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Pebblebrook Hotel Trust
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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. [Operator Instructions] 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.
Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter and year-end 2018 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.
Before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2017 and our other SEC filings and future results could differ materially from those implied by our comments. The forward-looking statements that we make today are effective only as of today February 26, 2019, and we undertake no duty to update them later. You can find our SEC reports in earnings release, which contain reconciliations of the non-GAAP financial measures that we use on our website at pebblebrookhotels.com.
So given all that's happened during the quarter and the year we have a lot to cover today but let's first review some of the highlights from the acquisition of LaSalle Hotel Properties. On November 30, we completed the acquisition of LaSalle for approximately $5.1 billion, which was calculated based on our $35.18 share price at closing, which accounted for 67% of the acquisition consideration to LaSalle shareholders with $1.2 billion in cash for the remaining 33% of the consideration. The $5.1 billion transaction amount includes the $112 million termination fee paid to Blackstone, approximately $180 million in closing and transaction costs, $260 million in preferred equity that was assumed and $1.1 billion of LaSalle debt paid off at closing and replaced with new debt.
We estimate that the LaSalle 41-hotel portfolio generated approximately $343.6 million of hotel EBITDA in 2018 and $300 million of net operating income after a 4% FF&E reserve, which results in a 14.8 times EBITDA multiple and a 5.9% NOI cap rate. As a point of reference, we initially underwrote LaSalle's 2018 hotel EBITDA for the 41-hotel portfolio before any asset sales at approximately $340.5 million. So the portfolio despite the distractions during the year because of the merger performed approximately $3 million better than we underwrote for 2018.
As part of the transaction closing, we paid all of LaSalle's $1.1 billion of exiting debt, utilizing a newly-originated $1.7 billion term loan in our unsecured credit facility, which was upsized from $450 million to $650 million to provide us with enhanced liquidity and debt capacity. We also assumed both of LaSalle's existing preferred equity series, which compromised $260 million and converted them to our Series E and Series F preferred equity. Since we didn't complete the LaSalle acquisition until November 30 per GAAP we can only reflect the period of December 1 to December 31 in our income statement and operating data, which includes reporting for hotel EBITDA, adjusted EBITDA, adjusted FFO and net income. However, given LaSalle paid its last dividend for the second quarter and at a reduced rate, our shareholders effectively received the entire earnings and net cash flow from the legacy LaSalle hotels for six months of the year, including the fourth quarter even though we didn't purchase the company until November 30.
As a reminder, we only reported LaSalle's property results for the month of December in our fourth quarter and year 2018 financial results. And as we discussed with you in early September, we plan to be active selling numerous legacy LaSalle hotels to reduce the leverage of the combined company post-merger as well as to improve the overall quality and diversification of the portfolio. Well, we've certainly been continually active on this front. In conjunction with the merger closing, we sold five legacy LaSalle hotels for $820.8 million with the combined property sales occurring at a 15.8 times EBITDA multiple and a 5.4% NOI cap rate based on 2018 numbers.
And in early December, we sold the Minneapolis Grand Hotel, a legacy Pebblebrook hotel for $30 million. Together these six hotels comprised $850.8 million in property sales in 2018 which were used to reduce our leverage. In addition, our merger transaction and closing costs were approximately $20 million lower than we previously expected and underwrote and combined with higher cash balances than anticipated from LaSalle, this allowed us to reduce our overall leverage at year-end to approximately 4.9 times, which is significantly better than the mid to low 5's we estimated in early September though that did not reflect all of these additional 2018 property sales.
I also wanted to highlight that the sub-5 debt-to-EBITDA ratio does not reflect the two recently announced sales of Liaison Capitol Hill on February 14 for $111 million and Palomar DC which we announced yesterday for $141.5 million. Proceeds from these sales further reduces our debt-to-EBITDA ratio to approximately 4.7 times at the end of the first quarter and increases the total assets sold as part of our strategic disposition plan to $388.3 million.
Jon will provide more color on future asset sales in 2019 and we've provided significant supplemental information outlooks and tables to help everyone bridge the combination of the two companies and take into account in our outlook all asset sales since the LaSalle acquisition, those that already have occurred this year and those we are forecasting for later this year.
In yesterday's earnings release, we also provided the components of the 2018 pro forma for LaSalle and Pebblebrook following the property sales completed in the fourth quarter. For the legacy LaSalle hotels, these five legacy LaSalle hotels reduced 2018 pro forma hotel EBITDA by $51.8 million from $343.6 million to $291.7 million. For the legacy Pebblebrook hotel portfolio, our 2018 pro forma hotel EBITDA is $254 million, following the sale of the Grand in December.
Adding the LaSalle pro forma and Pebblebrook pro forma together results in a 2018 combined pro forma hotel EBITDA of $545.7 million, RevPAR of $205, total revenues of $1.65 billion and a hotel EBITDA margin of 33%. This is all detailed for you on Schedule J of our earnings press release.
Turning briefly to the highlights from our fourth quarter results same-property RevPAR increased 0.7% which exceeded the Q4 outlook we provided in mid-December of down 1% to flat. During the fourth quarter, we experienced approximately 550 basis points of negative impact from ongoing renovations as well as the strikes that affected several of our hotels.
As I indicated earlier, these results only include the month of December for the LaSalle legacy hotels owned in December. In terms of monthly RevPAR growth, we saw a 1.2% decline in October, a 7.6% decline in November and a 7.3% increase in December, largely due to a healthy convention calendar in San Diego a good month in San Francisco and the ramping up of several hotels that were under renovation in the prior-year quarter including several of the legacy LaSalle hotels.
As a reminder, our fourth quarter RevPAR and hotel EBITDA results are same-property for our ownership period and includes all the hotels we owned as of December 31, 2018 except for LaPlaya Beach Resort, as this property was closed for much of the fourth quarter in 2017, as we completed repair and remediation work at the resort due to the impact from Hurricane Irma and we included the legacy LaSalle hotels for just the month of December.
