Hersha Hospitality Trust (HT) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Hersha Hospitality Trust Second Quarter 2018 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Greg Costa, Manager of Investor Relations. Please go ahead.

Thank you, Kate, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Second Quarter 2018 Conference Call. Today's call will be based on the second quarter 2018 earnings release, which was distributed yesterday afternoon.

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 positions to be materially different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

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

Good morning. And thank you for joining us on today's call. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

Market conditions were healthy again this quarter and marked a milestone for the lodging industry, 100 consecutive months of U.S.-wide RevPAR growth. That said, the rate of growth has been quite tepid for the last 3 years and particularly challenging for owners and operators in major urban gateway markets. But for several quarters now, our sector has seen and experiencing a notable rebound. In many major markets, new hotel supply, and even shadow supply, has peaked and is now decelerating; while macro-indicators like GDP, corporate profit and employment are accelerating.

Hersha had a strong quarter, capturing market share and margin in most of its geographic clusters. But our results were obscured by significant renovation programs at 5 hotels that slipped into the second quarter. Including these renovation disruptions, we grew comparable portfolio RevPAR by 1.9%. Despite the short-term drag, these long-term capital projects are high-return transformational projects that will meaningfully benefit the portfolio in the coming quarters and years ahead.

Excluding these renovation hotels, we drove comparable portfolio RevPAR growth of 3.5% and generated 39.8% EBITDA margins. For the second consecutive quarter, we are especially pleased by the results from Miami and New York. We generated RevPAR growth of 9.5% and 5.7% respectively. Strong demand fundamentals from business transient and leisure segments, along with less supply deliveries and more regulations curtailing home sharing, provide a very encouraging outlook for both markets.

Our performance was also driven by recently acquired hotels that continue to ramp up as we execute our business plan. Our 7 most recently acquired hotels average 7.2% RevPAR growth in the second quarter, which follows double-digit RevPAR growth for these same assets over the prior 2 quarters. As we look into the back half of 2018 and into 2019, we are encouraged by the growth profile of these newly acquired assets and the impact of our capital projects.

Let's take a deeper dive into our markets, beginning with South Florida, which reported 9.5% RevPAR growth in the second quarter, driven by 10.5% ADR growth. Miami continues to benefit from strong leisure and corporate travel trends, less new supply, waning Zika fears and continued growth of international travelers to the market. Second quarter booking data showed an 8% growth in travelers from Brazil to Miami and 13% growth from the United Kingdom. This follows double-digit growth from both origins to the Miami market during the first quarter.

Additionally, travelers from European countries are spending more despite the recent strength of the dollar, as travelers from the Netherlands, Germany, Italy and Spain were key contributors to increased international room revenue in the second quarter at our properties. Despite volatility in the dollar, geopolitical uncertainty and visa immigration constraints, international travel continues to be a secular tailwind for our markets.

The Ritz-Carlton Coconut Grove, our most recent acquisition in Miami, was once again our best-performing asset, achieving 19.7% RevPAR growth. This continued outperformance was driven by our ability to capture rate from the transient segment while driving more group volume, leading to 6.3% ADR growth and an occupancy increase of 771 basis points.

Ash will go into more detail on our CapEx projects. But we made significant progress at our 2 largest South Florida hotels during the second quarter. We received our Certificate of Occupancy at the Cadillac Hotel and Beach Club, and the hotel will open in the middle of the third quarter; while the Parrot Key Hotel and Villas, our second-largest asset in South Florida behind the Cadillac, is forecasted to reopen at the end of the third quarter. These hotels will open into a very strong market in the coming quarters, and the enhanced quality of both hotels will drive strong returns on these long-term investments.

Our New York City cluster continued to grow market share during the second quarter, with 5.7% RevPAR growth, driven by ADR growth of 4.1%, 149-basis point occupancy bump to 96%, and 300 basis points of EBITDA margin growth. We're also pleased with our team's outperformance in Manhattan this quarter, as our comparable Manhattan portfolio outperformed the Manhattan market by 180 basis points.

Our Hyatt Union Square, located in the heart of Silicon Alley, reported 5.1% RevPAR growth over the quarter. The hotel reported ADR increase of 4.4% to $386, benefitting from our established mix of leisure and corporate L&R. The performance of the hotel's restaurant and bar, Bowery Road, and The Library of Distilled Spirits, helped drive 840 basis points of margin growth.

Uptown, at our Hilton Garden Inn on 52nd Street, which experienced 10.5% RevPAR growth, we were able to drive rate without impeding occupancy, as the hotel grew ADR by 8.2% and ended the quarter with 204 basis points of occupancy growth to 97.35. And further downtown, our Hilton Garden Inn Tribeca was up 6.2% in RevPAR, underpinned by strength in our locally negotiated rate and corporate transient business.

