Pebblebrook Hotel Trust - Earnings Call - Q3 2019
October 25, 2019
Transcript
Speaker 0
Greetings, and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Raymond Martz, Chief Financial Officer. Thank you. You may begin.
Speaker 1
Thank you, Michelle, and good morning, everyone. Welcome to our third quarter twenty nineteen earnings call and webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer. But before we start, a quick reminder that many of our comments today are considered forward looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10 ks for 2018 and our other SEC filings, and future results could differ materially from those implied by our comments.
Forward looking statements that we make today are effective only as of today, October 2539, and we undertake no duty to update them later. You can find our SEC reports and earnings release, which contain reconciliations of the non GAAP financial measures we use on our website at helblebrookhotels.com. Okay, for the 2019, our hotel operating results were slightly below our expectations. Adjusted EBITDA met the lower end of our outlook and adjusted FFO of $0.77 per share was in the middle of our outlook range of $0.76 to $0.78 In the third quarter, same property RevPAR decreased 2.2%, which was just below our outlook of flat to down 2%. Same property non room revenues increased 1.9% and same property total RevPAR was down 1%, which was also slightly below our outlook.
In addition to the moderating business and leisure hotel demand that we experienced during the quarter, our South Florida hotels and resorts were impacted by Hurricane Dorian in early September, which we estimate negatively impacted same property RevPAR growth by 30 basis points. Overall, our 2.2% RevPAR decline during the third quarter was a result of a 0.6% decline in ADR and a 1.6% decline in occupancy. Our portfolio on a relative basis outperformed our comparable combined STR market tracks, which experienced a 2.6 RevPAR decline, 40 basis points below our same property third quarter RevPAR. We also had approximately 60 basis points of negative impact to RevPAR at five of our hotels that have recently transitioned to new management companies. However, this was largely as we had forecasted going into the quarter.
Interestingly, 17 of the 20 market tracks in our portfolio experienced negative RevPAR for the quarter with Philadelphia, Washington DC and Naples, Florida as the only three market tracks that generated positive RevPAR in the quarter. As for Pebblebrook, our best performing markets in the third quarter were Boston, San Diego, Philadelphia and Naples, Florida. In addition, our hotels in 15 of our 20 markets outperformed their respective star market tracks. Our Boston hotels generated a RevPAR increase of 1.7%, which was above the Boston CBD RevPAR decline of 1.7%. This outperformance was driven by the Weston Copley, the Liberty and W Boston, similar to the trends we experienced during the second quarter.
These properties continue to make progress working through the challenges of the Starwood Marriott sales, revenue management and loyalty program integrations. In addition, the Westin Copley has shown consistent growth all year, including the third quarter as it gained share as a result of its very significant renovation last year. And W Boston also began to gain share in the third quarter as a result of the rooms renovation we completed at the end of the first quarter. Boston continues to be an outperforming market for us this year despite its weaker convention calendar. Boston CBD hotel demand was up 2.7% in the third quarter and is up 3.4% year to date and RevPAR is up 1.5% year to date.
San Diego was another positive performer for us in the third quarter producing a 0.8% RevPAR gain which outpaced the San Diego market track decline of 2.7%. This was due to solid performance at our Hilton Gaslamp and Embassy Suites hotels in Downtown San Diego. Our Paradise Point resort also generated a positive result in the quarter as did our recently renovated Hilton San Diego resort that is ramping up following its significant renovation that was completed midyear. Our La Playa Resort in Naples, Florida had a tremendous quarter generating 17.5% RevPAR growth which led our portfolio even with cancellations resulting from Hurricane Dorian in early September. This resort continues to ramp up nicely following Hurricane Irma and the completion of our major multi year comprehensive renovation earlier this year, and we applaud our property team's continued solid results.
Our underperforming markets were the ones we expected. Our Seattle hotels experienced a 7.9% RevPAR decline due to supply increases in the market, which are primarily attributable to the new twelve sixty room Convention Center hotel that was added to the market at the end of last year. Despite ongoing healthy demand growth of 9.9% in Seattle from a robust economic base which accelerated from the second quarter, the city was not able to immediately absorb its year to date 13.1% supply increase and we expect Seattle to be an underperforming market through the remainder of 2019. RevPAR at our Washington DC hotels was down 4.2%, which underperformed the Washington CBD, grew RevPAR 4% during the quarter. Our underperformance was mainly due to the recent management transitions at Mason and Rook and the Donovan Hotel in anticipation of the upcoming repositionings and major redevelopments of both hotels.
We expected this near term underperformance, which is normal for management transitions. Our Chicago hotels generated a 6% RevPAR decline, which was slightly below the 5.6% decline posted by the Chicago CBD as Chicago continues to be challenged by its weaker convention calendar and increases in supply growth. We gained meaningful RevPAR share at our Hotel Chicago, but gave it back and a little more at our Western Michigan Avenue hotel as we've been unable to overcome the huge group room shortfall we entered the year with following challenges from the Marriott Group sales integration. Fortunately, the convention calendar for Chicago in 2020 is much better and our Weston hotels up significantly in group on the books for next year. Our San Francisco hotels produced a 4.9% RevPAR decline during the quarter, which was slightly under the San Francisco market track decline of 4.2%.
We expected this to be the most difficult quarter in San Francisco given the unfavorable convention calendar in the quarter compared to last year and the operator transitions at both the Marker and Villa Florence in anticipation of the upcoming major repositionings and renovations of these properties next year. We expect San Francisco to be much better in Q4 given the favorable convention calendar and an already healthy group pace advantage on the books. And finally, our Key West hotels generated a 5.7% decline in RevPAR, slightly better than the market's 6.1% decline. The negative RevPAR performance overall in Key West was mainly due to Hurricane Dorian, which caused a significant amount of cancellations during what was typically a very busy and profitable Labor Day weekend in Key West. The Keys also faced a sargassum seaweed outbreak, which negatively impacted the southernmost beach resort during the quarter.
