Q3 2019 Earnings Call
Greetings and welcome to.
Apple hospitality <unk> third quarter 2019 earnings call.
This time, all participants listen only mode. A question and answers that she will follow the presentation. If anyone should require operator assistance. During the conference. Please press star Zero and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Kelly Clark Vice President Investor Relations. Thank you.
You may begin.
Thank you and good morning, we welcome you to Apple hospitality retail third quarter 2019 earnings call on this if they stay in November 2019.
Today's call will be based on the third quarter 2019 earnings release, and Form 10-Q , which were distributed and filed yesterday afternoon.
A reminder, today's call will contain forward looking statements as defined by federal securities laws, including statements regarding future operating results.
These statements involve known and unknown risks and other factors, which may cause actual results performance or achievements that apple hospitality you'd be materially different from future results performance or achievements expressed or implied by such forward looking statement.
Participants should carefully review, our financial statements and the notes there too as well that's the risk factors described an apple hospitality in 2018 Form 10-K , and other filings with the FCC any forward looking statement that Apple hospitality makes it speaks only as of today and the company undertakes no obligation.
To publicly update or revise any forward looking statements, except as required by law.
In addition, certain non-GAAP measures of performance such as EBITDA EBITDA Ari adjusted EBITDA Ari adjusted Hotel EBITDA El Paso and modified after that so well be discussed during this call.
Encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings release and other filings with the FCC.
For a copy of the earnings release or additional information about the company. Please visit Apple hospitality, we dot com.
This morning, just ignite our Chief Executive Officer, Krissy, Gathright, our Chief operating officer, and Rachel Rothman, Our Chief Financial Officer will provide an overview of our results for the third quarter 2019, as well as an outlook for the sector and for the company.
Following the overview, we will open the call for Q and a at this time. It is my pleasure to turn the call over to our CEO just a night.
Thank you Kelly good morning, and thank you for joining us today.
During the third quarter or this year performance across our portfolio of hotels, which generally in line with our expectations.
Certainly impacted by favorable calendar shifts and solid transient demand.
We're pleased to report that our diversified portfolio of high quality rooms focus hotels outperformed the industry overall as well, it's our chain scales during the quarter based on star data.
For our portfolio comparable hotels, revpar increased by 1.1% for the quarter and 0.4% year to date comparable hotels 80, our increased 5.2% for the quarter and 0.6% year to date and occupancy improved by 70 basis points for the quarter and declined by 20 basis points here today.
Yes.
We remain diligently focused on maximizing profitability and are pleased to report a comparable hotels adjusted hotel EBITDA margin of approximately 38% for the quarter and here to date, despite ongoing cost and supply pressures.
Adjusted EBITDA, our he was down 5.7% for the quarter and 3.1% year to date due primarily to corporate incentive plan outperformance total adjusted hotel EBITDA was down approximately 1% for the quarter and year to date.
As we highlighted in our second quarter call, we anticipate a decline in revpar during the fourth quarter as compared to the same period in 2018, primarily as a result of more challenging year over year comparisons and the potential for some softening in demand tied to macroeconomic and geopolitical factors.
We are tightening the ranges of our full year 2019, revpar guidance slightly lower in the mid point.
In addition, we are reducing the midpoint of the company's guidance for net income and adjusted EBITDAR easy to match topline guidance to reflect higher anticipated general and administrative expenses associated with the outperformance of the company's relative shareholder return metrics, which are components of the company's incentive plans.
At the end of the third quarter, approximately 65% of our properties had one or more upper mid scale upscale or upper upscale new construction projects underway within a five mile radius, which represents a decrease of 340 basis points from what we reported at the ended the second quarter.
Although new supply presents challenges in some of our markets are consistent reinvestment the strength of our brands our locations within markets.
And the quality of our on site management teams position us to remain competitive over the long term.
With the intent to provide our investors with attractive dividends and appreciation the value of their underlying investment over time, we developed a strategy of hotel ownership to mitigate volatility and provide consistency and operations.
Over our 20 year history in the lodging industry. The operate companies have own more than 400 hotels and our team has underwritten hundreds more today Apple hospitality owns 235 rooms focused hotels that are aligned with industry, leading brands and located across 34 states and 87 markets.
Our broad diversification reduces volatility and provides the portfolio exposure to a wide variety of industries and demand generators.
Our highest EBITDA producing market Los Angeles.
It's under 7% our total comparable hotels adjusted hotel EBITDA more than 50% of our EBITDA comes from high density suburban assets just over 25% from urban assets.
And less than 15% from the top U.S. global gateway markets, which overlap both categories.
From a guest standpoint, the value proposition for our hotels is strong.
