Strategic Hotels & Resorts' (BEE) CEO Raymond Gellein on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Strategic Hotels (BEE)

Strategic Hotels & Resorts, Inc. (NYSE:BEE)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 am ET

Executives

Jonathan Stanner - VP, Capital Markets and Treasurer

Raymond L. Gellein, Jr. - Chairman and CEO

Diane Morefield - EVP and CFO

Analysts

William Crow - Raymond James

Ryan Meliker - MLV & Co.

Andrew Didora - Bank of America Merrill Lynch

Jonathan Mohraz - J.P. Morgan

Smedes Rose - Evercore Partners

Jeffrey Donnelly - Wells Fargo Securities

Chris Woronka - Deutsche Bank

Lukas Hartwich - Green Street Advisors

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Strategic Hotels & Resorts Earnings Conference Call. My name is Steve and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a Q&A session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now, I would like to turn the call over to Jon Stanner, Vice President, Capital Markets, Acquisitions and Treasurer. Please proceed, sir.

Jonathan Stanner

Thank you and good morning everyone. Welcome to the Strategic Hotels & Resorts' first quarter 2014 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the Company's Web-site in the Investor Relations section. We’re hosting a live webcast of today’s call, which can be accessed by the same section of the site with a replay of today’s call also available for the next month.

Before we get underway, I would like to say that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which the Company operates, in addition to management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statements notice included within our SEC filings.

In the press release and supplemental financials, the Company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.

I would now like to introduce the members of the management team here with me today; Rip Gellein, Chairman and Chief Executive Officer; and Diane Morefield, our Chief Financial Officer. Rip?

Raymond L. Gellein, Jr.

Thank you, Jon. Good morning, everyone. Strategic had a very productive first quarter on virtually all fronts, operating and financial results, balance sheet improvements, acquisitions, dispositions, and lastly adding a strong new Board member in Dave Johnson as part of our settlement with Orange Capital.

I will review our operating and financial results, which were once again amongst the best of our peers and ahead of consensus estimates. We will review our transaction activity. This is total over $1.1 billion in acquisition, disposition and capital markets transactions since the beginning of the year. I'll also give you some color on what we're seeing in the deal world as we continue to look for opportunistic and value-creating ways to enhance our already outstanding and best-in-class portfolio. And lastly, Diane will conclude with a more detailed review of the quarter and the significant balance sheet activity we completed in the first four months of the year.

Our first quarter results reflect the continuation of a solid and steady recovery in our business. RevPAR in our total U.S. portfolio grew 6.3%, but would have been close to the 9% when adjusting for displacement related to two major guestroom renovation projects that were ongoing in the first quarter at the Westin St. Francis in San Francisco and the Hyatt Regency in La Jolla. As expected, nearly all of our room revenue growth was the result of strong rate growth which was over 5% year-over-year.

As a few of our peers have already discussed this quarter, we're continuing to see positive trends on the group side of our business and that is an important catalyst for our business mix that was nearly 50% group with the previous peak but has hovered in the mid to high 40% range during the recovery. Group room nights in the first quarter increased 6.3%, and importantly, spend per occupied group room increased 11% during the quarter leading to a 9.2% increase in our total RevPAR growth.

Group production in the first quarter for the remainder of the year increased 4.6% compared to the same time last year, which is an important indicator of the strength of that segment of our business and a continuing sign that certain groups are still booking in a relatively short window. Our full year 2014 group pace is up 5.3% in room nights compared to the same time last year, with rates that are 3.2% higher resulting in group revenue pace up 8.7%.

From a market perspective, our West Coast markets in Scottsdale and Miami were outperformers as those destinations benefited from the bad weather on the East Coast and in the Midwest and a lack of snowfall early in the ski season in Northern California markets – mountains. The Southern California market was particularly strong as it fully absorbed the supply that came on at the peak of the last cycle.

Our West Coast properties grew RevPAR an impressive 15% during the first quarter after adjusting for displacement. Our Four Seasons Resort in Jackson Hole was another beneficiary of the weather as that market had over 500 inches of snow this season, the most of any major ski destination in the U.S., leading to a 9% RevPAR growth and an average rate of over $700 in the first quarter.

Conversely, Chicago, New York and DC, all had weaker quarters, particularly due to the poor weather in those markets. Chicago had two less citywide conventions in the first quarter of the year compared to 2013 which resulted in a 3% decline in the overall market RevPAR. This does though correct itself during the year as overall citywides for Chicago are flat year-over-year.

