Pebblebrook Hotel Trust (PEB) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pebblebrook Hotel Trust fourth quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Raymond Martz. Please go ahead, sir.

Thank you, Lisa. Good morning everyone, and welcome to our fourth quarter and year-end 2015 earnings call and webcast. Joining me is Jon Bortz, our Chairman and Chief Executive Officer.

Before we start, a quick reminder 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 our10-K for 2015 which we filed last night and our other SEC filings. Future results can differ materially from those implied by our comments.

Forward-looking statements that we make today are effective only as of today, February 23, 2016, and we undertake no duty to update them later. You can find our SEC reports and earnings release which contain reconciliations of the non-GAAP financial measures we use on our website at www.PebblebrookHotels.com. And with that, let's get started.

Throughout 2015, we continued to make progress improving the operating performance of our portfolio, as well as completing several large transformative renovation and repositioning projects. For 2015, our hotels generated a same-property EBITDA increase of 8.3%, adjusted EBITDA grew 31.5% and adjusted FFO per share increased 27.6% to $2.50. Another great year of growth for Pebblebrook.

And since 2011, we have achieved a compounded annual adjusted FFO per share growth rate of 26%. Our 2015 same-property RevPAR was up 3.3%, with room revenue up 3.9%, due to the increase in average room count during the year, as we were able to add 52 guest rooms through creative design efforts, as part of our several recently completed renovation programs. This is important, as increasing the room count usually has an adverse effect on RevPAR, but a positive impact on revenue, and ultimately cash flow, which is where we're focused.

Excluding the Manhattan Collection, our same-property RevPAR grew 4.6% with the room revenue rising 5.2%. Again, the increased room count accounting for the difference. Our properties on the West Coast produced a 4.7% RevPAR growth rate for the year, and our properties on the East Coast generated a 1% gain.

Later on the call, Jon will provide more specifics of the results and trends within the portfolio, as well as the opportunities for 2016. Our hotel has generated $281.9 million of same-property hotel EBITDA for the year, which represents an 8.3% growth rate. Same-property hotel EBITDA margins improved 148 basis points to 33.1%.

Total hotel revenues grew 3.5% while total hotel expenses were limited to a 1.2% increase. This low growth rate in operating expenses reflects the progress we continue to make improving the operating efficiencies of our hotels which we expect will continue into 2016. Excluding the Manhattan Collection, our wholly owned same-property EBITDA increased 11.2%.

The hotels with the highest EBITDA growth rates in 2015 were La Playa Beach Club and Resort, Hotel Vintage Seattle, Union Station Nashville, The Prescott San Francisco, W Boston, Embassy Suites San Diego and The Nines Portland. Not reflected in our hotel EBITDA, adjusted EBITDA and adjusted FFO results were approximately $1.7 million of additional net cash flow and the 25 net memberships sold by our La Playa Beach Club. Turning now to some of the specific highlights from our fourth quarter results, same-property RevPAR growth for the total portfolio increased a modest 1.7%, which is below our 2.5% to 4.5% outlook.

This result was largely due to softer than expected corporate transient demand, which got weaker as the quarter progressed with a noticeable fall off in December. Room revenues increased 2.4% in the quarter. In terms of markets, New York, Boston, Washington, DC, and West Hollywood Beverly Hills were weaker than expected markets in the quarter.

Overall for the quarter, transient revenue, which makes up about 35% of our total portfolio room revenues, was up 2.2% compared with the prior year, with ADR growing 0.5%. Group revenues rose 0.5% in the quarter as room rates were down 1.2% but ADR increased 2.1%. Our properties located on the West Coast generated RevPAR growth of 5.2% in the fourth quarter, led by our hotels in San Diego, which benefited from a strong convention calendar, as well as Portland and Seattle which had healthy demand growth.

Our properties on the East Coast experienced a RevPAR decline of 3.2%, which was driven by a 5.7% RevPAR decline by our New York properties, as room rates were under pressure throughout the quarter. Because of these factors, monthly RevPAR for our portfolio increased 4.4% in October, 1.7% in November, with December declining 2.1%. As a reminder, our Q4 RevPAR and hotel EBITDA results are same-property for our period and include all the hotels we owned as of December 31, except for the Prescott in San Francisco because this hotel was closed on November 1 for renovation.

RevPAR growth in the fourth quarter was led by Embassy Suites San Diego, Westin Gaslamp, Skamania Lodge, W Los Angeles West Beverly Hills and Hotel Vintage Portland. Our same-property hotel EBITDA of $69.2 million was slightly below our outlook of $70 million to $72 million as a shortfall in RevPAR was partly offset by strong food and beverage revenue growth, particularly from the group segment. The hotel EBITDA percentage growth leaders in the fourth quarter were Embassy Suites San Diego, La Playa Beach Resort and Club, W Los Angeles West Beverly Hills and Skamania Lodge.

Moving down the income statement, adjusted EBITDA was $64.4 million, which was in line with our outlook as a shortfall in hotel EBITDA was offset by savings in corporate G&A expenses, including incentive compensation, preopening expenses and legal fees. Adjusted FFO was $44.7 million, which was at the upper end of our outlook range and we experienced interest expense savings and lower overall taxes for our TRS. On the capital market side of our business, during 2015 we originated $375 million of additional five- and seven-year term loans, plus we completed a very successful $100 million senior private notes offering in a volatile capital markets environment, at a weighted average interest rate of 4.79% and an average maturity of 8.8 years.

This was our first transaction with this segment of the debt market. These combined debt finances provide the longer term capital to pay off all of our 2015 and early 2016 debt maturities, replenish the availability on our $450 million credit facility, as well as extend and lengthen the debt maturity for our portfolio. Our weighted average debt maturity now stands at 3.8 years.

Our weighted average interest rate is 3.7% and 91% of our total outstanding debt is at fixed interest rates. On February 8, we announced that we will be redeeming our $140 million Series A preferred equity shares when it is callable on March 11. To fund a redemption of the Series A preferred, which has a 7.875% dividend rate, we intend to utilize our credit facility, which based on our projected leverage ratio will have an interest rate of less than 3%.

