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Pebblebrook Hotel Trust (NYSE:PEB)
Q3 2018 Earnings Conference Call
November 2, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Pebblebrook Hotel Trust third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

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

Raymond Martz -- Executive Vice President and Chief Financial Officer

Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2018 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 annual report, on Form 10-K for 2017, the joint proxy statement prospectus that we filed on October 29th, and our other SEC filings. Future results could differ materially from those implied by our comments this morning.

Some of the factors that contribute to these risks and uncertainties include but are not limited to the outcome of any legal proceedings against us or others related to the proposed merger, unanticipated difficulties or expenditures related to the proposed merger, risks associated and Pebblebrook's and LaSalle's ability to consummate the proposed merger, including required approvals from both companies' shareholders and the timing of the closing of the proposed merger.

The forward-looking statements that we make today are effective only as of today, November 2nd, 2018 and we undertake no duties to update them later. You can find our SEC reports in our earnings release, which contain reconciliations of the non-GAAP financial measures we use, on our website at pebblebrookhotels.com.

Okay. So, we have a lot to cover this morning. So, let's first review the highlights from our third quarter financial results.

At the bottom line, our overall third quarter financial performance exceeded our expectations. Same property hotel EBITDA was $75.9 million, which was $0.2 million above the upper end of our outlook. Adjusted EBITDA of $69.4 million was $1.8 million above the upper end of our Q3 outlook. Adjusted FFO was $51.2 million or $0.74 per share, which exceeded the upper end of our outlook by $0.02 per share, so another solid quarter for us in all bottom line financial metrics.

On the hotel operating side, same property total RevPAR increased 1.5%, same property RevPAR increased 1%, which was squarely in the middle of our outlook of zero to 2% growth. We estimate the disruption from the Marriott Starwood and the InterCon Kimpton integrations negatively impacted our third quarter RevPAR growth by an estimated 70 basis points and renovations at Sir Francis Drake and Embassy Suites San Diego negatively impacted the quarter by roughly 50 basis points.

Our RevPAR increase was driven by a 1.1% increase in our average rate and a 0.1% decrease in occupancy to 89.5%. Same property non-room revenue decreased by 2.8% above our room revenue growth, which has been a consistent trend across our portfolio throughout the year. As a result, our same property total revenues increased 1.5%. Same property operating expenses were, again, well-controlled, increasing only 1.4%, which enabled same property hotel EBITDA to grow 1.7% and margins to increase 6 basis points.

Most of our best performing hotels in the quarter were in San Francisco, which had an improved convention calendar during the third quarter as compared to last year, which two of the three Convention Center buildings were closed. This created more rate compression opportunities for our seven San Francisco hotels despite some ongoing renovations in the quarter.

Our San Francisco hotels generated a RevPAR gain of 8%, which was in line with the Smith Travel Research San Francisco urban trac data, despite room renovations at Sir Francis Drake that commenced in early September and took about 150 basis points off our San Francisco in the quarter.

Hotel Zoe, which was renovated last year with its completion in June, continues to ramp up nicely and led the portfolio during the quarter with a RevPAR gain of 24.2%. Other strong performance in the third quarter included several of our San Francisco hotels, Hotel Zelos, Hotel Zeppelin, and Hotel Zetta.

InterContinental Buckhead was another standout performer in the quarter as the new executive management team that was put in place last year continues to execute well. They have managed to significantly grow group pace, allowing them to gain almost 1,000 basis points of market share year to date through September. We expect further positive strides in 2019 at the InterCon Buckhead and want to acknowledge the great progress our team has made in the last year.

Our underperforming hotels included Hotel Modera Portland, which continues to be challenged from its transition from the hotel's recent renovation and management company change, in addition to being negatively impacted by the increased supply in the Portland market, which also affected Hotel Vintage Portland, another under-performer in the quarter. Hotel Mondrian in Los Angeles also underperformed in the quarter, which we attribute to the nearby market's increased supply and discounted room pricing.

Our legacy Starwood Hotels also continues to struggle following their integration into Marriott's clustered revenue management and sales organization. Our legacy Starwood managed hotels lost 172 basis points of market share during the third quarter and year to date through September, they have lost 422 basis points.

So, although some good progress has been made since last quarter, these properties continue to underperform their competitive steps. With complete IT and system changes for these hotels taking place in the fourth quarter, we expect continuing underperformance for the rest of the year at our legacy Starwood managed hotels.

During the quarter, our independent hotels led our portfolio with a 6.5% RevPAR gain. Our major branded hotels experienced a 0.3% RevPAR decline and our collection brand hotels generated a 2.7% RevPAR decline, with our Kimpton hotels continuing to be impacted by their integration into ISG.

Overall for the quarter, transient revenue, which made up about 77% of our total portfolio of rooms revenue in the quarter was down 1.5% compared to the prior year, with ADR up 0.9%. The decline in transient revenue is largely due the shift of Salesforce in San Francisco to September this year from October last year. This of course, benefited our group revenue overall, which increased 14.7% in the quarter. And group ADR was up a healthy 5.1%, which is very encouraging.

All of our group segments were up, including convention, association, and corporate group. Our group booking trends continue to be very positive looking out into 2019, which Jon will cover later in the call.

Our monthly RevPARs for our portfolio in the quarter were impacted by the convention dynamics I just described in San Francisco as well as some difficult holiday shifts that negatively impacted both July and September. Same property RevPAR increased 0.8% in July. It declined 0.9% in August, and it increased 3.2% in September, which was led by our San Francisco hotels, which grew RevPAR by almost 15% in September.

As a reminder, our Q3 RevPAR and hotel EBIT results are same property for our ownership period and include all the hotels we owned as of September 30th. We don't exclude hotels under renovation or for other reasons unless they were closed in the current or prior year quarter, which was the case for LaPlaya Resort in Naples.

