Q3 2019 Earnings Call
Greetings and welcome to the Pebblebrook Hotel Trust third quarter earnings call. At this time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it isn't.
Now my pleasure to introduce your host Mr., Raymond Martz, Chief Financial Officer. Thank you may begin.
Thank you Michelle and good morning, everyone welcome to our third quarter 20, arching earnings call webcast. Joining me today as Jon Bortz, Our chairman Chief Executive Officer.
Before we started quick reminder, that many of our comments today you considered forward looking statements under federal Securities laws. These statements are subject to numerous risks and uncertainties I described in our 10-K for 2018 and or other FCC filings in future results could differ materially from those implied by our comments.
Forward looking statements are we make today are effective only as of today October 26, 2019, and we undertake no duty to update them. Later you can find your assets. He reports in earnings release, which contain reconciliations of the Nongaap financial measures. We use on our website a couple of record tells dotcom.
Okay for the third quarter 2019, or hotel operating results were slightly below our expectations adjusted EBITDA not the lower end of our outlook and adjusted FFO 77 cents per share was in middle of our outlook range of 76 cents to 78 cents.
In the third quarter same property Revpar decreased 2.2%, which was just below our outlook a flat to down 2%.
Same property non room revenues increased 1.9% and same property total revpar was down 1%, which was also slightly below our outlook.
In addition to the moderating business the leisure hotel demand that we experienced during the quarter, our south Florida hotels and resorts were impacted by Hurricane Dorian in early September , which we estimate negatively impacted same property revpar growth by 30 basis points.
Overall, our 2.2% Revpar declined during the third quarter was the result of a 0.6% decline and Aer and a 1.6% decline in occupancy.
Our portfolio on a relative basis outperformed our comparable combined STR market tracks, which experienced a 2.6% revpar declined 40 basis points blow our same property third quarter Revpar. We also had approximately 60 basis points of negative impact to revpar at five of our hotels.
Recently transitioned to new management companies. However, this was largely as we had forecasted going into the quarter.
Interestingly 17 of the 20 market traction in our portfolio experienced negative revpar for the quarter with Philadelphia, Washington, DC, and Naples, Florida as the only three market tracks that generated positive revpar in the quarter.
As for Pebblebrook, our best performing markets in the third quarter were Boston, San Diego, Philadelphia in Naples, Florida.
In addition, our hotels in 15 of our 20 markets outperformed their respective start market trucks.
Our Boston hotels generated revpar increase of 1.7%, which was above the Boston CBD Revpar decline of 1.7%.
This outperformance was driven by the Westin Copley, the Liberty and W. Boston similar to the trends we experienced during the second quarter.
These properties continue to make progress working through the challenges of the Starwood Marriott sales revenue management and loyalty program integrations.
In addition, the Westin Copley it showed consistent growth all year, including the third quarter as gained share as a result of just because it's very significant renovation last year and W. Boston also began to gain share in the third quarter as a result of their rooms renovation, we completed at the end of the first quarter.
Boston continues to be outperforming market for us this year, despite is weaker convention calendar.
Boston CBD hotel demand was up 2.7% in the third quarter and is up 3.4% year to date and Revpar is up 1.5% year to date.
San Diego was another positive performer for us into the third quarter, producing a 0.8% revpar gain which outpaced the San Diego market track decline of 2.7%.
This was due to solid performance at our Hilton Gaslamp It embassy suites hotels in downtown San Diego.
Our Paradise point resort also generated a positive results in the quarter as did our recently renovated Hilton San Diego resort that is ramping up following its significant renovation that was completed mid year.
Our the pie resort in Naples, Florida had a tremendous quarter generating 17.5% revpar growth, which letter portfolio, even with cancellations, resulting from hurricane durian in early September .
This resort continues to ramp up nicely following hurricane or pharma and the completion of our major multiyear comprehensive renovation earlier this year and we applaud our property teams continued solid results.
Our underperforming markets, where the ones, we expected our Seattle hotels experienced a 7.9% revpar decline due to supply increases in the market, which are primarily attributable to the new 1200, 60 room Convention Center hotel that was added to the market at the end of last year.
Despite ongoing healthy demand growth of 9.9% Seattle from a robust economic base, which accelerated from the second quarter. This city was not able to immediately absorb it's year to date, 13.1% supply increase and we expect Seattle to be an underperforming markets through the remainder of 2019.
[noise] Revpar at our Washington, D.C. hotels was down, 4.2%, which underperformed the Washington, CBD, which grew revpar, 4% during the quarter.
Our underperformance was mainly due to the recent management transitions at Maysoon rock and the Donovan hotel in anticipation of the upcoming Repositionings and major redevelopment of both hotels. We expect this near term underpriced expected. This near term underperformance, which is normal transitions.
Our Chicago hotels generated a 6% revpar decline, which was slightly below the 5.6% decline posted by the Chicago CBD.
Chicago continues to be challenged rights weaker convention calendar and increases in supply growth.
We gained meaningful revpar share at our hotel, Chicago, but give it back and a little more at our Westin, Michigan Avenue Hotel as we've been unable to overcome the huge group room shortfall, we entered the year with following challenges for the Marriott group sales integration.
Fortunately the tail the convention calendar for Chicago in 2020 is much better in our western hotels up significantly in group on the books for next year.
Our San Francisco hotels produced at 4.9% Revpar declined during the quarter, which was slightly under the San Francisco market track decline of 4.2%.
We expect to this to be the most difficult quarter in San Francisco, given the unfavorable convention calendar in the quarter compared to last year and the operator transitions at both the marker and Villa Florence in anticipation of the upcoming major repositionings.
Renovations of these properties next year.
We exit we expect San Francisco to be much better in Q4, given the favorable convention calendar and an already healthy group pace advantage other books.
And finally, our key west hotels generated 5.7% decline in revpar slightly better than the market, 6.1% decline the negative Revpar performance overall in key west was mainly due to hurricane Dorian, which caused a significant amount of cancellations. During was typically it very busy and profitable labor day weekend in key west.
The keys also face a sargassum seaweed outbreak, which negatively impacted the southern most beach resort during the quarter.
