Pebblebrook Hotel Trust (PEB) 2016 Q2 法說會逐字稿

Good day and welcome to the Pebblebrook Hotel Trust second-quarter 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead, sir.

Thank you, Ashley. Thank you very much. Good morning, everyone. Welcome to our second-quarter 2016 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

Before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2015 and our other SEC findings; and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, July 26, 2016, and we undertake no duty to update them later. You can find our SEC reports and earnings release which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com.

Okay. We have a lot to cover this morning, so let's first review the highlights from our second-quarter financial results. Our same-property RevPAR growth for the second quarter was 2.5%, which slightly exceeds the revised outlook of 1% to 2.25% that we provided in early June. Our RevPAR growth is driven by a combination of occupancy and rate growth, as occupancy increased 1.1% and ADR increased 1.4%. Room revenue grew 3.1%, higher than the RevPAR growth due to the increase in the average room count, as we added 44 guest rooms from the prior-year period due to several renovation programs; including 32 keys at Hotel Zeppelin, which reopened in March.

Our performance in the quarter was led by our hotels on the West Coast, as our hotels out there generated RevPAR growth of 6% in Q2 with ADR increasing a healthy 4.3%. Our strongest West Coast markets were Portland, where our properties grew RevPAR 12.4%, and West LA which grew RevPAR 10.7%. As a reminder, our West LA hotels include our hotels in West Hollywood, Beverly Hills, and Santa Monica. Our national hotel was another leading property for us, growing RevPAR 10.9%, even though we began the second and last phase of our renovation and repositioning program in the quarter. On a monthly basis, RevPAR for portfolio increased 1.5% in April, which is slightly above our expectation. May was up 4.3%, but we expected the month to be much stronger given the solid booking pace we had going into the month. And June increased by 1.7%, which was a significant disappointment, primarily due to weakening business travel, both transient and short-term group.

Transient revenue, which makes up about 75% of the room rate demand for our portfolio, was up 0.9% compared to the prior year, with ADR growing 0.3%. The softness from our transient segment was largely due to weakened business travel trends we experienced in most of our urban markets, which we expect will persist for the remainder of 2016 or until we see a recovery in corporate profit growth trends. Group revenues increased 8.8%, with ADR of 3.8%, with group room nights growing 4.8%.

As a reminder, our Q2 RevPAR and hotel EBITDA results are same-property for our ownership period and include all the hotels we owned as of June 30, meaning they excluded Viceroy Miami and Redbury Hollywood, since we've sold both of these hotels during the quarter. Our numbers do not exclude hotels under renovation unless they are closed during the renovation. Later in our call, John will provide additional color on the progress we have made repositioning several recently acquired hotels that we have redeveloped.

Same-property EBITDA grew 1.9% during the quarter to $83.8 million, which was above our more recent June outlook. Our same-property EBITDA margin declined 26 basis points in the quarter to 36.6%, which was largely impacted by a 16.3% increase in property taxes which negatively impacted our EBITDA margin by 51 basis points. This was largely due to increases at our more recently acquired and renovated properties, as well as a prior-year property tax credit in Q2 at the Argyle Hotel in San Francisco.

RevPAR growth in the quarter was led by Hotel Zephyr Fisherman's Wharf and Hotel Vintage Portland, as both of these hotels continue to ramp up their market penetration and overall performance following our prior-year redevelopment and repositioning programs. Other stand-out hotels during the quarter included Hotel Palomar Los Angeles Beverly Hills, the Nines Hotel Portland, the Meridien Delfina Santa Monica, and Union Station Hotel Nashville. Same-property hotel percentage growth leaders in the second quarter were Hotel Zephyr Fisherman's Wharf, Hotel Palomar Los Angeles Beverly Hills, Hotel Vintage Portland, and Union Station Hotel Nashville.

Moving down our income statement, adjusted EBITDA for the second-quarter increased 6.7% and adjusted FFO per share climbed 12.5% compared to the prior-year period. And year to date, same-property RevPARs increased 4.9%, same-property room revenues has grown 6.1%, same-property total revenues have improved 4.5%, same-property EBITDA has increased 7.1%, adjusted EBITDA has climbed a robust 19.8%, and our adjusted FFO per share grew 30.5% versus last year.

Now to shift our focus to our dispositions and capital markets activities since we last updated you during our first quarter call. On June 1, we were active, announcing three separate dispositions. We sold a 148-room luxury Viceroy Miami hotel for $64.5 million, which equates to a 4.2% net income capitalization rate and a 17.7 times EBITDA multiple. We also sold a 57 room all-suite Redbury Hollywood hotel for $40.9 million, which equates to a 5.2% net income capitalization rate and a 15.5 times EBITDA multiple.

