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Edited Transcript of LHO earnings conference call or presentation 20-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 LaSalle Hotel Properties Earnings Call

Bethesda May 10, 2017 (Thomson StreetEvents) -- Edited Transcript of LaSalle Hotel Properties earnings conference call or presentation Thursday, April 20, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth G. Fuller

LaSalle Hotel Properties - CFO, EVP, Treasurer and Secretary

* Max Leinweber

* Michael D. Barnello

LaSalle Hotel Properties - CEO, President and Trustee

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Conference Call Participants

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* Anthony Franklin Powell

Barclays PLC, Research Division - Research Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director and Analyst

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Floris Gerbrand Hendrik van Dijkum

Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT

* James William Sullivan

BTIG, LLC, Research Division - Analyst

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Neil Malkin

RBC Capital Markets, LLC, Research Division - Associate

* Ryan Meliker

Canaccord Genuity Limited, Research Division - MD and Senior REIT Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the LHO First Quarter 2017 Earnings Call.

At this time, I'd like to turn the conference over to Max Leinweber, Vice President of Finance and Asset Management. Please go ahead, sir.

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Max Leinweber, [2]

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Thank you, Dana. Good morning, everyone, and welcome to the first quarter 2017 earnings call and webcast for LaSalle Hotel Properties.

I'm here today with Mike Barnello, our President and CEO; and Ken Fuller, our CFO. Mike will discuss our first quarter results and activities. Then he'll provide an overview of the industry. Ken will provide details on our portfolio performance and an update on our balance sheet. Then, we will open the call for Q&A.

Before we start, please take note of the following. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties, over which the company may have no control. Factors that may cause actual results to differ materially are discussed in the company's 10-K, quarterly reports and in other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements.

Our SEC reports as well as our press releases are available on our website, lasallehotels.com. Our most recent 8-K and yesterday's press release include reconciliations of non-GAAP measures to the most comparable GAAP measures.

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

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [3]

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Thanks, Max. It's only been 2 months since our last earnings call, but we're excited about the changes we've made to the portfolio in that short time.

Including the Hotel Triton sale last week, we've sold 4 assets this year at an average 6.5% trailing NOI cap rate. And we have announced our plan to redeem the 7.5% Series H preferred shares, a transaction we expect to close in a couple of weeks.

We'll go into more detail about each of these deals later on in the call. We're also encouraged by our continued success controlling expenses and driving impressive EBITDA margin growth.

Before we dive further into our results, we'll start with an update on recent industry performance. When we spoke in February, we already had the January industry RevPAR result, which reflected 3.8% RevPAR growth and was somewhat inflated due to a record-breaking month in D.C. due to the presidential inauguration. RevPAR growth in February was 1.2%, a meaningful deceleration from January and the lowest monthly RevPAR increase since February of 2010. March RevPAR rebounded to be up 5.1%, which is partially due to the Easter shift out of March and into April this year.

All told, the first quarter industry RevPAR grew by 3.4%, which is a slight acceleration from Q4 last year. Clearly, a significant portion of the acceleration was due to the inauguration and the holiday shift, and those benefits do not repeat in the second quarter.

Upper upscale generally continued its underperformance to the overall industry. Urban outperformed the industry during the quarter but that was bolstered by the inauguration and the holiday shift. The last time that both urban and upper upscale outperformed industry RevPAR was in Q3 of 2014.

Having recapped industry performance, let's now walk through our monthly results, which exclude Lansdowne , Alexis and Deca. Our January RevPAR, excluding the assets we sold, grew 12.3%. February declined by 3.8%, and March was down 2.2%. Our first quarter was up 1.4%, driven primarily by rate. Later in the call, Ken will provide more color on some of the market-specific performance.

Zooming in on our group and transient mix for Q1, 76% of our demand was transient, and 24% was group, consistent with prior quarters. Our transient RevPAR grew by 1.5%. with rate up by 1.3%. Similarly, our group RevPAR increased by 1.9% due entirely to rate, which grew by 2.8%, while group rooms sold decreased.

Now let's examine a few of the components within the transient segment. In the first quarter, we saw our corporate-negotiated room rates increase by 3%. In fact, this is the first quarter in 3 years that we had a corporate volume increase. We note that corporate volume in January and February combined was approximately flat, meaning all this growth came in March, which was clearly supported by the holiday shift year-over-year. Our corporate ADR was fully positive this quarter, which is in line with our strategy to forego meaningful rate growth to drive more volume into this profitable segment.

Moving on to our international business. Our volume decreased by nearly 8% during the quarter, which was mostly a result of less demand from the U.K. International volume represented approximately 8% of our demand in Q1.

Our team's laser focus on expense management is evident in the total portfolio results as well. Our asset managers and our teams across the portfolio continued to relentlessly pursue opportunities to operate efficiently in each department while delivering a great product and experience to the guests at our hotels. These efforts are reflected in our standout margins. Our total expenses dropped by 1.1% during the quarter, which led to excellent margin expansion of 50 basis points despite moderate RevPAR growth.

Now to recap the first quarter, let's look at the key drivers for industry performance going forward in '17. Regarding supply, not much has changed since February. Industry supply grew by 1.9% in the first quarter, as expected. 2017 supply growth for the industry is expected to be approximately 2%. Looking at our market specifically, we're still predicting about a 3.8% weighted average supply increase this year.

As is our custom, we'll now discuss the components of demand and the economic landscape as we see it today. Let's start with group. As mentioned in February, citywides are down in most of our markets in 2017. The bright spot citywides remain Boston, D. C. and, to a lesser extent, Chicago. After examining how the citywides look in our markets this year, it's not surprising that our own group pace for '17 is down by 2% as of April 1, which is worse than the pace in February when it's down only 1%. For the balance of the year, our group pace is down by 3.5%. Of note, our pace, including San Francisco, is approximately flat both for the full year and for the balance of the year.

The next piece of demand is corporate. For the S&P 500, profits were estimated to increase in Q1 for a third straight quarter. If the current estimates hold, Q1 would mark the highest year-over-year earnings growth reported by the index since Q4 of 2011. It's encouraging that profits continue to rebound and that corporate travel may have started to recover, although it's tough to see a clear trend in the first quarter with the holiday shift. We expect it may take another few quarters of corporate profit improvement before we see it translate into additional sustained demand in our markets.

In addition to corp profits, the other economic indicators we track have all either improved or remained stable this year. GDP, which is estimated to grow by 2.3% in '17, is one metric for which the annual forecast actually increased by 10 basis points since the beginning of the year. In addition, Q4 '16 GDP was recently brought up from 1.9% to 2.1%. These changes are an improvement from the trend of weakening expectations we experienced the last several years. However, we do remain concerned that the Q1 GDP estimates have continued to slide.

Consumer confidence was the indicator we track that improved the most during the first quarter. The index rose to 125 in March, which is the highest level since 2000.

Unemployment remained stable, below 5%, and employment have been steady since the beginning of the year, with modest capacity increases planned for many of the airline carriers. As a whole, the facts we have today about increase in supply growth and softer overall demand keep us cautious on industry fundamentals going forward, but the recent improvements and the general strength of the macroeconomic environment are positive signs.

