Braemar Hotels & Resorts Inc (BHR) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Braemar Hotels & Resorts Inc. Fourth Quarter 2018 Year-end Results Conference Call. Today's call is being recorded. And at this time, I would like to turn things over to Jordan Jennings, Investor Relations for Braemar. Please go ahead.

Good afternoon, and welcome to today's call to review results for Braemar Hotels & Resorts for the fourth quarter and full year of 2018 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, Chief Operating Officer. The result as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed this morning 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 and are being made pursuant to the safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risk, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed 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 terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on February 27, 2019, and may also be accessed through the company's website at www.bhrreit.com. Each listener is encouraged to review those 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, Richard.

Thank you. Good afternoon, and thank you for joining us this afternoon to discuss our fourth quarter and full year results. Overall, we are very pleased with the operating and financial results Braemar generated in 2018. We're excited about the progress we're making on the continued growth and success of our platform.

In January of 2017, we announced a revised strategy with a focus of investing in the luxury hotel segment and since that time, we've taken concrete steps to realign our portfolio to the strategy, including selling 2 noncore properties, announcing an agreement to upbrand 2 properties and align them more closely with our luxury focus, and acquiring 4 high-quality luxury properties. We believe that continued execution on this strategy will lead to solid growth and strong financial performance for our company going forward.

Our strategy to focus on the luxury segment of the hospitality market is supported by the current and historical performance of this segment. Empirical evidence has shown that over the long term, the luxury segment has had greater RevPAR growth than the overall industry. Currently bolstered by strong consumer confidence trends and a healthy macroeconomic outlook, the luxury segment has outperformed the overall lodging industry over the last several quarters. According to Smith Travel

Research, in the fourth quarter, luxury segment RevPAR growth was 3% compared to RevPAR growth of 2.4% for the entire industry.

For full year 2018, luxury RevPAR increased 4.4% compared to RevPAR growth of 2.9% for the entire industry. Looking ahead, the economic outlook continues to be favorable and consistent with our long-term growth thesis for the luxury segment. STR and other industry forecasters are predicting modest overall RevPAR gains in 2019 for the industry, with the luxury segment expected to continue to outperform.

By clearly aligning our platform with this segment, we believe Braemar is well positioned to capitalize on these trends and continue to outperform our REIT peers.

Before turning to our operational results, I would like to take a moment to discuss the Enhanced Return Funding Program, or ERFP, agreement with Ashford Inc. that we announced in January. The ERFP is a $50 million funding commitment from Ashford Inc. that has provided the Braemar to facilitate accretive growth. Simply put, Ashford Inc. contributes 10% of the purchase price of qualifying acquisitions up to the agreed maximum funding commitment, with no additional fees or future return on investment provisions. The program has a 2-year term, with 1-year renewals and the ability to be upsized to $100 million based upon mutual agreement. This programmatic funding arrangement provides us with a competitive advantage and the potential to meaningfully drive our performance is significant. With the ability to add an estimated 100 to 200 basis points to unlevered returns on our future hotel acquisitions, we believe the ERFP will be a key differentiator behind our ability to increase shareholder value.

To put the ERFP program to work immediately, in January 2019, we acquired the Ritz-Carlton Lake Tahoe, located on the North Shore. We are very excited about the acquisition of this high-quality resort and believe it's a great addition to our portfolio.

Braemar will receive approximately $10 million of ERFP funding as part of the $103 million purchase price. We anticipate that this will increase our returns on this acquisition from a projected 10% to 12% unlevered IRR. This landmark luxury hotel built in 2009 consists of 170 rooms with over 37,000 square feet of indoor and outdoor meeting space and sits mid-mountain on the ski slopes of the Northstar Ski Resort. With record snowfall propelling the 2018 into '19 ski season out of the gates, we are very excited about this property joining our portfolio.

Let me now turn to our fourth quarter results. For the fourth quarter, actual RevPAR growth was 9% for all hotels and was 7.2% for the full year. These significant increases are a direct result of our portfolio repositioning efforts to acquire higher RevPAR hotels and dispose of our lowest RevPAR assets. Comparable RevPAR for hotels not under renovation grew by 7% during the quarter, while comparable RevPAR for all hotels increased 3.2%.

We reported adjusted EBITDAre of $20.3 million and AFFO per share of $0.15 for the quarter, while full year adjusted EBITDAre was $119.3 million, reflecting 7.3% growth over the prior year; and AFFO per share was $1.55. Our overall portfolio TTM comparable RevPAR of $226 continues to be the highest in the lodging REIT sector.