To calculate our cap rate and EBITDA multiple, we used actual financial results with a trailing 12-month period ending April 2016. For our NOI cap rate, we deduct an FF reserve amount equal to 4% of total hotel revenues from EBITDA. And finally, we sold an undeveloped 3,200 square foot parcel located adjacent to our Revere Hotel Boston Common for $6 million. This non-income generating parcel of land will also save us $90,000 annually in property taxes. On a weighted basis, these $111.4 million of dispositions were completed at a 4.4% cap rate and 17.7 times EBITDA multiple. And we estimate the GAAP gain in sales to be approximately $40.3 million, which is reflected in the net income they reported this quarter. We expect that our taxable gain on these hotels would be in this range as well.

The net proceeds from these three separate sales were used to reduce our outstanding debt on our credit facility. On June 9, we completed a $125 million preferred offering at a rate of 6.375%, which is the lowest rate of the four preferred equity offerings that we have completed to date. We are pleased to have taken advantage of the current yield-hungry environment and we used proceeds from the preferred offering to also reduce the outstanding balance on our unsecured credit facility. As a result of our property sales and preferred equity raise, as of June 30 we had $30 million outstanding on our $450 million unsecured credit facility. Our fixed charge covered ratio is 3.3 times; our debt to EBITDA ratio is now 4.4 times; and we have no debt maturities into Q1 2017. Of our currently outstanding debt, 90% is at fixed rates and 10% is at floating rates. We will continue to evaluate opportunities to lock in fixed rates, while also extending out our debt maturities.

Turning to our capital reinvestment projects, during the second quarter we invested $24.8 million across our portfolio with much of this capital related to the renovation and repositioning projects in Hotel Zeppelin San Francisco, Westin Colonnade Coral Gables, Union Station Hotel Nashville, Hotel Monaco Washington DC, and Revere Hotel Boston Commons. Year to date we have invested $61.1 million into our hotels as far as our capital reinvestment programs.

I would now like to turn the call over to Jon to provide more color on the recently completed quarter as well as our outlook for the remainder of 2016. Jon?

Thanks, Ray.

During the second quarter, industry operating trends continued to moderate and our performance was no different. While the industry's RevPAR growth actually accelerated to 3.5% in Q2 from the first quarter's 2.7% growth rate, it benefited from the Easter shift to March from April last year as well as the shift from the 4th of July following on a Monday this year instead of a Saturday last year. As you saw from Smith Travel Statistics, the last week of June significantly benefited from this shift at the expense of the first week of July.

I would like to take a shot at summarizing the overall industry trends that we saw in the second quarter, which we believe will likely continue in the second half of the year. Group continues to have a pretty good year, based primarily off of healthy convention calendars across most of the major markets. This business consists primarily of major association and corporate-sponsored meetings. This accounts for the industry's positive pace this year. Small and midsize corporate meetings, which are primarily booked in the year for the year, in the quarter for the quarter, or even in the month for the month, have continued to weaken, as represented by the slightly weaker overall industry's group volumes year to date. While we and others continue to go into each quarter with generally healthy group pace levels, we often come out of the quarter far from the pace we started with, due principally to weakening short-term group bookings plus a minor amount of increased attrition and corporate cancellations or reductions in group size.

Business travel trends, which began to noticeably weaken in Q4 last year, softened further in Q2. It seems that the combination of declining corporate profits and rising economic and geopolitical risks, has taken its toll on business travel. We have seen a broadening from an industry perspective in the number of companies focused on saving money on travel, enforcing policies, and asking their employees to be more thoughtful about travel levels. When top lines are not growing, there is clear pressure to improve bottom lines by reducing expenses. Businesses have become more price-sensitive too, either trading down or staying disciplined within corporate programs. We still have not heard of any travel bans, though we do not have much exposure to the energy industry. The good news is it seems that fears of an impending recession have substantially dissipated, but we continue to believe that business demand will remain weak until corporate profit growth rebounds and business confidence increases.

Leisure remains better than business travel, but really just okay. Leisure customers have become more technologically savvy, monitoring rates, canceling and revoking, or changing properties if rates decline or promotions are offered. International inbound travel remains weak due to the strong dollar and weakening global economies. And unfortunately, due to the strong dollar and substantially cheaper international airfares, the growth in US citizens traveling abroad has been robust, with the latest year-to-date statistics through March showing overseas travels up over 9% and travel abroad, including Mexico and Canada, by US citizens is up almost 11%. Unfortunately, US citizens that can afford to travel abroad are in many cases, choosing those trips over domestic travel, particularly to major US cities, which partly accounts for the weaker performance of urban markets versus the industry. And while active violence in foreign countries may divert some of this travel, the dollar has only strengthened since the Brexit vote.

Overall industry demand in the second quarter grew 2.1%, an improvement from Q1's 1%. But as I just discussed, demand benefited at the expense of both Q1 and Q3. We think the demand run rate is closer to 1.5% right now, which is obviously a significant moderation from last year's 2.9% growth rate.

