Pebblebrook Hotel Trust - Earnings Call - Q4 2018

Transcript

Speaker 0

Greetings and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen only mode. A 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, Ray Martz, Chief Financial Officer.

Thank you. You may begin.

Speaker 1

Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter and year end twenty eighteen earnings call webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer. 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 2017 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, February 2639, 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 pebblebrookhotels.com. So given all that's happened during the quarter and the year, we have a lot to cover today, but let's first review some of the highlights from the acquisition of Hotel Properties. On November 30, we completed the acquisition of LaSalle for approximately $5,100,000,000 which is calculated based on our $35.18 share price at closing, which accounted for 67% of the acquisition consideration to LaSalle shareholders, with 1,200,000,000.0 in cash for the remaining 33% of the consideration. The $5,100,000,000 transaction amount includes the $112,000,000 termination fee paid to Blackstone, approximately $180,000,000 in closing and transaction costs, dollars $260,000,000 of preferred equity that was assumed and a $1,100,000,000 of LaSalle debt paid off at closing and replaced with new debt.

We estimate that the LaSalle forty one hotel portfolio generated approximately $343,600,000 of hotel EBITDA in 2018 and $300,000,000 of net operating income after a 4% FF and E reserve, which resulted in a 14.8 times EBITDA multiple and a 5.9% NOI cap rate. As a point of reference, we initially underwrote LaSalle's 2018 hotel EBITDA for the 41 hotel portfolio before any asset sales at approximately $340,500,000 So the portfolio, despite the distractions during the year because of the merger performed approximately $3,000,000 better than we underwrote for 2018. As part of

Speaker 2

the

Speaker 1

transaction closing, we repaid all LaSalle's $1,100,000,000 of existing debt, utilizing a newly originated $1,700,000,000 term loan in our unsecured credit facility, which was upsized from $450,000,000 to $650,000,000 to provide us with enhanced liquidity and debt capacity. We also assumed both of LaSalle's existing preferred equity series, which comprised two sixty million dollars and converted them to our Series E and Series F preferred equity. Since we didn't complete the LaSalle acquisition until November 30, per GAAP, we can only reflect the period of December 1 to December 31 in our income statement and operating data, which includes reporting for hotel EBITDA, adjusted EBITDA, adjusted FFO and net income. However, given LaSalle paid its last dividend for the second quarter and at a reduced rate, our shareholders effectively received the entire earnings and net cash flow from the legacy LaSalle hotels for six months of the year, including the fourth quarter, even though we didn't purchase the company until November 30. As a reminder, we only reported LaSalle's property results for the month of December in our fourth quarter and year end twenty eighteen financial results.

And as we discussed with you in early September, we plan to be active selling numerous legacy LaSalle hotels to reduce the leverage of the combined company post merger as well as to improve the overall quality and diversification of the portfolio. Well, we've certainly been continually active on this front. In conjunction with the merger closing, we sold five legacy La Salle hotels for $820,800,000 with a combined property sales occurring at a 15.8 times EBITDA multiple and a 5.4% NOI cap rate based on twenty eighteen numbers. And in early December, we sold the Minneapolis Grand Hotel, a legacy Pellabrook hotel for $30,000,000 Together, these six hotels comprised $850,800,000 of property sales in 2018, which were used to reduce our leverage. In addition, our merger transaction and closing costs were approximately $20,000,000 lower than we previously expected and underwrote.

Combined with higher cash balances than anticipated from LaSalle, this allowed us to reduce our overall leverage at year end to approximately 4.9 times, which is significantly better than the mid to low fives we estimated in early September, though that did not reflect all of these additional twenty eighteen property sales. I also want to highlight that this sub five debt to EBITDA ratio does not reflect the two recently announced sales of Laysan Capital Hill on February 14 for $111,000,000 and Palomar DC, which we announced yesterday for 141,500,000 Proceeds from these sales further reduces our debt to EBITDA ratio to approximately 4.7x at the end of the first quarter and increases the total assets sold as part of our strategic disposition plan to 388,300,000 will provide more color on future asset sales in 2019 and we've provided significant supplemental information, outlooks and tables to help everyone bridge the combination of the two companies and take into account in our outlook all asset sales since the LaSalle acquisition, those that already have occurred this year and those we are forecasting for later this year. In yesterday's earnings release, we also provided the components of the 2018 pro form a for LaSalle and Pebblebrook following the property sales completed in the fourth quarter.

For the legacy LaSalle hotels, these five legacy LaSalle hotels reduced twenty eighteen pro form a hotel EBITDA by $51,800,000 from $343,600,000 to $291,700,000 For the legacy Pebblebrook hotel portfolio, our twenty eighteen pro form a hotel EBITDA is $254,000,000 following the sale of The Grand in December. Adding the LaSalle pro form a and Telobook pro form a together results in a twenty eighteen combined pro form a hotel EBITDA of $545,700,000 RevPAR of two zero five dollars total revenues of $1,650,000,000 and a hotel EBITDA margin of 33%. This is all detailed for you on Schedule J of our earnings press release. Turning briefly to the highlights from our fourth quarter results. Same property RevPAR increased 0.7, which exceeded the Q4 outlook we provided in mid December of down 1% to flat.

During the fourth quarter, we experienced approximately five fifty basis points of negative impact from ongoing renovations as well as the strikes that affected several of our hotels. As I indicated earlier, these results only include the month of December for the LaSalle legacy hotels owned in December. In terms of monthly RevPAR growth, we saw a 1.2% decline in October, a 7.6% decline in November and a 7.3% increase in December, largely due to a healthy commercial calendar in San Diego, a good month in San Francisco and the ramping up of several hotels that were under renovation in the prior year quarter, including several of the legacy LaSalle hotels. As a reminder, our fourth quarter RevPAR and hotel EBITDA results are same property for our ownership period and include all the hotels we owned as of December 3138, except for La Playa Beach Resort, as this property was closed for much of the fourth quarter in 2017 as we completed repair and remediation work at the resort due to the impact from Hurricane Irma. And we included a legacy LaSalle hotels for just the month of December.

