
Hersha Hospitality Trust (HT) Q3 2019 Earnings Call Transcript
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Earnings Call Transcript
Operator: Good morning, and welcome to the Hersha Hospitality Third Quarter 2019 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Mr.
Greg Costa, Manager of Investor Relations. Sir, the floor is yours.
Greg Costa: Thank you, Mike, and good morning to, everyone, joining us today. Welcome to the Hersha Hospitality Trust third quarter 2019 conference call. Today’s call will be based on the third quarter 2019 earnings release, which was distributed yesterday afternoon.
Prior to proceeding, I would like to remind everyone that today’s conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company’s actual results, performance or financial positions to be considerably different from any future results, performance or financial position. These factors are detailed within the company’s press release, as well as within the company’s filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil H.
Shah, Hersha Hospitality Trust’s President and Chief Operating Officer. Neil, you may begin.
Neil Shah: Good morning, and thank you for joining us on today’s call. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.
Forecast for 2019 global GDP growth continue to drift lower, and this deceleration has spilled over into the U.S., as trade tensions and political uncertainty have resulted in a significant impact on corporate and consumer confidence, leading us to remain cautious in our near-term outlook for the lodging industry. Last quarter, we anticipated the third quarter to be challenging in many of our markets, particularly in June, July and August, and we brought down our forecast meaningfully to reflect this outlook. We remained constructive on September, but corporate travel did not rebound. Weakness in the international demand persisted and Hurricane Dorian had a meaningful impact on demand and margins in South Florida. Star’s top 25 markets recorded negative to flat RevPAR for the quarter.
Of our six markets, only the Washington, DC track showed positive RevPAR for the quarter. 2019 has been a challenging year for major urban gateway markets. Year-to-date, we have gained 290 basis points of market share, but baseline market performance has been flat to negative in our market. We are confident that these markets will rebound in the coming years and our portfolio of segment leading hotels will achieve our targets. In 2020, the majority of our markets have stronger convention and event calendars.
Most notably, South Florida is expected to be the nation’s leading market in 2020. That said, for 2019, we are forecasting softer fundamentals for the rest of the year based on the September trend and early observations from October in our markets. We have taken a fresh approach to our near-term operating and capital allocation strategies, and we will outline a few of these initiatives this morning. Throughout the year, we’ve been highlighting the three company specific catalysts to drive our outperformance versus
our markets: our seven repositioned hotels, our seven recent acquisitions and our two redevelopment projects in South Florida. The primary driver of results for the second consecutive quarter are our seven newly repositioned hotels.
We invested $77 million into the legacy assets, where we added hotel rooms, activated restaurants and bars and created event space, while delivering an upgraded guest experience. These hotels posted a weighted average RevPAR growth of 8.1%, with 110 basis points of EBITDA margin growth in the third quarter. These assets have not only recaptured their position in the marketplace, but have established themselves as leaders within their respective concepts. We anticipate continued outperformance from these hotels to drive meaningful growth for our portfolio for the foreseeable future. Second, the seven hotels we acquired since June 2016, which reported weighted average RevPAR growth of 4.3% during the third quarter.
These hotels provided a strong tailwind in 2018 as well, but their performance was obscured by the disruptive renovations we had ongoing throughout the year last year. We expect these hotels to continue to drive meaningful outperformance, as they ramp and garner the competitive advantages of our cluster strategy. Our third catalyst, the redevelopment of the Cadillac and the Parrot Key Resort, continued to ramp, but was slower than expected. The two hotels are achieving or exceeding prior peak ADR, but occupancy and margins have been slower to build. The second and third quarters in South Florida attract value-oriented leisure traveler that was drawn to hotel openings in South Florida, Puerto Rico and the Caribbean that were closed last year from Hurricane Irma.
This resulted in softer demand on the beach and in the Keys, which coupled with expense growth, hindered EBITDA production again this quarter. Adding to this was the threat of Hurricane Dorian, whose forecasted path led to widespread cancellation across our assets in the region. They had been fully occupied over Labor Day weekend, but these cancellations, in conjunction with increased staffing required to secure the hotels for a potential impact, led to an approximate $1 million EBITDA loss for our portfolio and significant margin impact. At the Cadillac, despite the market-wide pressure on demand and the impact of Hurricane Dorian, the hotel was able to generate sequential rate growth again this quarter, 18% above our prior peak year in Miami. Despite softer results in the second and third quarter, we remain constructive on our projections for the fourth quarter, as we are seeing an uptick in transient pace for November and December.
In Key West, the market demand waned, but the Parrot Key Resort was able to capture market share and the upgraded resort recorded ADR for the quarter surpassing prior peak levels. Demand in South Florida this year proved to be more challenging than anticipated when we underwrote these holistic transformations. But we remain confident that the two property stabilized EBITDA will surpass the levels we last saw during the markets peak in 2015. I will now focus on the outperformance of our clusters versus their respective markets. Beginning in our nation’s capital.