The impact on RevPAR from the seaweed was minimal, but we lost an estimated $850,000 in food and beverage revenue and $500,000 in hotel EBITDA. Overall for the quarter, transient revenue, which made up about 77% of our total portfolio room revenues, declined 2.9% compared to the prior year. Transient ADR declined by 1.5% in the quarter. Group revenues decreased 2% in the quarter with room nights declining 2.1% and ADR increasing 0.1%. This is primarily due to weak convention calendars in Chicago and San Francisco.
In terms of monthly RevPAR growth, July was down 3.9%, August declined 1.9% and September was down 0.7%. Our hotels generated $145,100,000 of same property hotel EBITDA for the quarter, which was $1,400,000 below the bottom end of our outlook. This was primarily due to the weaker business and leisure demand across most of our markets and the $1,000,000 combined negative EBITDA impact from Hurricane Dorian and the seaweed outbreak in The Keys that I mentioned earlier. Our hotel teams did an excellent job managing expense growth in the quarter. Same property hotel expenses increased just 1.2% during the quarter after adjusting for the impact of real estate tax increases from Proposition 13 at the California properties required in last year's corporate transaction.
Year to date, operating expenses excluding Prop 13 increased just 2.4% even with the continuing investments we've making this year improving the guest experience and investing in our employees. As we continue to make progress implementing our portfolio wide initiatives and cost synergies program, we expect to see similar expenses limiting expense growth and improving productivity in 2020 and 2021. Moving down the income statement, adjusted EBITDA was $136,500,000 which was at the bottom end of our Q3 outlook range. This was a result of a $1,600,000 savings in corporate G and A expenses, which offset the shortfall in hotel EBITDA. These savings came primarily from reduced incentive compensation expenses and some timing differences in preopening expenses.
Adjusted FFO was $100,500,000 or $0.77 per share, which was in the middle of our outlook range. Our interest expenses were $1,200,000 below our outlook, which combined with our $1,600,000 of G and A savings offset the $1,600,000 shortfall in hotel EBITDA. Due to the $138,000,000 of successfully completed property sales during the quarter, ensuing debt pay downs, reviewing our balance sheet at the end of the third quarter on a variety of metrics shows that we are in very good financial shape. Our debt to EBITDA ratio was at 4.6 times, debt to net assets after GAAP depreciation was at a low 35%, debt to enterprise value was at 36% and our fixed charge ratio was at three times. We expect to further improve these metrics and ratios as we complete additional property sales.
And finally, a quick update on our net asset value calculation. As we revised we have revised our estimated NAV for our portfolio to reflect the decelerating economic environment and the performance of our hotels in that environment. As a result, our calculated NAV has been slightly reduced to $36.25 to $41.5 per share with a midpoint of $38.75 per share, which implies an NOI cap rate of 5.8% at the midpoint. Based on our current share price of approximately $27 we trade at an applied 7.3% NOI cap rate, which is more than 30% discounts or a midpoint of our NAV, while also providing a healthy 5.6% dividend yield. And with that update, I'd like to now turn the call over to John.
Speaker 2
Thanks, Ray. As noted in our press release, the third quarter was more challenging than we expected. The rate of demand growth continued to modestly slow from the second quarter in both business and leisure transient, and September was particularly disappointing given the benefits that were expected from the Jewish holiday shift into October. Slowing economic growth around the world due to the trade war and continuing geopolitical events and uncertainty have clearly had an impact on business confidence, which is translating into slightly more cautiousness by businesses in investments and spending. This is also evidenced in travel, where trailing twelve month hotel demand growth has decelerated from a range of 2.7% to 3% a year ago or so to 2% to 2.1% most recently.
This slowdown in demand, along with a weaker year in group business across the industry, has pressured ADR growth, which has also slowed from a trailing twelve month growth rate of 2.4% to 2.5 a year ago to 1.2% to 1.5% in the last quarter. When trends are changing in either direction, it becomes harder to forecast, primarily because our business forecasts are based upon the consistency of trends. Since so much of our business in this industry is booked short term and even business booked further out like larger group business can quickly shrink or cancel, forecast variances can change quickly. While the demand trends this year have been moderating, the good news is we haven't seen any increase in cancellations or attrition, and we've not heard about any changes in corporate policies related to travel. And average spend per group customer has also shown healthy increases all year.
While industry RevPAR growth has been softening, the urban and top 25 markets have continued to underperform the industry. We believe this is primarily due to negative shifts in international travel and a relatively higher rate of supply growth in the industry in the urban and top 25 markets. Inbound international travel has been weak, if not negative this year, and outbound travel, meaning US citizens traveling abroad, is up significantly. Some of this is likely due to the strong dollar, and some is due to US policies and rhetoric that make it much more difficult or desirable to come to The U. S.
For Pebblebrook, on a year to date basis, we've outperformed our markets. We've outperformed our local competitive hotel sets in terms of gaining RevPAR share. We've outperformed the urban and top 25 markets as reported by Star, and we've performed in line with the industry. In the third quarter, we also outperformed our markets and competitors. But due to more challenging convention calendars in a number of our markets in the third quarter and the 60 basis point impact from operator transitions at five of our properties, we underperformed the urban and top 25 markets as we expected.
And as Ray stated earlier, Hurricane Dorian took about 30 basis points off our RevPAR performance in the third quarter. The fourth quarter, which has been shaping up since the beginning of the year to be a very good quarter for us due to favorable convention calendars in a number of our markets, doesn't look as good as it did ninety days ago as demand growth and pickup trends have softened. Nevertheless, our pace heading into the quarter continues to be extremely favorable. Specifically, as of the September, total room nights for the fourth quarter are up 5.4% over the same time last year, with ADR up 1% and total revenues up 6.4. Group pace is even stronger for Q4, with group rooms ahead by 6.2%, group ADR ahead by 5.6% and group revenues ahead by 12.1%.
So you can see pace is still pretty strong for the fourth quarter. The challenge we've been experiencing relates to in the quarter for the quarter pickup. It's been down on a year over year basis, and we expect pickup to weaken further in Q4 based on current trends. As a result, we've lowered our same property RevPAR and EBITDA forecast for the fourth quarter to anticipate further softening. Now let's pivot to how Pebblebrook is going to continue to create value for our shareholders regardless of the economic environment.
