Q2 2019 Earnings Call
This is the conference operator.
Welcome to the RLJ lodging Trust second quarter 2019 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad I would now like to turn the conference over to kill Abella, RLJ Treasurer, and Vice President of Finance. Please go ahead.
Thank you operator.
Good morning, and welcome to RLJ lodging Trust.
2019 second quarter earnings call.
On today's call legacy Hill.
Our president and Chief Executive Officer will discuss key highlights for the quarter and provide an update on the recent strategic initiatives.
Sean Mahoney, our executive Vice President and Chief Financial Officer will discuss the company's operational and financial results and guidance.
Tom Bartlett, our executive Vice President of asset management will be available for acuity.
Forward looking statements made on this call are subject to numerous risks and uncertainties that may lead the companys actual results could differ materially from what had been communicated.
Factors that may impact the results of the company can be found in the Companys 10-Q, and other reports filed with the SEC.
The company undertakes no obligation to update forward looking statements.
Also as we discuss certain non-GAAP measures. It may be helpful to review the reconciliations to GAAP located in our press release from last night.
Finally in order to assist investors, but bridging to our prior guidance. We included cables in last night's press release to adjust our second quarter and 2019 outlook for the sale of 41 hotels.
I will now turn the call over to Leslie.
Thanks, Neil Good morning, everyone and thank you for joining us.
We had a very successful and active second quarter, where we achieved not only solid operating results, but also made meaningful progress on our key objectives.
For the quarter, we delivered operating results in line with our expectations with Revpar growth of 2.7%.
In terms of our other priorities.
We remain focused on selling noncore assets.
Maintaining a strong balance sheet and deploying investment capital Accretively.
Since our last call we achieved several milestones.
We completed the sale of Kingston plantation $456 million at an accretive EBITDA multiple.
We entered into an agreement to sell two portfolios of noncore legacy RLJ assets totaling 39 hotels for approximately $490 million.
We position ourselves to unlock significant value by entering into an agreement to terminate our analog guaranteed with Wyndham.
And we also accretive we repurchased over two and a half million shares with disposition proceeds.
In aggregate these transformational transaction significantly improve our portfolio quality.
Enhance our growth profile.
Unlock meaningful embedded value and position us for incremental growth and any of the appreciation over time.
In terms of dispositions during the quarter.
We sold it to Kingston help held in Myrtle Beach, and an accretive multiple of 12.9 times.
Our team was able to successfully unlock incremental value by taking time to simplify the structure of the asset and the package the development opportunities for potential buyers.
Indeed in these steps and able to serve on a competitive process and achieve attractive pricing for this asset.
We also opportunistically entered into two contracts to sell two portfolios.
Well they totaled 39 assets for approximately $490 million, which represents an accretive EBITDA multiple of 10.6 times.
The first portfolio of 21 hotels close in late June and the second portfolio of 18 hotels is currently under a firm contract.
And is expected to close this month.
In aggregate.
These sales exceeded our initial target.
Of $100 million to $200 million of disposition proceeds.
These 39 hotels, which represent 10% of our EBITDA are primarily located in slow growth low revpar submarkets and generate revpar that is $50 below our remaining portfolio.
The sale of these assets have several strategic benefits and as a result, we have enhanced our growth profile.
Our year to date pro forma Revpar growth is 90 basis points higher or 1.8% excluding these assets.
We enhanced our operating metrics the absolute revpar of a comparable increase to nearly $150, which is a 6% improvement excluding these hotels.
And we have enhanced our geographic footprint.
Our reshaped portfolio drove a higher percentage of EBITDA from markets that we believe are well positioned to outperform long term such as northern and southern California.
Additionally, we recently entered into an agreement with Wyndham to terminate our animal I guarantee at the end of 2019 three years ahead of the expiration.
[noise] win them will remain obligated to fund the 2019 in Hawaii guarantee payment of approximately $10 million.
Our children will also receive a $35 million lump sum termination payment, which we believe represents the fair value of the remaining time under the guarantee.
We're currently evaluating the rebranding of these hotels, which is expected to occur in phases, beginning early next year.
The termination allows us to unlock substantial value embedded in these hotels with brand repositioning.
These eight hotels represent over 13% of our EBITDA and are located in prime locations within top markets, such as Boston, San Diego Charleston, Santa Monica.
We are underwriting a 20 point improvement in the Revpar index.
