Hersha Hospitality Trust (HT) 2018 Q3 法說會逐字稿

Good day, and welcome to the Hersha Hospitality Trust Third Quarter 2018 Conference Call. (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, Nicole, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Third Quarter 2018 Conference Call. Today's call will be based on the third 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 President and Chief Operating Officer. Neil, you may begin.

Thank you, Greg. 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.

Despite the capital market's volatility, lodging fundamentals continued their upward trajectory last quarter, as the majority of our clusters produced notable RevPAR growth. Our growth was driven by the performance of our newer assets and those that underwent significant renovation activity over the past 12 months.

Comparable portfolio results were impacted by significant weakness in the D.C. market, calendar shifts as well as the unforeseen dislocation from Hurricane Florence. If we exclude our Washington, D.C. cluster, our portfolio grew RevPAR by 3.4% and margins by 110 basis points, both at the high end of our guidance range, showcasing our ability to outperform markets on the top line and operate efficiently in a low-growth environment.

We do expect continued weakness in Washington through the end of the fourth quarter, and along with delays in the Cadillac and Parrot Key opening this year, lead us to bring in our fourth quarter outlook.

But as we've discussed before, the results of our wholesale portfolio recycling and capital investment program will be evident as our capital projects complete. Hurricane Irma led to 2 quarters of delay. We are now 1 quarter away from an easier story.

During our second quarter call, we discussed our goal of $200 million of EBITDA for our portfolio by 2020. Our conviction to achieve this goal remains steadfast. And in addition to our stabilized portfolio's growth, our bridge to $200 million is supported by 3 drivers: first, the reopening of our 2 South Florida assets damaged by Hurricane Irma; two, the completion of the substantial CapEx projects we executed on in 2018; and three, the ramp up of our recent acquisitions.

During the quarter, we made progress on all 3 fronts and look forward to having a transformed portfolio with our full suite of hotels back on line by the end of the year.

In the third quarter, we successfully opened our Cadillac Hotel & Beach Club, which we transformed from a Courtyard to an Autograph Collection Hotel. We opened less than 2 months ago, and our teams have delivered an exceptional product, a first-class asset on Miami Beach that, as of this writing, holds the #1 TripAdvisor rating out of 214 hotels on Miami Beach.

In Key West, we're in the final stages of our extensive renovation of the Parrot Key Hotel & Villas as 50% of the rooms will be available on November 1, and the hotel and restaurant fully open in December.

The second driver is our ROI projects, where we allocated significant capital to repositioning a number of our high-potential, high-value hotels. Ash will go into more detail on our CapEx spend. But in summary, all major renovations are on pace to be completed by the end of this year. Our last remaining ROI project to be finished is at the Ritz-Carlton Coconut Grove, which we accelerated to this year due to robust demand fundamentals on the horizon in the submarket. This project too will be completed by the holidays.

Our final building block to $200 million of EBITDA is the ramp-up of our recent acquisitions. Across the last 3 years, we acquired hotels in high-growth submarkets, but also focused on either recently built hotels with ramp up to go or those hotels where we could meaningfully improve operations once we were in control. We continue to execute our business plan at these properties, which have averaged high-single to low-double-digit RevPAR growth in each of the prior few quarters.

During the third quarter, the hotels we acquired since June 2016 produced a weighted average RevPAR growth of 6.5% and margin growth of 239 basis points. As we look towards 2019, we are encouraged by the growth profile and the operational advantage implemented at these newly acquired assets to drive meaningful EBITDA growth for our portfolio.

Now let's take a deeper dive into our markets, starting right here in Philadelphia. Our Philadelphia portfolio was our best-performing cluster during the third quarter, increasing RevPAR by 10.2%, primarily driven by ADR growth of 9.4%, a function of increased visitation to the city from both corporate and leisure customers. Our outperformance this quarter was led by 2 of the premier hotels in the city, the Rittenhouse and the Philadelphia Westin. The Rittenhouse received a full room refresh during the first half of 2018 and was our best-performing asset in Philadelphia, recording 17.4% RevPAR growth. We were able to drive visitation to the hotel without sacrificing rate, growing occupancy by 613 basis points while increasing ADR by 7.4% to $428.

Outperformance was driven by demand from both group and transient customers, while also generating revenue from our restaurants and bars.

At the Philadelphia Westin, we continued the rate-driven initiative we established since our purchase during the second quarter of 2017. RevPAR growth of 7.9% was driven by 6% ADR growth during the quarter as our revenue management strategies continue to drive results at this asset.