On a full year basis, redeeming the Series A with funds from the credit facility increases the cash flow of the Company by more than $6 million, which is $0.08 to $0.09 on a per share basis. In terms of balance sheet and liquidity, at year-end our debt to EBITDA ratio is 4.7 times and our fixed charge ratio is 2.9 times. Excluding the debt associated with the Manhattan Collection, our debt to EBITDA ratio was 4.3 times and our fixed charge ratio is 3 times.

We currently have $45 million outstanding on our $450 million credit facility. With the redemption of the $140 million Series A preferred being funded by a line, we have plenty liquidity to pay off the two remaining 2016 debt maturities totaling $85 million, as well as $85 million of 8% Series B preferred which we can redeem in September. If we chose not to use our credit facility to pay off these debt maturities or preferred redemptions, we have several other options as we continue to see active interest from the bank and CMBS market for debt financing.

Although credit spreads have widened since December, and loan-to-value ratios have become slightly more constrained, treasury rates have also declined. So the overall cost of financing for low leverage borrowers like us has only slightly increased. It remains very low.

Furthermore, with a high quality and excellent location of our hotels combined with our more conservative leverage requirements, we believe that we will continue to have multiple avenues for our debt needs. As we saw as recently as January when we completed $150 million of new term loans, debt capital is available from a wide array of banks and is available for both balance sheet and CMBS loans. Regarding our common dividend, as we noted in our earnings release from last night, we anticipate increasing our quarterly common dividend from $0.31 to $0.38 per share in 2016, an increase of 22.6%.

At Friday's closing stock price, this increased dividend represents a yield of 5.7%. And its worth noting that over the last five years, our common dividend has grown at a 26% compounded annual growth rate. With that good news, I would now like to turn the call over to Jon to provide more insight on the year as well as our outlook for 2016. John?

Thanks, Ray. 2015 was a year of many positives as well as some disappointments. Despite a significant deceleration in our expected rate of RevPAR growth for the year, we still managed to grow same-property EBITDA by 8.3% or $21.6 million, with same-property EBITDA margin climbing 148 basis points.

We had great success working with our operators implementing best practices that limited total same-property expenses to just 1.2%, a pretty amazing accomplishment and one we are quite proud of. We made a lot of progress in improving food and beverage operations, including leasing out restaurants, creating saleable meeting and social venues and continuing to right-size staffing levels as appropriate. We also implemented strategies to drive ADR and EBITDA at numerous hotels, especially at some of our more recently acquired properties, yet we had only mixed success.

In a number of cases, such as Union Station Nashville, Westin Coral Gables and The Nines, we were very successful, yet at Palomar Beverly Hills and Revere Boston Common we sacrificed too much occupancy for rate and didn't execute well enough to replace lower-rated business with enough higher-rated business. We believe that with leadership changes and strategy changes at both the Palomar and Revere, 2016 will be a much better year for both properties. And we're already seeing that based on sales and operating performance in the first quarter.

In the first half of 2015, we completed three major renovations, successfully transforming Vintage Portland, Radisson Fisherman's Wharf, which became Hotel Zephyr Fisherman's Wharf, and W LA West Beverly Hills, where we also added 39 keys. These projects were all very successful in their transformations, as customer reviews have been fantastic. Yet in the case of both W LA and Zephyr, we were overly optimistic last year as it related to the speed in which we would ramp up coming out of these major disruptive renovations.

With customers loving all three of these newly recreated hotels, we have been gaining momentum since the third quarter. We had very healthy EBITDA growth at all three hotels in Q4, roughly $1.5 million combined, and first quarter growth looks to be substantially stronger. All three hotels will be very significant contributors to our RevPAR growth and EBITDA growth throughout 2016.

We also had an out-sized number of leadership changes throughout our portfolio in 2015. Some of these were voluntary, and many of these were changes we and our operators felt were necessary to improve long-term performance. These changes for the most part are now complete and we feel optimistic that not only do we have much improved leadership, but we should have more stability in 2016 as well.

The macro economy and global travel trends also didn't play out as we expected at the beginning of the year. In many cases, headwinds strengthened as the year progressed and the global economy weakened during the year, particularly in previously fast growing emerging market countries. The dollar on average strengthened throughout the year, negatively impacting travel in two ways.

First, inbound international travel weakened all year, impacting major gateway cities the most. And second, US citizens took advantage of the strong dollar and substantially increased their travel abroad, thereby reducing their domestic travel, particularly in major cities. Positive factors such as meaningfully lower airfares and increased international airlift capacity to the US failed to mitigate these headwinds as much as we had thought they would at the beginning of last year.

In addition, short term rental companies such as AirBNB, which have evolved from predominantly sharing venues into market places with a large percentage of commercial investors operating illegal hotels, created more competition for hotel guests as the year progressed. Especially during major events, but also for leisure travelers including international travelers and families more accustomed to renting apartments in urban environments. We believe that many cities are gaining a better understanding of what these short term rental companies have become, and recognize the harm they are creating by both significantly reducing affordable housing as well as lowering the quality of life through disruptions from illegal operations in neighborhoods not zoned for commercial operations or transient customers. As a result, over the next several years, we believe cities will better regulate, limit, and enforce the laws that limit this illegal and disruptive behavior.

Finally, the advent of new technologies that monitor constantly changing prices, combined with nonexistent cancellation policies and brand loyalty programs that create incentives for revenue managers to lower rates as arrival dates approach, resulted in increasing challenges growing rates in many major cities as the year progressed. Customers have been adapting their behavior to take advantage of these lower rates being offered by hotels by canceling higher priced reservations at a much more rapid pace as the year went on and rebooking at either the same property or other competitive properties in the market at lower rates. On a positive note, we believe that over the next year or so, we will see significant changes in cancellation policies, pricing approaches, and brand loyalty reimbursement formulas that should successfully address this relatively new but increasingly pervasive and challenging issue.

For 2015, we grew same-property RevPAR 3.3%, well below the industry's 6.3% growth rate. This was just the first year in the last five years that we did not handily outperform the industry. With same-property RevPAR growing 3.3%, and with the addition of an average of another 42 rooms, room revenues grew 3.9% for the year.

