Pebblebrook Hotel Trust - Earnings Call - Q4 2019
February 21, 2020
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, Donovan, and good morning, everyone. Thank you for joining us today. With me this morning 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 2019 and our other SEC filings, and future results can differ materially from those implied by our comments today.
Forward looking statements that we make today are effective only as of today, 02/21/2020, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of the non GAAP financial measures we use on our website at peltbrookehotels.com. Okay, 2019 marked our tenth year as a public company and we wanted to take a moment to thank our shareholders as well as our hotel and financial partners for their strong support over the last ten years. Not only have we achieved a lot over the last ten years, we successfully moved the ball forward in many areas in 2019 following our corporate acquisition in late twenty eighteen. And on an operating basis, we outperformed the industry for the year.
In 2019, total same property RevPAR increased by 1.9%, adjusted EBITDA increased 87.8% and adjusted FFO per share increased by 7.3% to $2.63 per share, all of which were ahead of our expectations. Since November 2018, we also completed $1,330,000,000 of asset sales comprising 13 hotels at very attractive valuations with another $331,000,000 of sales expected to be completed later this quarter. We also successfully completed 12 operator and brand transitions and invested $162,800,000 of capital into our hotels, putting us in great position to continue to outperform. Following the $5,100,000,000 corporate acquisition that we completed in November 2018, we successfully integrated the two portfolios including all IT, business intelligence and accounting systems and corporate employees and we combined our offices into one location in September all with no disruption. During 2019, we also announced our first formalized ESG report, highlighting the benefits of our more than $13,000,000 of environmentally focused capital investments across the portfolio over the last several years that help the overall environment in our local communities.
This has allowed our hotel portfolio to reduce greenhouse gas emissions by 24%, energy intensity by 12% and water intensity and usage by 5%, even with increasing occupancy levels across our portfolio. Our entire team is proud of the great work we've done and the additional environmental and social responsibility opportunities we identified for the future. Turning to the highlights of our fourth quarter, same property total RevPAR increased 2.8%, exceeding our outlook and same property RevPAR increased 2%, which was at the top end of our 0% to 2% outlook and outperformed the industry's 0.7% increase and the urban market's 0.3% decline. Adjusted EBITDA came in at $100,100,000 beating the top end of our outlook by $1,900,000 Adjusted FFO per share finished at $0.54 per share exceeding our outlook of $0.49 to $0.52 per share. Our better than expected performance during the fourth quarter was driven primarily by healthy business and leisure travel demand, which strengthened as the quarter progressed, reversing the trends that we saw during the third quarter, which was encouraging.
For our markets, San Francisco, South Florida, Philadelphia and Chicago were our strongest markets. Our weaker markets were in the quarter were San Diego due to a softer convention calendar compared with the prior year along with Seattle and Portland, which was mostly due to supply increases. In terms of monthly RevPAR, we saw a 2.7% decline in October, a 7% increase in November with the help of a very healthy convention calendar in San Francisco, and a strong 4% increase in December. In the quarter, our San Francisco hotels generated a RevPAR increase of 13.5%, which achieved growth rates well above the San Francisco market track's gain of 10.5%. San Francisco benefited from a strong convention calendar as well as a shift to Dreamforce into November year from September.
Our Key West hotels generated a RevPAR increase of 7.1%, which was above the Key West market track gain of 6.6%. And our Naples resort produced a RevPAR increase of 9.9%. Our Chicago hotels grew RevPAR 3.3%, far outpacing the Chicago CBD's decline of 2.2%. Our underperforming markets were the ones we expected. Our Seattle hotels experienced a 2.8% RevPAR decline due to a 7.5% increase in supply, even with a 9.2% demand increase in the market.
The Seattle Downtown track had a 2% decline, still struggling to absorb the 1,200 room convention hotel added to the market in late twenty eighteen. Our Portland hotels experienced a 2.7% RevPAR decline in the quarter, slightly better than the 3.7% decline in the Portland Downtown track, which was impacted by a 4.1% supply increase that more than offset a strong 3.4% increase in demand. Our San Diego hotels experienced an 8.1% RevPAR decline, better than the San Diego market track decline of 10.4%, even with our Weston and Embassy Suites being under renovation as the city had a weak convention calendar compared to the prior year. Our portfolio on a relative basis outperformed our comparable combined STR market tracks, generating a RevPAR increase of 2% versus 0.7 for the market tracks. We also had approximately 55 basis points of negative impact to RevPAR from renovations during the quarter, plus 125 basis points of negative impact from the hotels that recently transitioned to new management companies.
This combined 180 basis point impact to RevPAR in the fourth quarter was largely in our forecast and serves to underline the potential future outperformance of our hotels. Our hotels gained approximately 100 basis points on market share for the quarter. Again, this demonstrates significant success from our prior redevelopments even with the disruption from renovations and manager transitions across the portfolio. For the year, we gained approximately 60 basis points of penetration on a portfolio basis despite 125 basis points of negative impact from renovations, brand manager transitions and other market specific events during the year. This outperformance versus our markets is driven mainly by the ramp up of our recently renovated hotels and continued implementation of our best practices and other initiatives, all of which allowed us to outperform the urban markets during 2019 by over 100 basis points and we expect that this trend of outperformance will continue into 2020 and beyond.
As a reminder, our fourth quarter RevPAR and hotel EBITDA results are same property for our ownership period and include all of the hotels we owned as of December 3139, except the Topaz, which was sold in November and the Donovan Hotel, which was closed on November 17 for a major renovation and redevelopment and is expected to reopen in the second quarter. Overall for the quarter, transient revenue, which makes up about 74% of our total portfolio of room revenues, declined 1% compared to the prior year. Transient ADR declined by 2.2% in the quarter. Declines in transient demand were partly driven by our hotels in Downtown San Diego where we started the renovations at Weston Gaslamp and Embassy Suites downtown. On a positive note, group revenues increased 9.4 in the quarter, with room nights rising 6.4% and ADR increasing by 2.7%.
This was primarily due to a healthy convention calendar in San Francisco. Fourth quarter same property hotel EBITDA was $109,000,000 exceeding the top end of our outlook by $1,200,000 and a 1.4% increase over the prior year period. Adjusted EBITDA was $100,100,000 exceeding the top end of our outlook by 1,900,000.0 due to the better than expected hotel EBITDA growth combined with savings and corporate G and A expenses. Adjusted FFO per share was $0.54 per share above our outlook range of $0.49 to $0.52 per share due to the adjusted EBITDA beat and interest expense savings. As we look to 2020, our RevPAR outlook for the portfolio assumes a range of down 1% to up 1%, which is also where we believe The U.
