Pebblebrook Hotel Trust (PEB) 2013 Q4 法說會逐字稿

Good day and welcome to the Pebblebrook Hotel Trust fourth-quarter 2013 and year-end 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, Tiffany. Good morning, everyone, and welcome to our fourth-quarter 2013 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our 10-K for 2013 that we filed last night and our other SEC filings, that 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 February 21, 2014, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures we use, on our website at PebblebrookHotels.com.

Okay, so we had another strong quarter to complete another great year for our Company. In the fourth quarter, we achieved revPAR growth of 5.2%, which was above our 3% to 5% outlook, largely due to the continued strong transient and group demand that allowed our properties to boost their rates, as well as better-than-expected performance at many of our West Coast properties. Overall, transient revenue which makes up about 3% to 5% of the demand for our total portfolio, was up 5.7% compared with the prior year, with ADR up a healthy 4.5%.

Group revenues, which were a little more tempered, increased 5.3% with ADR up 1.8%. Our properties located on the West Coast generated revPAR growth of 9.8% in the fourth quarter, led by our hotels in San Francisco, Portland, and Seattle.

This strength helped to offset weaker performance from our hotels in the DC area, which were negatively impacted by the government shutdown in October; the Affinia 50, which was adversely impacted by the full-property renovation and expansion that was completed in November; and the Viceroy Miami, which suffered disruption due to the restoration and reconstruction of the defective guest bathrooms, which we successfully completed in November.

As a result of these factors, monthly revPAR for our portfolio increased 4.6% in October, 6.3% in November, and 5.1% in December. As a reminder, our Q4 revPAR and hotel EBITDA results are same-store for our ownership period and include all the hotels we owned as of December 31, except for Radisson Fisherman's Wharf, which we didn't acquire until December 9. Also, as we state each quarter, we do not exclude hotels under renovation.

RevPAR growth in the quarter was led by Hotel Zetta, Skamania Lodge, W Boston, Monaco Seattle, and the Sir Francis Drake in San Francisco. Food and beverage revenues for the portfolio increased 1.7% compared to last year. Our overall food and beverage revenues were negatively impacted by the closure of our restaurant at Mondrian Los Angeles during the quarter for our major re-conccepting with a new third-party restaurant operator who leased the restaurant space at the Mondrian.

This new restaurant, called Herringbone, opened on January 16 to rave reviews throughout the Los Angeles market. Partly offsetting the absence of food and beverage revenues at the Mondrian was continued excellent growth at Southern Art & Bourbon Bar in the InterContinental Buckhead, as well as tremendous growth in banquet and catering at the property.

Compared to last year, fourth-quarter same-property total revenues increased 5.6%, and expense growth was 4%, resulting in a same-property EBITDA margin increase of 110 basis points. The renovation of Affinia 50 negatively impacted our margins by 28 basis points, and property tax increases also took 16 basis points off our margin growth in Q4. Despite these items, 13 properties grew EBITDA at double-digit rates compared to the same period last year.

Moving down our income statement, we generated adjusted EBITDA of $40.9 million for the quarter, a 28% or a $9 million increase versus 2012's fourth quarter. Our adjusted FFO climbed to $24.6 million or $0.39 per share compared with $18.5 million or $0.30 per share during the fourth quarter of 2012, representing a 27.3% increase per share.

As we look at our performance for the full year, our 2013 same-property revPAR was up a strong 6.4%, which was driven by a 1.8% increase in occupancy and ADR growth of 4.6%. We are very pleased with our portfolio's performance, which was delivered despite the negative renovation impact we experienced throughout the year at several of our hotels, including Affinia 50's 87 basis point impact.

Our revPAR leaders for 2013 were Hotel Zetta, Monaco Seattle, Argonaut San Francisco, and Vintage Plaza Portland. Our hotels generated $162.5 million of same-property hotel EBITDA for the year, with same-property hotel EBITDA margins improving 88 basis points to 28.3%.

