Raymond Martz - CFO Jon Bortz - Chairman and CEO.

Rich Hightower - Evercore ISI Anthony Powell - Barclays Michael Bellisario - Robert W. Baird Stephen Grambling - Goldman Sachs Jeff Donnelly - Wells Fargo Bill Crow - Raymond James Wes Golladay - RBC Capital Markets Lukas Hartwich - Green Street Advisors.

Greetings and welcome to the Pebblebrook Hotel Trust First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. You may be again..

Thank you, Donna, and good morning, everyone. Welcome to our first quarter 2018 earnings call 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 Federal Securities Laws.

These statements are subject to numerous risk and uncertainties 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, April 27, 2018 and we undertake no duty to update them later.

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

So, you saw from our updated Q1 outlook that we issued two weeks ago, the beginning of 2018 particularly the second half of February and March, we're much stronger than we expected as business travelers appear to be getting back on the road again.

Same-Property RevPAR declined 0.2% which was significant better than our original outlook of down 1.5% to 2.5%. Our RevPAR decline was driven by 0.8% reduction in occupancy which was probably offset by 0.7% increase in ADR.

As a reminder, we indicated in our last call that we believe the first quarter would be our most challenging quarter primarily due to the challenging year-over-year convention activity and markets like San Francisco, San Diego, Seattle and Washington D.C.

Our best performing hotels in the quarter not surprisingly were hotels that were under renovation in last year's first quarter including Hotel Zoe Fisherman's Wharf, Revere Hotel Boston Common, and Palomar Los Angeles Beverly Hills.

Jon will speak in more detail later in his remarks, but these three hotels are ramping up and improving market share quite nicely and we're very encouraged by their performance so far this year.

The grand hotel in Minneapolis also had a strong quarter primarily due to the benefits of the Super Bowl in February and our strategy to pre-sell the entire hotel to one event promoter for four days at a very high rate. Sofitel Philadelphia also had a very strong quarter as we in the market benefited from the Eagles’ march to the Super Bowl.

But more importantly, our property in the Philadelphia market were able to take advantage of a significant increase in business travel both group and transient and particularly short-term pickup. This allowed us and the market to drive rate.

ADR in Philadelphia's CBD grew by 9.6% in Q1 as business travel replaced lower rated winter convention business. Our underperforming hotels whereas expected, Hotel Madera Portland and Embassy Suite San Diego Bay Downtown both of which experience significant displacement from renovation work during the quarter.

Hotel Monaco Washington DC was very challenging as expected due to the difficult year-over-year comparison from the inauguration of Women’s March in the prior year quarter, a week matching calendar and CBD supply growth of 4.2%. RevPAR in Washington CBD declined 18.4% from last year.

We underperformed at the Monaco due to our outperformance in Q1 last year and the negative impact of the IHG Kimpton system integration. Overall for the quarter, transient revenue which makes up about 75% of our total portfolio room's revenues increased 0.9% compared to the prior year. Transient ADR increased 0.7% for the quarter.

We experienced an increase in short-term business transient pickup throughout the quarter, which is broadly based across most of our markets. The uptick in short-term business activity such as in-the-week for the week or in-the-month for the month is something we haven't really seen since 2014.

Group revenues fell 4.2% in the quarter as room nights declined 3.2% and ADR was down 1.1%. This was largely due to weak convention calendars in the cities I mentioned earlier, as well as the inauguration of Women's March in Washington, D.C. in the prior first year quarter.

Because of these dynamics, monthly RevPAR for our portfolio declined 0.8% in January and 2.8% in February, which was the toughest month in San Francisco. But we experienced a 2.6% increase in March, which is well above our outlook.

As a reminder, our Q1 RevPAR and hotel EBITDA results are same the property for our ownership period and include all the hotels we own as of March 31. Our hotel has generated $55.6 million of same property hotel EBITDA for the quarter which is $4.1 million above the top end of our original outlook and $5.6 million above the midpoint.

This is due to stronger business travel demand that led to better room revenue as well as higher than forecasted food and beverage and other revenues.

In addition to the increased group spending at our hotels, we are also reaping the benefits from the increase in performance of our newly reconcepted and redeveloped bar and event focused food and beverage spaces such as Outlier and Monaco in Seattle, Double Take and Palomar in Beverly Hills, The Mantle bar and game room at Hotel Zeppelin in San Francisco, and Dirty Habit at the Monaco in Washington D.C.

We expect to see continued improvements in F&B revenues following the completion of additional reconcepting this quarter. Same-property hotel EBITDA margins increased 2 basis points which was above the top end of our outlook of 150 to 200-basis-point decline.

Total revenue increased 1.9% with all the revenue increased in food and beverage and other revenues and yet we are able to grow EBITDA by 2% which is encouraging.

Overall operating expenses increased just 1.9% though we received some benefit from lower real estate tax assessments which declined 6.4% versus prior year improving same-property EBITDA margins by 38 basis points in the quarter.

