LaSalle Hotel Properties' (LHO) CEO Michael Barnello on Q2 2017 Results - Earnings Call Transcript

Jul. 20, 2017 5:37 PM ETLaSalle Hotel Properties (LHO)
SA Transcripts profile picture
SA Transcripts
132.51K Followers

LaSalle Hotel Properties (NYSE:LHO) Q2 2017 Earnings Conference Call July 20, 2017 11:00 AM ET

Executives

Max Leinweber - VP, Finance and Asset Management

Michael Barnello - CEO, President and Trustee

Kenneth Fuller - CFO, EVP, Secretary and Treasurer

Analysts

Shaun Kelley - Bank of America Merrill Lynch

Abhishek Kastiya - Citi

Patrick Scholes - SunTrust

Floris van Dijkum - Boenning and Scattergood, Inc.

Michael Bellisario - Robert W. Baird & Co.

Chris Woronka - Deutsche Bank AG

Stephen Grambling - Goldman Sachs Group Inc.

Lukas Hartwich - Green Street Advisors

Ryan Meliker - Canaccord Genuity

Felicia Hendrix - Barclays PLC

Wesley Golladay - RBC Capital Markets

Operator

Welcome to the LHO's Second Quarter 2017 Earnings Call. I would now like to turn the conference over to Mr. Max Leinweber, Vice President of Finance and Asset Management. Please go ahead.

Max Leinweber

Thank you, Ryan. Good morning, everyone and welcome to the second quarter 2017 earnings call and webcast for LaSalle Hotel Properties. At I'm here today with Mike Barnello, our President and CEO; and Ken Fuller, our CFO. Mike will provide an overview of the industry, then he will discuss our second quarter results and activities. Ken will provide details on our portfolio performance and an update on our balance sheet. Then we'll open the call for Q&A.

Before we start, please take note of the following. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties over which the company may have no control. Factors that may cause actual results to differ materially are discussed in the company's 10-K, quarterly reports and its other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Our SEC reports as well as our press releases are available at our website, lasallehotels.com. Our most recent 8-K and yesterday's press release include reconciliations of non-GAAP measures to the most comparable GAAP measures.

With that, I'll turn the call over to Mike Barnello. Mike?

Michael Barnello

Thanks, Max and good morning, everyone. Over the last 3 months, we've sold 2 hotels at attractive prices, we've redeemed 7.5% preferred shares and we've built upon our long-standing track record of best-in-class asset management with our 38.2% hotel EBITDA margin. We will come back to the highlights of our transactions and operational performance in a few minutes. We will start this morning with an update on recent industry performance.

When we look at the broader lodging industry, we continue to see mixed signals. On a high level, industry RevPAR has been encouraging with modest growth continuing well into the eighth year of the cycle. The second quarter industry RevPAR was up 2.7%, bringing the first half of the year to 3% growth. Even after a move in January due to the boost from inauguration, the year will still be up to close to 3% for the period of February through June. However, when we look at a few segments that make up the industry, namely urban and upper upscale, we start to see a very different picture. For both segments, second quarter RevPAR was up 0.6%. Despite the slow growth in Q2, the year-to-date performance is notably stronger which is largely due to the record-breaking January in D.C. over the inauguration. If we look at just February through June results for urban and upper upscale, the growth in both cases would be just over 1%. This trend has continued in July where the industry is up close to 2% month-to-date where urban and upper upscale segments are below 1% for the same period.

When we spoke on our first quarter call, we knew that the April month results for urban were going to be hurt by the Easter shift. For the urban segment, April RevPAR ultimately decreased by 8 -- by 0.8%. May rebounded a bit and finished up 1.5%. June was another disappointing month with RevPAR up 0.9%. With elevated supply in these urban markets, we're not surprised to see the trend of industry underperformance continue this quarter. Having recapped the industry's performance in some of its more relevant component parts, let's now walk through our monthly results which were not materially different than the urban segment, especially given our higher exposure to San Francisco. Our RevPAR declined each month with April down 0.7%; May, down 0.5%; and June, down 3.5%. Excluding San Francisco which was negatively impacted by the construction of the Moscone Convention Center, our RevPAR in April was flat; May was up nearly 3 points; and June was basically flat. In total, our second quarter RevPAR declined 1.6%, driven primarily by occupancy. Excluding San Francisco, our second quarter RevPAR was up nearly 1%. Later in the call, Ken will provide more color on some of the market's specific performance.

Focusing on the group and transient mix for Q2, 75% of our demand was transient and 25% was group which is consistent with our recent history. Our transient RevPAR was flat with a slight increase in occupancy and a decrease in rate. Our group RevPAR was a tougher comparison with fewer citywides and RevPAR was down 9%, with rate up 1% and volume, down 10%. It's important to note that approximately half of this group RevPAR decline for the portfolio was in San Francisco.

Now let's examine a few other components within the transient segment. In the second quarter, we saw our corporate-negotiated room nights increase by 0.5% which is a second quarter in a row volume growth in this segment. Our corporate ADR was also up 1% this quarter. In addition, we experienced a modest shift out of the OTA channels and into lower cost property websites. Both of these trends in our transient business are positive for the profitability of our rooms department.

Moving on to our international business. Our volume decreased by 4% during the quarter which is entirely a result of less international business to Park Central New York. Including that 1 hotel, our international demand was actually up 3%. We mention this distinction as a reminder of how sensitive this data can be to small swings given that international volume represents less than 10% of our total demand. Our team's laser-focus on expense management is evident in the total portfolio results as well. Our asset managers and teams across the portfolio continue to relentlessly pursue opportunities to operate efficiently in each department while delivering a great product experience for the guests of the hotels. These efforts are reflective in our standout margin of 38.2%. Our total expenses actually dropped by 2.1% during the quarter which allowed our margins to remain about 38% despite a moderate RevPAR decline.

Now that we've recapped the quarter, let's look at the key drivers for industry performance going forward in 2017. Regarding supply, not much has changed since the beginning of the year. Industry supply grew by 1.8% in the second quarter as expected. 2017 supply growth for the industry is still expected to be approximately 2%. Looking at our markets specifically, we're predicting a 3.4% weighted average supply this year which is similar to STAR's urban segment year-to-date supply increase of 3.1%.

