Pebblebrook Hotel Trust (PEB) 2014 Q3 法說會逐字稿

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

Thank you, David. Good morning, everyone, and welcome to our third-quarter 2014 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

Before we start, let me remind everyone that many of 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 and our other SEC filings and could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements that we make today are effective only as of today, October 24, 2014 and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contains reconciliations of the non-GAAP financial measures we use on our website at Pebblebrookhotels.com.

So, we have another terrific quarter to talk to you about. Our third-quarter performance was much better than we expected on all operating metrics. Same property RevPAR for the total portfolio climbed 11.4% to $225. This exceeded our outlook for RevPAR growth of 7% to 8% due to strong demand across all of our market segments including group and transient, business and leisure, and all across the country throughout the portfolio.

Our RevPAR growth is driven by both our West Coast properties, which rose 11.2%, as well as our East Coast properties which increased 11%. In addition to the healthy gains in group and transient demand, we continue to see steady growth from inbound international travel, which benefits many of our hotels as a result of our significant 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 8.5%, while occupancy climbed 2.6% to a very robust 90.2%. 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 our prior-peak occupancy levels. 18 of our 31 hotels achieved double-digit RevPAR gains with 13 of those hotels realizing double-digit ADR gains in the quarter.

As a reminder our Q3 RevPAR and hotel EBITDA results are same store for our ownership period and include all the hotels we owned as of September 30. Our hotels do not exclude hotels -- our numbers do not exclude hotels under renovation.

For our portfolio on a monthly basis, July RevPAR increased 9.7%, August was up 12%, and September climbed 12.5% reflecting accelerating demand growth throughout the third quarter. RevPAR growth in the quarter was led by the Viceroy Miami and Affinia 50 as both hotels had easy comparisons due to the prior-year renovations and the repairs at these properties.

Affinia 50 is performing well with RevPAR increasing 30.3% in the quarter as it ramps up from its comprehensive renovation and rooms addition. Affinia 50's RevPAR performance added 35 basis points to our third-quarter RevPAR growth rate.

Other strong performers included The Grand Minneapolis, Hotel Zetta, Hotel Madeira Portland, Sir Francis Drake in San Francisco, Mondrian LA, and W Boston. When compared to last year, third-quarter same property total revenues increased 9.2%, and third-quarter same property expense growth was limited to 3.6% resulting in a same property EBITDA growth of 21% with our EBITDA margin growth climbing 350 basis points.

Food and beverage revenues increased 3%, but food and beverage expenses declined by 1.9% as we continue to make strides retooling and re-concepting our food and beverage operations across the portfolio. In Q3, food and beverage departmental profit margin improved by 359 basis points, and year-to-date, food and beverage margins were up 276 basis points. Food and beverage departmental profit improved by $1.7 million in Q3, or over 18% from last year representing terrific progress in our focused asset management efforts.

The hotel EBITDA growth leaders in the third quarter were Sir Francis Drake, Mondrian LA, Hotel Palomar San Francisco, and Le Meridien Delfina Santa Monica. Our EBITDA growth was broad as 16 properties, which is about 50% of our portfolio, grew EBITDA by more than 20% in the quarter compared with the same period last quarter. Because of the exceptional performance generated by our portfolio during the third quarter and the benefit of a select number of acquisitions in the last year, adjusted EBITDA increased 43.1% and adjusted FFO per share climbed 47.6% compared with last year's third quarter.

Non-cash G&A expenses increased in the quarter due to increased accruals relating to our long-term performance shares which reflects a better-than-expected improvement in our hotel EBITDA margins. As you may recall, one of the drivers of our performance share awards is the improvement in our hotel margins versus LaSalle, who we consider one of the best asset managers in the business.

At the end of 2011, our hotel margins were more than 600 basis points below LaSalle's. Based on our current 2014 outlook, we anticipate this difference to be 225 basis points or less by the end of this year, and we have expected to narrow the gap by almost 400 basis points over four years which represents an improvement of roughly $17.5 million of additional EBITDA.

Since this performance criteria is deemed to be non-market-based measures in terms of accounting terms, we are required to mark-to-market the performance measurement related to this increase in our margin improvement in our non-cash G&A, which is different than the majority portion of our performance share criteria, which are marked based on the value when issued and accrued ratably over a three-year investment period -- or measurement period.

