LaSalle Hotel Properties (LHO) CEO Michael Barnello on Q1 2016 Results - Earnings Call Transcript

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LaSalle Hotel Properties (NYSE:LHO) Q1 2016 Earnings Conference Call April 22, 2016 10:00 AM ET

Executives

Max Leinweber – Director of Finance

Michael Barnello – President, Chief Executive Officer, Trustee

Bruce Riggins – Chief Financial Officer, Executive Vice President, Secretary

Analysts

Jeff Donnelly – Wells Fargo Securities

Patrick Scholes – SunTrust Robinson Humphrey, Inc.

Smedes Rose – Citigroup Global Markets, Inc.

David Loeb – Robert W. Baird & Co., Inc.

Shaun Kelley – Bank of America Merrill Lynch

Lukas Hartwich – Green Street Advisors

Wes Golladay – RBC Capital Markets

Thomas Allen – Morgan Stanley & Co.

Steven Kent – Goldman Sachs & Co.

Chris Woronka – Deutsche Bank Securities, Inc.

Anthony Powell – Barclays Capital, Inc.

Kris Trafton – Credit Suisse

Bill Crow – Raymond James & Associates, Inc.

Ryan Meliker – Canaccord Genuity, Inc.

Operator

Please standby, we're about to begin. Good day and welcome to the LHO First Quarter 2016 Earnings Call. At this time, I'd like to turn the conference over to Max Leinweber, Director of Finance. Please go ahead, sir.

Max Leinweber

Thank you, Taylor. Good morning, everyone, and welcome to the first quarter 2016 earnings call and webcast for LaSalle Hotel Properties. I'm here today with Mike Barnello, our President and CEO; and Bruce Riggins, our CFO. Mike will provide an overview of the industry and discuss our first quarter results and activities. Bruce will provide details on our portfolio performance and then update on our balance sheet. And then, we will 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, quarterly reports and its other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Our SEC reports as well as our press releases are available at our website, lasallehotels.com. Our most recent 8-K and yesterday's press release include reconciliations of non-GAAP measures with the most comparable GAAP measures.

With that, I'll turn the call over to Mike Barnello. Mike?

Michael Barnello

Thanks, Max, and thanks, everyone, for joining our first quarter call. I'll start out this morning by highlighting our outstanding EBITDA and margins, which again reached a record level for our company in the first quarter. We pride ourselves in our ability to consistently deliver strong bottom line performance during all phases of the lodging cycle.

As such, we are pleased with our 14% adjusted EBITDA increase and 23% adjusted AFFO per share growth in the first quarter. Our impressive AFFO per share growth reflects the benefit of our opportunistic capital markets activities during the last year and the strength of our portfolio.

Our historically best-in-class hotel EBITDA margin rose to 26.5% and expanded by 47 basis points due to our efforts to control expenses, which were flat, despite rising occupancy, wages, and benefits.

Turning to capital, we invested $36 million in our portfolio during the quarter, which included completing renovations at the Chaminade Resort in Santa Cruz, Gild Hall in New York, Hotel Solamar in San Diego, Hotel Amarano in Burbank, The Liberty Hotel in Boston, Lansdowne Resort in Virginia, Hotel Palomar DC, the Mason & Rook Hotel in DC, and the second phase of the guestrooms at Westin Michigan Avenue in Chicago. The Mason & Rook was the most significant of these renovations, and we've dramatically upgraded the product compared to the former Hotel Helix.

Now, we've had an opportunity to quickly recap our company's performance in the first quarter. We'd like to widen our lens and evaluate the status of the lodging industry. But before we do, let's address our decision not to provide earnings guidance and by extension, a perceived lack of transparency for 2016. We've tried to provide much more transparency by identifying and acknowledging the trends both the industry and our company have been experiencing. We operate in a cyclical industry. That's a fact everyone seems to agree on.

We have identified the trend directions that form the basis for all components of demand. These trends are swiftly moving, and unfortunately, most of it to the downside. When coupled with an increasing uptick in supply, it is quite challenging to pinpoint a range of a high and low RevPAR for the year. We know this from previous years during similar parts of the cycle where we historically chased down numbers as trends continue to soften.

So we acknowledge the following. We are in or approaching a downturn, and based on our portfolio and positioning, we expect to be in a position to outperform on a relative basis. We've been through the storms and the down cycle multiple times. Through the worst lodging downturn in the history, we performed the best.

In 2008, LHO had the best EBITDA margin in the full-service segment. In 2009, our margins actually fell the least among the peers. Despite the drop in RevPAR that year, approximately 17%, our nominal EBITDA declined only 23%. In 2009, our EBITDA margin fell less than 300 basis points. We attribute that largely to our expertise with a proven cycle-tested asset managers and operators, as well as to the caliber of properties we have and the well-structured management contracts we have.

Today, we saw our terrific asset managers, top notch operators and even better properties that are located in the right markets with broad and geographic diversity. To sum it up, we're better prepared today to weather the downturn than we were in 2008. Having said all of that, in keeping with our history of providing detailed [indiscernible] industry, we want to offer our perspective on the current market conditions.

Industry RevPAR growth has now decelerated for six consecutive quarters and industry demand growth has decelerated in four of the last five quarters. We have not experienced this low level of demand growth since 2009. In fact, demand growth is 1% as compared to 4.2% for the first quarter last year and was less than half at 2.6% demand growth we had in Q4 of 2015.

Additionally, for the first quarter during this cycle, lodging supply growth increased at a faster pace than lodging demand growth, resulting in a decrease in the industry quarterly occupancy for the first time since 2009. While we cannot be certain whether the supply-demand dynamic will remain at a balance for the rest of the year, the data we have today has kept us cautious about the prospect for meaningful demand acceleration over the next couple of quarters.

With new supply growth increasing as expected, we'd like to now spend a few minutes updating you on those components of demand as we see it as well as how those components interact with our performance.

First is group. There's not been a material change in our citywide demand by market since we updated you in February as most of that business was already booked before the year started. As mentioned before, citywide are up in all of our market this year, except in Chicago and Seattle. Specifically, citywide across our markets are up in the first three quarters of the year and are down in the fourth quarter.

We note the group RevPAR for the industry decreased by 1.4% during the first quarter. Regarding LaSalle's group performance, our first quarter group RevPAR beat the industry, and was approximately flat with a rate increase and occupancy decrease.

We noted in our call in February, that our overall group pace for 2016 kept shrinking quarter-over-quarter since the middle of last year, which could have been partially been a result of an earlier booking window driven by citywide. Since February, our full-year group pace improved slightly and is now 3.8%. Our group on the books for the balance of the year is ahead of pace by 5%.

Our operating teams are working hard to add group bookings, and we're pleased with the results of the bookings during the first quarter. As a reminder, our business is approximately 26% group and 74% transient.

The next piece of demand is corporate. For the S&P 500, revenues and profits were estimated to decline again in the first quarter, which will mark the fifth consecutive quarter of revenue decline on the fourth consecutive quarter of earnings declines, a trend we haven't witnessed since 2009.

Here's some perspective on how rapidly the picture changed on profit expectations. As of December 31 last year, the estimated S&P 500 earnings growth rate for Q1 2016 was 0.7%, which was [indiscernible] estimated earnings decline of approximately 8%.