I'd like to break this down into three discussion topics: first, the repositionings and redevelopment opportunities throughout the portfolio second, an update on our strategic disposition plan and third, progress with our portfolio wide initiatives. When we made the decision to pursue the acquisition of LaSalle, we believe there was a significant opportunity to increase the value of the acquired portfolio by not only creatively repositioning a significant number of properties to drive higher room revenues, but also by utilizing and redeveloping the real estate more creatively to drive higher non room revenues, such as in the areas of food and beverage and room rental, just as we've done over the last nine years at Pebblebrook. After spending almost a year now evaluating the opportunities and creating an overall comprehensive plan for each hotel, we've come to the conclusion that there are more property and portfolio wide opportunities than what we originally anticipated. Today, we believe there are 16 properties within the portfolio that can benefit from substantial investment that will reposition them to a higher competitive level, improve the guest experience and drive very attractive returns. While we've made numerous operator and brand changes to position properties to maximize performance upon redevelopment, and we have a few more to go, we feel like we're in a very good place now to start this value creation process.
Over the past year, we've been feverishly planning these redevelopments with our designers, architects, operators and project managers, and we're extremely excited about the opportunities. I'd like to give you the broad parameters of this investment program, the returns we expect to drive, the timing and some details about a few of them. To date, including what we disclosed in yesterday's earnings release, we've announced and provided details on eight of the projects: The Donovan Hotel, which will become the seventh hotel in the Unofficial Z Collection following its reopening in the second quarter next year as Hotel Zena after completing a $25,000,000 repositioning and reconcepting Mason and Rook, which will join the Viceroy Luxury Urban Collection following an $8,000,000 upgrade, which is expected to be completed by midyear twenty twenty The first phase of the repositioning of Viceroy Santa Monica, consisting of $12,000,000 to reinvigorate this property's reputation as one of the most iconic luxury lifestyle hotels in the highly supply constrained Santa Monica market the $12,500,000 repositioning of Le Parque in West Hollywood through a comprehensive renovation of this entire all suite hotel the repositioning of Chaminade Resort and Spa in Santa Cruz, following the completion of a $10,000,000 upgrading of the property's vast indoor and outdoor public areas and meeting and event venues The second phase of the redevelopment of the Hilton San Diego Resort, which includes a $10,500,000 upgrade of the property's public areas on top of the just completed $21,000,000 of improvements to the hotel's guest rooms and meeting space completion by year end of the $5,000,000 repositioning of the 96 room Marker Key West and finally, the 37,000,000 redevelopment and reflagging of San Diego Paradise Point Resort as a Margarita Island Resort with the redevelopment not expected to commence until the second half of next year with reflagging targeted for late next year.
All but two of these projects will commence either late this year or early next year and be completed by no later than midyear next year. The marker Key West and Paradise Point are the two exceptions, with the marker already underway and Paradise Point starting after public approvals sometime in the second half of next year. These eight redevelopments total an estimated investment of approximately $120,000,000 with about 75% of this capital representing ROI related capital and 25% representing regular capital maintenance or renovations in the ordinary course of the property's life. We're forecasting that this repositioning capital will generate on average a 10% return on investment upon stabilization, which we typically get to between three and four years following completion. In addition to these eight projects, we anticipate commencing an additional seven repositioning projects by the end of next year or early in 2021, with the majority of the work and investments occurring over the twenty twenty to twenty twenty one winter and one last project in the 2021.
As previously discussed, some of these projects will involve us making operator or brand changes as part of the value creation process. All told, we're currently forecasting that these 16 major repositioning projects will represent a total investment of approximately $260,000,000 with roughly two thirds of the total amount projected to represent ROI projects, which we underwrite to generate an increase in EBITDA equal to a 10% return on investment upon stabilization. In addition to taking advantage of the opportunity to drive higher average room rates and RevPAR at these properties as a result of their repositionings, many of these major projects include creatively improving the real estate to generate opportunities to drive an increase in food and beverage revenues through the upgrading of, expansion or development of new experiential venues. For example, as part of the Donovan conversion to Zena, we're dramatically improving the rooftop and the Ground Floor. On the rooftop, we're taking advantage of one of the few hotels in Downtown D.
C. With a rooftop pool and additional rooftop real estate by upgrading the experience and adding very desirable rooftop venue space. And on the Ground Floor, in addition to creating a lobby bar, we're adding a combination game room, restaurant and event venue. At Viceroy Santa Monica, we're converting the indoor restaurant into a lobby bar with food, opening it up to the outdoors, adding a highly desirable outdoor bar and substantially improving the outdoor pool and venue experience. At Mason and Rook, as part of the conversion to Viceroy, we're increasing the amount of venue space, making the existing meeting and venue space much more unique and attractive, adding a lounge, converting outdoor bar space to a year round bar and event venue and adding a cafe.
At Chaminade Resort, we're substantially increasing and improving meeting and venue space through numerous projects, including combining two unattractive and underutilized meeting rooms to create a second major ballroom for the property, dramatically improving and expanding the outdoor wedding and event venues and increasing and enhancing the outdoor bar seating. Our second phase project that we're master planning now involves adding significant active resort amenities such as zip lines and aerial adventure park in the forest on the property, axe throwing facilities as well as additional experiential indoor and outdoor wedding, meeting and event venues on a portion of the property's underutilized 300 acres, which have spectacular views of the Santa Cruz Mountains and the Pacific Ocean. This is truly incredible real estate, and it's just 45 from Silicon Valley. We're also working on adding tree houses as well as other substantial glamping facilities. Paradise Point, as part of the property's conversion to a Margaritaville Island resort, we expect to add multiple unique and highly desirable indoor and outdoor wedding, meeting and event venues throughout the property's 44 acres, along with an additional and expanded bar, restaurant and music venues on the property.
These are just a few examples of our approach to creating value and better utilizing the strength of the very unique and flexible brand unencumbered real estate we own as a result of the L'Salle portfolio acquisition. Not only will these projects allow us to drive significantly higher ADRs, non room revenues and EBITDA, but they're a key part of creating unique experiences that will make each property much more attractive to group and transient business, both business and leisure customers. We look forward to announcing the rest of these very exciting and financially attractive projects in the coming quarters and providing you with the details of the opportunities to creatively redevelop and reposition these additional hotel properties. Next, I'd like to make a few comments about the progress on our strategic disposition plan. Including the Topaz for which we have a hard money contract and assuming it transacts this quarter, we will have sold 12 hotels from the acquired portfolio for gross proceeds of just over $1,300,000,000 at a combined NOI cap rate of 5.4 and a combined EBITDA multiple of 15.9 times twenty eighteen operating numbers.
