Q3 2019 Earnings Call
Good day.
Welcome to the Hersha hospitality third quarter, 2019, comforts calling webcast at.
All participants will be in listen only mode.
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After todays presentation.
It's really to ask questions.
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Please note this event is being recorded.
I'll now turn the cops conference Mr., Greg cost the manager of Investor Relations, Sir the floor is yours.
Thank you, Mike and good morning, everyone joining us today.
Welcome to the Hersha Hospitality Trust third quarter 2019 conference call today's call will be based on the third quarter 2019 earnings release, which was distributed yesterday afternoon.
Prior to proceeding I like to remind everyone that today's conference call may contain forward looking statement.
These forward looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual result.
Garment or financial position.
These factors are detailed within the company to press releases as well as within the company filings with the FTC.
But that is now my pleasure to turn the call over to Mr. Neely.
Her shop Fatality Trust, President and Chief operating Officer, Neil you May begin.
Good morning, and thank you for joining us on today's call. Joining me. This morning, our Jay Shah, our Chief Executive Officer, and Ashish Perrigo, our Chief Financial Officer.
Forecast for 2019 global GDP growth continue to drift lower and this deceleration has spilled over into the U.S. as trade tensions and political uncertainty have resulted in a significant impact on corporate and consumer confidence leading us to remain cautious in our near term outlook for the lodging and.
History.
Last quarter, we anticipated that third quarter to be challenging and many of our markets, particularly in June July and August and we brought down our forecasts meaningfully to reflect this outlook.
We remain constructive on September , but corporate travel did not rebound weakness in international demand persisted and hurricane Dorian had a meaningful impact on demand and margins in South Florida.
Stars top 25 markets recorded negative to flat revpar for the quarter.
Although our six markets only the Washington, D.C. tracked showed positive revpar for the quarter.
Year to date, we have gained 290 basis points of market share.
But baseline market performance has been flat to negative in our markets.
In 2020, the majority of our markets have stronger convention and event calendars, most notably South Florida is expected to be the nation's leading market in 2020.
We have taken a fresh approach to our near term operating and capital allocation strategies, and we will outline a few of these initiatives. This morning.
Our seven repositioned hotels, our seven recent acquisitions.
And our two redevelopment projects in South Florida.
These hotels posted a weighted average revpar growth of 8.1% with 110 basis points of EBITDA margin growth in the third quarter.
These assets have not only recaptured their position in the marketplace, but have established themselves as leaders within their respective comp sets.
We anticipate continued outperformance from these hotels to drive meaningful growth for our portfolio for the foreseeable future.
Seven hotels, we acquired since June 2016, which reported weighted average revpar growth of 4.3% during the third quarter.
These hotels provided a strong tailwind in 2018 as well, but their performance was obscured by the disruptive renovations, we had ongoing throughout the year last year.
We expect these hotels to continue to drive meaningful outperformance as they ramp and garner the competitive advantages of our cluster strategy.
Our third catalyst the redevelopment of the Cadillac and the pair key resort.
Continue to ramp but was slower than expected.
The two hotels are achieving or exceeding prior PKD are but occupancy and margins have been slower to build.
The second and third quarters in South, Florida attractive value oriented leisure traveler that was drawn to hotel openings in South, Florida, Puerto Rico, and the Caribbean that were closed last year from Hurricane Irma.
This resulted in softer demand on the beach and then the key.
Which coupled with expense growth hindered EBITDA production again this quarter.
Adding to this was the threat of Hurricane Dorian, Chris forecasted have led to widespread cancellation across our assets in the region.
They had been fully occupied over labor day weekend, but these cancellations in conjunction with increased staffing required to secure the hotels for a potential impact led to an approximate $1 million EBITDA loss for our portfolio and significant margin impact.
At the Cadillac despite the market wide pressure on demand and the impact of Hurricane Dorian The hotel was able to generate sequential rate growth again, this quarter, 18% above our prior peak year in Miami.
Despite softer results in the second and third quarter, we remain constructive on our projections for the fourth quarter as we are seeing an uptick in transient pace for November and December .
In key west the market demand waned, but the parrot key resort was able to capture market share and the upgraded resort recorded 80 are for the quarter, surpassing prior peak levels.
Demand in South, Florida. This year proved to be more challenging than anticipated when we underwrote these holistic transformations.
We remain confident that the two properties stabilized EBITDA will surpass the levels. We last saw during the market's peak in 2015.
I will now focus on the outperformance of our clusters versus their respective markets beginning in our nation's capital.
Our Washington, D.C. portfolio was our strongest during the third quarter generating 9.1% revpar growth and outperforming the market by 460 basis points.
Bolstered by favorable comps Congress in session for three straight weeks in September and performance at our think Gregory which underwent a holistic transformation during 2018.
That hotel generated 15.5% revpar growth driven by 9.8% HDR growth and continued to gain share following the hotels upgrade to a forestar lifestyle offering.
In addition, we underwent a strategic shift in our sales strategy at the newest asset in our portfolio you Annapolis waterfront hotel, resulting in over 1200 basis points of occupancy growth, leading to 19.4% revpar growth for the quarter.
