Pebblebrook Hotel Trust (PEB) 2018 Q2 法說會逐字稿

Greetings and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to our second quarter 2018 earnings call 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 risk and uncertainties as described in our 10-K for 2017 and our other SEC filings 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, 2018, and we undertake no duty to update them later. You can find our SEC reports in our 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 of our second quarter financial results. Our second quarter financial performance exceeded the upper end of our outlook range. Hotel EBITDA was $74.8 million which was $1.4 million above the upper end of our outlook. Adjusted EBITDA was $72.8 million, $6 million above the upper end of our Q2 outlook and adjusted FFO was $56 million or $0.81 per share which exceeded the upper end of our outlook by $0.09 per share. So solid quarter for us in all financial metrics.

On the hotel operating side, same property RevPAR increased 2.6% which was at the upper end of our RevPAR outlook of 1% to 3%. Our RevPAR increase was driven by 1.5% increase in our average rate and 1.1% increase in occupancy. The hotel operating beat was primarily a result of higher growth in forecasted in non-room revenues which grew a strong 4.4% in the quarter and greater success with ongoing cost reductions and our relentless pursuit of operating efficiencies which limited total same property expense growth to 2.4% even after a 1.1% increase in same property occupied room nights.

Our same -- our best performing hotels in the quarter were in San Francisco which had a solid convention calendar during the second quarter compared with prior year and created more rate compression opportunities for our hotel. Our San Francisco hotel has generated a RevPAR gain of 15.5%, Hotel Zoe which was under renovation last year, and is ramping nicely, [the other] portfolio during the quarter generated RevPAR growth of 143%. Our other strong-performing properties in the quarter were Hotel Zetta, Hotel Zeppelin which is also ramping from its 2016 transformation and Sir Francis Drake. Our underperforming hotels include the Hotel Modera Portland which is transitioning from the hotel's recent renovation and management company change in addition to being negatively impacted from the increased supply in the Portland market which also affected Hotel Vintage Portland, another underperformer in the quarter.

As we previously discussed, we expected Portland to be a challenging market this year due to robust supply growth and that has been the case. Our downtown Portland hotel has generated a RevPAR loss of 3.3% compared with a market track decline of 3.9%, so on a relative basis, we declined slightly less than the market.

Westin San Diego Gaslamp Quarter was a significant laggard in the portfolio in the second quarter as we continue to be negatively impacted by the sales and revenue management reorganization being implemented by Marriott as part of their integration of Starwood into Marriott. Unfortunately, this effort has been ongoing since the end of last year and is having a very negative impact on group bookings and overall performance not only at Westin Gaslamp but our other legacy Starwood managed properties including W L.A., West Beverly Hills and W Boston.

The Westin and W underperformed their competitive sets by 600 basis points and 1,000 basis points respectively in the second quarter and Westin underperformed the downtown San Diego market by a whopping 1,150 basis points. W L.A. underperformed the market by 120 basis points. While we're hopeful that the reorganization will ultimately lead to better performance, we're very disappointed it's had such a large impact for such an extended period already this year and the overall poor performance in group bookings will have a greater than expected impact in the second half of this year as well. I suppose the good news is we were able to absorb this worse-than-expected performance with better performance elsewhere and hopefully these negative impacts will be limited this year and should make for easier comparison next year.

Interestingly during the quarter, our major branded hotels were our worst performing type of hotel posting a RevPAR decline of 1.8% which is largely due to the Marriott/Starwood sales and revenue management reorganization. Our collection branded hotels generated a 4.5% RevPAR increase and our independent hotels produced a 5.4% RevPAR gain leading our portfolio in the quarter.

Overall for the quarter, transient revenues, which make up about 74% of our total portfolio room revenues, was up 0.5% compared to the prior year and group revenues increased 10.4% in the quarter as all of our group segments were up including convention, association and corporate group which is an encouraging sign. Jon will provide additional color including our much-improved group pace especially heading into 2019.

Because of these dynamics, monthly RevPAR for our portfolio increased 6.7% in April which benefited from the Easter shift, 1% in May and 0.3% in June which is dragged down by soft performance from our West Los Angeles Hotels and our Portland Hotels and rooms out of service had a negative impact from our hurricane-related go-back renovations at LaPlaya Beach Resort in April.

As a reminder, our Q2 RevPAR and hotel EBITDA results are same property for our ownership period and includes all the hotels we owned as of June 30. We only exclude hotels under renovation if they are closed during the quarter. Our hotels generated $74.8 million of same property hotel EBITDA for the quarter which was $1.4 million above the top end of our outlook and $2.4 million above the midpoint. Same property hotel EBITDA margins increased 47 basis points which was above the top end of our outlook of flat to down 50 basis points.