Performance at these hotels reinforced our hometown thesis. Philadelphia's growing technology and innovation sector downtown, its continued success in drawing domestic and international leisure and our resurging convention center are all driving impressive fundamental growth in the market. 2019 is shaping up to be an historic calendar year for Philadelphia, highlighted by a very strong convention calendar with nearly 2x the number of citywides over 2,000 room nights, continued strength in the corporate and healthcare sectors and growth in international demand with several new nonstop flights to Europe and the U.K. added in the last quarter.

The Rittenhouse and the Philadelphia Westin often get the accolades, but we're also looking forward to robust performance from our newly refreshed Hampton Inn Convention Center in a robust Q4 this year and through 2019.

Boston was also able to rebound in the third quarter, posting ADR growth of 4.3%, which led to 5% RevPAR growth. The Boxer was our best-performing Boston asset during the period, generating 9% RevPAR growth with a few TD Garden events occurring in July and citywide compression over Labor Day. Our most recent acquisition in Boston, The Envoy, continued to outperform the market and generated 6.9% RevPAR growth, driving both rate and occupancy. The revenue management initiatives we established after we purchased the hotel 2 years ago were fruitful again this quarter, growing margins by 360 basis points to 46% on continued success at our Outlook Restaurant and the Lookout Bar.

The expansion of the Lookout Rooftop Bar was completed during the latter part of the summer and has already yielded margin growth for The Envoy.

Both The Boxer and The Envoy were named top 10 hotels in Boston by Condé Nast traveler. Boston has a good Q4 ahead, but a softer convention calendar on the docket in 2019. Fortunately, the city has cemented itself this cycle as one of the leading innovation markets in the country with world-class universities, top-rated hospitals and a huge R&D tech sector. This has led to a rapid expansion of corporate footprints in such areas as the Seaport and in Cambridge, 2 locations proximate to our hotels. We remain very confident in Boston's demand fundamentals for years to come.

Our West Coast portfolio reported 2.8% RevPAR growth, driven by a 3.3% ADR increase to $255. Our best-performing asset on the West Coast and across our portfolio during the third quarter was the Sanctuary Beach Resort, which increased RevPAR by 23.2% aided by 19.7% ADR growth to $433. We were able to capitalize on overlapping events in the area, such as the Continental grand prix and the jazz festival, allowing us to push rate in September.

Demand also stemmed from the reopening of the Pacific Coast Highway near Big Sur coming in 3 months ahead of schedule and during the peak travel months for domestic and foreign travelers.

We recently upgraded the Sanctuary's pool and landscaping as well as the welcome gatehouse, known as The Lodge, which now includes a full lobby and a bar, spa treatment rooms and an innovative boardroom. This renovation came on the heels of the opening of Salt Wood Kitchen & Oysterette earlier this year. Our farm-to-table seafood offering has been very successful since inception. The restaurant and bar have become a destination for hotel guests and the Monterey community and is helping us to attract corporate retreats from Silicon Valley and weekend getaways from San Francisco.

Our innovation districts on the West Coast continue to yield mid-to-high single-digit RevPAR growth as our 2 Sunnyvale hotels, The Courtyard and the TownePlace Suites, registered combined weighted average RevPAR growth of 8.3% in the third quarter, driven by a steady mix of midweek corporate and transient demand.

Apple and Google are our biggest demand generators. And in the midst of corporate RFP season, it looks like we can find low-to-mid single-digit growth.

At the Pan Pacific in Seattle, 5.9% RevPAR growth was primarily driven by continued strong weekday group and corporate demand. Our thesis when we purchased this asset in 2017 was to focus on margin growth as the market absorbs elevated supply. And we were successful again this quarter, increasing margins by 460 basis points to 36.2%.

Seattle is a remarkable market. It's our newest market, but we have increasing conviction in its short-, medium- and long-term future. And our hotel's unique location and prominent high-quality position provides a lot of flexibility and opportunity to drive rate growth as Seattle matures.

In Southern California, new supply in Los Angeles weighed on our Courtyard Westside. However, strong weekday demand at the Ambrose in Silicon Beach helped to push rate 2.3% higher and grow occupancy close to 92%. October continues to pace well.

In San Diego, we are forecasting a strong fourth quarter at the Courtyard downtown with 2 significant citywides taking place. San Diego, like Seattle and Philadelphia, also benefits from its increasing international profile as international nonstop airlift continues to grow. Building on 2 years of remarkably strong growth in the West Coast, we continue to see opportunity for ADR growth in our portfolio. After some significant operational changes in Los Angeles and Santa Barbara, we look forward to positive contributions next year.

Our corporate RFP process in Silicon Valley is going well so far. The West Coast should contribute more growth in Q4, and we have a positive outlook for 2019.