With supply growing 1.5% in Q2, industry occupancy grew by 0.6%. With industry ADR increasing 2.9%, RevPAR for the industry rose 3.5%. As Ray discussed, our RevPAR growth of 2.5% in the second quarter exceeded our revised outlook provided in early June and fell in the middle of the range of our initial outlook for the quarter provided back in April. Our West Coast properties led the way with 6% RevPAR growth, while RevPAR declined by 2% at our East Coast hotels. I won't repeat the detail Ray already provided on our better markets and properties, but I will say that, compared to our initial outlook, we experienced weaker than expected performance in Boston and New York. Our properties in Boston underperformed the Boston CBD market, but our hotels in New York outperformed the Manhattan market. Both markets overall were materially softer than what we thought they would be going into the quarter.

Three hotels were under major renovation in the quarter that negatively impacted performance: Union Station Hotel Nashville, Hotel Monaco Washington DC, and Westin Colonnade Coral Gables. We estimate the combined negative impact to RevPAR from these three renovations at 30 basis points in the quarter. Performance at the three properties that underwent major transformational renovations last year was again outstanding in the second quarter. All three continue to ramp up nicely at this point. At Hotel Zephyr Fisherman's Wharf, RevPAR climbed 33% in Q2 with ADR up 14.1% or $29 versus Q2 last year. At W LA, RevPAR grew 10.2%, with ADR rising 8.6%. Vintage Portland's RevPAR increased 19.8% with ADR growing 9.1%. And it came within $15 of the Nines ADR, which is the leader in the Portland market place.

If we look at EBITDA generated by these three properties, it increased a combined $2.3 million in Q2 over last year and it is up $6.7 million year to date. Already getting near the $7 million plus we have been forecasting to pick up this year as we discussed in our last call. While we were overly optimistic about the ramp-up for these three properties last year, they have so far outperformed our expectations this year.

Finally, it's worthwhile to provide you a quick update on Hotel Zeppelin, which reopened in early March. Our customer reviews have been fantastic. We have moved from a rating of well over 100 on Trip Advisor to number 50 out of 233 most recently, and we are still climbing. As indicated earlier this year, we expect the financial performance to be an overall drag compared to last year due to the hotel being closed this year until early March, and as we build the group and corporate base and encourage [trial] to build the overall customer base. To date, the hotel is right on plan at the top and bottom lines.

Given we have several major redevelopments and repositionings currently underway we're starting later this year or early next year, I wanted to provide an update on those activities. First, we are in the final phases of the redevelopment and repositioning of both the Westin Coral Gables and Union Station Nashville hotels. Both are transformational and both should be complete by the end of the third quarter. At the completion of the Westin redevelopment, the hotel will be reflagged as Hotel Colonnade Coral Gables and will become part of Starwood's tribute portfolio. The total investment dollars are budgeted at $17.5 million, which equals roughly $111,000 per key, so you can see it is a major comprehensive upgrade to what was just an okay Westin. In Nashville, the project is budgeted at $15.5 million or $124,000 per room, and the improvements involve renovating the complete interior of this incredible historic landmark building. We are very excited about the upside in 2017 and beyond for both of these hotels.

In Washington, DC, we are gutting, expanding, and reconcepting the restaurant bar at Monaco DC through a $6.5 million investment. The restaurant has been closed since late April and the new concept is scheduled to open in late September. We are incredibly excited about the opportunity here in DC, with the location of the hotel being catty-corner to the Verizon Center, which draws 20,000 people over 200 times a year for sporting, concerts, and other events. We completed a $6 million rooms and meeting space renovation at the Monaco in the first quarter, so the entire product in this unique historic landmark structure will be entirely new.

Finally, in November we plan to commence additional major repositionings at Hotel Palomar Los Angeles Beverly Hills and Revere Hotel Boston Common, and then a third at the Tuscan Fisherman's Wharf, a Best Western Plus Hotel, which will commence in the first quarter of 2017. All three of these properties were purchased between late 2014 and early 2015. The investment at Palomar is budgeted at $12 million and is a comprehensive reconcepting of the hotel and bar restaurant including renovation of all public areas, meeting space, and guestrooms. With an entirely new executive team at this property this year, we have seen great success in the repositioning of the property in the market from a price perspective even before the renovation of the hotel. Year to date, the hotel has grown RevPAR 28.4%, with ADR climbing 12.4%, and EBITDA increasing 100% or $1.8 million over the first six months of last year.

The Revere's renovation and repositioning involves a budgeted investment of $22.5 million, with the focus again on a complete upgrading of the entire property, including gutting and rebuilding the lobby; creating a new lobby lounge; reconcepting the club as a bar restaurant, and leasing it out to a local third-party operator, and then connecting it to the new lobby lounge; fully renovating all of the meeting space including creating a second ballroom; doubling the size of the very popular rooftop pool deck; and reconcepting an existing street-front restaurant and adjacent underutilized meeting spaces into retail and restaurants with third-party lessees. The Revere's guest rooms and corridors will also be fully renovated.

