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Executives

Kenneth G. Fuller - Treasurer

Michael D. Barnello - Chief Executive Officer, President and Trustee

Bruce A. Riggins - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Analysts

Ryan Meliker - MLV & Co LLC, Research Division

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Joshua Attie - Citigroup Inc, Research Division

Patrick Scholes

Andrew G. Didora - BofA Merrill Lynch, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

Neil Malkin - RBC Capital Markets, LLC, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Ian C. Weissman - ISI Group Inc., Research Division

LaSalle Hotel Properties (LHO) Q1 2013 Earnings Call April 18, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to this LaSalle Hotel Properties First Quarter 2012 Earnings Call. As a reminder, today's call is being recorded. It is now my pleasure to turn today's call over to Ken Fuller, LaSalle Hotel Properties' Treasurer. Please go ahead.

Kenneth G. Fuller

Thank you, Andrea. Good morning, everyone, and welcome to the first quarter 2013 earnings call and webcast for LaSalle Hotel Properties. I'm here today with Mike Barnello, our President and Chief Executive Officer; and Bruce Riggins, our Chief Financial Officer. Mike will provide an overview of the industry, discuss our first quarter results and activities and talk about our outlook for the second quarter and full year 2013. Bruce will provide additional details on our first quarter performance, and our balance sheet, then we'll open the call for Q&A.

Before we start, please take note of the following. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties, over which the company may have no control. Factors that may cause the actual results to differ materially are discussed in the company's 10-K for 2012, quarterly reports and its other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Our SEC reports, as well as our press releases are available at our website, www.lasallehotels.com. Our most recent 8-K and yesterday's press release include reconciliations of non-GAAP measures to the most comparable GAAP measures. And with that, I'll turn the call over to Mike Barnello. Mike?

Michael D. Barnello

Thanks, Ken, and good morning, everyone. As Ken mentioned, I'd like to start with an overview of the industry in the first quarter. Industry performance was solid during the first quarter, demand continued to improve, while supply growth remained historically low. Pricing power was evident, given the strong increase in rates for the quarter.

As we've seen in past several quarters, ADR made up the majority of the first quarter RevPAR increase, and overall industry RevPAR for the quarter was healthy. The economic backdrop remains stable, relative to the color we provided just 2 months ago. Since then, unemployment has come down a little, and consumer confidence improved slightly. Employment increased during the first quarter and corporate profits have generally been strong so far this year.

While we're still waiting to hear the Q1 GDP figures, GDP was revised upward for Q4 2012. Overall, we view the current operating environment as favorable, which has lead to positive results for our portfolio during the quarter as well.

Excluding Park Central, which is under a substantial renovation, our portfolio RevPAR grew 5.1% in the first quarter, with an ADR increase of 1.8% and occupancy growth of 3.3%. We would characterize these results as solid, especially given the tough year-over-year comparison as a result of the holiday shift from the second quarter of 2012 to the first quarter of 2013.

During the quarter, our RevPAR growth was led by strong group performance, with group rooms increasing 12.7%, offset by a 3.2% decrease in ADR. The group ADR decline was due to the Super Bowl comparison to our hotel in Indianapolis last year. Transient rooms declined 4.1% as a result of the renovation at the Park Central, while average rate increased 5.5%.

Absent Park Central, transient rooms were actually up 2.6% in the quarter. Our group transient mix was 33% group and 67% transient during the first quarter.

Excluding Park Central, our portfolio hotel EBITDA margin improved by 33 basis points to 23.1%, since we're able to hold expense growth to just 2.4%.

For the portfolio, including the Park Central, expense growth was just 0.8%. As such, our portfolio delivered solid EBITDA, which led to strong corporate adjusted EBITDA and AFFO per share.

Corporate adjusted EBITDA increased 17% to $39.8 million and AFFO per share increased 29% to $0.27 per share. We were pleased with the results of our portfolio.

When we look at the booking activity during the first quarter, we have seen improvement in our overall pace from total revenue up 2.5% at the time of our February call, to up 2.9% now. Transient revenue books is 7% higher than last year, and group is little better than flat, up 0.3%.

When we exclude Park Central, group revenue in the books is 1.4% higher than last year, and transient is 19.3% higher than last year. As such, excluding Park Central, total revenue on the books is 7.2% higher than last year.

Again, we're pleased with the operating results during the first quarter. We were also able to further improve our balance sheet. During the quarter, we issued $110 million, of 6 3/8% Preferred Shares and redeemed $100 million of 7 1/4% Preferred Shares. These transactions further reduced our cost of capital.

Our cost of debt and prefers is now 4.9%, compared to 5.4% at the same time last year. At the time of issuance, our 6 3/8% coupon was the lowest ever for an unrated REIT.

Now I'd like to provide a brief update on our Park Central and West House renovations. The project has been going well so far and is currently on schedule and on budget. We continue to expect the majority of the work to be completed by the end of the third quarter, with potential to slide into the fourth quarter.

Displacement during the first quarter was $1.1 million, and our expectation for full year displacement related to this project remains at $8 million to $12 million. As a reminder, the quarter most significantly impacted by the renovation disruption is Q2. We also maintain our outlook for the project cost of $60 million to $70 million.

