Hersha Hospitality Trust (HT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Q3 2017 Conference Call and Webcast. As a reminder, ladies and gentlemen, today's call is being recorded.

At this time, I'd like to turn the conference over to Bennett Thomas, Senior Vice President of Finance and Sustainability.

Thank you, Keith, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Third Quarter 2017 Conference Call. Today's call will be based on the third quarter 2017 earnings release, which was distributed yesterday evening.

Prior to proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial position to be materially different from any future results, performance or financial position. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer.

Thank you, Bennett, and good morning to all of you on today's call. Joining me this morning are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

The operating environment was challenging in the third quarter, with notable market-wide headwinds, including the holiday shift from October to December, limited activity on Capitol Hill and Philadelphia facing a difficult comp with the DNC in Q3 2016. All of these items kept a cap on RevPAR growth for the quarter, which was then exacerbated by significant disruption to our South Florida portfolio by Hurricane Irma. Strength in leisure demand at many of our hotels was unable to offset the lackluster business transient activity in late August and September. And as we have discussed in prior quarters, wage and property tax growth erodes margins without at least 2% to 3% top line growth. So it was a tough quarter. But as we will discuss, we do not believe this is a trend, just a very stormy quarter.

Let's begin with Hurricane Irma's impact on our South Florida portfolio. Mandated evacuations were put in place as of September 6, leading to closures of each of our 6 hotels in the region. The Winter Haven, the Blue Moon and the Residence Inn and Ritz-Carlton in Coconut Grove reopened and began accepting reservations by September 25. Although 4 of our 6 properties resumed operations within about 3 weeks, near-term performance has been materially impacted by the closure of our 2 largest hotels in South Florida: the Cadillac in Miami Beach and the Parrot Key Resort in Key West.

Prior to Hurricane Irma, Hersha had commenced a major redevelopment project at the Cadillac Hotel and Beach Club, transforming the property from a Courtyard into an Autograph Collection hotel. The $25 million renovation will update the guestrooms, lobby and meeting spaces as well as bring in a new farm-to-table concept restaurant. Due to storm-related damage at the property and the expanded scope of restoration and renovation, we've decided to now keep this property closed through the transformation. We expect to relaunch the Cadillac Hotel and Beach Club towards the end of the first quarter of 2018.

In Key West, the Parrot Key Hotel & Resort experienced limited structural damage as a result of Hurricane Irma. However, water penetration in many guestrooms requires extensive remediation, which will take the property off-line for the majority of the fourth quarter. We are considering accelerating more meaningful renovations originally forecasted for 2019 if we do not see strength in Key West in the first quarter.

Currently, our hotels in Coconut Grove are experiencing some uptick in occupancy related to the ongoing recovery, but the Miami Beach submarket remains weak 6 weeks after the storm as leisure travelers haven't returned in force. We have great conviction in South Florida's longer-term fundamentals and feel very good about our locations and hotels, not to mention our cost bases. The current dislocation in South Florida allows us to focus on meaningful capital projects at the Cadillac, Parrot Key and the Ritz-Carlton and position our portfolio for growth in 2018, as Miami benefits from the opening of the convention center, a weaker U.S. dollar for international travel and a recovery in business and social groups that avoided Miami due to Zika in 2017. In addition, South Florida may prove an attractive alternative to the resort destinations in Puerto Rico, U.S. Virgin Islands and other areas of the Caribbean that will be off-line for several years.

Shifting now to our portfolio and submarket performance. During the third quarter, our comparable portfolio delivered 2% RevPAR decline. If we exclude the Philadelphia market, which hosted the Democratic National Convention in third quarter 2016, our comparable portfolio reported 70 basis points of RevPAR growth to $217.14 during the quarter. RevPAR growth, however, did not keep pace with escalating wage growth and rising operating expenses as hotel EBITDA margins for the comparable portfolio decreased 240 basis points. A combination of the South Florida and the Philadelphia cluster had over 100 basis point impact on our portfolio-wide margins for the quarter.

Ash will focus on margins in his comments, but for now, let's take a deeper dive into our markets, starting on the West Coast. Our West Cost portfolio consists of 8 hotels from Seattle to San Diego and reported RevPAR growth of 2.3%, driven by a 3.9% ADR increase to $247.12 and contributed $11 million to our comparable EBITDA. Our West Coast portfolio reported GOP and hotel EBITDA margins of 51.6% and 40.7%, respectively, in the third quarter.

