RLJ Lodging Trust (RLJ) 2013 Q3 法說會逐字稿

Greetings and welcome to the RLJ Lodging Trust third-quarter 2013 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Hilda Delgado, Director of Finance for RLJ Lodging Trust. Thank you Ms. Delgado, you may begin.

Thank you, operator, and welcome to RLJ Lodging Trust third-quarter earnings call. On today's call Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. Leslie Hale, Treasurer and Chief Financial Officer, will discuss the Company's financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that can cause the Company's actual results to differ materially from what has been communicated. Factors that may impact the results of the Company can be found in the Company's 10-Q and other reports filed with the SEC. The Company undertakes no obligation to update forward-looking statements.

Also, as we discuss certain non-GAAP measures it may be helpful to review the reconciliation to GAAP located in our press release last night.

I will now turn the call over to Tom.

Thank you, Hilda. Good morning, everyone, and welcome to our third-quarter 2013 earnings call.

We are pleased to report that our third quarter's solid RevPAR performance of 5.4% continues to add to our positive track record. Excluding prior-year one-time events, our RevPAR grew by 6.4%. Our consistent performance since going public highlights the quality of our geographically diverse portfolio, our focused service, and compact full-service hotels.

We are very pleased by our RevPAR expansion in light of the heightened uncertainty in the market and tough year-over-year comparables.

In addition to reporting another positive quarter of solid performance, I'm also pleased to report that we made significant strides on our balance sheet. This quarter we completed a comprehensive refinancing that staggered our debt maturities and will yield meaningful interest expense savings.

In executing this transaction we completed yet another significant milestone towards our goal of achieving an investment-grade rating. Maintaining a highly flexible and liquid balance sheet is a top priority, especially during these times of market and geopolitical uncertainty.

We are closely monitoring the possible impact of both general macro and lodging trends to our outlook. We are currently cautiously optimistic about the long-term macro outlook given several key metrics. Business confidence continued to increase through September, and although there was a modest pullback in consumer confidence in the third quarter, trends remained positive as unemployment continues to improve.

Interest rate volatility and the political uncertainty we expect that interest rates are likely to remain near current levels for now as the government's bond tapering program has been delayed. Looking out a bit further, GDP growth is projected to improve in 2014 and we expect that lodging fundamentals will remain positive. We anticipate that increased personal spending, consumer confidence, and continued strength in international travel should allow us to achieve greater pricing power.

For the third quarter Smith Travel reported US RevPAR growth of 5.5%. Specifically for the upscale and upper midscale segments, which are most representative of our portfolio, Smith Travel reported 5.3% increase and a 4.2% increase, respectively. Using Marriott's limited service hotels as an additional benchmark, RevPAR grew 4.9%. Our performance was once again in line or exceeded most of these metrics.

We are pleased with the overall performance of our portfolio. We achieved broad RevPAR grains across the portfolio and continued to increase market share. We generated a solid RevPAR growth of 5.4% this quarter, despite tough comparables caused by several one-time events from last year such as the Republican National Convention in Tampa. Adjusting for these events, our RevPAR grew this quarter by 6.4%.

As I move to our top markets I will begin with Houston, which once again was our top performer for the quarter. RevPAR grew 19.1%, primarily through a 16.1% increase in rate. Our RevPAR growth for our hotels exceeded the market by almost 300 basis points.

The oil and gas sector continues to lead the city's growth and this quarter our hotels benefited from strong corporate demand and compression from strong convention center activity.

In Austin, we also saw double-digit RevPAR growth. During the quarter our hotels posted a 12% RevPAR growth and also exceeded the market. Our hotels saw a strong pickup in corporate and leisure demand. We expect our Austin hotels will be one of our strongest performers again in the fourth quarter.

We expect to see leisure demand drive growth in the upcoming quarter from events such as Formula One and Austin City Limits. We remain bullish on Austin's corporate demand growth. Visa and Apple have both recently broken down on their new centers and British Airways has announced that it will begin new direct flights to and from London, which we anticipate will increase Austin's attractiveness to international companies.