As is our custom, we'll now discuss the components of demand and the economic landscape as we see it today. Let's start with group. As mentioned previously, citywides are down in many of our markets since 2017. The bright spot for citywide for the remainder of the year are Boston and D.C. For the balance of the year, our overall group pace is now up by 1% which is down in Q3 and up in Q4. The next piece of demand is corporate. For the S&P 500, profits are estimated to increase in Q2 for the fourth straight quarter which will be encouraging. Although we suspect it may take another few quarters of corporate profit improvement before we see it translate into additional sustained demand into our markets. In addition to corporate profits, the other economic indicators we track have all remained relatively stable this year. GDP is estimated to grow by 2.2% in 2017.

Consumer confidence which reached a 17-year high in March, retreated slightly during the second quarter but the index still sits in an elevated level which is a good sign. Unemployment dropped even lower to 4.4% and employment have been steady since the beginning of the year with modest capacity increases planned for many of the airline carriers. As a whole, the facts we have today about increasing supply growth and softer overall demand keep us cautious on the industry fundamentals going forward. The recent improvements and general strength in the macroeconomic environment are positive signs that they have not yet translated to the urban and upper upscale lodging performance.

Before handing the call over to Ken, I want to touch on the Westin Philadelphia sale for $135 million or nearly $460,000 per key which represented an approximate 7.8% trailing NOI cap rate after normalizing for the DNC impact last July. While this is a fine investment over 7 years, we saw a good opportunity to take advantage of the seller's market. Two of the central reasons for our timing in addition to buyer's interest was the upcoming hotel supply growth and the weakening citywide demand in Philadelphia. On a particular note, within the supply which is expected to grow by over 20% over the next 3 years, is that nearly 50% of the new rooms will be in the Marriott distribution system which will have an outsized impact on the Westin.

In total, the 5 asset sales that are completed this year provided approximately $410 million of proceeds. While we did redeem the 7.5% Series-A preferred shares for $69 million, we're not in a rush to allocate the remaining capital from these sales whether that as a future acquisition, buying back stock or otherwise. We're in an excellent position to pivot in either direction depending on how the year unfolds. First and foremost, we make decisions that we think are in the best interest of the shareholders.

Now, Ken will provide some details about our second quarter performance as well as an update on our balance sheet. Ken?

Kenneth Fuller

Thank you, Mike and good morning, everyone. I'll start by providing more color on our second quarter results. Our best performing markets during the quarter in terms of RevPAR were Boston, Philadelphia, San Diego and New York, with growth of 5.8%, 4.6%, 1.3% and 1.1%, respectively. Boston performance was strong across all 4 of our hotels and the market as a whole benefited from good citywides. The citywide calendar for the balance of the year in Boston continues to be strong. Similarly, Philadelphia had a great citywide quarter and the Embassy Suites began its rent out of renovation. Looking forward, we note Q3 will be a tough comparison with the DNC in July 2016 and a very strong citywide quarter last year.

San Diego downtown has been a steady performer this year and some of our resorts outside of the CBD had a second -- a strong second quarter as well. New York also experienced modest growth during the quarter. However, this growth was entirely from a great April. The last 2 months have been tougher which we suspect will be the norm for the short term. Our toughest market this quarter was San Francisco, Chicago, Key West and L.A. San Francisco citywide story is well-known. And as a result, our hotels there are in a more challenging operating environment. The second quarter was expected to have the most significant impact from the Moscone expansion but Q3 will also be difficult. Citywide pace does start to look more encouraging at the end of this year and heading into 2018.

While the Chicago market had a decent citywide quarter, our hotel did not feel as much compression from the smaller event that dominated the calendar. Our Key West hotels experienced a rare win quarter on the top line after consistently beating the market each quarter for the last 2 years. Regarding L.A., we benefited last year from the Porter Ranch gas leak and the supply reduction which contributed to 17% RevPAR growth in Q2. So we were facing a tough comparison this year. That said, we were only down 2% in Q2.

With respect to our bottom line performance, our asset management team and our operators have continued to do an outstanding job. Our hotels delivered solid results overall, driven by another excellent quarter of limiting expenses which actually decreased by just over 2% in the quarter. And our EBITDA margin held up at an impressive level above 38%.

We did have another quarter of F&B revenue decline and that led to a corresponding 8% drop in F&B expenses. The F&B revenue decrease was partially due to the restaurant closure at Villa Florence as we described in April. And it was also a result of less group banquets at our larger hotels.

Turning to capital. We invested approximately $25 million in our portfolio during the quarter, partially for the renovations we'll be starting during Q4 2017. The 2 largest projects we have upcoming are lifecycle room renovations at Westin Copley in Boston and Paradise Point in San Diego.

Finally, I'll provide a brief update on our balance sheet which was further strengthened following the 2 asset sales in the quarter and the preferred share redemption. In May, we redeemed a 7.5% Series H preferred shares for $69 million which will save the company $5.2 million of expense annually. As of June 30, we had total debt outstanding of $1.1 billion. The total debt to trailing 12-month corporate EBITDA, including $461 million of cash on hand, was 1.9x. Additionally, we finished the quarter with fixed charge coverage of nearly 6x. We continue to have substantial flexibility with 39 of our 41 hotels unencumbered by debt and nearly $775 million of capacity available on our lines of credit. We have a highly liquid balance sheet and remain extremely well capitalized.

So that completes our prepared remarks. And Mike and I would now be happy to answer any questions you may have. Ryan?

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll go first to Shaun Kelley with Bank of America.

Shaun Kelley

Mike, I sort of have a just a high level kind of theoretical question for you. But just as we look at the overall operating environment, we've seen, like you said, I think, now 4 quarters of corporate profit growth. Is there a period in your career where we just -- we've seen something similar in terms of this kind of lack of translation of a fairly positive macro backdrop into whether it'd be pricing or just overall -- ultimately, that translating to overall RevPAR. Is there a period in time that this reminds you of or do you think we're sort of in a little bit of a new area given what's going on with urban supply at the moment?

