RLJ Lodging Trust (RLJ) 2016 Q4 法說會逐字稿

Welcome to the RLJ Lodging Trust fourth-quarter 2016 earnings call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Hilda Delgado, Treasurer and Corporate Vice President of Finance. Please go ahead.

Thank you, operator Welcome to RLJ's fourth-quarter and year-end earnings call. On today's call, Ross Bierkan, the Company's President and Chief Executive Officer, will discuss key highlights for the quarter and the year. Leslie Hale, the Company's Chief Operating Officer and Chief Financial Officer, will discuss the Company's financial and operational results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may 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-K 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 reconciliations to GAAP located in our press release from last night. I will now turn the call over to Ross.

Thank you, Hilda. Good morning, everyone, and welcome to our 2016 fourth-quarter and full-year earnings call. As we reflect on the various macroeconomic and lodging issues that persisted through 2016, we are pleased that we were able to generate positive RevPAR growth of 1.1% for the full year. Our ability to do so is a testament to the overall quality and broad diversification of our portfolio.

Our strong foundation is centered on three guiding principles -- first, to insist on operational excellence; second, to allocate capital prudently; and finally, to always be proactive managers of our balance sheet.

In 2016, we continued to execute on these principles in a thoughtful and disciplined way. First, we successfully grew RevPAR and EBITDA despite multiple headwinds affecting both the industry and select markets.

Second, we took advantage of the strong interest from international investors looking to acquire real estate in New York by opportunistically selling to hotels at a very attractive valuation. Separately, we sold two non-core assets as part of our continuing effort to recycle capital and optimize our portfolio quality.

Finally, we refinanced over $1 billion of debt leading to one of the strongest balance sheets among publicly traded lodging REITs. These efforts led to our ability to continue to generate significant cash flow and to create value for shareholders. As such, we distributed over $178 million to our shareholders in the form of dividends and share repurchases.

Life to date, we have returned $930 million of capital to shareholders, over 85% of all capital raised since our IPO. Looking forward, we are encouraged by the optimism surrounding possible improvement in economic growth, which would benefit corporate demand. We are hopeful that high consumer confidence bolstered by strong job creation, increasing wages, and a healthy housing market will continue to support consumer spending.

Several of the new administration proposals regarding tax cuts and reduced regulation are encouraging. However, we remain cautious on how that might benefit our 2017 results given the viability of certain policies, as well as the uncertainty of their timing and execution.

Furthermore, it's still unclear to what extent a strong dollar, changing visa rules, increasing political tensions, and inflationary pressure could have on corporate profits and lodging demand.

As we look at lodging fundamentals, we ended the year with demand surpassing supply for the seventh consecutive year despite a pullback in corporate travel. We expect demand to increase in 2017; however, we also anticipate that supply will outpace demand in a number of markets.

Nationwide, supply has been accelerating and is expected to reach its long-term historical average this year. While we expect new supply will lead to a slight decline in occupancy, we expect ADR to remain positive. Accordingly, we believe that industry RevPAR is poised to have an eighth consecutive year of growth, albeit modest.

On the operations side, during the fourth quarter, we were pleased to see our RevPAR strengthen following a weak October, which was impacted by an unfavorable holiday shift and Hurricane Matthew. Despite these headwinds, our portfolio once again increased marketshare, representing five consecutive quarters of RevPAR index growth.

For the year, as I mentioned, we were very pleased that our portfolio achieved RevPAR growth of 1.1% in light of moderating demand and softness in certain markets. In aggregate, eight of our markets met or exceeded the industry's RevPAR, including some of our non-top markets such as Atlanta, Indianapolis, Tampa and San Antonio, which achieved RevPAR growth of 8.3%, 6.2%, 5.9%, and 3.9% respectively. Our top market this year was northern California. RevPAR grew 4.4% for the quarter and 9.8% for the year.