We continue to manage through wage and benefit pressures across our portfolio to keep expenses in check through finding efficiencies and making investments that improve performance. The hotel EBITDA percentage growth leaders in the first quarter were Hotel Zoe Fisherman’s Wharf, Hotel Palomar Los Angeles, Grand Hotel Minneapolis, and Skamania Lodge.

Moving down the income statement, adjusted EBITDA was $59.3 million which was $9.2 million above the upper end of our Q1 outlook range. This was a result of the same property hotel EBITDA of 4.1 million combined with $2.8 million of G&A expense savings compared to our outlook.

These savings in G&A are largely related to lower incentive compensation expenses as well as the timing of preopening and legal fees. So, $1 million of the G&A expenses that were saved in Q1 are now savings for the year and are expected to be incurred in the second quarter.

We also recognized $3.4 million of net business interruption income from our 2017 business interruption claim at LaPlaya Beach Resort in Maple. This was in line with our expectations and was included in our Q1 outlook. We also realized $2.4 million of dividend income from the common shares we invested in LaSalle during the quarter.

This was not in our prior Q1 outlook nor was this reflected in our 2018 outlook. Our new outlook for 2018 now includes dividend income from our LaSalle shares at the reduced dividend payout level for the rest of the year along with the accompanying interest costs on the debt use to acquire the shares.

Adjusted FFO was $46.2 million or $0.67 per share which exceeded the upper end of our original outlook range by $0.12 cents per share. This resulted from the hotel EBITDA and adjusted EBITDA bps but was partly offset by increased interest expenses associated with the LaSalle shares that we purchased by drawing on our unsecured credit facility.

At quarter end, our debt to EBITDA ratio excluding the income and increase debt associated with the strategic purchase of the LaSalle common shares was at 3.6 times and our fixed charge ratio was at 3.9 times.

And with that update, I would like to now turn the call around Jon to provide more insight on the quarter as well as our outlook for the second quarter in the remainder of 2018.

Jon?.

Thanks Ray. 2018 has started out very well for the industry and for Pebblebrook. We finally begun to see healthy signs of improvements in business travel. Last quarter, we talked about some early signs of business travel improving.

And since our call in mid-February, we've seen those early indications broaden out for most of our markets and to a majority of our properties.

Given that continuing strength of the economy, the passage of the new federal tax bill and significant projected increases for corporate profits in 2018, it shouldn't come as a surprise that corporate travel is improving. It's only a surprise because everyone would have expected it to have happened much sooner.

So, what specifically have we been seeing either at our hotels or in the industry numbers? As it relates to demand at our hotels, we've seen an increase in short-term group bookings which Ray mentioned we really haven't seen for a number of years. And we've been seeing a pickup in corporate transient business on a short-term basis.

And when I say short term for both group and transient, we're talking about pick up in the week for the week or in the month for the month. In Q1, for example, in just 60 days, we went from being down over 10,000 group rooms for the quarter at the end of January to finishing down only 4,000 rooms for the first quarter.

In addition, we've also started to see an increase in group bookings a little further out, but still in the year for the year. Our group pace for the year improved meaningfully from the end of January when we last reported to the end of March.

Over that two-month period, we went from being down 12,000 group rooms for the year to being up almost 3,000 room nights or down $1.6 million at the end of January to up $2.5 million at the end of March. This short-term business is primarily corporate and we view the improvement as very encouraging.

We've also been seeing better attendance from groups, both in-house and with many convention related groups and less attrition and fewer now shows. Seems that businesses are sending more people to their meetings and allowing more of their employees to go to conventions and conferences. Maybe it's the same for your businesses.

More companies have told us or our operators that their travel restrictions have been lessened or in some cases eliminated completely. Again, these are great signs and we're encouraged that what we've seen so far with business travel is likely to continue.

Perhaps not a solid trend just yet, but if we see them continue through the heavy business travel months of this quarter then I suspect we then feel comfortable going on the record that they represent real trends.

Finally, at our hotels, we continue to see groups spend more per group customer than last year either improving the quality of their meals or breaks or adding additional meals, breaks, cocktail hours or other events. This was a trend we identified last quarter and it has definitely continued so far this year.

When we look at the industry data we see corroborating evidence of improving business travel trends. I know that many folks following our industry tend to focus on the Upper Upscale Smith Travel data as an indicator for many of the public REITs.

But to see how business travel is doing, we tend to focus on the midweek data as a better proxy for business travel. And what that data shows is that weekday occupancies have risen strongly in every month this year and obviously then for the entire first quarter while weekend occupancies are roughly flat.

This suggests that business demand has accelerated from last year when weekend demand growth outpaced weekday demand growth. We believe leisure demand growth has remained healthy. Industry RevPAR in the first quarter grow better than expected 3.5%.

While the growth is down from last year's fourth quarter, the first quarter benefited to a lesser degree than Q4 from the aftermath of the hurricanes and Q1 was arguably negatively impacted by the Easter Passover holiday shift which is improving April in Q2 this year as well as from the inauguration and Women's March which we believe had a positive 30 basis point impact on the industry last year.

And the 3.5%compares favorably to last year's 3% RevPAR growth. Even more encouraging and we believe representative of the benefits of improved business travel is that industry ADR grew a healthy 2.5% in the quarter.

