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Pebblebrook Hotel Trust (NYSE:PEB)

Q4 2013 Earnings Conference Call

February 21, 2014 10:00 AM ET

Executives

Raymond Martz - CFO

Jon Bortz - Chairman and CEO

Analyst

Jim Sullivan - Cowen and Company

Bill Crow - Raymond James

Lukas Hartwich - Green Street Advisors

Wes Golladay - RBC Capital Markets

Operator

Good day and welcome to the Pebblebrook Hotel Trust Fourth Quarter 2013 and Yearend Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Raymond Martz, Chief Financial Officer. You may begin.

Raymond Martz

Thank you, Tiffany. Good morning, everyone. Welcome to our fourth quarter 2013 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2013 that we filed last night and our other SEC filings and could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements that we make today are effective only as of today February 21, 2014 and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures that we use on our website at pebblebrookhotels.com.

Okay so we had another strong quarter is complete and another great year for our company. In the fourth quarter we achieved RevPAR growth of 5.2% which was above to 3% to 5% outlook, largely due to the continued strong transient and group demand in the lateral properties that boost their rates as well as better than expected performance in many of our West Coast properties. Overall, transient revenue which makes up about [25%] of the demand for our total portfolio was up 5.7% compared with the prior year with ADR up a healthy 4.5%. Group revenues which were a little more tempered increased 5.3% with ADR up 1.8%.

Our properties located in the West Coast generated RevPAR growth of 9.8% in the fourth quarter led by our hotels in San Francisco, Portland and Seattle. This strength has helped to offset weaker performance from our hotels in the DC area which were negatively impacted by the government shutdown in October, the Affinia 50 which was adversely impacted by the full property renovation and expansion that was completed in November and the Viceroy Miami which suffered disruption due to the restoration and reconstruction of the defective guest bathrooms which we successfully completed in November.

As a result of these factors, the monthly RevPAR for our portfolio increased 4.6% in October, 6.3% in November and 5.1% in December. As a reminder, our Q4 RevPAR and hotel EBITDA results are same store for ownership period and include all the hotels we owned as of December 31 except for Radisson Fisherman’s Wharf which we didn’t acquire until December 9.

Also as we state each quarter, we do not exclude hotels under renovation. RevPAR growth in the quarter was led by Hotel Zetta, Skamania Lodge, W Boston, Monaco Seattle and the Sir Francis Drake in San Francisco. Food and beverage for the portfolio increased 1.7% compared to last year. Our overall food and beverage revenues were negatively impacted by the closure of our restaurant at Mondrian Los Angeles during the quarter for a major reconcepting with a new third party restaurant operation who’ll lease the restaurant space at the Mondrian. This new restaurant called Herringbone, opened on January 16 to rave reviews throughout the Los Angeles market.

Partly offsetting the absence of food and beverage revenues at the Mondrian was continued excellent growth at the Southern Art and Bourbon Bar in the Intercontinental Buckhead as well as tremendous growth in banquet and catering at the property. Compared to last year, fourth quarter same property total revenues increased 5.6% and expense growth was 4%, resulting in a same property EBITDA margin increase of 110 basis points.

The renovation Affinia 50 negatively impacted our margins by 28 basis points and property tax increases also took 16 basis points off our margin growth in Q4. Despite these items, 13 properties grew EBITDA at double digit rates compared to the same period last year. Moving down our income statement, we generated adjusted EBITDA of 40.9 million for the quarter a 28% or $9 million increase versus 2012’s fourth quarter. Our adjusted FFO climbed to 24.6 million or $0.39 per share compared with 18.5 million or $0.38 per share during the fourth quarter of 2012representing a 27.3% increase per share.

As we look at our performance for the full year, our 2013 same property RevPAR was up a strong 6.4% which was driven by a 1.8% increase in occupancy and ADR growth of 4.6%. We’re very pleased with our portfolio’s performance which was delivered despite the negative renovation impact we experienced throughout the year at some of our hotels including Affinia 50’s 87 basis point impact.