Michael Barnello

I think there's a couple of pieces to that question. We think about it -- we look at corporate strength. Corporate America got beat up for about 5 quarters. And then they started to improve and what you've seen are earnings increases starting in Q3 last year which has continued and hopefully, continues in Q3 moving forward. Now recall a lot of those bids are on the bottom. So you are seeing bids in the top 2 but there is a lot of bids in the bottom which would effectively hurt us because some of those folks are actually have been restraining travel including a lot of the bankers that we deal whether it's limiting the cost of the travel or limiting the amount of people who are traveling.

So you are seeing a little bit of that. And then when you think back in history, to answer the other part of your question, no. It's an unusual period of time, right? If you look back for about a 30-year period where Smith Travel existed and tracked a lot of these segments, really the urban and upper upscale, particularly the urban had outperformed really in every year that was a non-recessionary year. So throughout '01, '09. But when -- in '91, but wait, but in kind of the normalized years, the markets have done a much, much better. Starting in '14, what you saw -- you saw that reversed where industry beat urban upper upscale. And that's continued and that's been one of the focuses of our discussions for the last couple of years. A couple of things to that, you mentioned one of them. Yes, the supply in those markets, in the top 25, particularly our markets, has been elevated. People have gotten it right in terms of where they're building. They're building where the demand is. So from that perspective, it make sense. But that's obviously tougher competition for us. The other thing is that when you look at who was done better when you slice and dice these segments, the lower-priced segments have done better over the last couple of years. There's no perfect way to get an answer for that. One of our suspicions is that as unemployment has recovered, going from what was 10% in '09 and '10 to now down to the low 4s. A lot of folks whose jobs have recovered, it has been attracted more to the lower-priced segment which would make sense that they have done better. Obviously, there's also been a proliferation of the short term rentals throughout the country that obviously has an impact as well which is really kind of embedded in the supply discussion. So we think that's it. I don't think there's a perfect correlation in the past couple of decades that suggests we're mimicking another period. I do think that, at some point, we'll ultimately recover. These are markets that have a ton of demand generators. The demand has been elevated in these markets. And so people are building for reasons people keep coming. So I don't think it's a situation where the urban and upper upscale are bad places to be. I just think that they're a tougher place to be at this moment.

Shaun Kelley

And then just a quick follow-up. You called out in your prepared remarks that, I think, we excelled in San Francisco. June was flat, April was flat. I think April, we all would have anticipated around the shifts. But any color on sort of why kind of the summertime softness here? It seems like that -- like to your point, that might also be continuing into July. So just any insight onto what exactly is going on in June?

Michael Barnello

We think it's a lot of the same, Shaun. I mean, these markets have been doing okay because I don't think that running 1% is a train wreck by any means. But it's not exciting. It's not the levels that we're looking for of 4% or 5% or more growth. And we're not really surprised by it. I do think that when we look out, what we see is a number of things that would suggest this will continue for a while. I mean, you do see the supply, that's not going away anytime soon. What you're also seeing is that citywides are not as strong, particularly in Q3. And I guess I'll look at this as the rest of the year from more of a macro perspective. But in Q3, the citywides in our markets are overall down about 9%. What you're seeing is now you have a couple of Jewish holidays that will hurt September. And when we think about it from our perspective, for Q3, our pacing right now is down about 5%. That's group and transient.

When you think about Q4, moving to the next quarter, you see why pace is better. It's up by 12%. Our pace is down slightly. But you do have the Jewish holidays that actually will help October because there will be 2 less this year. However, from our perspective, we'll see some additional impact from renovations. We have a little more renovations going on in the Q4 than we did last year. And obviously, we look for -- we're very interested to see how Q4 plays out because we all got a huge run up last November because of the election. I think that was a surprise to everybody and everybody will be curious to see how that laps. So when we look out to the future, we see a lot of things that are concerning, so we don't see things changing anytime very quickly.

Operator

And we'll go next to Smedes Rose with Citi.

Abhishek Kastiya

This is Abhishek for Smedes. Could you guys just provide a little more color on San Francisco and what your expectations are for the balance of the year? And I think on prior calls, you've shared your citywide group numbers. So could you just give us an update for this year and next couple of years?

Michael Barnello

So I guess, I'd say a couple of things. When we look at San Francisco overall, San Francisco in the next couple of quarters. These are citywide numbers. Citywides are down a little over 45% in Q3. So a reminder, Q2 is the worst. Q2 was down about 80% in citywides. From a Moscone perspective, Q3, down 45%. Q4, it gets much better. Still down but only down slightly to down 0.6%. So that brings the full year total to down about 40% for the year. Good news is that, that's the worst of it. And then when you look out into '18 and '19, what you see is that '18 is actually up about 39%. And that '19 is actually up not quite 80%. So we're not surprised by that. Those have been pretty consistent numbers that we get now for a while. If you think about it, Moscone did a renovation and an expansion. So they're bringing in more capacity to have additional shows. They're taking advantage of that.

Just to give you some phenomenal color on that. Just to make a finer point of it. When you think about it, the prior peak for citywide business was '16 with 785,000 rooms. We're going down to 480,000 rooms this year, we come back up to about 650,000. Again, these are Moscone numbers. But then look into '19. There's 1,150,000 rooms in the books. So that's eyeballing it. 50% more than the prior peak on the books. So really should be in very good shape for 2019. A little bit of supply coming in San Francisco over the next couple of years. But not really significant. One of the better markets overall. They have just under 1% this year. A little bit of increase next year, 3.5% but then very muted thereafter. So this should be an excellent position to take advantage of that.

Abhishek Kastiya

Got it. And then just management fees are a little higher year-over-year while revenues and profits were slightly down. So was there anything in particular that led to that increase or...

Michael Barnello

A big reason for that is the Westin Michigan Avenue. They have a good calculation for profit sharing but a tricky calculation for a public company. The managed fee is actually -- fluctuates based on the capital we put in. So when we did a renovation, what happens is the management, the incentive fee is reduced for the buyback. So that -- what, that, happened is the prior year and so the incentive fee went down, as a result, this year, there's no renovation and the incentive fee goes back to normal but it makes that comparisons look like there's a big increase.

Operator

And we'll go next to Patrick Scholes with SunTrust.

Patrick Scholes

A couple of questions I have. First, you mentioned in the prepared remarks on the Park Central experiencing -- the Park Central New York experienced some weakness from international travelers. Can you give a little more color on that?