Same-property total revenues increased 3.5% as the outsourcing of restaurants and food and beverage operations to third parties lowered our revenues but increased our profits. Same-property hotel expenses were held at just a 1.2% increase, and the same-property hotel EBITDA increased healthy 8.3%. Same-property net operating income, after the assumption of a 4% capital reserve, grew an even stronger 9% in 2015. And as a reminder, we mentioned NOI because this is the number typically used in the private markets for valuing properties.

With the benefit of the acquisitions made in 2014, and to a lesser extent, those made in the first part of 2015, adjusted EBITDA for the Company increased 31.5%. This is on top of 2014's 31.4% growth. With a very well managed balance sheet, adjusted FFO per share for 2015 climbed by 27.6% to $2.50 following 2014's 33.3% increase.

While we are very pleased with our performance in 2015, particularly given the challenges in the macro environment during the year, as mentioned earlier, we are nevertheless disappointed compared to our expectations at the beginning of the year and even more recently our expectations at the end of the third quarter. And not surprisingly, we are very disappointed in the performance of our stock in 2015 as psychology on the sector changed dramatically from early last year.

When we look at last year's overall industry trends, we saw very choppy performance throughout the year. Forecasting for 2015, as we have previously discussed, was extremely challenging throughout the year. Sometimes transient was strong and group was weak, and sometimes it was the other way around. Some months saw strong leisure business and weak business transient travel, and other months it was the other way around. Overall, demand and performance weakened as the year progressed and slowed more substantially in the fourth quarter as we witnessed more sustained weakness in business transient travel. And obviously, we failed to get ahead of the weakening trends with our forecasts throughout the year.

With softening international travel negatively impacting the major cities, along with the impact from the short term rental companies at the margin, urban markets underperformed during the year as did the luxury and upper upscale segments. Travel on the upscale and midscale categories continued to be strong in 2015, as the economic recovery again broadened out to include more of the socioeconomic middle.

Overall, industry demand growth of 2.9% moderated from 4.5% in 2014. With industry supply growth again restrained in 2015 at just 1.1%, industry occupancy rose 1.7%. Unfortunately, urban markets overall significantly underperformed, partly due to the heavy influence of a very poor performing New York and a still weak but better performing Washington, DC, but also because of the issues I discussed earlier.

Now I would like to turn to a discussion of our views and outlook for 2016 for the lodging industry and our Company. Let's start with the industry. We're appropriately cautious about 2016, given the weakening and more uncertain macro and economic environment. Our forecast assumes US GDP increases between 1.5% and 2% this year. We currently expect industry demand to grow between 2% and 2.5%, with supply increasing between 1.7% and 2%, resulting in occupancy remaining flat to growing as much as 0.8%. We expect ADR to increase between 3% and 4%, leading to RevPAR growth of 3% to 5%.

We're currently forecasting that the urban markets will underperform the industry by between 150 and 200 basis points, to a growth of roughly 1% to 3%. For Pebblebrook, given our positive West Coast waiting, and the ramp up benefits of our renovations the last several years, we are forecasting that we'll be able to grow same-property RevPAR for our portfolio by 2% to 4%, 100 basis points better than our forecast for the urban market segment. Based on this, we are forecasting same-property room revenues to grow in a range of 2.7% to 4.7%, taking into account 2016's extra day and a increase 0.5% average in the number of rooms in our portfolio.

This year is off to a good start with our same-property RevPAR in January increasing a healthy 6.2%, as compared to the industry's 2.4%. And February should be higher than January, aided by a very strong Super Bowl performance in San Francisco. Overall, portfolio performance for the year will be stunted by renovations at the Monaco DC and Nines Portland, which are just being completed now as well as repositioning renovations at Nashville Union Station and Westin Coral Gables, which will be completed this summer and renovations that are expected to start late this year at Palomar Beverly Hills, Mondrian LA and Revere Boston Common.

These projects, which have a negative impact in the short term, create significant growth and value in the long term as proven by our historical results. Benefits of our most recent major renovations will significantly enhance our performance in 2016 and are already evident in our January results. In the first month of the year alone, EBITDA at Zephyr has increased $468,000 over January of 2015, W LA has increased $635,000 and Vintage Portland has grown $276,000 for a combined $1.38 million.

While we expect the Prescott Hotel's transformative renovation to be completed by the beginning of the second quarter, if not sooner, we are being cautious about the ramp up of the property as the new Hotel Zeppelin. So we are forecasting it to be a drag on overall RevPAR and EBITDA growth in 2016, and that is built into our outlook.

Our outlook for same-property EBITDA growth for 2016 is a range of 1.9% to 6%, with adjusted EBITDA growth forecast between 6.3% and 11%. Same-property EBITDA margin is expected to grow by 25 basis points to 75 basis points in 2016. As a result, adjusted FFO per share is forecasted to increase to between $2.67 and $2.84, for a growth rate of 6.8% to 13.6% with the midpoint just over 10%. Given the current uncertainties with the global and domestic economies and recent travel trends, we have widened our outlook range for RevPAR growth for the year from 100 basis points last year to 200 basis points this year, and we have widened our range for the rate of EBITDA growth for the Company to almost $12 million.

For the first quarter of 2016, we are forecasting same-property RevPAR growth of 3% to 6%, with same-property room revenue increasing 4.8% to 7.8% which takes into account the extra day in February as well as the benefit of an average of 50 more rooms, or 0.6% in the quarter. Our outlook for same-property EBITDA is $56.5 million to $59.5 million, or an increase of 5% to 10.6% for Q1. We expect adjusted EBITDA of $48.8 million to $51.8 million for the first quarter, an increase of 25.7% to 33.5%.

Our forecast for adjusted FFO per share is a range of $0.43 to $0.47, or an increase of 26.5% to 38.2% for Q1. Since we clearly discussed a number of headwinds for the industry, I wanted to mention a couple of positives in order to make sure you understand that our view of 2016 overall is much more balanced. Convention calendars overall in 2016 remain pretty favorable, with most of the major cities showing either increases or flat city-wides and room nights compared to last year.

