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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

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Chris J. Woronka - Deutsche Bank AG, Research Division

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

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

James W. Sullivan - Cowen and Company, LLC, Research Division

Patrick Scholes

Ryan Meliker - MLV & Co LLC, Research Division

Wes Golladay - RBC Capital Markets, LLC, Research Division

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

LaSalle Hotel Properties (LHO) Q4 2013 Earnings Call February 20, 2014 11:00 AM ET

Operator

Good day, and welcome to this LaSalle Hotel Properties Fourth Quarter 2013 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Ken Fuller. Please go ahead, sir.

Kenneth G. Fuller

Thank you, Tega. Good morning, everyone, and welcome to the fourth quarter and year-end 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 our results and activities for 2013, and specifically, the fourth quarter. He'll also provide our 2014 full year outlook. Bruce will provide additional details on our performance and outlook, including our first quarter outlook, and he'll discuss our balance sheet and capital markets activity. 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 actual results to differ materially are discussed in the company's 10-K for 2013, our quarterly reports and at 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 2013 U.S. lodging industry environment, followed by a review of our activities and results in 2013 and in the fourth quarter. 2013 was a solid year for the U.S. lodging industry. The year was characterized by limited supply growth, which increased only 0.7%; strong demand growth, up 2.2%; and pricing strength, evidenced by a 3.9% improvement in industry ADR. As such, RevPAR was positive, growing 5.4% in 2013.

We're very pleased with the performance of our portfolio, our acquisition and capital market activities and the finished product of our Central and WestHouse, New York City.

Let's begin with the operating results of our portfolio. 2013 was another year of outstanding performance for our hotels as we achieved new portfolio records in ADR, occupancy, RevPAR and hotel EBITDA margins.

During the full year 2013, our portfolio, excluding Park Central, delivered 80% occupancy, a 3.1% improvement over 2012. Our strong hotel occupancy is a reflection of our strategy to invest in the best locations within the strongest markets. Our hotels are located in the markets with multiple demand drivers, which mitigates the risk that comes from the fall-off of any one particular demand driver. The strong and steady demand for our hotel rooms enabled our operators to drive a rate increase of 2.4%, resulting in a 5.6% RevPAR improvement.

When we look at our entire portfolio, including Park Central, we're pleased with the records we've achieved. The portfolio reached -- reported its highest-ever reported ADR, $212, the result of a 2.7% increase from prior year. Occupancy was 79.2%. We're encouraged by the fact that our portfolio occupancy remains essentially flat relative to last year's occupancy, given that this result includes significant reduction in rooms sold attributable to the displacement we experienced while renovating and recreating Park Central and WestHouse. As a result, our portfolio increased just under 3% to its highest-ever RevPAR.

We had another year of outstanding margin performance, thanks to the efforts of our operators, our best practices program and our asset management team's relentless pursuit of efficiency and profit improvement. Expense growth was held to only 2.1% for the year. Our hotel EBITDA margin expanded 19 basis points to 32.2%, which is our highest-ever reported annual margin. While we're encouraged by our progress, there is still plenty of opportunity for improvement, given our pro forma peak margin will be approximately 36%.

The strong flow-through experienced in the hotel level translated into solid growth for our shareholders, with 14% corporate adjusted EBITDA growth for the year and 11% AFFO per share improvement. In addition to strong operation performance, we were pleased with the acquisitions we made. During 2013, we invested a little over $300 million to acquire 4 hotels. Each one of the properties we acquired is located in high barriers-to-entry markets with very limited supply growth. Hotel Triton and Hotel Serrano are located in the Union Square neighborhood of San Francisco, while Harbor Court is in the San Francisco Embarcadero. Southernmost is located right off the ocean in Key West, Florida.

Now I'd like to discuss the completion of the Park Central renovation and the recreation of WestHouse in New York City. As many of you know, we performed a transformational renovation of the Park Central Hotel, which is located on 7th Avenue in Manhattan, between 55th and 56th Streets. We acquired a 934-room hotel at the end of 2011, and the product was dated. During 2013, we reduced the room count to 751 rooms and transformed the lobby, food and beverage outlets, meeting space, corridors and guestrooms. Additionally, we created a 172-room WestHouse, a more specialized hotel experience located on 55th Street, between 7th Avenue and Broadway. WestHouse features a well-appointed lobby and an upgraded, more upscale guestroom experience. We're thrilled with the outcome of this project and are confident that it will be well-received in the marketplace.

Now, we look forward to unlocking the ADR potential of these extraordinarily well-located assets. During the last couple of years, the hotel's ADR was about $50 below the average Times Square hotel. Given the above-average location of the hotel, we look for our renovation to enable Park Central's ramp-up to the average Manhattan rate, and we're looking for WestHouse to deliver $50 to $100 more ADR from the Park Central once stabilized. We anticipate stabilization to take 1 to 3 years for Park Central and 2 to 4 years for WestHouse.

As a reminder, we purchased the asset for a little under $425,000 per key, and our renovation brought this investment total to approximately $510,000 per key, an extremely attractive basis for the product level and location of these assets.

In addition to the company's successes operationally, transactionally and with respect to the completion of the Park Central and WestHouse renovation, we improved our already strong balance sheet. During the first quarter, we redeemed $100 million of 7.25% Series G preferred shares and issued $110 million of Series I shares at 6.375% coupon, which is a record low for lodging REITs.

