Pebblebrook Hotel Trust (NYSE:PEB)
Q4 2012 Earnings Call
February 22, 2013 09:00 AM ET
Ray Martz - CFO
Jon Bortz - Chairman and CEO
David Leob - Robert W. Baird and Co.
James Milam - Sandler O'Neill
Wes Golladay - RBC Capital Markets
Rich Hightower - ISI Group
Bill Crow - Raymond James
Good day and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year End 2012 Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to the Chief Financial Officer, Ray Martz. Please go ahead sir.
Thank you Matt. Good morning everyone. Welcome to our fourth quarter 2012 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.
But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk and uncertainties as described in our 10-K for 2012 that we filed last night and our other SEC filings could cause future results to differ materially from those expressed in, or implied by our comments.
The forward looking statements that we make today are effective only as of today, February 22, 2013, and we undertake no duty to update them later. You can find our SEC reports and our earnings release which contains reconciliations of non-GAAP financial measures we use on our website at pebblebrookhotels.com.
Okay, so we had another solid quarter as we are completing another fantastic year for our company. Our fourth quarter RevPAR growth of 5.8% was above our outlook for RevPAR growth of 2.5%, that we provided following super storm Sandy in November as leisure trends and demand was strong, and corporate trends and demand held up better than expected in the phase of the fiscal cliff uncertainties at the end of last year
We underperformed the U.S. industry’s RevPAR growth of 6.5% in the quarter which is primarily due to the negative impact from super storm Sandy which we estimated at about a 150 basis points of last RevPAR with a much of it in our Northeast hotels. In New York City though we were fortunate that none of our hotels were directly impacted by the storm, two of our hotels in New York City lost power due to the storm. And the market suffered further from the cancellation of the New York Marathon.
Some of the New York market experienced additional demand following the storm, for post-storm evaluations and rebuilding. Our hotel has been unable to capitalize due to the already high levels of occupancy. In both, 2011’s fourth quarter and 2012’s fourth quarter, our six hotels the makeup in Manhattan collection ran almost 93% combined.
For the balance of our portfolio, we produced a very healthy fourth quarter RevPAR of 7.1% benefitting particularly from our West Coast properties. And for our portfolio on a monthly basis, October RevPAR increased 6.7%, November is up 4.3%, and December climbed 6.1%.
As a reminder, our RevPAR and hotel EBITDA results, our pro forma for our period of ownership and include all the hotels we own as of December 31st, except for Hotel Zetta formerly Hotel Milano, since it was closed. Our results were flat 49% of the performance of the Manhattan collection nearing our joint venture ownership percentage. RevPAR growth in quarter was led by Argonaut San Francisco, Mondrian LA, the Intercontinental Buckhead, The Grand Minneapolis, and W Westwood….
During the fourth quarter we invested approximately $15.6 million in our hotels as part of our capital reinvestment program, with the largest portion related to the comprehensive renovation and repositioning of Hotel Milano which we opened last night as Hotel Zetta.
In addition to the major work we've done at Hotel Zetta, last month we also kicked off a comprehensive renovation and 41 room addition at the Affinia 50 which is scheduled to be substantially complete by the fourth quarter of this year.
For the portfolio, Pebblebrook revenues were largely flat in the quarters compared to last year, primarily due to the clients of number of our hotels with corporate spending generally a little more cautious than prior quarters, offsetting some of the weaknesses in food and beverage revenues in the quarter was a 23.6% improvement at the National, which is part of the Benjamin Hotel in New York. Our food and beverage team has continued to take positive steps to increase overall revenues including the banquet and catering business. So we (inaudible) in a very competitive Manhattan market.
For the year, the National's total revenues including banquet and catering increased 2.5 million or 32% compared to 2011.
Now moving down our income statement, we generated adjusted EBITDA of 31.9 million for the quarter, an increase of 3.8 million or 13% versus 2011's fourth quarter. For 2012 adjusted EBITDA was up 43.9% or 34.8 million versus the prior year. Again, this not only reflects the increased number of high quality hotels in our growing portfolio, but also elevated growth rate in same store EBITA for our existing hotels, which we believe will continue during the next several years.
For the year, our RevPAR was up a strong 8.1% which is driven by a 4.2% increase in occupancy with ADR growth of 3.8%. We're very pleased with this level of growth which is delivered despite all the negative renovation impact we experienced throughout the year in many of our hotels which adversely impacted our results approximately 80 basis points as well as super storm Sandy which impacted our results by approximately 60 basis points.
