Sunstone Hotel Investors, Inc. (SHO) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Sunstone Hotel Investors First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, May 3, 2012. I'd now like to turn the conference over to Bryan Giglia, Senior Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead.

Thank you, Patricia. Good morning, everyone, and thank you for joining us today. By now, you should have all received a copy of our first quarter's earnings release and supplemental which were released yesterday after the market closed. If you do not yet have a copy, you can access it on our website at www.sunstonehotels.com. Before we begin this call, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks, and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. With us today are: Ken Cruse, President and Chief Executive Officer; Marc Hoffman, Chief Operating Officer; John Arabia, Chief Financial Officer; and Robert Springer, Senior Vice President of Acquisitions and Dispositions. After our prepared remarks, the team will be available to answer your questions. I'd like to now turn the call over to Ken. Ken, please go ahead.

Thanks very much, Bryan, and thank you all for joining us today. On today's call, I'll start by covering some of the high points from our first quarter and our acquisition of the soon to be named, Hyatt Chicago Magnificent Mile. Marc will then cover operations in detail, and John will discuss our balance sheet, finance transactions, and guidance before I wrap up our prepared remarks and open up the call for questions. So let's get started. In spite of expected and isolated softness in certain of our hotels, the Renaissance Washington, D.C. in particular, our portfolio performed well in the first quarter. We're seeing continued strength across a broad range of leading indicators, including group booking productivity, group pace, and business trends in demand. In short, the turbulent macroeconomic backdrop is having little to no discernible impact on the lodging business trends. In fact, lodging industry fundamentals are currently as good as we've seen. As a result, we expect to realize continued growth in our operations through the remainder of 2012 and for the next several years. Drilling down on our first quarter, as compared to Q1 2011, our corporate revenues grew by 29% to $205.2 million. Property level revenue growth was driven entirely by occupancy gains, as we worked to push our portfolio to peak occupancy levels before aggressively driving rate. Our adjusted EBITDA grew by 33% to $43.1 million, and our adjusted FFO per diluted share grew by 71.4% to $0.12 in the first quarter. In Q1, our hotel EBITDA margins improved by 120 basis points, this is adjusted for credits and assessments, to 24.5%. While this was a nice step in the right direction, especially considering of that -- all of our revenue growth was driven by occupancy, we know our hotels are capable of generating stronger performance. For reference, our Q1 margins in 2007, the prior peak, and this is excluding the Hilton San Diego Bayfront and the JW Marriott, New Orleans, were 27.4% or 290 basis points higher than our level in Q1 of this year. Marc will discuss various steps we're taking aimed at not only re-attaining prior peak margins, but exceeding prior peak levels as this recovery continues. As a result of the strength we saw in Q1 and the positive leading indicators, we have increased our 2012 guidance. We are now projecting our full year RevPAR to increase between 5% and 7%, adjusted EBITDA to come in between $229 million and $238 million, and adjusted FFO per diluted share to be between $0.96 and $1.04. In addition to generating decent operating performance in the first quarter of 2012, we're also making solid progress against a number of our 2012 corporate initiatives. As we've stated before, our overall goal is to achieve industry-leading, stockholder returns by improving our portfolio quality and scale while gradually deleveraging our balance sheet. The transaction we announced yesterday solidly advances each of these objectives. Our acquisition of the 417-room Wyndham Chicago for a net acquisition price of approximately $212,000 per key, represents a value-additive real estate deal with clear upside at a very attractive price. Post-renovation and repositioning, we expect our all-in investment will equate to approximately $250,000 per key, which we estimate will result in a run rate EBITDA multiple inside of 10x once we complete planned renovations and the hotel stabilizes. We were able to achieve attractive deal turns in part because the seller, the Blackstone Group, rather than selling the hotel to us outright, is taking back the bulk of the purchase price in our stock at a price of $10.71 per share, a 3% premium to yesterday's close. In short, we're acquiring a high-quality hotel with significant growth potential at a very attractive price and Blackstone is acquiring a nearly 5% interest in Sunstone at a price we both believe, represents a very compelling value, given our team, portfolio and strategy and growth prospects. Typical acquisitions are zero-sum game, 1 side wins and 1 side loses. In this case, both sides are in a position to win and we couldn't be more excited about having Blackstone as a major stockholder and potential strategic partner going forward. A few more details on the transaction. First, immediately upon acquisition, we will re-brand the hotel the Hyatt Chicago Magnificent Mile. Both we and Hyatt see a tremendous upside in this asset, and Hyatt clearly represents the best brand for the hotel, given Hyatt's strong demand base and market representation. Hyatt has provided a very attractive package of terms in exchange for the flag, and we are thrilled to expand our relationship with Hyatt -- the Hyatt organization. Second, later this year, we will commence a comprehensive renovation and repositioning program aimed at making the Hyatt Chicago Magnificent Mile one of Chicago's top business destinations. Sunstone has an outstanding in-house design and construction team, and we have a high degree of comfort with our ability to execute on a full repositioning of this hotel that will fundamentally change its character and materially improve its attractiveness as a business hotel. Finally, there will be no debt on the hotel. And so coupled with the repayment of the mortgage on the Renaissance Long Beach, which we completed last week, we will have 13 unencumbered hotels with an estimated value approximating $700 million to $800 million, and we have maintained full access on our undrawn $150 million credit facility. As John noted in our release, at this point, we are comfortable with our low-rated, well staggered leverage. In our opinion, while we remain committed to gradually deleveraging over the next several years, we firmly believe our capital structure is an asset at this stage in the cycle. We own an outstanding portfolio of institutional grade, upper upscale hotels, and 1 of the best portfolios in our space, and we are appropriately levered for the recovery. Subsequent to our acquisition of the Wyndham Chicago, our average hotel size will be 413 keys, the majority of our hotels are recently renovated and in very good condition, and our primary exposures are to the top urban growth centers in the U.S. While we continue to trade at a discount EBITDA multiple to most of our peers, we couldn't be more confident in Sunstone's upside opportunity in terms of earnings growth from this point forward. Looking ahead, we are highly committed to unlocking our portfolio's full potential, and as you saw this quarter, we're confidently executing on a strategic plan or into the ramp [ph] of proactive portfolio management, intensive asset management, disciplined external growth and measured balance sheet improvement. With that, I'll turn the call over to Marc Hoffman to discuss our portfolio operations in greater detail.