In the third quarter, GOP margins, excluding the Sanctuary Beach resort, which underwent a complete restaurant and event space renovation, increased 130 basis points to 53.2% as a result of strong flow-through of 191%. Our recently acquired hotels delivered strong growth. In Santa Monica, we saw a continued success of the recently acquired Ambrose Hotel, which grew RevPAR by 4.3%. During the quarter, the Ambrose was able to leverage midweek L&R business and weekend summer leisure demand. While also implementing a strategic focus on the business traveler, corporate groups, which were strong in the third quarter, will remain a key focus of growth for the Ambrose, along with driving occupancy over the weekend.

In Seattle, 2.1% RevPAR growth for the third quarter was primarily driven by an ADR increase of 8.6%. Occupancy for the quarter fell 570 basis points as demand was hampered by the July 4 holiday falling on a Tuesday, which negatively impacted performance. Additionally, a flagship Microsoft event was moved from Seattle to Vegas in 2017. But we've achieved significant ADR growth since acquiring the Pan Pacific, growing 10.9% and 8.6%, respectively, in the second and third quarters of this year. This has been achieved by remixing our business mix or segmentation, strategically shifting mix while maintaining L&R relationships in the market. The L&R base allows us to yield into higher-rated bar and consortia segment. The Pan Pacific's ADR rank increased from 3 out of 6 to 2 out of 6 in the third quarter year-over-year; and the RevPAR ranking moved to 1 out of 6 in our comp set. Since taking ownership, HT has also redesigned the labor model to achieve year-over-year savings and continues to see significant margin expansion opportunities as the hotel stabilizes in our portfolio. Year-to-date, the Pan Pacific has seen 13.3% EBITDA margin growth and 16% RevPAR growth, nearly 550 basis points above the comp set.

Despite strong performance at several of our hotels, we experienced weakness in business transient demand at several of our Courtyard hotels in Sunnyvale, Los Angeles and San Diego; similar to our other business-oriented hotels in other markets, late August and September underperformed our expectations. We believe the calendar shift and perhaps a chilling effect on travel during the natural disasters drove this softness. October performance to-date is quite encouraging in each of these hotels and gives us more confidence for the fourth quarter and for 2018 for our West Coast portfolio.

In the third quarter, we also repositioned the Sanctuary Beach Hotel's bar and restaurant with the launch of Salt Wood Kitchen & Oysterette. The hotel's newly developed restaurant and event spaces anchor the property as a seaside farmhouse for the Monterey Bay Area. Saltwood offers corporate accounts in Silicon Valley and San Francisco a midweek coastal retreat and further enhances this destination wedding market. The renovation is complete, but some unforeseen delays in construction led to more displacement than expected in the third quarter.

Our 7 high-quality Manhattan properties registered a 1.7% RevPAR growth to $243 during the period, outperforming the Manhattan market by 280 basis points. Our portfolio has outperformed the Manhattan market in 13 of the previous 15 quarters as a result of a young, well-located and purpose-built hotel cluster and our dynamic revenue management strategy. However, as we've discussed in the past, without meaningful ADR growth, it is hard to avoid margin erosion in the face of increased labor costs as a result of the increase in minimum wage rates. While the overall operating environment in New York remains challenging, demand continues to meet new supply coming into the market, and demand for the city is on the rise, with forecasted growth in demand in 2017 of 5.7% and 7% in 2018. We are forecasting supply growth of less than 3% for 2017 and 2018. As demand begins to overshadow supply, we are confident our portfolio can continue to deliver exceptional occupancy, 96% this quarter, while finally being able to drive rate. Trailing 12-month ADR is 13% below the 2008 prior peak. We believe 2018 will be the first of many years of ADR growth in New York City.

Our Boston portfolio continues to benefit from the ramp at our recently acquired Envoy Hotel, which registered RevPAR growth of 7% as group demand for the third quarter was substantial, with the addition of 2 citywide conventions over the period. We continue to implement a more proactive e-commerce strategy to take advantage of Boston's fastest-growing district, which contains such demand generators as GE, Vertex Pharmaceuticals and Amazon. We remain encouraged by our progress in service delivery, revenue management and in driving profitability from the relaunch of the Rooftop Bar and OUTLOOK Restaurant. The strong performance at the Envoy was needed to offset significant weakness in corporate travel at the Boxer, the Brookline Courtyard and the Express Cambridge. Boston will benefit from 7 citywide conventions in the fourth quarter and will return to being one of our highest growth markets but was flat for the third quarter.

In Washington, D.C., the third quarter was weighed down by a lack of lobbying activity on Capitol Hill as Congress was not in session for a majority of September this year versus 2016. Transient demand, notably from the government, was significantly lower, leading to a year-over-year decline in occupancy and rate. However, early signs point to growth rebounding in the fourth quarter, notably with Congress in session during November compared to their absence last year due to the presidential elections. In addition, citywide convention pace is stronger for the fourth quarter compared to 2016.