Fourth quarter same-property hotel EBITDA was $55.9 million which was in line with our mid-December outlook of $52.6 million to $57.6 million. This incorporates $6.8 million of hotel EBITDA from the legacy LaSalle hotels for the month of December which is seasonally the weakest month in the quarter and the year for the legacy LaSalle hotels generating only 12% of total fourth quarter hotel EBITDA.
For the full fourth quarter, on a pro forma basis, the legacy LaSalle hotels generated $58.4 million of hotel EBITDA, so, although, we only reflected the month of December in our same-property operating results we captured all this cash flow for the fourth quarter.
As we noted in our mid-December updated outlook press release, we experienced disruption from labor strikes in Boston, San Diego, Chicago and San Francisco, which we estimated reduced hotel EBITDA in the fourth quarter by approximately $3.5 million and full year 2018 by $3.8 million. Much of this was the result of increased expenses to properly staff and secure our properties during the strikes. For the fourth quarter adjusted EBITDA was $53.4 million which was at the top end of our mid-December outlook and adjusted FFO per share was $0.33 exceeding the top end of our outlook by $0.01.
2018 adjusted FFO per share finished at $2.45, $0.01 above our mid-December outlook. As we look to 2019, our RevPAR outlook for the portfolio assumes an increase of 1% to 3%. This incorporates approximately 60 basis points of estimated negative impact from our 2019 renovations. We expect the first quarter to be the strongest quarter on a year-over-year RevPAR basis with an increase of 3% to 5%. Our portfolio generated a RevPAR increase of 4.4% in January and we're on target for a 7% to 9% increase in February.
Shifting now to our capital reinvestment programs. During 2018, we invested $87 million in our portfolio, completed the $9 million renovation at Sir Francis Drake and the $6 million renovation of Hotel Zelos San Francisco. We also started the $18 million property-wide renovations of the Mondrian Los Angeles in the fourth quarter and the $10 million guest room renovation of W Boston.
At the legacy LaSalle hotels, approximately $55 million of renovation projects were completed during 2018, which included Westin Copley in Boston, Paradise Point Resort in San Diego, the Heathman in Portland, Chamberlain West Hollywood, Montrose West Hollywood, Harbor Court in San Francisco and The Marker San Francisco. All of these projects were completed in the first half of 2018.
And finally, regarding our common dividend for 2019, we anticipate maintaining our current annual dividend payout of $1.52 per share which is the same payout as the 2018 dividend. Based on the anticipated 2019 asset sales included in our outlook, this implies a dividend to CAD, coverage ratio of approximately 70% which accounts for 4% FF&E reserve equal to about $0.50 per share. This dividend coverage is in line with our coverage ratios over the last several years. Based upon Monday's closing stock price, this implies a current dividend yield of 4.6%.
And with that, I would now like to turn the call over to Jon to provide more insight into the new Pebblebrook Hotel Trust. Jon?
Thanks, Ray. My focus today unlike prior earnings call is to outline for you what the new Pebblebrook looks like, what the opportunities are, what our focus has been since the acquisition and what our focus will be in 2019 and beyond.
To say that we're excited about the new larger Pebblebrook and the opportunities we see would be a major understatement. All of our efforts since the announcement of the deal in September have been focused on integrating the people and the organizations, integrating the properties and operators, financing and closing the overall transaction, determining and executing on our strategic disposition plan, developing a plan and vision for each hotel being acquired and organizing for and launching extensive efforts related to portfolio-wide initiatives. I intend to address each of these areas of focus today.
As you know we closed on the LaSalle acquisition on Friday November 30. We had already determined who would be part of the combined company, made offers, received acceptances and by Monday December 3, everyone was already moved into their new offices. We integrated our accounting team in one office and just down the street we integrated the rest of our team.
We've recently executed a new lease to bring everyone together in new offices and we've targeted that move for early in the fourth quarter. We continue to expect total corporate G&A synergies of $18 million to $20 million, and we've built these synergies into our outlook for 2019.
Between the announcement of the execution of the merger agreement with LaSalle to the closing of the transaction on November 30, our finance, investments and asset management teams have worked tirelessly to not only properly capitalize the combined entity, but contract and close on the disposition of five hotels on the same November 30.
And from early September until today, our executive and asset management teams have conducted several portfolio-wide tours and reviews with our operating teams to make a determination as to which hotels in the portfolio did not fit into the long-term vision for the company, and therefore, which hotels within the combined entity would be candidates for disposition.
As you've seen, we've been moving very quickly with our sales program. With the five hotels sold on November 30 and the two announced in the past 10 days, we've sold seven hotels from the legacy LaSalle portfolio for a total of $1.073 billion at a very attractive 15.8 EBITDA multiple and 5.4% NOI cap rate utilizing a 4% FF&E reserve. Adding in the $30 million sale of the Minneapolis Grand in December, that brings our total dispositions in the last 90 days to over $1.1 billion. With the dispositions that have already closed, we are currently forecasting that our debt to EBITDA ratio will be reduced to 4.7 times by the end of the first quarter.
We expect that additional dispositions this year will total approximately $350 million and we've built those sales into our outlook. Of this $350 million, we've assumed that we sell $250 million in the middle of the second quarter and $100 million at the end of the third quarter.
We've provided a table in our press release to help you with the expected seasonality of these dispositions and how much EBITDA is included in 2019 and how much EBITDA from these properties is excluded and will accrue to the buyers.
We expect the remainder of the dispositions in 2019 to sell at an average NOI cap rate of approximately 5.5% and we've built that into our outlook for the year. We've been very pleased with the sales prices we've achieved so far, and we're confident in our ability to achieve our 2019 objectives based upon strong current interest and the depth of that interest in the kinds of hotels we plan to sell this year. As we move through 2019, we'll be evaluating additional disposition candidates for either late this year or 2020 sales.