Our numbers also don't add in required capital even though most of the properties sold need significant capital. Recall that we acquired the entire company with all corporate and property transaction costs at a 5.9 NOI cap rate. So our sales of these less desirable properties have certainly been accretive to value due to higher sales prices than we paid for them. Our total disposition target for 2019 has been $600,000,000 Assuming that Topaz transacts, we'll have achieved $482,000,000 of sales. The topaz represents the last hotel we intend to sell this year.
What remains to be sold this year to reach our $600,000,000 sales target includes income producing pieces of several hotels that were separating through the condominiumization of the retail, restaurant and entertainment, and at least in one case, the parking real estate, separating that from the hotel real estate. Due to the extended time it's taken to complete these legal separations, we no longer believe these transactions will close this year, but we do currently expect that it's likely they'll be under contract by the end of the year with closing next year. We'll also be looking to sell an additional $300,000,000 to $500,000,000 of properties over the course of next year. All of these sales taken together, assuming they happen, should not only get us to our corporate leverage target, but provide additional proceeds for either further debt reduction, calling up preferred shares or repurchasing our stock, all depending upon market conditions at the time. Finally, I want to provide a quick update on our progress on our portfolio wide initiatives before we move to Q and A.
We continue to make progress on maximizing the opportunity to recontract many products and services that we purchase within our portfolio. We've now recontracted for almost $5,000,000 of annual run rate savings within the portfolio and have identified another $1,000,000 of savings that should get finalized in the next quarter or so. We have another $4,000,000 estimated and identified, but with a longer lead time to finalization. We're on a good pace and continue to believe that the $10,000,000 of targeted annualized savings will be successfully achieved by the end of next year. And as a reminder, this potential $10,000,000 of annualized savings was not underwritten as part of last year's corporate acquisition and represents an additional opportunity identified following the closing of the transaction.
To wrap up, we believe that regardless of the economic environment we find ourselves in over the next few years, we have a significant number of organic, substantial value creation opportunities within our new combined company that we've identified, And they fall within our core expertise, having demonstrated a long track record of success executing on these types of value creation opportunities. So we'd now be happy to answer questions that you may have. And operator, you may proceed with the Q and A. And before we do that, just one, reach out to our favorite team here in Washington, the Nats. So let's go, Nats.
Speaker 0
Thank you. We'll now be conducting the question and answer session. Our first question comes from the line of Wes Golladay with RBC Capital Markets.
Speaker 3
Can you give us your view on supply next year relative to this year? Any markets peaking this year or next year? And then maybe your view on citywide for next year as well?
Speaker 2
Sure. Wes, when we look at our markets, which I presume you're asking about because I think the industry is probably still going to run-in about the 2% range that it's running, give or take, in 2020 before it begins to decline in 2021. Sort of the same trend is what we're looking at for our portfolio. I think this year, our weighted market supply growth right now is running about 2.7%. So again, it's come down a little bit as projects have been further delayed into next year.
In 2020, we're looking at about 3%. Again, by the time 2020 ends, we expect that will be slightly below that. And then in 2021, in our overall markets, again, the weighted average supply growth at that point, we've got it running below 2%, so a nice drop from 2020. When we look at markets that are improving, Atlanta Buckhead gets down to almost nothing in 2020. Boston goes up a little bit in 2020.
Chicago comes down significantly from a little over 4% to a little over 1%. DC comes down a little bit, down into the mid-2s from the mid-3s. Hollywood, Beverly Hills goes up a little bit to 4.5% from 2%, a little over 2%, which has come down from our early forecast due to delays. Pretty much no supply in Key West. We have Manhattan over four next year, up from the mid-3s.
Nashville, believe it or not, coming down from 15 to 13.5. Philly, with the delivery of the 700 room W and Element sometime next year presumably. That's a project that's probably eighteen months delayed at this point and continues to push out their potential opening date. Portland pops up West with a 600 room convention hotel across the river to 10%, so a continuing tough environment from this year's 6%. San Diego drops in half from 3% to 1.5%.
San Francisco from flat to up about one next year, so still very limited in San Francisco. And then Seattle comes down from the 11.5% we're currently forecasting for 2019 down to a much more reasonable 3% in a market with very strong underlying economics. So that's kind of how the supply growth falls. And then when it comes to the convention calendar, the markets that are up include Chicago, DC
Speaker 4
And Boston. Boston.
Speaker 2
Nashville is flat. Atlanta be a little worse with Super Bowl. San Diego is a little better next year as well in the markets. San Francisco, as you know, be down a little bit, but still at the second highest ever off of this year's record year. And then Seattle, looking to be roughly flat Portland, flat to slightly better.
So those would be the larger markets for us overall.
Speaker 4
Yes, fantastic. So And then
Speaker 2
I was just on average, I'd say they're better across the country in the major markets as this year was worse on average across the country.
Speaker 4
Okay. And then maybe
Speaker 1
And Wes, just add that for 2020. The holiday calendar is much better in 2020 as well for where the holidays fall and the days of the week and timing.
Speaker 3
Okay. Good point. Looking at the disruption, though, maybe for public next year, you had a lot of manager transitions, brand integrations. You still have redevelopments next year as you do this year. What's the net impact of all the noise?
Is it going to be lighter, comparable, worse?
Speaker 2
Yes. I think what we know right now and keep in mind, we don't have a single budget yet for next year. But based upon the level of investment and disruption that we expect, we think it will be roughly similar to this year. There'll be some additional operator and brand transitions next year as well. And so give or take a couple of million dollars in either direction.
I think this year in total, we're running about 8,000,000 to $9,000,000 of renovation and operator disruption. And I would think it's going to be in the same ballpark, give or take a minor amount.
Speaker 1
Wes, in terms of RevPAR disruption, that's about 60 basis points or so in 2019 of impact from renovations.
