Apr 26, 2013
Executives
Raymond D. Martz – Executive Vice President and Chief Financial Officer Jon E.
Bortz – Chairman, President and Chief Executive Officer
Analysts
Andrew Didora – Bank of America Merrill Lynch Jeffrey J. Donnelly – Wells Fargo Securities James Milam – Sandler O’Neill Ian Weissman – ISI Group William A.
Crow – Raymond James James W. Sullivan – Cowen and Company Wes Golladay – RBC Capital Markets Lukas Hartwich – Green Street Advisors
Operator
Good day everyone and welcome to the Pebblebrook Hotel Trust First Quarter 2013 Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Raymond Martz, Chief Financial Officer. You may begin.
Raymond D. Martz
Thank you, Deana. Good morning everyone.
Welcome to our first quarter 2013 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.
But before we start, let me remind everyone that many of our comments for today are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risk and uncertainties as described in our 10-K for 2012 and our other SEC filings that could cause future results to differ materially from those expressed in or implied by our comments.
Forward-looking statements that we made today are effective only as of today April 26, 2013 and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contained reconciliations of non-GAAP financial measures we use on our website at pebblebrookhotels.com.
Okay so let’s get it started. Just like last year, 2013 is off to a great start for us and the Industry.
Our first quarter performance was better than we expected in all operating metrics. Same-Property RevPAR growth for the total portfolio climbed 8.5%.
This exceeded our outlook for RevPAR growth of 6% to 7.5%, primarily due to stronger overall demand than we are expecting. For our portfolio on a multi-basis, January RevPAR increased 12.8%, February was up 6.8% and March climbed 6.7% despite the negative holiday shift.
On overall, RevPAR gains in the quarter was driven by a combination of occupancy and rate gains. Occupancy rose to healthy 5% to 79.2% and ADR grew 3.4% over the prior year to $202.
As a reminder, RevPAR and hotel EBITDA results are same property beginning with our date of ownership and include all hotels we owned as of March 31 and the prior year comparison as whether we own them or not. We exclude hotels since we don’t have their viable prior year data before our period of ownership.
We don’t exclude hotels under renovation from our RevPAR and hotel EBITDA results. In addition, our results reflect 49% of the performance of the Manhattan Collection, nearing our joint venture ownership percentage.
That surprisingly RevPAR growth in quarter was led by our properties that were under renovation in the first quarter of last year, benefiting from easier comparisons and the recently completed renovations, including Sheraton Delfina Santa Monica, Hotel Monaco Seattle, the Argonaut in San Francisco and Mondrian Los Angeles. Many other properties also performed well in Q1, including Hotel Vintage Plaza Portland, Skamania Lodge, Viceroy Miami, Affinia Manhattan and W Boston.
During the first quarter, we invested $17 million in our hotels as part of our capital reinvestment program. This included $6 million at Hotel Zetta formerly Hotel Milano, which we opened in the late February following a complete renovation or repositioning.
$2.1 million at the Sofitel Philadelphia as part of a four guest room in quarter renovation, and $769,000 at Affinia 50 in New York is part of the comprehensive property renovation and 41 room expansion of this hotel, which started in January. Our strong RevPAR growth of 8.5% in the quarter, our hotel generated $25.7 million of EBITDA, a very healthy 4.4% increase over the prior year period.
Total revenues increased 5.9% and with expense growth limited to 3.8%, our same property EBITDA margin climbed to 157 basis points. Total hotel EBITDA growth in the first quarter was Sheraton Delfina, Monaco Seattle, Mondrian LA, and Westin San Diego Gaslamp Quarter.
Turning to our corporate G&A line, we incurred 920,000 of hotel acquisition costs and 197,000 cost related to changing operators. These expenses were largely related to the January acquisition of the Embassy Suites San Diego.
As the result of the strong hotel operating performance, in greater number of properties this year versus last, we generated adjusted EBITDA of $22 million for the quarter, an increase of $8 million or 57% ahead of last year’s first quarter results. Our adjusted FFO climbed $12 million to $0.20 per share compared with $5.5 million during the first quarter of 2012 or $0.11 per share, an increase of 81.8% On the acquisition front, on January 29, 2013, we acquired a 337 Room Embassy Suites San Diego Bay in Downtown, San Diego for $112.5 million.
As a reminder, this acquisition and its expected operating performance were previously incorporated into our 2013 outlook, while it was not reflected in our prior outlook where our more recent capital market activities. On March 18, we successfully raised $90 million through referred equity offering increasing to a $100 million with the exercise of the Green Shoe earlier this month.
This is our third preferred equity raise since our IPO, and the security provides preferred equity dividend of 6.5%, which is below our prior two preferred equity raises that we completed in 2011, which were in the 7% to 8% range. We saw that given the recent significant declines in preferred yields, which we believe was overdue when compared to the prior declines in debt rates and capital spreads, interest spreads.
This presented an attractive opportunity to take advantage of this movement and reduce our overall cost of capital. We’re also continuing to provide lower risks, non-debt leverage to benefit our common equity, as we significantly grow our property cash flows and values.
As a result of this preferred equity raise, we incurred 200,000 of preferred dividends in Q1, which were not previously provided in our outlook from our February earnings release. For the year, this offering which generally provides capital for future acquisitions increases our preferred equity dividends to approximately $5.1 million, which again were not contained in our prior 2013 outlook.
This of course only affects our FFO and adjusted FFO and not our corporate EBITDA or adjusted EBITDA. In addition to our preferred equity raise on April 4, we successfully originated a new $50 million non-recourse interest only grown secured by Affinia Dumont.
