Pebblebrook Hotel Trust (PEB) 2017 Q4 法說會逐字稿

Greetings, and welcome to Pebblebrook Hotel Trust's Fourth Quarter and Year-End Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Raymond Martz, Chief Financial Officer. Thank you. You may begin.

Thank you, Sherry, and good morning, everyone. Welcome to our fourth quarter and year-end 2017 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start, a quick reminder that many of our comments today are considered forward-looking statements under the federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2017 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, February 23, 2018, and we undertake no duty to update them later.

You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use, on our website at pebblebrookhotels.com.

So we have a lot to cover today. So let's first review our 2017 highlights. During 2017, we made great progress completing the last of our major transformative renovation and repositioning projects, which included Hotel Palomar Los Angeles Beverly Hills, Revere Hotel Boston Common and Hotel Zoe Fisherman's Wharf. We also successfully completed $213 million of property dispositions, which involves selling our last hotel in New York and a large parking garage in Boston and then using the cash proceeds to further reduce our leverage as well as repurchase more than $93 million of our common shares.

Turning to our 2017 financial results. Our same-property hotel EBITDA was $253.6 million, which exceeded the top end of our fourth quarter outlook by $1.1 million, due primarily to better-than-expected nonrevenue -- nonroom revenue growth without related expense increases. While our same-property RevPAR declined 2.2% during 2017, our nonroom revenue per available room increased a strong 4.4%, resulting in a same-property total revenue per available room rate declining to 0.3%.

The hotels with the highest EBITDA growth rates in 2017 were Union Station Nashville, Hotel Zeppelin San Francisco and Hotel Monaco Washington DC, all of which are continuing to ramp up following their renovations in 2016. Hotel Zelos San Francisco and Skamania Lodge also generated healthy EBITDA increases in 2017. Zelos's improved performance that bucked the downtrend in San Francisco is due to Viceroy taking over management at the end of 2016. And Skamania Lodge had very strong group and transient lift as we continue to add amenities like our zip line and our new adventure park as well as the addition of our third and fourth treehouses.

For 2017, adjusted EBITDA was $2.1 million, above the upper end of our outlook, due to the same-property hotel EBITDA beat combined with lower G&A expenses and a little better performance at LaPlaya following its reopening. Adjusted FFO per share was $2.57, which exceeded the top end of our outlook by $0.05 per share and the bottom end of our range by $0.09 per share. This resulted from the same-property and adjusted EBITDA beat in addition to a lower TRS tax expense.

Now looking back over the performance since 2011, where a significant portion of our existing portfolio was in place. We have achieved a compounded annual adjusted EBITDA per share growth rate of 18.3% and adjusted FFO per share growth rate of 17% and a total annualized return for our shareholders of 12.6%. These results highlight the success of our numerous transformative redevelopment projects, our asset management efforts, which included tremendous support and hard work by our hotel management teams as well as our overall capital allocation decisions.

Focusing on the fourth quarter. On the hotel operating side, our 2017 same-property RevPAR decreased 0.1%. Our nonroom revenue per available room increased a very strong 9.5%, with the revenues from food and beverage operations up 7.3% and a resulting total revenue per available room which increased 2.9%.

Same-property hotel EBITDA margins in the fourth quarter declined 78 basis points to 30.7%. However, property taxes declined 8.9% due to successful property tax reductions at 2 of our hotels, which improved margins by 49 basis points in the quarter. While lowering our property taxes was a great result, the significant true-up reductions for 2017 will make for a more challenging comparison for this line item in 2018.

Total hotel expenses increased 4.1% during the fourth quarter. While we continue to make progress improving the operating efficiencies of our hotels, wage and benefit pressures due to the shortage of workers in all urban markets will continue to be a headwind, which we expect will continue into 2018. We have been successfully offsetting these labor cost increases through increase labor productivity and revenue pass-throughs that we've discussed in the past.

Overall, for the fourth quarter, transient revenue, which makes up about 76% of our total portfolio rooms revenues, was down 3% compared with the prior year while transient ADR improved by 0.4%. The rate of growth in corporate transient and group demand remained soft but stable during the quarter, with growth in leisure, transient demand remaining relatively healthy, which has been the trend throughout 2017.

Group revenues improved 9.6% in the quarter as room nights were up 8.3%, while ADR increased 1.2%. This was largely expected and primarily due to our -- the stronger convention calendars in Q4 across many of our markets as well as the shift of the Jewish holidays out of October.

Our properties located on the West Coast experienced a RevPAR decline of 2% in the fourth quarter. Our hotels in San Diego realized a 7.5% decline; our hotels in West L.A., a 3.4% decline; and San Francisco realized a RevPAR decline of 2.3%. Partly offsetting this were our Seattle hotels, which were up 4.4%, and our properties in Portland, which generated a 4.6% improvement.

Our properties on the East Coast produced a RevPAR increase of 3.8%, largely due to our newly renovated and rebranded Hotel Colonnade in Coral Gables. Revere Hotel Boston Common also had a solid ramp up compared with the prior year fourth quarter when it was under renovation.

As a result of these factors, monthly RevPAR for our portfolio increased 0.2% in October, 4.6% in November, but declined 6.2% in December, largely due to weaker convention calendars in San Francisco and San Diego, which were expected. As a reminder, our fourth quarter RevPAR and hotel EBITDA results are same-property for our ownership period and include all the hotels we owned as of December 31, 2017, except for LaPlaya Beach Resort as this property was closed for much of the fourth quarter as we completed repair and remediation work at the resort due to the impact from Hurricane Irma. The good news is as of the end of January, all guest rooms were back online at LaPlaya, Naples, and it's now fully reopened.

RevPAR growth in the fourth quarter was led by Union Station Nashville; The Nines Hotel, Portland; Hotel Colonnade Coral Gables; and Hotel Zeppelin San Francisco.