Speaker 4
Okay. All right. Thanks a lot, guys.
Speaker 0
Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Speaker 4
Hi, thank you. I wanted to ask you, you talked about some of the impact transitioning to the to new managers. How how long does that usually take before, before things are kind of righted on that front? And kind of what specifically are the things that drag down results when you have a transition change? Is it due with the way that bookings are made?
Or is it on staff changes? Or maybe just some of the specifics around that.
Speaker 2
So it's usually a combination of those things. So it'd be an impact of business coming through your distribution channels. So typically, you'll have a different GDS code as an example. So your customers are going to have to find you And your corporate accounts will need to find you with different online input information than what they were doing before. Occasionally, there's changes in the executive teams and in the systems.
And so those cause disruptions as well at the property level. Sometimes they're much more limited. So as an example, we've had pretty much no negative impact at all with the Skamania Lodge in the Columbia River Gorge. The entire executive team stayed on. The system changes were minimal other than the GDS code.
And so there's an example of where it was limited. Paradise Point, when we changed from destination to Davidson, Again, we kept the name, and so that didn't change. And the system changes were relatively minimal. So and the team did not change at the property level. So it really depends upon those primary categories.
It's your technology and how it impacts your demand and your distribution channels and then your executive team leaders.
Speaker 4
And how long does it usually
Speaker 2
Yes. It varies on how much how many of those things have changed and how substantial, but it can be as little as nothing and it can be as long as a year.
Speaker 4
Okay. And then just the other thing I just wanted to ask. You mentioned better group bookings at the Chicago Weston. And you mentioned some weakness coming into this year with some changes on the Marriott system. Do you feel like that's behind you now?
Are you happy with the way that the group bookings through the Marriott system are are going? I know it's a lesser piece of your business overall relative to others. But since you called it out, I wanted to follow-up on it.
Speaker 2
Yes. Well, one, it actually is still it's a material part of our business because those properties, the three Westins as an example, the two luxury collections, the two Ws, they're large properties. And so they do have a material impact on our business. I would say we're behind most of the Marriott issues. And I would say it's probably neutral to beginning to be a tailwind.
We still have some sales issues in the San Diego cluster at our Weston where we've fallen behind from a pace perspective that impacted this year, and we're behind next year in a market that has increasing group in the market next year. And our other properties are generally up in the San Diego market. So we have some work to do there. And then the loyalty changes so I don't think we're behind those because I don't think we're ever going to get back to where we are. I think our properties, because they came out of the Starwood system and we're probably one of few choices in markets, now fall into a larger system where there's lots of choices.
And I think we're never going to get that redemption business back. And so we've been working very closely with Marriott. They've put a lot of resources on trying to replace that business with other business. And while we've not replaced it all, we're making progress, and that's a nice positive. So still have work to do.
We've lost a lot of share in our Marriotts, And we're beginning to gain a little back, but we got a ways to go.
Speaker 4
Great. Okay. Thank you. Appreciate it.
Speaker 0
Thank you. Our next question comes from the line of Ari Klein with BMO Capital Markets. Please proceed with your question.
Speaker 5
Thanks. From an asset sales standpoint in 2020, you mentioned the 300,000,000 to $400,000,000 in sales. As part of that, are there specific markets you'd look to deemphasize? And then also you did raise the assumed cap rate on the portfolio. And so given the challenges, has there been any change in buyer appetite and the pricing they're willing to pay?
Speaker 2
Yes. So as it relates to pricing, the answer is no. We haven't seen any change. I think the midpoint of our range moved to tenth. And that's just the way that when we look at each individual hotel and we adjust for renovation impact and operator transitions and hurricanes and other things, there's been performance impact on twenty nineteen numbers.
And it depends on how it falls by property in terms of what it averages out. So in this case, it's averaged out to about a tenth of a point higher on 2019 numbers that are a little bit lower than twenty eighteen numbers in aggregate. I think as it relates to your other questions about specific markets, we've sold down all but one property in New York. We continue to have a negative view on that. And then I think as it relates to additional properties beyond the, quote, non hotel real estate that we're looking to separate out and sell.
There are other some other markets that, as evidenced by our sales in D. C, that we continue to want to deemphasize. So primarily East Or Midwest markets being deemphasized and West Coast markets being emphasized.
Speaker 5
All right. And then you have The Donovan joining the Unofficial Z Collection. Are there any others as part of the 16 hotels you've identified that could also join that platform?
Speaker 2
There are. And we think, you know, within twenty four months, the Unofficial Z Collection is likely to be at 10 or more hotels of the existing portfolio. The next one after D. C. Will be the redevelopment of the Marker in San Francisco.
We think that renovation should begin late next year, probably be complete in early twenty twenty one. And that would also become a member of the Unofficial Z Collection. Outside of that, I wouldn't want to identify any specific properties, but we've identified them internally.
Speaker 5
Thanks.
Speaker 2
You. Next question comes
Speaker 0
from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.
Speaker 6
Hi, thanks. Could you just elaborate a little bit more on what you're seeing in the transaction market, specifically as you think about the mix of buyers, the speed of how these transactions are occurring in our general interest as the broader environment has softened a little bit here?
Speaker 2
Yes. I think the broad characterization for the buyers of the kind of assets that we're selling, meaning major market, in many cases unencumbered assets, many with value creation opportunities. I would say the buyer pool is primarily private equity and high net worth individuals with a few institutions sprinkled in a very occasional foreign buyer, particularly if they're a brand company or have a partnership with a brand company that might be looking for distribution in The U. S, and their focus would be one of the major markets, including where we might be selling. So it's folks primarily taking advantage of the very attractive debt markets and or looking to place capital from high net worth individuals who look at the alternatives and find hotels to be very attractive from a yield perspective.
Speaker 6
And I guess maybe a related follow-up to a degree. I guess if the current environment in terms of the soft RevPAR backdrop continues or even deteriorates further, does that change how you think about how you'd operate the business or even pursue dispositions from here?
Speaker 2
Well, in terms of the additional sales that we've identified, yes, I mean, the values will matter in terms of whether we ultimately pull the trigger or not. And so if the values at some point do get impacted, that might change our decision on some of the potential sales. I doubt that that would be the case on the non hotel pieces. I think those markets are probably a little bit more stable. And hard to believe you can say the retail business is more stable than lodging.