S. Hotel industry will perform in 2020. However, other than what we've already experienced and incorporated, this does not include any material impact from the coronavirus, which at this time is unknowable and not able to be forecasted. Our 2020 same property RevPAR outlook incorporates approximately 90 basis points of estimated negative impact from our 2020 renovations and planned manager and brand transitions, which is slightly less than our estimate of 110 basis points of impact from both factors in 2019. We expect the first quarter to be the weakest quarter on a year over year RevPAR 20 basis with a decrease of 1% to 4%, the largest impact from renovations and operator transitions forecasted at two sixty five basis points in the quarter.
Our portfolio experienced same property RevPAR growth of 0.7% in January despite substantial renovation impact and we're on target for a 6% to 7% RevPAR decline in February, mainly due to renovation disruptions as well as a weaker commencement calendar in San Francisco compared to a record breaking quarter in San Francisco last year. Shifting now to our capital reinvestment programs. During 2019, we invested $162,800,000 in our portfolio completing major renovations at several hotels including W Boston, Mondrian Los Angeles, Sofitel Philadelphia and Skamania Lodge. For 2020, we anticipate investing an additional $165,000,000 to 185,000,000 just slightly higher than last year and it includes eight major redevelopments. John will provide detail on the scope of these renovations and transformations later in the call.
Turning to our balance sheet, assuming the $331,000,000 of sales of the Intercon Buckhead and Sofitel DC are completed later this quarter and assuming net proceeds are used to reduce debt, our debt to EBITDA ratio should be around 4.4 times, our debt to enterprise ratio will be around 29% and our fixed charge ratio will be about three times. Our weighted average cost of debt is 3.5%, with 77% of fixed interest rates. Finally, based on our current share price of $24.64 we traded an implied 7.6% NOI cap rate based on 2019 actual results, which is a 35% plus discount to the implied midpoint of our NAV. We also provide a healthy 6.2 dividend yield. And with that, I would now like to turn the call over to John to provide more insight on the new Pebblebrook Hotel Trust.
John?
Speaker 2
Thanks, Ray. As Ray noted, the fourth quarter turned out better than we expected. The rate of demand growth improved from the third quarter in both business and leisure transient even with the challenging October. We also saw some improvement in ADR growth in the last two months of the year, which we also just saw in the STR industry results for January. Perhaps eliminating or reducing trade tensions and uncertainties was the trigger for increased confidence in the improvements in the last three months.
Unfortunately, with the emergence of the coronavirus and its impact on travel, we won't know whether this was the beginning of a positive trend or just a few good months. For 2019, industry RevPAR growth softened from the year before, ending the year just below the low end of our original industry outlook of 1% to 3%. But as we forecasted, the urban and top 25 markets continued to underperform the industry. In the case of 2019, the urban market segment underperformed by the 100 basis points we had estimated at the beginning of the year, and the top 25 markets underperformed by 110 basis points. Supply growth for the industry remained constant at 2% growth, while supply in the urban markets increased 3.2, representing the primary reason for the underperformance of the urban markets.
For Pebblebrook for the year, our RevPAR growth significantly outperformed the urban markets as we originally expected, and we outperformed the industry by 30 basis points, which was a little better than our forecast. The successful ramp up of numerous properties that we've redeveloped over the last few years was a key factor in this outperformance. With the exception of the unpredictable impact from the evolving coronavirus situation, we expect to continue to outperform the urban markets and perform in line or better than the industry due to the benefits from the major redevelopment projects we completed last year and those underway now. This is reflected in our outlook for 2020. We believe industry RevPAR is likely to range between down 1% and up 1%, with urban underperforming by around 100 basis points.
For Pebblebrook, we believe our same property RevPAR growth will again outperform urban by 100 basis points and perform in line with the industry. All of these outlooks exclude any impact from the coronavirus. We also expect same property non room revenues to grow about 100 basis points higher than our same property RevPAR. Also, keep in mind that room revenue should grow about 110 basis points higher than RevPAR in the first quarter due to the extra day from leap year and about 27 basis points higher for the year. Our same property RevPAR and room revenue outlooks also take into account 90 basis points of impact from renovations and operator and brand transitions.
As of the February, overall revenue on the books from group and transient for the year is supportive of our outlook and pacing ahead by 1.1, with room nights up 1.7% and ADR pacing down slightly at minus 0.6%. Group pace is slightly down, but it's up excluding San Francisco, which has a tough comparison to last year's record year. Boston, Chicago, South Florida, Philadelphia, LA and Portland are all currently pacing nicely ahead of last year's revenue on the books for the year. In arriving at our same property EBITDA outlook, we're forecasting same property expenses to increase in a range of 2.2% at the low end to 3.2% at the high end and 2.7% at the midpoint. These modest increases are achieved due to the success of our portfolio wide initiatives and implementation of our best practices.
And they're despite combined wage and benefit increases in the 4% to 5% range and continuing higher than inflationary increases in customer acquisition costs, including loyalty costs, insurance, real estate taxes and technology. As a result, we're forecasting same property EBITDA to decline between 2.85.6%, with the midpoint at minus 4.2%. This coincides with same property room revenue and RevPAR growth rates of 0.3 at the midpoint, respectively, and same property expenses growing at 2.7% at the midpoint. Now I'd like to turn our focus to the four areas where we're going to create value for our shareholders in the years ahead, regardless of the economic environment. Those four areas being our major hotel and resort redevelopments and transformations, the completion of our strategic disposition plan, our portfolio wide initiatives and branding.
As we explained last quarter, we identified 16 properties within the acquired portfolio that we determined will benefit from substantial investment through repositioning them to a higher competitive level, improving the guest experience and driving very attractive returns. With our most recent announcements, we've now disclosed the vast majority of the operator and brand changes we determined were needed to position our properties to maximize performance following redevelopment. The vast majority of these have occurred and are now behind us with less disruptive transitional performance and better overall performance ahead of us. To date, of the 16 major projects we discussed last quarter, we've commenced or completed construction on eight of them. The Donovan Hotel, which will become the seventh hotel in the Unofficial Z Collection following the completion of its $25,000,000 repositioning and its reopening in the second quarter this year as the reimagined Hotel Zena.
Mason and Rook, which will join the luxury Viceroy collection following an $8,000,000 upgrade, which is expected to be completed by midyear twenty twenty. The first phase of the $23,000,000 repositioning of the 162 key Viceroy Santa Monica to be completed by the end of the second quarter. This consists of $10,500,000 in Phase one to reinvigorate this property's reputation as one of the most iconic luxury lifestyle hotels in the highly supply constrained Santa Monica market. We'll do it through a complete redo of all of its public areas inside and out as well as creating value by adding seven keys. We also have the $12,500,000 repositioning of Le Park in West Hollywood through a comprehensive renovation of this entire all suite hotel with completion scheduled by the end of Q2.