Michael Barnello

I don't know that I would actually necessarily call it weakness from international. They just got less international business. The Park Central did okay in the quarter. I mean, our New York was a little better than New York overall. Nothing to scream about. We were up just over 1, New York was down slightly in the quarter. So I really just think it was just different channels, Patrick, more than it was that you're not coming in one particular channel. Especially when we look into the rest of our -- look at the rest of our portfolio to note that international was up about 3%. So 1 quarter, I'm not so sure, I thought too many conclusions about that. But while this is -- we'll continue to track and then keep you guys informed. But it's -- I wouldn't look too much into it.

Patrick Scholes

Okay, great. Second question concerns group pace. You noted in the prepared remarks, it's for the rest of the year, up 1% versus -- in your prior earnings call, it was down 3.5%. I imagine that's just because 2Q is now out of the picture. You had also given at that time a group pace for 2017 is negative 2. Would you have a comparable number where the full year 2017 is versus the previous negative 2?

Kenneth Fuller

Sure. So let's give both to make sure it's right. You're right. We've gone through the Q2 which is the toughest quarter to digest. And as we've said, Q3, now let me give you about what's right. This is group and transient, I assume that's what we're looking for. We mentioned in the prepared remarks, combo. Q3, down about 5, Q4, down 3. At this point, the balance of the year, yes, is up -- actually, the balance of the year for both, group and transient, were down about 5. For the full year, right now, I'd put this down to 2.

Patrick Scholes

Okay. So a slight slippage but measured in basis points as opposed to percentage points?

Michael Barnello

Right. I mean, obviously, there's 2 -- there's many takeaways from this. One of the things to think about is transient, obviously, is short term and the numbers are the numbers but it's short term booking. The second thing is group which is definitely is accurate for our portfolio. But I remind folks to keep in mind we're 25% group of which half is 5 hotels. So it's definitely not a read through for the industry. It's really more of a read through for us.

Patrick Scholes

Okay. One last question. Sort of a bigger picture question. How do you think about the trajectory of labor cost going forward in relation to what seems to be an increasingly tighter labor market? And also, what appears to be a bit of crackdown on undocumented workers.

Michael Barnello

An excellent and timely question. I mean, you're definitely seeing the cost labor continue to rise. As a reminder, close to 60% of our costs are labor benefit related. So it's very important to us. When we look across the portfolio because we're in the biggest cities, we've seen, obviously, huge movements, mostly West to East to bring minimum wage up. And obviously that not just increases the wages but the benefits, et cetera. The overall cost. And we have been experiencing that for the last couple of years. The good news for us, we don't have a lot of people making minimum wage. So the impact has actually not been as dramatic as it could be for much smaller businesses. But Patrick, we've been carrying probably and depending in the year and the markets and how the minimum wage rollouts have happened, $700,000 to $1 million increase cost just due to that. When we think about the future, we have -- that run rate will continue pretty much to '20 or 2021. That's the year most of the minimum wages have to get to the $15, depending on the city.

There is a different movement in California. The calculation that non-minimum wage workers, managers have to make 2x the minimum wage. Obviously, that could have impact on our hotels again. Not a big impact where people get -- generally get paid a lot more than that properties. You also touched on the tiding market. Yes, I mean, at some point, people worked in the low 4s on employment for the country. And people are talking about going to the mid-3s. Some of our markets are already in, the 3% -- the 3-ish percent unemployment. That's a tough labor market for us. So the only way to think about that, as the labor market tighten, is that we suspect that getting talented people will continue to be a struggle and ultimately, will cost more. So that's definitely on our radar for the next couple of years that we'll have to pay up for talent. That's okay. But it's going to be harder and harder to contain that line item.

Operator

We'll go next to Floris van Dijkum with Boenning.

Floris van Dijkum

I wanted to get your sense on your F&B decline in revenue. You mentioned the Villa Florence and a couple of other renovations that you're -- when do you expect to bounce back? And what's the magnitude of a potential bounce back in revenue on -- in food and beverage?

Michael Barnello

The F&B is one of the trickier line items for us to predict quarter-to quarter. There is some volatility of 2 levels. One, caused by us and one that's not. But caused by us, I mean, the Villa Florence, we purposely closed down Kuleto's at the end of the year. We're rebuilding the lobby. We're going to be putting in an UGG retail store which will be opening up in the next couple of months. So the profit story will be greatly enhanced. But obviously, the food and beverage revenues are diminished during this period. And they will be, for the rest of the year. That will continue at the Villa Florence. We had a similar situation at The Marker last year when we leased that out. That anniversary-ed in the first quarter this year. The other big components are a function of the big-box hotels and how they've done either with or without in-house group.

And sometimes, the citywides have an opposite effect on our food and beverage business. To the extent that there are additional citywides at some of the hotels, sometimes that hurts their ability to capture in-house F&B. And there is, obviously, an effect on our revenues there. But if you think about big picture, yes, we're down about $7.5 million in F&B. A big chunk of that is Villa Florence. But really a couple of hotels make up the rest of it. Westin Michigan Avenue, the Copley Park Central and a couple of smaller hotels really make up all of it. And it is a function of what they had, whether it was citywides or in-house. So it's not a function of a trend. This will be going down anywhere near this magnitude continuously. It's really more a function of what kind of business they're willing to take with these groups. So well, the only trend that we know will continue is 2 things. Obviously, the Villa Florence will be continued for the rest of the year and the San Francisco assets, particularly the Park Central San Francisco. As a result of it, the lack of citywides and taking in more transient business, I suspect our F&B will continue to be tougher this year and then it will recover the next couple of years as the citywide pace continues to grow.

Floris van Dijkum

Great. Thanks, Mike. One follow-up question I had for you as well which is, clearly, you've got a -- the strongest balance sheet in the hotel space. You got a tremendous amount of liquidity. We believe your shares are undervalued. I presume you do as well. When will you be looking to buyback stock? Or what are the trigger points? Or are we off in terms of where we value the NAV for your company?

Michael Barnello

It's a great question. The trigger points. I know we've discussed this in the past. From our perspective, when we look at the -- our capital allocation, what we've been thinking about is we're taking advantage of a disconnect in the markets with these sales. So we've mentioned what we sold this year. We sold a couple of assets last year. We've gotten good pricing for all of them. And there's been that disconnect where cap rates and the private markets have been generally very low and then the public company valuations haven't been as well. At the same time, we're not just looking at the moment in terms of what either, our stock is valued at or what a particular hotel is trading at. It's what's happening in the rest of this year and what's happening in the next couple of years.