Fourth quarter same property hotel EBITDA was $55,900,000 which was in line with our mid December outlook of 52.6 to $57,600,000 This incorporates $6,800,000 of hotel EBITDA from the legacy LaSalle hotels for the month of December, which is seasonally the weakest month in the quarter and the year for the legacy LaSalle hotels, generating only 12% of total fourth quarter hotel EBITDA. For the full fourth quarter on a pro form a basis, the legacy LaSalle hotels generated $58,400,000 of hotel EBITDA. So although we only reflected the month of December in our same property operating results, we captured all of this cash flow for the fourth quarter. As we noted in our mid December updated outlook press release, we experienced disruption from labor strikes in Boston, San Diego, Chicago and San Francisco, which we estimated reduced hotel EBITDA in the fourth quarter by approximately $3,500,000 and full year 2018 by $3,800,000 Much of this was a result of increased expenses to properly staff and secure our properties during the strikes. For the fourth quarter, adjusted EBITDA was $53,400,000 which was at the top end of our mid December outlook and adjusted FFO per share was $0.33 exceeding the top end of our outlook by $01 2018 adjusted FFO per share finished at $2.45.01 above our mid December outlook.

As we look to 2019, our RevPAR outlook for the portfolio assumes an increase of 1% to 3%. This incorporates approximately 60 basis points of estimated negative impact from our 2019 renovations. We expect the first quarter to be the strongest quarter on a year over year RevPAR basis with an increase of 3% to 5%. Our portfolio generated a RevPAR increase of 4.4% in January and we're on target for a 7% to 9% increase in February. Shifting now to our capital reinvestment programs.

During 2018, we invested $87,000,000 in our portfolio, completing the $9,000,000 renovation at Sir Francis Drake and the $6,000,000 renovation at Hotel Zelle in San Francisco. We also started the $18,000,000 property wide renovation of the Mondrian Los Angeles in the fourth quarter and the $10,000,000 guest room renovation of W Boston. At the legacy LaSalle hotels, approximately $55,000,000 of renovation projects were completed during 2018, which included Westin Copley, Boston Paradise Point Resort in San Diego The Heathman, Portland Chamberlain, West Hollywood Montrose, West Hollywood Harbor Court, San Francisco and The Marker, San Francisco. All of these projects were completed in the 2018. And finally, regarding our common dividend for 2019, we anticipate maintaining our current annual dividend payout of $1.52 per share, which is the same payout as our 2018 dividend.

Based on the anticipated 2019 asset sales included in our outlook, this implies a dividend to CAD coverage ratio of approximately 70%, which accounts for a 4% FF and E reserve equal to about $0.50 per share. This dividend coverage is in line with our coverage ratios over the last several years. Based upon Monday's closing stock price, this implies a current dividend yield of 4.6%. And with that, I would now like to call turn the call over to John to provide more insight into the new Pebblebrook Hotel Trust. John?

Hey, thanks, Ray.

Speaker 3

My focus today, unlike prior earnings calls, is to outline for you what the new Pebblebrook looks like, what the opportunities are, what our focus has been since the acquisition and what our focus will be in 2019 and beyond. To say that we're excited about the new larger Pebblebrook and the opportunities we see would be a major understatement. All of our efforts since the announcement of the deal in September have been focused on integrating the people and the organizations, integrating the properties and operators, financing and closing the overall transaction, determining and executing on our strategic disposition plan, developing a plan and vision for each hotel being acquired and organizing for and launching extensive efforts related to portfolio wide initiatives. I intend to address each of these areas of focus today. As you know, we closed on the LaSalle acquisition on Friday, November 30.

We had already determined who would be part of the combined company, made offers, received acceptances. And by Monday, December 3, everyone was already moved into their new offices. We integrated our accounting team in one office, and just down the street, we integrated the rest of our team. We've recently executed a new lease to bring everyone together in new offices, and we've targeted that move for early in the fourth quarter. We continue to expect total corporate G and A synergies of 18,000,000 to $20,000,000 and we built these synergies into our outlook for 2019.

Between the announcement of the execution of the merger agreement with LaSalle to the closing of the transaction on November 30, our finance, investments and asset management teams have worked tirelessly to not only properly capitalize the combined entity but contract and close on the disposition of five hotels on the same November 30. And from early September until today, our executive and asset management teams have conducted several portfolio wide tours and reviews with our operating teams to make a determination as to which hotels in the portfolio did not fit into the long term vision for the company and therefore, which hotels within the combined entity would be candidates for disposition. As you've seen, we've been moving very quickly with our sales program. With the five hotels sold on November 30 and the two announced in the past ten days, we've sold seven hotels from the legacy LaSalle portfolio for a total of $1,073,000,000 at a very attractive 15.8% EBITDA multiple and 5.4% NOI cap rate utilizing a 4% FF and E reserve. Adding in the $30,000,000 sale of the Minneapolis Grand in December, that brings our total dispositions in the last ninety days to over $1,100,000,000 With the dispositions that have already closed, we're currently forecasting that our debt to EBITDA ratio will be reduced to 4.7 times by the end of the first quarter.

We expect that additional dispositions this year will total approximately $350,000,000 and we've built those sales into our outlook. Of this $350,000,000 we've assumed that we sell $250,000,000 in the middle of the second quarter and $100,000,000 at the end of the third quarter. We provided a table in our press release to help you with the expected seasonality of these dispositions and and how much EBITDA from these properties is excluded and will accrue to the buyers. We expect the remainder of the dispositions in 'nineteen to sell at an average NOI cap rate of approximately 5.5%, and we've built that into our outlook for the year. We've been very pleased with the sales prices we've achieved so far, and we're confident in our ability to achieve our 'nineteen objectives based upon strong current interest and the depth of that interest in the kinds of hotels we plan to sell this year.

