Pebblebrook Hotel Trust's (PEB) CEO Jon Bortz on Q2 2016 Results - Earnings Call Transcript

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Pebblebrook Hotel Trust (NYSE:PEB)

Q2 2016 Earnings Conference Call

July 26, 2016 09:00 ET

Executives

Raymond Martz - CFO

Jon Bortz - Chairman & CEO

Analysts

Anthony Powell - Barclays

Rich Hightower - Evercore

Shaun Kelley - Bank of America

Wes Golladay - RBC Capital Markets

Jeffrey Donnelly - Wells Fargo

Lukas Hartwich - Green Street Advisors

Bill Crow - Raymond James

Operator

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

Raymond Martz

Thank you, Ashley. Thank you very much. Good morning, everyone. Welcome to our second quarter 2016 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. Before we start, a quick reminder that many of our comments today are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2015 and our other SEC 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, 2016, and we undertake no duty to update them later. You can find our SEC reports and our earnings release which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com.

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

Our performance in the quarter was led by our hotels on the West Coast as our hotels out there generated RevPAR growth of 6% in Q2 with ADR increasing a healthy 4.3%. Our strongest West Coast markets were Portland where our properties grew RevPAR 12.4% and West L.A. which grew RevPAR 10.7%. As a reminder, our West L.A. hotels include our hotels in West Hollywood, Beverly Hills and Santa Monica. Our Nashville Hotel was another leading property for us growing RevPAR 10.9% even though we began the second and last phase of our renovation and repositioning program in the quarter.

On a monthly basis, RevPAR for our portfolio increased 1.5% in April which was slightly above our expectation. It was up 4.3% but we expected the month to be much stronger given the solid booking page we had going into the month. And June increased by 1.7% which was a significant disappointment primarily due to weakening business travel, both transient and short-term group. Transient revenue, which makes up about 75% of the room rate demand for our portfolio was up 0.9% compared to the prior year with ADR growing 0.3%. The softness from our transient segment was largely due to weekend business travel trends we experienced in most of our urban markets, which we expect will persist with the remainder of 2016 or until we see a recovery in corporate profit growth trends.

Group revenues increased 8.8% with ADR up 3.8% with group room rates growing 4.8%. As a reminder, our Q2 RevPAR and hotel EBITDA results are same property for our ownership period and include all the hotels we own as of June 30, meaning they excluded Viceroy Miami and Redbury Hollywood since we sold both of these hotels during the quarter. Our numbers do not exclude hotels under renovation unless they are closed during the renovation. Later in our call, John will provide additional color on the progress we've made repositioning several recently acquired hotels that we redeveloped.

Same property EBITDA grew 1.9% during the quarter to $83.8 million which was above our more recent June outlook. Our same property EBITDA margin declined 26 basis points in the quarter to 36.6% which was largely impacted by a 16.3% increase in property taxes which negatively impacted our EBITDA margin by 51 basis points. This was largely due to increases at our more recently acquired and renovated properties, as well as our prior year property tax credit in 2Q at the hotel in San Francisco.

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

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

Now a shift of focus to our dispositions in capital markets like activities since we last updated you during our first quarter call. On June 1 we are active announcing three separate dispositions; we sold 148 room luxury Viceroy Miami Hotel for $64.5 million which equates to a 4.2% net income capitalization rate and is 17.7 times EBITDA multiple. We also sold a 57 room all-suite Redbury Hollywood Hotel for $40.9 million which equates to a 5.2% net income capitalization rate and a 15.5 times EBITDA multiple. To calculate our cap rate and EBITDA multiple we use actual financial results for the trailing 12-month period ending April 2016. For NOI cap rate, we deduct an FFO reserve about equal to 4% of total hotel revenues from EBITDA.