It's also worth noting that the performance shares are earned based on a 3-year measurement period, and the shares earned and the expense incurred is one-time in nature. Whereas the improvements in hotel EBITDA achieved through the efforts of our asset managers and corporate team, should be long-lasting improvements resulting in significant increases in cash flow and overall valuation of our portfolio.

Switching now to our year-to-date results, same property RevPAR has increased 9.8%. Same property ADR was up 7.8%. Same property EBITDA has climbed 17.5%. EBITDA margin is up 265 basis points, and adjusted EBITDA is up 34%, or more than $37 million versus last year.

Now, let's focus on our acquisition and capital market reinvestment activities in the third quarter. On July 17, we acquired The Nines, which is a 331-room luxury hotel located at Pioneer Square in downtown Portland for $127 million marking our third acquisition in the attractive downtown Portland market which next to San Francisco has been one of our best performing markets during the last couple years.

During the quarter, we invested $16.1 million into our hotels as part of our capital reinvestment program, and year-to-date, we have invested $34.3 million into our portfolio. These investments, though disruptive to performance in the near-term, are expected to lead to out-performance in 2014 and beyond, which is consistent with the improved performance we have regularly seen following our previously completed capital reinvestment programs.

On the capital market side of our business, we were also active during the third quarter. On September 9, we completed a common equity offering issuing 3.45 million common shares at a net price of $38.15 per share, resulting in net proceeds of $131.4 million.

On September 30, we completed a preferred equity offering reopening our 6.5% Series C preferred by issuing 1 million additional shares at a net price of $25 and generating $24.5 million of net proceeds. And, during the third quarter, we sold 400,000 common shares under our ATM program at an average price of $38.09 per share for total net proceeds of $15 million.

The common equity we raised during the quarter increased our diluted weighted average shares outstanding by $1.1 million in the quarter, and negatively impacted our FFO per share by $0.012 per share. The dividends in the quarter, on the newly issued preferred shares, added about $330,000 of dividend expenses and reduced our FFO per share by $0.005 in the quarter.

For our 2014 full-year outlook, the combination of additional preferred dividends and additional common shares negatively impacted our FFO per share outlook by $0.05 per share. To be clear, the dilution from the additional common shares and additional preferred dividends assume no future acquisitions or other capital investments to offset the impact of raising this capital in the third quarter.

On the debt side, last week you probably saw that we successfully amended and restated our existing unsecured revolving credit facility and term loans. We increased our overall facility up to $600 million, which is comprised of a $300 million revolving line, which has no outstanding balance currently, and up to $300 million of term loans which includes a $100 million term loan previously and currently outstanding.

The pricing on our amended credit facility improved by about -- by 25 basis points across the pricing grid. We extended our overall maturities to January, 2020, and we improved our flexibility with some of our overall terms and covenants. We are really pleased with the new line and thank our lenders for their strong support.

Finally, on our balance sheet as of September 30, we had consolidated cash, cash equivalents, and restricted cash of $137.2 million plus another $17.1 million in unconsolidated cash, cash equivalents, and restricted cash from our 49% pro rata interest in the Manhattan collection.

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

Thanks, Ray. As Ray said, Q3 was another very strong quarter for both the lodging industry and for Pebblebrook. In fact, performance in the third quarter, when looking at just about all fundamental variables, improved again from the first and second quarters. Industry demand growth, which had increased to 3.8% in the first quarter then 4.5% in the second, accelerated to a very strong 4.8% in the third with demand growth year-to-date at 4.3%.

With supply growth again subdued in Q3 at just 0.9%, occupancy rose 3.8% in Q3. ADR growth picked up significantly more steam in Q3 with year-over-year growth of 5.2% versus 4.4% in Q2 and 3.8% in Q1. As a result, industry RevPAR grew an exceptionally strong 9.2% in Q3, the strongest quarterly growth since before the last downturn.

This acceleration in demand is a result of numerous positive factors coming together at the same time. Domestic leisure and business transient travel remained strong. We have finally have begun to see a very healthy recovery in demand from group customers.