Total hotel revenues grew 5.5%, while total expenses were limited to a 4.2% increase. Paid occupied rooms increased by 1.9%, so total expenses for our occupied room were limited to a 2.4% increase. The hotels that contributed the most our EBITDA growth in 2013 were Hotel Zetta, Monaco Seattle, Argonaut San Francisco, Sir Francis Drake, and InterContinental Buckhead.

For 2013, adjusted EBITDA grew 31.5% or $35.9 million versus the prior year. Again, this not only reflects the increased number of high-quality hotels in our growing portfolio, but also the elevator growth rate in same-store EBITDA of our existing hotels which we believe will continue during the next several years. For the year, our adjusted FFO climbed to $91.3 million or $1.47 per share compared with $66.1 million or $1.17 per share during 2012, representing a 24.9% increase per share.

Now let's shift our focus to our capital markets and acquisition activities in the fourth quarter. While we had no ATM usage in the fourth quarter, we raised $74.5 million through a common equity offering on November 6, which was in anticipation of the Radisson Fisherman's Wharf acquisition.

A month later on December 9, we acquired the Radisson Fisherman's Wharf hotel and retail for $132 million. This 355-room hotel, which includes approximately 44,000 square feet of retail space, is located in the heart of Fisherman's Wharf San Francisco. We appointed Davidson Hotels & Resorts to be the manager of the hotel.

As part of this acquisition, we anticipate investing $18 million to $20 million into a complete renovation and repositioning of the hotel, including all guest rooms and public areas. This renovation is expected to commence in the fourth quarter of this year, and we anticipate it to be completed by the end of the second quarter of 2015.

The hotel will be renamed upon completion. And we're working with the same designer who we worked with on the transformation of our Hotel Zetta San Francisco. So we are very excited about this property and the significant upside opportunities we expect following the completion of this repositioning.

The acquisition of Radisson Fisherman's Wharf marked our fifth acquisition in San Francisco, and our investments in San Francisco are forecast to represent roughly 23% of our portfolio EBITDA in 2014. As a result of our capital market investment activities during the quarter, at the end of 2013 we held consolidated cash, cash equivalents, and restricted cash of $71.6 million, plus an additional $14.5 million in unconsolidated cash, cash equivalents, and restricted cash from our 49% pro rata interest in the Manhattan collection.

Our balance sheet remains very healthy. At the end of 2013, our debt to EBITDA ratio was at 4.2 times, our debt to total assets was a low 30%, and our fixed charges remain well covered at 2.4 times. As of December 31, we had complete availability on our totally unused $200 million unsecured credit facility, and we have no debt maturities until 2016.

And finally, an update on our dividend. As you hopefully noted in our earnings release from yesterday, due to continued rapid increases in the operating performance and cash flow of our portfolio, as well as our positive outlook for 2014, we anticipate increasing our quarterly dividend to $0.23 per share.

If approved by our Board, that will represent an increase of 44% from our current quarterly dividend and would be on top of last year's 33% dividend increase. We expect this to commence with our first-quarter dividend, which we typically announce in mid-March. This is consistent with our long-term strategy of providing industry-leading returns to our shareholders, including a reliable and growing stream of income.

And with that good news, I would like to turn the call over to Jon to provide more insight on the recently-completed quarter and year as well as our outlook for 2014. Jon?

Okay. Thanks, Ray. So as Ray said, 2013 was another terrific year for Pebblebrook. We completed $326 million of new investments through the acquisition of 4 high-quality hotels; and similar to last year, all of them are located in gateway cities on the West Coast. They include the Embassy Suites San Diego downtown, the Redbury at Hollywood and Vine in West LA, Hotel Madera in downtown Portland, and the Radisson Fisherman's Wharf hotel and retail in San Francisco.

On a 2014 run rate basis, our West Coast hotels located in San Diego, West LA, San Francisco, Portland, and Seattle now represent roughly 61% of our forecasted 2014 hotel EBITDA, which should allow us to further benefit from the significantly greater revPAR growth outlook on the West Coast versus most of the rest of the country.

