Braemar Hotels & Resorts Inc (BHR) 2017 Q2 法說會逐字稿

Good day, and welcome to the Ashford Hospitality Prime Second Quarter 2017 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joe Calabrese of the Financial Relations Board. Please go ahead, sir.

Good morning, everyone, and welcome to today's call to review results for Ashford Hospitality Prime for the second quarter of 2017 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management.

The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet we distributed yesterday afternoon in a press release that has been covered by the financial media.

At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information that are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully disclosed in the company’s filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.

In addition, certain items used in this call are non-GAAP financial measures. Reconciliations of which were provided in the company's earnings release in the accompanying tables and schedules, which have been filed on Form 8-K with the SEC on August 2, 2017, and may also be accessed at the company's website at www.ahpreit.com. Each listener is encouraged to review these reconciliations provided in the earnings release together with all other information provided in the release.

I will now turn the call over to Richard Stockton. Please go ahead, sir.

Good morning. Thank you for joining us. For the quarter, our comparable RevPAR growth for all hotels not under renovation was 2.7%. Additionally, we reported AFFO per share of $0.50 and adjusted EBITDA of $30.8 million. We believe, these solid results reflect the strength and quality of our portfolio and demonstrate our asset management team's ability to drive results of our properties.

In January of this year, we announced a revised strategy with a focus of investing solely in the luxury segment as evidence has shown the luxury segment has had greater RevPAR growth over the long term. More clearly aligning our platform with the luxury chain scale segment will help differentiate us from all of our REIT peers and should provide superior long-term returns for our shareholders.

We said we would pursue new acquisitions in order to accretively grow our portfolio consistent with our stated strategy. Additionally, as part of that revised strategy, we identified 4 hotels: The Courtyard Philadelphia, The Courtyard San Francisco, Renaissance Tampa and Marriott Plano that have been designated as noncore to the portfolio. We stated that our intent is to either reposition or opportunistically sell these hotels.

Since the announcement in January, we have made significant progress, both in our acquisitions strategy as well as our noncore hotel strategy. At the end of March, we completed the acquisition of the 190-room Park Hyatt Beaver Creek Resort and Spa in Beaver Creek, Colorado. This iconic resort is perfectly with our luxury strategy and further diversifies our portfolio by establishing a presence in the highly sought-after Vail Valley market.

The hotel, which is solidly positioned at the top of this high barrier to entry market, given its premier location, first-class amenities and excellent physical condition, performed very strongly in the second quarter producing 19.7% RevPAR growth compared to the same quarter last year.

Additionally in May, we closed on the acquisition of the 80-room Hotel Yountville in Yountville, California for $96.5 million. The Hotel Yountville is our second acquisition in the Yountville market, which is one of the strongest and most desirable lodging markets in the country, with very high barriers to entry and minimal new supply.

The property is located just down the street from our Bardessono property, which we acquired back in 2015, and we have seen tremendous operational performance improvement since Remington took over management.

While second quarter performance of the Hotel Yountville was impacted by the extended sales process and management transition, we believe that with Remington as manager of this world-class luxury asset, we will be able to replicate the operational improvements we achieved and continue to deliver at the Bardessono.

On the noncore hotel front in June, we entered into an agreement with Marriott to convert the Courtyard Philadelphia Downtown Hotel to an autograph collection property. With its prime location across from City Hall in a historical visit -- building designation, the operating of the hotel to an autograph collection property will fill a desirable niche in the attractive downtown Philadelphia market.

The agreement with Marriott calls for the courtyard to be converted to an autograph by June 30, 2019, pursuant to a conversion product improvement plan currently estimated to require approximately $23 million of capital expenditure.

In June, we announced an agreement with the city of San Diego for an extension of the ground lease at the Hilton La Jolla Torrey Pines. The lease, which has an expiration of 2043, was extended by 24 years and now expires in 2067. Additionally, we are able to secure options to further extend the ground lease by either 10 or 20 additional years, depending on the amount of capital expenditures invested in the hotel during the term. Based on our capital plans, we will expect to easily achieve a level necessary to extend the lease for the maximum term.