So as we look out into the future, some of the things that we're faced with right now, the increase in supply, the demand that has been okay but not as strong as we want to overcome the supply, is going to continue in our markets. We mentioned on our call that -- in our prepared remarks that our weighted average supply story is 3.4% up for this year. That continues for the next 3 years. So what we're worrying about is when will the urban and upper upscale segments which is not just us but most of the REIT peers, will come out of it of this funk. And we're hopeful that some of the things we're seeing in a more macroeconomic basis will ultimately translate to that but it hasn't yet so far as we discussed earlier in the Q&A. So we're waiting for that, so waiting for that.

And that really will be the most important thing for us to look at and then subsequently turn to what is in the market for pricing -- pricing-wise or our stock. So it's impossible to give you kind of a nominal answer like the stock will be x before we buy it because it will be a combination of where we're at the pricing at the moment as well as what our outlook is for the short and medium term. And -- because if things soften, either way, we could take advantage of maybe their pricing disconnects in our stock or if we're able to find better buys on the acquisition side then we can take advantage of those as well. But it's -- quite frankly, it's TBD.

Floris van Dijkum

So are we then to presume that, potentially, you think there's a chance that your NAV could go down because of the supply growth? Is that one way to interpret that?

Michael Barnello

Well, everybody has a different perspective on NAV. We don't publish a calculation of our NAV. So I suppose since everybody has their own NAV number, I suppose that, that number could fluctuate based on their own interpretation of the supply or the performance of the markets.

Floris van Dijkum

Great. And could you just remind me how many -- how much you have left outstanding on your share buyback authority?

Michael Barnello

Well, we authorized $500 million in April. And we thought about, rough, just $70 million left. So from authorization, about $570 million.

Operator

We'll go next to Michael Bellisario with Baird.

Michael Bellisario

I just wanted to touch on kind of your broad motivations to sell hotels. I guess, what gets you to sell a hotel. Is it really just thinking about that public and private market disconnect? And then in the context of you selling more hotels lately, particularly this year, are you marketing more hotels for sale? Or better, is just hitting your offer price more often today than they were 1 year or 2 ago?

Michael Barnello

I think it's more complicated than just looking at the bid ask difference between public and private. The specifics of any particular hotel in the market do matter. If you think back at what we have sold and I'll rewind to about last July. We sold our loan in the Casa/Shutters. That's noncore. We sold the Indianapolis Marriott, noncore. Got a great price. We needed $40 million of CapEx. Moving forward, we sold hotels in Seattle not just because of -- we got great pricing on both hotels. But hotels, one of them at least is in need of grand CapEx. There's a ton of supply coming on Seattle and there's some laws that have passed that could, if actually they go through, the laws if -- that have been -- have popped up could make operating in Seattle very, very expensive, much more so than they have in the last couple of years. You move forward, you look at what else we sold. Lansdowne, very specific golf resort. Those are -- resorts are something that we will obviously have and we would buy more of.

But the details of the resort are important. Golf, not a very big winner for us, quite frankly. And as golf's declined, it's been harder and harder to see us making money investing in a golf course. And then the other one was the Triton and the Triton was a short term ground lease that was, a, in need of significant renovation; and b, about to unionized which would obviously increase the cost. So we think about those very different stories for, really, almost each of them. And so it seems simplistic to say, "Well, I can sell it for a 5. I'm trading it at whatever. Let's just get out." We do look at what's going on in the short term, medium term, et cetera. When we think about the Westin in Philadelphia, the hotel had done well by us. We got a very -- a decent cap rate for Philadelphia. A good price per room. But when we look out at the landscape in the last couple of years, we see over 20% supply growth for the next three years.

And basically, half of that is Marriott Starwood related. So that's obviously going to have an enhanced effect on any other Marriott Starwood product. So we just thought that, that would be a good time to take advantage of that. And so as we look at our portfolio, I can't answer your question or else, we're marketing. We wouldn't talk about it until it's actually been announced. But the details of every single hotel are the most important thing to look at, not just the immediate price.

Michael Bellisario

Got it. That's fair. And then as you sell more hotels, do you guys have an incrementally higher threshold for each subsequent sale, especially today if you don't have a good use of proceeds then?

Michael Barnello

That's an interesting question. But really, no. I mean, if it's the right time to sell a hotel for any of the reasons that I talked about relative to the specifics of the ones that we did sell. And it's still the right time. It doesn't become the wrong time because you sold another hotel 3 months ago. So does it mean that at any point in time, your cash balance could be higher? I suppose it does. But if it's right thing to do to get out of a property, it's the right thing to do. No different than if somebody offered us a price for an asset that they had to have. We -- our job is to evaluate it, but it would be hard to say we would turn it down because we had just sold another hotel in the market.

Michael Bellisario

Understood. And then just lastly on the dividend. Because if you do keep selling hotels, it sounds like that's kind of the path you're pursuing. And what's the likelihood of a special dividend towards the end of the year? And at what point do you maybe think about rightsizing the payout ratio if you continue to sell hotels?

Michael Barnello

Well, the dividend is obviously something that's super important to us, super important to the board and obviously, shareholders. So moving that takes some serious decision making. But a lot goes into that, Mike, we still have 6 months left in the year. We have to figure out what happens. We have gains, about $100 million between the assets. We still have a bunch of runway left in terms of the operating performance of the portfolio for the rest of the year. And then anything else we might do in a transactional basis. So it's still too early to say what we would do. What I would tell you is that remind everybody that over the last 7 years, we've just paid out the requirement. I'm not saying that's our goal but between the way we can move the dividend to or from a prior or future year, we've paid out what we've had to pay out relative to the calculation of -- from a REIT perspective. And again, that's not our philosophy.

But we will take all that in consideration when we get to the end of the year, so it's what we'll do for this year. As far as going forward, it's our obligation to evaluate what the dividend is, what properties we have for the moment and what the short term or medium term will look like before making any changes to the dividend. So I can't possibly tell you there'll be a change. All I can tell you is that, that's our job to do it and any maneuvering on that is super important to us. So it wouldn't be done lightly.