Overseas inbound travel not only remains strong, but it has gotten even stronger this year with growth in the first half of the year of 8%, roughly twice the growth estimates going into the year. Demand socioeconomically has also expanded to the middle class as the economic recovery advances and broadens out.

Finally, it seems a greater percentage of increasing discretionary income is being spent for travel and to collect experiences. We believe all of these positive trends should continue over the coming years, but we wouldn't expect demand growth to remain at the current level though strong third-quarter industry performance was broader and more inclusive than any other quarter to date and clearly stronger than we were forecasting.

At Pebblebrook, like the industry, we had another great quarter. Our RevPAR growth of 11.4% out-paced the US industry by 220 basis points and was driven by a very strong 8.5% increase in rate. With our occupancies running high at 90.2% in Q3, we have plenty of opportunity to increase pricing and continue to revenue manage out lower-priced and discounted business, and then replace those customers with better-priced customers.

As has been the case in prior quarters, positive performance was widespread throughout the portfolio, yet unlike prior quarters, both our West Coast and East Coast hotels were equally strong as Ray discussed earlier. And, while our portfolio of properties outperformed the industry, they also picked up significant share overall as they continue to benefit from their renovations, repositioning, and our asset management and revenue management efforts.

Amazingly, 21 of our hotels ran occupancies of 90% or higher in the quarter in many cases providing significant pricing power. And, as a further indication of the strength of the urban markets we're in, just about every one of those markets are now running at overall trailing-12-month occupancies that are above prior-peak levels, starting with Manhattan at an incredible 87.1% followed by San Francisco at 84.8%, Hollywood Beverly Hills at 82.3%, Santa Monica at 81.9%, downtown Boston at 81.5%, Seattle downtown at 81.3%, Portland downtown, 79.2%, Miami downtown, 78.7%, San Diego downtown, 78%, Washington DC's CBD at 76.6%, Philadelphia's Center City at 74.7%, Buckhead at 74.5%, and even Minneapolis has passed prior peak at 72.3%.

The industry's occupancy of 63.8% on a trailing-12-month basis is now also ahead of last cycle's peak occupancy of 63.6% and should surpass the all-time record of 64.9% some time next year. And, why does that matter? Because as demand growth continues to surpass supply growth, occupancies climb higher, and we get more compression nights, more opportunity to raise prices, more opportunity to remix our business to yield higher average rates with all of it leading to the likelihood of higher annual ADR growth so long as occupancies continue to grow.

This should happen even if the gap between demand and supply growth narrows. As a result, provided the economic recovery continues, we currently believe it is likely that very healthy RevPAR growth will run at least through 2017.

Sorry. Let me come back to some Q3 performance highlights. On the East Coast, downtown Miami led the way with RevPAR increasing an exceptional 16.7%. Boston also had a great quarter with RevPAR growing an equally exceptional 16.6% as the city benefited from a very favorable convention calendar and strong underlying transient demand.

Washington DC's CBD improved greatly with RevPAR increasing 11.4% in Q3, principally as a result of a great convention calendar compared to last year, and strong overall business and leisure travel trends. Philadelphia also had similar benefits to DC as RevPAR grew 10.9%.

Buckhead increased 11.3%, and finally, New York City and Manhattan continued to absorb all of the new supply as trailing-12-month occupancy in Manhattan again hit an all-time record high. Demand in Manhattan increased an impressive 6.7% in the quarter, and RevPAR grew 4.3%.

On the West Coast, downtown Seattle led the way with RevPAR growth of 17.4% in the quarter followed by Portland downtown at 15.1%, San Francisco at 11.5%, West LA at 11.1%, and downtown San Diego underperforming at 5.1% due to a less favorable convention calendar compared to last year. As a reminder, all of the numbers I just provided are performance numbers for the urban markets, not our properties in those markets, though our hotels generally followed pretty closely those market numbers.

As examples, our hotels in Boston, Minneapolis, and Miami were all up more than 16%. Our Portland properties grew RevPAR by 15.4%. Our Seattle properties were up 14.7%. Our West LA hotels climbed 11.6%. Our DC properties grew RevPAR 12.5%. Our San Diego -- I'm sorry, our San Francisco hotels were up 10.8%, and our Manhattan collection achieved 7.8% RevPAR growth and 5.4% without including Affinia 50.