We believe that this increase in Revpar index will generate at least.
200 basis points of incremental portfolio revpar growth overtime.
In aggregate these transactions improve the overall quality of our portfolio and create the opportunity to further drive long term shareholder value.
With regard to the Knickerbocker, we have a high degree of conviction and underlying real estate value.
The success of our recent disposition program allowed us to exceed our initial expectation of sales proceeds and significantly increase our balance sheet capacity.
Therefore, with this positive backdrop, we will continue to be extremely disciplined and patient.
As it relates to the Nick.
We believe that this discipline will allow us to maximize the overall value for our shareholders.
Additionally, we are pleased with the Knickerbocker continues to outperform the New York market and generated 6.3% Revpar growth.
For the first six months of the year.
Now as it relates to capital allocation, our dispositions have created significant investment capacity of over a billion dollars and further strengthens our fortress balance sheet.
We will remain highly disciplined as we deploy this capital and have several options available to us to drive long term shareholder value, including share repurchases and multiple value creation opportunities such as brand conversions and ROI initiatives.
As it relates to share repurchases, we have been active this year, given a significant discount to our navy.
Poster dispositions given the enhanced quality of our portfolio. This discount has widened.
Increasing the attractiveness of share repurchases as we look to recycle proceeds from asset sales.
To this end since our last call, we repurchased $43 million of shares.
Now with respect to our operating performance.
We achieved solid revpar growth of 8.7% outperforming the industry in both the upscale segment and the top 25 markets during the second quarter.
Similar to the industry, the Easter shift negatively impacted us in April .
And having an extra Sunday was awful impactful to June .
Our performance this quarter was driven by the continuation of solid revpar growth in markets, such as Louisville, and Northern California, where we should typically invested capital last year as well as strength in markets, such as Chicago and Austin.
In Louisville, our Revpar increased by a robust 12.1%.
Driven by the continued ramp up of the recently renovated marry up moving downtown.
The hotel benefited from a strong group base, which also drove a 13% increase in food and beverage during the quarter.
A trend that we expect to continue in the second half of the year.
Our positioning in this market will be further enhanced by the sale of three hotels in the outlying submarkets of Louisville.
Excluding these assets under contract our Revpar and Louisville would have increased over 19% in the second quarter.
Our northern California hotels achieved solid revpar growth of 6.9% during the second quarter.
Continuing the trend of outperformance since the beginning of this year.
Our revpar exceeded the overall market by 750 basis points in the quarter.
Although we expect third quarter revpar to moderate due to non repeat citywides weeks with a strong fourth quarter.
In New York.
Our hotels outperformed the overall market by a 180 basis points, achieving flat revpar growth.
Although the overall market was soft during the quarter, we continue to benefit from the outperformance at the Knickerbocker.
Moving to Austin.
Our hotels achieved solid revpar growth of 1.4% despite renovations at one of our hotels.
We continue to expect moderating trends in Austin during the second half of the year.
Also remains a core long term market for us and we have taken steps to concentrate our portfolio in the CBD, which now represents 70% of our Austin EBITDA.
Similarly, we have strengthened our footprint in Denver, South, Florida, and Houston by selling several assets and slow growth low Revpar submarkets of these major Emmis A's.
Finally, our performance. This quarter was also aided by the strength in a number of other markets such as Philadelphia, Atlanta, Boston, Dallas in Charleston, which achieved revpar growth of 2.7% in aggregate.
An added benefit of our noncore asset sales is that our concentration in key long term growth markets, such as Boston, Charleston, New Orleans, and Waikiki will become more prominent.
Further illustrating the enhanced quality of our portfolio.
Overall, we are pleased with our second quarter performance in light of the recent deceleration in industry trends.
In terms of our outlook for the second half of the year.
We expect the uncertainty created by the trade wars to lead to a continued softness in corporate spending.
Well the remainder of the year with the exception of the incremental uncertainty around corporate demand our expectations around trends in our markets generally remains unchanged.
We expect to continue to see solid performance in markets, where we invested significant capital last year, such as Louisville, Northern California, and Tampa, where our pace remains robust for the second half of the year.
These tailwinds will be offset by weaker performance in Denver, Austin and South Florida.
The combination of our Tailwinds along with our recent dispositions is allowing us to hold our full year revpar outlook.