In October, we sold common stock at $30.05, which resulted in lowering our leverage to 3.9x.

At the beginning of 2014, we extended the maturities and lowered the interest cost on our $750 million revolver and $300 million term loan. As a result of all these efforts, our current weighted average interest cost is 3.9% for all the company debt. And our cost of debt in preferred is only 4.4%.

We feel great about our results and activities for '13. And now, I'll provide some insight into the industry and our fourth quarter performance.

During the fourth quarter, the U.S. lodging industry experienced demand growth of 2.5% against only 0.7% increase in supply. As a result, occupancy improved 1.8%. ADR increased 3.3% in Q4, continuing its trend of contributing majority of RevPAR growth, which was 5.1%. These results are particularly refreshing, given widespread concern that our industry's growth would be stunted by the government shutdown, which occurred during the first 2 weeks of October.

Excluding Park Central, our portfolio RevPAR grew 5.2% in the fourth quarter, with an ADR increase of 3.3% and occupancy growth of 1.9%.

During the quarter, our group occupancy was flat, relative to the prior year, but our operators grew group ADR by 3.5%. Transient rooms increased 2.3% and the transient rate improved 3.1%. Our group transient mix was 30% group and 70% transient during the fourth quarter and the full year 2013 as well.

Our portfolio produced a hotel EBITDA margin of 30.6% during the fourth quarter, an increase of 20 basis points over our prior year margin. As such, our portfolio delivered solid EBITDA growth, which led to strong corporate adjusted EBITDA and AFFO per share improvement. Corporate adjusted EBITDA increased 17% to $72.9 million, and AFFO per share increased 17% to $0.55 per share.

Let me turn to our outlook for 2014. I'll start with a brief overview of the economy, which is providing positive signals. Unemployment declined by 1.1 percentage points during 2013, though this is still historically high. Further declines in the unemployment rate and strong job growth are obviously very positive for our business. Consumer confidence has been volatile, but increased to the highest level in 5 years during 2013. Corporate profits achieved another year of record levels in 2013, and employments have been solid. GDP growth was positive all year during 2013. Fourth quarter GDP improved by a little more than 3%, while full year GDP increased 1.9%. Current estimates for 2014 are 2.5% to 3%, and we're optimistic that the trends we're seeing in our economic indicators will continue to improve in 2014, which will benefit the lodging industry and LaSalle tremendously.

While we [indiscernible] in our industry, we continue to benefit from historically low supply growth. We had supply growth at 0.7% in 2013, and the prognosticators are calling for growth of slightly more than 1% in 2014, which is still well below the long-term average. This low supply growth, coupled with continued demand growth, bodes extremely well for both the length of the recovery and the potential for continued strength and pricing power across the industry, and particularly in our markets, which tend to run the highest occupancies. In fact, 7 of the 9 markets that make up a large majority of our portfolio are currently running at peak occupancy. Since all of our target markets are running at peak demand, we expect these peak occupancies will lead to further rate growth for our portfolio.

Looking at our portfolio, I'll share some specifics that will provide some background regarding our outlook. Most of our operators completed the bulk of their 2014 corporate negotiations, and we're pleased that our portfolio was able to contract for nearly 7% rate increases on average.

Turning to our group pace. Our group revenue pace is up 2%, comprised of 4.6% increase in average rate, offset by a 2.6% decline in the rooms. Transient pace is up 5%, which is made up of a 9% increase in average rate, while rooms are down 4%. As a result, total revenue pace is 3% ahead of last year, with rate up 6.4% and rooms down 3%.

We expect the best results in 2014 from Boston, Key West, San Francisco, L.A. and Seattle markets.

Turning to our outlook, we anticipate RevPAR growth of 5% to 8.5%. We anticipate our margins to be flat to 100 basis points improvement. The flat hotel EBITDA margin reflected at the low end of our range is impacted by the expected recovery of lost occupancy at the Park Central. Our outlook for adjusted EBITDA is $320 million to $340 million, and AFFO per share is $2.28 to $2.48.

We also wanted to mention the Investor Day we just had a couple of weeks ago. We hosted a well-attended institutional investor and research analyst day on February 5. We walked through many case studies and demonstrated the value we've created in our portfolio as a result of opportunistic buying and diligent asset management. We then provided a tour of the Park Central and WestHouse hotels. For further details, please refer to our Investor Day presentation in the Investor Relations section of our website.

Looking ahead, we're excited about the Hotel Vitale, a 200-room hotel we have under contract in San Francisco. San Francisco has been one of the strongest U.S. markets and has one of the most favorable supply outlook for the next several years. Demand growth has been solid and the market results have continued to reflect substantial pricing power.

Hotel Vitale is in one of the best locations in San Francisco, in the South Financial District on the Embarcadero, with breathtaking views overlooking the bay. The hotel is located within a few blocks of various corporate offices, including Google, GAP, PG&E and Salesforce. The hotel runs an average rate substantially higher than our portfolio, but the EBITDA margins are just 23%, substantially below our portfolio average. We expect demand for the hotel product and location remains strong, while we capitalize on opportunities to grow the margin. We're excited about this transaction.