As we move through 2019, we'll be evaluating additional disposition candidates for either late this year or 2020 sales. Given that our sales to date, along with the additional $350,000,000 of sales planned for this year and included in our outlook, should allow us to bring our debt to EBITDA ratio down to our target of four to 4.25 by the end of this year, any additional sales completed this year and next year and the proceeds from those sales will be used to either lower our debt further, call our callable preferred securities or repurchase our stock in the open market. Our best guess today is that additional properties to be sold will total somewhere between 400,000,000 and $900,000,000 over the next eighteen months or so. In the meantime, we have a tremendous amount of upside opportunity in the portfolio we've decided to retain. As we toured these properties multiple times over the last six months and spent significant time evaluating them, we've come to the conclusion that the portfolio that remains is very unique.

It's of higher quality and it has more potential than we initially anticipated. While we believe we're now the largest owner of lifestyle oriented experiential hotels in The United States, if not the world, certainly being the largest is not an end all, be all. And that and a few bucks will buy you a cup of coffee. While our additional hotels for the most part would not fall into the category of traditional luxury hotels, though we have numerous hotels that are classified in the luxury category, such as our Ws, our luxury collection hotels and our InterContinental, we view the EBITDA per key generated by many of our hotels as exceedingly luxurious. In 2018, this incredibly unique portfolio of 61 hotels generated an average EBITDA per key of $36,300 By this measure of quality, we believe we have the highest quality portfolio of hotels in the REIT space.

Based on 2018 EBITDA, we have 15 hotels with EBITDA per key over $40,000 In total, this portfolio of 61 properties generated $530,000,000 of EBITDA in 2018 with an ADR of $252 occupancy of 82.3% and RevPAR of $2.00 $7 We believe that today, Pebblebrook is made up of three definable major portfolios of hotels, two of which include urban hotels and one of which includes resorts. Our urban hotels represent roughly 83% of our EBITDA, and our resorts provide the remaining 17%. We continue to be focused primarily on the two coasts, East and West, and we continue to hold a West Coast bias. And you should expect additional sales from the portfolio will be predominantly from either the East Coast or central markets. I want to provide more color on these three definable portfolios.

Today, following the two additional sales this month, we have 61 hotels and resorts in The U. S. Of these 61 properties, 53 are urban and located in major cities. The first definable portfolio represents the remaining eight properties, which are unique, experiential, lifestyle oriented resorts. They're located in some of the top resort settings in The U.

S, many of which are within a short drive of a major U. S. City. These eight unique resorts as a portfolio achieved an ADR of $272 in 2018, RevPAR of $2.00 $5 and a most impressive $48,000 per key in EBITDA. In 2019, we're currently forecasting that four of these resorts will deliver EBITDA per key over $60,000 and our highest generating property, La Playa Resort and Beach Club in Naples, Florida, should come close to $100,000 per key in EBITDA.

What makes these numbers even more impressive is that many of these resorts were impacted last year either by the aftermath of Hurricane Irma, as was the case with La Playa, the southernmost resort and the marker in Key West, or by renovations, which was the case with both Paradise Point and the Hilton Resort in Mission Bay, San Diego. And even with these already strong numbers, we believe there are numerous significant opportunities within this resort portfolio to drive substantial additional EBITDA. This would include repositioning the extremely unique property, Paradise Point, which has four sixty two single story casitas with a mile of beachfront on 44 highly landscaped acres in Mission Bay, San Diego or by fully renovating the two sixty two room southernmost resort in Key West, by redeveloping the golf course and tens of acres of excess land at Skamania Resort in the Columbia River Gorge and by upgrading the Chaminade Resort in Santa Cruz that sits just a short drive from Silicon Valley on hundreds of acres, including excess redevelopable land. In addition to the opportunities within the resort portfolio, we intend to look to expand this collection of unique, experiential lifestyle oriented resorts over time.

Our urban portfolio, which is made up of 53 hotels, we're dividing into the other two major definable portfolios. First, we have 46 urban lifestyle oriented hotels, all located in major cities in The U. S. And second, we have a portfolio of seven major branded hotels located in key U. S.

Gateway cities that provide more traditional branded hotel experiences. I want to discuss this branded portfolio first and then pivot to the larger urban lifestyle oriented portfolio. The urban major branded portfolio includes our three larger Westons, Copley in Boston's Back Bay, Michigan Avenue in Chicago and Gaslamp in San Diego as well as our Hilton Gaslamp and Embassy Suites in San Diego Hyatt Regency Boston Harbor and our InterContinental Hotel in Buckhead. These seven strong major branded hotels generated $1,400,200,000.0 of EBITDA last year with an ADR of $233 occupancy of 81% and RevPAR of $188 EBITDA per key was $31,300 in 2018 and represented 20% of the company's 2018 run rate EBITDA. Results in this portfolio were also stunted last year as all three Westons were negatively impacted by strikes, and Weston Copley was also under renovation in the 2018.

That brings us to the core of the new larger Pebblebrook, our urban lifestyle oriented hotels. There are 46 of them. That's right, 46 unique experiential urban lifestyle oriented hotels, and they generated 63% of the company's 2018 run rate EBITDA. These 46 hotels provide unique experiences to all travelers, whether business or leisure or group or transient. This portfolio is comprised of independent, collection branded and even several branded lifestyle oriented hotels.

Last year, the ADR for this portfolio was $255 with occupancy of 84.2% and RevPAR of $215 These hotels averaged EBITDA per key of $35,700 just slightly below the average for the entire company. We divide this portfolio of 46 lifestyle oriented hotels into three distinct portfolios: our urban iconic portfolio of 14 hotels, our urban contemporary portfolio of 27 hotels, and what we call our unofficial Z Collection hotels, which is our proprietary non brand and includes our five existing Z hotels in San Francisco. The urban iconic portfolio includes distinctive, urban, lifestyle oriented, independent and soft branded collection hotels with a sophisticated iconic architecture or design and standout features with a unique story and soul. Some of these hotels are iconic because they're architecturally significant, such as our National Historic Landmarks that include Argonaut Fisherman's Wharf, the Liberty Hotel in Boston, Monaco, Washington, D. C, the Nines in Portland, and Union Station Nashville.