Before I turn to our outlook, I'd like to provide some information on the sequestration. During the first quarter, our portfolio did not experience any impact as a result of sequestration. During the second quarter, we have seen minor impact, all of which has been outside of Washington, D.C. Within D.C., we are being told by contacts that decision-making surrounding booking government business has gotten more stringent, and as a result, government leads are generally down for the remainder of the year. The impacts of government decision is clearly nationwide and not limited to Washington, D.C.

That said, we see the temporary budget resolution that took place last month as a positive, and while yet another debt ceiling deadline looms, we expect that to ultimately be resolved as well.

Turning to our outlook for the second quarter, we expect the economic environment to continue to be positive, with steady demand and limited supply allowing solid RevPAR gains.

When we exclude Park Central, we expect second quarter RevPAR to increase 5% to 7%. We expect our entire portfolio, including Park Central, to generate adjusted EBITDA of $90 million to $93 million, and adjusted FFO per share of $0.70 to $0.73.

We maintain our full-year outlook, which is provided in conjunction with our reported year-end 2012 earnings in February. Our outlook is based on portfolio RevPAR growth, excluding Park Central, of 3% to 6%, and hotel EBITDA margins to be flat at the low end, to high, to high-end outlook of 100 basis points of margin growth.

Including Park Central, RevPAR would range from flat to an increase of 3%, and margins would range from down 50 basis points to up 50 basis points. Our portfolio currently generates industry-leading hotel EBITDA margins, and our asset management team continues to work with our operators to keep expense growth at bay, and run as efficiently as possible.

We had another quarter of outstanding performance in this regard, and we'll continue to strive to perform in this manner throughout 2013. As such, the range for adjusted EBITDA remains $275 million to $295 million. And the range for adjusted FFO per share is $2.03 to $2.23.

Now Bruce will provide some details about our first quarter performance and capital market activities and update our balance sheet. Bruce?

Bruce A. Riggins

Thank you, Mike, and good morning, everyone. I'll start with more detail on our first quarter results. As mentioned, our first quarter RevPAR increased, excluding Park Central, to 5.1%. Our urban portfolio, excluding Park Central, grew 7.2% in RevPAR, with ADR growth of 3.8% and occupancy growth of 3.3%. RevPAR at our resorts increased 4.1% due mostly to ADR, which grew 3.7%, while occupancy improved 0.4%. We had particularly strong performance at Paradise Point in San Diego, and the Hotel Viking in Newport.

Our convention properties grew 0.1% in RevPAR, comprised of occupancy improvement of 5%, offset by an ADR decline of 4.7%. Our convention segment was impacted by the Marriott Indianapolis, which had a tough comparison, as the city hosted the Super Bowl last year.

LA was strong in the quarter, with a RevPAR increase of 9.8%, comprised of a 6% ADR improvement and 3.6% growth in occupancy. Washington, D.C. RevPAR grew 6.8%, with an ADR increase of 4.4% and 2.4% growth at occupancy. San Diego RevPAR improved 6.8%, with an ADR increase of 5.3% and occupancy growth of 1.4%.

Chicago had a strong quarter, with RevPAR growth of 6.2%. Occupancy drove the increase up 9.3%, offset by a 2.8% decline in ADR. Boston had a RevPAR increase of 3.1%, due to a 3.5% increase in occupancy and a 0.4% decline in ADR.

Seattle had RevPAR growth of 2% this quarter, as ADR grew 2.8% and occupancy fell 0.8%. Seattle was impacted by declines in citywide business during the first quarter.

Philadelphia RevPAR improved 1.4%, with occupancy driving all the increase. San Francisco had a softer performance, with RevPAR down 0.8%, as ADR improved 0.2% and was offset by a 1% decline in occupancy. San Francisco was impacted by the renovation of Hotel Monaco, which is now complete. New York was our weakest market overall, due to the impact of the Park Central renovation. As such, RevPAR declined 3.3%, with occupancy decreasing 21%, while ADR was up 22.4%.

Excluding Park Central, our New York hotels were strong this quarter, with RevPAR increasing 40.6%, driven by a 26.4% increase in occupancy and 11.2% ADR growth. These results are positively impacted by the Roger, which was under renovation last year.

During the quarter, our best-performing properties were the Roger and Gild Hall in New York, Le Parc and Le Montrose in L.A., Liaison, Helix and Sofitel in Washington, D.C., and Paradise Point in San Diego. The Embassy Suites in Philadelphia and the Liberty in Boston also experienced notably strong growth.

Excluding Park Central, total revenue for the quarter improved 3%, food and beverage revenues declined 0.5%, although 3 hotels had unusual circumstances deserving more color.

First, food and beverage revenue declined due to the Super Bowl comparison last year, which was a boon for our Marriott Indianapolis, where we hosted the Giants.

Second, at the Liaison, we shut down and renovated a restaurant, Heart and Soul, during the quarter. And lastly, the restaurant at Gild Hall has transitioned to a third party lease. Absent those 3 properties, food and beverage revenue increased 4% in the quarter.

As we look at the expense side of our operations, our asset management team and our operators continue to be very effective in the first quarter in controlling costs. As a result of the aggressive efforts of our asset management team and those of our operators, our expense increase, excluding Park Central, was held to an impressive 2.4% in the quarter.

The portfolio-wide hotel EBITDA margin was 23.1% in the first quarter, an increase of 33 basis points from the prior year. Our corporate adjusted EBITDA increased $6 million, or 17% compared to last year. And our adjusted FFO per share was $0.27, an increase of 28.6% compared to last year.