Before handing the call over to Ken, I want to touch on the asset sales we have completed this year. While the specifics of each sale are different, overall, we're excited we were able to take advantage of a strong seller's market. We've made good investments over the last several years, and there is a high desire in the market to own our assets.

We've sold the 4 assets at a combined 6.5% trailing NOI cap rate: Alexis was a 5.6% trailing NOI cap rate, Deca was 6.7%, Lansdowne was 6.8% and Triton was 7.8%. For Deca, Alexis and Triton, our weighted average unleveraged IRR was 11%, which we're very proud of. The IRR in the Lansdowne sale was positive, albeit below this average. And we're still pleased with that sale given the attractive cap rate.

The 4 assets we have completed this year have provided nearly $274 million of proceeds. And until we redeem the 7.5% Series H preferred shares, we're not in a rush to allocate the remaining capital from these sales, whether it's into a future acquisition, buying back stock or otherwise. We're in an excellent position to pivot in either direction, depending on how the year unfolds. First and foremost, we make decisions that we think are in the best interest of the shareholders.

Now Ken will provide some details about our first quarter performance as well as an update on our balance sheet. Ken?

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Kenneth G. Fuller, LaSalle Hotel Properties - CFO, EVP, Treasurer and Secretary [4]

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Thank you, Mike, and good morning, everyone. I'll start by providing more color on our first quarter results.

Our best-performing markets during the quarter in terms of RevPAR were D.C., San Diego and Boston, with increases of 22%, 8% and 4%, respectively. D.C. performance was certainly bolstered over inauguration, but the market continued to exhibit strength during the balance of the quarter, particularly in March, with the holiday shift. San Diego benefited from post-renovation rents at Solamar and a 17% increase in citywides. Similarly, our growth in Boston was led by post-renovation ramp-up at Liberty.

Our toughest markets were L.A., San Francisco, New York and Philadelphia. As a reminder, we benefited last year from the Porter Ranch gas leak, with 19% and 17% RevPAR growth in L.A. in Q1 and Q2, respectively. As such, we're facing a tough comparison.

San Francisco citywide story is well known, and as a result, our hotels there are in a tougher operating environment. The most significant impact from the Moscone expansion is expected to take place during the second quarter. Our RevPAR was down in New York, and unfortunately that market got sequentially worse throughout the quarter. Philadelphia actually had a decent quarter as a market, but our results were negatively impacted by displacement from the Embassy Suites renovation.

Now with respect to our bottom line performance, our asset management team and our operators have continued to do an outstanding job. Our hotels delivered solid results overall, driven by another excellent quarter of limiting expenses, which actually decreased by just over 1% in the quarter. And our EBITDA margin improved by 50 basis points.

Our room department was managed very well, as evidenced by nearly 70% flow-through.

And moving down the P&L, from rooms to food and beverage. We're proud of the great improvements our asset management teams made there in terms of profitability. F&B revenue did decline by 4% this quarter, but expenses dropped by 7%, which led to margin improvement of more than 250 basis points for that department.

It's important to note that F&B revenue decline is driven by The Marker San Francisco, where we leased the operation during the middle February last year; and Villa Florence, where, as of the beginning of 2017, we're converting the restaurant into prime Union Square retail space. Excluding these 2 hotels, F&B revenue grew by $765,000 and expense decreased by $836,000, an outstanding story and more profit in Q1 2017 than the same period last year.

Now turning to capital. We invested $13 million in our portfolio during the quarter, partially for the rooms renovations we just completed at L’Auberge Del Mar and Embassy Suites Philadelphia. Following the 3 most recent asset sales, we're reducing our 2017 CapEx outlook to be between $130 million and $150 million, which is down by $20 million at the high end of our range.

Finally, I'll provide a brief update on our balance sheet, which was further strengthened following the credit facility refinancing and 4 asset sales since the beginning of the year. As of March 31, we had total debt outstanding of $1.1 billion. Total debt to trailing 12-month corporate EBITDA was 2.9x. After including $361 million of cash on hand, our debt-to-EBITDA would actually be 2x. Additionally, we finished the quarter with substantial fixed charge coverage of 6x.

In 2 weeks, we plan to redeem the 7.5% Series H preferred shares for $69 million, which will save the company $5.2 million of expense annually. We continue to have substantial flexibility, with 40 of our 42 hotels unencumbered by debt and nearly $775 million of capacity available on our lines of credit. After the recent asset sales and the preferred redemption, our pro forma cash balance is just over $300 million. We have a highly liquid balance sheet and remain extremely well capitalized.

That completes our prepared remarks. Mike and I would now be happy to answer any questions you may have. Dana?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Shaun Kelley with Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [2]

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Mike, I was just wondering maybe if we could start with sort of the expense control you guys are able to deliver in the quarter. As we sort of roll through the year, I think you've been very clear that San Francisco and L.A. are going to face some continuing operating challenges, but those are pretty well known ahead of time. So can you just help us think through how well you're going to be able to manage expenses in the next couple of quarters as some of these disruptions are happening but, again, some of these you can start to plan for a little bit?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [3]

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Shaun, sure. I guess a couple things about the expenses. So when you dig into Q1, as we mentioned on the call, we're pretty pleased with what happened. You do have to look at F&B was the big help in the quarter. I mean we had a -- if you take out the 2 San Francisco assets where we changed the format of the F&B completely by leasing one out and closing one down so we can make them to retail, revenues were up and expenses were down. So that's a good thing. And -- but that -- while that -- those 2 items will happen for the rest of the year because they happened in Q1. We don't have additional places we're doing something like that. But the guys were pretty frugal throughout the year in terms of just staying on top of expense management. When you asked the question combined with L.A. and San Francisco, yes, it's well known. Now San Francisco is really most of the year. L.A., the things that helped L.A. were primarily in the first half. L.A. overall had a great year, but it was the first half that was about 19% and 20% up for the first -- 19% and...

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Kenneth G. Fuller, LaSalle Hotel Properties - CFO, EVP, Treasurer and Secretary [4]

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And 17%.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [5]

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And 17% for the first 2 quarters. So it does moderate in the second half. But as it relates to expenses, we're well aware of those things, and we just have to make sure that all the guys stay focused on being efficient wherever they can. And they are looking for new ways of doing things, and that -- primarily, that is still in the food and beverage in terms of hours, menus, what we're offering, et cetera. But even the rest of the P&L has managed pretty tightly. If you do look at the other line items, there have been pretty sensible increases throughout. Just when it rolls up, we have an expense savings. But as we've mentioned in prior calls, we're not trying or nor can we save our way to growth. And to the extent that modest RevPAR continues for a longer period of time, it does put pressure on the expense side. So we're very proud of the job that our asset managers and the property teams have done. But we are hopeful that, at some point, RevPAR will turn more robust, which will relieve some of the pressure on the expense side.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [6]

