Pebblebrook Hotel Trust (PEB) 2014 Q2 法說會逐字稿

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

Thank you, Tina. Good morning, everyone. Welcome to our second-quarter 2014 earnings call and webcast.

Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. We apologize for the music that being played from last quarter's call. We scheduled to have Love Potion Number 9 played, but apparently our conference call provider was stuck with Katrina and the Waves from last quarter. But it's appropriate for this quarter's results as well.

Before we start, let me remind everyone that many of the comments we make 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 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, July 25, 2014, and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contain reconciliations of the non-GAAP financial measures we use on our website at PebblebrookHotels.com.

Okay, so we have another good quarter to tell you about. Our second-quarter performance was better than expected on all operating metrics. Same-property RevPAR for the total portfolio climbed 9.2% to $210. This surpassed our outlook for RevPAR growth for 7% to 8% due to strong demand across all of our market sectors, including group and transient with both business and leisure customers.

Once again, our RevPAR growth was driven by our West Coast properties, which rose 11.7%. In addition to healthy gains from group and transient demand, we continue to see steady growth from inbound international demand, which benefits many of our hotels given our high concentration of high-quality hotels in major urban gateway locations.

Our overall same-property RevPAR gains in the quarter came primarily from growth in rate, which increased 7.6%, with occupancy climbing 1.4% to 87.7%. This mix demonstrates the pricing power throughout our portfolio and the very high occupancy levels we have already achieved with the majority of our urban markets exceeding prior peak occupancy levels. 10 of our hotels achieve double-digit ADR gains in the quarter.

As a reminder, our Q2 RevPAR and hotel EBITDA results are same-store for our ownership period and include all the hotels we own as of June 30 except for the Prescott Hotel, since we did not acquire this hotel until May 22. Our numbers do not exclude hotels under renovation.

For our portfolio on a monthly basis, April RevPAR increased 7.7%; May was up a sharp 11.9%, which is partly due to the holiday shift into April; and June was up 8.1%. RevPAR growth in the quarter was led by the Affinia 50, which benefited from the prior-year renovation at the hotel. Affinia 50 added about 100 basis points overall Q2 same-property RevPAR growth. We expect Affinia 50 to add about 53 basis points for the full year, due to its ramp up and easy comparisons to last year's renovation impact year.

Other strong performers included Hotel Zetta, Embassy Suites San Diego, Argonaut San Francisco, and Hotel Modera in Portland. Second-quarter same-property total revenues increased 6.1% compared to last year.

Food and beverage revenues declined 3.2%, but food and beverage expenses declined by an even greater 4.8% as we continue to make strides retooling our F&B operations across the portfolio by leasing restaurants to third-party operators or reconcepting and modifying operated models at our existing restaurants, bars, and public areas. This is part of our relentless effort to improve food and beverage profitability and increase cash flow throughout our portfolio, which is becoming apparent in our financial results.

In Q2, food and beverage departmental profit margin improved by 120 basis points and is 230 basis points better in the first half of 2014. In addition to improvements in F&B profitability, we continue to work closely with our operators to implement our other asset management initiatives as demonstrated by the limited expense growth of 3.4% in the quarter, resulting in same-property EBITDA margin increase of 178 basis points, which was 53 basis points above the top end of our outlook.

Our margins were negatively impacted 20 basis points by property tax increases, primarily at the Radisson Fisherman's Wharf from the automatic reassessment of taxes in California because of our acquisition of this hotel late last year. Our RevPAR growth of 9.2% and EBITDA margin growth of 178 basis points resulted in our hotel portfolio generating $57.4 million of same-property hotel EBITDA, a 12.1% increase over the second quarter of 2013.

The hotel EBITDA growth leaders in the second quarter were Affinia 50, Embassy Suites San Diego, Sir Francis Drake, Argonaut San Francisco, and Mondrian Los Angeles. Our EBITDA growth was broad as 12 properties grew EBITDA by more than 15% in the quarter compared to the same period last year.

Because of the great performance generated by our portfolio during the second quarter, adjusted EBITDA increased 24% and adjusted FFO per share climbed 29.9% compared with the prior-year period. Year-to-date same-property RevPAR has increased 8.8%, same-property EBITDA has climbed 14.9%, our same-property EBITDA margin is up 208 basis points, and adjusted EBITDA is up 27.7% or $18 million versus last year.

I would like to shift our focus to our acquisition and capital investments we have updated, that we have completed since we last talked to you in the first-quarter call. On May 22 we acquired the 160-room Prescott Hotel in the heart of Union Square in San Francisco for $49 million. This marked our sixth acquisition in the city, which has been one of the strongest hotel markets in the country for the last several years and 2014 is shaping up to be another excellent year for the city. The Prescott was funded with available cash and under our credit facility.

Last Thursday we acquired The Nines, which is a 331-room luxury hotel located at Pioneer Square in downtown Portland for $127 million. The Nines is our third acquisition in the attractive downtown Portland market, which next to San Francisco has been one of our top-performing markets during the last couple of years. This acquisition was funded with our credit facility and the assumption of $50.7 million of existing debt secured by the property, which matures in March 2015.

Turning to our capital reinvestment projects. During the second quarter, we invested $10.1 million across several hotels. At the Embassy Suites San Diego we completed the addition of four guestrooms at the hotel. At our Hotel Vintage Park Seattle we completed a comprehensive renovation and repositioning and have since renamed and relaunched the hotel as Hotel Vintage Seattle.