Typically offer loyalty members free Wi Fi free are reasonably priced breakfast free or low cost parking loyalty points and access to fitness facilities and other amenities without incremental resort destination or amenity fees.
Well this value proposition is consistently recognized by our guess it becomes increasingly relevant during periods, where business and leisure travelers are focused on expense control.
With unemployment low an average wages, increasing the propensity to travel is high and are well located relatively young portfolio of branded rooms focus hotels has broad appeal.
We place a tremendous amount of focus on acquisitions dispositions and capital Reinvestments and continue to pursue transactions that will enhance the market concentration and overall performance of our portfolio all of which play a key role in driving shareholder value.
As highlighted by the nine hotels, we sold earlier this year current market dynamics make potential sales attractive to US. We are pleased to report that we have three additional hotels under contract for sale and we continue to explore additional disposition opportunities both through broker transactions and a response to reverse inquiries.
Through opportunities like these we were able to strategically reduce our concentration in certain markets optimize our capex spend and improve the out for all quality and relevance of our portfolio.
We were purposeful as we assembled and structured our portfolio, so that we could maximize flexibility and value overtime.
Of intentionally avoided encumbrances, whether long term management contracts land leases or cross collateralized financing, which might limit our ability to dispose of individual properties or negatively impact valuation on sale.
Over 80% of our management contracts are readily terminable on sale and only 6% of our properties are encumbered with land leases the size of our assets and alignment with industry, leading brands make some attractive to a wide range of potential investors, including large private equity groups regional owner operators and even small local and.
Bastards.
These characteristics enable us to be both flexible and opportunistic and pursuing transactions two key determinants of long term value creation.
In October we completed the acquisition of an independent boutique hotel in downtown Richmond for approximately $7 million.
Our intention that though tell were will remain independent and we are currently developing plans for its full renovation and repositioning.
During the first quarter of 2020, we plan to convert our 208 room Renaissance Hotel in Midtown New York to an independent hotel.
Well, our intent with the Richmond Hotel is to use it as a test property for new technologies services amenities and customer acquisition methodology is our conversion at the Renaissance in New York to an independent will allow us greater flexibility to manage our capital reinvestment and operating model to mitigate losses on an asset that has been.
Particularly challenging for us.
This is our only asset in the New York market are only Union hotel and one of only three remaining full service hotels in our portfolio.
We will work with the existing management team to limit disruption during the transition. However, given the hotels current brand contribution and market forecast for next year, we expected to be challenged as the team works to establish a new customer base.
We continue to have six hotels under contract for acquisition that are currently under development for a total expected purchase price of $209 million.
From a timing perspective, the projects remain on track for expected completion, and 2020 and 2021.
Our balance sheet allows us to be opportunistic and our approach to capital allocation with just 3.1 times net debt to EBITDA no significant maturities over the next three years and a relatively young portfolio. We are in a position to be both patients and flexible as we work to capitalize on dislocations in the market from time to time.
Over the 12 months ending in September we have repurchased over $100 million in our shares paid over $270 million and total dividends and optimize our portfolio through both asset sales and acquisitions.
As business conditions and pricing warrant, we will continue to be both responsible and nimble and our approach to capital allocation.
With expectations. The GDP growth will continue to slow as we entered 2020, the added volatility and uncertainty that typically a company election years and ongoing property level cost and supply pressures, we're cautious and our expectations for the coming year. However, we're confident in our ability to drive strong results during periods.
Of growth as well as to outperform during periods of economic uncertainty.
Start date out across the last two cycles clearly shows the chain affiliated hotels outperformed time so contraction.
And with Apple hospitality strategy of combining premier brands and locations with above average demand drivers.
Together with best in Class third party managers, and our 20 years of asset management and business analytics experience. We believe we will continue to drive above peer average results for our company.
It's now my pleasure to turn the call over to Chrissie to give more detail on operations.
Thank you Justin.
The benefit of favorable calendar shifts and continued storm recovery business, we expected our comparable hotel revpar growth for the third quarter to be the highest of a year.
Well, we did experience a modest negative impact from hurricane Dorian in September it was more than offset by recovery business from 2018 natural disasters.
Yes, the made the thing that lift from recovery business was approximately 40 basis points in the quarter.
As communicated previously we anticipate that the fourth quarter will be more challenging with tougher comparison related to non repeat business from the Boston area gas explosion.
And decrease disaster recovery business.
Our estimate of the year over year impact from the reduced business. In these markets is approximately 150 basis points in the fourth quarter.
In October our comparable hotel revpar declined around 2%.