Despite the soft market, our InterContinental on Michigan Avenue had a 13% increase in RevPAR for the quarter on a soft comparison from a renovation process during the first quarter of last year, but also benefiting from its location on Michigan Avenue is an attractive transient destination. In New York, the Super Bowl resulted in a four-night/five-day average rate of $600, which was good year-over-year comparison but weaker than our expectations going into the quarter.

Adjusting for an accounting change implemented in the first quarter of last year as a result of our transition to the Marriott system, RevPAR [indiscernible] in New York increased 3.1% in the first quarter which outperformed the broader New York City market that was up only 0.2% and our comp set which was actually down 1.6% for the quarter. The 12% RevPAR decline in the Four Seasons in DC was primarily a reflection of a tough comparison of the first quarter of last year when a hotel was the beneficiary of the presidential inauguration that added more than $650,000 in revenue in January alone as a result of five-day average rates between $1,300 and $1,900 a night.

Several of our hotels dramatically outperformed their respective markets, reflecting both the superior locations of these assets as well as the success of our operating initiatives. For example, the InterContinental Miami had a 10% RevPAR growth in the first quarter compared to the Miami market that grew only 1.5%. And RevPAR growth at the Loews in Santa Monica was nearly 21%, far outperforming the LA market that grew 10% during the quarter.

As I mentioned, we had two major capital programs ongoing in the first quarter that displaced nearly 17,000 room nights at the Westin St. Francis and Hyatt Regency La Jolla at the same tranches for completing the renovation of all 616 rooms in the newer Coronado Hotel, including the replacement of all soft goods and case goods and significant upgrades to the bathrooms and quarters. We spent about $16 million on the project including $4 million from the hotel's FF&E reserve and estimate that this process displaced approximately 9,000 room nights during the quarter or nearly $2.4 million of revenue and $1.3 million of EBITDA.

Given the strength of the San Francisco market, it is difficult to find the time to do this type of work that doesn't result in lost revenue, but we believe the new product will give the hotel a nice lift in a market that continues to be one of the very best in the country.

Similarly at the Hyatt Regency La Jolla, we have completed $12 million guestroom, bathroom and quarter renovation that will dramatically improve the product quality of that hotel. This project displaced another 8,000 room nights during the quartet, approximately $1.7 million in revenues. So combined, the two projects displaced just under 17,000 room nights in the quarter which resulted in a loss of approximately $4 million of revenue and $2.1 million in EBITDA.

Then on the deal front, we had an extremely active start to the year completing over $700 million in acquisitions and dispositions and another $425 million in financing related activity. In February, we closed on the Four Seasons Punta Mita for a gross sales price of $200 million, netting us approximately $180 million after taxes. The gross valuation represents nearly $1.2 million a key for the hotel and a sub-4% cap rate on 2013 NOI, and included the disposition of the adjacent 60 acre land parcel known as La Solana. Proceeds from the sale were used to redeem all the outstanding $104 million Series A preferred stock and reduce the outstandings on the revolving credit facility.

And then the last day of the quarter, we closed on the sale of Marriott Grosvenor Square hotel in London for a gross sales price of £125.2 million or approximately $208 million, roughly $875,000 a key. As promised, from a strategic perspective this sale effectively marks the exit of the European markets for the Company as we now adjust our sandwiched lease position at the Marriott Hamburg remaining. Proceeds from the sale of Grosvenor were used, in fact that same day, to fund the buyout of the 50% interest in the Fairmont Scottsdale Princess, previously owned by Walton Street. We paid roughly $90 million to purchase their equity, which implied a net hotel valuation of $288 million or $440,000 a key, and just under 7% cap rate on forecasted 2014 net operating income.

Diane will discuss our balance sheet related activity in more detail shortly, but over the same timeframe, we closed on a new and improved $300 million revolving credit facility, retired the Series A preferred and then terminated the Company's interest rate swap portfolio.

So lastly on the acquisition front, we continue to selectively search for assets that would fit within our existing portfolio and present an opportunity to create shareholder value. As many of you know, there are an increasing number of sellers in the market today and we believe transaction activity in the higher-end sector of the lodging space will increase this year. We also believe the fundamentals of the business remain quite favorable, and in absence of some sort of exogenous macroeconomic shock, lodging demand growth is poised to outpace the fairly limited supply additions for the next several years.

