Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Pebblebrook Hotel Trust (NYSE:PEB)
Q3 2019 Earnings Call
Oct 25, 2019, 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 Call. [Operator Instructions]

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

Raymond D. Martz -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Thank you Michelle and good morning everyone. Welcome to our third quarter 2019 earnings call and webcast. Joining me today is Jon Bortz our Chairman and Chief Executive Officer, but before we start a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2018 and our other SEC filings and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today October 25 2019 and we undertake no duty to update them later. You can find our SEC reports and earnings release, which contain reconciliations of the non-GAAP financial managers we use on our website is public record tells calm OK for the third quarter of 2019, or hotel operating results were slowly below our expectations.

Adjusted EBITDA met the lower end of our hour and adjusted FFO of $0.77 per share was in the middle of our outlook range of $0.76 to $0.78. In the third quarter same-property RevPAR decreased 2.2%, which was just below our outlook of flat to down 2%. Same-property non room revenues increased 1.9% and same-property total RevPAR was down 1%, which was also slightly below our outlook. In addition to the moderating business and leisure hotel demand that we experienced during the quarter our South Florida hotels and resorts were impacted by Hurricane Dorian in early September, which we estimate negatively impacted same-property RevPAR growth by 30 basis points. Overall our 2.2% RevPAR decline during the third quarter was a result of a 0.6% decline in ADR and a 1.6% decline in occupancy.

Our portfolio on a relative basis outperformed our comparable combined STR market tracks which experienced a 2.6% RevPAR decline 40 basis points below our same-property third quarter RevPAR. We also had approximately 60 basis points of negative impact to RevPAR at five of our hotels that have recently transitioned to new management companies. However this was largely as we had forecasted going into the quarter. Interestingly 17 of the 20 market tracks in our portfolio experienced negative RevPAR for the quarter with Philadelphia Washington D.C., And Naples Florida has been only the three market tracks that generated positive RevPAR in the quarter. As for Pebblebrook our best-performing markets in the third quarter were Boston San Diego Philadelphia and Naples Florida. In addition our hotels in 15 of our 20 markets outperformed their respective STAR market tracks.

Our Boston hotel has generated a RevPAR increase of 1.7%, which was above the Boston CBD RevPAR decline of 1.7%. This out performance was driven by the Westin Copley The Liberty and W Boston similar to the trends we experienced during the second quarter. These properties continue to make progress working through the challenges of the Starwood Marriott sales, revenue management and loyalty program integrations. In addition, the western copy has shown consistent growth all year, including the third quarter as a game share as a result of this covets very significant renovation last year. And W Boston also began to gain share in the third quarter as a result of the room's renovation we completed at the end of the first quarter. Boston continues to be an outperforming market for us this year despite its weaker convention calendar. Boston CBD hotel demand was up 2.7% in the third quarter and is up 3.4% year-to-date and RevPAR is up 1.5% year-to-date.

San Diego was another positive performer for us in the third quarter producing a 0.8% RevPAR gain, which outpaced the San Diego market track decline of 2.7%. This was due to solid performance at our Hilton Gaslamp and Embassy Suites hotels in downtown San Diego. Our Paradise Point resort also generated a positive result in the quarter as did our recently renovated Hilton San Diego Resort that is ramping up following its significant renovation that was completed midyear. Our Laplaya Resort in Naples Florida had a tremendous quarter generating 17.5% RevPAR growth, which led our portfolio even with cancellations resulting from Hurricane Dorian in early September. This resort continues to ramp-up nicely following Hurricane Irma and the completion of our major multiyear comprehensive renovations earlier this year and we applaud our property team's continued solid results. Our under performing markets were the ones we expected.

Our Seattle hotels experienced a 7.9% RevPAR decline due to supply increases in the market, which are primarily attributable to the new 1260 room convention center hotel that was added to the market at the end of last year. Despite ongoing healthy demand growth of 9.9% in Seattle from a robust economic base, which accelerated from the second quarter the city was not able to immediately absorb its year-to-date 13.1% supply increase and we expect Seattle to be an under performing market through the remainder of 2019. RevPAR at our Washington D.C. Hotels was down 4.2% which underperformed the Washington CBD which grew RevPAR 4% during the quarter. Our under performance was mainly due to the recent management transitions at Mason & Rook and the Donovan Hotel in anticipation of the upcoming repositioning and major redevelopments of both hotels. We expect this near-term under expected as near-term under performance which is normal for any transitions.