The repositioning of Chaminade Resort and Spa in Santa Cruz following the completion of a $9,000,000 upgrading of the property's vast indoor and outdoor public areas and meeting and event venues with completion early in the second quarter The $11,000,000 second and last phase of an overall $32,000,000 redevelopment of the former Hilton San Diego resort, which is being reinvented as an independent luxury resort under its new name, San Diego Mission Bay Resort. The property has already been renamed, and we expect to finish the property's transformation by the middle of the second quarter. $5,000,000 luxury repositioning of the 96 room Marker Key West, which is now complete and finally, a $12,000,000 transformation of the 189 room Villa Florence to commence in the third quarter with completion late in the fourth quarter, at which time the hotel will be renamed and re concepted as the Bayberry San Francisco. Combined, these eight major redevelopments represent an investment of $93,000,000 with a forecasted increase in EBITDA upon stabilization of over $10,000,000 All of these projects should be complete this year with ramp up beginning next year. The remaining eight projects, all of which constitute 2021 completions, include the $37,000,000 redevelopment of San Diego Paradise Point Resort into a Margaritaville Island Resort, the just announced $25,000,000 repositioning and reinvention of Hotel Vitale in San Francisco as the eco conscious Luxury One Hotel San Francisco that John Travolta and Olivia Newton John were whining for in our hold music, the repositioning of the already luxurious La Baers Del Mar through a $10,000,000 investment to drive higher rates and higher food and beverage profitability a $20,000,000 redevelopment of the southernmost resort in Key West, which is similar to our repositioning project at La Playa that has been so successful.
The $20,000,000 recreation of Marker San Francisco as our eighth unofficial Z Collection hotel. Our just announced transformation of Hotel Solomar to a Margaritaville resort hotel through a $20,000,000 redevelopment, a $5,000,000 redevelopment and reconcepting of Grafton On Sunset in West Hollywood and finally, $20,000,000 redevelopment of an as yet unannounced property in the portfolio. These eight twenty twenty one projects, coupled with the $12,000,000 second phase of the repositioning of Viceroy Santa Monica, some of which are scheduled to commence in this year's fourth quarter, total $169,000,000 of investment and are currently forecasted to deliver an EBITDA yield of 10% or more in total upon stabilization in 2023 or 2024. All told, we're currently forecasting that these 16 major repositioning projects will represent a total investment of just over $262,000,000 with an expected 10% EBITDA yield on investment in total upon stabilization. Next, I'd like to turn to make a few comments about the progress on our strategic disposition plan.
As you're aware, we recently announced the contract to sell the InterContinental Buckhead and Sofitel, Washington, D. C. For $331,000,000 The buyer of the two hotels has significant hard money down. And assuming the sale closes, we will have sold 15 hotels for a total of 1,664,000,000 at a combined NOI cap rate of 5.6% and a combined EBITDA multiple of 15.3 times twenty eighteen operating numbers, all since we closed on our corporate acquisition at the November 2018. Our sales metrics are clean and do not add in required capital by the buyers, even though most of the properties sold need very significant capital.
Of these sales, two are from the Pebblebrook legacy portfolio and 13 are from the acquired portfolio. The NOI cap rate on the $1,426,000,000 of acquired properties sold or being sold equals 5.4% and the EBITDA multiple equals 15.8 times. As a reminder, 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. Our total disposition target for 2020 is $375,000,000 including the two properties currently under contract.
We continue to work through preparing retail for sale from potentially four hotels for gross proceeds of up to 150,000,000 by legally separating the retail from the hotel portion prior to offering the real estate for sale. We expect these sales to occur at various times over the course of the next twenty four months or so. And while it's likely that there will be a few additional hotel sales over the course of the next twelve to twenty four months, our outlook for this year does not include any further hotel sales beyond those already announced. Next, I want to provide a quick update on our progress on our portfolio wide initiatives. These are really important.
We continue to make significant progress on maximizing the opportunity to recontract many products and services that we and our operators purchase within our portfolio. We've now contracted for over $7,000,000 of annual run rate savings within the portfolio and have identified another $3,000,000 of savings that should get finalized in the next two quarters. This would bring us to our $10,000,000 of targeted annualized savings a little earlier than the end of the year, which was our original forecast. But we're not stopping there. We believe there are significant additional savings that we can achieve through portfolio wide initiatives, and our team will continue to work towards these additional savings.
In addition to the $10,000,000 of annualized savings either already contracted for, in process or identified. There's approximately $3,000,000 of annualized savings in process from the creation of seven separate pods involving 16 different hotels utilizing the same operator in the same market, in many cases within a block or two. Over half of these additional podding and portfolio wide initiative savings are reflected in our 2020 outlook, with the remaining portion expected to benefit 2021. These $13,000,000 of total annual savings should create over $200,000,000 of real estate value for our portfolio through the improved bottom line performance of our hotels. This opportunity to create value was made possible by the significant economies of scale we achieved through the portfolio acquisition and our creative and relentless efforts to reap the value of all of the benefits available from creating the largest owner of lifestyle hotels and resorts in The United States.
Finally, I want to briefly touch on the branding opportunities within our portfolio and the potential to create significant value from branding in the longer term. As we previously discussed, we've been working on bringing all of the Z hotels that were separately developed by us over the last seven years under a proprietary experiential brand called the Unofficial Z Collection. We recently completed our branding work with an expert third party branding firm for the Unofficial Z Collection, and we'll spend the better part of this year rolling out the brand to the existing portfolio of seven Z hotels, including Hotel Zena, which will open in the second quarter in Washington, D. C. Coinciding with the opening of Hotel Zena, we're planning to launch our unofficial Z Collection website, which will explain and demonstrate the brand's ethos and the individual personalities of each of the Z hotels.
After Markers San Francisco is fully renovated and becomes the eighth hotel in the collection, we'll connect it with the rest of the Zs as well as the collection's website. This will allow us to begin to connect all of these hotels together in the eyes of the customer as well as start to gain recognition of this unique experiential brand out there in the hotel industry. In addition, we've begun work on a second proprietary brand that will be broader in scale and ultimately incorporate the Unofficial Z Collection as part of it. This broader brand will initially be created by incorporating all of the completely independent and unencumbered lifestyle hotels and resorts in our portfolio, which today total 26 hotels and resorts. This includes our Z Collection hotels.