It's worth noting that 2.5% ADR growth is the best quarterly rate performance since the first quarter of 2017 when ADR also increased by 2.5% though that quarter did benefit from Easter's movement out of March and into mid-April.

If we’re to look at this even more completely, in Q1, industry weekday RevPAR increased by a strong 3.9% while weekend RevPAR grew 2.2%. This compares to the full year 2017 when weekday RevPAR increased by 3% while weekend RevPAR grew a slightly better 3.2%. As Ray said earlier, our first quarter performance was a lot better than our expectations.

This was primarily a result of the improvement in business travel that we've described and the acceleration and broadening of those signs in late February and throughout March. Many of our properties in markets performed better in Q1 than we expected.

Better performing markets included West L.A., San Francisco, and San Diego on the West Coast; and Philadelphia, Buckhead, South Florida, and Boston on the East Coast. And Boston was better even with the three nor'easters that hit three weeks in a row in March.

Even more encouraging in our portfolio was that there really were no markets that performed worse than we expected. I'd like to move on to an update of the performance of our recently redeveloped hotels. We're very pleased with the way our three transformative redevelopments from 2017 are performing so far this year.

In the first quarter EBITDA on a combined basis from Palomar Beverly Hills, Revere Boston Common and Zoe Fisherman's Wharf grew by $2.8 million. Last quarter we were forecasting that these three properties would increase by $5.2 million of EBITDA in 2018. We now expect the increase to be $6.5 million.

In addition, the four properties we transformed in 2016 Hotel Zeppelin San Francisco, Hotel Colonnade Coral Gables, Union Station Nashville and Monaco DC gained just over $7 million in 2017.

In 2018, we indicated these four properties should add another $1 million as they head towards a total of over $10 million of additional EBITDA stabilization following our $78 million dollar investment in their redevelopments.

In the first quarter of this year, they did very well with the exception of Monaco DC which was negatively impacted by the comparison to last year's first quarter which included the inauguration in Women's March. The three other properties increase EBITDA in Q1 by over $600,000 while Monaco DC saw a decline of just over $900,000.

In total, the four properties continue to be on track this year to add the $1 million of EBITDA we discussed last quarter. Now, I want to provide a brief update on LaPlaya. As we mentioned last quarter at the end of January, we completed the renovation of the last rooms that were knocked out of service by hurricane Irma in September of last year.

The hotel looks terrific following its renovation and you certainly wouldn't know it was ever hit by a hurricane. Unfortunately, due to the damage from the hurricane, we have significant go backs and repairs and replacements that are scheduled to be completed between early May and the end of September.

We have scheduled this work through the slower months of the year in order to mitigate the loss and business interruption claim. This work will negatively impact the property’s performance and, we believe, all of this work, along with a loss EBITDA, is covered by our insurance.

While we've included the negative impact in our EBITDA outlook for the year, we've not included any estimate for the collection of a loss income in our outlook as we don't know if this part of the claim will be settled this year. We expect 2019 to be a terrific year for LaPlaya following the renovation of the hotel and hurricane repair work.

So, let's turn to a discussion of our outlook for the full year and the second quarter of 2018. Overall, we continue to believe industry RevPAR is likely to grow between 1% and 3% for the year. Though as of today, we've leaned towards the top of that range.

We've not yet adjusted our outlook for improved business travel other than the first quarter is better than expected performance. We will adjust after Q2 if we see the current positive signs continue and turn into positive trends.

We continue to expect urban RevPAR to underperform the industry and do so by as much as 200 basis points versus the overall industry in 2018.

If business travel continues to improve, we would expect this underperformance by the urban markets to narrow and maybe narrow significantly as business travel positively impact the urban markets more so than the industry overall.

This forecast also doesn't anticipate any improvement in international inbound travel which would have a very positive impact on the urban markets if the trends turned positive.

For Pebblebrook, while we're very pleased we handily beat our RevPAR outlook for Q1, we're not yet prepared to increase the top of the range for the year but we're bringing up the bottom of the range by 50 basis points. Please keep in mind that Q1 represents well less than a quarter of the year's room revenues and EBITDA.

Our revised RevPAR outlook for 2018 is now flat to plus 1.5%. We're increasing our hotel EBITDA range by $4.1 million at the top of the range which is the full beat in Q1 and by $5.6 million at the bottom of the range.

As it relates to adjusted EBITDA, we're increasing the bottom of our outlook range by $13.5 million and the top of the range is going up by $12 million. Adjusted FFO per share increases by $0.08 at the top of the range and $0.10 at the bottom of the range.

For the second quarter, our outlook for RevPAR growth is a positive 1% to 3% as San Francisco has a stronger convention calendar and an easy comparison to last year when two of the three convention buildings were closed for renovation.

The third quarter for San Francisco, however, should be even stronger on a year-over-year basis than the second quarter. Philadelphia, Portland, and Boston have more challenging convention calendars in the second quarter while Washington D.C. has its only favorable calendar comparison in Q2.