During the quarter, we continued to actively manage our insurance recoveries at the Ritz-Carlton St. Thomas related to Hurricane Irma. We're working closely with our insurers to both seek recoveries for physical damage to the hotel as well as to minimize the impact to the property's P&L through BI insurance recoveries, which totaled $13.5 million for the full year 2018.

As previously discussed, we didn't book any business interruption income in Q4 2018. However, we do expect recoveries to resume in the first quarter 2019 and to continue at least through our planned reopening in October 2019.

We also continue to be on track with the rebuilding and renovation program at the property, and Jeremy will provide more detail on our progress in a few minutes.

We're also pleased with the progress we are making on the conversions of our Courtyard Philadelphia and Courtyard San Francisco properties to Autograph Collection hotels. Both projects remain on track to be completed this year and their opening as Autographs will mark the completion of our initiatives under our noncore hotel strategy and portfolio repositioning.

Thus far, we've spent approximately $20 million on these conversions and anticipate spending an additional $30 million in 2019. We're excited about the post-conversion upside of these 2 properties given the strong performance during 2018, with 6.7% RevPAR growth at the Courtyard Philadelphia and 14.6% RevPAR growth at the Courtyard San Francisco, even while these properties were under renovation. Additionally, San Francisco's Moscone Convention Center expansion was completed in late 2018, which, when combined with only modest supply growth, continues to fuel our excitement for 2019 with the upcoming opening of our San Francisco Autograph Collection hotel.

Two of this quarter's best performing assets were our Napa Valley properties, with comparable RevPAR up by 35.4% at Bardessono and 41.1% at Hotel Yountville during the fourth quarter, driven by strong gains in both rate and occupancy. We noted last quarter on our call that the fourth quarter was shaping up to be strong for our Napa Valley hotels as operations at the properties fully recovered from the fires in the fourth quarter of 2017. These properties' comparable RevPAR growth was 37.9% during the fourth quarter, driven by occupancy growth of 24.1% and rate growth of 11.1%. While the strong RevPAR growth was driven by depressed occupancy levels in 2017, this robust RevPAR growth resulted in Hotel Yountville increasing its share relative to both the California North market and Napa Valley California sub-market by 28.8 and 14.2 percentage points, respectively.

Bardessono similarly outperformed the market and sub-market. The 2 properties combined, hotel EBITDA margin increased by 112%, resulting in $1.9 million or 196% increase in hotel EBITDA. These results translated into 81% hotel EBITDA flow-through for the fourth quarter, which is a continuation of the strong 89% hotel EBITDA flow-through achieved during 2018.

At Bardessono, construction continued on the 3-unit presidential villa with structural framing currently under way. 2018 was our first full year of ownership of Hotel Yountville. While the year had its share of hurdles to overcome, mainly the recovery from the fires in the fall of 2017, during the year, comparable RevPAR grew by 4.9%, hotel EBITDA grew $1.3 million or 24.5%, while hotel EBITDA flow-through was 74%. With the impact of the fires mitigated, we anticipate Hotel Yountville to continue to perform well and be a valuable addition to our portfolio.

In addition to the strong performance of our Napa Valley assets, the Hilton La Jolla Torrey Pines was also a strong performer for the quarter, with comparable RevPAR of 12.5%, driven by 11.5% rate growth. This RevPAR growth represents 7.4 and 0.7 percentage point increases in RevPAR relative to the San Diego, La Jolla, California submarket and the San Diego upper-upscale class market, respectively.

The hotel's been focusing on group patterns and placement by deliberately moving groups to shoulder dates in order to capitalize on high-occupancy dates with transient business.

Addition of the strategic booking of group business, the hotel was able to drive transient rate during the San Diego citywides. Total hotel revenue at Hilton Torrey Pines increased 14.4% during the fourth quarter, leading the hotel EBITDA growth of $735,000 or 27.2% over the prior year period.

At our Capital Hilton in Washington, D.C., comparable RevPARs decreased 6.6% during the fourth quarter as October was impacted by the last 2 weeks not having any congressional activity leading up to the midterm elections. Additionally, October and November combined saw a 48,000-room night decrease in the market due to fewer citywides. Increased supply in the market also impacted the average rate at the Capital -- the Capital Hilton was able to realize on weekends from leisure travel. As a partial government shutdown occurred at the very end of the fourth quarter, it had minimal impact on the quarter's results. However, we expect it will have a greater impact on the results for the first quarter of 2019.

