RLJ Lodging Trust (RLJ) 2017 Q3 法說會逐字稿

Welcome to the RLJ Lodging Trust's Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Hilda Delgado, Treasurer and Corporate Vice President of Finance. Please go ahead.

Thank you, Operator. Welcome to RLJ Lodging Trust's Third Quarter Earnings Call. On today's call, Ross Bierkan, our President and Chief Executive Officer, will discuss key highlights for the quarter. Leslie Hale, our Chief Operating Officer and Chief Financial Officer, will discuss the company's operational and financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements.

Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP, located in our press release from last night.

I will now turn the call over to Ross.

Thank you, Hilda. Good morning, and welcome to our third quarter 2017 earnings call.

This quarter was transformative for RLJ as we completed our merger with FelCor. I want to thank all of our shareholders for their support of this transaction. I also want to thank our employees, who worked tirelessly to make this merger possible and who continue to work to ensure a smooth integration. We are truly excited by what lies ahead.

Over the years, we've remained committed to our investment strategy of owning high quality, premium branded, focused service and compact full service hotels that have high margins and are located in attractive markets with multiple demand generators.

Historically, this segment, which is primarily rooms revenue focused, has maintained strong top line growth coupled with robust margins. As one of the least volatile segments in the industry, we expect to continue to benefit from this model regardless of where we are in the lodging cycle.

Over time, we've consistently enhanced our portfolio quality and cash flow growth profile through a mix of strategic acquisitions and dispositions. Our merger with FelCor is a continuation of our disciplined approach. We are excited that the merger not only adds brand and market diversification, but also complements our differentiated investment strategy. We believe that the diversification, scale, the value creation opportunities and strong free cash flow profile should continue to drive superior long-term risk-adjusted returns.

Now, with respect to our merger update, our integration efforts are well under way. Our team is working diligently through an extensive integration across all functional areas, including accounting, finance, asset management and design and construction. Within each function, we are well along in combining systems, processes and staffing.

Our team also remains laser focused on our larger strategic initiatives that will drive long-term shareholder value. While these initiatives will naturally take time to fully execute, we're very pleased with the progress that we've made since the merger closed about 60 days ago. These initiatives include four key areas: realizing synergies, selling non-core assets, balance sheet optimization and finally opportunistically reinvesting in our assets.

First, with regards to synergies, we expect to realize corporate, operational and capital synergies, which further enhance our free cash flow. We have a clear line of sight to achieve $22 million of corporate synergies primarily by eliminating duplicative corporate expenses.

While there will be a tail for some corporate contracts that run into 2018, by and large we expect we will have eliminated the majority of these costs by the third quarter of 2018. And while we expect a longer lead time of 12 to 18 months to implement hotel level operating and capital efficiencies, we are excited to bring a fresh perspective to the acquired assets in the portfolio.

As one example, we've already identified opportunities among our capital procurement and property level service contracts. For instance, we identified on average a 23% savings in property level IT hard costs and 31% on the relative run rate per asset. We expect to find additional incremental wins such as these throughout our budgeting process that in aggregate will lead to a larger strategic goal of driving cost efficiencies and margin improvement.

Second, with respect to asset sales, our expanded platform allows us to more proactively optimize our portfolio. We have recycling opportunities in both the FelCor and legacy RLJ portfolio. We've identified 7 non-core hotels, which include boutiques, resorts and luxury properties, in the FelCor portfolio that do not meet out investment strategy. We expect to be able to sell this pool of assets in aggregate for at least a 14x EBITDA multiple, which not only would be highly accretive to our shares today, but would reduce the effective multiple paid for the FelCor portfolio by at least a full term.

Although we expect that asset sales within this specific non-core group will be staggered over the next 12 to 18 months, we are pleased by the various stages of contract negotiations underway on a number of these. We will provide further updates as these asset sales materialize.

Third, optimizing our balance sheet. We intend to reduce our overall cost of capital and leverage through proactive balance sheet management. Our most immediate active disposition pipeline includes assets from the FelCor and the RLJ portfolios that we anticipate will generate $300 million to $500 million of proceeds to be used towards retiring higher rated debt. Use of the proceeds from any incremental sales will be evaluated against retiring other high cost debt as well as opportunistic share buybacks.

And finally, reinvesting in our assets. We will look to drive additional market share and future growth by prudently investing capital in select renovations and conversion opportunities. Through our extensive experience in converting assets, we've historically produced significant EBITDA growth on a post stabilized basis.

