Pebblebrook Hotel Trust (PEB) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year-end Earnings Conference Call. At this time, all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder this conference is being recorded. It is now my please to introduce your host Mr. Raymond Martz, Chief Financial Officer for Pebblebrook. Thank you sir, you may begin.

Thank you, Dana. Good morning, everyone, and welcome to our fourth quarter and year-end 2016 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, a quick reminder that many of our statements today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our 10-K for 2016 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, February 24, 2017, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com. The same property operating results that we will provide on this morning's call are based on the hotels we owned during 2016. For the details of which hotels are excluded due to the sale of hotel or was close for renovation, please consult the financial schedules included in last night's release. Same property RevPAR, same property hotel EBITDA and same property hotel EBITDA margins which is what we'll speak to you today are based on the combination of our wholly owned property information, as well as our 49% pro rata interest in our Manhattan Collection joint venture, which we exited in October. You will note that in the press release we issued yesterday we break out our wholly owned hotels separately and did not provide the combined year-to-date operating performance, with our previous Manhattan Collection joint venture. This is due to the SEC's recent pronouncement about pro rata reporting, which does not allowed combined pro rata reporting data. Unfortunately this is the last quarter that we will need to provide the information in this manner. Okay with that let's get started. During 2016 we continue to make very good progress improving the operating performance of our portfolios, as well as completing several large transformative renovation and repositioning projects. We also successfully completed $464 million of property dispositions, which included selling our interest in 8 hotels and excess land parcel and being repaid our mezzanine loan to the prior Manhattan Collection joint venture, all as part of our strategic disposition plan. Turning to our financial results, for 2016 our hotels generated a same property EBITDA increase of 3%. Adjusted EBITDA grew 5.3% and adjusted FFO per share increased 11.2% to $2.78. Another solid year of growth for Pebblebrook and our shareholders and all these numbers represent records for Pebblebrook. Now since 2011 we have achieved a compounded annual adjusted FFO per share growth rate of 23%. Our 2016 same property RevPAR increased 2.4%, with room revenue up 3.1% due to the increase in the average room count during the year. As we were able to add 33 guest rooms through creative design efforts as part of several recently completed redevelopment programs. Our hotels generated $292 million of same property hotel EBITDA for the year, which represents a 3% growth rate over prior year. Same property hotel EBITDA margins improved 32 basis points to 34.2%. Total hotel revenues grew 2.1%, while total expenses were limited to a 1.6% increase. This low growth rate in operating expenses reflects the progress we continue to make improving the operating efficiencies of our hotels, which we expect we’ll continue into 2017. On a comparable basis for 2016, which excludes the hotels we sold during 2016. So this would effectively be our run rate for the hotels we owned as of December 31, 2016 as how several of our peers report their hotel operating results. For 2016 our comparable RevPAR increased 2.7%, our comparable hotel EBITDA increased 4.4% and our comparable hotel EBITDA margins improved 56 basis points. The hotels with the highest EBITDA growth rates in 2016 are all located in California, Palomar Beverly Hills, W. Los Angeles West Beverly Hills, hotel Zephyr Fisherman's Wharf, Meridien Delfina Santa Monica and Western San Diego Gaslamp Quarter. Not reflected in our hotel EBITDA, adjusted EBITDA and adjusted FFO results is approximately $900,000 of additional net cash flow from the 36 new memberships sold, net of refunds by the LaPlaya Beach Club. Now let's focus on the highlights from our fourth quarter results. Same property RevPAR growth for the total portfolio was flat, which was above our outlook for a decline of 0.5% to down 2.5%. This was largely due to a better than expected November and December that we attribute to some travel that was deferred from October and November until after the Presidential Election as well as Hanukkah shifting to the end of December compared to the early December last year. In terms of markets, New York, Washington DC and Santa Monica performed slightly better than we expected, but San Francisco and Minneapolis slightly weaker than expected. Overall for the fourth quarter transient revenue, which makes up about 77% of our total portfolio room revenues was up 2.1% compared with the prior year, with the ADR declining 1.4%. Corporate transient and group demand remains soft to stable during the quarter with leisure transient demand remaining relatively healthy in comparison. And to be clear all our optimism did increase following