We also grew same-property revPAR 6.4% for the year, ahead of the industry's 5.4% growth rate, even though the Affinia 50 renovation and repositioning took roughly 87 basis points off our revPAR growth rate for the year. As a reminder, at the beginning of last year, we forecasted the impact at 100 basis points.

In addition, our rooms out of service at Viceroy Miami took another 22 basis points off of our 2013 numbers. We weren't aware of these original construction issues at the beginning of the year, so the impact wasn't part of our original forecast.

With same-property revPAR growing 6.4% and same-property total revenues increasing 5.5%, same-property hotel EBITDA increased a healthy 8.9%. The negative impact of the almost year-long renovation at Affinia 50 reduced our same-property EBITDA growth rate by 184 basis points. So same-property hotel EBITDA for the rest of the portfolio grew 10.7%, which is perhaps a better indication of the underlying portfolio's EBITDA growth rate for the year.

With the benefit of acquisitions made in 2012, and to a more limited extent those made during the 2013, adjusted EBITDA for the Company increased 31.5%. And with a very well-managed balance sheet, adjusted FFO per share for 2013 climbed by 24.9%.

We're very pleased and proud of our performance in 2013, and it seems the investment community also felt pretty good about our performance, because the stock delivered a total return including dividends of 36.3%, outperforming the Bloomberg Hotel REIT Index at 27.9% as well as the Dow, S&P 500, and the Morgan Stanley REIT Index, which delivered only 2.5%.

Now let's reflect on what we forecasted a year ago for 2013 and where we ended up. Recall that for the industry overall, we expected demand growth of 2% to 3%. It grew 2.2% -- in the range, but certainly at the lower end.

We forecasted supply growth of around 1%, and it also grew little less, at just 0.7%. And we thought ADR would increase by 4% to 5%, and it went up by 3.9%, just shy of our lower end.

For 2013, the industry's revPAR growth of 5.4% ended up pretty much squarely in the middle of our 4.5% to 6.5% forecast, so we believe government cutbacks from sequestration and the government shutdown probably cost the industry around 50 basis points of revPAR growth for the year. Our revPAR growth of 6.4% for 2013 fell in the middle to upper end of the 5% to 7% revPAR outlook we provided at the beginning of the year. Our performance was aided by better-than-expected performance on the West Coast, offset somewhat by weaker performance on the East Coast, including the negative impact from cutbacks in government business.

When we look at last year's overall industry trends, performance was again driven by strength in trains and travel -- both business and leisure -- as well as very strong growth in international inbound travel, the vast majority of which has been positively impacting our major gateway cities. Group travel failed to recover any further in 2013, with industry group demand actually declining slightly, while group ADR growth significantly underperformed rate growth in the transient segment.

For 2014, the year shapes up overall as a slightly better convention year in general around the US as compared to 2013, so there is a reason to believe in some modest improvement in group business overall in 2014. Nevertheless, we believe transient revPAR growth for the industry will significantly outpace group revPAR growth again in 2014.

For Pebblebrook, the differential in revPAR growth between group and transient should be narrower than the industry, as was the case in 2013, due primarily to our high overall occupancy levels. And our revPAR growth should also continue to benefit from the fact that group represents just 25% of our overall room nights.

In 2013, leisure travel, as represented by weekend business, continued to be strong, outperforming business travel in demand growth, ADR growth, and revPAR growth. Unless we see a pickup in the overall growth rate of both GDP and corporate profits, we expect this trend will continue in 2014.

We also expect to continue to see better performance overall in our West Coast cities and properties as compared to our East Coast cities and properties. Regional economies, psychology, and underlying operating fundamentals remain stronger in West Coast markets like San Francisco, Seattle, Portland, and West LA, than they do in New York, Philadelphia, and Washington DC.

To highlight this differential, let's look at the 2013 occupancy levels of our West Coast markets. San Francisco climbed to 84.1%, downtown Seattle reached 79.3%, downtown Portland rose to 78.5%, and West LA increased to 81.2%. All of these cities have well surpassed prior historical peak occupancy levels.