Now, let me turn to our revised outlook for the year. 2014 just keeps getting better for both the industry and Pebblebrook. For the industry, due to better-than-expected performance last quarter, we're again increasing our RevPAR forecast for the year from a range of 6% to 7% to a range of 7.5% to 8%. Our increase comes primarily from stronger demand growth leading to higher occupancies as opposed to any increase in our prior ADR growth range of 4% to 5%.

Before we turn to our corporate outlook, let me make a few comments about our upcoming renovation projects. Next month, we expect to commence the comprehensive renovation and repositioning of W LA including all public areas and guest rooms as well as the addition of 39 keys. In November, we will also commence the renovation of the lobby and atrium of the Embassy suites in downtown San Diego.

Then, in December, we expect to begin the complete renovation of the Radisson Fisherman's Wharf which will become the Hotel Zephyr Fisherman's Wharf in the second quarter of next year. Finally, we're planning to begin the comprehensive renovation of vintage Portland in January of next year when we expect to close the hotel for some 8 to 10 weeks.

In 2014, renovations that occurred earlier this year in the first quarter, plus those to take place in Q4, are impacting overall same property RevPAR growth on a combined basis for the year by approximately 50 to 75 basis points with the majority of it impacting Q4. Based upon the projects just discussed and those planned for next year, we currently don't expect the impact next year to be materially greater than this year with the biggest difference being the majority of the disruption will impact Q1 next year versus Q4 this year. These major renovation and repositioning projects will play a material role, along with all of our prior projects, in driving better-than-industry performance in 2015 and beyond.

For our portfolio, we're again increasing our RevPAR outlook for the year. Our forecast for our same property RevPAR growth goes from a prior range of 7.25% to 8%, to a range of 8.25% to 8.75%. We continue to expect the vast majority of our RevPAR increase to come through as growth in ADR.

We're also raising our same property EBITDA and EBITDA margin growth forecast for the full year. Our forecast for same property hotel EBITDA increased by $6 million at the low end and $4 million at the high-end. This is a result of our increased RevPAR expectations and improved same property EBITDA margins, which are now forecasted to increase between 225 and 250 basis points over last year.

Flow-through of increased same property revenues to increased same property EBITDA is now forecasted at approximately 68% to 69% for the full year. Same property EBITDA for 2014 is now forecasted to increase between 13.5% and 14.5%. Same property NOI after an assumed 4% capital maintenance reserve is forecasted to grow another 140 to 150 basis points higher than same property EBITDA growth for roughly 15% to 16% over last year.

The last quarter of 2014 continues to look positive based on current trends and business on the books. For Q4, we're forecasting our same property RevPAR to increase by 5% to 6%, with the vast majority of the increase coming from ADR growth. Q4 RevPAR growth will be lower than the increases in the previous three quarters due primarily to the negative impact of the Q4 renovations I discussed earlier which we estimate at 200 basis points. Margin growth will also be much lower for the same reason.

Our forecast for same property hotel EBITDA for Q4 is $50.8 million to $52.8 million, with same property EBITDA margins increasing by 100 basis points to 150 basis points. For our full-year outlook for adjusted FFO and adjusted corporate EBITDA, we're also increasing the prior ranges.

Again, the increases are due to our increased outlook for same property RevPAR growth and EBITDA margin from Q3's out-performance, and slightly better performance forecasted for Q4, partially offset by an increase primarily in non-cash G&A expense due to an accrual for potential additional performance share compensation that Ray described in detail earlier. Adjusted corporate EBITDA is now forecasted between $191.6 million and $193.6 million, an increase of $4.4 million at the low end and $2.4 million at the high end.

Our outlook for adjusted FFO per share goes from a previous range of $1.87 to $1.93, to our current forecast of $1.87 to $1.90 with the lack of increase at the lower end and the decline at the upper end, all due to the negative effects of the additional common shares outstanding from our ATM and overnight offerings in Q3, the additional preferred dividends from the additional Series C shares also issued in Q3, and the additional non-cash G&A all as described in detail by Ray earlier. Our outlook does not include additional EBITDA from potential acquisitions which may or may not occur in Q4.