At our Manhattan cluster, we saw continued visitation from international travelers during the second quarter, with increased revenue growth of roughly 20% at our properties from the segment. The largest revenue increase came from Chinese travelers, which nearly doubled their spend from the second quarter in 2017. Similar to last quarter, European travelers increased visitation and revenue contribution notably from those in Germany and France, which spent roughly 30% more on average year-over-year. The recent uptick in the Brazilian economy showed its strength, as Brazilian travel to our Manhattan properties grew by over 10% in the second quarter.

We have a lot of conviction in the long-term demand fundamentals of Manhattan. New York continues to attract, create and grow the businesses driving demand for the massive expansion of office space and public infrastructure in Manhattan. And fortunately, on the other hand, new hotel supply is clearly decelerating in Manhattan, and the continued removal of shadow room supply is another reason contributing to the New York City RevPAR recovery.

Last week, we received encouraging news regarding continued Airbnb regulation in major U.S. markets. Most notable was the newest measure in New York City enforcing state law that prohibits transient rentals of fewer than 30 days at a time without the host being present. Days before, San Diego City Council also approved a short-term rental ordinance, joining the likes of other major cities such as LA, San Francisco, Boston, Washington, DC; Philadelphia and Miami.

Our West Coast portfolio reported 4% RevPAR growth, driven by a 2.5% ADR increase to $238. Our best-performing asset on the West Coast was once again the Sanctuary Beach Resort. In the second quarter, the Sanctuary Beach Resort increased RevPAR by 11.2%, aided by 10.3% ADR growth to $337.

Following 2 years of ownership, we have successfully repositioned the business mix, attracting more midweek corporate business and enhancing our restaurant bar and event space. We're encouraged by the ramp of our restaurant, Salt Wood Kitchen & Oysterette, which is becoming a destination for locals and a draw for hotel and meeting guests.

Over the past several years, we've focused on acquiring hotels and growing innovation districts on the West Coast. This strategy is proving especially beneficial in Sunnyvale, in the heart of Silicon Valley; and in booming South Lake Union in Seattle. During the second quarter, our 2 Sunnyvale assets had combined weighted average RevPAR growth of 9.7%, driven by a steady mix of midweek corporate and transient demand.

At the Pan Pacific in Seattle, 10% RevPAR growth for the second quarter was primarily driven by ADR growth of 5.8% to $283. The Pan Pacific continues to stabilize and grow market share, outperforming the Seattle market RevPAR by 980 basis points in the second quarter. We see continued upside in rate and margins despite new supply in the market. Pace for the back half of the year looks equally strong, most notably in weekday group and corporate demand.

In Southern California, new hotel supply, weaker convention calendars and wage pressures made meaningful EBITDA growth difficult to record. But robust international contribution does provide a bright spot and tailwind in both San Diego and Los Angeles. San Diego continues to have double-digit international [employment] growth, and Los Angeles is growing in the high single digits off of an already high base.

The Boston market was challenged in the second quarter, as historically robust graduation weekends were not able to offset a weak convention calendar and the delivery of additional new hotel supply during the quarter. New select-service supply in Boston, Cambridge and adjacent markets is impacting our ability to drive RevPAR at the Courtyard Brookline and the Holiday Inn Express Cambridge.

Fortunately, we continue to benefit from ramp-up at our most recent acquisition in Boston, the Envoy Hotel, which registered RevPAR growth of 5.7% and ADR growth of 4.1%. We acquired the hotel 2 years ago with high expectations to drive meaningful rates, loyalty and food and beverage profitability, with its exceptionally located property in the heart of Boston's Seaport Innovation District.

Our thesis on this asset and submarket remains intact, with an increase in local corporate accounts driving L&R growth for the foreseeable future. During the second quarter, we also expanded the Lookout Rooftop Bar, which will increase capacity by nearly 50% and is forecasted to yield a substantial IRR on our investment.

Our Philadelphia portfolio was impacted by renovations for the second consecutive quarter, as both the Rittenhouse and the Hampton Inn Convention Center completed significant ROI-generating capital projects, upgrading rooms and public spaces. This year's convention calendar is soft for the city. However, we're expecting a 30% bump in citywide room nights in 2019 in Philadelphia. So we strategically timed our renovations to take advantage of this forecasted growth. Our Hampton Inn Philadelphia demonstrates the tailwind of renovations, generating 11.6% RevPAR growth for the quarter despite being partially disrupted.

Fundamentals in Philadelphia remain strong, with a growing technology and innovation sector downtown, in close proximity to our Weston and Rittenhouse assets. Leisure-oriented visitation remains on the rise, with 15 million of the reported 43.3 million people that visited in 2017 staying overnight for leisure purposes. Our international bookings in Philadelphia also continued to grow at a robust pace, as we reported double-digit growth in international contributions this quarter.

And finally, the Washington, DC market, which experienced another soft quarter and continues to be hampered by a weak convention calendar, sluggish government-related demand and new supply. Additionally, the last few quarters have shown a deceleration in lobbying on Capitol Hill, leading to less compression nights and resulting in lower occupancy.