This five year loan has a fixed interest rate at 3.14% and is the lowest interest rate, we’ve executed on a secured non-recourse basis in this cycle, which we are thrilled about. As you know, Affinia Dumont is one of the six hotels in the joint venture that comprises the Manhattan Collection, and was not part of the five property Manhattan Collection financing that we completed in late December at 3.67%.
As a result of this debt financing, we will incur approximately 600,000 of additional interest in financing amortization expenses during 2013, which represents a pro rata share. This expense was also not in our previous 2013 outlook.
Following these capital market activities, we have cash, cash equivalents and restricted cash of approximately $143 million plus an additional $15 million in non-consolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in the Manhattan Collection. We have no outstanding balance in our $200 million unsecured credit facility and we have no debt maturities into 2016.
Our net debt to EBITDA ratio as of March 31 was 4.5 times and our fixed charge ratio was 2.2 times and on unconsolidated basis meaning excluding the joint venture, our net debt to EBITDA ratio was 3.9 times and our fixed charge ratio was 2.3 times. I’d now like to turn the call over to Jon to provide more insight on the recently completed quarter as well as an update on our outlook for 2013.
Jon?
Jon E. Bortz
Thanks Ray. So, as Ray said, 2013 is off to another strong start for both the lodging industry and for Pebblebrook.
When we look at the first quarter’s overall industry trends, performance continue to be driven by strengthened both business transient and leisure travel. Demand in the U.S.
was a healthy 2.6% in the quarter and with a little supply growth, occupancy grew 1.8%. This provided a foundation for ADR to grow a very healthy 4.5%, resulting in the 12 straight quarterly increased in industry RevPAR of 5% or more.
This quarter, the increase was 6.4% even with the negative impact of the Easter Passover holiday shift that’s stifled margins growth. So let me repeat that, since the second quarter of 2010 through seconds and annual scare after annual scare, quarterly RevPAR has grown at least 5% in every quarter for 12 straight quarters.
More impressively, it increased at least 6.2% for every quarter since the second quarter of 2010 with the exception of the third quarter of last year, which suffered in September from the negative impact of a holiday shift. And while annual demand growth has moderated to a more sustainable 2% to 3%, average daily rate growth continues to gradually trend upwards as occupancies raised supply growth remains muted, compression days increased and customer mix continues to improve.
In the first quarter while transient demand growth was strong, Group travel also continue to recover. So the recovery was temporarily interrupted by the negative effects of a holiday shift that pushed Group from March to April.
We continue to believe the recovery in Group, we are much slower and more modest in transient; we’ll follow employment growth, as it has so far and should accelerate whenever the competition for people heats up. At Pebblebrook, we had another terrific quarter, RevPAR rose 8.5%, driven primarily by growth in transient occupancies and rate.
We estimate the renovations at Sofitel Philadelphia and Affinia 50 caused us over a $1 million in room revenue, which represents a loss of roughly a 110 basis points of RevPAR growth. We expect the impact at Affinia 50 to be much more substantial in the next two quarters with more rooms out of service and the renovations moving to the lobby and entrance.
But short-term paying will result in long-term gain as we significantly improve both of these hotels. We also estimate that the portfolio benefitted by about 50 basis points in the quarter from the inauguration in DC.
As has been the case in prior quarters, positive performance was wide spread throughout the portfolio. 10 properties grew RevPAR over 10% and while our portfolio of properties performed very well, the CBD markets in which our hotels are located were also generally pretty strong.
RevPAR in Downtown, Miami led the way, up 18.1%, DC rose 11.3% aided significantly by the inauguration, New York’s uptown, midtown market rose 11% continuing to benefit from post-Sandy additional demand and strong growth in inbound international travel. Santa Monica increased 10.6% benefitting from the entertainment industries and an increasingly tight market.
Lower Manhattan rose 9.2% and Minneapolis grew 8.5%. Our hotels in these markets all benefitted from this ongoing strength.
One further comment worth mentioning is that you’ll know that San Francisco did not make the list of one of the best performing markets for the first time in quite sometime. Demand actually rose in Q1 for the weaker convention calendar including lower rated conventions on average let to RevPAR growth in both the Market Street area and the Fisherman’s Wharf, Nob Hill market of 6.2%.
We expect RevPAR growth numbers in San Francisco to be substantially higher for the balance of the year. Our mix of business that our hotels track the overall industry statistics, transient revenue growth made up all of the room revenue growth in the portfolio.
Transient revenues rose 9.5% in the quarter with Group revenue flat. Group suffered like the rest of the industry from the negative holiday shift in generally weaker convention calendars this year.
Total room revenues grew 7.4% in the quarter below the 8.5% rate of RevPAR growth due to having one fewer day this year. Group represented 26% of our room nights in the quarter, transient made up 74%.
We expect this breakdown to be roughly similar for the rest of 2013. Now let me talk a little bit about EBITDA growth and margins.
As we reported, portfolio revenues grew 5.9%. We have same property EBITDA grew 14.4%, as we limited the growth and operating costs to 3.8% and while the rate on the surface of expense growth may not sound that great in terms of limiting costs increases, considered that we had 3.8% more rooms occupied in Q1, compared to last year and property taxes increased by 15.8%, primarily due to increases at our hotels on the West Coast, especially in California that we are acquired and reassessed in the last year including W.
Westwood, Palomar San Francisco, and Embassy Suites San Diego. Property taxes at these three properties alone reduced our margin growth by 32 basis points.
