RLJ Lodging Trust (RLJ) 2018 Q2 法說會逐字稿

Welcome to the RLJ Lodging Trust Second Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Nikhil Bhalla, RLJ's Vice President of Finance. Please go ahead.

Thank you, operator. Welcome to RLJ Lodging Trust Second Quarter 2018 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, will discuss the company's operational and financial results; Tom Bardenett, our Executive Vice President of Asset Management; and Sean Mahoney, our Chief Financial Officer, will be available for Q&A.

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 have 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.

Thanks, Nikhil, and good morning, everyone. We had a busy and productive second quarter. We worked diligently to advance our strategic initiatives, which resulted in a significant and highly accretive asset sale and corresponding debt reduction in July. And we accomplished all of this while delivering solid operating results with RevPAR growth of 1.3%. We remain optimistic with respect to industry fundamentals as the economic backdrop continues to be healthy. The overall economy is benefiting from several factors, including robust growth in consumer spending and business investments, which are both relevant to the performance of our industry. These positive economic trends translated into accelerating lodging demand, ultimately driving strong industry-wide RevPAR growth. Additionally, this quarter, the overall industry's performance was further amplified by the timing of Easter, and of the 4th of July landing on a Wednesday this year and pushing some demand into late June. While industry performance in the second quarter was strong across all segments, the group segment was the primary beneficiary in the quarter, a stronger demand and the timing of the holidays.

As it relates to our portfolio, our 1.3% RevPAR growth was in line with our expectations. Excluding renovation-related disruption, our RevPAR growth would have been 2.1%. Similar to the industry, we saw continued strength in both the corporate and leisure transient segments. We also experienced a significant increase in group revenues mirroring industry trends, however, our group mix is low relative to the industry, which limited our ability to benefit from these tailwinds.

Overall, we saw broad-based strength across our portfolio and achieved significant RevPAR growth in markets such as Houston, South Florida and several of our non-top 10 markets. With respect to our key initiatives, I'm thrilled with our solid execution and the progress we've made to date unlocking the value in our portfolio. As planned, we have methodically delevered the balance sheet to align our leverage with our stated objective of 4.0x. We've paid down an aggregate of $375 million in debt with proceeds generated from noncore or opportunistic asset sales at highly accretive multiples. In total, we have sold 4 assets at an aggregate multiple of approximately 15x trailing 12-month EBITDA, well ahead of the 14x objective that we had initially indicated. These compelling valuations are the result of a thoughtful approach we have taken to position each asset for sale.

For example, we recently sold the Embassy Suites Napa Valley for $102 million, which represents a highly accretive multiple of nearly 15x. We maximized the value of this asset by taking advantage of strong investor appetite for resort-oriented assets, securing approval of entitlements to expand the property by 54 keys and creating the opportunity for the buyer to rebrand the hotel as a Curio by Hilton.

With robust interest in our remaining disposition candidates, our pipeline remains strong. We have several assets in various stages in the pipeline, including 2 hotels under contract that will generate proceeds of $175 million to $200 million. The combined sale prices of these 2 hotels will be at a valuation that is in line with our recent sales. We expect these deals to close over the next few months and will provide further updates as they materialize.

Our other key objectives remain on track. We are pacing to capture the vast majority of the $22 million in expected corporate G&A synergies by the end of the third quarter. Additionally, we are making progress toward realizing operational synergies to offset 25 basis points to 50 basis points of margin pressure by year-end 2019. As we continue to make great progress, we are pleased that the market has responded well to each of our announcements regarding execution of our strategic initiatives. And we remain confident that our continued success will drive incremental value for shareholders.

Now as I look back over my tenure, I am extremely proud of all the work we've done to create a leading platform in the lodging industry. Since our inception, we've never wavered from our strategy of investing in high margin, rooms-driven hotels in urban or dense commercial environments affiliated with the strongest brand families.

Over the last 2 years, we have enhanced our portfolio by strengthening our presence in long-term, high-growth markets, improving our diversification by entering several new markets and refining our business mix.