And finally we sold an undeveloped 3,200 square foot parcel located adjacent to our Revere Hotel Boston Common for $6 million. This non-income generating parts of land will also save us $90,000 annually in property taxes. On a weighted basis, these $111.4 million of dispositions were completed at a 4.4% cap rate and a 17.7 times EBITDA multiple and we estimate that GAAP gain on sales to be approximately $40.3 million which is reflected in the net income we reported this quarter. We expect that our taxable gain on these hotels will be in this range as well. The net proceeds from these three separate sales were used to reduce our outstanding debt on our credit facility.

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

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

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

Jon Bortz

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

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

Business travel trends which began to noticeably weaken in Q4 last year softened further in Q2. It seems that the combination of declining corporate profits and rising economic and geopolitical risks has taken its toll on business travel. We've seen a broadening from an industry perspective and the number of companies focused on saving money on travel enforcing policies and asking their employees to be more thoughtful about travel levels. When top lines aren't growing there is clear pressure to improve bottom lines by reducing expenses. Businesses have become more price sensitive too, either trading down or staying disciplined within corporate programs.

We still not heard of any travel bans though we don't have much exposure to the energy industry. The good news is it seems that fears of an impending recession have substantially dissipated but we continue to believe that business demand will remain weak until corporate profit growth rebounds and business confidence increases. Leisure remains better than business travel but really just okay. Leisure customers have become more technologically-savvy monitoring rates, cancelling and rebooking, or changing properties if rates decline or promotions are offered.

International inbound travel remains weak due to the strong dollar and weakening global economies. And unfortunately due to the strong dollar and substantially cheaper international airfares, the growth in U.S. citizens traveling abroad has been robust with the latest year-to-date statistics through March showing overseas travels up over 9% and travel abroad including Mexico and Canada by U.S. citizens is up almost 11%. Unfortunately U.S. citizens that can afford to travel abroad are, in many cases choosing those trips over domestic travel, particularly to major U.S. cities which partly accounts for the weaker performance of urban markets versus the industry. And while acts of violence in foreign countries may divert some of this travel, the dollar has only strengthened since the Brexit vote.

Overall, industry demand in the second quarter grew 2.1%, an improvement from Q1 is 1% but as I just discussed, demand benefited at the expense of both Q1 and Q3. We think the demand run rate is closer to 1.5% right now which is obviously a significant moderation from last year's 2.9% growth rate. With supply growing 1.5% in Q2, industry occupancy grew by 0.6%. With industry ADR increasing 2.9%, RevPAR for the industry rose 3.5%. As Ray discussed, our RevPAR growth of 2.5% in the second quarter exceeded our revised outlook provided in early June and fell in the middle of a range of our initial outlook for the quarter provided back in April. Our West Coast properties led the way with 6% RevPAR growth while RevPAR declined by 2% at our East Coast Hotels.

I won't repeat the detail Ray already provided on our better markets and properties but I will say that compared to our initial outlook, we experience weaker than expected performance in Boston and New York. Our properties in Boston underperformed the Boston CBD market but our hotels in New York outperformed the Manhattan market. Both markets overall were materially softer than what we thought they'd be going into the quarter. Three hotels were under major renovation in the quarter that negatively impacted performance; Union Station Hotel Nashville, Hotel Monaco Washington DC and Westin Colonnade, Coral Gables. We estimate the combined negative impact of RevPAR from these three renovations at 30 basis points in the quarter.

Performance at the three properties that underwent major transformational renovations last year was again outstanding in the second quarter. All three continue to ramp up nicely at this point and Hotel Zephyr Fisherman's Wharf RevPAR climbed 33% in Q2 with ADR up 14.1% or $29 versus Q2 last year. At WLA RevPAR grew 10.2% with ADR rising 8.6%. Vintage Portland's RevPAR increased 19.8% percent with ADR growing 9.1% and it came within $15 of The Nines ADR which is the leader in the Portland marketplace.