Operator

And we'll go next to Chris Woronka with Deutsche Bank.

Chris Woronka

Mike, I want to ask you if you think there's been any impact thus far from kind of the retail malaise and if that's a noticeable percentage of your room demand, maybe on the transient side? I would guess not. But maybe if you do have any color.

Michael Barnello

No. We have not seen anything. I mean, obviously, we're reading the same things you guys are reading about where the retail world is going. But no, we're not seeing any difference in terms of the business pattern we're seeing and we're not seeing anything different in terms of the, what I'll say, very limited amount of retail space we actually have. You heard us mention earlier that we're about to open an UGG store, a retail store as part of the Villa Florence. It's in Union Square San Francisco. It's a fantastic location. You can imagine the rents are quite nice. That's going in, in the next couple of months as soon as they're ready. So we don't have a ton of retail. So -- and it doesn't come up a lot. But when it does, we'll obviously be out in the market looking to release that and we may have better color next year. But right now, we're not seeing anything that is impacting us.

Chris Woronka

Okay, great. And then I just want to follow up on the Marriott Starwood, I guess, integration at this point. Are you seeing any of the benefits you thought or hoped on the kind of the back end? And then on the flip side, I know there might have been a few folks who thought this might help at the margin pricing power in some of the bigger markets. But certainly, it doesn't seem like that's the case it. Any color on those two?

Michael Barnello

Well, first of all, Marriott's been very well-intentioned about integrating. I know they've had a lot of meetings with all their stakeholders, really, across their spectrum to work through how integration's going to work. And then I can imagine it's pretty daunting. From our perspective, we've been very informed from what they're trying to do in terms of bringing both companies together. But as far as real impact, day-to-day, not much. I mean, the things -- some things have been fairly small and I say small, in a couple thousand dollars here or there range. But as far as big picture, no, nothing yet. None -- our sales organization haven't been put together. They're talking about doing those things some time, hopefully, in '18. I know they still talk about getting the rewards program, loyalty programs merged. I've heard different time frames on that. There are probably better guys to ask. But I know they're working diligently on doing that. But as far as drilling down to an owner level or a property level, we have not seen anything meaningful at all to talk about.

Chris Woronka

Okay, fair enough. And then just finally for me. You mentioned a little bit of a shift in the OTA mix in your favor towards property direct. Do you think that's -- is it too early to call that as sustainable trend? Or do you think there is something to that?

Michael Barnello

It was 3%, Chris. I mean, it was -- it's good. I'd like to see it continue to go in that direction. But it would be too early to see the trend and it wasn't 50%. If it was some huge number, I might have gotten more excited about that, but no. And we'll keep you guys informed if we see that moving in that direction over the next couple of quarters then, obviously, it's something that we can talk more about. But right now, it's probably just a quarterly issue.

Operator

We'll go next to Steven Grambling with Goldman Sachs.

Stephen Grambling

Just a couple of quick follow-ups. First, when you look at the primary buyers and the cap rates in the private market, are you sensing any change needed in the type of buyers that are out there or the sensitivity to valuation?

Michael Barnello

It's interesting because when you think about the buyers for our properties, then no, we're not the entire universe of hotel deals. We're very different from Casa/Shutters was to a high net worth individual. A family bought the Indianapolis Marriott. We've had a couple of REITs, a couple of private equities. So no. I mean, there's no one universal fit. And then a land that was sold to an offshore, wealthy company/individual. So no. I mean, it's -- there's been a variety of folks when I think that there's looking for stuff that fits their eye. Whether it's in terms of what they want to do at the property and yield is not important or if it's for some guys maybe just looking for some yield.

Stephen Grambling

That's helpful. And then second, I guess maybe you alluded to this a little bit. But what are you seeing in terms of corporate related group as you delineate between longer term bookings versus the in the quarter, for the quarter and related spend. Thinking maybe you could provide any kind of color on corporate behavior.

Michael Barnello

I mean, we trust the corporate. I don't know that we have any corporate outlook for our corporate transient for the next couple of quarters. We don't break it down that way. At the same time, I gave you the group numbers. A bunch of the group would be corporate. A bunch of it would be citywides. But right now, mostly -- it's mostly corporate of the ones that we have for the second half of the year. And then we get into next year, that would be predominantly citywides and beyond. So if you look at -- if you think about it from an '18 perspective, just FYI, I mean, '18, we have a strong pace. We're up about 11%. It is mostly San Francisco. Outside of San Francisco, we're only up 3%. And the reason is that San Francisco got hit so hard in '17 and it's bouncing back in '18. But that -- again, that's mostly citywides. So probably there's some corporate that's already booked. But at this point, that would be too far out from a lot of those guys.

Stephen Grambling

Got you. And then I guess changing gears a little bit. As you think about outside supply growth in some of these urban markets, are you seeing any delays or change to projects, entering some of these markets as you've seen some softening in RevPAR?

Michael Barnello

Cancellations, no. We haven't heard of a lot of that. Really, I'm blanking out thinking of any of it. Slowing down, yes. But I don't think any of the slowdown is what you're thinking. It's not tied into RevPAR. It's tied into everything just takes longer. There's a hotel next door to us, the old Sunset Millenium project next to the Grafton on Sunset Boulevard in L.A. I mean, it's supposed to be open ages ago. And it's finally going to open sometime later this year. So -- but that is not a function of the mark -- they're waiting on the market. They're just -- everything is just taking longer. And that is true in many, many cases. Construction and timing more than they're looking at the performance of the hotel market.

Stephen Grambling

Do you get the sense that even from a construction cost, labor cost standpoint, people are becoming more hesitant to start additional projects?

Michael Barnello

That's a good question. For the projects that are really out, I'd say the 3- and 4-year range. And I think we're TBD on that. When we look at our supply story for '17, '18, probably, the most, at '19. At this point, a lot of those projects -- they're largely cooked. I don't mean they couldn't be canceled. But the money's been raised. They either started or starting soon. And those are big numbers, I mean, we mentioned 3.4% for '17 for whatever supply growth. In '18, it's 4.4%; and '19, it's 3.6%. And so what we're seeing is we obviously have some guestimates. We take the announcements are done in '19. We attach a level of probability of that. Could that move? It could. In 2020, could people change their minds about their projects? Absolutely. Those are the harder ones to predict because if you haven't started now, you certainly could start and get done in 2020. But if you change your mind, you -- it wouldn't be so crazy. The unfortunate thing is that when people do cancel projects that far out, they don't put out a press release.