Given the significant progress we've made in executing our initiatives, and the team that we have in place, RLJ has excellent momentum and is well positioned. With all the building blocks for sustainable long-term growth now in place, this is an opportune time for me to pass the baton. As you're aware, I will be retiring later this month. I've enjoyed a 20-year career with RLJ and its predecessor entities. It has been a great honor and privilege to have been part of this incredible and dynamic organization from the very beginning. And Leslie Hale is more than ready to take the reins later this month. She and I have worked together for many years and, along with our Board of Directors, have enjoyed the benefit of time to plan this transition thoughtfully. Our commitment to our guiding principles of operational excellence, disciplined capital allocation and prudent balance sheet management has underpinned our success from the beginning and will continue to be the foundation upon which future success will be built.

I'm more confident than ever that Leslie and the team will create outsized shareholder value as they execute over the long-term.

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

Thanks, Ross, and thank you again for your outstanding leadership, dedication and commitment over the past 2 decades. The entire RLJ team wishes you all the best in your retirement, and while we are excited for the next chapter for RLJ, we'll miss your leadership.

With that in mind, I'd like to take this opportunity to welcome Sean Mahoney to the RLJ team as CFO. Sean joined RLJ just a few days ago. And we're thrilled to have him here. Many of you know Sean as a seasoned REIT executive with a broad industry experience and deep financial knowledge. His addition has bolstered our bench strength and we look forward to working with them to maximize value for shareholders moving forward.

Now as it relates our operating results, we posted solid RevPAR growth of 1.3% in the second quarter. The quarter was influenced by the timing of holidays with April benefiting from the Easter shift, which led to strong RevPAR growth of 3.7% in the month, followed by largely flat results in May due to the impact of the tropical storm Alberto, which hampered demand over the Memorial Day weekend. June then benefited from the 4th of July falling on a Wednesday, which resulted in positive RevPAR growth of 0.5%.

During the quarter, we generally saw strength in all demand segments. Leisure remained strong and corporate demand trends continued to improve. This was evident in our weekday revenue growth once again outpacing weekends, with increased revenue contribution from peak business travel days of Monday through Wednesday. Although we saw strength in the group segment, our overall group contribution is less than 20% of our revenues. The strong performance we saw across all of our segments drove positive RevPAR growth in 7 of our top 10 markets, with notable strength in Houston, South Florida, New York and Northern California. Our top-performing market this quarter was Houston, which achieved strong RevPAR growth of 10.9%. Our hotels benefited from a strong citywide calendar during the quarter, especially our CBD hotels, which led us to outperform the market by 170 basis points. Our South Florida hotels achieved robust RevPAR growth of 6.9% and outperformed the overall market by 140 basis points. Excluding results from the Key West market, which continues to recover from the hurricanes last year, our RevPAR would have increased by 9.9% in the overall South Florida market.

During the quarter, significant corporate and group demand, combined with continued strength in leisure, drove our strong performance.

In New York, our hotels achieved solid RevPAR growth of 3.4%. Our hotels benefited from a strong group pace and strengthening corporate demand. As we look ahead, we are encouraged by the fact, as stronger demand is now driving ADR growth after multiple years of softness in this market. While we are encouraged by the recent positive trends in New York, we expect the third quarter to be constrained due to the Jewish holidays falling on peak travel days. Our largest market of Northern California achieved RevPAR growth of 2.8%, despite significant renovations at 3 properties. Excluding these hotels, our RevPAR would have increased by a robust 7.4%. During the quarter, we saw strong corporate demand and benefited from compression created by improved citywide activity. Although renovations will continue to constrain our performance during the second half of the year, we are positioning our Northern California hotels to benefit from the significant growth in citywides 2019.

In the D.C. market, our hotels delivered 2.4% RevPAR growth. While the overall market saw an increase in citywides, our performance was driven by in-house group and corporate production, which generated significant demand at our hotels.

Our hotels in the Chicago market achieved 1.6% RevPAR growth, despite citywides being soft during the second quarter and some extended state business that did not repeat at several of our hotels.