This property, as you may recall, was closed starting September 9th, 2017 ahead of Hurricane Irma due to a mandatory evacuation in Naples, Florida. LaPlaya partially reopened in late November of 2017. As a result, we exclude LaPlaya in our third and fourth quarter, same property results for 2018 and 2017.

Our hotels generated $75.9 million of same property hotel EBITDA for the quarter, which was $0.2 million above the top end of our outlook of $1.7 million above the midpoint. Same property hotel EBITDA margins increased 6 basis points, which was 31 basis points above the top end of our outlook, which called for a decline of 25 to 75 basis points.

Our hotel teams did a great job managing operating costs. Year to date same property total revenues have increased 2.2% with same property RevPAR increasing 1.2% and non-room revenue growing 4.5%. Same property operating expenses have increased 1.9%, resulting in same property EBITDA margins expanding 19 basis points and same property EBITDA increasing 2.8%.

Year to date, we estimate disruptions from renovations have negatively impacted RevPAR by about 100 basis points and the combined integrations with Marriott and Kimpton have impacted RevPAR by an additional 100 basis points.

Moving down to income statements, for the quarter, the $69.4 million of adjusted EBITDA was the result of several items including the same property EBITDA of $0.2 million and G&A expenses that were $1.3 million lower than expected. We generated adjusted FFO of $51.2 million or $0.74 per share, which exceeded the upper end of our original outlook range by $0.02 per share.

This resulted from the same property EBITDA and adjusted EBITDA beats, which were partly offset by $0.4 million of higher interest expenses associated with the increased outstanding debt utilized to fund the $112 million Blackstone termination fee we paid after the merger agreement was executed with LaSalle. Since our previous outlook did not assume an agreement to merge with LaSalle would be achieved, the higher interest expense from the termination fee was not in our previous third quarter outlook or our full-year outlook.

Focusing now on our capital reinvestment projects, during the third quarter, we investment $20.9 million in our portfolio and year to date, we have invested $54.1 million. We expect to invest between $60 million and $70 million in the portfolio during 2018, with a major renovation and redevelopment projects to include Sir Francis Drake, which began in early September and Mondrian in Los Angeles and Hotel Zelos in San Francisco, both of which started in October, and W Boston, which will start at the end of November.

We expect our San Francisco hotel renovations to be completed before the J.P. Morgan healthcare conference in early January and the Mondrian Los Angeles and W Boston renovations to be completed in the first quarter of 2019. Capital was also invested for the renovation of the guest rooms at Skamania Lodge, with their work commencing at the beginning of 2019.

Turning to our balance sheet, at quarter end, our debt to EBITDA ratio, excluding the income and increased debt associated with the strategic purchase of the LaSalle common shares was 3.8 times and our fixed charge ratio was 4.2 times. Including the debt used to purchase the LaSalle shares, our debt to EBITDA ratio would be 5.1 times.

On the capital market side, we announced yesterday that we have successfully arranged for the origination of $1.75 billion of new term loans with our bank group. The terms, pricing, and covenants of this new debt financing is consistent with all the terms of our current term loans. The new term loans provides a funding required for the LaSalle merger, which includes paying off LaSalle's current outstanding debt as well as other closing costs. These term loans will only be utilized for the merger with LaSalle, which is currently on track to close by November 30th.

With that update, I would like to turn the call over to Jon to provide more insight into the quarter as well as our outlook for the fourth quarter. Jon?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Thanks, Ray. The third quarter exhibited the same positive underlying trends as the second quarter, but with a lot of noise obscuring those trends, due to holiday calendar shifts and hurricane impacts this year and year over year.

Demand trends from business travel, both group and transient, and leisure travel, including international inbound travel remained healthy and stable in the quarter. I'll be spending a little more time this morning trying to put all of the industry statistics in perspective in order to help everyone understand the positive trends.

On the supply side, over the last 15 to 21 months now, we've seen a flattening of not only net deliveries, which seem to be running pretty consistently in the 2% range, but industrywide construction starts, which importantly have now been running slightly below deliveries for the last year or so.

With construction starts slowing, the industry is in the process of topping out its rate of supply growth. With development costs continuing to increase at rates 2 to 5 times the rate of inflation depending on the market and construction financing terms becoming increasingly restrictive and demanding and with interest rates climbing, we're very encouraged that the rate of growth in supply is topping out at a level below this year's accelerated rate of demand growth.

This means industry occupancy should grow this year by another 50 basis points or so, on top of our already record occupancy levels overall. Supply growth in various urban markets will continue to be a challenge through next year, particularly with deliveries stretching out due to longer construction delays.

So, what happened to demand growth and RevPAR growth in the third quarter? As we and others have been indicating all year, the third quarter was expected to and did suffer from both negative holiday shifts, including in both July and particularly September due to demand that was enhanced following the two hurricanes that made direct hits in Houston in late August and Southwest Florida in early September.

If we look at industry numbers on a year over year basis for September, without Texas and Florida, in an effort to isolate as much as a possible the impact of the post-hurricane's demand growth to September's RevPAR growth rate last year, we see that demand was 127 basis points higher and RevPAR was 141 basis points higher. So, removing those two states leaves us industry demand growth of 1.1% this year instead of -0.1% as reported and industry RevPAR growth of 1.1% instead of the reported -0.3% for September.

But there were also significant negative impacts from the shift of holidays in the third quarter that impacted the industry numbers. First, July 4th moved from a Tuesday last year to a Wednesday this year, smack in the middle of the week and the worst possible day for both leisure travel and business travel. That week saw RevPAR decline by 2% on a year over year basis, negatively impacting July's RevPAR growth rate this year.

But the shift in the Jewish holidays also was a significant negative this year. While both of the high holidays remained in September, Yom Kippur moved from a Friday-Saturday to a Tuesday-Wednesday. These shifts were certainly a big negative for September's performance, so the numbers are a bit harder to isolate overall given the multi-week shift.