And so we never get to hear about that until it just drags on and it's -- and nothing's starting. We do monitor that, our guys in the markets go around town to look at what's happening physically. But that, you won't know until we're closer in on anything opening up that far out. So the things you're saying makes sense. Construction's gotten more expensive, people ask about labor. Labor, obviously, in the construction world continues to increase as well as product cost more money as we're seeing in our renovations. But so far, that has not been the headwind that we'd like it to be to slow down supply.

Operator

And we'll go next to Lukas Hartwich with Green Street Advisors.

Lukas Hartwich

Mike, you touched on this a little bit already. But are you seeing any change in the body language of your corporate customers?

Michael Barnello

It will be a good question for the next quarter, Lukas. And the reason I said that is because we're just starting to think about corporate-negotiated rates as we go into the season. Unfortunately, the season lasts too long. I mean, these guys make a 6-month event of corporate-negotiated rate contracting because there's no rush on the buyers' part quite frankly. So -- but we'll get to some indication by the October call to know where our people are going. Are they looking at trying to get the best deal? Are they trying to limit hotels? Are they trying to put any kind of mandates in the people? I don't know. So far, we're pleased with the last couple of quarters. We've seen an increase in room rates. The rates haven't been as strong. If I look back over this cycle, we saw a very big rate increases in corporate-negotiated, really, from 2010 to 2015 and '16. And then the rates have become more of an issue now as well as the volumes. So we're hoping for an uptick without people losing their purse strings but it's TBD.

Lukas Hartwich

That's helpful. And then the CMBS market seem to improve quite a bit over the last couple of months. Are you seeing any impact in that in terms of the transaction market? Are prices changing? Are more buyers coming more into the pool?

Michael Barnello

As far as more bidders, I think what you've seen is, I'd say, modestly robust acquisition market. Why do I say that? Because there's not a ton of hot properties in the market. I mean, there's still our properties in the market. And so for good properties which we think we've been selling, there is a crowd, right? The crowd may differ depending on what you're selling. But there is a crowd and part of it is the reason you're talking about. I mean, yes, that's gone up a little bit as the rates have increased but there's still plenty of availability for well-intentioned buyers and certainly, anybody who's low-leveraged. So we have not seen that or heard that as an impediment to anybody's potential acquisition.

Kenneth Fuller

And Lukas, that's not just for CMBS. That's true for bank debt, it's true for insurance companies who are lending. Just in general, the debt markets are strong and clearly, that has some impact on the overall transaction market.

Operator

And we'll go next to Ryan Meliker with Canaccord Genuity.

Ryan Meliker

I wanted to ask a little bit more about the Westin Philadelphia. If I recall correctly, you guys bought it for $145 million back in 2010, put roughly, what was it, I think $11 million or $12 million in, in CapEx a few years ago. And then just sold it for $135 million. And Mike, you referred to it as a fine investment. Something I'm missing?

Michael Barnello

So when we think about it, we bought the -- those -- the Philadelphia assets were combined. It was that and the Embassy Suites. You were right about the allocation, it was $145 million. This turned out to be about a 6 IRR. So yes, there's no high-fiving going on around town for a 6. At the same time, it's not worthy of splitting risks. So if you're picking apart our acquisition, these are the ones that we've sold. This wouldn't be the finest one. At the same time, we did what we could do with this asset and it was time for us to unload it. And we talked about that earlier in terms of the pressures implied. But we thought it made sense to move on. If you do, I mean, the reality is that the truth won't be told on the investments in Philadelphia until -- and it may never happen. We ultimately sell the Embassy Suites. You guys can see the numbers in Embassy Suites in our release in February. The Embassy is done better on a cash-on-cash basis. We just renovated that hotel. And in fact, it's done better and that was going through renovation from November through February. So we obviously continue to own that. And we feel that will continue to have a long runway. But part of it is a question of what the allocation was. You're right about the allocation. But it just easily could have been something different.

Ryan Meliker

Okay. No, that makes sense. That's helpful. And I guess along those lines, look, you guys have done a great job selling assets that were bought in the prior cycle. Obviously, you've put together some pretty good returns on a lot of those transactions. But if we look at the 2010 to 2012 time frame at the bottom of this cycle, then you look at this Philadelphia asset which, as you just said, is nothing to write home about and the Park Central which combined, total for about 40% of your investment dollars at the trough of the cycle. It doesn't look like those returns are going to be nearly as compelling. Maybe I'm wrong. Is there something I'm missing? Are there other assets where you feel really, really good and it's going to more than offset that?

Michael Barnello

Well, I think that the interesting thing about any kind of buying program is you're going to buy assets that are going to be phenomenal. Maybe some that are going to be medium and some that you won't do as well on. So we like to think that people are looking at the sum total of the company and not just any particular asset. If you -- we're looking at our investor presentation. We do show all the acquisitions we've done. We show we bought them out. We show the increase in cash on cash which has been pretty significant since that period you're referencing. I think the ultimate judge for a company like ours is return on invested capital. What we've done and when we compare ourselves to our peers is consistently outperformed with the shareholders capital.

That not only factors in the acquisitions you mentioned but the renovations, all the capital that we've put into the assets. So I suppose that there are -- there are deals that aren't going to hit on all cylinders relative to what we have suspected. But for the most part, I think we're doing pretty darn good. And when you look at that track record from 1998 to 2016, it would be -- it appears oddly every single year. So I understand you want to pick apart a couple of the assets that we've done. We did what's in the shareholders best interest by shedding the Westin Philadelphia. But that's -- and we're obviously looking to do the best things we can do for shareholders with whatever cash we have. Whether that's buybacks down the road or acquisitions. But we'll maintain our discipline and with the goals that we're going to invest in the right assets and knowing that every single one won't hit.