Our RevPAR of the year for 2013 were Hotel Zetta, Monaco Seattle, Argonaut San Francisco and Vintage Plaza Portland. Our hotels generated a 162.5 million, a same property hotel EBITDA for the year with same property hotel EBITDA margins improving basis points to 28.3%. Total hotel revenues grew 5.5% while total expenses were limited to a 4.2% increase. Paid occupied rooms increased by 1.9% so total expenses per occupied room were limited to 2.4% increase. The hotels that contributed the most to our EBITDA growth in 2013 were Hotel Zetta, Monaco Seattle, Argonaut San Francisco, Sir Francis Drake and InterContinental Buckhead.

The 2013 adjusted grew 31.5% or 35.9 million versus the prior year. Again, this not only reflects the increased number of high quality hotels in our growing portfolio but also the elevated growth rate in same store EBTIDA of our existing hotels which we believe will continue during the next several years. For the year our adjusted FFO climbed to 91.3 million or $1.47 per share compared with 66.1 million or $1.17 per share during 2012, representing a 24.9% increase per share.

Now let’s shift our focus to our capital markets and acquisition activities in the fourth quarter. While we had no ATM usage in the fourth quarter, we raised $74.5 million through our common equity offering on November 6, which was in anticipation of the Radisson Fisherman's Wharf acquisition. A month later on December 9th we acquired the Radisson Fisherman's Wharf hotel and retail for 132 million. This 355 room hotel which includes approximately 44,000 square feet of retail space is located in the heart of Fisherman's Wharf, San Francisco.

We appointed Davidson Hotels & Resorts to be the manager of the hotel. As part of this acquisition we anticipate investing $18 million to $20 million into a complete renovation and repositioning of the hotel including all guest rooms and public areas. This renovation is expected to commence in the fourth quarter of this year and we anticipate to be completed by the end of the second quarter of 2013.

The hotel will be renamed upon completion. And we’re working with the same designer who we worked with on the transformation of our Hotel Zetta, San Francisco. So we’re very excited about this property and a significant upside opportunity that we expect following the completion of this repositioning. The acquisition of Radisson Fisherman’s Wharf was our fifth acquisition in San Francisco and our investments in San Francisco are forecast to represent roughly 23% of our portfolio EBITDA in 2014.

As a result of our capital market investment activities during the quarter at the end of 2013, we held consolidated cash, cash equivalents and restricted cash of $71.6 million plus an additional $14.5 million in our consolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in the Manhattan Collection.

Our balance sheet remains very healthy. At the end of 2013, our debt-to-EBITDA ratio was at 4.2 times, our debt-to-total assets was low 30% and our fixed charges remain well covered at 2.4 times. As of December 31st we had complete availability on our totally unused $200 million unsecured credit facility and we have no debt maturities until 2016.

And finally an update on our dividends. As you hopefully noted in our earnings release from yesterday due to continued rapid increases in the operating performance and cash flow of our portfolio as well as our positive outlook for 2014, we anticipate increasing our quarterly dividend to $0.23 per share. If approved by our board that would represent an increase of 44% from our currently quarterly dividend and will be on top of our shares 33% dividend increase.

We expect this to commence with our first quarter dividend which we typically announce in the March. This is consistent with our long-term strategy of providing industry leading returns to our shareholders including a reliable and growing stream of income.

And with that good news, I’d like to turn the call over to Jon to provide more inside on the recently completed quarter and year as well as our outlook for 2014. Jon?

Jon Bortz

Hey, thanks Ray. So as Ray said, 2013 was another terrific year for Pebblebrook. We completed $326 million of new investments through the acquisition of four high quality hotels and similar to last year all of them are located in gateway cities on the West Coast. They include the Embassy Suite San Diego Downtown, the Redbury at Hollywood and Vine in West L.A., Hotel Modera in Downtown Portland and the Radisson Fisherman’s Wharf Hotel and Retail in San Francisco.

On a 2014 run rate basis, our West Coast hotels located in San Diego, West L.A., San Francisco, Portland and Seattle, now represent roughly 61% of our forecasted 2014 hotel EBITDA which should allow us to further benefit from the significantly greater RevPAR growth outlook on the West Coast versus most of the rest of the country.