Others are iconic because they have avant garde designs or they're culturally significant, such as Mondrian Los Angeles on the Sunset Strip, the Viceroy in Santa Monica, and both Hotel Vitale and Sir Francis Drake in San Francisco. This amazing portfolio of iconic hotels generated an ADR of two eighty three dollars RevPAR of $239 and EBITDA per key of a rich $41,000 in 2018. We believe this collection of 14 iconic hotels is truly unique and offers considerable long term staying power due to the one of a kind nature of these powerful properties. We believe there is significant upside within this portfolio through both renovations that will refresh and upgrade as well as several brand or operating changes that should enhance the performance and profitability of some of these properties. As we look to the future, we expect to continue to pursue and acquire additional iconic hotels that will expand this very unique portfolio.

Our urban contemporary portfolio includes 27 hotels located in 10 different cities. These exceptional, primarily independent and soft branded urban hotels are found in unparalleled locations and offer unique lifestyle experiences through high style design and personalized services with constant property activations designed to make and keep these hotels highly relevant in their cities and local communities. These hotels generated EBITDA per key of $32,000 through an ADR of $237 occupancy of 83.8% and RevPAR of $199 last year. This portfolio includes hotels such as the recently fully transformed Revere Hotel Boston Common, The George in Washington, D. C, the two Ws, W Boston and W L.

A. West Beverly Hills, La Meridian Delfina, Santa Monica our two vintages in Seattle and Portland and our three urban residential hotels in West Hollywood. We don't believe there is any urban portfolio anywhere like our urban contemporary portfolio, except, of course, our urban iconic portfolio. There are also significant opportunities within this portfolio to improve performance through transformations, redevelopments, renovations and rebranding as well as through changing operators. We're currently evaluating these opportunities, developing a plan and schedule, and we expect to be in a position to discuss some of these exciting projects in more detail in the coming quarters as we finalize our plans for these hotels.

Our last portfolio of urban lifestyle oriented hotels involves our unofficial Z Collection hotels. We currently have five of these hotels, all of them in San Francisco and all of them created by us through complete transformations and redevelopments. They include our first Z, Hotel Zetta as well as Hotel Zephyr Fisherman's Wharf, Hotel Zellis, Hotel Zeppelin and Hotel Zoe Fisherman's Wharf. These hotels have all been very successful investments for Pebblebrook, and all of them bring an individually curated unique experiences to our hotel guests as well as locals. And given the success of the Zs, we've decided to evaluate opportunities to carefully grow the Unofficial Z collection through the redevelopment of other hotels we currently own as well as future acquisitions where we believe the DNA of this proprietary non brand or sub brand can add value and be successful.

Our first addition will be in Portland, where we're in the process of completing the redevelopment of Hotel Madero. Upon its completion in the second quarter, we intend to rename the hotel as the Hotel Zags and reposition the hotel as a member of the Unofficial Z Collection. The five current Unofficial Z Collection hotels generated an ADR of $254 occupancy of 86%, RevPAR of $217 and EBITDA per key of $38,200 We encourage our shareholders to download from our website our updated investor presentation, which we published and posted last night, to find additional details of our one of a kind urban lifestyle, major brand and experiential resort portfolios. So with 61 hotels and resorts in total and 54 that are lifestyle oriented, what are the synergistic benefits? What are the operational benefits?

Well, as we've spent the last six months beginning to build the new Pebblebrook and we think about where the opportunities exist, we've come to the conclusion that we think the opportunities are plentiful, and there are many more opportunities than we thought just a year ago when we began this adventure. First off, there are significant portfolio wide opportunities that will allow us to take advantage of our larger scale, but importantly, our larger scale within a segment of the business, in this case, lifestyle oriented hotels as well as a relatively select number of geographic locations, meaning 10 or so major markets. We're even more convinced today that there are benefits of scale that will accrue to us with our vendor partners, our service providers, our contractor partners, our operating partners and the executive leaders of our hotel operating businesses. As it relates to vendors and service providers, whether it's purchasing linen, liquor or online services or websites or photography or audiovisual services or operator supplies, we would expect our increased market power and influence to lead to savings as we move through our now larger portfolio and determine the best approach to consolidating purchasing and achieving savings.

We believe these portfolio wide savings can and will be substantial, and we should be able to achieve a significant number and amount of them over the next twelve to twenty four months. We're hard at work already with a substantial team focused on these efforts and expect the first of these to begin to kick in as early as the second quarter of this year. As part of these portfolio wide initiatives, we're also consolidating the best practices from both LaSalle and Pebblebrook, and we're in the process of finalizing a set of incremental best practices that can then be rolled out across the portfolio. But there will also be savings and benefits from some not so obvious areas. For example, with 12 hotels in the city of San Francisco, including seven within about five blocks in the Union Square SOMA area, we're now able to consolidate and share data between our hotels with a significant share of the market, including many that competed against each other previously and provide each of our hotels with this specific property and market data every morning of every day of the year.

We expect not only will this information prove to be beneficial in saving time at the property level, but it will also allow our teams to gain confidence, increase revenues and improve profits. These financial benefits will be a little more difficult to measure, but we'll be looking at our competitive RevPAR shares for improvement for each of our hotels versus the market for indications of the financial benefits. As we've been rolling these out by market within our portfolio, we're just beginning to see some of these benefits in the changing behavior of our teams. One other area we believe we'll see a significant benefit is in our ability at our properties to attract and retain high quality executive leaders. We now offer the greatest opportunity of any company in the hotel industry in the lifestyle oriented hotel segment to general managers, directors of revenue management, sales directors, controllers and other positions to grow their careers within one company, meaning in this case, Pebblebrook, and do it, in many cases, within an existing market or in other major markets where we have multiple hotels, even if it's with a different operating partner.