In Denver, our hotels generated RevPAR growth of 8.9%. This was a nice pickup from our prior two quarters. In July we saw strong leisure demand from a large regional sporting event and in September our hotels benefited from recovery efforts after the floods and long-term road repair -- all of which helped offset some softness in government-related demand. We expect that the fourth quarter will maintain this momentum and our hotels continue to benefit from extended stay business by FEMA and EPA.

In New York, our hotels delivered RevPAR growth of 6.9%, exceeding the market's growth by almost 200 basis points. We saw an improvement in this year's turnout for the United Nations General Assembly and we saw a pickup once again in international travel with the UK, Canada, and Brazil leading the growth over prior year. New York remains a dynamic market with consistent growing demand and high profile events, including the upcoming Super Bowl game in 2014.

While there are concerns over the supply picture, demand is strong and we remain confident of the market's long-term fundamentals, and particularly in the quality and location of our hotels.

In Chicago, we saw a modest RevPAR growth of 2.4%. Last year our Chicago market had the highest RevPAR growth among our top six markets. In 2012 we benefited from strong convention activity, the Ryder Cup, and two large refinery projects. As expected, those two large refinery projects wrapped up this quarter and tapered demand for some of our hotels.

We expect that these tougher comps will impact our fourth quarter. However, looking further ahead, we are pleased to see the City of Chicago focusing their efforts on driving greater tourism to the city. Having opened 10 international tourism offices in the last 20 months, we believe that this increased tourism, as well as improvements in corporate demand, will lead to long-term, healthy market fundamentals.

Lastly, we move on to Washington DC. As we had expected, third quarter was challenging for the DC market. Soft transient demand and lack of citywide compression resulted in a difficult quarter for DC. In addition, sequestration and the volatility around the possibility of a government shutdown had a significant impact on government and government-related demand.

In sum, we saw RevPAR decline by 9.1%, driven all by occupancy. This decline also reflects tough year-over-year comps from a one-time true-up of [Marriott] redemptions at our Fairfield Inn in DC in 2012. Excluding the redemption from last year, our DC hotels would have only declined by 4.9%, in line with the market.

Our fourth quarter for DC was certainly impacted by the government shutdown and sequestration continues to impact demand in the market. So as we move through the end of the year we expect it to be another challenging quarter for DC.

In terms of margin, our portfolio maintained a solid EBITDA margin of 34.5%. While this represents a 17 basis point decline from the prior year, positive gains are offset by a 37 basis point impact from the new ground lease that we executed at our Waikiki property and 14 basis points from increases in property taxes, specifically in Chicago. We believe that long-term we have runway to continue to expand our margins further with ongoing rate growth and the execution of our cost control best practices.

Now moving on to acquisitions. Since our last call, we added two hotels in markets with strong market fundamentals. We added the Residence Inn Atlanta and Midtown and the Springhill Suites in Portland.

We acquired the Residence Inn through a foreclosure sale. We initially purchased a mortgage loan in 2009 for $5 million that was collateralized by the hotel. After the borrower defaulted on the loan earlier this year, we initiated the foreclosure process.

The addition of this hotel is a great example of our ability to underwrite opportunistic transactions. The 78-room hotel is located in an area known for its urban, high-density office, commercial, and residential setting.

We closed the hotel shortly after we acquired it to undergo a comprehensive renovation, which includes the possibility of adding 12 additional keys. We plan to reopen it late in the second half of 2014. Our total investment, including budgeted CapEx of approximately $4 million, will represent a forward capitalization rate of 12% based on the hotel's projected 2015 net operating income.

Since closing the quarter we acquired the 106-room Springhill Suites in Portland and increased our exposure to the West Coast. We acquired the hotel for $24 million, which represents a forward capitalization rate of 10% based on the hotel's projected 2014 net operating income.

The hotel is located in Portland Hillsboro submarket. The hotel is less than a mile from one of Intel's research campuses that is undergoing a multibillion-dollar expansion. And aside from the prevalence of high tech firms, Portland also has a strong base of education and healthcare companies that are expanding in the market and providing a steady flow of demand for our hotel.