I will now turn the call over to Shaun for a more detailed review of our operating and financial highlights Shawn.
Thanks Leslie.
Before discussing our second quarter results.
Please note the Boeing.
First.
Our second quarter and year to date operating results include our 127 owned hotels as of June Thirtyth.
Which excludes Kingston plantation and the portfolio of 21 hotels that we recently sold.
Second our full year outlook includes our 109 owned hotels after the sale of the 18 hotel portfolio.
And finally, corporate adjusted EBITDA and FFO only include the operating results for oral Jays ownership period.
With these housekeeping items out of the way.
We are pleased to report that second quarter Revpar grew 2.7%.
Which was driven by 8.3% increase in demand.
And 0.4% increase in rate.
May was our strongest month of the quarter.
With 1.8% Revpar growth.
Revpar was essentially flat in April and June .
I plus 0.4%.
And negative 0.1% respectively.
It is notable that our portfolio outperformed the upscale hotels.
And gained 110 basis points of market share during the quarter.
Excluding the 18 hotels under contract.
Our second quarter Revpar growth was 1.1%.
Representing a 40 basis point improvement.
Total revenue grew 1.1% during the quarter, which exceeded our revpar growth.
Due to a 10% increase in other departmental revenues.
Which was driven by the continued success of recent parking and other revenue initiatives.
From a segmentation standpoint, our second quarter benefited from a 2.2% increase in grew revenues.
Which was primarily driven by our hotels in northern California and Louisville.
Where group revenues increased 20% and 27% respectively.
That said the group segment only represented approximately 18.5% of our second quarter room revenues.
The strong group results were partially offset by a slight decline in transient revenues.
Which was impacted by a decline in government demand.
However, we successfully backfill the majority of the loss transit demand with incremental contract business.
Turning to the bottom line, our second quarter pro forma hotel EBITDA.
Was $143.2 million.
Please note that our second quarter pro forma hotel EBITDA guidance was reduced by approximately $16.7 million.
From the sales of Kingston plantation.
And a 21 hotel portfolio.
In terms of our operating margins.
We were pleased that our asset management cost containment initiatives limited the increase in second quarter operating costs to only 2%.
Which limited our hotel EBITDA margin contraction to 59 basis points.
Our team is continuing to implement best practices to manage productivity and labor cost.
And this full employment environment.
We were pleased that we limited the increase in second quarter wages and benefits to only 3%.
Which was slightly better than expectations.
Our operating results also translated into solid corporate results.
Our second quarter, adjusted EBITDA was $148.4 million.
And I FFO per share was 69 cents.
Please note that our second quarter, adjusted EBITDA and AFFO guidance was reduced by approximately $1.1 million and a penny respectively.
From the sales of Kingston plantation, and a 21 hotel portfolio.
Now, let's turn to capital allocation.
Our recently announced dispositions would not only transform our portfolio quality.
And improve our growth profile.
But will also create significant investment capacity.
As you would expect we will remain highly disciplined as we evaluate our alternatives to deploy this capital.
We have a range of highly accretive opportunities to pursue.
Including share repurchases.
Multiple brand conversion opportunities, including the eight Wyndham hotels.
And a $150 million to $200 million of high impact ROI opportunities.
Let me provide an update on our share repurchase activity so far this year.
Since our last call, we repurchased over 2.5 million shares.
For approximately $43.5 million at a significant discount to and maybe.
Since the beginning of the year, we have repurchased over 3.1 million shares for approximately $54 million at an average price of approximately $17.30 per share.
We currently have just under $206 million of capacity on our share repurchase program.
Looking forward, we expect to continue returning capital to worst shareholders through share repurchases.
Depending on market conditions.
Additionally, we continue to view our dividend at a critical tool to return capital to shareholders.
Our recent asset sales have further strengthened our already fortress balance sheet.
We ended the quarter with $2.2 billion of debt.
Approximately $700 million of unrestricted cash.
And net debt to EBITDA of 3.3 times.
Pro forma for the impact of our dispositions, including the 18 hotel portfolio under contract.
Our net debt to EBITDA improved to 3.1 times.
We continue to maintain significant flexibility on our balance sheet.
As of the ended the quarter over 93% of our debt is fixed or hedged.
Our balance sheet remains highly flexible.
And adjusted for all dispositions 90 of our 109 hotels are unencumbered.
Which represents approximately 80% of EBITDA.