Thank you, Ken, and good morning, everyone. And thank you for joining us today. I will review our portfolio's first quarter operating performance in greater detail, review some of our asset management initiatives aimed at recapturing peak profitability, and provide an update on our major 2012 CapEx projects. All hotel information discussed today, unless otherwise noted, is for our 32-hotel portfolio, which includes, on a pro forma basis, all 2011 acquisitions, including the Doubletree Guest Suites, Times Square, the JW Marriott New Orleans, and the Hilton San Diego Bayfront. Chicago, the Hyatt Chicago Magnificent Mile is not included in the statistics I am providing today. For the first quarter, our portfolio RevPAR was up 5.5% to $117.45, driven by a 6% increase in occupancy, which grew to 73.8%. 17 of our hotels generated double-digit RevPAR growth, including our hotels of Marriott Houston, Doubletree Guest Suites Minneapolis, Marriott Quincy, Courtyard LAX, Marriott Long Wharf, and Sheraton Cerritos, just to name a few. From a total room segmentation standpoint in Q1, group revenues were up 0.8%, with a 5.9% growth in rooms and 4.9% decrease in group ADR. Q1 transient room revenue increased 9.2% to last year, with a 6.4% increase in room nights and a 2.6% increase in ADR. In Q1, our hotels had 431 sellouts compared to 278 sellout nights in the first quarter of 2011. Based upon a 98% occupancy standard which shows the continued signs of strengthening demand in our portfolio. Similar to the trend we saw in Q4, the highest number of sellouts in 5 years for Q1, indicating our portfolio is operating at occupancy levels that will enable our operators to compress rates and capture a higher percentage of premium-rated business going forward. The Hilton Times Square, Marriott Houston, Courtyard LAX, and Sheraton Cerritos all saw significant increases in sellout room nights. As we have previously discussed, Q1 RevPAR was negatively impacted by soft group calendar in Washington, D.C. Our 807-room Renaissance, which like other convention group houses in Washington, D.C., depends on citywide conventions to fill their rooms, was meaningfully impacted by a weak convention year, causing Q1 RevPAR to decrease 17.4%. This 1 asset brought the portfolio RevPAR down 230 basis points. Said another way, excluding the worth of the Renaissance Washington, D.C., our portfolio RevPAR would have been up 7.8% in Q1. We expect this weakness to continue through 2012, especially as we commence on our complete bathroom, guestrooms, suites and corridor renovation in Q3. The good news is that, in stark contrast to 2012, the mid-term outlook for D.C. is outstanding. 2013 is particularly shaping up to be a banner year in D.C. We will have a completely new product and our group pace is up a strong 66% to 2011. And we are active in more mini citywide conventions in the market. We expect 2013 to be a fantastic year for the market in our hotel, and our outlook for 2014 and beyond is also very positive. The 13 hotels we renovated in 2011 to continue to ramp up very nicely, with Q1 RevPAR up 14%. As many of these hotels completed their renovations in Q2 through Q4 of last year, we expect to see continued quarter-over-quarter growth, as we realize return on the invested capital, and these hotels continue to improve their performance. As noted, our 2012 group pace is up 8.2% over 2011 levels. With all growth coming from additional group room nights. You may recall that last quarter, we noted that 2,000 [ph] group pace was up 4.5%. Our sales teams have been booking significant business, resulting in a 3.6% increase in pace. Looking farther out, our booking pace for our 4 convention group hotels is up an outstanding 22% for 2013. In Q1, our group booking production for all current and future years was up significantly, 52.4% compared to Q1 of last year. This was our highest first quarter group booking production in the last 5 years for these 32 hotels. For the first quarter, group production for these 32 hotels was 231,105 group rooms. In addition to the positive pace trends in our group hotels, a number of our transient hotels, especially our hotels in New York, Chicago and Boston, will benefit from strong convention calendars in those cities, as those cities experience considerable compression. As an indication of both our operators' ability to shift business into higher-rated segments and the continued recovery in the business demand in the first quarter, our revenues from premium demand sources were strong, with premium revenues increases 10% with premium ADR increasing 5.7%, and premium room nights increasing 4%. As hotels continue to mix shift their business into higher-rated segments, our corporate negotiated business increased slightly at 2.1% in Q1. As we were able to close out our lower-rated corporate negotiated channels and in some of our higher occupancy hotels pushed those customers into premium-rated segments. Our asset managers continue to work closely with our managers on a weekly basis to maximize hotel room strategies and profits through nimble rate and occupancy shifts, depending on the changing market conditions, street corner by street corner. In addition, we continue to work with all our operators to ensure that as RevPAR increases, operating expenses do not creep back in, unless significant occupancy increases justify higher costs and we, as an asset management team, agree to those increases. As Ken noted, our focus is not only re-attaining prior peak margins, but exceeding them. To this end, specific profit initiatives include our continued execution of a portfolio-wide retro-commissioning energy improvement program, as well as our ongoing gastro bar F&B refinements. Moving to CapEx, during the first quarter, we invested $21.8 million in our portfolio. For the full year 2012, we expect to invest between $85 million and $100 million into the portfolio, including major renovations of our Renaissance Westchester and our Hyatt Newport Beach. Additionally, 2 of our most significant projects will be the complete room, bathroom and corridor renovation of the 807-room Renaissance Washington, D.C., which we are budgeting at $25 million, and ordering in the initial phase of the conversion and reinvention of the Hyatt Chicago Magnificent Mile. The majority of work done in Chicago will be in 2013, but we will begin to place deposits and immediately work towards the end of 2012. Overall, we expect to incur approximately $3 million to $5 million in renovation-related revenue displacement for the entire portfolio during 2012, which is roughly $1 million to $3 million higher than the displacement we incurred in 2011. In 2012, our asset management team will continue to roll on our successful gastro-bar concepts at the Renaissance Westchester, which will result in the addition of 5,000 square feet of function space, as well as the Marriott Tysons Corner. Both of these will occur in Q4 of 2012. Throughout 2012, we expect to complete total energy audits at 50% of our portfolio, which we expect to result in between $5 million to $7 million of energy-related ROI investments. With that, I'll turn the call over to John. John, please go ahead.