We utilized a portion of the net proceeds from our strategic dispositions. During the year, we paid off all of our 2017 debt maturities, including property-specific loans at par that was scheduled to mature in 2017. We also extended and replenished the availability of our $450 million credit facility and extended the overall average debt maturity for our portfolio.

In terms of balance sheet and liquidity, at year-end, our debt-to-EBITDA ratio was 3.7x, and our fixed charge coverage ratio was also 3.7x. As a result of the refinancing and extension of our credit facility and term loans that will be completed on October, our weighted average debt maturity now stands at 4.7 years, with the next debt maturity not until 2020. Our weighted average interest rate is 3.3%, and 87% of our total outstanding debt is at fixed interest rates.

Regarding our common dividend. For 2018, we anticipate maintaining our current annual dividend payout of $1.52 per share, which is the same as our 2017 dividend. Based on our 2018 outlook, this implies a dividend to [cat] coverage ratio, which includes a reduction for a 4% FF&E reserve of approximately 67%, which is consistent with our dividend coverage ratios over the last several years. Based on Thursday's closing stock price, this implies a current dividend yield of 4.3%.

Now a quick update on our property and business interruption insurance claims LaPlaya in Naples. We continue to estimate that the costs to remediate, repair and replace and clean up LaPlaya will be between $12 million and $15 million, which is in line with the estimate we provided to you last quarter. We have been working closely with our insurance carriers so they are fully aware of their total amount of these losses.

On the business interruption side, we estimate that the lost hotel EBITDA during the fourth quarter of 2017 was at least $5 million, not including additional cleanup costs, which are also covered by insurance. We expect to reach a resolution with our insurance carriers on the majority of this 2017 BI claim over the next couple of months. Our outlook assumes $3.5 million of business interruption proceeds, which reflects a partial claim for 2017 losses, net of our deductible. We expect that this claim will increase as we make progress working with our insurance carriers to finalize the 2017 BI loss.

We're also forecasting business interruption losses in 2018 for go-back and additional repair work that we will complete out of season in order to minimize our 2018 business interruption claim. We currently estimate that -- this impact to 2018 adjusted EBITDA to be an additional $2 million.

When we do receive business interruption proceeds, we will record the amount of the negative expense in our income statement, which will increase our adjusted EBITDA. We will provide updates quarterly as we continue to make progress.

And with that, I would now like to turn the call over to Jon to provide more insight on the year as well as our outlook for 2018. Jon?

Thanks, Ray. 2017 was a bit more of a challenging year than we had hoped for, given the healthy economic growth rate going into the year and the improving economic conditions that occurred over the course of the year.

Despite the lack of improvement in business travel in 2017, we still managed to beat the top end of our initial outlook from 1 year ago for AFFO per share, and we also managed to achieve adjusted EBITDA in the middle of our range. And we would have been at the upper end of the range had we factored in the EBITDA that was eliminated due to the sales of both Hotel Dumont in New York and the parking garage at Revere in Boston, which were not assumed to be sold in our initial outlook last year.

Industry RevPAR growth ended the year at 3%, 1% above the upper end of our initial range for 2017, yet it was significantly aided by substantially increased demand in Texas and South Florida due to the major hurricanes that hit both areas. On a positive note, industry RevPAR also was higher due to lower supply than we had forecasted, primarily a result of construction deliveries being more significantly stretched out than we had anticipated at the beginning of last year. Nevertheless, the urban markets, per STAR, underperformed the industry by 140 basis points, which was worse than we initially forecasted and would have been even worse, but for the benefits to the cities of Houston and Miami, that resulted from increased occupancies in those markets in the aftermath of the hurricanes.

Our 2017 RevPAR underperformed our initial outlook for the same reasons. However, we weren't able to take advantage of the increased demand in South Florida due to our Naples property being closed for almost 3 months following Hurricane Irma, and we also had to redo the renovation that was almost complete when the hurricane came through. And as you know, we don't have any hotels in the Houston area.

In 2017, while we did not see any improvement in business travel, in the second half of the year, we did see improvement in the group spend in our hotels, including increased spend on food and beverage. That trend has so far continued into the first couple of months of 2018.

In the fourth quarter, we also experienced continued softness in international inbound travel. Unfortunately, the Department of Commerce data, which is the only reliable data for inbound international travel, has only been provided through August. However, the data for the first 8 months of last year shows that overseas inbound travel was down 6% while travel grew over 6% on a global basis. So the U.S. clearly lost significant share in 2017. We believe the trend was likely still negative in the last 4 months of the year, though the declines may have softened as the dollar continued to decline over the course of the entire year.

One positive trend that continued in the fourth quarter was strong growth in leisure travel as the consumer's generally well employed, wages are now escalating faster than inflation and the secular trend of people wanting to collect experiences versus things continues to benefit travel. So far, in 2018, we believe these same trends have continued. However, we've also seen some spotty improvement in business travel and short-term group bookings that we haven't seen in several years now. We've also seen some improvement in group attendance, including less wash or attrition in group blocks. These initial signs of improvement are certainly positive, but it definitely does not yet make a trend and the signs aren't yet consistent across our customer base or our markets.

As for the industry in the fourth quarter, RevPAR grew 4.2%, perhaps a better-than-expected number. However, we provide some caution about misinterpreting the industry number. First, the industry significantly benefited from the hurricanes in the fourth quarter. If you look at the U.S. industry without Houston and Miami, RevPAR was up 3.5%. So there was something in the range of 70 basis points of help. Now that doesn't mean that there wasn't some underlying improvement in both Miami and Houston without the hurricanes, but it does help isolate where some of the improvement came from.

Also, the fourth quarter clearly benefited from the holiday shift to the detriment of the third quarter. We estimate the benefit was somewhere between 50 and 100 basis points so, combined, 120 to 170 basis points of positive impact.