During the quarter, we outperformed the overall market by almost 400 basis points. Our hotels are well-located across the region, allowing us to benefit from broad economic growth and robust corporate demand being driven by the technology sector.

Looking ahead, we expect the ramp of our new Courtyard Union Square and our diversified exposure in the region to lead us to outperform the overall market and help offset the reduced compression expected in San Francisco this year as a result of the Moscone renovation.

Our southern California market was our second top performer for the full year. RevPAR increased 8.8% during the quarter and a robust 8.0% for the year. During the quarter, our hotels also outperformed the market, which continue to benefit from strong corporate growth in technology and the arts and entertainment industries. We have also seen a positive lift from the large renovation completed earlier in 2016. Looking ahead, we expect these positive trends in this market to continue.

In Washington DC, our hotels achieved outstanding RevPAR growth of 12.4% for the quarter to close out the year at 6.3%. Once again, our hotels significantly outperformed the market this quarter. In this case, by 450 basis points. In addition to the lift from our higher placed DC and our recently renovated hotels, we also benefited from robust demand from leisure, corporate, group and extended-stay business. In 2017, we expect DC to be one of our top markets as the region should benefit from a strong convention calendar and an increase in corporate demand that a change in administration typically creates.

The year is already off to a great start. Our hotels have benefited from the recent inauguration activities, generating RevPAR growth of over 56% in January. In Chicago, our hotels grew RevPAR by 4.3% in the quarter, partially offsetting the soft first half of 2016, ending the full year with a RevPAR decline of 3.3%.

During the quarter, our hotels benefited from a better citywide calendar and also from strong corporate demand being driven by project business that we booked. As a result, our hotels outperformed the market by 100 basis points.

Looking forward, the citywide calendar in 2017 is meaningfully stronger than last year, which is expected to drive positive RevPAR growth at our hotels.

In Denver, our hotel has generated 2.6% RevPAR growth for the quarter and achieved growth of 3.2% for the year. Throughout the year, our hotels benefited from strong corporate demand, citywide compression, and the rampup from recently renovated hotels. As we look ahead, we expect positive growth, albeit modest, as the citywide calendar in 2017 is expected to create less compression than in 2016.

In south Florida, our broad diversification in the region allowed us to outperform the market by 550 basis points during the quarter. Our RevPAR was down 2.2% during the fourth quarter and flat for the year.

The market, as well as some of our hotels, have faced multiple headwinds, including decreased international travel, new supply and Zika virus concerns. Starting in the fourth quarter, the closure of the Miami Beach Convention Center reduced compression further. Looking ahead, we expect some of these headwinds to continue into 2017.

That said, we expect that our south Florida exposure outside the greater Miami market will continue to provide diversity that will benefit our portfolio.

In Louisville, our RevPAR during the quarter continued to be heavily impacted by the closure of the convention center, leading to a full-year decline of 0.6%. Given that the renovations at the convention center will be ongoing through 2017, we expect Louisville will be one of our softer markets during the year, but should rebound in 2018.

Accordingly, we are using this time to renovate our Marriott Louisville hotel, which is connected to the convention center, so it will be ready for the highly anticipated reopening next year.

In Austin, our hotels have benefited over the last several years from solid demand growth being driven by the region's expanding technology base and a growing calendar of citywide events such as Formula One, US Grand Prix.

During the quarter, Austin continued to show robust demand growth although the new supply coming online affected occupancy levels. As a result, our RevPAR declined by 1.5% for the year.

Looking ahead, we expect demand will continue to increase given Austin's many drivers and ongoing business and leisure appeal. However, we anticipate RevPAR growth for the MSA will moderate based on some non-repeating events and projected new supply.

In New York, our hotels experienced a RevPAR decline of 2.3% for the year as new supply and a stronger dollar continue to weigh on the market. We continue to believe in the market long term. During the fourth quarter, we were pleased to see a surge in demand generate positive RevPAR growth for the market for the first time in 2016 despite the holiday shift. That said, we still expect New York to experience softness in 2017 because of new supply.