Our New York City cluster continued to capture market share during the third quarter with 2% RevPAR growth, a 114 basis-point occupancy bump to almost 97% and 350 basis points of EBITDA margin growth.

Our Hyatt Union Square, located in the heart of Silicon Alley, continues to be a top performing asset in our portfolio, recording 3.5% RevPAR growth for the quarter by yielding our mix of corporate [L&R] and profitable leisure segments.

In the face of holiday shifts clearly impacting demand patterns in New York, the market still performed relatively well, showcasing its depth. Demand has clearly been strong as evidenced by occupancy in our cluster, but rate growth remained difficult this quarter in New York. New supply across the last 5 years in New York has limited ADR growth, which -- with much of the new supply branded limited service further limiting rate growth. And today, we remain nearly 15% below 2008 ADR levels in New York.

But as we begin to benefit from decelerating supply growth, we expect more rate-driven RevPAR growth in the coming years. Hotel development has clearly slowed in New York, and recent M1 zoning regulations will limit growth even more than construction costs and financing already have.

Encouraging regulatory enforcement targeting Airbnb has meaningfully reduced the shadow supply inventory in New York as well.

A few more words on demand in New York. The domestic and international leisure customer has been very reliable in New York this cycle. The technology and innovation sectors grew fast in New York since the start of this cycle. And more recently, life sciences have been driving new office development and corporate demand. But financial services, the bedrock of prior New York cycles, has had only a tepid recovery until recently. We believe positive dynamics for banks and other sectors in New York in 2018 and 2019 will help drive ADR higher.

Finally, our -- not finally, but second to last, our South Florida portfolio reported 3.4% RevPAR decline due to a difficult post-hurricane calendar comparison in September, a few nonrecurring citywides like the MLB All-Star Game in Miami as well as a last -- as well as a lack of last-minute bookings to the market surrounding Hurricane Florence and even some concerns around the red tide. The third quarter is always the weakest for South Florida with leisure demand dissipating in August and September as schools kick start the new academic year, but this year saw even less demand with the reopening of assets in South Florida and the Caribbean that were closed for Hurricane Irma. Our Residence Inn Coconut Grove was affected most by the aforementioned demand inhibitors, combined with a slowdown in short-term group pickup in September compared to last year.

The fourth quarter will be challenging in South Florida, facing a difficult comp when our portfolio grew RevPAR by 22.5% in Q4 2017.

The Residence Inn Coconut Grove and the Autograph Hotels in South Beach, in particular, really were able to leverage the construction groups in the market. That said, Miami continues to benefit from strong leisure and corporate travel trends, less new supply and the reopening of the convention center. Most importantly, our 2 largest EBITDA-generating assets in the market will ramp up in Q4 to deliver meaningful EBITDA in January -- in the January to April high season.

The Washington, D.C. market experienced another soft quarter, hampered by a weak convention calendar, new supply and sluggish results from traditional demand generators in the region. Adding to this, our properties saw a significant impact from Hurricane Florence during the middle of September as our portfolio RevPAR fell over 27% from the same week in 2017. This came in an environment of less compression with less lobbying on Capitol Hill, the holiday calendar limiting the number of times Congress was in session and a weak convention calendar.

The fourth quarter will remain challenging as midterm elections will yield less activity on the Hill, coupled with an even softer convention calendar. Our independent hotels have held up better in Washington as the Capitol Hill Hotel outperformed the comp set in the third quarter. The St. Gregory is ramping in a challenging time for the market, but its forward outlook is solid. But our 2 largest EBITDA producers, The Hilton Garden Inn and The Hampton Inn, have been significantly impacted by too much select service supply in DC.

The past 12 months have been disruptive to our portfolio with hurricane-related closures and significant capital projects undertaken to position ourselves for the future. These are now complete and our focus turns to realizing the embedded growth in our highly differentiated, high-quality portfolio. We upgraded 20 hotels across the last 2 years that will offer meaningful top line and margin growth opportunity for the portfolio for the remainder of the year and well into 2019.

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 over the foreseeable future. With less CapEx spending and disruptions moving forward and less acquisitions and dispositions, we look forward to a rather simple ramp-up story ahead.

The volatility in stock price and even short-term STAR data can be distracting. Our world is a complex place with a lot of weather, geopolitics and lots of other transient trends, but the major economic indicators remain positive. GDP, corporate profits, employment, consumer sentiment are all better than they have been in 2 to 3 years. Enplanement data point to continued strength in corporate travel and international demand, and most travel managers expect increased corporate travel in 2019.