Thank you, Marc. Good morning, everyone. Today, I'll give you an overview of several topics including: first, our liquidity and access to capital; second, recently completed and anticipated finance transactions; and third, details regarding our earnings guidance. With respect to liquidity, Sunstone ended the first quarter with $198 million of cash, including $126 million of unrestricted cash. Subsequent to the end of the quarter, we used $32 million to repay maturing mortgage secured by the Renaissance Long Beach. We expect to utilize the bulk of our significant cash position during the remainder of 2012 to fund the cash portion of the Hyatt Chicago Magnificent Mile acquisition for CapEx, and for debt reduction according to our stated plan to methodically delever our balance sheet. In addition to our strong cash position, we have an undrawn $150 million line of credit, and we'll have 13 unencumbered hotels once we close the Hyatt Chicago that collectively generated roughly $50 million of EBITDA in 2011. Our pro forma unrestricted cash balance exceeds the $58 million of all of our debt maturities through early 2015. As detailed on Page 20 of our investor supplemental, our only near-term debt maturity is the remaining $58 million of Exchangeable Senior Notes, which will likely to be put to us next January. At the end of the quarter, Sunstone had a $1.56 billion of consolidated debt, which includes 100% of the $237 million mortgage, secured by the Hilton San Diego Bayfront. Adjusting for the debt attributed to our minority partner in this asset and the transactions completed subsequent to the end of the first quarter, our pro rata debt balance is currently $1.47 billion. Our debt has an average term to maturity of nearly 5 years at an average interest rate of approximately 5%, including the effect of our interest rate derivative agreements. Our variable rate debt as a percentage of total debt stands at approximately 27%. The $58 million of debt maturing through early 2015 represents less than 2% of our current enterprise value and, again, we hold more unrestricted cash than the sum of our near-term debt maturities. Our liquidity is strong, our near-term debt maturities are few, and we have access to several sources of attractively priced capital. We will continue to enhance our already strong financial flexibility over time, as is evidenced by the highly equitized Hyatt Chicago Magnificent Mile acquisition, and the repayment of the mortgage on the Renaissance Long Beach. Now let's turn to our updated earning guidance. A full reconciliation of our current guidance can be found on Pages 16 and 17 of our supplemental, as well as in our earnings release. We expect second quarter 2012 RevPAR growth of 5.5% to 7.5%, with adjusted EBITDA between $65 million and $68 million, an adjusted FFO per diluted share between $0.30 and $0.33. I should note that quarter-to-date through April 30, our portfolio RevPAR is up approximately 8%. As Ken noted, our first quarter performance has led us to increase our full year 2012 RevPAR growth by 100 basis points to 5% to 7%. Accordingly, we have increased the midpoint of our adjusted EBITDA guidance by $4.5 million to a range of between $229 million and $238 million. And we have increased the midpoint of our guidance for adjusted FFO per diluted share by $0.05 to a range of $0.96 to $1.04. We expect full year RevPAR to be negatively impacted by isolated factors, including soft group business in Washington, D.C. and Baltimore, as well as approximately $3 million to $5 million of hotel revenue displacement from our 2012 renovations, specifically at the Renaissance D.C. and the Renaissance Westchester. This compares to revenue renovation disruption of approximately $2 million in 2011. That said, we remain optimistic regarding the outlook for revenue and profit growth in 2012, as a result of positive growth booking pace, strong group booking production and healthy pricing pressure in many cities stemming from increased occupancy and a high number of sold-out room nights. Moreover, as occupancy strengthens into 2012 in a backdrop of an anemic supply growth, pricing pressure is likely to intensify, which is likely to result into a reacceleration of RevPAR growth into the future. With that, I'll turn the call back over to Ken to wrap up our prepared remarks.