Our hotel EBITDA margin growth would have been even higher without the negative impact of property taxes which reduced margins by 42 basis points due to prior year property tax reductions as property taxes increased 16.2% versus the prior year period. Also at the Mondrian, our restaurant tenant is leaving the property which negatively impacted margins by 15 basis points or about $320,000 due to the net write-offs of straight-line rent associated with this lease.

Total revenue increased 3.2% with non-room revenue rising 4.4% which, as mentioned earlier, was better than we expected. Overall operating expenses increased by just 2.4% in the second quarter as our hotel teams and asset managers continue to manage through wage and benefit pressures across our portfolio to keep expenses in check through finding efficiencies, utilizing our best practices and making investments that improve performance and productivity including the implementation of green programs and conservation best practices.

Year-to-date, same property RevPAR increased 1.3%, same property total revenues increased 2.6% and same property operating expenses increased 2.2% resulting in same property EBITDA margins increasing 28 basis points and same property EBITDA increasing 3.5%.

Moving down the income statement, the $6 million in Q2 adjusted EBITDA beat was a result of several line items including the same property hotel EBITDA beat of $1.4 million and G&A expenses that were $1.2 million lower than expected.

We also successfully finalized our insurance settlement relating to the Hurricane Irma and its impact at our LaPlaya Naples Resort. This settlement totaled $20.5 million which is the expected full cost to repair and remediate the damage caused by the hurricane last September. This incorporates the $3.4 million of 2017 business interruption income we recorded in Q1 and $1.9 million for our actual and forecasted 2018 business interruption income which we recorded in the second quarter.

The 2018 BI was not included in our outlook and helped to contribute to our adjusted EBITDA beat in the quarter. This loss business income relates to the negative impact we incurred in the first 2 quarters of this year at LaPlaya and agreed upon negative impact forecasted for the remainder of the year primarily due to the significant go-back work that is disrupting the properties performance.

We also received $2.4 million of dividend income from a $349 million strategic investment in LaSalle's common shares. $1.2 million of this dividend income was above our prior outlook due to the $5.4 million of additional LaSalle common shares we purchased during the second quarter. However, this dividend income will be eliminating starting in the third quarter due to the merger agreement LaSalle executed with Blackstone so this will negatively impact our third and fourth quarters by approximately $2.4 million versus our prior outlook which did not assume the elimination of LaSalle common dividends. We achieved adjusted FFO of $56 million or $0.81 per share which exceeded the upper end of our original outlook by $0.09 per share. This resulted from the same property EBITDA and adjusted EBITDA beats that was probably offset by $0.5 million of increased interest expenses associated with the LaSalle shares that we purchased by drawing on our unsecured credit facility.

We utilize proceeds from our credit facility to fund the additional LaSalle common share purchases, so our interest expense is now forecasted to be $3.7 million higher during the second half of 2018 versus what was reflected in our prior outlook. Combined with the reduced LaSalle dividend income of $2.4 million for the second half of 2018, these 2 items total approximately $6.1 million of negative impact or approximately $0.08 per share compared to our prior 2018 outlook.

Our $349 million strategic investment in LaSalle's company shares has impacted our 2018 operating results and likely makes our outlook somewhat confusing. To try to make the impact clear, had we not purchased the approximately 9.8% of LaSalle's outstanding shares, our adjusted EBITDA would have been $5.2 million lower for all of 2018 but our adjusted FFO and adjusted FFO per share would be $7 million and $0.10 per share higher respectively for the year as compared to our prior outlook that we provided.

This impact to adjusted EBITDA and FFO excludes the unrealized gain of $20.2 million as of June 30. This gain represents the difference between our average cost per acquired share as $32.31 compared with LaSalle's share price at the end of the quarter at $34.23 calculated for the 10.8 million shares we owned. Given the current LaSalle share price through yesterday's close, the current unrealized gain would be over $26 million. At quarter end, our debt to EBITDA ratio excluding the income and increased debt associated with the strategic purchase of the LaSalle shares was 3.4x and our fixed charge ratio is 4.2x.

And with that update, I would now like to turn the call over to Jon to provide more insight into the quarter as well as our outlook for the third quarter and the remainder of 2018. Jon?

Thanks, Ray. The second quarter was a very positive quarter for both the industry and for Pebblebrook. Overall demand growth accelerated in the second quarter from the first quarter as the healthy signs of improvements in group and transient travel that we saw late in the first quarter continued throughout the second quarter and certainly seem to be a trend at this point. Leisure travel continues to be strong and data published by tourism economics indicates that international inbound travel has turned positive.

So the demand side of the industry's equation is clearly showing an accelerating trend in growth this year versus last year and I'll be spending a little more time this morning trying to put all of the industry statistics in perspective in order to help everyone understand the positive trends.