Year-to-date through September the Portland market has exhibited strong double-digit RevPAR growth of 11%. We expect that the hotel is positioned for strong growth as it capitalizes on these positive market fundamentals.

Since the beginning of the year we have closed on seven hotels for approximately $210 million of acquisitions, all of which are in markets with compelling demand drivers and growth profiles. We continue to achieve growth through a combination of opportunistic renovations and high-quality acquisitions.

We currently have a pipeline of approximately $150 million of hotels under contract or letter of intent. These hotels are located in various markets that exhibit market fundamentals consistent with all of our acquisitions. Included in our pipeline is the Hilton Cabana in Miami. Construction of this hotel remains on target and we look forward to adding this great new asset to our portfolio in the fourth quarter or early 2014.

On the disposition front, we are currently marketing 15 non-core hotels for sale as part of our active portfolio management process. We remain disciplined in both our acquisitions and our dispositions, and we will only execute transactions that are accretive to our shareholders. We will provide further updates if and when any transaction closes.

While there has been more economic uncertainty in the second half of this year than we had originally anticipated, our portfolio continues to post solid performance. We believe our refreshed and upgraded portfolio is well positioned to continue to outperform.

Last year in the fourth quarter we had more than 10% in RevPAR growth and more than 160 basis points in margin growth. We benefited from several one-time events, including business from Superstorm Sandy, a strong convention quarter in Chicago, and presidential election events in Denver. Additionally, last year Austin benefited from the introduction of Formula One, which drove RevPAR growth for that market up 30% last year.

Since the beginning of the year we knew we would face tough comps and, therefore, had expected that the fourth quarter would step down from the third quarter. However, the impact of sequestration and the government shutdown have further impacted the quarter. As such, we expect fourth-quarter RevPAR and margins to step down slightly more than originally anticipated.

Strong growth from several of our top markets all year enabled us to post impressive industry-leading RevPAR growth year-to-date of 8.2% and gain market share. As we look at the fourth quarter and the impact of the government shutdown and sequestration to the portfolio, we are tightening the range of our RevPAR guidance to 6.5% to 7.5% and maintaining our hotel EBITDA and margin expectations.

I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter.

Thanks, Tom. Before reporting on our third-quarter financial results I would like to remind listeners that the pro forma message that Tom shared earlier referred to 145 hotels as if we had owned them for the entire comparable period. These figures exclude any hotels that were transferred this quarter, our conversion hotels, and two non-comparable hotels.

Now, looking at our results for the third quarter, our consolidated hotel EBITDA increased $4.3 million to $86.5 million, representing a 5.2% increase over the same period in 2012. For the quarter, our adjusted EBITDA increased $9.1 million to $80.8 million, representing a 12.7% increase over the same period last year.

Adjusted FFO increased $14.5 million to $65.1 million, representing a 28.7% increase. For the quarter, adjusted FFO equates to $0.53 on a per share basis. Both adjusted EBITDA and adjusted FFO reflect addbacks to normalize our operating expenses.

Adjustments worth noting in third quarter include $1 million in accelerated deferred financing fees that were associative with our recent refinancing, a $4.8 million gain associated with the acquisition of the Residence Inn Atlanta via foreclosure sale, and a $3.3 million gain associated with the transfer of the Courtyard Goshen. For further adjustments, we recommend reviewing the exhibits in last night's press release for a full reconciliation of both metrics.

Now turning to our balance sheet and capital market's activities. During the quarter, we completed a comprehensive $565 million refinancing. We are very pleased with the overall execution of this transaction.

This refinancing accomplished a number of goals for us, including further staggering our maturities, reducing our interest expense, and significantly increasing our unencumbered asset pool. Finally, this refinancing was yet another significant step towards achieving our long-term goal of becoming investment grade.

The refinancing consisted of multiple parts. First, we completed a new $350 million five-year unsecured term loan. Secondly, we exercised the accordion feature on our existing seven-year unsecured term loan and drew an additional $100 million. And, lastly, we completed a $150 million secure debt financing structured as three first mortgage loans.