As for Pebblebrook, we completed our successful escape from New York in 2017 with the sale of our last hotel there, the Dumont. In addition, we took advantage of a very strong private market for parking garages and sold our 800-plus space garage in Boston at the Revere for $95 million. And we utilized $93 million of our sale proceeds to repurchase Pebblebrook's stock at less than $29 per share. So we feel good about the successful execution of our strategic plan and the benefits for our shareholders as a result of those efforts.

Generally, our fourth quarter performance was a little better than our expectations. As Ray mentioned, RevPAR was in the middle of our outlook range, though other revenues continued their trend of beating our forecast, allowing us to beat on hotel EBITDA, adjusted EBITDA and FFO.

When we look at the performance of our hotels by market in the fourth quarter, as compared to our expectations in October, South Florida, Buckhead, Philadelphia, Nashville and Seattle all performed a little better than expected and West L.A. and San Diego were both softer than forecast.

Finally, our 4 transformative redevelopments from 2016 all continued to perform well in the fourth quarter. And overall, they performed much better than we expected in 2017.

EBITDA on a combined basis for Monaco DC, Union Station Nashville, Hotel Zeppelin San Francisco and Hotel Colonnade Coral Gables grew another $1.33 million in the fourth quarter over the fourth quarter of last year. That brings a total increase for these 4 properties to almost $7 million in 2017, significantly better than the $5.5 million we had forecasted at the beginning of the year. We expect these 4 properties will continue to drive increased RevPAR growth and EBITDA in 2018, with the exception of the Monaco DC due to the difficult comparisons to last year. We originally forecasted these 4 redevelopments, where we invested a total of $78 million, would stabilize with $10 million of additional EBITDA. With $7 million in the bank, in 2018, we should gain an additional $1 million of the remaining $3.5 million.

In 2017, we completed the transformational redevelopments of 3 hotels: Hotel Palomar Beverly Hills, Revere Hotel Boston Common and Hotel Zoe Fisherman's Wharf, which was previously the Tuscan Inn, a Best Western hotel. We calculate that the EBITDA of these 3 hotels, due to their redevelopments, was reduced by approximately $4.9 million in 2017. In 2018, we're forecasting to regain all of this lost EBITDA and a little bit more, and we should see a significant increase in 2019 as the hotels gain traction from finding new, higher-paying customers and remixing the business into higher average rates.

In addition, our renovation at LaPlaya was interrupted by Hurricane Irma and the damage that resulted from it. Unfortunately, we had to renovate the Gulf Tower twice, once right before the hurricane and then again after, beginning after all the cleanup was completed in November. As Ray indicated earlier, we estimated that we lost over $5 million of EBITDA in the fourth quarter at LaPlaya. We were able to complete the renovation of the Gulf Tower, along with all of its rooms, restaurant and public areas, by the end of last month. However, due to the damage from the hurricane, we'll have significant go-backs and repairs and replacements throughout the first 9 months of this year that will again impact available room inventory and, therefore, EBITDA in 2018. We're currently estimating 2018's reduced EBITDA at LaPlaya at $2 million. We believe all of this work, along with the lost EBITDA, is covered by insurance.

As Ray mentioned, we've included in our outlook $3.5 million of business interruption insurance proceeds for a portion of the loss in 2017, net of the deductible. This amount does not represent a final amount for 2018 but a minimum level that we and the insurance company have conceptually agreed upon. We expect additional amounts in the final settlement, including for 2018, to occur sometime late this year once all of the work is completed and lost income is determined. We expect 2019 to be a terrific year for LaPlaya, following the renovation of the hotel and hurricane repair work.

Now I'd like to turn to a discussion of 2018. Overall, we believe industry RevPAR is likely to grow between 1% and 3% for the year. And today, we'd lean more to the upper half of that range. We expect demand will increase between 2% and 2.5%, with supply growing by 2.1% to 2.4% and ADR likely increasing somewhere between 2% and 2.5%. This is based on a slightly better overall economy in 2018 with our forecast of GDP growth in the 2.5% to 2.75% range.

We expect urban RevPAR to again underperform the industry as the urban markets suffer more supply growth than the industry. We're forecasting urban's underperformance at approximately 200 basis points versus the overall industry in 2018. This forecast for the urban markets does not anticipate any improvement in either business travel or international inbound travel, which would have a very positive impact on the urban markets if the trends turned more positive. We expect urban supply growth to peak in 2018 with the industry supply growth not peaking until next year. This bodes well for improved relative urban performance in 2019.

Since our portfolio tends to -- tracks STR's urban track pretty closely, all else being equal, we'd expect to also underperform the industry by 200 basis points. However, all else isn't equal, and we have a few headwinds and tailwinds to take into account.

This year, unlike last year, our Pebblebrook-specific issues net out to a positive 50 basis points, above our estimate for urban markets. Specifically, fewer disruptive renovations will have about 70 basis points of positive impact, offset by 20 basis points of net negative impact from market-specific events, including not having last year's benefits in D.C. from the inauguration and Women's March as well as the negative impact from integration activities related to IHG's previous acquisition of Kimpton and Marriott's acquisition of Starwood. Combined, all of the pluses and minuses result in a RevPAR range of minus 0.5% to plus 1.5% for 2018.

We expect the most challenging quarter will be the first quarter. This is due to year-over-year convention calendar shifts in numerous markets, including San Francisco, Seattle and San Diego, as well as the lack of an inauguration and march in Washington D.C.

Our outlook for RevPAR in the first quarter is for a decline of between 1.5% and 3.5%. The second and third quarter should be the 2 stronger quarters for us, also, for the same reasons, in this case, because of positive convention calendar shifts in a number of markets in our portfolio but especially in San Francisco and Seattle and the second half of the year for San Diego.