As a result, EBITDA margins increased a healthy 157 basis points, as we continue to be successful, working very closely with our operators, identifying and implementing our best practices. As of today, we now identified over $15 million of cost savings and enhancements.
We expect this process of identifying and then implementing, and then annualizing these EBITDA and margin enhancements will continue for several years to come. Our margins are far below stabilized margins for our portfolio, and in addition, as we acquire hotels with significant opportunities to improve subpar performance, we resale the pipeline of higher growth and EBITDA for future years.
So let me provide a quick update on our property renovations. During the quarter, two properties were undergoing significant renovations that had a big negative impact on their performance.
The largest of them all, the comprehensive renovation, reconfiguration and expansion of Affinia 50, began in January and continues to be on schedule and without any budget surprises. We’ve completed the first several floors of rooms and they are back in service, but we’re now in the heaviest space of rooms out of service with the greatest negative impact on revenues and EBITDA.
This will continue through the third quarter from we renovate the lobby and exterior, the most disruptive, visible and financially impactful part of the improvement project. We’re very pleased that the newly renovated rooms have been well received by the property’s customer base and we’re very optimistic about the hotel’s performance next year as it fully renovated, repositioned and expanded hotel.
At the Sofitel in Philadelphia all the rooms are renovated and back in service as of earlier this month though we continue to have furniture arrivals and minor work being completed. Customer feedback has been great here as well.
As we looked out into 2014, we see a fairly limited renovation program amongst the existing portfolio as the vast majority of our properties have been renovated. We expect to begin a comprehensive renovation of the Vintage Park Hotel in Seattle as we repositioned that small property to a higher level.
That work should start late this year and be complete early in the second quarter next year. And at the W Westwood the renovation of the ground floor public areas, both inside and out is being pushed to next year as we align the project with the re-concepting of the indoor and outdoor restaurants and bars.
We expect both of these projects to have only a minor impact on our performance in 2014. Now let me turn to a quick update on our outlook for 2013.
We continue to expect 2013 to be a great year for both the industry and Pebblebrook. For the industry based on a better-than-expected first quarter, we’re increasing the lower end of our RevPAR growth range by 50 basis points, so it’s now at 5% to 6.5%.
We continue to expect the RevPAR growth rate to be relatively even throughout the year. And I’d like to make one comment about the second and third quarters.
While the holiday shift of Easter Passover has added significantly to April’s RevPAR growth. We shouldn’t forget that June last year benefitted from July 4, following on a Wednesday last year, which push significant business particularly Group in the last two weeks of June.
This is likely to reverse this year, which June subject of difficult comparisons, while July should be aided by much easier comparisons with the holiday falling on a first day of this year. So as a result, we expect June for the industry, and Pebblebrook to be a lower growth month, while July should be enhanced and with September having fairy easily comparison and a better holiday calendar, Q3 is likely to be pretty good quarter assuming now unexpected negative events.
For our portfolio, we’re also increasing the lower end of our RevPAR outlook for the year by 50 basis points, based on a better than expected first quarter, and our current comfort with our pace for the rest of the year. That brings our outlook for RevPAR growth to range of 5.5% to 7% with about a 100 basis point negative impact from the renovation of Affinia 50.
We’re also raising the lower end of our range for portfolio, EBITDA and adjusted EBITDA by $1 million, reflecting our better than expected performance in Q1. The second quarter looks healthy based on current trends and business on the books.
So we’re forecasting RevPAR to increase by 5% to 6%, which reflects about a 150 basis point negative impact from Affinia 50s renovation. For our FFO outlook, we’re raising at the lower end by the additional $1 million of EBITDA, but we’re also adjusting it to the additional preferred dividends from our $100 million Series C offering as well as $600,000 for our share of the interest related to the JV financing of the Dumont in New York.
All other assumptions for our outlook remain as previously provided in February. Economic trends, travel trends and business on our books continue to support our forecast of healthy growth for 2013.
As of the end of March total Group and transient revenue on the books for the last three quarters of this year was up 9.3% over same time last year. Portfolio wide for the remaining nine months of 2013 Group room nights were up 1.6% with Group ADR of 1.9% for total of 3.6%; transient room nights on the books for quarters two through four were up 9.5% with transient rate up 5.4% and total transient revenues on the books up 15.4%.
To wrap up, we continue to expect 2013 to be another terrific year for the lodging industry and an even better year for Pebblebrook. Underlying fundamentals are very healthy; we’ve got tremendous opportunity in the existing portfolio to recapture significant RevPAR loss in prior years and to dramatically improve margins through the implementation of best practices and lots of focus and hard work by our operators and our team.
And we continue to be successful executing on both of these major opportunities. So that completes our prepared remarks.
We now would be happy to answer whatever questions you have. Operator?
Operator
Thank you. (Operator Instructions) And we’ll go first to Andrew Didora with Bank of America.
Andrew Didora – Bank of America Merrill Lynch
Hi, good morning guys. Jon, just one question, I just wanted to gets your thoughts on the demand environment here, the recent Smith Travel data has had a lot of noise of lay just given some of the calendars as we’ve been seeing.
And then the airlines have been telling asset business travel is slowing, but it doesn’t seem to be flowing to the hotel industry yet. Have you seen any change in any of our booking patterns or anything like that in terms of your business travelers and are you seeing anything major on the Group started, I know any of your – any Group cancellations in any of your big Group markets?