At the Palomar San Francisco we completed the restaurant and lobby renovations along with the addition of five more guestrooms. Renovation of the guest floor corridors and a rooms refresh is well underway and due to be completed later this quarter. Year-to-date we have invested $18 million into our hotels as part of our capital reinvestment programs.

Shifting back to our balance sheet. Following the acquisition of The Nines, we have approximately $126 million outstanding on our $200 million unsecured credit facility. As a reminder, we have the ability to upsize our credit facility to $500 million and have 14 unencumbered hotels totaling over $1.1 billion of invested capital, so we have plenty of debt capacity if needed. In addition, five- and seven-year term debt is readily available, so you should expect the outstanding balance on our credit facility to go down or to be eliminated over the next several months.

Following The Nines acquisition, we continue to be well within our long-term leverage objectives, with debt to EBITDA forecast at roughly 4.3 times at the end of Q3 and our debt to total assets at historical cost were approximately 34%. Other than the debt we assume with The Nines acquisition, we've no other debt maturities until 2016.

Finally, we did not raise any equity under our ATM program in the second quarter or to date in the third quarter.

I would now like to turn the call over to Jon to provide more color on the recently completed quarter as well as our outlook for the remainder of 2014. Jon?

Thanks, Ray. As Ray said, the second quarter was another strong quarter for both the lodging industry and for Pebblebrook. In fact, performance in the second quarter when we look at just about all fundamental variables actually improved from the first quarter.

Industry demand growth, which had accelerated to 3.8% in the first quarter, grew even faster in the second quarter at 4.5%. With supply growth continuing to be subdued in Q2 at just 0.8%, occupancy growth was even stronger, up 3.6% in the second quarter versus 2.9% in Q1. And ADR growth began to pick up some steam in Q2 with year-over-year growth of 4.4% versus a healthy 3.8% in Q1.

As a result, industry RevPAR grew a very healthy 8.2% in Q2, the strongest growth since the first quarter of 2011. This acceleration in demand seems somewhat inconsistent with more modest growth in retail sales in the first half of the year as well as negative GDP performance in Q1 and likely modest growth in Q2. So the question is what's going on with travel? Why is our industry stronger than other consumer-oriented businesses?

Well, first off, as most of you know, we're generally not a consumer-dominated business. Roughly 50% to 60% of the industry's customers are businesses, not individual consumers. For Pebblebrook and many of the other lodging REITs, it's more like 65% business travel and 35% leisure travel. And businesses are generally doing very well, with many at record profits and an expectation for a meaningful increase in the rate of profit growth in 2014.

In addition, many industries are beginning to see greater challenges in finding new hires and their skilled labor and white-collar employees are seeing a greater number of opportunities for compensation or positional advancement as the economic cycle lengthens. As a result, businesses are choosing to organize more meetings, including training, corporate culture-related get-togethers, and incentive trips, all of which help improve loyalty and reduce turnover.

Second, the industry, and particularly the Gateway markets, are benefiting from the positive secular trend of increasing global travel, particularly from Asia and South America. Third, when we analyze where increased demand is coming from, the industry this year is also seeing it at more midpriced or even lower-priced hotels and sectors, suggesting that as the economic recovery lengthens and broadens and as unemployment declines the recovery becomes more inclusive with the middle class and potentially the lower end of the socioeconomic spectrum participating in the recovery to a greater extent. And more of them are choosing to travel.

Finally, and we believe this is perhaps another emerging secular trend, it seems both the aging demographic as well as the youngest demographic, the Millennials, seem less inclined to collect things, choosing to be more focused on collecting experiences and then sharing them online. And, of course, some of these experiences are gained through travel.

Though strong second-quarter industry performance was broader and more inclusive than any other quarter to date, strength came from business and leisure, group and transient, well-off, and not as well off. With group across the industry picking up for the second quarter in a row and with forward group bookings for the rest of the year and into next year looking favorable, we feel we have reached the point that we can say that the recovery in group is healthy and likely sustainable.

Growth in group won't be as strong as transient, but that is typical. While last quarter we highlighted the trend of five consecutive months of increased demand growth, at the time we were not ready to increase our outlook for the full year. However, with the trend of increased demand growth now eight months long, we are comfortable increasing our outlook for both the industry and for Pebblebrook this quarter as we'll discuss in more detail later in our comments.

At Pebblebrook, like the industry, we are fortunate to have had another great quarter. Our RevPAR growth of 9.2% outpaced the US industry by 100 basis points and was driven by a very strong 7.6% increase in rate. As has been the case in prior quarters, positive performance was widespread throughout the portfolio, though as Ray indicated, the West Coast in general continued to significantly outperform the East Coast.

Across the portfolio, 11 properties grew RevPAR over 10% with eight of them on the West Coast and while our portfolio of properties performed very well picking up significant share overall, the CBD markets in which our hotels are located were also generally pretty strong, particularly the West Coast cities. On the West Coast, RevPAR in San Diego led the way this quarter, increasing an impressive 12.8% while the city benefited from a healthy convention calendar and a snapback in transient demand, partly generated by increased marketing and sales spending by the city as funds were finally released following the election of the new mayor.

