell their interest in the joint venture. I think as we mentioned when we bought the joint venture that we fully expected that our ownership would remain exactly where it was at the time of acquisition, and that we didn't expect it to go up at all.

Got it. One last one from me -- the group revenue numbers that you put up in 3Q, as well as the pace numbers for 2014, seem pretty strong to us. Why do you think group was so much better, I guess, first, in 3Q than transient? Then, just in terms of the industry, do you think some of the issues that we saw in the first half of the year on group are getting less bad as we are now in the back half of the year, heading into 2014?

I think our performance from a group perspective in the third quarter was very specific to our portfolio. We have some properties in our portfolio that strategically have been focused on ramping up, following renovations, including Westin Gaslamp, the InterCon in Buckhead and the Affinia Manhattan. So, really, three of our largest properties, and those that have a very heavy group focus, and we are looking to have an even heavier group focus in order to maximize overall RevPAR growth, and in particular, ADR growth.

When you look at the industry statistics for 2013, which is really a much better way to judge were group is -- for 2013, we certainly haven't seen any improvement at all across the overall industry. In fact, it's certainly been negatively impacted by the government cutbacks, and certainly reductions in overall group meetings being undertaken by the federal government.

We are encouraged about next year's numbers. Maybe not as much by our own numbers, which, again, I think are probably more specific to our portfolio, but through what we've heard consistently from many of our peers and some of the brands about their overall pace for 2014, which is a much broader set of data than anything we could possibly provide.

I think the other positive about group for next year, as I mentioned in my comments, is in a lot of the markets -- the major cities next year have improved pace, and have expectations for improved overall convention business for next year compared to this year. Again, it just has to do with this peculiar rotation that goes on. So, that is very encouraging, as opposed to this year where we said at the beginning of the year that the convention business overall in the industry and in many of the major cities was going to be off in 2013, and unfortunately that, in fact, has been the case.

That's great. Thanks a lot for the color -- appreciate it.

David Loeb, Baird.

Definitely enjoyed the song. (laughter) Can you talk a little bit about where you guys are in the acquisition phase of the cycle, and how much longer you think the hotel cycle itself is likely to continue?

I think, as it relates to the overall underlying operating cycle -- we talked about it in more detail at our investor day in September. It really comes down to what happens with really two cycles. One is the macro cycle -- we're economically sensitive. Whenever the next downturn takes place economically, we are going to be impacted by that.

But for the fiscal shenanigans here in DC, our expectation is -- but for that or any event that might take place that could throw the overall economy into recession again -- we really think the economic cycle is going to be stretched because the recovery has been relatively weak and very modest. From the overall economic cycle, we think that has quite a long way to go.

From the micro cycle, which is the supply and demand from an industry perspective and in our markets, we also think that's stretched out, as indicated by what is a very low growth in supply at this point, and continuing challenges and difficulties on the part of developers to get large amounts of capital for new construction. While the supply growth and the construction pipeline is increasing -- and we focus much more on what's under construction than what's in the pipeline, because the pipeline is always huge. We're very encouraged by what we are seeing, and the reduction in our outlook for supply growth for next year is a particular positive from our viewpoint.

We think the micro cycle's getting stretched out. Obviously, the even greater micro cycle, David, is related to each individual market. Clearly, we're seeing supply as well publicized in different markets to a much greater extent than in other markets. And that's the cause of our focus over the last two years already on markets where the supply growth is coming much later in the cycle. We're pretty encouraged about that.

We think the overall cycle will be stretched out. We think the micro cycle's being stretched out. For now, we continue to be active and pursuing assets. As you are aware, everything we've bought since July of 2011 has been on the west coast. I think that represents our micro bias, if you will, and perhaps even some macro bias, economically.

How long that lasts? I mean, we've talked about it being perhaps through -- at least our ability to compete -- at least through sometime next year. We have to see how everything plays out. As we indicated, supply is coming a little later than what we've been forecasting. We continue to be encouraged about the opportunities in the market, but we continue to focus on assets where we can make a big difference from an operating standpoint and/or a physical standpoint.