Economic trends, travel trends, and business on our books all remain supportive of our forecast of strong growth for the rest of 2014. As of the end of September, total group and transit revenue on the books for the fourth quarter of this year was up 8.8% over same time last year, with ADR up a healthy 5.5%.

Group room night pace is up 3.7% with group ADR on the books higher by an impressive 8.2%, for a total group pace advantage of 12.2% in group revenues. Our portfolio-wide transient room nights on the books for the last quarter of 2014 are up 2.8%, while rate for transient on the books is up 3.8%.

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

Assuming industry RevPAR grows by 5% to 7% a year for the next three years, and we outperform by 100 basis points a year on average with continuing improvement in relative margins as we drive to catch up to LaSalle's superb margins, we should be able to grow same store EBITDA up by 10% or more on average and FFO per share by 15% to 20% on average, all without any additional acquisitions. We believe our industry's prospects are bright, and our prospects are even brighter.

That concludes our prepared remarks. David, we would be happy to take questions now.

(Operator Instructions)

We will go first to Rich Hightower with ISI Group.

Hello. Good morning. Excellent quarter, of course, which means that people will start to worry about tough comps for next year, I think. I know that we've talked about this previously, but there seems to be an impression that I think citywide calendars in several key markets are a little bit softer next year. Just was wondering if you could give a little more color on your take specifically on a few of the key markets there? And, how that impacts Pebblebrook's portfolio specifically.

Sure, Rich. Happy to do that. So, let's start on the West Coast where I think the calendars for next year are a little better comparatively than those on the East Coast. I think San Diego is basically flat next year though the ups and downs are different by quarter compared to this year. We do think the overall quality of the conventions is a little better. Meaning we think rate growth is a little better on the convention calendar, but otherwise pretty static with this year. LA is a non-event since it's not really an impact, and I'd say we see from one to two citywides a year that actually work their way out to West LA, and that isn't any different next year.

In San Francisco, total room nights on the convention calendar are down slightly to this year, but the large citywides are actually up next year and given the overall strength of San Francisco, and in fact, the convention calendar this year that we're comparing it to, we don't really see any impact on next year other than, again, we have these month-to-month and occasionally quarter-to-quarter shifts particularly if some of the big ones like Dreamforce or Oracle as they move back and forth across the third and fourth quarters. Portland and Seattle are actually up next year. It's a little more of an impact in Portland because it's a good-size convention center. In fact, bigger than Seattle. And, it's a little bigger impact on the market, but they're both up next year. So, the West Coast looks as good or better than this year from a convention calendar perspective.

On the East Coast, Boston next year is as strong as this year, which is a super year, and where we see a little bit of weakness continues to be in Philly and DC which are both down slightly. Though again, because they're running at lower levels, a bit less of an impact on the overall market. Atlanta downtown is down a little bit, but like LA, doesn't have much of an impact on Buckhead. Not many of those conventions actually push out that way. Miami is down a little bit next year. Again, not the big factor in the market in terms of percentage of demand. And then, I can't speak to Chicago because we don't own anything there. I honestly don't know whether it's up or down. But, that kind of covers the major markets from our perspective.

Okay. That's very helpful, Jon. Thanks. And then, for me just a couple quick modeling questions. This is a question for Ray, I suppose. On the $200 million option to draw down on the term loan, should we assume that, that's only drawn if and when the Boston acquisition closes?

Yes. I think it's safe to say we have an option so if we have needs to draw the line, the term allows us to do it at a slightly lower rate. We should anticipate as we use the term loan, we will use those opportunities to swap rates on a fixed-rate basis. So, when you're modeling, whenever you are assuming if there are acquisitions, assume it's going to be any debt that's required through the line of the term loan.

Okay. That's helpful. And finally, just on the mechanics going forward of the long-term performance share payments that hit this quarter? I know you said you're about 225 basis points off of LaSalle's margins. Can you talk about how that is going to work going forward? And maybe, what we should think as far as a run rate? And, when maybe those one-timers are going to hit in the future, if that's even possible?