As previously announced during the quarter, we refinanced point $4 billion of debt.
Which extended our maturities increased our flexibility and reduced our annual borrowing costs by $2.5 million.
We will continue to explore opportunities to further ladder out maturities and lower interest expense.
As it relates to capital expenditures, our full year capital program remains on track and on budget.
We continue to expect $90 million to $110 million in 2019 renovations.
And expect full year renovation related displacement of 40 to 50 basis points.
Before turning the call back over to Leslie for closing remarks.
I would like to provide additional color on the assumptions underlying our updated outlook.
Although our second quarter was in line with expectations.
We have seen some softening in July and acknowledge that forward looking data points indicate that there is incremental risk to lodging fundamentals for the second half of the year.
We have incorporated the following assumptions into our 2019 outlook.
Recent trends and business sentiment will continue through the end of the year.
Northern California will continue to outperform.
Third quarter growth is expected to moderate but pick up again in the fourth quarter.
Which is a function of the timing of Citywides and a favorable comp due to last year's strike in San Francisco.
Louisville will also continue to outperform.
Driven by the continuation of post renovation ramp up.
And strong group production at the Louisville Marriott.
And the fourth quarter will be impacted by softer citywides in Washington, DC, Chicago, Houston and San Diego.
We are pleased that despite recent industry trends.
Our dispositions enhanced our growth profile and allowed us to maintain our prior revpar growth outlook.
Our revised outlook assumes no additional acquisitions dispositions refinancings or share repurchases.
For 2019, we now expect.
Revpar growth to range between flat and up 2%.
Hotel EBITDA margins in the range of 31.6% to 32.2%.
Consolidated hotel EBITDA to range between 449 million to $474 million.
Adjusted EBITDA to range between 455 and $480 million.
And adjusted FFO per share to be between $1.98 and $2.10.
Which incorporates shares repurchased to date, but no additional repurchases.
Please refer to the supplemental information.
And a new investor presentation, both of which were posted on our website last evening.
The supplemental includes pro forma results for our 109 hotel portfolio over the past four quarters.
I will now turn the call back over to Leslie for concluding remarks.
Lastly.
Thanks, Sean as we sit today.
RLJ is ideally position with a portfolio rooms oriented high margin premium branded hotels and growth oriented markets.
We've achieved this positioning <unk> outlining thoughtful strategy and meticulously executing on our objectives, including selling noncore assets and strengthening our balance sheet.
With the recent transactions not only have we enhance our portfolio quality, but also creating meaningful investment capacity to pursue highly accretive capital allocation opportunities as we move forward, we have multiple levers to create value such as ROI projects.
Conversion opportunities and share buybacks.
We are truly pleased with our progress and today, we are uniquely positioned to drive significant any appreciation long term.
We will now open the line for Q and a.
Operator.
Thank you.
If youd like to ask a question. Please press star one on your telephone keypad, a confirmation Turnbull indicate your line is in the question queue.
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Our first question comes from the line of Wes Golladay with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone can you talk about the flexibility you have on the capital allocation plan with the stock currently yielding around 8% is that one of the top priorities right now.
On the buyback.
Hey, Wes. Thank you you know Wes obviously with a billion dollars of capacity, we have a lot of optionality. We can what that allows us to do is not a allow these things to be mutually exclusive. So we can do buybacks and also continue to invest in our portfolio, but clearly buybacks given where we are trading today are the obvious choice from a prioritization perspective and at these levels, we do intend to continue to be active.
Okay, and then when we look at the 150 to 200 million of ROI spend how much of that is tilted towards the legacy Felcor portfolio.
Hey, Wes it's Sean it's actually a mix between legacy Felcor is way as long as legacy RLJ portfolio I think when you look at the Repositionings the that $150 million to $200 million does exclude any capital that a that we think we're going to have to invest into the wyndham portfolio as part of the conversions, but it does include a the conversion of Mandalay Beach, which is a which is a big chunk of that of that conversion, but I wouldn't.
Say that its really slanted towards any one of the two portfolios.
Okay and can you clarify the 20 hotels that could potentially convert or have the franchise agreements are changing over the next few years does that include the eight Wyndham.
Hi, guys Wes.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.
Good morning, everyone.
Good morning.