With this second-quarter strength, San Diego has now joined the ranks of the urban markets that have surpassed prior peak occupancy levels. Trailing 12 occupancy has climbed to a very strong 78% in downtown San Diego.

Also in the second quarter, RevPAR in Santa Monica increased 10.7%, San Francisco rose a very strong 9.9%, downtown Seattle climbed an impressive 9.6%, downtown Portland rose a healthy 6.6%, and Hollywood Beverly Hills rose 5.6%. On the East Coast, downtown Miami led the way with RevPAR increasing a very strong 15.8%. The city benefited from strong leisure travel due to the holiday shift of Easter moving to April as well as perhaps some pre-World Cup travel from South America.

Boston also had a great quarter with RevPAR growing a very strong 12.5% as the city benefited from a very favorable convention calendar and strong underlying transient demand. New York City improved greatly from Q1 with RevPAR increasing 5.9% in Q2, though the city was still an underperformer due to quarterly supply growth of 5.3%. Encouragingly, these ongoing high levels of supply growth continue to be completely absorbed by strong growth in demand in New York as trailing 12-month occupancy in Manhattan reached an all-time record high of 86.8%.

RevPAR in Buckhead grew just 4.4%, up against the tough April comp last year that included the Men's Final Four basketball tournament in Atlanta. On the weaker side, RevPAR in downtown Minneapolis was up just 3.8%. Philadelphia RevPAR declined 4% due to a weak convention calendar, but we are very encouraged by the recent labor peace deal reached that helped solve the underlying convention sales challenges that have been a result of poor labor relations at the Philadelphia Convention Center.

Finally, RevPAR in Washington, DC's CBD declined by 2.3%, still struggling from significant government cutbacks in travel. Please remember all these numbers I just provided are performance numbers for the urban markets, not our properties in those markets.

For Pebblebrook, ADR growth of 11.1% led to RevPAR growth of 11.7% for our West Coast hotels which again overwhelmed the 5% RevPAR growth and significantly lighter 2.5% ADR growth at our East Coast properties. This general outperformance in West Coast markets should continue for the next several years due to more favorable demand trends and more limited supply growth.

Now let me turn to our outlook for 2014. As expected, 2014 is turning out to be a great year for both the industry and Pebblebrook. For the industry, due to better-than-expected performance in the first half of the year, we are increasing our RevPAR forecast for the industry for the year by 100 basis points from a range of 5% to 6% to a range of 6% to 7%. All of our increase comes from stronger demand growth resulting in higher occupancies as opposed to any increase in our prior ADR growth range of 4% to 5%.

For our portfolio, we are also increasing our RevPAR outlook for the year. Our forecast for our same-property RevPAR growth goes from a prior range of 6.5% to 7.5% to 7.25% at the low end and 8% at the high end. We continue to expect the vast majority of our RevPAR increase to come through as growth in ADR.

We are also raising our same-property EBITDA and EBITDA margin growth for the full year. Same-property hotel EBITDA increases by $11 million at the low end and $10 million at the high end.

$8.6 million of this comes from our two acquisitions: $1.8 million of EBITDA for the Prescott for the second half and $6.6 million related to The Nines for the second half, though $800,000 of The Nines' EBITDA does not accrue to us this year. It is the prior owner's portion of the results from July prior to our acquisition date, even though the entire quarter is included in our same-property performance results.

Of the remaining increase for the year, $1.2 million of it relates to the second quarter's beat over the high end of our range for the quarter. Same-property EBITDA margins are now forecasted to grow an additional 25 basis points from our prior outlook for 2014, primarily as a result of better performance in the first half and a slightly better expected performance in the second half. Our new range now calls for growth of 150 to 200 basis points versus the prior range of 125 to 175 basis points.

We continue to make great progress on the implementation of our best practices throughout the portfolio, particularly with food and beverage profitability. The second half of 2014 continues to look healthy based on current trends and business on the books. For Q3, we are forecasting our same-property RevPAR to increase by 7% to 8% with again the vast majority of it coming from ADR growth.

We achieved a portfolio-wide occupancy of almost 88% in last year's third quarter, which leaves little room for occupancy growth in this year's third quarter. Our same-property hotel EBITDA range for Q3 is $64.5 million to $66.5 million, with same-property EBITDA increasing by 175 to 225 basis points.

For our full-year outlook for FFO and adjusted EBITDA we are also increasing the prior ranges. Again, the increases are due to the two acquisitions recently made as well as the outperformance in Q2 and slightly better performance forecasted for the remainder of the year, partially offset by an increase in G&A expense due to an accrual for potential additional performance compensation and additional preopening costs at the property level. These preopening costs, one-time in nature, relate to the opening of Dirty Habit at the Palomar, our new bar and restaurant there, and an acceleration into the second half of 2014 of preopening costs previously planned for 2015 related to the repositioning of the Radisson Fisherman's Wharf.

Adjusted corporate EBITDA is now forecasted in a range of $187.2 million to $191.2 million, an increase of $9.6 million at the low end and $8.6 million at the high end. Our outlook for adjusted FFO per share goes from the previous range of $1.78 to $1.86 to our current forecast of $1.87 to $1.93, which represents an increase of $0.07 to $0.09 for the year.