the November elections, we've not seen any surge in demand from the business or leisure segments since the election. Group revenues declined 10% in the quarter, as room nights were down 12.1% while ADR increase 2.3%. This was largely expected and due to weaker commencing calendars in Q4 across many of our markets. Our properties located on the West Coast experienced the RevPAR decline of 0.1% in the fourth quarter. Our hotels in San Francisco realized a RevPAR decline of 3.8%. And Portland experienced a decline of 0.6% as both of these markets had soft commencing calendars. And Portland also experienced some winter storms in November and December, which negatively impacted travel to the Citi. Palomar Beverly Hills was also under renovation in November and December negatively impacting West Coast performance. Our properties on the East Coast produced a RevPAR increase of 0.9%, largely due to newly innovated and rebranded Hotel Colonnade Coral Gables, a lot of our hotels located in Washington DC and Buckhead. Although our last remaining hotel in New York the Dumont NYC experience the RevPAR decline during the quarter it was better than we expected and Manhattan as whole performed better during the fourth quarter. As a result of these factors monthly RevPAR for a portfolio decreased 2.3% in October, but improved 1.1% in November and 2.4% in December. As a reminder our Q4 RevPAR and hotel EBITDA results our same property for our ownership period and include all the hotels we own as of December 31, 2016. Except for a Hotel Zephyr in San Francisco, since this hotel was close on November 1, 2015 for renovation. RevPAR growth in the fourth quarter was led by Hotel Colonnade Coral Gables, Le Meridien Delfina Santa Monica, Hotel Monaco Washington DC and Hotel Zephyr Fisherman's Wharf. Our same property hotel EBITDA of $59.6 million was $1.6 million above the top-end of our range, which incorporate the sale of the Manhattan NYC in late December. Our outperformance versus our outlook is primarily due to the better than expected RevPAR performance. Combined with further progress on reducing our run rate expenses, which nearly on margins to continue to grow despite flat RevPAR and declining total revenues. Moving down to income statement, adjusted EBITDA was $57.7 million, which is $1.6 million above the top end of our outlook and adjusted FFO per share - adjusted FFO was $41.5 million or $0.57 per share which was $0.05 per share above the top end of our outlook. As we also continue to experience some interest expense savings and overall lower taxes for our TRS [ph]. Turning now to our strategic distribution plan, in addition to the Manhattan Collection redemption agreement, which enabled us to exit our joint venture in New York in October, we completed two additional property sales during the fourth quarter. On November 2nd, we sold a 270 room DoubleTree Bethesda for $50.1 million, which implies an 11.6 times EBITDA multiple and a 7.4% NOI cap rate on trailing 12 month numbers. And on December 20th, we sold the 618 room Manhattan NYC for $217.5 million, which imply the 19.9 times EBITDA multiple at a 4.1% NOI cap rate using 2016 actuals for 11 months and one month of forecasted operating performance. The cap rate, our NOI cap rate on our sales we deduct FF&E reserve amount equal to 4% of total hotel revenues from hotel EBITDA. For the year we completed $463.8 million of hotel and other asset sales. On a combined basis these sales were completed at an 18.9 times EBITDA multiple and a 4.3% NOI cap rate. Shifting to our capital market activities and balance sheet. During 2016 we originated $150 million of new five year and seven year term loans, paid off $169 million of debt maturities, redeemed $225 million of preferred equity and issued $125 million of new preferred equity at a very attractive coupon rate, approximately 160 basis points lower than the preferred equity that we redeemed during the year. Combined with the net proceeds from our strategic dispositions we paid off all of our 2016 debt maturities, as well as several property specific loans at par that were scheduled to mature in early 2017. We also replenished the ability of our $450 million credit facility and extended with average debt maturity for our portfolio. Our weighted average debt maturity now stands at 3.9 years and our weighted average interest rate is 3.4% and 82% of our total outstanding debt is at fixed interest rates. Following the pay-off of the debt secured by the Sofitel Philadelphia that we anticipate completing next week. Our only remained debt maturity prior to 2020 is the $25.7 million loan secured by Hotel Zelos, which matures in September of this year. In terms of balance sheet and liquidity at year-end our debt-to-EBITDA ratio was 3.8 times and our fixed charge coverage ratio 3.6 times. And we currently have just $107 million outstanding on our $450 million credit facility. Regarding our common dividend for 2017, we anticipate maintaining our current annual dividend payout of $1.52 per share, which is in line with our 2016 dividend payout. Based on Thursday’s closing stock price, this implies the current dividend yield of 5.3%. And with that, I would now like to turn the call over to Jon to provide more inside on the year as well as our outlook for 2017. Jon?