Can you provide just a little bit more background on the dispositions the process, there and I know you're targeting 100 to 200 million, but maybe how both of the deals came about and then just how you thought about pricing perky pricing valuation of those portfolios versus.
What's remaining today for RLJ there would be helpful.
Yeah.
So.
<unk> <unk> at the beginning of the year, we outlined our key priorities and outlined our strategy and one of our priorities. This year was a sale hundred to $200 million of noncore assets at that time, we obviously had thought about what's pool of assets would potentially be assets that we'd be looking to sell a and we started the process from a marketing perspective, and the deals really came about might because we did the process identified some buyers who really their investment needs really match. The types of assets. We were selling again. These are slow growth low revpar assets and capital needs and so finding the right buyer was important and that really allowed us to upsize it and from a pricing perspective, we think the pricing reflects the profile of these assets the market dynamics and the capital needs.
You know in any time that we sell an asset we are looking to maximize their relevant asset and I think that's what we did here.
Okay. That's helpful and then.
Just back to the Wyndham deal.
And can you provide any initial thoughts on maybe how much capex you might.
Have to spend either with or without potential for key money and then what sort of disruption should we kind of think about.
In 2020, as you guys renovate and reposition those hotels in terms of Revpar and maybe margin impact.
Mike those are great questions, but it's too early for us to be able to provide that level of detail. Please note that this is a high priority for US and then we're working really hard we're working with the brands to understand whats available what options, we choose and underwrite that and we look forward to being able to provide a wholesome update on our next call as we provide as we get more clarity around around which branding and the timing and we'll be able to provide some color on that.
Yes, Mike just a tad bolt on to utilize it and I think the one thing that I would focus you to think about on that $35 million termination payment.
That is simply an acceleration of.
Of the guarantees that we would have gotten otherwise under I don't know I guarantee it's although the optics for EBITDA or a reduction of the 2021 and 22 EBITDA. We are getting paid that upfront, we'll have that capital with which to create value and so I think thats an important way to think about it.
Got it that's helpful and it's fair to assume that of these eight hotels you are going to keep all of them or any plans to potentially sell one or two.
Well, Mike I would never say never but you know one of the jewels of the of the merger transaction was pulled asset we understood how valuable the real estate is and and so the growth profile. These assets based on what we think we can do from a topline perspective is it is a key cornerstone of our growth profile going forward. Additionally, we believe this tremendous any appreciation in these assets, we think that the cap rate that we'll be able to get post renovation and post conversion will be substantially different than what we get today I would tell you that you know lots of people understand the value of these assets because the inbound calls we've gotten on this our tremendous not it hasnt been executive on our team has received several call because they understand how these assets and where these assets are located as prime real estate and so.
So we think it's a key component for us going forward, but I would never say never about possibly selling an asset.
That's all from me thank you.
Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning, Andy.
Do you have to sales seem to indicate a strong buyer interest in the select service assets is there any appetite on your part to sell additional assets or or are you pretty much done there.
Anthony you know these transactions represent a heavy lifting that we wanted to do to reshape our portfolio and the vast majority of our EBITDA is concentrated in assets that is aligned with our long term vision.
That said when you have 100 asset portfolio. You know we are going to be an active portfolio manager and I would say that on a go forward basis, you know that will be more opportunistic with ourselves is the way I would sort of think about it.
Got it thanks, and Sean you mentioned the dividend as we have to sell that happened covered just come down a bit how do you view dividend coverage are you comfortable with where you are in terms of.
Coverage and as a dividend kind of right size of the current level.
Sure Anthony we and I'll start with stating the fact that the dividend maintaining the dividend is very important part of our overall story at RLJ and so when we think about the dividends and the loss of EBITDA from the sales.
You have to look at the other side of that equation, which is the heavy investment capacity, which which we've raised as ever as a result of the sales and our ability to redeploy that in a way that that helps today.
Take the dividend coverage back down to where.
To where it was before there are both short term and medium to long term tools that we have the short term tool that we're going to have a is through incremental share repurchases, which will have an immediate 8% yield on that on that capital from a dividend perspective, the medium to longer term tools that were going to deploy or the ROI initiatives. The conversions are there the brand repositioning et cetera.
To replace a EBITDA as well and with a billion dollars or investment capacity you know that's a tremendous amount of embedded EBITDA that that's that's gonna sit within our portfolio was reduced as we redeploy.
Got it thank you.