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Great. And then maybe my follow-up would be on -- you mentioned in the prepared remarks a little bit about the corporate business, and I think you said that you'd seen some of the first growth that you've seen in that channel in a couple of years, if I caught the comment correctly. Could just give us a little bit more color specifically on what you were referring to there? And then sort of I was just -- a couple of other channels. I think group is pretty clear, but any movement you're seeing on the leisure side as well as we just think about different -- kind of types of business moving into the -- in and out of the hotels right now?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [7]

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Sure. The -- yes, you did catch it right on the corporate side. So every quarter, we give you guys an update on what we're seeing in terms of the corporate volume and rates. The one thing that's been very consistent over the past -- well, since the recession ended really, the end of '09 really beginning into '10, we saw significant corporate rate increases, and that's been pretty consistent really through the last 7 years each and every quarter. What we had not seen really beginning in 2014 was lift in the corporate room nights. And so Q1, as you heard correctly, we saw a lift in volume for the first time since Q1 of '14, so 3 years. Now that's what we have tracked, we are not entirely sure if it is because of the holiday shift. We did see more corporate improvement in March, and obviously, the holiday shifted into April. So -- but there's been holiday shifts for the last 3 years, and that didn't result in positive corporates. So when we take the volume increase, coupled with the fact that the S&P and corp profits have been stronger over the last 3 quarters, we feel like there's -- there are -- there's corp business that's starting to find its base. So are we convinced that it will continue to improve over the next couple of quarters? That's hard to say. But obviously, the better off the S&P 500 does, the better -- more profits that they deliver, it bodes better for corporate travel, which would -- will help us. So we do feel encouraged by that. On the leisure side, we don't really track exactly what the leisure is. We do look at weekend, weekday. But outside of resort, we don't have good data to tell you what the leisure is or isn't. I mean we do have the transient and the group, as we mentioned on the call. They're kind of similar in terms of how they shook out overall for the quarter, in the mid-1s. So -- but I don't have particular data on what that meant leisure versus business.

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Operator [8]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [9]

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I wanted to ask you -- you talked about not in a hurry to spend the excess cash. But first, would you expect to have to pay a special dividend based on the gains? And then what sort of factors would influence you one way or the other? Are you actively looking at potential acquisitions? Or do you -- are you thinking about more from a defensive perspective of being able to buy back stock? Or kind of just as the year plays out, what are some of those factors that might influence you one way or the other?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [10]

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So it's too early in the year to know what we'll have to do with the gain. So you're right, right now, with the 4 assets we have approximately $100 million gain. And what goes into that is, well, how did the properties do and what our performance is and then what our requirement is. And then, if we do buy or sell anything else, if we sell something that has a gain or loss, then obviously, it adjusts that calculus. And then, as you're probably aware, I mean, there are things that we are able to do in terms of pulling dividends forward from 2018. So it's a decision that we're likely to make later in the year, Smedes. That is a result of a number of factors that we'll have to see how they play out. But -- and so it's really just too early to make that call. As far as what we do with the cash that we're on, we said in the prepared remarks that we're really poised to pivot. So your question is, well, when do you know when to pivot? We are looking for some stability, both in terms of fundamentals as well as what's going on with pricing. And so while I don't have an exact answer to tell you, here's when we would buy back stock or here's when we buy an asset, we'll monitor both closely. On the asset side, we are looking at a number of projects that come our way, as we have for years. And so we haven't bought anything since early 2015. But we did look at other properties in '15, potential acquisitions in '16, and nothing fit our criteria in terms of what -- the deliverance of cash-on-cash flows and what we could do with the asset. So we'll continue to look. And certainly, if more properties come on line, then that perhaps will provide more opportunity for us. And the market specifics obviously matter, Smedes. It's what market are we buying in, what are the dynamics there, what does the supply horizon look like, what citywides look like, how their demand has been, et cetera. So all that goes into thinking on the asset purchase side. And on the buyback side, obviously, it has to do with what goes on with the more macro sentiment, what we've seen month-to-month in lodging, clearly not just the industry but what we're seeing in really our segment and the other upscale, urban and how that plays out. But that's a longer way of saying what we said earlier, which is we don't feel that we absolutely have to put this money to work right now. And so -- but if we see something that makes sense for the shareholders, then we will act accordingly.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [11]

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Fair enough. Could I just ask have you seen any significant changes in pricing, one way or the other, either since your last call or maybe just kind of over the last several months for the kinds of assets that you would be interested in buying? Or ...

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [12]

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No, not really. In fact, I think one of the things you can look at is you see what we've sold. I mean it averaged 6.5% cap rate on trailing. For us, it's been, obviously, we felt it made sense to dispose of. And so there's a big push largely coming from the private side, some international folks that seemingly has a higher value than a lot of the public company valuations. So I think that's been pretty steady, Smedes. Hard to say how it will play out this year. I would say there is -- it's not a flood of deals that are in the market that we would look at. That's been pretty consistent.

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Operator [13]

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

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [14]

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I guess, specifically on your gateway markets or even more so on your New York City hotels, have you been able to decipher any hiccup in inbound international demand since the travel ban?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [15]

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So Patrick, I guess, a couple of things. When the travel ban was first announced, we saw very minor cancellations, I want say it's minor, that we knew about, people who are kind of really friends with the hotels because they sent our GMs e-mails saying, "We can't come because of the travel ban." We obviously don't know if anybody else canceled because of the travel ban because many people just canceled, and certainly, there's people that just didn't book. Obviously, it got moderated, but it never rose to a level of cancellations that we felt deserved a call-out in the quarter, other than it's just a frustrating thing that obviously doesn't encourage travel to the U.S. What we mentioned on the remarks is what was down this year. If you recall, we actually had a decent international story last year in terms of what we saw coming from inbound. We were positive in growth all 4 quarters last year. So when we look at Q1, we were down about 8%. If we look at that by country, really it was all covered by the U.K. I can't -- it sounds rational to say it was a Brexit-related issue, but it's hard for us to know with a fairly small portfolio like we have. So -- but otherwise, we're not hearing anything specifically from, I guess, really macro or even any one country.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [16]

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Okay. Two more questions. The first is -- obviously, you don't give guidance, but is it reasonable to think that in 2Q, not having the inauguration boost, the Easter shift hurting you the other way, that RevPAR growth could possibly be negative for you in 2Q?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [17]

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Well, you're right. We aren't giving guidance, and anything is possible. If your question is, is it a tough roll-forward, the answer is yes. I mean we had the benefit of inauguration and the holiday shift. The one thing that I would say that was specific to our portfolio is that you have to look at the year-over-year comparisons as a wash when we bring up special events. So in Q1 of '16, we had Super Bowl and we had Porter Ranch, which was the issue in Los Angeles. When you compare those to inauguration, it's really a wash. So we benefited in Q1 '16. We benefited again in Q1 '17. So it's not quite as pronounced of an impact as you might have, if we didn't have a good comp last year. But yes, sequentially, we don't -- there's nothing particularly special that's going to happen in Q2, like it did happen in Q1.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [18]

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Okay. And then the last question concerns San Francisco. Certainly, we know 2017 is going to be weak, and we hear a lot of chatter that 2019 is going to be strong. But what about 2018? How do you think 2018 will fare for San Francisco?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [19]

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It will be -- it should be a kick up. So if you lay the groundwork for '17, I mean, '17 in the citywides are down about 37%. So obviously, that's pretty dramatic. When you look at 2018, just focusing on the citywides for a second, there's a rebound. You're seeing an uptick almost 29%, Patrick. So it doesn't get you back to square one, but it's a big uptick. And then in '19, we're tracking about a 66% lift over '18. So when you think about big-picture numbers, the peak citywides that we track, we're not quite 800,000 rooms in '16, okay? When you break it into '17, it drops to 490,000, so a pretty big drop; lifts up to 630,000 in '18; and then it comes roaring back to over 1 million in '19. So we think that '18 won't get us back to where we were, but it should look a whole lot better than '17.