We also grew same property RevPAR 6.4% for the year ahead of the industries’ 5.4% growth rate even though the Affinia 50 renovation and repositioning of roughly 87 basis points of our RevPAR growth rate for the year. As a reminder, at the beginning of last year, we forecasted the impact at 100 basis points. In addition, our rooms at service at Viceroy Miami took another 22 basis points off of our 2013 numbers. We weren’t aware of these original construction issues at the beginning of the year but the impact wasn’t part of our original forecast.

With same property RevPAR growing 6.4% and same property total revenues increasing 5.5%, same property hotel EBITDA increased to healthy 8.9%. The negative impact of the almost year long renovation at Affinia 50 produced our same property EBITDA growth rate by 184 basis points, so same property hotel EBITDA for the rest of the portfolio grew 10.7% which is perhaps a better indication of the underlying portfolios EBITDA growth rate for the year. With the benefit of the acquisitions made in 2012, until more limited extent that was made during 2013, adjusted EBITDA for the company increased 31.5%, and with the very well managed balance sheet adjusted FFO per share for 2013 climbed by 24.9%.

We’re very pleased and proud of our performance in 2013, and it seems the investment community also felt pretty good about our performance because the stock delivered a total return including dividends of 36.3%, outperforming the Bloomberg hotel REIT index at 27.9% as well as the Dow S&P 500 and the Morgan Stanley REIT index which delivered only 2.5%. Balance reflects on what we forecasted a year ago for 2013 and where we ended up. We call this for the industry overall, we expect a demand growth of 2% to 3%. It grew 2.2% in the range but certainly at the lower end.

We forecasted supply growth of around 1% and it also grew a little less at just 0.7%. And we thought ADR would increase by 4% to 5% and went up by 3.9% just shy of our lower end. For 2013, the industry’s RevPAR growth of 5.4% ended up pretty much squarely in the middle of our 4.5% to 6.5% forecast. So we believe government cut backs from sequestration and the government shutdown probably caused the industry around 50 basis points of RevPAR growth for the year. Our RevPAR growth of 6.4% for 2013 fell in the middle to upper end of the 5% to 7% RevPAR outlook we provided at the beginning of the year.

Our performance was aided by better than expected performance on the West Coast offset somewhat by weaker performance on the East Coast including the negative impact from cutbacks in government business. When we look at last year’s overall industry trends, performance was again driven by strength in transient travel, both business and leisure as well as very strong growth in international inbound travel, the vast majority of which has been positively impacting our major gateway cities.

Group travel fail to recover any further in 2013, with industry group demand actually declining slightly, while group ADR growth significantly underperformed rate growth in the transient segment. For 2014 the year shapes up overall as a slightly better convention year in general around the U.S. as compared to 2013, so there is a reasonable and some modest improvement in group business overall in 2014.

Nevertheless we believe transient RevPAR growth for the industry will significantly outpace group RevPAR growth again in 2014. For Pebblebrook the differential in RevPAR growth between group and transient should be narrower than the industry, as was the case in 2013 due primarily to our high overall occupancy levels and our RevPAR growth should also continue to benefit from the fact that group represents just 25% of our overall room nights.

In 2013, leisure travel as represented by weekend business continued to be strong, outperforming business travel in demand growth, ADR growth and RevPAR growth. Unless we see a pickup in the overall growth rate of both GDP and corporate profits we expect this trend will continue in 2014. We also expect to continue to see better performance overall in our West Coast cities and properties, as compared to our East Coast cities and properties. Regional economies psychology and underlying operating fundamentals remain stronger in West Coast markets, like San Francisco, Seattle, Portland and West LA than they do in New York, Philadelphia and Washington DC.

To highlight this differential, let’s look at the 2013 occupancy levels of our West Coast markets. San Francisco climbed to 84.1%, Downtown Seattle reached 79.3%, Downtown Portland rose to 78.5% and West LA increased to 81.2%. All of these cities have well surpassed prior historical peak occupancy levels. On the West Coast only Down Town San Diego which increased to 76% occupancy, which is still below its prior peak of 77.1%, though we expect this city to surpass that prior peak this year.