Jon E. Bortz
Andrew, no we’re really not seeing any change in the trends. I mean the scary thing about daily or weekly Smith Travel data is it often leads the business bounces around.
We can have holiday shifts, we have big convention shifts from year-to-year like happened this quarter in markets like Philadelphia and San Diego, and even through a lesser extent in San Francisco. And so we’ve haven’t seen a change in trends at all in the last month.
The first quarter was the great booking months for 2013 on both the Group and the Transient side. So the trend was very favorable.
We’ve been seeing cancellations in government and government Groups, and government tentatives not going to definite, when the government Group were dealing with, whether it’s a DC or San Diego or Seattle or LA or any market that we are in. When they don’t get funding, and there is less funding for groups, then there was a year ago at this time.
Government begin to put a lot of pressure last year on reducing travel spend in general. And so we are continuing to see that and it’s a fairly immaterial impact I think on the industry and for us and we went back and looked at what our government business was last year.
And as a percentage of room revenues, government was 2.2% in the portfolio and probably even less of total revenues because governments spend tends to be less on a per occupied rooms than private business. So we think it’s probably around 2% of total revenues and any impact whether it’s 10%, 20%, 30% is fairly immaterial and seems to be being absorbed because of the strength of the markets we’re are in by other business.
Andrew Didora – Bank of America Merrill Lynch
That’s helpful, Jon, just a follow-up one, can you remind us when you first started seeing some of those government cancellations coming through. I believe you talked a little bit about it maybe in the back half of last year, just curious if you can remind us, when you first started to seeing those come through.
I guess for how long have you been seeing that kind of that trend there?
Jon E. Bortz
It’s been since of third quarter of last year and I would say there has probably been a little bit more of it in the last month, probably as a representation of the austerity measure passed by the government.
Andrew Didora – Bank of America Merrill Lynch
Okay. Thank you very much.
Jon E. Bortz
Fair.
Operator
We’ll go next to Jeff Donnelly with Wells Fargo.
Jeffrey J. Donnelly – Wells Fargo Securities
Good morning guys, just first question I apologize if I miss this in your early remarks, but what’s been your early experience with, is that relates to pricing, are you finding the properties getting traction at the price point and positioning you had originally hoped?
Jon E. Bortz
Yes, it is. We did a soft opening, so we’ve been working a little bit more on getting some trial on top of the demand that wants to be at the property because of the buzz, but we are, we feel good about where we’ve positioned it from a corporate rate perspective, which is at or above the Palomar, and from a public market pricing perspective, we ultimately are going to be pricing it above the Palomar.
We should average rates above the Palomar, and I would guess that we should be getting there probably by the third quarter of this year, as we open the restaurant and the bar at the hotel, which are under construction right now by the third party lastly.
Jeffrey J. Donnelly – Wells Fargo Securities
Okay.
Jon E. Bortz
Okay. Great response so far to the property and the reviews even without the restaurant opened has been really tremendously since we completed the property.
Jeffrey J. Donnelly – Wells Fargo Securities
It has been a big change for sure, just actually two questions, I guess it relates to the Washington DC and the government travel issues. I guess have you accept of thinking that there is going to be some sort of a defined step back on government spending and then the City will eventually resume on more normalized growth pace at some point, perhaps next year.
I guess, where do you think we are in that pullback stemming from austerity, do you think you are half way through it, you think you are largely through it, what is your sense?
Jon E. Bortz
It’s hard to predict something that’s based upon what people in Congress decide to do or not do. But based upon what we know right now Joe, I would say, we are certainly well more than halfway through it.
It’s been going on now for probably 10 months and our guess is that it probably rolls through the early part of next year and then we’re adjusted down and we generally grow from there. But you know that’s – considering that, we’ve not lived through this specifically, that’s a gut outlook versus being able to look back at history with any particular guidance.
Jeffrey J. Donnelly – Wells Fargo Securities
Other than gut question for you I guess – can you have a guess to may be how much of if you call potential decline in DC demand that we could see establish from direct government spending cuts to travel on events they host versus a indirect impact such as private companies hosting fewer trips to DC because of reductions and government outlays. Do you think that’s an evenly balanced proposition because obviously maybe one segment maybe savors different change scales than others?
So I must have to think of this every dollar of government cut backs and spending might relate to another dollar in private spending or giving…
Jon E. Bortz
That’s really a tough one because it’s all mixed up here in DC when it comes to that. I mean it’s a fairly thin line between a private – for a lot of reasons I’m not making a political statement here but it’s fairly cloudy.
I mean there is a lot of users in the market that do business with the government to get per diem rate but there are private companies, but they are working on a government contract. So what you call that?
On our books, it shows up as government per diem in some cases and other cases it shows up as corporate rate. So it’s really hard to differentiate the two – the thing I would point out about DC is, there is no catastrophe here in DC from our view point.
We’ve gone through these periods where government has pulled back whether it was the Reagan years, whether it was even the Clinton years, where the budget was balanced finally with rate increase and then spending cuts. In general, it’s an adjustment period and then it grows from there.
And what often happens is, it’s just the dollars gets redirected from one department to another, from one priority to another. And so you’re looking at a market right now running at the highest level of occupancy ever on a trailing 12 month basis through March.
So DC was never an explosive market, it was always a plotter, and it has less downside. And well, I think DC is probably likely to be below average for farmer this year now, even with the inauguration and probably a below average performer next year as a combination of some spending cuts and the additional supply coming into the market.
I think it gets better after that and due to the adjustments. So I think it’s good to be concerned about Washington, but I wouldn’t overly worry about it.