Now, Bruce will provide some additional details about our fourth quarter performance and capital markets activities, and update our balance sheet and our first quarter 2014 outlook. Bruce?

Bruce A. Riggins

Thank you, Mike, and good morning, everyone. I'll start with more detail on our fourth quarter results.

As mentioned, our fourth quarter RevPAR increase, excluding Park Central, was 5.2%. RevPAR at our resorts increased 10.7% due mostly to rate, which grew 8.3%, while occupancy improved 2.2%. Our convention portfolio grew 5% RevPAR, both with ADR growth of 2.6% and occupancy growth of 2.4%. RevPAR at our urban hotels, excluding Park Central, increased 4%, with ADR growth of 2.4% and occupancy improvement of 1.6%. Boston was our strongest market during the fourth quarter as RevPAR grew 14.7% due to an 8.6% increase in ADR and a 5.6% improvement in occupancy. San Francisco was also very strong in the quarter with a RevPAR increase of 14.5%, comprised of a 10.2% ADR improvement and 3.9% growth in occupancy. Seattle had a RevPAR growth of 11.7%, as ADR grew 8.8% and occupancy rose 2.7%. Philadelphia had RevPAR growth of 2.1%, driven by occupancy, up 3.5%, and partially offset by a decline in ADR of 1.4%. Los Angeles RevPAR grew 1.4%, with occupancy growth of 2.2% and an ADR decrease of 0.7%. Washington D.C. RevPAR was flat this quarter. ADR increased 2%, but was offset by an occupancy decrease. Excluding the $1 million impact of the government shutdown, D.C. RevPAR would have increased 3.6%. We also had renovations underway at Hilton Old Town, Hotel George and the Donovan House during the quarter. San Diego had a RevPAR decrease of 3.1% due to a 5.8% decrease in occupancy, partially offset by a 2.9% increase in ADR. San Diego had fewer conventions in the quarter compared to the fourth quarter of 2012.

New York was one of our weaker markets due to finalizing the renovation of Park Central. As such, RevPAR declined 6.6%, with occupancy decreasing 5.5% and ADR was down 1.1%. Excluding Park Central, RevPAR at our New York hotels grew 1%, driven by a 6.7% increase in occupancy, partially offset by a 5.3% decrease in ADR. These results are negatively impacted by a tough comparison to Q4 2012, where our New York portfolio RevPAR increased over 11% due to business driven by the cleanup efforts after Hurricane Sandy.

Chicago was our weakest market overall. RevPAR fell 7.4%, with ADR down 8.1%. Chicago citywides were down more than 30% in the fourth quarter.

During the quarter, our best performing properties were Southernmost in Key West; Hotel Monaco and Harbor Court in San Francisco; Chamberlain in L.A.; Hyatt Boston Harbor, Onyx, The Liberty and Westin Copley in Boston; and the Alexis and Deca in Seattle. Sofitel D.C., Viking in Newport and the Indianapolis Marriott also experienced notably strong growth.

As we look at the expense side of our operations, our asset management team and our operators continue to be very effective in the fourth quarter in controlling cost. The portfolio-wide hotel EBITDA margin was a strong 30.6% in the fourth quarter, which represented an increase of 20 basis points from the prior year. Our hotel EBITDA was $76.6 million, an increase of $3.1 million or 4.3% compared to last year. Our corporate adjusted EBITDA increased $10.7 million or an impressive 17% compared to last year. And our adjusted FFO per share was $0.55, an increase of 17% compared to last year.

On the capital markets front, in October, we raised $229 million from an equity offering in which we sold stock at $30.05. At December 31, we had total debt outstanding of $1.26 billion, at an average interest rate for the quarter of 3.7%. As of year-end, total debt to trailing 12-month corporate EBITDA, as defined in our senior unsecured credit facility, was 3.9x, which translates to a current interest rate on our credit facility of LIBOR plus 170 basis points.

As Mike mentioned, in January we refinanced our revolver and $300 million term loan. We extended both maturities to 2019, and reduced our annual interest cost. The interest rate for the new revolver is based on a pricing grid with a range of 170 to 215 basis points over LIBOR, up to 6x leverage. The current interest rate on the revolver is 1.86%. We added the ability to upsize the $750 million revolver by $300 million. We also had the ability to upsize the $300 million term loan by $200 million.

As of today, we have approximately $625 million of capacity on our credit facility, and 39 of our 45 hotels are unencumbered. As such, we have substantial liquidity with which to execute our business plan and continue to be opportunistic from an acquisition perspective.

Now, I'll provide some additional details regarding our outlook for 2014. To briefly reiterate what Mike shared, our outlook is based on portfolio RevPAR growth of 5% to 8.5%, and hotel EBITDA margins to be flat at the low end to a high-end outlook of 100 basis points of margin growth.

Our portfolio currently generates industry-leading hotel EBITDA margins, and we continue to strive to keep expense growth at bay and run as efficiently as possible. We had another year of outstanding performance in this regard during 2013, and would expect to continue to perform in this manner during 2014.

As such, the range for adjusted EBITDA is $320 million to $340 million, and our range for adjusted FFO per share is $2.28 to $2.48. Our outlook reflects a $6.3 million reduction in EBITDA due to the February 10 payoff of accounts with Shutter, Smith and [indiscernible], and income taxes of $8 million to $10 million compared to $500,000 in 2013.