Great. Thank you very much, John. Some final comments. As you've heard us say before, our goal is to achieve industry-leading stockholder returns by improving our portfolio's profitability, quality and scale, while gradually deleveraging our balance sheet. We hit on all of those objectives this quarter. Operations continue to improve, and the Chicago acquisition will enhance the portfolio quality while deleveraging our capital structure in a way that's clearly additive to our stockholders. Looking ahead, lodging industry fundamentals have materially strengthened over the past year and are now highly constructive. Supply trends and capital costs are at historic lows, while lodging demand continues to build. With groups booking and business travelers hitting the road in record numbers, the lodging industry's leading indicators unquestionably point toward prolonged growth over the years ahead. Our company is well positioned to capitalize on strong industry fundamentals and we, as a team, are confidently and enthusiastically executing on our plan. We sincerely thank you for your interest in Sunstone. And with that, we would like to open up the call to questions. Patricia, please go ahead.

[Operator Instructions] And our first question comes from the line of Ian Weissman with ISI Group.

Just quickly, with respect to the Blackstone deal, maybe you can give us a little bit of background color on how that deal sort of came to your table, and Blackstone has got a lot of real estate they would like to sell, and have they committed to doing more deals with you in the future?

Good question. The deal with the Blackstone Group is kind of typical of the deals that we've done over the last year. Last year, we acquired $900 million worth of hotels, all through privately negotiated, relationship-based transactions. We've had a fairly strong relationship with the Blackstone Group, although we haven't done any significant transactions with them over the last few years. But we know the guys well, we have a mutual respect between our 2 firms. And so when this opportunity came up, it was clear to both sides that this fit squarely within our strategy and our objectives. And so it certainly made sense for both sides, as was evidenced with the way we restructured the deal. As far as commitments to sourcing arrangements, or other transactions going forward, there's nothing formal here I would tell you that both sides obviously would love to do more together and -- but there's no formal commitment there.

Okay. And then finally just the last question, if you look at the pipeline of deals so far this year, there's maybe have been $2 billion or $3 billion worth of transactions, 80% of them had been concentrated in gateway cities, and that's clearly the markets at which you're targeting. But you also have 4 or 5 assets on the market for sale. Can you maybe talk about what the investor bid is for assets outside of gateway cities, and what your interest you've seen so far on those -- or at least give us a status update on those asset sales?

Sure. And what I'd like to say, first and foremost, is that our policy is do not comment on any pending transactions before there's a formal go hard. And so at this point, we have no specific details to provide on any potential asset sales. What I will tell you is based on our observations, historically, obviously secondary and tertiary markets do command higher cap rates and then -- and correspondingly lower values. That said, you need to look at all the facts in any given transaction, what are the growth potential? What is the growth potential, the upside potential of specific assets? What is the capital structure that may be stapled to the deal? For example, if hotels are being sold with legacy indebtedness that is at a very low rate and high LTV, that can be attractive to certain buyers and that can certainly add to valuation. So at this point, I'd say, the value of, I think, that any seller would realize on a secondary or tertiary market asset in today's environment is going to be a product, not just of the market, but the asset upside potential, the quality of the assets, and the capital structure itself.

And the next question comes on the line of Eli Hackel with Goldman Sachs.