For RLJ, we expect the largest asset in our portfolio, the Doubletree Met, will benefit from the Waldorf's closure given its proximate location and Hilton brand affiliation. With our recent sale, New York is expected to account for less than 4% of our EBITDA this year.

Finally, our Houston hotels outperformed the overall market during the quarter by 330 basis points, but ended the year with a RevPAR decline of 11.9%. Although the Houston market was soft throughout the year, during the quarter, we did benefit from the rampup of several hotels coming off 2016 renovations and the addition of our SpringHill Suites, which entered our comparable set during the fourth quarter.

We expect headwinds from new supply and soft market conditions will remain. However, we were pleased that the Super Bowl has given most of our hotels a strong start to the year. We saw significant RevPAR growth during the peak nights of the event with our preliminary February results showing RevPAR growth of more than 24%.

Now, delivering positive results in a slow growth environment speaks not only to the quality and diversification of our portfolio, but also to our capital allocation strategies. Over the years, we have positioned ourselves for long-term growth by recycling capital from slower growth markets into higher growth markets. In 2016, we continued recycling capital and sold two non-core hotels for approximately $16 million. We also capitalized on the interest from foreign investors looking to acquire in New York and opportunistically sold two hotels for approximately $286 million or $495,000 per key, representing a cap rate of 4.7%.

While we continue to believe in the New York market long term, the attractive pricing coupled with the market's near-term outlook compelled us to monetize these assets. As we look to redeploy the proceeds, we will explore all opportunities available to us to enhance shareholder value, including acquisitions and further strengthening our balance sheet.

As for our outlook, over the years, we have demonstrated the advantages of owning a diversified portfolio backed by a strong and liquid balance sheet with a seasoned and disciplined management team. Our portfolio has best-in-class brands, which command the strongest customer loyalty in the industry.

Our upscale, focused service and lean full-service model continue to generate high-margins and significant free cash flow. All these advantages have led to our success throughout the last six years and will become even more relevant and significant as we move through the cycle.

We expect the industry will have modest RevPAR growth this year. The magnitude of any incremental economic growth could naturally play a role in any additional RevPAR upside, although no clear pattern has emerged as of yet.

With our broad diversification, we are well-positioned to capitalize on any upside in lodging fundamentals. We believe that several of our markets, such as Washington DC and southern California, will perform very well and will help to offset the weaker fundamentals in markets such as New York and Houston.

Finally, while we are cautiously optimistic, we are also conscious of the high level of uncertainty around policies from the new administration and the impact that they may have on travel. As such, our guidance reflects our current view for the year. I would like to turn it over to Leslie for a more detailed review of our financial highlights along with our guidance for 2017. Leslie?

Thanks, Ross. We had expected a softer fourth quarter, particularly given the trends we saw in the third quarter and October's softness, which was heavily impacted by the holiday shift. However, the stronger-than-expected performance in November and December enabled us to generate flat RevPAR growth for the quarter and resulted in our full-year RevPAR slightly exceeding the high end of our revised guidance.

While our business mix is primarily transient in nature, we were pleased to see our strategy to group up produced positive results in the quarter. A meaningful increase in small social groups provided a base of business which helped offset softer transient trends.

Overall, business transient had been weak throughout the year and while that continued to some degree into the fourth quarter, we did see a slight increase in corporate demand, primarily driven by northern and southern California, Denver and Washington DC.

Given the pressures we faced all year, we were pleased that our EBITDA margin for the quarter increased by 10 basis points to 35.2% despite flat RevPAR. The tireless efforts of our asset management and hotel operating teams to control costs resulted in solid margin growth across a number of our markets. These results demonstrate the benefit of the efficient operating model of our hotels and our ability to manage costs effectively throughout the cycle.