Given that our sales to date along with the additional $350 million of sales planned for this year and included in our outlook should allow us to bring our debt to EBITDA ratio down to our target of four to 4.25 by the end of this year. Any additional sales completed this year and next year and the proceeds from those sales will be used to either lower our debt further, call our callable preferred securities or repurchase our stock in the open market. Our best guess today is that additional properties to be sold will total somewhere between $400 million and $900 million over the next 18 months or so.
In the meantime, we have a tremendous amount of upside opportunity in the portfolio we've decided to retain. As we toured these properties multiple times over the last six months and spent significant time evaluating them, we've come to the conclusion that the portfolio that remains is very unique is of higher quality and it has more potential than we initially anticipated.
While we believe we're now the largest owner of lifestyle-oriented experiential hotels in the United States, if not the world, certainly being the largest is not an end-all be-all. That and a few bucks will buy you a cup of coffee.
While our additional hotels for the most part would not fall into the category of traditional luxury hotels, though we have numerous hotels that are classified in the luxury category, such as our W's, our Luxury Collection hotels and our InterContinental, we view the EBITDA per key generated by many of our hotels as exceedingly luxurious. In 2018, this incredibly unique portfolio of 61 hotels generated an average EBITDA per key of $36,300. By this measure of quality, we believe we have the highest-quality portfolio of hotels in the REIT space.
Based on 2018 EBITDA, we have 15 hotels with EBITDA per key over $40,000. In total, this portfolio of 61 properties generated $530 million of EBITDA in 2018, with an ADR of $252, occupancy of 82.3% and RevPAR of $207.
We believe that today Pebblebrook is made up of three definable major portfolios of hotels, two of which include urban hotels and one of which includes resorts. Our urban hotels represent roughly 83% of our EBITDA and our resorts provide the remaining 17%.
We continue to be focused primarily on the two coasts, East and West, and we continue to hold a West Coast bias and you should expect additional sales from the portfolio will be predominantly from either the East Coast or Central markets.
I want to provide more color on these three definable portfolios. Today, following the two additional sales this month, we have 61 hotels and resorts in the U.S. Of these 61 properties, 53 are urban and located in major cities. The first definable portfolio represents the remaining eight properties, which are unique experiential lifestyle-oriented resorts. They are located in some of the top resort settings in the U.S., many of which are within a short drive of a major U.S. city. These eight unique resorts, as a portfolio, achieved an ADR of $272 in 2018, RevPAR of $205, and a most impressive $48,000 per key in EBITDA.
In 2019, we're currently forecasting that four of these resorts will deliver EBITDA per key over $60,000 and our highest-generating property LaPlaya Resort and Beach Club in Naples Florida, should come close to $100,000 per key in EBITDA. What makes these numbers even more impressive is that many of these resorts were impacted last year either by the aftermath of Hurricane Irma, as was the case with LaPlaya, the Southernmost Resort and The Marker in Key West or by renovations, which was the case with both Paradise Point and the Hilton Resort in Mission Bay, San Diego.
And even with these already strong numbers, we believe there are numerous significant opportunities within this resort portfolio to drive substantial additional EBITDA. This would include repositioning the extremely unique property, Paradise Point, which has 462 single-story casitas with a mile of beachfront on 44 highly landscaped acres in Mission Bay, San Diego; or by fully renovating the 262-room Southernmost Resort in Key West; by redeveloping the golf course and tens of acres of excess land at Skamania Resort in the Columbia River Gorge; and by upgrading the Chaminade Resort in Santa Cruz that sits just a short drive from Silicon Valley on hundreds of acres including excess re-developable land.
In addition to the opportunities within the resort portfolio, we intend to look to expand this collection of unique experiential lifestyle-oriented resorts over time. Our urban portfolio, which is made up of 53 hotels, we're dividing into the other two major definable portfolios. First, we have 46 urban lifestyle-oriented hotels, all located in major cities in the U.S. And second we have a portfolio of seven major branded hotels located in key U.S. gateway cities that provide more traditional branded hotel experiences.
I want to discuss this branded portfolio first and then pivot to the larger urban lifestyle-oriented portfolio. The urban major branded portfolio includes our three larger Westins, Copley in Boston's Back Bay, Michigan Avenue in Chicago and Gaslamp in San Diego as well as our Hilton Gaslamp and Embassy Suites in San Diego; Hyatt Regency, Boston Harbor; and our InterContinental Hotel in Buckhead. These seven strong major branded hotels generated $104.2 million of EBITDA last year with an ADR of $233, occupancy of 81% and RevPAR of $188.
EBITDA per key was $31,300 in 2018 and represented 20% of the company's 2018 run rate EBITDA. Results in this portfolio were also stunted last year as all three Westins were negatively impacted by Strikes and Westin Copley was also under renovation in the first half of 2018. That brings us to the core of the new larger Pebblebrook, our urban lifestyle-oriented hotels. There are 46 of them, that's right, 46 unique experiential urban lifestyle-oriented hotels, and they generated 63% of the company's 2018 run rate EBITDA.
These 46 hotels provide unique experiences to all travelers whether business or leisure for group or transient. This portfolio is comprised of independent, collection branded, and even several branded lifestyle-oriented hotels. Last year the ADR for this portfolio was $255 with occupancy of 84.2% and RevPAR of $215. These hotels averaged EBITDA per key of $35,700 just slightly below the average for the entire company. We divide this portfolio of 46 lifestyle-oriented hotels into three distinct portfolios: Our urban iconic portfolio of 14 hotels, our urban contemporary portfolio of 27 hotels and what we call our Unofficial Z Collection hotels which is our proprietary non-brand and includes our five existing Z hotels in San Francisco.