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Operator [20]

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And we'll take our next question from Jeff Donnelly with Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [21]

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Maybe a similar question, I guess, on just sort of the roll forward. But I was just curious, like now that we're in the thick of things on San Francisco, just can you talk about how RevPAR has looked subsequent to maybe quarter end, how that -- you think that maybe compares to some of your original expectations when budgets were coming together in late '16 and early '17. I recognize it's ultimately a short period of time in the life of these assets, but I'm just curious to have people's -- I guess our expectations managed a little bit about how we should be thinking about how these months are going to come together.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [22]

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We actually had a range of possibilities for San Francisco. When you think about it, you had not only the citywides, the Super Bowl in Q1. So you had citywides that were down about. . .

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Kenneth G. Fuller, LaSalle Hotel Properties - CFO, EVP, Treasurer and Secretary [23]

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35%.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [24]

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35% in Q1. So when you think about the big picture, the fact that San Francisco is down -- was it 2%, 2% on a macro basis, right? Yes. But then for -- yes, for us, we were down about 4.5%; for the city, about just 2%. When you look at it that way, it doesn't seem so harsh. What worries us, of course, is what goes forward. I mean the next 2 quarters are the worst in terms of the citywide pace. You're down not quite 80% in Q2, but you're down about 40% in Q3. This is the Moscone Center. It gets a little cheerier in Q4. It was down 6%. So hopefully, the Q2 and Q3 are the worst of it. When you think about expectations, I mean, we thought negative, but it was a pretty wide band, Jeff. So I'd say it's somewhat in our expectations, but at the same time, it's not like something we feel pretty good about. I think what we would tell you is that despite the fact that the citywides were tracking down pretty consistently at that number for all of last year, for -- the citywides for '17, not quite 40% down. The properties have tracked much better. So the properties are just over -- about 12% down in pace. So that's given us some optimism that they can, not necessarily fill but they can make up a bunch of the downward trajectory in citywides for -- through in-house business. Does that help?

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [25]

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No, that does help. And I guess, maybe kind of related to that, I was curious if you've had any anecdotes as to whether some of your competitors have been successful in generating that in-house group because otherwise, unless some of those that are sort of big supertanker assets, whether it's the Marriott or the Hilton complex, maybe backfilled some of that group demand, I just figured there could be somewhat of a dynamic where you had sort of a price war within that market. I wasn't sure if you've had any anecdotes in the market about the confidence level around that kind of April, May, June and rolling into Q3 period on backfilling that.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [26]

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I think there are different stories with different hotels. Nothing that we've heard for certain. But I would tell you that the sentiment for Q2 is not too rosy. I mean people realize that, that's the toughest quarter. If you think about it from our perspective, in terms of our group bookings, that's where we're the worst. So we were able to make up really a lot in Q1, 3 and 4. Q2 was the holding--, and Q2 is down, again, citywide almost 80%. For our portfolio, it's much better, but it's still down about half of that. So I would expect -- and again, everybody's expecting Q2 to be the worst of it. So hopefully -- that's true but hopefully it's a little better than we expect. I mean it will depend on other demand that we get that's clearly not group-related.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [27]

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Okay. And then just switching gears. I know you can't speak to the decisions of your peers, but there appears to be more of a divide, if you will, among the hotel companies on capital allocation. You're clearly a seller. Some of your peers have returned to acquisitions. I guess I'm just curious, do you think that divide is rooted in maybe a separation in the fundamental outlook for the industry in '17, '18 and '19? Or is it just related to maybe trends in asset pricing that has come in a little bit and they're -- they think they're seeing better deals and you continue to think it's a good time to sell? I'm just kind of curious what's maybe giving rise to some of the separation that maybe didn't exist in the last 12 to 18 months.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [28]

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You're absolutely right. I think that's a -- I can't really speak for any of the peers as to why they're buying or not buying. I can just tell you what we're looking at is we look at a lot of the products that you've seen trade. And for one reason or the other, it doesn't fit for us. So that will change. I don't think that any mode we're in is a forever mode. When we're -- as evidenced by the fact that when we've been -- had buying opportunities and we bought a bunch of properties, that does change. And right now, we're not, and we've been selling. And so -- but I expect that there will be a time when we feel very confident about what we can buy and what's available in the market, and we'll change course. But as far as what anybody else is thinking, yes, I can't answer that question.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [29]

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And maybe just one last one. I guess maybe kind of just stepping back from the time that we're in now. I'm curious, do you think the hotel industry is maybe entering, I guess for lack of a better term, sort of a new normal? And what I mean by that is, if we look over the time that you've been in the industry, for example, you've certainly had these very big booms and busts in RevPAR growth and certainly asset prices. But you look at how the industry has evolved. Leverage for both public and private companies is materially lower than where it was 20 years ago, 10 years ago, even sometimes 5 years ago. Banks seem to be much more diligent around development financing, the things that tend to let it kind of get out of control. I'm just curious, do you think we're kind of in a new normal where maybe the booms and busts on RevPAR become a little more muted and, same thing, the propensity of the overbuild will be a little more muted as well?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [30]

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It's certainly hard to say. I think you're asking a grander question in some respects about what the cycle looks like. We're still believers that it's a cyclical business. There's plenty of data that shows how it goes up and down. The question is -- if you're really asking if it's no longer cyclical or as cyclical, perhaps we'll see what happens over the next couple of years. The things that we're looking at that still suggest cycle is still continuing is evidenced by really the supply story. I mean, yes, the supply is -- has taken a relatively longer time, since the last downturn, to get up to even just 2% for the industry. But if you look at a lot of the stronger markets, a lot of the markets where we are, the REITs -- other REITs are, the supply growth has continued to grow and will continue to grow for some period of time. The outlook for us on a supply basis is pretty steady in '17, '18, '19 and '20. So from that perspective, we're still believers in that. We've never been smart enough to tell you when it starts or stops, but we still believe that there will be an ebb and flow. If your first part of your question is, "Hey, these hotel real estate assets are in the hands of more responsible people across the country, and we -- everybody deserves higher multiples because of that, because of low leverage, et cetera," then -- if that's what you were saying, then, sure, we agree with that. But...

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [31]

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I wouldn't say you're responsible.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [32]

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I know you wouldn't. But that's how we feel about it. I would say, again, it's possible that we're in a slower growth period, but it's also possible that we've seen other cycles that have been shorter and longer than this. So it's not a situation where we've stretched the previous long, long cycle by x number of months or years and so we feel like there's been a new normal. So I know that was a long way to answer your question, but that's what we're seeing.