The impact on Revpar from the seaweed was minimal, but we lost an estimated 850000 in food and beverage revenue and 5.5 million and hotel EBITDA.
Overall for the quarter transient revenue, which made up about 77% of our total portfolio room revenues declined 2.9% compared to the prior year transient HDR declined by 1.5% in the quarter.
Group revenues decreased 2% in the quarter with room nights declining, 2.1% and 80 are increasing 0.1%.
This was primarily due to weak convention calendars in Chicago and San Francisco.
In terms of must be Revpar growth July was down 3.9%.
I guess declined 1.9% and September was down 0.7%.
Our hotels generated 145.1 million of same property hotel EBITDA for the quarter, which is 1.4 million below the bottom end of our outlook. This was primarily due to the weaker business and leisure demand across most most of our markets and the $1 million combined negative EBITDA impact from hurricane Dorian into seaweed.
Breaking the keys that I mentioned earlier.
Our hotel teams did an excellent job managing expense growth in the quarter same property hotel expenses increased just 1.2% during the quarter after adjusting for the impact or real estate tax increases from proposition 13 at the California properties required in last year's corporate transaction.
Year to date operating expenses, excluding prop 13 increases 2.4%, even with the continuing investments been making this year improving the gets experience and investing in our employees.
As we continue to make progress implementing our portfolio wide initiatives and cost synergies program, we expect to see similar expense successes limiting expense growth and imprudent proving productivity in 2020 and 2021.
Moving down the income statement adjusted EBITDA was 136.5 million, which was at the bottom end of our Q3 outlook range. This was the result of a 1.6 million dollar savings in corporate JJ expenses, which offset the shortfall in hotel EBITDA.
These savings came primarily from reduced incentive compensation expenses and some timing differences in preopening expenses.
Adjusted FFO was 100.5 million or 77 cents per share, which was in the middle of our outlook range.
Our interest expenses were 1.2 million before below our outlook, which combined with our 1.6 million dollar adjacent Jay savings offset the $1.6 million shortfall and hotel EBITDA.
Due to the $130 million have successfully completed property sales during the quarter ensuing debt Paydowns review, our balance sheet at the end the third quarter on a variety of metrics shows that we are in very good financial shape, our debt to EBITDA ratio was at 4.6 times debt to net assets. After GAAP depreciation was added a low 35%.
Debt to enterprise value was at 36% and our fixed charge ratio was at three times.
We expect to further improve these metrics and ratios as we complete additional property sales.
And finally, a quick update on our net asset value calculation.
As we revised we have revised our estimated any of our portfolio to reflect the decelerating economic environment and their performance of our hotels in that environment.
As a result are calculated NPV has been slightly reduced the $36 on 25 cents to $41, a 50 cents per share where the midpoint of $30.75 per share, which implies an annualized cap rate the 5.8% as a midpoint.
Based on our current share price of approximately $27, we traded in applied 7.3% NOI cap rate, which is more than 30%, 30% discounts or a midpoint of our NPV, while also providing a healthy 5.6% dividend yield.
Well that update I'd like to now turn the call over to John .
Thanks, Greg.
As noted in our press release, the third quarter was more challenging than we expected the rate of demand growth continue to modestly slow from the second quarter and both business and leisure transient and September was particularly disappointing given the benefits that were expected from the Jewish holiday shift into our.
Caliber.
Slowing economic growth around the world due to the trade war and continuing geopolitical events and uncertainty have clearly had an impact our business confidence, which is translating into slightly more cautiousness by businesses and investments and spending.
This is also evidenced in travel.
We are trailing 12 months hotel demand growth has decelerated from a range of 2.7% to 3% a year ago or so.
2% to 2.1% most recently.
This slowdown in demand along with a weaker year and group business across the industry has pressured HDR growth.
She has also slowed from a trailing 12 month growth rate of 2.4% to 2.5% a year ago to 1.2% to 1.5% in the last quarter.
When trends are changing in either direction it becomes harder to forecast primarily because our business forecast are based upon the consistency of trends.
Since so much of our business in this industry is book short term and even business booked further out like larger group business can quickly shrank or cancel forecast variances can change quickly.
While the demand trends this year have been moderating the good news as we havent seen any increase in cancellations or attrition.
And we've not heard about any changes in corporate policies related to travel.
And the average spend per group customer has also shown healthy increases all year.
While industry Revpar growth has been softening the urban and top 25 markets have continued to underperform the industry.
We believe this is primarily due to negative shifts and international travel at a relatively higher rate of supply growth in the industry and the urban and top 25 markets.
Inbound international travel has been weak if not negative this year and outbound travel, meaning us citizens traveling abroad is up significantly.
Some of this is likely due to the strong dollar and some is due to us policies and rhetoric that make it much more difficult or desirable to come to the us.
For Pebblebrook on a year to date basis, we've outperformed our markets we've outperformed our local competitive hotel sets in terms of gaining revpar share.
We've outperformed the urban and top 25 markets as reported by Star and we performed in line with the industry.
In the third quarter, we also outperformed our markets and competitors.
But due to more challenging convention calendars, and a number of our markets of the third quarter and the 60 basis point impact from operator transitions at five of our properties, we underperformed the urban and top 25 markets as we expected.
And as Ray stated earlier hurricane door and talk about 30 basis points off our revpar performance in the third quarter.
The fourth quarter, which has been shaping up since the beginning of the year to be a very good quarter for us due to favorable convention calendars in a number of our markets doesn't look as good as it did 90 days ago as demand growth and pickup trends have softened.
Nevertheless, our pace heading into the quarter continuous to be extremely favorable.
Specifically as of the end of September .
Total room nights for the fourth quarter are up 5.4% over the same time last year.
They are up 1% and total revenues up 6.4%.
Group pace is even stronger for for Q4.
With group rooms ahead by 6.2%.
Group 80 are ahead by 5.6%.
And group revenues ahead by 12.1%.
So you can see pace is still pretty strong for the fourth quarter.
The challenge we've been experiencing.
Relates to in the quarter for the quarter pickup.
It's been down year over year basis, and we expect pickup the weaken further in Q4 based on current trends.
As a result, we've lowered our same property revpar and EBITDA forecast for the fourth quarter to anticipate further softening.