Nevertheless, you can see the impact in September on business travel as businesses have become sensitive to scheduling meetings during the Jewish holidays. Industrywide weekday demand 0.4% as compared to an increase of 1.7% for weekend demand.

If we use August as a reasonable proxy for the ongoing trends in the quarter, even though it's not a big business travel month, nevertheless, when we look at the year over year comparison, for a month in the quarter that was not impacted by either hurricanes and holiday shifts, we see that overall demand grew a strong 3.2% in the month. Weekday industry demand grew 2.8%. So, we see the clear presence of healthy business travel.

These favorable trends, particularly with business travel, have been benefiting the urban markets. At the beginning of the year, we were forecasting urban RevPAR growth to run between 150 and 200 basis points lower for the year, primarily due to substantially higher supply growth in the urban markets.

In Q2, with industry RevPAR growth of 4%, RevPAR for the STAR-defined urban markets grew 3.9% or just 10 basis points below the industry's performance. In the third quarter, the urban markets grew RevPAR 2.4% better than the 1.7% than the industry, which to be fair, was probably impacted more so by the difficult post-hurricanes comparison than were the urban markets.

We have to go back to the first quarter of 2017 to find a quarter where urban outperformed the overall industry's performance. We have to go all the way back to the third quarter of 2014 before that quarter. We wouldn't be surprised to see the urban markets outperform the industry on a go-forward basis or at the very least, perform in line with the industry, given the ongoing strength of business travel, both group and transient, and the strong economic trends and forecasts.

The urban markets have also been benefiting from an improvement in overseas international inbound travel, which according to tourism economics has risen 2.4% year to date through August, though the growth rate has weakened as the year has progressed. These numbers are consistent with the Department of Commerce inbound travel data that is once again being published, albeit several months behind tourism economics. These numbers also seem consistent with what the brands have been communicating.

As it relates to demand in our hotels, we continue to see increases in short-term group bookings as well as short-term pickup in our corporate transient business. In the quarter for the year, group bookings were up 23.3% in room nights, with ADR flat.

In addition, for the third quarter in a row, we're seeing improvement in group bookings a little further out. In the third quarter, group revenues booked in the quarter for 2019 were 8.1% higher than group bookings a year ago for 2018. While we booked 1.4% fewer room nights for 2019 in the quarter, we did it rates that were 9.6% higher. This, of course, was very positive and with very strong growth in our group pace for 2019 at this time, it is clearly an important indicator for our potential performance for next year.

In the third quarter, we continue to see better attendance from groups, both in house and convention-related groups, and less attrition and fewer no-shows and more spend per group customer. We saw no change in corporate travel policies or behavior in the third quarter or for that matter in October, so we continue to see healthy business travel that correlates with the strong economic trends.

As Ray said earlier, our overall operating performance was better than we forecasted, led by our hotels in San Francisco. But in addition to San Francisco, Minneapolis, Philadelphia, Boston, and Buckhead performed better than expected.

As a market, San Diego also performed better than expected in the quarter, but our properties didn't participate given the Marriott reorganization and embassy renovation impacts previously discussed. Weaker than expected markets in the third quarter included Portland, Washington DC, Nashville, and West LA.

I'd like to move on to an update on the performance of our recently redeveloped hotels. We're very pleased with the way our three transformative redevelopments from 2017 are performing so far this year. In the first half, EBTIDA on a combined basis from Palomar Beverly Hills, Revere Boston Common, and Zoe Fisherman's Wharf grew by $5.5 million. As a result, you'll recall re increased our growth forecast for the year for the second time this year for these three properties, from $6.5 million of EBITDA in 2018 to $7.5 million.

In the third quarter, these transformed properties grew EBITDA by another $2.8 million, which again was a greater increase than we were forecasting. Given year to date EBITDA growth of $8.3 million, we now expect EBTIDA growth to total $8.5 million for the full year.

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

Convention room nights on the books for the city for next year were up by 74% as of September with a number of days with compression as represented by days with 5,000 or more rooms on the books increasing a whopping 131%, going from 39 days in 2018 to 90 days in 2019, which is an improvement of two more days of compression since we reported last quarter.

These are obviously huge increases and are consistent with both our booking pace for 2019 as well as our increasingly confident expectations for at least a high-single-digit increase in RevPAR in San Francisco for 2019.

In addition to the strength in San Francisco, we'll have easy comparisons with our legacy Starwood-managed hotels and our Kimpton hotels due to the significant negative impact in 2018 from the integrations and reorganizations as well as from the significant growth we expect at LaPlaya due to easy comparisons and the benefit from the comprehensive propertywide renovations we've undertaken in the last two years.

We also have a significant number of properties that we've completely transformed that we continue to ramp up in 2019 toward stabilization, including the eight properties in the last two years. At the same time, economic growth is generally forecasted to continue at a healthy level in 2019, coming off what is likely to be record corporate profit growth in 2017 and 2018, which should drive further growth in business travel and leisure travel.

When we look at our pace for 2019, we're particularly encouraged. Group revenues for 2019 are up a robust 22.3% over same time last year for 2018. Group room nights are up by 15.4% and for what is a very positive sign for 2019, group ADR is currently up 6%. We currently have 41% of the number of group room nights on the books as compared to our forecast for where we'll end up for 2018.

Our pace is also very positive for transient. Room nights for 2019 are up 1.5%. Transient ADR is ahead by 10.8% and total transient revenue is 12.5% over same time last year for 2018. So, 2019 is shaping up so far as a very good year.

For the remainder of 2018, meaning the fourth quarter, while our outlook for Pebblebrook same property RevPAR growth is negative, we have a significant amount of destruction from both renovations as well as other one-time events.