Pace was robust during the third quarter and we believe the market is poised to continue this momentum in the fourth quarter with notable events such as the return of the IMF in October .
An easier comp in November without midterm elections, and overall strong market fundamentals in Washington.
These factors lead us to believe DC will continue to be one of the better markets in our portfolio for the rest of the year and into 2020 with less new supply deliveries a more robust convention calendar.
And easier comps.
[noise] demand to Boston remained strong during the third quarter and our cluster outperformed again growing revpar by 4.2% and outpacing the market by 460 basis points.
The envoy continues to be one of the best performing assets in our portfolio and the Boston market and generated 11.9% revpar growth in the third quarter exclusively driven by 80 our growth.
Additionally, we expanded our lookout rooftop in 2018, increasing our capacity by over 30% with expectations of growing FNB revenue through an increase in private events.
Results. This quarter were strong in this department and we continue to generate ROI from our recent capital infusion into this premier seaport asset.
Boston faced a difficult convention calendar comparison this year, but it has been a standout market for us all year long and we expect this momentum to continue in 2020 with a more robust convention calendar.
That said Q4 will be soft as October was challenging with the Jewish holiday shift no post season success for the Red Sox and a difficult comp with the Columbia gas of Massachusetts explosion, causing significant market compression, leading to 8.2% HDR growth for our cluster in Q4 2018.
Despite headwinds for international demand and the impact of Hurricane Dorian, our comparable South Florida portfolio generated positive revpar growth and outperformed the market by 590 basis point.
The bright spot during the third quarter was our Ritz Carlton coconut Grove generating 29.9% Revpar growth on an occupancy increase of approximately 1500 basis points.
The hotel underwent a transformation in 2018 and these renovations attracted higher trends into band in the third quarter, which combined with continued success that the.
Success at the redesign restaurant.
Just to capture incremental room revenue and grow margins by 470 basis points.
[noise] after softer second and third quarters, the fourth quarter is showing stronger pace around high demand weekends, such as the auto show and dark volatile.
We believe the positive momentum in the fourth quarter will continue into next year supported by our ramp at the Cadillac and parakeet, the redevelop Miami Beach Convention Center, attracting high profile event and the Super Bowl in February .
Miami was also recently labeled the city with the second highest growth economy in the country and among the most significant in terms of job creation.
A growing in more diverse corporate base will increase hotel demand in the coconut Grove market.
Philadelphia was a very strong market for our portfolio in the first half of 2019 as our recently renovated hotels took advantage of the city's robust convention calendar.
However, the third quarter bumped up against a difficult comp with our cluster generating 10.2% revpar growth last year.
Despite our 1.2% Revpar loss this quarter in Philadelphia.
And then did continue to take advantage of increased activity at the Convention center outperforming the comp set by 400 basis points by growing both occupancy and rate.
We anticipate this trend will continue into the fourth quarter with a busy group calendar in November and December .
Despite the meaningful increase in new supply in center city, we remain confident the long term demand fundamentals of Philadelphia, driven by the growth in investment in technology media health care and educational sectors across the city and we believe our purpose built cluster, we'll continue to outperform.
Warm their competitive sets.
[noise] out on the West Coast, we had mixed results in the face of new supply and decelerating corporate travel, which led to a 2.2% revpar loss for our portfolio in the third quarter.
The hotel Milo in Santa Barbara was our best performing asset on the West coast generating 5.8% Revpar growth.
The hotels newly implemented sales strategy allowed us to drive rate from a robust group calendar and favorable weather during September .
Despite new supply continuing to be absorbed in the Santa Monica sub market, our Ambrose hotel captured share and grew revpar by 3.1% driven by a 4.2% HDR increase.
The hotels 2018 renovation has directly led to an increase in groups are mid week, corporate and weekend leisure customer base.
And up in Monterrey, Our sanctuary Beach resort registered over 1000 basis points in margin growth as the hotel continues to ramp from its renovation in early 18.
Our hotels in San Diego, Los Angeles, and Sunnyvale, all face new supply and coupled with weaker corporate and international demand led to flat to slightly negative results.
In Seattle demand remains strong with 9.9% demand growth for the market in the third quarter.
However, the new supply that has come online. This year continues to have a significant impact on rate growth at the Pan Pacific.
Our west Coast markets will continue to face these headwinds in the fourth quarter, which will impact revpar growth.
This will be most notable in San Diego, which generated 21.2% revpar growth in the fourth quarter of 2018 on citywide events that do not repeat this year.
However, we remain constructive for our West coast hotels in 2020 with positive results, thus far from our RFP significantly strong group calendars in Los Angeles in San Diego and continued absorption of new supply in Seattle.
New York City remained our toughest market from a growth perspective.
Occupancy remained robust during the third quarter as our portfolio registered close to 97% occupancy.
However, demand growth did not equate to rate growth as our portfolio generated a 2.9% revpar loss, which was impacted by elevated supply deliveries decelerating demand from the international traveler and from rate sensitive leisure travelers generating more stage than historically price agnostic business travel.
There's.
Despite several challenging quarters in New York, there have been a few bright spots at the end of the month with demand during the UN General Assembly the best the market as seen in years and our portfolio taking advantage of this compression week outperforming the market by 210 basis points.