We're in the early stages of discussions with the brands regarding some of these opportunities, such as the Embassy Suites Mandalay Bay in Oxnard, California. Based on this asset's location and the competitive set in the market, we see an opportunity to convert this to one of Hilton's lifestyle brands, which we expect would drive more than a 15% increase in EBITDA.

By realizing synergies, optimizing our portfolio, lowering our overall cost of capital and reinvesting in our portfolio, we're positioning ourselves for long-term growth. We have an expansive, high quality, diversified portfolio of premium branded focused service and compact full service hotels that has positioned us to be the leading player in the most profitable segment in the industry. We believe that with our strong balance sheet and ongoing strategic initiatives, we'll continue to refine our positioning and drive substantial value for our shareholders.

Now, before turning to our third quarter results, I would like to take a minute to say that I'm extremely appreciative and proud of our property level associates, who, despite the incredible difficulty in their personal lives caused by the 2 devastating hurricanes, truly went above and beyond in taking care of our guests. Their efforts were extraordinary under the circumstances and truly made a difference in the lives of so many of those guests. Their dedication also ensured that we were able to return to normal business operations as soon as possible. We thank them.

Despite the back to back hurricanes, our legacy portfolio performed in line with our expectations. The addition of the new FelCor assets provided a positive lift to our quarterly RevPAR of approximately 40 basis points, leading to combined results that were better than our standalone estimates at the time of our last earnings call.

Given the multiple market headwinds in the quarter, we were pleased that our overall pro forma RevPAR decreased just 1.9% or a decrease of 1.1% if we adjust for hurricane related displacement. Hurricanes Harvey and Irma resulted in some of our hotels experiencing water intrusion and minor damage. None of our properties experienced significant damage, and therefore we do not foresee any future disruption to earnings.

In Houston, we have seen robust demand at our hotel since the hurricane. In September, despite a few days of disruption, RevPAR grew 41.8%, driving positive RevPAR growth of 6.9% for the quarter. Given the 5 extended stay assets we have in the market, we've seen significant post-hurricane demand continue into October and November.

In Austin, hurricane related cancellations and some group events and city-wide activity, plus the mix of non-repeating business from last year muted RevPAR, leading to a decline of 6.1% for the quarter. Storm related disruption negatively impacted RevPAR by approximately 260 basis points. With some of these headwinds now behind us, we expect fourth quarter results to slightly improve relative to Q3.

In South Florida, the temporary closures of 8 hotels due to the mandatory evacuation orders were partially offset by the lift from post-hurricane recovery activity, leading to flat RevPAR growth. October clearly benefited from recovery business, but the ongoing pace is unclear. Still, given this demand and potential upside from disrupted Caribbean travel, we are cautiously optimistic about the trends in South Florida.

In Northern California, RevPAR declined by 1.2% this quarter, slightly better than expected. Given increased city-wide activity and easier comps, we expect strengthening performance in Q4. Also, with record breaking city-wide activity in San Francisco expected in 2019 and our increased footprint in the region as a result of the merger, we expect this market to be a powerful driver of performance within our portfolio long-term.

In Southern California, our hotels benefited from robust corporate demand and strong group, leading to 4.4% RevPAR growth during the third quarter. Southern California has been one of our strongest markets all year and we expect these positive trends to continue into the fourth quarter.

Strong corporate demand was also the main driver of our growth in the Denver market, where our hotels achieved RevPAR growth of 1.7% despite a weak city-wide calendar. We continue to expect strong corporate demand to drive positive results at our Denver properties.

In Chicago, RevPAR declined by 8.6%. A sprinkler head malfunction on a high floor at our Mag Mile property led to water damage in 53 rooms, negatively impacting our market performance by approximately 360 basis points and our overall portfolio by approximately 20 basis points this quarter. While we expect these rooms to come back on line by the beginning of the year, we expect continued disruptions in these rooms along with weaker city-wide activity to lead to soft Chicago RevPAR in the fourth quarter.

In Louisville, our RevPAR declined of 1.4% was an improvement from the previous quarter as the market benefited from easier comps related to the Convention Center closure. We remain on track to post positive RevPAR growth in the fourth quarter as a result of strong city-wide activity and alternative venues in the city as well as a large in-house group at our Marriott.

Washington D.C. and New York experienced RevPAR declines of 2.9% and 3.5% respectively, partly because of the holiday shift along with some difficult comps in both markets.

Finally, our non-top 10 markets, which now represent approximately 35% of our EBITDA, experienced a RevPAR decline of 3.6%. In addition to the impact from the holiday shift, markets such as Atlanta, Myrtle Beach, Charleston and New Orleans were impacted by the hurricane, but did not benefit from the post-hurricane lift we saw in markets such as Houston and South Florida.