In aggregate, the term loans were oversubscribed and, therefore, allowed us to upsize the overall transaction. The proceeds were used to retire approximately $565 million of higher rated debt across eight loans that were secured by 51 assets. The interest rate on this debt was 6.29% and was replaced with a blended 3.6% interest rate on the new debt.

With the completion of this refinancing, our weighted average cost of debt decreased by almost 100 basis points. And as a result, we expect to realize $10 million of interest expense savings on an annualized basis. I am particularly pleased to report that in aggregate we will have saved more than $40 million in interest expense since going public.

This transaction fortified our balance sheet and further unencumbering a significant number of hotels. We now have a total of 111 unencumbered assets that make up approximately 70% of our portfolio's 2012 hotel EBITDA.

Our ending cash balance of more than $340 million and undrawn credit facility provide us with ample liquidity for our future capital outlays. With an outstanding debt balance of $1.4 billion, net debt to adjusted EBITDA was 3.4 times at quarter end. Our strong cash position, as well as our robust portfolio performance, continues to provide us with the ability to offer shareholders meaningful return via both growth and cash dividends.

In the third quarter we maintain our distribution of $0.205, which equates to $0.82 per share on an annualized basis.

Moving on to capital expenditures, our 2013 capital plan is well underway. The majority of our $45 million capital program that we planned across 25 hotels is taking place now in the fourth quarter in order to minimize any potential disruption at the hotels.

These figures do not include projected capital requirements for hotels that we acquired this year. For those assets, the design and planning has already started but the hard cost will not be incurred until 2014.

Now with respect to our outlook. First, we have tightened our RevPAR guidance to 6.5% to 7.5% and kept our EBITDA margins at 34% to 35%. These metrics exclude non-comparable hotels, which are the New Orleans Indigo Hotel that was closed most of last year for its conversion and the Residence Inn Atlanta hotel which is currently closed for renovation.

Second, our hotel EBITDA guidance of $328 million to $348 million does not include our recent Portland acquisition, but does include approximately $6.3 million of prior ownership results that will be reflected in our operating statistics but will not be included in our corporate EBITDA and FFO.

Lastly, using third quarter as a benchmark, we expect RevPAR results and margins for the fourth quarter to continue to step down given some tougher comps from the prior year and the impact of the government shutdown. Although we expect to see a step down, we believe our portfolio is well positioned to deliver solid year-over-year results for the full year.

Thank you and this concludes our remarks. We will now open the lines for Q&A. Operator?

(Operator Instructions) Jordan Sadler, KeyBanc Capital Markets.

Good morning. It is Austin Wurschmidt here with Jordan. So just wanted to touch a little bit on the dispositions. It sounded like you increased the dispositions to 15 from 10 to 12 previously being marketed.

I was wondering if you could give us some detail on the characteristics of these assets -- average RevPAR or geography, are these suburban hotels, and what chain scale do they fit into?

It is all of the above, Jordan. These are clearly non-core assets; there are 15 of them. They are spread probably across 10 markets, I would say.

These are lower RevPAR growth. In some cases these are assets that are probably a little more capital starved and are assets that clearly don't fit in our long-term plans. So obviously the plan is to recycle out of these lower-growth markets into higher-growth markets, really consistent with what we have talked about.

Obviously our recent refinancing also gives us more flexibility. As Leslie pointed out, we have got 111 assets now that are unencumbered. This first batch is largely unencumbered by management as well, which we think will also give us flexibility with buyers.

So you will see this happen more over the next few quarters. We think it will take a few quarters to recycle this first batch and probably others, but it is a priority and it is something that you will see our pace accelerate with that.

Thanks for the detail there. Then just looking at the balance sheet, it is really in great shape today. You have got, as you mentioned, over $300 million, $340 million of unrestricted cash. What are some of your plans to deploy this cash, and is there a timeframe that you would like to get the cash deployed?