At March 31, we had total debt outstanding of $1.15 billion, and an average interest rate for the quarter of 4.4%. As of quarter end, total debt to trailing 12-month corporate EBITDA, as defined in our senior unsecured credit facility, was 3.9x, which translates to an interest rate on our credit facility of LIBOR plus 175 basis points.

As of the end of the first quarter, we had $722 million of capacity on our credit facility, and 33 of our 40 hotels are unencumbered. We've given notice of our intent to pay off the mortgage secured by the Hotel Solamar in San Diego on June 3. After we paid this off, 34 of our 40 hotels will be unencumbered by debt. As such, we have substantial liquidity with which to execute on our business plan, and continue to be opportunistic from an acquisition perspective.

With that, I'd like to turn it back over to Mike to close out our prepared remarks.

Michael D. Barnello

Thanks, Bruce. To sum it up, we're pleased with the growth of our portfolio delivered to our shareholders in the first quarter of 2013. We had very strong growth in both adjusted EBITDA and adjusted FFO per share. We remain very encouraged by the performance of the industry and the supply picture, and we continue to believe that we are in a positive and sturdy portion of the cycle.

Our capital markets activities and balance sheet places us in great shape, positioned to continue to act opportunistically and make more growth creating acquisitions like those we made over the past few years.

We expect our portfolio to deliver solid results in 2013. At the same time, we're performing the major renovation project to Park Central, which will drive substantial growth beyond 2013.

One last item to mention before we open up for questions. Earlier this week, Boston experienced a tragic event during the marathon, which occurred only blocks from our hotel, the Westin Copley Place. Our thoughts and prayers are with all the people affected by this tragedy. At the same time, we'd like to commend all of our properties in Boston for handling the event professionally and safely. We especially wish to thank Mike Jorgensen and his team over at the Westin, for their swift response to the tragedy. The Westin Copley Place instantly became the headquarters hotel for law enforcement, as well as the media center for the governor and mayor. We thank the entire team for all they've done.

That completes our prepared remarks. Bruce and I would now be happy to answer any questions you may have. Andrea?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question today will come from Ryan Meliker with MLV Company.

Ryan Meliker - MLV & Co LLC, Research Division

Good morning, guys, just a couple of quick things, and thanks for the color on the sequester and the potential impact, I think that was really helpful. As you guys look at your group pace right now, it looks like it's basically, excluding the Park Central, about where it was 2 months ago. Were you expecting it to be higher to the sequester? I mean, you talked a little about the government being less willing to book. Just any added color on where you think group pace is going, or how it's performed relative to expectations over the past couple of months?

Michael D. Barnello

On the group pace, I think it performed pretty much in line with what we thought. Just keep in mind, we're not a very big group house, over a typical year, we're generally about 30% group, which is smaller than a lot of other companies. And when you really break it down, the majority of that group business is primarily about 5 or 6 hotels, over a portfolio of 40. So many of our smaller hotels are predominantly a transient business. So because of that, while we report our group business to you guys every quarter as well as pace, it is a -- lumpier results from quarter-to-quarter, because they can have some big swings, and what happens in an individual property like what you did see with, say, Super Bowl last year in Indianapolis, compared to this year without the Super Bowl, and that does have its effect. When we think about government business as it relates to group, we then, we keep, we want to -- you guys to keep in mind is that, we have a very small percentage of our business overall as government. So it's trending to the plus or minus 3% level for the entire year. That's down pretty steadily from a little north of 5% in '09. And so that's based on a couple of things. One, is our business has improved. We have taken less government business. And on top of it, government rates were kept flat for the fiscal year of '13. And so the government rates are not as attractive as some other rates that we could take. The last thing is, is that the citywides were down. So even though our pace delay of 1.4% would, while outside of Park Central, it's actually pretty good when you think about -- the citywides, overall, are down substantially.

Ryan Meliker - MLV & Co LLC, Research Division

Sure, okay then, it's helpful. And then, I guess, with regards to Boston, obviously, thanks for your color on the tragedy. I think everybody's thoughts are with the whole region up there. But just -- with regards to your particular business, are you seeing any impact regarding the incident on your Westin Copley?

Michael D. Barnello

The initial reaction, for really most of Boston, we have the 4 hotels there, was a tick up in cancellations, early in the week, or right after the event happened. That's subsided. We're not seeing those anymore, and we're seeing some recovery of the business that initially did cancel. So we expect that, or we hope that this -- it blows over fairly quickly. But we did see some trend down initially, as you might imagine with people's concerns about the overall safety of Boston. But as it turns out now, I think people are getting more comfortable that Boston is safe, and the city's opened up to normal business.

Ryan Meliker - MLV & Co LLC, Research Division

Was there any, within your various different assets that you have in the area, where there any neighborhoods that were more heavily impacted by those cancellations? I think I'm particularly thinking Westin Copley, given how close it was.

Michael D. Barnello

Copley experienced the most, yes.

Operator

Our next question will come from Nikhil Bhalla with FBR.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Mike, just on the topic of acquisitions, you hinted on that. If you could just give us a little bit more color on what you think is likely for this year, just in terms of the types of projects, markets or who the willing seller may be?