Q2 should also benefit in general from a holiday shift this year. Overall for the year, we expect our better markets to include Nashville, Buckhead, Seattle and South Florida. And our weaker markets, which are likely to show negative RevPAR, include West L.A., excluding the Palomar, due to its expected ramp up following its renovation last year; as well as Washington, D.C., Philadelphia and Portland.

We think San Francisco, the city, not the metropolitan market, is likely to see RevPAR growth in the low single digits, probably 1% to 3%, due to continuing strong growth in corporate travel, a better convention calendar and stabilization of international inbound travel. This is significantly better than San Francisco's RevPAR decline of 3.8% in 2017. And again, that is for the city of San Francisco, not the metropolitan market. The convention calendar in San Francisco continues to look extremely strong for 2019 and beyond, and based upon what we know today, should deliver at least high single-digit RevPAR growth in 2019 given no worsening in the economy.

Other positives for the travel industry in the U.S. include: a synchronized global economy forecasted to grow at a higher rate than 2017; a strong global travel secular trend and a dollar that is down another 3% this year and 12% from its peak early last year, which has historically encouraged more travel to the U.S.; declining construction starts due to challenges with finding construction financing and rapidly increasing construction and development costs without commensurate increases in hotel operating profits.

We're also seeing, as we mentioned, some [alp] and some early, but albeit spotty, evidence of improving business travel and business spend trends, continuing strong leisure travel and progress with some of the structural issues that have been negatively affecting our industry, such as better cancellation terms; growing regulation and enforcement of illegal short-term online rentals, particularly in many of the major cities; and improvements to loyalty program reimbursement formulas late this year that should allow for better revenue management in the future.

Industry negatives include: noneconomic issues that are discouraging travel to the U.S., at the same time, that outbound U.S. travel has been growing robustly; supply growth rates that will increase in the U.S. in 2018, especially in the urban markets; and labor shortages and cost increases that are pressuring margins in the lower revenue growth environment. All in all, we believe the combined trends are improving and provide a reason to be a little more optimistic than a year ago.

Given our RevPAR outlook for 2018, we expect same-property hotel EBITDA to be between $244.5 million and $254.5 million. As a reminder, our same-property RevPAR and hotel EBITDA numbers do not include LaPlaya for the second half of both 2017 and 2018 due to its post-hurricane closure and disruption. Our outlook assumes a little over $4 million of EBITDA for LaPlaya in the fourth quarter of this year, which is added to same-property hotel EBITDA to arrive at our adjusted EBITDA range for 2018. Also our outlook does not include any business interruption insurance proceeds beyond the $3.5 million that we mentioned earlier in our comments, and that's included in our first quarter outlook.

Finally, in 2018, we need to note that, while we're completing the renovation and releasing of most of our ground-floor retail at Hotel Zephyr, which we call Zephyr Walk, we'd be negatively impacting our retail EBITDA by another $500,000 in 2018. We expect to complete the redevelopment of all of the ground-floor retail space by the end of the second quarter, and we currently have 20% left to re-lease of the almost 46,000 square feet of street-level retail that makes up Zephyr Walk.

We're investing $9 million to $10 million to upgrade the ground floor structures that wraps Zephyr Walk on 3 of the 4 streets on which the hotel sits. And we're retenanting with much higher quality tenants, which will improve the value of the income stream. Once we re-lease all of this space, we estimate our stabilized EBITDA at around $4.5 million, which would be roughly $2 million higher than 2018's forecasted EBITDA from Zephyr Walk. So unless we see a pickup in business travel in 2018, which is not in our current outlook, 2018 will be a stable to slightly up transition year for Pebblebrook to what looks like a much stronger year for our portfolio in 2019.

It's in 2019 that we expect to make significant gains from the completion and expansion of the Moscone Convention Center with its already record convention room nights and compression nights on the books and when we'll benefit from further ramp-up of our 2016 and 2017 transformative redevelopments. We should also benefit from a clean year without disruption at LaPlaya, which should see significantly improved performance due to our renovations over the last couple of years, which we expect will drive this hotel to a higher level of overall luxury.

We'll wrap up our comments today with a reminder that next Friday, we'll be announcing our sixth annual Pebby Award winners. Each year, these awards honor our most outstanding property teams from the preceding year, in this case, 2017. We'd like to thank all of our property teams for their hard work, their passion and their collaboration over the past year. So don't forget to follow us live on Twitter starting at 3 p.m. Eastern Time on March 2 as we reveal this year's award winners.

With that, we'd be happy to answer any questions that you may have. Operator, could you please proceed with the Q&A.

(Operator Instructions) Our first question is from Anthony Powell with Barclays.

Could you update us on the disposition plan in general? After $676 million in sales, are you still actively looking to sell assets? Or is it more opportunistic at this point? And have your -- any of your estimates changed since your last call?

Sure. So as it relates to our disposition plans as part of the strategic plan, we have some minor interest in some selective dispositions within the portfolio. And then we would continue to look favorably upon any very attractive opportunistic interest that we might get for various properties within the portfolio. But at this point, our activity level is reduced as it relates overall to our interest in sales. I would say that we are beginning to look at acquisitions. I don't know whether we'll be successful this year. I don't know how aggressive we'll be. I don't anticipate we'll be particularly aggressive. But we do feel a little bit more comfortable on the acquisition side, given the movement of our stock valuation closer to or into our NAV range. And Anthony, as it relates to our NAV range, we've gone through our typical quarterly reevaluation. And at this point in time, there is no change to the range of between $36.50 and $41 for the NAV of the portfolio.

Got it. And there's one more for me. Airbnb announced yesterday that they're more willing to feature a boutique hotel in their platform, and I believe their commissions are significantly lower than traditional OTAs. Would you consider listing some of your hotels in that platform? Or have you talked with them about that?

Well, the answer is sure. We'll list on most platforms if the terms are attractive and they can deliver business to our hotels -- attractive business to our hotels. So we certainly would, and we are working to try to understand what their program is, how it works, what technology's required, et cetera.