The Tuscan's renovation and repositioning also involves a comprehensive redevelopment and upgrading of the entire property, including the entry, porte-cochere, lobby, meeting space, and other public areas and all guestrooms. We'll be opening up the lobby and meeting space through a currently unused and inaccessible outdoor courtyard, just as we did at the Hotel Zelos; and we'll be creating seating and cocktail service from a new small bar in the lobby. We plan to drop the Best Western affiliation late this year, and upon completion of the renovation in the second quarter of 2017, we plan to rename the hotel and make it part of our unaffiliated Z collection of hotels in San Francisco, which includes Hotel Zelos, Hotel Zetta, Hotel Zeppelin, and Hotel Zephyr Fisherman's Wharf.

All three of these major redevelopment and repositioning projects should drive substantial upside from the second half of 2017 through at least 2019. Now let me turn to a quick update on our outlook for 2016.

Due to geopolitical and economic uncertainties, a lack of visibility, and continued weakening demand and RevPAR trends, we remain, we believe, appropriately cautious about 2016 for both the industry and Pebblebrook. We are lowering our forecast for the industry from RevPAR growth of a range of 3% to 5% for the year to a range of 2.2% to 3% for the year. Our new industry forecast is based upon demand growth of 1.3% to 1.7%, supply growth of 1.6% to 1.8%, occupancy of minus-0.4% to plus-0.2%, and ADR growth of between 2% and 3%. For our portfolio, we are lowering the top end of our RevPAR outlook for the year from 4% to 3%.

General economic statistics have been mixed to slightly better lately, though they continue to be pretty choppy. Employment growth rebounded nicely in June. Consumer spending seems to be improved from early in the year. Consumer confidence remains fairly high, yet corporate profits are forecasted to be down significantly again in the second quarter, which would mark the fourth straight quarter of declining year-over-year profits. Forecasts of growth in the global economy continue to be reduced. So that is a continuing headwind for an inbound international travel. The dollar, which encouragingly had weakened off its highs earlier this year, has since rebounded substantially since the surprising Brexit vote. This of course, is an additional headwind for international travel to the US.

Overall, the most negative of the signals we have been seeing remains the lack of corporate profit growth, which is clearly having a negative impact on business travel in particular and is affecting both group and transient. Forecast for the resumption of growth in corporate profits in the second half of 2016, if it happens, would bode well for stronger business travel demand in 2017. For Q3, based upon our pace and recent underlying trends, we are forecasting our same property RevPAR in a range of minus-1% to positive 1%. Our same-property hotel EBITDA range for Q3 is $83.5 million to $86 million, with same-property EBITDA margins down between 50 and 100 basis points due to the weak revenue growth. While these numbers are weak, they would be 150 basis points better but for the negative impact from our renovations in the third quarter.

In Q3, we expect performance that will be weaker than the industry in New York, Miami, Naples, San Francisco, Nashville, Boston, and Seattle. We believe better than industry performance is likely in Philadelphia, West LA, San Diego, and Minneapolis. Our hotels in Nashville, Miami, Naples, and Washington, DC, are all being impacted by their renovations.

Our pace, which was certainly more encouraging as of April, has slipped significantly due to weak short-term bookings and pickup. Overall group room revenue remains positive for the year, with revenue up 3.5% due to ADR growth of 4.3%, though group room nights are now down 0.8% for the year. For the year, transient room nights are up 4.9%, transient ADR is up 0.4%, and transient revenues are up 5.2%. Combined pace of total room nights currently up 3.1%, ADR increasing 1.5%, and total revenues up 4.7%. The challenge, of course, and what is accounting for our reduced numbers for the second half of the year, is that our pace advantage has shrunk significantly for Q3 and pace continues to be down for Q4. In total, for the second half of the year, total rooms on the books are up 0.9%, ADR is up 1.9%, and total revenues are up 2.8%.

Finally, I wanted to remind everyone that we continue our focused efforts to execute on our strategic plan to create value for our shareholders by working to sell upwards of $1 billion of a select number of hotels and real estate, including our interest in the Manhattan collection, and utilizing net proceeds to reduce debt, distribute capital gains, and potentially repurchase up to $150 million of our stock. We announced our first sales pursuant to our strategic plan on June 1, with successful execution of the sales of the Redbury and Viceroy Miami, as well as the excess land parcel adjacent to the Revere. And we generated gross proceeds of $111 million, at very attractive valuations, with net proceeds of over $106 million.

That completes our prepared remarks. Operator, we would be happy to take questions now.

Thank you.

(Operator Instructions)

And we'll take our first question from Anthony Powell with Barclays.