Our type of assets are particularly well insulated from new supply as we generally own a high barrier to entry, urban and resort markets, which have virtually no supply in the pipeline. We continue to believe that this unique supply dynamics suggest a prolonged up-cycle is very likely. So we're encouraged to currently have an interesting pipeline of potential acquisitions under review that meet both our strategic and qualitative criteria, and as I said on our last earnings call, both pricing and leverage discipline are of paramount importance to us and our Board as we evaluate these opportunities and we will only transact if we are confident that we have the ability to add value to the hotels through our asset management expertise and generate a return greater than our cost of capital.

With that, I'll turn the call over to Diane to discuss the results of the first quarter and our balance sheet activity in more detail. Diane?

Diane Morefield

Thank you, Rip. Good morning, everyone. We reported another very strong quarter of financial results with comparable EBITDA of $41.2 million, a 19.5% increase over the first quarter of last year, and comparable FFO of $0.06 per share compared to $0.01 a share last year. Beginning this quarter with the acquisition of the remaining 50% interest in the Fairmont Scottsdale Princess and the disposition of the Four Seasons Punta Mita, we are simplifying our reporting to only discuss our total U.S. portfolio, which will reflect 100% of all our owned assets, and the only exclusion is our leasehold interest in the Marriott Hamburg.

RevPAR in our total U.S. portfolio increased 6.3% during the quarter driven by a 5.1% increase in rate and 0.7 percentage point increase in occupancy. Total RevPAR increased 9.2%. As Rip mentioned, adjusting for displacement, RevPAR increased 8.9% and total RevPAR increased a very strong 10.8%. During the quarter, we had eight properties which achieved double-digit RevPAR growth, primarily concentrated on the West Coast. The Westin St. Francis grew RevPAR nearly 11% during the quarter despite the $2.4 million in renovation disruption, and our Four Seasons Silicon Valley also increased RevPAR 11% as our new revenue strategy resulted in a 20% increase in ADR in the first quarter of last year. The Ritz-Carlton Half Moon Bay RevPAR increased 13.5% during the quarter with transient rates increasing 10%, further reinforcing the ongoing strength of the Greater Bay Area market.

As Rip mentioned, the group segment of the business had a great quarter with room nights up 6.3% and rates up 2.8%. This was aided by a strong short-term group pickup quarter in Southern California, particularly at the Hotel Del. Corporate group room nights increased 9% during the quarter across the portfolio. Our transient room nights actually declined 3.7%, primarily at our urban hotels and mostly as a result of renovation disruption. However, transient rate increased a very strong 7.3% across the portfolio during the quarter and ADR in our highest rated premium segment actually increased 9% to nearly $500 per night.

Non-room revenue increased 12% with banquet revenues up 14%, covers increasing 6% and average checks up 7%. EBITDA margins expanded 220 basis points across the portfolio and our EBITDA growth to RevPAR growth ratio was a very strong 3.5x compared to our stated goal of 2x. Hours worked per occupied room, our best measure of labor productivity, was flat compared to last year. These are all really impressive results and a testament to the expertise of our operating team, particularly considering 17,000 room nights of displacement that occurred during the quarter.

Turning to our balance sheet activity during the first four months of the year, we sold the two assets which generated $270 million in net proceeds. These proceeds were redeployed to retire the 8.5% dividend yield Series A shares for $104 million, purchased our 50% partner's interest in Fairmont Scottsdale Princess for $90 million, and paid down the revolving credit facility by approximately $75 million.

One housekeeping item on the balance sheet, the Series A preferred redemption did not settle until after quartet end, so you'll see on our first quarter balance sheet we still reflect the $104 million preferred liability and a large cash balance that both subsequently were eliminated in early April.

Pro forma for all of these activities, our net debt to 2014 EBITDA ratio is in the 5x range based on the midpoint of our EBITDA guidance, and net debt preferred will be in the 6x range. The preferred redemption alone will increase our free cash flow by nearly $9 million on an annual basis and the sale of the two foreign assets eliminates approximately $2 million in frictional costs per year.