Additionally, Philadelphia had difficult comparison from the Democratic Convention last year. We do expect to see significant improvement in the fourth quarter as many of these markets are projecting stronger demand.

As for our outlook, as we look out over the general back up, we are encouraged by a number of favorable economic indicators. Given lower unemployment, improving GDP growth, rising consumer confidence and strong corporate profit, we expect lodging demand to remain healthy.

On the legislative front, the prospect of tax reform has also gained momentum and an infrastructure bill might follow. All of these could be a tailwind for corporate demand next year.

While the macroeconomic backdrop is continuing to drive positive lodging demand, pricing power remains muted in light of new supply, especially in major urban markets. We expect supply to remain a headwind to RevPAR growth in a number of markets in the near to medium-term. At the same time we are monitoring the impact of the reconstruction activity in Texas and Florida on the cost of hotel construction, which could lead to a favorable deceleration in new development.

Looking further out in 2018, we expect the first half of the year to have some difficult comp as a result of the Super Bowl in Houston and inauguration in DC. However, we expect to see positive lift in South Florida from a potential increase in leisure demand.

Next year, we will have also lapped the closures of the convention centers in San Francisco, Louisville and Miami and we will be well positioned to benefit once they are fully operational. We'll provide further 2018 detail and guidance on our year-end earnings call, according to standard practice.

I'm energized about the direction and future of our company as we continue executing our strategic plan. I'm excited about the multiple levers we're pulling to drive cash flow and shareholder return. We're poised to benefit from a number of unique opportunities embedded in our combined platform that will set the stage for long-term growth.

And with that, I'll turn the call over to Leslie for a more detailed review of our operational and financial highlights. Leslie?

Thanks, Ron. First, I would like to reiterate that we are excited about the direction of the company and the platform we are building to drive continuous growth. I am proud of the team we have in place as well as the new team members who are joining us.

One of our recent key additions includes Tom Bardenett, who joined us as Executive Vice President of Asset Management. Tom is a respected industry veteran, who brings broad industry and operational experience well suited for our portfolio. We are excited to have Tom as part of our senior team.

Now, turning to our financial performance for the quarter. Before discussing our operating result, I would like to highlight for our listeners that our pro forma operating results for quarter include the addition of the FelCor assets for the full quarter. However, corporate results such as FFO and EBITDA include only 1 month of FelCor results.

In the third quarter, RevPAR for our combined 158 hotels declined 1.9%. July was the softest month, with RevPAR declining by 2.9% as the 4th of July holiday fell on a Tuesday this year, impacting both group and corporate transient demand.

August was relatively flat, while September experienced a 2.4% RevPAR decline, largely due to the shift of the Jewish holiday and the 2 hurricanes. Adjusting for the hurricane disruption, RevPAR in September would have been flat.

In light of all the moving pieces this quarter, we are highlighting the results of both respective portfolios. On a standalone basis, third quarter RevPAR for the legacy RLJ assets declined by 2.3% and RevPAR for the FelCor hotels declined by 1.4%. We were pleased with the lift from our newly acquired hotel, which further affirmed the benefit of a portfolio diversification both geographically and from a brand and business mix standpoint.

From a segmentation perspective, our portfolio saw trends similar to the overall industry. Group was down and was partially offset by transient business, in particular leisure.

With the addition of 18 Embassy Suites hotels to our portfolio, we benefited from the relative strength in leisure travel. The added benefit of greater exposure to a brand that attracts strong shoulder business from leisure travelers balances out corporate demand patterns and provides increased earnings stability.

With regards to our bottom line, in light of a 1.9% RevPAR decline, we were pleased that our expenses increased less than 1%, leading to a margin drop of only 137 basis points. Given the operating efficiencies of our assets, our portfolio continued to generate strong margins of 33.1%. Excluding the 7 non-core FelCor hotels that we are looking to sell, our EBITDA margin would have been 34%.

Now, turning to our corporate performance during the quarter. Adjusted EBITDA was $108 million and adjusted FFO was $86.5 million or $0.61 on a per share basis. The 1 month of FelCor result was accretive to the adjusted FFO per share by approximately 4.5%. Both adjusted EBITDA and adjusted FFO reflects add back to normalize our operating expenses.

Adjustments worth noting in the quarter include approximately $33 million of transaction in transition related expenses associated with the merger. It also includes approximately $1 million for hurricane related expenses. We recommend reviewing the exhibits in last night's press release for a full reconciliation of adjusted FFO and adjusted EBITDA.