Headwinds do exist, but major markets have been feeling the pinch of wage inflation for several years, while price inflation will actually serve us well. New supply is tough, but has peaked in most of our markets. In this stable, not great, but not bad environment, we are confident in our portfolio's EBITDA growth profile and our ramp-up to $200 million of EBITDA by 2020.

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

Great. Thank you, and good morning, everyone. As Neil mentioned, lodging fundamentals remain strong in our core markets. And we were able to drive EBITDA margins in the majority of our clusters despite continued wage pressures and increases in property taxes.

This ability to grow margin stems from our operating model, which allows us to work directly with our management company to adjust staffing and restructure labor hours in real-time. This, along with our continued focus on cost controls and active asset management, gives us added confidence in our ability to drive margin growth throughout our existing portfolio even in a tepid RevPAR growth environment.

In addition, margins will continue to benefit from the completion of the significant ROI projects and capital expenditures we took on over the past 24 months, and the stabilization of our recent acquisitions.

Neil discussed the revenue outperformance for the third quarter at the Westin and the Rittenhouse in Philadelphia, and these hotels are prime examples of executing margin growth from ramp-up at our latest acquisitions and hotels coming off recent renovation projects. We've now owned the Westin for over a year since our acquisition. We've been able to drive ADR base growth, simultaneously control our reliance on OTAs by driving [L&R] business through our clustered sales efforts, and reduced our sales commissions. This has resulted in sustained outperformance compared to the prior operator, including 200 basis points of margin growth in the third quarter.

At the Rittenhouse, we completed a full rooms renovation during the first half of 2018, and we're clearly seeing the benefits of our multiyear transformation of the asset with 500 basis points of margin growth last quarter.

In Manhattan, despite a challenging RevPAR environment during the quarter, we were able to grow margins by 70 basis points. This growth was led by the Hyatt Union Square, where margins increased 440 basis points, driven by the continued success of our new restaurant and bar outlet.

In 2017, we redesigned the hotel's F&B offerings, brought in a new operator and revitalized the space to incorporate a locally sourced farm-to-table restaurant, along with a bespoke cocktail bar. Bowery Road and Library of Distilled Spirits have been popular among our hotel guests as well as locals as these concepts are in high demand to consumers in the growing Silicon Alley submarket.

We've enjoyed F&B revenue growth since their opening just over 1 year ago and remain optimistic about our ability to grow our F&B contribution and overall hotel margins from these concepts.

We see other examples of margin growth from our ROI investments and recent acquisitions on the West Coast. In Monterey, our Sanctuary Beach Resort saw 1,200 basis points of margin growth in the third quarter as rate increases and the popularity of our newly renovated lodge and spa and Salt Wood Kitchen & Oysterette helped drive demand to the resort.

Shifting to CapEx. We ended the third quarter having completed the majority of our ROI and large-scale capital projects. We shifted our strategy for 2018 and accelerated a number of planned renovations, especially in South Florida with demand fundamentals looking robust in 2019, allowing us to more clearly showcase our organic revenue and margin growth potential over the next several years.

Phase 1 of the renovation at the Ritz Coconut Grove included transforming the bar and lounge to a new concept and partnering with LDV Hospitality who operates -- who also operates well-known F&B venues such as Scarpetta, Dolce and the Beach Club at Gurney's Montauk Resort.

This was completed during the second quarter, while guest room and public space renovations have been accelerated to the second half of 2018 and are on schedule to be completed by the end of the year.

Our total CapEx spend for 2018, excluding the Parrot Key Resort, where the majority of the funding is covered by insurance proceeds, is estimated to be in the $78 million to $80 million range.

As we look out into 2019, we anticipate our CapEx spend, inclusive of maintenance CapEx, to be in the range of $30 million to $35 million, with a very limited number of renovations resulting in rooms out of order or operational disruption.

On the disposition front, we entered into an agreement to sell the 96-room Residence Inn Tysons Corner for $15.7 million. We expect to close on the sale by the end of the fourth quarter and record a gain of approximately $1 million, which is built into our 2018 guidance.

We've owned this gen-1 Residence Inn for over 10 years. And although we are bullish on this submarket for the long term, we decided to forgo another disruptive large-scale renovation in 2019 and have entered into the sale at an attractive per-key price for this asset. We'll continue to look for accretive ways to dispose of a few other assets in our portfolio in the next few years. But at this time, we are not aggressively marketing any asset for sale.

Shifting to the balance sheet and business interruption proceeds, before I finish up with our updated guidance for 2018. We maintain significant financial flexibility as we ended the quarter with $37.7 million in cash on hand and ample capacity on our $250 million credit line. With the stabilization of operations and the collection of business interruption insurance, our dividend payout ratio is near our 50% payout target and one of the lowest in the sector, along with a solid fixed charge coverage ratio. With the continued ramp-up of our newly acquired assets, reopening of our South Florida assets and less CapEx spending in 2019 and '20, 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.