It's a hard thing to forecast because we know our side of where our margins are forecasted to improve to a relative range, but we don't know LaSalle's. So, we ultimately have to wait and ultimately it's determined at the end of each year, and we update our estimates as our forecast has changed.

And, currently, the increased accrual is because our margins, at least we know our portfolio is improving for the year versus what we thought 90 days ago which is why the accrual went up. As we look into 2015 and beyond, we will evaluate that. We'll do our best to estimate it. But again, we only have half the equation so it's hard to understand where LaSalle would be or not be. We'll try to do the best of communicating that out to the best we can for our forecasting.

Okay. That's all for me. Thanks.

Thank you.

Jeff Donnelly, Wells Fargo.

Good morning. Actually just building on the modeling question quickly. Jon, you mentioned the 2015 renovation benefits and disruption. Just to clarify, the majority that would fall into Q1 of 2015, is that a similar scale to the amount of disruption that you are thinking about for Q4 2014?

Yes. I think it's -- right now, we think it's very similar to this year except just flip-flopping Q1 and Q4.

Okay. Got you And, considering the purchase that's in the Boston region, are you able to give us a sense of scale that the adjacent commercial property and land represents? Maybe as a percentage of the total prospective investment. And, secondarily, I think you referenced that there was a land component. Is that land that's something that's instrumental to the execution of that investment? Or, is it just ancillary to the property?

So, Jeff, unfortunately, we're bound by a confidentiality agreement with the seller, and we only filed with the SEC due to the SEC requirements related to percentage of income of the property related to the portfolio for the prior year. And so, outside of that, I can't really give you any information about it, and I would caution everyone to continue to understand that it's only a potential acquisition as stated in the K. It's a contract signed, but it doesn't mean it will be an acquisition made.

Okay. And maybe, the last question or two then is as you look across your target markets, are there any where you're finding yourself consistently uncompetitive for acquisitions? I guess to the flipside, are there markets where you think there is some opportunity for being a contrarian? That maybe pricing has moved to a point, like say, Washington, DC where it is proving more attractive to enter?

Yes. I don't think we've really seen that opportunity come about yet. I think the pricing we've seen in markets like DC, from our viewpoint of underwriting, they don't seem to work at the current values because we don't think they have adjusted for the lower growth that we think will occur over the next several years in DC. Again, that's just our viewpoint of the market.

It may turn out to be very different than that, but no. No, we really haven't seen a lot of the contrarian opportunities yet. Meaning, we really haven't seen markets adjust for these weaker markets. And, New York is a good example with the really flood of foreign capital and private equity capital coming into New York as a global investment market, we've actually seen going-in yields continue to come down, and actually, just as we've seen in some of the West Coast markets like San Francisco.

Okay. And, do you have any change in your view on New York City maybe being able to absorb the supply that you've been talking about coming into the market? Just thus far, it seems you have done a pretty good job handling it. I wasn't sure if you might have altered your view?

So, we never had a view on the absorption in the market. What we have always said is there is a lot more supply coming into the market than in other markets, and that creates more risk from an ownership and investment perspective because we don't know whether it will all get absorbed or not. But, in either case and as we've seen, it has been absorbed. But, it does continue to keep pressure on the market in terms of ability to raise average rate in the marketplace.

So, New York continues to underperform on a RevPAR basis albeit at low- to mid-single-digit RevPARs, but of course, that's well below the 8% or so that the industry is running. And, obviously, well below all the West Coast markets. So, we don't have an opinion about whether it's all going to get absorbed or not. It's obviously very encouraging that it is getting absorbed, and it's keeping the markets from being worse. We think it is likely to continue to be absorbed, and we think supply -- next year, it will be at a lower rate slightly than it is this year. It looks like we will be in the upper 5% this year which is a little bit lower than the mid 6% midpoint of our range for this year.

Next year, it looks like it's going to be somewhere between 4% and 5%. Again, all of these numbers are as calculated by Smith Travel, and then how those numbers will come out when they report their statistics. So, we think if the demand growth continues, Jeff, there is a potential opportunity. Certainly better likelihood then there was six months ago to look at New York and say, it should do a little better next year perhaps than it's doing this year. Not just in absorbing the supply, but perhaps being able to remix and get a little bit more pricing power and a few more compression nights to drive potentially solid, mid-single digit RevPAR growth in the market.