For the week HDR for our New York City portfolio was $385 at nearly 99% occupancy.
For the quarter overall, however, our attempts to push HDR led to market share declined this quarter and with declining HDR margin suffered.
As previously mentioned supply deliveries were higher in the third quarter, which impacted pricing power.
We anticipate supply growth for the year to be 3.7% across Manhattan, and we'll continue to pressure HDR and negate revpar improvement in the fourth quarter.
The shifted the Jewish holidays to beat to the first two weeks of October were impactful and our New York portfolio bumps up against a difficult comp when our cluster generated 6% revpar growth in the fourth quarter of last year.
Before I transition to ash to discuss our margins the balance sheet and our updated 2019 guidance I wanted to quickly update you on our capital allocation strategy.
We began the year with expectations for meaningful EBITDA and free cash flow growth that we intended to use to reduce leverage.
With lower expected free cash flows and an uncertain environment, we are accelerating our libre leverage reduction plan by actively marketing several hotels for sale.
With the disparity between public and private market values and major gateway markets. We can accretively transact on two to four hotels were $50 million to $75 million net proceeds within the next two quarters.
Proceeds from these asset sales will be utilized to pay down our preferred C shares or debt.
We're very encouraged with the current interest in the assets that are being marketed and the inbound interest for other assets in our portfolio from a variety of domestic and international buyers.
Depending on our outlook for 2020, we may increase the number of sales we target for 2020.
We look forward to sharing an update with you on our fourth quarter earnings call if not sooner.
During the third quarter, we also repurchased 659000 shares at a weighted average price of $14.50 capitalizing on the market dislocation that took place in August when the stock was trading more than 30% below our internal net asset value.
We remain focused on our leverage reduction strategy, but we'll advantageous Lee buyback shares when extreme periods of market volatility are prevalent.
Our industry has been in a low single digit revpar environment and our outlook for the next several quarters shows that this trend will likely remain.
In this environment outperformance alone is not enough to drive growth.
To reduce leverage we're actively pursuing several hotel sales to sustain our market leading margins were also executing a cost containment strategy that Asheville discussed in his remarks.
Our management team has successfully navigated three cycles together and can boast the highest level of shareholder alignment in our sector.
We are confident that strategies, we are deploying will lead to value creation for our shareholders. Whether this cycle is over or we are just in a growth pause.
Over the last several years, we upgraded our portfolio to one of the highest quality platforms in the industry.
We did this by recycling close to $1 billion of hotel assets into new investments in the most sought after markets in the country.
By allocating approximately $200 million to reposition our highest potential hotels.
And by transforming two of our largest EBITDA producing assets following hurricane aroma.
With all of this disruption behind us along with a lower capex load for the foreseeable future.
And strategic leverage reduction plans in place.
Stabilization of our portfolio is within sight.
And with our stock trading more than 30%, 30% below our internal then avi at an 8% dividend yield with one of the lowest payout ratios in the sector. We believe this is a great entry point for investors.
With that let me turn it over to ask to discuss in more detail our margin performance balance sheet and our updated guidance for the year.
Great. Thanks, Neil good morning, everyone.
As mentioned macro headwinds and the continued strength of the U.S. dollar were prevalent during the third quarter, leading to a slowdown in corporate transient and international travel, which substantially impacted pricing power and our ability to drive both topline and bottomline growth despite record occupancy throughout the portfolio.
Our revpar mix this quarter significantly impacted operating margins as our occupancy has remained extremely strong in a number of markets. They hit new highs, while we experienced NDR losses from slowing trend and new supply deliveries.
For example, as Neal discussed in our New York portfolio, we maintain extremely high occupancy of 97%.
But realize the 2.9% HDR loss, leading to margin losses of 250 basis point.
These assets deliver industry, leading GLP margins exceeding 50% and EBITDA margins exceeding 37%.
But with all of the Revpar loss coming from HDR is difficult to maintain these type of margin.
We witnessed a similar dynamic in our Philadelphia portfolio and in certain properties on the West coast.
These portfolio dynamics combined with disruption from Hurricane Doreen resulted in greater margin pressure than we anticipated 90 days ago.
But in the face of these challenges we remain encouraged that our portfolio was able to generate 33.6% EBITDA margin one of the highest amongst our peers.
Despite the difficult operating environment in third quarter, our unique operating model and alignment with our management company provided us flexibility to control labor costs, limiting our margin loss and even yielding margin expansion at several of our properties.
As forecast for demand growth remained strong in our markets into 2020, Weve enacted measures to mitigate margin loss, while defending our occupancy and market share at the property.
We believe our focus on cost containment initiatives will bolster the cash flow profile of our asset and drive EBITDA growth, even if near term fundamentals remain muted.
We've been working with our property team to evaluate all operating department to identify opportunities for operational inefficiencies.
Speaking out ways to reduce our property level expenses with minimal impact of the guest experience and we have already started changing staffing model structuring operating model.
Additionally, we've realigned our revenue management in sales strategy to ensure that we continue to outperform our comps that while limiting our overhead.
Good.