As mentioned on last quarter's call, a special committee of our board, comprised of independent directors, was engaged with a special committee comprised of independent directors of the Ashford, Inc. board to work on changes to our advisory agreement. After extensive negotiations in January, we entered into an amended and restated advisory agreement with Ashford, Inc. The modifications to the agreement include a significantly lower termination fee, adjustments to the change in control provisions and public disclosure of the incremental expenses associated with the agreement. The amendments with subject to shareholder approval, and we were pleased to receive that approval of the agreement at our Annual Stockholders Meeting on June 9th, with over 95% of the shares voted approving the amendment.

In conclusion, we believe we have made great progress in the first half of this year in advancing our revised strategy and enhancing our corporate governance. Going forward, our team will continue to focus on enhancing shareholder value by delivering solid operational performance and continuing to execute on all aspects of our stated strategy.

Before turning the call over to Deric, I'd also like to mention that we are having an upcoming Investor Day in New York on October 3. Details for this event will be distributed shortly, and we look forward to seeing you there.

I will now turn the call over to Deric.

Thanks, Richard. For the second quarter of 2017, we reported a net loss attributable to common stockholders of $2.6 million or $0.09 per diluted share. For the quarter, we reported AFFO per diluted share of $0.50 compared with $0.60 for the same quarter last year. Adjusted EBITDA for the quarter was $30.8 million.

At quarter's end, we had total assets of $1.5 billion. We had $915 million of mortgage debt, of which, $48 million related to our joint venture partner share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined debt had a blended average interest rate of 4.1% and was almost entirely floating rate. All of our floating rate debt has interest rate caps in place. We currently have approximately 45% net debt to gross assets. As of the end of the second quarter, our trailing 12 months fixed charge coverage ratio was 2.0x. All of our debt is nonrecourse property level debt, and our next hard debt maturity is not until 2019.

We also ended the quarter with net working capital of $134 million. As of June 30, 2017, our portfolio consisted of 13 hotels with 3,740 net rooms. Our share count currently stands at 37.3 million fully diluted shares outstanding, which is comprised of 31.9 million shares of common stock and 5.4 million OP units. In our financial results, we include approximately 5 million shares in our fully diluted share count associated with our Series B Convertible Preferred Stock.

With regard to dividends, the Board of Directors declared a second quarter 2017 cash dividend of $0.16 per share or $0.64 per diluted share on an annualized basis. This equates to an annual yield of approximately 6.2% based on yesterday's closing price.

On the capital markets front, when we completed the acquisition of the Hotel Yountville, we concurrently closed on a new $51 million nonrecourse mortgage loan on the property with a 5-year term. The loan is interest-only and provides for a floating interest rate of LIBOR plus 2.55%.

This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our Asset Management activities for the quarter.

Thank you, Deric. Comparable RevPAR for our portfolio grew by 2.7% for all hotels not under renovation during the second quarter. Year-to-date comparable RevPAR for hotels not under renovation has grown 3.5%. For the second quarter, comparable hotel EBITDA for the entire portfolio increased 2.9% or $1.1 million compared to the same quarter last year with strong 104% hotel EBITDA flow-through.

This quarter's best-performing asset was a newly acquired Park Hyatt Beaver Creek, which grew RevPAR by 19.7%, driven by rate growth of 12.8% and occupancy growth of 6.1% compared to the same quarter last year. This robust RevPAR growth resulted in the property increasing share relative to the Colorado market by 1,310 basis points and relative to its competitors by 1,060 basis points, according to Smith Travel Research. Directed monthly strategy shifts led to the strong growth.

In April, we capitalized on the eastern shift from March as well as spring break weeks by driving regrowth of 29%. In May, we increased occupancy by attracting discounted leisure business and lower rate in corporate and group business. And in June, we were successful in maximizing both transient and group rates as the summer travel season got underway.

Not only did we increase the top line during the quarter, but the hotel EBITDA flow-through was a solid 68% and margins increased by 613 basis points, resulting in a $248,000 increase in hotel EBITDA compared to the same quarter last year.

This was our acquisition in the first quarter of 2017. The performance of this irreplaceable hotel with a premier ski-in/ski-out location in Beaver Creek Resort in village had been stellar. One of the biggest opportunities this asset has is the ability to maximize occupancy during the off-season.