However, there are pockets of strength, as we were able to drive 8.1% ADR growth at our St. Gregory Hotel, capturing high ADRs of bar and consortium guests. We utilized the first quarter to upgrade the rooms at this hotel, which should benefit the portfolio in the second half of 2018.

We also achieved significant growth in international revenue at the Hampton Inn and the Hilton Garden Inn Georgetown that bodes well for future quarters. And the outlook for the Ritz Georgetown is also improving in the third quarter. That being said, we anticipate the market softness to continue into the third quarter, as Microsoft hosted a convention last July that is now repeating. And demand will be hindered by both Jewish holidays falling in September.

Just outside of Washington, last quarter we acquired the Annapolis Waterfront Hotel on the Chesapeake Bay. We were able to purchase the asset at a very attractive basis and going-in yield and expect to improve the hotel's operations and pricing strategies in the coming years. And so far, we are pleased with our team's performance at the hotel. In our first quarter of ownership, we achieved 9.9% RevPAR growth, driven by an 814-basis point increase in occupancy.

Across the last several months, we have spent a lot of time meeting with both new and existing investors. After several years of disruptive renovations, wholesale capital recycling and challenged fundamentals, our strong returns year-to-date reflect our more clear free cash flow profile and improving investor sentiment.

Across the last several years, we've invested in some of the best-located hotels in the most thriving markets in the country. These properties are demonstrating excellent results today and will continue to drive portfolio results in the back half of 2018 and for several years to come.

In addition to newly acquired hotels, we upgraded over 20 of our hotels in 2017 and 2018, nearly 50% of our portfolio across the last 2 years. This will offer meaningful top line and margin growth opportunity for the portfolio for the remainder of the year and clearly into 2019; and, as always, our dedicated team of owners, operators and managers driving operational advantage in our core portfolio.

With this level of organic growth, we are not focused on acquisitions at this time. And in an effort to reduce leverage, we're also not active in the buyback market at this time.

With that, let me turn it over to Ash to discuss in more detail our capital expenditures, margin performance, and our updated guidance for the year.

Thank you, and good morning, everyone.

As Neil mentioned, we are entering the final stages of our significant ROI-generating capital projects and PIP refreshes, and we anticipate completion of the majority of these projects by the end of the third quarter. We spent approximately $30 million on these projects during the quarter, bringing our year-to-date total to roughly $57 million. We will expend approximately 90% of the $75 million of our forecasted 2018 allocated CapEx by the middle of the third quarter, allowing us to more clearly showcase our organic RevPAR and margin growth potential for the remainder of the year and into 2019. I will touch upon this in more detail when I discuss our margin performance in the second quarter and our guidance for the remainder of the year.

During the quarter, delays from renovations at several of our hotels resulted in nearly $1 million of EBITDA disruption from our internal forecast and had a significant impact on our margins. Excluding properties with ongoing renovations, our comparable-property EBITDA margins were very impressive at 39.8%, approximately 180 basis points higher than our disrupted-property EBITDA margin.

In Philadelphia, we completed significant guestrooms and public space renovations at the Rittenhouse and the Hampton Inn Convention Center; while in Washington, DC, upgrades to the guestrooms at St. Gregory also concluded during the second quarter. Additionally, we finished the majority of our work at the Mystic Marriott and the Hyatt House White Plains, where we added an additional 28 rooms.

The remainder of our project work is now focused in South Florida. And with that market continuing to show steady and sustainable growth, we are very eager for the opening of these assets.

Due to the uncertainty related to the collection of business interruption insurance, we had not built in any recovery into our guidance figures for 2018. In the second quarter, we collected approximately $6.4 million in BI proceeds for the Cadillac and Parrot Key Hotels, with the majority related to Parrot Key. We continue to negotiate with our insurance providers to recover additional proceeds at Parrot Key, but we have now concluded our claims negotiation at the Cadillac. So although we are pleased to oversee $6.4 million of BI insurance during the quarter, this pales in comparison to what we would've earned and what we anticipated to earn at these assets once they are open.

In 2015 and 2016, the last time we witnessed the sustained growth we are seeing today in South Florida, and the last time we had non-disrupted operating results for 12 consecutive months, our contribution from these assets was significantly higher than our forecasted BI recovery. During those years, we earned over $10.5 million in EBITDA in the first 2 quarters of each year from these hotels and averaged approximately $16.5 million in EBITDA at these assets for the full year. With the comprehensive rebranding of the Cadillac and upgrades at Parrot Key, we anticipate that these results will be easily dwarfed in future years.

Lastly, in South Florida, the Ritz-Carlton has also been executing a transformative renovation in 2018. Phase I of this renovation, the transformation of the bar and lounge to the Commodore was completed in the first quarter, while guestroom and public space renovations have been accelerated to the second half of 2018.