As Ray mentioned, we commenced a guestroom and guest bathroom renovation at Sir Francis Drake in early September and a more extensive rooms renovation at both Hotel Zelos in San Francisco as well as Mondrian LA, both of which commenced in October. A complete rooms renovation at W Boston will also commence before the end of November.

These renovations will have a substantial impact on our performance in the fourth quarter. We estimate the total negative impact to RevPAR from these renovations alone equal roughly 320 basis points in the quarter with most of it at the two properties in San Francisco.

We also continue to anticipate a negative impact from the Marriott Starwood and IHG Kimpton integrations. In addition, the major union at two of our Starwood-managed legacy hotels is currently striking Marriott while those contracts are being negotiated and those two hotels are being negatively impacted as a result.

We're forecasting the integrations and the strikes in the fourth quarter will have a combined impact of 100 basis points on our RevPAR growth. So, we're forecasting RevPAR to decline between 1.5% and 3.5% with 420 basis points of total impact in the fourth quarter.

Finally, I'd like to make a few comments about the status of our efforts to strategically combine with LaSalle Hotel Properties. As you know, in September, we were pleased to report that we executed a merger agreement with LaSalle. We continue to be very excited about the value we expect to be able to create over the long-term by putting these two companies together.

This combination will create the largest owner of high-quality independent and collection-branded hotels in the United States. Since that time, we've been working thoughtfully and expeditiously and cooperatively to integrate the two companies and make the major initial decisions necessary to put the company in the best financial and operating conditions to outperform in 2019 and beyond.

In the eight weeks since we executed the merger agreement, we've toured every property in the portfolio and met with every property team. We reviewed all recent, current, and planned renovations and we've identified the hotels we plan to offer for sale in order to reposition the portfolio including hotels that we've already put on the market through investment brokers or those that we've already entered into contract negotiations to sell.

We're pleased to report we also now have one additional property under a separate hard-money contract for $38.75 million that is planned to close concurrently with the merger closing. Currently, we have hotels representing over $750 million of value on the market listed with brokers who are actively marketing these properties.

As you can see, we're moving rapidly and we're making very good progress. So far, we're extremely encouraged by the very positive market reception to the LaSalle properties that we've put on the market for sale. The buyer market for these types of hotels remains relatively deep and robust. Based on our thorough review of the portfolio, we now expect to sell between $750 million and $1.25 billion of properties in total, with the vast majority of these sales over the next six to nine months.

Proceeds of these sales would initially be used to reduce debt to quickly achieve our long-term leverage targets and then utilize additional proceeds for either further reductions in debt, repurchasing our stock, calling preferred shares or additional acquisitions, all depending on market conditions and possible public/private market arbitrage opportunities.

Finally, I thought it would be worthwhile to provide a little color on what we think the portfolio will look like following our plan dispositions. The criteria that we're using to determine what we are or will be offering for sale include factors such as the size of the property, either too big or too small, uniqueness of the hotel or its potential to be unique, our intermedia to long-term view on a market, anticipated necessary capital investment, and the expected return on that capital and whether a hotel is branded or independent.

Of course, we've been using the same criteria since Pebblebrook was created. At the end of the day, following our current targeted sales, we think our repositioned portfolio will look a lot like our portfolio today with a few exceptions. So, of course, it will be substantially larger. We expect to continue to have terrific individual property diversification. We also expect the portfolio to have a similar West Coast bias.

At closing, based on our estimates of 2018 EBITDA and following the sale of the four hotels with hard money contracts, we expect the West Coast to continue to represent our highest concentration at roughly 54%. Following the disposition of the properties we've now targeted for sale, we expect our West Coast EBITDA to represent between 60% and 65% of our portfoliowide EBITDA based on our current 2019 estimates.

San Francisco, which is our highest-rated market, with the best long-term supply/demand fundamentals will remain the single market with our highest concentration. Following the sale of our targeted dispositions, we expect San Francisco to represent between 23% and 25% of our portfoliowide EBITDA based on our rough 2019 estimates.

The one major difference between our current portfolio and repositioned portfolio following the merger and targeted asset sales is we expect our resort concentration to represent roughly 20% of our EBITDA, which is substantially higher than today. Given the very high-quality nature of this portfolio and the market diversification of these assets, we're extremely pleased with this exception or difference between our current and future portfolio.

As a result of our efforts so far, we've also identified numerous opportunities within the portfolio to add value, including experientially driven or design-driven redevelopments and renovations. Overall, following our tours and reviews, we believe there is more long-term opportunity and value in the portfolio than we thought when we entered into the merger agreement.

We're also very excited about the cross-implementation of best practices from both companies, as well as portfoliowide initiatives to take advantage of our combined size to lower costs and increase efficiencies.

We've also finalized all the necessary decisions related to organizational structure, responsibilities, and people, including making offers to the vast majority of the team at LaSalle. All of our offers have been accepted and everyone is very excited about joining the Pebblebrook family.

We also continue to feel comfortable with the range of $18 million to $20 million of annual corporate G&A synergies related to the combined company, recognizing that an estimated $10 million of Proposition 13-related property tax increases will offset some of those savings.

Finally and importantly, LaSalle's portfolio is performing at least in line with, if not better than, the underwriting for 2018 we've been using since the beginning of the year. So, overall, so far, so good.

We'd now be happy to answer any questions you might have. Operator, Donna, you may proceed.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. If you would like to ask a question, please press *1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. Once again, that is *1 to register your questions at this time.

Our first question is coming from Anthony Powell of Barclays. Please go ahead.

Anthony Powell -- Barclays -- Analyst

Good morning, everyone. Focusing on the 4Q 18 RevPAR outlook, if you exclude the impact of the renovations and some of the market issues you talked about, can you talk about a sequential change in underlying demand in your markets and 4Q relative to 3Q.