Economic trends, travel trends, and business on our books all remain supportive of our forecast of strong growth for 2014. As of the end of June, total group and transient revenue on the books for the last six months of this year was up 9.7% over same time last year with ADR up a very strong 8.9%. Group room night pace has improved dramatically for the second half, now up 11.8% with group ADR up an impressive 10% for a total of 23% in group revenues.

As we are replacing some lower-priced discount or OTA transient with some more attractively priced group at a number of our properties, particularly in New York, our portfolio-wide transient room nights on the books for the last two quarters of 2014 are down 8% while rate for transient on the books is up a strong 9%. I would now like to provide a brief update on our renovation and repositioning activities within our portfolio. These projects will play a material role in driving better than industry performance in 2015 and beyond.

In addition, we are increasingly focused on staying ahead of the trends in the industry by focusing our renovations and repositionings on creating unique experiences for the customer, far different than the general and more mundane brand approach. We've learned over the years that by providing a unique experience we can reduce the need to compete for guests on price, allowing us to otherwise charge higher rates and earn a premium for providing our guests with something they just can't get anywhere else.

And by owning so many independent hotels we can do this without the inhibitions and restrictions that come with hotel brands. Thus, allowing us to move more quickly to respond to changing consumer tastes, interests, and behaviors. So let's start with our larger projects.

At the Radisson Fisherman's Wharf, we have completed our redesign and overall renovation plans and are on track to commence the renovation in the first half of the fourth quarter of this year with completion expected in the second quarter of next year. We are extremely excited about the new look of the property, which we believe will reposition it up a full star from three to four and drive ADR meaningfully higher than our acquisition underwriting. As mentioned previously, we are pulling forward certain preopening costs to this year, properly marketing and sales activities and materials, in order to get a jump on the overall repositioning and speed the ramp up of the property's performance upon completion.

The hotel will be renamed Hotel Zephyr Fisherman's Wharf and will provide a truly unique San Francisco Fisherman's Wharf experience for our guests. I would like to thank so many of you who were helpful in the naming process by submitting your ideas to us over the last couple of quarters.

At the W LA we are on track for a fourth-quarter start of our complete renovation of the property, including the addition of 39 keys through the reconfiguration of large suites in the hotel. This would bring our room count up to 297 and add $18 million to $20 million of value to the property upon full stabilization several years out. The comprehensive renovation, along with the outsourcing of the indoor and outdoor bars and restaurants through a lease to a third party, will provide an entirely new and reenergized contemporary experience for the W customer.

At the Palomar, the lobby renovation is complete, as is the buildout of the new bar restaurant, Dirty Habit, which opened May 1 to a huge audience. Customer response to date has been way beyond expectations and is perhaps the hottest bar in San Francisco, providing an experience unique in the city. Performance since opening is far above our underwriting and should help drive even better performance on the room side at Hotel Palomar San Francisco.

And at the Mondrian LA, while renovations were completed some time ago the new restaurant, Herringbone, which opened in January and replaced Asia de Cuba, is doing extremely well and the completion and opening of its space has brought a renewed energy to the hotel and sky bar. In addition, new management at Morgan's corporate has led to a renewed positive relationship and focus that is benefiting the performance of the hotel.

We are also on track to begin the comprehensive renovation and repositioning of the Vintage Plaza in Portland at the beginning of next year with completion in the second quarter. Similar to Vintage Seattle we will be creating a more luxurious product centered around a contemporary wine experience, which in this case highlights Oregon wines, and we will be renaming the hotel as Vintage Portland upon completion, dropping Plaza from the name.

Finally, as discussed in our release related to the acquisition of the Prescott, we will be embarking later this year on the visioning and planning for a comprehensive renovation and repositioning of this hotel, which will likely commence in the latter part of next year and be complete in the first part of 2016. At this time we don't yet know if we will keep the hotel open during the renovation or close it like we did with Hotel Milano, which became Hotel Zetta upon reopening. We should know more by the middle of next year.

To wrap up, we continue to expect 2014 to be another strong year for the lodging industry and an even better year for Pebblebrook. Underlying fundamentals remain very healthy and have improved from three months ago as well as last year. We've got tremendous opportunity in the existing portfolio to recapture significant RevPAR lost in prior years and to continue to significantly improve margins through the implementation of best practices and lots of focus and hard work by our operators and our team.

That completes our prepared remarks. Operator, we would be happy to take questions.

(Operator Instructions) Andrew Didora, Bank of America.

Good morning, guys. Jon, just wanted to get your thoughts here on asset pricing that you are seeing in your target markets. I guess we have obviously seen pricing creep up pretty nicely here, particularly as the buyer pool deepens and cash flow improves. Could you maybe talk about where you are seeing deals close relative to replacement costs in your markets and how narrow do you think this gap could get as the cycle lengthens?

You're right, we are definitely seeing values increase based upon cash flows increasing and the additional flow of capital, particularly from the private equity side and the increase in leverage available that is helping facilitate that at very low interest rate levels. I think it really varies by property and by market fairly dramatically. Our acquisition in Portland, and again you never know whether you would replace a unique property like The Nines, but the prior developer completed the property in 2008 at 11% higher than the price we paid in 2014.

We are seeing -- and something we have been tracking recently and perhaps you are hearing this from other property sectors, but there has certainly been a fairly dramatic escalation in land costs in the major urban markets. We are seeing that in New York. We're seeing it in San Francisco. We are seeing that even in DC for the limited amount of land that is trading.