Let me shift over to the balance sheet before closing with our updated guidance for 2018. We maintained significant financial flexibility as we ended the quarter with $46.9 million in cash on hand and ample capacity on our $250 million line of credit. With the stabilization of operations and the collection of BI insurance, our dividend payout ratio is at our 50% payout target and one of the lowest in the sector, along with a solid fixed charge ratio.

With the continued ramp-up of our newly acquired assets, reopening of our South Florida assets and less CapEx spending in 2019 and 2020, we continue to target a leverage range of 4x to 5x debt to EBITDA. We believe this is attainable through organic EBITDA growth, debt pay-downs from free cash flow and calculated property sales across the next 2 years.

In conjunction with the acquisition of the Annapolis Waterfront Hotel, we entered into a $28 million mortgage loan at a floating interest rate of LIBOR plus 2.65%. We simultaneously entered into an interest rate hedge, capping LIBOR at 3.35%, which expires in May of 2021; while the loan matures in April of 2024.

I'll finish with our updated full year guidance for 2018, which we presented in the earnings release published yesterday. In addition to our second quarter operational results and collection of insurance proceeds, the primary changes to the guidance were driven by continued outperformance of our Manhattan portfolio, which registered 6.1% RevPAR growth during the quarter, outperforming the Manhattan market by 180 basis points. For the second consecutive quarter, we were able to successfully grow margins in our New York portfolio, aided by strong demand fundamentals and asset management initiatives implemented over the past several quarters.

Our New York City cluster also experienced EBITDA margin growth of 300 basis points in the quarter, helping to offset wage pressures in tight labor conditions. As Neil mentioned, our new F&B program at the Hyatt Union Square drove EBITDA margins of 840 basis points during the quarter, while the conversion of the Sheraton JFK to an independent allowed us to significantly drive margins at that hotel, which we anticipate will continue to boost our margin performance for our New York cluster in the foreseeable future.

The shift of Jewish holidays, a headwind in the third quarter, should prove to be a tailwind for the fourth quarter, which is a robust period for our portfolio, with notable business transient activity in October and November; and domestic and international leisure travelers ascending on Manhattan around the holidays.

Margin performance for our comparable portfolio over the remainder of the year is on pace to be significantly better than the first half. We are forecasting margin growth of 100 to 150 basis points, driven not only by our New York cluster but also from the strength in our West Coast cluster, bolstered by asset management initiatives at the Sanctuary Beach Hotel and the Pan Pacific. The Sanctuary continues to benefit from ramp-up in stabilization of the new Salt Wood Restaurant, leading to not only leaner margins for our hotel but increased visitation to the property by tourists and locals alike.

At the Pan Pacific, in many of our properties in innovation districts coast to coast, we've shifted our strategy mix to focus on locally negotiated corporate accounts to drive rate. We were successful in this initiative during the second quarter, as L&R grew over 50%, boosting our top line revenue, resulting in 500 basis points of margin growth.

Our Philadelphia cluster is also forecasting higher margins with the completion of renovation work and the stabilization of the Weston since our acquisition, which realized 240 basis points of margin growth in the second quarter. And we are now forecasting greater than 150 basis points in margin growth for the back half of the year at this asset.

I won't go into detail on all the numbers presented in our earnings release, but a few of the highlights include AFFO of $93 million to $98 million, AFFO per diluted share of $2.15 to $2.27 per share, and EBITDA to be in the range of $170 million to $175 million, with our EBITDA margin growth range moving up a full 50 basis points, where we're now looking at flat to up 50 basis points in margin performance for the full year.

So this concludes my portion of the call. And 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) The first question comes from Shaun Kelley of Bank of America. Please go ahead.

Maybe, Neil, if you guys could just give us a little bit more breakdown on maybe what you saw behavior-wise across kind of corporate transient during the quarter -- it's particularly important -- and just sort of how you think that's trending so far into Q3? That'd be really helpful.

Sure. Shaun, this is Neil, I'll get it started. Ash will jump in. On one hand, it's not all that surprising to us. Our expectations were starting to be set really by the third, fourth quarter of last year. A lot of the locally negotiated rate contracting is done towards the end of the year last year. And in that effort, we were able to get meaningful increases in rates. And then, across the last couple of quarters, we've actually seen real utilization of those rates. And that's a sign of, we believe, kind of the health of corporate America and just corporate travelers from around the world, and also just kind of increasing compression in markets generally. So corporations do have to kind of use their rate to get a room rather than shopping around last minute. So it's a function of both. But we do see that our corporate midweek business in most of our portfolio -- our portfolio is probably 65/35 kind of corporate leisure, and then at certain hotels that we have that have a lot of leisure. But primarily, most of our hotels are in central business districts that are really leveraged to kind of corporate transient travel. And we've had very strong performance in most of those markets and real kind of distinction in midweek performance versus weekend performance, in terms of the ability to move rate. So we're increasingly confident, and we're looking forward to it building further throughout the year. As you know, we do have kind of more expectations for higher RevPAR growth in the back half of this year. And so far, we have confidence around that.