Moving on to the balance sheet. Given our current leverage, robust interest coverage ratio and a well-laddered maturity profile, we continue to have a strong and flexible balance sheet. During the quarter, we assumed $1.2 billion of debt in connection with the merger. In total for the quarter, our aggregate debt outstanding was $2.8 billion and our unrestricted cash balance was $421 million.

For the quarter, our net debt to EBITDA ratio on a pro forma basis for the merger was 4.1x. We expect our net debt to EBITDA to improve further as we execute on our disposition strategy. We are encouraged by our disposition pipeline and we anticipate using the proceeds from the sale towards retiring $525 million of bonds that we assumed and are callable in March of 2018.

Our liquidity position remains strong and is supported by our current unrestricted cash and an undrawn $600 million revolving credit facility, which was upsized from $400 million in connection with the merger. We continue to have a solid base of unencumbered assets. As of quarter end, we increased our unencumbered assets from 108 to 129, representing approximately 80% of our hotel EBITDA.

In terms of our capital distribution, we continue to see dividends and opportunistic share buybacks as an integral component of how we return capital to our shareholders. During the quarter, we paid a quarterly dividend of $0.33, which was prorated into 2 payments to account for the timing of the merger.

During a short open window in the quarter, we repurchased 123,000 shares at an average price of $21.31, which we believe represents a significant discount to our NAV. Over the last 6 years, our robust free cash flow and strategic dispositions have allowed us to recycle capital into new acquisitions, execute value-added renovations and grow our dividend on average by 17% annually. In aggregate, we returned over $1 billion to our shareholders in the form of dividends and share buybacks.

Turning to capital expenditures. Our 2017 renovations at our legacy hotels are now in their final stages. One of our key projects this year was the Marriott, Louisville, where we are doing a comprehensive renovation, including both guest rooms and public spaces. Renovations at this property remain on schedule to be completed prior to the reopening of the adjacent Convention Center in 2018.

With regards to the newly added assets, a significant portion of their 2017 expenditures were concentrated within 2 major multiyear redevelopment projects: One at the Kingston Plantation in Myrtle Beach, which includes 2 hotels; and the other at the Renaissance Vinoy in St. Petersburg, Florida.

Renovations at the Kingston Plantation will primarily focus on public spaces and were completed in the second quarter of this year. Renovations at the Renaissance Vinoy included guest rooms and public spaces. While these renovations are still underway, they are nearly substantially complete.

During the quarter, we had approximately 60 basis points in revenue disruption, primarily as a result of renovations at the Renaissance Vinoy and the Marriott, Louisville. We expect fourth quarter's disruptions to step down slightly.

During the quarter, while we had $4.5 million of total revenue disruption, no one hotel sustained material damage as a result of the storms. However, in aggregate, we expect remediation efforts across all of our hotels which had some wind and water damage to be $5 million to $6 million. Given the higher deductible required for named storms, we do not anticipate receiving any insurance proceeds for physical damage.

Now, with respect to our outlook. In light of our merger, we are providing fourth quarter guidance in addition to our updated full year guidance. As we have done historically when new assets have been added to our portfolio, we will post a supplemental on our website after market hours today that include combined historical operating statistics.

Now, with respect to our fourth quarter guidance: first, given the positive lift expected from the FelCor portfolio, RevPAR growth for the combine portfolio is expected to be between 0.5% to 2%. Second, we expect hotel EBITDA to be between $136 million to $140 million. And finally, we expect corporate G&A to be between $10 million to $12 million.

For the full year, our guidance is being adjusted as follows. First, we're tightening our range of RevPAR growth to negative 1.25% to negative 0.75% to reflect the lift from the FelCor portfolio. Second, we're adjusting our hotel EBITDA to $606 million to $610 million. Third, we're adjusting our margins to 32% to 32.5%. And finally, we're adjusting our corporate G&A to $30 million to $32 million.

And this concludes our remarks. We'll now open the line for Q&A. Operator?

(Operator Instructions) Our first question today comes from Tyler Batory of Janney Capital Markets.

And congratulations to the team on closing the merger. So I wanted to ask first just on asset sales. Ross, can you just comment on what you're seeing out there generally, maybe also comment on interest from foreign investors in some of your properties as well?