Thanks, Ray. Well 2016 was an interesting year to say the least and I'm not even talking about politics. Despite a weaker fundamental environment than we initially expected and provided in our initial outlook a year ago. Our operating and financial performance for pretty much all of our metrics landed within the ranges that we initially provided. Starting with GDP growth, which preliminary fell within our 1.5% to 2% growth range. Industry RevPAR growth for 2016 of 3.2% was at the low end of our 3% to 5% range. The urban RevPAR increase of 2.1% was in the middle of the 1% to 3% range. And our same property RevPAR growth of 2.4% was towards the lower end of our initial outlook range of 2% to 4%. Our same property EBITDA growth rate of 3% for the year fell within our initial outlook range of 1.9% to 6%. And our same property EBITDA margin manage declined 32 basis points within the 25 to 75 basis points growth range we initially provided. We managed the whole same property expense growth to 1.6% even with a 2.1% increase in the number of occupied rooms, pretty incredible. As a result adjusted EBITDA fell within our original range after counting for reduced hotel EBITDA due to our hotel sales during the year. And our AFFO per share of $2.78 ended in the upper half of our initial outlook of $2.67 to $2.84. Despite the dilutive impact of our dispositions on EBITDA and AFFO, which were not included in our initial outlook. Overall for the year business travel both group and transient was weaker than we originally expected. International travel into the U.S., which likely declined due to the strong dollar and weak global economy also weighed on industry results as well as our results. And due to the strong dollar travel from the U.S. abroad was very strong, which also negatively impacted the industry’s performance as well as our own. Supply growth continue to rise, however the end result of 1.6% industry supply growth for the year was at the low-end of the initial expectations. As a result of construction labor shortages and lengthening construction schedules. Weighted average supply growth for our markets, which we initially expected would climb 2.3% in 2016 rose only 1.5%. So did we see any changes in travel trends in Q4? Looking at our portfolio and at the industry overall our conclusion is no. We believe November benefited from a weaker than expected October due to the holiday shift and we believe December benefited from Hanukkah [ph] moving to late in the month around Christmas without any commensurate negative impact at that time. While overall optimism and hope about an improving economy and a better business environment have significantly improved since the election. We have seen no change yet in the level of travel especially business travel. Have we seen any changes so far this year? The answer again is unfortunately no. Do we believe there are reasons to be optimistic that travel will improve later this? In this case, the answer is yes, but we are not budgeting yet nor are we forecasting it, but we’ll let you know as soon as we see it. We also made great progress in executing on our strategic plan to create value for our shareholders through the disposition of between $500 million and $1 billion of properties at private market values higher than the public markets implied values. In 2016, we successfully unwind our New York joint venture in a manner and value that were very favorable to us. And gave us the flexibility to more easily sell the two hotels we gained full ownership and control of. One was sold in December and we continue to work towards selling the remaining New York hotel. We also sold three additional hotels, the Viceroy Miami, the Redbury in Hollywood and the Doubletree Bethesda, as well as a small excess parcel of land adjacent to the Revere in Boston. All told, gross proceeds equaled $464 million and we sold at a combined EBITDA multiple of 18.9 times. These values are indicative of values for high quality hotels in major gateway cities with flexible brand and managers, which represents much of our existing portfolio. In addition to our New York efforts, we continue to pursue other potential dispositions in an effort to take advantage of the very large differential between private market values for our properties. And the much lower public market value for the combined portfolio and company. We continue to believe that the NAV of our portfolio determined on a property-by-property basis is between $36 and $40 per share. Of course, this provides no value for management, our expertise and track record in creating value, our attractive financing, nor does it add any value for the portfolio as a whole. And a challenge of assembling a high quality group of assets in great condition, in major gateway cities within many cases flexible management and brand. Finally, it’s worth a few minutes to discuss in more detail our transformational renovation and redevelopment projects and the significant value we’re creating with our unique talent. While we have been successfully executing major projects since our early acquisitions in 2011. And have created significant value over our first five years. I want to focus on our more recent developments, since they have recently been impacting our performance both negatively and positively. In 2015, we completed the comprehensive redevelopment and repositioning of three hotels, W West Beverly Hills, Vintage Portland and Zephyr Fisherman's Wharf for a total of $65.5 million. On a combined basis, these three properties draw $7.5 million of increased EBITDA in 2016 as compared to 2015. Arguably, there were some negative impact on 2015’s performance from the renovations. So some of this improvement was a result of a comparison. However, these three properties combined did not have a reduction in EBITDA in 2015 from 2014. They actually grew EBITDA $900,000 in 2015, despite the renovations. In addition, we expect these three properties will continue to pick up share and drive outsized performance relative to their markets, at least through 2018 and they are likely to reach or come close to stabilized performance. The $7.5 million of increased EBITDA in 2016 represents a pretty good first year return on our $65.5 million of invested capital to execute these repositionings. In 2016, we completed three additional major redevelopments, Union Station Nashville, Hotel Colonnade Coral Gables and Hotel Zeppelin in San Francisco. And at the Monica, Washington DC, while not quite as comprehensive, we completely renovated the rooms, all the meeting spaces and rebuild and re-concepted the properties restaurant creating Dirty Habit DC. The combined investment in these four properties was $78 million. We expect these four properties will drive at least $5.5 million of increased EBITDA in 2017. With ramp up and share gain like continuing through 2019. Ultimately adding a total of over $10 million of EBITDA. And thereby again creating significant value for the shareholders through this dramatic repositionings. This year we're completing another three transformational redevelopments including Palomar Beverly Hills, which is wrapping up in the next few weeks. Revere Hotel Boston Common, which should be complete by early May. And Tuscan Fisherman's Wharf, which is being transformed into Hotel Zoe. The sixth hotel in our unofficial Z collection in San Francisco. This project is due to be complete by the beginning of June. Combined these projects represent an investment of $49.5 million. And we expect they will generate at least $5.5 million of increased EBITDA upon stabilization in the next few years. Together these 10 redevelopments with a total investment of $193 million should generate increased EBITDA of $27 million by stabilization or a 14% EBITDA yield on investment. That means we should be creating value of more than twice our investment. Now I’d like to turn to our discussion of 2017. Overall we believe industry RevPAR is likely to range between flat and a 2% increase for the year. This would result from demand that we expect will increase between 1.5% and 2%. With supply growing by 2.1% to 2.4% and ADR likely increasing somewhere between 2% and 3%. This is based on a slightly better overall economy in 2017 with our forecast of GDP