And then, my second or other question would be on some of the buckets around renovation timing. So Ashish, you gave us some of the building blocks here in your comments around particularly what you're seeing in South Florida. When is the right time to think you guys will be at a run rate that could be equivalent back to, let's call it, the '15, '16 level? Can you be there by -- it sounds like Q3 these things come back online, Q4 has probably got some seasonality, given it's Florida. I mean, is Q1 the right time line to get to at least -- I mean, maybe not above where you were before, but getting back in line? Or do you need more than one season to get stabilization there?

I think to get stabilized, Shaun, I think we'd need more than one season. But these assets are assets that were operational for many years that we do have boots on the ground and a lot of local knowledge. So we think that we can hit the ground running starting in Q1. I think Q4 of this year will still be us ramping these assets back up.

Those are in reference to kind of these 2 South Florida hotels, the 2 big ones that will be opening: Cadillac by the end of August, and Parrot Key by the end of the third quarter. But all of the other renovation projects that we've been doing across this year, some of which slipped into this quarter -- but those [are] going to deliver significant kind of EBITDA growth now. Third quarter, we're starting to see that performance in those. So we will get benefit in the third and fourth quarter from all of the other CapEx projects that we've been busy on for the last year or so.

The next question comes from Michael Bellisario of Baird.

Just kind of sticking to the South Florida topic, how should we think about risks with those 2 properties that are still closed in terms of any further delays, costs that you might end up bearing; versus what might be covered with insurance? And has there been any change to your ramp-up expectations as you look out over 12, 18, 24 months?

I'll start with the Cadillac. There we have our TCO in hand. So at this point, we're just training employees and working with our researchers at Marriott to get our staff and systems up and running. So we see very little risk in opening that hotel by the end of August. With Parrot Key, it's been an uncertain project. It's a very big project, and it does have -- we are working on the seawall and some pretty significant kind of work that requires not only kind of city approvals but lots of other regulatory bodies. So there's some risk there that there's some slippage. But we at this time feel very confident about end of third quarter for that hotel. I think ramp-up for these hotels, September/October are not great months in Miami. But for the Cadillac, it'll be kind of a good time to kind of get practice. And then, I'm hoping for a pretty strong winter season in Miami generally. And the Cadillac does have -- as Ash [mentioned] before, we have a lot of boots on the ground. We have 2 other Autograph Collection hotels just down the road from the Cadillac. So we do believe that we're going to be able to ramp that one up very quickly. And Key West, starting in January, the season there is going to be so robust, and there's just so few hotel rooms there of the quality that we'll be delivering. We feel very confident about the ramp-up of that hotel as well.

And then, you mentioned not currently focusing on acquisitions. I think you mentioned that last quarter, too. How much of that shift is because you're not seeing attractive assets out there that you might be able to buy, versus really just kind of hunkering down and focusing on what you currently own, and getting the renovation completed with these 2 properties ramped up?

Admittedly, it is a combination of both. But right now, we just haven't seen anything in the marketplace that would prove so opportunistic to change course from what we've been planning to do this year, which was to harvest the efforts and gains that we've kind of created in this portfolio. Not gains, but kind of the growth profile of the portfolio. As you know, we have, with kind of our market insight and our proprietary kind of yield pipelines in many of our markets, we're always looking at opportunities. But we have yet to see anything that is compelling enough to consider for acquisition. We are sensitive to some investors' concerns around leverage levels. And so we are, we think at this time -- with the amount of organic growth that we have embedded in this portfolio, we believe that we can outperform most of the sector in growth rates without any additional acquisitions. And in so doing, we'll also be bringing down leverage meaningfully every quarter. And we think that, that story plays very well for creating great total returns for our shareholders.

The next question is from Jeff Donnelly of Wells Fargo.

Maybe similar to an earlier question about corporate transient on the group side -- can you just talk about how the production of, I guess, in the year for the year group has trended as we've moved through the year? I'm just wondering if maybe the catalyst that we've seen lifting corporate transient demand is also stimulating some short-term group activity for you guys as well. I know you're not a big group house, but I figure you do see it to some extent across many of your assets.

I mean, we've talked about a couple of them, right? Just kind of where we've really made a focus on trying to attract corporate group kind of business, like the Ritz-Carlton Coconut Grove, the Sanctuary Beach Resort -- those 2 hotels just kind of -- we can't point to a lot of data for our portfolio-wide. But in those hotels that we've been focused on that business, it is, we're finding -- it is delivering great returns. And so I do think that not only the corporate transient, but there is more increased corporate spending and investment pieces.

And maybe to switch plans -- Neil, you've kind of talked about doing $200 million of EBITDA, I think, by 2020. Can you update us maybe on progress initiative? And maybe, I guess, I'm thinking about the past to that earnings level -- does that contemplate any dispositions in the portfolio that you could use to reduce leverage?