Our RevPAR leaders for 2012 were Sir Francis Drake, the Grand Hotel Minneapolis, Affinia Manhattan, the Intercontinental Buckhead and Argonaut, San Francisco. All these hotels continued increase in our market penetration and operating performance following recently completed property renovations and refurbishments.
Our hotels generated a 126.6 million of Pro forma Hotel EBITDA for the year, with pro forma EBITDA margin improvement 263 basis points to 27.4%. Total hotel revenues grew 6.2%, while total hotel expenses limit to a 2.5% increase. The hotels that generated the highest EBITDA growth rate for 2012 were Sir Francis Drake, Affinia Manhattan, Viceroy Miami, the Benjamin and the Grand Hotel Minneapolis.
Shifting to the acquisition side of our business, on October 25 we announced the acquisition of the 196 room hotel Palomar San Francisco for $58 million and on January 29, 2013 we acquired the 337 room Embassy Suites San Diego Bay in Downtown San Diego for $112.5 million.
In conjunction with the acquisition of the Embassy Suites San Diego we appointed HEI Hotels and Resorts to be the hotel manager. Additionally, we anticipated investing approximately $7 million into the hotel over the next two years. We anticipated impact of this year’s property refurbishment has been reflected in our 2013 outlook.
We are extremely excited about our most recent acquisition in downtown San Diego. We love downtown San Diego and believe it’s one of the most reliable growers of all of our target market. San Diego benefits from having the most consistently favorable and predictable weather in United States and that weather along with the city’s strong amenity base, extremely attractive convection venue, convenient and close airport and a numerable cultural, recreational and entertainment activities make San Diego one of the strongest leisure and convention destinations in the country.
The hotel also benefits significantly from its terrific location in Downtown San Diego and from the strength of the Embassy Suites brand, which delivers a uniquely powerful value proposition to its all-suite format and free breakfast and free manager's happy hour.
The hotel is a leader in the market and has been consistently number one in RevPAR in its competitive set and number two in 2012 in ADR. Its competitive set includes the Hilton Gaslamp, Marriott Marquis and Marina, Grand Hyatt Manchester, Westin San Diego, and our Westin Gaslamp. We believe the joint efforts of our asset management team and the property's new operator HEI Hotels and Resorts will deliver a significant upside to both the top line and bottom line through the implementation of best practices from both of our organizations. As part of the San Diego acquisition, we assume that $66.8 million, non-recourse loan which is a current fixed interest rate of 6.275% and matures in June 2016.
Now, I’d like to touch upon our debt activities in the fourth quarter. On December 27, we completed an $81 million seven year fixed rate loan at 3.69%, which was secured by our Westin Gaslamp Quarter Hotel. Also, on December 27th, which was a busy day for us, we successfully refinanced the maturing debt secured by the Manhattan collection for the new $410 million five year fixed rate loan at 3.67%. This loan was secured by five of the six hotels in the collection.
Also as part of this financing, Pebblebrook contributed $50 million in the form of preferred capital investment to the partnership which yields 9.75%. This preferred capital can be repaid at any time by the joint venture partnership. 51% are these preferred dividend payment which is the percentage that we don’t own in the partnership will be reflected in the interest income line item in our income statements.
As a result of our capital market activities and operating activities during the quarter, at the end of 2012 we hold cash, cash equivalents and restricted cash of 97.9 million plus an additional of 16.3 million in our unconsolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in Manhattan Collection. We had no outstanding balance in our $200 million unsecured credit facility.
And finally an update on our dividend, as you read in our earning release from yesterday because of the continued increases in the operating performance in cash flow of our portfolio as well as a deposit fundamentals of 2013, we anticipate increasing our quarterly dividend to $0.16 per share which represents an increase of 33% from our current quarterly dividend. We expect this to commence for our first quarter dividend which we typically announced in end March. This is consistent with our long term strategy providing industry leading returns to our shareholders including reliable and growing stream of income.
And with that good news, I’d now like to turn the call over to Jon to provide more inside on the on the recently completed quarter and year as well as our outlook for 2013. Jon?