Our Chicago hotels generated a 6% RevPAR decline which was slightly below the 5.6% decline posted by the Chicago CBD as Chicago continues to be challenged by its weaker convention calendar and increases in supply growth. We gained meaningful RevPAR share at our Hotel Chicago but gave it back in a little more at our Westin Michigan Avenue Hotel as we have been unable to overcome the huge group room shortfall we entered the year with following challenges from the Marriott Group sales integration. Fortunately the convention calendar for Chicago in 2020 is much better and our Westin hotel's up significantly in-group on the books for next year. Our San Francisco hotels produced a 4.9% RevPAR decline during the quarter which was slightly under the San Francisco market track decline of 4.2%. And we expected this to be the most difficult quarter in San Francisco given the unfavorable convention calendar in the quarter compared to last year and the operator transitions at both the Marker and Villa Florence in anticipation of the upcoming major repositioning and renovations of these properties next year.

We expect San Francisco to be much better in Q4 given the favorable convention calendar and an already healthy group pace advantage on the books. And finally our Key West hotels generated a 5.7% decline in RevPAR slightly better than the market's 6.1% decline. The negative RevPAR performance overall in Q1 this was mainly due to Hurricane Dorian which caused a significant amount of cancellations during what is typically a very busy and profitable Labor Day weekend in Key West. The Key's also faced a Sargassum seaweed outbreak which negatively impacted the Southernmost Beach Resort during the quarter. The impact on RevPAR from the seaweed was minimal but we lost an estimated $850000 in food and beverage revenue and $5.5 million in hotel EBITDA. Overall for the quarter transient revenue which made up about 77% of our total portfolio room revenues declined 2.9% compared to the prior year transient ADR declined by 1.5% in the quarter. Group revenues decreased 2% in the quarter with room nights declining 2.1% and ADR increasing 0.1%.

This was primarily due to weak convention calendars in Chicago and San Francisco. In terms of monthly RevPAR growth July was down 3.9% August declined 1.9% and September was down 0.7%. Our hotels generated $145.1 million of same-property hotel EBITDA for the quarter which was $1.4 million below the bottom end of our outlook. This was primarily due to the weaker business and leisure demand across most of our markets and the $1 million combined negative EBITDA impact from Hurricane Dorian and the seaweed outbreak in The Keys that I mentioned earlier. Our hotel teams did an excellent job managing expense growth in the quarter. Same-property hotel expenses increased just 1.2% during the quarter after adjusting for the impact of real estate tax increases from Proposition 13 at the California properties requiring last year's corporate transaction.

Year-to-date operating expenses excluding Prop 13 increased just 2.4% even with the continuing investments we have been making this year improving the guest experience and investing in our employees. As we continue to make progress implementing our portfoliowide initiatives and cost synergies program we expect to see similar expense successes limiting expense growth and improving productivity in 2020 and 2021. Moving down the income statement, adjusted EBITDA was $136.5 million which was at the bottom end of our Q3 outlook range. This was a result of a $1.6 million savings in corporate G&A expenses which offset the shortfall in hotel EBITDA. These savings came primarily from reduced incentive compensation expenses and some timing differences in pre opening expenses. Adjusted FFO was $100.5 million or $0.77 per share which was in the middle of our outlook range. Our interest expenses were $1.2 million before below our outlook which combined with our $1.6 million of G&A savings offset the $1.6 million shortfall in hotel EBITDA.