Hi, good morning, everyone. If you could just go ahead and talk about the overall transaction environment, if you have seen more or less interest in hotel deals after Brexit?

Yes. Anthony, it certainly would be too early to come to any conclusion about what impact Brexit might have on the US real estate market, and in particular, hotels. We certainly have not seen anything to date. We have read a lot of stories that the Brexit vote should cause capital to head to the US from the UK, but we certainly haven't seen anything yet.

Got it. And your overall outlook for the rest of the year, it seems a bit more conservative than some of the other releases we've seen recently. Starwood was out this morning with 3% to 4% RevPAR growth in North America, a few other REITs were a bit more positive. What do you think makes you a bit more negative on the outlook than some of your peers?

Well, we do not have any franchises to sell. So that may make us more pragmatic than the brands who provide outlooks.

The other thing I would mention is, I do not know how Starwood's outlook breaks down between the US and North America, but I suspect Canada and Mexico are having pretty good years, given the US outbound travel, and the weak peso and the weak loonie. So I would not be surprised at all if their US outlook was more consistent with actually what our view is of 2% to 3% for the year.

Got it. And the last one is just on the renovation activity. It seems to be you're continuing on with your renovation plans in San Francisco and Nashville despite slowing trends. Have you thought about maybe adjusting some of the renovation plans given the overall environment?

The answer to that, we bought with planned repositionings and transformations. We have not changed our desire to move forward and execute on those redevelopments. We think there is very significant value to be added from very modest investments.

And so we have made no changes from that perspective. We have looked at a couple of renovations through the rest of the portfolio. There were two room renovations we were going to begin late this year and complete into the first quarter, and we've postponed those for a year for various reasons.

So we've looked at those, Anthony. But as it relates to the major redevelopments, we have to keep in mind that these are properties we bought that in many cases were tired, needed to be redeveloped, would benefit from the capital infusion significantly, and will continue to spiral down from a market share perspective if we do not invest in them.

So we are in the long-term investment business. We have to invest through the cycles. And we need to make sure that our balance sheet is in a condition where we can do that, and that is the case.

That is all for me. Thank you.

Our next question comes from Rich Hightower with Evercore ISI.

Good morning, guys. I know that you have not previously given third-quarter guidance until last night, but can you give us a sense, based on just the change in trends that you saw during the second quarter, perhaps implicitly, where the third quarter was in your minds as of three months ago versus where it is in the guidance as of last night?

Yes. I think if we look at the second half, Rich, I think overall we thought the second half might be a couple of hundred basis points higher than where we think it is going to be now.

Okay. That's actually quite helpful. And then -- (laughter)

Sorry to surprise you on that. (laughter)

Well, you know, there was actually a quantifiable answer there. That's good. (laughter)

The second and last question, I promise, is on asset sales. With respect to the $1 billion target, a lot of that is the Manhattan collection. That, of course, has been pretty well telegraphed for a while, in terms of Pebblebrook's intentions there.

Can you just give us a little more general sense as to the screen that you guys use to evaluate what is for sale and why it is for sale, and why now is the right time to sell a particular asset? Is it based on reverse inquiry or are they all marketed -- just a little more color on that front would be helpful.

Sure. The plan we put in place in February that we announced was based upon identifying the assets that we would be putting up for sale. So they are all being marketed. They are being marketed differently, depending upon who the likely buyers are.

So, as an example, in the case of the Redbury in Hollywood, we did not do a broad marketing. We did a very targeted offering to high net worth individuals, a few brands, and some foreign capital, that we thought would find that property an asset that they wanted to own.

And so we did hire a broker, but we did not go through a formal overall bidding process. We just worked with the likely buyers for that particular asset.

In Miami, it actually was our intention to do, again, a fairly targeted -- not broad, but targeted process. The process lasted about three days. And we had an interested buyer who ultimately bought the property who gave us an offer attractive enough to take it off the market and work with them exclusively.

When we look at what we are going to sell, we evaluate a lot of things. We evaluate the individual market, what we think the intermediate- to long-term prospects are, the barriers to entry in those markets, the capital that needs to be invested, any short-term negatives that might impact our returns, the value creation that we may have created, the value we may have created in those assets.

But we are really looking at things from a longer-term perspective. It would include the land that we sold at Revere, that we are not in the development business, we're certainly not in the apartment or condo development business.

And there are others that are far more capable and skilled that working their way through the Boston rezoning and approval process than we. So we made a decision to take a piece of land that looks no bigger than my front yard and to sell it to a developer.

Okay. Very helpful, Jon. Thanks.

And our next question is from Shaun Kelley with Bank of America.

Hi, good morning, guys. Jon, you have always been pretty helpful on saying -- I think last quarter you give us a little bit of the pattern about the monthly trend you were expecting, and it did play out because I think you were calling for May to be your strongest month, and that seemed to be the case.