And, one last question, and I will yield the floor. A couple of folks who own hotels in New York have contemplated selling off ground leases under their hotels. I guess you could say it is a financing transaction. Ultimately is a way to monetize the land without potentially impacting the way that public market views the value of the hotel. What is your thought on that approach or strategy? Is that something you would contemplate for your New York investments?

It's totally a financing structure and not something we have an interest in.

Okay. Thanks.

Jim Sullivan, Cowen Group.

Thank you. Jon, a couple of questions on margin and penetration. In the presentation that you have been using for a while you provide the RevPAR penetration, prior peak, what you've achieved through the middle of the year. And then, the potential target to get back, and then you put a dollar value on that. Can you give us an update? I don't know if you have that data through the end of the third quarter in terms of where you think you've gotten back to now in terms of RevPAR penetration.

Yes. So, year-to-date through Q3 -- let's see here, we are up about 200 basis points in RevPAR.

You're up 200 basis points? You mean, for the year?

Year-to-date. Through the third quarter. We're up about 200 basis points. And, we were up about 170 basis points in the third quarter.

And then, in terms of the asset management initiatives that you have been pursuing for a while. Again, going back to that presentation, the biggest individual item there was changes in terms of how you manage the F&B business at the assets, and you've made some changes of course already that you've talked about in prior calls. I wonder if you can give us an update, as you look forward for the next 12 months, about any initiatives that are underway where you expect further gains in terms of returns from F&B revisions.

Sure. We have actually quite a number of projects underway in various -- at various points of the process. At the W LA, we've leased -- we signed a lease in September with the one group, which owns STK, the steak restaurant and other restaurants and bars. I think they also operate all the food and beverage at the Gansevoort in New York, the Midtown One, and they will be taking over -- in fact, they've already taken over the existing operations October 1 at the W LA, the restaurants and the bars. And, they will be building out a new restaurant in a reconfigured lobby and bar area inside, and then they'll be doing a new bar and restaurant outside by the pool. Those should both be open and full rent-paying some time in -- no later than in the second quarter.

We think that will not just add, again, not just add to margins, but will add to overall profitability for that operation by shifting that business to a party who is an expert and provide new energy overall to the property. We are at various stages of doing similar outsourcing, if you will, of internally managed restaurants at several of our other properties in the portfolio, particularly on the West Coast. As you know, in Boston, we closed the money-losing Jean-George Restaurant Market, and we've moved our food and beverage operations into the lounge and serving all three meals there. And, we are working with the local union to see if we can come up with an arrangement that would allow us to lease to a third party who could actually lease the space and make money under new arrangements.

And so, those discussions are underway, and I don't know whether we will have success there or not. But, in either case, we've eliminated a restaurant that was losing $0.75 million a year. So, there are a number of these throughout the portfolio. You do know that we re-concepted the bar restaurant at Palomar in San Francisco, was previously called the Fifth Floor which was a bit of a hoity-toity restaurant in a very obviously unleasable location on the fifth floor.

We re-concepted it as a bar restaurant called Dirty Habit which we think could be perhaps the greatest name for a bar conceived. And, it's doing fantastically. We're running somewhere between $450,000 and $500,000 a month right now of which there is a very healthy split between room rental events and the bar and restaurant operation. So, early in the process, but a great success so far. We will see what the longevity is over the next several years. But, lots going on, Jim, and I think we will continue to make a lot of progress, not just in those major efforts, but when we buy properties, changing out the way purchasing is done, working with the operators on menus, on pricing, et cetera -- the methods of operations, staffing levels, et cetera in order to improve overall profitability performance.

Okay. Then, final question from me is a modeling question. On the Q4 guide, share count over 69 million shares, and besides the equity issuance in the third quarter, is there any other assumption that's in there that we should know about?

No. That's -- (multiple speakers)

We should note -- (multiple speakers)

That's reflective of the correct count based upon the issuances already done.

Already done in Q3?

Correct.

Great. Okay. Thank you.

Wes Golladay, RBC Capital Markets.

Good morning. For your estimate of similar renovation disruption next year, does this include the Prescott in the second half?