As for the first quarter of 2014, the portfolio was negatively impacted by a tough comparison due to the presidential inauguration in D.C. last year, which provided $1.8 million of incremental room revenue, contributing 140 basis points of RevPAR growth for the first quarter of 2013. Our January 2014 RevPAR declined 1.2%, but grew 7.5%, excluding Washington D.C. As a reminder, during the quarter, Hilton Old Town, Hotel George and Donovan House were under renovation as well.

Based on these factors and the portfolio's performance to date, we expect first quarter RevPAR to increase 2% to 5%. We expect our portfolio to generate adjusted EBITDA of $42.5 million to $45.5 million, and adjusted FFO per share of $0.29 to $0.32.

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, 2013 was a very successful year for LaSalle Hotel Properties. We achieved new records in several key operational metrics including ADR, occupancy, RevPAR and EBITDA margins. We made meaningful acquisitions in markets of first preference. We further strengthened our balance sheet, and we successfully completed the Park Central and WestHouse renovations. We expect those projects to drive substantial growth beyond 2014. Our portfolio's poised to deliver outstanding results and the market dynamics are in our favor. We look forward to another strong year in 2014.

Over the past 3 years, we have consistently improved our portfolio, having invested $1.8 billion, optimistically acquiring high-quality properties in key markets, many with upside potential, which we work diligently to unlock. Our capital markets activities and balance sheet place us in great shape position to continue to act opportunistically like we have throughout this market upcycle.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Steven Kent.

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Two questions. Can you just talk a little bit more about the D.C. market? It's interesting, because Marriott just noted on their call that they don't think the conference center opening up will impact results. And I just wanted to -- broadly in the market, I just want to understand your view. And then, can you talk more broadly about expense control and what your expenses are growing at? And then, I'm sorry, one final question. The Hotel Vitale expected to close -- how much -- when would it expect to close? And what do you think the margin gap is and how long will it take for you to close that margin gap?

Michael D. Barnello

Sure. Good morning, Steve. First, on the D.C. market, I guess just in terms of general comments, we have continued to believe in the D.C. market for the long term. We're not investing in an asset or a market for 1 year or 2, we're investing for the long term. And D.C. has been a long-term outperformer. The last couple of years have been more difficult for it relative to some other markets. But we're investing for the long term and we think it will continue to come back. When you think about what happens in 2014 relative to the Marriott Marquis, we absolutely expect it to have impact. I mean, it's supposed to open right around May, I think the early part of May, and we're factoring about 8 months of additional supply and almost 1,200 rooms. And so the supply increase will be in the 4% range for the year just because of that property. So it's really hard to say that, that would not have any impact. And 4% supply growth does have impact on our -- on any market. Now, thankfully, D.C. is running at peak demand and has been, really, for the last couple of years. And so [indiscernible] continue to grow. So our expectation is they will absorb some of that. I mean, maybe even all of it. But it absolutely has to have effect in the second half of the year. When we think about expense control, to guess, I'd say a couple of things. I mean, our margins have been a source of pride for us for a long time. Our asset managers work hard. They're very competitive about doing the right thing, efficiency-wise, in all of our properties. And our operators have done a great job coming together to use -- utilize our best practices to do that. And so it's not a surprise that our results have been strong on the margin perspective for a long time. When you think about what we did in 2013, with expense growth of 2.1%, it's pretty amazing given what things have increased over the years. Most particularly, real estate taxes are up almost 10%. And labor costs, obviously, continue to increase. Benefits continue to increase. And so we've been able to find other ways to be more efficient. When you think about how that works going forward, the thing that we say in general is it takes about 3% of RevPAR to equate to the offset of a 3% expense growth. Now thankfully, we've been more efficient. In the last couple of years, we've been able to do less than 3%. But we generally, we think budget-wise, from that perspective, what the expense growth is going to be. Big picture items that are weighing heavy on us in '14: One, the ACA health insurance, and a lot of our hotels are in compliance, despite the fact they're not necessarily required to be in compliance. And that's, obviously, an increase. You have, obviously, labor, which is the biggest component of our expenses, going up 2.5% to 3% depending on the markets and the properties. Real taxes continue to go up. They're lumpier, but they continue to go up. So we've been more efficient in other areas, but those are the biggest expense headwinds that we have. And obviously, we're expecting -- we're going to try to find new ways to be more efficient. I think the last part of your question was Vitale, when we expect it to close. As we said when we announced it, we're really just waiting for the City of San Francisco to approve the assignment of the ground lease [indiscernible] the landlord. And they don't have an obligation to get back to us anytime soon, so it's really hard to pin it down. I think it's not weeks, it's months. But I don't -- and I don't want to give you a number that we can't achieve because it really is 100% out of our control. Whenever the city wants to approve it, that's when it will be approved. Oh, and last, I guess, you asked about the margins there. They're about 23% that we announced, we announced in our investor day. And you guys know our average margins are over 32%. This particular property does a lot higher average rate, so one would think that the margin's would actually be on the higher side of our average. When we get into it, we expect to be able to find savings and efficiencies, just like we've done for all the properties we've acquired. And we showed you guys a lot of that during the Investor Day presentation and the case studies. And obviously, you're welcome to look at those and see where we bought properties, margin-wise, and what we transformed them into today, and we expect the Vitale will be along those same-story lines.