Great. Can I just ask one more?

Sure.

What do you think the outlook is for increasing group rates? It just doesn't seem like that rate increase is all that strong. When do you think that starts to improve?

I think it's going to be gradual. I think it's going to continue to improve as underlying occupancies continue to improve. There are more compression days due to the higher occupancies. We've seen significant group rate growth on the west coast. We expect to see it again next year. Again, I think group rates are bifurcated, just like the east coast/west coast overall rates and performance are bifurcated.

We do think that as we see further employment growth, and as we begin to see the unemployment rates come down, and as we begin to see more competition for professional service providers in particular, we believe we will see increased demand growth through the rah-rah culture meetings, training meetings and incentive travel that historically picks up and is historically correlated to competition for people. We haven't really seen much pickup in that yet. Where we've seen pickup in corporate group, it's been offset by reductions in federal group, and so we haven't seen improvement overall.

We believe that next year will be better from a group perspective, and we think that should translate into some modest improvement in group rates. But again, much more so on the west coast than on the east coast.

Okay, great. Thank you.

Ian Weissman, ISI Group.

Most of my questions have been answered, but just in terms of -- as you are looking at deals in the marketplace, given that rates are probably trading at one of the lowest implied cap rates they have in the last two years, maybe you can talk about who's out there looking most aggressively? Are you competing now more with the REITs on deals, would you say?

I think what we have seen over the last six months is an increase in the amount of leverage that's available to private equity, and a willingness to use that, particularly because the cost of mezzanine debt and the higher tranches of debt has come down significantly even though we've seen some increase in the interest rates on the base apportion of debt that gets underwritten and provided. We've begun to see more competition in the major cities of high-quality properties from private equity. Acquisitions by Northwood is a good example related to the London or the Waldorf in Naples down in Florida.

We've also seen more competition from the public non-traded REITs like Carey Watermark or Inland American, who are seeing significant ramp-ups in capital that they are raising, and a rotation on their part into investing that capital not only into hotels but into full-service, four-diamond-equivalent hotels. I think we mentioned at our investor day -- where we used to see most of our competition come from our peers, and we still certainly see that, we have added competition from both private equity and the public non-traded REITs. All of which has been expected, as we've talked about previously.

Where we are happy to cede the grounds to folks in the middle or later part of the cycle, where our focus has been accumulating assets, high quality, in the major markets in the early part of the cycle. Our hit rate has probably gone -- our success rate has probably gone from -- for the assets we pursue, and pursue aggressively, it's probably gone from a 50% hit rate down to a 20% or 25% hit rate.

Given the change that you've seen in the leverage the private equity is taking on, would you say -- private equity, early cycle, was focused a lot more on limited service, secondary markets, higher yield. Given the change in leverage, are you seeing -- would you then say private equity is getting more aggressive for high-quality luxury-branded product today than you've seen before?

I'd say no doubt about that. I think part of it is they've driven pricing up so significantly on the limited-service or select-service side, and the gap has narrowed, and the much higher growth rates on full service, particularly urban properties, is so much higher than select service that it makes sense to refocus or pivot to the full-service properties.

Right. Okay. Thank you very much.

Wes Golladay, RBC Capital Markets.

Looking at that 7.3% increase in ADR in the wholly-owned portfolio -- is that driven by mix shift, or are you guys raising prices across the segments?

Both. We continue to improve our mix through eliminating the lowest-rated business that we have, when we can, and replacing it with continuing growth in business transient and leisure transient that is less price sensitive.

It's also price increases. We had probably mid-single-digit corporate-transient increases for this year. We are looking at something similar next year. Again, probably higher in the west coast markets and lower on the east coast markets, in terms of success with our corporate accounts.

Then, we continue to improve mix as demand continues to go up. As seen through our eyes in the third quarter, there is not much more occupancy we can increase at an awful lot of our properties. Clearly, we can pick up some occupancy from the Viceroy Miami and the Affinia 50, but our focus has been giving up some occupancy for rate.