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

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

Given we have several major redevelopments and repositioning skirling underway or starting later this year or early next year, I wanted to provide an update on those activities. First, we're in the final phases of the redevelopment and repositioning of both, The Westin Colonnade, Coral Gables and Union Station Nashville Hotels. Both are transformational, and both should be complete by the end of the third quarter. At the completion of The Westin redevelopment, the hotel will be reflagged as Hotel Colonnade Coral Gables and will become part of Starwood's Tribute Portfolio. The total investment dollars are budgeted at $17.5 million which equals roughly $111,000 per key. So you can see it's a major comprehensive upgrade to what was just an okay Westin.

In Nashville, the project is budgeted at $15.5 million or $124,000 per room and the improvements involved renovating the complete interior of this incredible historic landmark building. We're very excited about the upside in 2017 and beyond for both of these hotels.

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

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

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

The Tuscan's renovation and repositioning also involves a comprehensive redevelopment and upgrading of the entire property, including the entry, port share [ph], lobby, meeting space and other public areas and all guest rooms. We'll be opening up the lobby and meeting space to a currently unused and inaccessible outdoor courtyard just as we did at the Hotel Zelos and we'll be creating seating and cocktail service from a new small bar in the lobby. We plan to drop the Best Western affiliation late this year and upon completion of the renovation in the second quarter of 2017 we plan to rename the Hotel and make it part of our unaffiliated Z-collection of hotels in San Francisco which includes Hotel Zelos, Hotel Zetta, Hotel Zeppelin and Hotel Zephyr Fisherman's Wharf. All three of these major redevelopment and repositioning projects should drive substantial upside from the second half of 2017 through at least 2019.

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

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

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

In Q3 we expect performance that will be weaker than the industry in New York, Miami, Naples, San Francisco, Nashville, Boston and Seattle. We believe better than industry performance is likely in Philadelphia, West L.A., San Diego, and Minneapolis. Our hotels in Nashville, Miami, Naples and Washington DC are all being impacted by the renovations. Our pace which was certainly more encouraging as of April has slipped significantly due to weak short-term bookings and pick up. Overall, group room revenue remains positive for the year with revenue up 3.5% due to ADR growth of 4.3% though group room nights are now down 0.8% for the year.

For the year transient room rates are up 4.9%, transient ADR is up 0.4% and transient revenues are up 5.2%. Combined pace has total room rates currently up 3.1%, ADR increasing 1.5% and total revenues up 4.7%. The challenge of course and what is accounting for our reduced numbers for the second half of the year is that our pace advantage has shrunk significantly for Q3 and pace continues to be down for Q4. In total for the second half of the year, total rooms on the books are up 0.9%, ADR is up 1.9% and total revenues are up 2.8%.

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

That completes our prepared remarks. Operator, we'd be happy to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll take our first question from Anthony Powell with Barclays.

Anthony Powell

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

Jon Bortz

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

Anthony Powell

Got it. And your overall outlook for the rest of the year seems to be bit more conservative than some of the other releases we've seen. Recently Starwood, that was burning [ph] with 3% to 4% RevPAR growth in North America, if other reach it be bit more positive. What do you think makes you bit more negative on the outlook than some of your peers?

Jon Bortz

Well, we don't have any franchises to sell so that may make us more pragmatic than the brands who provide outlooks. The other thing I'd mention is, I don't know how Starwood's outlook breaks down between the U.S. and North America but I suspect Canada and Mexico are having pretty good years giving the U.S. outbound travel and the weak peso and the week loonie. So I wouldn't be surprised at all if their U.S. outlook was more consistent with actually what our view is, up 2% to 3% for the year.

Anthony Powell

Got it. And I guess the last one is just on the renovation activity, that seems to -- and continuing on with your renovation plans in San Francisco and Nashville despite kind of slowing trends, have you thought of maybe adjusting similar renovation plans given the overall environment?