As we look out to the full year, we note the consensus S&P 500 earnings estimate currently fitted approximately 2% growth as compared to almost 7.5% growth – estimated earnings growth, as of beginning of the year.

Given the inaccuracy we saw in the Q1 estimates, we do not place a lot of credibility on the current full year growth estimate. In fact, in seven in the last nine years, the S&P 500 earnings actualized less than the estimates as of the beginning of the year.

Along the same vein, we saw our corporate negotiated room nights declined by approximately 10% in the first quarter. Corporate ADR was up by 1%, but it was clearly not enough to avoid a drop in revenue in the corporate segment. For reference, the corporate transient segment averages between 10% and 14% of our overall demand in any given year. However, that only includes the guests who booked using their company's negotiated rate code. We know the pool of corporate guests is actually much larger especially Sunday through Thursday but we're unable to track other guests who are traveling without a corporate negotiated rate.

As with corporate, the data behind our international demand is inexact, given the lack of booking source info for many of the OTAs. That said, our data shows that international demand was actually up by 12% during the first quarter, which is an increase of just under 10,000 room nights. It's the first time since Q1 of last year that our international demand did not decline.

Our increase this quarter was almost entirely driven by the Park Central and WestHouse in New York and the Grafton in L.A. The Park Central and WestHouse hotels respectively increased their total occupancy by 22 points to 90% during the first quarter. Much of the lift was international production.

The Grafton's increase was partially due to the renovation displays from last year, and partially due to a strategy shift away from low-rated business. The management team at Grafton successfully replaced the chunk of its OTA business this quarter with wholesale international business which at a higher rate and lower commission. Looking at our transient segment overall, we are pleased the segment demand is growing relative to last year. Our transient RevPAR in the first quarter was up approximately 3% with an increase in occupancy, partially offset by a rate decrease.

Looking at the second quarter, as of February, our overall transient revenue pace in Q2 was up 10.8%. Today, our Q2 transient revenue pace decline is now 6.5% ahead. While we're happy we have a healthy pace, we also understand that transient is a very short booking window and pace trends can change quickly, as we experienced the last few months.

With that said, our transient revenue for the balance of the year is ahead of pace by 7.7%, and 6.8% of that is increased room rates. When we look at our economic indicators we track, we kept mixed signals. On a positive side, some of the economic indicators were generally very strong. The two most positive indicators were unemployment and enplanements. Unemployment hovered near regular – I'm sorry, a recent low at 5%, and enplanements were steady, with planned capacity increases in 2016 from several carriers.

In several cases, the planned capacity increases have contracted slightly during the last few months, but they still remain positive for the year. Also positive, consumer confidence remains at a similarly high level as it was at the end of 2015, but the index did have a small drop during February.

On the less encouraging side, when we look at GDP, as with the S&P 500 estimates, the GDP estimates have continued to weaken. Consensus for 2016 GDP growth at the beginning of 2015 was 2.8%, to drop at 2.5% at the beginning of 2016 and has now dropped further to 2%. This downward trend in GDP estimates concerns us as GDP growth has an impact on RevPAR growth.

Before turning it over to Bruce, let me be very clear. We remain ready to overcome any challenges the rest of 2016 may bring. We have a terrific dividend yield with high coverage, coupled with a low leverage balance sheet and incredibly low average interest rate.

Our fixed charge coverage ratio is 5.3 times. We were the best-performing REIT during the downturn in terms of EBITDA and margin preservation, something we're very proud of and look to duplicate if the conditions arise.

Now, Bruce will provide some details about our first quarter performance and an update on our balance sheet. Bruce?

Bruce Riggins

Thanks, Mike, and good morning, everyone. I'll start with more details on our first quarter results. Los Angeles and San Francisco were our top markets in RevPAR performance, with increases of 19.3% and 11.5%, respectively. L.A. benefited from strong entertainment demand during the quarter, renovation ramp-up at the Grafton and an unfortunate natural gas leak in Porter Ranch, which has displaced thousands of families. The strength in San Francisco is predominantly due to the Super Bowl.

Conversely, Boston, Chicago, San Diego and Seattle all experienced RevPAR declines in the first quarter. Our Boston and Chicago performance was citywide-driven, with 27% less citywide demand this quarter in Boston and 53% less citywide demand in Chicago. San Diego's lower performance was partially due to 11% less citywide and partially due to unfavorable weather during most of the quarter, which impacts the resorts more than the downtown hotels.

Our Seattle performance was hurt by lower group occupancy at our hotel in the University District. Our downtown Seattle hotel did keep pace with the CBD's slightly positive RevPAR growth. As Mike mentioned earlier, adjusted EBITDA grew by 14% in the first quarter and adjusted FFO per share increased by 23%. Our Hotel EBITDA margin expanded by 47 basis points. Impressively, our expenses were flat last year during the quarter despite a 2.1% growth in occupancy, rising wages and benefits.

Our top performing hotels this quarter in terms of EBITDA margin improvements were the Grafton on Sunset in West Hollywood, Villa Florence in San Francisco, Park Central in San Francisco, Hotel Chicago and Serrano in San Francisco.

Turning to our balance sheet. At March 31, we had total debt outstanding of $1.47 billion at an average interest rate for the quarter of 2.5%. As of quarter end, total debt to trailing 12-month corporate EBITDA, as defined in our senior unsecured credit facility, was 3.6 times which translates to a current interest rate on our credit facility of LIBOR plus 170 basis points.

We currently have approximately $430 million of capacity on our credit facility and 45 of our 47 hotels are unencumbered. Lastly, we did not repurchase any shares during the first quarter or to date during the second quarter. We still have approximately $70 million of capacity remaining in our share repurchase program.

That completes our prepared remarks, and Mike and I would now be happy to answer any questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Jeff Donnelly with Wells Fargo.

Jeff Donnelly

Curious because I think it's on people's minds today, how do you think about RevPAR growth or I should put more specifically, where is RevPAR growth do you think need to be in, say, 2016 and 2017 that have margin growth would be flat to positive? Can you continue to get margin growth at RevPAR levels as low as 2% or you think it has to be a little higher than that?

Michael Barnello

Good morning, Jeff. What people have generally asked us is, what is the regular run rate on RevPAR to cover normalized expenses? And we've typically said that we expect 2.5% to 3% expense run rate, and so you would need 2.5% to 3% RevPAR to offset that, to maintain flat margins.

That's kind of a normal scenario. And what we've been able to do because of the great job of our operators and asset managers really over better part the last couple of years has become much more efficient in many, many departments. So, as a reminder, if you look out all through 2015, we were basically flat on expenses with not a lot of RevPAR growth.

That's continued into the first quarter. I can't say it's going to actually last forever. We do have expense pressures in terms of things like increase in minimum wage throughout the country and obviously continued increases in benefits. But the challenge that our operators have faced is finding other ways of doing things that are more efficient and they've risen to that challenge.

So, optimistic, we'll continue to find ways to improve. Will it offset the run rate of normal 2.5% to 3% expense growth, hard to say, but that's our goal.