On the supply side, over the last 12 to 18 months, we've seen a flattening of not only net deliveries, which seem to be running in the 1.9% to 2.1% range, but industry-wide construction starts which are now running slightly below deliveries, clearly indicating construction starts are slowing and the industries in the process of topping out the rate of supply growth. And the good news is, the rate of growth and supply is topping out at a level below this year's accelerated rate of demand growth. So occupancies should grow this year by another 50 to 100 basis points on top of an already record level of occupancy overall for the industry. Supply growth in various urban markets will continue to be a challenge through next year particularly with deliveries stretching out due to even longer construction delays. With demand exceeding supply growth this year and occupancy levels rising from record levels, we're seeing industry RevPAR growth accelerate from last year's rate of growth.

In the second quarter, RevPAR increased to 4% growth with ADR growth accelerating to a 2.9% increase and occupancy rising 1.1%. We haven't seen 4% or better quarterly industry RevPAR growth outside of the hurricane-aided fourth quarter last year since the fourth quarter of 2015. We also haven't seen industry demand grow by the 3.1% rate of the second quarter outside of last year's hurricane-aided fourth quarter since the first quarter of 2015 over 3 years ago. And finally, we haven't seen ADR growth as good as the second quarter's 2.9% since the third quarter of 2016. Overall, it's clear that positive momentum continues for the lodging industry.

And while the second quarter benefited from holiday shifts affecting both April and June, the rate of demand growth bottomed in the first quarter of 2016 and has been rising consistently ever since clearly following the improvements in business activity and business profits. The same can be said for the pace of ADR growth which bottomed more recently in the third quarter of 2017 and has been rising since. If we look at the weekday industry statistics in the second quarter, we see the clear presence of improving business travel. Weekday RevPAR increased a strong 4.3% in the second quarter accelerating from 3.9% in the first quarter and 3.6% on a trailing 12-month basis. Weekend industry activity has also been improving but weekday RevPAR growth is now running higher than weekend growth. Weekend RevPAR grew 3.6% in the quarter compared to 2.2% in the first quarter and 2.7% on a trailing 12-month basis.

Year-to-date weekday RevPAR growth of 4% compares to 3% for all of 2017 and weekend year-to-date RevPAR growth of 2.9% compares to 3.2% last year. Weekday ADR growth has also been accelerating, growing 3.1% in Q2 versus 2.6% in Q1 and 2% in 2017. Clearly a very positive trend. Weekend ADR has also improved growing 2.5% in Q2 versus 2.3% in Q1 against 2.2% in 2017.

These improving trends particularly with business travel, have been benefiting the urban markets. We've seen a significant narrowing of the underperformance gap to the industry. At the beginning of the year, we were forecasting urban RevPAR growth would run between 150 and 200 basis points lower primarily due to substantially higher supply growth in the urban markets. In Q2, with industry RevPAR growth of 4%, RevPAR for the STR defined urban markets, grew 3.9% or just 10 basis points below the industry's performance. And while the holiday shift in the second quarter benefited business travel more so than leisure, this improvement in the performance of urban markets, even with increased supply growth, is a very significant positive.

The urban markets are also benefiting from an improvement in international inbound travel which according to tourism economics has risen 3.9% year-to-date through April and 3.2% when we look at just overseas inbound travel which excludes Canada and Mexico which can be influenced by daily cross-border business or leisure travel.

Since the Department of Commerce has temporarily halted, providing inbound travel data, it is indicated and has indicated its previously provided data was inaccurate, tourism economics has stepped in utilizing extensive alternative government and private sector datasets to make these estimates. And these numbers seem consistent with what the brands have been communicating. As it relates to demand at our hotels, we continue to see increases in short-term group bookings as well as short-term pickup in our corporate transient business. In addition, for the second quarter in a row, we're seeing increases in group bookings a little further out for both in the year, for the year, as well as for next year which I'll discuss in detail a little later but this improving trend has already led to an exceptionally strong positive group pace for 2019.

Our group pace for this year continued to improve in the second quarter. During the quarter, we went from being ahead by 2,700 group room nights at the end of Q1 to now being up 6,500 group room nights for the year. At the end of Q2 for all of 2018, group room nights were up 1.5% with ADR up 1.6% and group revenues up 3.1%. We booked meaningfully more rooms in Q2 for the year versus last year; 5% more rooms and 5.6% higher combined total revenues for both group and transient. Most importantly at this point, total revenue pace for the second half of the year is ahead by 3.4% with total room nights, group and transient up 1.8% and ADR up 1.6%. Pace for group and transient revenues are ahead equally for the second half; both up 3.4%.