Due to the uncertainty related to the collection of business interruption insurance, we'd only built in a minimal amount of recovery into our guidance figures for the third quarter. During the period, we collected approximately $5.6 million in business interruption proceeds from the Florida assets and continue to negotiate with our insurance providers to recover additional proceeds as renovation delays will have an impact on the ramp-up of our assets during the fourth quarter.

I'll finish with our updated full year guidance for 2018, which we presented in the earnings release published yesterday. In addition to our third quarter operational results and collection of insurance proceeds, primary changes to the guidance were driven by delayed openings, weaker-than-anticipated demand in Washington, D.C., and ramp-up at the Cadillac and Parrot Key. We've revised our full year guidance to take into account the uncertainties surrounding these items in the fourth quarter.

For the fourth quarter, we're forecasting comparable portfolio RevPAR growth between 1% and 1.5% and 25 to 75 basis points of margin growth. If we exclude our Washington, D.C., cluster, we're forecasting RevPAR growth between 3% and 3.5% with 75 to 125 basis points of margin growth.

A few of the highlights from our earnings release include AFFO of $93 million to $95 million, AFFO per diluted share of $2.15 to $2.20 per share and EBITDA in the range of $171 million to $173 million, with our EBITDA margin growth rate range at minus 50 basis points to flat for the full year.

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

(Operator Instructions) Our first question comes from Shaun Kelley of Bank of America.

Thanks for the -- the detailed rundown. Maybe just to start off, you guys always seem to have a strong crystal ball on New York. And this year, I think that market has actually ended up performing better than a lot of the expectations coming into the year. Jay or Neil, could you give us a little bit of your view as you look out to '19, particularly on supply side, what your expectation is for New York, what you guys are seeing on the ground, and how you're thinking about that market?

I can get it started, Shaun, but -- this is Neil. The -- on the supply side, there was a lot of delays on projects that were expected this year. So this year, supply will likely come in close to 3%, which will push some projects into 2019. So 2019 is looking like 4% today. Now there could be delays again to that next year. But generally, for the next 3 years, we're in that kind of 3% to high 3% range before we drop back off to kind of historic levels of less than 2% in New York. We still view that as a very significant deceleration, because across the last 3 to 5 years, we had 4% to 5% and some 6% kind of supply years in there. So bringing that down nearly in half will be significant.

That's on the supply-side.

On the demand side. As you see, the demand fundamentals are very strong in New York. And as a New York City resident, you see that they feel like they're going to get even better with all of the delivery and tenancy on the far west side, far downtown, the infrastructure investments around rail and train and just the development of more 24-hour kind of neighborhoods. We've always loved Union Square and that kind of -- the tech corridor here in New York, but it is building on itself with such great momentum today. Just a block down from our hotel, the Hyatt Union Square, they're doing a major redevelopment to create a new tech incubator space, which will take up nearly half the block. I mean, it's just -- and that momentum is continuing with great pace. So on the demand side, we feel very strong and the supply side is getting better.

Great. I think I live in one of those 24-hour markets in New York, which is a mixed bag. So kind of other questions. Since you touched on supply for New York, could you just sort of do the pros and cons as you're looking out at 2019 across the portfolio? And you guys have pretty isolated demand just in your key markets, Boston, Philly, West Coast, et cetera. Just kind of give us, like where you are seeing -- where do you think you're going to see supply tailwind or drop-off? And where are you a little bit more concerned?

Sure. From a supply standpoint, we are -- on average, it's probably kind of mid-2% to high 2% kind of supply across all of our markets. And the -- where we have more supply than demand or where there's a -- where we have some concern going into 2019 is that Boston has a softer convention calendar in 2019. It does have some new supply opening as well, and so that will be a little bit more challenged of a market. Philadelphia has very strong demand and the new supply -- the big new supply is a 750-room hotel that's being built downtown. That continues to get pushed back. And so today, their opening date is now November 2019. That could push back further, but so we're going to have the best demand year Philadelphia has ever seen without any new -- any significant new kind of supply inventory in Philadelphia. So great balance there. The West Coast has -- Los Angeles has taken a lot of supply in particularly downtown, and that does have an impact on the whole market. But Northern California hasn't had much supply, and so they're kind of in check. I think L.A. will get a little better next year from a supply-demand standpoint. Silicon Valley will stay kind of similar and attractive. Seattle is a big supply market, and we've been taking a lot of supply there the last several years and the peak supply is probably right around now. The last year and this year, we have some openings. And so Seattle will continue to face a lot of supply challenge, but the demand there is overwhelming. And so we continue to have a positive perspective on that market. For us, the weak markets next year are Washington, and Boston is going to be a kind of mediocre market for us.