Thanks Ray and good morning. So, as Ray said, we had a dynamite third year as a public company. In 2012, we made $275 million of new investments through the acquisition of five hotels all of them on the West Coast. Four of them four diamond quality hotels and four different gateways cities including San Francisco, West LA, Portland, and Seattle. And the fifth was the Hotel Milano in San Francisco which soft open last night as the renamed to hotel Zetta following our complete renovation and repositioning of our property as a very cool four diamond boutique hotel.
Including the Zetta’s renovation, we invested almost $60 million on the portfolio during the year completing significant renovations at Argonaut, San Francisco; Westin Gaslamp in San Diego; Monica, Seattle; Mondrian, LA; Sheraton Delfina and the second phase of Affinia Manhattan’s renovation. And thanks to our trusting and supportive investment community we were able to raise $215 million of equity to support our efforts.
We’re extremely pleased with the portfolio that we’ve been able to assemble not just because of a high quality of the assets and not just because of the attractive pricing and not just because of their traffic locations in major gateways cities but because the portfolio has so much operational upside that we believe will continue to drive outsized the growth for the next several years. And importantly, we generally didn’t underwrite or pay for this upside potential at the time of the acquisitions.
The portfolio has already begun to benefit from the vast array of best practices and operational efficiencies that we have been able to put in place as evidenced by the 263 basis point increase in 2012 portfolio EBITDA margin; on top of 2011, 318 basis point improvement. In the fourth quarter, as expected EBITDA margin growth was more muted than prior quarters due to more modest RevPAR and overall revenue growth as well as the difficult comparison to 2011’s fourth quarter EBITDA margin and growth of 562 basis points.
As a result, same story EBITDA rose a modest 5.3% in the fourth quarter but it increased a very strong 17.4% for the year. The better performance versus our outlook in the fourth quarter was primarily due to demand growth holding up better than what we expected given the looming fiscal cliff and overall economic uncertainties.
As a result, higher RevPAR in the fourth quarter and margin growth in the range of our expectations delivered better than expected EBITDA growth in the portfolio. A couple of standout EBITDA growth performers for the year worth mentioning; Sir Francis Drake's EBITDA increased 68%, Affinia Manhattan’s EBITDA climb 56%, Viceroy Miami draw EBITDA up 56%, The Benjamin grow EBITDA by 42%, The Grand Minneapolis 41%, W Boston 32% and Argonaut St. Francisco 30%.
And despite the great EBITDA and EBITDA margin performance of these properties our EBITDA and margin increases weren't driven by just these; in total 15 properties grew EBITDA margin by more than a 150 basis points for the year. And 14 grew EBITDA for the year more than 10%. A pretty terrific achievement by our assets managers and our operators and one certainly we applaud. A big part of this was our joint efforts to limit growth in same store hotel expenses to just 2.5%. Despite occupancy increasing by 4.2% and occupied rooms increasing by 5%; giving 29 more rooms in the portfolio and one more day in 2012 due to leap year.
Key category contributors to our success on expenses. Undistributed expenses were limited to a 0.3% increase with A&G declining 2% and energy declining by 11.5% or almost $1.7 million and despite 12.6% increase in property taxes to primarily to our California acquisitions. Fixed expenses grew just 0.3% with the aid of 11.3% decline in insurance cost and declines in other fixed expenses.
Many of our hotels prior to acquisition also suffered from significant deferred capital maintenance or lack of owner attention due to capital constrains, bankruptcy receivership or foreclosure. As a result, they significantly underperform from a competitive perspective in prior years.
With the implementation of renovation repositioning and refurbishment programs at the majority of our hotels, we began to recapture some of that loss competitive RevPAR penetration.
As a portfolio, we captured approximately 140 basis points of RevPAR penetration in 2012 despite disruptions during the year from numerous renovations. Yes, we believe, we still have several 100 points of additional RevPAR penetration in total recapture through 2015.
That means we expect to continue to outperform the competitors in our markets as well as the industry overall each year through at least 2015. I’d like highlight a few examples of increase penetration we achieved in 2012 at properties where we previously completed renovations.
At the Sir Francis Drake where our renovation accomplished a complete redo of all of the guestrooms, the entrance, lobby, and bar and a full renovation and repositioning of the starlight lounge on the top floor. The hotel picked up over 550 basis points of RevPAR penetration on a year-over-year basis.