We're also evaluating all vendor contracts with particular focus on items, such as property maintenance and outsourced labor to ensure that our labor model. So structured appropriately for the current operating environment.
And lastly in coordination with our team we continue to look at unique operational strategies to reduce our rooms department and utilities costs and continue to look at energy saving capital expenditures that generate immediate ROI is in the mid to high teen.
Before moving to capital expenditures, let me spend a minute on our margin performance at the Cadillac and parakeet.
As Neal discuss parking dorians forecasted path at a significant impact on the overall performance of our South Florida cluster last quarter, but most notably at the Cadillac and parrot key hotel.
Last minute cancellations and increased staffing required to secure the hotel resulted in over 1600 basis points of margin loss at the Cadillac and close to 3800 basis points of impact at the parent key during the last two months of the quarter.
As we've noted on past calls these assets remain in their ramp up period and in light of recent headwind margins will stabilize at a slower rate than our topline results.
Staffing marketing and operating expenses incurred to drive revenue are critical to reestablishing these properties and our ability to stabilize these assets over the next 24 month.
I will be driven by our operating expertise and the significant investments we've committed to the asset on the operational front.
As we look out 2020 with a full year of stabilization in the were rearview mirror and a more positive group and transient demand backdrop in south Florida, we are confident in our ability to reduce these expenses, allowing us to drive bottom line performance at these hotel.
As discussed last quarter, the majority of our large scale capital projects are behind us and we continue to forecast limited renovation related disruptions over the next few years, allowing us to focus on our asset management initiatives and to drive free cash flow.
During the third quarter, we allocated $12.7 million to capital projects.
It is 22.6 million in the third quarter of 2018.
For 2019, we anticipate our total capital spend.
Maintenance capex, but excluding deposits for 2020 capital projects to be in the range of $33 million to $35 million versus $90 million in 2008.
The reduction in Capex spending calculated dispositions across the next several quarters and stabilization of assets that have undergone large scale renovation our free cash flow is forecasted to increase allowing us to further reduce our payout ratio.
We believe our payout ratio coming close to if not below 50%, even with the plan disposition.
Reduced cap spending stabilization of our assets in interest expense savings from our recent refinancing activity.
These items provide us a significant amount of cushion as we look at our dividend profile.
So we've been active in the debt markets what appears to be a more accommodating near term interest rate environment. During the quarter. We took advantage of the strength of the debt market as we refinanced our $300 million senior unsecured term loan and entered into a series of new swap contracts to fix the interest rate on the remaining 400.9 million of.
Senior unsecured term loan eliminating all of our debt maturities until 2021.
The term loan refinancing a new interest rate swap agreement.
Function with the mortgage refinancings.
At our Hyatt Union Square Hilton Garden Inn Tribeca in the second quarter resulted in estimated interest expense savings of 2.2 million in 2019.
And 6.7 million of savings run rate in 2020.
The refinancing of the near term reached maturity, we continue to improve our into flexibility.
As we have ample capacity with cash on hand, and our $250 million revolver to execute our business.
All finished with our updated full year guidance for 2019, which we presented in our earnings release published yesterday.
As we discussed third quarter trying to the lodging industry underperformed expectations and decelerating economic metrics have been impactful to consumer and corporate confidence.
We saw rapid deterioration in Revpar trends of the majority of the top 0.5 market, Denver, which have carried into the fourth quarter and several market.
October proved challenging the shift of the Jewish holiday.
Peso the fourth quarter is positive in our South Florida in Washington, DC clusters.
We are anticipating continued softness in the remainder of a market.
Accordingly, we're revising our full year guidance to reflect the challenging operating environment.
We tightened the range of our forecasted comparable portfolio Revpar growth, which is now between 0.75% and 1.25% as well as our EBITDA margin loss at 100 basis points to 75.
We're now forecasting FFO per share with solid $94 99, and adjusted our full year EBITDA range to be between 165.5.
And 167.5 million.
So this concludes my portion of the call. We can now proceed to Q in a where Jay Neil and I are happy to address any questions that you may have operator.
Thank you Sir.
We'll now begin the question answer session to ask a question Press Star then one on the touched on some excuse English speakerphone, please pick up.
Personally.
Spend the time or question has been addressing your question.
Question. Please press Star then too.
Again. This star then one to ask your question at this time what was this pause momentarily to assemble roster.
And our first question will come from Michael Bellisario of Baird. Please go ahead.
Good morning, everyone.
Good morning.
First question for I mean, maybe could you quantify the cost savings and those cost saving initiatives you talked about and then just kind of what you're thinking about in terms of a timetable there to essentially realize those savings.
Sure. So Michael we started a lot of those initiatives as we speak.
Our continuing to look at all of the budget for the properties, which are not finalized yet but for a baseline we are targeting about $3 million cost saving from these new initiatives.
I think the majority of those will be enacted by the ended the year and realize those savings in 2020.
Got it that's helpful. And then maybe can you just remind us again of your kind of your threshold for share repurchases.
Your rationale for repurchasing shares during the quarter given that the fundamental outlook was weakening and just how we should think about any opportunistic share repurchases and use of capital going forward, especially out of any disposition proceeds coming in the door.