Operator

And our next question comes from the line of Chris Woronka.

Chris J. Woronka - Deutsche Bank AG, Research Division

I just want to ask you first about Chicago. Obviously, you didn't have a great 2013. And based on the data we're looking at, it doesn't look like it's off to a real hot start. Is there something structural there? Are you -- do you guys think maybe you outperformed the market? Just maybe some color on what's going on there, and if it's going to change anytime soon.

Michael D. Barnello

Well, Chicago is interesting. When you think about it, it is structurally a tough market, the answer is I don't think so. I think that if you look at all of our big markets, our A target markets, it is the market that has perhaps, the most availability of space to add supply in terms of expanding into neighborhoods and going further west, out -- away from the lake. And quite frankly, people have done that. So when you think about what happens in 2014, we expect that Chicago will have about a 4% supply increase, which is obviously higher than average and higher than we'd like. When you think about where Chicago shook out for us for the year of '13, they were about 2.5%, 2.3%, Chris. And obviously, down in the fourth quarter because of citywides. So a lot of Chicago have to do rely on how citywides play out, maybe more so than any of our other cities. When we look into '14 at the citywide story, it's pretty close to flat in terms of the room rates. They're down a number of shows, but the room rates are actually fairly flat. So -- but [indiscernible] as we mentioned, up in supply. So we're not expecting a big performance in Chicago in 2014. When you think about it structurally, in terms of whether we continue to invest there, our perspective is we just have to factor those things into any acquisition model we look at because there's prices for lots of different assets and we want to make sure that we're underwriting both the supply and demand trends accurately, including the citywides. The other thing I would tell you is that we're obviously looking for some improvement on the, what was the Hotel Sax being renamed the Hotel Chicago as of February 5. And at the same time, it became an autograph hotel. So that doesn't kick in, in the first day and it's obviously been 2 weeks. But we're expecting continued growth to be part of the Marriott reservation system, and we're hopeful to update you positively on that, fast-forward a year from now, and tell you how that's worked out.

Chris J. Woronka - Deutsche Bank AG, Research Division

Okay, that's great. And then just a second one. On a couple of your few core -- or non-core markets you have left, any updated thinking on potential sales there, given what we think is a fairly strong market for sales?

Michael D. Barnello

Well, we have not really ever commented on any sales or acquisitions until we've announced something, so I wouldn't give you any specifics. But I would tell you that we look at all the properties every year, non-core and core, to evaluate in a whole diverse sale analysis, whether it makes sense to hold them or sell them. I would tell you that obviously, the core properties are in target markets, and so we haven't sold anything there. We look at the non-core, which you're referring to, there's not a lot of those properties. And quite frankly, a lot of them have done very well for us. And so we look at -- I look to the next 3 to 5 years and see what they're going to do before we would actually make any decision on potentially selling. But I can't get any more specific than that because we wouldn't give it out until we were actually ready to announce something.

Operator

Our next question comes from the line of Ian Weissman.

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

Most of my questions have been asked and answered, but just curious about the 1Q guidance. We sit here about 2/3 through the first quarter, just what's -- why the wide range? And what could go right, what can go wrong?

Michael D. Barnello

The biggest thing for Q1 is that Q1 ramps up, Ian, with less of the revenue in January, then building in February and the most in March. So even though it appears that January is in the bank and that we've already experienced that, January itself is about 25% of the overall quarter. And then February starts to build, it seems March is actually the most meaningful month of the quarter. So part of it is that. And obviously, we told you how we did in January. We were down overall. But that's a little mischaracterized because it was really predominantly the result of Washington D.C. being down 32% comparing itself this year to the inauguration last year. But when you take that out, it's up 7.5%. And I think we just -- so for that reason, we just wanted to have a wider range to encompass whatever else could happen in some of the tougher markets like D.C. and New York.

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

Okay. And just curious, I don't know if you quoted a cap rate or a multiple on the San Fran deal, but any update on that?

Michael D. Barnello

We did give it out at the Investor Day. It was about a 4.3% cap on trailing.

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

And what type of IRR would that be underwritten to?

Michael D. Barnello

Well, we don't give out any specifics on our underwriting. But we have said, and I think it's really forever, it hasn't really changed, that we're underwriting 2 double-digit IRRs on a 5-year unleveraged basis. This wouldn't be any different. We're comfortable that we'll get to that level on an unleveraged basis in over 5 years. How we get there is different with each asset. Sometimes, they start up a little higher and they have more slow, steady growth. And sometimes, they start out with lower cash on cash because we're changing things over whether it's with management, renovation, repositioning, et cetera. And so -- but we're confident that between where the margins are and where this market is and is going, that this will definitely achieve that threshold of under -- of IRRs.

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

I'm just curious, how does that full [ph] process change between a ground lease and a fee simple property on their return expectation?