We continue to see better attendance from groups both in-house and convention-related and less attrition and fewer no-shows. It seems that businesses are sending more people to their meetings and allowing more of their employees to go to conventions and conferences. Maybe it's the same for your businesses. More companies have told us, or our operators, that their travel restrictions have been lessened or, in some cases, eliminated completely. These are all signs that we saw late in the first quarter which have continued in the second quarter. At this point, we'd certainly call these trends. Finally, at our hotels, we continue to see group spend more per group customer than last year; either improving the quality of their meals or breaks or adding additional meals, breaks, cocktail hours or other events. This was a trend we identified at the end of last year and it has definitely continued all year this year.

As Ray said earlier, our overall operating performance was better than we forecasted. Our revenue beat would have been even higher had it not been for a much greater than expected negative impact from Marriott sales and revenue management reorganization. We'll also have some easier comparisons next year for 2 other properties; LaPlaya Beach Resort in Naples, where, as planned we've negatively impacted performance due to hurricane repair work including in the second quarter.

The repair work is forecasted to be complete by the end of the third quarter consistent with our outlook. And at Embassy Suites San Diego, we've also been completing renovation work as planned including in the second quarter that is negatively impacting room revenues by over a million dollars this year.

San Francisco led our better-performing markets with our 7 properties totaling a 15.5% RevPAR increase in the second quarter. Our Union Square properties outperformed our Fisherman's Wharf properties as well as the market. I think the second quarter’s performance is a great representation of what happens in San Francisco when there is a strong convention calendar, particularly on a year-over-year basis. This bodes extremely well for 2019 with the city’s convention business on the books growing dramatically over 2018; very similar to the second quarter of this year.

In addition to San Francisco, Minneapolis, Philadelphia and Naples performed better than expected. San Diego also performed better than expected but our properties didn't participate given the Marriott reorganization and Embassy renovation impacts previously discussed. Weaker than expected performance in markets in the second quarter included Boston, Portland and West LA. In the quarter, we modified some of our booking and revenue management strategies as we experimented with pushing rate in order to take advantage of the improvement and strength in business travel which also tends to book more short-term than other segments. We're not doing this in all markets or at all times but we're doing it where we believe there's likely to be more demand and compression due to greater business travel. We're having some decent success with this strategy and in some cases, we're willing to give up some occupancy including taking less discount business in order to drive more rate growth and greater profitability. We find the results encouraging so far and we're continuing these efforts in the second half of the year.

I'd like to move on to an update on the performance of our recently redeveloped hotels. We're very pleased with the way our 3 transformative redevelopments from 2017 are performing so far this year. In the first quarter, EBITDA on a combined basis from Palomar Beverly Hills, Revere Boston Common and Zoe's Fisherman's Wharf grew by $2.8 million. As a result, you'll recall, we increased our growth forecast for the year for these 3 properties from $5.2 million of EBITDA in 2018 to $6.5 million. In the second quarter, these 3 transformed properties grew EBITDA by another $2.7 million which was better than we were forecasting particularly at Hotel Zoe Fisherman's Wharf. Given the booking pace for these 3 properties in the second half, the second quarter beat and the positive momentum generated already this year we're, again, increasing the EBITDA growth forecast for this year by another million dollars from $6.5 million to $7.5 million for these 3 properties.

Now, let's spend a few minutes talking about 2019 before discussing the remainder of 2018. As we've mentioned previously, 2019 is setting up to be a very good year for both the industry and more importantly for Pebblebrook. As has been discussed at length, both by us and many others, San Francisco, which represents roughly 25% of our portfolio-wide EBITDA for 2018 currently has a spectacular convention calendar next year following the completion of the renovation and expansion of the Moscone Convention Center which we're told continues to be on track for a late 2018 completion.

Convention room nights on the books for the city for next year were up by 72% as of June with the number of days with compression as represented by days for 5,000 or more rooms on the books increasing a whopping 126% going from 39 days in 2018 to 88 days in 2019. These are obviously huge increases and are consistent with both our booking pace for 2019 as well as our increasingly confident expectations for at least a high single-digit increase in RevPAR in San Francisco for 2019. In addition to the strength in San Francisco, we'll have easy comparisons with our legacy Starwood managed hotels and our Kimpton Hotels due to the significant negative impact in 2018 from the integrations and reorganizations as well as from the significant growth we expected. LaPlaya did an easy comparisons and the benefit from the comprehensive property-wide renovations we've undertaken in the last 2 years. We also have a significant number of properties that we've completely transformed that we'll be continuing to ramp up in 2019 toward stabilization including the 7 properties in just the last 2 years. At the same time, it's likely that economic growth will continue at a healthy level in 2019 coming off what is likely to be record growth in corporate profits in 2017 and 2018 which, combined, are likely to drive further growth in business, in both business travel and leisure travel. When we look at our pace for 2019, we're particularly encouraged. Group revenues for 2019 are up a robust 28.3% over same time last year for 2018. Group room nights are up 22.9% with ADR up by 4.4%. The pace advantage for 2019 is also broad-based. With group pace up in all of our markets except Seattle, Coral Gables and Minneapolis, which was already fully booked for the Super Bowl this year.