On another note, the hotel opened a new fitness center, continued to progress on the last phase of the meeting space renovation as preparing for the opening of new retail tenant, CVS. One of our recent acquisitions, the Ritz-Carlton Sarasota, posted a 2% comparable RevPAR decrease during the fourth quarter. Red tide began impacting the Gulf Coast at the beginning of August 2018, and the Sarasota market has been one of the worst hit regions. Despite the poor market conditions relative to the Sarasota Beaches, Florida submarket, Sarasota Bradenton, Florida market, comparable RevPAR of the property outperforms by 9 and 7.6 percentage points, respectively.

During the fourth quarter, hotel EBITDA flow-through was a robust 95%, and for the entire year this figure was an exceptional 305%. Despite the headwinds mentioned earlier, the hotel exceeded 2018 operating income by 3.5% or $568,000 through effective expense control, and we did not have to draw on the GOP guarantee negotiated with prior ownership as part of our acquisition. Additionally, the city-council-approved beach restoration project that began in November reached the hotel’s Beach Club this quarter, which should have a positive impact on performance. We believe we have made great progress in advancing our strategy in the quarter and expect these trends to continue through the first quarter of 2019.

I'll now turn the call over to Deric.

Thanks, Richard. As Richard mentioned, during the fourth quarter, we did not recognize any business interruption income for the Ritz-Carlton St. Thomas. However, for the year, we recognized $13.5 million of business interruption income for the Ritz-Carlton St. Thomas, which is reflected in the Other hotel revenue line of our income statement. These insurance recoveries related to the month of December 2017 through November 2018, and we expect business interruption income to resume in the fourth --- first quarter of 2019 and continue until at least the reopening of the hotel as a Ritz-Carlton, which is anticipated to occur in October of this year.

For the first quarter, we expect our BI income to be similar to what we booked in the first quarter of 2018 for the Ritz-Carlton St. Thomas. For the fourth quarter of 2018, we reported a net loss attributable to common stockholders of $14.4 million or $0.44 per diluted share. For the full year of 2018, we reported a net loss attributable to common stockholders of $5.9 million or $0.19 per diluted share.

For the quarter, we reported AFFO per diluted share of $0.15, and for the full year of 2018, we reported AFFO per diluted share of $1.55. Adjusted EBITDAre for the quarter was $20.3 million, while adjusted EBITDAre for the full year was $119.3 million, which reflected a 7.3% growth rate over 2017. At quarter's end, we had total assets of $1.6 billion. We had $993 million of mortgage loans, of which $47 million related to our joint venture partner's share of the loan on the Capital Hilton and Hilton La Jolla Torrey Pines.

Our total combined loans had a blended average interest rate of 5% at year-end, but after taking into account our recent refinancing, along with the financing on the Ritz-Carlton Lake Tahoe, our current blended average interest rate is approximately 4.8%. Our loans are entirely floating rate and the vast majority of interest rate caps in place. As of the end of the fourth quarter, we had approximately 44% net debt to gross assets and our trailing 12 months fixed charge coverage ratio was approximately 1.8x.

Our next loan maturity is not until March of 2020. Our cash and cash equivalents at the end of the quarter was $183 million, with an additional $76 million of restricted cash. The vast majority of that restricted cash is earmarked for CapEx projects, including our Autograph conversions. So we have already set aside a significant amount of the CapEx we plan to spend in 2019. We also entered the quarter with net working capital of $188 million.

As of December 31, 2018, our portfolio consisted of 12 hotels with 3,314 net rooms. With the acquisition of the Ritz-Carlton Lake Tahoe, we now have 13 hotels with 3,484 net rooms. Our share count currently stands at 37.3 million fully diluted shares outstanding, which is comprised of 32.5 million shares of common stock and 4.8 million OP units. In our financial results, we include approximately 6.6 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 fourth quarter 2018 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 5.1% based on yesterday's stock price. The Board also approved the company's dividend policy for 2019. The company expects to pay a quarterly cash dividend of $0.16 per share for 2019 or $0.64 per share on an annualized basis. On a trailing 12-month basis, this represents an approximate 41% AFFO payout ratio.