In fact, we were interviewing a GM candidate in our offices a few days ago for one of our properties, and unsolicited, he pointed to this reason for wanting to join a Pebblebrook owned hotel. Of course, while the financial benefits of this competitive advantage will be difficult to measure, we do believe it will result in more executive team stability at our properties and less time with vacancies of key positions when we do have openings. At the corporate level, the benefits of scale are significant as well. Some of these benefits have already been achieved or are in process, such as the 18,000,000 to $20,000,000 of G and A savings that allow us to lower the G and A load, if you will, thus lowering the leakage from and increasing the financial efficiency of our hotel operating businesses. This increases our returns per investment dollar and further lowers our cost of capital.

Our increased size also gives us more flexibility with recycling capital as we're doing now as well as an increased ability to take advantage of public private value arbitrage opportunities as they come about from time to time. And with the larger size of our lifestyle oriented property portfolio and the flexibility we have with the majority of our operating agreements, we have an increased ability to grow our own brand or brands should we choose to go in that direction. Finally, I'd like to focus on our current renovation plans within the portfolio and briefly discuss the additional opportunities we're working through now. Within the portfolio, there were a number of renovations that were planned last year that started in either this past year's fourth quarter or early this year. They're primarily guest room and guest room bathroom renovation focused and include an $18,000,000 complete renovation at Mondrian L.

A, which also incorporates the lobby and Sky Bar, a $10,000,000 renovation at W Boston, a $9,500,000 renovation at Skamania Lodge, including the addition of a new outdoor pavilion, a $9,000,000 renovation at Sofitel Philadelphia and a $21,000,000 renovation at Hilton San Diego Resort on the waterfront in Mission Bay that also includes all of the hotel's meeting space. All of these renovations have already begun and are due to be complete between the first and second quarters of this year. At Skamania Lodge, we've also begun planning to roll out two more tree houses to add to the very successful four tree houses we've completed in the last several years. We're also evaluating the redevelopment of our golf course and excess land into alternative more profitable uses. We believe there's a lot of opportunity for further substantial EBITDA growth and value creation at Skamania.

In the fourth quarter of this year, we also plan to begin a number of renovations, including $13,000,000 renovations at both Embassy Suites San Diego Downtown and Weston Gaslamp San Diego. Both should be complete in the first quarter of next year. We're also planning a complete renovation of the Ground Floor interior and exterior of Viceroy Santa Monica with the objective to return this iconic property to its rightful place as the leading boutique or lifestyle oriented hotel in Santa Monica. In the fourth quarter, we also plan to begin a $10,000,000 renovation of all of the public areas and meeting and event venues at Chaminade Resort in Santa Cruz. The plan is to reposition this resort to a higher quality level by dramatically improving the design and providing additional guest amenities to drive significantly greater levels of transient leisure customers and corporate and social groups to the property, which was once primarily a conference center.

Additional amenities being evaluated include a luxury pool complex, tree houses, zip lines and an adventure park, an outdoor pavilion, as well as other active oriented guest amenities. In addition, the property includes several 100 acres of excess land that could be planned for other profitable uses, and we're just beginning the process of master planning the property. Finally, our comprehensive review of the portfolio has led us to believe that there are many opportunities for rebranding, changing operators, transforming properties and generally looking at properties with an open mind to fresh new ideas and concepts. And we already have a number of these projects in the works, and we'll provide more details in coming quarters. The good news is there are an extensive number of opportunities to create significant value, and we expect these projects in particular will be scheduled out in a balanced and thoughtful manner over the next several years.

So with that, operator, Donna, you may begin the Q and A.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. Our first question is coming from Anthony Powell of Barclays. Please go ahead.

Speaker 4

Hi, good morning everyone.

Speaker 5

Good morning. Good morning.

Speaker 4

Good morning. Just starting with some of the brand topics, there's a lot of talk about brands including rebranding hotels, launching your own brands, your current non brand The Z Collection. How do soft brands fit into this long term, especially given the ability to maybe secure some key money from the brand companies? And going forward, do you expect to be largely independent still? Or could you increase your exposure to the big brands?

And how would owning a brand work in the context of a lodging REIT? Sure.

Speaker 3

So brands often mean a brand of one. So you could take a look at a property like the Argonaut and say, that's a brand. Now if you go around the industry, there are lots of folks who have brands of one, two, or three, and they do call them brands. I mean, we do develop a brand profile and a brand story and narrative for every individual property we have. And so to the extent that we want to take all of our independent experiential resorts and begin to tie them together with a brand message, even if it's our own brand, if there's a way to tie them together to the benefit of those multiple properties, it's something we'll be looking at.

It's the same thing that we're doing with the Z Collection. To the extent that we can tie these Zs together from a customer perspective, with the benefit of the unique DNA and the common DNA that they possess that we've created with the unofficial Z Collection, there's a benefit of that ultimately that benefit each properties within the portfolio. So it's not our plan to go out and franchise these brands, certainly, although there could be potential for that somewhere down the road. But that's not in our current plans. We expect these to be pretty soft, a sub brand or almost a non brand being tied in with whatever operator or brand within their portfolio where it might exist.

As it relates to the collection brands, I mean, we'll continue to look at collection brands just as we have done over the course of really the last ten years, the five years more explicitly as these brands have really come about, to determine whether there's some benefit to rebranding as a sub brand from an independent, or in fact, in going in the other direction, which we also look at. So the nice thing about having our own independent brands, whether it's a brand of one or it's a brand of five, is that we have complete nice flexibility to do whatever we want whenever we want to do it, which could include not only soft branding it, but hard branding it if there were a benefit to that. So the fact that there's key money that gets involved, which is a payment of capital, there's a return in loss of flexibility and long term contract when you do that. So all of those things ultimately impact value. And given that we are not in need of capital as a public, well capitalized company, we'd always rather see lower terms than we would key money at the end of the day.