Consistent with industry trends markets outside the top 25 markets are outperforming benefiting from more favorable supply demand dynamics in the third quarter Revpar growth for our hotels in the top 25 markets representing about half of our EBITDA was essentially flat, while revpar growth for non top 20.
Five markets was approximately 2%.
We grew revpar in almost 60% of our market.
Our more impactful top performing markets included Boise, Dallas, Denver, Norfolk, Virginia Beach, Phoenix, Richmond, Rogers in Washington D.C.
I've of our top 20, EBITDA contribution markets experienced revpar declines in the quarter, including Chicago, Nashville, Oklahoma City, San Diego and Seattle, primarily as a result of supply outpacing demand.
We are excited to share than in October we started the extensive renovation of our full service Mary out in Richmond, Virginia.
The lobby area and existing food and beverage Atlas will be transformed to provide expanded enhanced dining in gathering option.
In addition to a full renovation of existing rooms inventory three new guest frames will be added bringing the total number of rooms to 413.
The rooms portion the renovation is expected to be completed by the end of the first quarter 2020 with the remainder scheduled to be completed in the second quarter of 2020.
After a slower group production year in 2019 at a Richmond Marriott Group room nights on the books for the full year 2020 are pacing up double digits compared to this time last year.
Well the headwind from ongoing renovations in the first quarter, followed by a tailwind in the fourth quarter.
We anticipate displacing revenues of almost $1 million in the fourth quarter 2019 was slightly more than half of those revenues attributable to rooms, and the remainder being food and beverage.
Portion displacement rooms will be absorbed by other hotels and the Richmond market.
We are pleased with our portfolio market share growth.
56% of our hotels, gaining share during the quarter, especially with our Marriott branded hotels, showing nice improvement over the prior year when the loyalty programs were combined.
As for segmentation group and transient revenues increased around 1% during the quarter.
Aided by the calendar shifts and our strategic focus on increasing based business and supply impacted markets or corporate negotiated business mix continued to increase.
Mix was flat representing an improvement from the year to date trend of a modest decline.
Consistent with industry trends weekday revpar growth outperformed weekend revpar growth.
Turning to profitability continued solid cost control on the part of our operators assisted by our asset management team helped us to produce a strong comparable hotel EBITDA margin of 38% during the quarter.
Inline with our guidance expectations and the full year trend same store total payroll costs increased just under 4% per occupied room.
Our on site Labor management systems, which we began implementing two years ago continue to produce positive result, enabling our operators to offer competitive wages increased productivity reduce unnecessary overtime and decreased costly turnover expenses.
At the same time, we're working with our operators to fill open positions quickly and just strategically invest in talent, especially in key leadership positions.
Over the long term this is proven to be a winning strategy for driving increases in guest satisfaction market share and ultimately profitability.
Outside of payroll costs, our same store controllable operating expenses increased less than one per cent per occupied room.
Also consistent with the year to date trend.
Notably our focus sustainability efforts are resulting in lower utility cost.
I revenue strategy and business intelligence teams are continuously enhancing our performance analytics to help our asset management team and our operators focused on the areas of greatest impact.
We are well positioned to implement winning revenue and profit strategies in dynamic market conditions.
I'll now turn the call over to Rachel to provide additional detail on our financial results.
Thank you Chrissie and good morning, everyone as Justin mentioned, we're narrowing our full year Revpar comparable hotel adjusted hotel EBITDA margin percent, an adjusted EBITDA outlook.
We now expect our full year 2019 comparable revpar to be in a range of positive 25 basis points to negative 50 basis point.
Just below flat for the year at the midpoint.
The midpoint of our previous Revpar guidance calls for flat revpar year over year.
Correspondingly, we're reducing our comparable hotel adjusted EBITDA margin percentage by 10 basis points at the high end.
Five basis point reduction at the midpoint.
You're lowering our full year 2019, adjusted EBITDA Ari by $3 million at the midpoint and narrowing the full year range to 425 million to $435 million.
Our prior outlook calls for 425 million to $441 million.
You're reducing the midpoint of the company's guidance for net income in adjusted Ari EBITDA Ari to match topline guidance and to reflect higher anticipated general and administrative expenses associated with outperformance of the company's relative shareholder return metric.
Sure components of the company's incentive plan.
As we've highlighted in the past a core underpinning of our board's approach to executive compensation is unwavering commitment to the alignment between the goals of our shareholders and our management team.
A full 50% of the executive teams incentive based compensation is tied to absolute and relative total shareholder return.
Year to date, our shares have outperformed our peers on a relative basis.
Assuming this outperformance holds and combined with the recent leadership realignment within our organization, we anticipate our 2019 Gionee, we'll continue to outpace our prior year run rate.