In New York, we've had some success doing that, perhaps giving up more occupancy than we want to get the rate that we've gotten. That's a lot of tweaking and revenue management to take place. Whereas on the west coast, we've gotten rate and we haven't given up any occupancy.

So, we're going to continue to push those boundaries. It is both pricing and choosing not to take certain business, and choosing not to have as many discounts and promotions offered on a periodic basis.

Okay, thank you. Looking at your west-coast markets, are you seeing an increase in development permitting and pre-planning for some of those more supply-constrained markets?

For sure. There is definitely -- the development community is increasingly active in trying to put projects together as the performance of these markets continues to improve and ultimately support new development. It takes time. Particularly in the west-coast markets, it can take a long time. There was a report about this dramatic change in Santa Monica, in terms of new development, and the reality is -- there probably isn't going to be anything delivered, at the earliest, until 2016. That presumes they can get through the process without ultimately having the community groups stretch these things out even further.

We are seeing activity, and the beginnings of activity, in markets like Seattle where there is an Embassy Suites under construction down by the stadiums. There's probably four or five other projects, many of which are part of major mixed-use towers, be announced, but nothing started yet. We have a select service hotel in Portland under construction. We have one in San Francisco.

We have some folks who have discussed potential projects in all of those markets. But again, not much has started, and not much is fully approved. When it does, it's going to take, generally, anywhere from 18 to 36 months, depending upon the size of the project.

Okay. Thank you, guys.

Jeff Donnelly, Wells Fargo.

Jon, you touched on this a little bit in your earlier remarks, but I'm just curious. With the higher rates upon us, have you seen that influence asset pricing in some markets at all? Or maybe buyers step back, or assets even be held back from the market at all?

No, we haven't seen that at all, Jeff. In fact, as I mentioned, we've probably seen the opposite. We've seen more capital with more leverage, and on an overall rate basis, more attractive. To a developer or to a private equity in funds, it's all about maximizing your levered returns. It's really about the leverage and the amount of leverage, and far less about the cost of that leverage, which kind of gets washed out in the overall return models.

We've actually seen, if anything, a decline in cap rates. We talked about it last quarter. We talked about it at our investor day. We've probably seen a decline of as much as 50 basis points in cap rates in the major cities.

I guess to put it differently, the higher rates haven't weighed on lender proceeds at this point?

Not at all. What's weighing on lender proceeds is the fact that they have so much money, and not enough places to put it and get what they consider a decent yield. They are increasingly more aggressive. Their credit terms are more lenient. There's still a challenge for new construction; but for existing properties, it's clearly loosened over the last 9 to 12 months.

Yes, Jeff, in addition to -- you see the banks getting more aggressive because they have capital. They're trying to deploy it.

It has the same effect on the mezz side. So, as the same mezz capital is allowed out there, they're trying to compete to find deals; their yields are also compressing. That's having the combined effect of making the leverage more attractive and more of it.

I would say, Jeff, we don't really see it changing without a very dramatic change in interest rates. I don't think 100-basis-point increase is dramatic at all for the private equity folks, and has little to no influence on the public non-traded REITs.

Sometimes lenders have other governors that kick in that maybe limit their aggressiveness. Do you find that they're starting to look at metrics like maybe on a debt on a per-key basis or things like that, that might cause them to hit a ceiling, if you will? Or you don't think we're close to that?

No, I don't think we're close to that.

All right. Just maybe to switch gears, historically the asset side -- the side of an asset like the Redbury would've been considered too small to be attractive, really, from a margin perspective. Do you think that there are opportunities to look at assets of that size in other locations, or is this one just particularly special?

I think it's pretty special because of the quality of the asset and the location, and the really high barriers to entry in the west LA market overall. But we'll continue to look. We've clearly bought assets that are in the 100-room range. We'll continue to look for opportunities in those areas in the target markets that we've identified.