Speaker 4

Great. And so going to operations, in the release, you mentioned that you expect San Francisco RevPAR and your hotels to be up 9% to 11%. What does that imply for the rest of the portfolio? And how have the expectations for both the San Francisco hotels and the non SF hotels changed over the past few months?

Speaker 3

So there's been no changes in expectations in San Francisco. We still expect the market to be up eight to nine. We expect our portfolio to be up nine to 11. Some of that is the tailwinds from the renovations. Some of that is ramp up in the portfolio from prior renovations in prior years.

And some of that ultimately is probably going to come from the synergies that we talked about in that individual market. As it relates to the non San Francisco markets in total, with our 1% to 3% overall corporate RevPAR outlook, it means those markets are generally, in total, we're forecasting RevPAR between minus one and plus one. And those the non San Francisco market is where all of the renovations in 'nineteen are occurring. And so that impact is between seventy five and eighty basis points. So sort of a if you look at that view of the markets or those properties within the markets, without that impact, you'd be somewhere pretty close to 0% to 2% for those markets.

And I don't think our view of those markets in terms of overall performance has changed in the last few months either.

Speaker 4

Great. That's it for me. Thank you.

Speaker 0

Thank you. Our next question is coming from Steven Grambling of Goldman Sachs. Please proceed with your question.

Speaker 6

Hey, thanks. One quick clarification. I just want to make sure I heard this right, but you made some comments about capital allocation potentially beyond the asset sell down. I guess maybe if you can just repeat what you would talk to there and how you about the appropriate leverage ratio and any kind of puts and takes that you think about the broader environment as you think about right leverage ratio for the business.

Speaker 3

Sure. So our view as to and I don't know if it's the right leverage level, but it's the level we feel is appropriate for Pebblebrook, given our portfolio and the markets we're in and our experience in prior cycles, we're comfortable at a leverage level between four and four point two five, given the size of the portfolio. And so for us, it means once we get there, which we believe we'll get there by the end of this year with the additional $350,000,000 of sales that we've planned out and included in our outlook for this year, it means that additional sales that would likely occur late this year or in 2020 that we have planned, the capital from those sales would be used for any of the above, right? It would include paying down debt. It would include buying our stock back if there was an arbitrage opportunity.

It would also include potentially even calling our preferreds that are already callable. And it could include even additional acquisitions should we find the right properties out there. So that's kind of the way

Speaker 2

we look at it, Stephen.

Speaker 6

That's helpful. Maybe one follow-up. I guess, do you think the ROI project spend and integration spend should then come down into, call it, 2020? And any sense to how we should think through the free cash flow that you'd be generating at that point?

Speaker 3

Yes, good question. It's a little premature for us to lay out where we think 2020 and 2021 are going to be from a capital investment perspective. We're reviewing those potential projects now. It'll take us several months to determine the ones we want to proceed with, the capital involved, what we think the ROIs are. And obviously, we're only going to proceed with those that meet our return hurdles.

But I would say at this point in time, I wouldn't expect necessarily next year's capital investment, which will be project driven, these ROI project driven investments. I don't think it's necessarily going to go up much or down much. And I think that's probably the same for 2021 as we kind of plan these out in a balanced way.

Speaker 6

That's helpful. And as one unrelated follow-up on the Marriott disruption, how do you think about quantifying the impact that you've seen from the integration and what needs to change to correct that disruption? Thanks.

Speaker 3

Sure. So well, the best way to measure it is to look at prior year performance. So as an example, group production. How is that production going compared to what's typical for that hotel in order to hit its group objectives. So those are pretty easily quantifiable.

The second way is to look at competitive RGI or competitive RevPAR share in the market and see what happened. And when we look at the performance in Q4 and we look at the performance for the year, we see a huge amount of what I would describe as unique share loss at particularly our Marriott managed hotels, which happen to be our Starwood legacy properties. And so in terms of what we see that needs to change, I'd love to tell you that Marriott has given us the answer yet, or that we have the answer. We don't. But it's likely to be some combination of additional staffing, probably at the property level.

It could be complete staffing back at the property level, which is where we were before. And then as it relates to some of the issues with the revenue management system, Some of it is going to be our revenue managers getting used to the way it works and how that changes how much business comes through each channel. And some of it's probably going to be modifications to the software that allow our property teams, which are very sophisticated with very sophisticated inventory management techniques, for those things to change in order to allow our properties to manage the inventories and maximize occupancy and ADR the way they were doing before with the previous software system. So those are the things that need to happen. We would have hoped those things would have already happened.

And we'd have the lost share from 'eighteen as a tailwind in 'nineteen. But that hasn't happened yet. And it's not for lack of trying or lack of responsiveness or flexibility on the part of our Marriott partners. It's just that we haven't gotten there yet.

Speaker 6

That's super helpful color. Thanks so much.

Speaker 3

Yes, thank you.

Speaker 0

Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead with your question.

Speaker 3

Hey, good morning, guys.

Speaker 5

Good morning. Good morning.

Speaker 3

Can we get our yes or no question? Yes. Just kidding.

Speaker 7

This one might be quick. So John, back to your prepared comments with respect to the synergies of scale with vendor partners, service providers, etcetera. I just want to clarify that, that is separate from the G and A synergy target that's very distinctively laid out in the guidance? And then how much of some of those other synergies are included within sort of property level guidance, if any, at this point?

Speaker 3

Yes. So it is completely distinct from the G and A savings at the corporate level, and none of it is included in our individual property or portfolio wide numbers.

Speaker 7

Okay. So it's fair to say then that's potential sort of upside surprise given that you said that some of that could begin in 2Q to some extent?

Speaker 3

That's correct.

Speaker 7

Okay. Fair enough. And then just with respect to the volume and the pricing of asset sales over the last few months and then what's expected to come for the remainder of this year, can you obviously, some of this news is public and we can see it ourselves, but can you generally describe the or characterize the buyer pool for what's maybe currently on the market?