growth in the 1.75% to 2.25% range. We expect urban RevPAR to again underperform the industry as the urban market suffer more supply growth than the industry. We're forecasting urban underperformance at 100 to 125 basis points versus the overall industry in 2017. Since our portfolio tends to track STR’s urban track pretty closely all else being equal. We’d expect to also underperforming industry by 100 to 125 basis points as well. However, all else isn’t equal and we have quite a few unique headwinds and tailwinds, which I’ll now discuss in a little more detail. But as to our outlook we expect our positives and negatives to generally to cancel out, and we're forecasting our same property RevPAR growth at minus 1% to plus 1%. So let’s start with the unique headwinds. First, we have a couple of difficult comparisons to some one-time benefits received last year. Specifically our LA properties benefited from the unfortunate family relocations surrounding the Porter Ranch gas leak and six of our seven hotels benefited from the Super Bowl in San Francisco last year. As a reminder, our seventh hotel, Hotel Zeppelin was closed for redevelopment and transformation. Combined our RevPAR was positively impacted by 80 basis points with EBITDA better by $3.2 million in 2016 and obviously we don't have the benefit of these events in 2017. Second, as is well known at this time, Moscone Convention Center in San Francisco is undergoing a complete renovation as well as a significant expansion. And the most disruptive work and impact will occur in 2017 as the convention authority closes two of the three existing buildings in the second and third quarters of this year. We currently estimate that the negative impact of the short-term disruption will be 400 to 500 basis points in RevPAR for the San Francisco market, which equates to between 100 and 125 basis points of negative impact to our same property RevPAR performance in 2017. We estimate this equals approximately $5.3 million of reduced EBITDA in 2017 for us. The good news is that the convention center room night bookings for San Francisco for 2018 are currently up 12% from 2017. And citywide nights or nights defined as 5000 or more room nights are up by a third in 2018. Bookings for 2019 are already at record levels with room nights currently up by over 50% from 2018 and citywide nights again those nights with over 5000 or more room nights are doubling in 2019 from 2018. These are incredibly positive numbers. New records in fact for the city in 2019 and bode extremely well for improving results in 2018 and very strong results in 2019 for San Francisco. Third, while the number of our major renovations and repositionings is not increasing in 2017 from 2016. The size of the hotels is much larger and the impact is a little more than last year. The good news is with the completion of these three projects will have concluded all of the major repositioning opportunities available within our existing portfolio. So the investing part will be complete, but much of the upside remains to be recognized. The negative impact from our renovations in 2017 is estimated at 110 basis points to RevPAR, which is 20 basis points more than 2016. And the EBITDA impact is estimated at $4 million, which is $0.5 million more than last year. Fourth, we'll also be negatively impacting our retail income stream at Hotel Zephyr. The redevelopment and re-tenanting of much of our ground floor retail of the site, which we’ll be calling Zephyr walk will reduce our retail EBITDA by $1 million in 2017, which is about a quarter of 2016's retail EBITDA. We're investing $9 million to $10 million to upgrade the ground floor structures that wrap our property on three of the four side streets. And re-tenant with much higher quality tenants, representing roughly 18,000 square feet of the 46,000 total square feet of retail. We've already released about a third of the 18,000 square feet of space that is currently vacant or becoming vacant throughout 2017. In addition our annual ground rent from the property is increasing by $1.5 million in 2017 as it will now be based on revenues generated by the hotel, retail and parking at the property. Combined these four items represent a headwind of roughly 300 basis points in same property RevPAR impact. And an estimated $15 million of same property EBITDA impact to our 2017 forecasted results. There are however some positive offsetting factors, which is why we expect we should perform roughly in line with the urban markets overall. First as mentioned previously, we're forecasting a positive ramp up of the four properties redeveloped and repositioned last year, representing $5.5 million of additional EBITDA. Second, we've already benefited to the tune of about $400,000 of EBITDA as a result of the inauguration and women's march in January in Washington DC. So this benefit is offset by the benefit we had last year in Philadelphia from DNC in Q3. And third, we expect to continue to gain share with properties redeveloped and repositioned prior to last year that should largely offset most of the negative impact from the difficult comparisons in LA and San Francisco as well as the challenging year in San Francisco because of the Moscone Center expansion. Finally, as you'll review our outlook for 2017, please keep in mind that there was $22 million of EBITDA in 2016 from the properties sold and the mezzanine loan repaid last year. This represents roughly $0.30 per share of EBITDA, which is offset positively by about $12.7 million of interest expense savings from reduced debt or a combined reduction of a little over $9 million to adjusted FFO or $0.13 per share. As a result our outlook for AFFO per share is a range of $2.34 to $2.50 and our outlook for adjusted EBITDA is $227.4 million to $238.4 million. While the most recent improvement in many economic statistics including corporate profits, business investments, leading economic indicators and business confidence as well as expectations for business friendly legislation. And administrative actions such as deregulation leads us to be more optimistic about the potential for increased travel later this year or next year. We remain cautious due to the uncertainty being created by actions of this administration and potential for renewed global perception that the United States might not be a welcome destination for the discretionary travel plans. We’re also concerned about the negative impact of the strengthening dollar, which has risen another 7% just since the election. Finally, before we wrap up just a few comments about the first quarter. Most of the challenging comparisons related to Porter Ranch in LA and the Super Bowl in San Francisco occurred in the first quarter last year. We estimate this headwind in Q1 to RevPAR is 275 basis points. In addition unlike last year more than half of the negative impact from our renovations is falling in the first quarter. We estimate it equals 300 basis points offset to some extent by the comparative benefit for Union Station Nashville and the inauguration in all around great quarter expected in Washington DC. While there are lots of other pluses and minus based on market or specific property performance, we wanted to provide some explanation for our same property RevPAR range for Q1 of minus 2.5% to minus 4.5%. Nevertheless while 2017 has its challenges we remain very positive about our team’s ability to create value for our shareholders. Through both our strategic plan involving property dispositions and potential stock repurchases as well as significantly increased results from our properties that have been or are being repositioned as higher quality, higher performing hotels. We certainly feel we’re well positioned to take advantage of existing and future opportunities. And as France Ferdinand sings in today’s songs we believe we have the right thoughts, right words and right actions as we head into 2017. And we’ll wrap up today with the announcement of our 5th Annual Pebby Awards honoring our most outstanding property teams from 2016. Don’t forget to follow us live on Twitter starting at 03:00 PM Eastern Time today as we reveal this year’s award winners. And with that we’d now be happy to answer any questions. Dana please proceed with the Q&A.