Michael D. Barnello

Sure. The acquisition market started out to be pretty slow in 2013, which is -- is not so atypical, because a lot of things were closed at year end, whether it's just the normal year end wrap up or when it was to avoid potential tax changes because of the shift in taxes at 2013. That's, of course, hard to say. But generally, there's not a lot of product on the market right now. The brokers insist that there will be more coming online this quarter and the second half of the year. And if it does, we'll definitely take a look at it. As far as what we hope to achieve, our perspective really never changes. We're still looking for the right acquisitions for the shareholders, and so they have to meet a lot of criteria for us. Otherwise, we won't do any. So we never have a goal in mind, in terms of dollars or a number of hotels that we would -- we want or need to add, or we're not compensated that way. We don't go with the board, we don't ever publish that from a guidance perspective or talk to you guys about that. So we're happy to do one, or we'd like to do even more than one, if the opportunities present themselves. But until it unfolds, it's hard to nail down.

As far as in the last thing I'd say that you asked about the market, really nothing's changed in the markets that we're looking at. Still the 8 core urban markets for us, as well as, we do look outside and obviously the resorts that we look at, they can be anywhere, but they tend to be coastal.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Sure. Just a follow-up question on disruption at the Park Central in the first quarter. I mean, either disruption impact in your view, was that pretty much in line with what you'd expected? Was it slightly below your expectations?

Michael D. Barnello

That was within that range. So the thing that we had talked to you about the last couple of quarters was that the first quarter would be the slightest amount of impact, just because the renovation was just starting to gear up, January 1. And so, as a result, they had 2 things. The least amount of rooms out of order that would -- relative to Q2 and Q3, and on top of it, Q1 is a weaker quarter. So our rates aren't high as a disruption dollar-wise, it's not as, is not as much. So you start getting into Q2 and Q3, where our rate starts to grow substantially. And we have the majority of our rooms for now, we're at peak levels of rooms out of order, disruption is a lot more. So I think it fell pretty much in line with what we thought it will.

Operator

[Operator Instructions] We'll go next to Joshua Attie with Citi.

Joshua Attie - Citigroup Inc, Research Division

Mike, can you spent some time on guidance? The low end seems to imply a pretty large RevPAR deceleration in the back half of the year, the first half, based on what you reported, and your projection for the second quarter, is trending up 5% to 6%, the full year is 3% to 6%. So in order to be at the low end, the portfolio would need to grow at only 1% in the second half of the year, and based on your comments it seems like revenue on the books is up nicely and D.C. is holding up relatively well, although it seems like there's some question marks. My question is, why did you decide not to list the low end of the guidance range? And what are the risks that could cause a slowdown of that magnitude in the second of the year?

Michael D. Barnello

Sure. As it relates to our outlook for the rest of the year, I think the things that we are keeping in mind is that, we just gave the outlook less than 2 months ago. And one of the things that we had cited on our call was that, there was a question mark regarding sequestration. And interestingly enough, we were glad that, that we didn't see any impact of sequestration during Q1. However, as we mentioned in the prepared remarks, we have started to see some impact of sequestration that started this quarter. It isn't necessarily for this quarter, it's for different events throughout the year. And it's -- the possibility of that actually ticks up, could mean some disruption for, not just us, because as I mentioned earlier, we don't do a lot of government business, but it could affect hotels in the comps set -- which would inevitably lead to comps set hotels lowering rates, which would have a negative effect on all of us. When you do the math, you're accurate in terms of what it means, the second half must be in order to maintain the outlook. From our perspective, we're just being cautious and conservative about that. And obviously, we hope things turn out to be better, but we feel very good about where we are in the second quarter, and depending on what happens there, that's something we'll have to evaluate after the second quarter earnings.

Joshua Attie - Citigroup Inc, Research Division

Maybe I'll ask it a little bit differently, because it sounds like you were a little reluctant to revisit the guidance so quickly after you introduced it. But I guess, based on where you sit today, when you look at the back half of the year, if the low-end implies up 1%, the high-end probably implies around up 6%, which where -- is where the business is trending today. Based on what you note today, do you think that those 2 outcomes, up 1% and up 6% for the back half of the year, do you think they have equal probabilities today? Or do you think one is more likely than the other?

Michael D. Barnello

No, like I said earlier, I think that you're right. We just introduced the outlook a couple of months ago. We feel good about where the business is trending. And we're not assigning a different level of probability to either one of those. We're not seeing anything that would suggest that -- a downtick in the second half of the year. But from our perspective, we just want to be conservative, relative to the things we just mentioned.

Joshua Attie - Citigroup Inc, Research Division

Okay, and one separate question. Can you give us an update on the debt investment? In Shutters, has there had been anything new that's come out in terms of what those owners plan to do? I know it's still a year before the debt matures.

Michael D. Barnello

Sure, the debt matures May of '14. They are allowed to prepay us as early as January of '14. And I don't have much of an update for you, other than things are going well. They continue to pay us on time. And based on the information that we get, that hotel seems to be doing quite well. And so, other than that, I don't really have much of an update for you.

Operator

Our next question will come from Patrick Scholes with SunTrust.

Patrick Scholes

I'm wondering if you can -- maybe you did this in the prepared remarks, but break out what your RevPAR results, by month were for D.C., and also if you have that by occupancy and ADR growth? And the reason I'm asking, I'm just a bit skeptical after looking at the February and March results for D.C. versus other cities, which were pretty horrible in the Smith Travel results that the sequestration is in fact not hurting the city?

Michael D. Barnello

Sure. So D.C., let's see. For us, we were up 40% in January, 4% in February, we were down 8% in March. But Patrick, that didn't have to do with sequestration. That had to do with the citywides and the shift in accounting for the -- for Easter.