Jeff Donnelly

Do you think the structure of RevPAR – obviously, if you have maybe occupancy declines and rate growth and possibly you're right about wages, but on the other hand, I'm guessing energy prices and insurance costs are also probably pretty low. I guess my question is do you think it's possible for at least, say, another 12 months to have sort of an environment where at 2% RevPAR, you could continue to eke out sort of positive margin growth?

Michael Barnello

Well, look, we clearly did that in Q1. We'll strive to do it for the rest of the year. You're right. Our insurance numbers, we experienced a decrease in 2016. On the energy, that is also going down, too. Those aren't enormous line items for us. So while they help, they're not going to carry the day in terms of the expense efficiency, but they definitely help.

Jeff Donnelly

And just – I want to switch gears to San Francisco and maybe you could help us manage our expectations for that market as we look forward. We're assuming to have negative comparisons in Q1 2017 because of the Super Bowl against the backdrop of the disruption from the Moscone renovation that could impact the city overall, but also kind of cause some pressure as different submarkets compete versus one another.

Can you maybe give some thoughts about – or update us, I guess, on timing, the dates of the work at Moscone and maybe how you're thinking about maybe year-over-year sort of RevPAR impacts from the Super Bowl and Moscone that people should be processing now?

Michael Barnello

It's a timely question, Jeff. So to give a little bit of background, Moscone is in the process of about a $500 million expansion. They're adding four stories, and they're going to add about 300,000 square feet. So it will bring the total convention space to about 1 million square feet. So it's a 42% increase in functional space. So long term, medium term, this is going to be a great addition for the city and for the hotel business, but getting through it, will be a little bumpy.

Construction has started, but the bulk of the work really is 2017 and ending in 2018. There's not much impact this year. You guys all know that San Francisco had a strong first quarter. The citywide are strong in San Francisco, Q1, Q2 and Q3 this year. We started seeing the impact really in Q4 where citywide are down about 20% in San Francisco, and then throughout 2017 citywide are down pretty dramatically. So there – citywide are down about 32% next year and they're also down in terms of number of events, eight events.

So you're right. Q1 will have a very tough comp in San Francisco but, quite frankly, still have a full year. So it's going to be a tougher year in San Francisco. At the same time, you're going to have a little bit of supply coming online next year, just over 1%. So while that's not an enormous number relative to some cities and clearly what the country is experiencing, that's a number that hasn't – we haven't seen in San Francisco for some time because supplies have been pretty constrained.

So a tougher slotting in San Fran 2017, part of 2018 with the citywide will show slowdown still and a little bit into 2018. But beyond that, it should be much better situation as Moscone is online and a lot of the citywide that went elsewhere will return to the city.

Jeff Donnelly

That's helpful. And just one last question on, I guess, dispositions. I was curious, maybe if you had any updated thoughts on the – sort of the hotel transaction market now is – we're into the year and we've seen some transactions either recur or, for example, I think, one of your competitors just announced the sale of a hotel in Washington, D.C.

And maybe a little more broadly, I guess my question also is, in prior calls, you spoke about maximizing after-tax net proceeds on asset sales as somewhat of a challenge to recycling capital to return that money to shareholders.

Given the disposition market you see today, do you think about some assets like, for example, even Park Central, which probably has one of the highest tax bases out there because of when it was purchased, as an asset that you'd even consider to be as open to selling as other assets in your portfolio? Because it would seem like it would be one of the ones that would have the potential to return the greatest amount of proceeds to shareholders.

Michael Barnello

So, as far as any particular asset, we're open to sell any of them. I mean, we're not emotionally tied to one asset, one market, the company. I mean, our job is to maximize the value for the shareholders, and if there's an opportunity to sell an asset, a cluster of asset, the company for a great price, then we should evaluate that.

As far as what we have seen in the market, yes, there are some transactions that have happened. It's not been as robust as what started off in 2015. There was much less transactions in Q1 overall. We think that the acquisition market has become tougher for the folks that are even still in it, on the – largely on the PE side.

The result of an increase in the cost of debt, as well as the amount of proceeds, you've seen a huge change in what the change in spreads and the change of proceeds over the last 12 months. It's gotten a little better debt-wise over the last couple of months, but not anywhere near strong it was say 12 months ago. So I think it's a little tougher for folks to be aggressive on the buy side right now given the components – cost components for them as well as the outlook on where we are on the cycle. That said, if there's opportunities for us to take advantage of that in any particular city and we're not opposed to doing it in New York or Park Central as you mentioned, then we should take a look at it and we would do that.

Jeff Donnelly

Okay. Thanks.

Operator

And we'll take our next question from Patrick Scholes with SunTrust.

Patrick Scholes

Hi. Good morning. A couple of questions here. As I understood it correctly, you said that your group pace was tracking 5% for the rest of the year. I had my notes here from the last quarter, it was 2%. So it seems like an acceleration, is that a comparable figure that I'm pointing to?

Michael Barnello

You're right. So the group – we've said in the prepared remarks, Patrick, was that we saw the 2016 pace slip from July of last year to October last year to year-end and then to February. It went from about 8% up to about just over 2% when we had our fourth quarter call, so your number is right on. That number has moved up to 3.8% for the year, which means the balance of the year so Qs 2, 3 and 4 are up 5%.

Patrick Scholes

Okay.

Michael Barnello

That's the good side of the pace. Often, somewhat is our transient pace has actually come down, so net-net our pace is actually slightly down from where we were from February up. So February was just over 5% for group and transient for the year and now it's just at 5%. So it's holding in there, the group has been a little better, but transient is a little softer.

Patrick Scholes

Okay. Thank you. Two more questions. How should we think about what your RevPAR result in the first quarter would have been if we exclude San Francisco and L.A. sort of back of the envelope [inaudible] (25:42)?

Michael Barnello

Without San Francisco for the Super Bowl, just taking out February, it would be approximately flat. I don't know if we have it without – totally without LA. But L.A. was up 19%, Patrick, and L.A. is about 7% – 8% of our portfolio. So you can kind of work backwards on that. But if you take out just San Francisco for the Super Bowl for February, then we'd be flattish and then something else for – if you take out – a quick math, call it, 8% of 20%, so 1.6%. So it would be down on the 1% range as a quick math.

Patrick Scholes

Okay. And then my last question, shifting gears here, obviously, we've seen and you've seen a clear downward trend line in RevPAR so much for yourselves and for the industry. I'm wondering if you'd like to take a stab – assuming these trends continue, and it sounds like your belief is that is the case, what would you think would be the first negative RevPAR month this cycle for the industry? Care to take a stab on that one?

Michael Barnello

Yeah. That's a tough one to take a stab at. We've been hesitant to do that because it's a tough guess. I mean, you're right that we've pointed out that the trends have been decelerating, right, really across the board. RevPARs decelerated consistently. Demand has decelerated not only consistently, but sharply from Q4 to Q1, and occupancy went negative this quarter.

If you look at history, Patrick, history would suggest that the times that occupancy first went negative for a quarter. This has happened three times in the last 30 years for the first time; and in two times, the RevPAR has been negative pretty quickly in the first three, four quarters. And those two times where when supply was pretty 1.5% to 2.5%. When the one time it didn't happen was when supply was fairly benign. So, supply in 2006, supply was about 0.5%. So, history would suggest that it will be more like the two times than we will be the outlier in 2006, but it's so hard to guess, so many factors go into it.