Thank you. [Operator Instructions] Our first question is coming from Anthony Powell of Barclays. Please proceed with your questions.

Hi, good morning everyone. You mentioned some of the challenges that you continue to see with the corporate travel and corporate transient, seems like leisure travel was decent for you in the fourth quarter and so far this year. What’s your outlook for that business and how do you think efforts like a direct booking and everything have helped that segment?

So I think just in general Anthony leisure has been healthy last year and we expect it to continue to be healthy this year. Clearly consumers in good financial shape, they’re generally mostly pretty well employed and we are seeing improving wage growth for the consumers. So with that and the continuing secular change of people wanting to create experiences and collect experiences versus things we think the leisure segment will continue to be one of the positives in 2017. As it relates to the direct booking programs of the brands, I think the jury is still out on the financial benefit of that to the ownership community. It is working in terms of at least from the early numbers we have seen, it is increasing the number of direct bookings, but we’re also sacrificing some rate to do that. For customers who would have otherwise booked at full non-discounted rates. So while the brands are definitely taking back some share, we continue to see - we’ll continue to wait and see whether that’s - it actually at the end of the day works out financially.

Got it. And on asset sales and proceeds, you mentioned you’re still looking to sell in New York and in other markets are you still looking to buyback shares this year? What’s your parameter for buying back shares, it sounds like you not really in the market for acquisitions like some of your peers. If you can comment on proceeds that’ll be great.

Sure, so to the extent there are additional sales, we feel very comfortable with where our debt-to-EBITDA and our fix charge coverage ratios are there they are very, very healthy. And so we would feel comfortable using additional proceeds to buy our shares. Particularly given the fairly wide discount we believe exist between the NAV as the properties we own and the implied value of those properties through the value of our stock. If - but at any point in time we’re always going to be evaluating the environment, the economy and that differential to see if that’s the best use of capital at that time.

Just a follow-up on that one. So you say your NAV is 36 to 40, so would you be comfortable buying basically stock at any value below 36?