Our next question comes from Michael Bellisario of Baird.

Just wanted to touch on revenue management first. Any change that you guys have seen in kind of pricing sensitivity from your guests and any differential when looking at the business versus leisure traveler today?

I can't say that there is any change in that from the last couple of quarters. There are pressures that make driving rate difficult, like new supply, like some of the brand strategies and plans around redemptions. But those are -- we expect those. Supply is tailing off a little bit. We are getting more leverage from the brands against OTAs, and they're kind of resetting their own policies. And so we see it getting better, but we can't share any data in particular about the rate of growth in our corporate versus our leisure segments that would hold true for our whole portfolio. It's pretty market specific.

Got it. And aside from that ADR challenge, pushing ADR maybe, is there any other struggle out there that you guys are experiencing on the revenue management front? Or what else is tough on that end for you?

I think with some of these markets Neil has detailed, where we've been seeing supply coming into markets or submarkets where we operate. And so when you do have that kind of increased supply, regardless of the demand profile, as that -- as that differential narrows or turns negative, you just have to be real mindful because it becomes a lot about share shift because you don't have new demand coming into the marketplace at the rate you would otherwise. And so again, it is very market-by-market. If you take a look at Philadelphia for us, most of our hotels there, we saw great rate increases in group segments. And even though we saw more volume in transient, we didn't drive transient rate as much as we did in group. But that's just Philadelphia. Then if you would take a look at New York, there we drove a lot more bar in our transient segment -- with one of our transient segments as well as group and [L&R]. So I think it's real hotel- and market-specific based on the size of the hotel and then the supply/demand fundamentals in that market.

One last thing to add to that, Michael. I think it is most challenging for branded select service right now because that's what's getting delivered into the marketplace. And so they are -- so if you own hotels and there's a newer Hilton select service hotel opening or a newer Marriott select service hotel opening, it does lead to diffusion of the pipe. And so it's a bit more challenging on some of those, as we pointed out in Washington in particular, but that's really the case as you look across the portfolios. When you don't have -- when you're reliant on a pipe that is getting diffused and you may not have something else that's clearly differentiating, it's a little bit tougher.

That's helpful. Just last one for me on capital allocation. Where do share repurchases rank today on your list? And then how has your view of NAV changed, if at all, over the last few quarters?

Our view on NAV hasn't changed at all. This portfolio is going to be able to kind of demonstrate its EBITDA growth profile across the next couple of years. And so we view -- we've continued to view that we're trading at a very meaningful discount to NAV and to private market value. We've said in the past that when we are over a 20%, 30% kind of discount to NAV, we are -- we often will buy back shares and we do have authorization to do so. This year, in 2018, we have been planning to use our free cash flow -- our excess free cash flow in 2018 and the coming years to primarily to kind of pay down leverage and to pay down debt, while we had our EBITDA increase as well on the other side. And we weren't expecting to have another great opportunity to buy back shares, but we are -- we will continue to monitor it. It's a decision that we don't take lightly because we do see the benefits in reducing debt. But on the other hand, when you can buy assets in the kind of markets we have with no kind of friction or transition costs, it's pretty compelling today. We absolutely believe that this portfolio on a stabilized basis would be trading at kind of 6-ish cap rates, 6, 6.5 cap rates. And today, we're trading at least a full turn below that. Some of that is ramp-up, but some of it is just sentiment, I think, that is temporary and short-term and will reverse.

Our next question comes from David Katz of Jefferies.

I wanted to just touch on one comment that you made about getting leverage with the OTAs from the brands. Can you talk more about that and maybe put some detail, to the degree that you can, around what you're getting and how that is happening? I think in general, whether it's with -- with all the companies, brands [or selves], we sort of have high-level discussions about it. But how much detail can we get?

I mean, David, it's in progress and the brands are probably -- will have the best data for it. But as owners, we do view the brands' increasing leverage with OTAs to be one of the great kind of catalysts for profit growth in our sector in the coming years. You'll remember that OTA commissions even for the big brand families used to be above 20%, and they slowly came down to 18% and 15% and 14%. The brands believe that their increased leverage will allow them to bring commissions with some of these online travel channels into the single-digit range. If you think of airlines, it's at low-single-digit range. And all of that commission is our profit. And so it's a very significant opportunity. How fast it will come will depend on their negotiating and their leverage. They have increasing leverage for sure with the online travel channels. And so far, Hilton and Marriott have both been negotiating pretty hard. So we think of it as a very significant catalyst. Where is it showing up? For us, it's always been our strategy to kind of minimize online travel commissions just generally because we focus on really differentiated locations and smaller hotels that can drive original demand. But for that bit of our business that is online travel-driven, call it 10% to 20% of our business, commissions are coming down. And so that is leading to some increased profitability and some more margin growth for us. But I think we'll start to see it more in 2019 and 2020.