As we have highlighted in the past with our fishing operating platform. Our total expected G and H is roughly 70 basis points, it enterprise value and 2.7% of revenue.
Putting both metrics at the low end of our peers.
Our team is continually evaluating opportunities to enhance the competitive positioning of our properties and drive incremental return on our investment.
Your consistent reinvestment in our hotels, we maintain competitive positioning within our markets and helped mitigate the impact of competing new supply.
Year to date through September the company reinvested approximately $47 million in our hotel.
We plan to spend an additional $30 million to $40 million during the remainder of 2019, which includes various scheduled renovation projects at approximately 20 property.
Including as Christie mentioned, the first phase of the renovation at our full service Mariano enrichment.
Through September of this year, we've returned over $200 million to shareholders in the form of dividends and as of last Friday's closing price or dividend represented 7.3% yield.
He ended the third quarter, we had approximately $1.3 billion of total outstanding indebtedness with a current combined weighted average interest rate of approximately 3.6% for the remainder of 2019.
Excluding unamortized debt issuance costs and fair value adjustment.
Total outstanding indebtedness is comprised of approximately $458 million in property level debt secured by 29 hotels and $887 million outstanding on our unsecured credit facility.
Undrawn capacity on our unsecured credit facilities at September Thirtyth, 2019 was approximately $274 million.
Our total debt to total capitalization at some Tempur Thirtyth 2019.
It was approximately 27%, which provides us the financial flexibility to fund capital requirements and pursue strategic opportunities in the marketplace.
Weighted average debt maturities are five years and the weighted average maturity of effectively fixed rate debt is four years at a weighted average interest rate of 3.7%.
We believe we continue to operate effectively against our strategy and that over the long term, we are well positioned to meaningfully increase shareholder value.
Thank you for joining us this morning, and we will now open the call for questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad confirmation tele indicate your line is in the question. How do you mean press star to to remove your question from the Q.
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Our first question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning, everyone.
Good morning Attorney.
Morning stuff just like you mentioned that you were cautious about next year could you maybe comment on some of the guidance that's been put out there by Oh, you choose major brands Hilton and Marriott Hilton that zero in on 1% and Mariana zero to two are those.
Numbers reasonable for the industry and how do you think you need to form relative to those guidance targets.
I appreciate the question, it's early for us to give guidance specific to our company we.
Just got I've seen process and are in a you know in continuous conversations with our various management companies speaking to the dynamics of their individual markets. You know, helping them out have a tremendous amount of data I think I've been tone.
In every leases is a perfect inconsistent with our sense for how things might play out next year, but but I think it's important to note that now is we look you know going forward and what I tried to highlight in my remarks was we're getting somewhat mixed signals as we look at the economy there certainly.
Things that are going incredibly well and there are other things that are a you know going last well I'm and as we look across our portfolio.
As you highlighted the we have a number of markets, where we continue to see meaningful growth and then we have other markets, where despite stable demand we've seen some a drop in performance because of increases in new supply. So I think what you'll find as we go into the year. This next year is is.
Something very similar to what we saw this last year, a with kind of national numbers be generally in line with with what the brands are saying right now, but individual markets performing denied a broader range around those national numbers.
Got it is there any reason inspect the trend to be non top 25 markets are outperforming should that change at all and next year or do you expect that to continue.
You know it will be interesting I think absent macro changes that that's a trend that seems to have traction you know I think we feel a significant recent for the outperformance in markets outside of top 25 is is the impact of.
Trade Wars thing and I'm, a strong dollar on foreign travel, which is particularly impacted gateway markets. I'm, you know that that could clear up which would I just the balance you know and because of the diversity of our portfolio, we benefit in that case as well I think on a relative basis, we've outperformed.
Because of our exposure outside of gateway markets, but it's important to remember that we do have exposure to those markets as well and to the extent they perform well I'm not benefits our portfolio is and supply growth in the top 25 markets is projected to still be elevated relative to markets outside of the top 25 next year as well.
Got it thanks, and the supplied with mattress you talk about every quarter that the decelerated pretty meaningfully. This this quarter, what drove that change or that reduction and competitive supply pressure.
Yeah, Hey, we've highlighted in the past several calls that individual construction projects were taking longer to be delivered.
You know what appears to have happened over the past quarter as we saw delivery of a number of projects that had been and the development pipeline for some period of time and those projects Werent replaced at the same pace that they happen earlier, so we see that as a positive indicator I remember we've been reporting that statistic for some pay.
Over time, and there has been some volatility in the number I'm it hasn't moved up and down but we've highlighted a number of calls now that we continue to see construction costs increasing.
And with a number of the markets I'm beginning to soften in terms of you know.