Finally, I'd like to make a few comments about our offer to combine our company with LaSalle Hotel properties. Following a dinner I had in early March with LaSalle’s CEO to discuss the topic, we made a formal proposal to combine the two companies including offering a substantial premium to LaSalle shareholders.

The premium at the time of that offer was 18%. With the increased exchange ratio of our final offer and the very positive response of our stock to our merger proposal, the premium was 33% at the time of our final offer.

It's clear to us and to all of the investors we've spoken to that the logic of the combination of these two companies is likely the most obvious combination in the history of REITs. Our overall strategies are very similar.

Our focused markets have huge overlap, the quality of the hotels are similar, and we partner with most of the same operators and brands. We believe the many benefits are clear to our shareholders and LaSalle shareholders many of whom are the same and we've clearly laid out those benefits in our letters to LaSalle’s board over the last seven weeks.

So we don't feel it's necessary to repeat them here. Nevertheless, we do want to reiterate that we believe the benefits are truly compelling. Not only are two companies extremely similar but we know the portfolio incredibly well.

22 of LaSalle hotels were acquired under my leadership and at Pebblebrook we either bid on or extensively reviewed and underwrote another 13 of the company's hotels prior to LaSalle’s purchase of them. Outside of the team at LaSalle, no one has better knowledge of this portfolio than we do.

Putting these properties in our hands will allow us to bring to bear our particular expertise in renovating and redeveloping the hotels and restaurants to provide the customer a more unique experience which, as we've repeatedly proven over 20 years, can deliver higher revenues and more profit to the bottom line.

We believe this increase to EBITDA could be as much as $3,000 to $5,000 per room over the long term as compared to the more than $6,000 per key differential between our outlook for 2018, for our portfolio and LaSalle’s outlook for this year for their portfolio.

While there would be significant investment in the portfolio to achieve these potential results, we've demonstrated a consistent ability to earn double-digit EBITDA yields on the investments we've made in our portfolio.

Through our many discussions with our shareholders and LaSalle’s shareholders over the last four weeks, we've heard nothing but strong support for the merger of our companies. The research community has also been in strong support of the combination.

We've offered one of the highest premiums ever paid for a REIT in the history of completed REIT mergers. Our offer is also higher than LaSalle’s stock has traded at since mid-2015. When optimism about RevPAR growth for the industry was high, their dividend was doubled today dividend and long before LaSalle’s most recent outlook for 2018.

All of the other lodging REITs also traded at much higher prices in early 2015. In fact, Pebblebrook's stock traded in the high 40s in early 2015. In addition, it's worth pointing out that our proposal is also a significant premium to LaSalle's consensus NAV and consensus target prices.

In addition to the very large price premium, we've offered a significant cash component as well in response to LaSalle's Board indicating in their March 28 rejection letter that the mix of consideration was a reason for their rejection of our initial offer.

We believe that the index and ETF shareholders who own roughly 40% of LaSalle would want or need stock and that the additional 30% of LaSalle own by shareholders who also own Pebblebrook would want to continue to own the combined company. Of course, we own just shy of 5% of LaSalle and would also elect shares.

So, that means that any remaining shareholders could likely get almost 100% in cash if they should so choose with our final merger offer. Earlier this week, we disclosed our final offer that we sent to LaSalle's Board last Friday, April 20.

We're confident that the LaSalle's Board will consider this highly attractive offer expeditiously and in a fair manner and also recognize that it maximizes value for their shareholders. If LaSalle's Board chooses not to do anything or they choose a lower bid, it would be troubling. On the other hand, if we lose to a higher bidder, then so be it.

We will have exercised our fiduciary duty to our shareholders to pursue opportunities that would create value for our shareholders. But our success has always been based on remaining disciplined and we will continue that successful practice by remaining disciplined with this opportunity.

We have a great company with a strong and consistent track record of performance in a terrific position to continue to outperform with a team that is committed to that goal.

With a better than expected first quarter behind us, we're increasingly optimistic about the potential for the continued improvement in travel including business travel and the benefits that will accrue to our performance should that come to pass. We're positioned well for the rest of this year and for 2019.

We now will be happy to answer your questions. Please keep in mind due to instructions from our legal counsel, there is nothing more we can say about our proposed merger. Operator, Donna, you may proceed with Q&A..

[Operator Instructions] Our first question is coming from Rich Hightower of Evercore ISI. Please go ahead..

Unfortunately I can't ask any questions on my favorite topic nowadays. So, I'll go straight to guidance. So, a lot more bullish commentary in the prepared remarks.

One of our questions is maybe why not even, at this point in the year, given the forward outlook and the pacing you talked about and some of the business that's on the books, why not reach the high end of the RevPAR range at this point?.

Well, if you look at the last few years, that wasn't a very good decision if folks did that.

And so, given the volatility of the market, given the volatility of our administration, some of the geopolitical risk, the increasing interest rate environment that we're in, we just think it's prudent, at this point, to wait and let's see how the really strong business travel months do in April and particularly May in the first half of June, and then we'll see how it turns out.

And, again, we think these trends are likely to continue. I think we've probably made that pretty clear. And if they do, then there'll be an opportunity to do that..