In April, we announced the closing of a new $300 million unsecured credit facility with $100 million accordion feature. The new facility is the same size as the prior facility but pricing has been reduced by approximately 100 basis points across the pricing grid. Importantly, we successfully transitioned from a mortgage secured facility to a stock or unsecured facility that further demonstrates the Company's improved credit quality since we last restructured our line in 2011. An unsecured facility provides Company important flexibility, with ability to add, remove and replace assets from the borrowing base as we contemplate other transactions and financing activities.

Finally, we spent approximately $23 million to terminate the remaining $400 million notional value swap portfolio to eliminate the legacy derivative program. The swap portfolio is at well above market weighted average LIBOR strike rate of 5.09%, with maturities ranging from November of 2014 through February of 2016. The termination is effectively a prepayment of interest expense but significantly improves our fixed charge coverage ratio as calculated under our new credit facility and we believe simplifies our balance sheet structure.

We forecast this termination will result in cash interest savings of $11 million for the balance of 2014. As a result of the swap termination, we will record $8.9 million of non-cash interest expense in the last nine months of the year with legacy amortization of the swaps to remaining OCI balance. The non-cash interest expense is added back for purposes of reporting comparable FFO and we adjusted our guidance range for that metric accordingly.

We currently have $58 million drawn on our line of credit and approximately $9 million of letters of credit, which gives us roughly $235 million of availability under the line. We continue to evaluate potential refinancing opportunities on some of our mortgage debt given the current strength of the credit markets and hope to have more to announce on that in the near future. At quarter end, we also had approximately $60 million of total unrestricted cash.

Also during the quarter, we settled with Orange Capital, our activist investor. In total, we spent approximately $2 million related to the Orange Capital activist situation, of which $1.5 million was expensed during the first quarter. We've excluded these expenses from our comparable results since they are truly nonrecurring costs.

We are maintaining our full year guidance ranges for RevPAR, margin expansion and comparable EBITDA. We expect RevPAR growth in 2014 to be in the 5% to 7% range which again is reduced by approximately 1% related to the displacement. We are increasing our guidance range for total RevPAR growth from 4.5% to 5.5%, to 5% to 7% to reflect the strong pickup in non-room spend we see – I'm sorry, that we saw during the first quarter and anticipate throughout the rest of the year. EBITDA margins are expected to expand between 120 and 200 basis points and comparable EBITDA is in the range of $210 million to $230 million. We are increasing our comparable FFO range by $0.07 per share, primarily as a result of the interest rate swap portfolio termination. We expect comparable FFO to be in the range of $0.57 to $0.67 per share.

With that, we'd now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Bill Crow from Raymond James and Associates. Please go ahead, sir.

William Crow - Raymond James

Two or three topics this morning. Your FFO guidance is essentially unchanged other than the financing benefit. The strength that you saw in group looks – and you indicated expected to continue, so is there some conservatism baked in on the FFO front or how you're thinking about that?

Raymond L. Gellein, Jr.

By and large, Bill, I think we are being a little conservative in the first quarter. It's our smallest quarter, if you will. We're encouraged especially about the group spend. Group bookings are still relatively short-term. But overall the business is strong, margin improvement has been good, but I think we just wanted to be a little bit cautious as we are seeing some – as the short-term business is what it is, but overall we feel very good about the results.

Diane Morefield

And Bill, our actual results obviously reflect the projected actual displacement that we experienced in the first quarter and we are projected to have some additional displacement in the fourth quarter for some other rooms renovations that we plan to start towards the end of the year. So that flows through the actual results.

William Crow - Raymond James

Okay, thanks. The group business you said is still short-term in nature but I got to give you a lot of credit, I think it was about a year ago, at May REIT, you were out there and much more optimistic than your peers and the brands over the group business in '14, and that seems to be playing out as you had expected. How does your activity level that you've seen in the last several months translate into your expectations for '15?

Raymond L. Gellein, Jr.

It's interesting because the short-term business has been good, the longer-term business has been a little bit a little weak in the first quarter. I think we're up 1.5% in rooms and a couple of percent in rates in '15. So it hasn't translated yet into stronger bookings but the strength in '14 would suggest that there's no reason that it wouldn't. And so, we're cautious I guess is the best way to put it, but overall it's been a good story. So we'll know more, I think we'll know more at the end of the second quarter, but overall I think that – and one of our team just pointed out that given the fact that the Westin St. Francis was under renovation, we think that's affected some of the bookings into '15 as well just from a timing perspective, but overall I think it's been good.