We're also looking at a number of opportunities to further increase performance, including the conversion of nonrevenue producing lounge area to a concierge lounge and exclusive membership club. Additionally, we have found ways to trim costs through better scheduling practices during the hotel transitions from ski season into the summer season by working with highest operations efficiency group.

In addition to the outstanding performance of the Park Hyatt Beaver Creek, I wanted to briefly mention that our next best-performing asset, the Marriott Seattle Waterfront grew RevPAR an impressive 11.2% during the second quarter as compared to the same period last year, primarily due to occupancy growth of 6.5%. This RevPAR growth represents a 160 basis point increase in RevPAR relative to the market.

The strong Seattle market year-to-date, coupled with focused operations, resulted in hotel EBITDA growth of $807,000 or 12% over the prior year, respectively, which made this property one of the top performers in our portfolio. Furthermore in asset property, we are completing an end club, market pantry, new front desk and adding 3 keys, which should continue to increase profits given the high number of sellout nights experienced in this market.

I would now like to discuss the acquisition of the Hotel Yountville, our second luxury hotel in Yountville, California. The town of Yountville is in close proximity to over 451 boutique shopping, luxury spas, geothermal hot springs, golf courses, award-winning restaurants and numerous culinary and arts festivals. It is also a high barrier to entry market with long development timelines and is located within 90 miles of San Francisco, Oakland, Sacramento and Silicon Valley.

We closed the acquisition mid quarter and experienced some expected disruption due to the extended sales process and management transition. More specifically, prior to the closing on the acquisition, the previous sales team had slowed their bookings in the 2 to 3 months forward calendar, resulting in a negative RevPAR growth for the second quarter of 9.7% as compared to the same quarter last year.

We now have our sales team and revenue processes in place and are beginning to turn things around on the revenue side. On the cost side, we have an opportunity for savings and synergies between the Bardessono, our other Yountville hotel, and the Hotel Yountville through complexing multiple positions. Today, we have complexed more -- most of the key positions including GM, Director of Sales, Director of Finance and Director of Engineering. Additionally, we are now able to work cooperatively with certain groups that might desire to utilize both of our properties in the market.

As Hotel Yountville had previously been managed by a small private operator, going forward, we see significant upside in both the top line as well as hotel EBITDA flow-through over the time under Remington's professional management.

We're also excited to announce the ground lease at the Hilton La Jolla Torrey Pines. Expiration lease was extended 24 years until 2067 with additional extensions of 10 or 20 years, if we meet certain capital expenditure requirements. Under the revised lease, base and minimum rent remain unchanged.

On the operating side, along with the Marriott Seattle Waterfront, the hotel, La Jolla Torrey Pines, had been among the top performers during the first 6 months of 2017, realizing 5.9% RevPAR growth and 103% hotel EBITDA flow-through, resulting in a $1.6 million hotel EBITDA increase. The 5.9% RevPAR growth represents a 110 basis point increase in RevPAR relative to the property's track scale.

Another big announcement for the portfolio is the upcoming conversion of the Courtyard Philadelphia Downtown to an Autograph Collection hotel, which is due to be completed by June 30, 2019. With this hotel, we realized a 121% hotel EBITDA flow-through, increased margins 144 basis points during the second quarter. We expect the conversion to boost RevPAR by up to $25 and more closely align the property with our strategy of investing in luxury hotels. We anticipate spending an approximately $23 million in repositioning the guest rooms, guest bathrooms, corridors, lobby, restaurant and meeting space. And Marriott will continue to manage the property following this conversion.

One item to note during the quarter was the performance of the Courtyard San Francisco Downtown. The property continues to be impacted especially on the group business side by the renovation of the Moscone Convention Center, which remains on schedule to be completed in the fall of 2018.

During the quarter, RevPAR decreased 15.6%, resulting in a revenue decrease of $1.6 million or 15.4%. In addition to the convention center renovation, the property's guest room renovation began early in the first quarter of 2017 with 2/4 out of inventory on a rolling basis. Today, we have completed approximately 20% of the guestrooms and are selling them for a premium relative to the pre-renovation product.