Doubletree Bethesda over 700 basis points, Intercontinental Buckhead almost a 1,000 basis points, the Grand Hotel Minneapolis almost 1,300 basis points, Affinia Manhattan 1,250 basis points, and Westin Gaslamp despite being under renovation the first half of 2012, still managed to pick up over 300 basis points for the year.
As these numbers demonstrate our renovations have been extremely well-received by the market, and with the completion of our renovations at virtually all of our properties, either previously or by this spring, we are confident that between margin growth opportunities and RevPAR penetration recapture, we should be able to generate significant outsized growth in the existing portfolio through at least 2015.
In addition while the redevelopment renovation and addition of rooms at Affinia 50 in New York City will depress our expected outperformance in 2013 by roughly a 100 basis points of RevPAR growth and 60-70 basis points of EBITDA margin growth. Its completion later this year will meaningfully and positively impact 2014 and beyond. And the addition of the Embassy Suites in downtown Santiago and the reopening of Hotel Zetta in San Francisco should also add to our overall growth rate going forward.
The strength of our portfolio in 2012 and expected industry outperformance in 2013 and beyond is also partly due to the high occupancy levels of most of the cities in which our hotels are located. In 2012, most of our markets again grew occupancies with the majority now with occupancies surpassing last cycle's prior peak levels. This includes the urban or CBD markets of San Francisco, Washington D.C., Miami, West Hollywood, Boston, Santa Monica, Seattle, and New York City’s Lower Manhattan, as well as the Manhattan market overall which surpassed prior peak occupancy in December at an astounding 86% for 2012.
Our urban markets that are nearing last cycle’s peak occupancies include Philadelphia, Santiago, Portland, Minneapolis and New York City’s Uptown – Midtown market. Most of these markets except for New York City have either very little or no supply underway and be expected to continue to strengthen through at least 2014 or 2015.
Occupancies at these levels have historically provided firm footing for significant price increases; reduce discounting in promotions, and strong ADR growth. While the industry’s ADR growth rate continues to increase at a modest pace of improvement, it was up 4.3% in 2012 versus an increase of 3.7% in 2011. We believe otherwise stronger growth in ADR is being held back by the uncertainty in the economy, and in fiscal policy. And once that uncertainty is significantly reduced or eliminated we believe there's significant potential for an acceleration in the growth of average daily rates. With limited new supply growth expected in 2013, we expect it to be around 1% and continuing sub-average growth expected in 2014, we're forecasting industry occupancies to continue to grow in 2013 and 2014, as demand growth is expected to outpace new supply. So overall, industry fundamentals remain very strong.
And when we look at last year's overall industry trends, performance was driven by strength and trends in travel, both business and leisure as well as very strong growth in international inbound travel, the vast majority of which has been positively impacting our major gateway cities.
Recovery in group travel has been more modest, so there's more to go in 2013 and beyond. We believe we're unlikely to see an acceleration in the recovery and group business until the pace of employment growth increases or until we reach significantly lower rates of unemployment, when competition for people typically picks up meaningfully.
I think what went somewhat unnoticed in 2012, was the continuing strength of the recovery in leisure travel particularly in the last nine months of the year. With these haves and have-nots economy that we've been living with over the last two years, the leisure customer has shown significant confidence in their economic wellbeing, as evidenced by strong weekend demand and RevPAR growth. In fact leisure demand growth as represented by weekends outgrew business demand growth as represented by weekdays, in all but two months from April 2012, through the rest of the year. And despite general concerns about the potential negative effects of our country's fiscal issues we think it's likely these favorable trends in leisure travel will continue in 2013, along with healthy growth in business travel and continuing strength in travel from overseas.
For 2013, we're forecasting industry demand growth of 2% to 3%, supply growth of around 1%, ADR growth of 4% to 5% and industry RevPAR growth of 4.5% to 6.5%. Despite headwinds from European economic weakness, and significant fiscal uncertainty here, corporate profits in the U.S. continue to be strong with forecast that they will again set new records in 2013.
And employment growth while sub-part compared to prior economic recoveries has shown more recent signs of an improving face of pickup. Both consumer confidence and business confidence have also been improving recently, so all of these seem to go well for at least a modest year of demand growth in 2013. And at Pebblebrook we expect to outperform the industry by roughly 50 basis points with our more typical 100 to 200 basis point outperformance depressed in 2013 by Affinia 50's 100 basis point negative impact on our overall RevPAR growth.