Additionally, as I mentioned on our last call, we have been aggressively managing our property taxes and this quarter, we began to see the results from some of our successful appeals. We also yielded additional benefits from some of our other portfolio-wide strategies that we have discussed previously, including reduced energy costs from investments in energy initiatives and reduced insurance premiums.

As a result, our expenses decreased slightly for the quarter despite relatively flat RevPAR growth. For the year, our expenses increased less than 1.5%, allowing our portfolio to achieve a full-year EBITDA margin of 36.3%, which continues to be among the highest of all publicly traded lodging REITs.

Looking our results for 2016, we were pleased to report that our hotel EBITDA increased $16 million or 4.1% to $400 million. Our hotel EBITDA excludes approximately $16 million from the three assets sold in the fourth quarter. During the fourth quarter, our hotel EBITDA increased by $1 million to $91 million.

With respect to our corporate performance our adjusted EBITDA increased by $12 million or 3.2% to $392 million for the year. During the quarter, we realized $89 million of adjusted EBITDA.

Adjusted FFO for the year increased $8 million or 2.5% to $333 million, which equates to $2.67 on a per-share basis, an increase of 6.8%. For the quarter, our adjusted FFO was $74 million or $0.60 on a per-share basis.

Now with respect to our balance sheet, we continue to maintain one of the most conservative and nimble balance sheets among public lodging REITs. With a total of $1.6 billion of debt outstanding, we ended the quarter with a net debt to EBITDA ratio of 3 times and 108 unencumbered assets that account for 82% of our hotel EBITDA.

In 2016, we capitalized on a low interest rate environment to refinance over $1 billion of debt and in doing so, we increased our duration, enhanced our covenants and improved the overall interest rate for our debt.

The majority of our debt is fixed and carries a very attractive average interest rate of 3.3%. Having addressed our near-term maturities, our debt is well-laddered. We are now focused on refinancing our 2019 maturities.

Maintaining ample liquidity continues to be a fundamental principle for us. Our liquidity increased meaningfully in the fourth quarter with the completion of the three dispositions. As a result, our ending cash balance was $457 million. Including our $400 million undrawn credit facility, we have over $850 million of liquidity to opportunistically deploy towards future capital outlays to drive shareholder value.

Our dividend remains a priority; it is a very important component of the total return we seek to provide our shareholders. Currently, our dividend yield is north of 5% and is well-supported by our operating cash flow and liquidity position.

Additionally, we see share repurchases as another form to return capital to our shareholders. Since we initiated our program, we have repurchased 8.7 million shares for $238 million. We will continue to be disciplined with our capital allocation and evaluate share repurchases against other capital deployment opportunities. Given market volatility and lodging trends, we did not repurchase any shares in the fourth quarter.

Finally, in 2016, we successfully completed our planned capital expenditures. We had approximately 30 basis points of RevPAR disruption, which was in line with what we anticipated at the beginning of the year. In 2017, we expect to see a positive benefit from the hotels we renovated.

Additionally, in 2017, we planned to invest between $40 million and $45 million across 12 hotels, including a significant renovation at our Marriott Louisville hotel, which would accelerate to coincide with the closed convention center. Accordingly, we are projecting 30 to 40 basis points of RevPAR disruption for the year.

Now, our guidance reflects the uncertainty in the economic outlook and the trends we are currently seeing in our lodging fundamentals. While we are encouraged by the potential for economic growth to accelerate and the associated benefits to lodging fundamentals, there is a great deal of uncertainty about what will ultimately come to fruition and the timing of any benefits. Therefore, we are not assuming any economic acceleration in our guidance at this time.

First, we expect RevPAR growth of negative 1% to positive 1%. Second, we estimate hotel EBITDA margins of 34.5% to 35.5%. Third, we estimate that our hotel EBITDA will be between $380 million to $400 million. Fourth, we expect our corporate G&A to be within $27.5 million to $28.5 million and finally, I would like to also note that all 122 of our hotels will be comparable this year.