Jeffrey J. Donnelly – Wells Fargo Securities
And just one last question, I’ll see before on the DC. Do you think when the dust settles on this effectively by removing demand out of the market that’s arguably very low-rated demand?
I know the loss of room demand isn’t necessarily good, but do you think when the dust settles, we’re going to end up with a market that like you said, if we’re more than halfway through this and the occupancy in the markets at a peak. You would think that average rate in the market is effectively going to raise as a result of their removal and if occupancy is high, the industry could have eventual very good pricing power nonetheless.
Jon E. Bortz
Well I think the thing I would comment about on rate is per diem is not low in Washington. And so I don’t have, I mean we can look up the average rate for the DC market and even the CBD market.
But my guess is that per diem is at least as good as what the market is. So I don’t know that there’ll be any great lift from there being less government in the market.
I think it will vary a little bit between the Downtown and the suburban markets probably more attractive rate in the suburban markets. It’s probably a little less attractive for most of the hotels Downtown.
But I think on an overall basis, it’s probably a wash.
Jeffrey J. Donnelly – Wells Fargo Securities
Okay thanks guys.
Operator
We’ll go next to James Milam with Sandler O’Neill.
James Milam – Sandler O’Neill
Hey good morning guys.
Jon E. Bortz
Good morning.
James Milam – Sandler O’Neill
Jon, you gave us some pretty good color a couple of quarters ago about your view on supply in the New York market, I was wondering if you could just maybe update us on your thoughts in terms of when and where you see supply being delivered and how you think that may affect the Manhattan Collection in particular?
Jon E. Bortz
Sure. I think our view on New York supply hasn’t changed, so probably the one development that’s occurred and we actually, I think talked about this last quarter and may be the quarter before.
We think there’s about a 3.5% expected increase in gross supply in the market this year offset by four properties being taken out of service as hotels being converted to residential or timeshare. And then there is one or two hotels like the lows, which is actually closed right now for renovations and part of the palace, which is closed for renovation that will reopen later this year or early next year.
So we think right now, this year again shapes up to be a pretty good year in New York. Demand continues to exceed the supply growth and that’s giving folks a little more confidence in the market to raise rates and we’re beginning to see that bill.
I think as we run into 2014, there is more in the market because we’re looking at somewhere between 7% and 7.5% supply growth, not knowing of course, whether there might be some other conversions out of hotels into residential as residential values raise, and so we’ll see if anything happened in that regard. But we think that’s where the risk is in the market and it may all get absorbed and again the good news is as we said before the market starting at its highest occupancy levels ever, I think the markets running 86.7% on a trailing 12 month basis.
So I think there is a little bit of demand for the last five months that’s going to go away that relates to FEMA and the other city displaced owner or renter occupancy programs. So we’ll see little a bit, I think they’re talking about that being about 2,000 rooms, which is little bit more than 2%, maybe 2.2% of demand growth that we’ve seen in the last four months or so.
That will go away, but we’re seeing great international demand growth particularly from Asia, Australia, China and that’s more than offsetting the weakness, we’re seeing from Europe.
James Milam – Sandler O’Neill
Okay. And then I guess is there anything in terms of the mix of the business traveler given maybe a little bit of shift in the economy, the business economy of New York from financials towards (inaudible) things like that?
Jon E. Bortz
Yes, for sure. I mean there is certainly a much more activity in those industries you mentioned, dominated in the Midtown, last Midtown sell markets and Downtown as well.
I would say they tend to be a little less users of demand generators for hotels as compared to the big financial institutions, which tend to have more meetings and more trends in travel, but the big positive in New York that we continue to see and expected to continue for many, many years is, it’s the biggest recipient of the global growth in travel that’s going on as the developing world fills middle and upper classes and those people want to travel. And when they come to the United States, the most primary destination is New York, and within New York, it’s Times Square, so if you want to learn in a language in the world just go hang out in Times Square pretty much hear anyone you want.
James Milam – Sandler O’Neill
Perfect. Thank you, guys.
Jon E. Bortz
Sure.
Operator
We will go next to Ian Weissman with ISI Group.
Ian Weissman – ISI Group
Yes, good morning. Jon just quickly outside of New York, Miami and even DC, what other markets do you see face the risk of future supply?
Raymond D. Martz
I’m not sure I quit Miami necessarily into the same category. And I think DC is pretty much concentrated right now into 2014, with the big conventional hotel opening but it has been the predominant amount of supply coming into the market.
But I think the markets that have the biggest exposure to supply and therefore the way we would describe them is having greater risk from a performance perspective would include Chicago, which has over 2,000 rooms under construction today, which represents about 6% to 7% of the market. Austin, which has 2,000 rooms under construction and is a much smaller market than Chicago, although much faster growing from a demand perspective, but that’s a lot of rooms in Austin.
Nashville has a lot of rooms, I think 2,000 rooms there as well. Those are really the big, the markets with the big exposure.
At this point in time, the West Coast is generally almost zero in most of those markets. And while it will come and we’re beginning to hear of announcements, there is very, very little that actually started yet in the major West Coast markets.
Ian Weissman – ISI Group
Do you think just given the analyst supply of QE money, banks and lenders opening their pocket books a little bit easier in just ground up development at this point?
Raymond D. Martz
It’s interesting and I think there’s obviously some more that’s coming from the banks. It continues to be – I’d say expensive, it’s expensive from an equity perspective.
They are still requiring a lot of equity and so you need a very, very well financed development in order to get even 50%, 60% construction financing. So you need a lot of equity, which is restraining the market and should continue to restrain the markets for sometime.