Sure Mike.
Yeah, we were active in August .
We bought back about 659000 shares earlier in the year.
Acquired about 273000 shares so for the year.
Close to $15 million in buybacks.
We target buybacks, it's clearly opportunistic it's not a it's not a strategy.
But when we're trading at more than a 30% discount to.
And Avi.
We are.
We are looking at the opportunity for buybacks.
Now we are also focused on leverage reduction and that's always the balance in our mind.
Throughout this year, we've been using.
Free cash flow to pay down debt as we mentioned as we've been seeing our free cash flow expectations come down.
We are now.
Good morning to pursue some asset sales to help reduce leverage.
Reducing leverage remains I think our our number one goal right now.
But when there is very attractive pricing a lot of volatility in the markets. We continue to have authorization to to buy back stock.
I think in eight.
As I mentioned, we are where in our in our remarks, we were planning to.
I have $50 million to $75 million proceeds from some sales we are.
Planning to use that for debt pay downs.
And we'll continue to be opportunistic on the buyback front.
And then just lastly, I'm on the asset sales yet.
How should we think about pricing from EBITDA multiple or cap rate perspective, and just kind of how you're thinking about which assets.
You're pursuing to sell.
At this time, Mike we're focused on assets that.
That have.
Less EBITDA contribution to the portfolio and can sell at multiples greater than where we're trading as a company today.
We're focused on some assets in New York City.
Focused on some joint venture assets.
We've gotten a lot of inbound interest in Miami.
And so they're select assets across the portfolio that we're targeting today, we mentioned in our remarks, two to four assets $50 million to $75 million and proceeds depending on our outlook for next year, we could increase that the acquisitions market the private market.
In particular is very robust and the market is not.
There is there has been less kind of high quality urban gateway hotels available on the acquisitions market for the last year too and that's leading to a lot of pent up demand from buyers.
For those kinds of assets, so we see it being very attractive and thats whats, leading us to consider more asset sales.
That's helpful. Thank you.
The next question will come from David Katz of Jefferies.
Hi, good morning, everyone.
Morning, guys.
I wanted to just.
Ask about the guidance and I appreciate all of the detail Neil that you gave up front or both of you that you gave upfront.
I just spoke to get to a clear sense for what you're underwriting in that guidance and does it.
Leave some room to the downside.
You know.
How are you scale, a one to five how conservative I suppose is one way to ask the question.
That's what I'm looking for.
Yes, David we only have topline results for October right now and as we looked at our.
Forecast were manual in November and December we are seeing that there has definitely been some slippage.
Initially gave guidance back in July for both of those month.
And we've tried to adjust our forecast accordingly.
I don't think that in any way we have set these guidance ranges.
And back to numbers or certainly that air.
These are the.
Wouldn't go to the downside market for transient.
Travel right now we're being so volatile.
Booking window so short.
We looked at our October results for top line adjusted Accordingly.
Got it.
And I know Youve talked about the asset sales.
And some parameters but.
Just timing in order of magnitude on one we might see those and just how big we might be talking about.
Sure David we're targeting two to four hotels.
For sale within the next two quarters.
Oh, well will hopefully be able to provides a little bit more of an update by our next quarterly call. The yearend call early next year.
And if we make faster progress will we will release accordingly.
We are focused today on assets that.
Aren't significant EBITDA contributors, because we are trying to bring down the debt to EBITDA metric and and so we are focused on high multiple.
Low EBITDA assets today.
I think the.
As as you've seen from.
From the sales processes of some of our peer companies as well as in the marketplace. There is very strong values being paid by the private market in New York City in Miami, and all of our markets for that matter.
Yes Angeles.
And so at this stage, we're focused on smaller hotels, but that can release $50 million to $75 million or so of proceeds our preferred see tranche of preferred is.
Has a coupon of 6.875% and is $75 million in total.
Our first step is to.
To use proceeds to pay that down and that wouldn't be clearly accretive.
Cash flow.
Now there there are there we continue to get inbound interest on some of our larger assets that have.
More EBITDA and we are exploring.
Those.
Kinds of offers as well.
But at this stage, we don't believe.
That.
We're not planning to execute on those transactions, but we'll we'll see how the worlds turns across these next couple of months and and what level of cash flow. We can expect next year and how much we can reduce debt with.
With just organic cash flow in these two to four asset sales.
Got it it's very helpful. Thank you.
Next we have some Kelly bank of America.
Hey, Good morning, guys. This is actually Danny aside on for Sean.
Just one follow up on the asset sale question.
Are you targeting of that Youve guys, given a lot of detail already but are you targeting specific asset type. So is it full service or limited service and then given the health of where the transaction market is today and how each of those types are performing is there any particular reason you'd want to sell one over the other today.
Danny.
On the two to four there were exploring today they are.
Sure full service to our select service.
And so it's not a call on segment.
It's really.
What's driving it is the multiples we can get in the private market for the assets how much capex would be required if we were to hold onto the hotels and try to make them grow more.
And geographically, we see very strong bids for assets in New York City.
And our outlook for New York is still mixed for the next year. So we are probably more focus there than other markets in our portfolio.