Well, as we have said, one of the key cornerstones of our business model is to make sure that we have a fortress balance sheet, that we have flexibility. We think over the long term the group with the lowest cost of capital wins and believe passionately, as we have stated, that we wanted net debt to EBITDA under 5.

In fact, we are going to lower that target to probably something south of 4 and ultimately get into the low 3 range. We think that that will make a strong case for investment grade, again which will give us additional flexibility as we move forward.

As we look at the $340 million of cash, keep in mind that some of that is earmarked already for the Hilton Cabana deal, approximately $70 million. We have also got some existing conversions that are already in the pipeline that are going to use a portion of that. We also have a very active deal pipeline right now.

I would still say that we are a net buyer. We have got $150 million in deals, including Miami, under letter of intent or contract. We continue to look aggressively for opportunities, but please keep in mind that we are going to maintain our discipline.

We have bought 13 hotels, about $600 million, since going public, but if you look at the year before going public, the reality is that we bought about 36 hotels, about $1.5 billion, over that period of time, which is really on the top end when you compare us vis-a-vis our peers. So you will continue to see us active, but we will be prudent, we will be thoughtful, and we will be disciplined. It will be assets that are compliant with our investment thesis and returns that make sense for us.

That is helpful. And then just one last one. It looked as though -- looking across the flags that the Fairfield underperformed materially. I know you mentioned there were sort of a one-time item there that impacted the third quarter, but really it has underperformed the portfolio year-to-date.

Is there anything going on there and are there any potential opportunities to reflag any of those?

Yes, you are probably referring to the Fairfield Inn in DC. Again, that was an isolated issue where we had some redemptions and a true-up after that conversion that resulted in about $588,000, if memory serves me correctly, so it really sort of distorted the picture.

I would say to you, though, that that Fairfield conversion I think is just a great example, not only of our strategy -- keep in mind that we bought that in December 2010 for $40 million. It was a Red Roof Inn. We spent $7.5 million converting that to a Fairfield Inn; converted it in March 2011.

That hotel has been a fabulous performer for us, and if you look at what we expect the cap rate to be on that in 2013, we expect that to be well north of 12%. So it has been a huge performer and I think also, if you look at the RLJ portfolio, if you look at our Marriott hotels vis-a-vis the brand averages in total, I think year-to-date through third quarter we are up about 207 basis points in RevPAR over the Marriott brand average.

So we have continued to be a strong performer; I think our results show that. I think year-to-date in RevPAR we are up about 8.2%. Anything happening right there with Fairfield is really isolated and really related to those redemptions. So that has been a great investment for us. We believe passionately in that strategy of upscale focused service and we will continue to look opportunistically for conversions as well.

Great. Thanks for taking my questions.

Jeff Donnelly, Wells Fargo.

I got on a little late so I might have missed your remarks on this, where are you guys at with the process of converting, I guess what I'll call the Humble Oil Complex product, that you bought earlier in the year?

We are pretty excited. If you think about Houston for a second, Jeff, again it has been our strongest market. We were up 19.1% in third quarter; 16% of that in rate.

We have got eight hotels in that market. Seven of those eight hotels grew RevPAR by double digits in the third quarter. And if you look at the Humble, as an example, the Courtyard Downtown, RevPAR was up 34.2% in the third quarter. Residence Inn was up 23%. So I would tell you confidently that we are ahead of schedule operationally; very pleased with the results so far.

As it relates to the conversion, as you know, we are converting the apartment building and the plan is to convert the apartment building to a Springhill Suites. We allocated about $18.8 million to that asset. It is about a $17 million renovation, 166 keys, so we expect to be all-in at about 215,000. That should deliver in mid-2015, just given the complexity of that conversion, but it is on schedule at this point.

That is helpful. I guess maybe a bigger question. How are you guys thinking about supply growth in the industry, maybe like I said, on a broader scale and then specifically in your core markets? It does feel like we are seeing maybe a little more, not so much ground-up construction, but conversions from other uses. Is that your sense as you look around or you still feel it is largely in check when you look forward one or two years?

I would say that supply is largely in check. Obviously, there is some isolated -- there are a couple of markets, I think New York is one that everybody sort of talks about.