Upon completion the Moscone Center renovation in 2018, we expect a material uptick in the market demand, and we'll be well positioned for the 2019 city-wide calendar. During 2017, we will continue to invest in our portfolio to maintain competitiveness. Until we estimate spending approximately $40 million to $50 million in capital expenditures during the year, which will primarily be comprised of the guestroom renovations at the Courtyard San Francisco and Sofitel Chicago. We also plan to renovate the meeting space at the Capital Hilton. Additionally, we have identified several highly accretive opportunities to add additional keys within our portfolio, and we'll be adding 3 guestrooms at both the Marriott Seattle Waterfront and the Bardessono Hotel and 5 keys at the Courtyard San Francisco.

This concludes our prepared remarks, and we will now open the call up to your questions.

(Operator Instructions) And we will now take our first question from Michael Bellisario with Baird.

First, I just want to dig in to the Courtyard Philly rebranding a little bit. Can you maybe walk us through how you underwrite the expected returns on the renovation there, and maybe simply versus just selling the hotel? I know that was one you'd considered selling previously. $23 million is a pretty big check, especially relative to the renovation that was done there just a couple of years ago, I think that cost $60 million.

Sure, this is Jeremy. We looked at it multiple ways. We do a pretty extensive underwriting. And one of the things is we start with a broker's opinion of value, what brokers think we can sell the asset for today, and we look at a buy-sell based on that. And then we also do an analysis on either the upper end and the additional rate. We did a market study with HBS and negotiated the PIP pretty extensively with Marriott. And then we go out and look at the 5- and 7-year horizon on what the expected upside is on ROI basis, but we also look at accretion and deletion to the stock price. So we do believe this is going to be highly accretive relative to selling asset, the incremental returns are very attractive. This is a great market long-term. There is some new supply that's coming into the market as you're well aware of. Most of that supply is positioned in the upper up -- I'm sorry, up scale segment that would be more competitive with the Courtyard. So up-branding into an Autograph will more effectively -- competitively position ourselves in the market. One of the things that when you look at the analysis that HBS did, we do feel like it's very conservative in some of the potential upside. There is another similar product in the market, which is the Hilton's Imperial and that runs at a very attractive premium to our asset, and we believe our asset is a much better asset, a much better location. If you've seen the hotel, it's an incredible property. It's very unique. It's a former annex of the city of Philadelphia. So it's got a very historic nature, the guestrooms have very high ceilings and it's much better than what's represented in a typical Courtyard product. So we do believe by investing in the product, we think there's upside in the current market, especially, when you look at where some of the upper upscale and luxury hotels, the premiums above our hotel. And in addition, we looked at where the Westmoore rates and the Ritz-Carlton rates were as well, which were significant, significant premiums to our Courtyard.

And then, Deric, did I hear correctly? You underwrote $25 of RevPAR increase. How much of that is rate occupancy? And then what kind of market share gains are you assuming there? And how much ultimately does that fall to the bottom line in terms of EBITDA dollars?

I don't know if we're prepared to go through all that analysis right now. But what I can say is it's primarily rate, and the returns are attractive.

Because the returns on investing in an asset you already own, at least, as we look at it, are significantly better than a new acquisition. I don't think that should come as much of a surprise. It's kind of what we expected to see out of the analysis, and this absolutely fits that criteria.

Understood. And then, just one smaller item. What's the scope of the project at the Pier House, I see that was added as a third quarter and fourth quarter renovation that was on there before?

Yes, what we're doing is we're basically renovating a portion of the guestrooms. And we went ahead and added it to the schedule just because we thought it was appropriate, but it's not the entire guestrooms. And what we're doing is, we're doing the guestrooms in cycles, and we're focused on the offseason. So primarily, in the third quarter, a little bit in the fourth quarter, we're trying to minimize displacement. And instead of just doing a renovation on a cycle of every 6- to 8- to 10-years, we've changed it. We're just going to take a segment of rooms out of inventory and renovate those -- the guestrooms. And it's just a little bit more unique, we can do that very easily because it's multiple buildings and previous ownership actually did have a similar renovation plan. We typically do not like to do that, but in a high occupancy market, we do believe over long term, we can minimize displacement with that approach and continue to keep the property fresh.

Got that, sir. And then just lastly on the acquisition pipeline, has your appetite changed at all, given your stock price hasn't really moved since you last raised capital? And are you seeing anything different in the transaction market today as you look at deals?