We believe this base of unique lifestyle experiential hotels and resorts, all clustered between the four four point five star quality levels, is rare outside of the major brands and offers a very significant opportunity down the road to create substantial value for Pebblebrook shareholders. We look forward to providing you with more information on our plans and our progress throughout the year. 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 substantial organic value creation opportunities within our new combined company that we've identified and we're actively executing on. Not only are most of these opportunities unique to Pebblebrook, but they fall squarely within our core expertise, having successfully executed on these types of value creation opportunities over the last twenty years. So that completes our remarks.
Donna, we'd be pleased to answer whatever questions that our callers might have.
Speaker 0
Thank you. The floor is now open for questions. Our first question is coming from Rich Hightower of Evercore ISI. Please go ahead.
Speaker 3
Hi, good morning guys.
Speaker 2
Good morning, Rich. Good morning, Rich.
Speaker 3
I just want to dig in quickly to the inflection point in corporate transient that you described and others have described kind of from November through the January. And John, I know you mentioned maybe some trade war headlines and Brexit resolution maybe contributed to that. But was there anything maybe more tangible that you guys saw in certain hotels or in certain markets that you can really ascribe to sort of the pickup there? And given that you're predominantly a transient portfolio, do you think you guys would be in a position to see if that is indeed a trend once we kind of get out of maybe some of the corona virus impact in the near term? Would you guys be in a position to sort of call that earlier than most, you think?
Speaker 2
Well, it's a good question. I don't know that our portfolio is big and broad enough across The U. S. To be the ones who can call it. But we do analyze in detail the industry data that Smith Travel puts out and particularly focus on the weekday, weekend business and the occupancy levels on a year over year basis.
And in addition to the more shorter term positive pickup trends we saw over that three month period from November through January, When you look through and focus on the weekday business across the industry, I mean, you clearly see an improvement overall after October in business transient. You had demand up in November, 2.7% or 2.8%. You had demand for weekday business in December up in the 1.8, 1.9 range. And then in January, it even got a little stronger. And I think January is probably a cleaner comparison month when you think about November and December and the probably benefits that were received in the industry from the holiday shifts, which fell better.
But occupancy weekday in January was up 0.9%, which means weekday demand was up close to 3%. And so that's clearly an acceleration. Again, maybe some of that was due to better weather and fewer impacts from weather in what might traditionally be a weather impacted month in January. But clearly, there was a positive trend positive results going on in January.
Speaker 3
Okay. That's helpful. And maybe just on the asset disposition side of things. I know in the past, you've mentioned that private equity and high net worth, I think, have tended to be the predominant buyer pools for what you guys have been selling. So most of that's been one off assets for the most part.
Where do you peg demand for maybe portfolio trades among that same group at this point in time, if you had any insight there?
Speaker 2
Yes. That's a little tougher because we don't really have we didn't really have any portfolios out on the market, And we don't see many other than more in the select service side out in the market. But one of the things that was interesting about sale of the InterContinental and the Sofitel is we have those actually listed separately, and and they were being sold separately on on a different task. And we had an institutional buyer come in who had an interest in both, who actually indicated they had a much stronger interest in both than they had in any either of the individual properties, meaning that they they were more focused on getting more capital out to high quality assets and good markets than just getting it out on a piecemeal basis. And they ultimately preempted the process.
So that's one anecdotal piece of information, but it certainly indicates that, what we believe, which is for good quality assets in good markets, there's a lot of capital out there.
Speaker 3
Perfect. Thanks, John.
Speaker 1
Thanks, Rich.
Speaker 0
Thank you. Our next question is coming from Sneeds Rhodes of Citi. Please go ahead.
Speaker 4
I just wanted to ask you, a couple of questions about your projects. I guess the scope of investment increases into 2021. So just in terms of, I guess, more sort of pronounced or stabilized earnings growth, that's more of a 2022 event given that I assume you'll have disruption in 2021 with these projects as well?
Speaker 2
Yes, Smedes. We would expect a similar level of disruption in 2021. Again, give or take a couple of million dollars as is the case as we're forecasting for this year, which is all of about $1,000,000 different than last year. So all should continue to be about the same. And the total investment dollars should be about the same as well next year.
Even though the number for the projects looks higher, some of those projects start in the fourth quarter of this year, have a little bit of impact, which is built into our numbers. And of course, there's a lot of pre start dollars that go out related to not only soft costs, but deposits and orders for FF and E well in advance of when they would be installed in the 2021 project. So we think it's pretty smooth between 2019, 2020 and 2021 in total dollars out, again, give or take 10,000,000 or $20,000,000 and in disruption. But yes, stabilization and the largest amount of unimpacted ramp up would occur in 2022.
Speaker 4
Okay. And then I just wanted to ask you, on another call, they were to comment that 2020 would be kind of seen as the year for peak wage and benefit increases. And I was just wondering, do you see that as well? Or do you have any thoughts around that?
Speaker 2
They might have some specific circumstances within their portfolio. I think it's hard to gauge. It's interesting that we noted a 4% to 5% increase in the combined wage and benefit. That's our forecast for this year being mitigated elsewhere, particularly through our efforts. But it comes off a base of increases that are generally in the 2.5% to 3% range for much of or the majority of the portfolio.
The difference is, is that benefits are going up at 5% to 7%. You're seeing some minimum wage increases that continue to clip along in numerous cities and states, which again only impacts a small portion of our employees. Often it's the tipped employees. There's not something specifically provided in the legislation that's different as there has been historically for tipped employees. And then a few markets where the wage and benefit combo is driven by the contractual union increases, which have fallen again in the 4% to at most 5% annual range.
And then a few markets like in Nashville, where there's so much new supply being added with new supply driving up wages and benefit rates, start rates, because of their need to hire folks in very tightly constrained labor market. So you put that together and that's how we get to that four to 5% range, It's hard to know whether those are going to abate moving forward. It really depends upon what goes on in the economy.
Speaker 4
Okay. All right. Thank you very much.
Speaker 2
Thanks Smedes.
Speaker 0
Thank you. Our next question is coming from Ari Klein of BMO Capital Markets. Please go ahead. Thanks.
Speaker 5
There have been a number of management transitions over the last year or so. Are you comfortable with where you're at right now? Or do you think there's still more to come? And how do you think that headwind evolves maybe over the next year or so?
Speaker 2
Yes. So Ori, the ones that we have planned are mostly complete. So we have a transition that will take place at Vitaly as it becomes the one and we have the folks who manage the one hotels, the Starwood Hotel Group will come in and manage that. So we have that transition. We have a few brand transitions, if you will, within the portfolio.
We've probably felt most of that impact or it's built into our numbers for this year. And then it's always possible, I mean, if we have performance that we just are unsatisfied with on an ongoing basis and we don't think an operator can turn things around for really structural reasons related to their organization, we'll make changes in the future. But in terms of what's planned, we're for the most part through the major impact. And in fact, this year, the impact, we believe, is less than what it was last year. And we think that will decline again next year.