Jon Bortz -- Chairman, President, and Chief Executive Officer

Sure. Obviously, when you take those out, you end up with a positive spread. I think it's 0.7% to 2.7% of RevPAR growth that we're forecasting. I think in terms of the sequential changes, the biggest change, Anthony, would be San Francisco in the fourth quarter has a much weaker, really, flat convention calendar, which we've talked about all year. So, it doesn't quite have the same positive benefits that Q2 and Q3 have, but then of course, it picks up dramatically next year with the first quarter of 2019 being the strongest quarter now estimated for San Francisco.

Anthony Powell -- Barclays -- Analyst

Got it. Thanks. The management company for a few of your properties and a few of LaSalle's properties is being bought by a large brand. What's your view of that transaction and how do you make sure you minimize any of the integration issues that we've seen happen this year when those hotels go into a new system or are converted next year?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Well, that's a good question. We're still educating ourselves on that transaction and we still need to be educated by both Hyatt and Two Roads about what integration means not only to them, but most importantly to the six properties that we and LaSalle have on a combined basis.

So, we're a ways off from having any conclusion, but I would say we have a lot of knowledge, which Hyatt has been appreciative of us providing to them about where the risks are, where the challenges are, where the downsides are and important for them to communicate to us what are the positives at the end of the day and give us the strong rationale from an owner's perspective for the benefits of combining from the acquisition by Hyatt of Two Roads.

That will be something we evaluate very closely. We work with Hyatt and Two Roads on and ultimately will make some decisions. Obviously, one way to mitigate the issue of those integrations is to make changes.

That certainly is one alternative we'll be looking at, keeping those properties independent, potentially by changing operators or keeping them within the system, but understanding what system changes are required here, how are properties sold by Hilton versus the way they're being sold, so what will change at the end of the day in terms of operations. If it's very little, the good news is there would be very little impact on the properties. If the changes are significant, then obviously we have to take that into consideration.

Anthony Powell -- Barclays -- Analyst

Got it. So, given the hotels that are independent now, if you were to theoretically keep them independent with a new manager, would the disruption be less than what you've seen this year with the small brand to big brand conversions?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Yeah. Typically, it would be just because the systems changes would generally be fairly minimal from one independent to another. Typically, the way the properties would be sold would be the same. You'd have on-property teams for everything, which is what we'd have right now.

Anthony Powell -- Barclays -- Analyst

Great. That's it for me. Thank you.

Operator

Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead.

Rich Hightower -- Evercore ISI -- Managing Director

Hey, good morning, guys. Congrats are in order for a record prepared comments section. That was 35 minutes.

Jon Bortz -- Chairman, President, and Chief Executive Officer

We're just trying to limit the questions, Rich.

Rich Hightower -- Evercore ISI -- Managing Director

I was going to say we've covered quite a lot of ground, so a lot of my stuff has been answered. There are always challenges when integrating two companies. You've covered a lot of, I think, things that have turned out to be better than expected upon original inspection. So, maybe thinking about it from the other side, where do you see some of the challenges to the integration with Pebblebrook and LaSalle.

Jon Bortz -- Chairman, President, and Chief Executive Officer

Well, the main challenge is that we don't know those properties like we know our own portfolio. So, from that perspective, when you don't have as much information, arguably, you have more risk, right? That's where we would say the biggest risk right now is what do we not know at the end of the day.

Because of the way that the two groups and the people are working collaboratively and because we'll be essentially retaining almost every single asset manager within the current group at LaSalle, at least the property level knowledge from an owner's perspective is going to get retained. Unlike a regular property acquisition, we also retained all of the files, all the history, all the information. So, we think we're mitigating that, but that's where I would say the biggest risk is at the end of the day.

Of course, the other main one, Rich, would be the fact that we are anticipating selling a significant dollar volume of assets and were the market to change meaningfully and become less attractive from a sales perspective, then obviously either pricing or transaction volume wouldn't meet our objectives.

Rich Hightower -- Evercore ISI -- Managing Director

Okay. That's helpful, Jon. My second question -- as you go through the outlook for '19 and the buildup in terms of what the different demand segments are looking like in Pebblebrook's portfolio, it sounds like pricing power, which has been a bit of a missing leg of the stool for a while for the industry has turned the corner, at least, as it relates to what you guys are seeing.

Can you overlay any of that on top of the industry or at least the urban upscale segments and talk about how pricing power maybe in the aggregate is trending and what some of the changes have been if I'm correct in characterizing it that way?

Jon Bortz -- Chairman, President, and Chief Executive Officer

I think you are correct about it. We talked about it in more detail last quarter, that we are beginning to see more pricing power. You see it in the industry data. You certainly see it in the urban data. We're continuing to see it not only in the industry data but in the performance of our own properties in our future group booking paces, which we shared with you, which have the best ADR growth we've seen this cycle, frankly, at the end of the day.

I think there are a number of things helping that. We continue to grow occupancy as an industry to record levels. We have more and more days that are getting sold out. We as an industry are in the process of addressing the cancellation terms, which have been stressed out some, which has been very helpful from a revenue management perspective.

We've begun to address the redemption reimbursement formulas, which have created a negative motivation, particularly in the urban markets that have impacted pricing over the course of a cycle with Marriott's new combined loyalty program, the redemption program was also changed and the reimbursement program was also changed and it now has a slope that eliminates the on/off switch that was motivating property teams and revenue managers from dropping rates at the last minute.

So, you combine those two. You add in progress being made in various cities with not only legislation to make sure illegal hotels get eliminated and enforcement in that regard. You put all that together and I think you get in a strong economy and you continue to get an improving environment from a pricing perspective.

There's going to be a tipping point if this continues, we think, where psychology changes and we may be in the very early stages of that and it may end tomorrow, but from what we've been seeing, it continues to get better.

Rich Hightower -- Evercore ISI -- Managing Director

That's great. Thank you.

Operator

Thank you. Our next question is coming from Shaun Kelley from Bank of America Merrill Lynch. Please proceed with your question.