In general, the market is very active. There is significant capital out there and it's chasing a few different types of investments. I guess the first would be value add. There's a lot of investors that are a little bit reluctant to simply make a market bet, but they're looking for value add deal, a catalyst, something that they can affect in the outcome of the hotel that would drive value. And fortunately, we have a few assets like that in our pool of disposition candidates. Next is, there's other investors that are looking for yield, tranches of yield. And out of our legacy portfolio of RLJ assets, some of our select service fit that bill and we feel good that they'll attract attention over the next 12 months. There's always an appetite of course for luxury assets and that (technical difficulty) in capital of course. And the Fairmont Copley in Boston fits the bill and it has attracted a lot of attention. What we did see, though, in the last quarter was that some of the foreign capital activity was a little more subdued. I think China was on the sideline as they gathered for their most recent Congress and Jinping ascended to Mao like status and everything was on hold until they convened. And it will be interesting to see over the next month or so what kind of direction he provides to the active investors that we're all familiar with now and whether or not he basically unleashes them to continue with their international activities. But indications are favorable in that direction, but yet to be seen. Middle Eastern buyers quieted down a little bit. There was quite a bit of conflict in the Gulf between the Saudis and the Qataris. The Korean and Japanese investors quieted down over the unrest. It's easy to forget weeks later how tense things were getting in North Korea, but that had a chilling effect as well. So the foreign capital quieted down, but we expect it to come back in pretty robust fashion at the turn of the year. But in general, the capital markets activity is good despite that. A lot of equity out there, debts affordable and buyers are active. A lot of private equity, a lot of high net worth and even some of our peers in the REIT world are still active in the external growth business.

And then just as a follow-up, I wanted to ask about Houston. A little bit curious on what you are seeing into October in that market and then also curious your thoughts on potentially how long the demand lift could last -- they are just coming out of the hurricane here?

Yes, you bet. October was great of course. We were up, frankly call it, 30%-ish area. And congratulations to the Astros too on their first World Series. But it's interesting. The booking window on the recovery business is actually pretty short. When you look at what's literally on the books, there's quite a bit of fade towards the back end of the quarter. But based on our experience with FEMA and some of the other recovery agencies, we are expecting the tail to last through the quarter. After that, it's hard to gauge. But we think it will be a big boost to the fourth quarter for sure and we are hoping of course that it spreads into the first quarter of next year. But we don't have the business on the books to prove it. It seems to be booking at this point week to week.

The next question is from Wes Golladay of RBC Capital Markets.

Sticking with that Houston question, so it looks like that could add about, just the October month alone, about 60 to 70 basis points to your quarter. And to be clear, you're not guiding for Houston to be strong in November, December based on the booking patterns?

That's right. We're actually tempering pretty considerably our expectations there until we've got hard evidence, Wes, until it actually materializes. So our projection for the fourth quarter for Houston is low double digits. But that's about as aggressive as we want to get.

And then looking at that commentary about the 14 multiple for the non-core assets, is that on the in place cash flow or at normalized post CapEx cash flow? And then on the balance sheet, can you remind us of your leverage goals, because you are -- it looks like you are buying stock now -- or not now, but you were willing to buy in the quarter?

Right, right. I'll take the first part of that. It's in place. The 14 (inaudible) is on -- in place cash flow. And then, Leslie, you want to talk about leverage?

So, Wes, we did in the quarter at 4.1x on a net debt to EBITDA basis. But that's just generally a timing issue. As we deploy capital into the portfolio, as we expect to do, that will move up a bit. But as we pay off the bonds, which we anticipate doing next year, that will bring us back down. So there's a little bit of timing in that number. Yes, we did buy back shares this quarter. We obviously felt that we were severely -- significantly undervalued. And as long as our debt metrics stay within acceptable level, you may see us to be active to the extent that we continue to see our shares trade at these depressed level.

The next question comes from Bill Crow of Raymond James.

I got in late, so if you've addressed this I apologize. But I had 2 questions for you. One was, in your prepared remarks you talked about the completion of the convention center work in -- I think it was Miami, Louisville and San Francisco. And if you could just talk about the group dynamics as you look into '18 and how much impact does that have on your assets in those markets? That would be the first question.

I guess I'll start with San Francisco. That's a market of interest for a lot of folks and we're real pleased to have increased our footprint in the Northern California area as a result of the merger. It's interesting. The pace in San Fran is actually picking up prior to the reopening of Moscone. Second and third quarter next year look pretty good and we expect to participate in that, although we did as part of the merger pick up the 400 key Marriott Union Square. And to their credit, FelCor had initiated a renovation there, which we're continuing. And we are going to be under renovation through the second quarter of next year, so we'll have a little bit of displacement in Q2. But the business is picking up earlier than expected in San Fran. Fourth quarter, ironically, might underwhelm because it's benefiting this year from Salesforce, which is a huge conference that moved from the third quarter into the fourth to accommodate -- just shifting venue availabilities this year. And it will move back to the third quarter next year, so it will be a tough comp in the fourth quarter. But then of course 2019 is off the charts. So that's sort of the trend: Strong Q2 and 3 in San Fran next year, to be determined in Q4 and then just an amazing 2019. In Louisville, the convention center does reopen in the second half, but the booking pace so far in the second half of Louisville is not great. There seems to be sort of a show me attitude among meeting planners about getting that work done. And so it's not going to be lights out. But we are currently renovating extensively our Marriot Louisville both public spaces and guest rooms that is connected to the convention center. And the hotel has done an amazing job, even while under renovation, while the convention center is dark of booking in-house group business. And they're planning to do that more in the second half of next year. Miami, still on schedule to reopen in the second half of next year. We're definitely looking forward to it. I confess, I don't have good city-wide group numbers yet for Miami as it relates to the pace on that market, so we'll have to get back to you on that.