Very good. I think the one overarching question -- and my guess is that you addressed it in number of ways in your prepared remarks. But we have -- obviously, are seeing the indications that are presented in the equity market. And they are suggesting that the economic climate may weaken. And I only used the word suggesting because in the past, it's been both right and wrong. What data are you looking at? Or what are you seeing specifically that can help us interpret what next year looks like on a broad basis, irrespective of the company-specific gains and so forth that you put forth?

David, you see all the metrics too. But for us, we really take a lot from just GDP. There's gross output, there's a lot of kind of other metrics that kind of get around to that GDP kind of number, but that is a big one for us. And when GDP is growing better than 2%, 2.5%, that generally is good for hotel demand. And so GDP is a big one. Corporate earnings growth, big one for us. Now we probably maybe hit already like the peak corporate earnings growth across the last few quarters, but how does it look relative to a couple of years ago? Still a lot better. And so we take a lot of confidence in that. We've talked about enplanement data. Like -- the enplanement data we find to be more compelling than some of the other international travel data that's out there, because we do believe that nonstop airlift to our markets drives demand over time. And we're seeing that happen in every single one of our markets in great force. We don't study the airlines that carefully, but we did take confidence from Delta's earnings announcements and their commentary around corporate travel driving their business today and their ability to drive increased rates from it. And then locally, in each of our markets, it is -- we're a real sales oriented and revenue management oriented company. And so we're talking to customers all the time and getting a feel for how much growth we can get. And clearly, all of the conversations today, really nationally, are about growth. It's about like, are we going to get 6%, 7%, 4%? Our walk-away prices right now are like kind of in that -- I don't want to share our whole kind of strategy, but like at certain hotels, their walk-away price might be like a 3% increase. But they are at those levels. So we -- that gives us some confidence as well, just in our local markets. We are not that group oriented. So the convention calendars and group pace, they mean a lot for compression, but they are not our biggest drivers as a company. But we, obviously, look at them and they influence our revenue management strategy quite a bit.

Got it. And if I can ask one last one. As we think about the next several quarters and the schedule that we've laid out or the timing we've laid out for projects completed and so forth, irrespective of any natural impacts, just help us focus on the 1 or 2 or 3 things that need to go right or wrong to make sure that the schedule stays the schedule and doesn't slide out any further. Please.

Sure. It's a fair question, David. Cadillac is open. It's open and operating and ramping up. It's #1 ranked on TripAdvisor in Miami Beach. It is -- all the pipes are open, and we are booking rooms and the like. It's just, ramping up a 363-room hotel does take some time. And so it's -- across the next few quarters, or next few months, we'll see it kind of get to its fair share in the marketplace. Right now, our outlook for November and December is very strong for the Cadillac, and so we feel like that ramp-up is kind of on track. No other risks there. Key West has been a challenging project. There was a lot of damage. There was damage not only to the hotel, but to the seawall for this waterfront property, and it required lots of permitting. And Monroe County, the county around Key West, has had its hands full. It's a small place. They are not known for -- it's a small place and there's a lot of projects going on, and so permitting has been our biggest challenge in Key West. Are there any outstanding permits? There is a few related to our restaurant, and so that's why you'll -- I mentioned that we're opening 50% of the room inventory on November 1. And then we are planning for -- towards the end of the month to open the rest of the rooms and the restaurant. And that's related to the permit for the restaurant. But we don't see any other risk right now. The seawall construction is going very well and the project is going well. It's going to open kind of in November in part, and December will be its kind of first full month. In a month, will we be able to ramp up? It's going to be a really high-demand month. But it will probably be hard to, like, produce real cash flow in that month, which is a little bit different than we expected early in the year. But by January, we feel very good about it. And then finally, there's -- the only last project that's going is the Ritz-Carlton Coconut Grove. And that was a very conscious decision that we all made here around the table this summer. We knew that it would have an impact on our numbers for sure because the Ritz is doing really, really well. It's ramping up well and market is doing well, and the fourth quarter will be a strong quarter. But we decided to move up the renovation. Rather than take it offline again next summer, we decided to just finish it all. So we are doing all the guest rooms right now and the restaurant. We have great confidence that, that will be done by early December. And so really, David, frankly, the risk is really done. In the next 30 days, we should have all the projects up and running and ramping up.