But we are also seeing upwards of a 4% to 5% increase in construction costs and even greater in some of FF&E costs, as the more limited number of manufacturers are able to price higher and get back some of their profit margin. So it really varies, Andrew, by market. In New York you have seen some transactions well over $1 million, but if you want to build a new luxury hotel, ask Hyatt, it's probably $1.5 million, $1.6 million, maybe even more than that today.

So we still think you can buy in many markets full-service, quality assets at a minimum of a 10% discount to replacement cost and maybe upwards of 20% in a number of markets.

Thank you for that. I guess that all seems to make sense for me.

Switching gears a little bit back to the East Coast, maybe the DC market. It seems like the numbers that we continue to see out of DC continue to be pretty volatile. There are some good weeks of data followed by some very poor results.

How much longer do you think these trends will last and are you seeing any sort of green shoots in that market all right now?

Well, we think DC in general is going to be an underperformer for the next several years. It's going to struggle with two things. It's going to struggle with government.

We don't think -- other than the snapback from the closure of government, we really don't see any meaningful increase in government travel that was dramatically reduced over the last several years. We think the new levels of government travel are here to stay. And, of course, we are lapping them kind of as we speak so on a year-over-year basis it won't be a drag anymore.

And we are beginning to see employment growth come back in DC and, of course, that is a healthy thing for overall demand. But I think we are going to struggle with the supply that's coming into the market and the lack of growth in government over the next several years. Perhaps that will change, as it always does, after several years when government begins to grow again, but I think it's still going to be a couple years off based upon the political stalemate that we see here in Washington.

So our view would be the good thing is the market is running at kind of record occupancy levels. The marquee will get absorbed and it comes with an ability to drive new business into the market, both because of the large amount of meeting space developed with it, but also making it more attractive for conventions to come here. And we see that in the uptick in the convention calendar in 2016 and 2017, but we also have some or supply coming into the market, including at both ends of the market, the upper end and the lower or mid-scale end.

So I think it's -- we just think it's going to be an underperformer for the next several years, but a great long-term investment market because of the barriers to entry. They are not much higher in other markets than they are in DC.

That's really helpful, appreciate the color. Thanks, guys.

Rich Hightower, ISI Group.

Good morning, guys; couple questions. First, on the corporate finance side. Notwithstanding Ray's earlier comments about the strength in the term loan market and the additional debt capacity that Pebblebrook has, just given where you are trading on a cap rate basis right now, do you think that an equity raise might be a conservative way to raise additional capital and pay down the revolver, just kind of given some of the uncertainty that still is out there in the world today?

I don't really think so. I think raising equity for us at this point in the cycle with the high growth we have in the portfolio and the low leverage level, we are at, with The Nines acquisition, 33% debt as compared to our total gross investment which has occurred over the last 4.5 years. So it has occurred at, in general, much lower values than where values are today.

I think equity and additional debt make sense if we have something to do with it in terms of new investments, but I don't think swapping out inexpensive debt for inexpensive equity is a good trade off when we are growing at the pace that we are growing at. Because, Rich, we will just lose some of the nice leverage we have for the shareholders over the next several years, which look to be fairly favorable from an underlying microperspective that will accrue to them as we get the benefit of the renovations of these properties and the recapture of the lost RevPAR as well as the growth in margins, all of which that are going to help drive our same-property EBITDA growth into double digits, just like it's doing this year.

Okay, that's fair. The second question, in New York have you guys kind of run the math, along with your JV partner, on what a condo conversion of some of the units in the Manhattan Collection might trade for and just how that compares to the value of the hotel on a per key or per square foot basis?

No, we haven't run that math. Our partner doesn't have an interest in selling hotels at this time to convert them to other uses regardless of what -- if there is financial benefit. So that couldn't happen until the partners have -- until we have an ability to trigger a sale, if we wanted to do that, two more years from now.

Okay, just thought I would ask the question. Thanks, Jon. I appreciate it.

David Loeb, Baird.

I thought I might be question number nine, number nine.

Well, yes, we were supposed to have some music related to that, but didn't happen. Sorry about that.

Totally fine. Jon, the last couple of acquisitions have been pretty complex deals and it sounds like you were working on them for long time. Are we getting to the point in the cycle where pretty much any transaction you buy is likely to be either complex or require some pretty dramatic overhaul? I guess that is part A.

And part B is how much longer do you think there is a window to continue to buy in this cycle?

The answer to your first question is I hope not. But, if that's where our competitive advantage lies, while we remain disciplined in what we are willing to pay for transactions then that's okay with us. We are -- as we have demonstrated we are more than happy to take advantage of those opportunities through hard work and persistence, and in many cases, patience.

And to reap the value of opportunities like the Prescott through visioning and creativity and again a lot of hard work in order to drive much higher returns. I hope they are not all that way, but maybe they will be. It's hard to say at this point, David.

As it relates to your second question, which was timing for additional acquisitions, I think what we have said is this year is probably the last year we will do material acquisitions. And the ones we do beyond would need to be both compelling and also recognize the risk of a recession that ultimately may come in the next five years. And so I would expect our volume to be relatively low.

I would offset that to a small extent by the fact that supply, so our micro view of the market, has gotten better over the last year and our viewpoint on supply growth for this year and next year and at this point 2016 is being reduced. Now we think we are probably going to be closer to 1% to 1.2% this year versus 1.3% to 1.5% of supply growth this year.