2 buckets of questions, 1 related to the deal and 1 related group pace. Just on the deal, it seems like it's just a little bit of a different franchise deal given its upper upscale brand in a major city. Just curious, how much of the reason to go with Hyatt was the brand itself, and how much was related to the money that Hyatt was willing to put in towards the renovation? And then also, just on the hotel's location, I think it's maybe a block or so off of Michigan Avenue. Does that matter at all? I'm not sure it does. And then just second, on the group booking pace, you noted a very big pickup in bookings in the quarter. Just some color on that, is that corporations, associations, any industry call-outs, any help there would be great as well.

Sure, Eli. First on your question about the brand. If you look at the Chicago market, Hyatt obviously is based in Chicago. Hyatt also happens to be somewhat underrepresented in Chicago relative to the other major brands. And yet, if you look at the demographics of travelers to Chicago, there's a great depth of Hyatt loyalists who travel to that market. So from our perspective, the Hyatt brand was kind of a no-brainer in terms of where to put or what brand to put on this particular asset in this particular location, with all the business trends and qualities that we expect to capitalize on once we finish with our repositioning program. We can't comment on specifics in terms of the economic enhancements that Hyatt provided. In any case, when we're changing the flag on a hotel, certainly that the brand enhancements will be considered, but that was not the deciding factor in terms of going with Hyatt. We couldn't be more pleased about growing our relationship with the Hyatt brand. As far as the location, you're exactly right. This is about a block off of Michigan Avenue, very -- what we would consider to be a kind of an A-, B+ location within the Chicago market. And the hotel's orientation around a growing and vibrant medical complex within the city, is 1 of the, I think, unique qualities that attracted us to the asset. It's interesting how that particular high-rated business is not currently being penetrated to the level that we believe the hotel is capable of. And so part of our business plan is to reposition this asset to firmly and squarely capitalize on that business. And then with respect to your group pace question, let me turn it over to Marc Hoffman for that one.

Group pace, the pickup in the year so far for the year, really has been short-term corporate around the country, and additional pickup at our large convention hotels with the blocks coming in larger. In our current pace for 2012 breaks down, we were up 0.5% in Q1, we're up a strong 12.5% in Q2, and plus 7.3% in Q3, and up 2.3% in Q4. And our Q1, just as a separate note, our Q1 sales production was strong for the quarter just for currents and futures over our last year, plus 39%, almost 40%. So -- and as we said in the pre -- the original remarks, the bookings were the strongest in our portfolio for 5 years.

All right. Just on -- are you getting any concerns from corporations, it seems like maybe there's still able to book short-term and no one is really being priced out -- are they starting to build any concerns within corporations that maybe, if they don't start booking a little bit further out, there won't be space for them?

I think that's a good comment. I mean, look we were starting to see very strong occupancies. We had good, very good occupancies in Q1, and we do have some hotels that are -- don't have much of space left in places. So that would be naturally be the next curve in the growth of being able to grow ADR future out, would be that there'll be less and less space available, and then people will have to book further out.

Our next question comes from the line of Smedes Rose with KBW. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask you, with your deal with the Blackstone, is there any thought that they would take a seat on your board? And also, what do you think their sort of end game is here? I mean is there any sort of -- are they committed to being the long-term holder of your stock? Is there any kind of holding agreement, I guess, or just kind of maybe -- I'm just sort of interest a little more in your relationship with that company going forward.

Smedes, first of all, there's no board seat contemplated at this point, and Blackstone will be a regular shareholder. There's no lockup, there's no piggyback rides, so really no special bells and whistles on this investment. Our view from management's perspective is that Blackstone's taking an investment in the company based on what they perceive is a very attractive value. And from our perspective, it's our job to continue to unlock that value. So as long as we continue to do our jobs, I would expect Blackstone will remain a stockholder, and if their investment philosophy or desires change, they'll probably move out of the shares, but there's no artificial lockup. We prefer to have a free-market system here and it's in [ph] our own merit, if you will. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. But I mean there's no -- you could potentially do a similar kind of deal with them again, I guess, in the future, I mean they obviously hold a lot of hotels?

Absolutely. We could do a similar deal with Blackstone or any number of other institutional holders of assets. We think that our currency, if employed in an acquisition that's attractively and appropriately priced, is probably the best way to capitalize the deal.

And our next question comes from the line of Enrique Torres with Green Street Advisors.

Ken, your comments on the company being appropriately levered for the recovery and the capital structure being a strength right now? It seems to have a little different tone in kind of the deleveraging emphasis you guys have placed in the past. Does that imply that you're going to be looking to strengthen the balance sheet or delever later in the cycle?