For Pebblebrook, our pace for 2016 is currently pretty robust, though we are cautious due to the weakness we have seen over the last few quarters in bookings in the quarter for the quarter. At the end of January, group room nights for 2016 were up 5.7%, with ADR up a strong 9%, and total group revenues on the books up 15.2%. Group room nights are down in quarters one and four, with the first quarter being negatively impacted by Easter's move from April last year to March this year.

Nevertheless, our first quarter group revenues are currently up 6.6% with ADR up 8.2% and group room nights down 1.5%. This strong rate growth in Q1 is partly due to the success of our hotels in San Francisco, which did very well over the JPMorgan Healthcare conference in January and sold out with primarily group rooms at attractive rates over Super Bowl. While group only represents about 25% of our forecasted room nights, transient pace is also favorable with transient room nights up 14.2% for the year, with ADR down 0.3% and transient revenues up 13.9%.

We have been successful with a change in strategy that has our teams focused on getting more business on the books further out when appropriate in order to help offset the negatives we have been seeing with short-term bookings and near-term transient cancellations. Overall, both group and transient combined, our pace is up 14.5% in revenues on the books, compared to same time last year with ADR up 4.1% and room nights up 10.1%. This certainly represents a good base to work from for 2016.

In addition, we had a very successful corporate contract negotiation season throughout the portfolio. While this segment only represents between 10% and 15% of our business, it's encouraging that our average increases were in the mid to upper single digits throughout the portfolio, with the exceptions being low single digit increases in New York, Washington, DC, and Philadelphia. Again, this doesn't guarantee volume, but it is nevertheless a positive for 2016.

Finally, I wanted to take some time discussing some strategic plans we're in the process of putting in place. As you are well aware, our sector has seen a significant shift in interest from public securities investors concerned about factors that have been negatively impacting the growth rates and fundamentals in the sector, as well as those seriously concerned about an impending recession. While we don't buy into the recession scenario for this year or next year, we do nevertheless agree that the weakness in the global economy, soft corporate profit growth, and other factors have certainly increased the possibility of a recession in the US, or at the very least the likelihood of a slower growth path for the overall economy.

At the same time, capital continues to flow into the private real estate investment sector, and combined with foreign capital looking for either higher yields than treasuries, or capital safety, there continues to be solid buyer interest in high quality hotels in major cities in the United States, particularly those that are unique or have brand and/or management available. And with the dramatic decline in our public market value along with the sector, there is currently quite a wide gap between the value that public markets are ascribing to our Company and hotels, and the values we believe private market investors are likely willing to pay to own our hotels. Based on what we know today, we believe that the current value of our hotels on a private market basis is conservatively somewhere between $38 and $42 per share. Of course, this provides no value for management, our expertise in track record in creating value, or our attractive financing, or the value of putting together a portfolio such as ours.

While there has been much talk about the volatility in the debt markets, reasonably priced debt at historically normal leverage levels continues to be readily available through banks, the CMBS market, and alternative lending sources to consummate transactions by investors who are not all cash buyers. As a result, together with our Board, we have made a decision to retain investment brokers to market for sale a select number of our hotels and non-hotel real estate portions of our properties where we believe there is a very wide gap between the underlying private market values and the value the public market is ascribing to our underlying assets.

In addition, and as we have discussed previously, we retained investment brokers in the fourth quarter to offer for sale our joint venture interest in the Manhattan Collection. The offering memorandum hit the market in mid-January, and we have seen significant interest in the joint venture interest, as well as the individual assets and the entire portfolio, for which we can trigger a sale process beginning in late July of this year. Our partner is also looking for a capital partner to replace us and avoid us triggering a sale of all of the hotels in the portfolio.

Of course, there is no certainty that a sale will ultimately be consummated for our joint venture interest, the New York portfolio overall or any of the hotels or properties that we have placed or will place on the market. However, we do believe that there is and will be healthy interest in these assets.

To the extent there are sales throughout the year, we will utilize proceeds to pay down debt, including our line of credit which is being used to call our Series A preferreds; make distributions of capital gains that cannot be covered by our existing dividends, which we would do periodically during the year, provide capital to finance the redemption of our Series B preferreds in late September, should we choose to call them. And as announced yesterday as parts of our earnings release, repurchase up to $150 million of common stock from time to time as we deem it to be attractive.

Other than our disclosure about the offering of our interest in the Manhattan Collection joint venture, we do not intend to announce or indicate which properties are being marketed or offered in the market, nor do we intend to provide an update on any of the activities unless and until a transaction is required to be announced. I hope you appreciate the benefit of this to our shareholders and the underlying businesses which are operating businesses that can be negatively impacted by rumors of potential sales. However, so you can better understand our efforts, we will likely be offering a limited number of properties that in the aggregate totals somewhere between $500 million and $1 billion, which includes our share of the Manhattan Collection JV.

Today, we have headwinds, tailwinds, and cross winds which are affecting both the economy and our industry. But we believe underlying fundamentals remain solid. And here at Pebblebrook, we should continue to benefit from the renovations, repositionings, and transformations we have completed which are underway and are upcoming in the near future in addition to the implementation of best practices that are driving better margins and profits.

We now would be happy to answer whatever questions you may have. Lisa?

Thank you sir.

(Operator Instructions)

We will take our first question from Anthony Powell from Barclays.

Good morning, everyone.

Good morning.

Thanks for all the color. A question on the sequential RevPAR acceleration, end of January from December, aside from San Francisco, could you describe what segments and what markets maybe drove that improvement in the performance in January?

For us, there were a couple of other markets that were pretty healthy in the quarter, most notable of those would be LA and Portland. And from a segment perspective for us, I think we had some good healthy growth in ADR in group, which, again, some of which was in San Francisco related to the JPMorgan Healthcare conference, but we also had it elsewhere within the portfolio.

Okay. Got it. Generally, on the cancellation policies and AirBNB, and the impact that's having, it seems there are a lot of customers out there that are price sensitive and are using these channels to search for lower pricing combinations.