The industry is already off to a great start in January with industry RevPAR climbing 8.8% in the U.S. Our portfolio in January also got off to a great start, RevPAR climbed a strong 12.7%. Our performance was aided by the inauguration in Washington, even though it was disappointing compared to the last inauguration.
We estimate that DC added about a 180 basis points to January’s numbers with the DC Monaco’s RevPAR climbing by 53% and Doubletree Bethesda benefiting less so with RevPAR growing 20%. For the portfolio, we expect first quarter RevPAR to increase between 6% and 7.5% with February and March being significantly impacted by the Affinia 50 renovation and the Sofitel room's renovation.
Please keep in mind that there is one less day in the quarter and the year so room revenue growth will not keep pace with RevPAR growth both in the quarter and for the year.
We are forecasting total revenue growth on a comparable hotel basis of 5% to 7% in 2016, combining now with the EBITDA margin growth of 75 to 125 basis points, we are forecasting to deliver a comparable hotel EBITDA increase of a very healthy 7.1% to 10.5% for the existing portfolio even after the significant negative impact of the Affinia 50 renovation.
Business trends and business on our book support our forecast of healthy growth for 2013, as of the end of January total group and transient revenue on the books for the year was up 6.1% over same time last year for 2012.
Portfolio-wide group revenues are up 2.4% with room night down 0.1% and group ADR up 2.5%. Transient room nights on the books were up 5.5% with transient rate up 3.9% and total transient revenues on the books up 9.6%.
Group bookings continue to be very short term in nature as corporations in particular wait to the last minute to book their meetings in banquets. And as an indication of how short term our group bookings have been, we only need to look at the fourth quarter. We went into the quarter with group revenues at minus 0.7% based on room nights down 2.4% and rate up 1.7%. We finished the quarter with group revenues up 4.5% with room nights up 1.7% and rate up 2.8%.
So that’s a lot of in the quarter for the counter bookings. We don’t expect this behavior to change until either the economy accelerates due to less uncertainty where overall demand rises to a level that begins to preclude last minute bookings due to lack of availability. Fortunately for our portfolio, our group room nights only account for about 25% of our total business. So, it’s less of an issue for planning purposes than otherwise might be the case with the greater level of group business.
We thought it also might be helpful to summarize how our portfolio breaks down geographically based upon our acquisitions in 2012 and our most recent acquisition in San Diego just last month. Based on our outlook for 2013, roughly 54% of our EBITDA is forecasted to come from the West Coast and 43% is expected to be delivered by our East Coast hotels.
The largest markets are forecasted to breakdown roughly as follows. New York 17%, West LA 17%, San Francisco 16% and San Diego 11%. Every other market is less than 9% of EBITDA. As a result, we feel like we’ve pretty good diversification through our 12 different major city markets.
We continue to be very excited about the strong underlying fundamentals in the hotel industry and even more excited about the incredible and unique opportunity for further upside from our existing portfolio. And while we expect to be as active this year as last year on the acquisition front, a significant majority of the value we expect to create through this cycle is likely to come from the existing portfolio. So asset management of our portfolio will continue to be the primary focus of our entire team here at Pebblebrook and the reason for the song selection that you heard while waiting for our conference call to begin. With that, we'd now be happy to answer whatever questions you may have. Operator?
(Operator Instructions). And we will take our first question from David Loeb with Baird
David Leob - Robert W. Baird and Co.
Jon on that last theme, can you talk a little bit more about the margin outlook. I wanted to make sure that I heard you right about the impact of the Affinia 50 margin and how much more room do you think you have in terms of asset management initiatives to improve margins going forward?
Yes, you heard correctly that the Affinia 50 has between 60 and 70 basis point impact on our margins with, I think, what it’s something like a 30% or 35% negative impact on RevPAR growth at the hotel. So, we do have a lower overall revenue growth this year than last year partly because of the impact from Affinia 50 and partly because our outlook for the industry is a little bit more modest than what our outlook was for last year.
However, I don’t think that's a change in the second derivative; I think right now we'd expect to see an acceleration in both our RevPAR growth and a significant acceleration in our EBITDA margin growth in 2014, given the fact that we have very little major renovation work planned for next year with the existing portfolio and given that the portfolio will benefit from the opposite of the negative impact from the Affinia 50. It will both be completely renovated as well as we will benefit from having an additional 41 keys at the hotel.