Our Washington, DC portfolio was our strongest during the third quarter, generating 9.1% RevPAR growth and outperforming the market by 460 basis points, bolstered by favorable comps, Congress in session for three straight weeks in September and performance at our St. Gregory, which underwent a holistic transformation during 2018. That hotel generated 15.5% RevPAR growth, driven by 9.8% ADR growth and continue to gain share following the hotels upgrade to a four star lifestyle offering. In addition, we underwent a strategic shift in our sales strategy at the newest asset in our portfolio, the Annapolis Waterfront Hotel, resulting in over 1,200 basis points of occupancy growth, leading to 19.4% RevPAR growth for the quarter. Pace was robust during the third quarter, and we believe the market is poised to continue this momentum in the fourth quarter with notable events, such as the return of the IMS in October and easier comp in November without midterm elections and overall strong market fundamentals in Washington.
These factors lead us to believe DC will continue to be one of the better markets in our portfolio for the rest of the year and into 2020 with less new supply deliveries, a more robust convention calendar, and easier comes. Demand to Boston remained strong during the third quarter, and our cluster outperformed again, growing RevPAR by 4.2% and outpacing the market by 460 basis points. The Envoy continues to be one of the best performing assets in our portfolio and the Boston market and generated 11.9% RevPAR growth in the third quarter, exclusively driven by ADR growth. Additionally, we expanded our Lookout Rooftop in 2018, increasing our capacity by over 30% with expectations of growing F&B revenue through an increase in private events. Results this quarter were strong in this department and we continue to generate ROI from our recent capital infusion into this premier Seaport assets.
Boston faced a difficult convention calendar comparison this year, but it has been a standout market for us all year long. And we expect this momentum to continue in 2020 with a more robust convention calendar. That said, Q4 will be soft, as October was challenging with the Jewish holiday shift, no postseason success for the Red Sox, and a difficult comp with the Columbia Gas of Massachusetts explosion causing significant market compression, leading to 8.2% ADR growth for our cluster in Q4 2018. Despite headwinds for international demand and the impact of Hurricane Dorian, our comfortable South Florida portfolio generated positive RevPAR growth and outperformed the market by 590 basis points. The bright spot during the third quarter was at our Ritz-Carlton Coconut Grove, generating 29.9% RevPAR growth on an occupancy increase of approximately 1,500 basis points.
The hotel underwent a transformation in 2018, and these renovations attracted higher transient demand in the third quarter, which combined with continued success that – success at the redesign restaurant, allowed us to capture incremental room revenue and grow margins by 470 basis points. After softer second and third quarters, the fourth quarter is showing stronger pace around high demand weekends, such as the Auto Show and Art Basel. We believe the positive momentum in the fourth quarter will continue into next year, supported by our ramp at the Cadillac and Parrot Key, the redeveloped Miami Beach Convention Center attracting high profile events and the Super Bowl in February. Miami was also recently labeled as a city with the second highest growth economy in the country and among the most significant in terms of job creation, a growing and more diverse corporate base will increase hotel demand in the Coconut Grove market. Philadelphia was a very strong market for our portfolio in the first-half of 2019, as our recently renovated hotels took advantage of the city’s robust convention calendar.
However, the third quarter bumped up against a difficult comp, with our cluster generating 10.2% RevPAR growth last year. Despite our 1.2% RevPAR loss this quarter in Philadelphia, the Hampton Inn did continue to take advantage of increased activity at the Convention Center, outperforming the comp set by 400 basis points by growing both occupancy and rate. We anticipate this trend will continue into the fourth quarter with a busy group calendar in November and December. Despite the meaningful increase in new supply in Center City, we remain confident the long-term demand fundamentals of Philadelphia, driven by the growth in investment in technology, media, healthcare and educational sectors across the City. And we believe our purpose-built cluster will continue to outperform their competitive sets.
Out on the West Coast, we had mixed results in the face of new supply and decelerating corporate travel, which led to a 2.2% RevPAR loss for our portfolio in the third quarter. The Hotel Milo in Santa Barbara was our best performing asset on the West Coast, generating 5.8% RevPAR growth. The Hotel’s newly implemented sales strategy allowed us to drive rates from a robust group calendar and favorable weather during September. Despite new supply continuing to be absorbed in the Santa Monica submarket, our Ambrose Hotel captured share and grew RevPAR by 3.1%, driven by a 4.2% ADR increase. The Hotel’s 2018 renovation has directly led to an increase in groups, our midweek corporate and weekend leisure customer base.
And up in Monterey, our Sanctuary Beach Resort registered over 1,000 basis points in margin growth, as the hotel continues to ramp from its renovation in early 2018. Our hotels in San Diego, Los Angeles and Sunnyvale all faced new supply and coupled with weaker corporate and international demands, led to flat to slightly negative results. In Seattle, demand remains strong with 9.9% demand growth for the market in the third quarter. However, the new supply that has come online this year continues to have a significant impact on rate grows at the Pan Pacific. Our West Coast markets will continue to face these headwinds in the fourth quarter, which will impact RevPAR growth.
This will be most notable in San Diego, which generated 21.2% RevPAR growth in the fourth quarter of 2018 on citywide events that do not repeat this year. However, we remain constructive for our West Coast hotels in 2020, with positive results thus far from our RFPs, significantly strong group calendars in Los Angeles and San Diego, and continued absorption of new supply in Seattle. New York City remained our toughest market from a growth perspective. Occupancy remained robust during the third quarter, as our portfolio registered close to 97% occupancy. However, demand growth did not equate to rate growth, as our portfolio generated a 2.9% RevPAR loss, which was impacted by elevated supply deliveries, decelerating demand from the International traveler and from rate-sensitive leisure travelers, generating more states than historically price-agnostic business travelers.