Patrick Scholes

Okay.

Michael D. Barnello

We're not -- we didn't see a slowdown in our government business, and we didn't get any cancellations for that period so...

Patrick Scholes

With that, just in the overall number citywides or just the attendance in the citywides wasn't there that you thought it would be?

Michael D. Barnello

It was the number. I don't think they saw a slowdown of people attending.

Operator

Next, we'll hear from Andrew Didora with Bank of America.

Andrew G. Didora - BofA Merrill Lynch, Research Division

Appreciate the color on sequestration. I just wanted to dig into that a little bit more. I think you mentioned in your prepared remarks that you're seeing a minor impact outside of D.C. Was this based on future cancellations that you got in April? Or is this -- or is it more just in terms of government groups little -- a bit more hesitant to book? And then in D.C., you mentioned that the government leads are down. Have you gotten future cancellations? And just curious in terms of how -- have you seen any change in any of your nongovernment leads in D.C.?

Michael D. Barnello

I guess, that on the nongovernment leads note, no changes. On the government leads, the leads are down. The -- a lot of the organizations issued a new manual, a new guideline, which is, I think, about 53 pages long on how they -- what they need to go through in order to book business. And it's got a lot of key questions in terms of defining whether it's absolutely necessary or not. And if it's necessary, why that particular person needs to attend. Those guidelines were, again, created beginning of the year and have gotten much more stringent in terms of getting any approved. And on top of it, it's not just getting approved to a level to above certain people. It's getting approved by folks 5 or 6 levels above, people who actually will attend the meetings. So it's gotten more difficult. The result, the government meetings are down. And that's just what we're hearing about in our D.C. properties. We're not seeing that elsewhere. When you look at the impact that we have seen, we mentioned was the minor cancellations, the detail on that is there were a couple of cancellations. They were, again, not in D.C. We saw them in Chicago, Indianapolis, San Diego, and they're for different periods of the year. Actually, it's pretty much across-the-board for the second, third and the fourth quarter. We don't know how much more that's going to continue, if it is going to continue at all. Thankfully, we don't have a lot of group business that's government-related, so our risk is not that high. But we did want to mention that we did see that start happening in April.

Andrew G. Didora - BofA Merrill Lynch, Research Division

Great, that's helpful, Mike. And then on a different topic, we've seen the transaction market changed a bit over the last 2 quarters or so. We've cited some more -- we've seen some more private equity activity emerge as many of the public REITs have taken a little bit of a breather here. Can you talk about any changes kind of you've seen in that market over the past 6 to 12 months and how that might impact some of your deal activity?

Michael D. Barnello

Well, you're right in terms of Q1 was a fairly light transaction quarter. And in fact, a number of the transactions that did close in the quarter were really carryover deals that have been negotiated for whatever reason in 2012 and fell into 2013. So you did see that. As far as looking back over the last couple of years, I think, a couple of things we've noticed. First, there was never a flood of deals that everybody, including us, way back when expected, and that didn't happen in '10, '11 or '12. It has been fairly steady. I think that transaction volumes in '12 were pretty much equal the transaction volumes in '11. And I think a lot of folks, a lot of the brokers who are pitching deals would expect the volumes in '13 overall to be pretty close or slightly up to '12. With that said, we haven't seen that so far. It doesn't mean it can't happen. There's still better part of 9 months left. But it has -- I'd say, it's been pretty quiet on the acquisition front. We still do have a deal pipeline, the deals we're looking at, we pretty much always do, however, I wouldn't call it as robust as it has been the last couple of years.

Operator

Our next question comes from Jeff Donnelly with Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Just another question on sequestration. Are you seeing a difference in maybe trends between transient government demand versus group events? I'm just thinking that the District of Columbia federal employees that maybe one is more representative than another category in the district?

Michael D. Barnello

The overall government rooms that we've seen were down slightly for the quarter. But again, just -- it's -- there's a couple of reasons. I mean, our group was up overall, and we don't do a lot of the business, Jeff, and so it trended down from something like 3.6% of our rooms to 3.1%. So it is a notch down. But remember, it's not just a question of less travel on their part as much as an equally a purposely driven strategy in our part not to take as much government business because the rates didn't increase.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

That's helpful. And I guess, continuing on Ryan's earlier question at the start. Were there any group cancellations at the Westin Copley? And I guess, did you see any sympathetic cancellations in other cities?

Michael D. Barnello

I didn't see anything in other cities. And really, the only thing that really was unable to come in -- we did have a charity event that evening. And obviously, with all the closures and the chaos that was going on, they shut down cell service. They halted airport traffic for a very short period of time, but it was tough to get in and around the city, so a lot of that -- that evening's business fell apart. But other than that, no group cancellations. It's been more individual.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And just the last question or 2. Can you tell us with the group ADR would have been up, excluding Indianapolis? I think in your prepared remarks, you mentioned that it was down, including it, because of the Super Bowl comp. But I'm not sure if you mentioned it, excluding it.

Michael D. Barnello

Let me see if I we can pull that up for you while we go to your next question to see if we can [indiscernible]...

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Sure. The last question actually was just concerning San Diego. I was just kind of interested in what your view was on the San Diego market for 2013 and '14.