Okay.
They struggled with an ability to keep up with it the supply that's already in the pipeline you know, we see new construction starts I'm beginning to slow in the near future.
Thank you.
Thank you. Thank you.
Our next question is from Austin, Wurschmidt with Keybanc capital markets. Please proceed.
Hi, Good morning, everybody just Uh huh.
Tagging on to Anthony supply question, there I guess I'm curious if you have any sense what percent of your hotels are exposed to recently completed projects that are that are still in lease up versus maybe a year ago because it certainly does seem that the the projects under construction or at the lower.
[noise] level since I think the fourth quarter, you've ordered of last year.
So to the extent that the the pipeline is decreasing as you said it seems like we should see that you know moderate overtime.
Well I don't I don't have an exact percentage for you, but what I can tell you is that well first of all on the in the individual markets. When the supply Ah you have comes into the market depending on obviously the demand in the market the supply.
You Yeah in some cases it takes the market you know six months to absorb that supply in some cases it might take that market two years jumpstart that supply, but what we have seen as leaves you have moves through the course the year is that slight favorability in terms of the gap between the supply that has a incur.
Recent supply and increase in demand. So Oh, you overall, we've seen a little bit more positivity in terms of the absorption and you know as we look out at least for that you you know the near future. It seems to be fairly consistent in terms of that.
Great. Thanks appreciate the thoughts there and then you guys have lined up 40 million of proceeds are so with the three dispositions you highlighted that are under contract seemingly that's going to be used to prefund over 200 million an acquisition pipeline you've got so I guess <unk> can you should we continue to assume you know additional.
Dispositions to fund the remaining honored and 70 million or so and what do you really view is best execution today, you know for portfolio deals or or one off.
I'm, so I'll start with that the last question first we continue to see a stronger free individual properties on them for larger portfolios in terms of use of proceeds remember again that the pipeline that we have currently under contract will be delivered over the next two years and so you know the specific funding source will depend.
Someone on market conditions, as we round out 2020 and go into 2021 near term use of proceeds from this particular sale are likely to be to fund assets that we currently have under contract, but we are continuing to participate in the market I'm looking at.
Both sale transactions and underwriting potential acquisitions, and I think in today's environment, we see the potential to do both a with a balance more likely to be for us to be net sellers given the strength of demand for assets I like the assets that we have.
But yeah with us be mindful of I've been need to maintain sufficient cash flow to oh sustained a dividend payout that's attractive to our shareholders.
So it sounds like based on that response that that share buybacks in your mind or or less attractive than maybe three to six months ago.
That proceeds are more likely to be you know geared towards funding that pipeline or potential new acquisition.
That's something that we monitor and we've seen increased volatility in share prices not only for our company, but our cross that the hospitality space.
We did buy some shares during the quarter or we continue to have a program in place and we'll be opportunistic in person there our shares I've highlighted in past calls and our past conversations that as we look at potential acquisitions, we will look and compare them from a relative on a relative basis to purchase of our share.
Ours and look to deploy capital, where we feel we can generate a highest returns for investors.
Alright, thanks, everyone. Thank you.
Our next question is from Brian Mayor with B. Riley FBR. Please proceed.
Yes, good morning, everyone. So a little bit more on the acquisition thoughts. It seems like you guys had been more focused on the new builds and that's fine but is it really a function of the fact that you're just not seeing anything in the existing supply that you're willing to pay for can you elaborate on that a little bit.
Yeah sure I, you know Weve highlighted in the past couple of calls pricing for the types of assets that we would be interested in buying continues to be elevated and our reason for continuing to purchase I'm going to sign up new development deals is is the pricing that we have been able to get on.
Those particular assets is meaningfully better you know I've highlighted in past calls comp trades in markets, where we had recently acquired assets and that continues to be the cases, we look at assets that trade.
And in Denver for example, relative to pricing that we have a for the asset that we currently have under contract or or even in Cape Canaveral or are some of the other markets. You know, we're we're signing up new deals.
At a meaningful discount to comparable trades on older assets in the same market and we see that as being long term beneficial for our portfolio you know worry. Additionally advantage as we pursue those assets in that were active participants.
In the design of those products and have an ability to I just as designed to ensure that they will be competitive and have a competitive advantage I in the marketplace, whether its you know.
Then the layout of the rooms and configuration or that the rooms by room type or the amenities that the hotel offers you know which as were building hotels include things like significantly larger exercise facilities and in some cases rooftop bars and things that sorry, we feel very good about.
With that particular type of investment that said, we continue to underwrite I deals that are consistent with our investment a strategy and you know they exist the possibility that that we find a deal that we find equally attractive based on our underwrite.