Despite several challenging quarters in New York, there have been a few bright spots at the end of the month. With demand during the UN General Assembly, the best the market has seen in years and our portfolio taking advantage of this compression week, outperforming the market by 210 basis points. For the week, ADR for our New York City portfolio was $385 at nearly 99% occupancy. For the quarter overall, however, our attempts to push ADR led to market share decline this quarter, and with declining ADR, margin suffered. As previously mentioned, supply deliveries were higher in the third quarter, which impacted pricing power.
We anticipate supply growth for the year to be 3.7% across Manhattan and will continue to pressure ADR and the gate RevPAR improvement in the fourth quarter. The shift of the Jewish holidays to be – to the first two weeks of October were impactful, and our New York portfolio bumps up against the difficult comp when our cluster generated 6% RevPAR growth in the fourth quarter of last year. Before I transition to Ash to discuss our margins, the balance sheets and our updated 2019 guidance, I wanted to quickly update you on our capital allocation strategy. We began the year with expectations for meaningful EBITDA and free cash flow growth that we intended to use to reduce leverage. With lower expected free cash flows in an and an uncertain environment, we are accelerating our leverage reduction plan by actively marketing several hotels for sale.
With the disparity between public and private market values in major gateway markets, we can accretively transact on two to four hotels, or $50 million to $75 million in net proceeds within the next two quarters. Proceeds from these asset sales will be utilized to pay down our preferred C shares or debt. We’re very encouraged with the current interest in the assets that are being marketed, and the inbound interest for other assets in our portfolio from a variety of domestic and international buyers. Depending on our outlook for 2020, we may increase the number of sales we target for 2020. We look forward to sharing an update with you on our fourth quarter earnings call, if not sooner.
During the third quarter, we also repurchased 659,000 shares at a weighted average price of $14.50, capitalizing on the market dislocation that took place in August, when the stock was trading more than 30% below our internal net asset value. We remain focused on our leverage reduction strategy, but will advantageously buy back shares when extreme periods of market volatility are prevalent. Our industry has been in a low single-digit RevPAR environment and our outlook for the next several quarters shows that this trend will likely remain. In this environment, outperformance alone is not enough to drive growth. To reduce leverage, we are actively pursuing several hotel sales.
To sustain our market-leading margins, we are also executing a cost containment strategy that Ash will discuss in his remarks. Our management team has successfully navigated three cycles together and can boost the highest level of shareholder alignment in our sector. We are confident that strategies we are deploying will lead to value creation for our shareholders, whether the cycle is over, or we are just in a growth pause. Over the last several years, we upgraded our portfolio to one of the highest quality platforms in the industry. We did this by recycling close to $1 billion of hotel assets into new investments in the most sought after markets in the country by allocating approximately $200 million to reposition our highest potential hotels, and by transforming two of our largest EBITDA-producing assets following Hurricane Irma.
With all of this disruption behind us, along with a lower CapEx load for the foreseeable future, and strategic leverage reduction plans in place, the stabilization of our portfolio is within sight. And with our stock trading more than 30% below our internal NAV at an 8% dividend yield with one of the lowest payout ratios in the sector, we believe this is a great entry point for investors. With that, let me turn it over to Ash to discuss in more detail our margin performance, balance sheet and our updated guidance for the year.
Ashish Parikh: Great. Thanks, Neil, and good morning, everyone.
As mentioned macro headwinds and the continued strength of the U.S. dollar, we’re prevalent during the third quarter leading to a slowdown in corporate transient and international travel, which substantially impacted pricing power and our ability to drive, both top line and bottom line growth, despite record occupancies throughout the portfolio. Our RevPAR mix this quarter significantly impacted operating margins, as our occupancies remained extremely strong. In a number of markets, they hit new highs, while we experienced ADR losses from slowing trends and new supply deliveries. For example, as Neil discussed in our New York portfolio, we maintain extremely high occupancy of 97%.
But realized that 2.9% ADR loss leading to margin losses of 250 basis points. These assets deliver industry-leading GOP margins exceeding 50% and EBITDA margins exceeding 37%. But with all the RevPAR loss coming from ADR, it is difficult to maintain these types of margins. We witnessed a similar dynamic in our Philadelphia portfolio and in certain properties on the West Coast. These portfolio dynamics, combined with disruption from Hurricane Dorian, resulted in greater margin pressure than we anticipated 90 days ago.
But in the face of these challenges, we remain encourage that our portfolio was able to generate 33.6% EBITDA margin, one of the highest amongst our peers. Despite the difficult operating environment in the third quarter, our unique operating model in alignment with our management company provided us flexibility to control labor costs, limiting our margin loss and even yielding margin expansion at several of our properties. As forecast for demand growth remain strong in our markets into 2020, we’ve enacted measures to mitigate margin loss, while defending our occupancy and market share at the property. We believe our focus on cost containment initiatives will bolster the cash flow profile of our assets and drive EBITDA growth even if near-term fundamentals remain muted. We’ve been working with our property teams to evaluate all operating departments to identify opportunities for operational inefficiencies, seeking out ways to reduce our property-level expenses with minimal impact of the guest experience, and we have already started changing staffing model, restructuring and operating model.