Now lets pivot to our hope to to how Pebblebrook is going to continue to create value for our shareholders regardless of the economic environment.
I'd like to break this down into three discussion topics first the repositionings and redevelopment opportunities throughout the portfolio second an update on our strategic disposition plan and third progress with our portfolio wide initiatives.
While we made the decision to pursue the acquisition of Lasalle. We believe there was a significant opportunity to increase the value of the acquired portfolio.
By not only creatively repositioning a significant a significant number of properties to drive higher room revenues.
But also by utilizing and Redeveloping the real estate more creatively to drive higher non room revenues such as in the areas of food and beverage and rumor at all.
Just as we've done over the last nine years of Pebblebrook.
After spending almost a year now evaluating the opportunities and creating an overall comprehensive plan for each hotel we've come to the conclusion that there are more property and portfolio wide opportunities than what we originally anticipated.
Today, we believe there are 16 properties within the portfolio that can benefit from substantial investment that will reposition them to a higher competitive level.
Improve the guest experience and drive very attractive returns.
Well, we've made numerous operator and brand changes to position properties to maximize performance upon redevelopment and we have a few more to go we feel like we're in a very good place now to start this value creation process.
Over the past year, we've been Feverously planning these redevelopments with our designers architects operators and project managers and we're extremely excited about the opportunities.
I'd like to give you the broad parameters of this investment program. The returns we expect to drive the timing and some details about a few of them.
Date, including what we disclosed in yesterday's earnings release.
We've announced in provided details on eight of the projects.
The Donovan hotel, which will become the seventh hotel and the unofficial see collection following its reopening in the second quarter next year as hotels Xena after completing a $25 million repositioning and reconcepting.
Mason and rock, which will join the viceroy luxury urban collection.
Following an $8 million upgrade which is expected to be completed by mid year 2020.
The first phase of the repositioning of Viceroy, Santa Monica, consisting of $12 million to reinvigorate. This properties reputation as one of the most iconic luxury lifestyle hotels in the highly supply constrained Santa Monica market.
The $12.5 million repositioning of look park in West Hollywood through a comprehensive renovation of this entire all suite hotel.
The repositioning of shot Manav resort and Spa in Santa Cruz. Following the completion of a $10 million upgrading of the properties vast indoor and outdoor public areas and meeting and event venues.
The second phase of the redevelopment of the Hilton San Diego Resort, which includes a $10.5 million upgrade of the properties public areas on top of the just completed $21 million of improvements to the hotels guest rooms and meeting space.
Completion by year end of the $5 million repositioning of the 96 room marker key west.
And finally, the $37 million redevelopment and reflagging of San Diego Paradise point resort as a Margarita Island resort.
With a redevelopment not expected to commence until the second half of next year with reflagging targeted for late next year.
All but two of these projects will commence either late this year or early next year and B B completed by no later than mid year next year.
The marker key west in Paradise point are the two exceptions with a marker already underway and Paradise point, starting after public approvals sometime in the second half of next year.
These eight redevelopments total an estimated investment of approximately $120 million.
With about 75% of this capital representing ROI related capital and 25% representing regular capital maintenance or renovations in the ordinary course of the properties life.
We're forecasting that this repositioning capital will generate on average a 10% return on investment upon stabilization.
Which we typically get to between three and four years following completion.
In addition to these eight projects, we anticipate commencing an additional seven repositioning projects.
By the end of next year or early in 2021.
With the majority of the work and investments occurring over the 2020 to 2021 winner and one last project in the summer of 2021.
As previously discussed some of these projects will involve us, making operator or brand changes as part of the value creation process.
All told we're currently forecasting that these 16 major repositioning projects will represent a total investment of approximately $260 million.
With roughly two thirds of the total amount projected to represent ROI projects, which we underwrite to generate an increase in EBITDA equal to a 10% return on investment upon stabilization.
In addition to taking advantage of the opportunity to drive higher average room rates and Revpar at these properties as a result of their repositionings. Many of these major projects include creatively improving the real estate to generate opportunities to drive an increase in food and beverage revenues through the.
Upgrading of expansion or development of new experiential venues.
For example, as part of the Donovan conversion to Xena were dramatically improving their rooftop and the ground floor.
On the rooftop we're taking advantage of one of the few hotels in downtown DC with a rooftop pool and additional rooftop real estate.
Upgrading the experience at adding very desirable rooftop venue space.
And on the ground floor. In addition to creating a lobby bar, we're adding a combination game room restaurant and event venue.
At Viceroy, Santa Monica, we're converting the indoor restaurant into a lobby bar with food opening it up to the outdoors, adding a highly desirable outdoor bar and substantially improving the out for the outdoor pool and venue experience.
At Mason in rock as part of the conversion device ROI.
We're increasing the amount of venue space.
Making the existing meeting and venue space much more unique and attractive, adding a lounge converting outdoors part bar space to a year round bar and event venue and adding a cafe.
At Shire Manav resort were substantially increasing at improving meeting and venue space through numerous projects, including combining two unattractive and underutilized meeting rooms to create a second major ballroom for the property.
Dramatically, improving expanding the outdoor wedding and event venues and increasing and enhancing the outdoor bar seeding.
Our second Phase project that were master planning now involves adding significant active resort amenities, such as ZIP lines and aerial adventure Park in the forest on the property.
Acts throwing facilities as well as additional experiential indoor and outdoor wedding meeting and event venues.
On a portion of the properties underutilized 300 acres, which have spectacular views of the Santa Cruz Mountains, and the Pacific Ocean.
This is truly incredible real estate and it's just 45 minutes from Silicon Valley.
We're also working on adding treehouses as well as other substantial glamping facilities.
The Paradise point as part of the properties conversion to a Margaritaville Island resort.
We expect to add multiple unique and highly desirable indoor and outdoor wedding meeting and event venues throughout the properties 44 acres, along with an additional an expanded bar restaurant and music venues on the property.
These are just a few examples of our approach to creating value and better utilizing the strength of the very unique and flexible brand unencumbered real estate, we own as a result of wholesale portfolio acquisition.
Not only will these projects allow us to drive significantly higher 80, ours nonroutine revenues and EBITDA.