Michael D. Barnello

We feel pretty good about San Diego. When we started talking about '13, I guess, as early as the middle of last year, and then, again, in October and February on our calls, we had predicted that the West Coast overall will do better than the East Coast. And the reason for that was -- big picture was that the demand -- growth was still continuing to increase since supply growth was very limited and citywides were not as affected overall in the West Coast. When you do look at San Diego, in particular, they see a little supply and then the citywides are down about 6% -- sorry, I'm sorry about 10% for the year this year. Now when we look out to '14, down slightly next year. So we think it'll be a good market, but they do have a slight downtick in citywides overall.

Operator

Our next question will come from Bill Crow with Raymond James & Associates.

William A. Crow - Raymond James & Associates, Inc., Research Division

A couple of questions, Mike. Any change to outside room F&B spend? It's been lagging this recovery relative to prior recoveries. I'm not talking just your portfolio but industry-wide. And anything that is sequestration-related or government-related? Were they're going back to existing contracts and kind of renegotiating the outside the room spend?

Michael D. Barnello

Haven't seen anything relative to the latter part of your question. On the food and beverage, I mean, our numbers appear a little misleading when you look -- just look at the -- what's reported in the press release. And that's why we added some color in Bruce's remarks that even though it was down overall, you really have to take out 4 properties. The Park Central, which was -- we've shut down all the food and beverage outlets, so the revenues are down substantially. We have transferred the in-house operation of what was the Libertine outlet in Gild Hall to the third-party lease of Finice [ph]. We also renovated Art & Soul at Liaison during the quarter. And the last thing was Super Bowl, which when we hosted the Giants and then after their victory at Super Bowl, spend food and beverage was enormous. So if you take those things out, our food and beverage spend was actually up 4% on remaining hotels, so we think that's pretty healthy, and we haven't seen anything that would cause us to think that there might be changes to that. It is a harder one for us to predict. It's because people give us numbers for the food and beverage spend and we have minimums, but those things do change pretty substantially month-to-month and quarter-on-quarter.

William A. Crow - Raymond James & Associates, Inc., Research Division

And on new group contracts that you're signing, any switch from chicken to steak, steak to chicken, anything like that, that you can -- any noticeable change in trends?

Michael D. Barnello

I haven't seen anything. I haven't heard that we're seeing that.

William A. Crow - Raymond James & Associates, Inc., Research Division

All right. The other question I have for you is really the cycle we don't talk about as much, which when we talk about the economic cycle and the fundamental cycle, but the other one is the acquisition disposition cycle. At some point, we reached a year -- a time frame where it may not make sense to buy anymore. It may make sense to sell, et cetera, we've seen that, again, prior cycles. Where are we today from an acquisition perspective, knowing there's always one-off deals that might make sense at any point in the cycle? But do you have another year to buy, another 2 years to buy as you think about it?

Michael D. Barnello

It's a good question, and something we spend a lot of time thinking about every time we're looking at new deals. And we typically do a 5-year unleveraged underwriting and if you look at the cash-on-cash on the IRR. And right now, we are not projecting a downturn, any kind of recession in our 5 years. It's something we think about. When should that be? It should be '18, '19 or '20. We don't have the greatest answer for you in terms of when the downturn's going to happen. And the reason for that is that, historically, the downturns have surprised all of us. And so to combat that bill, what we do is when we do our acquisition underwriting, we, obviously, have a base case and then we do sensitize that to different levels all less of RevPAR growth over that 5-year hold that will give us comfort that if there was some kind of downturn, what would the returns, what would the IRR look like. That's the first thing. As far as how much longer we have to build -- I'm sorry, to buy, it is a tough question to answer. Not only is it overall macroeconomic driven, but it is also microeconomic driven in terms of the market we're in. So some markets that perhaps may have different changes in demand generators or may have changes in citywides, may have changes in supply, will be different than markets that perhaps won't have as much of an issue in supply and perhaps better outlook for demand. So we do factor those things in. At the same time, the thing that helps us is that we're not flippers, we're not looking to buy something this year and get out of it in 2 or 3 years later. And as a result, if our view is, which has been and remains to be as a forever holder, then despite the fact there might be a downturn in, you picked at '18, '19, '20, our perspective is that if we bought the right hotels for shareholders that fit our markets and have the criteria that we look for, that they'll weather that storm and they'll come out of it and get to hit old peak levels again and grow. So to answer your question directly, we're still looking at acquisitions and we'll continue to look at acquisitions, mindful of things we just mentioned, and obviously, your concern. But that's not holding us back at this point. It's more of a question of finding the right products for the shareholders.

William A. Crow - Raymond James & Associates, Inc., Research Division

And on your 5-year IRR, have you increased the exit cap rates in your calculation over the past year or so to kind of reflect the natural maturation of the cycle?

Michael D. Barnello

We've never really had super low cap rate from our back end, so we haven't tinkered with that too much. We do show sensitivity grids that show what the results would be at different cap rates. Keep in mind a couple of things: First, because of what I said earlier relative to being long-term/forever owners, we focus more on the cash-on-cash. And while the IRR is important, if you don't sell, you never get to see that part of the equation. The second thing is that we think that the cap rate compression that you've seen over the last 3 or 4 cycles -- I'm not going to say it is necessarily permanent. But I do think that where we are cap rate wise for our types of markets leads us to believe that we don't really think we'll see cap rates go at 7 or above on a trailing basis for our types of hotels. Will there be exceptions here or there? Perhaps. But I think, overall, that's what's going to be. Because I think there's more and more people who know the histories of these markets who want to be in these markets, who know what the hotels can do. And I don't think you'll see sellers that would be interested in selling for high cap rates like that.