And but today there continues to be a incredible demand for high quality select service assets and as I highlighted in my remarks that demand comes from a broad range of potential buyers and you know I think that's why you've seen in our portfolio and and others.
A propensity to explore dispositions as well as a kind of these select acquisitions the market for a long period of time this cycle was relatively quiet.
And while it's not as deep as it might have been a you know as we approach peak of last cycle significantly more often than it has been.
Oh, sorry, yes [noise].
Right. So when we think of companies like let's say Ashford Trust to also has a bunch of select service hotels, and they've kind of shifted gears towards going after a full service hotels in maybe second tier cities, where they're finding you know pricing advantages to acquire although their balance sheet as much more stretched than you.
Ours is that anything that management at Apple, where the board has or would considered as a vehicle to grow other than what you're doing currently.
I you know we've been consistent in saying that the we underwrite have both individual assets and larger portfolios I am I highlighted in my remarks that as we assemble our portfolio. There's certain criteria that are important to us I'm. One of those is limiting the number of encumbrances, whether it'd be.
Cross collateralized debt or long term management contracts in our portfolio in order to maximize flexibility.
As we manage the portfolio over time, you know those are things that we consider as we look at larger portfolios and take into consideration or pricing as for players.
Okay, and then shifting gears to the Renaissance in New York do you guys have like a name and kind of product types that independent hotel upper upscale or upscale where do you want a position it and is there any way to get those labor costs down in that market.
You know the name we will announce in the not too distant future, but in terms of operating models, you know away I think our expectations there will be roughly consistent with with where it has operated historically recognizing that you know one of the reasons for us transitioning to.
To an independent away from the brand is to gain additional flexibility as we look at our operating model you know I I don't know from in response to the second part of your question. A you know related to labor, reducing labor cost is a challenge for us a across the entire you know.
State. So you know, while they're nuances particular to New York and the fact that this is a union hotels you know in some ways, it's not any more difficult to manage vapor there that it is and in some of our other markets, where we see a incredibly low unemployment.
And are competing heavily with new hotel supply. So you know I think we are fortunate to have an operator that hotel that has a tremendous amount of experience in the New York market and that benefits us I think both as we look at driving top line outside of.
Brand channels, but it but it also benefits us.
As we look at bottom line Highgate has a tremendous amount of experience interacting with labor in that particular market and to date has been very effective in helping to ensure that we have exceptional employees that though itself and that we manage labor effectively there right and then just last for me you know you commented.
You know how good employment is in the country, which we all know and wages heading up you know what have you why do you think it is not just for you guys, but for the industry and when we're talking about the industry running at near record occupancy is that it seems like everybody is having a problem driving rate higher is it simply the new supply.
Or something else going on.
And I'm not going to answer that there are a lot of different factors that go into that 111 of the strategies that weve implemented and we started implementing that you know last year as we looked at Oh, we were consistently implementing strategies to look at these different.
Supply demand dynamics in individual markets and adjusting Mexico strategy, but as we started to see transients, a slow down a little bit more in order to in order to shift the next to protect and make sure that we had decent base occupancy we have worked.
With our occupancy with our operators to layer on additional three and corporate base and that allows us to yeah shrink the hotel and then he has to be less reliant on a additional transient pickup which may or may not happen, depending on what's going on the market and then with that the and then if we were able to then we're out.
Allow to and then we're able to drive higher rates on the remaining inventory, but in doing so strategically and individual market you in some cases, where sacrifice sacrificing a bit afraid to build that occupancy whether it be on that group for the negotiated Todd so.
You know on one side is is a strategic and and initiative.
Other ito areas that you as our brands have continued to grow our loyalty occupancy as their programs and have continued gets stronger or what the Marriott Starwood integration, we are seeing a pick up and although it's not hugely material we are seeing increase.
And redemption business and you know in some cases redemption business comes in when hotels are full and you get you a higher rate higher reimbursement in some cases that redemptions come in when the hotels artful and its incremental so you're building that incremental occupancy, but when the business comes in it you know when it's not a peak night than you're getting a lot.
Lower rate. So some of its also you shift index there.
You know as well as if you look at the same.
You know overall industry stats I mentioned earlier that a week day has been weekday has been stronger than a weekend and I do you look at our break down on rate growth a day by day on those higher occupancy nights mid week nights were still able that's where most of our revpar growth is still company were able to come.
Kras were able to drop rate, a where we're seeing some additional softness a in on the weekends. We have to assume that majority of that is leisure then we're having to work with our management teams with their marketing strategies to drive additional business into the hotels and often that business is discounted business. So it's going to come in it.