Yes, it doesn't contemplate necessarily any meaningful kind of sales, or acquisitions, for that matter, to get there. We have a lot of confidence on $200 million by 2020, and we're clearly on track for that. These delays, some of these renovations, make the second quarter a little bit choppy. But by the end of this year, we think it's going to be a pretty clear path to that $200 million. We're always opportunistic with sales. And so if we get a very compelling inbound inquiry and bid on a particular asset, we may sell. And that can help us reduce leverage. But for reducing leverage, there's 3 big kind of drivers there that Ash mentioned in his prepared remarks. But there's a lot of disrupted EBITDA. We have all of that coming online in the coming quarter. We have the just free cash flow annually. The last 2 years, we've spent more capital in this portfolio, clearly, than we ever have in the past, averaging $60 million, $70 million a year. Our traditional run rate is $20 million a year, so that's an additional kind of $30 million of free cash flow that we can start to use to kind of pay down leverage each year. And so those 2 things across 2 years turn leverage, at least 2 times, in the right direction. And then, you throw in 1 or 2 opportunistic sales, and we're very squarely in the kind of -- our target 4x debt to EBITDA range. Sounded like a meandering answer. Did I answer what you asked?

You did, you did. And maybe just one last one, only because I think you just touched on it in your remarks, is -- there has been a little bit of an increase in regulation on short-term rentals in New York and some other markets. Certain other cities, like San Diego most recently, seem to be following suit. I'm just curious, I know that sort of the rise of Airbnb oftentimes is difficult to perceive the impacts. A lot of GMs and, I think, you guys, particularly in New York. So it was always hard to pinpoint the impact on the way up. Do you think that maybe that regulation has played some degree of a role going the other way, that maybe that's another way to sort of measure how impactful the short-term rental business has been on lodging? Or has it not been as easily pinpointed?

Yes, Jeff, we do think that -- and we've said it -- it was hard midweek to really pinpoint in our markets, especially a market like New York or Boston, that it was Airbnb because of our locations. But we believe that Airbnb and some of these home sharing platforms, the biggest impact they have is on the weekend leisure travel. And we are starting to see a little bit of that. But these regulations that recently went into effect often don't go into effect until, I think, January of '19. This new regulation from New York is January of '19. The past regulation went into effect last November. And we have seen it change. And it will -- if it follows something like San Francisco, where about a 1.5 years after it was enacted -- or, sorry, not a 1.5 years, 6 months after it was enacted, we've seen a 50% reduction in listings on Airbnb in San Francisco. I mean, Airbnb had to take all those off for themselves to comply with the law. So I think that it is potentially a good deal for a city like New York and a city like Boston.

The next question is from David Katz of Jefferies.

I wanted to just go back to the CapEx and make sure that we're thinking this through properly, particularly as we get into '19 and '20, because it obviously is a pivotal issue, and I know you've made some remarks about it already. But just doubling back on what a normal run rate of CapEx would look like in '19 or '20, irrespective of any new projects that would come up? And if you could sort of talk about what the prospects of any of those unforeseen new projects might look like, that'd be helpful as well.

Sure. David, we think our run rate for this portfolio is now in the $30 million range. When you look at the portfolio, there's some more full-service assets, there's some more select-service assets. So it's about, give or take, 5% of revenues is what we would look at for a normalized spend, which would get us in or around that $30 million range. We do take on, as you would imagine, some level of PIP work every year. So even next year, of course, we'll have a few projects. But the level of the -- the number of hotels that we would be refreshing and the dollars spent are going to be significantly lower than the $75 million that we anticipate spending this year.

So $30 million-plus a project here or there is the takeaway?

$30 million-plus in opportunistic ROI project here or there. The $30 million kind of covers all the PIPs and all the kind of potential work we'd be doing.

Correct.

So we're going into the year expecting around $30 million, and then we'll see if something comes up that requires or that warrants investment.

Correct. If I look at the -- and I heard your commentary around the 2020 EBITDA levels -- if I look at -- there aren't a ton of analysts, but if I look at consensus of estimates, it's materially lower than that $200 million level in 2020. What would be any potential obstacles or key issues and risks around that could stop you from getting to that level?

That's a good question, David. I think the risks to that would be kind of a macro change in the economy. We're not expecting, or we're not projecting, any kind of additional acceleration in the marketplace. But we are expecting kind of a steady, moderate pace of growth for the next several years, in that kind of 2% to 3% kind of GDP range. So something significant could change that. Where I think the investment community may not see it yet is just because there's been so many moving parts. And we sold nearly half of our portfolio, we acquired nearly half of our portfolio, and then we renovated the remaining core portfolio, half of it. And so it's just kind of the growth profile of those assets hasn't been as clear. Each quarter, I think it's becoming more clear as each project delivers. And each of the acquisitions that we've made across the last few years, we can demonstrate the amount of returns we're getting from them. I think there's -- we sold a lot of hotels at a 6 cap, and we acquired a lot of hotels that, going in, was a 6 cap. But they were hotels that we believed would stabilize in the high single-digit range. And that stabilization process has been going on for the last year or 2 and will continue for the next year. And so I think that's the disconnect. And I think we'll continue to close that disconnect every quarter as we deliver the projects. The hurricane at the end of the last year and the delays on the Cadillac and Parrot Key have just made it -- those are 2 very significant assets, 2 very large assets for us. And that's just made it harder, I think, to see forward without them delivering or being imminent.