HT's Philadelphia portfolio faced a very tough comparable, with Philadelphia hosting the Democratic National Convention during the third quarter of 2016. Despite this difficult comparison, we are pleased to see that visitation remained strong in the quarter, with our Philadelphia Westin and Hampton Inn Convention Center posting greater than 80% occupancy. Our RevPAR was down across the cluster by over 18% due to significantly lower ADR without the group compression. Future pace is strong, and we expect solid growth year-over-year for the fourth quarter with the return of the Army-Navy game to the city beginning in December. The 2018 and 2019 convention calendars are more robust than previous years, and we continue to be very pleased with our recent purchase of the Philadelphia Westin and its integration with the Rittenhouse and the Hampton Inn in this great city.

A few comments on capital allocation before turning it over to Ash. Faced with a decelerating growth environment in the lodging sector since 2015, we began a transformative recycling of our portfolio. We sold older, mature hotels and reinvested gains in higher-quality hotels in higher-growth markets with a greater opportunity to drive EBITDA growth in the coming years. This process is complete and will pay big dividends in even a moderate growth environment.

Across the last several years, we've also repurchased nearly 20% of our shares outstanding. We are opportunistic in our approach. This quarter, we were able to repurchase $4.7 million of stock at an average price of $17.93. We consider opportunities to purchase our existing portfolio at a 20% to 30% discount to private market value as very attractive, but balance buybacks with ROI-oriented investments in our existing portfolio. This year, we've been very focused on several meaningful capital projects that position the portfolio for significant growth in 2018 and 2019. In addition to the transformation of the Cadillac, our new restaurants, bars and event spaces at the Hyatt Union Square, the Sanctuary Beach Resort, the St. Gregory in Washington, D.C. and the Ritz-Carlton Coconut Grove will lead to meaningful EBITDA growth in 2018 and 2019.

We believe we are very well positioned to outperform in our submarkets and remain nimble in our approach to property and portfolio strategy. We continue to witness strong U.S. and global economic growth, increasing corporate profits and investments, full employment and a strong leisure demand. And as we look into 2018, there are several reasons to be bullish about corporate travel, a weakening dollar for international travel and improving supply and demand fundamentals in many of our markets. So despite a stormy quarter and a challenging year overall, we remain confident in the EBITDA growth profile and the value of the portfolio we have assembled.

With that, let me turn it over to Ash for a deeper dive into margins and the balance sheet before we open it up to questions.

Thank you, Neil, and good morning. My comments will focus primarily on our EBITDA margin, CapEx spend, recent refinancings and our updated guidance for full year 2017.

Our comparable portfolio realized overall occupancy of 87.2% during the third quarter, our highest occupancy quarter of the year. The third quarter, however, is also our highest leisure mixed quarter, and only the month of September has any meaningful business transient activity. Neil highlighted the numerous onetime items and calendar shift, and our comparable portfolio realized 240 basis points of margin loss, largely due to these nonrecurring events. The Philadelphia and South Florida clusters recognized EBITDA margin losses of 740 and 960 basis points, respectively, which significantly impacted our portfolio-wide margins. Excluding these 2 markets, we saw margins deteriorate 130 basis points, which was primarily the effect of onetime property reassessments following the acquisition of our Courtyard Sunnyvale and Ambrose in Santa Monica, in addition to higher wage expense due to increases in the minimum wage. We have and continue to work closely with our operating partners to implement expense controls and revenue management strategies as we face the combination of tepid RevPAR growth and increasing wage pressure across all of our markets. Our franchise model and close relationship with our primary operator allows us to quickly realign our staffing model and restructure our personnel across various departments, including sales, revenue management, accounting and engineering to maximize the benefits of our clustering strategy. As the lodging industry continues further along in this cycle, we view our ability to react quickly to market conditions and cost pressures essential to drive EBITDA growth at our assets.

Shifting over to capital expenditures. We spent approximately $10.9 million in CapEx in development projects during the third quarter. Our largest project during the period was at the Cadillac Miami Beach, where we began transitioning the hotel from a Courtyard into an Autograph Collection hotel. As previously disclosed, we will keep the hotel fully closed to devote our focus on this renovation. We continue to anticipate spending between $50 million to $52 million in CapEx and ROI projects in 2017. And our hurdle rates for these ROI projects were in the mid- to high-teens, which is in line with our historical returns on these type of investments.