I think it depends on the environment Anthony. The level of the discount that would need to exist for us to buy the shares really depend upon where we are in the cycle. What we think is going on in the underlying economy et cetera. So you would expect naturally to balance risk and return and what those expectations are for each. And so we will take that into account in executing on the repurchase program based upon where the stock is at that time and where we are from an economy and a cycle perspective.

Great, that’s it for me. Thank you.

Thank you. Our next question is coming from Shaun Kelly of Bank of America. Please proceed with your question.

Hey guys, good morning and thanks for all the detail and puts and takes in the guidance. So, Jon just wanted to think about I guess your general view on leverage at this point. You’ve done pretty good job on the disposition side bringing in some proceeds at attractive multiples. Is there a number you want to bring that down to, to be I guess in your mind cycle appropriate? And kind of where do you think that level would be both including and excluding preferreds if you would?

Yes, so we look at debt-to-EBITDA without preferreds because the preferreds are equity. And for that ratio our comfort level today is sub-4 which is where we are. But we also have to look at our fixed charge coverage ratio that obviously takes into account the obligations on the preferred. And that at an extremely comfortable 3.6 times or 3.8 times, 3.6 times level today. So we are very comfortable with both ratios and feel like we have some room there.

Great. And I guess sort of to build on a couple of Anthony’s questions, I mean you guys have always been kind of like willing to go into slightly different places on the acquisition front, if you see opportunities out there. And I guess my question is, is the best place to invest right now in the four portfolio. And that’s why we kind of continue to see the incremental capital dollars flood there relative to what you might be seeing out there in maybe even some unique places like you have done in I am just thinking of Florida, LaPlaya is an example of something a little bit different. But we have got other guys who are talking about non-top 10 or 20 cities or resort opportunities are you seeing any attraction out there, would you rather just invest in the portfolio given risk reward?

Yeah. I mean given risk reward, if we’re going to invest dollars in hotels, we're going to do it in the stock, which is again we believe trading at north, well north about 20% discount to NAV. So I don't know why we’d be out in the market buying assets at market, when we can buy assets we know more that we know have continuing growth opportunities within the portfolio. And do it at a very significant discount to what we can buy any asset on the market forum. And frankly it helps explain the disposition strategy as well. It's to take advantage of those values.

Very clear, thanks guys.

Thank you. Our next question is coming from Rich Hightower of Evercore. Please proceed with your question.

Hey, good morning guys.

Good morning.

Hey, Rich.

Jon, I’ve got sort of a big picture question here, so as you think back across your career and you think, you sort of stack up the different factors out there in the world today. Can you think of a - I mean is there a parallel time in memory where you’ve reasonably high levels of optimism, strong economic data and then at the same time no real follow through on the lodging demand side. I mean is there a playbook that we should think about employing as we think about forecasting and as you think about forecast?

Well, we've had - we've always had periods where we can see economic growth and it doesn’t translate into travel for another two or three, sometimes even four quarters. I mean historically, we're mostly a lagging indicator. And in some recoveries early on like obviously following 9/11 and that recession and then following ‘08. We were actually perhaps a leading indicator at the time because businesses and people got back travelling to a little bit more normal than where they were in the underlying downturns. So I don't think it's that unique from that perspective. And clearly when we've had - I think what's more unusual Rich is the five or six quarters in a row with negative profits for business. And having that come in the middle of an economic cycle, when employment growth continues to be strong and interest rates continue to be low. So I think that's the more unique aspect. I think then perhaps delay if we ultimately see it in increased travel from improved economic environment other than just the stock market, I think is not that unusual.

Okay, that's helpful color. Then my second question is just touching upon the final potential New York City asset sale. So can you just give us your comments on what the landscape is right now in terms of the number of other competing property through sale the depths of capital sources available and then also pricing?

Well, I think New York is certainly a more unique place than some of the other - than many other markets. There may be a couple of other cities that have some similarities like San Francisco and LA where there is very strong interest from multiple sources including international and foreign capital, domestic private equity. There continues to be good activity in New York. I can’t tell you that we have a firm count on what the inventory of assets for sale is and I think there is probably some assets on the market, there have been other rumored that aren’t on the market, or if they are it's not an active marketing effort. I think what we’ve focused on is what's the market for what we own and I think that market continues to be attractive we have a unique asset with very large rooms, a lot of square footage that also has a residential zoning. So that's another alternative for that property in addition to it being a hotel. And again we would expect that at some point during this year we'll have some success in transacting that asset.

Alright great. Thanks John.

Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please proceed with your question.

Hey good morning guys. Looking at the portfolio all the work you've done on the past few years. How should we look at it maybe for the 2018-2019 period? How much unstabilized EBITDA do you have and what is the timeline to capture that? And then on the CapEx side how will that trend for the next few years?