The next question is from Anthony Powell of Barclays.

Could you talk more about the New York supply growth outlook? I know there's some talk about supply growth increasing in the back half of the year. Is that still the case? And how do you think supply world changes over the next 4 to 6 quarters?

On supply, this is a lighter year of supply. After the big years of supply, kind of 2014 to 2016, where it was averaging nearly 5%, we started significantly decelerating in 2017, where by the end of the year it fell at 2.6%. This year, our expectation for total year is 3% new supply growth. That will lead to a little more supply growth in 2019 that are just delays from '17, really. And so in 2019, we're currently expecting around 4% supply growth. And in 2020, we're also expecting kind of between 3% and 4% supply growth. And so now, 2021 is when we project us to get back down below historical levels of supply growth in Manhattan. So clearly, decelerating relative to 2014 to 2016. But for the next several years, it's going to bounce around this 3% to 4% range.

And just going to the RevPAR performance, there's been some noise around holiday shifts and whatnot impacting both second quarter performance and the outlook. How did the monthly RevPAR numbers trend relative to your expectations, April, May, June, and so far in July? And if you could exclude kind of renovation impact, that'd be great.

Sure. Anthony, for New York, we did see a fairly weak April because of the Easter shift into March, where a lot of markets benefit from Easter shifting. New York, because of the leisure activity, does see a decline in business. May was exceptionally strong for the city, and June was very good as well. And we think some of the push in June was because July 4th falls on Wednesday, and we're expecting the first couple of weeks of July. So second quarter did get the benefit of sort of a lot of business moving into June. We think third quarter for New York, as I mentioned in my remarks, is affected by July being a little weaker because of the holiday, as well as Rosh Hashanah coinciding with Fashion Week and Yom Kippur coinciding with the UNGA. So that should benefit Q4, and we are seeing very solid numbers for Q4 for New York.

And for the entire portfolio, is that July third quarter dynamic similar, or are there any kind of different things going on for the things outside of New York?

I think July is pretty much portfolio-wide. But then, August and September are not as much of an impact for the rest of the portfolio.

Just one more for me, on DC -- it sounds like some of these things like less lobbying and supply growth are more medium- or longer-term challenges. Has your view of that market changed at all as a big part of your portfolio? And if there are any other markets that you see that could be challenged, what would those be, and would you consider maybe selling some of those assets?

We have conviction long term in all of the markets that we're in today. We've selected these markets to be areas that we do business, as we believe in their long-term and residual value for land and real estate, in addition to the hotel markets in those markets. And so we think that Washington has phenomenal real estate value. It's going through a period and an administration that just is not helping travel today. We think that, that will rebound over time. DC has never had the kind of spikes of growth that other markets have had, but it has more stability and a little less volatility. And so as part of our portfolio at kind of 15% of our EBITDA, we think it's a strong part of the portfolio. We're always open to sales, when we're finding that we can get a price that fully values the long-term value creation that a property might offer. But at this time, we're not actively considering it, we're just focusing on trying to drive better results and win market share. And there are some signs of some change. There's some legislation right now in the Senate about the per diem structure that's really been impactful for not only Washington, DC but for Southern California, for Department of Defense travel. So there's some things that can change. We're just going through a period where it's a little bit tougher. As we look across our other markets, I think it's going to be -- Philadelphia, we're going to have a couple of great quarters ahead. We have a strong convention calendar next year. But there is a lot of new supply hitting the market also in 2019 and 2020. So there will be -- I think DC and Philadelphia will be our lower-growth markets across the next couple of years. But we believe in their long-term potential, long-term or even midterm potential, to be very strong producers in 3 years from now. Boston as a marketplace, it's a phenomenal marketplace from so many different kind of parts. It's attracting a lot of leisure travel, international leisure travel. The corporate market there and the technology-driven innovation market for health care, biotech, as well as more traditional technology companies, is significant. We have new world headquarters moving there. The market's doing great. That said, 2019 does have a tough convention calendar in Boston. And we will have some new supply in Boston in 2019 and 2020. So it's going to be a more challenging market than it may have been for the last few years. But we think of it as a moderate growth market in our portfolio. And then, New York, Miami and the West Coast we continue to believe will be able to show very high single-digit kind of growth.

The next question is from Bill Crow of Raymond James.

Just a couple of follow-ups on the topics already that have surfaced. CapEx spend -- you indicated that 5% revenues is the right number. And I'm just wondering how much inflation in the cost of doing the FF&E work you're seeing both in labor and materials, and whether 5% is really going to be the right number going forward.