On the West Coast, only downtown San Diego, which increased to 76% occupancy which is still below its prior peak of 77.1%, though we expect the city to surpass that prior peak this year. In 2013, revPAR grew 13.5% in San Francisco, 10% in Seattle, 11.1% in Portland, 7.5% in Santa Monica, and 6.4% in West Hollywood Beverly Hills. Compare that to 4% in Manhattan, stunted by continuing above-average supply growth; 4.6% in Washington DC, with much of the gain coming from January's Presidential inauguration; Boston at 5%, hurt by a weak convention calendar despite occupancy well above and beyond prior peak, and Philadelphia at 0.1%, also stunted by modest supply growth and a weak convention calendar.

For our markets, the stronger ones on the East Coast were in the South, with downtown Miami revPAR climbing 10.3% and Buckhead increasing 7.1%. In 2014, we can expect above-average revPAR growth in San Francisco, Seattle, Portland, and West LA on the West Coast and Buckhead and Miami on the East Coast, with Boston also joining the party due to a very strong convention calendar. We expect New York, Philadelphia, and Washington DC to all remain underperforming cities in 2014.

For Pebblebrook, we expect our properties to generally mirror the performance of these individual markets, with our portfolio continuing to benefit from our West Coast emphasis. And we expect outperformance by our recently-renovated properties, including Affinia 50, the Benjamin, and Affinia Manhattan in New York; the Sofitel in Philadelphia; Westin Gaslamp in San Diego; Mondrian in LA; and Viceroy Miami in a strong Miami market.

Our performance in 2014 will be negatively impacted in a minor way by renovations at a number of our properties. They include our comprehensive renovation and repositioning of Vintage Seattle, which stood be substantially complete in April; the reconcepting and renovation of the restaurant, the lobby, and quarters at Palomar San Francisco, which should be completed in the second quarter; the renovation of the lobby and atrium at Embassy Suites San Diego Downtown, which will commence in the fourth quarter; the lobby, restaurants, bars, and guestrooms at W LA, which should also commence in the fourth quarter; a comprehensive renovation of Vintage Portland, also to commence in Q4; and a very exciting and game-changing comprehensive renovation and repositioning of Radisson Fisherman's Wharf, which we also expect to commence in the fourth quarter.

As part of the W LA project, we are pursuing the potential reconfiguration of suites that may allow us to increase our overall room count by up to 36 keys. And we're adding somewhere between 5 and 13 keys at the Palomar, 4 keys at our Embassy suites, 6 rooms at the Radisson, and we've added 1 key at Affinia Gardens.

Even on a combined basis, these renovation projects should have a fairly minor impact on revPAR growth in 2014. We are currently forecasting only a 50 basis point to 70 basis point reduction, which was built into our 2014 outlook.

With the upcoming renovations of Radisson Fisherman's Wharf, vintage Seattle, W LA, Vintage Portland, Palomar San Francisco, and Embassy Suites San Diego, we continue to fill our pipeline with properties that will help us deliver outsized growth in revPAR, EBITDA, and value in 2015 and beyond. Projects completed in 2013, especially the renovations at Affinia 50, Affinia Manhattan, Hotel Zetta, Sir Francis Drake, and Sofitel Philadelphia will aid the for the ramp-up in performance that we expect from other previously-renovated properties, including Westin Gaslamp, Seattle Monaco, the Meridian Santa Monica, and Mondrian LA.

If we look at 2013, the benefits of our renovations and asset management efforts are clearly visible in the performance at many of our properties. Here's just a few examples.

In 2013 at Hotel Zetta, revPAR increased 50% over 2012, well ahead of underwriting. EBITDA is forecasted to reach $4.7 million to $5 million in 2014, the first full year of operations, which would represent a EBITDA yield of between 11% and 11.5%.