So, Enrique, good morning. Look our comments -- my comments today, I think, are highly consistent with what we've been saying all along. And that is that if you look at our capital structure, which is single assets, secured financings, very well staggered, very little REIT-ed [ph], with a great deal of coverage, as I mentioned on the call we have $700 million to $800 million of unencumbered assets, and undrawn credit facility, great access to capital, and we believe we believe we're at the front end of the cyclical recovery. So the comment that we're comfortable with our capital structure, at this point, is absolutely accurate, and it's absolutely the fact that we believe our capital structure is a strength and a competitive advantage, currently, is also an accurate comment. That does not mean that our plan has changed to gradually and methodically de-leverage our balance sheet, so that as the cyclical peak approaches, we are at the very low-leverage level with high liquidity, so that we can capitalize on opportunities as the next cyclical trough ensues. As you know in our business, the value is created at the inflection point in the cycle. If you hit the peak of a cycle with very low leverage and very strong liquidity, massive opportunities tend to present themselves during the trough for those companies are appropriately capitalized. So for where we are in the cycle right now, we're very comfortable for where we -- but that does not mean that we're going to stop deleveraging from this point forward. We'll gradually continue to execute on de-leveraging initiatives, and like the one we announced today, that are additive to our stockholders.

Enrique, it's John. Let me add emphasis to that. I agree absolutely with Ken, there's no change in tone or direction for our balance sheet management. Over time, we will continue to gradually delever the balance sheet and add in incremental flexibility. I think the 2 transactions you've seen out of us over the past, in this recent announcement, solidify the types of things that we will continue to do forward, so that we can gradually reduce leverage, while being incredibly mindful of maintaining shareholder value. Ken's comments regarding being comfortable where we are, as we have built in significant amount of liquidity, and also made sure that our near-term debt maturities are very few. So while our leverage is a little bit higher than some of our peers or where we want it to be eventually, we are comfortable with our capital stack, and we don't believe that there are really any potential defensive costs that we could incur as a result.

Okay. It looks like the markets kind of pretty hungry for equity. I mean, here's the deal this morning just got upside, and another company deals when they've issued equity to pay down, their pref have been pretty well-received. Is that something that you guys would consider?

Hey, Enrique, this is Ken. As you saw today, we announced the transaction that was funded with attractively priced equity in order to acquire an attractively priced hotel. So I guess we answered that question with the deal we announced today. We're going to do it in a smart way, but certainly as we mentioned in the past, we think the most elegant way to achieve our leverage objective, is by improving the quality and scale of our portfolio by carefully acquiring hotels, using equity in a way that's additive to our stockholders. So long-winded answer, but for the right deals at the right price, and when it's additive to our stockholders, we would certainly consider deploying equity.

I guess by my comments also was targeted at the pref, and if you think that is at the appropriate level in terms of the percentage of the capital structure.

In terms of preferred equity?

Yes.

We consider preferred equity to be more debt-like than equity-like. So our view is that it's -- we certainly got a sufficient amount of preferred, we would not be looking to tap the preferred market as a first choice, currently, and my guess is over time, you'll see us whittle down the preferreds.

And our next question comes from the line of Jeffrey Donnelly.

Actually, I apologize for the delay, but maybe you gave us in your remarks, I just missed it. But can you share with us what the FTR index was for the Wyndham, I guess, it's going to be high that you acquired, maybe for 2010 or 2011, and maybe talk about where you think that could get to, down the road post renovation?

Sure. I will give you a little bit of color on that one. First of all, it's important to note that the hotel that we acquired today is clearly not representative of the asset that we're underwriting. There's a big change in that hotel going forward. So historical RevPAR penetration for the hotel is somewhat disconnected with our long-term aspirations. And so, first of all, we're looking to change the competitive set for the hotel. It's historically running an index for its current set, that's right around 100%. But its current set includes some hotels that -- it includes the Doubletree Chicago, the Crowne Plaza, the Millennium Knickerbocker, the Allerton and then the Embassy Waterfront. We have a new competitive set that we think is much more representative for what the aspirational, quality and characteristics of the hotels would be going forward. Our model shows our hotel being well below 100% on the competitive set, which includes the W Chicago Lakeshore, the Sofitel, the Omni, the Intercontinental Magnificent Mile and the Conrad. Those are much more representative of the quality of the hotel that we'll ultimately execute on. For that comp set, we see the hotel approaching 100% after renovation. Our model shows that gradually, gravitating toward that level, certainly not hitting 100% on day 1.

When you say well-below, do you mean 90 or do you mean 60?

Oh, to the current comp set?

Yes -- or to your new comp set, like how it might have done in the past versus that new comp set?

Where we're currently versus our new comp set, we're at about, you -- we call it, between 75% and 80% penetration.

Okay. And then you touched on this earlier, but marketing to the medical community, there are lessons that you can take from the killer portfolio and apply them here? I'm just -- I'm curious what maybe some of those examples are, if it's something about the room product itself or is it just really more on the marketing side?

Jeff, it's Marc Hoffman. Yes, I mean absolutely. I mean, look, we've learned a lot from our relationships up at Mayo. I mean first and foremost, there are some clients in the building that have been very clear with us that have several thousands of room related in the medical business that they stop using that hotel because of its current condition, those clients are very high-rated and we see as good impact. In addition to that, there's a new children's hospital opening up very, very close, literally across the street from the building. And we know from our learnings at Mayo, particularly around incoming doctors, incoming association business, incoming corporate pharmaceutical business that will be -- being involved in the rollout of the new hospital and then on the transient side, absolutely. Knowing what to do with patients and how to handle patients and we will be looking at doing a couple of family suites in the room, based upon the children's hospital as well.