In transition to our balance sheet now, where we ended the third quarter with $57.5 million in cash on hand, we made significant progress strengthening our balance sheet and extending out the duration of our debt. During the quarter, we closed on a new $475 million senior unsecured credit facility that is expandable to $875 million. The facility consists of a $250 million senior unsecured revolving line of credit and a $225 million senior unsecured term loan. The company utilized the term loan to refinance existing indebtedness of approximately $210.5 million on the previous credit facility and for general corporate purposes. We also refinanced our property-level debt on the Courtyard Los Angeles during the quarter.

Following the refinancing, 68% of the company's consolidated debt is fixed, while total consolidated debt had a weighted average interest rate of approximately 3.78%. In addition, we have extended out the weighted average life-to-maturity on our debt to 4.4 years and have no significant debt maturities until 2020. We continue to target debt to EBITDA in the range of 4 to 5x and remain very comfortable with our leverage target, given our portfolio's growth trajectory, cash flow profile and coverage metrics.

Lastly, let me talk -- let me discuss our updated guidance for the year. We have updated our guidance and adjust -- and we've adjusted our guidance following the significant disruption to our South Florida portfolio and the anticipated closure of the Cadillac and Parrot Key hotels for the reminder of 2017. We continue to forecast that our South Florida portfolio will recognize EBITDA deterioration of $7 million in 2017 from our pre-Irma expectations. Although we encountered a difficult operating environment in the third quarter, we are encouraged by our fourth quarter results to date. For the month of October, we're seeing strong growth in the majority of our core markets, including the West Coast, Boston, Washington, D.C. and Philadelphia, where we are seeing mid- to high single-digit growth and comparable portfolio RevPAR growth approaching the mid-single-digits for the month. We're raising our overall view on RevPAR growth to 1% to 2% while lowering EBITDA margin expectations to 125 to 175 basis points of deterioration due to disruption in South Florida. Margins, excluding South Florida, are still expected to be in the range of flat to down 100 basis points. We are, however, decreasing our FFO per share guidance to be between $2.06 and $2.15 per share and adjusted EBITDA between $162 million and $166 million to account for the weakness in the third quarter as well as the loss of EBITDA in South Florida.

So that concludes my portion of the call. Operator, we can now proceed to Q&A, where Jay, Neil and I are happy to address any questions that you may have.

(Operator Instructions) We'll take our first question from Anthony Powell with Barclays.

Given some of the RevPAR challenges you've seen, and -- have you -- focusing more on growing some of your non-room revenues like food and beverages, I know you renovated some of your restaurants in your portfolio, can you do a bit more of that across the portfolio over the next couple of years?

Anthony, this is Neil. We did launch a couple of efforts -- about 4 efforts on the restaurant and bar side this year. There are a couple more opportunities that we're exploring and planning for next year as well, so we do think that there's -- particularly in our independent hotels and in our -- even in our branded lifestyle hotels, there's real opportunity to drive more EBITDA from these A+ locations. We have, in some cases, the opportunity to create a little bit of street-front retail at one of our leading properties in Boston. We have the opportunity and the plans in motion for a new restaurant in the Ritz-Carlton in Georgetown. And so there's opportunities in 2019 as well, but we're -- or in 2018 as well, but we feel very good about the 4 that we embarked on this year and are starting to deliver real profits. And it's a different margin profile than the room side of the business, but whole dollar profit, we're looking to food beverage and the kind of pop-up events that we are hosting at a lot of our properties to drive incremental EBITDA.

Got it. And you mentioned the supply outlook in New York and how you expect it to moderate over the next couple of years. Can you just go over your overall supply outlook for your portfolio overall over the next few years? And do you expect supply to increase or decrease -- supply growth to increase or decrease?

Yes. In New York, we see a clear kind of deceleration in supply growth. We've -- we are at less than 3% supply growth in 2017 and 2018 in New York. This is coming off of years of 5% and 6% supply growth. So New York, which is a meaningful market for us, significant deceleration in supply growth in the coming couple of years. In several of our other markets, we're in between kind of 2.5% and 3.5% supply growth. There are some outliers like Seattle, where we're seeing an elevated level of supply growth, again, fortunately met by tremendous demand growth. But we are -- we look at supply in most of our markets to be relatively stable relative to 2017, so in that 2.5% to 3.5% level.

We'll take our next question from Michael Bellisario with Baird.

You mentioned the potential Parrot Key renovation early next year. As you guys look at potentially doing that, what are the key indicators that you're going to look at to decide whether or not to go forward with that project? And then, what might the scope of that project be in the first half of the year?