Ryan Meliker

Sure. No -- and I get that. That makes a lot of sense. I guess I would just hope that the ones that do hit are the larger ones where you've got higher conviction of bringing more capital to work. But no, that's really helpful. I guess, the other question I would have is the Triton was obviously a good deal which is one that was bought during this cycle. Are you looking to potentially prove out some value or deploy any of the proceeds you've generated from asset sales or sell more assets that you bought in this cycle to kind of prove out the value creations since you became CEO?

Michael Barnello

There's nothing that we're doing with the assets of the shareholders to prove anything. We're doing something to -- with assets because they're not liquid, if it makes the best sense for the shareholders at that time. So if a hotel is worth selling for whatever reason, then it's our job to recognize that. We talked about it a couple of questions ago. So it's probably not worth repeating. But that's our job, to evaluate each asset.

Ryan Meliker

No, it make sense. All right. And then just one other thing I have for you guys was you did a great job controlling costs in the quarter with same-store hotel expenses down a couple of million dollars. How sustainable is that? If we fast forward to a year from now and hypothetically, RevPAR growth is flat to plus 2% like we've been seeing in the recent environment, can you continue to be able to cut costs? Or are we more likely to see margins compressed at a greater level?

Michael Barnello

To the extent that there's RevPAR struggles, whether it's flat or negative, it obviously becomes harder and harder to maintain the expense controls. And I say that from a couple of reasons. I mean, I'll remind that the 60-ish percent of our expenses are labor-related. At the same time, our occupancy for the quarter was 88%. So it's not like we're running empty. We're crazy full. We'll likely be over 80% for the year if the last couple of years' trends continue. So it is harder and harder to run this efficiently from an expense perspective. It's easy when RevPAR is plus 5. It's easier to make drastic changes if its negative 5. It's very tough to operate in an environments of minus 1 to plus 1 range which we've been in the last couple of quarters, right? We were slightly positive, Q2, Q1. I think our guys did a phenomenal job on asset management and operations controlling costs. Again, in Q2, with a slight dip in RevPAR. But obviously, the longer those trends continue, the harder it is to maintain those costs. So it's a combination of time and severity that will really produce whatever our margins end up being. So hopefully, we can see outsized top line growth so we don't have to be in a situation where the expenses are more of a drag.

Operator

And we'll go next to Felicia Hendrix with Barclays.

Felicia Hendrix

Mike, I just have one here towards the end. So just based on your prior comments in several of the questions that were already asked, it's clear that you're opportunistic with your asset sales. But I'm just wondering, now that you're below 2x leverage, you have $400 million of cash in the balance sheet, is there a limit to how many properties you will sell or how low you'll go in terms of leverage in? Can you just talk about how you're thinking about earning a return on the cash without buying properties?

Michael Barnello

So it's a good question but just building on what we're saying earlier, we're not looking at the threshold as we can only get to x in terms of the debt-to-EBITDA or we can not sell an asset because we've just sold a prior one. We're trying to be optimistic on both sides, right? We're, right now, acting opportunistically on the sell side. I know it feels like that we've been in this position for quite some time because of the 12-month period where we've been selling and haven't been buying. But this is our 20th year as a public company and the vast majority of the years, we've been not just net buyers, gross buyers, we really only bought. And so we're hopeful that those days return. But we're not going to force the issue, Felicia. If we get offers or -- on something that we should sell, then we have to evaluate whether we should do it or not. We don't have a hard limit on that. As far as what to do with the cash, you're right. I mean, we're sitting on cash, not the best investment. At the same time, we're comfortable that whatever direction the world goes in the next couple of quarters, couple of years, we'll have ample opportunity to invest at some point either through buybacks or acquisitions. It's just hard to see those right this moment.

Operator

We'll go next to Wes Golladay with RBC Capital Markets.

Wesley Golladay

Quick one for you on Key West. How does supply and demand out in that market? And what is your outlook for the balance of the year?

Michael Barnello

Key West. Key West has a rare struggle in the top line. What you're seeing is a little bit of supply that has kicked into gear that we knew was coming online -- well, not online, the last couple of years. So the last couple of years have some funky supply comparisons less. Why? What you saw is there was a 4-pack of limited service hotels. They actually shut down, physically closed for a number of years and they got rebuilt and reopened. Again, it's a limited service hotel and they did it in pieces. So what happened is the supply numbers have been increasing but it's really just a reentry of supply that was in the market. Nonetheless, this is a tiny, tiny market. You're talking about 4500 rooms in the entire island. So 100 rooms here or there is a big supply increase.

So we saw that and we saw a little bit of softening at the top. We don't use anything else to -- related it to. It's not like there's been other issues in Key West. And we think that, that will probably continue a little bit into Q3. But we still love the market not just this year. We love it long term. There's a market that if we would continue to look at acquisitions, at that obviously. And when we talk about supply, there's really -- once you get past this year, like, nothing on the horizon for the next couple of years. So this and San Francisco are the best supply markets we look at the next 5 years.

Wesley Golladay

Okay, yes. So I guess I'm just trying to look at consumers' pretty strong. So probably a relative outperforming market next year when the supply is absorbed? Is that a fair statement?

Michael Barnello

One would think so. But that is a -- when you look at Key West and you look at other markets, other markets have broader demand generators whether it's citywides, convention, corporate, group, et cetera. U.S. is a fairly singular market. I mean, you are talking about consumers, like you mentioned and the leisure travelers. So as that kind of part of the economy goes, that's how they will go because we can't lean on any kind of BT, corporate traveler or citywide or group. But generally, we feel very excited about Key West if not just for next year, for really the long, long term on that.

Wesley Golladay

Okay. And then lastly, on that UGG store. Do you have the square footage that you're developing? And would you look to monetize that asset?

Michael Barnello

Sell it? No. It's part of -- it's where our lobby is. I can't remember the exact square footage. I think it's a couple of thousand square feet, Wes. It's 3,000 square feet. And no, it's a critical component to what we would have. So obviously, it's a longer term lease but when that expires, we obviously have to valuate what we do and we may do something else with the space because it is part of our building.

Operator

And we have no further questions in the queue.

Michael Barnello

Super. Thanks, Ryan. I appreciate everybody taking the time to listen to our call and I wish everybody to enjoy the rest of the summer. Thanks so much. Appreciate it.

Operator

And that does conclude today's conference. Thank you for your participation and you may now disconnect.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.