The second question -- and you kind of led me there a little bit in your answer on the first one when you were talking inheriting a redevelopment, repositioning project in San Francisco. And so I wanted to ask about the Vinoy here in St Pete. And as I'm sure you know, 2 days ago voters approved a referendum that will allow you to add a parking deck, a bunch of tennis courts on top of it and really as part of a much larger repositioning there, at least that's how it was sold to the voter. So I'm just curious, that was one that seemed to be kind of a poster child for asset sales from the acquired portfolio and I am just curious how committed you are to undertaking that investment and repositioning that assets even further?

So I guess this is where I announce that we're becoming a tennis resort REIT.

Yes, exactly.

Exactly. No. We're very pleased with the outcome of the referendum because it will be great not only for the resort, but for the city of St Pete, which has just flourished over the last 5 to 10 years and is under parked as a community. And so it was sorely needed. I think it's a big reason the referendum got passed as it was widely recognized throughout the city that it would be a great amenity. And of course it's going to benefit the resort in a big way. But no. RLJ recognized right up front that there were, let's call it, 7 assets that were not compliant with our strategy either from a positioning or because of the margins that they run and that were candidates for sale. And the Vinoy, as much as it's a beautiful historic resort in a well -- in a great location in a market that's trending in the right direction, it is a sale candidate for us. And we are finishing up some work that was sorely needed, a tower of guest rooms. The renovation is coming to completion. We are upgrading the fitness center and the spa, a restaurant -- under FelCor's leadership a restaurant was designed and it is close to completion -- and quite a bit of outdoor exhibition space. And our operator there, Marriott, is very excited about the improvements. But we'll be looking over the course of 2018 to sell the upside, sell the vision, sell the opportunity to someone who is in the resort business. When we look at our asset disposition targets, it's about a 12 to 18 month horizon. The resorts have a little bit more complexity to them, both Vinoy and the Kingston Plantation in Myrtle Beach. And the queue of disposition activity, we see the resorts being towards the latter part of the queue in order to -- for the CapEx projects to be seasoned in order for us to get our hands wrapped around the upside opportunities in the assets so that we can bake them into the proposal and the offering memorandum that we're going to put out when we list the assets.

The next question is from Michael Bellisario of Robert W. Baird.

Just on the margin front in your updated guidance, kind of a housekeeping item first. I know the addition of the FelCor portfolio is bringing the numbers down. But maybe how did your margin outlook change on a comparable basis quarter-over-quarter?

Michael, are you asking if we exclude the 7 assets that we are selling how did it compare?

No, just the -- I mean you brought down the pro forma hotel EBITDA margin range by 250 bps. If you're just looking maybe at the legacy RLJ sssets, how did that -- how did your expectations for those margins maybe come in in the third quarter and then any change in your outlook for the fourth quarter?

I mean for our third quarter portfolio, RLJ legacy would have been down 127 basis points year-over-year. Part of your question, Michael, you said was on the full year said?

Yes. And just how did that 127 basis points compare to your expectations and has your outlook for the fourth quarter on the margin front changed at all specifically for the RLJ assets? I was just trying to bridge the 250 basis point headline reduction there. I know that's not comparable. But just trying to get our arms around how your view changed on a comparable basis would be helpful.

I would say that for the third quarter, it was in line with our expectations and for the full year we are still on target. As you may recall, for fourth quarter, though, within our legacy portfolio, we obviously had a hurdle because of the tax screw up. But by and large our margins are holding.

And then the 7 non-core FelCor assets that you mentioned, how should we think about those 7 relative to the $300 million to $500 million range that you provided and are all 7 of those in there or are there only a couple of those 7 in that range?