In 2013, RevPAR grew 13.5% in San Francisco, 10% in Seattle, 11.1% in Portland, 7.5% in Santa Monica and 6.4% in West Hollywood Beverly Hills. Compare that to 4% in Manhattan stunted by continuing above average supply growth, 4.6% in Washington DC with much of the gain coming from January’s Presidential inauguration, Boston at 5% hurt by a weak convention calendar despite occupancy well above and beyond prior peak. And Philadelphia at 0.1% also stunted by modest supply growth and a weak convention calendar. For our markets the stronger ones on the East Coast were in the south, with downtown Miami RevPAR climbing 10.3% and Buckhead increasing 7.1%.

In 2014, we again expect above average RevPAR growth in San Francisco, Seattle, Portland, and West LA on the West Coast and Buckhead in Miami on the East Coast with Boston also joining the party to do a very strong convention calendar. We expect New York Philadelphia and Washington DC to all remain underperforming cities in 2014.

For Pebblebrook we expect our properties to generally meager the performance of these individual markets with our portfolio continuing to benefit from our West Coast emphasis and we expect outperformance by our recently renovated properties including Affinia 50, the Benjamin and Affinia Manhattan in New York, the Sofitel in Philadelphia, Westin Gaslamp in San Diego, Mondrian in LA, and Viceroy Miami in a strong Miami market.

Our performance in 2014 will be negatively impacted in a minor way by renovations at a number of our properties. They include our comprehensive renovation and repositioning of Vintage Seattle which should be substantially complete in April; the reconcepting and renovation of the restaurant, the lobby and quarters at Palomar San Francisco which should be completed in the second quarter; the renovation of the lobby and atrium at Embassy Suite San Diego downtown which will commence in the fourth quarter; the lobby, restaurants, bars, and guest rooms at W LA which should also commence in the fourth quarter; a comprehensive renovation of Vintage Portland also to commence in Q4; and a very exciting and game changing comprehensive renovation and repositioning of Radisson Fisherman's Wharf which we also expect to commence in the fourth quarter.

A part of the W LA project we are pursuing the potential reconfiguration of suites that may allow us to increase our overall room count by upto 36 keys, and we’re adding somewhere between 5 and 13 keys at the Palomar, 4 keys at our Embassy Suites, 6 rooms at the Radisson, and we have added 1 key at Affinia Gardens. Even on a combined basis these renovation project should have a fairly minor impact on RevPAR growth in 2014.

We are currently forecasting only a 50 to 70 basis point reduction which was built into our 2014 outlook. With upcoming renovations of Radisson Fisherman’s Warf, Vintage Seattle, W LA, Vintage Portland, Palomar San Francisco and Embassy Suite San Diego; we continue to fill our pipeline with properties that will help us deliver outsized growth in RevPAR, EBITDA and value in 2015 and beyond.

Projects completed in 2013, especially the renovations at Affinia 50, Affinia Manhattan, Hotel Zetta, Sir Francis Drake and Sofitel Philadelphia await the further ramp up in performance that we expect from other previously renovated properties including Westin Gaslamp, Seattle Monaco, Le Méridien Santa Monica, and Mondrian LA.

If we look at 2013, the benefits of our renovations and asset management efforts are clearly visible on the performance at many of our properties. Here is just a few examples. In 2013 at Hotel Zetta, RevPAR increased 50% over 2012, well ahead of underwriting. EBITDA is forecasted reach $4.7 million to $5 million in 2014. The first full year of operations which would represent an EBITDA yield of between 11% and a 11.5%.

Seattle Monaco delivered a RevPAR increase of 22.2% in 2013 with EBITDA increasing 51.4% to $5.2 million or an EBITDA yield of 9% on our total investment including the cost of renovation just in the first year following renovation. InterContinental Buckhead which we renovated in 2011 and 2012 and reconcepted the restaurant in 2012 grew RevPAR 9.2% in 2013. EBITDA increased 15.7% achieving a 12.2% EBITDA yield last year on our total investment of $110 million.