But there are a key part of creating unique experiences that will make each property much more attractive to group and transient business, both business and leisure customers.
We look forward to announcing the rest of these very exciting and financially attractive projects in the coming quarters.
And providing you with the details of the opportunities to creatively redevelop and reposition these additional hotel properties.
Next I'd like to make a few comments about the progress on our street to strategic disposition plan.
Including the Topaz for which we have a hard money contract and assuming a transacts this quarter.
We will have sold 12 hotels from the acquired portfolio for gross proceeds of just over $1.3 billion at a combined allied cap rate of 5.4% and a combined EBITDA multiple of 15.9 times 2018 operating numbers.
Our numbers also don't add in required capital, even though most of the property sold need need significant capital.
Recall that we acquired the entire company with all corporate and property transaction costs at a 5.9% ano wide cap rate.
So our sales of these less desirable properties.
Has certainly been accretive to value due to higher sales prices than we paid for them.
Our total disposition target for 2009 team has been $600 million summing that topaz Transacts will have achieved $482 million of sales.
The Topaz represents the last hotel, we intend to sell this year.
What remains to be sold this year to reach our $600 million sales target includes income producing pieces of several hotels that were separating through the condominium innovation of the retail restaurant and entertainment and at least in one case the parking real estate.
Separating that from the hotel real estate.
Due to the extended time, it's taken to complete these legal separations, we no longer believe these transactions will close this year, but we do currently expects that its likely there will be under contract by the end of the year with closing next year.
We'll also be looking to sell an additional $300 million to $500 million or properties over the course of next year.
All of these sales taken together, assuming they happen should not only get us to our corporate leverage target, but provide additional proceeds for either further debt reduction calling of preferred shares or repurchasing our stock all depending upon market conditions at the time.
Finally, I want to provide a quick update on our progress on our portfolio wide initiatives before we move to QNX.
We continue to make progress on maximizing the opportunity to re contract many products and services that we purchased within our portfolio.
We've now re contracted for almost $5 million of annual run rate savings within the portfolio and have identified another million dollars of savings that should get finalized in the next quarter or so.
We have another $4 million estimated and identified but with a longer lead time to finalization.
We're on a good pace and continue to believe that the $10 million of targeted annualized savings will be successfully achieved by the end of next year.
And as a reminder, this potential $10 million of annualized savings was not underwritten as part of last year's corporate acquisition and represents an additional opportunity identified following the closing of the transaction.
To wrap up we believe that regardless of the economic environment, we find ourselves and over the next few years.
We have a significant number of organic substantial value creation opportunities within our new combined company that we've identified.
And they fall within our core expertise, having demonstrated a long track record of success executing on these types of value creation.
Opportunities.
So we'd now like to be happy to answer questions that you may have an operator you may proceed with the Q anyway, and and before we do that just one reach out to our favorite team here in Washington than that so let's go nuts.
Thank you will now be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
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Our first question comes from the line of Wes Golladay with RBC capital markets. Please proceed with your question.
Good morning, guys can you give us your view on supply next year relative to this year any markets, peaking this year next year and then maybe your view on city wide for next year as well.
Sure. So so when we look at our markets, which I presume you're.
Asking about because I think the industry's probably still going to run in about a 2% range.
That it's running give or take in 2020 before it begins to decline.
In 2021.
That sort of the same trend is.
Is what we're looking at for our portfolio I think this year our weighted.
Market supply growth.
Right now as we're running about 2.7% so again, it's come down a little bit as.
Projects have been further delayed into next year in 2020 were looking at about 3%.
Again by that by the time 2020 ends we expect that will be slightly below that and then in 2021 in our overall markets.
Again, the weighted average supply growth at that point, we've got at running below 2%. So a nice dropped from 2020, when we look at markets that are improving.
Atlanta Buckhead.
It's down to almost nothing in 2020.
Boston goes up a little bit in 2020.
Chicago comes down significantly from from a little over four to a little over 1%.
DC comes down a little bit down into the mid twos from the mid Threes Hollywood Beverly Hills goes up a little bit to four and a half from too little over two which has come down from our early forecast due to delays.
Pretty much no supply and key west.
We have Manhattan over four.
Next year up from the mid threes.
Nashville.
Believe it or not coming down from 15 to 13 and a half.
Philly.
Up with the delivery of the 700 MW an element sometime next year presumably.
That's a project that's probably 18 months delayed at this point and continues to push out there they're a potential opening date I'm Portland Pops up West where the 600 room Convention hotel across the river.
To a 10% so continuing tough environment from this year, 6% San Diego drops in half from three to one and a half San Francisco from flat to up about one.
Next year, so still still very limited in San Francisco, and then Seattle comes down from the the 11 and a half were currently forecasting for 19 down to a much more reasonable 3% in a market with very strong underlay.
Economics, so that's kind of how the supply growth falls and then when it comes to the convention calendar.
The markets that are up.
Include Chicago DC.
Boston Boston.
Well.
Nashville is flat.
Atlanta be a little worse with Super Bowl, San Diego's, a little better next year as well.
In the in the markets San Francisco as you know be down a little bit, but but still at the second highest ever.
Off of this year's record year.
And and and then Seattle looking to be.
Roughly flat.
Portland flat to slightly better so those would be the the larger markets for us.
Overall.
Fantastic and then so on average I'd say, there you know there better across the country in in the major markets.
As this year was worse.
On average across the country.
Okay, and then maybe.
Yes, it's not going for 2020 to holiday calendar is much better in 2020.
As well for the holidays fall in the days a week and timing.
Okay. Good point.
Looking at the disruption on maybe for public next year, yet a lot of manager transitions brand integrations are still have redevelopment next year as you do this year with the net impact of all the noise is going to be lighter comparable worse.
Yes, I think what what we know right now and keep in mind, we don't have a single budget yet for next year.
But based upon the level of investment.
And disruption that we expect we think it will be roughly similar to this year.
It will be some additional operator and brand transitions next year as well.
And so give or take a couple of million dollars in either direction. I think this year in total were running about eight to 9 million of of renovation.
And operator disruption and I would think it's going to be in the same ballpark give or take a minor amount.