The urban iconic portfolio includes distinctive urban lifestyle-oriented independent and soft-branded collection hotels with a sophisticated iconic architecture or design and stand-out features with a unique story and soul. Some of these hotels are iconic because they're architecturally significant such as our national historic landmarks that include Argonaut Fisherman's Wharf, the Liberty Hotel in Boston, Monaco Washington, DC, The Nines in Portland and Union Station Nashville.
Others are iconic because they have avant-garde designs or they're culturally significant such as Mondrian Los Angeles on the Sunset Strip the Viceroy in Santa Monica and both Hotel Vitale and Sir Francis Drake in San Francisco. This amazing portfolio of iconic hotels generated an ADR of $283, RevPAR of $239 and EBITDA per key of a rich $41,000 in 2018. We believe this collection of 14 iconic hotels is truly unique and offers considerable long-term staying power due to the one-of-a-kind nature of these powerful properties.
We believe there is significant upside within this portfolio through both renovations that will refresh and upgrade as well as several brand or operating changes that should enhance the performance and profitability of some of these properties. As we look to the future, we expect to continue to pursue and acquire additional iconic hotels that will expand this very unique portfolio.
Our urban contemporary portfolio includes 27 hotels located in 10 different cities. These exceptional, primarily independent and soft-branded urban hotels are found in unparalleled locations and offer unique lifestyle experiences through high style design and personalized services with constant property activations designed to make and keep these hotels highly relevant in their cities and local communities. These hotels generated EBITDA per key of $32,000 through an ADR of $237 occupancy of 83.8% and RevPAR of $199 last year.
This portfolio includes hotels such as the recently fully transformed Revere Hotel Boston Common; the George in Washington D.C.; the two W's, W Boston and W LA, West Beverly Hills; Le Meridien, Delfina, Santa Monica; our two Vintages in Seattle and Portland; and our three urban residential hotels in West Hollywood. We don't believe there is any urban portfolio anywhere like our urban contemporary portfolio, except of course, our urban iconic portfolio.
There are also significant opportunities within this portfolio to improve performance through transformations, redevelopments, renovations and rebranding as well as through changing operators. We're currently evaluating these opportunities, developing a plan and schedule and we expect to be in a position to discuss some of these exciting projects in more detail in the coming quarters as we finalize our plans for these hotels.
Our last portfolio of urban lifestyle-oriented hotels involves our Unofficial Z Collection hotels. We currently have five of these hotels, all of them in San Francisco and all of them created by us, through complete transformations and redevelopments. They include our first Z Hotel Zeta; as well as Hotel Zephyr Fisherman's Wharf; Hotel Zelos; Hotel Zeppelin; and Hotel Zoe Fisherman's Wharf. These hotels have all been very successful investments for Pebblebrook and all of them bring individually curated unique experiences to our hotel guests as well as locals. And given the success of the Z's, we've decided to evaluate opportunities to carefully grow the Unofficial Z Collection through the redevelopment of other hotels we currently own as well as future acquisitions where we believe the DNA of this proprietary non-brand or sub-brand can add value and be successful.
Our first addition will be in Portland, where we're in the process of completing the redevelopment of Hotel Modera. Upon its completion in the second quarter, we intend to rename the hotel as the Hotel Zags and reposition the hotel as a member of the Unofficial Z Collection.
The five current Unofficial Z Collection hotels generated an ADR of $254, occupancy of 86%, RevPAR of $217 and EBITDA per key of $38.2000. We encourage our shareholders to download from our website our updated investor presentation, which we published and posted last night to find additional details of our one-of-a-kind urban lifestyle major brand and experiential resort portfolios.
So with 61 hotels and resorts in total and 54 that are lifestyle-oriented what are the synergistic benefits? What are the operational benefits? Well, as we've spent the last six months beginning to build the new Pebblebrook and we think about where the opportunities exist, we've come to the conclusion that we think the opportunities are plentiful and there are many more opportunities than we thought just a year ago when we began this adventure.
First off, there are significant portfolio-wide opportunities that will allow us to take advantage of our larger scale. But importantly, our larger scale within a segment of the business -- in this case lifestyle-oriented hotels -- as well as a relatively select number of geographic locations meaning 10 or so major markets. We're even more convinced today that there are benefits of scale that will accrue to us with our vendor partners, our service providers, our contractor partners, our operating partners and the executive leaders of our hotel operating businesses.
As it relates to vendors and service providers, whether it's purchasing linen, liquor or online services or websites or photography or audio-visual services or operator supplies, we would expect our increased market power and influence to lead to savings as we move through our now larger portfolio and determine the best approach to consolidating purchasing and achieving savings.
We believe these portfolio-wide savings can and will be substantial and we should be able to achieve a significant number and amount of them over the next 12 months to 24 months. We're hard at work already with a substantial team focused on these efforts and expect the first of these to begin to kick in as early as the second quarter of this year.
As part of these portfolio-wide initiatives, we're also consolidating the best practices from both LaSalle and Pebblebrook, and we're in the process of finalizing a set of incremental best practices that can then be rolled out across the portfolio. But there will also be savings and benefits from some not-so-obvious areas.
For example, with 12 hotels in the city of San Francisco, including seven within about five blocks in the Union Square Soma area, we're now able to consolidate and share data between our hotels with a significant share of the market, including many that competed against each other previously and provide each of our hotels with this specific property and market data every morning of every day of the year. We expect not only will this information prove to be beneficial in saving time at the property level, but it will also allow our teams to gain confidence, increase revenues and improve profits.
These financial benefits will be a little more difficult to measure, but we'll be looking at our competitive RevPAR shares for improvement for each of our hotels versus the market for indications of the financial benefits. As we've been rolling these out by market within our portfolio, we're just beginning to see some of these benefits in the changing behavior of our teams.