But I think a lot of the bad news has already come out. And as it relates to capital investment, I mean, there are projects that we'll be doing that if we don't do them, they're going to lose more share. There are properties that need to be renovated. They're losing share today and not putting the capital in is going to continue to damage their positioning in the market. There are some other projects, like some of the ones we identified at Chaminade in the second phase, that are ROI related.
Perhaps we could defer those. They'll always be available to be done, and they're not necessarily going to have a direct impact on the position of the property, which is already being repositioned with the current project. So it could change the way we look at that. It certainly could change what we do with any excess proceeds that get generated out of sales next year and what we do with those proceeds. And as it relates to operating the properties, I mean, until you I think the way we approach it today is our focus is not on it's not on, I don't know.
I I hate to say cost control. You're you're always in a in a appropriate level of process and procedures and fundamentals of making sure you don't make mistakes in overtime or scheduling or things that basically where you waste money on an operating basis. But generally, don't make across the board cuts in this kind of environment. We're really we wouldn't do that until we got into a recessionary environment where the customer understands that they're in an environment where they may get a little bit less for their money than what they used to get. Or they're going to be paying less and they're going to get less in an effort to reduce costs.
Similar to what we did back in 2008 and February and what we did back in 2001 and 02/02, where we had arbitrary reductions within the portfolio. And we just had to figure out what would have the least impact on the customer, what wouldn't have an impact on the long term value of the real estate, and let's try to save that money in the near term while we're in the depths of the recession, and then we'll put those things back as the economy begins to get better.
Speaker 6
Makes sense. Thanks so much for all the color.
Speaker 2
All right. Thanks, Stephen.
Speaker 0
Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird and Company. Please proceed with your question.
Speaker 7
Good morning, everyone.
Speaker 1
Good morning, Mike. Good morning.
Speaker 8
Just kind of on the fundamental front and then also your view of customer preferences. Have you seen any divergence in performance between your branded and independent properties, kind of manager transitions aside? Were there any maybe widening between renovated and nonrenovated properties? Just trying to think about how that might be impacting performance and which hotels you're targeting for sale versus repositioning.
Speaker 2
I'm not sure I fully comprehend the Just in terms of
Speaker 8
the I guess, maybe just on the first part, the branded versus independent, any change in performance or the way you're viewing trends within your portfolio specific to the brand versus independent side?
Speaker 2
No. No. They're performing similarly in the environment as it's changing.
Speaker 8
And then in terms of renovations, I know you've talked about getting less lift today or recently versus several years ago post renovation. Is that still the case? Or does the focus have to be more on the ROI projects and all the stuff that you listed in your prepared remarks?
Speaker 2
I think as the environment softens, what happens is the upside stretches out. Your ability to get to the competitive positioning that from a RevPAR perspective that you would anticipate with the capital that you're investing might move from three years to four years, as an example, depending upon what those last few years look like. It's easier to gain share in a stronger environment and takes a little longer in a softer environment. So from that perspective, I mean, we've tried to build that into our underwriting as we look at these projects. And they're so lucrative that whether it's three years or four years or even five years in some cases, it doesn't really impact the numbers because most of it is going to be achieved in the first couple of years.
Speaker 8
Got it. That's helpful. And then just one clarification. I think I heard you say 300,000,000 to 500 next year. How does that what's changed there versus the $350,000,000 to 400,000,000 that you kind of hinted at last quarter?
And where does the 4Q unidentified disposition fall into each of those buckets?
Speaker 2
Yes. So the three to five does not include any of the six from this year, whether it closes before the end of the year or closes early next year in terms of the non hotel pieces that are out on the market. The next year is a little higher. I think we had indicated that we were thinking about bringing some additional properties to the market given the pricing in the market. And that's what's really driving that increase in the upper end of that range.
Speaker 8
That's helpful. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Speaker 9
Hey, good morning. Thank you. John, is there any reason to think that urban and top 25 markets can perform closer to the overall industry next year?
Speaker 2
There are lots of things that could cause that to happen in terms of improving the trend line. And one of those would need to be a change in the international inbound travel. I think we're going to be down this year. That's the way the numbers are tracking and trending right now as the dollar strengthened over the course of the year. If we see a reversal in the dollar and it begins to move back in the other direction, you do have global travel growth running in the 4% to 5% a year range.
So we've been losing significant share. So that would be one way, Bill. A second would be to get back to a more favorable rhetoric or environment that encourages folks to come here and also is follows the processes and procedures that were done prior to this administration so that getting a visa to come to the country for meetings or for travel is also back to, I don't want to say a normal level, but the level that it was at before the last couple of years. So those things would help. We're not going to solve the supply issue next year in the urban markets.
As I said, I think it's going to run both for our weighted average, but I think the Smith Travel urban category, the major cities are still going to run-in that 3% range. But after that, they begin to come down, and we should see some benefit at that point. The last piece would be to see a meaningful pickup in business travel, which the major urban markets generally benefit from. And when it softens, we generally suffer from. So any of those things could happen, but it's certainly not we don't see any indication of that just yet.
Speaker 9
Yeah. It seems like maybe we have to wait until after the election to see what happens to business travel. But as we think about fourth quarter and transitioning from a minus 2.2% RevPAR decline or RevPAR growth to 0% to two on the positive side. How much of that is driven by really easy comps from last year? I heard your comments on group and pace being better, but I think you also had some labor issues and integration issues made for an easy comp.
Is that am I remembering correctly?
Speaker 2
Yeah. There were definitely some impacts from the strike, the strikes that occurred in the portfolio. I would say more of the impact from the strikes has to do with the bottom line than the top line. I mean interestingly markets like Boston, the Copley actually did better last year. We actually had some group displaced because of the strike and refilled it with transient at higher rates.
And so on a RevPAR basis, was better. We lost some food and beverage and had much higher operating costs for security and Boston police and replacement workers in terms of people who flew in to help the team clean their rooms every day. But I would say the biggest impacts are the convention calendar bill. And at the edges, there's some benefit from particularly EBITDA for the properties that had strikes last year.