No. The Prescott is not likely to start until the end of next year, and it's likely to be closed for renovation. So, it will impact our overall profitability, slightly probably in the fourth quarter. We don't have a firm schedule yet, Wes, because we don't even have the full scope yet. We're just early in the process, but it would be in the fourth quarter impact, and it's likely to be very limited.

Okay. And then, as you look to next year, which markets do you want to aggressively hold back the pace and switch the mix?

Well, we don't really approach it that way. We look at each property individually. We have some hotels where were increasing group because it's a better mix for the hotel, and examples of that would be the Intercon in Buckhead, would include the Westin Gaslamp in San Diego, would include not only the Affinia Manhattan, but some of the other Manhattan collection properties. It would also include the Sir Francis Drake where by adding better priced group with food and beverage, it is actually more attractive than the lower end of the transient that we're otherwise taking at those properties.

So, it really varies by property. There are some properties where we are seeking to do less prime day of the week group -- so prime month, prime Tuesdays and Wednesdays. Our first objective in many cases would be to move that group business if we can to shoulder nights with Sunday check-ins versus Monday or Tuesday check-in with Thursday shoulders or potentially even Friday shoulders. So, it's not an approach to hold back and wait until the last minute although I would tell you there are times during the year at various properties where it's not just group, it's really all business. Where we might believe that if we hold back inventory in what we perceive to be a high compression week, that we'd rather be a last-to-fill than an early-to-fill. So, it really varies totally throughout the portfolio.

Okay. Thanks a lot and good quarter.

Thank you.

(Operator Instructions)

Lukas Hartwich, Green Street Advisors.

Great. Thank you. Good morning. Jon, can you talk a bit about the acquisition pipeline? Do you still expect 2014 to be the last year of acquisitions?

Yes. Good question, Lucas. I think what we've been saying is because we've seen supply get stretched out at least a year, the micro cycle, i.e., the supply and demand for customers and supply of rooms, looks to be more favorable for a longer period of time. And, the macro cycle also seems to be stretched out although we claim far less expertise in forecasting economic cycles versus the micro cycles.

So, at this point in time, I would say we will continue to look and potentially be active into at least the first half of next year, but we are highly sensitive to changes in the starts in various markets in terms of new supply and when that supply might ultimately come into those markets. So, as the cycle has gone on, we've tended to be less competitive in markets. We get more and more conservative about in terms of the ongoing outlook, and so while we may be continuing to look and acquire in general, our markets get narrower -- our focus get narrower and narrower and we get pickier and pickier.

Right. That's helpful. Another question on the Denihan JV loan? The coupon on that is almost 10%. I'm just curious whether you expect that loan to be prepaid given that there is no prepayment penalty?

There have been no discussions about that, Lucas.

Okay. And then, lastly, did you talk about your 2015 pace at all?

We did not. I'm happy to do that.

That would be nice.

Sure. So, overall pace from a revenue perspective is up 7.2% at the end of the third quarter. That's 3.1% in room nights and 4% in ADR. Those numbers are combined group and transient. On a group basis, room nights are up 0.6%. ADR is up 3.2%, and revenues up 3.8%.

One observation, a couple of observations about the numbers. One is, keep in mind that growth in rate for both transient and group tends to be more short term. Meaning, the business you put on further out -- and for us, further out is not that long. But, it seems long when we have corporations booking 30 days in advance. But, the rate growth is much more aggressive and higher for the shorter-term bookings than it is for the further-out bookings.

The second thing is as it relates to overall pace, we're really in a position of running the portfolio at 85% this year, give or take. That the focus continues to be on growing rate and much less so in terms of overall room nights for the portfolio. So, when we are ahead on room nights, it's giving you an indication that we have pricing power by getting that base on the books ahead of time, and there should be an acceleration in the ADR growth from what's on the books to where we ultimately end up.

Great. That's it for me. Thank you.

(Operator Instructions)

We have no further questions in the queue at this time. I would like to turn the conference back over to our speakers for any additional or concluding remarks.

Thanks, David, and thank you all for participating in the call and your support and your confidence in us, and we look forward to reporting to you early next year with our final 2014 results and our outlook for 2015. Thank you.

Thank you. That does conclude today's conference. We thank you for your participation.