Shaun Kelley -- Bank of America Merrill Lynch -- Managing Director

I wanted to go back to the Kimpton and integration issues called out for this quarter and thinking more about how this plays out for next year and years beyond. Can you guys tell us whether or not -- I think, Jon, in your script you mentioned some of these things will be easy comps as we move into next year. Given some of the substantial changes, our understanding, at least with Kimpton is that this is being much more meaningfully integrated as opposed to being less separate from the broader IHG family.

Is there any risk these issues linger longer? What's Pebblebrook's response or what steps are you taking to mitigate the fact that some of these things -- this seems to be the way the industry is headed with some of these independent managers?

Jon Bortz -- Chairman, President, and Chief Executive Officer

I think as it relates to the two integrations, the good news is we continue to see very cooperative partners on the other side working to mitigate the negative impact to us and other owners. I think part of the issue with Kimpton and IHG -- and we've talked about this previously -- when you change the way your systems work and it impacts the level of volume of business that goes through different channels, you can immediately unfortunately reduce distribution volume when a system doesn't do what it was doing before or doesn't have the same flexibility it had before.

The benefit of the brand integration is they have a broader base of customers they can expose to the property and who will ultimately choose the property and also choose it on a direct basis. The challenge is it takes longer to gain that business than it does to lose the business from the channels that get negatively impacted.

So, we've been working very closely with IHG, as have the Kimpton people, frankly, as part of the difference between the Kimpton team, the legacy Kimpton team and the corporate team in Atlanta or in Europe, to modify the systems and allow them to do more of the things the Kimpton systems were able to do. That's one thing.

The second is continue to push folks like IHG and Marriott to put more resources in place to drive that new business more quickly into our hotels. As I said earlier, they're both being very cooperative in that regard and we are seeing them do those things. Do we think it's going to run into next year and have some impact next year? Yeah, I would say it would just because it's not an on and off switch. It's a gradual improvement.

As it relates to the sales reorg, particularly at the bigger properties, once you get behind, it's a little harder to catch up with those than it is to say a W, where we book so much of our business in the month for the month and if you get behind, you can catch up by throwing more resources at it and more educated salespeople.

So, how do we protect ourselves in the future for these kinds of sales? The same thing we've been doing -- we have multiple different independent operators, we maintain our terminable at will contracts, and to the extent that folks buy these operators when we have these contracts and we eliminate and move on, maybe at some point, they're going to stop buying them or stop paying for them because the revenue stream they're buying isn't turning out to be the revenue stream they thought they were buying.

Shaun Kelley -- Bank of America Merrill Lynch -- Managing Director

Thanks for that. That's very clear. The follow-up to it would be Marriott was pretty adamant last quarter, at least, that they weren't seeing or measuring any outsized impact even across their Starwood legacy hotels. Some owners clearly disagreed on that. And not to air any of this necessarily in public, but the question is are you seeing either continued signs of that or are there any new integration issues as it relates to systems in 4Q that's happening on that side.

Jon Bortz -- Chairman, President, and Chief Executive Officer

Well, the systems integration is happening in Q4 and it's rolling through the brand. So, it has a different impact on different properties at different times depending upon what brand you have. We've had some of our properties transfer over. Most of our properties have not yet. They're later in the quarter.

As it relates to the overall integrations, I would just say at I said earlier and repeat it so it's clear -- both Marriott and InterCon are working very closely with us to mitigate the issues. So, what they do or say publicly is really none of my business, at the end of the day. What we care about is are we getting the time and effort and money that's necessarily to improve performance at the property level. I would say our answer to that would be yes. It's just an unfortunately thing that when you make all these changes, there is a short-term negative impact and we are experiencing it.

Shaun Kelley -- Bank of America Merrill Lynch -- Managing Director

Understood. Switching gears for one other one, then -- on the incremental asset sales, Ray or Jon, where does this take the kind of leverage range outcomes if you're successful in reaching the new target?

Jon Bortz -- Chairman, President, and Chief Executive Officer

I think at 750 we get down to --

Raymond Martz -- Executive Vice President and Chief Financial Officer

The mid-four is on a debt to EBITDA basis.

Jon Bortz -- Chairman, President, and Chief Executive Officer

Yeah, that would be on today's numbers. On '19 numbers, it would be lower than that. So, we feel pretty comfortable at the low end of the range. We get petty darn close, if not to, our leverage targets. So, the additional sales will give us flexibility as it relates to taking that number lower, buying back our stock if it continues to remain depressed as compared to the underlying NAV of the portfolio.

Like we did two years ago, I know people may not want to believe us about values, but we proved those out two years ago and I believe unless things change, we're going to prove out those values again with the sales we're making. You see other folks including some of our peers who have made some sales at pretty attractive multiples and low cap rates and I can tell you for the right assets, particularly assets that are unencumbered, there's a robust buyer pull for those assets.

Operator

Thank you. Our next question is coming from Stephen Grambling of Goldman Sachs. Please go ahead with your question.

Stephen Grambling -- Goldman Sachs -- Analyst

Hey, thank you. I guess first on the strike, looking back at history, do you have any sense for how quickly demand can bounce back. Is that an immediate thing or there more of a bill once the negotiations are settled?

Jon Bortz -- Chairman, President, and Chief Executive Officer

You've got to go pretty far back for strikes that actually occurred as opposed to those that have been threatened. What I would tell you is generally, the only impact we see from strikes is groups that have a union clause because they may be union employees having meetings in different industries or they may particularly sensitive to it because of the business they're in.

So, that business goes away pretty immediately and comes back pretty immediately. I don't really think once there's a resolution of the strike that we won't see an immediate pop back because really, the only thing we lost are particular groups.