Speaker 9
Great. One more for me, John. It was announced over the past week or so that Marriott is going to relaunch the W brand. And you have some exposure to that brand, obviously. What do you think that means to you?
And from certainly, probably more expensive, but any thoughts there?
Speaker 2
Yes. I mean, I don't we don't really know enough about it, Bill. They've not shared a whole lot at this point. Think W will benefit as a brand from what I would describe as growing a need to grow up. It's a luxury brand.
And think it's twenty years old in some cases in terms of sort of the, I don't know, the vernacular of the brand. And so I presume it'll all help at the end of the day. We've recently renovated the WLA completely and we're just finishing up adding some meeting space that used to be a spa there. And we just redid the W Boston completely. So as it relates to anything they might be doing physically, those are things that would be many, many years off at our properties unless they were minor.
But hopefully they can improve the positioning of the brand, the vernacular, make it a little more sophisticated than it is today, which is more dated. And that would improve performance overall for the brand.
Speaker 0
Our next question comes from the line of Jim Sullivan with BTIG.
Speaker 10
Quick question for you, John. Obviously, for many years, you've chosen to overweight the West Coast and that served you well. And we've talked you've talked about the supply issues in both Seattle and Portland now for a couple of quarters. In this quarter, three of the markets that underperformed expectations were San Diego, LA and San Francisco. And I just wonder as you think about that, is it your view that the reason for that were they were all market specific reasons or was there something that was generic that applied to all three that might suggest some weakness in demand in California generally?
Speaker 2
Yes. They were all local market specific issues, Jim. San Diego was the convention calendar. LA is supply growth, but part of it is supply growth downtown versus in West LA. And San Francisco is completely the convention calendar.
I think what we've seen on the corporate side is very strong underlying corporate growth. And I guess maybe, Jim, maybe one thing that could be attributed to all the West Coast markets is just the international travel demand. And I would say that probably impacts them all. Different countries impact different cities differently, but an overall weakness in international inbound would impact all five markets.
Speaker 10
One other factor I know earlier in the year, particularly in Southern California and LA specifically, weather was a factor. We talked about that I think back in the after the first quarter when there was persistent rain. And, you know, we have a continuation of events whether it's fires or, know, other issues that have, you know, seemingly impact the state on a regular basis. Have you seen any increase in cancellation at all that one might attribute to concerns about factors like that?
Speaker 2
No. I mean, back in the spring, I wouldn't say cancellations, but weak bookings when the weather forecasts were for rain in San Diego or LA or snow in Portland and Seattle. But in terms of the last quarter into October related to any fear of fires or anything else, I'd say no. We haven't heard anything from our properties related to either cancellations or frankly weak bookings.
Speaker 10
Okay. Very good. Thanks, John.
Speaker 4
Thanks, Jim.
Speaker 0
Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.
Speaker 7
Hey, guys. Good morning.
Speaker 4
Good morning, Neil.
Speaker 7
Hey, guys. Just looking at supply kind of peaking over the next couple of quarters, give or take some delays, look at demand trends and the hesitance on the business transient side or corporate confidence. I mean, is it are we in a lodging recession right now? Are we heading there? You know, I guess high level views or whatever would be great.
Speaker 2
Well, it depends how what your definition of lodging recession is. So interestingly, I mean, Ray mentioned 15 of our 20 markets were the actual markets, not our properties, but the markets were negative in the third quarter. That's definitely up from prior quarters. And if you look at 10 of the last fifteen weeks that the industry have been negative, if you want to describe that as a mini recession or a recession, I mean, you could describe it that way. I don't think we're in a macro recession at this point, but we're definitely in a softer economic environment than we were a year ago.
And there probably are some economists out there who might say we're in recession on a macro basis or close to it. But those I'm not sure there's much consensus that that's the case at this point. So I guess it depends upon what how you describe it. And we've gone through these sort of mini recessions back in 2013 and 2016 when business when corporate profit growth slowed or flattened out and we saw that come through and weakness in demand and then it popped back up as the economy got better. So I think it's purely definitional.
And it's certainly not a recessional right now in the I wouldn't think on macro side.
Speaker 7
Yeah. No, I would concur on that. I just I know, you know, I don't think we've had a streak this long of negative RevPAR posting. But so, you know, I appreciate that. Other one
Speaker 6
for me is, you know,
Speaker 7
you talked about your your expanded ROI initiatives, you know, you know, three to fours out three to four year out, you know, time line to stabilize, talking about a 1010% IRR or ROI. I'm just wondering a couple of things. One, are you baking in, you know, this current low to potentially, you know, maybe going negative RevPAR environment in those in those underwriting decisions. And the the 10% ROI, is that assuming you hit that in year three or four? Or is that like the IRR you're you're targeting?
And then the last part of that would be, you know, the stock's down three and a half percent today. I just wonder, you know, you think that has anything to do with the fact that you're you're you're, you know, going full steam ahead into the ROI projects at a time when maybe the market thinks it's not a good idea? Or, you know, any commentary commentary on that would be helpful as well.
Speaker 2
Sure. So on the last point, we have I've been doing this for twenty one years now. I have the faintest idea why the stock goes up or down in any given day. And the project profile that we've laid out is no different today than it was last quarter or the quarter before. And I think we've been pretty consistent in saying we'd be proceeding with those regardless of the economic environment for the most part.
So I wouldn't have any idea why the market would be down. We thought we'd be up 5.5% today based upon what we reported because that seems to be the normal response the next day from releasing your earnings in the lodging space. And sorry, what was the first question?
Speaker 7
Yes. The first thing was the you talk about your IRR, your ROI.
Speaker 2
Yes, yes. So the 10% is stabilized EBITDA yield. It's not an IRR. I want to be clear about that. The IRRs would be much higher than a 10%.
So these are stabilized EBITDA yields. Think about it as a 10 is 10 times. So if we trade it 15 times, there's a value creation of 50% of the investment. And yes, we don't typically get there until three to four years after the completion. And it's providing both nominal and relative performance yield.
So in a down environment, are we going to get 10%? And if we stay down, we wouldn't get a 10% nominally, but we're going to get a 10% on a relative basis by significant outperformance. So that's the way we have to look at it. Are we getting a good return on that capital? What would have been otherwise had we not invested?