So, we think there is a lot more upside in the portfolio; I think if we compare our existing margins with sales existing margins for 2012. I think we are looking at somewhere between 500 and 600 basis points of differential, so we still think that there is at least several 100 basis points of margin improvement in the portfolio and we are really just beginning to see the benefit for the properties that were renovated in 2011 and those that were acquired in 2011 and 2012, so a lot of upside from margin growth over the next three years.
David Leob-Robert W. Baird and Co.
What’s your view on how long the acquisition window will stay open?
A lot of it depends upon what we see in the development market obviously being impacted by both continuing improvement and whatever the pace of the improvement in bottom lines in the industry, so a lot of it has to do with how much closure we get to the economics warranting new development in most of the markets.
We think in most markets we’re still always away although we all know that doesn’t necessarily guarantees that new development won’t happen and of course we’re seeing that in markets like Chicago and Nashville and Austin today and perhaps even in some in New York in terms of it not necessarily making good economic sense.
But some of it has to do with obviously the capital markets and we all know there is a lot of capital available globally with the Fed providing its QE infinity program and that hasn’t generally made its way into the construction lending environment for hotels but it is only a matter of time.
Now, the good news is as we look at supply for our markets today in the urban markets, David if you don’t have a shovel in ground today, you’re not delivering probably until 2015 at the earliest.
And so as we worked our way through the year with actually fairly reasonably visibility of what we expect will start later year, its look like a pretty a benign environment through 2015 for most of the major markets and that would exclude the ones I mentioned as well as New York.
So, we take a lot of positive thoughts from that and so from an acquisition perspective, I think we’ve got probably at least another 12 to 24 months maybe 18 months where we think it will continue to be a pretty attractive overall as we look at being able to buy meaningful discounts to replacement cost.
We will go next to James Milam with Sandler O'Neill.
James Milam - Sandler O'Neill
Jon, I just wanted to follow up, just kind of a bigger picture on your discussion about group business, and I guess I am curious if you would give us your comments on how you think about the group’s cycle right now and whether, obviously corporate profits are high but some of that is expense control, so how do you think the group cycle; do you think that there is a secular shift in the way groups are spending their money, or do you think that it’s just a longer cycle and has profitability and employment, and everything else improves, that will recover back to what it has been historically?
James, I think on a U.S. industry basis, I think that it’s really a cyclical impact that we've been seeing and it really relates to, we believe slower growth in employment. We think a lot of groups, whether it’s the RARA meetings, the cultural meetings, the incentive travel; we think those don’t pick up until there is significant competition for people. I think companies are pretty smart with the way they spent their dollars. Those meetings are generally necessary when they are worried about losing their people and until that happens, I think companies save the money; as you have said, companies are pretty good at cost control. And I think those kinds of meetings often fall in the category of discretionary meetings until there is a human resources benefit. I do think there is probably a little bit of a secular change at least for this cycle and perhaps the utilization of resorts on a group basis, at least on the part of some, certainly a large enough percentage of overall corporate users and governmental users to have a sort of material and noticeable impact on the recovery in group at resort property. So our view on resorts right now is, they are just not likely in this cycle to recover a group to the same level that they were at previously. And that’s probably why our bias has been more towards the urban markets and the urban hotels even though resorts particularly drive-to resorts have been within our target type of assets.
James Milam - Sandler O'Neill
Okay, thanks. That’s helpful. And then just a quick one, I think you guys were gave some pretty good color on the margin growth be a little slower in '13 versus '14, but could you just talk about some of the, obviously insurance was good in 2012 but maybe insurance and tax outlook for '13 and maybe within the '14 to the extent that you have any visibility that far out.
Unidentified company representative
Personal property insurance, right now with the visibility we have is maybe some expectations in 2013, it remains to be seen what the impact from super storm Sandy will have on the market and what carries in or not. We would think something in the mid-single digit to high single digit would probably be a reasonable expectation growth rate, with a reminder that, as we acquire our make new acquisitions, many of the acquisitions we fold in into the Pebblebrook insurance program, we typically have pretty good savings there, versus what the prior folks are paying. So right now it's really that mid to high single digit number's probably a reasonable expectation for 2013 for property insurance. Beyond that it's hard to say, we don't want to speculate. And that happens really kind of mid to early spring we started that process where most of our portfolio and the Manhattan collection's on a different cycle, but on the property taxes…
The P&C for the bulk of the portfolio is on a June cycle and the Manhattan collection I think is September.