Those 3 markets combined are down roughly $600,000 in group revenues in 2019 while the rest of our markets are up $8.7 million combined with transient, total revenue pace for 2019 is ahead by 29.6% with room nights up 23.6% and ADR ahead by 4.9%. It's all extremely positive right now for 2019.

With pace for the rest of 2018 ahead in a positive way and with economic and travel trends very favorable, we're optimistic about the second half of this year. As a result, we made a tactical decision 30 days ago to expand the scope of renovations at 2 of our properties in San Francisco in order to position them competitively to take most advantage of the upcoming strength in 2019 and beyond in the city. The increased scope at Hotel Zelos and Sir Francis Drake which now includes the addition of relatively disruptive and time-consuming bathroom upgrades will reduce our room revenues in the second half of the year and primarily in the fourth quarter by almost $3 million. This represents an impact of almost 60 basis points to 2018's potential RevPAR growth and over 110 basis points to the second half growth rate. As a result, we're not in a position to increase our RevPAR growth rate or our hotel EBITDA outlook for 2018 even with the second quarter's favorable performance and our very positive outlook in general for the second half of the year. So by keeping our hotel EBITDA outlook flat for 2018, we're absorbing this higher level of EBITDA disruption from renovations through the $1.4 million second quarter beat and an improved outlook in general for the second half of the year. And due to our improving expectations for the industry, we're increasing our outlook for industry RevPAR growth to a new range of 2.5% to 3.5% and we're increasing our outlook for the urban segment to a RevPAR growth range of 2% to 3%.

While our RevPAR growth and hotel EBITDA outlooks are not increasing, we are increasing our outlook for adjusted EBITDA for 2018 by $2.2 million despite the higher interest expense due to our increased strategic ownership of LaSalle and the elimination of dividends on the LaSalle investment that were previously included in our outlook for the second half of the year.

Finally, I'd like to make a few comments about the status of our pursuit to strategically combine with LaSalle Hotel properties. As you know, in late May, LaSalle's board made a decision to enter into an agreement to sell LaSalle to Blackstone for a price of $33.50 per share despite the 7.1% premium at the time of our stock and cash offer. After increasing our ownership to 9.8%, we decided to revise our offer to fix the cash portion of our offer at $37.80 per share providing a partial but substantial anchor to the value of our offer. At that time, our offer represented a premium of 13% to the agreed upon Blackstone price of $33.50.

Despite this huge premium, LaSalle again declined our revised offer and did so without communicating or negotiating with us in any way. Based upon the favorable industry trends, the continuing positive performance of our stock and all of the lodging REITs, LaSalle shareholders have been consistently valuing our offer at a significant premium to the Blackstone price as clearly evidenced by LaSalle's shares consistently trading in a range with a very significant premium to what is now the Blackstone take underprice.

Based upon our discussions with LaSalle's shareholders owning the vast majority of LaSalle's shares, it should come as no surprise that they are overwhelmingly in support of our offer and completely against the existing proposed agreement. Consequently, the proposed agreement with Blackstone is not in a position to receive shareholder approval and not surprisingly might not even get any votes today given where our stock and their shares are trading. After all, since LaSalle's announcement of the Blackstone deal, over 110 million LaSalle shares have traded and every single one of those shares traded above the Blackstone price. So clearly, any shareholder wanting the certainty of cash has already received it.

Consequently, we strongly encourage LaSalle's board as we did in our most recent letter sent late last week to take advantage of the opportunity to deliver more value to their shareholders by acceding to those shareholders clear desires which have been expressed in the many shareholder letters and discussions both publically and privately provided to the LaSalle board. We urge LaSalle's board to recognize the changes in facts and circumstances, determine that our offer will lead to a superior proposal and move forward with quickly finalizing a merger agreement with Pebblebrook.

Even taking into consideration shareholder approvals, we believe we could close in the next 90 days if not sooner. We believe the many benefits of strategically combining our 2 fine companies are compelling and very clear to our shareholders and LaSalle shareholders, many of whom continue to be the same and we've clearly laid out those benefits in our letters to LaSalle's board over the last 5 months so we don’t feel it's necessary to repeat them here. Given our substantial ownership in LaSalle and the overwhelming preference of LaSalle's shareholders for the higher value of our offer, we want to again make it clear that we're not going away until LaSalle's shareholders are satisfied.

We would now be happy to answer any questions you have. Please keep in mind, due to instructions from our legal counsel, there's limited further comments we can make about the proposed merger. Donna, you may proceed with the Q&A.

Thank you. The floor is now open for questions. (Operator Instructions) Our first question is coming from Jeff Donnelly of Wells Fargo.