Seattle Monaco delivered a revPAR increase of 22.2% in 2013, with EBITDA increasing 51.4% to $5.2 million for a EBITDA yield of 9% on our total investment, including the cost of renovation, just in the first year following renovation. InterContinental Buckhead, which we renovated in 2011 and 2012 and re-concepted the restaurant in 2012, grew revPAR 9.2% in 2013. EBITDA increased 15.7%, achieving a 12.2% EBITDA yield last year on our total investment of $110 million.

And the last example of many great stories is the Sir Francis Drake. RevPAR at the Drake increased 13.9% in 2013, and EBITDA climbed 20.7%. Our NOI yield on total investment of roughly $100 million was 8.3% in 2013, with NOI calculated as EBITDA minus an assumed 4% reserve on total revenues.

We expect NOI to be well over 10% in 2014. This compares to the 1.8% to 2% 2010 NOI yield we forecasted at the time of acquisition in June 2010. With these kinds of results, we hope you can understand why we are so excited about the continuing performance enhancements that will result from our past, current, and upcoming property renovation and repositioning efforts.

Now let's turn to our outlook for 2014. As you know, we released this outlook last month, and it remains unchanged. However, it's worth noting that our view of and the outlook for the first quarter we provided last night with our earnings release is slightly more tempered than it would have otherwise been a week and a half ago as a result of the negative impact from last week's snow and ice storms. Unfortunately, we suffered roughly $500,000 of lost business due to these storms, and most of these losses are unlikely to be recovered.

For 2014, we are forecasting that overall demand for the US will increase between 2% and 3%, with supply likely between 1.2% and 1.4%, which again is well below the long-term average growth rate in industry supply. We believe ADR is likely to grow between 4% and 5%.

As a result, we are forecasting overall US industry revPAR growth of 5% to 6% in 2014. And we expect these strong underlying industry fundamentals to continue through at least 2016, based upon what we can see at this point. Please also note that our forecast assumes US GDP increases between 2% and 2.5% this year.

For Pebblebrook, we expect to outperform the industry again in 2014, this time by approximately 150 basis points, with 50 of it coming from Affinia 50. Seems like too many 50s.

And so we expect our same-property revPAR to increase between 6.5% and 7.5%. Based upon this level of projected revPAR growth for our portfolio, we're forecasting same-property EBITDA to increase between 8.7% and 11.5%, with our same-property EBITDA margin increased between 125 and 175 basis points.

With the benefit of our 2013 acquisitions performing for all of 2014, adjusted EBITDA is forecasted to increase between 18% and 22% and adjusted FFO per share is forecasted to increase between 21% and 26.5%. And we are forecasting the 2014 will be another year of very strong growth in earnings and cash flow on a same-property basis and per-share basis. Our outlook for 2014 does not assume any acquisitions. However, for the right opportunities, we hope to be active in 2014.

The industry is already off to a healthy start in January, with industry revPAR climbing 5.3%. Our portfolio in January also got off to a great start. RevPAR climbed a strong 8.8%, with 87% of it coming from ADR growth. Our performance in January was hurt by the difficult comparison in DC to last year, which benefited from the inauguration that added about $400,000 of room revenue in the month for an impact of about 1.5% to revPAR growth. This January was also negatively impacted by the ice and snow storms on the East Coast and the resulting high levels of flight cancellations, which impacted business everywhere in the US.

For the portfolio, we expect first-quarter revPAR to increase between 5.5% and 6.5%, with February also being impacted by the bad weather up and down the East Coast, which also caused an unusually large number of airline flight cancellations. However, as arguably the greatest rock n' roll group of all time said before we began, here comes the sun. And for you twentysomethings, that's the Beatles.

Today, we feel particularly well situated to continue to take advantage of the strong underlying operating fundamentals of the business, as well as amplify them through our renovation, repositioning, and asset management efforts. This should also allow us to continue to significantly outperform and deliver strong growth on both the top line and the bottom line for the next several years.

We'd now be happy to answer whatever questions you might have. Operator?

(Operator Instructions) Jim Sullivan, Cowen Group.