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Operator [33]

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And we'll go next to Thomas Allen with Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [34]

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Could you -- are you able to assess whether Airbnb and alternative accommodations are having a bigger or less of an impact to RevPAR growth today than it was, let's say, 6 months ago or a year ago?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [35]

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Thomas, yes. I mean we can't. These short-term rentals, they exist in many cities, obviously, across the country, and there's no great data that's published on that, that would suggest that we could tell you what's coming or going to that. So we can't say there's been a shift one way or the other in the last 6 months.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [36]

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Okay. And then just on your CapEx guide, I noticed you cut it. I missed it and maybe you said it, but why -- what drove that?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [37]

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So a lot of that was driven -- if you think about it, we were -- we took the top down by $20 million, which was largely predicated on the assets that we sold. So if we had not sold those assets, then there was a chance that we were going to invest additional proceeds in those properties. Having sold the properties, clearly, we're not going to do that, so it went back down to $130 million to $150 million.

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Operator [38]

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We'll go next to Bill Crow with Raymond James.

We'll go next to Neil Malkin with RBC Capital Markets.

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Neil Malkin, RBC Capital Markets, LLC, Research Division - Associate [39]

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First, I'd like to talk about Seattle. You sold your 2 assets there, so you're completely out of the market. Can you just maybe talk about or elaborate on your thought process there? Is that a call on your expectations for fundamentals in that market over the next -- remainder of the cycle or longer? Was it a function of just really attractive pricing? Any color would be great.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [40]

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Sure. Good morning, Neil. The Seattle market, it was a good market for us. We're in it for quite some time, still a target market we would absolutely buy in the Seattle, right asset, right time, right price. These assets, if you know Seattle, the Deca is not technically in the CBD. That asset is by the University of Washington, so a little bit on the outskirts. And Alexis is right in the heart and soul of the city. Big picture. Supply growth over the next 3 years, 20%, so it's a pretty daunting supply number coming online in a relatively small city, one of the smallest physical cities that we're in. And so we have that. We did get a great pricing on both assets. And at least for the Alexis, there's a significant capital infusion that we were going to make and the buyer is looking to make. So that's really the big picture reason. But I should be clear that we would absolutely invest in Seattle again if the metrics were right.

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Neil Malkin, RBC Capital Markets, LLC, Research Division - Associate [41]

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Okay. Great. And then you said that supply was going to kind of be steady through 2020. I thought, last time you had a call, you said that '17 and '18 would be elevated and then '19 maybe back off a little bit. Is that -- has your view on that changed since then? What are you kind of seeing on the supply front past '18, if you can give any color?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [42]

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I don't know that it changed. I don't know we gave a different number. It hasn't moved much. So if you look at our weighted average, the way we buy looking at (inaudible) percentage in cities we're in, we're staring down the barrel about a 3.8% supply story this year, 4% in '18, 3.5% in '19, and 4% in '20. So it moderates after that. Now, a, some of that might not get built, or if it does, it gets extended. And b, one thing to be clear about is in these markets that we're in, demand growth has generally been higher than the country. So you have to make sure you're kind of lining up your demand expectations and supply expectations for the right market. We wouldn't use the national demand to look at any one of these markets that we're in. As an example, in New York, which has been well discussed, I mean, the demand there has outstripped the supply from 2010 to 2017, even year-to-date, with only one exception of 2015, where it just narrowly missed. So it's important to recognize that I'm not saying, if you build it, they will come, I'm not saying that. But there is a fact that many people do come to the new hotels because they're either not able to get rooms elsewhere or they're coming in from an area they were forced to go outside of the CBD. The numbers we're talking about, Neil, they are all CBD numbers, not MSA numbers.

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Neil Malkin, RBC Capital Markets, LLC, Research Division - Associate [43]

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Right, got you. And then last one for me, someone asked about margins earlier. I just wonder how you guys are able to continue to maintain or achieve margin growth given the very tepid RevPAR environment. I think 2.5% or 3% RevPAR is traditionally viewed as a number you need to have like flat margin, maybe that's changed. But I mean, is it at all a function of like staffing issues? Are positions staying open longer? What are the kind of levers or things you're seeing, or levers that you could pull to kind of continue that? Or what would actually make that change course?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [44]

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Well, our guys are really good at it, I would say that. Kudos to the property teams. The asset managers are second to none in terms of operating efficiencies, and we're constantly looking for new ways to do it. We have a lot of operators to work with, lot of brands. So we're able to find best practices about each individual hotel. And if it makes sense, pepper those ideas throughout the portfolio. There's a lot of examples to that. This year, as I mentioned earlier, food and beverage was the primary reason for the expense decrease. So again, we've been very thoughtful, very efficient on F&B, probably for really 3 years, 2.5 years, I should say. And so I'm not going to tell you that, that's going to go on forever. But I also won't tell you that we're anywhere near perfect in it. And so there will be opportunities for us to be more efficient. Really, the more operations that we have, the more chances that we have to try to fine-tune them. So -- but you're right, we've said in general, a big picture we really are looking to 2.5%, 3% RevPAR to cover 2.5%, 3% expenses to keep margins steady to the extent that we can override that and become more efficient, then obviously it's better, and we're doing a better job to do that for the long term.

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Operator [45]

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

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [46]

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A couple of questions. Just putting a fine point on the acquisition side of things. Have you actually passed on anything that you would have pursued in a different economic backdrop?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [47]

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I'm sure. I mean the reason I say I'm sure is that to think back to specifics. And there's lots of properties that would ultimately be great in our portfolio, but given either a pricing or a particular encumbrance at the moment or what's going on in that market, it may have kept us out. So the answer is I'm sure, but we pass for lots of reasons. The primary reasons though, Bill, are what is happening in the market in terms of supply and demand and then what the price the seller wants. Other things are obviously more our plan-specific than they are the market-specific.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [48]

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Right, right. Okay. I wanted to shift now to the impact from the Easter shift. I think -- my question is, are we making too big a deal about it with your portfolio? And I say that because New York tends to outperform during Easter, resorts tend to outperform during Easter, we saw that in the latest weekly data. Is it possible that your April may not be as impacted as we might otherwise consider?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [49]

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Well, you're right. I mean, you're right in terms of New York actually is a benefit. And so if you look at, say, New York, month-to-date, they're one of the handful of markets that we're in that's up. So month-to-date, New York is up about 12%. So if you think about our top 10 markets, 4 markets are actually positive month-to-date, and 6 are negative. So it's hard to say where that's going to shake out for the rest of the month or the quarter, Bill. But your point is valid. Like our New York, which is still 8% of our EBITDA, will get the benefit of April. There are all questions for New York is what's going to happen in the rest of the quarter, how will May and June shake out. And obviously, there's still concern about that given what's going on with the supply. So -- but that could be -- that's something that we're happier with.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [50]

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Okay. And then I think you started, early on, your comments, mentioning the underperformance of upper upscale and urban since, I think, 2014. And I'm just, I'm curious whether you think this is just transitory reflecting supply? Or this is more about permanent impairment or reflection of consumer choice shifting within the hotel industry?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [51]