Thank you. Our next question comes from the line of Dori casting with Wells Fargo. Please proceed with your question.
Good morning, everyone.
Sorry, good morning.
Can you talk to the operations of the next since you acquired Felcor and what are you seeing any the higher end New York City transaction markets.
On the operations side Dori, we're very pleased with the performance. So far as you know the Nic had a great first quarter and even year to date, we're at 6.3% Revpar. So we've been very pleased with the performance in fact, even international demand was up at the Knickerbocker as we continue to ramp up the hotel and its up a literally 23% overall and 9% of our overall portfolio in New York and when we look at a the hotel. We're very pleased with the continuation of growth we have high expectations in the back end of the year as well. So we're pleased with what the Nic has been doing on an overall market basis I'll kick that back over to Leslie in regards to New York in general on the transaction side.
No no I would say that on the transaction side, obviously for assets that have stories in New York and our iconic Theres interested it obviously you have to have the right buyer associated with that you know.
High net worth individuals.
Family offices, and people, who are looking past yield and are focused on long term real estate value in New York.
Okay. Thank you.
Thank you. Our next question comes from the line of Austin Wurschmidt with Keybanc capital markets. Please proceed with your question.
Hi, Good morning, everyone I'm just curious how quickly we should think about you redeploying some of this available dry powder and if you could.
Ballpark, maybe your ROI and redevelopment spend targets for 2020.
Sure Austin I think on the on the short term you would expect US you know certainly on the on there on the share repurchases to continue to be active for the balance of the year. You know we have a we have $206 million remaining on our on our share authorization program.
You should expect us to be methodical and systematic about how we how we redeploy that capital within we didn't share repurchases.
For 2020 and beyond I think what you should expect.
On the ROI initiatives, what we've said is $150 million to $200 million of Optionality. There that we expect to ER to invest over the next two to three years.
I think on the Wyndham portfolio as well what potential conversions, we expect those conversions to happen over phases over the next three years and so I think what you'd expect.
Is that we're going to redeploy that over time, we don't have a set target for 2020 or even 2019 I think what what you should expect us to do is be opportunistic.
Redeploying that capital based on what the market offers us and but you should also expect us.
You know to be aggressive to the extent that the market present, those sorts of options to us, but we are we're going to be.
Yeah, you know focused on deploying that capital in member on the most accretive option possible.
Appreciate that and then what percent of the portfolio would you say remaining has similar characteristics to the assets, you've recently sold and the two legacy asset portfolios and.
Just thoughts around continuing to sell those.
Yeah look I I would say Austin as I said before the vast majority of our EBITDA as cost fit in the assets that that fit our long term aspirations for our portfolio. So there is a handful of assets left but it's not meaningful Scott and then just last one for me going back to the dividend I guess longer term, how do we think about sort of a target payout ratio and how you think about setting that overtime.
Allison so it's their payout ratio is one of the variables with which we set the dividends. The other is you want to make sure that we have a competitive dividend to our peers on a yield basis. We also you know as a result have to have to pay out essentially 90%, but really 100% of our of our taxable income.
And so.
All those factors come in I think we we believe that our that that our dividends. It in as an important part of the RLJ story as I articulated before and so I think we we think maintaining the dividend and protecting the dividend is core to to sort of our offering to the shareholders in a way for us to return capital to shareholders.
Thank you.
Thank you. Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Hey, guys good morning.
Good morning.
Just a question on South, Florida, and Fort Lauderdale.
Elevated sales there and in West Palm Beach.
I was I think that you know with the Miami a convention center reopening.
That helped drive that demand incremental demand on a sustained basis was the other dispositions a function of just kind of that needed to be in the harder demand.
Oh are you trying to avoid supplier I guess, what's the rationale there has that thought south Florida was the strong.
Mark to market you guys like.
Yeah, I mean look I would say that you're you're spot on in terms of the key driver you know our goal is to own assets that our premium branded rooms oriented high margin in hotels located in the heart of demand and these assets have moved away from that definition and so we look to sell those assets and we saw the phone you saw that and moving away from that thesis in a function of how them how they the growth profiles and flow and the Revpar isn't where we want it to be in terms of poaching a full service type asset with flex service margins and Tom can talk about the margin the market profile, yeah. So a little bit of color around Miami. We're excited about 2020 as you know the Super Bowl is coming there and the convention centers ramping up it'll be over roughly 200000 rooms, which is a good starting point as a convention center opens up and has opportunity to get volume. The other thing about South Florida is less they spoke about harder demand you know key west has been a great market for US now that this is the first time all rooms are back over.