Speaker 3

Sure. I mean, think we're at a period of time where the buyer pool is very broad and pretty deep, particularly for urban hotels and resorts, although we're not planning to sell any of our resorts. And so the buyers are unique. When you look at what we've sold, the two Park Centrals were sold to private equity. Guild was sold to a local, large real estate owner in New York City, high net worth entity.

Embassy Suites was sold to a local commercial real estate owner in Philadelphia. The liaison was sold to a combination of a brand company as well as a high net worth real estate investor out of New York. The Palomar was sold to a REIT. So the buyers have been very different. We do see significant foreign interest, particularly from foreign brands or branded owners in some of our individual offerings.

But I would say the pool is very deep, very broad. The debt markets are great, so your levered buyers are competitive today. And we would suspect, as we sell additional properties, that, again, the buyer the ultimate buyer is likely to be somewhat different than the buyers we've had so far.

Speaker 2

All right. Thank you, John.

Speaker 0

Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead with your question.

Speaker 8

Hi, good morning everyone and thanks for all the detail John on sort of the strategic layout. Just one question for me, which is you highlighted the portfolio of the seven major brands and some of the key gateway cities. Just kind of curious when you dig through the details here, is there a substantial margin differential for those hotels as you think about those relative to what you've been able to do on the independent side? And then secondarily, how many of those hotels are actually franchised versus are any of them brand managed?

Speaker 3

Yes. So they're a mixture of brand managed and franchised hotels. There is a difference. I mean, the biggest difference is EBITDA per key at the end of the day. And the interesting thing is the branded properties, as you know, tend to drive significant other revenues, food and beverage, audiovisual, parking, etcetera, on a fairly larger scale, particularly this group of seven properties, which has some pretty good medium to large size hotels, or at least how we define them.

And when you look at the EBITDA per key, these major branded properties were at $31,000 The portfolio is at 36 So it's a $5,000 differential there, and there's a 140 basis point differential on the EBITDA margin. So we've always said brands are expensive, But when you get to a certain scale, you're probably going to make more money on a per key basis with a brand than you will taking a 700 room hotel and making it independent.

Speaker 8

Great. Thank you for the detail.

Speaker 3

Yes. Thanks, Sean.

Speaker 0

You. Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead with your question.

Speaker 5

Good morning, guys. Good morning, Mike. Can you maybe walk us through just the drivers of your slightly lower NAV estimate? And then kind of what's changed in terms of how you think about values for both the assets that you've tried to sell and the remaining portfolio?

Speaker 3

Well, one the bigger impacts is always that when you sell the properties, you have transaction costs. And so we've as we've always said, this is a gross NAV, meaning this is what the gross sale prices would be. And as you sell assets, and we've sold $1,000,000,000 you have transaction costs related to those. And so the proceeds that you get effectively lower your NAV, your gross NAV at the end of the day. So that's the primary driver, Mike, at the end of the day.

I mean, we tweak these numbers twice a year based upon information we see in the market. We obviously have full twenty eighteen actuals. We have twenty nineteen budgets and forecasts. We factor that all in and the numbers can move around a little bit. But we're talking about zero five zero dollars at the midpoint.

And again, most of that is because of the going from gross to net on the dispositions of over $1,000,000,000 of hotels.

Speaker 5

Got it. And then just kind of switching gears on the fundamental side. Can you maybe touch on your updated view on overall demand trends and kind of where you're still seeing pockets of strength and weakness within your portfolio?

Speaker 3

Yes. I mean, it's really the same, Mike. We haven't seen much change. Obviously, it's winter. We have all sorts of weird weather going on, whether it's record blizzards in Seattle and Portland or record cold in the Central And East Coast or lots of things that impact numbers.

But when we look at the underlying demand, we really haven't seen any change in leisure or business travel, whether it's group or transient. Actually, the demand numbers have been pretty strong. I mean, they continue to be run-in the mid-2s, even on a tough comparison to demand last year that was positively impacted by the aftermath of those two major hurricanes. So we really haven't seen any change. For us, the biggest difference is much more laser focused on driving ADR, experimenting, taking chances, being willing to take some risk at the end of the day.

And we're seeing some pretty good success doing that in a number of markets. So that's really about the only change we've seen. We are beginning to see that a little bit more in some of the markets we're in from the competition, which is a positive.

Speaker 2

That's helpful. Thank you.

Speaker 0

Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead with your question.

Speaker 9

Good morning, guys. John, could you give us two or three of the former LaSalle hotels that have the biggest upside as you think about what you can do to them?

Speaker 3

I'll give you a few. So Paradise Point in Mission Bay, San Diego, I'll give you one factoid. The property is doing in 2018, it did the same ADR it did twelve years ago. So it's lost a lot of share in the market, ADR and RevPAR. And we think with investment, with the proper investment, with the proper branding and repositioning, there's a lot of opportunity there.

So that would be one place. I would say a second place would be in some of the Kimpton properties in DC that have not gotten meaningful investment in many, many years where there's significant upside in renovating and redeveloping those hotels. And then I think there's some cases within the portfolio, and I don't want to talk about the specific properties, but there's some places where we'll benefit from some operator changes which would come along with a transformation, a redevelopment and or a brand change, even if it's one independent brand or small brand to another.

Speaker 9

All right. And maybe a short answer on this one, but can you just give us your initial thoughts for 2020 on San Francisco, L. A, San Diego and the Boston markets?

Speaker 3

Sorry, say that again, Bill?

Speaker 9

Yes. I'm trying to get a feel for the markets, your biggest markets of San Francisco, L. A, San Diego and Boston as you think about 2020 versus 2019.

Speaker 3

Sure. So I mean, in general, the convention markets get better. We see Portland better. We see San Diego better in 2020. We see Chicago better.

We see Boston better. We see DC much better. We think Seattle will be slightly weaker. San Fran will be a little bit weaker, but still very strong, obviously, from a historical perspective. And Atlanta won't have the Super Bowl, which will move to Miami, which will help that market.