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It's an excellent question which has caused a lot of reflection. When we look back over 30 years of data with the really advent and expertise of Smith Travel provides, the last 3 years have really been the only ones that have had that phenomenon in an up year. And down years, yes, urban and upper upscale struggle more than the industry. It's something to wrap your head around, Bill, because on one hand, you'd say, well, this is going to be on -- going to happen for a while because of supply numbers that we just gave you. The building is happening in these top 25 markets, the top 10 markets that where we are, et cetera. But the building is happening because people keep coming to those markets, right? The demand growth keeps happening. So the question is, what will stutter first? Will the supply stutter or will the demand stutter? And it's a hard one to answer. So people -- unlike prior cycles where people built because they had land and a loan. Here, they are building because they are looking to be in a top market, hence the increase in supply in our markets. So at some point, the supply moderates. If, in fact, demand actually does slow in these markets, then perhaps you see a downtick in supply. But I think it's too early to make that call, when we look at 30-plus years of data, let's say, last couple of years have seen this. As you know, you have seen the advent of the short-term rental market that is primarily affecting the top markets in the country, both from a compression perspective as well as from a rate perspective. It's not obviously much of an impact in the lesser expensive markets. So it's TBD, but something that we talk about regularly.

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Operator [52]

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And we'll take our next question from Floris van Dijkum with Boenning.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [53]

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Mike, question for you in terms of capital allocation. You touched upon this a little bit before as well. But with your stock being where it is, would you consider additional property sales?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [54]

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Floris, we would consider really everything. Our job is to evaluate what the right thing to do is for the shareholders in terms of all the assets, right? So these assets had specifics relative to what we're able to achieve in pricing facing them in terms of the next couple of years, that made sense for us to sell. If other assets fit that criteria or in the event that somebody just makes us an offer we can't refuse, then we know we have an obligation to evaluate that. As we've done in the past or, I should say, not done in the past, we don't really comment on anything particular until we've announced it. So other than saying that we evaluate the portfolio regularly, we can't really give any more color on that. But we're open every year to buying and selling just this year, we're tipping more on the sell side.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [55]

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Great. And then in terms -- I just -- you've got increased authorization to buy back stock being -- your shares being where they are, obviously. At what point does that become an attractive or a more attractive option?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [56]

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Well, we're looking at lots of data points relative to that. I mean, the simplest one is the stock wherever it's trading at was the trailing 12 NOI cap rate on the stock. So you can see today, with stock being pressured a little bit and as the -- our stock -- our cap rate is somewhere in the plus to 8% range. And assets are trading, as you can just see by our assets, 6.5%, but those are assets that we -- obviously, we've disposed of. So there are many assets that people are looking to get in the 5s and 6s. So there's a pretty big delta there at the moment. Will that rise or fall, hard to say. But we look at both. And then the things that we've looked at relative to acting either way is really -- is what's specifically happening in the markets for buying an asset. And with the stock, what is happening on the macro side that gives us the hint of stability in the -- it's not only the stock world which is obviously hard to do. That's, obviously, the investors job to do that, but also what's going on in the fundamentals for the lodging industry. And that's the one that we've been most concerned about over the last couple of years as we've seen demand soften and supply increase. We're at an interesting point right now where we're waiting for an inflection point as to which direction we go. Hence, the fact that we have the buyback authorization, and we feel like we can pivot either way once we get some more clarity on where things are going. So it's more of a road map for how we would look at things versus an exact direction of when or what data points we'll see before we act.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [57]

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But if I were to hear you speak, you're not terribly bullish on sort of the macro outlook. And with your stock trading at a significant discount and your balance sheet being in pretty good shape, what are going to be the triggers for you? Do you need anything? Or is it just sort of the lack of other investment opportunities that's going to cause you to utilize your share repurchase?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [58]

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Right. Well, first of all, a couple of things. We said earlier as we're encouraged by more of the macroeconomic indicators. There has been an uptick in most of those. And there is definitely a feeling of optimism that's related to the presidential election in terms of what the party feels that they're or was trying to accomplish in terms of deregulation and tax reform, which would perhaps trigger corporate stimulation and demand for us. I think there's been a slowing realization that some of these things either -- certainly will take longer, perhaps may not happen, that's TBD. So I don't know that I would say that it's -- we're just -- we're observing what was going on in the macro. On the micro in lodging, yes, we're concerned about where we are because of the supply/demand factors because of what we're seeing from a many citywide perspectives. And so we're taking more of a wait-and-see perspective. We're not looking at it by any means as, well, we have this cash, we have to act ASAP by any means. We recognize that taking a disciplined approach is probably the hardest thing to do, but we don't feel the need to act one way or the other ASAP. Is that what you're looking for?

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [59]

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No, that's great.

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Operator [60]

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And we'll go next to Michael Bellisario with Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [61]

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Just one housekeeping item first. Are any of the 3 recent dispositions structured as reverse 1031s?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [62]

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No. None of them are.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [63]

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Okay. And then just wanted to revisit the manager transition in San Francisco from what, 18 months ago or so. That's still a work-in-process for you guys, and any lingering impact on performance still that you're seeing?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [64]

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It's a little bit of both. First of all, it's been a while. So to say, there is a transition impact at this point is not accurate. We think that there's been some performance that's suffered over the last 18 months, but it's -- we're passed the period of transition, Mike. We have the 3 hotels, but really down to 2. One of them we sold was the Triton, so that's no longer in the portfolio. But with the others, I would just tell you that San Francisco has been the one market from our perspective, that we're not happy with the performance with -- really for quite some time. So it is more of a top line issue for us. I know we don't give out the numbers quarter-to-quarter, but on the bottom line basis, we've had a lot of good improvement over the years. So but from a top line perspective, there is still work to be done. And that's not just the transition management company, Mike, it's really across the board.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [65]

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Sure enough. And then one other, just aside from the travel ban impact that you mentioned, any changes on the cancellation front that you've seen throughout your portfolio year-to-date, for better or for worse?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [66]

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So if you look at our cancellations since '09, they're amazingly steady 0.9% of revenue to 1%. I will tell you the last 2 quarters have ticked up to about 1.2%. Now these are small numbers, but those 2 quarters have been the highest since '10, 2010. We're talking about not a lot of dollars here, Mike. But I would classify that as a slight uptick to normal. I would not classify that as anything that gets to a point of serious investigation.