Well, say, the transaction markets in terms of opportunities that we see attractive is a little bit thinner than it has been. Like there are sellers out there that are seeking prices that don't look affordable to us, and when I say affordable -- and we do have available cash. We have a credit facility. I don't anticipate needing to go to the equity markets to fund acquisitions, but there are things that we can do to build the portfolio based on our available liquidity.

And we'll now take our next question from Chris Woronka with Deutsche Bank.

Could you give us a little bit of detail, whatever you can, on kind of how the properties, the Bardessono and the Yountville are sole distributed in terms of the mix kind of OTA and other?

Yountville, at this point, is not really applicable because we're going to reposition the mix. But the Bardessono, oddly enough is one of our lower -- lowest OTA mix properties that we have. So it is significantly lower than -- in regards to the independence. But typically our portfolio runs about 10% to 12% OTA and Bardessono is right around that level and it's an independent. So we think that's very attractive for that property, and then we anticipate bringing the mix down in Hotel Yountville over time as well.

Okay. Great. And then maybe just an update on market conditions on kind of on the sell side. I know there's a few hotels you're either kind of marketing or considering options for. Is that -- given the comments that the acquisition side is kind of tough right now. Does that help you on the disposition front?

Yes, I'd say, that is what we're seeing. We, as you know since we've announced it, we've got the Marriott Plano Legacy in the market. We've seen a tremendous amount of interest in the asset from all types of buyers. So there are private equity funds out there, there are family offices, there are high-net worth individuals, there are other REITs kicking the tires. So we're encouraged that our process has been broad enough to achieve market pricing, and hopefully, we'll have an update on that in due course.

Okay, great. And can you just remind us, I was looking through my notes, I couldn't find it. What -- how long is the management or the franchise contract to that Sofitel in Chicago running for?

It's long term, it's a long-term agreement. And it's got very brand-friendly performance termination clauses. We've looked through it pretty extensively. And it's -- what is typical is to have the initial term plus some renewal options. We do believe, I can say that, it is underperforming. I'm very disappointed in the results. There's been a tremendous amount of turnover in the property, and it is a top focus priority of -- across all of our assets. And so, we are spending a tremendous amount of time in the property. We are going to be doing a renovation in the fourth quarter. I do believe that the product is not nearly competitive to its competitors set at this point, so the renovation is certainly over due. With that, and some of the strategies we have in place, we do believe that we can optimize the performance of the asset. With a stronger brand, I think that would be more attractive. Unfortunately, it's just not one of the options that we have at this point.

And we'll now take our next question from Ryan Meliker with Canaccord Genuity.

Might've have a couple of things I wanted to touch on. Jeremy, I'm wondering if you can give us some color at all on what your expectations for the San Francisco market are, coming out of the Moscone Center renovation? We keep hearing mixed signals from different people. Some think that 2018 is going to be great year. Some think the back half of 2018 is really what's going to be driven very positive, and it's really 2019 that's going to be the year that moves the needle. I know you guys don't have a lot of exposure. But you do have the Courtyard there that, obviously, was impacted prematurely this quarter. Can you give us any color on what we should expect for San Francisco?

Yes, Ryan, I've seen some of the mixed signals you've read as well, and so I find it interesting. And as you stated there, we look at is that 2019 is the year. There's no question about it. It's going to be a significant uptick in the city-wide pace. There is some good demand generators that continue in that market, but I don't see a huge uptick in 2018 versus -- 2017 versus the convention calendar when you have the convention calendar. So I'm happy to share that information with you, which you probably have access to it. But specifically for our hotel, I think 2018 is going to be a better year because we won't be under renovation the entire year. And so we've got a significant amount of displacement that we're experiencing right now. It's primarily because of the renovation, but it's certainly also because of the Moscone. And what's happened is, is that during the second quarter, our rate was down, I think, we're on 9% at Courtyard San Francisco, maybe 8%. And a big part of that is because of the mix of group that we have in the hotel. It's actually one of the hotels that we have a group rate premium versus the transient segment. But specifically, when you look at our property, all the demand generators going around our property, I think that we are very well positioned to capture it on the upside, both in terms of the renovated Moscone as well as just more demand, transient demand, within the market. I don't know if you've been there a while, but it's becoming somewhat of the Silicon Valley area of San Francisco with a lot of technology companies located very close proximity to our hotel.