Speaker 7
No, that's fair. I guess the reason I'm asking is even though you're saying relative, you'd outperform. If you invest money and the market is down 10% and you're only down 5%, I mean, if you run that out as a starting point, that it's going to be harder to get to a sort of desired return on that capital longer term. Does that make sense?
Speaker 2
Yeah. I'm not sure that's accurate because if we're increasing food and beverage revenues because we have more venues, I mean, again, some of this revenue has absolutely nothing to do with RevPAR. Yes, it has to do with the overall demand environment and the recessionary period. But if we drive ADR growth and therefore revenue growth, whether it's nominally or relatively compared to where we would otherwise be, we're going to get that return on that capital. And ultimately, the market comes back and we're at that higher penetration level and competitive level, it's going to come through in driving very attractive returns nominally at that point on those dollars.
Speaker 7
Good point. Yes, I appreciate the color. Thanks.
Speaker 3
Sure.
Speaker 0
Thank you. Our next question comes from the line of Gregory Miller with SunTrust Robinson Humphrey. Please proceed with your question.
Speaker 5
Thanks. Good morning. Since the last earnings call, we saw the merger announcement of two very large third party management companies, Cambridge and Interstate. Do you view this consolidation trend as a positive or negative given Pillbrook has many independent management companies as operators?
Speaker 2
That's a good question. Well, we've been seeing it for the past few years, right, at all levels. We've seen it at the brand level. We've seen it at the operator level with not just that transaction, but Destinations selling themselves to Hyatt, with Kimpton selling themselves to IHG. There are a number of other independent operators and franchise operators that have consolidated as well.
It comes with pluses and minuses, frankly. I think the smaller companies are going to continue to have a harder time competing because of the cost of technology and the channels and where the business comes from and where it's going to come from in the future. And so I think by combining there, there are clearly business model benefits on their side. But for that, we prefer not to see the consolidation on the operator side. We like having lots of different operators.
We like a lot of the smaller operators. The people who run those businesses tend to be very actively involved and very experienced and being, in many cases, very creative. But one of the things that we're doing is part of the genesis of or the rationale behind our own proprietary brands is that even if the operators consolidate, if we don't have to change the name of the property or the brand, and we're just changing or combining an operator at the lower level, then we don't really we won't really see much of an impact on our performance. So from a defensive perspective, there's some benefits to having our own brand or brands at the end of the day where we control whether there ultimately is consolidation at the property level within our portfolio.
Speaker 5
Our
Speaker 0
next question comes from the line of Anthony Powell with Barclays.
Speaker 11
Hi. Good morning. Maybe a follow-up on my question. You've expanded the Z Collection quite a bit. You call it unofficial.
Why not make it official? Is there a to benefit from an official brand? And is there a group sales benefit or a branding benefit? And just commentary on that would be great.
Speaker 2
Sure. So it's unofficial because it truly is unofficial at this point, meaning it doesn't really mean anything yet. It's been created, or we're creating it out of a bunch of individual properties that we named with a Z, but in many cases have very similar DNA and attitude and personalities. But I think we've said before, the quote unofficial z collection brand itself doesn't drive anything now because we haven't connected anything. If you mean, why don't we move forward and connect it and try to get some benefit out of them all being part of that unofficial z collection, the answer would be yes.
That is in fact what we're doing, what we've commenced this year and what we would be doing when we add a quote brand website for the Unofficial Z Collection. What we won't do is add our own GDS. We'll still book through the existing channels that our properties book through. But if we can create a connection in the eyes of the consumers, even in a market like San Francisco or DC or Portland, where there'll be crossover of customer from one to the other, we will get benefit out of the brand ultimately, whether we call it official or unofficial at the end of the day. So we are going to be proceeding with trying to connect the properties in order to create value out of having seven six or seven or eight or ultimately 10 in the next twenty four months.
But today, it doesn't mean anything yet.
Speaker 11
Got it. And one more. Just the various, I guess, public safety and quality of life issues in San Francisco seem to be getting a lot more press. The President has talked about it and whatnot. Do you think those have had an impact on transient demand in the market?
And if so, what can you as a property owner in the market do about it?
Speaker 2
Yeah. So I do think it is getting more press. I think it's a good and bad thing. In the short term, it's a bad thing that it's getting more press. In the long term it's a good thing because it's important for the city and the community in San Francisco to understand the impact on their business, their city, their neighborhoods, and their employment at the end of the day.
And so ultimately there are lots of cities who've done a very good job with addressing the needs of the homeless, the needs of people who have mental health issues. And I think the good thing about the mayor and increasingly the council in San Francisco is a recognition that there's a lot that can be done to address these issues, to improve the quality of the environment for the people who live there, who work there, and who come to visit. And I think we view ourselves as a meaningful part of the community, the business community. We've been there for a long time. We'd like to be there for a long time.
We're working closely, not only through the hotel association, but actually on our own, meeting with members of the government, providing solutions that we've seen, best practices that have worked in other cities, connecting them with these organizations in other cities that they might not be familiar with. And so we're taking a very active role in trying to help, both from a time perspective, from an idea perspective, and from a financial perspective.
Speaker 11
Got it. And just a follow-up. I mean, you heard of any groups canceling or moving conventions based on this issue?
Speaker 2
Yes. There have been a couple, at least, Anthony, that have written letters to the authority, copied the city. One of those, I think, was the Auto Dealer Association in 2020, it's either 2021 or 2023, that I don't know if they canceled or they just they didn't repeat. And I think there's been one other convention, I think a medical convention that made a decision to go elsewhere and was very clear about the rationale.
Speaker 4
Okay, thank you.
Speaker 0
We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. John Bortz for any closing remarks.
Speaker 2
So just thanks for participating. One reminder, Wells Fargo and Raymond James, along with Pebblebrook, will be holding a LA hotel tour the day before NAREIT begins on November 11. And if you're not if you haven't signed up for that but would like to, please reach out to us and or Wells Fargo or Raymond James, and we'd be happy to add you to the tour. Otherwise, we look forward to giving you an update on the year's performance in February, and we'll see you at NAREIT in Los Angeles next month. Thank you.
Speaker 0
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.