Patrick Scholes

Okay. I'll leave at that. Thank you.

Operator

So, we'll take our next question from Smedes Rose with Citi.

Smedes Rose

Hi. Thank you. I wanted to ask you just about – you were just talking about RevPAR in the occupancy declines in the first quarter, but you did have a negative impact from the shift in Easter, and I'm just wondering, is there any way to – do you have a sense of kind of what that impact was on the negative in the first quarter that would probably reverse somewhat in the second quarter?

Michael Barnello

We don't have our EBITDA – or I'm sorry our RevPAR is broken out by the entire quarter the last week, so I couldn't tell you that. What I would tell you is that the Easter shift was probably not as painful on the downside in the first quarter. Conversely, the recovery has not been very strong in April. Most of you noticed, the first couple of weeks of April have been interesting. The first week was up almost 4% and the last week was actually down. And the first week might be okay but given the offset the people are expecting relative to the Easter shift, I think people had much grander expectations for it. And what you saw is you saw a big decrease in occupancy in the first – in the second week, so where demand actually is actually upside down in the last week – the last public week that we have [indiscernible] Smith Travel data for April. So looking at your question, I mean Easter is an impact. We thought it would be a little worse in March. We thought the recovery would be a little better in April.

Smedes Rose

Okay. The other thing I wanted to ask you, you outperformed at least relative to kind of the Smith Travel numbers for Los Angeles. Do you have a sense of what would that market have done without the Grafton in it? It sounded like maybe the comps there are a little easier due to renovations.

Michael Barnello

Well, the Grafton is a small hotel, so I don't know if we [indiscernible] without the Grafton. We don't – one thing – we had a couple of things going for us in Q1 in L.A., Smedes. We had, first, the Grafton renovation recovery that was helpful. Second, Porter Ranch had a gas leak where they had to evacuate the 68,000 homes, and thus people went to a lot of the markets of hotels near us that created some compression.

And then the film and entertainment business has actually been very strong in Q1, and the outlook there for film and entertainment business is actually very strong for the rest of the year. So no doubt helped by some factors needs, but an overall good quarter. As you can see by the MSA and CBD data, L.A. was a great performing market for Q1.

Smedes Rose

Okay. And then just on – finally, on the credit facility, would you expect to term that out at all or are you comfortable where it is sort of indefinitely or?

Bruce Riggins

Well, the balance that we've got, Smedes, is somewhat consistent with what we've carried in the past couple of years, and it's pretty similar to where it was late last year and then we did the new $555 million term loan. So that essentially pre-funded the mortgages that were paid off earlier this quarter. So given the capacity of $400-plus-million, we're certainly fine carrying that balance at the same time. We've got obviously very significant flexibility with only two of the properties encumbered so we could encumber any of the other 45 hotels.

Smedes Rose

All right. Thank you.

Operator

And we'll take our next question from David Loeb with Baird Investment Bank.

David Loeb

Hi. Good morning. I want to follow up on Jeff's question, Mike. Given that you said that we are in or approaching a downturn. If you sold assets, how would you use the proceeds? What can you do to further position the balance sheet for a downturn?

Michael Barnello

Well, it depends on the asset, it depends on the amount of proceeds. We have options. Obviously, we can short term pay down the line. And if we don't have any other use for it, we can hold on to the cash. With most of our assets with the prices that we expect to get, we would expect to have a gain, in some cases sizable. Depending on the size of the asset we sold and the size that we gain, it may or may not be able to be absorbed with our regular dividend.

And given our outlook, we're unlikely to do a 1031 for a new asset. So we would likely have some kind of special dividend, perhaps a special dividend at the end of the year, if the gain was big enough.

As far as the uses for any excess proceeds, we do have options. The options are we can buy back stock or evaluate buyback stock. We can evaluate paying down preferred that is outstanding and callable, or we can sit on it until we figure out a better use for it.

David Loeb

And just on the dividend from a capital gain, would you consider a stock dividend to preserve cash?

Michael Barnello

Clearly, we would consider all those things. Again, the details matter when we sell at the amount of the gain, what we're talking about.

David Loeb

Okay. Thank you.

Operator

And we'll take our next question from Shaun Kelley with Bank of America.

Shaun Kelley

Hey. Good morning, guys. Mike, just wanted to ask about something slightly different. You mentioned that some of your flexibility in your performance during the last downturn and one question we started to get from people as they think about cyclicality is the dividend. Traditionally, the hotel sector has reduced dividends as taxable income has declined. But I'm curious even your leverage is in a much different position. The liquidity environment is in a much different position than what we experienced a long time ago. So, how do you think about the dividend at this point, especially with a pretty material yield at this moment?

Michael Barnello

The dividend is one of the important things that we have. I mean, it's a sacrosanct thing to us, to shareholders, to the board. So, any movement for that is super important to us. It's ultimately a board decision, and, obviously when we – we like the times, the years that we can increase the dividend as far as what you're suggesting in terms of the times get tougher, what do you do with it. It's so hard to speculate, Shaun. The details matter: what is happening short term, where are we with our balance sheet, what is happening medium term, what's our long-term outlook, what's the right thing to do to protect the company.

And right now, we have a balance sheet that's in one of the best shapes it’s ever been in our almost 20 years as being a public company. So, we feel very good about our positioning. And all I could tell you is that we have to evaluate all those things at any given time as we see changes in both the short-term and the long-term outlook for the fundamentals of the business.

Shaun Kelley

Is there a payout ratio that you'd just be uncomfortable with? Like, so if we reached a number that started to approach, I don't know, take it, 80%, 90%, is that how you think about it? Or is it – I mean, I appreciate there's all these other factors, but I mean, is there anything in free cash flow that investors could look at to just kind of at least start to frame how you guys might think about it?

Michael Barnello

We look at both. We look at the payout ratio. We do that every year when we had increases in the dividend. But we don't have a set threshold. We don't have a number, as you suggest, that if it gets to that, we're not going to raise it beyond it. But I can't separate it from the particulars that I mentioned earlier. I mean, the current status of our balance sheet is super important, the current market conditions are super important, and the only way to evaluate what to do about the dividend would be to factor in all of those items. And without it, I'd be just giving you some bad information.

Shaun Kelley

That's entirely fair. Last thing would just be the one thing that people keep asking us about a lot is the activity of sovereign wealth in particular in the M&A landscape. Any thoughts? I mean, you guys own some pretty solid real estate in major metros, on where you think some of that – those conversations are if anywhere from just sort of what you're hearing out in the industry?

Michael Barnello

You're right. That's been in the news over the last year and I guess more recently in the last couple of months. Look, it kind of piggybacks an earlier question, are we open to anything disposition-wise, and the answer is yes. We're not particular where those buyers come from. If they happen to come from offshore and sovereign wealth funds, then great.

Do we necessarily see a huge movement coming in? You're seeing a little bit of it, but if you look at the transaction that happened in the first quarter, it hasn't been quite as much as I think that the investor talk is, meaning, I think, that there are definitely our transactions. I just don't think it's as big as everybody seems to make it out to be.