Michael, we're -- we did sustain a lot of damage from water penetration at the hotel. The hotel is waterfront, and we had significant storm surges and flooding in the first floor guestrooms. The second floor guestrooms also were impacted by water penetration through the balconies and terraces. And so there, on the first floor, we have already embarked on kind of restoration and remediation and renovations of that floor rooms -- or all of our first floor rooms. The second floor rooms, we can approach more tactically. It's not a wholesale kind of ripping out of everything there. Absolutely required, but we are still in the process of judging each room on that second floor of our hotel to see what is absolutely required versus what would be nice to have. And there is not a kind of clear indicator, but it's kind of how much there are hotels open on Key West and to see how airlift continues to develop across the next couple of quarters and to see how much real kind of leisure demand there is in the market. There's been a couple of big events in Key West last weekend and coming up this weekend. There is visitation, but currently, it's significantly less than prior years. The hotels that are open and operating are primarily serving first responders and the like. We think that Key West will recover. This is a highly unique and highly sought-after destination across the U.S. and for international travelers. And it is the closest way to be in the Caribbean without being in the Caribbean, so we think it has some benefits from that. But I think that Key West is a small market. It's 100% leisure kind of market, and so it could take 3 to 6 months to really recover. We're just -- it's just a little too early to tell, Michael, how far we will go, but we are likely to do more work than we would have otherwise on other parts of the resort in the first quarter of the year.

And then, in terms of the cost of that, how much of that could be recouped through business interruption insurance proceeds? Or that would be additional out-of-pocket spend for you?

We think a significant amount would be recouped. And that is a driver just as much of -- as the weakness in that submarket right now in leading us to explore this acceleration of the project.

Understood. And then, circling back to acquisitions and dispositions. You mentioned briefly, anything incremental going forward, are those kind of the back burner now? Is that how you're thinking about it with all the renovation and rebuilding work that's going on within your portfolio? Or is it just, you're not seeing a lot of opportunities in the market right now and that's why there's more of a pause?

Yes, we're not seeing great opportunities out in the marketplace. We remain active in the transaction market in terms of underwriting opportunities and looking at things, particularly in our existing markets, more in adjacent markets. But we haven't seen anything that's compelling as of yet. A lot of our acquisitions across the last 2 to 3 years were the redeployment of the gains from significant sales. As we look forward across the coming year, we're not expecting nearly the level of sales activity, which is one driver for making new investments for us and to do acquisitions. There are a handful of hotels. There's small hotels but not a lot of significant EBITDA generation but kind of our extended stay hotels in suburban Washington, D.C. and a limited service hotel in -- outside of New York City that we are exploring for sale. And we could have some sales in the coming quarter or 2. We may be interested to redeploy the gains and proceeds from that in additional acquisition if there is compelling opportunities in the marketplace. Right now, we don't have anything to share on either disposition or acquisition.

Got it. And then, last one for me, just on New York City. Maybe can you characterize your revenue management strategy? And how defensive are you being? And is that leading to all the market share gain that you guys have realized over the last few quarters?

Yes, we are being defensive to a certain degree. Never know whether to call it defense or offense, but it's just -- it's being dynamic and being highly responsive. We had a quarter earlier this year where our strategy didn't pay off as well. This quarter, it's working very well. We did go with more of an occupancy-driven strategy, we grouped up. We took more government business than we have in years and found that, that was the way to create real growth in the marketplace in the third quarter. Our hotels are exceptional, too, in New York. These are newly built hotels in prime corners, in the best submarkets in Manhattan. So having category-killing brands, purpose-built hotels and having the advantage of our cluster management, there's real economies of scale, scope and a real information advantage we have in revenue management in operating our hotels and being able to outperform.

We'll take our next question from Bryan Maher with FBR Capital Markets.

Just a couple of quick questions. On the labor side, aside from minimum wage increases, can you kind of quantify what you're seeing kind of across your portfolio? And are you seeing any actual worker shortages?

This is Ashish. We are seeing just higher labor attrition and the need to paid higher wages because whether it's housekeeping, front desk or any other position, there is effectively a shortage on -- in most of these markets for that type of labor. So putting additional cost pressure on the hotels in addition to minimum wage is the tight labor market, which is seemingly getting tighter with some of the governmental policies that are in place as well. It's hard to quantify exactly like how much more we're paying for that, but there are hotels in the portfolio where we have increased wage rates due to the high level of attrition and difficulty in finding labor.

Okay. And then, on Zika down in South Florida. I mean, with the hurricane and all that's going on down there, is that just becoming an increasing nonevent? Or is there some still lingering impact on -- from Zika?