Speaker 5
Okay. And then on the branding side with the Unofficial Z, how would you expect that to ultimately translate into performance at those hotels? And is there any incremental investments that are needed as that rebranding or branding kind of ramps?
Speaker 2
Yes. So there is some incremental investment we're going to make in the portfolio to make what was individually created hotels into hotels that all share the ethos that we've determined is what's underlying the Unofficial Z Collection. So we've already gone through the properties with our designers and project managers. We'll have some work relatively minor through the portfolio. We haven't scoped out the full amount of the investment, but I would say at most in the portfolio, it's a couple of million dollars in total, spread about six of the existing hotels.
So pretty minor. Ultimately, I think connecting them in the eyes of the customer will begin to bring a little bit of business across the portfolio that we don't see today and a little bit of business, particularly from the group side, where we have some really unique meeting and event venues within the portfolio. And I think providing them as a group and showing them all together is going to be stronger than showing them individually. So I think ultimately it's going to lead to more business and cross business. But I don't want to overstate it.
A brand of seven or a brand of eight isn't going to drive a lot of business outside of what each of the property teams is going to drive by themselves. Great. Thank you.
Speaker 0
Thank you. Our next question is coming from Anthony Powell of Barclays. Please go ahead.
Speaker 6
Hi. Good morning, guys. I wanted to focus more on some of these brand kind of announcements or commentary. First, on loyalty costs. You mentioned before that you're seeing growing loyalty costs in the portfolio.
It seems like you're not seeing kind of any kind of RevPAR index benefit. How's how's the benefit of loyalty programs changed over time? And do you see them as less valuable than you did before?
Speaker 2
Yeah. I I think, you know, what we've been seeing, and you know, you hear this from the brand companies, is that they have fairly dramatic increases in the number of members of their loyalty programs. And if you think about that, if you're in many cases these are people who stay one or two times a year, who book through other channels perhaps, or book direct but never joined the program. And with an aggressive push to get them to join, well, what it means is we've taken business that we weren't paying the loyalty percentage on, which might be 4% to 5%, and we've turned it into business that we're now paying loyalty costs on. So generally speaking, through our portfolio, we're seeing an increase in the number of customers as a percentage of our total business of our major branded properties that are loyalty members, which means we pay more into the program.
And I think we've we commented last year, I would say for the most part, maybe we were just unlucky, but we lost a lot of redemption business that's clearly gone to others, primarily Starwood business that went over to Marriott properties because there were more choices for what had been a more limited inventory of Starwood properties. So and then if you think about what the other benefit of these branding, these loyalty big brand loyalty programs, you know, if you take a customer who was paying full price once or twice a year and they join, and now they get a 3% to 5% discount depending on the day, we're also having an impact on our average ADR. So there are positives that offset some of this stuff. But on the distribution cost side, we and most everyone in the industry have been seeing significant increases in customer acquisition costs at a much faster pace than inflation. So I don't I'm not here to say they're not valuable programs.
All we're stating is that the costs have been going up much faster than inflation. We don't think we're getting it back in revenue at this point.
Speaker 6
Got it. Thanks. And on your commentary on kind of the larger independent lifestyle brand of, I believe, with 26 hotels. Obviously, there have been a lot of brand transactions over the past few years, but they tended to involve management as well. I'm guessing this larger brand would not involve management given you have third party managers.
Could you talk can you just talk through what kind of value creation you think there could result from this kind of larger brand effort you're now pursuing?
Speaker 2
Yes. So I think, again, we don't want to get ahead of ourselves and promise something that doesn't turn out to result. But I think it's giving us optionality in a number of areas. One, I think a brand of 26 versus a brand of eight begins to provide some value across the brand ultimately to each of the properties in the brand. I think the second thing it does is it provides, as we make acquisitions, another opportunity to grow that brand.
And third, there potentially is opportunity based upon the scale of that entity to bring others in, whether it's through license arrangements or through affiliations ultimately to grow that brand. And so what ultimate value there is to that would ultimately get determined by others if at some point we decided it was something we wanted to monetize. But I do think, if you think about the major brand companies across the world, their growth is all about unit growth. And for them to grow and create on their own the kind of it's the kind of brands that we're talking about creating, whether it's the ones that have uniqueness across the portfolio. And so we do think ultimately there will be significant value for the brand scale and the creative nature of them, of the collection, as opposed to just some management fees that in many cases often go away after these acquisitions occur.
Speaker 6
Very interesting. Thank you.
Speaker 2
Yes. Thanks, Anthony.
Speaker 0
Thank you. Our next question is coming from Shaun Kelley of Bank of America Merrill Lynch. Please go ahead.
Speaker 7
Thanks. Good morning, everyone. John, that loyalty commentary was interesting. That was one of my questions. So the other thing I had was just to look at the urban side has continued to be sort of a little bit of a different supply curve than what we see across the nation broadly.
And you guys, from all your experience in these markets, pretty good insight on what that supply curve looks like. So the two part question is, one, kind of any sense of peak activity just either as things get delayed or construction costs move up across the broader urban set? And then, so kind of how does that trend broadly? And then probably more importantly for Pebblebrook's portfolio as you look out to kind of 2021, 2022, any sight line that I think the number you called out was 3.2%, that, that number starts to come down?
Speaker 2
Yes. Good question, Sean. We actually think we're at the peak for urban at this point, and it's on the way down. And so for us, when we look at what we think will what we think supply growth will be next year on a weighted average basis in our portfolio, we see that pretty close to 2% versus the 3.2 it ran last year. And for us, to run-in the 3% range this year and also in that range for the industry.
So we do think it's beginning to peak that it's it'll be on the way down as we go across this year. There obviously has been a significant stretching out of the time it takes to build and deliver. And during that period, we've seen a decline in urban starts. And so while you can look at what's under construction, frankly, for the whole industry and see it, you know, inching up over the last eighteen months, the deliveries are have really peaked. And there there's more under construction only because it's taking longer for a property to go from beginning to completion and because starts have declined.
And we expect that to accelerate because what we've seen obviously over the last three to four years is we've seen no increase in bottom lines on average in the industry, but we've seen 20% to 30% or more increases in cost to deliver through the increase in development costs. And so the yield, the ability to deliver an attractive yield has gone down dramatically on new development. And so we think it's turned. We think we're going to see it next year in our portfolio. We think the disadvantage of additional supply growth in the urban markets disappears by next year and then begins to look even more attractive than the industry where you're seeing more development in the suburban markets now than in the urban markets.