And the last example of many great stories is the Sir Francis Drake. RevPAR at Drake increased 13.9% in 2013 and EBITDA climbed 20.7%. Our NOI yield on total investment of roughly $100 million was 8.3% in 2013 with NOI calculated as EBITDA minus an assumed 4% reserve on total revenues. We expect NOI to be well over 10% in 2014. This compares to the 1.8% to 2% 2010 NOI yield we forecasted at the time of acquisition in June 2010.

With these kinds of results we hope you can understand why we’re so excited about the continuing performance enhancements that will result from past, current and upcoming property renovation and repositioning efforts.

Now let’s turn to our outlook for 2014. As you know, we released this outlook last month and it remains unchanged. However, it’s worth noting that our view of and outlook for the first quarter we provided last night with our earnings release is slightly more tempered than it would have otherwise been a week and a half ago as a result of a negative impact from last week’s snow and ice storms.

Unfortunately we suffered roughly $500,000 of loss business due to the storms and most of these losses are unlikely to be recovered. For 2014, we’re forecasting that overall demand for the U.S. will increase between 2% and 3% with supply likely between 1.2% and 1.4%, which again is well below the long term average growth rate in industry supply. We believe ADRs likely to grow between 4% and 5%. As a result, we’re forecasting overall U.S. industry RevPAR growth of 5% to 6% in 2014, and we expect these strong underlying industry fundamentals to continue through at least 2016 based upon what we can see at this point.

Please also note that our forecast assumes U.S. GDP increases between 2% and 2.5% this year. For Pebblebrook we expect to outperform the industry again in 2014 this time by approximately 150 basis points with 50 of it coming from Affinia 50, in slide too many 50s. And so we expect our same property RevPAR to increase between 6.5% and 7.5%.

Based upon this level of projected RevPAR growth for our portfolio, we’re forecasting same property EBITDA to increase between 8.7% and 11.5% with our same property EBITDA margin increasing between 125 basis points and 175 basis points. With the benefit of our 2013 acquisitions performing for all of 2014 adjusted EBITDA is forecasted to increase between 18% and 22% and adjusted FFO per share is forecasted to increase between 21% and 26.5%.

And we’re forecasting that 2014 will be another year of very strong growth in earnings and cash flow on a same property basis and per share basis. Our outlook for 2014 does not assume any acquisitions. However, for the right opportunities we hope to be active in 2014. The industry is already off to a healthy start in January with industry RevPAR climbing 5.3%. Our portfolio in January also got off to a great start. RevPAR climbed to strong 8.8% with 87% of it coming from ADR growth.

Our performance in January was hurt by the difficult comparison in DC the last year which benefited from the inauguration that added about $400,000 of room revenue in the month or an impact of about 1.5% to RevPAR growth. This January was also negatively impacted by the ice and snow storms on the East Coast and resulting high levels of flight cancellations which impacted business everywhere in the U.S.

For the portfolio we expect first quarter RevPAR to increase between 5.5% and 6.5% with February also being impacted by the bad weather up and down the East Coast which also caused an unusually large number of airline flight cancellations. However, as arguably the greatest rock and rolls of all time said before we began Here Comes The Sun, and for you 20 Something that’s the Beatles.

Today we feel particularly well situated to continue to take advantage of the strong underlying operating fundamentals of the business as well as amplify them through our renovation, repositioning and asset management efforts. It should also allow us to continue to significantly outperform and deliver strong growth on both the top line and the bottom line for the next several years.

We’re happy to answer whatever questions you might have, operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll go to our first question from Jim Sullivan with Cowen Group.

Jim Sullivan - Cowen and Company

Thank you, good morning Jon, and thanks for the intro music, brings back good memories both of the Beatles and the sun. Jon, quick question. You've talked over the years about the positive impact, which I guess was a secular impact, on demand from international inward-bound travel. And I just wonder if you could give us an update on your sense for whether you expect that to continue to be kind of an outsized contributor to demand in your markets over the next couple of years?