Diane Morefield

And those guess are just through the end of March, we don't have April yet. So it's still pretty early in the year to reflect on next year.

William Crow - Raymond James

Understood, alright. And then finally, the third topic is acquisitions/dispositions. On the disposition front, other than maybe Lincolnshire, is it fair to say your portfolio is still the keepers at this point or are you looking to market additional assets that we're not aware of at this point?

Raymond L. Gellein, Jr.

I think other than Lincolnshire as you say, which at some point is not a core asset for us, but the balance of the portfolio I think is pretty stable. Our view now is that given the fact that our balance sheet is stronger and our stock is where it is, that we would at the right price be looking to acquire additional scale.

Diane Morefield

So Hyatt Regency La Jolla near-term is a hold because we just did the rooms renovation and we think that will have a great impact on that hotel longer-term, but probably not a core as the rest of the portfolio.

William Crow - Raymond James

Thank you, guys. Last quarter you mentioned acquisitions and you said you were looking throughout North America including Mexico and Canada, and I think the people that I have talked to kind of, they get a little nervous with the mention of Mexico. Is that you want to keep that on the table or is that something that maybe is not really there anymore now that you've sold out of Mexico?

Raymond L. Gellein, Jr.

I keep it there. I think that Mexico has got some potential strength. So I wouldn't – we'd be careful. There are places in Mexico I have no interest in going, but there are some markets in Mexico that I think are quite strong. So I wouldn't exclude it from places that we would consider.

Operator

Your next question is from the line of Ryan Meliker from MLV & Co. Please go ahead.

Ryan Meliker - MLV & Co.

Just a couple of things. First of all, on the Fairmont transaction, I'm assuming the difference between the $90 million and then the half of the $288 million that you guys assumed the purchase price of the asset to be is, the difference is the promote that you guys earned on that asset, is that correct?

Raymond L. Gellein, Jr.

Yes, it's correct, to promote, what is about $19 million.

Ryan Meliker - MLV & Co.

Okay, so that's very nice. And then secondly with regards to guidance, in terms of the non-room spend, in the quarter non-room revenue was up 12%, group bookings or group revenues were up roughly 9% which is in line with your pace for the year, why only plus 5% to 7% for total room revenue? Do you expect the non-room spend to come down materially from where it was in the first quarter?

Raymond L. Gellein, Jr.

As we just said, I think we're being a little cautious. I mean the spend in the first quarter was above our expectation and part of why that happens is that the groups decide to spend when they are on site as opposed to before they come. So a little bit of that we have to wait and see. And the other side is, and the other point is, they are more citywide, that in our group business in the balance of the year and the citywides don't tend to spend as much in the hotel. So we're being cautious about that.

Ryan Meliker - MLV & Co.

Okay. And then just real quickly on the balance sheet, any update to plans for a common dividend?

Raymond L. Gellein, Jr.

On the dividend side, as Diane said, we've been very focused on the balance sheet. So we've gotten our leverage ratios down to net debt-to-EBITDA at about 5, which is at the sort of top-end of our 3 to 5 range, and the net debt preferred at 6 which is the top-end of the 4 to 6 range. So, we're still a little focused on making sure that we strengthen the balance sheet at this point in time in the cycle, but we have an active conversation with our Board about instituting the dividend as soon as we feel like we've gotten the balance sheet where we want it to be. So we're focused on it, we have a goal to reinstate it, but at the present time it's a discussion with our Board and we'll have more for you later.

Ryan Meliker - MLV & Co.

Okay. So then can you give us an update on where you would feel more comfortable on that or are you in the range? I understand you're at the high end of the range. Do you want to be towards the low end, towards the middle, or is it going to be more driven by [indiscernible] dynamics and with the preferred dividends being reduced?

Raymond L. Gellein, Jr.

I think it relates to a lot of things. It's not only leverage but it's the other opportunities that we might have for the capital that we have to be able to invest. So we'll balance all of that with the Board, but I don't think we have one specific target that would tell us that now is the time.

Ryan Meliker - MLV & Co.

Okay, that's helpful. And then one last real quick one. Diane, if I heard you correctly, you indicated that the preferred equity redemption wasn't completed until after the first quarter. Does that mean the $167 million on the balance sheet at the end of the quarter is going to drop by about $100 million?

Diane Morefield

Right, that's correct. It's actually all of generally April.

Ryan Meliker - MLV & Co.