Jon Bortz

Well, the assets that we bought with planned repositioning and transformations -- we have not changed our desire to move forward and execute on those redevelopments, we think there is very significant value to be added from very modest investments. And so we've made no changes from that perspective. We've looked at a couple of renovations through the rest of the portfolio, there were two room renovations we were going to begin late this year and complete into the first quarter and we've postponed those for a year for various reasons. So we've looked at those Anthony but as it relates to the major redevelopments -- I mean, we have to keep in mind that these are properties we bought that in many cases were tired needed to be redeveloped, would benefit from the capital infusion significantly and will continue to spiral down from a market share perspective if we don't invest in them. So from -- we're in the long-term investment business, we have to invest through the cycles, and we need to make sure that our balance sheet is in a condition where we can do that and that is the case.

Anthony Powell

That's all for me. Thank you.

Operator

Our next question comes from Rich Hightower with Evercore. Please go ahead.

Rich Hightower

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

Jon Bortz

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

Rich Hightower

Okay, that's actually quite helpful. And then…

Jon Bortz

Sorry to surprise you on that.

Rich Hightower

You know, there is actually a quantifiable answer, that's good. The second and last question I promise is on asset sales, so with respect to the $1 billion target a lot of that is a Manhattan collection, that of course has been pretty well telegraphed for a while in terms of Pebblebrook's intentions there but can you just give us a little more general sense as to the screen that you guys use to evaluate what's for sale and why it's for sale and why now is the right time to sell a particular asset? I mean is it based on reverse enquiry or are they all marketed? Just a little more color on that front will be helpful.

Jon Bortz

Sure. Well, the plan we put in place in February that we announced was based upon identifying the assets that would be -- we would be putting up for sale. So they are all being marketed, they are being marketed differently depending upon who the likely buyers are. So as an example in the case of The Redbury in Hollywood, we didn't do a broad marketing, we did a very targeted offering to high net worth individuals, a few brands and some foreign capital that we thought would find that property an asset that they wanted to own. And so we did hire a broker but we didn't go through a formal overall bidding process, we just worked with the likely buyers for that particular asset. In Miami, it actually was our intention to do again a fairly targeted -- again, not broad but targeted process. The process lasted about three days and we had an interested buyer who ultimately bought the property, who gave us an offer attractive enough to take it off the market and work with them exclusively.

So when we look at what we're going to sell, I mean we evaluate a lot of things; we evaluate the individual market, what we think the intermediate to long-term prospects are, the barriers to entry in those markets, the capital that needs to be invested, any short-term negatives that might impact our returns, the value creation that we may have created -- the value we may have created in those assets. But we're really looking at things from a longer term perspective, it would include the land that we saw at Revere that -- we're not in the development business, we're certainly not in the apartment or condo development business, and there are others that are far more capable and skilled that working their way through the Boston, rezoning an approval process then we. So we made a decision to take a piece of land that looks no bigger than my front yard and to sell it to a developer.

Rich Hightower

Okay, it's very helpful Jon. Thanks.

Operator

And our next question is from Shaun Kelley with Bank of America. Please go ahead sir.

Shaun Kelley

Good morning, guys. Jon, you've always been pretty helpful on saying -- I think last quarter you give us a little bit of the pattern about the monthly trend you're expecting and it did play out because I think you were calling from May to be your strongest month and that seemed to be the case. I know a lot of people listening are probably interested in how you think about some of the movements in Q3 particularly, given the Jewish holiday shift between September and October in some of the key urban markets. And then also the impact that you expect August to have given the way that Labor Day played out last year. Could you give us any color about sort of your thinking on sort of the monthly trend? I appreciate it's a relatively short-term focus.

Jon Bortz

Sure. So I mean from what we see right now Shaun, I think September is likely to be the strongest month in the quarter, positively impacted by the Jewish holidays which unfortunately will then negatively impact October. I think as it relates to the way Labor Day is falling, I think the conclusion we came to last year after doing more research was we think the last week to ten days of August, almost regardless of the way Labor Day falls; unless it falls at the very, very beginning, it is likely to be weak on a secular basis. We think the change in the school system dates, when kids go back to school is having a negative impact on leisure travel at what we used to think was a prime part of the summer and we no longer think that. So strategically, our properties have been highly focused on getting business on the books well in advance for that last ten to two-week period in August. And so that will have some negative impact obviously on pricing but hopefully for the benefit of occupancy for us.