We think next year is likely to be 1.4% to 1.8%, which is down from a 1.6% to 2% growth forecast for next year we had previously. Then, as we look at 2016 right now, we think that's likely somewhere in the 2% to 2.4% range, which again is a reduction from what we thought. So while there's a lot of properties in planning, it is still a lengthy process to raise the equity and the debt.

The equity because there's a lot of equity required for new construction and the new construction financing, while increasingly available, continues to be expensive and demanding some fairly tough terms. So it is getting stretched. Construction is going up, but it's taking longer and, of course, that will continue to benefit the industry.

Sure, one more if you don't mind. Can you talk a little bit about the trade-off between ADR and occupancy? Clearly, there is an optimal in losing a little occupancy to get better rate is probably a good thing. But how far are you willing to push that and how are your operators doing in terms of managing that process?

Theoretically there's -- an equal trade-off would be beneficial because the ADR is going to be 10% to 15% per dollar more profitable than the occupancy is going to be. I would say most of our operators in general are working with us very closely to not only push pricing, but take the risk of remixing product, remixing your customer mix and your base.

What we have done in New York, recently we have taken advantage of some long -- I guess I would call it long-term stay, two or three month stay business at some very attractive rates which we can accommodate because of the suites we have. And in particular, suites with kitchens in the portfolio. That is allowing us to replace some discounted business and OTA business.

So it isn't just raising prices, it's being wise or being willing to take some risk to turn some business down that you have historically taken in order to either wait or take some other business that you think is going to come into the property. And I would say we are having a lot of success. Take a look at our overall RevPAR numbers.

Despite outgrowing the industry, we picked up -- I think in the second quarter we picked up over 280 basis point of RevPAR penetration and I think all of that or more was in ADR. So we are having a lot of success in making that trade-off in a smart way where it adds to profitability which you see coming through in the margins as well.

Great, thank you.

Jeff Donnelly, Wells Fargo.

Good morning, guys. A few questions. Jon, I guess back on DC; do you think that the government, the federal government effectively crowded out, if you will, other employment there and that maybe the scaling back of federal government employment provides an opportunity for private sector employers to enter over time?

I guess ultimately -- I don't mean to be flip -- it's not Flint, Michigan, where you had a specialized industry pull back, leaving specialized workers. Just sort of office workers. Do you think there's an opportunity for employment to help that market recover a little bit more robustly?

I would say probably, Jeff. It's interesting; over the years one of the things we struggled with in this market in positions often accounting and administrative positions is we compete with the government, where people can work just 9-to-5 and get decent pay and great benefits. So from a lifestyle perspective, we do get crowded out by the government for people in those categories.

So, yes, I'm sure other people experienced the same thing, not only in those categories but in others. I doubt those people are going to leave the market, because I think it continues to be a nice lifestyle here. But I think businesses will continue to move here, as they have over the decades, to do business with the government. And as you know, a lot of people who do leave the government end up doing business with the government and staying here.

Just to switch gears on acquisitions, maybe touch on your remark from a different angle. Given what your profile was and where you think you can get returns, is it fair to say that the potential volume of acquisitions you could do in the next 12 months could still mirror what you've done in the past 12?

Yes, I think it's possible.

What is your appetite for, David Loeb touched on, sort of larger and more complex acquisitions? Do you think we are too late in the cycle to attempt those?

I view those as two different things. Larger, we have always -- we've been hesitant since we started to do large transactions, either portfolios or large hotels. And the reason is risk.

We have great diversification for a small company right now with the hotels we have. We don't have a single hotel that I think is more than 7% of our EBITDA. And so, as a result of that, and you look at the balance within the portfolio from property to property, it just lowers our risk and allows us and the investment community to not have to get dragged down focusing on one large asset when we have a problem.

We always have problems in the portfolio, but they are spread out and none of the problems at any particular property are going to do much damage to the performance of the overall company. So we really like the risk profile and I would say we will continue to refrain from adding assets that would cause that to change and increase the risk profile of the Company.

I think as it relates to the more complex structures, The Nines is a good example of it was a very complex ownership structure with limitations because of historic tax credits and new market tax credits about how the transaction had to be done and what restrictions on the new owner would be for some period of time. That limited the players and also meant an awful lot of work to make sure that it could work in a REIT structure and work for new owner without creating a new liability for the seller, who then wouldn't be a seller.

We were willing to invest that time, which was a long time, all the way back to Labor Day in terms of when we reached the deal on the price, to the final completion and sit by why the seller made a deal with the PDC on their outstanding debt. So in the meantime the property went from a 7 cap to an 8.25 cap, so it was well worth the patience at the end of the day.

Deals like The Prescott will really depend upon the market and how much value we can create. You can do those kinds of deals at any time in the cycle because they are such large creators of value, but you have to weigh that off by what happens in the downturn and what is that downturn going to look like. And at the end of the day are you going to end up creating value overall?

Clearly, you can create value on a relative basis, but nobody cares about relative. We all care about nominal. So it really depends on a case-by-case basis and a market-by-market basis.

That is helpful. Just one last question. Do you have handy the trend in compression nights that you've seen in the quarter, maybe versus prior quarters? I'm just curious what it might be overall for your markets, New York specifically, and what your expectation is for the trend in compression nights as we begin to see more supply coming on in markets like Manhattan and DC.