Shaun Kelley

Very helpful. Thanks guys.

Operator

And we'll take our next question from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich

Thank you. Hey, Mike. You'd mentioned that San Francisco was flat without the Super Bowl impact. That seems like it's pretty big underperformance relative to the market. Can you explain what's driving that?

Michael Barnello

No. That was not what I said or hopefully I didn't say. Now the question was how did the portfolio perform without San Francisco and L.A. If we pulled out San Francisco for February of Super Bowl, so our portfolio would have been flat. San Francisco, our first – our January was up, I think, almost – yeah, it's about 8% and March was just slightly positive. So I don't have the number exactly taking out February or certainly taking out just Super Bowl, but it is better than what you heard earlier.

Lukas Hartwich

Okay. Sorry. I must have heard that wrong. My other question is given your views in the cycle, I'm just kind of curious what your priorities are in terms of, I guess, the strategies that the company is focused on.

Michael Barnello

Well, we've been through the cycles before, and there is no exact timing of when they turn up or turn down. The thing that we tried to outline in our prepared remarks is that we've seen the cycle’s lots of ways. Clearly, we're heading into a downturn, and we've emerged from those downturns in the past with a stronger company. We have great assets with great asset managers and great operators, so it's not a question of wondering if we'll get through any kind of downturn. We know we will. And many times, it actually made us even stronger. But the priorities are to operate as best as we can in this environment despite the fact that we see the trends are slowing, but we've told the operators just to take more of a heads in beds mentality with how they're booking the business. So, we're looking out further.

In terms of group business, our perspective is to group up as much as we can, and on the transient just try to hit as many of the corporate accounts as we can that will frequent the hotels. At the same time, obviously, we're managing the bottom line. So, from an expense perspective, you saw the results of the hard work of the teams in Q1, and, obviously, they'll continue on that path. And so, our perspective is that if we're minding both of those things, then the operation should be strong as they can be relative to the market.

As far as inner priorities, obviously, keeping the balance sheet in great condition which it already is and to further strengthen that. And then we do look at potential dispositions from time to time. Unlike some folks that they talked about them before, our perspective on any dispositions is to really not talk about it if we've made any kind of announcement. So, I can't give any particulars on that, but as we said in prior calls, we're definitely open to look at hotels that might have a better value elsewhere.

Lukas Hartwich

Great. That's really helpful. And then lastly, can you just give us an update on international demand trends?

Michael Barnello

Well, I can give you what we've seen, Lukas. The real data is very poky. I mean, it doesn't come out until months after the fact. And so, it's not particularly timely. When we look at our international demand, we're pretty pleased with what happened in Q1. So, as a reminder, Q1 of last year, 2015, was flat, then we saw the next three quarters, international demand was softening. A couple of reasons. One, you saw a lot of countries outside the U.S. go into recession. You also saw the strengthening dollar hurt the pricing of folks from a country coming in to visit the U.S.

So, for the first time since then, Q1 reversed that trend. And as we mentioned in our prepared remarks, a good bit of that was really the job at Park Central and WestHouse did increasing occupancy. It took a lot of international business made up a bunch of that, the increase. The Grafton also made up a lot of that too. The guys at – in West Hollywood overall have done a great job of taking advantage of international business.

So, we have seen an uptick. Do we know if that's going to continue? It's hard to say, but overall, if I look at the entire portfolio, we saw the markets that got the benefit of international were San Francisco, L.A., and New York, with the other markets down or flat.

Lukas Hartwich

Great. That's really helpful. Thank you.

Operator

And we'll take our next question from Wes Golladay with RBC Capital Markets.

Wes Golladay

Good morning, guys. Looking at the outlook, it looks like a little more cautious here. What is the biggest driver of that? Is it the historical RevPAR trends that you cited? Is it the corporate profit slowing? Is it discussions you're having with the operators?

Michael Barnello

I don't know that I can weight them other than to say that they're all factoring in. We went through all the components in the prepared remarks. I think that the trends speak for themselves, how each component is made up. Quite frankly, it's not helping matters, and we're seeing deceleration in most of those.

As I mentioned just in the last question with Lukas, international ticked up a little bit. That's pleasing. So, we feel good about that. But otherwise, I don't know that I can give you a weight for each component.

Wes Golladay

Yeah. I wasn't looking for an attribution, just more like if there's one that stood out for you. But looking at your corporate travel, is there any customer segmentation that's hurting? We've heard in the past E&P, the industrial companies. Has that now spread to other industries such as financial services, insurance? Is it becoming more broad-based, in your opinion?

Michael Barnello

Interesting that you asked this question because over the last couple of months, for the first time since the recession, we have heard of some travel bans that some companies have put in place. We did see that from a couple pharmaceuticals. We have heard of a couple investment banks issuing travel bans. We heard of some retailers that have recently issued a short-term travel ban, this particular retailer was on a calendar year, a fiscal year that ended in June, and then revaluated that position in July. So, you're seeing some softening. We mentioned on the remarks, we're down about 10% in our corporate room nights. That's disappointing. But I will say it's somewhat consistent with what we've seen over the last couple of years in terms of the softening of that as the earnings for those companies has drifted down. So, I don't know that we can point to one particular segment of our corp business, but it's been kind of consistent throughout that period.

Wes Golladay

Okay. Last one. You have two larger brands, unbranded Park Central hotels, are you actively considering going for the soft brand in light of the view of a slowdown coming?

Michael Barnello

Well, we would answer and tell you anything before it was actually done, so I wouldn't answer the question relative to the Park Centrals or any particular soft brand before we have actually done anything. I would – to answer it in a different way, is that our soft brand is something that we would consider for our assets and the answer is sure. Our job is to consider what's the best story is for our properties in terms of bottom line. So, historically, we've been able to have a great return on invested capital and the strategies and tactics that we've had in place have led us to a lot of independent properties.

Would we evaluate the strength of a soft brand relative to the cost to bring one on, absolutely, that's something that we'll continue to do. As you guys know, the soft brands have grown significantly last three or four years. 10 years ago, they weren't that many. Now, there's a lot of choices. So, to the extent that there's some that could provide a great lift at a cost that would benefit us, that's something we should look at.

You guys have probably seen our case study for the Autograph which was the previously the Hotel Sax. We converted to the Hotel Chicago, made it an Autograph Collection. Now it's been two years. The first year was okay, but last year, the first full year of ramp, we had a significant increase in the profitability of the hotel. But the details matter in terms of the size of the hotel, the cost to comply with any kind of soft brand standards, and the cost overall to do it. So, that's something we should be looking at regularly.

Wes Golladay

Okay. Thanks a lot, Mike.

Operator

And we'll take our next question from Thomas Allen with Morgan Stanley.

Thomas Allen

Hey. Good morning. And, Bruce, I believe this is one of your – maybe one of our your last days, so best of luck in your future endeavors and thanks for all your help over the years.

Bruce Riggins

Thank you, Thomas.

Thomas Allen

So, just wanted to ask just in terms of cost, it seems like you guys are doing a better job than your peers just keeping cost flat. Would you say you're controlling costs as if we're going into a downturn? Is that your mentality? Or if we do go into downturn, there's probably other stuff that you'll start to cut?