Okay.
Okay.
And then just my follow up so we're thinking about the cost savings initiatives that you guys have laid out this morning on the call.
How do you protect how do you balance protecting margins and like making sure you have the adequate resources to deliver next year, especially since occupancy there so high across your portfolio and like you and yet between those two.
Yes.
Hey, this is she so we are really targeting things that wouldn't be guest facing right.
I'd mentioned several things in my script, but.
You can when it comes to something like our view program, we're looking at ways to focus on energy blogger.
Chemical use.
Looking at staffing as it relates to those item, especially our laundry services and housekeeping I really wouldn't be something that the gas will focus on also looking at our off property allocation to the cost to sales and marketing it comes to revenue management waste.
Solid date, those position and ways to consolidate property level managerial positions waste to cut down on front desk. So we are looking at a lot of item that wont impact directly the gas there they are certainly won't be.
Adjustments necessary from staffing managerial work, but yes. This is something that it's not new if we work on cost in the plan.
All the time I think it's just at the bottom it's a little bit more unique in that we're not seeing any type of demand shop, we're not seeing occupant voting.
So you have to look at new way.
These costs be late in the cycle without really impacting yes.
And we feel very good about where we are today identified about.
Understood. Thank you very much.
Next we have already Cline well be ammo.
Thanks.
Maybe just following up on the asset sale question can you just talk about update us on your leverage targets and maybe timing on when you when you expect to get there.
Sure.
Our leverage targets kind of remain the four to five times debt to EBITDA metric.
We we continue to we think the kind of the greatest contributor to bringing that inline is gonna be the ramp up of our newly acquired a newly repositioned assets.
Particularly the trends the south Florida assets as they ramp up.
So its organic EBITDA growth is is the primary way of getting their.
We're also reducing capex spending.
In 19, and 20 and for the foreseeable future.
And and as Weve discussed so far we are now calculate it we're considering calculated property sales to also bring that in.
We think that there is where we believe that with the ramp up in the portfolio with the pay downs we have.
Planned and the property sales that were.
Considering we believe we can get there within a couple of years.
Obviously, it really does depend on how robust the markets are how difficult they are in 2020.
But we think by 2021, we have.
We believe we can get there.
And then maybe just turning to New York markets, obviously been pretty challenging as you look to 2020, what kind of your expectations, there and any potential positive that you see and then maybe can you quantify how much of a drag that market has had on EBITDA year to date EBITDA margins year to date.
No for Oh.
I'll take just the first part of it just.
The outlook for for New York next year, I mean for the fourth quarter. We think it is going to continue to be challenging we had tough comp in the fourth quarter for for New York.
But as we look forward to next year. There are some there are some good signs that we never think of New York has a big convention kind of market, but.
But there is a convention center, there and it is growing and next year, there's 10% to 12% increase in.
In.
Convention room nights expected in the market.
The Big Challenge in New York is the with the uncertainty in.
Corporate transient and international demand.
You know weve.
This year, we started the year with government shutdown and then we throughout the middle of the year and into the fall we've had.
Trade issues.
We would expect that to be less of a drag next year.
But obviously it remains uncertain the strong dollar an international demand has been highly impactful in New York.
I'd expect that to not can not be as much of a sharp reduction next year and so that gives us a little bit of confidence, but primarily the supply side of the equation in New York and the demand is there. It's just theres a lot of new supply some of it hotel supply some of it just continued penetration of the.
Short term rental space.
We do expect New York to still have meaningful new supply next year, we're finishing the year. This year, where we believe it's around 3.7% new supply growth in 2019, 2020 is going to be very similar to that.
There's.
And one fortunate.
Think about similar supply growth is that it's just where it's coming this year. We had it really hit every single one of our sub markets next year, it looks to be a little bit more isolated in the financial district in the far west side of Manhattan.
Our next year than this year, but we continue to think of it as a mixed market in not one that we are.
Ready to Bang the table about.
Just to add you asked you know how you know.
How much of a contributor was in New York to some of this adjustment guide and so if you.
You know you just take a look at our guidance from your from July two and a quarter of four we were were to be about a million and a half dollars have you been softness.
In the third and fourth quarter.
Contributed to our either guidance adjustment.
Okay, great thanks to the color.
Next we have Brian may her of be Riley.
Yes. Good morning, So you know admittedly a clusters all have you know certain uniqueness to them, but when we looked at the third quarter results and now after four Q. and 2020.
What do you think are the biggest contributing factors to the yeah reduction in your rapport expectations is is it more supply is it lower demand is it one time impacts can you talk to that.
Mm.
Sure you know Brian I, you know, we've been dealing with with elevated levels of supply in these kind of global gateway markets for the last several years and that doesn't make any kind of softness in demand much more pronounced.
But the supply we can predict up front and we can see it's and we have visibility into it. So we would say that the biggest kind of.
Impact is really been the softness in demand and it's both corporate transients and international demand.
You might say, how how could that be if you're at 95, 97% occupancy it's because the market mixes change we used to be able to count on at least 50, 60% of our mix being a corporate transients, but these days in New York, There's a lot more leisure and they are much more price sensitive and much more willing.