Little bit lower rate, but it's going to you know again protect our occupancy said that we can you manage our hotels effectively from a labor standpoint.
Yeah. There are multiple other things that I can point to I mean, you have irregular supply you have I mean at all so yes, a supply impact from alternative lodging a combination do you have revenue management systems that are is set up to drive revpar, but often yeah, that's skews towards driving occupancy versus rate, but let me assure you [laughter].
We are 100% focused on where we can to drive you. This is the business in our hotels to their highest rated heights profit channel.
And we had been extremely pleased with the efforts stuff that's up our hotels and the brands and being able to increased brand dotcom contribution which has helped on our operating cost we a year to date, where.
Still saying, a a channel shift with basically O T acreage being flat or slightly up 10 basis points up and brand dot com being up 70 basis points. So that's 60 basis points chance a channel shift so.
Right. Thank you that colors very helpful. Thanks.
Thank you.
Our next question is from Michael Passaro with Robert W. Baird <unk> Company. Please proceed.
Good morning, everyone Barney <unk> Barney.
Justin You you mentioned your development projects are still on time, but.
All the brands are talking about longer timetables delayed openings I know you touched on a little bit, but maybe why are you seeing that with the projects that you have in the pipeline and then what specifically might cause your timelines ticket pushed out potentially.
It's like a good question to some extent, we built a cushion into the timeline that they we initially given and so.
Given the track record of deals taking longer than they did at some point in time, we have I think more realistic expectations on I you know timing for deliveries we have seen a few projects over the years push past that or an M were somewhat sensitive to that but remember.
You know these are projects that are not being developed on our balance sheet and our specifically structured such that the developer takes risk for any cost overruns, including those associated with delays for delivery. So you know we have some protection regardless of the timing of delivery.
You know in terms of impact to POS hi in our portfolio. You know we are partnered with a couple of groups. If you look at the deals that we currently have under contract that we have a good track record with and their groups that have consistently delivered for us.
Yeah.
Got it that's helpful. And then maybe just Directionally. How are you guys thinking about 2020, capex spend maybe relative to what you guys are thinking about spending for 2019.
You know interestingly and we've highlighted this in past calls.
We tend to be relatively consistent in our capex spend from year to year.
There are occasions, when we have larger projects, which skews that number I'm somewhat and you know this year and partially in next year I'm. Our total capex number will be impacted by our renovations on the full service marry up here in Richmond, Virginia on the scope of that renovate.
Nation is extensive given that it's in and a franchise a re licensing Pip and involves a can complete remodeled and redesign of the lobby in food and beverage I'll, let us as well as and essentially full renovation, including significant investment in back.
Firms of the Guestrooms and so I'm projects like that will move our total investment higher on the historically, we've been in that the 5% to 6% Upsells Ranch and you know, while we may skew in some years marginally higher we continue to talk about side a reasonable average.
For a relatively young select service portfolio like ours.
Thank you.
Thank you.
Our next question is from Neil that walk in with capital One Securities. Please proceed.
Hi, good morning, guys.
Good morning, I already.
Hi, just a kind of you know given your performance or I guess stability compared to some of the coast full service.
Rhetoric and performance you feel that I know, it's hard to quantify that your hotels have actually gained share or taking share from those those types of hotels.
Just given the focus now on businesses to cut cost or be more prudent with their t. any.
Well, where we haven't seen a bride shift so to speak up you know hearing from my hotels anecdotally Atlanta feels that they are saying that that counts are coming back to them, saying that we need to cut cost and we need to move down some upscale upper upscale hotel to an upscale.
Hotel in past cycles, you as the is when the economy has had a little bit I'm more of a pullback of we have seen where there is a into a couple of cases, it's not necessarily the chain scale, but more the.
The the rates you focus on looking at it what particular.
Now lets charging and in some cases, if that's an up you know upper upscale hotel and you know we're charging I'm you know a little bit lower rate or were charging a stay the same rate or even potentially a and an increase right. But then we're able to provide because of the amenity package. We offer you have free parking free Brad.
Stan Yeah, no <unk> destination or you know other amenities you know type fees, we do you see that.
We are at you are particular.
Product type can be more compelling in a an environment where companies are starting to cut cut back in and implement cost controls and as we had where in the midst of the budget season, right now and as we are going out to you know particular accounts and we are is definitely making sure to reiterate the value that we're able to provide.
And our hotels, but yet for the most part we haven't can't hurt if any you know there's some isolated circumstances here or there where hotels are saying we have to reduce the number of preferred hotels and we're going to cut down to you know from five hotels to three hotels, you, but we haven't hit we haven't heard anything systemic as of yet but of course Lee.