One other area we believe we'll see a significant benefit is in our ability at our properties to attract and retain high quality executive leaders. We now offer the greatest opportunity of any company in the hotel industry in the lifestyle-oriented hotel segment to general managers, directors of revenue management, sales directors, controllers and other positions to grow their careers within one company, meaning, in this case Pebblebrook and do it in many cases within an existing market or in other major markets where we have multiple hotels even if it's with a different operating partner.
In fact, we were interviewing a GM candidate in our offices a few days ago for one of our properties and unsolicited, he pointed to this reason for wanting to join a Pebblebrook-owned hotel. Of course, while the financial benefits of this competitive advantage will be difficult to measure, we do believe it will result in more executive team stability at our properties and less time with vacancies of key positions when we do have openings.
At the corporate level, the benefits of scale are significant as well. Some of these benefits have already been achieved or are in process, such as, the $18 million to $20 million of G&A savings that allow us to lower the G&A load if you will, thus lowering the leakage from and increasing the financial efficiency of our hotel operating businesses. This increases our returns per investment dollar and further lowers our cost of capital.
Our increased size also gives us more flexibility with recycling capital, as we're doing now, as well as an increased ability to take advantage of public private value arbitrage opportunities as they come about from time-to-time. And with the larger size of our lifestyle-oriented property portfolio and the flexibility we have with the majority of our operating agreements, we have an increased ability to grow our own brand or brands should we choose to go in that direction.
Finally, I'd like to focus on our current renovation plans within the portfolio and briefly discuss the additional opportunities we're working through now. Within the portfolio, there were a number of renovations that were planned last year that started in either this past year's fourth quarter or early this year. They're primarily guest room and guest room bathroom renovation focused and include an $18 million complete renovation at Mondrian LA, which also incorporates the lobby and Skybar; a $10 million renovation at W Boston; a $9.5 million renovation at Skamania Lodge including the addition of a new outdoor pavilion; a $9 million renovation at Sofitel Philadelphia; and a $21 million renovation at the Hilton San Diego Resort on the waterfront at Mission Bay that also includes all of the hotel's meeting space. All of these renovations have already begun and are due to be complete between the first and second quarters of this year.
At Skamania Lodge, we've also begun planning to roll out two more tree houses to add to the very successful four tree houses, we've completed in the last several years. We're also evaluating the redevelopment of our golf course and excess land into alternative more profitable uses. We believe there's a lot of opportunity for further substantial EBITDA growth and value creation at Skamania.
In the fourth quarter of this year, we also plan to begin a number of renovations, including $13 million renovations at both Embassy Suites, San Diego Downtown and Westin Gaslamp, San Diego. Both should be complete in the first quarter of next year.
We're also planning a complete renovation of the ground floor interior and exterior of Viceroy Santa Monica with the objective to return this iconic property to its rightful place as the leading boutique or lifestyle-oriented hotel in Santa Monica. In the fourth quarter, we also plan to begin a $10 million renovation of all of the public areas and meeting and event venues at Chaminade Resort in Santa Cruz. The plan is to reposition this resort to a higher quality level by dramatically improving the design and providing additional guest amenities to drive significantly greater levels of transient leisure customers and corporate and social groups to the property, which was once primarily a conference center.
Additional amenities being evaluated, include a luxury pool complex, treehouses, ziplines, and an adventure park, an outdoor pavilion, as well as other active-oriented guest amenities.
In addition the property includes several hundred acres of excess land that could be planned for other profitable uses and we're just beginning the process of master planning the property.
Finally, our comprehensive review of the portfolio has led us to believe that there are many opportunities for rebranding, changing operators, transforming properties, and generally looking at properties with an open mind to fresh new ideas and concepts and we already have a number of these projects in the works and will provide more details in coming quarters.
The good news is there are an extensive number of opportunities to create significant value and we expect these projects in particular will be scheduled out in a balanced and thoughtful manner over the next several years.
So, with that, operator, Donna, you may begin the Q&A.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Anthony Powell of Barclays. Please go ahead.
Hi, good morning everyone.
Good morning.
Good morning.
Good morning. Starting with some of the brand topic there was a lot of talk about brands including rebranding hotels, launching your own brands, your current non-brand the Z Collection. How do soft brands fit into this long-term, especially given the ability to maybe secure some key money from the brand companies? Going forward do you expect to be largely independent still or could you increase your exposure to the big brands? And how would owning a brand work in the context of the larger REIT?
Sure. So, the brands often mean a brand of one, so you could take a look at a property like the Argonaut and say that's a brand. Now, if you go around the industry, there are lots of folks who have brands of one, two or three and they do call them brands. I mean we do develop a brand profile and a brand story and narrative for every individual property we have. And so to the extent that we want to take all of our independent experiential resorts and begin to tie them together with a brand message even if it's our own brand if there's a way to tie them together to the benefit of those multiple properties, it's something we'll be looking at. It's the same thing that we're doing with the Z Collection.
To the extent that we can tie these Z's together from a customer perspective, with the benefit of the unique DNA and the common DNA that they possess that we've created with the Unofficial Z Collection, there's a benefit of that ultimately that benefits each property within the portfolio.
So, it's not our plan to go out and franchise these brands certainly although there could be potential for that somewhere down the road, but that's not in our current plans. We expect these to be pretty soft a sub-brand or almost a non-brand being tied in with whatever operator or brand within their portfolio where it might exist.
As it relates to the collection brands, I mean, we'll continue to look at collection brands just as we have done over the course of really the last 10 years, the five years more explicitly as these brands have really come about to determine whether there's some benefit to rebranding as a sub-brand from an independent or in fact going in the other direction which we also look at.
So, the nice thing about having our own independent brands whether it's a brand of one or it's a brand of five is that we have complete flexibility to do whatever we want whenever we want to do it which could include not only soft branding it but hard branding it if there were a benefit to that.