Michael Barnello

So, the thing that we have been talking about for the last couple of years is that the margins have improved because of efficiencies. And there is a distinction between efficiencies and cost cutting. So, we separate those into two categories. Cost cutting is many times cost that I otherwise need to spend. I've just decided not to spend it now like either cleaning the windows, doing the brass work, just pushing maintenance items off into the future. And, obviously, that can help a quarter, but you ultimately got to pay for those items to be done.

What we focus on, Tom, this is more of the efficiency side, finding a better way to do things across the board. No department is left untouched, and our guys have been pretty creative of finding ways to be efficient. And hats off to the operators who went through 47 different budget processes and budget meetings. We found a lot of new processes to help us and not everyone is a big area. Some things are $5,000, $10,000 items, but when you roll them over 47 properties, it can be a lot of money. So, that's the things we're focusing on now.

As far as the second part of that cost cutting, if we end up going into a downturn that makes things look bleaker or negative, then there's always things you can do. We mentioned our performance in 2008 and 2009, and the thing I would do – my focus is now going into 2008, 2009, we didn't think that we were waiting for a downturn to improve our margins by 100 basis points. No. I mean, at that time, we thought we were doing the best job we could, but when times demand changes in the cost structure, then we'll do that, and we have the flexibility doing that.

The thing that we remind investors is that we have a management contract base that's different than most. And as a result, we have the most alignment with the owners and the shareholders from our operators than anybody else. So, we fully expect that as things – and if things continue to get rockier, then we'll be able to be on the forefront of any expense management, cost cutting, efficiencies than anyone else.

Thomas Allen

Helpful. Thank you. And then just a numbers question, do you have what your RevPAR would have been up in the first quarter ex renovations? I understand that there were no like major kind of Park Central-WestHouse kind of renovations, but you typically concentrated – yeah, your renovations in the fourth and first quarter, do you think it was a tailwind or a headwind to that 2.1% RevPAR?

Michael Barnello

This year, we were a little bit of a headwind. We had a little bit more displacement this quarter than last year. It's about the same if you offset Mason & Rook. So the Helix Hotel that we closed on October and reopened last quarter – during our first quarter. That had about $0.5 million in EBITDA hit to us. Otherwise, the other renovations kind of wash compared to year-over-year, Thomas.

On a RevPAR basis, I don't know what the RevPAR – I don't know if we have that. But I actually thought pretty much flat. The reason is because we've taken – we take Mason & Rook out of the comparisons because it was closed, so not much of a RevPAR story there either.

Thomas Allen

Okay. Thank you.

Operator

And we'll take our next question from Steven Kent with Goldman Sachs.

Steven Kent

Hi. Good morning. Two questions. First, can you just discuss broadly some of the wage pressures that are out there and whether there are specific markets where you expect that to be more or less significant?

And then, on the likelihood that RevPAR will reaccelerate in the balance of 2016, a lot of your peers are still holding on to that and I just was wondering what you are seeing that they're not seeing or are you which I think the answer is you are being more sober than maybe some of the others?

Michael Barnello

On the wage increases Steve, well, first of all they're just natural pressure in terms of wages and benefits. As far as specifics that are – I'll say somewhat unusual as you've seen minimum wage ordinances that have been passed throughout the country, they've mostly been Chicago and West. So for us Chicago, L.A., San Francisco, Seattle have all instituted moving the minimum wage up to $15 so that has impact.

For us, that is about a $2 million run rate for this year, for 2016. So that's what I'll call more unusual. And as more cities adopt those minimum wages then obviously we'll feel the pressures wherever they do so. But we have, I'd say, the better part or half of our portfolios aren't experiencing those. So it's really the East Coast that hasn't gone through that.

As far as the outlook for RevPAR reacceleration, I can't really comment on what anybody else is saying or thinking. It's hard to know other than we, like you, I've seen your reports are looking at the trend line and the trend line is not so optimistic. But could things turnaround? The answer is sure. Will they turnaround at some point? They do. I mean, the only thing good about going through the down part of the cycle is that the next step is the up part of the cycle.

So where we are right now we won't be in forever and there will be an uptick and we'll be able to take part of that. So our perspective is that we've got great teams, great properties. We'll get through whatever the market throw us. And then when we return to a more acceleration phase, right there and take advantage of that as well.

Steven Kent

Are those fire engines coming towards you? Because you guys might want to end the call a little earlier if that's the case.

Michael Barnello

I don't think so.

Steven Kent

Okay. All right. Thank you.

Michael Barnello

Thanks.

Operator

And we'll take our next question from Chris Woronka with Deutsche Bank.

Chris Woronka

Hey. Good morning, guys. I was hoping we could talk a little bit about OTAs, and maybe you could give us a reminder of what your – during the quarter, some of the mix shifts that occurred and whether you're seeing any, I guess, interesting trends on that front.

Michael Barnello

A little bit of an increase in OTA business for the quarter. As you might imagine, we saw an uptick of our occupancy. So when we look at the third parties, the OTAs, they went up of about 25%. So, for us, that's a decent-sized increase.

What you also may see that in our rooms expense, had a little bit of an uptick. So the commission structure cost us a little bit more money there. Net-net, it was the right move in terms of taking it to play a more occupancy-driven gain, but we did see an uptick.

Chris Woronka

Okay. Is there any way to kind of quantify what that impact on rate was? And I know rate is impacted by a lot of things, not just mix, but I mean is it fair to say that that – your customer shift going through the OTAs – I mean I'm guessing the OTA rate's a little bit lower than your non-OTA rate across the portfolio?

Michael Barnello

It is, Chris. As far as what the cost of it is, it's hard to know because if you're taking it when you have availability versus pushing it and taking it upfront, there is a difference. So in some days it's an incremental business and some days it's defensive business. The only thing we could do which would be some aspects of making it up is just change – find the difference between our corporate rate and our OTA rate and assume it's costing us that. But that's not really fair, because it's not like the rest of it would have come through the corporate rate.

But obviously for us, we wanted to source the best business that we can get at the cheapest channel. And at the same time, we still are cognizant of our fixed costs, so if there is incremental business to be gained, then that's nice. If it's core business then obviously wanted to come through the least expensive channel. And we're constantly working with our operators to try that, maneuver as best they can against those tides.

So the more they can group up or use corporate transient accounts to get base business, and they will. And if they have gaps and they can fill that in with OTAs, but it's obviously not the first choice of business given the expense load.

Chris Woronka

Sure. And then just a follow up on that, Mike, looking at your comments about we're in or near a slowdown. Do you think the structure of the industry in terms of the Internet business is going to be – it's going to have a greater or lesser impact this time around? I mean, the Internet was pretty solid in 2008, right? It was up, it was very common to book online. But some of the strategies have changed a little bit. And so I'm just wondering if you have a perspective of – do you worry more about pricing this time around or you think it's roughly the same?

Michael Barnello

Well, we do worry about the pricing in any change in the cycle, Chris. I don't know that we're worried about pricing specifically relative to where it comes from. Meaning, obviously every channel matters. But I don't know that because the OTAs have become more technologically advanced or any of our channels have become more technologically advanced, that's going to dictate pricing. That door swings both ways. In good times, the transparency helps people push pricing. In downturns, people can see that there's pricing weaknesses and that becomes contagious also. I think that's a technology story more than it is an OTA story.