Jon Bortz

Yes, we do expect to continue - the forecasts that have been done by the department of commerce I think averaged something like 3.5-4% a year growth, through the next I think five to eight years. But we think that is a secular trend that will continue, we do continue to see significant increases in travel, you know companies like Boeing, the aircraft makers are benefiting greatly by this secular growth and the globe is adding significant capacity that is meant to accommodate this expected growth on an ongoing basis so, unless we see a very dramatic change in the behavior here in the US in terms of whether we’re going to continue to invite people here and hopefully increasingly make it even easier for them to come here or we see some kind of event take place or maybe a dramatic increase in the value of the dollar. Our view is that that’ll continue to benefit the gateway cities and particularly our hotels.

Jim Sullivan - Cowen and Company

And Jon, I wonder if you could -- you made some encouraging comments, I guess, about the potential acquisitions. I wonder if you could comment -- give us your view on all of the activity we're seeing in downtown LA versus the rest of that overall market. Clearly, it does seem to be coming into its own in a lot of different ways; and it seems like every month we're hearing news about new development across all property types. And I just wonder -- it's a market where there is a lot of older building stock. It seems to be a market ripe for conversion and maybe boutique hotel development. And just curious what your views are of that submarket?

Jon Bortz

I mean I think you know L.A. is very gradually changing as a downtown market and probably the most important aspect of that is you know increases in the volume of people who are choosing to live in the downtown L.A. market. You know part of that is driven by frankly lack of availability and development elsewhere particularly in the West L.A. market, but what we’re - so we think it’ll be a gradual process of improvement in downtown L.A. You’re absolutely right about you know that the availability of older C quality office product particularly south, directly south of the downtown area towards L.A. Live and obviously the other thing you have there is, there’s just a lot of land down there, which you don’t have anywhere else really in the L.A. metropolitan area, so it would be natural to think that, that would continue to develop as a residential market, as an entertainment market, I think the one thing we’re not seeing to any meaningful extent yet is an improvement in the office market and any kind of meaningful rotation of quality tenants into the downtown market.

Jim Sullivan - Cowen and Company

Okay, then. Finally for me, two of the markets which have lagged -- you noted them in your prepared comments, San Diego and Philadelphia. Convention calendar seems to be a very important variable for both these markets. Maybe you can give us your views on convention calendar outlook -- not just for 2014, but maybe 2015 and 2016 to the extent you have visibility on it?

Jon Bortz

For those two cities?

Jim Sullivan - Cowen and Company

For those two, yes.

Jon Bortz

Okay so San Diego has a meaningful pickup in ’15 and ’16 very encouraging, the other encouraging aspect, really two others in San Diego, one is the recent election, the very business friendly mayor who won election earlier this month and that should lead to the reconstitution of all of the funds satisfied by the hotel association and industry in San Diego for the marketing of San Diego which cut off last year and all of the sales people were let go, so that’s being added back and then the convention center expansion which has been approved and is in the final hurdles of one last litigant case, right now it’s forecasted to be completed in either 2017 or 2018 and that will have a very-very positive impact, further positive impact on the convention activity in downtown San Diego. As relates to Philadelphia, it’s a little bit of a different story, they actually expanded the convention center a year and a half ago, it’s a beautiful center, it works well but for the management of the center and the labor at the center. They made a great decision late last year and bringing in a private company called SMG that manages 70 convention centers around the country including some of the biggest including Chicago and Las Vegas and very well qualified private group happens to be based in suburban Philadelphia. And they’re already making some very positive changes that hopefully will resolve in significant improvement in operations and ultimately in marketing and perception of the attractiveness of having a convention in downtown in Philadelphia. So the facility is there, it’s terribly underutilized today because of the problems that have come about in the last two years. And there is great reason to be very encouraged about that being resolved like it was done in Chicago with these changes. But right now, it looks like 15 and 16 in terms of major convention it’s going to be weaker than it is this year.