But if you look at Manhattan for us, as an example, we had a great quarter. We were up 6.9% on a relative basis. I think we beat the market by almost 200 basis points. Our Manhattan hotels ran occupancy of 98.5% and we had several that were up high single digit.

So we have a great portfolio there. We continue to see demand growth. I think there is a lot of international growth there that is providing a nice tailwind, so we feel very good about New York long term. Obviously the supply has to get absorbed.

It is affecting the number of compression days and to some extent it is affecting the psychology of operators. Do they have the confidence to push rate? And really New York is really all about rate.

As you look across other markets, I mean Austin is one everybody talks about. But, again, we were up 30% in fourth quarter of last year, we were up another 12% this third quarter, and I think we are going to have another solid fourth quarter as well.

Obviously there is a lot of supply being talked about. We will have to understand what has kind of been what I would call planning to what is actually under construction, but it is something that we are going to continue to monitor.

I do think in those markets where you have got higher barriers to entry -- clearly the West Coast is a great example of that -- you are seeing less supply growth there. You are seeing and hearing more about the debt markets loosening up a little bit, but still they are really focused on strong sponsorship, big equity checks, and guarantees to go with that.

So I think the industry is still pretty safe through 2015/2016, but I think you and I both know over the long term the supply will get done. And so it is something we will watch, but we don't see it being an issue here in the next couple of years.

You talked earlier -- just in response to another question about uses for your cash. I think I ask you every quarter about consolidation in the industry.

There is a couple of companies out there that have received, I guess I will call them, unsolicited offers recently that would seem to be kind of up your alley. And then there is some other brands out there like La Quinta that are our allegedly coming to market and I think some private REITs that are doing some rollups.

Of all that is out there is there anything that really, I guess I would say, sort of intrigues you guys or fits your strategy? I know some of it, like La Quinta, might not. Or do you really think that the menu of options out there today just doesn't align really well with what you would like to do?

Yes, I don't think La Quinta is a good fit for us. Obviously, it is a brand. We are obviously focused more on the real estate than we are a brand play. I think that could make sense for someone else to bolt it in to another brand company and perhaps then sell off the real estate, but you and I will have that discussion another day.

As it relates to opportunities, we continue to believe passionately that the industry should consolidate. We want to be part of that dialogue, either as a buyer or as a seller. We engage in frequent conversations.

I don't think that there is anything that is actionable today. I think that you are beginning to see a little momentum, but I think that is more likely, in my view, to probably accelerate in mid to late 2014, early 2015. There is some natural combinations, and I think we could all look at four or five that kind of makes sense, but as you know, it really will come down to price, to timing, to working through some of the social issues. But we clearly want to be part of that dialogue.

We are the second- or third-largest REIT depending on how you want to define it today, enterprise value or EBITDA. I think we have done everything we have said we were going to do post-IPO. We are working hard as a team and hopefully continuing to build credibility.

We think scale is important. We have it, but we think getting even larger is a good thing. And having, candidly, fewer hotel REITs, public hotel REITs we think is also a positive thing.

If some of the debt maturities increase in the next few years, some of the CMBS maturities accelerate, we think that there will be more sellers that will start looking at do they want to run through another cycle? Do they want to monetize now? There is some funds also that are getting a little long in the tooth, so we will continue to evaluate and monitor carefully.

In the interim, you will see us do single assets, small portfolios, but we are willing, ready, and able to talk about something of a larger transaction.

Great, thanks.

Wes Golladay, RBC Capital Markets.

Good morning, everyone. Looking at your acquisition pipeline, do you have any conversions embedded in that?

I would say right now, Wes, leaning -- obviously Miami is a conversion. Someone else is taking that risk where they take out and obviously we have been working alongside that seller/developer for some time on it. I would say the others are existing assets, but we do look opportunistically at conversions.

We have had a lot of success with it, as you know. In fact, the last four conversions, if you look third quarter, out of the seven, they were up 10%. So we are still getting a tailwind. We are still getting lift; not only on the top line, but we are also seeing margin growth as well. So we think that is a way to really distinguish ourselves.