Unidentified company representative
Yes, later in the year in the third quarter. And our property taxes, well now that California is, because we're largely mandated by that, based on the purchase price and it's really city by city, we look at those increases, now cities are being more aggressive on those increases because they need to fund their budgets and it's easy to tax their commercial owners and we evaluate each on a case by case basis, and we regularly contest all these increases if we believe it's directly above market.
And so that for the year, whereas the property insurance and insurance side is kind of mid to upper single digits, property taxes for the year, should, you're looking at the 9-11% increase, for a year-to-year basis.
And keep in mind a lot of that has to do with the fact that we bought a number of California properties last year and we're seeing the automatic increases in those in the portfolio.
We go next to Wes Golladay with RBC Capital Markets.
Wes Golladay - RBC Capital Markets
Going back in the quarter group bookings, are you seeing any of the markets where this behavior has to change. We've heard that some of the west coast hotel operators were allocating more rooms to leisure and some of the groups were having a hard time booking rooms.
Yes, I think on the West Coast we're likely to see some change in behavior but I would say we haven't seen it yet and you know part of that is the first quarter particularly in market like San Francisco, it tends to be a softer quarter so there is still plenty of availability in hotels in San Francisco in the quarter. Some of that also might be rooms only business, you know what you do or don’t take from the convention authority and of course that would probably lead to a better advanced booking because most of that gets booked well ahead of the time.
Wes Golladay - RBC Capital Markets
Okay, and now turning to your acquisition pipeline, what are you guys seeing there as far as the type of deal I mean you guys had some nice deals with the Zetta and Sir Francis Drake where you nearly doubled the yield within two years. Have you seeing any more opportunities like that, or is it going to be more core?
Our focus continues to be buying properties that need to be fixed where there is a significant opportunity to create value either through significant change in operations or because the property has been a star for a physical perspective and need capital in order to alleviate the sort of downward competitive spiral that they are suffering from. So, we continue to be more highly focused on those and I suspect while the embassy suites, I would say even with the $7 million we've allocated or underwritten towards improvements, a bunch of that certainly is differed capital maintenance, the real opportunity there is that change in the way the property is being operated both at the top line and the bottom line and we think there is very significant margin opportunity at that property. So we'll continue to focus on the more substantial turnarounds, hopefully it doesn’t mean buying stuff at two cap, like what the Sir Francis Drake was, when we originally bought it because I think the markets have recovered for over the last three years, but I wouldn’t be surprised to see us buy an asset that has a sort of sub-six or lower cap rate because the property is in dire need of capital and probably a change in management or flag.
Now we will go next to Rich Hightower with ISI Group.
Rich Hightower - ISI Group
A couple of questions, one broad and one a little more specific, I think this is a follow up to one of Wes' questions but depending on the company during this earning season, you’ve had different answers as far as what the effect on demand is going to be related to the upcoming sequestering Washington and so forth and I am wondering in your portfolio is there a difference between that effect on the West Coast versus the East Coast given different demand drivers for those markets and any other softness that you’re seeing perhaps?
First, we’re not seeing any softness. So, there’s been no impact from all of that to do about sequester. We believed begin to see back last year in August running through October hesitation on the part of businesses to travel as much or meet as much due to the uncertainty surrounding the entire fiscal cliff but with the solution related to the biggest piece of that that would have an impact on this year being the tax agreement that was made. We think in general, whatever happens with either the sequester or the alternative reductions in spending our tax increases that might take effect in ’13 to be pretty modest which is what economist are forecasting.
Now, it will have a different impact by market clearly and one would expect naturally that the impact in DC would be more material given both the heavy concentration of government agencies and government in the overall market both including downtown as well as the suburban markets but also because of the heavy concentration of those that do business with the government, particularly the defense industry that is slated for some meaningful reductions. So, we think the biggest impact if there is one, on a national basis is likely to be more limited to the DC market and frankly we don’t expect to see much impact anywhere else in the U.S.
Rich Hightower - ISI Group
So, maybe you’re not seeing as much in terms of group demand for instance in other markets beyond DC, that’s what it sounds like?
We’re not seeing any impact anywhere yet from this more recent uncertainty.