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Operator [67]

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

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [68]

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So you guys have been active sellers for the last few quarters. Can you talk a bit about the transaction market, has it improved? Is it stable? Is it getting worse? I'm talking about things like number of bidders, values that you're seeing, those sorts of things.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [69]

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On the sell side, we're going back to the couple of sales that we had in '16, midyear. I would say it's kind of steady. Maybe a slight uptick in the number of bidders. I think it was -- I don't have a list in front of me, but we definitely had bidders on both of the assets that we sold last year. And the 4 assets we sold this year, yes, we had a -- I mean, we had a pretty good round. We went through a number of rounds, it differs for each asset, with buyers. But I think it was a pretty good grouping of bidders across the board. And it wasn't the same. I mean, you saw a REIT bit bought one of our assets, a small private group bought another one. We had an offshore investor buy another one, so it's been different people for different assets.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [70]

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That's helpful. And then my other question is on supply. So just looking at the Smith Travel supply data, the pipeline just continues to grow every month. And I find it odd because it's been what, 18, 24 months now that people have been talking about construction lending tightening up, deals are being tougher to pencil. So what do you think is driving the discrepancy there between what you hear from people and then the actual data?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [71]

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That's a -- it's a good question. We're not really looking to do any development ourselves. So as far as what the particulars are of any kind of construction loans, we're probably the wrong guys to ask. But we're as surprised as you are that some of the longer staged projects continue to be announced. Now maybe part of the answer, Lukas is, is that some of the things that are announced for '19, '20, '21 may either get delayed or not done. That also happens. So we'll see. But you're seeing the same announcements we're seeing, and it's -- we find it odd at this point of the cycle as well.

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Operator [72]

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

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [73]

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I was hoping we could talk about the distribution topic for maybe just a minute. I think we've heard anecdotally maybe that the OTAs are giving independence a bit more preference in the search order. Can you guys maybe just talk a little bit about what you're seeing on that front, if the OTAs are becoming more important for you, or if they're changing their strategy any for your portfolio?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [74]

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As far as that particular, no. We're not -- I mean, I'm not saying it'd not happening in our properties. I'm just saying we've not heard that, that's been -- something that's been common throughout our portfolio.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [75]

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Okay, good enough. And then you guys do, obviously, a ton of work on looking at supply in your markets. I want to ask, Mike, is we hear the big brands talk more and more about growing the soft brands. How do you guys -- do you guys contemplate that at all in your supply outlook? I mean -- to the extent that something gets announced. But do you kind of consider that at a time in terms of factoring that into your supply outlook? Or do you think those -- some of those hotels aren't truly competitive even when they kind of go soft?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [76]

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Well, I think I'm hearing. It was 2 pieces to this. I mean, any new addition of rooms, whether it's lower or higher rated than us, whether it's branded or independent. If it's within the CBD, we track and then we add it. That's the first part. The second one, I think, is are you saying that if it was independent yesterday and it becomes a soft brand tomorrow, do we look at it differently? Is that where you're going?

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [77]

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Yes, yes, exactly right.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [78]

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Okay. So we don't treat that as new supply. But depending on who it is and where it is, and what it was, then it could be a factor. So certainly, if it was some asset that was in our set, then there is impact. And if it's something that happens to be in the city, then there could be impact. And certainly, that's something that is ours, right? So I don't mean ours literally, but I mean, if -- we have the Westin Copley in Boston. If there is a soft brand from the Marriott, Starwood brand that opens nearby, that's a concern for us, even though it might not be a Westin, because it's more distribution that needs to come through that particular pipe. So we monitor all those. But as far as the supply numbers we're giving you, no, we don't look at that as a new supply. And we do treat everything, whether it's the lowest-rated hotel or the highest as additional supply if -- if they're physically adding rooms.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [79]

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Okay, great. Just one more for me. You guys have been focused on these, I guess, 9 or so core markets for a while now. If you look at the map and you do all your work on economic factors and demographics and things, I mean, are there a few more markets popping up on your radar? Some of these mid-tier markets that are kind of growing, or is it -- are you more likely to kind of do more in those markets? Or do you think you'll stick to the core you've got now?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [80]

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We're always looking, Chris. Over the years, we did add in Philadelphia, in Portland, in Key West, those are the ones we added recently. We would add another market. I mean, we're not going to name names, but there are plenty of good hotels that don't happen to be in our top target 8 markets. So -- but it's our job to evaluate those, if and when they are available to potentially purchase. So the answer is yes. We'll not beholding to those. We never said there were only in the (inaudible). We said those are primary. And we have looked to bolster in other markets, and we will continue to do that. I mean, in some respects, it's nicer to have more diversification. I think it's better for us, better for the shareholders, we'll learn a lot, but the opportunity has to be available for us to act on.

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Operator [81]

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And we'll take our next question from Jim Sullivan with BTIG.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [82]

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Just a couple of quick ones from me. First of all, on the markets. San Diego, obviously, quite strong in the quarter, and I just wonder to what extent, if any, that San Diego convention market might be benefiting from the -- what's happening in San Francisco.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [83]

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Morning, Jim. I can't comment on what's swapped out of San Francisco into San Diego. I did not hear that one. Years ago, when Moscone was announcing the changing of the time line of the expansion, there were a number of citywides that left. I don't recall any going into San Diego. But I can give you some color on San Diego for Q1. The citywides were up about 16%. Unfortunately, that's the best citywide story. The next 3 quarters in San Diego are down about the same, 15%, 16% and 18%. So the citywides in San Diego are down about 10%. So yes, you're right, San Diego had a great quarter. We were up about 8%, which is strong, downtown. We still think it'll be a good -- it'll be a better market than those numbers indicate just because San Diego's strong spot really is Q2 through 4, in terms of weather, visitation, et cetera. But as far as something swapping out of San Fran in, I don't recall that happening. I thought it was more of the big -- the others like Orlando, Vegas and some other ones.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [84]

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Okay. And then second market, Key West, was the weakness there anticipated? Or did it surprise you?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [85]

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We actually did great relative to both -- well, really the market there is no CBD there, perhaps. But, yes, we're down too. It was anticipated. We had as yet the finishing touches on the -- what we call the 4 pack that we're opening up and then a couple of other hotels that opened up, not in Key West but in Stock Island, which is the next island up, Ocean's Edge, and there's another small one. They're not big hotels, but increases the supply number. So market was down about 9%, and we're down about 2%. So kudos to the guys at the properties of the Highgate. And the property management teams did a fantastic job managing through a difficult quarter. So yes, expected, and we did better than expected.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [86]

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Okay. Then hopefully this will be the last question on the asset sale market. But I'm curious whether there were any assets that you have put on the market and let's say, that was put on the market that have not attracted acceptable bids?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [87]

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Over the years, what I would tell you is, there have been times where we have tested a market. And for one reason or other, haven't acted. That could have been a macro issue, could have been a pricing issue, could have been our desire. I won't -- I can't really comment. I won't comment on something that we talked about recently and didn't get it. But I would say, over the last 2 decades, at different times that, that has happened. Yes, I wouldn't say it's often though.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [88]

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Okay. Would it be fair to say that, with concerns on the lending side, certainly earlier in the first quarter, that the levered buyer is out of the market? Or do you think the levered buyer is still looking, still active?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [89]

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If I look at what we've done, in terms of our 4 sales, 2 of the buyers didn't have leverage, one did. And I can't recall the data. They didn't do. Yes, so 2 and 2. So that gives you an indication. However, yes, it was that -- they did, but it was a smaller 2.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [90]

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Okay. And then finally, 2 minor modeling questions. There was a benefit on the ground rent credit in the quarter and also insurance settlement recovery helped other income. Are both of those done in the first quarter? Or is there some impact that we would expect, we should expect to see out of the second quarter or any future quarters?