Stephen Grambling -- Goldman Sachs -- Analyst

Then maybe a bigger picture question -- as you increase your concentration to the West Coast market, what do you view as the risks or things we should be thinking about, whether it's things that can impact the supply/demand environment or outside competition and maybe give us a little more comfort that that's the right concentration and approach.

Jon Bortz -- Chairman, President, and Chief Executive Officer

So, I don't know if we're right, whether we'll continue to be right. We've been right so far. We're driven by the underlying supply/demand dynamics of the West Coast, where in general, it's harder to build, it takes longer, it's more expensive. Today, you have these fairly large clusters of knowledge growth industries that are driving demand at a very strong pace. We would expect to continue to drive strong demand because these are the future industries and they're real and they're big.

If you look at the ten largest companies in the world, most of them are now located on the West Coast. That's a change in the world in the US, compared to where it was 10 or 20 years ago. So, we think it's the right strategy. Obviously, there's a history out there of stronger swings or greater volatility in some of those businesses, although I think again, those businesses have evolved and are very different than if you go back to 2001. That's 17 years ago, at this point.

So, I think it's a typical risk. It's demand and supply. I think you have lesser demand risk out there and you have lesser supply growth risk as well.

Stephen Grambling -- Goldman Sachs -- Analyst

Fair enough. Maybe one last one, if I could, just on wages. Maybe I missed this, but any expectations as we think about 2019 that can dictate how wage inflation compares to 2018?

Jon Bortz -- Chairman, President, and Chief Executive Officer

We expect it to be pretty similar. It's in the 3%+ range throughout the portfolio. There are obviously some markets that might have living wage increases that are greater and in most markets, actually, just impacting our tipped employees as opposed to our regular hourly employees who generally are already making more than the minimum wages in those West Coast cities and East Coast cities in particular. So, I think we'll continue to see that 3%+ increase with benefits higher.

As indicated this year and last year, this year is very similar from a wage growth perspective. We're finding and expect to continue to find ways to mitigate that through greater efficiencies, use of technology, job sharing. As we say every quarter necessity is the mother invention. Part of it is an inability to fill certain positions. We have to operate the hotels 24 hours a day, 7 days a week, 52 weeks a year. We'll continue to provide those services the guests are looking for.

Operator

Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please proceed with your question.

Michael Bellisario -- Robert W. Baird -- Analyst

Good morning. Just in the cadence of the LHO dispositions, first question is is it possible there are more deals that maybe close before concurrent with the merger?

Jon Bortz -- Chairman, President, and Chief Executive Officer

I would say it's possible but not likely.

Michael Bellisario -- Robert W. Baird -- Analyst

Could you give us a sense of how you're thinking about timing of those other assets that are in process right now that are currently being marketed for sale?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Yeah. I think the timing is we think there will be quite a few of those that happen over the next three to six months. It's certain possible that the full program doesn't get completed for 9 to 12, but I would expect at some point over the course of the next 6 to 12 months, we'll be complete with the program.

Michael Bellisario -- Robert W. Baird -- Analyst

Got it. That's helpful. As you kind of sum up all the negative impacts from 2018 renovations, management transition issues, how we should think about that getting recaptured, that lost RevPAR, lost EBITDA getting recaptured next year, what the net impacts to 2019 RevPAR growth should be as we think about modeling for next year?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Yeah. I think the renovation impact will be a little bit less next year. We talked about the renovations we have that roll into next year that include the Mondrian, the W Boston, that include Skamania, which starts in January, the Sofitel in Philadelphia that starts in early January of next year.

The renovations will fall differently. There will be a bigger impact on Q1 than there will be based upon what we can see right now for Q4. We do have a couple projects within our portfolio that we have planned to start in the fourth quarter next year. That would be a refresh of the rooms at Westin and a similar maybe slightly larger renovation of the rooms, including the bathrooms at the Embassy Suites in San Diego. The fourth quarter in San Diego is the weakest quarter next year.

I think in general, we would expect most of the impact from integrations where we should see recovery in the share that we lost this year and we wouldn't expect -- of course, who knows what impact there's going to be from other one-time events, but the contracts that would get signed with the union and the legacy properties with Starwood would be multi-year contracts at the end of the day. We certainly wouldn't expect any impact from that next year.

Michael Bellisario -- Robert W. Baird -- Analyst

Got it. That's all for me. Thank you.

Operator

Thank you. Our next question is coming from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeff Donnelly -- Wells Fargo -- Analyst

Good morning, guys. I think aside from leverage levels, which John, you addressed in an earlier question. I think one of the overhangs, if you will, on the company is Pebblebrook had an otherwise clean year and I think there's some concern that the integration of LaSalle will cause some disruption to FFO next year from branding changes or whatever might transpire as a result of the merger. Can you talk about how you prioritize FFO per share growth versus maybe NAV growth as you think about '19 and '20.

Jon Bortz -- Chairman, President, and Chief Executive Officer

I think about maybe a different way to answer that would be to say we make decisions for real estate, which are long-term. These are long-term assets and long-term businesses. We make them for the long-term. If it makes sense to change an operator -- keep in mind, if we're changing an operator, we're probably losing share. We're doing it for a good reason. So, while sometimes there's some short-term disruption, there's usually significant long-term gains from making the change.

So, we think that actually enhances NAV and yes, it might have a minor impact on FFO per share in the short-term. I hope that's not the focus of our investor community, but nevertheless, if it is, it's like anything else, it's short-term pain for long-term gain.

Same thing we do when we renovate -- we could try to milk the portfolio, not do these renovations that have an impact, but it catches up with you over time. If you don't do it, you are going to lose value. You'll maintain FFO in the short-term, but you have the opposite happening. You're negatively impacting NAV both in the short-term and long-term probably.

So, we tend to make our decisions based on longer-term focus. We do try to balance out our renovations, Jeff. The good thing is most of our renovations were done a year or 18 months to two years following the acquisitions that we made. The good thing about this LaSalle portfolio is we'll be able to phase those -- we're not going to have some big chunk at one time that would be a catch-up, if you will, within the portfolio.