Additionally, we have realigned our revenue management and sales strategies to ensure that we continue to outperform our concepts, while limiting our overhead expense to achieve these results. We’re also evaluating our vendor contracts with a particular focus on items, such as property maintenance and outsourced labor to ensure that our labor models are structured appropriately for the current operating environment. And lastly, in coordination with our EarthView team, we continue to look at unique operational strategies to reduce our rooms department and utilities costs and continue to look at energy-saving capital expenditures that generate immediate ROIs in the mid to high-teens. Before moving to capital expenditures, let me spend a minute on our margin performance at the Cadillac and Parrot Key. As Neil discussed, Hurricane Dorian’s forecasted path had a significant impact on the overall performance of our South Florida cluster last quarter, but most notably, at the Cadillac and Parrot Key Hotels.
Last-minute cancellations and increased staffing required to secure the hotel, resulted in over 1,600 basis points of margin loss at the Cadillac and close to 1,300 basis points of impact at the Parrot Key during the last two months of the quarter. As we’ve noted on past calls, these assets remain in the ramp-up period. And in light of recent headwinds, margins will stabilize at a slower rate than our top line results. The staffing, marketing and operating expenses incurred to drive revenues are critical to reestablishing these properties and our ability to stabilize these assets over the next 24 months will be driven by our operation expertise and the significant investments we’ve committed to the assets on the operational front. As we look at to 2020 with a full-year of stabilization in the rearview mirror and a more positive group in transient demand backdrop in South Florida, we are confident in our ability to reduce these expenses, allowing us to drive bottom line performance at these hotels.
As discussed last quarter, the majority of our large-scale capital projects are behind us. And we continue to forecast limited renovation-related disruptions over the next few years, allowing us to focus on our asset management initiatives into drive free cash flow. During the third quarter, we allocated $12.7 million to capital projects versus $22.6 million in the third quarter of 2018. For 2019, we anticipate our total capital spend, including maintenance CapEx, but excluding deposits for 2020 capital projects, to be in the range of $33 million to $35 million versus $90 million in 2018. With a reduction in CapEx spending, calculated dispositions across the next several quarters and stabilization of assets that have undergone large-scale renovations, our free cash flow is forecasted to increase, allowing us to further reduce our payout ratio.
We believe our payout ratio can remain close to, if not below 50% even with the planned disposition, reduce cap spending, stabilization of our assets and interest expense savings from our recent refinancing activities. These items provide us a significant amount of cushion as we look at our dividend profile. So we’ve been active in the debt markets with what appears to be a more accommodating near-term interest rate environment. During the quarter, we took advantage of the strength of the debt market as we refinanced our $300 million senior unsecured term loan and entered into a series of new swap contracts to fix the interest rates on the remaining $400.9 million of senior unsecured term loans, eliminating all of our debt maturities until 2021. The term loan refinancing and new interest rate swap agreements, in conjunction with the mortgage refinancings we completed at our Hyatt Union Square and Hilton Garden Inn Tribeca, in the second quarter resulted in estimated interest expense savings of $2.2 million in 2019 and $6.7 million of savings run rate in 2020.
With the refinancing of these near-term maturities, we continue to improve our potential flexibility, as we have ample capacity with cash on hand and our $250 million revolver to execute our business plans. So I’ll finish with our updated full-year guidance for 2019, which was presented in our earnings release published yesterday. As we discussed, third quarter trends for the logging industry underperformed expectations and decelerating economic metrics have been impactful to consumer and corporate confidence. We saw rapid deterioration of RevPAR trends for the majority of the top 25 markets in September, which have carried into the fourth quarter in several markets, as October proved to be challenging with the shift of the Jewish holidays. Pace for the fourth quarter is positive in our South Florida and Washington, DC clusters, but we are anticipating continued softness in the remainder of our markets.
Accordingly, we’re revising our full-year guidance to reflect the challenging operating environment. We tightened the range of our forecasted comparable portfolio RevPAR growth, which is now between 0.75% and 1.25%, as well as our EBITDA margin loss at 100 basis points to 75 basis points. We are now forecasting FFO per share to be the $1.94 and $1.99 and adjusted our full-year EBITDA range to be between $165.5 million and 167.5 million. So this concludes my portion of the call. We can now proceed to Q&A, where Jay, Neil and I are happy to address any questions that you may have.
Operator?
Operator: Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Michael Bellisario of Baird. Please go ahead.
Michael Bellisario: Good morning, everyone.
Jay Shah: Good morning, Mike.
Michael Bellisario: First question for you. Maybe could you quantify the cost savings – those cost saving initiatives you talked about? And then just kind of what you’re thinking about in terms of the timetable there to eventually realize those savings?
Jay Shah: Sure. So, Mike, we started a lot of those initiatives, as we speak. We are continuing to look at all the budgets for the properties, which are not finalized yet.
But for a baseline, we are targeting about $3 million of cost savings from these new initiatives. I think the majority of those will be enacted by the end of the year and will realize those savings in 2020.
Michael Bellisario: Got it. That’s helpful. And then maybe can you just remind us again of your kind of your threshold for share repurchases, your rationale for repurchasing shares during the quarter, given that fundamental outlook was weakening and just how we should think about any opportunistic share repurchases and use of capital going forward, especially out of any disposition proceeds coming in the door?
Neil Shah: Sure, Mike.