It’s being augmented by alternative lenders, so there actually is a much more rational approach to construction lending right now. I come from the development business all the way back to the early 80s and I never really understood why construction financing was priced so well given the risk involved and the extra cost involved on the part of the lender in terms of administration.
And today it’s actually much more expensive than it used to be and a lot of what you are seeing particularly any of the large projects, a lot of them are being financed by alternative capital whether it’s the opportunity funds, the [maze] lenders, the Starwood Capital’s of the world, the Ackman-Ziffs. It’s a different market that’s providing the capital and it’s much more expensive.
And so, there is stuff that can happen although it have to have great sponsorship need to be in one of the major markets I think. And so I think we are going to continue to see supply growth and new construction build gradually just like what we’ve been seeing.
I think that goes on for another year at least and then we look around again and see if economic activity and if this pick its development any more. But clearly that will happen as we get closer and closer to replacement costs.
And you can justify to a lender, the underlying value of what you are building.
Ian Weissman – ISI Group
Okay and just final question. In the gateway cities in your markets you consistently hear that many of the markets are back to peak occupancy, I would say that the consensus that rate growth has been a bit disappointing to this point, and lot people point to the job picture in unemployment rate.
Have you been surprised by the inability to push rate as aggressively as you would hoped at this point in the cycle and when do you think that inflection point occurs?
Jon E. Bortz
I think our view has been that there is a lack of confidence in a lot of the markets to push pricing. I think if you look historically, and by the way that lack of confidence is not really surprise and giving the media reporting and the headwinds that we see on these sort of events that seem to be more globally interconnected today whether it’s in Europe or Cyprus or other events that are going on in the world that seem to worry people in the U.S.
I think after what happened in 2008 and 2009 everybody sees their shadow pretty quickly when they hear something bad and worried about, but significant decline economically and obviously that’s flowing into the lodging business. So I think there’s been a lack, a general lack of confidence, again we stated this for more so on the East Coast and then there is on the West Coast.
I think we see much stronger pricing power in the West Coast in general. I think it comes from slightly stronger economies, but a better attitude overall.
And so I do think that the underlying occupancy, the strength in the markets particularly the gateway cities, because of what you said is being passed prior peaks and some unprecedented levels. There’s a lot of potential for upside growth when we begin to gain more confidence.
And that can be shown in some other markets out west, like in San Francisco, where interesting last year there wasn’t any demand growth in the market, but we had double-digit ADR growth in the market, so no lack of confidence in raising rates and in them sticking in the market.
Ian Weissman – ISI Group
Okay. Thank you very much, helpful.
Jon E. Bortz
Sure.
Operator
We’ll go next to Bill Crow with Raymond James.
William A. Crow – Raymond James
Good morning guys.
Jon E. Bortz
Good morning.
William A. Crow – Raymond James
Two questions, Jon. Following up on the cyclical kind of analysis, where are we from a Group perspective compared to prior cycles, it feels like we’re may be a year behind scheduled from that perspective?
Raymond D. Martz
We’re probably well more than that behind on Group, I mean the Group demand is still off, I think 13%, I’m sorry 11.5% from the peak in ‘06. Now interestingly, obviously that peak before the downturn in the economy, so that would suggest that there are some other things that work, in terms of maybe low, particularly low, things like training, there might be being done on the Internet, as that’s become a lot easier to do.
But I think that we’re still ways of in the recovery in some big pieces of demand like the cultural meetings that companies have the incentive trips, some might call them boondoggles, be in business column alternatives to cash compensation. And I think that will come at some point as the employment market strengthen and then there is more competition for people and companies need to be more proactive in growing loyalty and trying to keep people happy.
But I can’t tell you when that’s going to be, it’s likely to be a gradual process like it’s been, and so I think we’ve got several years to go build it seems like in the recovery of Group demand.
William A. Crow – Raymond James
Okay, that’s helpful; Jon on the Affinia, the Manhattan collection, any success moving gas down the Street to the Benjamin with rooms out of service of the 50?
Jon E. Bortz
Yeah, I mean we’ve definitely – that’s definitely happened to some extent, the Benjamin is doing very well, parts of that’s been from moving gas from Affinia 50 of them choosing to go down or part of that is due to closure of the lows and the powers to tower there and as being able to take some corporate business that was at those properties into the Benjamin. The other benefits that we had at Affinia 50 we’ve had very strong rate growth beyond the market, because we basically have to house available, we got 100 room hotel lot of the business we’ve been able to avoid has been lower rated discounted promoted business, which we haven’t had to take it.
So it’s actually done a little bit better than what we’ve thought so far, but we haven’t gotten into the very visible disruptive phase.
William A. Crow – Raymond James
And Jon, with the completion of the Affinia 50, do you think about Affinia as a brand whether if or not think of it as a brand. Is the quality now such that – guess that might go to one month might one the other will not be disappointed or surprised?
Jon E. Bortz
I think so, I mean the properties have either been recently renovated or they’ve been gradually renovated over the last few years, so all of the properties are in pretty good shape. And I’d say this, the size of the rooms even following a reconfiguration, we still have probably some of the largest rooms in the market at Affinia 50 on average and for anyone who has gone through the model room or will go through the model room, you will see how large the room is after being reconfigured.
So I think there is a lot of consistency between the five Affinia’s that are in New York, and even interestingly, I believe with the completion of the full renovation of Affinia 50 from a physical product perspective, it is nice or nicer than The Benjamin.