We have got a core competency there. I don't think you will see us do more than 20%, 25% of our deals are conversions. Obviously current income is an important part being a REIT, but we will look opportunistically for conversions that make sense and where we can generate outsized returns.

Okay. Then looking at your RevPAR growth, it seems that you are getting about 2% pick up on occupancy the last few quarters. When do you see that switching over to a heavily ADR-driven RevPAR growth? I know it is already now, but like where occupancy is sub 1% you are just really driving the rate.

I think, obviously, a loaded question and one that we -- Howard Isaacson and his team on our asset management side are pushing rate every day. We ran high occupancies, high 70%s last quarter. Again looking -- the last several quarters we have been 65%, 67% rate growth. So I think, candidly, we have been outperforming many of our peers there.

We will continue to push. I think the reality is that as you see the economic, the GDP picture pickup, and if we can accelerate and move it from 2% to 2.5% or 3% and you can see the employment picture pickup, I think that will serve as a real tailwind for pushing rate.

Okay. Then looking at your Texas markets, Tom, those have been exceptionally strong with double-digit RevPAR growth this year. How do you see those markets playing out next year?

Austin just continues to hum along. When you look at a market -- and I know everybody is -- some are fearful of it, but as we look at it it has got a wonderful storyline. You have got a state capital, a university town that is becoming a tech hub. Even last year, fourth quarter of last year we were up 30% and I still think we will be probably up high single digits this year. So it continues to be a strong performer.

You don't have -- the legislature meets every other year. That historically has accounted for about 180 basis points, so we have that benefit this year. We won't have it next year, so you will see a slight pullback as it relates to that market.

Houston is another. We look at job growth in Houston and Austin. Most of the recovery, about 40% of the jobs, have come out of Texas and the two strongest markets, obviously, have been Houston and Austin. So Houston is one that -- as I mentioned, we were up 19% and seven of the eight hotels were up double digit.

I don't think -- they have had a great convention year. Next year will not be as strong. I think it is down about 160,000 room nights right now, but again that pace will change. And I think in the year, for the year I expect that they will continue to grow.

So we are optimistic what we are seeing on the energy corridor there and we will continue to look for opportunities. Again, opportunities that make sense and fit our investment criteria.

Okay, that is it for me. Thanks for taking my questions.

Steven Kent, Goldman Sachs.

Good morning. This is Anto Savarirajan for Steven Kent. The acquisition pipeline, ex the Hilton Cabana, of approximately $80 million; can you give broad color on its composition? In dollar terms is that a few major properties or a collection of small to midsized assets?

I would say that the strike zone would be more in the $25 million to $40 million range. Obviously, Cabana is $71 million; I believe is the acquisition price. So these would probably be slightly smaller, but again assets that are compliant with strategy and markets that -- top 30 markets, more of a coastal bias.

And, no secret, we continue, like most of our peers, to look for more and more opportunities on the West Coast where we think there are currently higher barriers to entry and there is going to be a lot more growth here in the near term.

Okay. Understand you're not sharing expectations for 2014, but given the growth one can see for the Company for different metrics -- FFO, EBITDA next year, the dividend coverage to AFFO -- they all look very healthy. How are you and the Board thinking about dividends in the outer quarters?

The first thing, we think dividends are obviously an important part of just being a REIT and an important component of return of capital for shareholders. So, as Leslie said, we are going to pay out at least $0.82. Again we will look at where we need to be from a REIT distribution standpoint in fourth quarter and we will discuss that with our Board.

If you look since going public, we have paid out about $1.70 in dividends so far. We will continue -- historically we have set it at about 55% of AFFO. I think that is reasonable.

The beauty -- and I am not sure that we get enough credit for this. I think the beauty of our business model is that not only are we generating significant cash -- and that is cash that is covering not only renovations and any out-of-pocket, which inevitably happens with renovations -- and also a strong dividend, but we are also generated significant free cash flow that allows us to use part of that to not only fuel additional growth in the business, other acquisitions, etc.