We were active in August when we bought back about 659,000 shares. Earlier in the year, we acquired about 273,000 shares. So for the year, close to $15 million in buybacks. We target buybacks. It’s clearly opportunistic.
It’s not a strategy. But when we are trading at more than a 30% discount to NAV, we are looking at the opportunity for buybacks. Now, we are also focused on leverage reduction and that’s always the balance in our mind. Throughout this year, we’ve been using free cash flow to pay down debt. As we mentioned, as we’ve been seeing our free cash flow expectations come down, we are now going to pursue some asset sales to help reduce leverage.
Reducing leverage remains, I think, our number one goal right now. But when there is very attractive pricing and a lot of volatility in the markets, we continue to have authorization to buy back stock. I think in a, as I mentioned, we’re, in our remarks, we were planning to have $50 million to $75 million proceeds from some sales. We are planning to use that for debt pay downs and will continue to be opportunistic on the buyback front.
Michael Bellisario: And then just lastly, on the asset sales.
How should we think about pricing from an EBITDA multiple or cap rate perspective and just kind of how you’re thinking about which assets you’re pursuing to sell?
Neil Shah: At this time, Mike, we’re focused on assets that have less EBITDA contribution to the portfolio and can sell at multiples greater than where we’re trading as a company today. We’re focused on some assets in New York City, focused on some joint venture assets. We’ve gotten a lot of inbound interest in Miami. And so they’re select assets across the portfolio that we’re targeting today. We’ve mentioned in our remarks two to four assets, $50 million to $75 million in proceeds.
Depending on our outlook for next year, we could increase that the acquisitions market, the private market, in particular, is very robust. And the market is not – there’s – there has been less kind of high-quality urban gateway hotels available on the acquisitions market for the last year or two, and that’s leading to a lot of pent-up demand from buyers for those kinds of assets. So we see it being very attractive and that’s what’s leading us to consider more asset sales.
Michael Bellisario: That’s helpful. Thank you.
Operator: And the next question we have will come from David Katz of Jefferies.
David Katz: Hi, good morning, everyone.
Neil Shah: Good morning, David.
David Katz: I wanted to just ask about the guidance, and I appreciate all of the detail, Neil, that you gave upfront – or both of you that you gave upfront. I just like to get a clear sense for what you’re underwriting in that guidance? And does it leave some room to the downside, how you scale of one to five? How conservative I suppose is one way to ask the question, that’s what I’m looking for?
Ashish Parikh: David, we only have top line results for October right now.
And as we looked at our forecasts for the remainder of November and December, we are seeing that there it has definitely been some slippage. We initially gave guidance back in July for both of those months and then we’ve tried to adjust our forecast accordingly. I don’t think that in anyway we have set these guidance ranges to stand back to numbers are certainly that there – these are the – it couldn’t go to the downside. I think the market will trend in, travel right now would be so volatile and the booking window is so sure that we looked at our October results for top line and just as we reported.
David Katz: Got it.
And I know you’ve talked about the asset sales and some parameters. But just timing in order of magnitude on when we might to those and just how big we might be talking about?
Neil Shah: Sure. David, we’re targeting two to four hotels for sale within the next two quarters. We’ll hopefully be able to provide a little bit more of an update by our next quarterly call, the year-end call early next year. And if we make faster progress, we will release accordingly.
We’re focused today on assets that aren’t significant EBITDA contributors, because we are trying to bring down the debt-to-EBITDA metric. And so we are focused on high multiple, low EBITDA assets today. I think the – as you’ve seen from the sales processes of some of our peer companies, as well as in the marketplace, there is very strong values being paid by the private market in New York City, in Miami, in all of our markets for that matter, Los Angeles. And so at this stage, we’re focused on smaller hotels, but that can release $50 million to $75 million or so proceeds. Our preferred C tranche of preferred is – has a coupon of 6.875% and is $75 million in total.
Our first step is to use proceeds to pay that down, and that would be clearly accretive to cash flow. Now, there are – there – we continue to get inbound interest on some of our larger assets that have more EBITDA and we are exploring those kinds of offers as well. But at this stage, we don’t believe that we’re not planning to execute on those transactions. But we’ll see how the world turns across these next couple of months and what level of cash flow we can expect next year, and how much we can reduce debt with just organic cash flow in these two to four assets sales.
David Katz: Got it.
It’s very helpful. Thank you.
Operator: Next we have Shaun Kelley, Bank of America.
Dany Asad: Hey, good morning, guys. This is actually Dany Asad on for Shaun.
Just one follow-up on the asset sale question. Are you targeting that you guys have given a lot of detail already, but are you targeting a specific asset type? So is it full service or limited service? And then, given the health of what the transaction market is today and how each of those types are performing, is there any particular reason you’d want to sell one over the other today?
Neil Shah: Dany, on the two to four that we’re exploring today, they are two are full service, two are select service. And so it’s not a call on segment, it’s really what’s driving it is the multiples we can get in the private market for the assets, how much CapEx would be required, if we were to hold on to the hotels and try to make them grow more. And geographically, we see very strong bids for assets in New York City. And our outlook for New York is still mixed for the next year.
So we are probably more focused there than other markets in our portfolio.
Dany Asad: Okay, that’s totally fair. Okay. And then just my follow-up. So if we’re thinking about the cost saving initiatives that you guys have laid out this morning on the call, how do you protect – how do you balance protecting margins and like making sure you have the adequate resources to deliver next year, especially since occupancies are so high across your portfolio, and like it – and yes, between those two?