And then, in terms of the redevelopments that you highlighted and, I think, you've done a good job of highlighting those every quarter for the last several quarters, can you tell us where you're trending on an EBITDA ROI basis for what's been spent over the last couple of years? I know you guys have put detail in the investor presentations.

And, I think, I recall something around a 20% unlevered return on - expected return on some of that spend.

Would you say that you're ahead of that at this point?.

I'm not sure we've put out anything that said 20% unlevered return. But I would tell you that of the projects that we've done over. Well, really I would say by and large over the last nine years or eight years, we've generally gotten to stabilized double=digit EBITDA yields.

It's always hard to differentiate particularly in the first half of the cycle Rich when markets were going up in a healthy way to differentiate between the benefit of the market and the benefit of our - of the redevelopment and transformation.

But I think it's been a lot easier in the last few years because the markets that we're in have been much flatter overall.

And so I guess we would we'd direct you back to our investor presentation in page 18 that's in there right now to take a look at sort of what our first year incremental yields have been and what the third year yields have been or are forecasted to be..

And then one last quick question here. It sounds like at least as far as the top line goes trends are moving in the right direction. As we think about operating expenses and I know you talked a little bit about labor expense and real estate taxes.

Are there any cost categories where trends are going the other way that you're a little worried about this year or that we should be concerned about?.

Well there's nothing going the other way compared to what our outlook was. So clearly we've talked at length about the increases in labor cost that we're seeing and benefits that go along with that. And that's already built into our outlook. We certainly expect when we renew our insurance policy to see a significant increase.

Again it's a relatively small portion of our expense base but also again built into our outlook.

We continue to see some increases in distribution costs even with lowered OTA because of the changing mix within the portfolio and hopefully we're nearing the end of that mix change particularly with the recovery in business travel which tends to be more direct book with our hotels.

And then, we are beginning to see some reductions in some of the brand costs particularly some that Marriott has mentioned whether it's OTA costs or group commissions or credit card processing costs and things - loyalty programs, things like that..

Our next question is coming from Anthony Powell of Barclays. Please go ahead..

I think I can’t ask this but I'll go for it. Your offer for LaSalle is in mid-5% cap range.

Does that imply that you would be willing to do other deals with that valuation in size or this is a special situation given your knowledge of the assets in the markets?.

It doesn't imply anything about additional acquisitions..

So what's your appetite to do additional or alternative deals at this part of the cycle given your updated views on business travel right now?.

Well, I’d say the first thing is that we're kind of focused on one opportunity right now and we're not focused on individual asset opportunities at this moment. We'll see how it plays out and then we'll relook at individual property opportunities also depending upon where our stock price is..

And what's your updated valuation - what's your update estimate of your NAV per share?.

No change to our NAV this quarter, Anthony..

I think in the past, you've expressed a preference for West Coast markets. In the past couple of quarters your East Coast RevPAR has been pretty good.

Has that changed your overall views of some of the markets that you’re in?.

Yes, it hasn't changed our views. I mean, markets all ebb and flow. When our bias was really that we underwrote and what we've ultimately gotten was better returns at what we believed was lower risk with the West Coast acquisitions that we were successful at. And so, we're not adverse to buying on the East Coast.

We continue to have many of those markets be focused markets and it really depends upon the pricing for those assets and our perception of upside and risks. So, we'll continue to focus on primarily the same coastal cities that we have focused on in the past..

Our next question is coming from Michael Bellisario, Robert W. Baird. Please go ahead..

Just on the business demand comments you made.

Can you maybe dig a little bit further into the particular sectors or types of companies that you're seeing the most uplift in demand or at least pricing uptake in the quarter?.

I think the last quarter we've talked about it being it was spottier and in places like Coral Gables it was a lot of the international corporations. In San Francisco and in Boston, it was taxed. And I think what we've seen is a broadening out of the industries and the types of companies that seem to be more active in travel.

We've seen more from the financial services industry. We've seen some fairly significant increases in consulting in the financial services sector, the consultant.

So whether it's Ian White or Deloitte with our consulting work or IBM or PWC or Boston Consulting or other groups that are doing these mega projects that are lengthy projects you might say those are driven by in effect in a lot of cases technology upgrades and systems upgrades.

But it's certainly the people who are staying with us come out of the financial services industries. So, we've definitely been seeing that. We've seen pickup from banks as well. Again, it's a lot more broad-based than what we saw just six or eight weeks ago..

And just to clarify that business transient and group or is there a different categorization for what you're seeing in the group side too?.

It’s business transient and group. So corporate group and that's - a lot of that I would say the vast majority of that short-term group that we talked about in the call that's corporate group..

Our next question is coming from Stephen Grambling of Goldman Sachs. Please go ahead..

Two quick follow-ups. I guess first on Anthony's question on capital allocation.

Are any of the ROI projects that you'd be evaluating have they been impacted at all or delayed or anything like that from - amidst the proposal for LaSalle?.

No. That doesn't impact any of our existing business or any of those projects..