No. That is a nonevent at this stage. Zika did not reappear this summer or early fall pre-hurricane, and so there have been no occurrences. And it's -- and the hurricane and everything else that's happened since has probably put a lot of distance and kind of time and kind of noise between the current crisis and the last crisis. But we don't believe that there is any significant Zika impact left in the marketplace. It had such a significant impact on both corporate group travel, financial services and the like, and on social group business, weddings and the like. As you'll remember, the fourth quarter and the first quarter -- the fourth quarter of 2016 and the first quarter of 2017, were off in the double digits, close to 20% in some submarkets. That will provide an easier comp for Miami in 2018.

And then just lastly, so you're converting the Cadillac Courtyard to an Autograph, and you have some other independent hotels in the portfolio. How do you think about or analyze the prospect of converting any of your other independents to one of the soft brands?

This is Jay. I think with the Cadillac, there, I think the conversion was not necessarily from an independent to a soft brand. We were a hard-brand courtyard, and we -- there, the analysis suggests that with the ADR increases, that we'll be able to manage through a conversion, the additional F&B. And banquet and catering revenues will be able to generate there, but it made a lot of sense. We kind of take an IRR approach to any capital that we spend. And in that case, I think when you consider -- even without taking up the terminal value of the hotel significantly, but just putting it within even like the midpoint or the lower point of the range of full-service hotels, I think we decided that there, that just the additional yield and cash flow that we'll be able to get justified the -- the IRR justified the capital investment. Now I think taking an independent hotel and converting it to a soft brand, I think that analysis would kind of takes into -- you have to take into account how many rooms the hotel has, the supply/demand fundamentals of the marketplace. And there, you would judge whether or not the soft brand franchise royalties, marketing fees would justify the additional demand that you'll be able to drive. I think normally, all of our independent hotels to date, we've been very specific in where we do independent hotels and where we kind of run that execution, and they're in high-demand markets. So most of our independent hotels, I don't think are necessarily great candidates for a conversion to a soft brand. But it's almost a case-by-case basis. But those are some of the elements that we think about when we're considering repositioning a hotel.

We'll take our next question from Chris Woronka, Deutsche Bank.

I wanted to revisit the Manhattan for just a second, if we could. You mentioned, you've shifted revenue management strategies a few times this year, and the question is really on the wage front and margins. As you look forward, does there come a point where, if Manhattan does not return to rate growth, it starts to become a much more significant drag on your margins?

I think when it comes to Manhattan -- Chris, this is Jay. Manhattan, when you take a look at Manhattan's demand dynamics, but even when you look at 2017 where -- it's been a challenging operating environment, you've got a 5.7% demand growth. So in 2018, we're expecting it to be north of 6%. So despite all of the supply -- it's just a matter -- there's an element of absorbing supply. When you're in a market that has the kind of demand growth that Manhattan does, I think you've got to hold tight and you kind of determine your strategy based on where things are at that moment in time. As Neil mentioned, we have actually grouped up and have more of a rate-driven -- an occupancy-driven strategy today because there's no rate really to be had. Like until the new supply that's come in, in this current year and the year before is absorbed and you can start driving rate again, which we expect will happen in '18 and '19, you kind of have to -- you go with the heads in beds for the time being because without that, you'll have no growth at all. I think with not having the occupancy strategy right now is not going to yield more rate. It's not -- when you have this much supply coming in and everybody is kind of starting with introductory rates, et cetera, et cetera, you're going to have a hard time driving that incremental ADR that creates the flow-through that leads to margin growth. So I think as we look out into '18 and '19, we're starting to see supply moderate. And even if supply growth doesn't go to 0 or get below 2% in a market like New York where you've got 4% to 6% demand growth, you still should be able to make some hay in the coming years, and that's what we are staying very focused on. But the revenue management strategy is something that -- we take a look at that on a weekly basis. And you kind of measure demand trends against the traction you're getting on rate. So I feel pretty confident in New York. We've been there for a really long time. As you know, our basis is very good there, so we're doing quite well from a return on asset standpoint. But I think the rate, when it comes back, is going to be pretty strong just based on the demand profiles of the city. It's one of the strongest demand growth markets in the entire country still, despite the supply.

Great. And then on top Florida, there's obviously a lot of moving pieces there for you guys and for everyone else that operates there. But the question is kind of how -- is there anything you can point to if you look out to next year, pluses and minuses? Is there any kind of firm advanced bookings or groups that make you feel confident that the debt market can actually come back? I know the comp is easy, but sometimes the comp gets easier, so is there anything you firm you can point to?