And in key West and we're getting some great Revpar results down there at 6.9 in the second quarter and then the other hotels that we remain to have our embassy suites in Miami Lauderdale, as well as the Deerfield Beach, which came with the Felcor transaction and those hotels have great locations in harder demand on the beach in Deerfield right on 17th Street near the Marina and then Miami near the airport. So we're feeling positive about the hotels that we have and continue to reinvest in those.
Opportunities.
Okay. Thanks, and then just going back to a question and Austin was getting at maybe different way the Vicki.
I ask that you sold obviously needs to portfolios had a lot of associated capex, the buyer would need to pay.
Just wondering what your remaining I think 109.
Assets, how many of those have that that elevated capex requirement just thinking about you know appropriate cap rates for the devaluation of the NAV.
Well I mean, obviously, we chose not to allocate capital towards those assets because we didn't think that was the right capital allocation for us.
But the assets that we hold today, we've chosen to invest in those assets and put the capital towards it. So I would say again with the vast majority of our EBITDA concentrated in assets that we own those are the assets that we didnt have been investing in as a handful of assets that you know still fit to slow growth low for a par profile, but the vast majority of what we have today is concentrated in what we want to own is aligned with our vision.
Okay and last one I am just going back to the Wyndham.
Our just in your initial thoughts.
Would you care to share of the potential type of strategy there would it be independent soft brand.
And then would you expect just given the nature of the repositioning would you expect those to be shut down.
For a period for periods of time.
I would say that we're looking at all you know brand options, including independent for these assets were going to run the analysis in term and whats the the best.
Option for the relevant assets and in terms of the conversions, we would expect to operate them well we convert.
One of the things I would add on to his.
You know our partnership with Wyndham is very important to us and the field and regional teams have been doing a great job in maximizing performance at this point in time and it's strictly is offered opportunities for index opportunities and mix changes, but I want to make sure I put that on record.
Thanks, guys.
Thank you. Our next question comes from the line of Tyler <unk> with Janney Capital markets. Please proceed with your question.
Hey, good morning, Thank you.
Just a couple of follow up questions for me.
All right can you just remind us where you're comfortable on the leverage side of things and how you guys are thinking about leverage in relation to your outlook for the industry and some of the uses of capital as well.
Sure Tyler I mean, our long term goal for a net debt to EBITDA is approximately four times with these dispositions. We have you know we are you know about a turn below that a we think maintaining some incremental balance sheet capacity at this stage of the cycle, particularly in light of recent headwinds. This feels like a prudent thing to do for our shareholders and we also think that there will be good opportunities with which to deploy that capital share repurchases being the most front and center today.
But we're very comfortable with our leverage levels today. When we think about leverage are we thinking about leverage over an entire cycle and we and we peg our leverage to at any one point in time to what the leverage would be and what we would view as a relatively draconian downturn scenario in other words, we stress test our leverage you know at all times and wanting to make sure that if in fact.
You know that the that a draconian downturn happened or that our balance sheet, we were well positioned to not only survive, but thrive during a downturn and create a and create value for our shareholders. Most likely through returning capital through share repurchases. So we're very comfortable where we are where we are today and expect to continue to be opportunistic.
Okay, Great. That's helpful and then how about on the preferred that's outstanding you guys have any potential thoughts or maybe creative ways to take that out.
Sure. That's a the preferred is are not callable a under the contract I think that is you know an instrument that is relatively expensive relative to our debt and something that we're going to continue to monitor but when we look at that opportunity to deploy capital you know on on the balance sheet that that is certainly one of them. There are some I would be remiss not to to note that we have senior debt that we have a call option for.
Mid next year that based on where that coupon is at 6% versus where we could borrow today will create incremental at that FFO for our shareholders of a of over $10 million a year and so that's a I'd say another tool that we can use that sort of that there is already a vehicle built into that instrument, but the preferred there definitely one that we would also think about Tyler.
Okay, and then last question for me.
Any update on the supply outlook, how that's changed with the 109 hotels. What you have now versus last quarter are you still have 127.