I know a lot of people listening are probably interested in how you think about some of the movements in Q3, particularly given the Jewish holiday shift between September and October in some of the key urban markets, and then also the impact that you expect August to have, given the way that Labor Day played out last year.

Can you give us any color about your thinking on the monthly trend? I appreciate it is a relatively short-term focus.

Sure. From what we see right now, Shaun, I think September is likely to be the strongest month in the quarter, positively impacted by the Jewish holidays, which unfortunately will then negatively impact October.

I think as it relates to the way Labor Day is falling, I think the conclusion we came to last year after doing more research was, we think the last week to 10 days of August, almost regardless of the way Labor Day falls, unless it falls at the very, very beginning, is likely to be weak on a secular basis. We think that the change in the school system dates, when kids go back to school, is having a negative impact on leisure travel at what we used to think was a prime part of the summer. And we no longer think that.

So strategically, our properties have been highly focused on getting business on the books well in advance for that last 10 days to two-week period in August, and so that will have some negative impact, obviously, on pricing, but hopefully to the benefit of occupancy for us. So that is kind of the way we think it's going to fall out.

We think July is running weak because of the negative impact from the July 4th shift. You saw that in the Smith Travel numbers that were mid-single-digit negative, I think, for the first week. And marginally better, certainly positive, but probably more in the normal range we were expecting of kind of 2% to 3% in the second week.

We do think there is some lift in July, clearly from the two political conventions from an industry perspective, and obviously those will positively impact Cleveland and Philadelphia. We do not have any hotels in Cleveland. We do have one in Philly. And it is benefiting. But we do not have the Pope coming back in September, which was a benefit in the quarter in Philly as well.

That is kind of the way we think Q3 lays out. And Q4 -- I think you have probably heard previously from most folks, both brand and some of the other REITs, that Q4 looks to be weaker than Q3 when you look at the back half of the year. Group paces are not great in Q4, and obviously part of that is definitely the shift in the Jewish holidays into what is otherwise a very prime business travel and group travel period.

That is really helpful. And then my longer-term question, if you will, is -- obviously renovations are having an impact in the absolute magnitude of your RevPAR. Can you help us think about, when 2016 is said and done, what is the overall renovation headwind you are expecting for the full year this year?

And then next year, appreciate that at least one of the assets, the big one that you are redoing in San Francisco -- it may not be open for the full year but do you think renovations are a net headwind or tailwind for 2017?

I think for this year we're in the 100-basis-point range.

100 basis points, Shaun. (multiple speakers)

Negative impact for the year.

Next year should be meaningfully less than that. But most of it's going to be pushed into the first quarter of next year, when we are doing the Palomar and the Revere, and we are starting the Tuscan, which will probably run a little bit into Q2.

Right now, the only thing we see at all major would be doing the Gulf Tower at Naples in the summer. We are doing the beach building this summer. And outside of that, we think overall next year should be meaningfully less from a disruption impact versus this year.

All right. Think you very much. (multiple speakers)

Shaun, the other thing I would point out is, the projects that we have planned for next year really complete all the projects we had planned when we made our acquisitions over the last five years.

That is great. Thank you very much.

And next up is Wes Golladay with RBC Capital Markets.

Good morning, guys. I can't believe you don't have any hotels in Cleveland. (laughter)

Looking at the short-term incentive group, when we look at the labor data, it shows the -- it's really hard to get employees, and it looks like a pretty tight labor market at the high end. So what do you think is behind the lack of incentive group? Is that what has fallen off for the end of the quarter bookings?

No. It is not the incentive groups, Wes. Because the incentive trips tend to be much more elaborate and generally booked well in advance.

It is really the 5-, 10-, 30-person meeting that companies are deciding to defer, maybe they are doing it in-house, saving the travel, maybe they are doing it by phone, I do not know. But I know that it is certainly under pressure, like business transient travel is.

So you are right in making the correlation between the strong employment markets, the challenge in finding good, quality people, and the need to continue to have incentive travel. And that is what makes kind of this environment a little bit more unique than what we have seen in some prior -- you really have to go all the way back into the early 1990s to see an environment like today.

Okay. And then looking at the industries that are cutting back on business travel, is it broad-based? Are your technology customers hanging in there, pharma hanging in there? Was it financial services? Can you give us a little more drill-down color on who is cutting back, and is it incrementally negative or positive for that segment?

Yes. Overall, it is certainly being led by financial services.

As you all on the phone asking the questions or listening know, probably the two industries struggling the most, energy and financial services, in the environment we are in. So whether that is banks, insurance companies, investment managers, whether it involves consulting or to some extent even accounting and legal, we are definitely seeing significantly less travel in those areas, and certainly more price sensitivity in those areas.