Chris Woronka

Okay. Very good. Thanks, Mike, and good luck, Bruce.

Bruce Riggins

Thank you.

Operator

And we'll take our next question from Anthony Powell with Barclays.

Anthony Powell

Hi. Good morning, everyone. Do you have a view on whether the next downturn will be as severe or less severe than the last two downturns, and how does that view impacts how you think about capital allocation, cost controls, or any other decisions?

Michael Barnello

I'd love to have an answer on that one. It's so hard to say. There is nothing to suggest that the downturn will look anything like what happened in 2009, but there wasn't anything in 2008 to suggest that either. So, who the heck knows? It's so hard to say, I mean, you have to pick your downturn because of the very big difference between 1991 and 2001 and 2009. Unfortunately, it hasn't revealed itself as to what's going to happen.

As far as what we do, look, we managed the properties the best we can. We found efficiencies last go-around. We made cuts. We had to make last go-around. And we'll do the same things. I mean, the properties, our teams, our asset managers have been incredibly resilient through any kind of changes in fundamentals and I'm certain that's going to continue with the group of guys that we have here.

Anthony Powell

Okay. Thanks a lot. And also Marriott has recently said that they believe they can deliver meaningful cost savings to Starwood-managed hotels. Do you agree and how much of an opportunity could that be for your Starwood properties?

Michael Barnello

I have no idea, and I hope that that's totally accurate because we do have two Starwood managed properties. So I would look forward to getting that benefit. But without knowing what they're doing, I can't tell you.

Anthony Powell

All right. Thanks a lot. And good luck, Bruce.

Bruce Riggins

Thanks, Anthony.

Operator

And we'll take our next question from Kris Trafton with Credit Suisse.

Kris Trafton

Hi, guys. I think it's fair to say that you're quite a bit more bearish that many of your peers in the buyer pool. Which makes it seem like you could get some deals done on the disposition side. Just curious on what you think is holding up these deals? Is it you're reluctant to kind of take a little bit of a price hit now and get rid of them? Some of the assets that you think may deteriorate a little bit faster than the rest of your pool or do you think it's more on just the buyer pool just not being there?

Michael Barnello

I don't know we have reluctance to sell anything. So it comes down to the right price for the shareholder. From our perspective, look, again anything is for sale at the right price, the buyer pool may still be the same size. The activity throughout the buyer pool clearly has changed. And there's just not as many transactions that are happening despite people talking about it as much. So as mentioned earlier cost-to-debt has gone up over the last year.

And the proceeds have come down which means people have to put more equity in the deals. And because there's more uncertainty, there's more reluctance to do that, so that all translates into pricing coming down. And so for us, it's about balancing what each property is doing, what their outlook is versus what the prices we can get for it at any given time.

Now, there's no reluctance. We're happy to sell an asset or more if we find that balance. But until then, there's not much else we can talk about.

Kris Trafton

Sure, it makes sense. And when you think about like the drivers for FFO growth in 2016 – and we talked about – a lot about your view on RevPAR growth will continue to decelerate, but you have some offsets and potential margin expansion unless the RevPAR gets too ugly and then lower debt cost and tailwinds from renovations including Mason & Rook. Is it your view that you'll likely have one more year of maybe fairly strong cash flow, FFO growth even as the fundamentals kind of continue to soften?

Michael Barnello

Tricky question to answer. I mean, again, we're managing the portfolio as best we can, and the guys did a great job with the expenses overall. As long as we continue to see RevPAR gains, we'll do our best to see margins and EBITDA gains. How long will that continue? Hard to say. And so I wouldn't want to put up a punctuation on it, to say that it's one year or two years or one quarter. The fundamentals will be what they'll be.

Kris Trafton

Great. Thank you very much.

Operator

And we'll take our next our next question from Bill Crow with Raymond James.

Bill Crow

Good morning. Thanks. Bruce, good luck in your future endeavors. Mike, a couple of questions for you. First of all, since you don't provide the guidance, could you tell us what during the first quarters may have surprised you relative to your internal expectations?

Michael Barnello

Our surprises were on the negative side, quite frankly. I mean, when we first pre-released our numbers in early January and then again came out in February with our final numbers for Q4, clearly, we had noted consistently that the trends were slowing down. And if you think about it, we saw consistent deceleration in RevPAR. What we didn't expect was the deceleration in RevPAR was going to go from 4.8% to 2.7%. It's pretty meaningful drop in one quarter.

The second part that we were surprised by is that if you look at demand, while, yes, demand has been down now four of the last five quarters, for Qs 2, 3 and 4 of last year, they were kind of about similar levels, in the mid-2s, Bill.

The drop down to 1%, that was very disappointing and surprising to us. So we actually thought that there might be grander expectations and grander performance in Q1. And so those items surprised us to the downside.

Bill Crow

All right. That's helpful. Mike, from a supply perspective in your markets, is the worst yet to come, or are we hitting – are we getting closer to an inflection point where it may start to equal out a little bit or even out?

Michael Barnello

So if you look at the supply in 2016, we have supply in our markets that's higher than the supply that's predicted for the U.S. in all of our markets except for three: Philadelphia, San Francisco and L.A. That's going to be absorbed this year, obviously.

When you look into next year, which I think is the focus of your question, what changes? Really, the only market that has a better growth story, meaning their supply number comes down, is Boston. Otherwise, the supply numbers are flat or go up.

So, I'll give you some example. We think it's a 6% number in New York. It will be 6% in 2017. So Philadelphia goes from just over 1% in 2016 to about 4% next year. D.C., 4% this year to about 4.5% next year. Chicago goes down a little bit, 3.5% this year to just under 3% next year. San Diego, 4% this year going to just under 5% next year.

L.A. got a little benefit recently, our L.A., the markets we look at, which is actually negative. The reason is that the Hyatt Centric City went out of service a month or so ago and will be closed for about 20 months as they rebuild it. So it's – that's good. It's real number, but it's just pushing up the supply. So they're going to be negative slightly this year, up about almost 5% next year.

San Fran, 0.5% this year going to 1.5% next year. Seattle, not quite 2% this year going to 2%, about 2.5% next year. Portland, 3% this year going about 8% next year. And then, Boston was the good market, so it's just over 5% this year, but we think the 2017 supply will be about 1.5%. That's a good story.

Bill Crow

Thanks for the detail, I guess. Thanks. Two questions about the Park Central and then I'll yield the floor. The first question, your Heads in Beds strategy, is that kind of causing you to be a rate leader on the downside? I say that because I'm looking on the Internet and I'm finding rooms in mid-June in the $140, $150 range. And how much ADR are you losing to – obviously, we're looking at RevPAR that was positive in the first quarter, so there's a balance there. But what was ADR at the Park Central in the first quarter? What do you think it does in the second? Do you have a feel for it?