William A. Crow - Raymond James & Associates, Inc., Research Division

Okay.

Michael D. Barnello

That said, Bill, every cap rate on our underwriting is different. It's not just one number.

Operator

Our next question comes from Neil Malkin with RBC Capital Markets.

Neil Malkin - RBC Capital Markets, LLC, Research Division

I just had a couple of questions. One kind of going back to the acquisitions. Do you think that given the lower volume than, I guess, 1 year ago is due to maybe some hesitance on owners who don't want to sell, given an improving albeit slowly economy? And then part 2 of that question is, are there any markets where you're seeing pricing on assets kind of at or above replacement costs?

Michael D. Barnello

On the first part of your question, it's hard to say why or why not a seller or an owner would or wouldn't sell. Everybody's got their reasons. The thing that we would look back upon over the last couple of decades is good times, bad times, there's always been reasons for people to sell. So a lot of people have suggested -- you asked is it because everybody thinks the economy is growing so much, and so if it's growing so much, why sell? But those same things were happening in '04, '05 and '06 and '07, and there were a lot of transactions. In fact, it was -- probably, our biggest period of growth was '05 and '06, and there were a lot of sellers at that point. And everybody thought rightly so that things will continue for a while, and they did. They continued for rest of '06, '07 and even part of '08 before the downturn. So I don't think it was a lot of sellers who are waiting to time it perfectly as much as they had reasons. And I think those things still exist, whether it's partnership decisions, whether it's tax driven, whether a property needs certain amount of capital and the owner doesn't want to put the money in, you name it, or whether it's just time to harvest some profits. So those things still exist. So it's hard to pinpoint exactly why. I think that the good news is it's been fairly steady. It hasn't been a flood. And if I had to predict, based on what the brokers were saying, and we will probably see more deals later on this year. But from our perspective, if it happens great, if it doesn't happen, that's okay also. The second part of your question, replacement cost, that's a tougher one to nail down because I think a lot of people have different views what replacement cost is. And it's certainly something that we look at relative to every property that we buy. But let me give you some examples of the questions we wrestle with. We bought the San Francisco Monaco in 2010 and we paid about $340,000 a room for that. But what's the replacement cost on an asset like that? I mean good luck building in downtown San Francisco so close to Union Square. It's not a question of a bricks and mortar, it's a question of the approvals, acquiring the land, which is not something you can do easily. So what's the attribute that to? And we have other examples of that, the Sofitel in D.C. 2 blocks from the White House, the Viceroy on Ocean Avenue in Santa Monica. It's not just a question of the physical pieces because that will be easier to figure out. Well, you can build a room for x dollars. The harder part is value of land and the Part B on that is, is there even land available. And then the last question is, even if you have those first 2 things, can you even get anything approved. In a lot of places, you just can't do it. It's particularly tougher in California. So when you talk about, from our perspective, we haven't -- we don't feel like we've paid above replacement costs for our assets. When you -- if you're asking on a macro basis, the answer is we don't study as closely, we look at some of the other hotels and markets that are not our focus, so tough for us to answer. But from our market perspective, we don't think we've gotten to that level yet.

Neil Malkin - RBC Capital Markets, LLC, Research Division

Okay, great. That's helpful. And then my follow-up is on this call, people are asking a lot about other sequestration and impacts, but I think what we've been hearing, at least on our end, is that the health care or ObamaCare is causing more uncertainty, and I guess, fear on the -- for corporate management. And I'm guessing or I guess, have you guys seen the booking windows extended or the minimum spend lower that people are willing to do just because corporations don't know where they stand with health care costs for employees? And then, also, do you see any potential for an increase with your employees relative -- related to the health care -- Affordable Health Care act that's going to be implemented in the relative near-term?

Michael D. Barnello

Well, I think it's a very good question. And it's something that we've been thinking about for quite some time. I know that our operations folks have gathered information from all of our operations. Just keep in mind that as a corporate -- on a corporate level, we have a small number of employees. We have about 34 employees here at the office. When you look at our hotels, they have over 5,000 employees across the portfolio. Those employees are employees of the management companies. And we have about 20 brands and operators we work with. So it's a variety of employers that we're dealing with. We have surveyed all of those folks, and they've given us their initial thoughts on the process, and how it's going to work for next year when the Affordable Care Act gets implemented. And we have not gotten to a level we know exactly what that means dollar-wise or process-wise. It's a legitimate question. It's something we're studying, and we're hoping to gain more insight on really quarter-to-quarter. But I don't have a good number for you today. As far as the potential increase, the answer is, of course. I mean, until we've nailed down what the premium is going to look like, what the coverage looks like and then who we have to carry in terms of additional people who are not on our insurance today, it's a hard question to answer, but it's something that we're studying. As far as impact on the business, no one's mentioned to us that they have not booked anything because they're concerned about what health care cost will be this year or next year. It doesn't mean we're not thinking about it, it's just that no one has verbalized that to our folks yet.

Operator

Next, we'll hear from David Loeb with Baird.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Just a couple of follow-ups in the Park Central. As you go into these 2 quarters we have the most renovation, what do you think the biggest risk is to either time or budget?