So the fact that there's key money that gets involved which is a payment of capital there's a return in loss of flexibility and long-term contract when you do that. So, all of those things ultimately impact value and given that we are not in need of capital as a public well-capitalized company, we'd always rather see lower terms than we would key money at the end of the day.
All right, great. Going to operations in the release you mentioned that you expect San Francisco RevPAR at your hotels to be at 9% to 11%. What does that imply for the rest of the portfolio? And how have the expectations for both the San Francisco hotels and the non-SF hotels changed over the past few months?
So, there have been no changes in expectations in San Francisco. We still expect the market to be up 8% to 9%. We expect our portfolio to be up 9% to 11%. Some of that is the tailwinds from the renovations. Some of that is ramp-up in the portfolio from prior renovations in prior years. And some of that ultimately is probably going to come from the synergies that we talked about in that individual market.
As it relates to the non-San Francisco markets in total, with our 1% to 3% overall corporate RevPAR outlook, it means those markets are generally -- in total we're forecasting RevPAR between minus 1% and plus 1%.
And those -- the non-San Francisco market is where all of the renovations in 2019 are occurring and so that impact is between 75 and 80 basis points so sort of a -- if you look at that view of the markets or those properties within the markets without that impact, you'd be somewhere pretty close to 0% to 2% for those markets. And I don't think our view of those markets in terms of overall performance has changed in the last few months either.
All right. That's it from me. Thank you.
Thank you. Our next question is coming from Stephen Grambling of Goldman Sachs. Please proceed with your question.
Hey thanks. One quick clarification. I just want to make sure I heard this right but you made some comments about capital allocation potentially beyond the asset sell down. I guess maybe if you can just repeat what you had talked to there and how you think about the appropriate leverage ratio and any kind of puts and takes when you think about the broader environment as you think about the right leverage ratio for the business.
Sure. So, our view as to and I don't know if it's the right leverage level, but it's the level we feel is appropriate for Pebblebrook. Given our portfolio and the markets we're in and our experience in prior cycles we're comfortable at a leverage level between four and four and a quarter given the size of the portfolio.
And so for us it means once we get there which we believe we'll get there by the end of this year with the additional $350 million of sales that we've planned out and included in our outlook for this year. It means that additional sales that would likely occur late this year or in 2020 that we have planned the capital from those sales would be used for any of the above, right? It would include paying down debt; it would include buying our stock back if there was an arbitrage opportunity; it would also include potentially even calling our preferreds that are already callable; and it could include even additional acquisitions should we find the right properties out there. So, that's kind of the way we look at it Stephen.
That's helpful. Maybe one follow-up. I guess do you think the ROI project spend and integration spend should then come down into call it 2020? And any sense to how we should think through the free cash flow that you'd be generating at that point?
Yes, good question. It's a little premature for us to lay out where we think 2020 and 2021 are going to be from a capital investment perspective. We're reviewing those potential projects now. It'll take us several months to determine the ones we want to proceed with the capital involved what we think the ROIs are and obviously we're only going to proceed with those that meet our return hurdles.
But I would say at this point in time I wouldn't expect necessarily next year's capital investment which will be project-driven these ROI project-driven investments. I don't think it's necessarily going to go up much or down much, and I think that's probably the same for 2021 as we plan these out in a balanced way.
That's helpful. And as one unrelated follow-up on the Marriott disruption. How do you think about quantifying the impact that you've seen from the integration and what needs to change to correct that disruption? Thanks.
Sure. So, well the best way to measure it is to look at prior year performance. So as an example group production, and how is that production going compared to what's typical for that hotel in order to hit its group objectives. So those are pretty easily quantifiable.
The second way is to look at competitive RGI or competitive RevPAR share in the market and see what happened. And when we look at the performance in Q4 and we look at the performance for the year, we see a huge amount of what I would describe as unique share loss at our -- particularly our Marriott managed hotels, which happen to be our Starwood legacy properties.
And so in terms of what we see that needs to change, I'd love to tell you that Marriott has given us the answer yet or that we have the answer. We don't, but it's likely to be some combination of additional staffing, probably at the property level. It could be complete staffing back at the property level, which is where we were before. And then as it relates to some of the issues with the revenue management system, some of it is going to be our revenue managers getting used to the way it works and how that changes, how much business comes through each channel. And some of it's probably going to be modifications to the software that allow our property teams, which are very sophisticated with very sophisticated inventory management techniques -- for those things to change in order to allow our properties to manage the inventories and maximize occupancy and ADR the way they were doing before with the previous software system.
So those are the things that need to happen. We would have hoped those things would have already happened and we'd have the loss share from 2018 as a tailwind in 2019 but that hasn't happened yet and it's not for lack of trying or lack of responsiveness or flexibility on the part of our Marriott partners. It's just that we haven't gotten there yet.
It's super helpful color. Thanks so much.
Yeah. Thank you.
Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead with your question.
Hi, good morning, guys.
Good morning.
Good morning. Can we get a yes or no question?
The yes, hello…
Just kidding.
This one might be quick. So, Jon, back to your prepared comments with respect to the synergies of scale with vendor partners, service providers, et cetera I just want to clarify that that is separate from the G&A synergy target that's very distinctively laid out in the guidance. And then how much of some of those other synergies are included within property level guidance if any at this point?
Yeah. So it is completely distinct from the G&A savings at the corporate level and none of it is included in our individual property or portfolio wide numbers.
Okay. So it's fair to say then that's potential upside surprise given that you said that some of that could begin in 2Q to some extent?
That's correct.
Okay. Fair enough. And then just with respect to the volume and the pricing of asset sales over the last few months and then what's expected to come for the remainder of this year. Can you -- obviously some of this news is public and we can see it ourselves, but can you generally describe, or characterize the buyer pool for what's maybe currently on the market?