With our portfolio, we're just -- we're not that group heavy of a portfolio. So we're not going to be able to point anything in our portfolio to give us that confidence. But it's more anecdotal. It's seeing more group events at some of the bigger-box hotels around Miami Beach that will help compress some of the other hotels in the marketplace. It's -- the easier comps were a function of a significant crisis with Zika. And some of the other kind of metrics you can look at, there is less new supply in Miami Beach than in prior years. So that has some benefit. The convention center is going to reopen towards the end of this year. Their convention calendar gets very busy in 2019, but end of 2018, they have some bookings on the books. So as you get towards the end of the year, you can probably find good data on group. But in the next couple of quarters, it is a little bit more anecdotal.

And, Chris, if it's helpful, I can just share some supply/demand stats like on Miami. In 2017, the market had supply growth of about 4.8%, and we had demand growth of 4.3%. So you had sort of a negative supply/demand delta. But in 2018, supply growth is expected to moderate to 3.4%, but demand growth is going to be about 6.1% when you take a consensus average on outlooks for the market. So you've got a positive delta there of 2.7%. So I think Miami, despite the fact that the convention center will just be ramping up, and I think as we look deeper into 2018, Miami, I think, we'll get some good pricing traction there. Demand is strong. Occupancy remains very strong throughout this entire period.

We'll go next to Bill Crow with Raymond James.

I want to touch on the labor topic and a couple of questions. In Key West, it seemed like more damage was done in some of the other Keys besides Key West. And a lot of damage was done to workforce housing, to use a term we use around here. I'm just curious what the prospects are for labor coming back in sufficient quantities to be able to staff your hotels.

Bill, that is a concern. We've been in touch with all of our key members at our hotel. And there's, I'd say, 30% or 1/3 of them are still outside of the market today and staying elsewhere with friends and family or who are just relocated temporarily. And so there -- that is a concern as we get closer to reopening the hotel. That said, there is a lot of activity right now and restoration activity going on, so you're probably at the worst point of it today, like where you see all of the trash and debris from all of the cleanup of all of these homes and workforce housing apartments that's being done on the sides of the roads. But the work is being done quickly. There's a lot of resources that the state of Florida and FEMA have put to it. And so we do think that by the first quarter of next year, there will be accommodations available, and there's going to be hotels that will probably play in that market as well. You'll remember back at -- after -- post Sandy in New York City, a lot of the hotels did provide dislocated kind of folks in New York with hotel offerings, and the government paid something close to a per diem on them. And so, I think you'll see that a bit as well. It is so that we're concerned about and it's on our mind, but we don't have great clarity on at this moment.

Sticking with labor and other cost increases, what sort of RevPAR do you need in New York to offset the expense growth you anticipate next year?

Bill, this is Ashish. I think we continue to look at RevPAR growth being between 2% and 3% to really break even on margins to offset labor.

Even in New York? In New York, specifically? Okay. And then finally, you talked about the flexibility of being able to shift workers from one role to the other, and that is a great ability you guys have, but that is also -- that would be threatened, I guess, by any unionization. I'm just wondering if you could give us an update on any efforts that UNITE HERE is making to become a bigger force with your portfolio?

We -- Bill, this is Jay. We haven't had any -- I don't know that we have heard or seen or detected any unionization activity. I think is -- as we mentioned before, in Manhattan, particularly, we're fortunate we've got a lot of hotels that don't have broad food and beverage and B&C, banquet and catering, work, which is, I think, really -- that's sort of the playground for collective bargaining. That being said, I will tell you we are generally owners that have nonunion operations, but we do have a handful of union operations. And when we do have those, we've been able to negotiate pretty attractive terms in terms of cross-utilization of associates and other work rules, minimum -- I think, what the minimum period is on shifts rather than being 8 hours, it being 4 hours. And some of these work rules, that's really where the -- I think that's where the vulnerability is for a lot of hotels. But having had that experience, not that collective bargaining wouldn't -- something we avoid. We don't think we need it with our associates. We generally take pretty good care of them. I think the culture at the properties is very strong, and we have good leaders there. But if it were to come down to it, these are certain things that you have to really be on the lookout for when you're entering into these collective bargaining agreements. I think a lot of the times, everyone thinks of a collective bargaining agreement almost as -- in a commoditized way, that it is you're either union or nonunion. But I think even in a union environment, I think we can make some -- you can have very specific provisions that help address the needs of the union at that point and that of the hotel owner. But again, this is not to say anything other than the fact that we are familiar with collective bargaining, but we are very fortunate that we haven't had to deal with it much.

Bill, I would just mention, our wage growth is part of the strategy. We have always been -- pay and benefits very similar to the union in the markets that we operate in. And so you see our wage growth increasing across the last year or 2, and we feel that that's what keeps, in the end of the day, our employees and team members very happy to work directly with an owner that's providing them similar compensation without any other fees being deducted from it.