On the capital markets front, during the quarter, we completed an underwritten public offering of 1.6 million shares of our 8.25% Series D cumulative preferred stock at $25 per share. Dividends on the preferred stock will accrue at a rate of 8.25% per year on the liquidation preference of $25 per share. We used the proceeds from this offering for the acquisition of the Ritz-Carlton Lake Tahoe.

Subsequent to quarter-end, we refinanced the mortgage loan with an existing outstanding balance totaling approximate $187 million. The new loan totals $195 million and has a 5-year term. The loan is interest-only and provides for a floating interest rate of LIBOR plus 1.7%. The loan remains secured by the same 2 hotels: the Capital Hilton in Washington, D.C. and the Hilton La Jolla Torrey Pines in La Jolla, California.

Also subsequent to quarter-end, we closed on a $54 million nonrecourse mortgage loan secured by the Ritz-Carlton Lake Tahoe. This loan is interest-only, bears interest at LIBOR plus 2.1% and has a 5-year term.

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

Thank you, Deric. Comparable RevPAR for our portfolio grew 3.2% during the fourth quarter. However, for all hotels not under renovation during the fourth quarter, comparable RevPAR grew by 7%. Our portfolio's compatible RevPAR growth led to a share gain of 2.1 percentage points relative to our hotels' submarket chain scale. Holiday shifts did not significantly impact results during the fourth quarter and the government shutdown led to minimal impact in December.

For the year, comparable RevPAR for the entire portfolio decreased by 1.6%. However, this decrease represents 1.7 percentage point gains relative to our hotels' submarket chain scale. In addition, for the year, hotel EBITDA flow-through was robust at 137%, leading to a hotel EBITDA growth of $4.1 million.

Park Hyatt Beaver Creek Resort and Spa completed its first full year under our ownership. During the year, comparable RevPAR decreased 2.3%, primarily due to poor ski season weather and snowfall to start the year. However, comparable RevPAR actually surpassed that of the Colorado ski area submarket upscale and above chains by 5.2 percentage points.

Numerous expansion projects at the property have also been approved, including a ski valet locker room, where each guest will have a private heated locker to store and dry their boots and other ski items. The major renovation of the lobby and Antler’s Lounge will get under way this spring, with the focal point being a completely redesigned Antler’s Lounge with a newly built bar in the center of the room. A second fireplace will also be added to maximize warmth and ambience of the lobby, especially during the winter season. Additionally, the front desk will be relocated to the center of the lobby and consist of 3 podiums where guests will register while seated comfortably.

We anticipate these expansion projects will help drive future top line growth, which in conjunction with our profitability track record at this property should lead to a strong return on our investments.

Now, over 1 year after the devastating hurricanes of September 2017, I'd like to provide an update on our progress at the Ritz-Carlton St. Thomas. During the fourth quarter, there was significant reconstruction activity at the property. While work has continued on the guest room buildings impacted by the hurricanes, in December, work also began on one of the guest room buildings that had been operational, thus reducing inventory from 83 to 59 rooms. Operating room inventory was further reduced in February with another operational guest room building going under renovation. Construction will start on the last guest room building in March and the resort will be shut down entirely to guests from March until July.

The lobby expansion area build-out and tile floor are substantially complete as are the roofs. Despite the ongoing renovation, we have also been able to operate a portion of the hotel under a white label and realized comparable RevPAR growth of 5.8% during the fourth quarter.

During 2018, we booked $13.5 million in BI insurance proceeds. And while we did not book any BI insurance proceeds for the months of September, October and November during the fourth quarter, we expect to realize robust recoveries through the months of December, January and February during the first quarter of this year.

Continuing the theme of capital improvements, I'd like to provide an update on both of our ongoing Courtyard renovations, conversions to Autograph Collection hotels. The Courtyard San Francisco Downtown, which continues to grow at a tremendous rate following its transformative guest room renovation, had 9.7% comparable RevPAR growth during the fourth quarter. This RevPAR growth represents an increase of over 15 percentage points relative to the hotel's competitors. This is a continuation of the strong performance seen for the full year of 14.6% comparable RevPAR growth. With the conclusion of the major guestrooms renovation in the first quarter of 2018, we were able to position the hotel to not only grow occupancy, but also grow rate, which grew 5.6% during the fourth quarter.

For the year, hotel EBITDA grew $1.1 million. All major room items are substantially complete with only a few go-back items remaining. Plans for the final stages of the Autograph conversion have been finalized, including entirely new lobby, restaurant, coffee shop as well as a remodeled exterior. Additionally, in December 2018, the Moscone Convention Center expansion was completed, which, when combined with the modest supply growth anticipated for the market, continues to fuel our excitement for 2019 and the upcoming rebranding to an Autograph Collection hotel.