Sure. I mean, I think we're at a period of time where the buyer pool is very broad and pretty deep particularly for urban hotels and resorts, although we're not planning to sell any of our resorts. And so the buyers are unique. When you look at what we've sold the two Park Centrals were sold to private equity. Guild was sold to a local very large real estate owner in New York City, high net worth entity. Embassy Suites was sold to a local commercial real estate owner in Philadelphia. The Liaison was sold to a combination of a brand company as well as a high net worth real estate investor out of New York. The Palomar was sold to a REIT.
So the buyers have been very different. We do see significant foreign interest, particularly from foreign brands or branded owners in some of our individual offerings, but I would say the pool is very deep, very broad. The debt markets are great, so your levered buyers are competitive today, and we would suspect as we sell additional properties that again the buyer -- the ultimate buyer is likely to be somewhat different than the buyers we've had so far.
Right. Thank you, Jon.
Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead with your questions.
Hi, good morning, everyone, and thanks for all the detail, Jon on the strategic layout. Just one question for me, which is you highlighted the portfolio of the seven major brands in some of the key gateway cities. Just curious when you dig through the details here, is there substantial margin differential for those hotels as you think about those relative to what you've been able to do on the independent side?
And then secondarily, how many of those hotels are actually franchised versus are any of them brand managed?
Yeah. So, they're a mixture of brand managed and franchised hotels. There is a difference. I mean, the biggest difference is EBITDA per key at the end of the day and the interesting thing is the branded properties as you know tend to drive significant other revenues, food and beverage, audiovisual parking, et cetera on a fairly larger scale, particularly this group of seven properties, which has some pretty good medium to large size hotels, or at least, how we define them.
And when you look at the EBITDA per key these major branded properties were $31,000. The portfolio is at $36,000, so it's a $5,000 differential there and there's a 140-basis point differential on the EBITDA margin. So we've always said brands are expensive, but when you get to a certain scale you're probably going to make more money on a per key basis with a brand than you will taking a 700-room hotel and making it independent.
Great. Thank you for the details
Yeah. Thanks, Shaun.
Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead with your questions.
Good morning, guys.
Good morning.
Good morning, Mike.
Can you maybe walk us through just the drivers of your slightly lower NAV estimate and then what's changed in terms of how you think about values for both the assets that you've tried to sell and the remaining portfolio?
One of the bigger impacts is always that when you sell the properties you have transaction costs, and so we've -- as we've always said this is a gross NAV meaning this is what the gross sale prices would be and as you sell assets, and we've sold $1 billion, you have transaction costs related to those, and so the proceeds that you get effectively lower your NAV, your gross NAV at the end of the day.
So that's the primary driver Mike at the end of the day. I mean we tweak these numbers twice a year based upon information we see in the market. We, obviously, have full 2018 actuals; we have 2019 budgets and forecasts. We factor that all in and the numbers can move around a little bit, but we're talking about $0.50 at the midpoint and again most of that is because of going from gross to net on the dispositions of over $1 billion of hotels.
Got it. And then, just kind of switching gears on the fundamentals side, can you maybe touch on your updated view on overall demand trends and kind of where you're still seeing pockets of strength and weakness within your portfolio?
I mean, it's really the same Mike. We haven't seen much change. Obviously, it's winter. We have all sorts of weird weather going on, whether it's record blizzards in Seattle and Portland or record cold in the Central and East Coasts, or lots of things that impact numbers.
But when we look at the underlying demand, we really haven't seen any change in leisure or business travel, whether it's group of transient. And actually the demand numbers have been pretty strong. I mean, they continue to be run in the mid-2's even on a tough comparison to demand last year that was positively impacted by the aftermath of those two major hurricanes.
So we really haven't seen any change. For us the biggest difference is, much more laser-focused on driving ADR, experimenting, taking chances, being willing to take some risk at the end of the day and we're seeing some pretty good success doing that in a number of markets. So that's really about the only change we've seen. And we are beginning to see that a little bit more in some of markets we're in from the competition, which is a positive.
That’s helpful. Thank you.
Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead with your question.
Hey. Good morning, guys. Jon, could you give us two or three of the former LaSalle hotels that have the biggest upside as you think about what you can do to them?
I'll give you a few. So Paradise Point in Mission Bay San Diego. I'll give you one factoid, the property is doing -- In 2018, it did the same ADR it did 12 years ago. So it's lost a lot of share in the market, ADR and RevPAR. And we think with investment, with the proper investment, with the proper branding and repositioning there's a lot of opportunity there. So that would be one place.
I would say, a second place would be in some of the Kimpton properties in D.C. that have not gotten meaningful investment in many, many years, where there is significant upside in renovating and redeveloping those hotels.
And then I think there are some cases within the portfolio, and I don't want to talk about the specific properties. But there are some places where we'll benefit from some operator changes, which would come along with a transformation, a redevelopment and/or a brand change, even if it's one independent brand or small brand to another.
All right. And maybe a short answer on this one, but can you just give us your initial thoughts for 2020 on San Francisco, L.A., San Diego and the Boston markets?
Sorry, say that again, Bill?
Yes. I'm just trying to get a feel for the markets, your biggest markets, so San Francisco, L.A., San Diego and Boston, as you think about 2020 versus 2019.
Sure. So, I mean, in general, the convention markets get better. We see Portland better, we see San Diego better in 2020, we see Chicago better, we see Boston better, we see D.C. much better. We think Seattle will be slightly weaker. San Fran will be a little bit weaker, but still very strong obviously from a historical perspective. And Atlanta won't have the Super Bowl, which will move to Miami, which will help that market. So that's kind of the way we see, at least for our major markets 2020, in terms of convention impact.
Okay. That’s it for me. Thanks.
Thanks, Bill.