Speaker 1
And Sean, also to add to that, construction financing is also getting more difficult to obtain and it's really being more provided by a lot of these more local banks rather than larger banks. If it's a convention center hotel, that's a different story. But look in New York, the number of defaults are already starting to rise on loans and that should put a big pause for a lot of construction lenders out there who are thinking about issuing a new commitment. When you see those headlines of defaults rising, that sort puts a pause and helps abate the supply growth.
Speaker 2
And I do think it's the mezz players that are going to be taking the hits where they thought they had a comfortable position ultimately with 20% or 25% equity above them. And I think the challenges in a number of these markets, like in New York, like in Chicago, where your operating leverage is really driving down your bottom lines as revenue is at best flat, if not declining with expenses going up. I think you're going to be reading more and more about folks taking pretty big hits in the mezz positions. Again, not necessarily the construction lenders who maybe have been down in the 45% to 50% area of cost, but it's the capital above that that's at risk.
Speaker 7
Thank you very much. That's a very good color. And I guess the follow-up would just be, when specifically did you see that starts number peak? I mean, I'm sure that's kind of a time series data point. Was that sometime in within the last year, in the last couple of months?
Just that's a helpful data point.
Speaker 2
Really back in 2018.
Speaker 7
Back in 2018. Okay. So you're sort of already seeing of the lag to deliver in that two point five years shows what puts you out to next year?
Speaker 2
Correct.
Speaker 7
Great. Thank you very much.
Speaker 2
Yes.
Speaker 0
Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead.
Speaker 8
Good morning. John, a couple of questions. The first one, does the push to get all the repositionings done by the end of next year say anything about your view towards 2021 or maybe 2022?
Speaker 2
No, doesn't say a thing about it. It basically says there's significant attractive returns from these investments. It's the best place to allocate capital today. And the sooner we get them done, the quicker we get those returns. And in a number of cases, these are properties that need to be redeveloped.
And if we don't put the capital in, they're going to continue to lose share.
Speaker 8
Okay. On the rebranding, John, why is the Solomar better as a Margaritaville than it is a Z Collection? And on the Vitaly, I've known you for a long time, and I I don't think you've ever had a big desire to have five diamonds or stars or lucky charms or whatever they are. And it feels like this is this is more luxury than you have previously experienced?
Speaker 2
Sure. So as it relates to Margaritaville, I think we feel like there's more power to that brand in San Diego based upon the customer base that is convention and leisure than a Z Collection, which is much stronger, would be much stronger with corporate business, which you see more in the other markets where the Z Collection is in. So a market where we're lacking that base of major corporate accounts probably isn't the best place for a Z Collection. So Margaritaville really fills the void for that leisure customer and the convention goer who's looking for that sort of chilled resort type experience in a downtown location. As it relates to the One, I think the fascinating thing about One is it's a five diamond product in the eye of the customer, a luxury product in the eye of the customer, but the cost base of operations is four.
It's a lot like the W, except I would say, it's being executed extremely well today. And it's very successful with the customer base. And so we have other properties like that where we provide a five diamond physical experience, but a four diamond level of services. So we get five diamond rates, and one would fall into that category.
Speaker 8
All right. And then just a housekeeping question. Given the pending sale of the Intercon, I assume that's taken out of your first quarter RevPAR growth guidance, what would it be if it was in given the lapping of the Super Bowl?
Speaker 2
I don't know. We can get back to you on that, Bill.
Speaker 8
All right. Thanks, guys.
Speaker 1
All
Speaker 2
right. Thanks. You have that.
Speaker 1
Thanks. Bill, just a follow-up. So Intercon, if we included that for January and February, it's about $3,000,000 to $3,100,000 of EBITDA. And in March, it's about 1,700,000.0
Speaker 2
Yes, don't think that's what he was looking for though. He's looking for RevPAR impact.
Speaker 1
He won't pull that. In terms of impact to earnings.
Speaker 9
Next question.
Speaker 0
Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead.
Speaker 2
Good morning, everyone. Good morning. Good morning.
Speaker 9
Just on the Marriott Starwood disruption that you guys experienced last year, have all those issues been resolved in your eyes? And then kind of what's the step up that you're embedding in 2020 guidance?
Speaker 2
Yes. Many of them have resolved one way or another. I think as it relates to the group sales issues, I think we're in pretty good shape everywhere except for San Diego, where we continue to have issues with group sales. We're very far behind this year. And I know Marriott is working furiously to improve the performance of that cluster sales group.
And I don't think we're alone in that group in experiencing issues. I think as it relates to redemptions, unfortunately, think we just got the shaft at the end of the day that our properties were disadvantaged by the combination. Marriott's done a very good job of working with our teams to replace that business with other business. But that redemption business is not going to come back. It's now subject to different customer behavior because the customers have more choices.
So I think we're pretty much behind us with most of it other than the San Diego Group sales issue, which I think is unfortunately going to disadvantage our property this year in that market for the better part of the year. That's helpful. Thank you.
Speaker 0
Thank you. Our next question is coming from Jim Sullivan of BTIG. Please go ahead.
Speaker 10
Thank you. Sean, just to follow-up on your discussion about branding. One thing that's interesting in going through your most recent presentation is how much higher the EBITDA margin is for the Z Collection than the rest of the portfolio. I guess it helps to be in San Francisco. And as you expand the collection into new markets, I'm just curious whether that differential in EBITDA margin that's been running I think at 40% versus like 32% for the portfolio.
How you view that differential going forward? Do we expect that spread to moderate? And is it because is it the San Francisco share of the z collection that's driving that? Or is it everything else that you've been talking about?
Speaker 2
Yeah. I mean, I I I'd love to, you know, be a great sales pitch to say, you know, all we have to do is turn something into a Z and it goes from 32 percent to 40%. Unfortunately, we couldn't make that case. I think there's some benefit. Three of them are sold together by Viceroy.
They're marketed together. I think that's a good indication of the benefit of connecting them together. That's Xelliss, Zeta and Zeppelin. They're also all within about five blocks of each other in the Union Square SoMo Market. I think some of the benefit is that specific to those properties, two or three of them don't have food and beverage operated by us.
They're by their third party independent restaurants, and they also do the banquet. But think part of it is related to how we've approached the food and beverage at those properties in terms of creating unique venues that drive a lot more food and beverage, drive a lot more event business, that the restaurant can be successful, very successful with that help, and which we get significant room rental revenues. Our room rental at this tiny little hotel, Xelliss, which has two board rooms and a restaurant with a patio, was over $800,000 last year. And so the ability to drive that through the creation of unique spaces, whether they're Zs or others, but they are, in many cases, they are a part of the ethos of the Z Collection and where we do think there is a competitive opportunity. So there's some of each, Jim, at the end of the day that is a result of the benefit.