Our next question is from Michael Bellisario with Robert W. Baird & Co.

Could you maybe provide a little bit more detail about what you're doing on the nonrooms revenue side? And how we should think about maybe the lift or at least the incremental lift in 2018 versus 2017, and how much more you have there to push?

Sure. So as you know, we've spent many years now reconstructing, in many cases, food and beverage at pretty much throughout the portfolio. In some cases, we've leased restaurants out. In other cases, we've rebuilt our restaurants, revised their concepts, focused on more profitable business related to beverage instead of food as well as events instead of sit-down dining. We've tried to create unique spaces and flexible spaces that allow us to not only drive higher food and beverage revenue but drive higher room rental within our portfolio, which has been a material driver from both a revenue perspective and a profitability perspective in our food and beverage operations. And you're seeing that in last year's and, particularly, last -- in the fourth quarter's numbers. In addition to as it relates to groups, in many cases, redoing our meeting spaces in ways that are both more flexible as well as more unique in terms of the design and the atmosphere, trying to make them differentiated from a typical meeting room in a standard hotel. So we've had success in both of those areas. That's helping drive the increases both in our profitability and in our revenue, nonroom revenue base. And you can see that in our numbers. For '18, I think the range for nonroom revenues that goes along with our RevPAR outlook is something like 0.2% at the low end to 3.9% at the high end.

That's helpful. And then just one follow-up on the acquisition comment you made. I know it's still early days, but kind of what would you be targeting? And -- or repositioning is still a focus for you guys. Is it really just kind of the same thing you had been doing earlier in the cycle?

Yes, I wouldn't say there's any change in strategy at all. I think the strategy's worked. We've created a lot of value for our shareholders. There are going to be fewer opportunities, we believe, today than there were years ago of properties that have been lacking in capital improvement investments. And so there may be fewer opportunities for turnarounds. But in terms of high-quality assets that fit our criteria in our major coastal cities and the occasional resort market would continue to be attractive from our perspective. And they don't trade that much, so you need to be prepared to move

regardless at the end of the day.

Our next question is from Bill Crow with Raymond James.

Jon, I've got a couple of questions, but I want to go back to the acquisition disposition opportunities. And I think maybe some of the unintended consequences of going, shrinking the portfolio and deleveraging has shown up this week. And I'm just curious how that impacts your decision-making process and your portfolio? And whether this might discourage you from doing value-add or very low year 1 cap rate acquisitions?

Sure. Good question, Bill. So there's an art to running a company and a science, and we look at and try to balance all of the issues related to leverage, cash flow, returns, dividends through our market allocations and diversification, through the timing of when we do our projects, through our strategic plan that we put in place, which contemplated what would happen with the size of the company, what would happen with cash flow, would it have any impact on the dividend, what did it mean in terms of how the importance of buying your stock back factored in to balancing your cash flow per share. We take all of those things into account, and those would be taken into account on every acquisition that we make and our plan for acquisitions as well as the type of assets that we invest in and the timing for redevelopments of those if we're buying projects that would benefit from a redevelopment. So I think we've done a very good job over the years in both directions, Bill. And hopefully, that shows in the strength and flexibility of our balance sheet, the performance of our assets, the coverage of our dividend, all of those things. And we were very thoughtful about how we approach all of our major decisions over the course of many, many years.

That's helpful, Jon. I think we're entering a seasonal period where business travel typically picks up. And I'm just wondering, you've pointed out some green shoots out there. But how important are the next 4 or 5 weeks in your determination whether these are actually taking root or may be misleading us early in the year?

Sure. Yes, I mean, we think of trends. If we're sort of trying to conclude is something a trend versus anecdotal or inconsistent evidence, it really takes probably 3 to 4 months of consistent activity for us to come to a conclusion that this is a trend. There've been a lot of false starts over the last couple of years. And there's a bias today, including ours, yours, and everyone else associated with the industry, to try to find those green shoots and announce the trends. And we've been very cautious about that because while we hope for things to improve, we certainly don't want to communicate to you that our hope is reality. And so I'd say we've got see at least a couple of more months, Bill. But you're totally right. We're pulling into a fairly strong period beginning in, I would say, maybe mid-March through the end of May where we should get a pretty good idea over that period whether these are trends or not.

And Jon, finally, for me. What stood out -- one of the things that stood out in your prepared remarks was the comments about the manager switch in San Francisco and putting Viceroy in, and how much that asset outperformed the market. I'm just wondering, was there something different that they really did? Do they have a different mentality toward rate? Did the -- and not only that, is there more opportunities -- are there more opportunities out there to change the management for outperformance in other hotels?

Yes. I think in the case of Hotel Zelos, which we brought in multiple operators following the changes that we made in 2015, I think what Viceroy brings to the table and which is -- where they've been effective, are really a couple of things. First of all, they're very creative. They work very collaboratively with us, coming up with ways to create a story, position a property, make a property relevant and active in order to create an environment that's unique for our customers and get the word out, both on a direct sale basis as well as through public relations and social media. And I think they're very good at that. And they've been very successful with that at both Hotel Zetta and Hotel Zeppelin with us. And so I think that's part of it, Bill. I think the other part is because of the fact that we have 2 similar properties, albeit with different stories and slightly different positioning from a rate perspective, we really have a package of 3 hotels within blocks of each other, very close to both Union Square and the Convention Center that they sell together. They revenue manage together. And it's not about cost savings, and there are a few of those. They're relatively small and not a driving factor. But it's really about how the properties are sold and their ability to be even more effective with 3 versus 2. So as it relates to other places to do that. So we did just make a change, January 1, in Portland at Hotel Modera where we've brought Sage Hospitality in. Sage manages The Nines for us in Portland as well as Union Station Nashville where they've done similar things, in those cases, under collection brands. In one case, the Luxury Collection in Portland; and in the case of Union Station, the Autograph Collection. But we've really approached those the same way as our independent hotels, just -- we just have higher costs because of the brands. But it really is about the creativity of the story, the unique experience, the design, the activities. And so with Hotel Modera, we hope to take advantage of their efforts at The Nines, the ability to sell both properties together on a local basis and activate the property creatively in the same way that we weren't able to do it before.