Operator

We’ll take our next question from Bill Crow with Raymond James.

Bill Crow - Raymond James

Jon, as Company leader, as industry leader, you're kind of charged with looking ahead two or three years. As you think about how things might play out, does it make you more interested in going back and looking at the East Coast acquisitions at this point?

Jon Bortz

Not until pricing changes, Bill. Again, it’s not that we’re not looking. And in many case we’re bidding. We’re just not competitive. And I am sure it has to do with our growth rate assumptions for a number of those markets and it has to do with our view of risk to new supply or other issues in those markets. And so as a result of that, we’ve just not - we’re just not competitive in general on the East Coast. And until either our viewpoint or our competitor’s viewpoints change, I wouldn’t be surprised to see that continuing.

Bill Crow - Raymond James

John, one of the things that we're hearing from clients and I'm sure you're hearing or you are seeing is that guidance for 2014 that we have received so far is generally in line on a top-line basis, but margin growth is going to be weaker than many had expected. And if you think about 5% or 6% RevPAR growth, and 80% of that driven by pricing, it does seem like -- whether it's 25 to 75 bps or 50 to 100 bps, the guidance has been weaker. So what levers are out there? And obviously your portfolio is a little bit different, and you're going to post better margin growth. But just talk generally about some of the pressures that you're seeing on the expense side.

Jon Bortz

Well, in our case, we’re forecasting I think a pretty growth in our EBITDA margin for ’14 at 125 to 175 basis points. But I think the general industry pressures are generally the same ones we always see. It’s wage pressure. It’s in particular benefit pressure. The wage pressure comes primarily from the union driven markets which are many of the major cities. And the benefits are obviously something that is an issue not just for our industry but for all industries. And I think in markets we continue to see municipalities and states trying to raise more revenues, so we see increases in business and operating taxes. We see increases or attempted increases in property taxes and in a number of markets. I think the nice thing about our portfolio with but it’s a really heavy concentration now in California which has good and bad aspect.

But one of the good aspects is once you reassessed that purchase, you’re limited to at 2% per year increase in your taxes. So we’re seeing pressures in workers compensation cost again driven by experience that the states and cities are having with these dramatic increases in disability claims and so it’s - that is generally where we’re seeing the pressures and then we’re able to offset a lot of that through our efforts in implementation of best practices, investments in energy, investments in technology. Working with our operators to right size or create efficiencies and the amount of supervisory work manager time and staff levels that we need to utilize at our hotels.

So it’s always a challenge and you can either kind of let it happen or you can work hard and creatively to mitigate and offset, and that’s what we do.

Bill Crow - Raymond James

Yes, that's helpful. Jon, one more question for me. And again, a question that we get asked, which is: what sort of impact are you seeing or can you anticipate from alternative lodging sources? So Airbnb, as an example, which has become more aggressive. How big a threat do you assess that?

Jon Bortz

I think it’s a real threat, I think it’s hard to know how bigger threat it is right now. One of the things that Airbnb and other providers like them are doing is they are having a meaningful impact on demand growth. They are increasing demand because of the affordability and publicity surrounding their offerings, a city like New York I think I have been told they have 40,000 listings in New York in New York City. That’s a lot, but it’s not 40,000 hotel rooms. And we’re really not seeing it in the demand numbers in any of our markets. And we haven’t heard of customers who said hey we used to stay with you and we’re choosing to stay elsewhere. But I am sure it’s happening and one of the areas it may have the biggest impact, now clearly it’s going to our an impact on the low end of the market, because that’s frankly in a lot of cases where it’s -- who it’s competing with, because of the type of customers they’re currently attracting.

Although again that may change overtime and it may become some more upscale customers, but it’s clearly having an impact on the lower end of the market. It’s having impact on the hostels in the market; it’s having an impact on some of the suburban markets to some extent again at the low end of the marketplace. So at this point in time we’re not seeing an impact to our businesses and our competitors. But I wouldn’t be surprised for there to be some no different than I guess technology itself has had an impact on the number of meetings. Particularly lower end training meetings which many of which now get done on the Internet.