We are we obviously keep our year to the ground for that.
Appreciate that and then could you just give a high level view of what I'm sort of the your segmentation has.
Looked like in terms of pace, you know heading into the fourth quarter from the beginning of the year till now and then just maybe.
Hi level commentary on in general.
Any any notable trends and.
The a small group a short term group type of gas versus business versus leisure would be great.
Yes, it as he as we went into the beginning of the year now with our outlook, we essentially in the mid point if the estimated that we're going to be flattish and if you factor out you know calendar shifts and disaster recovery comps, that's essentially the environment that we're saying I'm using the booking window hey, yeah.
As is short on you know it and can you know continues to decrease somewhat for the most part as we have gone into yeah, 30, 60, 90 days, if we look at our forecast and our booking window. Yeah. We started out you a little bit.
It's slightly declining just because of the shortening booking windows that we are usually able to pick up and like I said outside of calendar shifts we haven't seen any material you know degradation degradation as we look at the pace and they're booking window in terms of a different if its segments I as I mean.
And then the call that we're still seeing you positive growth and our corporate negotiated a which is a which is encouraging and we're continuing to you have pushed out with our hotels as well as for leisure. Other sees me ask for group and transient Transients, then you have pretty consistent all year.
Uh Huh and and then group has on the smaller group has been a slightly down year over year, but as we've moved throughout the year in the fourth I mean excuse me in the third quarter. It did actually picked up a bit and some of that was or a majority of it was more leisure depth driven smart type group.
That our particular hotels actually did a really good job with but you ever all M E fairly consistent trends group and transient or anything I missed in that I think that [laughter] ever. So I think it's important are going back to your earlier.
Matt demand for our chain scales has been incredibly strong throughout this cycle and you know while the economy continues to be relatively strong you know, we're not going to see trade down as much as we will in a more challenging economic environment. The fact that.
I highlighted this him in my remarks that we have low unemployment and that you have wage growth that you know that those are factors in increasing demand specifically for the types of assets that we own and we feel to date, we've been beneficiaries of those trends.
Thanks, and then lastly from me I'll, maybe just give some more color around the Renaissance.
You know going going independent maybe just you know some you said, you're I think you're only going to spend a million dollars, which seems kind of light I imagine. That's just a you know maybe computer systems are signage, but how does it typically work when you have to switch to new brand or go independent in terms of you know GDS code setting up internal system.
And then how do you sort of.
Negotiate or correspond with existing corporate based business. So you can you know retain at least that part of it when you switch.
So it's a good question a significant portion of that the funds that we currently have budgeted are related to system transitions and signage I'm. There are some branding pieces or you know.
Related to two items in the rooms, and things that sort, which are also captured by that number <unk>. We're fortunate again and I highlight this earlier to be working with a management group that has extensive experience in the city suppose managing branded and independent hotels and and has managed transitions for several.
Hotels within the market and we're relying heavily on their experience in this particular market to ensure a smoother transition as possible recognizing that moving away from brand loyalty programs and replacing a you know that type of gas with dish.
I guess I'm you know, it's always going to be a challenge us or we're working with a group has done that effectively on several times not within the city.
Thanks.
Thank you. Thank you.
As a reminder, this star one on your telephone keypad, if he would like to ask the question. Our next question is from Dory Kidston with Wells Fargo. Please proceed.
Hey, good morning.
All right or what are your expectations for increases in labor cost per occupied room in 2020 as compared to 2019.
[noise], a well we're going through the budget process right now and so are still really early there I would say it's been pretty consistent.
And at the labor cost have been inline with our expectations. Thus far this year.
We we are focused on as we've gone through with our managers, we've done a pretty good deep dive of individual markets to see where we might have potential additional risk and.
While we aren't giving guidance at this point in terms of yeah overall, yeah cost or margin naive isn't for the most part it looks fairly consistent.
We're not seeing any.
Large increases or anything like that or reductions or reductions at this point [laughter].
Have you seen an increase in inbound calls for portfolio sales.
Hi event, that's been relatively constant so I've been highlighting the fact that the we have been fielding inbound for portfolios and for individual assets for some time.
I'd say the.
Portfolio inquiries are still smaller then they would be or have been in prior periods. So generally in that 100 to 200 million dollar range and the number of inquiries has remained relatively constant though the specific potential buyers.
You know have changed over the cycle.
Okay. Thank you.
Thank you.
We have concluded our question and answer session I would like to turn the call back over to Justin for closing remarks.
Thank you and thanks for joining us. This morning, we look forward to see many of you at the Navy Conference next week, and we hope that as you travel as always you'll take the opportunity to stay with us at one of our hotels have a good day.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
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