Looking ahead, we expect stronger performance in the second half driven by an improved citywide calendar and tailwinds from one of our hotels being under renovation last year.

Our Southern California cluster achieved positive RevPAR growth of 0.8%, while our hotels saw strong corporate demand in the region, especially in San Diego. This was offset by weaker citywide activity in L.A. and some non-repeat group business at our hotels.

Now with respect to the Louisville market. Renovations at our Marriott Downtown were a headwind for us during the second quarter. These headwinds were further amplified by some non-repeat project business, which resulted in our RevPAR declining by 13.8%. While continuing renovations at the hotel will weigh on our results during the second half, we look forward to the reopening of the Convention Center this month. And we are encouraged by the strong group base that our Marriott already have in the books for 2019.

Finally, Austin and Denver, which continued to generate solid demand, were among our weaker markets this quarter with RevPAR declining 4% and 3.4%, respectively. In Austin, citywides were soft, which significantly affected our downtown hotels, and we saw decline in government businesses since 2018 is a non-legislative year.

In Denver, our performance was hurt, primarily by some non-repeat business from the last year in addition to new supply. Excluding Louisville, Austin and Denver, our RevPAR would have increased by 2.6%.

As we look at our performance outside of our top markets, many of our non-top 10 markets achieved RevPAR growth ahead of the industry with Salt Lake City, Tampa, Atlanta and Orlando seeing increases of 9%, 8.6%, 8.4% and 6.3%, respectively, which speaks of the benefits of a diversified portfolio.

Now with respect to our margins. Our portfolios generated solid EBITDA margins of 35% during the second quarter. While our lean operating model generates high margins, we are operating in a tight labor market which, combined with increases in taxes and insurance, resulted in our margins declining by 79 basis points over the prior year. Our solid operating results translated into robust corporate financial results for the quarter. We reported adjusted EBITDA of approximately $160 million and adjusted FFO of approximately $128 million or $0.73 on a per share basis for the quarter.

With respect to our balance sheet, we ended the quarter in a strong position with nearly $400 million in unrestricted cash, $2.5 billion of debt outstanding and a net-debt-to-EBITDA ratio of 3.9x. With our recent asset sales, we paid down $100 million of debt subsequent to the quarter and further strengthened our balance sheet.

In aggregate this year, we have reduced our debt by $375 million, which represents 75% of our stated objective of reducing our debt by $500 million this year. Our liquidity position remains strong. We have ample capacity to support our capital deployment priorities and cover our dividend, which we view as an important component of a total return we seek to provide our shareholders.

For the full year, our renovations remain on schedule and on budget. We continue to expect renovations to have approximately 100 basis points of impact on our 2018 RevPAR growth.

Now with respect to our margins, our portfolio generated solid EBITDA margins of 35% during the second quarter. While our lean operating model generates high margins, we are operating in a tight labor market which, combined with increases in taxes and insurance, resulted in our margins declining by 79 basis points over the prior year. Our solid operating results translated into robust corporate financial results for the quarter. We reported adjusted EBITDA of approximately $160 million and adjusted FFO of approximately $128 million or $0.73 on a per share basis for the quarter.

With respect to our balance sheet, we ended the quarter in a strong position with nearly $400 million in unrestricted cash, $2.5 billion of debt outstanding and a net-debt-to-EBITDA ratio of 3.9x. With our recent asset sales, we paid down $100 million of debt subsequent to the quarter and further strengthened our balance sheet. In aggregate this year, we've reduced our debt by $375 million, which represents 75% of our stated objective of reducing our debt by $500 million this year.

Our liquidity position remains strong. We have ample capacity to support our capital deployment priorities and cover our dividend, which we view as an important component of the total return we seek to provide our shareholders.

For the full year, our renovations remain on schedule and on budget. We continue to expect renovations to have approximately 100 basis points of impact on our 2018 RevPAR growth.

Now in terms of our outlook, we are updating our full year guidance to account for the sale of the Embassy Suites Napa.