And then I'm not sure what kind of a handle you have on this, but what reports out suggesting private equity has been looking at LaSalle too.

Are you finding or hearing about more competition for one-off deals or even getting inbounds for your own assets?.

I mean, we do continue to get I would say we've probably had an increase in inbound calls from private equity groups. I would say that those are generally smaller groups, more in many cases with small funds or focused on more individual property efforts. In some cases, they're owner operators who are sponsoring the fund.

And I would say on as we follow the transaction market from both sides, I would say for our kinds of assets meaning good quality assets, high quality assets in major institutional cities, there's fairly robust demand on the buy side and relatively a limited supply offerings.

So, it's probably gone back to being a seller's market and that's probably aided by continuing healthy debt markets even with base rates going up. In many cases, spreads have narrowed offsetting that to some extent..

And then, one last one, if I can sneak it in.

Given your strength in kind of non-room categories and also, the strength you're seeing in transient, I guess how should we think through the EBITDA and EBITDA margin contribution from, let's call it, a corporate transient versus leisure transient versus corporate group versus leisure group at this point? Thanks..

Well, generally, I would say, when we think about rate, it's generally going to be better for the travelers to be business travelers. I mean, we do have some lower rated corporate accounts and et cetera.

But most of what we're seeing on a short-term basis, as an example, is going to be a better rated transient business and it's coming from that corporate side or the business travel side.

Generally, rate is going to flow somewhere - additional rate is going to flow somewhere in the, I would say, 65% to 75% range to the bottom line, depending upon whether a property is branded or not. It would be more at the upper end of that range if it's one of our independent properties.

It’s going to be at the lower end of that range if it’s going to be one of our branded properties. With group, it sort of depends what market it’s in, if it’s in a lower cost market, where our F&B margins are close to probably 50%. Departmentally and probably better than that on a marginal basis in markets like Atlanta or San Diego as an example.

Then group customers ultimately going to bring more profit per key to the bottom line than what a transient customer is likely to do even if the transient customer is utilizing the restaurant as an example because we'll make a lot more profit departmentally and then to the bottom line on that group customer.

And when we see the pickups that we're seeing on the group's side, I mean, we've been seeing double-digit increase in groups spend per group customer over the last quarter. And that would suggest to us certainly the health of the business travel.

But again, in many cases and I think Q1 is a good example that when the business comes in short term, it's generally going to be more profitable than if it comes in longer term just because the marginal expenses, the additional staffing is probably not going to happen because it was unplanned..

And margin percentages are important but alternates about margin per customer and EBITDA per key which is what we're most focused on..

I guess one very, very quick follow up and just be, is the food - the changes that you made to the food in non-room offering. Is that resonating any differently between your business and leisure or are you seeing a difference in trends between midweek and weekend? Thanks..

Actually, the changes we've made appeals to both but in different ways. So, the change in the environment that we create the high style, the high design, the energy of our spaces may be bar with food orientation, the use of outdoor patios that in many cases courtyards and things that were never used previously in the properties that we've purchased.

That has a very strong appeal to leisure but then because of the way we create flexibility in these spaces and the ability to use portions of those spaces for entertaining events, business events in particular, and the ability to charge room rental, just like we would in a meeting space is driving much higher profit per square foot in those previous restaurant spaces.

So there's significant investment in them. The restaurant we just completed in Boston as an example was $4.5 million. The restaurant that we just - the Dirty Habit that we just completed I guess about a year and a half ago now in D.C.

where we also dramatically expanded the outdoor courtyard and the quality of the experience there and increased the size of the restaurant and basically redid it completely.

Now it's $7 million investment but we've increased our profit by over $2 million a year much of which is coming from the event side and the ability to charge room rental in addition to food and beverage minimums..

Our next question is coming from Jeff Donnelly of Wells Fargo. Please go ahead..

If I can go back just to the urban national RevPAR outlook that you, I think you were saying there's a 200 basis point discount between urban international markets and that it could diminish.

With the industry operating at what's probably a 30-year peak in occupancy, it just strikes me that any marginal demand coming from corporate transient could present like a very quick tipping point if you will in RevPAR. Should these trends persist? You didn't increase that urban market outlook. I assume that's to maintain a more cautious stance.

Are there specific factors that you're seeing that lead you to be cautious or is that really just sort of past history and knowing that the industry is volatile that keeps you maybe a little cautious?.

Jeff it's really the latter and that's why I mentioned let's see a couple more months and then we'll have a lot more information particularly from heavy business travel months when we're gauging the most important part of those month, i.e., business travel.

So the one thing I would point out in and some analysis that we did is when you look at the industry data versus urban in the first quarter you might think it's actually worse than the 200 basis points, right. I think the difference was 3.5% versus 0.9% for urban. But if you take Washington, D.C.

CBD out of both the industry for that calculation, so the industry goes up from 3.5% to 3.8% I think. And but urban goes up from 0.9% to 1.6% or 1.7%. So the gap narrows to about 1.7% versus what the quarter is showing.

Now look there's clearly it's just one way to look at sort of the rest of the world and see what the trends are because DC tends to be driven by different factors than some of the other markets obviously particularly dominated by government.