I had heard that that SLS in South Beach is on the market. I'm not sure if that's been snapped up, but is that a sort of asset you guys would look at? Double down in Miami and maybe deepen your relationship with sbe?

I think our general challenge with South Beach are the ego values that are being built into the values you'd get to based upon normal financial economics. Our guess is that we will continue to be challenged to be successful in the South Beach market.

You just need a bigger ego. (laughter)

Yes. I haven't found that to be financially a successful strategy.

Just one last question -- I'm curious -- why weren't the leaks in Miami encountered in initial due diligence? I know you don't open the walls when you buy a property, but was it that the actual construction didn't match the original plans? Is that the issue?

Yes, that's certainly the case. And we didn't have leaks, and there wasn't a record of leaks at the time we bought it.

I can't get into too much detail because there will be litigation surrounding, obviously, what we've encountered. We have to be careful about talking in detail about what we believe the causes are.

Understood. Thank you.

Bill Crow, Raymond James & Associates.

On that same topic, Jon, are the residential units above your hotel at the Viceroy also being repaired? Or is there risk that you could suffer some water damage from above?

No, there are no issues in the condominium units.

It's just the hotel. Okay.

Jon, you gave us a lot of ingredients to think about for next year with your economic comments, supply, et cetera, and better group metrics. You want to go ahead and throw out a industry-wide RevPAR forecast for next year, like Starwood did yesterday?

I don't think we're ready to do that, Bill. Again, Starwood has certainly a broader view than we have. But we've historically talked about the fact that we think, over the next several years, prior to supply that exceeds demand, which we think isn't going to occur until at least 2016, that a general range of 5% to 7% for the industry is very reasonable to expect.

The markets continue to grow occupancy. The only thing constraining rate is psychology, particularly on the east coast. Take DC as a great example. In the last few months, it's hit the highest occupancy ever in its history, yet there is no pricing power and no rate growth in the market right now. It's clearly being impacted by very bad psychology.

We continue to grow occupancies in so many of the major markets because demand continues to outpace little to no supply growth in those markets. For the moment, we continue to see very significant pricing power, again, particularly on the west coast. If our government can get their act together, and get out of the way and stop impacting us every year with these self-created crises, I think psychology will improve for corporate users and the public in general, and we will see more pricing increases being able to be passed through to the customer base.

Given those comments then, Jon, would DC provide an opportunity for a creative and maybe longer-term buyer that could wait out short-term psychological damage on rate?

Yes, I certainly think it could, if the pricing reflects what we believe to be probably a relatively flat or below average or significantly below average growth in RevPAR over the next two and, perhaps, three years.

Two more quick questions for me. Hawaii, Jon -- I know it's been a subject that's come and gone, and we've talked about it before. Given your understanding and embracing of the global travel trends, is that a market that might re-emerge as a target for you?

I don't think so. It's had a hell of a run in this recovery. Prices are arguably above replacement costs, at this point, in many of the markets there.

It's really far from us here in Bethesda, and so I think we've been extremely hesitant to pursue assets in Hawaii at this point. I doubt that that's going to change.

Okay. Finally, Jon, you made comments about the increased leverage being available to PE buyers. Does this foreshadow that relatively soon, maybe next year, we start to see another round of M&A in this space?

If you're talking about public to private, I think that often follows higher leverage, and particularly inexpensive leverage, being available, and it also follows capital flows and capital raising. As some of the PE firms raise significant amounts of capital to invest in real estate, and in some cases in particular in hotels, they are going to be increasingly looking for larger investment opportunities. And that certainly could be companies.

Great. That's it for me. Thanks.

(Operator Instructions)

There are currently no further questions. I'd like to turn the conference back over to Jon Bortz for any additional or closing remarks.

Thanks, Devona. Thank you, all, for taking your time today to participate. We know it's a very busy period.

We look forward to seeing you in San Francisco at NAREIT. We thank you all for staying at our -- booking reservations in our properties in San Francisco. Again, we look forward to seeing you out there. Thanks.

Thank you. This does conclude today's conference. We appreciate your participation.