Jon, quick question. You've talked over the years about the positive impact, which I guess was a secular impact, on demand from international inward-bound travel. And I just wonder if you could give us an update on your sense for whether you expect that to continue to be kind of an outsized contributor to demand in your markets over the next couple of years?

Yes, we do expect to continue. The forecasts that have been done by the Department of Commerce I think average something like 3.5% to 4% a year growth through the next 5 to 8 years. But we think that is a secular trend that will continue.

We do continue to see significant increases in travel. Companies like Boeing, the aircraft makers, are benefiting greatly by the secular growth; and the globe is adding significant capacity that is meant to accommodate this expected growth on an ongoing basis.

So unless we see a very dramatic change in the behavior here in the US in terms of weather, we're going to continue to invite people here, and hopefully increasingly make it even easier for them to come here -- or we see some kind of event take place, or maybe a dramatic increase in the value of the dollar, our view is that that will continue to benefit the gateway cities, and particularly, our hotels.

And Jon, I wonder if you could -- you made some encouraging comments, I guess, about the potential acquisitions. I wonder if you could comment -- give us your view on all of the activity we're seeing in downtown LA versus the rest of that overall market.

Clearly, it does seem to be coming into its own in a lot of different ways; and it seems like every month we're hearing news about new development across all property types. And I just wonder -- it's a market where there is a lot of older building stock. It seems to be a market ripe for conversion and maybe boutique hotel development. And just curious what your views are of that submarket?

Yes, I think LA is very gradually changing as a downtown market. And probably the most important aspect of that is increases in the volume of people who are choosing to live in the downtown LA market.

Part of that is driven by, frankly, lack of availability and development elsewhere, particularly in the West LA market. But what we're -- so we think it will be a gradual process of improvement in downtown LA. You're absolutely right about -- you know, that the availability of older C-quality office product, particularly directly south of the downtown area, towards LA Live.

And obviously, the other thing you have there is there's just a lot of land down there, which you don't have anywhere else, really, in the LA metropolitan area. So it would be natural to think that that will continue to develop as a residential market, as an entertainment market. I think the one thing we're not seeing to any meaningful extent yet is an improvement in the office market and any kind of meaningful rotation of quality tenants into the downtown market.

Okay, then. Finally for me, two of the markets which have lagged -- you noted them in your prepared comments, San Diego and Philadelphia. Convention calendar seems to be a very important variable for both these markets. Maybe you can give us your views on convention calendar outlook -- not just for 2014, but maybe 2015 and 2016 to the extent you have visibility on it?

For those two cities?

For those two, yes.

So San Diego has a meaningful pickup in 2015 and 2016, very encouraging. The other encouraging aspect -- really, two others in San Diego. One is the recent election of a very business-friendly mayor who won election earlier this month. And that should lead to the reconstitution of all of the funds set aside by the Hotel Association and Industry in San Diego for the marketing of San Diego, which were cut off last year, and all of the salespeople were let go.

So that's being added back. And then the convention center expansion, which has been approved and is in the final hurdles of one last litigant case, right now is forecasted to be completed in either 2017 or 2018. And that will have a very, very positive impact -- further positive impact on convention activity in downtown San Diego.

As it relates to Philadelphia, it's a little bit of a different story. They actually expanded the convention center a year and a half ago. It's a beautiful center. It works well but for the management of the center and the labor at the center.

They made a great decision late last year in bringing in a private company called SMG that manages 70 convention centers around the country, including some of the biggest -- including Chicago and Las Vegas -- and a very well-qualified private group. Happens to be based in suburban Philadelphia. And they are already making some very positive changes that hopefully will result in significant improvements in operations and, ultimately, in marketing and perception of the attractiveness of having a convention in downtown Philadelphia.

So the facility is there. It's terribly underutilized today because of the problems that have come about in the last two years. And there is great reason to be very encouraged about that been resolved, like it was done in Chicago, with these changes. But right now, it looks like 2015 and 2016 in terms of major conventions is going to be weaker than it is this year.