Due to the $138 million of successfully completed property sales during the quarter ensuing debt pay downs reviewing our balance sheet at the end of the third quarter on a variety of metrics shows that we are in very good financial shape. Our debt-to-EBITDA ratio was at 4.6x debt-to-net assets after GAAP depreciation was at a low 35%. Debt to enterprise value was at 36% and our fixed charge ratio was at 3x. We expect to further improve these metrics and ratios as we complete additional property sales. And finally a quick update on our net asset value calculation. As we revised we have revised our estimated NAV for our portfolio, to reflect the decelerating economic environment and the performance of our hotels in that environment. As a result our calculated NAV has been slightly reduced to $36.25 to $41.5 per share with a midpoint of $38.75 per share which implies an NOI cap rate of 5.8% at the midpoint. Based on our current share price of approximately $27 we trade at an applied 7.3% NOI cap rate which is more than 30% discount to a midpoint of our NAV while also providing a healthy 5.6% dividend yield.

Now with that update I'd like to now turn the call over to Jon.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Thanks Ray. As noted in our press release the third quarter was more challenging than we expected. The rate of demand growth continued to modestly slow from the second quarter in both business and leisure transient and September was particularly disappointing given the benefits that were expected from the Jewish holiday shift into October. Slowing economic growth around the world due to the trade war and continuing geopolitical events and uncertainty have clearly had an impact on business confidence which is translating into slightly more cautiousness by businesses in investments and spending. This is also evidenced in travel where trailing 12-month hotel demand growth has decelerated from a range of 2.7% to 3% a year ago or so to 2% to 2.1% most recently. This slowdown in demand along with a weaker year in-group business across the industry has pressured ADR growth, which has also slowed from a trailing 12-month growth rate of 2.4% to 2.5% a year ago to 1.2% to 1.5% in the last quarter.

When trends are changing in either direction it becomes harder to forecast primarily because our business forecasts are based upon the consistency of trends since so much of our business in this industry is booked short-term and even business booked further out like larger group business can quickly shrink or cancel forecast variances can change quickly. While the demand trends this year have been moderating the good news is we haven't seen any increase in cancellations or attrition and we have not heard about any changes in corporate policies related to travel. And average spend per group customer has also shown healthy increases all year. While industry RevPAR growth has been softening the urban and top 25 markets have continued to under perform the industry. We believe this is primarily due to negative shifts in international travel and a relatively higher rate of supply growth in the industry in the urban and top 25 markets.

Inbound international travel has been weak if not negative this year and outbound travel meaning U.S. Citizens traveling abroad is up significantly. Some of this is likely due to the strong dollar. And some of this is due to U.S. Policies in rhetoric that make it much more difficult or desirable to come to the U.S. For Pebblebrook on a year-to-date basis we have outperformed our markets. We've outperformed our local competitive hotel sets in terms of gaining RevPAR share. We've outperformed the urban and top 25 markets as reported by STAR and we performed in line with the industry. In the third quarter we also outperformed our markets and competitors but due to more challenging convention calendars in a number of our markets in the third quarter and the 60 basis point impact from operator transitions at five of our properties we underperformed the urban and top 25 markets as we expected. And as Ray stated earlier Hurricane Dorian took about 30 basis points of our RevPAR performance in the third quarter.

The fourth quarter which has been shaping up since the beginning of the year to be a very good quarter for us due to favorable convention calendars in a number of our markets doesn't look as good as it did 90 days ago as demand growth and pickup trends have softened. Nevertheless our pace heading into the quarter continues to be extremely favorable. Specifically as of the end of September total room nights for the fourth quarter are up 5.4% over the same time last year with ADR up 1% and total revenues up 6.4%. Group pace is even stronger for Q4 with group rooms ahead by 6.2% group ADR ahead by 5.6% and group revenues ahead by 12.1%. So you can see pace is still pretty strong for the fourth quarter. The challenge we have been experiencing relates to in the quarter for the quarter pick up. It's been down on a year-over-year basis and we expect pickup to weaken further in Q4 based on current trends.