That's great. If I could ask a question or 2 also about that transaction, Ken. How did the concept of taking stock come about? I mean was it something that was pursued by Blackstone, or something that you guys offered? And I guess also, how was the $10.71 determined?

Sure. The concept of using our stock to acquire assets is something that we advance in all of our conversations, or we try to in all of our conversations around acquiring hotels. And in part, that's probably why we are more inclined, as is shown by the deals -- the last 4 deals that we've done, privately negotiated transactions. So we look for deals where we can use our equity as currency. And obviously, we look for counter-parties who share our view in terms of the relative upside in our company, and that was clearly the case here with the Blackstone deal. As far as the structure of the -- a video on how we came up with the $10.71 price, it was pretty straightforward. When we negotiated the deal terms, we have a typical due diligence period, which expired yesterday. At the end of the due diligence period, we had a decision. We could either go hard or lock from the transaction. And upon going hard, the pricing of the consideration would be determined, and that was set at a 3% premium on our close on the day we went hard. So it just happened to be, we closed at $10.40, 3% up was $10.71.

And our next question comes from the line of Wes Golladay with RBC Capital Markets.

You mentioned margin expansion opportunities, driven partly by expense controls. Outside of energy where are you seeing cost savings or more moderating expenses?

Particularly, we're seeing a good improvements with what we've done in food and beverage. We now have 7 of these gastro-bars, where we are consolidating restaurants, and bars together and really creating social bar living spaces that happen to serve breakfast, lunch and dinner, and that's where we've seen significant improvement. We continue to work through our housekeeping area in reinventing housekeeping with a third-party company where it re-does how housekeeping is done in the guestrooms between -- difference between whether extended-stay customer or a single-night customer, those types of things and even based upon profiling of customers with larger families or individuals. So those are really the base areas, and then the energy program really is a -- we see as a significant process. We have been working through this for a few years. We have a couple of test cases that have been huge wins, and we will be creating relationships, formal relationships with 2 energy engineering audit companies that will perform audits on all 32 of our hotels over the next 6 months, and then we will roll out this retro commissioning throughout all of our portfolio in '13, and expect to see very measurable results.

Okay. And now going back to the acquisitions, what you guys are seeing in terms of pipeline at the moment? I guess with the nice movement in the stock today, what do you guys seeing from there, as far as you guys to be more active in the second half of the year?

Wes, I've said that we're going to be -- we'll maintain the same level of discipline, and take a very measured approach on acquisitions going forward. Frankly, we didn't see a real fall off on the types of deals that we were inclined to pursue over the last few months. Again, we tend to pursue relationship-based negotiated transactions, more so than the marketed deals. I think to your question, you probably will see more assets being marketed through the typical channels, the typical brokered channels, as REITs in general start to get back up to more appropriate evaluations, as we would say. You'll see the REITs, in general, becoming more inclined to buy. And therefore, sellers being more inclined to bring assets to the market. So I think from that side of the picture, you'll probably see more marketed deals. But from us, our pipeline remains relatively full with attractive opportunities that we continue to vet out, and getting deals done that are priced appropriately and structured appropriately is something that we view as being very, very important to pursuing any transactions. So you could see us do 1 or more deals this year, or you could potentially see us do no more deals this year. It's going to come down to getting the right deals at the right time.

And your next question comes from the line of Bill Crow with Raymond James. William A. Crow - Raymond James & Associates, Inc., Research Division: John, I'm going to direct 1 to you here. You guys had a great first quarter, you beat your mid, by 4-plus-million dollars. You raised guidance for the balance of the year, by $4.5 million at midpoint. And in the meantime, you picked up $90 million asset in Chicago, that's really going throw some EBITDA. So where's the offset given your bullish comments on group business, et cetera? It seems like the balance of the year should be, theoretically, coming up more?

Bill, keep in mind, that the guidance does not include the impact of the Hyatt Chicago Magnificent Mile yet. So that has been excluded from that guidance. Once we close that transaction, we'll be able to layer in new guidance to include that, to include that acquisition. William A. Crow - Raymond James & Associates, Inc., Research Division: Okay. But even without that, the balance of the year is relatively unchanged, is that fair? Am I missing something?

No, we took it up a little bit, Bill. I mean we took it up a little bit. William A. Crow - Raymond James & Associates, Inc., Research Division: $0.5 million.

And I think that there's still some pockets of identified weakness out there, particularly again in the D.C., maybe in the third quarter when we start the renovation. And so we are still in the mindset of being somewhat conservative when we set our guidance. I think it's a realistic guidance range, but given a couple of the items still there, it's a little bit on the conservative side. William A. Crow - Raymond James & Associates, Inc., Research Division: Yes, that's fair, understandable. There's no divestiture built into that though...