Because our properties are – 2 things about our portfolio, I think, are very unique. One is that it's the youngest portfolio of hotels, at least in the public marketplace. These are on average 5- to 7-year-old hotels. And so they just have less capital requirements than an older hotel might. And so that gives us confidence around the 5% number. Second, most of our hotels are still rooms-oriented operations. Even our lifestyle hotels and hotels that have prominence in well-known bars and restaurants, they're still deriving 80%-plus of their revenue from the rooms' side of the business. And so our CapEx dollars are going into areas that guests are seeing. And so I've always expected a lot of our capital expenditures to have real ROI, because our guests are seeing it, and we can charge more for it. There has been a lot of inflation in construction, particularly in new build kind of construction and steel and concrete, and in drywall, and all of those areas, lumber. And there has been a lot of -- in FF&E and the like, the cost hasn't been so much of a problem, because there has been -- there's just so many more vendors for FF&E around the world, but it's just delays. And it's hard to quantify those delays. But they've led to some of what you've seen in our portfolio across the last quarter or 2. It leads to disruptions, and it's hard to value those disruptions. But we do believe 5% is sufficient. For as much as there's some escalation in some costs, we are also starting to see some real ADR growth opportunities. And so I think we can match inflation on both sides for the sake of PIPs and things that we're talking about here.

And then you talked about ADR, I wanted to go to RevPAR. And just maybe it'd be helpful if you told us what your RevPAR forecast was to get to the $200 million by 2020 thesis.

I don't know if we should share that just yet, just because I don't have it in front of me, first off, Bill. But we're not providing guidance for 2019, let alone 2020. But I think that's something that's not that hard to see the EBITDA profile. Sometimes with RevPAR -- we're not driving this with a RevPAR assumption, we're driving it with individual business plans and the EBITDA that we're expecting to generate from each of them. But as contextual, it's kind of 3% to 4% kind of RevPAR environment.

Yes, it feels like --

Like 2.5% to 3.5% probably for national, and then depends on the market.

(Operator Instructions) The next question comes from Chris Woronka of Deutsche Bank.

Want to ask you, on the BI claims, I guess, for Parrot Key, do you expect to actually get more? I know you can't really -- can't record it or can't really maybe give formal guidance on it, but what's the disconnect between what that thing earned in '15-'16 versus what you've collected so far?

Yes, absolutely, Chris. Look, our negotiations are not complete by any means at Parrot Key. They are now finished at Cadillac. We are hoping to get more. But there is a fairly large delay in capturing funds. So we've captured a portion of the funds for '17 and '18, but certainly not through today. And our negotiations continue. These claims could easily go into the back half of '18 or even into '19. It took us roughly a 1.5 years to close out the claims on Hurricane Sandy. So the disconnect is the insurance companies are effectively -- they have a mandate to pay out as little as they can. And our mandate is to recover as much as we can. And that's it. It's a pure negotiation.

Fair enough. Just wanted to maybe get a little bit more color on the locally negotiated rate strategy that you guys have mentioned. Is something that you think is unique? Is that a driver of market share for you? And then, how does that kind of relate to maybe the broader strategy to try to shift away from low-rate OTA channels?

Look, the industry all uses locally negotiated rates. I think we may have pivoted to making it our kind of primary segment for most of our hotels, maybe a little earlier than others. But it is something that all of our peers and all operators are leveraging. I think having the kinds of hotels that we have, and being kind of built to today's tastes and preferences, does make it -- we're able to do locally negotiated rates, still kind of premium levels, pricing and things. But it is a big part of our strategy and how we're revenue-managing our assets. We have smaller boxes than most of our peers. So we're not as focused on the group business or on selling kind of last-minute kind of inventory. And we like to compress the building with locally negotiated rates from corporate business in our neighborhoods, and then work on other transient segments after that.

Yes, Chris, I can add just a little more color there. It's just a part of our distribution strategy. And when you open up different kinds of inventory, we notice different open windows in different markets. And we are seeing even L&R and corporate transient is booking in tighter and tighter windows. But when you can see demand building in the market, well, we might have worse case numbers in the market in the last year, but that may be very much by design. Because we're holding inventory open, not trying to pace up, because we feel that the demand on them is different in the current year than it was a year ago. So it is probably -- I imagine all the folks in the sector, through their asset management programs, have different ways they view distribution strategy. I think we look at it very, very granularly. We think it gives us a very strong competitive advantage. But it is varied case by case. And it's not even cluster by cluster, it is asset by asset. As Neil mentioned, I think you can take a look at mix at each hotel in a particular market and see sort of subtle nuances on how you time opening and closing of channels.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Great, thank you.

With no more questions, we'd like to take a moment to thank all of you for your time this morning. And as always, feel free to call Jay, Ash or I if you have any further questions today or in the future. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.