Okay, I just wanted to make sure. If you look at on the balance sheet, the Series A were zeroed out.

Diane Morefield

So there was a liability account because we had declared it, so it was a payable effectively.

Ryan Meliker - MLV & Co.

Got you. Okay, that's it for me. Thanks.

Operator

Your next audio question is from the line of Andrew Didora from Bank of America. Please go ahead.

Andrew Didora - Bank of America Merrill Lynch

Rip, from a corporate group perspective, have there been any particular industries that you have been seeing coming back maybe a little bit faster than others, and is there a desire for groups to go to destination say outside of some of your top markets of San Francisco and Chicago where you're seeing kind of that group shrink, spread to other regions?

Raymond L. Gellein, Jr.

The medical industry and pharmaceutical industry remains very strong. The one that's coming back is the financial industry because they sort of during the crisis they were late but they are definitely coming back, and the incentive business is growing. So those are the – the incentive business and the financial industry are the two that are sort of – that have begun to lead this growth.

Andrew Didora - Bank of America Merrill Lynch

Got it. And do you see kind of that group shrink expanding out of some of the top major markets?

Raymond L. Gellein, Jr.

We're in mostly major markets, we're not in secondary markets. So we're seeing it pretty much all over. Obviously in the west, in our resorts, Scottsdale particularly had a wonderful first quarter, the Del had another big quarter. So those are the assets where – and Miami actually had a very good quarter.

Andrew Didora - Bank of America Merrill Lynch

Okay, that's great, that's good to know. And then just finally, I guess Rip, how do you balance your desire to I guess increase your scale right now with the fact that the luxury hotel prices that have been crossing the peak seem pretty robust right now and then how would you expect to finance a potential deal and maybe the leverage level that you feel comfortable with?

Raymond L. Gellein, Jr.

There have been some assets that are traded for prices that we wouldn't compete with, but then also we're seeing assets on the market that given what we can bring to the table, we believe that there is pricing and returns that are potentially acceptable to us. So we're not going to be the guys – we're not going to be somebody that chases a one-off deal with a sovereign buyer or whatever that some of which you've seen, but we've actually seen reasonable discipline on the part of the market with a number of assets that have traded. So it hasn't been crazy yet, but long story short, we think that there are assets out there that we can acquire with good returns, and secondly, we would probably put no more than 50% debt on any asset that we acquire and we'd probably do the rest of it with equity.

Operator

Your next audio question is from the line of Jonathan Mohraz from J.P. Morgan. Please go ahead.

Jonathan Mohraz - J.P. Morgan

Most of my questions have been answered but I do have one on the Essex House. Given the new supply that's coming online in New York, are there things you've either looked at or might look at doing with that [product] (ph) from a conversion standpoint?

Raymond L. Gellein, Jr.

We look at a lot of different alternatives with the property. I mean there is potentially the opportunity to do a little bit in the way of conversions. But the other side is that it's just sort of growing into its own. We've done a lot of what I think are very good work, very good work at the property, in the food and beverage area, rates beginning to increase. So there are some potential options on the residential side potentially, but right now we're really focused on the hotel business at that property. And the occupancy, by the way, is pretty stable at that property. As you saw, it performed better than its peers and in the market they are. So I think because of its location, we're also going to put some capital limits in the rooms here fairly shortly. So we're bullish on that property.

Operator

Your next question is from the line of Rose Smedes from Evercore. Please go ahead.

Smedes Rose - Evercore Partners

I wanted to ask just also on the Essex House. You had mentioned you thought the performance guarantee this year would be around $3 million to $4 million and with stabilization in 2015. Is the property still on track with those two kind of forecasts I guess?

Raymond L. Gellein, Jr.

Yes, it is.

Smedes Rose - Evercore Partners

And so the whole business with reducing some of the labor force there and all that, that's kind of behind you at this point?

Raymond L. Gellein, Jr.

Correct.

Smedes Rose - Evercore Partners

Okay. The other thing I just wanted to ask you, just a little more on, you mentioned a little bit on the acquisitions outlook, but just with stuff you're looking at, do you see more stuff coming to market say relative to three or four months ago or any kind of change in pricing? I think for these very high end assets, they can be kind of quirky, right, so you see a big range of pricing depending on what kind of I guess you can bring to the table as you said, but kind of in general any kind of movement there?

Raymond L. Gellein, Jr.