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

(Operator Instructions). Austin Wurschmidt, KeyBanc Capital Markets.

Good morning. Thanks for taking the question. I was curious if you could break down the RevPAR guidance between your top 10 markets versus the other pool.

Good morning, Austin. Thanks. That's a strong question. Hang on just a second.

Happy to follow up, if you'd like, offline.

To save time, why don't we do that? Thank you. Maybe in the meantime, I was wondering if you'd be willing to offer up any detail as to how January and February are trending up and to this point.

January, very well; it came in strong. It was aided by a few different things. Certainly Super Bowl in Houston where we have a high concentration of assets, and inauguration in Washington, DC. But, in general, around the country, January firmed up nicely.

February, not so much and it seems to be taking back much of the gains in January. Now it should be said that those two months are disproportionately light relative to the month of March and we are expecting March to really be the bellwether of how the quarter comes in and the visibility there right now is relatively neutral to our guidance.

And then, Austin, to answer your question about our non-top 10 markets, they are generally going to perform in line with the industry.

Thanks for that, Leslie. Just lastly, I was curious if you could give us a comp on the 34.5% to 35.5% operating margins and then just talk a little bit about some of the expense pressures that you expect in 2017.

Austin, when you say comp, you mean what's 2016?

Yes, correct.

Yes, so we rolled up on an actual basis 36.3%, but if you do it on a comp basis, it's about 36.1%. And then from an expense perspective, just to give you a frame of reference, our expenses in 2016 in aggregate went up about 1.3%. We are looking at about 2%, 2.5% expense growth in 2017 and obviously we are going to continue to be aggressive and our operators are going to continue to look to control costs. We are going to continue to execute on the initiatives that we had outlined on our last call -- staffing initiatives, energy and insurance. But the reality of it is, in a flat RevPAR environment, it is going to be hard to grow, hard to hold margins. That's why at this part of the cycle it's really important from size and scale and given where margins are starting out at at 36%, we feel very good about our overall portfolio.

Having said that, we do recognize that wages are going to have some pressure. Clearly, in a tight labor market, you are going to have -- anything that's incremental to that will be something that is going to put pressure.

Given what's going on from an immigration perspective, we obviously see that may have an impact on wages as well, but it's something that we are monitoring and think that we feel very comfortable with our guidance for 2017.

Then could you just offer up a little bit of detail on what you expect for real estate taxes this year?

For real estate taxes, we are looking at about a 7% to 8% increase. That does not assume any wins on appeals. We don't budget appeal wins.

Great. Thanks for the detail.

Anthony Powell, Barclays.

Good morning, everyone. Just wanted an update on your acquisition strategy or disposition strategy in 2017. You obviously had a lot of liquidity after the sale in New York. We've heard some of your peers yesterday talking about being more aggressive buying hotels. If you could just summarize what you're thinking right now, that would be great.

Thanks, Anthony. We're in the enviable position of having options in front of us. The balance sheet is in great shape. We don't have a 10/31 clock ticking, but we are looking for acquisitions that can or could be accretive, especially considering the sub five cap that we rolled out of New York with. We feel like that EBITDA could be put to work in markets where there's still some running room or in locations that have a reasonable moat in a market or in an asset that has a catalyst either external or internal to the asset where we can add value and growth that EBITDA.

But it's going to be opportunistic. There's not a hard and fast goal or a deadline. But, similar to our peers, we are interested in finding opportunities that work for our portfolio and improve it.

Conversely, it's not a binary decision while we are looking at acquisitions to also consider buying back shares. We will be opportunistic on that front as well.

We did not -- during the window in December after we sold the assets in New York, there was a little bit too much volatility in the market and we chose to wait and this gives us the luxury now as 2017 unfolds to pick our spots.

Great, that's it for me. Thank you.

Wes Golladay, RBC Capital Markets.