Some of it is property specific, some of it is specific to what the ethos is the z collection and some of it is the market, being San Francisco being a better market.
Speaker 10
And some of it, of course, you mentioned the clustering, the ability to cluster operations to some extent. So as we see the you expand into DC and, of course, you've opened up a z collection in in Portland, the zags, and we assume there's gonna be zags up there. Just curious whether we would whether you anticipate clustering more Z Collection assets in markets as you enter them. Is that is that part I mean, there's certainly a customer focus that you mentioned earlier, but is that also part of the strategic plan for expanding the brand?
Speaker 2
Yes.
Speaker 10
Okay. And then finally for me, you've talked about the issues with the Weston brand over a couple of years and I know there was a prior question that talked about whether you thought you were through the worst of it. Looking through the portfolio and the CAGRs on the EBITDA on a trailing three year basis, I don't think I think the Western Michigan Avenue is probably the weakest asset. Can you just talk to us about your plans for that asset? And to what extent do you think you can you're going to be able to reverse that tide?
Speaker 2
Yes. So it's a very complicated asset. I think the challenges there have more to do with the dynamics of the market, the location of the property, and where it's historically has how it's created its segmentation and driven its business. I think its location as one of the furthest hotels away from the convention centers, it has progressively been an increasing problem. And the replacement of that business is really the key to the success of that property and how to drive other business there.
And that's what we've been working with Marriott on in terms of improving the performance. It also was disadvantaged by the Marriott Starwood merger and the removal of the sales teams from the property and into a cluster there. We think that's doing much better today, but perhaps not quite as well as it would have had the team still been at the property. And then finally, we ultimately have some flexibility here with overall real estate use with a management agreement that's up, I think, the '26. And so we're putting a lot of time and effort working with third parties on what are the creative alternatives, what are the alternative uses, if any, for this property versus what it is today?
Whether it's in hotels and maybe it's dual branding, which can be easily done because of the way the physical property works. Or are there alternate uses that might be better? And then finally, we have a while small amount of retail, it's very high priced, high rent retail on North Michigan Avenue that ultimately we're looking at separating that out and selling that separately.
Speaker 10
Okay. And then quickly, a final question for me in terms of the balance sheet. Asset sale proceeds are being used to reduce debt, lower coupon debt as opposed to higher coupon preferred. And if you could just talk about how you guys are prioritizing the use of proceeds and what your target is now for net debt.
Speaker 1
Sure. Well, we'll look at each of the options and depending on what our view of the world is. So we have two series of preferreds We have also debt that we can pay down. We're getting our long term target for leverage is in the debt to EBITDA ratio in the four to 4.25 level.
After the sales of these, Intercon and Sofitel, that will put us as noted, we noted in the call around four or four times. So we're in that range now. So we'll evaluate what's the best use. And the other use of proceeds in addition to reducing some leverage could also be stock buybacks. So we'll also look at each of those, but we'll be opportunistic looking at it and we'll as we make progress here in the sales.
Speaker 10
Good. Thank you.
Speaker 0
Our next question is coming from Neil Malkin of Capital One Securities. This
Speaker 9
call has gone on for a while, so I'm just going to do two questions like you asked. So the last slew of dispositions has really been focused or concentrated in the DC market. Just wondering if there's a reason or rationale behind that. Is it tell of kind of your view of that market? And then or does it have to do with particular buyer sets that have just been very active there?
Speaker 2
Yes. So it definitely has to do with our long term view of the market. I mean, we still are a fan of the market longer term, but we've wanted to reduce our share of our portfolio in that market. And so that's where you've seen quite a few of the dispositions within the portfolio. You're also seeing us completely redevelop two properties in the market.
So we do continue to believe in the market. We think there's opportunity, particularly for certain types of assets. But we also think that it's probably a little bit more of a slow grower over the next five or ten years than perhaps some of the other markets we're focused on.
Speaker 9
Yes, that's helpful. I imagine it's a supply issue. So then the
Speaker 2
That's last one part of it, yes.
Speaker 9
Yes. The last one I have is when you're you're obviously putting a lot of capital to work over the next twenty four months. Maybe if you could just run through sort of how you get comfort in those returns yields, the 10%. Because if you think about it, the the hotels that are, you know, approximate to that hotel, if their rates aren't really going up, you know, it's it's hard for you to say, Well well, our ADRs are going up, you know, 8% or whatever. Is it Is it that you are comfortable with the corporate meeting planners and they're such a large contributor to that?
Or it does involve a fair amount of risk just given the large amount of capital you're putting to work? So what gives you comfort those returns?
Speaker 2
So Neil, I mean, we've been doing this for almost twenty years. And so one of the things that gives us comfort is our experience in analyzing the market, analyzing the customer base of the market and understanding if we make investments and we do certain things to improve the properties that we can create a product that will drive, in many cases, a whole new set of customers to come to the hotel. So if you're taking a property that's 3.5 diamonds and you're making it a four or 4.5 diamond property, in most cases, we have to go out and find all new customers, whether it's meetings, whether it's transient, whether it's leisure, whether it's business. And our comfort comes from understanding the market overall. Who would our new competitors be in the market?
It's not about raising the rate on the customers you have today. It's about saying, look, we're going to, in many cases, abandon the customers that we have today. We're going to go find the customers who are paying these kinds of rates for this higher quality product with higher quality services than what's been provided in the past. So we go through and we look at the market. We look at those competitive sets.
We look at the performance of their rates and their occupancies and their RevPARs, and we say this is where we think we can get to. In total, we can be competitive because we're creating a competitive product in a competitive location. And if we get those revenues and we get this food and beverage revenue because of the creative nature of the product we're providing, then we can deliver the returns that warrant those capital investments. And that's pretty much the process that we go through. It's very scientific at the end of the day.
Speaker 1
And Neil, also we provide historically all of our hotel EBITDAs by property since our period of ownership in cases back to 2010. So you can look there at Zetta, Zephyr, Zeppelin, a lot of these redevelopments we've done where we invested meaningful amounts of capital and how we reposition the properties and what the how it's benefited the bottom line. So we have a track record there to look at, too.
Speaker 9
Appreciate that. Thanks, guys.
Speaker 0
Thank you. Our next question is coming from Gregory Miller of SunTrust Robinson Humphrey. Please go ahead.
Speaker 11
Good morning, John Ray. Well, I am curious about what's gonna happen to the ostrich at Villa Florence. I do have some I do have a more serious question on, San Francisco for you. I I figured someone might ask about the decision of Oracle moving its Open World Conference from San Francisco to Las Vegas, at least through 2022. So I'll take the lead on asking the question.