RevPAR guidance is unchanged. Hotel EBITDA is expected to be between $555 million to $586 million. Adjusted EBITDA is expected to be between $519 million to $550 million.

As additional color on our guidance, we expect full year adjusted EBITDA and hotel EBITDA to come in at the midpoint of our range. For the third quarter, we expect our hotel EBITDA to be approximately 25.25% to 25.75% of the full year hotel EBITDA.

In summary, we are pleased with our performance in the second quarter, and we are enthusiastic about the momentum we are seeing from the progress we continue to make with respect to the execution of our 2018 key priorities.

Notably, we generated $102 million from recent asset sales. With 2 additional assets under contract for nearly $200 million, we are well positioned to achieve our goal of $200 million to $400 million of incremental asset sales that we outlined earlier this year. We are on target to achieve our balance sheet objectives as well. We are only $125 million away from achieving our stated goal of paying down $500 million of debt, and have already achieved our targeted net-debt-to-EBITDA ratio of 4x. And we are well underway to realizing both our operational and corporate synergies. We remain focused on executing our key objectives to position RLJ for long-term growth and to maximize shareholder value.

Thank you. And this concludes our prepared remarks. We will now open the lines for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Anthony Powell from Barclays.

And just in terms of the asset sales, it seems like with the sales on a contract, you're right in the middle or close to the high end of your previously announced targets for the year. What's the potential for maybe generating even more upside to your targets in terms of extra asset sales either later this year or early next year?

Yes. We are on target and we feel good about the pace. And we also feel good about the economic backdrop, still. So all is well. I think that we've demonstrated a willingness to do some opportunistic sales in addition to the noncore assets that we identified at the closing of the merger. And so the Embassy Suites Marlborough outside of Boston was a good example, and now, most recently Napa. So as a result of some of those, I think we might possibly exceed our target. But we don’t want to get ahead of our skis here. And we feel good about achieving what we said, the $200 million to $400 million this year for sure and all other noncore assets by the end of Q1 '19.

And the noncore assets by Q1 '19, that includes the Knick, right?

Yes. The Knick is a special asset, and it requires a special approach. And we're experienced sellers in New York City, and we've demonstrated an ability to find the right buyer or a strategic buyer for an asset. Fortunately, the Knick is ramping, and the market is firming up a bit. So time is on our side to some degree, and animal spirits are staring in the Capital Markets community. And we feel good about owning the asset at this point in time, but we also recognize that the arbitrage between the private value and the public value is still very compelling, and it's still something we are working on.

And could you go over the citywide outlook in 2019 for, I guess, all the relevant markets that citywides impact? North San Francisco and Louisville look better, but Chicago, D.C. and all the other markets?

Anthony, what I would say is, from our perspective, we are encouraged by geographical footprint. When we think about 2019, we got 3 Convention Centers that are coming back online in Louisville, San Francisco and Miami. We like our exposure to San Francisco. And so we think it's obviously way too early to sort of think about how '19 is going to sort of shape up. But we clearly don't have the headwinds from the first quarter Super Bowl and inauguration, and obviously we don't have the headwinds in the fourth. But I think overall, I think it's kind of early to kind of think about how that's going to shape up, but we like our geographical footprint.

Maybe just one more from me. We've heard from you and others that the holiday time periods have been a bit softer than expected, and also that weekend businesses lagged weekday. What can you or your operators do to kind of improve the performance around this weekend and those holiday periods in your markets?

This is Tom. We did see a softer first week in July. And the good news is, there was some pent-up demand in the back of July, and we were able to recover from that. So we felt good about putting restrictions on the rest of July to be able to accommodate for that first week. The other thing that, I think, when you look at midweek and weekend to your other part of your question, we were very encouraged in quarter 2 that Monday through Thursday mid-week, we had our strongest RevPAR gains, which really signals the fact that transient, special corporate and even group were all pretty strong in quarter 2 for us. And we continue to see that as a positive going forward, specifically on the special corporate front, which is 2 consecutive periods where we've had some positive news in regards to mid-week. In regards to the holidays for future and opportunities, it's about putting ads out, getting ahead of it, trying to put in group on the shoulder dates that are where unsatisfied demand is not at a premium, and that's where the focus is going forward to try to accommodate for those shifts and holiday periods. That gives you a better idea of what we're trying to do here.