Ashish Parikh: Yes.
So, Dany, this is Ashish. So we are really targeting things that would be guest facing. For instance, I’ve mentioned several things in my scripts. But even when it comes to something like our EarthView program, we’re looking at ways to focus on energy, water, chemical use, looking at tapping as it relates to those items, and especially our laundry services and housekeeping. It really wouldn’t be something that the guests would focus on.
Also looking at more off property allocation as it comes to sales and marketing, as it comes to revenue management, ways to consolidate those positions and ways to consolidate property-level managerial position, ways to cut down on front desk. So we are looking at a lot of items that won’t impact directly the guests there. There certainly will be some adjustments necessary from staffing and from managerial work, but this is something where – it’s not new. We work on cost containment plan all the time. I think it’s just an environment, its a little bit more unique in that.
We’re not seeing any type of demand shop. We’re not seeing occupancies loading. So you have to look at new ways that you can cut these costs deep late in the cycle without really impacting guests. And we feel very good about where we are today in identifying this opportunity.
Dany Asad: Understood.
Thank you very much.
Operator: And next, we have Ari Klein of BMO.
Ari Klein: Thanks. And maybe just following up on asset question. Can you just talk about update us on your leverage targets and maybe timing on when you expect to get there?
Jay Shah: Sure.
Our leverage targets kind of remain the four to five times debt-to-EBITDA metric. We continue to – we think that kind of the greatest contributor to bringing that in line is going to be the ramp up of our newly acquired and newly repositioned assets, particularly the trends – the South Florida assets as they ramp up. So organic EBITDA growth is the primary way of getting there. We’re also reducing CapEx spending in 2019 and 2020 and for the foreseeable future. And as we’ve discussed so far, we are now calculated.
We’re considering calculated property sales to also bring that in. We think that there is – where we believe that with the ramp up in the portfolio, with the pay downs we have planned and the property sales that we’re considering, we believe we can get there within a couple of years. Obviously, it really does depend on how robust the markets are or how difficult they are in 2020. But we think by 2021, we have – we believe we can get there.
Ari Klein: Great.
And then maybe just turning to New York markets, obviously, been pretty challenging. As you look to 2020, what are kind of your expectations there and any potential positives that you see? And then maybe can you quantify how much of a drag that market has had on EBITDA – year-to-date EBITDA margins year-to-date?
Neil Shah: I’ll take just the first part of it. Just the outlook for New York next year, I mean, for the fourth quarter, we think it is going to continue to be challenging. We had tough comp in the fourth quarter for New York. But as we look forward to next year, there are some good signs that we never think of New York as a big convention kind of market.
But there is a Convention Center there and it is growing and next year there’s 10 to 12% increase in in convention room nights expected in the market. The big challenge in New York is the – with the uncertainty in corporate transient and international demand, we’ve – this year, we started the year with government shutdown and then we throughout the middle of the year and into the fall, we’ve had trade issues. We would expect that to be less of a drag next year. But obviously, it remains uncertain. The strong dollar and international demand has been highly impactful in New York, we’d expect that to not be as much of a sharp reduction next year.
And so that gives us a little bit of confidence. But primarily, the supply side of the equation in New York, the demand is there. It’s just – there’s a lot of new supply, some of it hotel supply, some of it just continued penetration of the short-term rental space. We do expect New York to still have meaningful new supply next year. We’re finishing the year this year, where we believe it’s around 3.7% new supply growth in 2019.
2020 is going to be very similar to that. There’s – and one fortunate thing about similar supply growth is that, it’s just where it’s coming. This year, we had it really hit every single one of our submarkets. Next year, it looks to be a little bit more isolated in the Financial District and the far west side of Manhattan, where we do have assets, but we also have some other hotels and other submarkets that should also be able to grow next year. New York, according to the kind of consultant forecast is expected to be a little better next year than this year.
But we continue to think of it as a mixed market and not one that we are ready to bang the table about.
Ashish Parikh: And just to add you had asked, how – what – how much of a contributor was in New York to some of this adjustment and guidance? So if you just take a look at our guidance from midyear from July to the end of quarter four, we’re attributing about a $1.5 million of EBITDA softness in the third and fourth quarter, that contributed to our EBITDA guidance adjustment.
Ari Klein: Okay, great. Thanks for the color.
Operator: Next we have Bryan Maher of B.
Riley.
Bryan Maher: Yes. Good morning. So, admittedly a clusters all have certain uniqueness to them. But when we look at the third quarter results and now after 4Q in 2020, what do you think are the biggest contributing factors to the reduction in Europe our expectations? Is it more supply? Is it lower demand? Is it one-time impacts? Can you talk to that?
Neil Shah: Sure.
Bryan, I – we’ve been dealing with elevated levels of supply in these kind of global gateway markets for the last several years. And that does make any kind of softness in demand much more pronounced. But the supply we can predict upfront and we can see it and we have visibility into it. So we would say that the biggest kind of impact has really been the softness and demands. And it’s both corporate transients and international demands.