Okay, that's helpful. And then with regards to the Hotel Yountville, you guys gave some good prepared remarks in some of the challenges that you faced this quarter with the Hotel Yountville. How quickly do you think those challenges go away? Is this something that we should start to see much better results in 3Q? Or is that really more of a 2018 story?

They're already starting your away. It is -- any time you have an independent operator and when you acquire a hotel, the folks of the hotel, the GM had already left before we even started diligence, the key revenue people were in the process of leaving and left before we even went hard on the asset. Normally, that's not a huge problem because we tend to be very, very quick to close in those situations. This asset was a little bit more unique, in that, if you recall or if you know anything about the asset, there were some additional keys that were built by the previous owners and those keys were not correctly zoned for full rebuilt, and we did not want to close on the asset until we had the appropriate city approvals. And in a town like Yountville, that could take a very, very long time. However, we had a pretty strong relationship with the city because we recently received some approvals to add 3 additional keys to Bardessono. So in this case, we received the approvals within 60 days, which I think is remarkable. However, 60 days is a very, very long time to go without the appropriate team in place. And so the set of cards that were dealt to us when we acquired the hotel in mid-May were very, very challenging. And we are -- did the best we can to mitigate the challenges. And so, we're seeing the results improved right now.

Okay, that's helpful. And then, Richard, maybe kind of big picture question for you. You guys issued equity earlier this year, you bought a couple of 5-star type properties. Stock hasn't really moved in the way you would have hoped for as you've diversified your exposure. I'm curious I know in the past, you've talked about a need for added liquidity. That doesn't seem to be in the cards right now, at least, in terms of stock liquidity. How do you think you get the stock to a valuation that really reflects what you think the portfolio value is without outright selling?

Thanks, Ryan, for that question. You're right. I mean, this is not an attractive price for us to issue equity. So that's under a lot of consideration. We're spending our time focused on working the non-core assets as we've identified in January. And we made, I think, already very good progress on that initiative. There'll be more to come on that front. And I think, it will merge, having dealt with that non-core portfolio with an even higher quality set of assets that will even further differentiate us from our peers. And at some point, we would hope and expect the equity pricing to reflect that. And for now, that's our intent. In terms of added liquidity, to the extent we sell assets, our plan is to recycle that capital into newer or rather new but higher-quality assets. So we've got certainly a lot of wood to chop and plenty to work on to get to the vision laid out in our strategy plan.

So it sounds like you're going to try to continue to improve the portfolio quality whether it'd be by improving assets or acquiring other high-quality assets. I guess, you know, do you think that doing that can be EBITDA and FFO accretive? Are you able to sell some of your non-core assets at pricing that is comparable to where you'd be buying what you would deem higher-quality assets? That's always a challenging thing to do. So I'm curious, if improving the portfolio quality it's going to erode FFO per share or EBITDA.

Yes, I think that comes with the territory to some degree. If you're selling lower quality assets, they're going to trade at a higher cap rate than the higher-quality assets, right? So that will be part of our evolution, I think, the silver linings, where we're trading now is that the multiples on those metrics are so low. Practically, there's plenty of room for them to move around. I don't think our shares are trading in respect of typical multiple metrics because they're, in some ways, detached from the rest of the comp set. So I think, what the market really wants to see is a way that we can differentiate ourselves and our story. And by having the best quality of portfolio in the business is our way to do that. And then, any intentions to get recognized for that through the valuation metrics over time.

And we'll now take our next question from Tyler Batory with Janney Capital Markets.

A quick one for Richard. Just wondering, can you give some general comments on your outlook for the luxury set and maybe any relevant trends you think are worth calling out and a review on the consumer here or maybe your views on corporate trends. I'm not sure if there are any high-level thoughts that you can share on second half of the year as well. That would be great.