So that's kind of the way we think it's going to fall out, we think July is running weak because of the negative impact from the July 4 shift. You saw that in the Smith Travel numbers that were mid-single digit negative I think for the first week and marginally better, certainly positive but probably more in the normal range we're expecting -- kind of 2% to 3% in the second week. We do think there is some lift in July, clearly from the two political conventions from an industry perspective and obviously those will positively impact Cleveland and Philadelphia. We don't have any hotels in Cleveland, we do have one in Philly [ph] and it is benefiting but we don't have the Pope coming back in September which was a benefit in the quarter in Philly as well.

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

Shaun Kelley

That's really helpful. And then my longer term question if you will is, obviously renovations are having impact in just the absolute magnitude of your RevPAR. So could you just help us think about when 2016 is kind of said and done what is the overall renovation headwind you're expecting for the full year this year? And then next year, I appreciate that at least one of the assets, the big one that we're doing in 10% scope may not be open for the full year but do you think renovations are a net headwind or tailwind for 2017?

Jon Bortz

Yes, I think for this year we're in the 100 point range, negative impact for the year. Next year should be meaningfully less than that but most of it's going to be pushed into the first quarter of next year when we're doing the Palomar and the Revere, and we're starting the Tuscan which will probably run a little bit into Q2. Right now the only thing we see at all major would be doing the Golf Tower at Naples in the summer. We're doing the beach building this summer and outside of that we think overall next year should be meaningfully less from a disruption impact versus this year.

Shaun Kelley

All right, thank you very much.

Jon Bortz

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

Shaun Kelley

That's great, thank you very much.

Jon Bortz

And next up is Wes Golladay with RBC Capital Markets. Please go ahead sir.

Wes Golladay

Good morning, guys. I can't believe you don't have any hotels in Cleveland. Looking at the incentive -- the short-term incentive group, when we look at the labor data, it shows the -- it's really hard to get employees, its looks like a pretty tight labor market at the high end. So what do you think is behind the lack of incentive group, is that's what it's fallen off within the quarter bookings?

Jon Bortz

Now you know it's not the incentive groups Wes, because the incentive trips tend to be much more elaborate and generally booked well in advance; it's really the 5/10/30 person meeting that companies are deciding to differ, maybe they are doing it in-house, saving the travel; maybe they are doing it by phone, I don't know but I know that you know it's certainly under pressure like business transient travel is. So you're right in making the correlation between the strong employment markets, the challenge in finding good quality people, and the need to continue to have incentive travel; and that's what makes this environment a little bit more unique than what we've seen and in some prior -- you really got to go all the way back into the early 90's to see an environment like today.

Wes Golladay

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

Jon Bortz

Yes, I mean it -- overall, it's certainly being led by financial services. As you are on the phone asking the questions or listening now, probably the two industries struggling the most; energy and financial services, in the environment we're in. So whether that's banks, insurance companies, investment managers, whether it involves consulting or to some extent even accounting and legal, we're definitely seeing significantly less travel in those areas and certainly more price sensitivity in those areas. But it's broadened over the last quarter, it certainly includes more companies, more industries, multi-nationals in particular are certainly cutting back on travel, we've certainly seen it in the manufacturing sectors. There is just an overall cautiousness on the part of business as it relates to travel. I mean we're even hearing it from some of the real estate companies believe it or not -- some of the service companies. So it seems to be fairly broad based, interestingly outside of individual company situations and technology; we're not really seeing it in technology, we're not seeing it in biomedical or pharmaceutical -- those industries continue to be growing, being able to grow top lines and therefore they seem to be -- seem to have a pretty positive attitude about travel.