Actually just maybe a first question for housekeeping, is on the disruption, what's the total EBITDA that you're expecting to have lost from renovation disruption in 2018 and then specifically LaPlaya?

Give us a second here. I think as it relates to LaPlaya, it's between the $1.5 million and the $1.9 million which represents also the settlement and then in total we're talking about $6.3 million from renovations.

Okay, that's helpful. And maybe, Jon, I just had a question for you about pricing power. The industry and most of your markets are at record occupancy but the incremental demand that we're seeing isn't necessarily translating to the rate spikes that maybe we're accustomed to seeing in kind of comparable periods in the past, is that a reflection of just price transparency that now exists in the industry? You know, call it corporate austerity is -- I guess, I'm curious, is there something about the nature of the demand that maybe has curtailed the ADR spikes that maybe we used to see in some markets?

So I think it's likely a result of quite a number of factors, Jeff. I mean, I think part of it -- we've talked about in the past there are some structural issues in the industry that some of which can be addressed. Obviously, the issue of transparency and pricing cannot and that's to the clear benefit of consumers. But I think as it relates to some of these structural issues we've talked about in the past, most of them are in the process of being corrected. It involves the terms upon which basically the agreements are made with the customer where most of our properties cancellation rights need to be outside of either 48 or 72 days. The industry, as well as our properties, have been selling much more advance purchase rates and terms which means those are prepaid, nonrefundable rates and both of those allow our properties to, at this point, as those changes have been made, it allows us to better revenue manage our properties and in many cases to wait for the higher priced later business that we've traditionally had particularly coming from business travel and with the improvement in business travel, we've seen an improvement in ADR growth. We haven't seen a dramatic increase in ADR but we have been gradually seeing ADR and increases as I've communicated in detail in the comments.

But I think the improvements in cancellation terms, the variety of pricing alternatives and term alternatives being provided to the customer are beneficial ultimately to pricing. I think the increased regulation that's being passed in many cities will be passed in additional cities along with increased enforcement related to short-term online rental management that violates zoning. I think that is beginning to benefit markets as we've seen in both New York and probably San Francisco, just recently passed in San Diego, just recently passed in Boston, was passed in Chicago. So I think that's beneficial and then Marriott is re-launching a combined loyalty program of their 3 brands; the Starwood SPG Program as well as the Ritz and the Marriott Loyalty Programs on August 18 and with that they're changing the -- and we've talked about this before, we've talked -- they're changing the reimbursement formula for redemptions to owners to make it much more of a slope instead of an on/off switch at 95% and we think that will have, as well, a very positive impact on future ADR growth and opportunity as revenue managers don’t need to try to do everything they can including really lowering rates at the last minute in order to get to that 95% on-off switch if they have a lot of redemptions on the books.

So we are seeing things move in a very positive direction and it certainly wouldn’t come as a surprise to us as this demand-supply imbalance continues in a positive way that we continue to get more pricing power in many of our markets.

That's helpful. I know it's a far-reaching question. And maybe on the expense side. I guess how do you think we should be thinking about expenses in the next 12 to 18 months, labor costs seem to be a significant and growing part of the expense pie, if you will, and it's hard to point to other expense categories that could provide some offset. I'm just curious how you're thinking about expenses and maybe flow through in the face of the sort of rising RevPAR that we're enjoying?

Yes, I mean I think the fallacy of just thinking of it that way Jeff is that there are lots of new ways to do things and so technology is beneficial, efficiencies can be found through investment and energy reduction technologies and green programs. There's new technologies that come out every day. As you know, we are seeing a shift, it's very gradual and should be, as the technology needs to be -- needs to be substantiated and any bugs taken out but you know, we're seeing more folks bypassing the front desk completely and going right to their rooms with the ability to open their doors off their phone devices. So, I do think as we've shown already this year, and as we're forecasting for the second half of the year, I think we are able to find efficiencies, different ways of doing business, different concepting in our food and beverage outlets, changing the way we do business, job sharing, all sorts of things that offset the wage and benefit pressures which are probably running 3% plus in our markets throughout our portfolio.

Our next question is coming from Rich Hightower of Evercore ISI.

Jon, I want to go back to the question about the Marriott/Starwood sales reorganization and some of the impact that it had on your portfolio this year. Is there a way to frame out for us what the market loss share or RevPAR index share has been this year and then what those easy comps might look like next year that you sort of alluded to but didn’t give maybe as much detail on? Is there a way to frame that out quantitatively for us?

Yes, so right now the combination of the lost RevPAR from the Marriott Starwood integration for the year and the integration of Kimpton with IHG, we're estimating a total of 100 basis of RevPAR lost for the whole portfolio. So, obviously, it's much greater with the impacted hotels.

Okay. And is that broad-based across every market that you're in? I mean, would you say it's isolated to a handful of hotels or markets?