But it has broadened over the last quarter. It certainly includes more companies, more industries, multi-nationals in particular are certainly cutting back on travel. We have certainly seen it in the manufacturing sectors.

There is just an overall cautiousness on the part of business as it relates to travel. We are even hearing it from some of the real estate companies, believe it or not -- so, some of the service companies. It seems to be fairly broad-based.

Interestingly, outside of individual company situations in technology, we are not really seeing it in technology. We are not seeing it in biomedical or pharmaceutical. Those industries continue to be growing, being able to grow top lines and, therefore, they seem to be -- seem to have a pretty positive attitude about travel.

Okay. And last question for me -- big picture, what is going on with the Z brands? Will you take it outside of San Francisco? Do you just like the letter Z, anything going on there?

Well, we like the letter Z. Some of the consumer studies show that customers are attracted to companies that start with either A or Z, and so we like the Z letter from a naming perspective.

It is also different in the market, like our properties. So we think it is -- the names are a little bit experiential, like the properties are.

We do not have any plans to make it a brand -- take it necessarily outside of San Francisco. And as you know, our properties with the Z names have different operators as well, in many cases. So it is not a new business strategy for us.

Okay. Thanks a lot.

Our next question comes from Jeff Donnelly with Wells Fargo.

Good morning, guys. A question about how you see the relative strength of the various segments at this point -- the last few quarters, corporate transient has been the segment that was softening, and group was seen as relatively resilient. Now some of your peers with more group exposure are seeing increasing group cancellation rates, and you cited the weaker group pace. I am curious from where we sit today, do you think the potential for incremental softness now is greater in the group segment than it is in corporate transient?

Is it greater?

Think of it as the potential for deceleration or do you think it is maybe more balanced at this point?

I think it is probably more balanced, Jeff. I mean, I think if we were to have a recession, it is obviously much more at risk. You know, that is always where the substantial cutbacks occur. That is where the big money is, from a corporate perspective, at the end of the day, in terms of potential savings. But I think in the environment we are in, I would say they are reasonably balanced from a downside perspective.

And I am just -- I have two questions on corporate transient. Are there periods in history where this current environment reminds you of, where it seems like it is more of a corporate recession than a consumer recession? Just curious on your perspective there. And maybe as a follow-up, just to give us some quantification, where are your expectations on corporate transient demand earlier in the year, and how has it evolved to where it is today?

Well, I think we have to go back to the 1990s, maybe you would see it during the Iraq, the first Iraq war, over that period of time where businesses got cautious because of the environment and the uncertainty.

And then, I'm sorry, Jeff, what was your second question?

Second question was -- I was curious -- just quantifying your outlook for the corporate transient demand, maybe where was it earlier in the year and where is it today? I am curious if you had any numbers to how you are thinking about your outlook for corporate transient demand?

I think what we have seen is probably somewhere between a 1% and 2% decline in business travel, which would account for much of the change during the year in demand. It is funny; it doesn't sound like a lot, and it is not on a percentage basis, but in an industry where a good year is 1.5% or 2% demand growth and a great year is 3% demand growth, or 3.5%, it is not a big difference overall.

So I think the numbers are not large; business is still traveling. You hear it from the airlines as well. They have seen softness in business travel as well.

I think we still have the international headwinds; I think business travel inbound is probably down. We do not have good statistics for that, obviously. But with the strong dollar and the weakening economies abroad, that impacts global business travel as well.

So, our viewpoint is, if we see a pickup in global growth, we see a pickup in US growth, we see a pickup in corporate profits, it would not take a lot to see a turnaround in the direction of business travel.

Okay. And to wrap up on asset sales, I think earlier in the year you talked about how you could potentially list upwards of, I think the number was $1.5 billion of assets to sell -- somewhere between $500 million and $1 billion. You've now had a few sales under your belt, and it maybe gives you a better perspective on the markets. If you had to update that view today, or those numbers today, would they change much, either in terms of where you would expect pricing to sort out, or would it cause you to bring more or fewer assets to market?

I think the first thing we do is correct a misconception, if that's the case, because we never talked about $1.5 billion. We talked about $1 billion to -- a $0.5 billion to $1 billion, in terms of assets we'd ultimately bring to market.

That is where we are right now in terms of what we've brought to market at this point in time, either again actively or in a very targeted way. We have sold a little over $100 million.

Obviously, we continue to pursue the ultimate disposition of our interests in New York. That is a meaningful piece of the potential overall $1 billion number.

And I do not think our view and our strategy has changed at all from the beginning of the year. I think what we plan to bring to market, we have brought to market. It is a long process.

I understand that people are anxious, but this is not -- we are not putting these things up on eBay. They are very complicated properties, and we're looking for the right buyers in many cases for some of these assets. And some of the situations like New York are very complicated.

So it takes time. And our viewpoint as to what we thought would likely get executed when we put the plan in place earlier in the year and announced it to you all and where we are today, I do not think our view has changed at all about what we think is likely to happen from when we put the plan in place.