Okay. Thanks, Jon.

Bill Crow, Raymond James.

Jon, as Company leader, as industry leader, you're kind of charged with looking ahead two or three years. As you think about how things might play out, does it make you more interested in going back and looking at the East Coast acquisitions at this point?

Not until the pricing changes, Bill. Again, it's not that we're not looking; and in many cases, we're bidding. We're just not competitive. And I'm sure it has to do with our growth rate assumptions for a number of those markets. And it has to do with our view of risk to new supply or other issues in those markets.

And so as a result of that, we're just not competitive in general on the East Coast. And until either our viewpoint or our competitors' viewpoints change, I wouldn't be surprised to see that continue.

Okay. John, one of the things that we're hearing from clients and I'm sure you're hearing or you are seeing is that guidance for 2014 that we have received so far is generally in line on a top-line basis, but margin growth is going to be weaker than many had expected. And if you think about 5% or 6% revPAR growth, and 80% of that driven by pricing, it does seem like -- whether it's 25 to 75 bps or 50 to 100 bps, the guidance has been weaker.

So what levers are out there? And obviously your portfolio is a little bit different, and you're going to post better margin growth. But just talk generally about some of the pressures that you're seeing on the expense side.

Well, in our case, we are forecasting, I think, a pretty healthy growth in our EBITDA margin for 2014 at 125 to 175 basis points, so -- but I think the general industry pressures are generally the same ones we always see. It's wage pressure; it's, in particular, benefit pressure.

The wage pressure comes primarily from the union-driven markets, which are many of the major cities. And the benefits are obviously something that is an issue not just for our industry but for all industries.

And I think in markets, we continue to see municipalities and states trying to raise more revenue, so we see increases in business and operating taxes. We see increases or attempted increases in property taxes in a number of markets.

I think the nice thing about our portfolio, with a really heavy concentration now in California, which has good and bad aspects -- but one of the good aspects is once you're reassessed at purchase, you're limited to a 2% per year increase in your taxes.

So we're seeing pressures in workers' compensation costs, again, driven by experience that the states and cities are having with these dramatic increases in disability claims. And so those are generally where we're seeing the pressures.

And then we are able to offset a lot of that through our efforts in implementation of best practices, investments in energy, investments in technology, working with our operators to rightsize or create efficiencies in the amount of supervisory work and manager time and staff levels that we need to utilize at our hotels.

So it's always a challenge. And you can either let it happen, or you can work hard and creatively to mitigate and offset. And that's what we do.

Yes, that's helpful. Jon, one more question for me. And again, a question that we get asked, which is: what sort of impact are you seeing or can you anticipate from alternative lodging sources? So Airbnb, as an example, which has become more aggressive. How big a threat do you assess that?

I think it's a real threat. I think it's hard to know how big a threat it is right now. One of the things that Airbnb and other providers like them are doing is they are having a meaningful impact on demand growth. They are increasing demand because of the affordability and publicity surrounding their offerings.

A city like New York -- I think I've been told they have 40,000 listings in New York City. That's a lot. But it's not 40,000 hotel rooms. And we're really not seeing it in the demand numbers in any of our markets. And we haven't heard of customers who said, hey, we used to stay with you, and we're choosing to stay elsewhere.

I'm sure it's happening. And one of the areas it may have the biggest impact -- you know, clearly, it's going to have an impact on the low end of the market, because that's, frankly, in a lot of cases who it's competing with because of the type of customers they're currently attracting. Although, again, that may change over time, and it may become some more upscale customers.

But it's clearly having an impact on the lower end of the market. It's having an impact on the hostels in the market. It's having an impact on some of the suburban markets to some extent -- again, at the low end of the marketplace.

And so at this point in time, we're not seeing an impact to our businesses and our competitors, but I wouldn't be surprised for there to be some, no different than technology itself has had an impact on the number of meetings, particularly lower-end training meetings, many of which now get done on the Internet.

Thanks, guys. Appreciate it.