Our next question comes from the line of Gregory Miller from SunTrust Robinson Humphrey.

I'm on the line for Patrick. Just one question from our end. Can you provide further background on the operational synergies you highlighted? What are the major opportunities today? And how you see to build those savings through 2019? Do you believe that the incremental synergies will grow steadily from quarter-to-quarter? Or will the incremental synergies be somewhat lumpy?

So we've been very focused since the integration with FelCor on best practices and opportunities based on scale. To answer your question in regards to the timing of everything, as contracts come up particularly on the IT side, we think that will be over time where it's -- by the end of '19, we'll be able to contract a variety of those throughout the end of '18 and mostly -- and '19 will be the benefit from that. On the procurement side, under energy, there was a fantastic energy committee that was put together that we really borrowed and put together at RLJ going forward. In that area, as contracts come up, and we are now procuring with scale, we think there is a benefit again as we tail into '18, but again, the primary benefit will be in '19, quarter-by-quarter as those contracts come up and we purchase on that side. And then from a best practice standpoint, we are also focused on the synergies in regards to revenues side. For instance, an example of that would be ancillary revenues and opportunities. Midway, for instance, was an opportunity to put in some parking aggregators. And we have other airport hotels at the FelCor assets that we've also tried to contract to get into more opportunities to make money, which is pure profit when you can do that with Spothero, ParkWhiz and groups like that. So to answer your question, I think it's more of quarter-by-quarter, but the bulk of it will be in '19 based on how contracts come up and continue to be able to be executed.

Our next question comes from the line of Wes Golladay from RBC Capital Markets.

Can you maybe walk us through the progression of some of the margin pressure, more specifically taxes and insurance as we move through the year? Do you start to hit a easier comp, maybe more specifically on the Prop 10 reset for California assets from FelCor?

So, Wes, this is a reminder, we obviously said that taxes and insurance would have about 60 basis points to 70 basis points impact on us for the full year. And I would say it's really going to sort of impact every quarter. I don’t think that -- I think in the fourth quarter, we have a true-up that we benefited from last year. So we're not going to necessarily sort of get the benefit of that in the fourth quarter. So we'll still have some pressure in the fourth quarter. It's not necessarily going to be from Prop 13, but it's still going to be on the tax side. So I would expect to see pressure every quarter this year.

Okay. And then, we heard from another REIT in another industry that Atlanta was -- Fulton County was being particularly aggressive on the tax front. Are you, I guess, accruing for the aggressive taxes in that market? And are you also doing a lot of appeals at the moment?

We always aggressively do appeals across our portfolio, Wes. And I would say that we haven't sort of -- our tax consultants haven't given us any sort of perspective of Atlanta, in particular. But I would say we are aggressive on every market relative to taxes, which is why we had the benefits of a true-up in the fourth quarter of last year as we benefited from those appeals. But we still -- we don't budget for those appeals. We kind of budget the worst-case scenario on the taxes side.

Okay. Fair enough. And then big picture, it seems like things are at the margin improving for the industry, have you noticed a noticeable uptick in behavior of operators, are they starting to push rate, target higher-rated business? Has it been a major change? Or is this still maybe select markets at the moment?