David, I can add just a little bit more data in support of what Neil said. And might be of interest to others on the call as well. But with the Cadillac open, I can just share some of forward booking pace numbers. For the month of November relative to 2 years ago, which was the last undisturbed November that we've had there, but as of October, as of today, the on-the-books pace for November '18 at the Cadillac is up 10% from 2 years ago. And for December, the booking pace is up 72% versus 2 years ago. And so we've got about 35% of the business on the books for both of those months. And by the time we're looking into December, the rates are also coming in line with what we had pro forma-ed earlier in the project. So it's all very good news. Even despite our only booking into 50% of the inventory in November at Parrot Key, and we've really only started booking with earnest 6 to 8 weeks ago there, we're seeing for December close to a $90 rate increase with 24% to 25% of the occupancy on the books for December. So I think this is a little data to put behind the fact that we're moving ahead now.

That's a great point. Because David, there was something I saw in one of the notes about stabilized EBITDA contribution from these 2 assets being $10 million to $15 million. In our kind of prior peak, as the Courtyard and as the Old Parrot Key resort, we were producing about $17 million of EBITDA across the 2 hotels. We've significantly upgraded these 2 assets. And so our expectation at stabilization is to be between $20 million and $25 million of EBITDA from these 2 assets. It's just how fast will we ramp up? We think we will ramp up faster than the numbers you mentioned, but that's the question. But stabilization in a couple of years would be significantly higher.

Our next question comes from Bryan Maher of B. Riley FBR.

Most of my questions have been asked and answered. So maybe shifting gears a little bit. When it comes to your capital recycling being substantially completed, can you give us a little bit of thought just to what you are seeing out there in the acquisition market, and maybe there is nothing, but maybe as it relates to the selloff in many of the lodging REITs? And if you're seeing any change in appetite across the industry to buy or sell assets, particularly after the Pebblebrook/LaSalle transaction and the run up in your stock only to retrace over the past couple of months? Can you tell us what you're thinking about there as it comes to using your balance sheet, if at all?

We are not seeing any anything compelling out there, Bryan, compelling enough to use our balance sheet. We feel like we have so much kind of organic growth that it's difficult to find assets that will be accretive to cash flow or accretive to our NAV and our growth rate in today's environment at a price that's reasonable. So we have been -- we're always active looking at opportunities, but we haven't seen anything compelling at this stage. I think you're seeing transaction activity. If assets can trade with yield, with real in-place cash flow in the 8% to 9% kind of range, a lot of suburban assets are trading today. There is -- so there is a bid, there is a strong kind of debt markets today. In the major markets like in New York City, even Washington -- Washington will announce a big select service trade at a big per-key value soon. It's just that private kind of high net-worth, family office, international capital, they're willing to pay more than public companies are willing to pay for these assets. So if they -- I think that kind of that 6 cap range for a well-located urban hotel, they're still trading today and we'll continue to see some announcements and things. But just relative to our cost of capital and relative to our existing organic growth rate, it's hard for us to be active today.

Okay. And then just a little bit of follow-on to the line of questioning on Key West. You guys are close to that market. You've been spending a lot of time there renovating, repositioning that property. What are you seeing with that market in general that gives you confidence in 2019 and 2020? So not just this near-term ramping up and opening of the property, but kind of the next...

Key West has clearly been soft since the hurricane and it is now coming back. And kind of what gives us that confidence? Partly, is Key West's history and tradition. It's always been a very significant demand market for both destination travel from across the U.S., but also kind of in-state kind of travel from Florida. And that's what's been kind of missing for the last 12 months in the market. I think there's been events like -- Fantasy Fest is about to come up, and I think there's been a lot of folks that didn't come. Remember, they put it on still last year, but it was just a real light -- kind of some people came to support it, but it just wasn't -- people didn't think there would be hotels available. They didn't know how the city looked. And so it's just the expectation is that it can normalize and stabilize in the coming year or 2. We felt that Miami would bounce back quicker than Key West, and that has been the case, but we're feeling pretty good about our outlook. And as Jay mentioned, we're just -- we just started kind of selling into the market. And so far for December, it's looking good. Yes, Bryan, I'm sorry, there's nothing we can give you that's the exact hook. All of our peers that we have that are in Key West, they have all had their hotels open for a few quarters, so they'll have a little bit more color on that.

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

No. I think that's it. Thank you very much. As always, Jay, Ash, and I will be here to take any questions that you might have. Have a great rest of the day.

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