Michael Barnello

I can't tell you what happens in the second quarter. I mean, we're trying to balance what's going on in the market, what's the best thing is for the hotel in terms of EBITDA. So, yeah, you're looking at one hotel. We could take the Heads in Beds strategy there. We made more EBITDA at the property. As far as if we're leading in any given time, hard to say. I'm sure that fluctuates from time to time. But our perspective is that if we can get this on the books that we think is going to perform and we can make more money at it, then we'll continue to do it.

So, at times, that may be being a rate leader on the low, at times, it may be a rate leader on the high. But that will change day to day.

Bill Crow

Then finally on the Park Central again and maybe combining a couple of prior questions, it does seem like that would be a really interesting asset to divest, to sell and probably elicit the best reaction from Wall Street if it was done. But then there's a question about maybe soft branding that. Would it not be best if you were open to selling that, to maybe market that prior to encumbering it even with a soft brand or does that make sense?

Michael Barnello

It might make sense. I mean, it depends on what you – can you dip your – details we're about any kind of soft brand. So, if you had to put a lot of money into a soft brand in terms of capital to meet certain life safety requirements they didn't want to do, then you probably should hold off. If it's something that you don't have to put a lot of money into from a capital perspective and you have favorable change rights or termination rights, then I'm not too sure it would matter. But the details matter on both the sale aspects as well as the soft branding cost and commitments.

Bill Crow

Okay. Thanks, guys. I appreciate it.

Operator

And we'll take out next question from Ryan Meliker with Canaccord Genuity.

Ryan Meliker

Hey, guys. Thanks for taking my questions. It's late in the call. A couple of things I wanted to ask about. First of all, food and beverage revenue dropped pretty dramatically in the quarter, especially on a per occupied room basis with occupancy up as well. Just wondering, was that just driven by the mix shift? As you said, corporate negotiated demand was down dramatically in the quarter. Was that what was driving it or was there something else? Should we expect that to persist going forward?

Michael Barnello

It was something else but I don't think it will persist. It was really that the citywide, we were down in Boston and San Diego where the citywide were down tremendously, and then Chicago, Westin Michigan Avenue. So the citywide really – the citywide drops in those cities affected our big box hotels in those cities that do a lot of banquet and catering events, Ryan, and so, that was the down tick.

As citywide are stronger – that would be stronger in Q2 and hopefully Q3, then we would see the return of – or normalization of food and beverage. That's what our expectation, but so it's not a trend – it was tied into that business.

Ryan Meliker

Okay. That's helpful. And the second question I had was you guys did a great job controlling expenses in the quarter. Obviously, it's a little easier to push margins at a – at the 1Q levels and it will be at 2Q or 3Q levels. I'm just curious with regards to margins and going forward, if I recall, last year you guys had announced that you had come to an agreement with UNITE HERE over everything going on at the Park Central that involved some headwinds associated with some forward unionization being offset by some tailwinds from some concessions that you got elsewhere. Have both sides of that equation already been put in place?

Michael Barnello

No. What we agreed to with labor last year was to agree to card-check neutrality at couple of hotels. There was some timeframe associated with when that can begin with the earliest property that's just started, but there's no guaranteed timeframe on to if or when that would actually result in any kind of labor arrangement, but – so, no.

And the other things on the positive side, those are, I'll say, ongoing. Some things happen right away. Some things happen over the last six months and some things we're still working on. So, not really to – unfortunately, to answer your question, nothing's really been – some things have been done, but not everything.

Ryan Meliker

Yeah. And it doesn't sound like not enough to really move the needle. Would that be a fair statement?

Michael Barnello

Yeah. It wasn't enough to move the needle in the first place. I mean, the impact that we would suggest on a run rate basis was somewhere in the $1 million range. So, when it's all said and done, I don't think it would be something that we'll be reporting on, quite frankly. I mean, we'll mention if somebody asks, but I don't think it'll be an aha moment whenever any of these things get implemented.

Ryan Meliker

Okay. That's helpful. And then, the other thing I wanted to ask about was CapEx. We're just taking a look at CapEx. Obviously, 1Q is a heavy CapEx period, but it was 14% of overall revenue. You had a lot of renovations come out. If we look back over the past five years, it seems like your total capital expenditure has hovered around 9% to 10% of overall hotel revenue.

Is that how we should think about things going forward, or should we expect things to moderate, I remember in the last downturn, it dropped pretty dramatically closer to 5%. Is that kind of where you are in terms of your thinking for CapEx going forward?

Michael Barnello

We don't have the perfect run rate for you, Ryan. I mean, some of the spend that we mentioned in Q1, $36 million, $9 million was Mason & Rook. So, some things are what you call run rate; some things are acquisition. The timing capital that we told everybody about we bought the asset, we might not have necessarily done it the first year we're owned the asset. And then, obviously some of it is renovation and some of it is maintenance.

There's no doubt things have gotten more expensive over in the last five years. In our Westin presentation, we've tried to provide the dollars normally that we invest in the hotels as well as the run rate basis on a per room cost annually. It moved up a little bit.

What I would tell you is that we just finished nine of our properties, renovating those. We have plans to do probably a similar amount going into O4 and O1 of next year. But that could be – some of those projects could be pushed back a year if we determine that it's better to do so. And then, we have maintained the properties in great shape, so I don't feel like the run rate will be quite as much as we have in the last couple of years just because of the lumpiness of the hotels that we were timed to do.

As far as the downturn, everything changes. I mean, obviously, we halted non-essential renovations in 2008 and 2009 and then restarted some of the things that we were doing later on. And I would imagine that if things turned, we would have to evaluate those projects just like we did back then.

Ryan Meliker

Okay. That's helpful. And then I guess the last question I had was you guys gave some great color on demand mix in the quarter and how trends are looking. I think you had mentioned that your corporate-negotiated demand was down close to 10% in the quarter. Obviously, your occupancy was up, so you were able to backfill that with leisure. I'm just wondering, do you feel like you lost corporate share in the quarter or in line, et cetera?

Just trying to understand – I mean, we're looking at weekday transient demand trends, and we're not seeing the 10% fall-off that you guys – that it sounds like you guys saw, at least on the corporate-negotiated front. So do you think maybe the independent nature of your hotels is having an impact on your ability to maintain share for corporate-negotiated?

Michael Barnello

Well, I'm not sure what you're looking at that shows corporate demand. I mean, you look at the overall transient and – on an overall...

Ryan Meliker

Yeah. We're looking at transient on a weekday basis, so as a proxy for corporate.

Michael Barnello

Yeah. But, yeah, overall for us, we were strong on a transient basis. So it's just a change in where it's coming from. That corporate number, as far as – do I know if we're losing share, no, we don't see data that suggests what every hotel is doing on a corporate basis.

Which – we don't have that, so I couldn't tell you, other than these trends have been continuing for some time. I don't think it's the independent nature of the hotels, though. That's not what our sense is.

Ryan Meliker

All right. That's it for me. Thanks.

Operator

And we have no further questions. I would now like to turn the conference back over to Mike Barnello for any additional or closing remarks.

Michael Barnello

Thanks, Taylor. Thanks, everyone, listening to our call this morning. Look forward to seeing many of you at NAREIT in about a quarter. I also do want to thank Bruce Riggins for his excellent contributions over the last five years and wish him all the best in his next endeavors. So, thanks, everyone.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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