Yeah. Tyler this is a couple of ways to kind of look at look at supply you look at least on an absolute basis and what I would say, we must look at kind of growth within our markets. It has improved with the dispositions, but the other way to look at supply is look at where our assets are located at relative to that supply and I would say that from that perspective, our position has moved in improved dramatically well take Austin for example, prior to dispositions about 40% of our EBITDA was coming out of the CBD today, 70% of our our even ask coming out of the CBD. The revpar in that market, where we were before and it was 1.4%. If you take out the assets that we have pending the revpar growth would have been 3.5 Louisville is another example of that where we sold the outlying assets and we reported revpar growth of 19, I'm, sorry, 12%, including those assets would have been up 19%, because we moved 100% of our EBITDA into a into the CBD and so again, it's not just looking at absolute percentages, but also looking at where our assets are.
Our located to that supply, but more importantly, low, whereas it located relative to demand and again, our thesis is making sure that the assets. We hold are located in the heart of the van.
Okay, Great. That's all for me. Thank you.
Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.
Hi, Good morning, everybody I think most of my questions have been asked and answered, but just just one quick one for John or Leslie.
John I think in the prepared remarks, you mentioned something about.
Yes, the forward guidance or did the.
Dispositions enhance your growth profile allowed you to maintain your Q4 guidance can be like if I heard that correctly can you just give any sense of sort of.
How much of a tailwind some of the dispositions or some of these lower growth markets sort of would've been to the portfolio and that's it for me.
Yeah, So what I, what I would say is is that you know overall, we're really pleased with our ability to hold our guidance in an otherwise choppy environment for lodging and the dispositions really was the primary driver in our ability to hold that guidance. If we had not achieved the dispositions. We probably would have moved the midpoint by 50 basis points, plus or minus not not dissimilar from our peers.
At the same token I also want to say.
That you know our guidance does reflect.
The softness.
[noise].
Here it is implying flat. So you know our ability to hold is definitely driven by the dispositions, which we believe further illustrates the strategic benefit of what we did.
But the same token we believe our guidance is achievable.
And it reflects the softness that that we're seeing on the business transit side, yes.
And a bolt on to a couple.
Yes, good brought a couple of data points to why these comments on the first half of the year.
The removal of these 39 assets added roughly 100 basis points to our revpar growth for the first half of the year.
So our 109 hotel portfolio generated 1.8% revpar growth for the first half of the year and so when you look historically.
That's that's pretty compelling when you look in 2018, it was about 50 basis points.
Growth enhancement from the removal of those assets.
And so I think thats another data point forward looking.
In the deck that we published last night, which we'd encourage everybody to spend time with.
We put a marker out there, which we think our long term growth will be enhanced.
By 50 basis points from the removal of these assets.
On a go forward basis, and so I think there are data points that just.
Helped reaffirm some of the comments that we made.
And.
Thanks, guys Thats a lot of color and very helpful. Just to be like a 100% clear then because of the way you guys do it and you go back and restate.
Pro forma basis. This is purely from these hotels generating lower revpar growth theres nothing in the forward forecast or the unit that would be just due to mix shift from lower absolute dollar revpar and keeping higher dollar revpar am I understanding that correctly.
Thats correct when you look at.
A forward looking basis standpoint on the on these hotels, we took out.
All the sold hotels for our full year guidance.
But to Echo lesbians comment we are sober on on the trends that we see for the back half of year, particularly business transient and so when you the assumptions that are underlying our back half to be your guidance, which is flat revpar.
Includes the softer business transient environment.
But it doesn't really change our thesis for what markets within our portfolio. We believe we're going to outperform what's northern California, and Louisville are big drivers of that as well as the other segments I mean group continues to perform well.
For us as well as the industry.
And our contract business has been a strong performer for us as well and we expect that to continue particularly as as we think about mix shifting away business transient trends continue.
I get it thank you both.
Thank you, ladies and gentlemen, we have come to the end of our time allowed for questions I'll turn the floor back to Ms. Hales for any final comments.
Thank you operator.
As you all can tell we've been extremely busy this quarter you successfully executing on our key priorities and we wanted to give you a comprehensive update today I want to take a moment to thank the entire RLJ team for their relentless effort and unwavering commitment our success would not have impossible without the many contributions from them. We are very pleased with all that we've accomplished and we appreciate the ongoing support of our investors enjoy the rest of your summer everyone and we look forward to reporting on the continued progress in the third quarter.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.