William A. Crow – Raymond James
Right. Jon, one final question from me, when you started putting together the budget and the outlook for this year and thinking about the industry, thinking about Pebblebrook, where did you see the highest risk?
Was it early in the year because of calendar issues? It seems like and you touched on some of these items that shift in the fourth of July, the September in New York last year, you got some easy comps coming up.
Is it fair to think that the risk to the outlook was really front-end loaded and if we kind of get through the second quarter, should we smoother sailing or is that the wrong way to think about it?
Jon E. Bortz
I think from micro perspective that’s true, Bill. The specific supply demand fundamentals and the holiday shifts and such I mean it’s interesting because I think as the year goes on, we continue to build occupancies in all the markets.
We move into the higher compression period and yeah, I think from a micro perspective there is less risk. I think from a macro perspective, you can make an argument that there is more risk just because of the fiscal drag aspect.
And people saying that may be the first quarter is the strongest quarter of the year from a economic growth perspective, I don’t really know. But I think there are little bit offsetting and so may be the macro-risk continues to be a little bit more second half of the year focused, but the micro-risk probably was more in the first half of the year.
William A. Crow – Raymond James
Great, thanks guys.
Operator
We will go next to Jim Sullivan with Cowen Group.
James W. Sullivan – Cowen and Company
Thank you. Jon, in your prepared comments, you touched a little bit on the outlook for San Francisco for the balance of the year and I just wonder if you could spend a few minutes talking about your expectations over the balance of the year for both San Diego and the Pacific Northwest?
Jon E. Bortz
Sure. I mean they are two very different markets.
The Pacific Northwest is very strong. Seattle is running a couple of 100 basis points higher on trailing 12 occupancy than its historical peak.
You have very strong corporate growth in that market. You have some of that in Portland.
It’s like a little brother or little sister. And so you have some strong corporate growth maybe not has deep in Portland.
And so we see both of those markets has very good for the balance of the year. I think San Diego is a bumpy year.
It’s convincing calendar the bumps around, but it’s generally a little bit weaker than last year, a little bit weaker in rooms and a little bit weaker in the rated types of conventions it is. So we saw some of that in the first quarter when the city had a great January and not so great March.
And we’re going to see that in the second, third and fourth quarters. There are some really good months and there are some pretty bad months in San Diego, because of the convincing calendar.
But I think if San Diego continues to grow from a demand perspective because of the weather and the desirability in the market. And as we began to look out in the future years, the convention calendar, which doesn’t move a lot between years, it’s a little better, little worse each year.
It definitely gets a lot better in 2015 and 2016 and I think part of that is anticipation of the expansion of the convention center though that’s probably not likely to happen and so at least 2016 at this point.
James W. Sullivan – Cowen and Company
And Jon just continuing on the West Coast, your portfolio has a significant rating in the West Coast already, and you touched earlier on your outlook for supply generally being a lower level coming in the West Coast. As you think about acquisition opportunities for the balance of this year.
How do you think about either pretty more capital work in the West Coast number one and number two, I think your risk adjuster factor that lower risk of new supply into the cap rates you are willing to pay in the market?
Jon E. Bortz
Well, I think we look at each market individually and things – when we’re forecasting the next five years, we’re looking at supply and demand in the market and it will factor itself into what we think the growth rates are going to be. So that’s certainly part of it and that effectively in a way gets factored into the risk side of it.
So we do look at the risk and take that into account, perhaps gets a little more built into what the growth expectations are in the market, assuming or being honest with the future which there is no reason for us not to be in our own underwriting. So yeah, I mean that’s pretty much how we taken into account and it would vary by market depending upon what we see as the supply/demand specifics of that market.
James W. Sullivan – Cowen and Company
And in terms of your waiting in the West Coast generally, are you – would you be happy to increase it if the valuation is right?
Jon E. Bortz
Fair question. Yeah, we are not uncomfortable with the weighting on the West Coast becoming larger.
We think the trends that we see today supply coming later and it being lower are the same trends we’ve seen for the last 25 years. It’s harder to build out there, it takes longer, it’s more expensive in many cases.
And so, yes, as a company we are very comfortable with the waiting on the West Coast being higher than the waiting on the East Coast and that waiting growing from where it is right now.
James W. Sullivan – Cowen and Company
Okay and two other quick questions in for the Boston W Hotel. Can you give us kind of an update on what’s happening at the lower level there, at the club level as well as the potential for signage revenue with the asset?
Jon E. Bortz
I didn’t follow, what do you mean by at the club level?
James W. Sullivan – Cowen and Company
Well the night club, I believe is closed.
Jon E. Bortz
Yeah, yeah, we closed the night club at the end of last year. It’s leased to a local third party with experience, very successful experience in the night club business and I think it’s due to open, reopen.
I think next month and they’re just finishing out some modifications to the space and getting their permits and approvals. So we’ve turned something that was losing a significant amount of money into something that’s going to pay us significant amount of money through the lease.
As it relates to the signage, I think you’re mentioning, we have a garden, a local approval as part of the being in the Theatre District to add a digital sign on the exterior of the building, large digital sign on the exterior of the building. And I think there is some final state approvals required, we expect to get those and we look to have, we have a lease in place with a billboard operator and we would expect that we begin receiving rent towards the end of the year.
And that rent is ramps up over time but it certainly becomes fairly substantial in a couple of years in the $200,000 to $300,000 year range.