We're seeing more volume of deals being presented to us, and obviously we're sort of an obvious target for people to come to if they've got a higher-end asset to market. So we are seeing increasing volume. And to your point, we do see a very wide range of prices. So there are people who have these very high expectations. So we don't have discussions with them very long. We wish them luck and send them on their way. But if they are more rational, we're in active discussions with a number that we think are rational and deals that could potentially be done.

Smedes Rose - Evercore Partners

Okay. And then I mean just sort of an open-ended, but broadly when you look at a property where you think you can kind of bring something to help turn it around, I mean do you think of it over kind of a three-year period of stabilization or is that too long or kind of what kind of timeframe would you typically be willing to consider I guess?

Raymond L. Gellein, Jr.

Three years is a good timeframe, but it depends on the property, it depends on what you have to do, right. So we wouldn't want to see the ups have to be five or six years away, right. You wouldn't go into that kind of thing. But it's in fact that we're – I mean like in Scottsdale, we built a new ballroom. I mean there may well be assets where there are some additional medium space or additional improvements to be made which we have – like Miami where we completely almost reconcepted the hotel. There may be some of those kinds of things, but I think your three-year timeframe is probably a good bet on where we would need to see the benefits materialize.

Operator

Your next question is from the line of Jeff Donnelly from Wells Fargo. Please go ahead.

Jeffrey Donnelly - Wells Fargo Securities

Just actually I want to circle back to Ryan's question on the common dividend. Is there a scenario where you'd be obligated to restore even a token common dividend in 2014 or is it really going to be purely at the Board's discretion this year?

Diane Morefield

We have sizable NOLs that we continue to carry forward from obviously the years of losses. So there is no pressure to maintain the REIT structure to announce a common dividend anytime soon, and preferred dividends count as dividends. So we still have the series, the other two series that also go towards your dividend trust.

Jeffrey Donnelly - Wells Fargo Securities

I guess is it fair to say or maybe this is too strong, do you think the Board feels it's an imperative to restore common dividend or is it not really a – there's no pressure, if you will, to restore it in 2014 versus say '15?

Raymond L. Gellein, Jr.

I think we believe it is an imperative over the sort of medium term, if you will, but I think it's important for us having been through what we have been through to make sure that we do what we have said, which is to strengthen our balance sheet and make sure that we're accomplishing our strategic goals, one of which is obviously to begin paying a dividend. So I think the Board is focused on it, but they haven't set a particular timeframe over which we want to accomplish it based on – and if you look at all the transaction activity we did in the first quarter, I think we're creating a lot of value and we've got a lot of different opportunities for our capital. So we just have to make sure that we've got that all in the mix, if you will, before we decide to reinstitute the common dividend.

Jeffrey Donnelly - Wells Fargo Securities

Understood. On another topic, Washington DC, I recognize your portfolio doesn't give you what I'll call a broad perspective on that market, but with a bit of supply hitting DC this month with a new marquee, do you guys have a sense of how that opening is going to impact maybe the market and your hotel and maybe do you have a view a little bit longer term on how DC is going to fair? I guess I'm thinking about your assets over the next 12 to 24 months because there's sort of a pervasive concern out there that the DC may remain weak for an extended period of time.

Raymond L. Gellein, Jr.

Obviously the supply is of a concern to the overall market. We have this unusual asset that we don't really – we're not really concerned with that particular issue. We run a market rev index close to 150 at that hotel, its average rate is $100 to $150 higher than the competition, it's an unusual location, it's the home for a number of foreign dignitaries who come to visit and nobody is building something like it. So our year-over-year comparison was more to our duration than it was to any supply increase.

Jeffrey Donnelly - Wells Fargo Securities

Understood. And then maybe just one last question, it might exactly seep a bit out there, but are there opportunities in your portfolio where you feel there's maybe a chance to convert rooms in these urban and resort locations to residential use, whether that's fractional ownership or even full-time residential, because off the top I'm thinking about markets like with the Del or the Essex House or even the Westin St. Francis where residential pricing per foot is just soaring frankly, and I'm just wondering if you guys think there's sort of an arbitrage there?

Raymond L. Gellein, Jr.