As for Courtyard Philadelphia Downtown, in October, we started the guest rooms renovation, which will include new case goods, carpets, lighting, bathroom, barn doors and shower conversions. By the end of the quarter, 57 guest rooms had been renovated and returned to the available inventory. During the fourth quarter, comparable RevPAR growth was negative 10.9% as a result of a 12.1% decrease in occupancy due to the ongoing renovation.

Results were also impacted by a decrease in citywide activity, specifically the lack of the International Chiefs of Police convention in October, which caused a significant compression in 2017. However, even with the reduction in the citywide calendar and the renovation in the fourth quarter, the hotel grew comparable RevPAR 6.7% during the year, which represents growth of 1.8 and 1.4 percentage points relative to the Philadelphia, Pennsylvania, and New Jersey upscale class market and the hotel's competitors, respectively.

During the year, the property had hotel EBITDA flow-through of 58%, which resulted in hotel EBITDA growth of $1.8 million or 14.9% over the prior year period. We eagerly anticipate the hotel's conversion to the Autograph Collection in mid-2019. As Richard mentioned earlier, in January, we acquired the Ritz-Carlton Lake Tahoe. The irreplaceable hotel represents the third Ritz-Carlton-managed addition to our portfolio over the past few years, joining the Ritz-Carlton St. Thomas and the Ritz-Carlton Sarasota. The 170-room hotel contains nearly 15,000 square feet of indoor meeting space and a 17,000-square-foot spa and fitness center. This 5-diamond rated hotel boasts ski-in/ski-out access and offsite lake club on the shore of Lake Tahoe and access to snowboarding, skating, lake activities, biking and golf.

While we were already excited about this acquisition, the hotel's performance in January exceeded our expectations. Early season winter snowfall created very strong demand that led to significant RevPAR growth for the month over the prior year. Very strong occupancy premiums coupled with high rates on the tail end of the holiday season and over MLK weekend drove topline growth.

During 2019, we will continue to invest in our portfolio to -- in order to maintain competitiveness. In total, we estimate spending approximately $80 million to $90 million in capital expenditures during the year, exclusive of capital expenditures funded with insurance proceeds. These expenditures will be comprised predominantly of the completion of the Autograph conversions at our 2 Courtyard properties, the aforementioned upgrading of the Park Hyatt Beaver Creek and the strategic acceleration of capital projects at the Ritz-Carlton St. Thomas while the resort is under renovation.

Finally, we have identified highly accretive opportunities to add additional keys within our portfolio. Specifically, we will be adding 10 keys at the Ritz-Carlton Sarasota, 2 keys at the Hilton La Jolla Torrey Pines, and we're progressing work on the 3-key presidential villa at Bardessono, which is expected to be completed this summer.

Looking forward even further into 2020 and beyond, we would expect our capital expenditures to reduce significantly as our major repositionings will have been completed.

I will now hand it back over to Richard.

Thanks, Jeremy. While we are pleased with our fourth quarter and full year performance, we are even more energized about our prospects and potential growth in 2019. While industry forecast remain muted, our specific portfolio of investments should allow us to continue to drive material RevPAR growth and added profitability.

This concludes our prepared remarks. And we will now open the call up for Q&A.

(Operator Instructions) And we'll go first to Chris Woronka of Deutsche Bank.

Wanted to ask you about -- on the Ritz-Carlton. What kind of ramp up you expect once that reopens later this year? And can you still collect the BI insurance until it gets to your projected stabilized level?

Yes, this is Jeremy. I think what you would assume as it relates to the ramp-up insurance, I would assume that you don't put that in your numbers. We can continue to -- as it gets closer to the fourth quarter, when the Ritz-Carlton St. Thomas opens, maybe give you a little bit more insight on that. But I'd expect it to be a pretty quick ramp, personally. I mean, there's just been a lot of pent-up demand in the Virgin Islands. We're aware of -- as you may know through Ashford Inc., we have an investment called RED, which does some boating activities and watersports activities at the Westin St. John. And my understanding is that they had a great first month of being open and servicing that hotel. So there's been strong demand there. We've seen strong demand in the adjacent residences. And so with new product and folks that are just kind of eager to get back to the Virgin Islands, I'd anticipate it to ramp pretty quickly. So I would say, hopefully, we'd have a very strong first quarter of 2020, and you'd see some ramp in the fourth quarter. Hopefully, that answers your question?