Yes, I wish it had been isolated. Unfortunately, it's pretty broad-based across the 3 Marriott managed hotels because those are the 3 that have been reorganized and all of the Kimpton properties because the systems integration and changes had an impact on all of them. It was varying degrees at all properties Rich, obviously, none of them were exactly the same but it was pretty broad-based, none of those ten properties in total were spared.

Got it, yes. And then the second question here, just as you've described the incremental improvement in underlying trends since last quarter, since the beginning of the year, have you thought about the -- you know, updating your NAV estimate for investors now that presumably, the value of the properties has gone up in that period?

Well, we did do it last quarter in June, so last month, so I think that that took those things into account already.

Our next question is coming from Anthony Powell of Barclays.

A few questions on the San Francisco renovations. I think every REIT that we cover is doing some kind of renovation in the market this year. Given that, do you expect any kind of RevPAR index gains from Sir Francis Drake and Hotel Zelos or is it more of a matter of keeping up with the market?

Well, we do expect gains, not just because of the bathroom work but because of the guestroom work that we're doing as well. Those were already previously scheduled renovations for the guestrooms and we made a decision after touring the market and having conversations with our operators that we would benefit from doing additional work and substantive work in the bathrooms and so, you know, we've done that work previously at Zetta and Zeppelin and Zoe, a lot of Z's sorry, that's our thing though. But -- and it's paid dividends and so we do think we'll pick up share overall. We don’t think it's completely defensive. It certainly is somewhat defensive as others, as you've indicated have made similar improvements in their properties.

Got it. And a couple of the renovations like -- I think particularly Zoe had some delays in recent years given the strength of the market it's important that the renovations are done on time. How will you ensure that there aren't any incremental delays in these 2 projects?

Well, we've been -- I don’t know if we can ensure given the challenges in the market but, you know, it goes to having extremely experienced project managers on the job now who have gone through many of these in the market. Same with the contractor and subs that get selected, making sure they have the crews available and committed to the schedule that they've provided to us.

We've tried to build in plenty of cushion, don’t know if it's enough but we know how these things have worked in the past and, you know, in our case we've also built in additional dollars that might be needed in order to accelerate any work that might otherwise get behind. So, you know, we've also been careful in what we've selected, how -- tried to limit the construction but for the work, we're doing in the bathrooms we've limited the construction which limits the permits that are required and the ultimate inspections that are required. So, you know, we're doing everything we can. There's no assurance that we won't have issues but hopefully, we've built in enough cushion and enough contingency.

Got it and just one more from me. Supply growth happened initially in Portland, what's kind of the next 2 years look like from supply growth there and when do you think your RevPAR can kind of turn around in that market?

Yes, so it gets a little bit better next year but not much and then with the delivery of the 600-room Hyatt over adjacent to the convention center, it continues on into 2020. So, I'd love to tell you we see a light at the end of the tunnel in Portland but we don’t right now. That's probably one of the markets with the most supply growth outside of maybe Nashville in our whole portfolio and you know, the good thing is Portland is a strongly growing market economically, it's benefiting from being between the really strong markets of Seattle and San Francisco but it's a lot of supply and we think the Portland market is going to continue to be a challenge over the next couple of years.

And your next question is coming from Michael Bellisario of Robert W. Baird.

Just first on San Francisco maybe your kind of near-term outlook there. How should we think about kind of the quarter-to-quarter performance 3Q and 4Q this year, you know, volatility up, volatility down before we [really hit] a good run rate next year?

Yes, that's a good question because the 2 quarters are dramatically different. So we think -- we think the third quarter is going to be mid to maybe upper middle single-digit RevPAR growth. It's a good calendar compared to last year. We're up -- we're up in compression nights in the market by 11 versus 8 in the quarter last year. We have sales force that moved from November to September. So that should help.

Obviously, July 4 was a big negative following as a Wednesday right in the middle of the week and that impacts all markets and the Jewish holidays in September. And then Q4 is the sort of the last week convention calendar, as I said, with sales force moving out in November into September, the room nights are down about 24% right now in Q4. So we expect Q4 to be probably flat to down as a market. Albeit with more than normal rooms out of service for renovations, not just with our properties but a number of properties in the market including, as an example, The W and the Big Marriott Marquis.

And all of those numbers are for the broader San Francisco market, right?

Correct.

Got it, that's helpful. And then just kind of in the whole LaSalle process, it's clearly dragging on but maybe when do you think about, you know, regardless of the outcome there, looking at other acquisition disposition opportunities for your existing portfolio to use your cost to capital advantage that you have today, albeit smaller deals but potentially value-creating transactions on that side.

Yes, I would say for now and for the foreseeable future, until there's a resolution we'll be, I guess, solely and hyper-focused on the -- trying to put these 2 companies together which makes so much sense.