Good morning, everyone. Just following up on the question of acquisitions. Are you seeing any developers get into trouble? I imagine some are missing their pro formas and any opportunity to take a value add or just a developmental leaseup on stabilized assets?

Right, right, I appreciate that. Historically, RLJ has definitely included unstabilized opportunities, value add opportunities in our mix of acquisitions in our pipeline. So far, we haven't seen that kind of distress. We've seen a different kind where developers have acquired a piece of dirt. They have teed up a project, they've gotten approval from the brands and then they've gone back to get their hard bids from their contractors and their full commitment letters from their lenders and the goalposts have been moved and the project -- the shovel doesn't go in the ground.

Now RLJ is not about to take on a situation like that, but we have friends in the development community who say that their phones are ringing with distressed developers, so predevelopment, but so far, of projects that are being delivered, there hasn't been much distress to speak of.

We do think that, in some markets where margins are being compressed, and New York might be a good example, that there could be some distress and we are certainly going to stay in touch with the development community around the country because perhaps a year or two from now that could be a better opportunity than it is right now.

Okay, thanks for that. Looking at Louisville, how should that progress throughout the year? We saw the negative 12% in the fourth quarter. Was that impacted at all by the renovation activity and how do you see it playing out throughout the year? Hopefully get some easier comps in the second half.

Yes, we are budgeting to be down about mid-single digits in Louisville. We are accelerating renovations there because there's no better time to do it. We are excited about the market. It is a 688-key asset and it's connected to the convention center, so we are looking forward to the reopening in the summer of 2018.

But, yes, the easier comps will help us and to their credit, the staff there, the operator there has done a good job of booking regional business into the hotel and not relying on the convention center for all of their compression. So they are going to minimize the pain during 2017 and be ready for 2018.

Okay, and then a quick one for Leslie on the margins. You had mentioned roughly around a -- maybe a 110 basis point contraction on a comparable basis. Do you happen to have the impact of the tax abatement, what that will cause for a headwind for this year?

So our margins in 2016 were down 21 basis points. We would've been down 50 less without the benefits of the tax wins this year. (inaudible)

Okay, fantastic. Thank you.

Ryan Meliker, Canaccord Genuity.

Good morning, guys. Thanks for taking my questions. I just had a couple here. I think the first one I wanted to ask about was with regards to southern California. Did you in any of your properties have any favorable impact last year from the Porter Ranch gas leak or was that immaterial to your portfolio?

Ryan, it was immaterial. Out of our five assets in the region, the only one that saw any benefit was our Hilton Garden Inn in Hollywood and that was just a little bit during the first half of the year. So we are not too concerned about overall comp at all.

Great, that's what I thought; I just wanted to make sure. Then if I look at your overall -- the major markets that you operate in, obviously, you gave some good color on the call earlier. Just make sure I understand correctly, obviously, DC is going to accelerate from 2016 to 2017. It sounds like Chicago might accelerate from 2016 to 2017 with the group calendar that's in Chicago. Are there any other markets that you think might be accelerating from 2016 to 2017 versus decelerating? It seemed like pretty much all the other major markets that you highlight might be decelerating.

Right, certainly southern California.

It will accelerate from the plus 8% you guys put up this year?

I'm sorry, not from the plus 8%. I would say then Denver is probably best bet. We're looking at low single digits there, but consistent with what we did last year despite the fact that there's a fair amount of new supply coming into that market, probably about 4.4% if you look at the RLJ tracks, but general corporate strengths and frankly some easy comps in Q1, it was both a very weak citywide last year quarter and we also had a couple of full-service assets under renovation. We think we are going to be able to accelerate slightly from last year.

Okay, so do you feel like Denver, Chicago, and DC and the acceleration you're going to see in those markets are going to offset the deceleration you might see everywhere else to get you to the high end of your guidance range or do you feel like there probably is going to be some I guess loss in terms of year-over-year growth coming from those decelerating markets?