No, I would say there's a few, there's a few in there. I want to remind listeners that we were not hard on this transaction until August 15th and closed on September 1. And we're really pleased -- really pleased with the progress that we've made since then. We're actually working on various contracts on a number of assets. But that $300 million to $500 million, Michael, is a few of the FelCor assets and possibly even a couple of RLJ legacy assets mixed in that are going to be earlier in the queue than, say, the resorts, which I mentioned in my last comments.

And then just on the RLJ legacy asset sales, how big do you think that bucket could be and then how much brand and more so management flexibility is there on those assets from a buyers perspective as we try kind of handicap values and how that might impact sale prices?

Right, right. We've identified a segment of our legacy portfolio that is non-core and it won't be sold all at once of course. We'll optimize the timing. We'll roll them out in bunches. But we will keep you posted as we bring them to market. But in the short-term, there are just a few that have drawn particular interest. They are a mix. They are a mix of brands and they are a mix of both unencumbered and encumbered assets.

And is it kind of correct to think that these proceeds would be the incremental funds for additional buybacks? Is that the right way to kind of think about it? I know cash is fungible, but in terms of timing and kind of scope?

No, I think fungible is the right word. I think the goal for RLJ is to get to that $300 million to $500 million level. Take a hard look at those high yield bonds that are callable in March of 2018 as a way to get and keep our debt ratios low. And so really it will be, once we get to that point and we know we have a clear line of sight to retiring those bonds, where we start to think a little harder about share buybacks.

The next question is from Austin Wurschmidt of KeyBanc Capital Markets.

Ross, just sort of wrapping up all the comments that you provided as far as the synergies you expect, the timing on some of the non-core asset sales, as well as the lift in some of the market fundamentals you're expecting, is it fair to say that you really expect the second half of '18 is really when the lift from some of these efforts start to take place?

I think that's fair. I think you can grade us based on how asset sales proceed over the next 6 months and our approach towards those high yield bonds. But, yes, when it comes to the G&A savings, it's going to take a little bit of time to burn off the contracts that are in place. From a staffing standpoint, we do have transitional associates that are helping us through this process that -- whose contracts will burn off between now and the second half of '18. And from an operational standpoint, absolutely we're digging in currently. I mean as we said before, when we underwrote this deal, we excluded from our model the operational synergies because we knew that that would take time and would be a bit of a mining expedition. And we are in digging in now. We're digging into the 2018 budgets. And I mentioned the IT hard cost and run rate savings. On the procurement side, we're going to save over $500,000 on television. In 2018, we're looking at energy procurement contracts. And so all of these incremental wins are going to add up and really kick in in the second half of '18. And we draw comfort from that. If we are in a low growth environment here for a while where expense pressures versus RevPAR growth are going to be an issue, all of these wins are going to add up, aggregate and help mitigate the cost creep that we might otherwise see.

And then when you think about the savings you identified at this point with the IT hard cost taken together with the sale of these non-core assets, which I assume are lower margins, what's a good longer term margin for the combined portfolios as we sit here today?

I don't have a hard answer for you. There's too many moving parts, because we recognize that we're going to make some gains there. We're also going to gain margin as we sell off the 7 non-core FelCor assets. We expect that net -- I think we quoted in the prepared remarks net of those assets our margins would have been in the 34% range. So that's all good news. On the other hand, we recognize that if we stay in a low growth environment for the next year to 18 months, we're going to have margin pressure from the other side, from the expense creep. And so it's really hard to pin down. And I feel we'd be hanging out there a little bit if we tried to pinpoint a number.

And then on the $300 million to $500 million, I think you were previously targeting by year-end. Is that still a timetable that you expect you can achieve or have things gotten pushed out a little bit at this point?

No, I wouldn't say necessarily year-end. These things take time. We're definitely making good progress. But I wouldn't want to confine ourselves to a hard year-end deadline.

The next question comes from Gregory Miller of SunTrust Robinson Humphrey.

Just one question from our end. We're curious how much your renovation and [RI] plans are being impacted by shortages in skilled construction labor either in terms of timing and/or costs?

I think it's a great question. I think the example of how our renovation projects are being impacted is that in Chicago -- as Ross mentioned, in Chicago we had a sprinkler leak and we had about 50-plus rooms that were offline. Part of the reason that's taking us a little bit longer to get that back online is because we actually lost our general contractor, who found it more lucrative to go down to Houston and the Florida area in order to get multiples on what he can make on a project up north. So we are seeing it's harder to move forward with some of the GCs mixture that we hold the labor. And Chicago is another example in the sense that getting some of the supplies, materials to rebuild some of the rooms is taking longer as well as glut of material requests are building. So there's definitely an impact. That is just one example. But our current 2017 plan is well underway and we're on target. But I think Chicago sort of the best example of a project being impacted.