But I do think it’s an early indication of the improvement in business travel that we've already seen in the first quarter and which is showing up in the statistics. But you have to look at it a little more analytically than just looking at the base numbers..

And maybe sticking on that point, are there data points you see? I know the time frame is relatively short that might lead you to believe that while corporate demand might be increasing there's some resistance on price.

I know that rebuilding price even coming out of a traditional downturn can be challenging and I think particularly upper upscale has been one of I’ll call it relatively weaker categories the last one or two years.

Just wondering if you think that while demand is changing, are you seeing any resistance in the ability to push through price increases to the corporate demand that’s coming at the increment?.

I mean, I think I would answer it a little - if I could answer it a little different way. I would tell you what we are seeing which is we have seen more pricing go through and show up because of mix change. And remember we don't even have to raise prices in order for ADR to go up.

We just need - we need to change the mix where we're picking up customers at higher rates and we're eliminating customers at lower rates. Most of our beat in Q1 was in ADR. And I think Ray gave some statistics for Philadelphia as an example where ADR was up more than 9%.

Those are pretty strong numbers and we are seeing some incremental ADR pick up and push through of higher rates as a result of this last minute demand that we've been seeing in most of our markets..

Have you changed the messaging to your managers? I mean, I'm sure that some of this is contemplated when you're doing your budgets.

But just as we've seen when the industry comes out of a more traditional downturn, sometimes there's a little bit of a wakeup call that people deliver to managers to sort of convince them to become a little more aggressive. Have you guys thought about altering your budgets for managers? I'm just curious if you changed your messaging there..

So, we wouldn’t change the budgets. Those are done and signed off on and agreed to by the parties. But as the environment changes, we do change the messaging and depending upon the market and that time period.

I would say we have changed the messaging at the property level and that messaging has more to do with in some cases being patient and waiting for that last minute demand to come in and not lowering pricing in order to drive the demand.

And I think it's also to get more aggressive with pricing in terms of raising prices a little further out where we're more focused on where we think we're going to have compression with short-term pickup. So, we're beginning to anticipate that short-term pickup in the strategies and tactics that we're using at the property level..

And just one last question that maybe you could talk about the tenure or the dispositions market. I know, you haven't been active in the last few weeks. But what sort of proceeds I guess is really what I'm going after.

What sort of proceeds are available from the debt capital markets and where the pressure points on maximizing financing on an individual asset? Is it dollars per key? Is it a debt yield? Just want to kind of hear what you think is appropriate for assets such as yours..

A lot of it depends on the market if you're going to major urban markets, Jeff, you'll get better terms. It's only more debt capital out there than if you start going to the suburban markets or outside the top five to seven urban areas.

We continue to see a very robust floating CMBS market which really - actually a good acquisition capital or allow the existing owners to stay in. So, continue to be press there with interest rates going up a little bit. We’re likely to see reaction some compression spreads or proceeds continue to get pushed.

So on a one-off basis you could certainly get to that 70%, 75% level on a floating rate basis in CMBS. But they need to be in the right market. You can probably get that in New York. You're not going to get that in Albuquerque as an example. So that continue to be very good, healthy there and which is aiding the disposition market.

So, as Jon alluded to earlier which is why we think it's more of a seller's market right now..

Next question is coming from Bill Crow of Raymond James. Please go ahead..

Jon you mentioned that if you see an increase in inbound international travel that would kind of push it over the edge and really accelerate things. Yesterday on their call Hilton mentioned a 9% increase in the first quarter and inbound international travel. And I'm not sure where they're getting the data. It tends to be lagged.

But are you seeing anything from the international front?.

I guess I would point you back to the brands and say we typically we - the data at the property level is not reliable to begin to look at I mean we could look for anecdotal evidence. We frankly haven't done that. It’s hasn't been the primary focus right now. But I would say the brands would have at least somewhat more reliable data.

The problem is what we end up with at the property level can be first of all is it's absolutely in complete. A lot of the data that comes through the OTA side you don't get addresses. So you don't know where they're from. And then, on individual reservations, if you use a travel agent in the U.S.

the address is likely to be the travel agents’ address and so your data system is going to be picking up the wrong information. So, we typically rely on the commerce data which unfortunately they've rescinded at this point. And we're going to need to look for other pieces of data. We've certainly heard what Hilton said.

We've heard maybe not quite as bullish from some of the airlines where they've said they've seen some increase in international travel. And I think again you always need to be careful between you know Americans coming home and non-U.S. citizens coming to the U.S. for business or leisure.

So, we've historically tended only to be able to rely on the commerce data which evidently wasn't reliable..

I think it was last quarter the topic of the Kimpton/IHG merger and Starwood/Marriott mergers as negative factors on your portfolio emerged. Has there been progress on those fronts. Do you feel better going forward or is it still kind of a mess..

Well it's much better. I mean, I think we've made a lot of progress. I think IHG/Kimpton has made a lot of progress in resolving the issues and replacing much of the business through other channels versus what was lost.