Yes, yes, that's great color, Jeremy. And then just kind of similarly on the Autograph conversions. Are you able to kind of presell those yet as Autograph Collections or do you have to wait? Just trying to get a general sense for the cadence of how those are going to ramp looking out.

Yes, that's a great question. And the answer is really yes and no. Yes, it relates to group, we're definitely getting the sales team to quote higher rates for group pricing. But as it relates to transient, no, we cannot market it as an Autograph. We haven't even announced publicly what's the branding of each of those hotels. There's individual branding for each hotel at this point. But the Mayor will not allow us to market that as an Autograph to transient consumers until that completion is done. What I can say is we've done this before in trust portfolio with the conversion of the Crowne Plaza to Marriott Beverly Hills. And the ramp was very strong and relatively quick. So we hope that we'd see something very similar in these 2 conversions as well. Keep in mind that our average booking window for our guests is really 3 weeks out. So I would just assume it would take at least a couple months initially to at least start getting some better demand for the Autograph. But you would anticipate probably a full 6 months to a year to get the full ramp.

Okay. Very helpful. And just more of a strategic question now. I guess, you guys were -- have continued to be pretty active on the asset front. What's the capacity or maybe the appetite to do more to the extent you find these hotels and resorts that are fitting your criteria?

Yes. Thanks, Chris. It's Richard Stockton. So I think we have been pretty active on the acquisition front, as you said. And I think as we look to 2019, we're more likely to kind of digest those acquisitions and focus on our asset management initiatives. And we're definitely keeping ourselves apprised of the market, but we like where we are in terms of our leverage at the moment. And so we're going to be focused on, as Jeremy mentioned, the Autograph conversions, bringing the Ritz-Carlton St. Thomas back online. As you know, we've got 2 potential residential developments in Sarasota and also at Lake Tahoe. And so we focused on that. So I think that will be the -- really the majority of our focus for 2019 at least, and then come 2020, we'll assess where things are at that point.

We will go next to Jim Lykins of D.A. Davidson.

First thing I want to ask you is, and Richard just kind of fit on this at the very end, but at Tahoe, what the thinking is right now for the number of townhomes you might be developing, what the time line might look like? And then also same question, but for the potential villas at Sarasota?

Sure. So on Tahoe, we're currently about to kick off our kind of content design work. We've definitely done a lot of work on market feasibility. The plot of land that we have now was at one point entitled for up to 60 units, but that was more of a kind of a high-rise construct. And then there was another in Tahoe done for 14. We think the right answer is somewhere in between. What we want to build there is very high-end luxury townhomes at probably the highest price point that, that market has seen to really appeal to the wealth coming out of the San Francisco kind of Bay Area. Now in order to build in Tahoe, you do have somewhat of a limited construction season, given the weather. So I don't expect to be coming out of the ground before next winter. So we'll spend this year getting our architectural plans in place, et cetera, to be in a position to build not this coming summer, but the following. So we're still a couple of years away from seeing the fruits of that labor. But rest assured, we're working fiercely behind the scenes to prepare for that. In terms of Ritz-Carlton Sarasota, obviously, you can build anytime you like all year round and we've made a significant progress on our architectural planning and site planning there. And the hope there is to build approximately 60 villas, which we'll be able to start marketing at the, hopefully, end of this year. So there will be some activity on the site starting this summer on that project, but again, that's a project that you won't see it come to fruition for probably 2 to 3 years once we look at absorption rates and construction time tables and the like. But we'll continue to keep you updated on that.

So it's probably way too early then for you to offer any kind of estimates on how we might want to think about returns for this project?

Yes, that's right. I think, to be safe, you can assume returns in line with what we've been targeting to our hotel investments. Hopefully, we'd want to exceed that, but that would be -- just given our cost to capital, that would be a safe assumption.

Okay. And then also Jeremy's last comment about significant CapEx reductions, any comment -- or any color on how we might want to think about what significant might be in 2020 and beyond?

I don't think we're prepared to give guidance on that right now as we sit in the first quarter of 2019. That's typically something we'd do basically fourth quarter or first quarter of next year, probably fourth quarter of this year. But we're still kind of working through our capital plans. But I can tell you that we just are not going to have as much renovation activity than what you're going to see this year, especially from a CapEx perspective.