Sure, we're going to have other positive markets as well. So I don't want it to seem like at all it will be negative. It's just whether or not they're going to accelerate by your definition over the prior period.

No, I understand that. I'm not highlighting negative, I'm just trying to figure out -- you guys hit 1% growth this year, which is the high end of your range for 2017 and it just seems like the vast majority of your markets are more likely to decelerate than accelerate in 2017, which maybe that's why your guidance implies a 1 percentage point deceleration. I just wanted to make sure there wasn't anything I was missing going into those markets that might lead you to get to the high end of the ranges. It doesn't sound like it.

Understood. No, I would say it's going to be equilibrium. It's the benefit of a large portfolio that you've got markets picking up for the ones that are going through some new supply indigestion, but I think it's true of the entire industry too. I think if you look at everyone's guidance, everyone is expecting similar things.

The industry average for new supply is often quoted as call it 2.0, 1.9, 2.0, but where most of the REITs own assets, new supply is going to be higher than that. In the RLJ tracks, for example, it will be 3.8% across the portfolio, so markets will be higher, some will be lower and it's just going to be a year for the entire industry of absorbing new supply, which is why I think you are seeing so much cautious guidance.

We are all hopeful that through some of the things the administration is talking about, tax reform, deregulation, that there will be an economic acceleration towards the back end that will boost things, but because of the lack of visibility of that, because of the time it's going to take to implement those things, and because of the lag effect that occurs even after they are put in place, we are not banking on that for 2017 and what we can bank on and what is staring us in the face is that these hotels are going to open and they need to be absorbed in these markets.

As strong as the markets are, in almost every case, demand is not the problem. We just need to absorb the supply. Fortunately, in our portfolio, it's so diverse that we've got the markets that can pull the others up and compensate for them and we've got a lot of conviction that the range that we have outlined is achievable.

That's helpful and good color. And then just one last one on margins. Leslie, you gave some good insights into margins in terms of operating expenses for 2017 versus 2016 earlier, but it looks like -- are you guys being somewhat conservative in terms of your operating expense growth given how low they were this year? Is it that you had some tailwinds this year that you don't expect to have next year at 1.3 versus the 2 to 2.5 that you are guiding to? Or is there something else going on there? Obviously you hit the high end of your guidance range on RevPAR. In 2016, you hit the high end of your 2017 guidance range on RevPAR and margins were only down about 20 basis points on a pro forma basis and at the high end of your range for 2017, you are expecting margins to be down 60 or 70 bps.

So it seems like you are certainly expecting operating expenses to get worse in 2017. Was there a tailwind in 2016 or was it just that you just think you can't necessarily sustain that level of low-cost growth?

Ryan, I think it's really a function of the fact that we have flat RevPAR and when you do that, it just really becomes hard to hold. And when you have your expenses growing at 2.5, while we think there's going to be still some meat on the bone relative to some of the initiatives we're working on, reality of it it's not going to be enough to offset the loss on top line and that's just the reality that we are in right now.

As I said before, our operators are going to continue to work very hard to control expenses and we're going to push very hard. The only thing that's not really sort of baked in that is really any appeal that we may win. We can't budget that. We can't sort of depend on that.

The only other thing is that we obviously do -- we have perfect payroll budgeted as well, meaning that if somebody -- if we had an open position, we assume we're going to fill it. We assume it's filled for the whole year. Maybe it's not filled for -- it may be filled for nine months versus 12 months; there's a little bit of that in there, but that's not going to be enough to really offset the overall expense growth.

Okay, that makes sense. That's it for me. Thanks for all the color. I appreciate it.

(Operator Instructions). Lucas Hartwich, Green Street Advisors.

Thanks. Good morning, guys. In terms of Houston, how much more pain do you think there is in that market before we kind of find the bottom?