And west in terms of Revpar disruption, that's about 60 basis points or so in 2019 of impact from renovations.
Okay, all right. Thanks, a lot guys.
Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Hi, Thank you.
I Wonder if you ask you you talked about some of the impact of the transitioning to the two new managers, how long does that usually take before.
Before things are kind of right. It on that front any kind of what specifically are the things that dragged down results. When you have a transit some changes to the way that bookings are made or is it on staff changes there maybe just some of the specifics around that.
So it's it's usually a combination of those things so it'd be an impact of business coming through your distribution channels. So.
Typically you'll have a different GDS code as an example, so.
Your your customers are going to have to find you.
And your corporate accounts will need to find ju with.
With with different.
Online input information than what they what they were doing before.
Occasionally there's changes in the executive teams.
And in the systems and so those cars.
Disruptions as well at the property level, sometimes they're less they're much more limited. So as an example, we've had pretty much no negative impact at all.
With the Skamania Lodge in in the Columbia River Gorge, the entire executive teams stayed on the system changes were minimal.
Other than the GDS code and and so.
There is an example of where it was limited Paradise point, when we changed from destination.
Repair to Davidson again, we kept the name.
And so that Didnt change.
And the system changes were relatively minimal so and the team did not change at the property level. So it really depends upon.
Those primary.
Categories, It's your technology and how it impacts your demand and your distribution channels and then.
And then your your executive team leaders.
And how long is usually.
Yes, it varies on how much how many of those things have changed and how substantial but it can be as little as nothing and it can be as long as a year.
Okay, Okay and then.
The other thing I just wanted to ask you mentioned better group bookings at the Chicago Weston.
You mentioned, some weakness coming into this year with some changes on the Marriott system do you feel like that.
Behind you now are you happy with the way that the group bookings through the Marriott system or are going I know, it's a lesser piece of your business overall relative to others.
Thank you called out I wanted to follow follow up on it.
Yes, you know well one it actually is still it's material part of our business because those properties.
The three Westons as an example that to luxury collections the two w.'s their large.
They're large properties and so they do have a material impact.
On our business I would say.
We're we're behind.
Most of the Marriott issues.
And I would say, it's it's probably neutral to beginning to be a tailwind we still have some sales issues in the San Diego cluster and at our West and where.
We've we've fallen behind from a pace perspective that impacted this year and and were behind next year in a market that has increasing group in the market next year.
And our other properties are generally up in the San Diego markets. So we have we have some work to do there and then.
The loyalty changes.
So I don't I don't think were behind those because I don't think where ever going to get back to where we are I think I think our properties because they came out of the Starwood system.
And we're probably one of few choices in markets now fall into a larger system, where theres lots of choices I think we're never going to get that that redemption business back.
And so we've been working.
Very closely with Marriott they put a lot of resources on.
Trying to replace that business with other business and and while we've not replaced at all.
We're making progress and Thats, a and Thats a nice positives so.
Still have worked a deal do we've lost we lost a lot of share in our marriott's.
And and we've we're beginning to gain a little back, but we got a ways to go.
Okay. Thank you appreciate it.
Thank you. Our next question comes from the line of Ari Klein with BMO capital markets. Please proceed with your question.
Thanks from an asset sales standpoint, and 2020, you mentioned the 300 400 million in sales as part of that or are there specific markets you'd look to deemphasize and then also you did raise the assumed cap rate on the portfolio and so given the challenges is there any been any change in buyer appetite and the pricing they are willing to pay.
Yes, so as it relates to pricing the answer is no. We haven't seen any change I think I think the midpoint of our arrangements to tense.
And that's just the way that when we look at each individual hotel and we adjust for renovation impact and operator transitions and.
And.
Hurricanes and other things.
There has been performance impact on 19 numbers and it depends on how it falls by property in terms of what it but it averages out. So in this case, it's averaged out to about a 10 foot point higher on 19 numbers that are a little bit lower.
Then 18 numbers in the aggregate.
I think as it relates to.
Your your other questions about specific markets.
We've sold down all but one property in New York we.
We continue to have a negative view on that and then I think as it relates to additional properties beyond the quote non hotel real estate.
That we're looking to two separate out and sell.
You know there there are other some other markets that.
As evidenced by our sales in DC that we continue to want to deemphasize.
So primarily east or Midwest markets, being deemphasized, and and West coast markets being emphasized.
All right and then you have the Donovan joint joining the unofficial de collection are there any others as part of the 16 hotels, you've identified that could also Jain at platform.
There there are.
And and we think.
Within 24 months, the unofficial see collection is likely to be at.
10 or more hotels.
The existing portfolio. The next one after DC will be the redevelopment of the marker in San Francisco.
We think that renovation.
Should begin late next year.
Probably be complete in in early 2021 and that would also become a member of the unofficially collection.
Outside of that I wouldn't want to identify any specific properties, but.
But.
But but we've identified them internally.
Okay. Thanks.
Thank you next question operator.
Our next question comes from the line Stephen Grambling with Goldman Sachs. Please proceed with your question.
Hi, Thanks could you just elaborate a little bit more on what you're seeing in the transaction market specifically as you think about the mix of buyers the speed of how these transactions are occurring in our general interest.
Broader environment to soften a little bit here.
Yes, I think the.
Abroad characterization for the buyers of the kind of assets that we're selling.
Meaning major major market in many cases unencumbered.
Assets.
Many with with value creation opportunities.
I would say the buyer poll is primarily private equity and high net worth individuals with a few institutions sprinkled in.
A very occasional foreign buyer, particularly if there.
There are brand company.
Or have a partnership with the brand company that might be looking for distribution in the us in their focus would be.
One of the major markets.
Including where we might be selling so that it's folks primarily taking advantage of the very attractive debt markets.
And are looking to place.
No.
Capital from high net worth individuals who look at the alternatives and find hotels to be very attractive from a yield perspective.
And I guess, maybe related follow up to a degree I guess, if if the current environment in terms of.
The softened soft revpar backdrop.
Continues or even deteriorates further does that change how you think about how you to operate the business or even pursue dispositions from here.
Well in terms of the additional sales that we've identified yep I mean, the values will matter in terms of whether we ultimately pull the trigger or not and so if the values at some point do get impacted that might.