You have invoked in the past years on earnings calls about defending the San Francisco market. And I'm curious how you interpret, Oracle's decision and what they claimed as expensive rooms and poor poor street conditions in deciding to move to Las Vegas.
Speaker 2
Sure. So, obviously, we know what we've read and what they stated, which was those two reasons you just mentioned. It's hard to take issue with the street condition comment. And I think the city is moving in the right direction, but I think they have a long way to go to make a dramatic impact on improving that. There's also a lot of self help going on within the market in the business improvement districts where we have a lot of together, the businesses are banded together and are providing cleaning services and security services, etcetera, in and around our neighborhoods.
But I think that where I might take some issue, I don't think San Francisco, and particularly for the Oracle Conference, I don't really think they have unusually high hotel rates. And I know that the hotel community has been working with Oracle on rates over the last few years. So I mean, you can go to just about any other market other than Las Vegas, any of the major markets. The convention rates for a convention that size are pretty similar across the country. So I do take issue with that.
I also think there's perhaps, and I'd be speculating here, but this is a citywide conference that has had declining participation over the last five years. And competing with an ever expanding Salesforce conference and VMware conference, both of which are in the fall, both of which draw similar participants, exhibitors, and attendees. And so perhaps part of the decision making, even though they didn't say it, was because they need a new venue. They're not doing well competitively with two other competing conferences. So there's a lot of work to do in San Francisco related to the cleanup of the city, the understanding of many about how important it is for local businesses to be successful.
There's more collaboration that's needed by government with the business community that's working very hard to create better conditions in the city. And perhaps the Oracle move is a bit of a slap in the face that maybe it wakes some people up. And you know what, maybe there'll need to be another slap in the face before folks really wake up. So hard for us to know, but the city is very successful because it draws a lot of people. There's a lot of attendees and these associations, you know, they depend on the revenue.
And so you can move your conference for whatever reason you want, but if people don't wanna go to the city that you're having it in, you're not gonna make as much money.
Speaker 11
Thanks for the excellent insight there. I want to ask a quick follow-up question on Hotel Zena. This hotel is likely to have some very clear thematics and potentially politics from what I've read. And I'm curious how you came to the decision of creating this SINA thematic. And relatedly, as a future Z, could a hotel like this or other Zs end up becoming their own sub brands in other markets?
From what I've read so far, I could potentially see this concept for Xenith taking off elsewhere.
Speaker 2
Yeah, so to be clear, there's no political statement being made. Narrative is not an activist message. The narrative is a celebration of the success of women, the empowerment of women, the equality of women, and the fight for those things to achieve what should come naturally over centuries around the world. And so it's not a political message, It's not a movement. That's not really what geared at.
But we are about celebrating, and we think it's time to celebrate those things and really look at things in a positive way. And doing it in DC, hard to think of a better place to launch it. And could there be other hotels within the Z Collection that have a similar narrative? There certainly could be.
Speaker 11
Thanks. I appreciate the clarification on that.
Speaker 2
Appreciate Sure.
Speaker 11
All of the answers to the questions.
Speaker 1
Okay. Thanks, Greg.
Speaker 0
Thank you. Our next question is coming from Wes Gallaudet of RBC Capital Markets. Please go ahead.
Speaker 12
Good morning, guys. Looking at the coronavirus, has this changed the way you do the revenue management? And then you mentioned the guidance being not including the coronavirus, but have you put in known cancellations such as Facebook in there?
Speaker 2
Yes, of course, we have. We've estimated what we think that impact is going to be in the first quarter and specifically in March. And we built in other cancellations that are for later periods during the year, of which we've had some. So all of that is built in. Of course, we are changing the way we're making modifications to the way we revenue manage.
We're overselling more in our hotels with the expectation that there are more cancellations, that there's more attrition, that there's more competition on a near term basis near arrival. So yes, we are making lots of different changes and have been for the better part of a month now within our portfolio.
Speaker 12
Okay. And then you do have guidance for an $82,000,000 gain for dispositions. Will there have to be a special dividend or can you mitigate that?
Speaker 1
So we'll be evaluating that between the two sales. The taxable gain between Intercon and Sobotel is over about $160,000,000 so clearly well in excess of $1 share. So we'll evaluate. We have a means to look at a variety of deductions and so forth. And as I say, the year transpires, but there's a fairly good chance that some type of special dividend could be needed, but we'll see as the year progresses.
Speaker 12
Okay. And then one quick follow-up to Neil's earlier question, you're looking about the potential returns. When you do these big redevelopments, are you trying to get lost share, recapture the lost RevPAR index? Or are looking to move the hotels into a higher comp set as a broad generalization?
Speaker 2
As a broad generalization, we're moving the hotels into a higher set.
Speaker 12
Okay. Thanks a lot, guys.
Speaker 1
Thank you, Wes.
Speaker 0
Thank you. We're showing time for one last question today. Our last question will be coming from Lucas Hartwig of Green Street Advisors. Please go ahead.
Speaker 10
Thanks. I just have one. In in terms of your dispositions, and and this is probably a mix, but how are buyers approaching these acquisitions? Are they planning on making major changes in terms of capital spend or operator? Or are they viewing these more as stabilized assets?
Speaker 2
Well, think there is a wide range as you indicated. I can give you a few of them. I would say in many cases there's significant capital going in. So in some cases it involves changing the brand and operator, so the liaison becoming a Yotel pad or pod or not sure exactly what it's becoming. We have a I think the Topaz was sold.
It's becoming a select service hotel with a lot of work being done to add subdivide the suites to make a lot more keys. There's some properties that were sold with Kimpton as operator, where Kimpton's been kept in. There's a property in Boston that was sold with a piece of land next to it, where they're adding 77 keys and public areas to the property. And we understand renovating the existing tower. Obviously the Intercon and the Sofitel, those are long term encumbered from a brand and operator perspective.
So there are no changes being made to those two. So it's a pretty diverse set of outcomes, Lucas, at the end of the day. I think the important part is outside of those two, the Intercon and the Sofitel, the flexibility of being completely unencumbered provides a broader base of buyers, a deeper base of buyers and more strategic buyers and has provided higher multiples and lower cap rates, so higher value for those assets because of the flexibility.
Speaker 9
Great. Thank you.
Speaker 2
Thanks very much, Lucas.
Speaker 0
Thank you. At this time, I'd like to turn the floor back over to Mr. Borch for closing comments.
Speaker 2
Well, if anybody's still there, thanks very much for participating. We look forward to updating you in April. And for many of you, we look forward to seeing you at the Raymond James and the Citi conferences and the Wells Fargo conference over the next month.
Speaker 0
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.