So I mean just from the three most recent years '15, '16 and '17 there is another $15 million of EBITDA in ramp up from those assets. I think in '18 we'll continue to gain share with some properties from previous renovations. I think we've said in a slower environment it can take a longer to gain that share whereas in a highly active and positive environment it can be done more quickly. When we did Zetta it happened more quickly, but we are in a very strong environment both nationally and locally in San Francisco. I think the other rebound is the $5 million, $5.5 million of lost EBITDA or a declining EBITDA in San Francisco this year, which we do think of as similar. The market is going to get back to not just the level of convention demand that existed before, but it's going to get back to a higher level because of the expansion and the renovation. And so we do expect to recapture all of that over the course of '18, '19 and perhaps even it taking until 2020. But that's a pretty hard time period to predict at this point.

Okay, thanks a lot.

Thank you. Our next question is coming from Bill Crow of Raymond James. Please proceed with your questions.

Hey, good morning guys. Jon I have a few questions, so hopefully make it quick here. Your NAV estimate of $36 to $40, is that down from $38 to $40? Or did I just missed that last quarter?

No, you're correct, that's down from a year ago, yes.

And is that just general valuations that have declined in the markets or…

Yes I think it's a reflection of the way a couple of markets are getting valued right. One of those being San Francisco with the expectation for '17 to be a really challenging year in the market. It's kind of dulled some of the interest in the market at this point. People want to kind of wait around and say what the damage is if you will in '17. So I think that's a good part of it in terms of the overall. We haven't really seen much of a change in how the rest of the portfolio would get valued.

Okay, thanks that’s helpful. The Z brand or Z names in San Francisco, is there any real value, consumer value are you gaining the attraction or is it just kind a fun way to think about your portfolio?

So I think it's a fun way to think about the portfolio. I think it has no downside and only has upside. There is some connection between the assets in the market today. Three of them are marketed by the same operator Viceroy the three of the four around Union Square. And I think all of our properties in the market cooperate and share business. And so the sort of similar attitude that exists within those Z properties I think ultimately will have some consumer value. But we're not out here saying there is a brand there that's not the case and not what we're trying to do there. We just think it's fun and it has some upside, but no downside.

Great. Two more Jon we look - spend a time looking at the cost inflation of construction and usually that’s focused a new builds, but when it goes through these big renovation projects what sort of inflation are you seeing? And how difficult is the decision making process becoming?

So, in a number of markets I would say between 2011 and 2016 or ‘17 we’ve seen a doubling of those cost.

And does that I mean it’s going to make it tougher to pencil out to go ahead and do that, is that fair?

Well we’ve certainly seen increasing in ADRs in a lot of those markets over that period of time. So, a good bit of that is able to get absorbed in the underwriting and some of it has been impact on ultimately what you decide to do at your property and what you can afford I mean it’s amazing what we did for $10 million at the Drake, which would cost we believe more than $20 million today. So, yes it can have an impact on redevelopments when you do them, what you do. But if you do we’ve always found that the ones that we’ve been thoughtful about doing have generally delivered pretty high returns. And I think if you look at the numbers that I talked about in the call a 14% EBITDA yield with assets that trade at a 7% or 7.5% EBITDA yield. You still have to start pretty healthy returns on those projects.

Thanks. And then finally from me Jon, you reference I think the reduced regulations as part of the mantra coming out of DC. Could you be specific as to anything that might be out there that would be helpful to the hotel industry as oppose to gas and drive demand anything on the other side of table that would be a direct benefit from deregulation?

So, one of the things folks are talking about is rolling back the overtime exempt rule that more than doubled the threshold for being exempt versus being an hourly. And then calculating overtime based on that that's certainly one rule that would have benefit for the industry. There are things that would happen with healthcare that if they truly did bring down the cost of healthcare or changed some of the obligations, which ultimately gave us some cost benefit obviously that. We’re a big employer that would have a positive impact overall in with our portfolio. So those are a couple of things that come to mind Bill.

Okay. Thanks, Jon. That's it for me.

Thanks, Bill.

[Operator Instructions] Our next question is coming from Jim Sullivan of BTIG. Please proceed with your question.

Thank you. Good morning, Jon. Just a follow on to Bill’s question about cost. Obviously the company has done a great job over the last couple of years on expanding the EBITDA margin and of course you’re providing for a pretty significant pullback here in 2017. And I wonder if you could just kind of refresh us in terms of where you are in the - there has been a series of initiatives you have done over the last several years with acquired assets in terms of expanding margins. So just give us an update us to whether there is some scope for more initiatives here or efforts that there is more to be obtained. And then contras that with the size of the pullback you are seeing here. And if you could maybe highlight a few of the major expense categories be it real estate taxes, insurance or labor cost that going to contribute to this pullback in the margins in ‘17?