Let's say the industry is better off -- let's say if the industry does a better job in improving cancellation policies and combating AirBNB, what do you think that would do to help to drive customers who are price sensitive to pay more for your hotels? It seems that the issue is that customers are price sensitive rather than willing to take pricing.

Let's say you have made progress. How do you expect that to maybe drive some more performance for you?

Well, first of all, just to be clear, I want to make sure you and others understand, we don't see a relationship between AirBNB and the cancellation policies.

Right.

And obviously, interestingly, there is no cancellation ability with AirBNB, other than on the part of the host who can cancel your reservation any time they want. So as it relates to cancellation policies, I think ultimately, by giving the customer choice between no flexibility, medium flexibility, and a lot of flexibility, probably similar to what the airlines do, you will have ultimately various pricing that we think ultimately will solve part of the revenue management and management problem right now where it's becoming, in some markets, very difficult to manage the business. The answer isn't just over booking, because the cancellations can be a bit unpredictable in terms of the level of volumes.

So if you overbook too much, then you lead to a lot of walks for your customers, which would be unhappy customers and additional expenses. So ultimately, we think the combination of pricing changes and likely, ultimately some costs for making changes, likely starting at very low levels, will begin to change the behavior and ultimately lead, along with the changes in the loyalty programs, to a greater ability to push pricing, which is really what's been getting squeezed at this point in some of the major markets. As it relates to AirBNB, I just think it's going to take time for the cities to legislate, put people in place, provide funding, get the message out, find people, and then ultimately change the behavior on the part of those who are illegally offering full units on the marketplace.

All right. Thanks a lot for that answer. I appreciate it.

We'll take a question from Shaun Kelly from Bank of America.

Hey. Good morning, guys. Jon, I just wanted to touch -- I appreciate you already gave a lot of color on some of the asset sales, but since the Manhattan Collection JV is now officially out there, and we have already seen a couple of trades at pretty good per key values in New York, could you give us a little color on who do you think the right buyer is for that portfolio? Or what kind of interest do you think you may be garnering, particularly from sovereign wealth since it's a 49% interest at least at this stage?

Shaun, I wouldn't want to preclude anybody who is showing an interest in the property and suggesting that they might not be the most likely candidate. So I am going to refrain from giving you any color on the kinds of buyers that are likely to find either the joint venture interest or the whole portfolio attractive. Suffice it to say, it is a very high quality portfolio, as you know. It's in midtown where there is far less supply being added in the marketplace and the barriers to entry historically are higher.

The rooms are very large, and we think there is some operational opportunity within the portfolio, as well as in some cases over time there may be some conversion opportunities where residential may be a higher and better use than hotel. But outside of that, I would prefer to refrain from commenting on who likely buyers are because it's really not for me to judge.

That's still helpful. Then you also mentioned in the release some of the opportunities around the property and specifically, it seems like you mentioned parking facilities, and I think retail. Could you talk a little bit more about -- I know we know some of the property you may have some of these assets at, because you called a few of them out when you actually acquired the properties. But could you talk more strategically, how you think about those types of opportunities, and how we might begin to quantify or think about those opportunities over time?

Yes. I think some of these properties or portions of properties have very significant value, and the markets for those assets - the private markets for those assets are, in many cases, in the markets we are in, trading in the 4 to 5 cap rate range on NOI. So substantially, higher multiples, lower cap rates on those dollars than what the public markets are going to give us credit for overall for those income streams.

So that's what we are evaluating. There is a process that would be involved, obviously apportioning any part of a property requires going down a path of condominium-izing or partializing. There is a portion of a government process as well as a private documentation process.

So that will take a little bit of time. But we do believe that since those businesses are not core to our expertise and our focus, we can provide for the needs that we have at the property levels as it relates to those uses, by building that into the documents for the long term. But we think perhaps other operators and owners are better able to maximize the performance of those assets and likely to maximize the value for us of those assets.

That's helpful. My last one would be to go back to the whole cancellation-rebook thing because you mentioned in prepared remarks specifically on that, that the industry or some people may be moving to a better solution or improving the solution on that. Can you either elaborate on that or what exactly needs to happen to push that further?

Because what we have heard is, particularly amongst the independents like yourselves, if you move a hotel or two it's very hard. You see very large elasticities when you go and try and change these cancellation policies unless other people are on board in the market as well. So what do you think begins this process or starts this process and why the confidence there?

Yes, so, you are right. We can't be an island in a market, whether we are independent or brand, in the marketplace. So what we think, what gives us confidence is the conversations we have been having with the various brands within the industry who individually are testing right now, different programs to solve this growing issue.

And I think the reason we have some confidence based upon those conversations, is because they understand the challenges that they are having with their management of those branded properties where they've had very high cancellations and their management people are screaming that they can't run the business. It's too challenging to run the business. It's too difficult to forecast.

There is no way they can maximize performance when there is this kind of level of cancellations. Within our portfolio, as an example, in December in New York, our cancellations of paid rooms in December was anywhere from 10% to 30% for an average of 20%. We were told by a brand that they had a property as high as 80% in the market, and by some large operators in the market that they averaged 40% cancellations in the market.

So everybody ended up with the same occupancy levels they were going to end up at at the beginning of the quarter. They just ended up with much lower rates as a result of the musical chairs that went on, because we have given 100% flexibility to the customer. And at the end of the day, there will be a balance and hopefully choice - I suspect choice - that the customer will have, as to how much they're willing to pay for that flexibility versus not.

Got it. But to summarize, at least for the beginning you think there is a brand-led initiative here, given that it seems to be impacting a lot more people other than just a handful of hotels at this point?

Yes, anyone who thinks this relates to just us, or just the independent market, is mistaken. The brands have to lead the way. They're the large players in the market.

They generally set the policies. They also obviously set the reimbursement programs and how those work for the owners. And those are in the process of being changed at least at one of the major brands, or at least it is being tested right now, and we do expect changes in that area again based upon conversations that we've had. The brands recognize the problems and have been moving forward, at their pace, to make changes and we think it's going to take probably 12 to 18 months.

Thank you very much.

We'll now take a question from Rich Hightower with Evercore ISI.

Good morning, everyone.

Good morning.