So that's kind of the way we see, at least for our major markets, 2020 in terms of convention impact.

Speaker 9

Our

Speaker 0

next question is coming from Jim Sullivan of BTIG. Please go ahead with your question.

Speaker 2

Thank you. John, just a question to kind of follow on the integration issues that there was a question about that earlier in the call. But I mean, I recall, back in the first half of twenty eighteen, LaSalle had talked about the negative impact from both the Marriott Starwood integration as well as the Kimpton integration as being about a negative RevPAR impact of about 8.5%. Now you've talked earlier about the continued issues, I guess, that you face with Marriott. But I just wonder if you could address the Kimpton issues as well and whether those have been resolved or solved and whether there's a tailwind at least with respect to that segment of the portfolio.

Speaker 3

Yes, I think there is a tailwind as it relates to the Kimpton properties at this point. And we're already beginning to see that when the integration started or happened in January, beginning of early January on the tenth of last year, we saw a lot of share loss. And when we look at the Kimptons as they're running so far this year in the first quarter, we're seeing us gain back a good chunk of that share loss. It's not 100% across the portfolio, but it's certainly a large majority of the

Speaker 2

portfolio if we don't have any other issues going on at the property. The biggest impacts are past us. We think that's primarily a tailwind. Don't think we'll get it all back this year, but we'll get much of it back this year in terms of recapturing share. Then can you also address you just talked in response to Bill's question about some of the markets.

But Key West, obviously, is a major market now for the combined entity. And again, it had its issues in the first half of last year. Can you just update us on what your where you are in terms of prospects for 2019 and 2020 in Key West? And then also if you could talk a little bit about Portland.

Speaker 3

Sure. So as it relates to Key West, we're seeing a very healthy recovery so far this year as compared to last year for not only the two properties we have in Key West, but the market overall. So Key West seems to be recovering well. People are coming back. They're paying these high ADRs because this is season in Key West.

And I would say Key West and South Florida overall is going to be that's going to be one of our stronger regions this year. Hard to say anything about 2020. We don't do there's not a lot of group and the group that's been that works down there is pretty darn short term. So I couldn't comment on 2020 other than saying the trends so far in 2019 are very positive and the booking paces are very positive in the market. As it relates to Portland, Jim, it's a good evolving, growing city that's suffering from a few years in a row, last year, this year and next year, of just way too much supply given the demand growth.

So it's nowhere near the kind of dynamism that a Nashville or an Austin are where you can absorb 10% or 12% or 8% supply growth in a given year. In Portland, you get healthy demand growth in the four plus range given the growth of the city, but not in these higher 7% or 8% ranges, which is where supply growth is running these days.

Speaker 2

Okay. And then a final question for me. When you talked about capital allocation, you talked about a share buyback. And currently, the shares are quoted at about a well, somewhere in mid teens kind of discount to the NAV that you've indicated in your presentation. You bought back shares in the past with asset sale proceeds.

Although as I recall, the discount might have been greater at that time. Could you just help us understand how much of a discount is enough to trigger the share buyback? Well,

Speaker 3

that's always a tough one because there are other variables we have to consider. But I do think, Jim, once you're getting into the mid teens, it starts to look pretty attractive. And we have to evaluate where we are from a balance sheet perspective, what's our confidence level in additional sales? What does the cycle look like? Where are we in the next few years?

So all of those things are going to come into play. But I think we've shown and will consistently say, we're not afraid to sell assets and buy our stock back. So that creates value for our shareholders. It's opportunistic in total. And yes, it would need a reasonable discount in order for it to make sense.

Speaker 2

Okay, very good. Thank you.

Speaker 0

Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead with your question.

Speaker 3

Hi, guys. Wes. Looking at other revenue growth this year for the fourth quarter, it slowed quite a bit compared to the prior quarters. Is there anything special there? And what are some of your other revenue initiatives that you have going on?

Yes. I don't think there was anything special there. I mean, we'd have to go through in detail to see if there was a property that was under renovation that might have dragged down the numbers for other revenues. But a lot of the initiatives related to driving other revenue are either these portfolio wide initiatives or they relate to these redevelopments and transformations where we really change the way a property is used, where it's positioned, trying to drive much higher profitability higher revenues, but higher profitability in the food and beverage spaces, as well as the meeting and venue spaces. So a good example would be in Portland where we're adding, for $1,200,000 we're adding an outdoor pavilion that's likely to be highly seasonal, maybe seven months out of the year for weddings, for events, for corporate outings, great views of the Columbia River Gorge, because we sit up on a hill.

And interestingly, we're already booking it. And in fact, we've booked two winter weddings, believe it or not, where people say we know it's going to be cold, but it's a unique experience and that's what we want to have. So it's looking at those kinds of things. I mean, we look at Chaminade and we say we might put zip lines in or adventure parks, those drive additional revenues in addition to driving additional room demand at the end of the day. I mean, make a few $100,000 a year off of the zip lines and adventure park at Skamania.

So it can be a lot of different things, very specific to each individual property. Okay. And then I don't know if you had a chance to update your numbers, but do you have a view on supply in 2020 looking at it from a perspective of weighted average 'nineteen versus 'twenty? We do. We've been finding that we continue to be well off each year.

2018, we ended up at 2.4%. And I think when we initially came out, we were in the upper 2s for the year. Right now, we're looking at 'nineteen being in the low 3s. And we're looking at 2020 to be relatively similar to 'nineteen. That's all for me.

Thank you. Thanks, Wes.

Speaker 0

Thank you. At this time, I would like to turn the floor back over to Mr. Borch for closing comments.

Speaker 3

Thank you, Donna. Thanks, everyone, for enduring our long comments today. But we are a new, different, larger, and we think much better company than prior to the merger. And we certainly encourage you to review the investor presentation, is brand new, that's on our website. Thanks very much.

We look forward to updating you on the first quarter in just a few weeks.

Speaker 0

Ladies and gentlemen, thank you for your patience or thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.