To try a short term rentals or other alternatives.
So we do believe it's a demand issue, we have highly concentrated kind of positions in.
Major urban gateway markets that are driven by corporate trends in an international demand and this year has been a very soft year for those two segments.
Okay, and then when you think out the 2020 you you've mentioned both you know and you released last night and you're prepared comments.
Healthier convention calendar, how much of of of you know uplift is that having on your thoughts for wrap par next year I know you haven't provide any guidance for 2020, but as it to the 50 basis points impact, it's a full percentage point impact rap par because of the calendar.
I think it could be a <unk> a point a percentage point I mean, it's it leads to compression in the markets you know as we've been discussing and I think a lot of there has been a lot of research on this but they're just the number of compression nights in 2019 have been significantly lower than.
Historical levels and some of that is new supply in some of it could be in our market. The the convention calendars in these markets as we look forward to next year Convention room nights I'll just run through a few of our markets in Boston, There's a 28% increase in projected <unk>.
Room nights from the convention space, Los Angeles up also over 20 per cent Miami is nearly doubling nearly 100% and that's not just the Super Bowl.
Superbowl does lead the first quarter to be very strong but throughout the year. There's also a significant increase in that convention centers booking as you know the convention center well had been close for renovations for several years.
New York I mentioned earlier is also up 10 per cent and Washington, D.C. is up nearly 2020, 5%. So it's meaningful and we believe that that can lead to compression and if there is some improvement in.
Corporate transients and international demand that could be something that could really lead to some significant performance in our in our markets.
Thank you.
Yeah.
Next we will have Chris <unk> outdoor tipping. Please go ahead.
Hey, good morning, guys.
What ask a little bit about your independent hotels, I know you mentioned performance that a few of them.
In a quarter I think you have maybe 17 and total and and and the question is really.
You know do you do you feel as if some of the soft brand product that it's coming into a lot of markets you know maybe disproportionately impacts you're.
Hotels that or not you know yet affiliated with with soft brands.
You know Christen I don't think so you know we we think about we we're always looking at all of our hotels and all of the soft brands are always knocking on our door to to put their brands on these hotels, but we just can't make the math work on a lot of them. You know, we we have many autograph collection hotels and.
And they make sense and they lead to good results on those hotels, but for our pure independence.
It is it hasn't that hasn't been we we don't believe that adding a soft brand can can help either production.
Or our independence are pure independence are smaller hotels in kind of great destination neighborhoods.
With.
With a we've kind of a design and kind of lifestyle kind of positioning but they are hotels that are where we've either least out food and beverage or we have limited food and beverage and so we're able to drive not only better rubber pars than most of our branded hotels, but also jen.
Generally better margins.
Are independent portfolio is has continued for the last several years to be the highest growth part of the portfolio and and so we we don't believe that they are significantly impacted by the growth of of other softbrands.
It's about.
I think on it's about $35 million to $40 million v., but the other we're generating from these independent hotel believed that they can.
They will continue to grow faster than the rest of our portfolio and so we think that they are actually well position today, but they do get big numbers in the transaction market because it provides an opportunity for a new buyer to consider branding a hotel or.
To reorient, it and and kind of change. It. So we are considering a handful of independent hotels and some of our sales discussions as well.
Okay appreciates color and then just on the on the costs initiatives for for a second Hmm you know sometimes.
I guess, there's a view that when I don't know if this is considered a break the glass kind of move it doesn't sound like it but yeah, I guess I'm trying to square kind of commentary about 2020.
Versus you know these costs cuts are a lot of times viewed as a <unk>, you're making a you know call, but it costs need to be caught because revenues aren't coming through was expected. So you how do we kind of jive.
That is are these just things that maybe were.
We're being gone before that in retrospect, you you wish you had or or something deeper than that.
Yeah, <unk> as I mentioned you know we.
Look we are always looking at ways.
Costs and this is not I I wouldn't care.
The classes lunge at just some different operating environment and we are late cycle, we are running record I.D.'s and we're not forecasting.
Those occupant drill down.
Significantly if at all so you're just reevaluating sort of all of our budget.
Going to kind of zero based budgeting thing, you know where where some of the new initiatives that we can install at this point and we're just focusing more of our time on that as we have.
Less disruption less capital expenditures.
Not really.
In the acquisitions market at this time.
We are focusing more on local hockey binges hold up and range from me challenging we are still seeing property tax increases.
Yeah, how do we mitigate all of that to maintain on March.
Oh, and that's really kind of focus right now.
Okay, Hmm fair enough and then.
Just lastly for me.
Guarding the the share repurchase totally get the rationale for for why you did you did in the third quarter I guess the question would be.
You're committing to you know an accelerated leverage reduction program and <unk> I mean do you think you have <unk>.
Realistically you have some bullets left there or.
Do you think you know from here on out it's it's pretty much street straight debt reduction.
Yeah.
You know Chris no. We we we we are probably prioritizing debt reduction, but but we still have we still have bullets left you know this portfolio is is a very strong one than on a cash flow basis. We are very secure in kind of our dividend. We believe that we could withstand.
A significant.