Our next question is from Jim Sullivan with BTIG.

Jon, just want to make sure I understand the commentary about being, I guess, a little more comfortable at the upper end of the guidance range that you had provided. And one of your peers earlier this week indicated that January 2018 had exceeded their November budgets pretty materially, and I just wonder if you saw the same or not. And if you could just clarify, I may have missed it because you may have referred to it. But what is it that's driving your increased comfort level at the upper end of the range?

Yes. so the -- first of all, just to clarify. My comments about the comfort on the upper end of the range were for the industry. It wasn't necessarily for our own numbers. I think our numbers are -- because I think the industry will continue to get some benefit from the hurricanes that took place. And unfortunately, we're not -- we don't see a lot of benefit from that, particularly without any properties in Texas or Houston. But as it relates to your other question, which was -- just remind me a second?

Sure. The January...

[The] January, yes. So no, we did not see that kind of improvement over budgets. It's a funny process, but I would tell you, in general, budgets tend to be light early in the year. So properties get off to a good start, and it's not uncommon for property teams to try to push budgets that are incredibly light in the first quarter for that reason and then back-end-load a budget later in the year. I'm not commenting on whether that's the case for one of our peers. I wouldn't want to conclude that. I have no idea. But I know in our experience in dealing with this over 20 years, that's not unusual, and we try to eliminate that bias in our own budgets because we really hate looking at budgets that are back-end-loaded. And so we think our budgets are fairly unbiased from quarter-to-quarter, and we haven't seen -- while I've identified a few things we've seen, it hasn't had a material impact just yet on the numbers that we've been seeing.

Okay. And then in terms of San Francisco. I think you had provided some specific information regarding nights and compression nights in 2019 back in, I think, the last quarter of last year. I don't know if that's been updated. I don't know if there's any more information you can share with us on an updated outlook.

Sure. I can. So on the books -- this is from SF Travel. So on the books for '19, right now, are 1,211,000 rooms. That is up 478,000 from 2018's $733,000 number. But that's a 65% increase from '18 to '19. In compression nights, on the books right now -- and these do move around some, Jim. So they're up another 4 in the last month. They're at 87, which I think is -- I think we were at 81 last quarter when we talked about it. And that's up over 100% from the 41 for 2018.

Okay. And in terms of compression nights and total rooms, the prior peak in San Francisco was some, and I want to say 20%, 25% less than that?

So on the numbers I have through '15, the highest year was 2016 in room nights, which was 936,000. And for compression nights, was 58 in 2015.

Okay. Very good. Also in San Francisco, in your release, you referred to some additional renovation at the Hotel Zelos, if that's the right way to say that.

Zelos, yes. Like a zealot. Like you, like you.

Absolutely. Can you confirm that the timing for the renovation project? When do you expect that to be finished?

Yes. It's likely to be late in the year when it would be finished.

Okay. And then on the Zephyr Walk, you had referred in your prepared comments I think the $4.5 million of EBITDA upon completion, and I think you indicated being fully leased. Just 2 questions with that. When on a quarterly basis do you expect to hit that? And what is the level of preleasing there currently?

Yes. So we've leased about half of the space that we've turned over or that had the expirations over the course of the last 12 months. Our hope is that we will have the rest of the space that's left, which is a little under 10,000 feet, and at most, represents 6, 7 small spaces. And of course, there could be some combined spaces, but you can obviously see they're relatively small spaces. And I think the average rent for the remaining spaces are between $150 and $200 a foot on a gross basis with the tenants paying full CAM and taxes on top of that. So we would expect and hope to have this space fully leased by the end of this year and then get to stabilization sometime, hopefully in the first half of '19 as the tenants all move in and start paying rent.

Okay. And I believe you referred before, Jon, to the potential for selling that retail space if you separate the lease agreements, the underlying ground leases. Is that still the plan?

Yes. I mean, that's the plan. We're still -- we still are a long way from completing that plan and dealing with the ground lessor. And if we don't work anything out with them, they will end up keeping it obviously. But we do continue to believe, Jim, that we're not the best owner of that space. We're not going to optimize it. Retail is not our expertise. And getting into the hands of others who are specialists in urban retail, in particular, would benefit both the property as well as the ground lessor.

Our next question is from Wes Golladay with RBC Capital Markets.

I'm just looking at some of the urban under performance, especially in some of these gateway cities. How much would you attribute to, call, it supply versus the actual weaker international demand?

Well, that's a toughie, Wes. I mean, I would tend to say that the vast majority of it is still -- is going to be the supply issues in the market. I think the international demand could add 50 basis points or something of demand in a particular market. But -- and so I think that supply issues, particularly when you start -- you see markets with 5% or 6% or more of supply in a given year, it's going to have a much bigger impact than a 50 basis points or a 75-basis point impact from international travel.

Okay. And then in your presentation on the website, you guys have a slide that shows $20 million of stabilized EBITDA or potential to capture an additional $20 million of EBITDA upon stabilization of your assets. How much of that is embedded in the 2018 guidance?

We're going to have to get back to you on that. We haven't done all those -- we haven't updated the investor presentation yet. But as it relates to the properties -- I mean, I can give you one piece of it. But as it relates to the properties that we redeveloped last year, there's about $5.2 million of increased EBITDA from those. And as I mentioned in my script, another $1 million from the properties from the year before. So those would represent $6.2 million that would be embedded in our outlook. As it relates to the other pieces, we'd have to get back to you once we update the investor presentation.