Yes. I can answer that. Couple of things on the margin side, then I'll talk about the average rate side. At the beginning of the year, we put profit preservation plans. The moment budgets get approved, then we can always pull those out if revenues decline. So we feel comfortable that from a fixed and variable expense, we have targeted opportunities. And the fact that we have scale, we know that we can act on some of those with our larger management companies where they can task force somebody to another property. And on the variable side, if the revenues are declining, we automatically look at operating supplies and expense management. But it doesn't take the place of what I would call blocking and tackling, and that's labor management and intensity around that. And looking at minutes per room and benchmarking CPOR. On the average rate side, we are encouraged that we have some opportunities on the revenue management strategy side. And what we're looking at is always to try to get peak night to drive higher bankable RevPAR. And some of the examples of that, that we're implementing at our management companies are, we're attaching software to our room configuration. As an example of that would be at the Knick and the Mandalay Beach Resort where you have a lot of different configurations and you have the opportunity to drive rate on room configurations, not only in the website, but at the desk and having incentives around that to try to drive average rate where opportunities exist. And then the last thing that I would add on the average rate side is, we are seeing, from an OTA standpoint, the ability to have some strategic yielding, which means peak night, we're actually down in OTA even though the OTA business is good business, we don't want to have as much on peak night because you can get better margin if you can strategically yield that business. And allowing that to happen at our Marriott and Hilton portfolios is pretty significant for us. So that gives you an example of a couple of things to answer your question.

(Operator Instructions) Our next question comes from the line of Bill Crow from Raymond James.

A couple of questions here. I think when the FelCor deal was announced, you identified 2 different buckets of asset sales, and I think you've been really focused on the FelCor assets. But you also were looking at selling a significant number of -- or the lower portion of the RLJ portfolio. Just where do we stand with that effort?

Yes, thanks, Bill. We like our portfolio, but we do continue to look at slower growth, lower RevPAR markets as opportunities. And I think, as you've seen, we take a pretty thoughtful approach to our recycling and the goal is to optimize pricing, not just fire sale stuff. So we're doing the work. And we are -- in fact, I would say, 1 of the 2 assets that we have under contract is a legacy RLJ asset. So we're going through a pretty thoughtful process there, and it continues to be, in our minds, one of the benefits of having done the merger is the ability to recycle out of the bottom, say, 10% of the portfolio over time.

Right. Right. Okay. I'm going to ask 2 questions on 2019, I know you're not giving guidance, but this will be helpful if you could answer this. Number one is, as we think about the asset sales that have been completed setting aside the 2 pending ones, What's the 2019 impact to EBITDA, the incremental change?

Are you asking in terms of the total EBITDA for the asset sales?

Yes. Well, as it would roll through to 2019, obviously, some of it is already in this year. So what's the incremental impact on that?

If we look at the 7 assets that we've identified, it's about $45 million to $50 million of EBITDA in aggregate, Bill.

On a full year basis?

On a full year basis, assuming that we sell the 7 assets that we identified. If you throw in Napa, which was sort of opportunistic, that's an incremental $7 million. So about $57 million.

Okay. And then the other question is, Louisville has been, obviously, a headwind for you all for considerable amount of time. It feels like the stars are starting to line up a little bit better. What's a good expectation for next year for that asset?

We're encouraged. Obviously, we've been under the knife and the timing has been perfect while the Convention Center is down to do our lobby reconfiguration and our rooms are under renovation as we speak now. What we've been looking at is trying to get a comparable, and when we go back to 2015 and '16, we kind of see that those are the numbers that we can easily compare to on a group room pace standpoint. So we feel like we're at our target number in regards of where we would be and ahead of pace based on our '19 results going into the year. We also see the Convention Centers starting to wake up and put some business on the books. We got a couple hotel conventions that are coming in that have not been in Louisville before in '19. So we're encouraged by that. And in addition to that, we did get a sneak peek of the Convention Center, and what we're really encouraged about is, when you walk over the walkway from our hotel, which we are the only hotel connected to the Convention Center, you see the Exhibit Hall is the first thing you see, and therefore, we think that's going to be ancillary opportunity for us to be able to benefit from that where we don't have to use our own spaces in exhibit hall, and we can use our 2 ballrooms to continue to try to grow group room business, which is a significant amount of business that we have at our Marriott Louisville there. So we're encouraged as we look at '19. And we think that we're going to have a good year as we go into that time frame.

Is that kind of a double-digit RevPAR growth year, you think?

Well, let's just say, whatever we lost this year, we want back.