Yes, sure. Well, there's a couple of things. First of all, I don't know that if the luxury trends are all too dissimilar from the other chain scale segments at the moment, taken as a group. And we're looking at a circumstance, where we've got supply coming into 2018 and the rest of this year that is more or less in line with the historical trends. There's certainly some markets that are being here with more supply than others, and we're fortunate not to be in those markets. Most of our markets are more in line with the historical trends and the overall forecast. But it's clear that we're coming out of a recovery. The pace of RevPAR growth is slowing. In recent forecasts, our -- 2.5% or so -- 2% to 2.5% for the next couple of years. That sort of RevPAR growth, we believe we can still make money. I think there's been some reaction in the market that is looking at that as, particularly, as negative or sluggish and, frankly, with the operating leverage we can get at more assets, we can still make some decent returns in that environment. So we are, I guess, I'd say, cautiously optimistic that the lodging market will remain healthy. But clearly, the pace of growth is slower than it has been. But we also don't see any particular storm cloud on the horizon. No reason to raise any alarms at this point.

Okay, great. And then maybe a follow-up on some of the questions on acquisitions. Can we talk a little bit more about your views on buying a branded asset versus independent property? I'm not sure if you have maybe a preference on that. And if you can also touch on how you're thinking about balancing your leverage target with growing the portfolio as well?

Sure. Yes, on the branded versus independent, in some ways, we're ambivalent. We -- if you look at our pipeline, it consists of as many of one as the other. I think what we need to scrutinize in each case is in the case of a branded portfolio -- branded acquisition, what are the terms of that management contract and are we underwriting it carefully enough. But we don't necessarily see that as a detractor of value, frankly, and you have to have someone manage your properties at the end of the day. And if it's a good manager and one that we know well, we feel like we can work with them to help drive performance. In terms of independent hotels, we have seen very good, experienced plugging Remington in where we can and having them deliver really strong flows. And so, in cases, especially, where we can realize some synergies there, as in, what we've done with Yountville, we think that's even better, right? But opportunities aren't necessarily easy to find, and we are first and foremost driven by the strategy of having the highest quality portfolio in the business. And then secondarily, focusing on whether it's branded or independent. And then all that kind of works into our under model and our terms analysis. And hopefully, in some cases, it will allow us to be more competitive than others. On the second question, which is the leverage target. As I've said, we've got these 4 non-core assets. We've announced our intentions on 2 of them. Any assets that we sell, the intention is to recycle that capital into new acquisitions. So for the time being, that's our plan and that will keep our leverage at its current level.

(Operator Instructions) And we'll now take our next question from Bryan Maher with FBR Capital Markets.

Just a couple of quick questions. On the La Jolla lease extension, I think I heard you say that there was no increase to the base or minimum rent. But was there any upfront cost to extend that?

Yes, there was a -- we paid a onetime payment of $500,000. Initially, when we started discussions, the city requested close to $4 million. So we're very pleased that we were able to negotiate that down to just $500,000 for an upfront payment, which when you look to amortize over the life of the lease, it was a pretty low upfront cost.

Okay, great. And then, in Chicago, is there any recourse in that agreement for underperformance that could get you out of that management contract?

Well, it has a typical performance duration -- provision, but the hotel -- and the hotel is failing from one of the metrics. But the other metric, it's fairly well into the money, which is the RevPAR index. RevPAR index is -- would have to go down for probably 500 to 600 basis points for a consecutive 2-year period, which I don't foresee happening and -- or we necessarily want that to happen. Although we'd like to get out of the contract, I do think the hotel probably has a good 500 to 600 basis points up side in terms of where it should be compared to reposition from a RevPAR index standpoint. So we're focused on that.

Okay. And then, lastly in Key West at the Pier House. One of your competitors acquired the Ocean's Edge property in Stock Island. Are you seeing -- which opened about, I don't know, 6 or 8 months ago. Are you seeing any impact to Pier House from that property?

Not really, haven't seen any impact. Pier House, we've had some good rate growth in that in the quarter. And so we did substitute some occupancy to continue the [first] rate but we did increase to $20 of ADR in the quarter. And it runs at high occupancy. I think if you look at the market and if you know the market, Key West is where you'd want to be within that market, and our location is one of the best locations to be on.

And ladies and gentlemen, that concludes today's question-and-answer session. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

Well, thank you all for joining us on our second quarter earnings call, and we look forward to speaking with you again on our next call. And also, I hope to seeing you on our Investor Day on October 3 in New York. Everybody, have a nice day.

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.