We will now take our next question from Michael Bellisario of Baird.

Just on that last comment on Sarasota, did I hear that correctly that you'd consider that an on-balance sheet project? And correct me if I'm wrong, but I thought the original view there was to have a third party take that risk?

Yes, as we looked at it, we realized that the capital outlay given that we can have construction financing in place for that project is quite minimal. And the time cost and disruption of bringing in some sort of a joint venture partner wouldn't necessarily make a lot of sense on -- given the size of the project. That said, the way these things are generally structured is you're essentially selling the land through a homebuilder, who is your merchant builder. And then they're going vertical with financing. So we're still working on all the details on that, but we're not at this point looking to bring in any sort of joint venture partner.

I guess, maybe a high level just from a risk profile structuring it this way, obviously, high risk I would think. But in terms of the amount of capital you'd have to keep on your balance sheet or deploy, it seems minimal given that it would be flipped to the homebuilders. Is that the right way to think about it?

That's right. Yes, I think the amount of capital that we have to put into the project's going to be not much more than our original land purchase price.

Got it. That makes sense. And then just high level on your underwriting and maybe looking back on the last few deals you've done, because you've focused on some seasonal resort that are pretty weather dependent. I guess, how do you account for that risk and then the inherent cash flow volatility in our underwriting? And how do you think about the risk premium that you associate to that cash flow profile for your particular assets, the resort, the higher end properties that are pretty weather dependent?

Yes. Yes. So in terms of forecasting weather, we don't try to do that. So when we do our underwriting, we look at primarily a 5-year forecast, which is essentially other than really the very near term kind of the average performance over that 5 years. So we don't have to necessarily figure out when we're going to have how much snowfall just not that -- for instance, we just have to know that we're going to have snow over the next 5 years. In terms of pricing the risk, you've mentioned we got some weather dependent, whether it's Sarasota or mountain resorts. You've seen how we've priced it. We've priced to a 10% unlevered return on these acquisitions with the benefit of ERFP program. We're at 12% on Tahoe. We think that's a significant enough premium to our weighted average cost of capital to accommodate that risk. So that's how we've done it.

Okay, that's helpful. And then maybe one for Jeremy. Maybe as best you can on a normalized basis, because I know there were a lot of moving pieces last year and in 2019 too, but what are you guys expecting for 2019 cost increases at the property level and then are you guys seeing any differences on the labor side or the cost pressure side between your resorts and then your urban hotels?

Yes. No, that's a great question. It's so market -- dependent on market-by-market. Certainly, we just went through -- you're probably familiar with the strike that happened in San Francisco, which impacted us in the fourth quarter at our Courtyard in San Francisco, which started on October 4 and lasted through December 6. And we reached agreement on that CBA. And I would say that the cost of benefits and wages over a 5-year time period for that hotel's about 4% to 5%. The -- Seattle's had a lot of cost pressures as well, so it will be another market that it would be kind of closer to that range. When it comes to the resort markets, it's maybe a little bit less about cost pressure and it's just more about just getting labor and good labor at some of those locations. So Tahoe is something that uses a lot of contract labor and it's fairly expensive, but I don't see a lot of cost pressures necessarily on a long-term basis there relative to maybe your Western markets that we have in the Braemar portfolio. Certainly, there is a lot of living-wages initiatives that you're familiar about that the industry is dealing with across the cross-country, but primarily in urban markets and West Coast-dominated markets.

(Operator Instructions) We will now go to Bryan Maher of B. Riley.

When it comes to the Courtyard conversions to Autograph, in 2019, and maybe this is a question for Jeremy, what are you thinking about in the way of disruption? Is it in level of magnitude similar to what we saw in 2018 so far? Is it going to be more or less what are your thoughts there?

Yes, I can give you -- let me break it down a little bit for you. We're going to have 2 floors out at -- let's talk about the quarter at Philly right now, 2 floors out for most of the first quarter and -- all of the first quarter and then most of the second quarter. So we're projecting to have the rooms done in early to mid-June if everything goes well. And returns are less than about call it 40 or so days per room. We'll be done with guestrooms and then it will be completely built out with the lobby and the restaurant. And right now we're looking at June, July for the public space. In terms of San Francisco, we have go-backs in the guestrooms, but were giving us very quick turns and we're doing it very selectively where we have availability. So our expectation is to have minimal room displacement throughout the year at Courtyard San Francisco. But there is going to be heavy disruption when it comes to the façade and the public space. I think we do, quite frankly, a really good job in our stealth renovation program to mask that off from the guests as best as possible. Certainly, it's going to limit the experience at the hotel, when you don't have as much public space available. But given the demand that we're seeing in San Francisco and particularly that heart of San Francisco, I'm hopeful that we really are not going to have a lot of disruption associated with the renovation in the Courtyard San Francisco.