Our next question comes from the line of Jeff Donnelly from Wells Fargo.

Let me echo, Ross, I wish you the success in all future endeavors. And not to leave anybody out, Leslie, same to you, very best of successes in the new role. And Sean, welcome to the fold. Hopefully, I didn't forget anybody. On -- I guess on dispositions, you guys have said exactly -- you've done exactly what you said you're going to do. On that point, do you think the strength of the disposition market will lead you guys to push a little further on dispositions than perhaps you originally contemplated because the market has strengthened maybe beyond what you might have contemplated last year when you devised the disposition plan?

Yes, it's a good question, Jeff. I would say not necessarily, although everything is for sale at the right price. And any time we see an opportunity to create shareholder value through a disconnect, or better said, probably an arbitrage between the private market value and public. I mean, we're certainly going on a take a look at it. No asset is sacred. But we're not -- we already feel like the recycling program is pretty aggressive. And so we're not necessarily intentionally looking to expand it.

And then concerning the Knickerbocker, I agree with you, maybe animal spirits are growing in New York. Are there certain sales or asset transactions you look to as an indicator of value for the Knick? I know you don't want to negotiate on a public call, but I'm just curious do you look at -- is it the W Union Square or Lexington or just other yardsticks that you look at in the market that say, this is kind of how we think about it?

It seems like there's a bipolar set of comps, and so I would say that no, we haven't settled on any specific comps. But we're definitely skewing towards the high-end asset trades because of the very special nature of this asset, and it is generating income. A couple of the lower comps, less impressive per key comps that you've seen in the market over the last 18 months have been assets where there is no cash flow. And so that doesn't apply to us, and we discount those.

And…

Go ahead, Jeff.

No, no, no. Sorry, sorry.

As we stated earlier, with the ramp of the Knickerbocker, we had a really strong quarter in quarter 2. Our expectations in quarter 3 and 4 are going to continue to be positive, and we're excited about where this asset is taking shape.

That's great color. And just one last question on -- just because it's been such a big focus for our investors. Are you able to break out your Northern California exposure, either -- I guess on an EBITDA basis between the rooms that you think will benefit or see direct impact from the reopening of the Convention Center and those that are maybe just outside of San Francisco proper?

Yes. So we have a couple of hotels write-down in the CBD. The other encouraging thing is we've had our Marriott Union Square under the knife. And we're finishing up the rooms right before sales force comes in, in September of this year. So we're encouraged by that asset, it's about 400 Keys Marriott Union Square. Literally kitty-corner is the Courtyard and they've really been benefiting from the JW and the Marriott being under renovation this year, that is about 166 keys. Then you start to get into the outlying areas of Northern California where over the bridge in Oakland, we have a couple of assets in Emeryville. And then you start to move into the San Jose area, which are some great higher-housed, higher-placed assets and Residence Inn in Palo Alto. And the other one that was brought under the knife this year is similar location to really great growth demand and that's Milpitas near Tesla and a lot of opportunities there. So we're encouraged with our footprint in regards to where our hotels are located because we think the compression assets are going to be really feeling the benefit of the citywide. And then lastly, we have a couple out of the airport, the 2 San Francisco Embassy Suites. We have one of them that just did a complete reimage of the lobby in South San Francisco and then last year, the waterfront. So we're encouraged that our footprint should see that compression push out into the outlying areas.

We think it's about kind of 11%.

Our next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets.

And sorry if this has been asked, but I had to hop on a little bit late. But so with the additional asset sales teed up that you guys talked about and you kind of are approaching the goal of debt repayment, I guess what are your latest thoughts on sort of use of proceeds moving forward and -- into 2019 and -- are buybacks on the table today?