Michael D. Barnello

So, yes, I mean what we do is we don't solve for a 10 when we're looking at the purchase price. So to get to double digits, you'd say, well, as long as we get a 10% IRR, that would make sense, let's just buy it. What we do is we look at the risk factors, all the positives and negatives, and that's with every asset. And even though assets, for us, are really in our target markets' [indiscernible] location, some have characteristics, like you mentioned, like ground lease is not our first choice. So in theory, we should be getting a higher return for taking a touch more risk relative to a ground lease. Now, that's where it's not as scientific. It doesn't mean that if it was a 10 IRR without a ground lease, it's an 11 with a ground lease. We recognize that factor and we put that into the many of the pros and cons that we weigh to determine if the -- is the return we're getting worth the risk and/or additional risk we're taking on buying any particular asset. So a lot of things go into the cooking when we underwrite an asset. It's not just one thing like ground lease or fee simple. And then we have to look at -- are there opposites that offset having these things like ground leases. And also, every ground lease is not the same. Some ground leases are much longer term, some ground leases are very small payments. The copies and air rights lease is prepaid for the 80 years we bought it. Indianapolis has a ground lease for 150 years for $1 a year. So those are -- they have -- they say the word lease in them, but they're effectively fee simple.

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

Are there standard step-ups in this ground lease in terms of -- how is the ground lease structured?

Michael D. Barnello

It's about -- well, here's what I would tell you. It's got 56 years left, and I don't want to get into too much detail, we haven't closed any asset Ian. And we'll definitely answer all those questions when we do, but it is the deference to the seller. It's really about all we should be getting into.

Operator

Our next question comes from the line of Nikhil Bhalla.

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

A quick question for you. On the occupancy projections for the Park Central, Mike, what do you think the stabilized level for occupancy would be at this hotel, including the WestHouse?

Michael D. Barnello

Well, that's a good question. They're actually very different animals in some respects. Consider it this way, Nikhil, the old Park Central ran high 90s occupancy, obviously, with 934 rooms. When you think about the new Park Central by itself, we would ultimately expect to get very strong occupancies in the high 80s and the 90s. And it doesn't mean we have to get to the same level of the high 90s we were at when we were the old Park Central. On the WestHouse, which is going for a more discerning customer and obviously, a much higher rate, we would expect that the occupancy stabilizes at a relatively lower occupancy. It wouldn't be low relative to the country, but it would be low relative to the Park Central. So we hope that, over time, it would get into the 80s. But that's going to just depend on how quickly we ramp up. And given the fact that it's a smaller hotel, Nikhil, we don't think that, that's a stretch, assuming New York continues to grow as strong as we expect it to grow.

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

Sure. And just a follow-up question on the acquisition pipeline as of the moment. What are you seeing out there? Is your pipeline a little bit stronger now than it was maybe last quarter?

Michael D. Barnello

I think it's been pretty steady. I mean, there's -- we've been characterizing it the last couple of quarters as not all that robust, but I think it's still the same. I mean there are deals out there. There are some deals that -- of the deals that are out there that we look at, and there's a lot that we don't. But there's always some things to look at. Whether any of those things hit for us, it's hard to say. And last quarter, we updated you guys, we didn't have any sense of the Vitale and, obviously, we're talking about getting that closed hopefully sometime soon. So things do change from quarter to quarter. And for us, being kind of rifle shot focused, it doesn't take a lot of deals for us to get some things working, and they may not be deals we even know about right now.

Operator

Our next question comes from the line of Jim Sullivan.

James W. Sullivan - Cowen and Company, LLC, Research Division

Mike, just a follow-up on the prior question. I think you touched on this in the Investor Day, but if you could just remind me, what is your thought in terms of the stabilization period for occupancy at the WestHouse?

Michael D. Barnello

Sure. What we talked about for both pieces, and this wasn't just in the Investor Day, we've been talking about this for a while ever since we announced the split of the hotels, is we thought that the stabilization for Park Central would be 1 to 3 years, and then the WestHouse will be 2 to 4 years. And the real difference is that the whole world already knows about the Park Central, between cabdrivers and tourists, international, people that have been coming there for a long time. Not that everybody will be able to afford to come there again, but there is a personality to that hotel. When you look at WestHouse, until we opened in December, nobody ever heard of it. So it just takes a while longer to get the word out, and that's why we think it's just a relative extra year to ramp up. Now, both of those numbers are completely dependent upon how strong New York is. The stronger New York is, the quicker it will ramp up.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And secondly, in your prepared comments, you talked about enplanement. And that's always been one of the leading indicators that you've talked about as a company. Obviously, in the first quarter, we've had a pretty unusual quarter in terms of flight cancellations. And I'm just curious, when we have this level of flight cancellations, and I realize this can cut both ways sometimes in some markets, but to what extent is that a factor that would take that RevPAR number to the lower end of the range?