We don't think there's much that are going to impact '19 because where there renovations being considered, we're really starting over with the visioning and the project scope and in almost every case, the team that's visioning the property with us. That won't really have much of an impact on '19. I guess that's the good side of it.

Jeff Donnelly -- Wells Fargo -- Analyst

I guess another way to ask it is when you look at -- it sounds like you may have answered me for 2019, but when you look at 2019 and 2020, do you think the level of renovation disruptions you're going to have across the combined portfolio is going to be, I guess, typical rather than maybe outsized?

Jon Bortz -- Chairman, President, and Chief Executive Officer

We don't know enough about when each of these renovations is going to get phased and what the impact will be. But I would guess based upon what we learned through touring the properties and laying out in general what we're going to renovate, what we're going to enhance, what we're going to transform, that it will continue to be relatively normal if you can look at our history and say it's relatively normal. Go ahead.

Jeff Donnelly -- Wells Fargo -- Analyst

Sorry, I interrupted you.

Jon Bortz -- Chairman, President, and Chief Executive Officer

I was going to say if what we do you consider normal. Certainly, a clean year. I'm not sure I would call '18 a clean year given all the integration impacts that existed this year. I'm hoping that's not a normal thing every year.

Jeff Donnelly -- Wells Fargo -- Analyst

Gotcha. Just one follow-up on San Francisco -- you shared your view earlier, I think expectations of your peers seem to cover up pretty broad range. Some people, I would say, sort of share your view, others are encouraging folks to exercise a little caution. I think that might result from where their hotels are in the city.

I'm just curious if you're expecting a high single-digit RevPAR next year for San Francisco, can you talk about how a Fisherman's Wharf or a Union Square, Moscone, or Downtown submarket would perform relative to that? Are there ones that you look at as clear leaders for that threshold or laggards?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Well, I think the whole city is going to be just on fire next year in a positive way, given the amount of business in the city, the continuing business growth in the city, the economic strength of the city, the leisure destination attraction of the city. So, I think all the markets are going to be impacted in a very positive and dramatic way. You can make an argument that says Union Square is going to benefit a little bit more than the Wharf, although interestingly, there are two properties going out of business in the wharf that are getting closed.

I think if it wasn't closed two days ago, it was closing any day, which was a big part of the Holiday Inn and then the 2620 property on the Wharf was bought and was being renovated and then transformed completely to timeshare.

So, we think the Wharf has some other things going for it, which is actually a shrinking of supply. That may offset to a great extent maybe the extra benefit, anything in the south of market or union square area gains disproportionately from the improvement in the convention center business.

Jeff Donnelly -- Wells Fargo -- Analyst

Great. Thank you, guys.

Operator

Thank you. Our last question today is coming from Wes Golladay of RBC Capital Markets. Please go ahead.

Wes Golladay -- RBC Capital Markets -- Analyst

Good morning, guys. Looking at the Fisherman's Wharf property, the Zephyr. Is the retail -- can you give us an update on that and how much EBITDA you expect from the retail component next year?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Good question, Wes. That property kind of gets lost because of the retail nature of it. So, the renovation was completed mid-year. We have leased all but about 4,000 square feet. We've leased about 92% of the space. We've leased about 88% of the revenue at this point. We have a couple of small spaces. We have three spaces left in the property, the larger one we think is soon to be committed, but we don't have a lease signed yet.

So, we should pick up based upon how tenants roll into the space after doing their improvements and getting through the city process, we should pick up another $1 million in EBITDA next year. So, I think we're doing about $2.5 million this year. We should get to three and a half next year and we should be at $4.5 million, assuming that tenants pay and we lease the rest of the pay by 2020. Hopefully, we'll get to that run rate in the second half of next year.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. And then you made that comment about the development cost inflation and that seems really large, especially considering the low RevPAR environment, and you've been through multiple cycles, have you ever seen a situation where development costs was running multiples at RevPAR growth?

Jon Bortz -- Chairman, President, and Chief Executive Officer

No. We haven't. So, obviously, as an owner, not a developer, we're particularly encouraged by it. The yields you can build to today have come down significantly at the same time interest costs are rising. We think those e to rise. So, we think it's going to continue on an accelerating basis to restrict new starts within the industry.

Wes Golladay -- RBC Capital Markets -- Analyst

I don't know if you've taken a look at it yet, but have you looked at how starts have trended in your markets for next year based on the planning?

Jon Bortz -- Chairman, President, and Chief Executive Officer

Starts are way down through the urban markets. That would be expected when you consider that's where you have the biggest increases in development costs as opposed to some of the secondary and tertiary markets that haven't seen the same kind of labor shortages and wage increases and commodity increases in those urban markets that the smaller projects that might not use steel or might not use some of the commodities the big buildings in the urban markets use.

Wes Golladay -- RBC Capital Markets -- Analyst

Thanks a lot, guys.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.

Jon Bortz -- Chairman, President, and Chief Executive Officer

Thanks, everybody if you're still on the call and not on the next lodging call. Thanks for participating. Thanks for your support related to our combination with LaSalle. We look forward to our next update on that. There will probably be some pre-quarter release on revised outlook once that transaction closes. We look forward to updating you. Thank you. Bye, bye.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.

Duration: 71 minutes

Call participants:

Raymond Martz -- Executive Vice President and Chief Financial Officer

Jon Bortz -- Chairman, President, and Chief Executive Officer

Anthony Powell -- Barclays -- Analyst

Rich Hightower -- Evercore ISI -- Managing Director

Shaun Kelley -- Bank of America Merrill Lynch -- Managing Director

Stephen Grambling -- Goldman Sachs -- Analyst

Michael Bellisario -- Robert W. Baird -- Analyst

Jeff Donnelly -- Wells Fargo -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

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