We don't think so to Westin St. Francis. I don't think it's zoned to be able to do that. So that doesn't really work. Obviously in the New York you would look at and maybe there's some – you might get some compression if you sold pieces of – sold some of that hotel as residential, but also that hotel has got the ability to – I think the hotel portion of that has tremendous upside. So we'll be very careful there. The others, the Del has got some residential product that was sold. I don't think that convert to Del, that historic building, makes any sense. Yes, so overall, I'm not sure that we've got many other assets other than the New York asset where that would make sense.

Operator

Your next question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Chris Woronka - Deutsche Bank

I think you guys mentioned earlier that group got up to 50% of your total mix in the prior peak. Do you think it gets back there or are there portfolio changes or some other reason, maybe less of a focus on over-grouping, that it might not get back to that range?

Raymond L. Gellein, Jr.

I think we're within about 6% today, about 44% or 45% range, and some – what number of rooms are we short?

Diane Morefield

So, about 6% below in total room nights to peak group room nights.

Raymond L. Gellein, Jr.

So I think we'll get there. I mean the group business is pretty strong. I'm not sure that there's anything that's fundamental at this point, especially for these kinds of assets. So you look at the assets that we have, these are places that higher-end groups want to come to. So maybe we're short a percentage or two from the 50% but we've been bullish, the bullish view has played out, and we'll let you know if it doesn't later, but overall I think we're headed there.

Chris Woronka - Deutsche Bank

Okay, got you. And then with the buying of the rest of the Fairmont Scottsdale, you have two Fairmonts now, I think they are about 14% of your EBITDA combined. What are you seeing in terms of maybe the evolution of the brand and things that are being done from the macro level at the brand?

Raymond L. Gellein, Jr.

They're being done what, I'm sorry?

Chris Woronka - Deutsche Bank

Kind of at the macro, how is that brand – it's always been kind of a smaller brand, if you will, and what are you guys seeing I guess from corporate, are there any initiatives to – I'm not suggesting there's anything wrong with the brand, just is there anything – now you guys own two of them, fairly large assets, just the evolution of the brand, where you see it?

Raymond L. Gellein, Jr.

Yes, where they've been strong, and if you go to Scottsdale for instance, where they've been strong is helping us enhance the group and fill that new convention center that we built. So we're quite pleased, our team works very closely with them. And so, we've got to two hotels but they are mainly focused on those locations and I think have done a pretty good job. Overall in terms of what else they're doing for the brand, I don't know that we've spent a lot of time. They got a strong group base. So for our assets, which are group focused hotels, they do a very good job.

Chris Woronka - Deutsche Bank

Okay, got you. And then Boston is one of the few markets you're not in that maybe a lot of your peers are and how do you guys potentially look at getting some exposure there, maybe to slightly lower cap rate versus another market and maybe a slightly higher cap rate? And then kind of the second part of that is, are you guys more focused on kind of building NAV over the long term or does the two to three year cash flow outlook matter more?

Raymond L. Gellein, Jr.

They both matter, is the short answer. I mean, as it relates to the Boston, we would love to have a hotel in Boston. We've been in Boston looking, we'll see what happens there. As it relates to what we do, a short-term dilutive deal if we believe that long-term the value was really strong. We're going to be really careful about that. If we can bring a lot to the table and the upside is really big, maybe, but I don't know that short-term dilution if it's of any scale, is a little scary for us.

Chris Woronka - Deutsche Bank

Okay, got you. Very good, thanks.

Operator

Your next question is from the line of Lukas Hartwich from Green Street Advisors. Please go ahead.

Lukas Hartwich - Green Street Advisors

I just got a quick one. Can you talk a bit about the performance of the Fairmont Chicago? That asset seems to have been lagging last few quarters. I'm just curious if there's anything specific going on with that asset or anything that you could provide color on what's going on there?

Raymond L. Gellein, Jr.

The issue especially in the first quarter, Lukas, was the citywide with – we were down I think two or three citywides in Chicago in the first quarter. That's a very much group focused hotel. And so when that happens, that's tough for that hotel. Hopefully during the balance of the year, as I said in my prepared remarks, Chicago is actually flat year-over-year, so we'll be up two or three citywides for the balance of the year. So hopefully that will help that hotel. I mean the hotel is in great shape and the people that have stayed there love it, but it is very much group focused, and so if that comes down to Chicago, it gets hurt.

Operator

Now, I would like to turn the call back over to Rip Gellein for closing remarks.

Raymond L. Gellein, Jr.

Thank you all, thanks for your questions, thanks for your support, and we look forward to talking to you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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