And then moving on to the villa development projects, I just want to be clear, these are going to be what, townhomes that you're going to sell, they are not going to be villas added to hotel inventory. Is that correct?

Correct. Yes. I think we're hoping to entice the buyers into participation in a rental program if possible, and that is little bit subject to negotiation agreement with Ritz-Carlton. But the idea is to sell them.

Okay. And then just lastly from me, we're starting to hear some of the companies we cover who had hits from the hurricanes over the past couple of years seeing their insurance costs go up. Are you seeing something similar at Braemar?

We had a decent increase at the last renewal, which is already kind of reflected in the fourth quarter. Our renewal is June 1. And so given the recent hit that we had in terms of spike in insurance, we're hopeful that we're going to get out of this on this renewal with modest increases. But it's difficult to say. We're just right at that time where we're finalizing our strategy, we've got all of our packets together and are about ready to go-to-market. And so I think that certainly by the time we do our second quarter call, which it should be early May, we're going to have much more clarity on what we think that's going to be. Oh, yes, sorry, first quarter call in May is what I mean, but in the second quarter this year.

And we will now take a question from Tyler Batory of Janney Capital Markets.

So just a couple of follow-up questions from me. First, wanted to ask on supply. I think in the past you guys talked about 2% supply growth going forward. So is there any change to that. And could you also talk about some of your markets that have a little bit of outsized supply in 2019?

Yes. This is Jeremy, I can take that. We're right almost in line with it. If you look at the Smith Travel projections, it's just under 2% for the next 2 years. And that's revenue weighted for all the hotels and so we project it out for the next 2 years. And then in terms of markets, really for the first time we're not seeing a big outlier. It's pretty consistent, ranging from low 1% to maybe as high as just under 4%. The market with the most supply, and this was something that we factored into our underwriting, is Sarasota, and so we anticipated that. And in fact starting to -- a lot of it's already been absorbed. And so over the next 2 years, we're projecting 3% to 4% in Sarasota and that's the highest market.

Okay, got it. That's helpful. And then wanted to ask with other revenue on the income statement, obviously, that line item flat year-over-year, but you didn't have any BI running through that in the fourth quarter this year. So is there anything unusual that was driving that line item?

Let's see, you're looking at other hotel revenue, Tyler?

Yes. Yes.

It was relatively flat?

I don't know how much BI we actually booked in the fourth quarter of 2017.

You're asking why it was down so much or why we had BI in Q4 of last year, but not this year and why it was relatively flat?

Yes, yes, I just assumed that, that line item would have been down a little bit more just given you had, I think you had a decent amount last year in the fourth. Or maybe that's correct.

Yes. It's a combination of the addition of the Sarasota Ritz-Carlton, which we did not have in the fourth quarter of last year, and just lower -- less, I guess, higher revenue from the assets that were impacted that did not require BI.

Okay. That's what I figured, that it was the Sarasota impact. But just wanted to doublecheck on that. And maybe the last question from me, probably for Jeremy too, just when we look at Key West, obviously very strong RevPAR growth. The second half of '18, you had some favorable comps there just given the weather. I mean, everything pretty much back to normal there in the market as far as trends that you're seeing maybe into this year?

Yes, I think so. I mean, if you -- you got to go back to 2015 for when Key West more or less peaked. If you recall, in '16, we had a little bit of impact from Zika and then, obviously, '17 was Hurricane Irma. And so there is heavy impact actually over the last 2 years, and so we're starting to see that surge in demand come back to the market. And it's a market that we tend to be long-term bullish on given the fact that you're not going to see any new supply that comes into it. So I think it's safe to say that it's more of a normalized state going forward.

And with that, that does conclude today's question-and-answer session. I would like to turn the conference back over to management for closing remarks.

We'd like to thank you all for joining us on our Fourth Quarter Earnings Call this afternoon, and we look forward to speaking with you again next time. Thank you.

And with that, ladies and gentlemen, it does conclude today's call. We thank you, again, for your participation. You may now disconnect.