Michael D. Barnello

We track the flight cancellations as well. It's interesting. I mean, I think I saw that there's been 75,000 flight cancellations since December 1. Obviously, all of that wasn't in the first quarter. The other thing I read was that New York's 3 airports have had more cancellations this year than the last 2 years combined for the first quarter. So they're way ahead of cancellation. When you think about it from us, I guess the most simplistic way to think about it is if they're short-term cancellations, meaning we're surprised by weather or something, then generally, it's not as impactful because yes, people can't get in but a lot of people can't get out. So because they can't get out, they're stuck at our hotel. So that's not as impactful. The ones that hurt us the most are when they have 5, 6 days' notice. They warn everybody not to go to a city, usually in the Northeast. And when they do that, then nobody comes. And that, we get impacted whether or not the actual event of weather happens. So we saw that big time, Tim, with Sandy where nobody came to basically, Boston, Philadelphia and D.C. And they didn't get hit anywhere near as hard as New York, which got hit, and then obviously recovered because for different reasons. So we monitor that. We think big picture on the enplanement, just talking to folks that we know that we think that the airlines will add a touch more capacity throughout the year. And that capacity will obviously translate to more enplanement. Well, that's a good thing. And so we'd expect a little bit more lift there. And obviously, the last thing we looking at it, is more international. The more international inbound they can get, the better off it's going to be for, I guess, the whole country. Whether it happens in our hotels or not doesn't matter. It's going to come to the big cities, and that will provide more demand.

James W. Sullivan - Cowen and Company, LLC, Research Division

So overall, when you think about airlift, I think you said a touch more. You're talking, is it like a 1%, 2% kind of increase in capacity for the year?

Michael D. Barnello

I think it's a touch. I don't know that it gets to 1%. But as -- they're meaningful numbers when you talk about flights, but I think it's probably in that 1 percentage range.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And then final question for me. Really talking about labor costs, you talked about the Affordable Care Act as an issue that has to be addressed and managed around or handled. But I'm just curious, we hear, particularly when people talk about New York City, F&B outlets, the impact of union activity or union presence in F&B outlets making it very difficult to make any money. This has been an issue for a long time. I'm just curious, particularly as you're expanding your investment in the West Coast, particularly California. When you think about union issues, number one, is the union situation comparable in California to what it is in New York City in terms of the presence and -- of unions and the impact they have on labor cost, number one? And then, number two, minimum wage legislation has passed there and in line for pretty significant increase over the next couple of years. To what extent is that a factor as you think about your expense profile in California?

Michael D. Barnello

Sure. And I guess, we'll take the second part first. Look, anytime there is an increase in cost, minimum wage, health care, real estate taxes, et cetera, we monitor that through all the hotels and markets that are affected. So to the extent that those things cause changes, then that will be an expense that we'll notify you guys of. And that has happened over the years in many different markets. I mean, if you remember when Bloomberg first took over, he increased real estate taxes significantly over a 5-year basis and that hurt us with New York assets. So those things happen from time to time. And what are -- you mentioned living wage or minimum wage, is there anything. Yes, we'll monitor those. And if it happens, then we have to adjust accordingly. And the rest of it, when you -- about your first part, it's really just we monitor all the costs of all the properties. And when we look at overall labor, it's -- we're monitoring what fair pay is and fair wages are across the portfolio, across the markets, and what we're seeing not just in our hotels, but other comparable hotels that our operators operate or other operators operate. So it's hard to give you a real answer about that for the first part of your question just because it's kind of broad. But we're looking at every expense category in detail and trying to balance fairness with what we think is most efficient.

James W. Sullivan - Cowen and Company, LLC, Research Division

Well, if we could go back on the minimum wage issue in California, I think the increase is, it's passed, it's pretty substantial. It will take place, I think, over 3 years. And to what extent, if any, can you tell me what percentage of the employees in those hotels here would be affected by changes in the living wage?

Michael D. Barnello

Yes. Well, first of all, minimum wage and living wage are different. And I don't really think we have -- or I don't know that we have many hotels, many properties or many employees at all that are paid below the minimum wage that they're proposing. So on a immediate impact basis, there's not much impact there at all.

Operator

Our next question comes from the line of Patrick Scholes.

Patrick Scholes

A somewhat related question to the last one that was asked. Mike, if you could talk a little bit about your -- what you see for margin potential for your recent San Francisco acquisitions versus some of your earlier cycle buys such as the Monaco or the Villa Florence?

Michael D. Barnello

Well, we haven't given out individual projections on any asset. But to run back 6 months or so, when we bought -- we had 3 assets that we bought in San Francisco in August, the Harbor Court and the Triton were together. They actually do very well on the margin side. And so we expect there'll be improvement using our best practices. But the fact they already do well and they're fairly small hotels, I wouldn't think it's going to be a ton of margin improvement there. The play for both the Harbor Court and the Triton was the market. When we switch gears and talk about the Serrano, the Serrano had about a 25% EBITDA margin when we bought it on a trailing 12 basis, Patrick. And I'm not going to tell you we're going to get to our average tomorrow. But clearly, we don't think there's any reason why we shouldn't get to our average 32% anytime soon. So that's something we're working on ASAP, and we expect to move that fairly quickly. And without giving you exact underwriting, because I wouldn't give that out, you can look at our case studies and see how swiftly we've been able to move from X to Y in terms of margin growth. And it's been pretty substantial and pretty quick.

Operator

And our next question comes from the line of Ryan Meliker.

Ryan Meliker - MLV & Co LLC, Research Division

Just one quick question that I was hoping you may answer for me. I guess, Bruce, this is probably more for you. On the income statement, other expenses came in at $5.4 million up materially from last year. It was up slightly last quarter as well. What's in that line item that's driving the increase? And how should we think about that from a run rate basis?