You might say, how could that be if you’re at 95%, 97% occupancy is, because the market mix has changed. We used to be able to count on at least 50%, 60% of our mix being corporate transient. But these days in New York, there’s a lot more leisure and they are much more price sensitive, and much more willing to try short-term rentals or other alternatives. So we do believe it’s a demand issue. We have highly concentrated kind of positions in major urban gateway markets that are driven by corporate trends in international demand.
And this year has been a very soft year for those two segments.
Bryan Maher: Okay. And then when you think out to 2020, you’d mentioned both in your release last night in your prepared comments, the healthier convention calendar. How much of an uplift is that having on your thoughts for RevPAR next year? I know you haven’t provided a guidance for 2020. But is it to the 50 basis point impact.
I think it’s a full percentage point impact to RevPAR because of the calendar?
Neil Shah: I think it could be a percentage –a point, a percentage point. I mean, it’s – it leads to compression in the markets. As we’ve been discussing, and I think a lot of – there has been a lot of research on this, but there’s just a number of compression nights and 2019 has been significantly lower than historical levels. And some of that is new supply and some of it could be an hour markets, the convention calendars in these markets. As we look forward to next year, convention room nights, I’ll just run through a few of our markets.
In Boston, there’s a 28% increase in projected room nights from the convention space. Los Angeles up also over 20%. Miami is nearly doubling, nearly 100%. And that’s not just the Super Bowl. The Super Bowl does lead the first quarter to be very strong.
But throughout the year, there’s also a significant increase in that Convention Center’s booking. As you know, the Convention Center had been closed for renovations for several years. New York, I mentioned earlier, is also up 10%. And Washington, DC is up nearly 20%, 25%. So it’s meaningful and we believe that that can lead to compression.
And if there is some improvement in corporate transient and international demand, that could be something that could really lead to some significant performance in our markets.
Bryan Maher: Okay. Thank
you
Operator: And next, we will have Chris Woronka of Deutsche Bank. Please go ahead.
Chris Woronka: Hey, good morning, guys.
What asked a little bit about your independent hotels? I know you mentioned performance at a few of them in the quarter. I think you have maybe 17 in total. and the question is really, do you feel as if some of the soft brand product that that’s coming into a lot of markets, maybe disproportionately impacts your hotels that are not yet affiliated with soft brands?
Neil Shah: Chris, I don’t think so. We think about – we’re always looking at all of our hotels and all of the soft brands are always knocking on our door to put their brands on these hotels. But we just can’t make the math work on a lot of them.
We have many autograph collection hotels and they make sense and they lead to good results on those hotels. But for our pure independence, it is – it hasn’t – that hasn’t been – we don’t believe that adding a soft brand can help EBITDA productions. Our independence – our purer independence are smaller hotels in in of great destination neighborhoods with a – with kind of a design and kind of lifestyle kind of positioning. But they are hotels that are where we’ve either leased out food and beverage or we have limited food and beverage. And so we’re able to drive, not only better RevPARs than most of our branded hotels, but also generally better margins.
Our independent portfolio is – has continued for the last several years to be the highest growth part of the portfolio. And so we don’t believe that they are significantly impacted by the growth of other soft brands. It’s about – I think on –it’s about $35 million to $40 million of EBITDA that we’re generating from these independent hotels. We believe that they can – they will continue to grow faster than the rest of our portfolio. And so we think that they are actually well positioned today.
But they do set big numbers in the transaction market, because it provides an opportunity for a new buyer to consider branding a hotel, or to reoriented and kind of change it. An so we are considering a handful of independent hotels and some of our sales discussions as well.
Chris Woronka: Okay. I appreciate the color. And then just on the cost initiatives for a second.
Sometimes, I guess, there’s a view that when – I don’t know if this is considered a break the glass kind of move. It doesn’t sound like it. But I guess, I’m trying to square kind of commentary about 2020 versus these cost cuts are a lot of times viewed as a, you’re making a, call that, that costs need to be cut, because revenues aren’t coming through as expected. So how do we kind of jive? That is – are these just things that maybe we’re being done before that in retrospect, you you wish you had, or it’s something deeper than that?
Ashish Parikh: Yes. Chris, as I mentioned, we look, we’re always looking at ways to execute and cut costs..
And this is not – I wouldn’t characterize it as break the glass as much as just a different operating environment and we are late cycle. We are running record occupancies and we’re not forecasting those occupancies to drift down significantly, if at all. So you’re just reevaluating sort of all of our budgets going to kind of zero-based budgeting and saying, where some of the new initiatives that we can install at this point, and we’re just focusing more of our time on that. As we have less disruption, less capital expenditures, we’re not really in the acquisitions market at this time. So we’re focusing more on, look, if occupancies hold up and rates remains challenging, we are still seeing property tax increases, insurance increases.
How do we mitigate all that to maintain our margin environment? And that’s really kind of the focus right now.
Chris Woronka: Okay. Fair enough. And then just lastly, for me, regarding the share repurchase, totally get the rationale for why you did, what you did in the third quarter.? I guess the question would be, now you’re committing to an accelerated leverage reduction program and more assets sales. I mean, do you think you have – realistically have some bullets left there, or you think from here on out, it’s pretty much straight that reduction.
Neil Shah: No, Chris,, we – we’re probably prioritizing debt reduction. But we still have bullets left. This portfolio is a very strong one. And then on a cash flow basis, we are very secure in kind of our dividends. We believe that we could withstand a significant downturn in the industry, not one that we expect, but we pressure test our company for it.