Change our decision on some of the potential sales I doubt that that would be the case on.
The non hotel pieces.
I think those markets.
Our probably a little bit more stable.
And.
Hard to believe you can say the retail business is more stable than lodging, but I think the a lot of the bad news is already is already come out and and.
As it relates to capital investment I mean it.
There are there are projects that will be doing that.
If we don't do them theyre going to lose market share their properties that that need to be renovated they're losing share today and not putting the capital and.
Is going to continue to damage their positioning in the market.
There are some other projects.
Some of the ones, we identified and shama not in the second phase.
That our ROI related and and.
Perhaps we could defer those.
I will always be available but to be done in there, they're not necessarily going to have a direct impact on.
The position of the property, which is already being repositioned with the current projects. So so it could change the way we look at that it certainly could change what we do with any excess proceeds that get generated out of sales next year.
And what we what we do with those with those proceeds.
And as it relates to operating the properties I mean.
No.
Until you I think the way we approach. It today is our focus is not on.
It's not on.
I don't know I hate to say cost control you always you're always in.
Appropriate level of process and procedures and fundamentals of making sure you don't make mistakes and over time, our scheduling are things that basically where you waste money on an operating basis, but.
Generally we don't make across the board cuts in this kind of environment, where really we wouldn't do that until we got into a recessionary environment, where the customer understands that they're in an environment, where they may get a little bit less.
For their money than what they used to get.
Or they're going to be paying less and they're going to get less.
In an effort to reduce costs.
Similar to what we did back in in a way to know nine and what we did back in 2001 into where we had arbitrary reductions within the portfolio and we just had to figure out what would have the least impact on the customer but wouldn't have an impact on the long term value their real estate and let's try to save that money in the near term while.
We're in the depth of the recession and then we'll we'll put those things back.
As the economy begins to get better.
Makes sense. Thanks, so much for all the color.
All right. Thanks Steven.
Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird <unk> Company. Please proceed with your question.
Good morning, everyone.
Good morning.
Just kind of on the fundamental front and then also your view of customer preferences have you seen any divergence in performance between your branded independent properties kind of manager transition decide.
Within any maybe widening between renovated and non renovated properties just trying to think about how that might be impacting performance in the wish hotels, you're targeting for sale versus repositioning.
I'm not sure I fully fully comprehend the.
Just in terms of.
I guess, maybe just on the first part the branded versus independent any change in performance or the way you're viewing trends within your portfolio specific to the brand versus independent died.
No no they're performing so early in the environment assets changing.
And then in terms of renovations I know you've talked about getting less lift.
Today or recently versus several years ago post renovation is that still the case or does the focus has to be more on the ROI projects and all the stuff that you listed in your prepared remarks.
Thank as as you know as the environment softens, what happens is the upside stretches out your ability to get too.
The competitive positioning that.
From a revpar perspective that you would anticipate with the capital that Youre investing might move from three years to four years.
As an example, depending upon what those last few years look like it's easier to gain share in a stronger environment and and takes a little longer.
In a in a softer environment so.
From that perspective, I mean, we've we've tried to build that into our underwriting as we look at these projects and and.
There there is so lucrative that whether it's three years or four years or or even five years in some cases.
It doesn't really impact the numbers because most of it it's going to be achieved in the first couple of years.
Got it that helpful. Then just one clarification I think I heard you say 300 of 500 next year. How does this what's changed there versus the 350 to 400 that you kind of hinted at last quarter and where it is the fourq you on identify disposition falling to each of those buckets.
Yes, so the three to five does not include any of the six from this year, whether it closes before the end of the year closes early next year in terms of the.
The non hotel pieces.
That are out on the market.
The next year is a little higher I think we had we had indicated that we were thinking about.
Bringing some additional properties to the market given the pricing in the market.
And and that's what's really driving that increase in the in the upper end of that range.
That's helpful. Thank you.
Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Good morning, Thank you.
John is there any reason to think that urban and top 25 markets can perform closure to the overall industry next year.
There are lots of things that could cause that to happen and in terms of improving.
The trend line and one of those would need to be a change in the.
International inbound travel I think we're going to be down this year.
That's the way the numbers are tracking and trending right now as the dollar strengthened over.
Over the course of the year, if we see a reversal in the dollar and it begins to move back in the other direction.
You do have global travel growth running in the 4% to 5% a year.
Range. So we've been losing significant share so that would be one way bill a set a second would be.
To to get back to a more favorable.
Rhetoric or environment that encourages.
Folks to come here.
And also is.
Follows the processes and procedures that were done prior to this administration, so that getting a visa to come to this to the country for meetings or for travel.
It is also back too.
I don't want to say a normal level, but the level that it was at before.
But before the last couple of years. So so those things would help we're not going to solve the supply issue next year in the urban markets as I said I think it's going to run both for our weighted average, but I think the Smith travel urban category the major cities.
We're still going to run in that 3% range, but that but after that they begin to come down and we should see some benefit.
At that point, the last piece would be to see a meaningful pickup and business travel.
Which the major urban markets generally benefit from and when it softens we generally.
Suffer from so so any of those things could happen, but certainly not we don't see any indication of that just yet.
Yes.
It seems like maybe we have to wait until after the.
Election.
She would have business travel.
Yes, we think about.
Quarter.
Transitioning from a minus 2.2% revpar decline or.
Two zero to two on the positive side, how much of that is driven by really easy comps from last year I heard your comments on group and page being better, but I think you also had some labor issues and.
Integration issues that made for an easy comp.
Am I remembering correctly.
Yes, there were definitely some impacts from the strike.
The strikes that occurred.
In the portfolio.
I would say more of the more of the impact from the strikes has to do with a bottom line than the topline I mean interestingly markets like Boston.
The Copley actually did better last year we.
We actually had some group displaced because of the strike and refill their with transient at higher rates and.
So on a revpar basis, it was better we lost some food and beverage and there and had a much higher operating costs for security and Boston Police and.
And.
And replacement workers.
In terms of.
People, who flow end to two to help the team.
And the rooms every day, but.
I would say the biggest impacts are.