We don't have that information. I guess, per se, we don't find tracking it is all that helpful other than just to report it I suppose. Our asset managers are on revenue calls with our property teams weekly and so they are much more clued into the dynamics of each individual market that way than just looking at some statistics.

So I apologize, we don't have that information and don't track it, but I would say anecdotally, and certainly from a math perspective, as markets get up to the levels they are at there's more compression and that's what's giving us more pricing power, on the West Coast in particular. And you would expect some of that ultimately on the East Coast markets that are at new peak.

But for kind of how that -- where that business is coming from and a little bit of the negative psychology that still exists in a market like DC or New York that is refraining the willingness of property teams to take risk and price more aggressively. So compression nights are absolutely going up, but you will have to rely upon that data from others.

Okay. Thanks, guys.

Wes Golladay, RBC Capital Markets.

Good morning, guys. You guys are building a nice footprint in Portland. Can you give us your multiyear outlook for that city?

Yes, we think the multiyear outlook is great. We would not have bought there otherwise. The demand growth in that market over the last several years has been as high as any West Coast market.

The long-term, 25-year trends for supply are as low as most any market on the West Coast, maybe but for West LA and more recently San Francisco. So the economic environment seems very favorable. There's healthy growth. There's very strong employment growth in the market. We think that will continue.

It benefits from its quality-of-life, public transportation, airlift as a gateway city. It's geographic location between San Francisco and Seattle, where it's seeing technology company growth in the marketplace. There are -- there have been movement from San Francisco to Portland for quality-of-life and presumably lower-cost labor. And so it is a little bit of the stepsister to Seattle right now, but it looks a lot to us to some extent like Seattle 10 years ago in terms of its potential evolution.

Okay. Now looking at the West Coast versus East Coast, the performance this year has been heavily weighted towards the West Coast and you mentioned this would be a multiyear trend. But do you think it can maintain the same magnitude of a 3% to 5% outperformance, say, through the next call it 2016, 2017?

That's really hard to forecast at this point, Wes. I would say theoretically sure. The supply growth continues to be very limited in the West Coast markets and more active in a number of the East Coast markets. And so we certainly think you are going to continue to see more attractive underlying fundamentals in those markets. How big the spread will be? Hard to forecast at this point.

Okay. Thanks a lot, guys.

Bill Crow, Raymond James.

Good morning, guys. Jon, you talked about the diversification in your portfolio and clearly from a size perspective that is true. Kimpton, though, continues to represent a sizable amount of the number of the assets managed. They are morphing into a larger branch and they recently announced a change in their frequent guest program, etc.

How is that going to impact you? Do you think it's a positive that they are growing like they are growing? Do you think it's a negative? Will the frequent guest program add to expenses? Do you have any less flexibility in dealing with them as a bigger company today?

Yes, all good questions. I would say 100% across the board what's going on in Kimpton from a growth perspective is a positive.

There's a lot more cross-customer utilization. There's much better usability. They continue to move back towards their roots of being a fun, different company focused on providing a unique experience, which we think is dead-on in terms of what the customer trends are in the industry. And they continue to do it without adding cost.

The restructuring of the loyalty program into Kimpton Karma, which is so cool -- punny, by the way -- and is not adding costs to the hotels. They've done it very thoughtfully and they've done it, I think, really well from a design and structure perspective.

So we are really pleased with where Kimpton is going. They've been a great partner. They continue to be extremely sensitive to the cost side and totally understand -- they have new competition. Their new competition is beginning to come from big brands with Curio and with Autograph and Luxury Collection, which the brands are pushing, because that's where the consumer trends are growing the fastest.

And so they get it and they know that they have to run faster, but they also have to be even more owner-sensitive, particularly on the cost side, and they are doing that. And they have been a great partner from that perspective so we think what is happening with Kimpton right now is all for the positive.

Are they using that increased size and leverage against the OTAs at all to try and reduce that commission rate?

They are. They're having different levels of success. And as an example, I know with one of the vendors they have continued to be at a standstill on where they are with negotiations because their owners are not supportive of what that OTA vendor is looking for. So they are being very responsive to the ownership groups and basically following their desires.

But, yes, in fact we are seeing it through the whole portfolio, not just at Kimpton, but we are having very good success shrinking the amount of OTA business being done in the portfolio and increasing amount of company.com or brand.com or property website business in the portfolio. And that continues to be a big focus of ours and our property team, because it's obviously much more profitable.

Thank you. Finally, for me; Jon, are you seeing any pushback on rate from your clientele? Are you losing people that have to go, because of per diems or whatever issues are out there? Are we starting to see rates get to that point where you start losing occupancy?

We haven't really seen that, Bill, and in fact the historical trends are, as there's more competition for people, the travel policies tend to get relax and allow more trade-up within the portfolio. We obviously saw that with government and its limited the per diem.

In fact, unfortunately in DC, from a competitive standpoint there's a lot of business being bid and done right now below per diem with government. So the market has kind of cracked from that perspective and competition is challenging in this market in DC with government. But on an overall basis with the general demographic, no, we're not seeing any more price sensitivity than we have been seeing.

That's it for me. Thank you.

Jim Sullivan, Cowen.

Thank you, good morning. Jon, you had talked about in the prepared comments the work you are doing at the W in LA and some of parameters or value creation there. I wonder if you could talk to us a little bit more about this conversion from suites to rooms.