And so we will continue to be opportunistic in the buyback market. I think that as we continue to find opportunities to sell hotels, we will balance buybacks with our leverage reduction strategy, but we believe we can do both.
Chris Woronka: Okay. Fair enough. I appreciate the color.
Thanks, guys.
Operator: Next we have Anthony Powell of Barclays.
Anthony Powell: Hi, good morning. You mentioned a few times that you’re seeing just a higher mix of leisure customers in some of your markets. Now when we look at leisure travel trends across a variety of industries like airlines and cruises, they’re pretty strong.
So is there a way for you or the industries do a better job of getting more pricing out of these leisure customers at any of your hotels?
Jay Shah: Yes. I think there will be opportunities. That as Neil and Ash have both mentioned, the consumer is – has – is and always will be a bit more of a price shopper. That being said, I think we haven’t been able to compress in our markets because of this continuous supply increase. And I think what gives us some confidence as we look into 2020 is that, those supply isn’t tapering meaningfully and in across our market portfolio, is actually peaking next year.
The demand fundamentals are growing at a higher rate than they have. And so we’re seeing a narrowing in the delta between supply and demand. And that gives us confidence for the coming year to be able to have more compression nights in our markets and be able to drive put some pricing power traction.
Anthony Powell: Got it. Okay.
And also you talked a few times about a short-term rentals. There was a referendum yesterday in Jersey City about Airbnb that resulted in some restrictions there. Do you see that as a new method for the industry to regulate the short-term rentals a bit more over the coming years?
Neil Shah: Yes. I don’t know what method – I don’t know the specifics around that. But I think there’s clearly been a regulatory cities are sensitive to it and we’re seeing it all over the world that this kind of rentals – short-term rentals not only hurts hotels, but really hurts the affordable housing market and leads to just more really distressed to these markets, like in Madrid or in major cities in Europe as well as the U.S.
And so I think, the growth rate of these short-term rentals will likely continue to decline. It’s just – at the same time, there is – they are getting more and more part of the leisure customers kind of alternative in their mind. And so there we do see further penetration of it than it is – and it comes up in all of these kind of major urban gateway markets that we’re in today. We think it’s declining in terms of impact, but it’s still very real and significant today in all of – in most of our markets. Santa Monica has done a very good job of kind of preventing and you see we are having very strong performance there.
But most other cities are either not regulate – not enforcing the regulations enough, or they haven’t gotten to that point yet. And hopefully across this next year, we’ll see more of it, more regulations for that.
Anthony Powell: So do you think the impact has been less this year or more, because it seems like this year in some of the markets, there has been a bit more chatter about just the impact of short-term rentals relative to, let’s say, 2018 or 2017?
Jay Shah: Yes. I think the growth rate has come down, but the impact was more significant. We think that they’ve penetrated a little bit more, especially with this leisure customer.
And again, this is a function also that we have less corporate transient in these markets. So we’re having to go after the leisure market. And then the leisure market they are price-sensitive, because they’re looking at short-term rentals as an alternative.
Anthony Powell: Okay. Thank you.
Operator: Next we have Barry Oxford of D.A. Davidson.
Barry Oxford: Great. Thanks, guys. You talked very nicely about the supply issues in the Europe.
But you also referenced the West Coast and in particular, Seattle. Can you give us a little color as far as maybe new product that you guys see coming online out there, or do you see those markets kind of firming up in 2020?
Neil Shah: Yes. In Seattle, in particular, the biggest impact was this 1,200 room Hyatt that opened late last year and that’s had a very significant impact on all Seattle hoteliers. It was a major Convention Center hotel that opened before the Convention Center’s expansion was complete. And so that has been a really significant impact this year.
We expect that to be absorbed by next year, given how strong demand has been in the market. But that said, there are still a couple of hotels that will open in 2020 in Seattle. They are not nearly as large, but they do play in the same geographic markets as we do. So we don’t think it’s going away, the kind of supply challenge in Seattle, but it should be less impactful than the 2019 supply side. On the West Coast, you started with the West Coast, I just mentioned LA and San Diego had a lot of new supply in 2019 as well.
We are seeing some in 2020. But we feel like in San Diego, well, in San Diego and Los Angeles, it’s – we still have new supply coming online in the select service space in Los Angeles and San Diego next year. So we would consider peak new supply to be 2020 for some of those markets on the West Coast.
Barry Oxford: Great. And then switching gears, when you were talking about lower CapEx, we see quite a substantial reduction from 2018 to 2019.
What type of reduction do you think we’ll see in the CapEx spending from 2019 to 2020?
Ashish Parikh: Hi, Barry. This is Ashish.
Barry Oxford: Yes.
Ashish Parikh: Right now. we are not forecasting any increase in CapEx.
So probably target the same general level of CapEx in 2020.
Barry Oxford: Okay. Perfect. Thanks, guys.
Ashish Parikh: Yes.
Operator: Well, at this time, we will then conclude the question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Gentlemen?
Neil Shah: Well, thank you, everyone, for your time today. I know you have – many of you have a lot of calls to go with the rest of the day, but please feel free to give us a ring directly here at the office. Jay, Ash and I are standing by for any additional questions.
Thank you.
Operator: And we thank you, sir, and to the rest of the team for your time also today. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone.
Take care, and have a great day.