I wanted to dig into the $38 to $42 per share NAV estimate. I am just curious, if you can run through the cap rates by region, or by city, that you estimate the portfolio would be valued at today? And maybe how that has differed from what the public markets are telling you in terms of the share price? And then also, have your cap rates changed at all over the past six months, say?

Okay. Well, we are not going to run through the cap rates by market, just because we don't think it is necessarily just a market factor. I think the thing to remind folks is, as we have stated over the years, including my dozen years at La Salle, first of all properties with management and/or brand available typically trade at 10% to 15% higher multiples than branded properties in the marketplace.

The second thing is, we have quite a few properties that have been through disruption, that have gotten very significant capital very recently that aren't performing anywhere near a stabilized basis. And so we think those assets are going to trade at cap rates that reflect the fact that they have been disrupted and aren't stabilized as opposed to just putting a market cap rate on or average cap rate throughout the portfolio. So our NAV range that we have provided is based upon a cap rate for each individual asset, based upon each individual asset's situation, condition and what we think is the situation and the desirability of that asset for potential buyers in the marketplace.

Okay.

So on average, we think that's somewhere between a 5.5% and a 6%, which for many people may sound low. But again, as we have indicated in our investment presentations, there is a very significant amount of EBITDA not represented in our historical data, either for 2015 or for 2016 in our outlook.

Okay. And do you think that those cap rates that you're using have changed at all in the last quarter or two?

I think over the course of the last 12 months on average, we have seen an increase in those cap rates. I'd say probably 50 basis points. I think it may be lower in some markets, and I think New York is a good example. If anything, cap rates have actually probably come down in New York because assets are trading more on a price per key, perhaps than they are on near term cash flow.

And then in some other markets that are more average, or properties that might be a little more typical, maybe we have seen a 100 basis point increase in cap rates over the last 12 months. The range that we have looked at could be anywhere from a 4% or 4.5% within the portfolio, all the way up to 7.5% or maybe even an 8%.

Okay. That's interesting, Jon. Then my final question here is just on the first quarter guidance, the range of RevPAR given. It's still fairly wide, about 300 basis points from top to bottom. Given that we've got only five weeks left in the quarter, what could skew the numbers to the low or the high end? What would have to change from now until the end of the quarter?

Well, I think what we saw as last year progressed, Rich, was that in the month for the month, and in the quarter for the quarter, bookings actually declined on a year over year basis and they did so at an increasing pace as the year went on. And as you know, we missed our top line ranges three quarters in a row, so we have widened the range hopefully enough in order to take into account any trends that might be continuing, that we might not see so clearly.

Okay. Thank you, Jon.

We'll take a question from Bill Crow from Raymond James.

Good morning, Jon, Ray. Jon, you had mentioned or contemplate, the use of a 1031 change with any asset sales proceeds, so that leads me to the following discussion. If you are successful with Manhattan sale, that would push your San Francisco exposure up north of 30% I believe.

Then if we look at some of the cyclical assets that you acquired early on, and say, well, maybe some of those are teed up for possible sale? To me at least, none of those are located in San Francisco, so that would further push that exposure up. We are looking at a market that in 2017 and 2018 is probably going to be weaker market on a relative basis. Help us think about San Francisco, which already has a high operating cost basis and potentially weaker performance in the next couple of years.

Sure. So, Bill, as we have talked throughout our history, we are focused on maintaining diversification and avoiding too heavy a concentration in any market, regardless of how well we might actually 00 we actually might view that market on a long-term basis. So I think you should take that into account in thinking about where we might sell assets, and whether there might be an opportunity to harvest some gains in a market like San Francisco in order to avoid our concentration increasing through a sale of assets outside of San Francisco.

Okay. And then on that market, Jon, have you articulated - I don't recall seeing it, but anything related to the union settlement out there?

We have not, Bill.

Okay. And you don't plan to or when something is finalized you might? Is that fair?

That's correct. I don't know whether we'll ever communicate anything and if we have anything to communicate, we will.

Okay. Thanks, guys. That's it for me.

Sure.

And Bill, just to clarify, for the San Francisco concentration, if we were to say, sell New York [and limit our] concentration there, it would increase our [terms in] concentration more to the 25%, 26% range, not to 30%.

Okay. Thank you.

Thank you.

We'll now take a question from Jim Sullivan from Cowen Group.

Thank you. Good morning, guys. By the way, great song, one of my favorites.

It was for you, Jim.

A question on the demand side here. You talked, Jon, and thank you again for all of the extensive commentary on the variables that you are trying to factor into your guide here. You talked about bringing down the demand growth forecast, from what you had been talking about back in September of 2% to 3% for 2016 and down to a 2% to 2.5% range.

GDP forecast that you are basing this on is 1.5% to 2%, so that relationship between demand growth and GDP is still on the high side, compared to what we have seen historically. I wonder how you think about -- and you didn't break this out, and I am not sure if this is getting too granular here. But I wonder if you can break out your thoughts for demand growth in the urban markets. We know the urban markets have a supply issue, but they're also impacted by some of the other variables that are headwinds, as you have characterized them.

Are you assuming that the urban market demand variable is going to be weaker in 2016 than for the US industry overall?

Yes, we are. And we think the biggest factors with that, relate to weakened business transient travel, which clearly has an impact on the major cities, maybe more so than the overall industry because the leisure component or drive component is lower than the suburban or resort markets, obviously. Two, we think it will be negatively impacted by the continuing headwinds from the dollar and inbound international travel, as well as outbound travel.

And you and I have talked about the very healthy robust growth in travel of US citizens abroad. That tends to be people who are people of means and those people tend to be customers for the urban markets, where average rates tend to be higher. So a little more impact in those -- in the urban markets overall. And then at the margin there is some impact from the short-term rental management companies, as we work through this new process with the governmental entities.

Okay. Then next for me, on the first quarter you talked about Super Bowl and the results at your hotels during Super Bowl. In prior calls, you have talked about AirBNB as having an especially noticeable impact around so-called special events, nonbusiness special events, and I guess the Super Bowl is a typical example.