Thank you. Our next question is coming from Jim Sullivan of BTIG. Please go ahead with your question.
Thank you. Jon, just a question to kind of follow on the integration issues that -- there was a question about that earlier in the call but -- I mean as I recall back in the first half of 2018, LaSalle had talked about the negative impact from both the Marriott Starwood integration, as well as the Kimpton integration as being about -- a negative RevPAR impact of about 8.5%.
Now you've talked earlier about the continued issues, I guess, that you face with Marriott. But I just wonder, if you could address the Kimpton issues as well and whether those have been resolved, solved and whether there's a tailwind at least with respect to that segment of the portfolio.
Yes. I think, there is a tailwind as it relates to the Kimpton properties at this point and we're already beginning to see that. When the integration started -- or happened in January, the beginning of early January on the 10th of last year, we saw a lot of share loss and when we look at the Kimptons, as they're running so far this year in the first quarter, we're seeing us gain back a good chunk of that share loss.
It's not 100% across the portfolio but it's certainly a large majority of the portfolio, if we don't have any other issues going on at the properties. So the biggest impacts are past us. We think it's primarily a tailwind. Don't think we'll get it all back this year, but we'll get much of it back this year in terms of recapturing share.
And then, can you also address -- you just talked in response to Bill's question about some of the markets, but Key West obviously is a major market now for the combined entity. And again, it had its issues in the first half of last year. Can you just update us on what you're -- where you are in terms of prospects for 2019 and 2020 in Key West? And then also if you could talk a little bit about Portland.
Sure. So as it relates to Key West, we're seeing a very healthy recovery so far this year, as compared to last year, for not only the two properties we have in Key West, but the market overall. So Key West seems to be recovering well. People are coming back. They're paying these high ADRs, because this is season in Key West. And I would say, Key West and South Florida overall is going to be -- that's going to be one of our stronger regions this year.
Hard to say anything about 2020. We don't do -- there's not a lot of group and the group that's been -- that works down there is pretty darn short term, so I couldn't comment on 2020, other than saying the trends so far in 2019 are very positive and the booking paces are very positive in the market.
As it relates to Portland, Jim, it's a good evolving growing city that's suffering from a few years in a row; last year, this year and next year; of just way too much supply, given the demand growth. So it's nowhere near the kind of dynamism that a Nashville or an Austin are, where you can absorb 10% or 12%, or 8% supply growth in a given year. In Portland, you get healthy demand growth in the 4-plus range, given the growth of the city, but not in these higher 7% or 8% ranges which is where supply growth is running these days.
Okay. And then, final question from me. When you talked about capital allocation, you talked about a share buyback and currently the shares are quoted at about a -- well, somewhere in a mid-teens kind of discount to the NAV that you've indicated in your presentation.
You've bought back shares in the past with asset sale proceeds. Although, as I recall, the discount might have been greater at that time. Could you just help us understand, how much of a discount is enough to trigger the share buyback?
Well, that's always a tough one, because there are other variables we have to consider, but I think -- I do think, Jim, once you're getting into the mid-teens, it looks -- starts to look pretty attractive and we have to evaluate what -- where we are from a balance sheet perspective, what's our confidence level in additional sales, what does the cycle look like, where are we in the next few years. So all of those things are going to come into play, but I think we've shown and will consistently say we're not afraid to sell assets and buy our stock back.
So, that creates value for our shareholders. It's opportunistic in total. And yes, it would need a reasonable discount in order for it to make sense.
Okay. Very good. Thank you.
Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead with your question.
Yeah. Hi, guys.
Hey, Wes.
Looking at other revenue growth this year for the fourth quarter, it slowed quite a bit compared to the prior quarters. Is there anything special there? And what are some of your other revenue initiatives that you have going on?
Yeah, I don't think there was anything special there. I mean, we'd have to go through it in detail to see if there was a property that was under renovation that might have dragged down the numbers for other revenues. But a lot of the initiatives related to driving other revenue are either these portfolio-wide initiatives or they relate to these redevelopments and transformations where we really change the way a property is used, where it's positioned, trying to drive much higher profitability -- higher revenues, but higher profitability in the food and beverage spaces, as well as the meeting and venues spaces.
So a good example would be in Portland where we're adding -- for $1.2 million we're adding an outdoor pavilion that's going to -- that's likely to be highly seasonal, maybe seven months out of the year for weddings, for events, for corporate outings, great views of the Columbia River Gorge as we sit up on a hill. And interestingly, we're already booking it and in fact we've booked two winter weddings, believe it or not where people say, we know it's going to be cold, but it's a unique experience and that's what we want to have.
So, it's looking at those kinds of things I mean, where we -- when we look at Chaminade and we say we might put ziplines in or adventure parks, those drive additional revenues in addition to driving additional room demand at the end of the day. I mean, we make a few hundred thousand dollars a year off of the ziplines and adventure park in Skamania. So, it can be a lot of different things very specific to each individual property.
Okay. And then I don't know if you had a chance to update your numbers. But do you have a view on supply in 2020 looking at it from a perspective of weighted average 2019 versus 2020?
We do. We've been finding that we continue to be well off each year. 2018, we ended up at 2.4% and I think when we initially came out, we were in the upper 2% for the year. For the year we're looking at 2019 being in the low 3% and we're looking at 2020 to be relatively similar to 2019.
Okay. That's all for me. Thank you.
Thanks, Wes.
Thank you. At this time, I would like to turn the floor back over to Mr. Bortz for closing comments.
Thank you, Donna. Thanks everyone for enduring our long comments today. But we are a new different larger and we think much better company than prior to the merger, and we certainly encourage you to review the investor presentation which is brand new that's on our website. Thanks very much. We look forward to updating you on the first quarter in just a few weeks.
Ladies and gentlemen, thank you for your patience -- or thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.