Operator

We’ll take our next question from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich - Green Street Advisors

I was hoping if you can provide an update on the Delfina conversion. Is that complete and how is it being received?

Jon Bortz

Yeah Lucas the conversions done, the flag change occurred in mid September of last year. It’s been very well received, there is some very minor work in the process of being completed, it’s primarily some furniture and some artwork that’s arriving any day. But all the brand standard S&E, all the other agreed changes for the flag or upgrading that we have done is complete. And it’s an interesting case because we didn’t change a whole lot physically at the property; we really made those changes previously with what was a $9 million renovation the year before.

But just changing the flag has actually meaningfully increased the customer satisfaction. And I don’t -- maybe it’s just better situated from a customer base and a flag change, it’s just better, it’s a better well respected flag than I guess what Sheraton is today by many customers. So it’s kind of curious case study and the results have been very positive.

Lukas Hartwich - Green Street Advisors

And then just one other question. Do you have any updates on your plans for the National, Benjamin?

Jon Bortz

We have two different paths we’re going down today hand in hand with our partner. And I think both of those, either of those path will result in a very favorable outcome compared to the losses that we have been experiencing there which have on a joint venture basis been -- have grown back to above $2 million, well above $2 million on an annual basis.

So I can’t give you anymore color yet but I think we’ll know more in the next 90 days about which path we end up going down and again in either case I think it will ultimately have a very, very meaningful impact on the reduction in those losses.

Operator

We’ll take our next question from Wes Golladay with RBC Capital Markets.

Wes Golladay - RBC Capital Markets

When we look at your exposure to San Francisco roughly around 23% now. Would you guys like to I guess keep a limit on that or if you guys find the right opportunity having more exposure there?

Jon Bortz

Well we’re going to continue to look in the market, yes. So we’re not uncomfortable having a higher exposure today, and the big reason for that is just the lack of supply in the market. There is I think, a Hampton Inn under construction; and outside of that, there really isn’t anything due to start for some time, so very low activity on the development side, again it will ultimately come but with the rapid escalation that we’ve seen in that market for replacement cost, in land cost, in a shortage of your specialized and experienced labor in that market; again it seems that hotels continue to be a lowest and worst use for land and older stock office properties in the market.

So we are very comfortable if that percentage increases and by the way it’s going to increase on its own as it continues to grow faster at the bottom lines of those properties than the average for our portfolio. The other thing we were pointing out and you know kind of comes from your question, we have seen, as I mentioned in San Francisco, fairly significant increases in replacement cost, we’ve actually seen that in most cities around the U.S. and our current estimate for our portfolio right now is upwards of $575,000 to $600,000 a key and we continue to see very significant competition in the markets for land and increasingly for labor. So if anything we expect to see in escalation, in those cost to build versus what we’ve seen over the last 24 months.

Wes Golladay - RBC Capital Markets

Okay, sticking with that would you think that all help slow down the development in New York in 2016, you know, in the light of replacement cost?

Jon Bortz

I don’t know what’s going to slowdown New York’s development pipeline. We think this year is going to be upwards 7% for the market, we think 15, based upon what we know right now, is in the 5% to 7% range and more probably three months away from having a fairly and even more accurate view because if you haven’t started by April in the market you’re probably not delivering in 2015. So you are on to 16. There is already a significant pipeline where 16 deliveries, some of which is under construction, and just a lot of announcements.

Hopefully at some point both the cost to replace, which is going up in New York at a fairly rapid pace, the cost of land and the slower pace of growth in performance. You know New York you need 4% just to keep your EBITDA growing at 4% at a minimum. So it’s a higher cost growth market. You actually need it to be a higher top line market as well, which what it’s been historically but with the change in the way New York is with the Westside in the neighborhood, I don’t think that’s going to happen again in the cycle.

Operator

At this time there are no other questions in the queue. (Operator Instruction). There is still no questions in the queue. At this time I will turn the call back over to our speakers.

Jon Bortz

Thanks operator. Again thank you all for (abruptly ended).

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