No, no... William A. Crow - Raymond James & Associates, Inc., Research Division: That's incremental...

No, it would -- if we were to sell assets, we would update the guidance as well.

And our next question comes from the line of Nikhil Bhalla with FBR Capital Markets. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: I just wanted to get your sense on the outlook for Chicago market in 2013 and 2014, and also if you could maybe give some color on how, in the last couple of years, I believe there have been some management changes at the MacCormick Center, and how that may be changing the dynamics for the Chicago market a little bit?

Nikhil, as far as the Chicago market, the 2012, and 2013, 2014 performance is in part going to be a product of some fairly weak performance that the market has seen over the last 2 or 3 years. Chicago certainly had some softness that exceeded the softness we saw in other major markets. At this point going forward, the trends for the Chicago market that we're seeing look pretty positive. You're going to get some PKF data, for example, that they would imply Chicago over the next 5 years is likely to have stronger growth trends than the average U.S. market. A minute from us [ph], our acquisition decisions are certainly, we start with market, but we also we end with street corner by street corner decisions, and in this case, the location of the asset and the brand upside potential and certainly, the repositioning potential for the hotel, all in our opinion, point to significant upside, relative to the current run rate. So part of it is positive market dynamics, a lot of it was asset-specific opportunities. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: So no real positive benefit from MacCormick, so to speak?

I wouldn't say it that way. I think the MacCormick -- there have been some changes to the MacCormick Center, I think their approach to conventions in that market is likely to, ultimately, help broader market trends. Remember, this hotel is a business transient property, when the market compresses to citywide, we benefit. And so our view is that certainly, the MacCormick Center stood to improve in the way it was booking citywide into the market over the last few years. We think they're making steps in the right direction, and that's helped our conviction that this market is likely to be a strong one going forward. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Yes, that's what I thought. And 1 last follow-up question on any accretion from this asset in 2012. I apologize if you've talked about this already and I missed it. You're not assuming anything to come in from this asset for this year, correct?

We have not, as John just mentioned, we have not incorporated the impact of this hotel in our full-year guidance. I would tell you just based on the time here that the [ph] year on seasonality, it will probably be a push on FFO, basically flat. And that will benefit us, of course, on the leverage and on the coverage ratios.

And our next question comes from the line of Tim Wengerd with Deutsche Bank.

Quick question on 1Q. I'm looking at F&B expense -- or F&B revenues, they were up a little over 4% in the quarter, expenses hardly increased at all. I'm wondering is that, it's really good flow through on F&B, and I'm wondering if that's because of the gastro pubs, or is that something that we should expect to continue?

Yes. I mean look, compared -- as you said, compared with revenue, the revenues were up 4.2% in Q1. We had strong lounge revenue up, 5%. We also had a good mix of higher quality catering. So what I would tell you is, I think we had strong flow in Q1, we'll continue to have a flow in the outer months, but you have to take into the fact that we're continuing to benefit from these conversions, taking restaurant and lounges out and adding meeting space, particularly at Long Wharf, we've added this 5,000 square foot ocean front space and have been doing very well with that incrementally.

Okay. And then moving on to just development costs, and what you guys think. Where do you think development cost are for say, a 300- or 500-room upper, upscale-type product in markets like San Diego, or New York or DC?

Sure. Obviously having just -- or being in the process of acquiring a hotel in Chicago, we spent a fair amount of time looking at development costs in that market. And it's ultimately going to -- it's going to come down to a lot of the characteristics of the property, but a typical hotel like the hotel we just acquired, we're in the process of acquiring, the starting point is recent data points. So you look at the JW Marriott in Chicago, for example, which was just built at a price that we believe was somewhere in the $600,000 to $700,000 per key. There was a Renaissance conversion in the market, also, that was somewhere in the $450,000 per key. So for an upper upscale hotel in a major market, you're anywhere from $400,000 to, let's call it, $800,000 depending on land cost and specific features of the hotel.

And our next question comes from the line of Jonathan Paul [ph].

From the GSA scandal, if you guys are seeing any kind of cancellations or even inquiries on cancellations. And then finally, how much of your business is from government group bookings?

So we missed the first part of your question, I think it was related the GSA scandal, and any impact on bookings. And the answer there is [indiscernible], none. And then as far as government business goes, that's also kind of an interesting market-by-market dynamic where, using the D.C. market, for example, government is available at basically as needed. So hotels when they need to fill up, they can access the government trends pretty well at Tysons and the DC Renaissance and then other market governments is less impactful. But if you look at our full portfolio, government comprises 3.8% of the total demand base in terms of our segmentation.

And there are no further questions in the queue at this time. I'll now turn the call back over to Ken Cruse for any closing remarks.

Great. Thank you very much, Patricia, and thank you all for joining us on our call today. We look forward to meeting with you in the weeks and months to come and thank you.

Thank you, ladies and gentlemen. This does conclude our conference for today. Thank you again for your participation and you may now disconnect.