Okay. Maybe the point of asking the question. Is it typically -- you have year -- probably a 2 to 3 years stabilization of these renovations. Is it -- when do you get the bulk of it? Is it typically year 2 or year 3? I imagine you have a little bit of a slower ramp in year 1.

So it's usually 3 to 4 years, and I would say year 1, we'd like to get back what we lost, what we disrupted. And then year 2, we'd like to get more than half of the gain. And sometimes, it works -- it depends on when we completed a project during a year. But as an example with the ones that were done in '16, we got more than we were expecting in '17 back. But for the properties, the year before, we got less than we thought we'd get back in the first year. So it really does vary. But I mean, in general, it's along the lines of what I just mentioned.

Our next question is from Dori Kesten with Wells Fargo.

Can you talk about your branded versus independent market share over the last few years? And how you see that trending going forward?

Sure. Yes, so we -- when we look at the last couple of years, I would say in '16, our branded properties and our independent properties performed pretty equally. We have to take out the properties impacted by major renovation in either the prior year or the existing year. But in '16, pretty similar performance. In '17 actually, when we look at how our branded properties did against the markets they're in versus our independents, our independents actually did better. We had I think 8 of our 10 branded properties underperformed their urban markets and our independent properties, again, nonrenovated impacted. I think only 6 of 13 underperformed. So a greater majority outperformed when only a minority of our branded properties underperformed. And I would tell you, for across my 20 years of doing both, and for us, it's pretty close to 50-50 between major brand and independent, and maybe our branded increased if we wanted to put Kimpton into the "collection brand" of a major brand at this point. But I think at the top line, they performed pretty consistent across the markets from year-to-year. Some years, one does better. Some years, others do better. It isn't generally because one's a brand and the other's independent. It just has more to do with what the dynamics are in that market and what's going on with our team, frankly, which is the most critical factor. So we haven't seen any change over the course of 20 years of brands getting stronger and independents getting weaker, or frankly, the other way around, despite the fact that the customers' preferences have been moving more towards independent or unique experiences and away from the brands as loyalty has lessened, particularly with the younger generations.

Our next question is from Shaun Kelley with Bank of America.

I apologize if this has already been asked a little bit. I've been sort of jumping back and forth on something. But I'm just kind of curious overall. This is really the kind of second or third year in a row where we've seen urban and kind of independents generally lag the broader RevPAR indexes. And you guys I think strategically are -- you're directly positioned there, but on the flip side, you keep coming up with pretty amazing ways to try and outperform to the extent at all possible. So I'm just kind of interested in a very high-level, strategic view of, is the portfolio positioned the way you want it to be? Is there anything you consider adjusting kind of further or bigger picture as you kind of move -- look out the next couple of years given this consistent underperformance we've seen? Just kind of how are you thinking about that from a large kind of big-picture perspective?

Yes. So if you think about this cycle, which has been a little bit reversed from prior cycles, urban significantly outperformed in the first half of the cycle. And as business travel came back in particular and the suburban markets underperformed in the first part, and that kind of got reversed. And the dynamics of that are a little different this go around than prior cycles. We don't think it's a secular change. We think it's more unique to this particular cycle and some events that are taking place, the dollar and our administration being one of them, where we gained very significant international inbound travel through 2014, which benefited the urban markets, all part of the global secular trend that the international -- the major cities are going to benefit more so from that secular trend than suburban secondary or secondary markets. So we think that still continues to work to the benefit of the urban markets. The second thing is supply came earlier in the urban markets for a number of complicated reasons. Again, none of which we necessarily think are secular changes, but a little bit more unique to this particular cycle. And then you think about the re-urbanization of America, people moving back into the cities, traffic being a problem, major transportation benefiting the major cities, the development of cultural activities, more completely in most of the major cities where the convention centers are in the major cities. And the -- over the long term, the more limited ability to build and the higher cost to build. We think those all continue to benefit the major city markets. We're never going outperform in every year, but yet your question is one that we've -- we asked ourselves over the last few years, has there been a structural change that works to the detriment of the major cities and to the benefit of the other markets? And we don't think so, Shaun. And I also think it's the strategy of being urban -- being in the urban markets continues to validate itself through the liquidity of the urban markets and the maintenance or increase in values of those markets over the long term as compared to suburban or secondary markets. It's just -- there's always a much bigger buyer pool. There are more strategic buyers in those markets. There's more buyers around the globe for the major markets, and values just hold up much better over the long term in urban markets than they do in secondary or suburban markets.

Great. Great. And then the -- this kind of second part of this is, as I alluded to, Pebblebrook has done a good job of putting in things like different features to drive the kind of nontraditional revenue side of the kind of the hotel model. Where are you at? I mean, we saw a big spread again this quarter. Where are you at in some of those initiatives? And can we -- what kind of uplift or kind of continued momentum can we see on that as we move through 2018?

Yes. I mean, we expect some really favorable momentum for '18 in our nonroom revenues, whether it's food and beverage or room rentals or AV. Our activities related to customer amenity packages, additional fees within the hotels related to early check in, late check out, pet fees. I mean, I could go through a long laundry list of things that we have been rolling out within our hotels. And in some cases, being consistent, and in other cases, being a leader on some things, a thoughtful and careful leader, but not afraid to be a leader as well. And then I think there are some other things coming down the pike as we continued to look every year at how do we make room service or food and beverage or other operations more profitable and more successful. And I think there's still a lot to do there, frankly. And customer tastes and desires are changing. And because of the kind of portfolio and how closely we work with our operators, I think we are -- we've been pretty successful and should continue to be pretty successful in being able to pivot pretty quickly to take advantage of those opportunities.

Our next question is from Stephen Grambling with Goldman Sachs.

Just a few quick follow-ups to earlier questions. I guess, first, if you do get the reacceleration in corporate demand hoped for over the next 3 to 4 months, how would that impact your capital allocation priorities and potential pursuit of acquisitions versus dispositions, assuming you kept trading near NAV?