I am just wondering, as you talked about the type of business you did for Super Bowl non-cancellable group, is the AirBNB impact in special events driving you to be more aggressive with the group segment in order to avoid -- rather than holding out for the strength and the pop and the ADR?

That's a really good question, Jim. I think Super Bowl was an interesting situation because I do think the NFL and the people who are, in many cases, going to that event were very committed to staying in hotels, versus alternative stay locations and types of properties. I do think that from a strategic perspective, we are a little bit more focused on, at least for us, building a little bigger group base within the portfolio. And I think Super Bowl was a combination of that, as well as our experience with other Super Bowls, which the hype often long transcends the reality.

So what we have found that, at least in markets like San Francisco, that it will be a very good year -- a very good event. I think we averaged a dollar shy of $500 RevPAR for our six hotels in the market and with the seventh one being closed, obviously. And I think 70% to 80% of that was group.

And interestingly, we did have some group cancellations of already prepaid rooms, and where we could, we turned around and resold those within the market to both group and transient on a last-minute basis. So I do think strategically, we are a little more focused on building group base, taking a little more group than we have historically. There are a lot of reasons for that. One of them is that we see weaker business transient travel, which is a big component in the major cities.

Okay. Then finally for me on that group point. Again, historically you have tended to do less group than some of your peers, but those peers this earning season have cited a strong outlook for group this year as a factor in their guides. I just wonder if you can help us understand the interplay - when you have a strong group demand at the larger hotels, typically historically, I think that's enabled you to benefit by pushing ADR. But are you assuming that strong group business that's been forecasted is going to materialize this year, in spite of weaker corporate profits?

Yes, we haven't seen any increase in cancellations within the group category. The use of the group blocks varies depending upon the convention specifically. The only trend that we have generally seen is that the host hotels, in many cases, have been perhaps weaker than some of the other properties that take group because the consumer desires have been moving towards smaller, more unique hotels and experiences and away from some of the big boxes.

But I think overall, putting more base, whether it is group, or contract or transient on the books ahead of time is all intended to be -- to mitigate some risk that relates to volume as well as rate when it comes to what the near-term bookings end up ultimately being. And if they turn out better than what the trends have recently been, then we are going to see a lot more pricing power than we have seen more recently. And if they continue to be weak, then I think, as we forecasted in our overall outlook, these pace advantages will decline as we get closer to the actual months that deliver the results.

Okay. Thanks, Jon.

We'll now take a question from Jeff Donnelly with Wells Fargo.

Good morning, guys. Jon, I wanted to circle back on San Francisco, specifically Fisherman's Wharf. How are you thinking about the outlook there in 2016? Because in the current environment it feels like this market has been facing - San Francisco overall has been facing more AirBNB pressures than other cities. And with Moscone under renovation, it strikes me that maybe Union Square and the financial district hotels are going to provide a bit more competition for traditional mid-week transient demand. Just curious what you are thinking there.

Your premise and conclusion we would agree with, but it isn't what we have seen in the results between the two sub markets. So when we looked last year at the Fisherman's Wharf/Nob Hill sub market, there isn't a specific sub market, Jeff, for just Fisherman's Wharf, but Nob Hill probably has some very similar. Particularly heavy international use, compared to -- when you look at it with Fisherman's Wharf and you compare that to the Market Street or Union Square area, I think there is a 40 basis point difference in RevPAR in 2015. So not really a material difference, even though we would have thought there would be.

Fisherman's Wharf continues to see strong demand from leisure customers, as well as some increased business customers, due to the upgrading of the quality down at the Wharf of really the better part of the inventory in that marketplace.

That's helpful. Then just maybe switching to the dispositions. I am just curious how you are thinking about use of proceeds. Assuming you are successful selling assets, do you think any incremental capital has to go to special dividends, or will there be capital left over for either debt paydown or share purchases?

Well, part of the selection process has to do with generating net proceeds that will be used for debt paydown and for stock buyback in addition to any tax distributions. So it's really -- all of it is an integral part of the selection of the properties that we are looking at selling, along with lots of other criteria including, have the properties stabilized? What's the near- to intermediate-term risk exposure? What's the interest level for these assets? How big is the gap between the public market and the private market values for these assets, et cetera.

Understood. And for the wholly-owned assets that you are looking at potentially bringing to market, is there a scenario where you contemplate an outcome such as, one of your competitors recently sold off a joint venture interest. Is that something you would be open to, or are you looking to really just sell assets outright?

I think we are going into it with the idea that we are going to sell the assets outright, and if there is another opportunity that presents itself that might involve us continuing to be involved, we would look at it. But we would look at it in light of it needs to be compelling.

Understood. Just one last question, maybe to keep some of the wolves at bay. Is -- given typical marketing and closing periods, what do you think of the earliest time frame that we might see something closed? Is it more of a second and third quarter event, or do you think it is later than that? I am just curious what your thought is.

I think it is likely to be second quarter through the end of the year.

Okay. Thank you.

Thanks, Jeff.

And we'll now take a question from Neil Malkin from RBC Capital Markets.

Hey guys, good morning.

Good morning.

First question is on the CapEx or the investments you guys have this year. It's elevated from 2015, and just given where we are in the cycle, and granted, you guys are the experts at repositioning assets, how did you think about balancing the amount of spend, versus where we are in the cycle, as well as the longer than expected ramp up time for your reposition assets and the effect on value creation?

The value creation part works in both a downcycle and an upcycle, because it is all about relative performance. And so to the extent that we -- there is an opportunity to reposition an asset and the returns are attractive enough, we'll move forward with those as we are doing now. It's the other properties - and we've had discussions with folks who have a view that later in the cycle you should stop investing in your hotels or refrain or limit your investing in hotels.

And the issue is that a lot of these properties are in a normal cycle of capital maintenance where rooms begin to get tired. And if you don't put the capital in and redo those rooms, they lose share and your relative performance declines actually, and declines at an accelerating pace until you put that capital in. And so what we have always found over the last 17, 18 years, has been it's far better to be early; in fact, a year early, than it is to be a year late in refurbishing your hotels.