Bruce A. Riggins

Most of that, Ryan, is you'll see it in our schedule to get to adjusted FFO. It was preopening and some management transitions, severance and most. Most of that is nonrecurring. And that would be excluded from our adjusted EBITDA and FFO.

Ryan Meliker - MLV & Co LLC, Research Division

Wonderful. I just wanted to make sure that was the case.

Bruce A. Riggins

Yes, sure.

Operator

Our next question comes from the line of Wes Golladay.

Wes Golladay - RBC Capital Markets, LLC, Research Division

I'm looking at the F&B this quarter. It looked like there was a nice uptick there. Was that purely related to the comps versus Sandy last year? Or is there any strength in this business?

Michael D. Barnello

Well, I would say a little bit would have come from Sandy because obviously, we got hurt with the big-time occupancy hit outside of New York City with Sandy last year. And so obviously, it translated into some additional F&B and other revenues. When we think about it as a trend, not so sure that I would tell you that we're seeing a significant uptick of that as anything abnormal. Our food and beverage is up about 3% for the year. A little more when you actually account for the fact that a couple of the outlets we changed, meaning Park Central's outlet, was really closed all year. We had changed one hotel to a lease we had, which was Gild Hall. And we renovated, heart and soul, Liason. When you adjust for those things, we're up I think almost 3.7% or so for the year in food and beverage, which is where we think that we've modeled the normal run rate to be. Obviously, our hotels are running pretty full at 80% occupancy. So we're not expecting big occupancy gains for the next couple of years. And as a result, we think food and beverage will grow a little bit in terms of rates. We are not a big group house. With -- we said 30%, which is our run rate for '13. But it's really a little lower than that because Park Central displacement was really a lot of transient business. So when you normalize for Park Central, we're really in the 28%, 29% group space. When you think about that way, as that group continues to grow, we'll get a little bit more food and beverage kick, but I don't know it will be meaningful for the whole portfolio. Did that help you?

Wes Golladay - RBC Capital Markets, LLC, Research Division

Yes. No, it does. And yes, I forgot about the leases will impact the number as well. Now looking at the San Francisco market, how much exposure would you like to have there? And how has pricing and competition changed since you were, I guess you got there aggressive in early August, but how has that market progressed for the last few months?

Michael D. Barnello

Well, it's had, obviously it had a great year. And San Francisco's been strong not just for us. I mean, our San Francisco year was up 13%. That's a blend of old hotels, that we own pre-'13 and the new hotels for a partial year. So it's been a strong market. When you think about pricing, I mean obviously, a lot of people want to be involved in San Francisco and competition is pretty fierce. So thinking back, all the deals went multiple rounds for all of them, even though they were all priced a little different. Harbor Court and Triton were only priced at the end of the first quarter, just took a long time to get the ground leases approved. And so that's why they closed in August. The Serrano was actually priced more like in July-ish. And obviously, it was very competitive. And so is Vitale. It went to a lot of rounds on the Vitale also. So people want to be in the best market. We think right now, it's got the best characteristics for the market in terms of supply and demand. It's really in the favor of the owner-operator. And a lot of people are aware of that, so means competition is pretty fierce. When you ask about how much we want to have, we don't set a target. We're looking for good deals. So if the next 5 deals are good and they're in San Francisco, then we'll look at them. And if the next 5 are in different markets, we'll go there also. If for some reason, if you look at our history, it tended to be lumpy. We've bought a bunch of Boston properties, at the same time, bought a bunch at D.C. at the same time. But that's not purpose-driven. And then I think what happens is once there are sales in the market, a lot of the sellers come out of the woodwork to try to sell their assets if they like the pricing. And it's been competitive. I think the hot -- the price per room has moved up substantially. And if you've seen our investor presentation, you could see what hypothetical values would be for the hotels that we -- where we bought them and where they -- we think they would trade at current cap rates. So you can see, there's been significant movement over the last couple of years.

Operator

[Operator Instructions] And our next question comes from the line of Lukas Hartwich.

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

Mike, at the Investor Day, there was a slide that highlighted pro forma peak portfolio margins of 36%. I'm just curious whether you think those margins are achievable in this cycle and over what sort of timeframe are you thinking?

Michael D. Barnello

We did show that slide, Lukas, and it really ties in with the rate. So what we're trying to show is that we're not there. We peaked in everything when you look at reported numbers. But we haven't peaked when you look at pro forma numbers or what we own now versus what we owned then. And certainly, no on an inflation basis. But if you look at it, they're kind of tied together with the rate. I mean our rate is off $26 from the peak-inflated basis. And to the extent we can get more rate, we're going to get more margin, right? So if we can add -- the more we can add to the rate this year, the higher the margin growth will be. And that's true even in our range that we gave out. If we have -- most of it's a rate gain, we'll see more of the margin gain. When you ask, though, how much will be in this cycle, I guess it depends on how long the cycle lasts. I mean, we feel good about where we are in the cycle right now and we expect it to last for a while, but it will turn around. It's just -- it's always hard to predict when that's going to happen.

Operator

And I'm showing no further questions at this time. Please continue.

Michael D. Barnello

Well, that's it for us. We appreciate you guys taking the time to listen to our fourth quarter call. We look forward to seeing many of you guys over the next couple of months and talking to you in April to update you on our first quarter results. Thank you Tega. Thanks, everybody, for joining us.

Operator

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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