Sure, so let me take the latter one first and then I can talk about what our - specifically what we are doing within the portfolio to mitigate the cost increases. So clearly the biggest increases that we face today are wages and benefit increases. Wages in general, within our portfolio are probably up 3% not counting specific increases, which would particularly impact tipped employees with new living wage or minimum wage ordinances in a number of our cities, particularly the West Coast cities. That get to offset a couple of different ways, one other expenses are generally not going up as fast. So whether it's utilities, whether it's insurance, whether it's office supplies, whether it's landscaping, whatever it might be many of those items are not being as influenced by wage growth and benefit growth as the direct labor costs are. The second thing is within our portfolio there is about a 30 basis point impact from the $2.5 million in Hotel Zephyr, a $1 million of lost retail income while we have some vacancies. And $1.5 million increase in our ground rent as we go from a base rent to a percentage rent for the property. So that impacts about 30 basis points alone. The other piece within the portfolio that's inflating this year is that we got some benefit last year from high rated events, whether it be the Super Bowl or it was the DNC or it was the Porter Ranch business, all of it was very high rated compared to what business it's being replaced with this year. And so the flow was actually fairly high and negative on that lost revenue from a comparative perspective. As it relates to the opportunity within the portfolio, I mean it continues to be a very significant portion of the effort of our asset management team, our senior leadership and our property teams and we continue to find efficiencies within the portfolio. So we offset some of those labor increases frankly with less labor, whether it be number of hours or people, it comes through combining positions, it comes through better education and training, it comes through the use of technology and using it better and all of that continues to get rolled out within the overall portfolio. Clearly as we buy properties, we have a lot success implementing our complete profile of best practices and a property like Naples where we reduced the run rate of our expenses by $2 million is a good example of that. We still have some properties where we've been making energy investments that produced anywhere from three to four year paybacks on average and some of that is annualizing. And then a lot of continuing improvements in food and beverage, much of which relates to either reconcepting like a dirty habit where the - we've changed the focus from being a really a sit down restaurant with heavy food and less beverage. And we've turned it into a bar with food and a venue, a place for social events, parties, weddings, rehearsal dinners, et cetera. Which is a much more profitable business than the restaurant business by itself. So there is still a good bit of that within the portfolio to work its way through, we're reconcepting in Seattle. The restaurant in a similar way and that will reopen in March of this year. It’s been closed since late last year or going to be redoing that at the end of the year in Portland, at Vintage to our restaurant there. And then in some cases, we've leased out restaurants and because they are local people who can just do it better and ultimately it's a better financial arrangement for us. So still a good bid within the portfolio, but with some headwinds on margins from some one-time items this year.

Okay, thanks for that. And then second question from me, in talking about supply growth, you talked about the completion of supply being of new product being reduced because of the inability of some of these developers to get the labor they need to complete the project. Have you seen much in terms of projects actually being abandoned or is it simply a case as we think about the pipeline that it simply going to be stretched out a little bit and deferred a little bit rather than actually coming down in a way that would make you more optimistic about the supply-demand balance.

Alright, we haven’t seen projects that have gotten underway that have bought their construction contracts. We haven’t seen those deferred or abandoned, but what we are seeing is increasingly folks are having a hard time making the numbers work. Because the cost have gone up so dramatically, not just on the construction side, but as a result of the projects taking longer your carry cost your soft costs, all gets stretched out and increased. And as we’ve talked, we’ve seen more stringent requirements from construction lenders. Although I would tell you that the number of rooms under construction continues to increase and at this point in time we would say that the industry may not peak until ‘19 in terms of the industry supply. Although we think the urban markets actually will likely peak in 2018.

Okay, perfect. Thanks Jon.

Thank you. Our next question is coming from Michael Bellisario of Baird. Please proceed with your question.

Good morning, guys. Thanks for taking my question. Just wanted to clarify one thing on the $36 to $40 per share NAV, does that include any deduction for capitalizing your G&A cost at the corporate level, or is it simply just your estimate of the real estate value?

That’s the estimate of the real estate value.

Got it, okay. And then kind of on that same topic…

As I am pretty sure that real estate value can be sold without us.

Right, fair enough. And then just kind of on the same topic on the disposition fronts. Are you seeing deals take longer to complete and how would you characterize the bid out spread today versus maybe one or two quarters ago and what you’re seen in the marketplace?

Yes, I mean I think it’s about the same as it was one or two quarters ago. Perhaps there is a few more buyers out there based upon this renewed enthusiasm about the business environment and upcoming economy. It has been taking longer to do deals in general, there are more busted deals that we hear about. Where folks are go into the second or the third buyers in situations. And clearly if you’re dealing with the foreign capital those deals tend to take much longer they don’t move anywhere near as quickly and as confidently as domestic buyers do.

Thanks, that’s helpful.

Sure.

Thank you. At this time, I’d like to turn the floor back over to management for any additional or closing comments.

Well, thank you very much operator, thank you all for participating and we look forward to updating you and actually what will be just another 60 days. Thank you.