Lucas, Houston has been a conundrum, but we do believe that demand may have bottomed there. Unfortunately, Houston has a supply challenge too. In 2016, it was about 5.8% supply growth and in 2017, it's another 5.9%. So including the new Marriott Marquis Hotel that opened in December, the 1000 room hotel down by the convention center -- now, Marriott has been a little bit close to the vest, but anecdotally they've reported that they've booked quite a few groups that considerably exceed their room count, 2500 room needs, 1500 room needs and in January, the property ramped up immediately and earned fair share. Half the groups they are booking have never been to Houston before. So the hotel seems to be doing its job as a headquarter hotel for the convention center, but it still contributes to the overall supply issue that the market needs to absorb.

So we are budgeting down mid-single digits in Houston and certainly the comps have gotten easier, but from what we are seeing in the oil patch, at least, rig counts are up and $60 oil seems to be a level at which they can make money. And from what our operators are telling us, demand seems to be troughing, so now we need to absorb the new supply.

The thing that I would add, Lucas, is if you look at the last eight quarters for us, the first four quarters in terms of the drop in performance was driven by occupancy, which coincides with the comments on demand and the last three quarters have really been focused on -- have really been driven by rate, which suggests a supply point that Ross is pointing out.

That's really helpful. Leslie, just one quick follow-up. The 2019 term loans, what is the earliest you can start thinking about extending those?

We are thinking about it now, Lucas. We are in the mix of doing that. We only waited -- we could've done it last year. We only waited for this year so that we can get an extra year of maturity, but we are actively engaged in discussions around next steps with that debt.

Great, that's it for me. Thank you.

Shaun Kelley, Bank of America.

Good morning, guys. This is actually Dany Asad on for Shaun. Just taking a quick look at your 10 south Florida assets, they were flat RevPAR for the last year and Ross or Leslie, what is in your budgeting for this year in terms of I know there's some renovation going on, but in terms of how are you thinking about that market for this year?

Right, we are budgeting slightly negative and we expect to outperform the market due to our geographical diversity there. We have got of course the Hilton on South Beach, but we also have a couple in Miramar, a couple in Plantation, three assets in West Palm and a pair in Key West. We think that's going to help us relative to certainly the Miami comps.

There is new supply there. Demand subsided last year as a result of everything we know -- the strong dollar and the South American economies and lingering Zika fears and then in the second half of the year, the closure of the convention center. But we still finished the year relatively strong and certainly outperforming the market. We were actually up 30 bps for the year in our south Florida portfolio last year.

So this year again slightly negative, but outperforming the area and hopeful that some of these concerns will subside surrounding Zika. We're looking forward to 2018 when that convention center gets reopened.

Great, that's it. Thank you from me, that's it.

Bill Crow, Raymond James.

Good morning, folks. Ross, continuing with the supply focus this morning, can you just tell us, within your major markets, which markets might see less supply growth in 2018 relative to 2017?

Most of them. 2018 is quite a bit of a relief. Across the country, not necessarily so, but across our portfolio, we are looking at -- it's probably about half of what 2017 is going to be and it varies by market. So if -- call it 3.8 for 2017, about 1.9 in 2018.

Based on what's in the ground right now or being discussed, is that a trend that you would think would carry forward into 2019? In other words, even more markets have hit their peak and are on the downside. Is that fair?

Yes, I would say across the country that that is true, not just in our portfolio, that you can certainly bank on everything that's in the ground obviously, but the attrition rate for developments starting right now and things that we deliver in 2019 has been relatively high, perhaps as high as 50%. So it does appear, it does appear that in most markets 2019 will be quite a bit better than 2018.

That's helpful, thank you. I appreciate it.

Thank you. Mr. Bierkan, there are no further questions at this time. I would like to turn the floor back to you for final remarks.

All right, I want to thank everyone for joining us this morning and we look forward to speaking to you again just a couple months down the road at the end of the first quarter as we provide more details on that quarter and perhaps a little bit more visibility on the rest of the year. We will talk to you then.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.