I don't think it's solved and we're still seeing impact into the second quarter here which is longer than we thought it would be but it is lower at this point than - much lower than what it was in the first quarter. But we're still not happy about that.

And then as it relates to Marriott, we have the systems integration for the three Starwood legacy issues that are Starwood-managed or now Marriott-managed legacy properties which we believe being the fourth quarter we don't have exact dates yet. Marriott is extremely well organized and communicative with their systems changes.

And but what we've experienced over the last four months is the negative impact from the sales and marketing reorganization where basically all the positions were eliminated at the property level and new positions were created that people had to apply for.

So, I think we're getting close to having all those positions filled and getting people back to focusing on our properties. But two of our three properties affected by that have lost significant share. And you can see it in particularly the group sales but also the BT sales.

So, we look forward to what we hope is a better organizational structure that will lead to better performance. But clearly we've only seen the negative side of that so far..

I got one more quickie. I was looking through your capital spending plan for this year the investment plan. You’re going to do the SkyBar at the Mondrian. I want to say you did that one once before..

Correct..

And if that's - if that's correct, I mean, it points out some of the challenges of kind of trying to keep a trendy - place trendy, right? I mean, and got some new supply in West L.A. I'm just curious.

Were the returns there the first time around or?.

So, I mean, let me explain. I mean, we say that - we included that in the description because everybody knows SkyBar. It's pretty legendary. It's been around a long time. So, you know it. It's a hut. And so when we say renovation, we're just going in and redoing the soft goods that are in there.

I mean, we'll probably spend $100,000 or $125,000 or $150,000 in total which is what we spent last time to renovate SkyBar. We're not doing anything with the structure or the building or the pool or the deck or any anything else there.

So, I mean, that does I think somewhere between $6 million and $7 million a year in revenues and pretty healthy profit because it's almost all bar business..

It's about wear and tear too of customer..

There is a lot of wear and tear on the soft goods. So, but I think in general, I mean, if you go into a dirty habit which we did three or four years ago, I mean, the bulk of the money has gone into the structure and the heavy finishes that are not touched by the customer.

And then yes, when it gets heavy use, we'll redo tables and chairs and cushions and things like that which we've actually already done in San Francisco on the patio which as you know gets heavy use..

[Operator Instructions] Our next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead..

I'm just looking at this ability to mix. Can you give us some context of how much the short-term business travel means for a hotel and then how it compares, call it versus 2014 and 2015 kind of get the mix..

We have any of that data handy, Wes, I mean we could talk to you off line about that. But again, we’re continuing to talk about - these things are at the margin.

So I mean if we talk about business travel coming back and overall demand in the industry goes up by I don't know, let's say, it's strong and demand goes up 100 basis points for the industry and it's all in the business travel side, I mean, for us business travel group and transient probably represents, I don't know - I mean business overall represents 65% of our customer base.

Corporate of that business is probably 50%, 50% in total. So you could see a couple of percent increase in demand from the business side that translates back into 100 basis points in overall demand increase.

But again the increase can be a little more powerful if it gets momentum because it impacts pricing as well and often more so than what impacts it might have on occupancy..

It allows you to makeshift out the lower rated leisure customers, discount customer..

I guess, that’s what I'm trying to get at. I think you will have a meaningful difference between called an OTA and the special business - the high rated corporate, and then obviously with the supply in the markets, you've probably had a down mix over the last few years and now you have the potential of mix.

Maybe a different way to look at this as well, what's the, I guess, customer acquisition cost versus the OTAs and the business travelers? Is the 1,000-basis-point delta too aggressive?.

No. That's probably in the ballpark..

And then lastly, what do you think, if you had a ballpark wide range, what do you think the high rated business travel will increase this year?.

I have no idea. I mean, we're kind of playing it monthly. And like we said, let's see how we get through Q2, and then when we get to our call next quarter, Wes, maybe we can have some more of the - some more substantive data for you on that issue..

Our next question is coming from Lukas Hartwich of Green Street Advisors. Please go ahead..

I just have a quick one. The leverage is in the mid-4s today, and I was just hoping you could provide an update on the philosophy in regards to the balance sheet and leverage, et cetera..

So, the objective at this point in the cycle is to run the business below 4. And if you look at what it is without the LaSalle investment which is obviously liquid, highly liquid, our debt to EBITDA is in the 3.6 times. So, again, I know Green Street, for whatever reason views preferred as debt and we don't.

So, our focus is, I mean, it's preferred equity. So, we look at fixed charge coverage which we think takes into account the costs of that preferred since there's no maturity on that preferred.

And our fixed charge coverage today is in the upper 3s when again excluding the LaSalle investment and the debt related to it and the interest costs related to it. So, we feel pretty comfortable where we are. And if anything we probably have some room to be a little bit more levered at this point in time than just in the mid-3s..

And, Lukas, the leverage through making an acquisition is different than leverage through these marketable securities that you could get in and out of in a month. It takes longer to sell a property..

Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for any additional or closing comments..

Well, thank you all for participating. We hope we'll have something to update you on long before the end of the next quarter and we look forward to doing that. Thanks very much. Bye-bye..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day..