Yes. So I mean, it'll affect our underwriting. I don't think it will affect our -- we're open to making acquisitions at this point. So I don't think it changes our strategic approach or direction, but it would change our underwriting and perhaps, it would make us more competitive. It depends on how other people change as well. But historically, when we get conviction about something, and that might help with conviction, we have the ability to use our cost of capital advantage to be more successful on our pursuits.

Great. And then second follow-up. As brands direct bookings appear to be gaining steam and consolidation has potentially improved system fund chargebacks, is there a point where the economics associated with brand hotels actually does become more compelling to you all?

Well, they'd have to bring down their costs significantly for the vast majority of our independent properties. I mean, that's -- the challenge has been that the economics don't work at the bottom line. We don't find that the brands deliver higher RevPAR than our independent hotels. They do make it easier I think than the hotels that we have. Our hotels are harder. We need specific expertise when it comes to independent hotels. We actually need salespeople as opposed to order takers, and so it would make it easier. But we look at this on a regular basis within the portfolio. And as you can imagine, the brands are calling on us all the time because we have a large number of independent properties that could easily help them in growing their collection brands. We just haven't generally found it to work or for it to be at all compelling. And we do have collection brands. We have 2 in the -- we have 3 in the portfolio. I mean, we have a Luxury Collection in Portland at The Nines. We have Autograph at Union Station in Nashville. It was -- they were both branded when we bought them. And we have Tribute in Coral Gables that we developed with Starwood as a brand, the creation of it, and where it was at Westin. So we could easily make that an independent property, perhaps make more money, but we kept it a Tribute and made it a Tribute because of the relationship that we had and our ability to both help them and maybe create something unique at our hotels. So we'll keep looking at it every year on a regular basis. And if these guys really drive down costs significantly, I mean, this is -- we're not talking about 10 or 20 basis points. We're talking about hundreds of basis points in reductions that they'd have to get to in order to make it work. It doesn't mean they can't get there. But if they get there, we'll be signing up.

One last one that maybe I missed, but what are your expectations for wage inflation both in 2018 and even looking into 2019, if you do you have any insight on regulatory changes at the market level?

Yes. I think we're -- I would say, through our portfolio, most of our standard increases were between 2.5% and 3% on an hourly or a salary basis in all our hotels outside of the union mandated. The ones by union contract, I would say, fall within that 2.5% to 3% range. There are some additional increases generally for tipped employees where the minimum wages would generally apply and have an effect. Our typical housekeeper in most of our markets is making $5 to $10 over a minimum wage as an example.

Plus benefits.

Plus full benefits, including full health care. So it doesn't really have much of an impact there. Clearly, the benefit size is increasing faster than 3%. So you can imagine that without changing staffing levels or finding productivity enhancements or efficiencies, you'd be looking at something probably closer to 3.25% to 3.5%. With productivity improvements and efficiencies, we think that's probably somewhere below 3%. And then as we said earlier, about 2.5% in our midpoint, we'd get down to that through lower expenses in our other costs. For '19, I'm not sure we see it as all that much different than that. At this point, increasing much beyond that -- unless inflation, because those are already above inflationary increases. Unless inflation went up significantly, I wouldn't imagine that our standard increases at the property level would increase.

Our next question is from Lukas Hartwich with Green Street Advisors.

Just a quick one for me. Can you provide any color on why the disposition you had under contract fell through?

Sure. So I think we've indicated in the past that we're always open to approaches from buyers if they -- for any of our properties if they get to a number that we find attractive and creates value, significant value for the shareholders. And so we had one of those at one of our hotels. It was at an opportunistic sale, potentially. It was a buyer with a significant number of hotels in the United States. And -- but this was a little bit bigger. Actually, substantially bigger than their typical buy. We knew it was a bit of a flyer. But they were confident that they could put the capital together and get their equity partners to buy in, and they didn't. And so at one point, they had asked for an extension. They paid us $2 million for that extension. And when the time arrived, they still didn't have the capital available. So we pulled the deal, and we ended our discussions with them.

Our last question is from Anthony Powell.

Just a follow-up on acquisitions. A majority of the REIT deals in recent years have been focused on resorts, and you have exposure with LaPlaya. In addition, you've had some success with Skamania Lodge in recent years. Would you increase your exposure to resorts and experiential hotels over the time relative to your kind of core urban business transient properties?

I mean, we're -- well, it's not a strategy to increase the percentage, but we're open. We don't have any negative bias, per se, in terms of weightings within our portfolio of urban versus resort. And -- but there's -- resorts are tricky. They're harder in general. They're more complicated. There's -- the grounds are usually bigger. There's a lot going on at those properties. You're sort of what we like to think of as 3-legged demand is typically a 2-legged demand. So you have a little less diversification of your demand base. You tend to be -- you tend to have a lot of group, and you tend to have a lot of leisure. You tend to have little to no corporate transient, unless it's a resort property in or very near an urban market. So at times like this, resorts can do better because they're heavily dependent on leisure, often 50% or 60% or 70% of a hotel, and leisure's doing great when corporate transient travel's been soft. But that goes in the other direction for -- often, for better part of the cycle. So you just have to be careful. They're more complicated. There's more risks. We think you need higher returns because of the higher risk. The capital costs tend to be higher. And then frankly, in general, we think customers are moving away from the more traditional resorts of -- that have golf courses and traditional spas, and they're frankly, moving more towards adventure resorts or active resorts depending upon how you want to define them. So when we look at resorts, we want to be able to be consistent with that trend and have that flexibility to move with what we think is a secular trend from a consumer perspective.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Jon for closing remarks.

Thank you, Cherry, and thank you all for participating. We look forward to our update in just 2 more months. And hopefully, there'll be some good news that comes out of the trend side. Thanks. Take care. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.