Michael D. Barnello

Well, it clearly falls into what -- in uncertainty category. If something comes up that -- actually, really more goes wrong, if you're asking the -- an easier part of the question for us to answer is, when you're digging into the rooms, what are you looking for that you haven't seen yet? And from that perspective, we feel very good at what we've uncovered. And just to give you a little more color, is that, right now, as of tomorrow, we have about 190 rooms done on the Park Central. That's -- 25% of the Park Central rooms inventory are basically complete, so it's good. And all the rooms are going as expected. The lobby, which many of you walked through the old lobby, but that was a bigger concern for us before we actually opened it up. But if you actually we're able to go in there today, it's all opened up and everywhere they had to dig or excavate or tear down the ceilings, they have done so. So that minimized a lot of risks because they have not found things that they -- that have caused them concern. So with each passing day, a lot of the risks get minimized, but we do have a long period of time between today and the time we're done. And so we're obviously just being cautious. As far as timing, you know the million things that could go sideways on and on to go into others, but it's also -- there are all sorts of accidents that could happen, but from our perspective, the guys that we have in place, the project management team, the guys at Highgate, the designers, they're all working tirelessly, as well as in conjunction with our asset manager who's up there early every other week to make sure things go smoothly. And so far, that has -- so we feel pretty good -- very good about where we are. And we feel very hopeful that things will continue on the same path it's been.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

We've also heard that since Sandy that the city has been very slow with inspections and permitting, is there risks of that? Is there any way for you to be in front of that?

Michael D. Barnello

We have not experienced that. What you've heard, we've heard for other projects. Our guys have been on top of this from day one and have gotten what they've needed before and have gotten what they needed during, so that has not caused a slowdown at all.

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

That's great. And finally, just on the business mix at the Park Central post renovation. Have you or Highgate begun working with potential corporate accounts? And if so, what's the pricing? Are these new customers, existing customers, things like that?

Michael D. Barnello

Yes, they have reached out to a lot of corporate accounts. Just keep in mind that the hotel before is the Park Central. There's virtually no corporate business. So one of the things that was the biggest upside for us in splitting the hotels -- 2 hotels and creating Westhouse was that we're now able to go out and secure some corporate business that you guys all know is so fertile in that area. I mean, Alliance, Deloitte, Barclays, you name it, everybody's got offices within blocks of us. And we don't get any of that corporate accounts. They have targeted a bunch of corporate accounts. They have hired a good number of their sales team dedicated to the Westhouse Hotel, and they're showing off that product. It is very early. No one would sign the corporate rates for us now, but the game plan is that as we -- first of all, get done with Park Central, that lobby, so you can see how that turns out, and then move over to Westhouse project, that you will get a lot more corporate accounts. And each corporate account will have it's different rate category, David, depending on the size, the importance of it. So that's not been finalized yet, but we expect to have a lot of that done really by the third quarter. If you look at us traditionally as a portfolio, we start the corporate negotiated discussions really August, September, but most of those are not finalized until close to the end of the year, December and some even in January.

Operator

[Operator Instructions] Our next question comes from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Bruce, what are the longer-term plans in terms of refinancing the Solamar debt?

Bruce A. Riggins

Well, we'll pay it off with a line and there's really no -- we don't intend to refinance it with any secured debt. Our pro forma line balance will be -- call it $210 million, so it's still $540 million of capacity. So no real need to take on additional mortgage debt. And then as we look at acquisition opportunities, we'll evaluate both unsecured and secured financing options.

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Another question. I've heard that Standard hotel in New York's on the market. I'm just curious what your guys' view of that hotel is, if you're perhaps interested.

Michael D. Barnello

Our guys look at pretty much everything that's for sale in New York. And so that's something that they would definitely take a look at. I'd really not comment on our feelings on another -- somebody's else's hotel though.

Operator

And ladies and gentlemen, our last question today will come from Ian Weissman with ISI Group.

Ian C. Weissman - ISI Group Inc., Research Division

Not to beat a dead horse on deals, but I mean, CMBS market was up huge in the first quarter, $6 billion, I think, underwritten for hotels. Brokers are telling us that private equity is getting more aggressive. Are you finding them competing in the property types and markets that you're going after or private equity more interested in secondary markets and limited service product at this point?

Michael D. Barnello

We haven't seen a change in the competition level recently, well, for the private equity. They've been involved, is a bidder in probably most of the deals we looked at. Not necessarily the same ones, but big deals, small deals. So they've been there. Obviously, on the ones that we won, they didn't prevail, and it's hard to say where they ended up bidding-wise. But you do bring up an interesting point that we really didn't talk about relative to acquisitions earlier, which is with the debt becoming more plentiful and lower priced, what we're seeing in a number of cases and it's happened even a couple times even this quarter, is that hotels that were talked about being brought to market, ultimately, the owner is -- did either refinance or is in the process of refinancing because they're getting high enough proceeds at a low enough rate that they'd rather just take their chances and own a property for a couple of years than try to sell it now. And from that perspective, they also maintained any kind of tax status that they may had if they -- may have avoided if they actually sold. So in some respect, we're now competing with lenders on a refinance as much as we're competing with the peer REITS as well as private equity. But as far as the tick up in their activity, I have not seen it in our markets yet.

Operator

And gentlemen, that is all the questions we have today. I'd like to turn the call back over to you for any final and closing remarks.

Michael D. Barnello

Thanks, Andrea, and thanks, everyone, for listening to our first quarter earnings call. We look forward to seeing many of you over the quarter and talking to you in July during our second quarter call. Thanks.

Operator

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.

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