Just since you mentioned it, concerning New York, has there been any meaningful change or advancement since you were last in front of investors, say, at NAREIT and the NYU conference there?

Well, there is nothing that has changed in what we are saying, which is we are not going to provide a play by play of what is an extremely complicated situation, where talking about any of it publicly would not increase our chances of getting anything done. So we will maintain that posture.

Hopefully, everyone understands and appreciates it that when we have something to announce, we will announce it. And until then, we're not going to talk about the process at all.

Thanks, guys.

(Operator Instructions)

We'll take our next question from Lukas Hartwich, Green Street Advisors.

Great, thanks. Hi, good morning. So, on the weakness with corporate transient, I am curious, do you think that the majority of that is driven by weakness in corporate profitability or do you think that part of it could also be explained by AirBnB taking share for the corporate traveler?

Yes. I do not think it is the latter. I think it is the former.

You are seeing it in all forms of business spending. You have weak capital investment; you have weak discretionary spending on the part of businesses. And I think it is no different in travel.

Companies are having a difficult time growing top lines. In order to mitigate or grow bottom lines, they're cutting expenses, and now making investments.

So that is what we are seeing on the business side. I do not think any of it has to do with AirBnB

Yes. And, Lukas, if you look at New York specifically, RevPAR in the Manhattan market was down 5% in second quarter. But we know AirBnB units have gone from 17,000 units last year to under 7,000 this year. The supply of AirBnB units in New York has gone down, but the demand is still weak, or the RevPAR is still weak there as a result of the corporate challenges, as well as supply concerns.

That's helpful. And I have a quick follow-up. Last quarter you talked about the benefit in LA from the Porter Ranch gas leak. Is there any boost in the second quarter from that? And I guess if there was, how much of a benefit was there for LA?

Yes. So the Porter Ranch, which kind of ran into April at a few of our properties, benefited us by about 50 basis points overall for the portfolio.

Great. That is it for me. Thank you.

And we'll take our final question from Bill Crow with Raymond James.

Hi, good morning. Jon, when you think about next year, not looking at your portfolio but your markets, can you name two or three that are going to be stronger next year than they are this year? Or maybe identify one or two that you think might be negative RevPAR declines next year.

Yes. I think the two -- well, really three markets stand out to us of being stronger next year. One of those would be San Diego, which has an even better convention calendar and less supply growth in the market.

Boston, which has a very good convention calendar next year and has almost no supply growth next year -- our forecast right now is only 0.6% for next year in Boston. It's 5.2% for this year in Boston. So, Boston is clearly struggling even with good underlying industries today to absorb that much supply in one year.

Washington DC should have a better year next year. It has an improved convention calendar, on top of having an inauguration, as well as benefiting from the first year of a new administration, which is historically one of the stronger years of activity for Congress and also for overall activity of people coming to the market to meet with their new congressmen and senators.

In terms of weaker markets, San Francisco is the one that obviously fans out the most. Again, we are not at a point to be able to make a prediction as to whether any particular market is going to be negative next year. But clearly, San Francisco would be the market with the most risk. It's a short-term phenomenon.

In terms of market impact with the expansion and renovation of Moscone, and the closing of two of the three Moscone buildings for the better part of the second quarter next year. So, San Francisco has a good first quarter, has a very weak second quarter, has a relatively flat fourth quarter, and a weaker third quarter next year.

And San Francisco travel is doing a yeoman's job in making up for convention shortfalls by booking larger meetings into the larger hotels in the market. And I think the pace that we last saw in San Francisco has in-house meetings over 100,000, maybe 115,000 rooms, while the convention room nights are down something like 330,000 or thereabouts.

Okay. And, Jon, finally for me, as you think about the implementation of the higher minimum wage and the scale that it ramps up a little bit each year, how much of an impact looking forward is that for next year? Do you have a sense yet for how that will impact margins?

Well, I think what it's causing us to do is to continue to look -- focus a lot of effort on creating efficiencies to absorb that. So, generally that means reducing our headcounts at our hotels from where they have been operated. In some cases it also involves adding surcharges on particularly in restaurants for living wage, for healthcare in San Francisco as we have done there, as we have done in Seattle, as we are doing in LA, in order to absorb some of that.

So I think overall, Bill, labor is probably running somewhere in the 3% range, with benefits, being offset by 1%, 1.5% growth at most, in other expenses. And ending up in the 2.5% run rate range for expenses, and then we have projects, and other capital investments and best practice implementation that should ultimately work to keep that number at that number or lower.

Okay. Thank you.

And that concludes our Q&A session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, Ashley, and thanks to everyone for participating. We look forward to updating you in another 90 days. Thanks. Goodbye.

And that concludes our presentation for today. We thank you all for your participation. You may now disconnect.