We'll take our next question from Anthony Powell with Barclays.

Just one more for me. You mentioned that some of your Courtyards underperformed your expectations in the quarter. Was that just due to the market sort of [being described as] being weak? Or was there anything else going on with that brand? And could you also give us a review of your brands and earning brands underperforming or outperforming relative to your expectations right now?

Not at all, Anthony. I mentioned them by name just because they were the most business-oriented hotels in our kind of West Coast marketplace. So we had weakness in Sunnyvale and Los Angeles and in San Diego and because those hotels were very business transient-oriented. And the weakness that we saw in the late August and early September was something that we saw at a lot of our business-oriented hotels, Courtyard, particularly in urban markets, is the kind of category killer for business travelers. And so we felt the pain there. But we are big believers in the Courtyard brand and expect them to recover quite well in the fourth quarter even. Everything we've seen in October from Courtyards on the West Coast or even in Boston and other markets is very encouraging for the fourth quarter. In terms of our brand mix, we are -- have -- we continue to have a pretty balanced portfolio, but we have most of our branded hotels are with Marriott and Hilton. We have some IHG and Hyatt-branded assets as well; and we have 20% of the portfolio EBITDA is generated from purely independent hotels. And that mix is one that we feel very comfortable with. It depends on the location, the size of the asset and the quality and profile of the hotel in the public's mind that leads us to go with various brands or going independent. But we continue to be very pleased with our brand partners.

Will take our next question from Shaun Kelley, Bank of America.

This is [Jardish] on for Shaun. I wanted to touch on Washington, D.C. You mentioned October has been pretty strong, but looking to November and December, there's been some commentary on tough comps from lapping business travel around the election last year. So I wanted to get your views on the market for the balance of Q4 and into 2018.

In the fourth quarter, October is -- has been developing well and with some growth in the marketplace. November, we think we are going to benefit from Congress being in session unlike last year. So if December holds together as we expect, we -- we're expecting it to be a strong quarter in the fourth quarter. As we look into 2018, obviously the first quarter is going to be a significantly tough comp with the inauguration the prior year. But the outlook for the convention calendar for the remainder of the year in 2018 is also good. And so we're expecting the market to be a moderate growth market for us in 2018.

That's helpful. And just looking at Philadelphia, wondering if you can provide an update just sort of on the supply/demand dynamics there as well as how your recently acquired Westin is ramping relative to expectations.

The supply in Philadelphia, we had a -- it's been kind of a challenging environment in Philadelphia from a RevPAR standpoint. Very little demand growth. We had supply growth this year of about 5.5%. And the supply numbers for Philadelphia, it encompasses beyond Center City. But when you look at Center City, it's actually pretty concentrated supply deliveries next year. That being said, I think in Philadelphia, we're very fortunate to have invested in assets that are first-to-fill assets. And so, though we don't expect a lot of pricing traction in the market in the coming year, I think we don't expect that we're going to have the impact of the supply that hotels in the locations are going to have. The Philadelphia Westin is sort of the primary business transient location in the city. It's located in the Liberty complex, which is a mixed-use facility that has adjacency with almost 2 million square feet of office and retail, restaurants, and it's in the center of town, and it is sort of the business destination. Rittenhouse has its very unique position around Rittenhouse Square, and in the next year we will see the opening of the Four Seasons. In some ways, we're actually looking forward to 180- to 200-room Four Seasons opening, and we hope that it opens next year. It gives us another peer comp at a high rate. Sometimes it's difficult that a luxury property like the Rittenhouse -- we exceed our comp set in that city by 30% to 40% when it comes to ADR, and it'll be helpful to have another strong ADR property in the city. Their location is pretty good. It's not the Rittenhouse location, but certainly a B+, A- location. So I think they will be able to drive very strong rates. Their investment in that hotel at over $1 million a key would suggest that they have to drive pretty strong rates in order to avoid a complete disaster of an investment for them. So I think it's going to be -- I think they're going to hold rate even if they don't get [OCC]. So the supply in Philadelphia is concerning. It happens to be our home market. We know the dynamics here very well. And as I mentioned before, we've invested in the A+ locations, both for corporate transient and luxury. So we're a little less concerned about the negative impact of supply. That being said, we haven't underwritten nor do we forecast significant ADR growth here for the coming year. But I think we're going to be able to hold pretty firm with our positioning where it is today.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to the company for any additional or closing remarks.

I think that does it. We are -- Jay, Ash and I and Bennett will all be here and available for any follow-up questions that anyone may have. In the meantime, we'll continue to keep it work and continue to get through this year. Thank you.

Ladies and gentlemen, this concludes today's discussion. We appreciate your participation.