Our that convention calendar bill and at the edges Theres some benefit from.
Particularly EBITDA up for the properties that had had had strikes last year.
One more for me John .
It was announced over the past week or so.
Is going to relaunch the W. brand.
You have some exposure to that brand obviously, what do you think that means June .
And.
Certainly.
Probably more expensive but.
Any thoughts there.
Yes, I mean, I don't we don't really know enough about it bill.
They have not shared a whole lot at this point I think.
I think at W will benefit as a brand from.
What I would describe is growing a need to grow up.
It's it's a it's a luxury brand.
And I think it.
It's 20 years old in some cases in terms of sort of the.
On another vernacular.
Of of the brand and and so I presume it all help at the end of the day Weve.
Recently renovated the WL, a and completely and and and we're just finishing up adding some meeting space that used to be a spa there and we just redid the W. Boston completely so.
As it relates to anything they might be doing physically.
Those are things that would be many many years off at our properties unless they were they were minor, but hopefully they can improve the positioning of the brand.
The vernacular.
Make it a little more sophisticated than it is.
Today, which is more dated.
And and that would improve performance overall for the brand.
Okay.
Appreciate your time thanks.
Thank you. Our next question comes from the line of Jim Sullivan with BTG. Please proceed with your question.
Thank you good morning, guys.
Darren and Jim.
Quick question for you John obviously for many years, you've chosen to overweight the west coast in that serve do well.
And we've talked to you've talked about the supply issues in both Seattle and Portland now for a couple of quarters.
In this quarter three of the markets that underperformed expectations for San Diego Ela in San Francisco and.
I just wonder as you think about that is your view that the reason for that were.
They were all market specific reasons or was there was there something that was generic.
At applied to all three the that might suggest some.
Weakness in demand in California generally.
Yes, they were all local market specific issues.
Jim.
San Diego.
As the convention calendar.
La is supply growth.
But part of it as supply growth downtown.
Versus in West La and San Francisco was completely that convention calendar I think what we've seen on the corporate side is very strong underlying corporate growth.
And I guess, maybe Jim maybe one thing that could be attributed to all the west coast markets is just as the.
The international travel demand and I would say that probably impacts them all different countries impact different cities differently, but but an overall weakness in international inbound would impact all five markets.
One other factor I know earlier in the year, particularly in southern California.
Let me specifically the the weather was a factor we talked about that.
I think back in the after the first quarter.
And when there was persistent rain.
And.
We have a continuation of events, whether its fires or.
Other issues that have seemingly impact the stayed on a regular basis have you seen any any increase in cancellation or at all that one might attribute to.
Concerns about factors like that.
No I mean, it back back in the spring.
I, Wouldnt say cancellations, but but week bookings when the weather forecast where for rain in San Diego or L.A. or snow in Portland and Seattle.
But in terms of to last quarter.
Into October .
Related to any fear of fires or any anything else I'd say no. We haven't heard anything from our properties related to.
Either cancellations or frankly week bookings.
Okay very good thanks, Sean.
Thanks, Jim.
Thank you. Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Hey, guys good morning.
All right.
Hey, guys just looking at.
Hi, kind of peaking over the next couple of quarters give or take some delays look good demand trends in the hesitant on the business transient side or corporate confidence I mean.
Okay.
Lodging recession right now are we heading there.
I guess high level views or whatever would be great.
Well it depends on what's your definition of of a lodging recession as so.
Interestingly I mean, Ray mentioned 15 of our 20 markets, where the actual markets not our properties, but the markets were negative in the third quarter.
That's definitely up from prior from prior quarters.
And if you look at 10 of the last 15 weeks, but industry have been negative.
If you want to describe that as a many recession or a recession I mean, you could describe it that way.
Well I don't think we're in a macro recession.
At this point, but we're definitely in a softer economic environment than we were.
A year ago, and there probably are some economists out there who might say.
We're in recession as a on a macro basis or close to it but the those.
I'm not sure there is theres much consensus that that's the case at this point so I guess it depends upon how you describe it.
And we've gone through these sort of many recessions back in 13 and 16.
When business, when corporate profit growth slowed or or flattened out and and and we solve that come through and and weakness in demand than that.
I would pop back up as as the economy got better so.
I think it's it's purely definition all.
And.
It's certainly not a recession all right now and I wouldn't think on the on the macro side.
I would concur on that I, just I know I don't think we've had a street this long.
Of negative.
Revpar posting but.
So.
Appreciate that.
Other one for me is you talked about your expanded.
ROI initiative.
You know three to four is at three to four year out.
Timeline to stabilize treatment at 10, 10% higher ROI Im just wondering a couple of things one.
Are you baking in this current low to potentially maybe going negative revpar environment in those in those.
Underwriting decision.
10% ROI is that assuming you hit that in year, three or four or is that like the IR you're targeting.
And then the last part of that will be.
Dr down 3.5% today I, just wonder anything to has anything to do with the fact that you're you're you're.
Going full steam ahead into the ROI projects at a time when maybe the market I think thats not a good idea or any commentary on that would be helpful as well.
Sure so.
On the last on the last point, we have that I've been doing this for 21 years now and the faintest idea why the stock goes up or down in any given day and.
The the project profile that we've laid out as is is no different today than it was last quarter are there for the quarter before.
And I think we've been pretty consistent in saying.
We'd be proceeding with those regardless of the economic environment for the most part so.
I wouldn't have any idea why the why the market would be down we thought we'd be up 5.5% today.
Based upon what we reported because that seems to be the than normal response. The next day from from releasing your earnings.
In the lodging space.
And sorry, what was the first.
What was the first question, yes. The first thing was the you talk about your eyes are your ROI, yes, so that 10% is stabilized EBITDA yield it's not an IR I want to be clear about that the IR ours would be much higher.
That then at 10. So these are stabilized EBITDA yields think about it is.
A 10 as.
10 times, so if we traded 15 times, there's a value creation of 50% of the investment and yes, we don't typically get there until three to four years after the completion and.
And it's providing.
Both nominal and relative.
Performance yield so you know in a down environment are are we going to get a tan and if we stay down.
We wouldn't get a 10 nominally but we're going to get a 10 on a relative basis by significant outperformance. So thats. The way we have to look at it are we getting a good return on that capital.