Our next question is coming from Stephen Grambling of Goldman Sachs.

I guess excluding the proposed transaction out there, and I guess given the strengthening debt market and the strength in the underlying trends, how are you thinking about approaching hotel acquisitions and dispositions?

So, you know, similar to what I just mentioned as it relates to acquisitions, we're really not focused on other acquisitions at this point. It's really hard to pursue other acquisitions and plan out your financials with a potential $5 billion combination up in the air. So for us, we're very comfortable waiting because of the benefits of being successful there if we ultimately can be.

As it relates to dispositions, you know, our disposition effort will be relatively limited. We've talked about a couple of assets in the past that we would have an interest in selling. One of those is our Minneapolis property and the second is the retail space, the 44,000 retail, square foot retail space at Hotel Zephyr that we call Zephyr Wharf and we're in the process of working with a ground leaser to divide the ground lease into 2 ground leases; one that would be just for the retail and one for the hotel, the parking and the rest of the property and that will probably take us another 9 months to a year to get finished. We are moving forward with that and hopefully get a final agreement with the ground leaser because it creates great liquidity for them and more flexibility to have 2 assets that they can treat separately versus -- the other thing is, as we've said in the past, you know, street retailer or retail, in general, is not our core discipline and expertise and so that asset would be much better performing if it were in somebody else's hands who actually knew what they were doing versus our efforts.

So that's really how we look at it in general. You know, we do continue to receive unsolicited offers for individual properties and we continue to be open to selling any of those properties at the right price and as you know, we sold about $700 million over the course of about an 18-month period and some of those were clearly opportunistic in nature.

Great, maybe a follow-up on that. I guess I appreciate the time constraints with the current deal but maybe more philosophically as you're seeing strengthening trends and loosening debt markets, are you changing your own, or would you be changing your own, underwriting standards? And as you look at deals that are done in the markets, do you feel like others may be changing the underwriting standard too?

Yes, that's a fair question. I don’t think so Stephen, in fact, we've talked in the past that we would look even before the major -- potential major transaction here. We've talked about you know, that we'd be looking at acquisitions based upon what we see as a maybe reacceleration in the industry and in our portfolio and in our markets. But it still is late in the cycle and frankly going out and paying cash given the aggressive nature of some other buyers and the pricing that's out there, I guess we'd be probably -- we'd be looking and we'd be underwriting. I'm not sure that we'd be committed enough to take advantage of our cost to capital advantage enough to offset the extra risk we see in buying for cash assets this late in the cycle. So, I think we'd be a looker, we'd be an underwriter. I doubt we'd be successful given -- I do think the levered buyers, in general, may have an advantage out there given the increasing availability of debt and the attractive cost nature of that debt.

(Operator Instructions) Our next question is coming from Lukas Hartwich of Green Street Advisors.

Is there a way to quantify the impact on San Francisco's fundamental's from those new home sharing regulations?

I wish there was. I mean, there's not really great data. What we -- what we look at is obviously the anecdotal evidence that the drop in the inventory that's happened because of the new law going into effect and the enforcement of that and I think those will continue actually to decline over time as the enforcement gets better and in some cases gets more aggressive in the market.

So I wish there was a way to quantify it. You know, there wasn't a way to quantify the impact of the growth in the short-term online rentals other than anecdotal and there really isn't a way at least for, that we've seen, to quantify it in the other direction.

That's helpful. And then another quick one, just the 19 pace that you talked about, was it 23% up, 29% up, something like that…

28%, 29%, yes.

Okay, 29%, what percentage of your expected business in 2019 is that? Is that like 10% to 15% of your total business in 2019?

Yes, so -- the group that we have on the books right now represents about 25% of what we expect will be the budgeted group for the year.

Okay, and then that 29%, was that group plus transient or was that just group?

Well, we gave 2 different numbers, Lukas. Group was up 28.3% of which 22.9% growth in room nights and 4.4% in ADR and so that number, that 25% I just gave you was for the group.

Okay.

And then the pace in total is up 23% -- 23.6% of room nights, 4.9% in ADR and 29.6% in revenue. Obviously not a huge amount of transit on the books although the big piece, the big impact would be transient related to JP Morgan which is in the first 2 weeks of January in San Francisco and with the average rates particularly in the Union Square market north of $1000. When those are up 10%, it's $100.00 and so some of that obviously is showing up in our pace data.

At this time I would like to turn the floor back over to Mr. Bortz for closing comment.

Okay, thanks, Donna. Thanks, everybody, for participating. Hopefully we'll see some progress on some of these issues and certainly, we look forward to a great third quarter and second half of the year and we look forward to communicating our results to you in another 90 days and in the meantime we wish everybody a great summer. Thank you.

Ladies and gentlemen, thank you for your participation, this concludes today's conference. You may disconnect your lines at this time and have a wonderful day.