And so there are a number of projects we have this year that are refurbishment. The rooms at the Monaco DC, as a part from the reconcepting of the restaurant there which is an ROI project, but one that, again, if we don't do something with the restaurant, it will continue in its sort of life cycle, which often involves an annual decline in performance because restaurant concepts face a lot of new competition on a regular basis.

We look at all the projects each year. We want to make sure that we do these projects either early or on time. As it relates to the ROI projects, it is all about the return being attractive enough. And yes, of course we consider where we are in the cycle because it has an impact on risk and how quickly you can ramp up and that's taken into account in our ROI analysis.

Okay. Thank you for that. My next question is, can you talk about the benefits or detriments from soft brands, or being branded in this environment versus your heavy independent focus? Just in terms of RevPAR performance for just increased or more efficient distribution channels with the brand, and then how do you weigh those versus better bottom line results, because you are not paying those 8% to 10% fees for being affiliated?

We have a multi-cycle experience with this from my time at La Salle where we went through two downcycles through this ongoing upcycle, and what we have found is the independent properties compete just as well, if not better in down markets than up markets. The brands would want you to believe otherwise, and those who own brands predominantly would want you to believe otherwise, but that in fact has not been our experience.

You need to have good operators. You need to have good independent or small brand operators. But the differential -- we don't see a differential at the top line, and in fact we see a benefit at the bottom line because you have more flexibility. You are not stuck with branded rules, which even the soft brands have. While the soft brands give you more flexibility with design, and to some extent operations, although more limited, they're still very expensive.

They're just as expensive as any of the major brands, as compared to independent properties or small brand properties, so we'll always evaluate them to see if there is a better alternative. And it would be particularly the case with larger properties, because there is a point at which it becomes more challenging as an independent hotel to drive enough business to the hotel versus what a branded or affiliated soft branded property could bring. But that's an analysis. As an example, we went through at our property in Santa Monica when we could have -- in taking the Sheraton flag off, we could have made it independent. We chose to keep it as a Meridian, and the property is doing very well and Starwood appreciated that decision at the end of the day, which I think benefits us in the long term from a relationship standpoint.

So we look at all the alternatives on a constant basis. And the great thing about independent properties is, particularly with these soft brands, we can always flag them if we want to, if we think there is a benefit.

Okay. Great. And then lastly for me, I think you gave supply and demand expectations for the industry, but for a Pebblebrook portfolio footprint, what's your expectations for demand and supply for 2016?

So I think the way to look at it is for - out of our 2% to 4% RevPAR growth, there is probably 100 basis points, give or take, of occupancy growth and the rest is ADR growth.

All right. Thank you, guys.

We'll now take a question from Ian Weissman from Credit Suisse.

Just two quick questions. We talked offline about asset pricing today, in particular noting that I think you guys said for the best assets in the best markets, asset pricing has remained fairly firm despite, what we would say, dislocation to credit markets. Can you just talk about whether the same exists for portfolios? In other words, for companies that trade at 30% to 40% discounts to NAV, do you anticipate more industry consolidation?

I think industry consolidation in terms of the REITs has always been way down the list, for a lot of different reasons, not the least of which are social reasons. But I think -- we do think there will continue to be more consolidation on the brand and management side, because I think scale is increasingly important in that sector. I don't think scale is important on the ownership side, beyond being too small, very small.

I think as it relates to portfolios, your question about portfolios, I think that market is a little more challenged, because of regulations on banks to limit lending to 6 times EBITDA. So with the lower levered nature of the companies in this cycle, I think it is more difficult. But as Blackstone has proven, not only with strategic, but with other companies and other sectors of even larger size, there still is some market for companies when they become attractive enough from a valuation perspective.

Okay. That's helpful. And just finally, on AirBNB, just given your portfolio concentration, what you talked about the growing threat, is there any way to quantify the impact for you guys in 2016? For your 2% to 4% RevPAR guidance, how much of a hair cut, if you can put sort of numbers around it, did you take for the growing threat of AirBNB?

Yes, we can't put any numbers on that, Ian. There just isn't good information on that. And again, I tend to think it is not a growing threat. I think it is a threat and I think it will actually moderate over time and perhaps shrink over time.

Okay. That's very helpful. Thank you very much.

We'll now take a question from Lukas Hartwich with Green Street Advisors.

Thank you. Hello, guys. Jon, last quarter you gave some helpful color on the portfolios performance versus the comp set. I was hoping that you might be able to do that again this quarter.

Yes, so overall, Lukas, I think we underperformed our comp sets for the year. We gave a number of reasons throughout the year, that included renovations. It included change in leadership within the portfolios, in some cases included strategy shifts to ADR and EBITDA and away from RevPAR overall, but I think we lost a little over 100 basis points on a star share basis. And I think our comparison on a weighted basis to our tracks, or our urban markets, I think that the differential was pretty similar. I think about 120 or 140 basis points.

That's helpful. Then, obviously we are seeing a lot of articles on the tech sector and what's going on there. Are you seeing any changes in tech demand?

No. And in fact, in the budget reviews we had at the end of the year, and subsequent to that, what we found in a market like San Francisco, which would be the poster child for the technology industry, obviously, we saw a fairly healthy increase in holiday parties and spend at those holiday parties both in December and in January.

Interesting. Then the last one for me, is there anything you are hearing from your corporate accounts that would explain the weakness that we have been seeing in corporate transient travel, or is it just more general - the strong dollar, lower global GDP growth, that sort of thing?

Outside of energy and some of the manufacturing industries, and maybe just a touch of the financial industry, some of the banks, we really haven't heard anything from corporate accounts in terms of change of policy. We also spent some time talking to the brands who obviously have a much broader and clearer picture because they have many more accounts and see the whole US versus a particular market. We didn't get that from them either.

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

With no additional questions on the telephone, I would like to turn the conference back over to Jon Bortz for any additional or closing comments.

Thanks, Lisa. Thank you, everyone for participating. Sorry about the length. We thought you might find the level of detail helpful, and we look forward to updating you in a couple of months. Thanks, bye-bye.

Ladies and gentlemen, this does conclude today's conference. We do thank you for your participation. Have a wonderful rest of your day.