What would have been otherwise had we not invested.
No Thats fair I guess, the reason I am asking is even though you're seeing relative you'd outperform if you invest money and the market is down 10, and you're only down five I mean, if you run that out as a starting point.
Going to be harder to get to a a sort of desired.
Return on that capital longer terms that makes sense.
Yes, I don't I'm not sure that's that's accurate because if we're increasing food and beverage revenues because we have more venues.
I mean again that a lot of some of this revenue has absolutely nothing to do with Revpar, yes. It has to do with with the overall demand the demand environment and the recessionary period, but if we if we outperform if we drive 80, our growth and therefore revenue growth whether its nominally era.
Relatively compared to where we would otherwise be we're going to get that return on that capital.
And ultimately when the market comes back and we're at that higher.
Penetration level and competitive level, it's going to come through in driving very attractive returns nominally at that point on those dollars.
Yeah. Good point, yes, I appreciate the color. Thanks.
Sure.
Thank you. Our next question comes from the line of Gregory Miller with Suntrust Robinson Humphrey. Please proceed with your question.
Thanks, Good morning.
Since the last earnings call. We saw the merger announcement of two very large third party management companies, Cambridge, and ER and Interstate.
Do you view this consolidation trend as a positive or negative given tilbrook has many independent management companies as operators.
And so good question.
Well.
We've been seeing it for the past few years right, but both at all levels, we've seen it at the brand level.
We've seen it out the operator level with not just that transaction, but.
But destination selling themselves to two high it with kimpton selling themselves to age G.
There are a number of other.
Independent operators and franchise operators that have consolidated as well it comes with pluses and minuses frankly I think.
The the smaller companies are going to continue to have a harder time competing because of the cost of technology.
And the channels and and where the business comes from.
And where it's going to come from in the future.
And and and so I think by combining there there are clearly business model benefits.
On their side, but for that we prefer not to see the consolidation on the operator side, we like having lots of different operators, we like a lot of the smaller operators the people who run those businesses tend to be very actively involved and very experienced and being in many cases very creative.
But one of the things that were doing is part of the Genesis of where the rationale behind our own proprietary brands.
Is that even if the operators consolidate.
If we don't have to change the name of the property or the brand.
And we're just changing or combining an operator at the at the lower level. Then we don't really we won't really see much of an impact.
On our performance so from a defensive perspective, theres some benefits too.
Having our own brand or brands at the end of the day, where we control whether they're ultimately as consolidation.
At the property level within our portfolio.
Thanks, John that's helping me.
Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, maybe follow but my question.
Yeah.
Span it'd be V collection quite a bit you call an official.
Why don't make an official is there a benefit from an official bran and.
As a group sales benefit or branded benefit and commentary that would be great.
Sure so.
Now.
It's unofficial because it truly is unofficial at this point, meaning it doesn't really mean anything yet did.
It it's been created or we're creating it out of a bunch of individual properties that we named with a Z, but in many cases have very similar.
So when a an attitude and personalities, but I think we've said before the quote unofficial see collection brand itself doesn't drive anything right.
Right now because we haven't connected anything if you mean.
Why don't we move forward and connected and and try to get some benefit out of them all being part of that on officials. The collection. The answer would be yes that is in fact, what we're doing well we've commenced this year and what will we would be doing when we we add a quote.
Web site for the on officials the collection, while we won't do is at our own GDS will still book through the existing channels that are properties book through but if we can create.
Connection in the eyes of the consumers even in a market like San Francisco or DC.
Or Portland.
Where there will be crossover of of customer from one to the other.
We will get benefit out of the brand.
Brand ultimately, whether we call it official or unofficial.
At the end of the day, so we are going to be proceeding with trying to connect the properties.
In order to to create value out of having seven.
Six or seven or eight or ultimately 10 in the next 24 months, but but today it doesn't mean anything yet.
Got it thanks, and one more just.
The various I guess public safety and quality of life issues at San Francisco seem to be getting a bit lot more press.
Presents talked about and whatnot.
Those I've had an impact on transient demand in the market and if so what can you at the property owner in the market knew about it.
Yes, so I do think it is.
It is getting more press I think.
It's a good and bad thing in the short term, it's a bad thing that it's getting more press.
In the long term, it's a good thing because it's important for the city and the community in San Francisco to understand the impact on their business there cities there they're neighborhoods and.
And their employment at the end of the day and so.
Ultimately there there there are lots of cities who've done a very good job with addressing the needs of of the homeless the needs of people, who have mental health issues and I think the good thing about the mayor and and increasingly the council in San Francisco is is a rare.
Ignition.
That theres a lot that can be done to address these issues to improve the quality of the environment for the people, who live there who work, there and and who come to visit and.
I think we view ourselves as a meaningful part of the community the business community. We've been there for a long time.
We'd like to be there for a long time, we're working closely not only through the hotel association, but actually on our own.
Meeting with.
Members of the government.
Providing.
Solutions that we've seen best practices that have worked in other cities connecting them.
With these organizations and other cities that they might not be familiar with and so we're taking a very active role in in trying to help.
Both from a time perspective from an idea perspective and from a financial perspective.
Got it and just a follow up have you heard of any groups canceling are moving conventions based on the based on this issue.
Yes, there have been up there have been a couple at least Anthony that have have written letters to the authority.
Copied the city one of those I think was the auto dealer Association in 2020 see the 2021 or 2023 that I don't know if they cancelled or they just they didnt they didnt repeat.
And I think there has been one other.
Convention I think a medical convention that made a decision to to go elsewhere and and was very clear about.
The rationale.
Okay. Thank you.
Right. Thanks very much. Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr., Jon Bortz for any closing remarks.
So just thanks for participating one reminder.
Wells Fargo, and Raymond James along with Pebblebrook will be holding a la hotel tore.
The day before Knavery begins on November 11th and if you're not if you havent signed up for that but would like to please reach out to us and.
Or wells Fargo, or Raymond James and and we'd be happy to add you to the to the tour.
Otherwise, we look forward to.
Giving you an update on the years performance in February of next year, and we'll see you at any rate in Los Angeles next month. Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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