Rich Hightower - ISI Group
And then second question more specifically, it looks like, if I look at your pro forma hotel results for the fourth quarter, it looks like management fees ticked up about 14% from 4Q ’11 to 4Q ’12, was that something related to incentive fees or is there anything else that’s that maybe brought that number up more than some other expenses?
Yes. The biggest impact actually we have insignificant incentive fees in the whole portfolio so it’s not incentive fees. It has to do with a few of our properties that had a ramp-up in management fees that we negotiated when we put new management agreements in place which was generally justified by the displacement and negative impact the properties were going to be going through as we did major renovations of them, so that's really what it relates to.
(Operator Instructions) We will go next to Lukas Hartwich with Green Street Advisors.
Lukas Hartwich - Green Street Advisors
Jon can you talk about some of the things you’ve done to drive the $40 million of efficiencies, you said in the press release?
Sure, boy, it’s a long list and I'd also direct you; I think we still have our investor presentation up, that we did a little over a year ago in New York which has a lot of detail in it Lukas, and has a number of case studies. But the modifications have to do with labor efficiencies; they have to do with the housekeeping programs, they have to do with green programs, they have to do with Energy Capital Investments, within the portfolio, they have to do with behind things that were renting where in many cases there is a one year pay back.
So it has to do with insurance as Ray said; a lot of efficiencies by bringing even the major operators and their insurance over to our program where not only do we get savings but we actually have better coverage and better written policies. So if you break that almost $14 million down by category, they fall into little over $4 million in energy savings on an annual basis, F&B about 3.5 million has to do with a lot of purchasing programs, a lot of this is fundamental blocking and tackling, control programs, procedures, using staffing and labor efficiency models, rooms about 1.4 million, insurance about a little over 700,000 and then sort of a general category of other which is a little over $4 million, so it really is a very extensive detail oriented operational involvement and work with our operators that involve the implementation of our best practices and of course our best practices come from our operators, so that’s generally what they would involve.
(Operator Instructions). We’ll go to Bill Crow with Raymond James.
Bill Crow - Raymond James
On the acquisition on the Embassy Suites little bit of a twist for you, I know you started the company with a goal of looking at limited service, select service sort of assets, do you anticipate adding more of these I know you’re an opportunistic buyer but is that something because of maybe the deals in the market, the price in the market maybe look more toward hotel such as that?
I don’t really think of it is a change in strategy at all, it’s an urban hotel you made comparison to select service and hopefully the audience understands that Embassy Suite is a full service.
Bill Crow - Raymond James
It’s a full service but it’s a room (inaudible) it’s not a heavy restaurant sort of property it’s a little different than what you typically have been buying.
Well, it’s certainly doesn’t have the independent or unique design flare that are other hotels have. It does have a full service three meal a day restaurant in it that appeals to both the local clientele and neighborhood clientele as well as the convention years as well as our existing hotel guest, but I would say that hotel does extremely well as a value proposition and maybe that’s where people might disconnect it with the rest of the hotels in our portfolio sort of the why it’s successful.
But its success nevertheless has to do with the fact that it’s in an urban market that has incredible appeal as a leisure and convention destination, it has a great location in that market and we think there is a tremendous upside in margins and in top line at the property. And really the interesting thing about it Bill is, while the other hotels in fact all of the hotels in inset would be categorized by Smith Travel as a higher brand. It beats all of them in RevPAR and beats all but one of them in ADR.
Bill Crow - Raymond James
I mean it is a category killer, Embassy suites are great, is that something you are going to look for going forward, or just continue your opportunistic pursuit of hotels.
I don’t think it’s something we haven’t been looking for. It’s just the first Embassy Suites that we have thought. As an example we pursue the Embassy Suites in Philadelphia that will sail by. We love the brand, you describe it appropriately as a category killer and because of that it’s able to compete at a higher level than maybe what you might argue the physical product looks like; on the other hand it is all suites and none of those properties in the market are.
We have no questions in queue this time, (Operator Instructions). And gentlemen we have no other questions. I would like to turn the call back to you for any additional or closing comments.
Thanks Matt, thank you all for participating. I know we are going to see a lot of you over the next month at various conferences and so we look forward to further discussion then, and we look forward to our first update on 2013 when we have our earnings call in late April. Thanks very much again.
And again that does conclude today’s call. Thank you for your participation. Have a good day.
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