Downturn in the industry not one that we expect but but we've pressure test our company for it.
And so we we will continue to be opportunistic in the buyback market.
No I think that as we continue to find opportunities to sell hotels, we will we will balance buybacks with our leverage reduction strategy, but we believe we can do both.
Okay.
Fair enough appreciates color thanks, guys.
Mm.
That's where I've asked any pal of Barclays.
I can morning, you mentioned, a few times that you're seeing the higher mix of leisure customers in some of your markets and then when we look at leisure travel trends across a variety of industries, the airline and cruises, they're pretty strong. So is there a way for you or the industry's do a better job of getting more pricing.
<unk>.
Oh.
Yeah.
I think I think there will be opportunities that you know that is Neil and ash and both mentioned the consumer is has.
And always will be a bit more of a price shopper.
That being said I think.
We haven't been able to compress at our market because of his continue to supply increase and I think what you know what gives us some confidence as we look into 2020 is that you know those supply isn't.
Tapering meaningfully in in in across our our market portfolio is actually picking next year.
The demand fundamental are growing at a higher rate than they haven't until we're seeing a you know, we're seeing a narrowing and the downtown between supply and demand it.
Events for the coming you're able to have more compression nights and our market some be able to.
Be able to drive, but some pricing power attraction.
Guided Okay and also you talked a few times about a short term rentals, there was a referendum yesterday and a Jersey city.
It'd be it'd be that that.
<unk> restrictions there do you see that as a.
A new method for the industry to regulate the short term rentals, a bit more or from coming years.
Hmm.
Yeah, I you know I don't.
I don't know what method I I don't know the specifics around that but I think there's clearly been.
A you know a regulatory cities are are sensitive to it then we're seeing it all over the world.
This kind of rentals short term rentals, not only hurts hotels, but really hurts the affordable housing market.
And leads to.
Too just more.
I really to stress to these markets like in Madrid, Orrin major cities in Europe , as well as the U.S. and so I think you know the the the growth rate of these short term rentals will likely continue to decline. It's just at the same time there is.
They are getting more and more a part of the leisure customers kind of alternative in their mind and so there we do see further penetration of it than it is.
And it comes up in all of these kind of major urban gateway markets that we're in today, we think it's declining in terms of impact, but it's still very real and <unk> and significant today in all of in most of our market.
Santa Monica has has done a very good job of kind of preventing you see we are having very strong performance there, but most other cities are either not regulate not enforcing the regulations enough or are they haven't gotten to that point, yet and hopefully across this next year, we'll see more of it.
More regularly regulations for that.
So do you think the impact has been less this year or more because it seems like this year and some of the market's there's been a bit more chatter about.
The impact of short term rentals relative to.
Say 18 or 17.
Yeah, I think the growth rate has come down, but the impact was more significant.
We think that they've penetrated a little bit more especially with this leisure customer and again. This is a function also.
That we have less corporate trends in these markets. So we're having to go after the leisure market and then the leisure market. They are price sensitive because they are are.
They're looking at short term rentals as an alternative.
Okay. Thank you.
[noise] next with Barry Oxford of D.A. Davidson.
Great. Thanks, guys.
You talked very night's sleep at the supply issues in New York, but you also reference the west coast and in particular.
Can you give us a little color as far as maybe new product that you guys see coming online out there or D.C. those markets kind of farming up at 2020.
Yeah in Seattle in particular, the biggest impact was this 1200 room Hyatt that open late last year, and that's had a very significant impact on.
On all Seattle Hoteliers.
As a major convention centre hotel that opened before the convention centers expansion was complete.
And so that has been a really significant impact this year, we expect that to be absorbed by next year, given how strong demand has been in the market.
But that said there are <unk> there are still a couple of hotels that will open in 2020 in Seattle, they're not nearly as large but they.
Do play in the same geographic markets as we do so we don't think it's going away I'm, the kind of supply challenge in Seattle.
But it should be less impactful then.
Then the 2019 supply side.
On the West Coast, you started with the West Coast I'll, just mention L.A.N. San Diego.
Had a lot of new supply in 19 as well we are seeing some in 2020, but we feel like in San Diego well in San Diego and Los Angeles. It's it's we still have new supply coming on line in the select service space.
In Los Angeles in San Diego next year. So we would consider peak new supply to be 2020 for some of those markets on the west coast.
Right right.
Switching gears when you were talking about lower cap actually see <unk>, you know quite a substantial reduction from 18 to 19.
What type of production do you think we'll see in the cap expending from 19 to 20.
I'm sorry. This is <unk> right now we are not forecasting any increasing cutbacks, though probably target the same general level of cutbacks in 2020.
Okay.
Perfect. Thanks, guys.
Yeah.
Well at this time move to include the question that's assassin Oh in order to turn the comforts called back over to the management team for closing remarks gentlemen.
Well. Thank you everyone for your time today I know many of you have a lot of calls to go with the rest of the day, but please feel free to give us a ring directly here at the office J. action I are are standing by for any additional questions.
Thank you.
Thank you Sir after the rest of the same for your time also today again. The conference calls now concluded at this time you may disconnects elastic you're getting everyone take care of a great day.
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Hmm.
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