I guess if there's a silver lining, Gregg, is that we're watching the situation pretty carefully and we do wonder how much it's going to impact new supply around the country -- hotels. Anecdotally, we know a lot of developers and they're providing sort of examples of where they're being rebid by 10% to 20% on projects that -- where they thought they had hard numbers. So it will be interesting to see. I'm not sure that it -- I'm not sure that projects get canceled, but they may get delayed. And so this may sort of stretch out the new supply cycle, but it may buffer it in the near-term.

The next question comes from Shaun Kelley of Bank of America.

Just looking at the asset sales and trying to line up some of the commentary earlier about selling for 14 times on average for the portfolio versus the $300 million to $500 million and sort of total proceeds that you're expecting, so I wanted to see, is that net proceeds, is there some sort of tax leakage we should be sort of expecting there? Or I guess given all the considerations there, a potential tax [should] go above that sort of high end of your range, the $500 million target range?

So just on the tax component, our transaction was a taxable transaction, which allowed us to set up the bases in assets. And so we don't expect much tax leakage. It could be a little, but nothing material from that standpoint.

Correct. And it's a net -- it's a net number. And as far as exceeding it, obviously that's the goal. And we are pleased with the activity that we have. We're negotiating a number of contracts right now. But we're trying to stay tempered in the expectations. But we're feeling good about the activity.

And just confirm, the $300 million to $500 million is also inclusive of the $92 million of sales you previously had for the margin growth, right?

No, no, it's incremental to the $92 million.

And then just a couple of other quick questions on sort of the portfolio. What sort of RevPAR level do you feel like you need to get to for 2018 to sort of get to that margin neutral there?

I mean we've always historically said that you need at least 2% RevPAR growth in order to sort of hold margins and I think that's still consistent in our current thinking.

And then sort of last one from me. Just wondering what your sort of weighted average supply growth in your markets are for next year?

Yes, for next year, it's -- we're looking at about 3.7%, 3.8% and then fortunately it begins to taper from there. Of course it's interesting whether you use PKF numbers for the MSAs or you use your Smith Travel Market tracks, affects those results. So I'm quoting PKF numbers for what it's worth.

The next question is from Jeff Donnelly of Wells Fargo.

Leslie, just I was curious, have you guys been active repurchasing shares subsequent to quarter end or have you guys not really had a window to do so?

So, Jeff, the way our blackout window works is we're blacked out certainly before the quarter end and we're not allowed -- our window doesn't open up until after earnings. So we would not have bought shares after quarter end.

I suspected it. I was just curious. And I guess, Ross, and just to be more specific, can you talk about the number of assets you guys actively have for sale in the market today and maybe the timing of assets you expect to bring to market? I'm just curious. Is it 3 more assets you expect to list this quarter or 5 more by [August]? I'm just trying to think about how we should think about what you're sort of proactively selling versus just sort of merely having a list sort of intended for this disposition?

I appreciate that, Jeff. And I know it would be helpful to provide a very sort of detailed list. Just not in a position to do that. I can tell you that we are working on a handful of contracts right now. We do anticipate in the first quarter of '18 that we'll bring other assets to market. But I'm just not prepared to be specific. I don't think it's in the best interest of the transactions to set ourselves up that way.

I mean I guess I wasn't meaning like naming assets. I guess I wasn't sure how many assets you have in the market. When you say working on contracts, do you mean like brokerage contracts or do you mean purchase and sale contracts?

Purchase and sale contracts.

And maybe if I can ask one specific asset question, is: Have you guys had much feedback from the market on the Knickerbocker and anything you can kind of share there with us?

Happy to answer that. I recognize it's a high profile asset. To be fair to the process that preceded us, there was a lot of noise around the Knicker that was affected by the merger. We think it affected the process and maybe even the pricing. And we're experienced sellers, including 2 New York assets last December, and we were looking for a better approach. So we felt it was better to pull it and select the optimal time to bring it back out, probably early in '18, fresh capital, international buyers potentially back in the market. A lot of reasons contributing to that. So it's still definitely targeted for sale for RLJ. It's a good asset. It's not so far from compliant with what we do that we couldn't justify holding it. But when you look at the arbitrage, when you -- between the private value and what we're carrying it on the books here, I mean it could be a multiple north of 20 and it's definitely something that we think we should look at and there's a higher and better use for those funds.

That's all the time we have for questions today. I would now like to turn the call back over to management for closing remarks.

We want to thank everyone for joining us today. We know it has been a long earnings season and we appreciated having you with us and we look forward to speaking with you again at our fourth quarter earnings call -- and we'll see you at January.

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.