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Kenneth G. Fuller, LaSalle Hotel Properties - CFO, EVP, Treasurer and Secretary [91]

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Ground rents -- is the ground rents done, and the insurance -- so we noticed that you're right up the insurance pickup. There is also sort of loss on the other side in other expense, that was in our Q as well. So net-net, it doesn't net so much for the quarter.

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Operator [92]

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

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Ryan Meliker, Canaccord Genuity Limited, Research Division - MD and Senior REIT Analyst [93]

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I just had a couple of quick things. First of all, Mike, I think you mentioned in your prepared remarks that in the first quarter, international demand was down 8%, but it only accounts for 8% of your overall demand. Do we see that 8% of overall demand pick up materially as we go through the year. I'm particularly thinking about third quarter with the summer travel season?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [94]

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So this one has been higher than that in the past. So -- but what we say is this. First of all, relatively small amount of our business is international. And every quarter, we feel like the teams and the OTAs are getting a little better at giving us the data. So if you recall some of our earlier calls, we said this is what we have. But some of the OTA business is not sourced, so we don't know it, okay? But if I was to give you the percentage of our business for the last year, last 4 quarters, '16, Ryan, 11%, 11%, 14% and 11%, okay? So the fact that '17 is 7 points -- is about 8% is a touchdown. When we think about what happens in the next 3 quarters, don't know. I mean, we don't have a pace for our international business. I suspect most of it is transient, so most transients, our view is really the next 60 days, and we do have it for the whole year, but there's really not much transient pace beyond 30, 60, 90. So we'll see. I mean, this would be odd if it's stuck out at that level because with more business being accurately sourced, I would actually think it might tick-up a little bit, but we'll see.

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Ryan Meliker, Canaccord Genuity Limited, Research Division - MD and Senior REIT Analyst [95]

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But bottom line, this is not a big number, so we shouldn't be too concerned even in 3Q if international is down a lot.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [96]

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What we saw is interesting is that even some things that we saw like say, when the Olympics, our international business was still pretty steady and people were concerned that with the Olympics that there would be people not coming to the States because they'd be going to the event itself, and we didn't see it. So that's -- of all other the things that we're tracking, we're interested in that, but I don't know that, that's risen to a level of worry for us.

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Ryan Meliker, Canaccord Genuity Limited, Research Division - MD and Senior REIT Analyst [97]

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No. Okay, that's helpful. And then the second question I have. I just wanted to dig in a little bit on L.A. I understand that Porter Ranch obviously had an impact in the first quarter, and it sounds like you think it'll have an impact in the second quarter. Was there anything else? I mean, was Burbank massively skewed to your West L.A. assets, just given Burbank's proximity to Porter Ranch versus West L.A., which I would've thought would've been a little more insulated? And I would've thought that some of the strength that you saw last year in L.A., especially in the first half of the year might have been driven by the supply reduction with the Hyatt Century City going away. Just wondering if you can give us some color on that and help us understand how we should think about things going forward for L.A.?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [98]

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Well, I think, you hit the topics. I mean, yes. It will -- it did affect us in Q1. It will affect us in Q2. When we think about L.A., it wasn't just Porter Ranch, it was the supply. So if I look at our track, which was Beverly Hills, Santa Monica, L.A., Hollywood -- West Hollywood, the supply story last year in the first quarter was down 3.3%. This year, it's up 6%. Okay? So what you have is -- that's obviously a 10-point swing in the supply. Yet (inaudible) biggest benefit last year because of the proximity to Porter Ranch. So we're, by no means, unhappy with the outlook for those markets long term, even medium term. But the way we're looking at it is, our L.A. market, they did great in the first quarter of '16, they outperformed the market big time. And then part of this quarter was just payback effectively because they had outperformed so well. So we're not surprised, but we would hope to do a little bit better on that, but we're not terribly surprised by how it shook out.

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Ryan Meliker, Canaccord Genuity Limited, Research Division - MD and Senior REIT Analyst [99]

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But am I correct in assuming that those supply headwinds relative to the tailwinds you saw last year will prolong for the full year, not just through the second quarter? So while you don't have the Porter Ranch headwinds, you still see the supply dynamics, so you put up 9% RevPAR growth in the back half of the year next year, that's going to be pretty tough comp, again, right?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [100]

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Absolutely. There's supply growth in that market for the next couple of years as well. Now granted, that's a smaller track. Actually, I think, that's one of the smallest tracks that we monitor. And so it doesn't take a lot of hotels to do that. But yes, over the next 3 years, there's a -- an influx of hotels into that submarket.

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Operator [101]

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

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [102]

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Just some more detail on the group pace. I believe you said it was down 100 basis points from your prior call, excluding San Francisco. So what's the market kind of led kind of a slowdown in group?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [103]

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Well we went down from, I think, 1 to 2. So it wasn't material, Anthony. So I mean, from quarter-to-quarter, the numbers do shake out effectively. We're rounding up and not giving you the exact numbers, we probably would have said it was steady state.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [104]

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All right, got it. And just on the acquisitions, following up on Chris' question, most of the deals this year on the buy side have been kind of in these resort areas, which you don't have much exposure outside of Key West. And going forward, would you do more kind of in the resort beach type of markets?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [105]

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Absolutely. I mean it helps the matter, we would buy resorts. That's one of the types of asset classes that we look at. The specifics matter a lot. Where is it, how difficult it is to build, what is coming online, what is the cost to run it longer term, what the price is, and what we can do with it. So all that matters. So we do look at them from time to time. We have looked at plenty. And in the event more of those become available, we'll continue to look at those, but it isn't a goal. We don't start out the year saying, sure, we wish we could buy more resorts versus urban properties. I mean, we don't do that. We start out with -- if we can find great assets for the shareholders to buy, well, let's jump. And if they happen to be one kind of the other that work for us, that's great.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [106]

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Got it. And maybe one more final one for me. I believe a 1.5 year ago, there was a lot of talk about how pricing power was deteriorating as it got closer into booking. Is that still the case across most of your markets?

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [107]

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In terms of the amount of the rates that were on the books now and the softening on the group side or the transient side, I'm not sure I ...

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [108]

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More transient, just kind of closer in pricing power. I believe, like 1.5 year ago, there was a lot of talk about rates getting lower as you got closer into reservation due to incentives with redemptions and whatnot, and just weaker pricing power.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [109]

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Well, the weaker pricing power is attributable depending on the market supply, et cetera. What I would say is that, you've heard us talk about the shift to some different avenues, whether it's prepaid, some contract accounts, et cetera. And if we certainly get that, that provides a more certain base that allows us to be more comfortable with our pricing. But I think the shift of shorter-term pricing power has continued for quite some time. I don't -- we haven't heard that it's been noticeably different this quarter.

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Operator [110]

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And at this time, I would like to turn the call back to our speakers for any additional or closing remarks.

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Michael D. Barnello, LaSalle Hotel Properties - CEO, President and Trustee [111]

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Thanks, Dana. And thanks, everyone, for listening to our first quarter earnings call. Look forward to seeing many of you at the conference over the next few months and talking to you after our next quarter. Thanks, everyone.

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Operator [112]

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Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.