James W. Sullivan – Cowen and Company
Okay then finally for me. In the first quarter, Miami was an exceptional market and you have asserted well, how much of that first quarter number do you attribute to the international in demand and where do you see that going over the balance of the year?
Jon E. Bortz
Yeah I think a good number, Jim, we’ve seen a strength in Brazil coming back, in travel due to the strength of the economy improving and the exchange rate with the Real, I think Miami has also got, it’s got a buzz to it as sort of a hot destination, March had some great festivals and events including the Ultra Music Festival which stretch from historically one week end to two week ends in March this year and really help drive occupancy and rate in the marketplace. So Miami is a well passed to the prior peak from an occupancy perspective and we think it’s going to continue to improve dramatically from a demand perspective, so long as South America and the South American economies continue to be healthy.
James W. Sullivan – Cowen and Company
Okay. Thank you.
Operator
And we’ll go next to Wes Golladay with RBC Capital Markets.
Wes Golladay – RBC Capital Markets
Hey good morning guys. Looking at the wider group on the books versus transient business, is some of this result of electing to allocate more of the rooms to [Hurricane] Transient customers?
Jon E. Bortz
Yeah there is definitely some of that, I mean particularly in San Francisco, there is a few of our properties like the, where that has been a specific strategy, we’re also finding in that market as an example that some of the Group is still price sensitive and our rates have just outgrown their ability to afford us. So, even with that, at the Argonaut as an example, we’re going to run at much higher occupancies than last year as we continue to try to drive rate.
But we look like right now, we’re going to run into the low 90s for the year. And we’re trying desperately to raise our rates to lower that.
But we’re not having, I guess we’re not desperate enough.
Wes Golladay – RBC Capital Markets
Okay. Now looking at the furloughs of the air traffic controllers, will this have any impact on the business in your mind?
Jon E. Bortz
I don’t know, I mean I don’t how much longer it’s going to last. The Senate passed the bill last night.
The House is expected to take it up and pass it today. Those guys don’t like to be inconvenience when they travel.
Wes Golladay – RBC Capital Markets
Okay.
Jon E. Bortz
And they certainly had a lot of pressure on them just in five days. And so it seems like that’s going to go away anyway.
But even if it didn’t, we’ve gone through periods historically in this industry, where they’ve changed the security measures and its caused significant delays and it hasn’t really impacted travel demand and I wouldn’t expect it to be material even if the folks in DC didn’t give the FAA more flexibility.
Wes Golladay – RBC Capital Markets
Yeah, it’s good point; I forgot being inconvenience as well. Now looking at the acquisition pipeline, I mean most of (inaudible) cost of debt, cost of preferred is pretty attractive.
Do you see the deal pipeline improving right now?
Jon E. Bortz
I think the acquisition market, the transaction market. I think they will continue to be as active as last year, particularly in the second half.
And so lot of times the years are a little slow getting going, because properties don’t come to market until the first quarter and they take time to go through the process. And then I think in sort of more cases this year than may be last year, more than we’ll involve assumption of debt.
And that process can take 90 days or 120 days and much of that is added to the overall process. So it seems like deals are taking a little longer on average than they have historically.
I mean the deal we did in San Diego West, we started that deal in September and didn’t close till the end of January because of the loan assumption.
Wes Golladay – RBC Capital Markets
Okay.
Raymond D. Martz
I would expect, I mean there is a decent number of assets on the market. We know there is a decent number of deals getting done, you’re beginning to see some of those with announcements in the market.
And I think that will accelerate over the course of the quarter and the rest of the year, just like it did last year.
Wes Golladay – RBC Capital Markets
Okay. And has pricing moved materially from say where you were buying W Los Angeles last year?
Raymond D. Martz
Well I think the pricing continues to move up from a nominal basis, because the underlying cash flows continue to move up. I don’t think we’ve had a drop in cap rates and I don’t think we’ve seen really an increase in cap rates if you will in first year yields.
Although that obviously is not the basis for valuations in our industry, but there often is the mathematical result of underwriting. So I think what’s happened is in general, you’ve had a slight increase in prices and values, because of underlying cash flows.
You have I think most underwriting showing lower [cagers] than they were a year-ago and you’ve probably seen another 100 basis point decline in un-levered IRRs.
Wes Golladay – RBC Capital Markets
Okay thanks.
Raymond D. Martz
In the past year.
Wes Golladay – RBC Capital Markets
Okay. Thanks for the color guys.
Jon E. Bortz
Sure.
Operator
And we’ll go next to Lukas Hartwich with Green Street Advisors.
Lukas Hartwich – Green Street Advisors
Thank you, guys. Just a quick one, what are the plans of the Delfina, when that franchise contract close in November?
Jon E. Bortz
Yeah, good question. We are in the process of valuating alternatives there.
There really are three, we can keep it as a share and renew the franchise arrangements with Starwood, we can rebrand it as a big brand and our desire would be to upper end it because of the quality of the property and the strength of the market. And so that’s a second alternative and the third is to de-flag it and make it independent and run it as an independent hotel, all of which would be done with the existing operator which is the Viceroy Group.
So no final decision has been made, the arrangement is up in November, the current franchise agreement and we’ll let you know as soon as we make a final decision.
Lukas Hartwich – Green Street Advisors
Great, thank you.
Jon E. Bortz
Sure.
Operator
And there are no further questions in the queue at this time.
Jon E. Bortz
All right; thank you all for taking the time to participate today and we look forward to another terrific quarter in Q2 and to updating you following that quarter. Thanks.
Operator
Again it does conclude today’s presentation. We thank you for your participation.