You've had some experience in New York. You're now doing it at the W and that W I think was an all-suite hotel at the time you bought it. I'm just curious what the -- when you think about the cost per room to do this how the cost for making that conversion in LA compares to the experience in New York and how much more opportunity you might have in the portfolio to do that.

You are right; in W LA the opportunity comes from the fact that the hotel is all suites and in many cases we don't get a value for those suites from the customer. So the property has been running in the mid to upper 80%s on an annual basis in occupancy and we will do north of $300 in rate this year at the property. And so it seems like the demand in the market, which is running 82% occupancy or something in that Western LA market, gives us an opportunity to add some keys when nothing else is going on in the marketplace.

The economics of doing it are actually a little less expensive than they were in New York, not because costs are necessarily materially different, but in New York at Affinia 50 we added an elevator which end up costing us about, for the added keys, cost us something like $15,000, $20,000 more a key. So we are ending up here at about $150,000 a key per total cost.

Recall we bought this property in the low [$500,000s] per key and that was a couple of years ago and the markets continued to move. We think values are probably between $600,000 and $700,000 a key in the marketplace and so ultimately, with stabilization, we think those keys are going to cover their costs by upwards of $500,000 a key or more.

What are the prospects for continued conversion, say, in New York? You are continuing to have in the Affinia portfolio a number of larger rooms, I believe, don't you?

Yes, the Dumont is all suites, the Gardens is all suites. The Benjamin has too many suites and so all three of those properties have an opportunity for conversion. We've looked at it, specifically at the Benjamin, and if I recall we can add again somewhere between 40 and 50 keys.

We do have a vertical logistics issue that we have to figure out like we did at the 50. We're tight on vertical transportation from a customer perspective at The Benjamin and so we need to find a solution for that in order to add the keys. So there's nothing imminent there, Jim, but there is opportunity at all three properties.

Okay. Then secondly for me, I wondered if you could just give us an update on labor cost pressures that you may be seeing or maybe I'm seeing in your markets and whether there are any markets where the pressures look like they might materialize sooner.

I would say across the board are not seeing any market-related pressures. We are seeing obviously in various cities around the US political pressure or legislation for living wage or extreme wage increases that, at least in Seattle, have been legislated and will work their way in over the next three years.

Our sense right now is to varying degrees that's going to happen in numerous cities around the country. It has happened in some states, although clearly it's a much lower increases in minimum wage.

And what we believe will happen is it's going to get passed through one way or another to the customer. It will reduce some labor, causing us to look at the need for greater efficiencies. It's going to create more outsourcing, particularly outsourcing outside of, if it's a city, outside of the city service providers into other service providers.

San Francisco is a good example of two things. One, several years ago they passed they call it Healthy SF, which is a required payment per hour for all noncovered employees. I think it's $2.44. We have completely passed that through to the customer through a separate charge on all the menus and all the outlet prices. So that is -- that happened in that market. It's prevalent within the restaurant industry there.

The other thing in San Francisco is we are now moving our laundry to Sacramento. Even though it's obviously a higher transportation costs, the labor costs are much lower and the benefit costs are much lower using the state minimum wages and we are significantly lowering our laundry cost. Those are the kinds of things that we will react to with the pressure and whatever gets legislated in these cities if it isn't a full extensive national or regional increase in wages.

Then finally for me, Ray used the phrase readily available talking about the five- to seven-year term loan market and you addressed it as well talking about acquisition financing. What are we talking about over the last six months or year in terms of spread compression and what would five- to seven-year term debt cost you today?

We are seeing at least a 25 basis point movement down in spread as it continues quarter to quarter because there is a lot of competition on the banking side to get the dollars out so it [will continue that way now]. So that would imply right now spreads on five- to seven-year term debt could be in the range of 150 to 200 basis points depending on your leverage level on a typical five-year term. Then for a seven-year term you will probably look at an increasing spread of about 20 to 30 basis points, depending on who you work with.

To put that in perspective you are looking at a five-year term in the low 2%s and seven-year you are looking at a mid-2% range. So all sub-3% and then obviously that is on a preliminary basis. If you decide to swap it out you will add a little bit.

Right now we're looking at all-in debt on the five-year side at 4% or less. That is what we, when we evaluate uses on our credit facilities, and also as we evaluate into 2016 as we have some debt maturities and preferred equity maturities of the options that are in front of us.

Sure, very good. Thank you.

Luke Hartwich, Green Street Advisors.

Thank you. Good one, guys. Just a quick one for me. Can you update us on your thoughts on acquisitions? Or, sorry, dispositions?

Sure, I think as we talked before, we continue to look at dispositions in markets that we don't view as perpetual markets. Those would be potentially markets like Minneapolis, Buckhead, Miami, and Philadelphia. And so, interestingly, what we continue to see in those markets on a micro basis is very little new supply coming into the market getting started.

So from our perspective we will continue to look at the right time to dispose of those. Maybe this year, maybe next year. It will really depend upon what market looks like, but I think the acquisition market for those properties today is generally very attractive with all the equity and debt available.

Great, thank you.

(Operator Instructions) We have no questions in the queue at this time.

Thank you very much, operator. Thank you all for listening in. Have a great weekend and we look forward to updating you again three months from now.

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