A perfect example of that is (technical difficulty) have been public now almost three years and we've only done one follow on given the kind of growth that we have. So we are very confident in the business model and the strategy, and I think we are proving that out that we are very prudent capital allocators.

Thank you.

(Operator Instructions) Lukas Hartwich, Green Street Advisors.

Thank you. Tom, can you remind us how much of your business is from a leisure demand? And can you talk about that segment of the market versus business travel?

I would say, Lucas, probably 80%, 85% of our business is transient; the balance being group. I would say the vast majority of the transient is coming on business.

We do benefit, given the diversely of our portfolio and being in urban environments and given our product type, clearly having a lot of leisure and weekends and sports groups and family outings. I think that is a real benefit of the strategy, but the vast majority is still really corporate centric. Put a number on it I would say it is probably in the 60% to 75% range being more corporate than it is leisure on the transient side.

That is helpful. Then I am just curious; across the limited service spectrum, do you have a preference for investing in select service or extended stay, or are you kind of indifferent? Just curious on that.

That is a great question, Lukas. It really depends on the market, the opportunity, what other brands exist, the market dynamics, where is the demand coming from.

We love urban, dense suburban markets, and we use the phrase three legs of a stool. We are looking for strong corporate, strong convention market, and obviously those markets that also have a leisure component. New York or Chicago come to mind. New Orleans obviously having a very strong leisure component, as well as a nice balancing.

And depending on the mix there is some opportunities or some markets that are underrepresented with extended stay, where it makes sense. And there are others that -- as we think about family of brands, obviously big believers in Marriott and Hilton and a growing affection for Hyatt and what they are doing. Obviously, all three are strategically strong fits for us.

Great, thanks very much.

Anthony Powell, Barclays.

Good morning. On the transaction market, have you seen more competition for assets in the urban-focused service segments and how do you expect that to play out going forward?

Yes, I think the secret of urban limited service is out for sure. I remind listeners and investors and analysts all the time that we were a very early adopter. We were buying these assets 10, 11, 12 years ago and have believed in them then. Believe even more today.

I also think you have seen sort of a secular shift with the consumer. I think we are very comfortable with the price value, with the efficiency of the box, the fact you are getting Wi-Fi free. You have got a nice morning daypart. So clearly it is a very compelling business model.

Yes, there is more competition I think that we have had. We have had great success over the years in finding many of our deals off market or limited bid, and so we are confident that we will get more than our fair share.

In terms of pricing, in some gateway cities and some well-marketed assets clearly it can get a bit frothy. We tend to not participate in those types of auctions, but we are very confident that we will get more than our fair share of the appropriate deals.

A follow-up on the West Coast that has been very strong across the industry, a lot of it due to limited supply. Do you see any changes in regulation helping supply growth increase on the West Coast? And if so, what is the timeline for that? Thank you.

Having been in this business a long time, the death knell is always too much supply. I just think given the density on the West Coast and the regulatory environment and the length of time it takes to get things done, I think there are just natural positions there that if you have got well-located assets and almost a fortress position that you are going to be reasonably well insulated.

Things will get done, but I think in the incremental time that it will take it won't be measured in weeks or months, but in years. And in some cases maybe even decades.

We like the metrics. We like the investment profile of the West Coast, but reality is so do most of our peers and a lot of other capital sources as well. So we will look opportunistic. We will not deviate from our underwriting criteria.

We have demonstrated that we have been able to find them. The deal that we have in San Francisco, the conversion, is an example of that. The deal we just did in Portland is another example. Very optimistic on both of them.

Again, I speak to our core competency being able to find both limited bid, one-off market, and then again a conversion opportunity where you can take something up brand and bull's-eye real estate. So we are really excited about our Vantaggio Suites conversion to a courtyard on Post Street in downtown San Francisco.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for any concluding comments.

Thank all of you. We appreciate the opportunity to discuss our third-quarter results. We look forward to talking with you again in February and also giving more guidance at that time in 2014. Wish everybody a happy holiday season; talk with you soon. Talk to you soon, bye-bye.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.