Lukas Hartwich, Green Street Advisors.

I was hoping you could provide an update on the Delfina conversion. Is that complete? And how is it being received?

Yes, Lukas, the conversion is done. The flag change occurred in mid-September of last year. It's been very well received. There's some very minor work in the process of being completed. It's primarily some furniture and some artwork that's arriving any day. But all the brand-standard OS&E, all the other agreed changes for the flag, all the upgrading that we've done is complete.

And you know, it's interesting -- it's an interesting case, because we didn't change a whole lot physically at the property. We really made those changes previously with what was a $9 million renovation the year before. But just changing the flag has actually meaningfully increased the customer satisfaction.

And I don't -- maybe it's just better situated from a customer base and a flag change. It's a better, well-respected flag than, I guess, what Sheraton is today by many customers. So it's kind of a curious case study and the results have been very positive.

Great. And then just one other question. Do you have any updates on your plans for the National at the Benjamin?

We have two different paths we're going down today hand-in-hand with our partner. And I think both of those -- either of those paths or both of those paths will result in a very favorable outcome compared to the losses that we've been experiencing there, which have on a joint venture basis been -- have grown back to above $2 million, well above $2 million on an annual basis.

So I can't give you any more color yet, but I think we'll know more in the next 90 days about which path we end up going down. And, again, in either case, I think it will ultimately have a very, very meaningful impact on the reduction in those losses.

Great. Thank you.

Wes Golladay, RBC Capital Markets.

When we look at your exposure to San Francisco, roughly around 23% now, would you guys like to keep a limit on that? Or if you guys find the right opportunity -- okay having more exposure there?

Well, we're going to continue to look in the market, yes. So we're not uncomfortable having a higher exposure today. And the big reason for that is just the lack of supply in the market. There is, I think, a Hampton Inn under construction; and outside of that, there really isn't anything due to start for some time.

So very little activity on the development side. Again, it will ultimately come, but with the rapid escalation that we've seen in that market for replacement costs, in land costs, and a shortage of your specialized and experienced labor in that market, again, it seems that hotels continue to be a lowest and worst use for land and older-stock office properties in the market.

So we're very comfortable if that percentage increases. And by the way, it's going to increase on its own as it continues to grow faster at the bottom lines of those properties than the average for our portfolio.

The other thing worth pointing out, and it kind of comes from your question -- we've seen, as I mentioned in San Francisco, fairly significant increases in replacement costs. We've actually seen that in most cities around the US. And our current estimate for our portfolio right now is upwards of $575,000 to $600,000 a key.

And we continue to see very significant competition in the markets for land and increasingly for labor. So if anything, we expect to see an escalation in those costs to build versus what we've seen over the last 24 months.

Okay, sticking with that, do you think that will help slow down the development in New York in 2016? Just the rising replacement costs?

I don't know what's going to slow down New York's development pipeline. We think this year is going to be upwards of 7% for the market. We think 2015, based upon what we know right now, is in the 5% to 7% range. And we are probably three months away from having a fairly -- an even more accurate view. Because if you hadn't started by April in the market, you're probably not delivering in 2015. So you're on to 2016.

There's already a significant pipeline for 2016 delivery, some of which is under construction. And just a lot of announcements. So hopefully at some point, both the cost to replace -- which is going up in New York at a fairly rapid pace; the cost of land; and the slower pace of growth in performance -- you know, New York, you need 4% just to keep your EBITDA growing at 4% at a minimum.

So it's a higher cost growth market. You actually need it to be a higher top-line market as well, which is what it has been historically. But with the change in the way New York is with the Westside and the neighborhoods, I don't think that's going to happen again in this cycle.

Okay. Thanks for taking the questions.

At this time, there are no other questions in the queue. (Operator Instructions) There is still no questions in the queue. At this time, I'll turn the call back over to our speakers.

Thanks, operator. Again, thank you all for taking the time to join us for the call, and we look forward to updating you again in about 60 days.

And that concludes today's conference call. Thank you for your participation.