Wes Golladay

Okay. And last question for me, the big picture -- what's going on with the Z-brands -- we take it outside of San Francisco, just like the letters Z, anything going on there?

Jon Bortz

Well, we like the letter Z; some of the consumer studies show that customers are attracted to companies that start with either and A or Z. And so we like the Z-letter from a naming perspective; it's also different in the market like our properties. So we think it's -- the names are a little bit experiential like the properties are. We don't have any plans to make it a brand, take it necessarily outside of San Francisco. And as you know our properties with the Z-names have different operators as well in many cases. So it's not a new business strategy for us.

Wes Golladay

Okay, thanks a lot.

Operator

Our next question comes from Jeff Donnelly with Wells Fargo.

Jeffrey Donnelly

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

Jon Bortz

Is it greater?

Jeffrey Donnelly

I guess I think of it as a potential for deceleration or do you think that it's maybe more balanced at this point?

Jon Bortz

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

Jeffrey Donnelly

And I'm just -- I have two questions on just corporate transient -- I have got periods in history where I guess this kind of environment sort of reminds you of where it seems like it's more about -- call it a corporate recession and consumer recession. I'm just curious some of your perspective there and maybe as a follow-up just to give us some quantification. What are your expectations on corporate transient demand, I guess earlier in the year and how is it evolved to where it is today?

Jon Bortz

I think we have to go back to the 90's. Maybe you'd see it during the Iraq -- the first Iraq weighted average rate, over that period of time where businesses got cautious because of the environment and the uncertainty. And then -- I'm sorry Jeff, what was your second question?

Jeffrey Donnelly

Second question was, I was just curious -- I'm just quantifying your outlook for the corporate transient demand, maybe where was it earlier in the year and where is it today. I'm just kind of curious if you had any sort of numbers to how you were thinking about your outlook for corporate transient demand?

Jon Bortz

I think what we've seen is probably somewhere between a 1% and 2% decline in business travel which would account for much of the change during the year in demand. It's funny it doesn't sound like a lot and it's not on a percentage basis but in an industry where a good year is 1.5% or 2% demand growth and a great year is 3% demand growth or 3.5%, it's not a big difference overall. So I think it -- the numbers aren't large, business is still traveling; you hear from the airlines as well, they've seen softness in business travel as well. I think we still have the international headwinds, I think business travel in-bound is probably down, we don't have good statistics for that obviously but with the strong dollar and the weakening economies abroad, that impacts global business travel as well. So our viewpoint is, if we see a pickup in global growth, we see a pickup in U.S. growth, we see a pickup in corporate profits; it wouldn't take a lot to see a turnaround in the direction of business travel.

Jeffrey Donnelly

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

Jon Bortz

I think the first thing we do is correct them, a misconception if that's the case because we never talked about $1.5 billion, we talked about $1 billion to -- a $0.5 billion to $1 billion in terms of assets we'd ultimately bring to market. That is kind of where we are right now in terms of what we've brought to market at this point in time, either -- again, actively or in a very targeted way. We've sold a little over $100 million. Obviously, we continue to pursue the ultimate disposition of our interest in New York, that's a meaningful piece of the potential overall $1 billion number. And I don't think our view in our strategy has changed at all from the beginning of the year. I think what we plan to bring to market, we've brought to market. It's a long process, I think -- I understand that people are anxious but this isn't -- we're not putting these things up on eBay. They are very complicated properties and we're looking for the right buyers in many cases for some of these assets. And some of the situations like New York are very complicated so it takes time. And our viewpoint as to what we thought would likely get executed when we put the plan in place earlier in the year, and announced it to you all and where we are today -- I don't think our view has changed at all about what we think is likely to happen from when we put the plan in place.

Jeffrey Donnelly

And just since you mentioned concerning New York, has there been any meaningful change or -- I guess advancement since your last time in front of investors and said many reads in the NYU Conference there?