Yes, I mean, Austin, what I would say is, as we sort of think about capital allocation, our first thought has been around risk management. And we've been focused on strengthening our balance sheet, as you know. From there, we're looking at sort of creating durable and recurring benefits from our capital allocation. So we will be looking at acquisitions. As a possible allocation, we'll look at reinvesting in our portfolio from a ROI perspective. We'll also look at possibly paying down incremental debt to the extent that we can do it accretively. If it makes sense, we'll look at it. And we're really going to be focused on driving long-term sustainable growth. And we will look at asset -- I'm sorry, stock buybacks opportunistically at the time that we have the proceeds to the extent that the market conditions warrant it.

But it sounds like buybacks' not necessarily a top priority today? Is that fair?

Austin, I think we will make that decision at the time that we have the proceeds in hand, and you got to look at where we are trading at relative to our NAV. You've to look at what our thoughts are on fundamentals at that point in time. So it's hard to say that it's a priority today because today is not the time and point that we would be buying back. We have more things to do relative to our strategic initiatives.

That's fair. I appreciate the thoughts there. And then just wanted to follow-up on Louisville a little bit. Should we expect that this quarter's results will be the bottom for that market before we see the re-acceleration in 2019? Or are there a couple quarters still in the back half of the year where things could get worse from here?

Yes. What we do is we take a look at 2 parts of Louisville. To give you an example, we have the 2 in the Downtown CBD area, which is our Residence Inn adjacent to our Marriott Louisville down there. And obviously, we're under the knife at the Marriott Louisville, and will continue to the end of this year. So we expect those results will be -- difficulties than having the same amount of rooms available. In addition, it had a pretty strong fourth quarter last year if you look at Louisville in Q4 that we're going to be up against. The other market that we have a significant amount of exposure is out in -- near the Ford plant. And last year was phenomenal, we had a great forward launch. Obviously, we're comping against those numbers, that will be to the end of this year. And then we are encouraged that will be against those or not against those comps in '19. But I would expect that similar results in Louisville for the remainder of this year.

Our next question comes from the line of Lukas Hartwich from Green Street Advisers.

Could you talk a little bit about the health of fundamentals in the Houston market?

Sure. So Houston is an interesting year for us. If you look at the health of Houston, we've always been in the CBD and Galleria area, which are the 2 most dominant markets when you have opportunities with average rate. And because of citywides this year, we've been very bullish on Houston as we came out of quarter 2. We had great results in one of our top markets in the quarter. And then, as we look at quarter 3, they came out of the gates pretty strong as well because of citywides, and that compression usually pushes out to the Galleria area. So we were encouraged in both markets in the month of July. Then, if you think about last year, and Hurricane Harvey, obviously, we had some tough comps going into quarter 4. And what we've done is try to really figure out how to replace some of that demand because it was just outsized demand if you look at what happened in September as well as quarter 4 that we're going to be up against. So we've been focusing with our folks now. Oil and gas is really in the outlying areas and hasn't pushed its way to Downtown and Galleria at this point in time. But we're encouraged that it is out in the outlying areas. And we are also focused on the fact that this was where the transition took place from White Lodging to Interstate. And we're encouraged based on complexing opportunities and what we're doing at the property level to try to gain back what we might have, have to replace. We kind of put that into our projections as we look at quarter 4 and knowing that we looked at the gap between '16 and '18 to give us a better idea of how we would perform if it was a non-hurricane year and feel like our projections are in line with that. So we're hopeful that we can replace some of it, but it's also -- those comps were oversized.

That's helpful. And then just a quick follow up. Do you have a sense of where cap rates are in that market right now?

Yes. Lukas, I would say that the cap rates are actually getting a little bit aggressive in Houston because buyers understand that if they're going to pull off a transaction there and persuade a seller to transact that -- they are going to have -- they can't price off of trough performance. They're going to have to pay into the recovery a little bit. And most people do believe that Houston is poised over the next 2 to 3 years to have a decent run here as it may be reversed back to the mean and starts crawling out of this dip. So I don't have an actual number for you, but I would say the cap rates in Houston have probably compressed a little bit over the last 6 months.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Well, we thank you for being with us. And we look forward to staying in touch regarding the asset sales, and certainly are available to you if you have any follow-up questions. And we'll talk to you at the end of third quarter.

Thanks very much.

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