Jon Bortz

Well, there is nothing that's changed than what we're saying which is, we're not going to provide a play-by-play of what is an extremely complicated situation where talking about any of it publicly would not increase our chances of getting anything done. So we'll maintain that posture, hopefully everyone understands and appreciate that when we have something to announce, we'll announce it. And until then we're not going to talk about the process at all.

Jeffrey Donnelly

Okay, thanks.

Jon Bortz

Sure.

Operator

[Operator Instructions] We'll take our next question from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich

Great, thanks. Good morning. So on the weakness with corporate transient, I'm curious -- do you think that's the majority that's driven by weakness in corporate profitability or do you think that part of it could also be explained by Airbnb taking share for the corporate traveler?

Jon Bortz

Yes, I don't think it's the latter. I think it's the former, it's -- I mean you're seeing it in all forms of business spending, you've got weak capital investment, you've got weak discretionary spending on the part of businesses. And I think it's no different in travel, companies are having a difficult time growing top lines in order to mitigate or grow bottom lines they are cutting expenses and not making investments. So that's what we're seeing on the business side, I don't think any of it has to do with Airbnb.

Raymond Martz

And you look at New York, specifically, RevPAR in Manhattan market was down 5% in the second quarter but we know Airbnb units have gone from 17,000 units last year to under 7,000 this year. So the supply of Airbnb units in New York has gone down but the demand is still weak, or let's say the RevPAR is still weak there as a result of the corporate transient travel challenges that has supply concerns.

Lukas Hartwich

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

Jon Bortz

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

Lukas Hartwich

Great, that's it for me. Thank you.

Operator

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

Bill Crow

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

Jon Bortz

Yes, I think the two -- well, really three markets kind of stand out to us of being stronger next year. One of those would be San Diego which has an even better convention calendar and less supply growth in the market. Boston which has a very good convention calendar next year and has almost no supply growth next year, our forecast right now is only 0.6% for next year and Boston it's 5.2% for this year in Boston. So Boston is clearly struggling even with good underlying industries today to absorb that much supply in one year. Washington DC should have a better year next year, it has an improved convention calendar on top of having an inauguration as well as benefiting from the first year of new administration which is historically one of the stronger years of activity for Congress and also for overall activity of people coming to the market to meet with their new congressmen and senators.

In terms of weaker markets; San Francisco is the one that obviously stands out the most. Again, I don't -- but we're not at a point to be able to make a prediction as to whether any particular market is going to be negative next year but clearly, San Francisco would be the market with the most risk, it's a short-term phenomenon in terms of market impact with the expansion and renovation of Moscone and the closing of two of the three Moscone buildings for the better part of the second quarter next year. So San Francisco has a good first quarter as of very weak second quarter has a relatively flat fourth quarter and a weaker third quarter next year. And San Francisco travel is doing a yeoman's job in making up for convention shortfalls by booking larger meetings into the larger hotels in the market and I think the pace that we last saw in San Francisco has in-house meetings up over 100,000 -- maybe a 115,000 rooms while the convention room nights are down something like 330,000 or thereabouts.

Bill Crow

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

Jon Bortz

I think what it's causing us to do is to continue to look -- focus a lot of efforts on creating efficiencies to absorb that. So generally that means reducing our headcounts at our hotels from where they've been operated. In some cases it also involves adding surcharges on -- particularly in restaurants for living wage, for healthcare in San Francisco as we've done there, as we've done in Seattle, as we're doing in L.A. in order to absorb some of that. So I mean I think overall Bill, labor is probably running somewhere in the 3% range with benefits being offset by 1.5% growth at most in other expenses and ending up in kind of 2.5% run rate range for expenses. And then we have projects and other capital investments and best practice implementation that should ultimately work to keep that number at that number or lower.

Bill Crow

Okay, thank you.

Jon Bortz

Thanks, Bill.

Operator

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

Jon Bortz

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

Operator

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

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