As a result we have lowered our same-property RevPAR and EBITDA forecast for the fourth quarter to anticipate further softening. Now let's pivot to how Pebblebrook is going to continue to create value for our shareholders regardless of the economic environment. I'd like to break this down into three discussion topics. First the repositions and redevelopment opportunities throughout the portfolio; second an update on our strategic disposition plan; and third progress with our portfoliowide initiatives. When we made the decision to pursue the acquisition of LaSalle we believe there was a significant opportunity to increase the value of the acquired portfolio by not only creatively repositioning a significant number of properties to drive higher room revenues but also by utilizing and redeveloping the real estate more creatively to drive higher non room revenues such as in the areas of food and beverage and room rental just as we have done over the last nine years at Pebblebrook.

After spending almost a year now evaluating the opportunities and creating an overall comprehensive plan for each hotel we have come to the conclusion that there are more property and portfoliowide opportunities than what we originally anticipated. Today we believe there are 16 properties within the portfolio that can benefit from substantial investment that will reposition them to a higher competitive level improve the guest experience and drive very attractive returns. While we have made numerous operator and brand changes to position properties to maximize performance upon redevelopment and we have a few more to go we feel like we are in a very good place now to start this value creation process. Over the past year we have been feverishly planning these redevelopments with our designer's architects operators and project managers and we are extremely excited about the opportunities. I'd like to give you the broad parameters of this investment program the returns we expect to drive the timing and some details about a few of them.

Date including what we disclosed in yesterday's earnings release we have announced and provided details on eight of the projects the Donovan Hotel, which will become the seventh hotel in the unofficial Z collection following its reopening in the second quarter next year as Hotel Zena after completing a $25 million repositioning and reconcepting. Mason & Rook, which will join the Viceroy Luxury urban collection following an $8 million, upgrade which is expected to be completed by midyear 2020, the first phase of the repositioning of Viceroy Santa Monica consisting of $12 million to reinvigorate this property's reputation as one of the most iconic luxury lifestyle hotels in the highly supply constrained Santa Monica market. The $12.5 million repositioning of Le Parc in West Hollywood through a comprehensive renovation of this entire all-suite hotel. The repositioning of Chaminade Resort & Spa in Santa Cruz following the completion of a $10 million upgrading of the property's vast indoor and outdoor public areas and meeting and event venues.

The second phase of the redevelopment of the Hilton San Diego Resort, which includes a $10.5 million upgrade of the property's public areas on top of the just completed $21 million of improvements to the hotel's guestrooms and meeting space. Completion by year-end of the $5 million repositioning of the 96 room Marker Key West. And finally the $37 million redevelopment and reflagging of San Diego Paradise Point Resort as a Margarita Island resort with a redevelopment not expected to commence until the second half of next year with reflagging targeted for late next year. All but two of these projects will commence either late this year or early next year and be completed by no later than midyear next year. The Marker Key West and Paradise Point are the two exceptions with The Marker already under way and Paradise Point starting after public approvals sometime in the second half of next year.

These eight redevelopments total an estimated investment of approximately $120 million with about 75% of this capital representing ROI-related capital and 25% representing regular capital maintenance or renovations in the ordinary course of the property's life. We're forecasting that this repositioning capital will generate on average a 10% return on investment upon stabilization, which we typically get to between three and four years following completion. In addition to these eight projects we anticipate commencing an additional seven repositioning projects by the end of next year or early in 2021 with the majority of the work and investments occurring over the 2020 to 2021 winner and one last project in the summer of 2021. As previously discussed some of these projects will involve us making operator or brand changes as part of the value creation process.

All told we are currently forecasting that these 16 major repositioning projects will represent a total investment of approximately $260 million with roughly 2/3 of the total amount projected to represent ROI projects, which we underwrite to generate an increase in EBITDA equal to a 10% return on investment upon stabilization. In addition to taking advantage of the opportunity to drive higher average room rates and RevPAR at these properties as a result of their repositioning many of these major projects include creatively improving the real estate to generate opportunities to drive an increase in food and beverage revenues through the upgrading of expansion or development of new experiential venues. For example as part of the Donovan conversion to Zena we are dramatically improving the rooftop and the ground floor. On the rooftop we are taking advantage of one of the few hotels in Downtown D.C.

With a rooftop pool and additional rooftop real estate by upgrading the experience and adding very desirable rooftop venue space. And on the ground floor in addition to creating a lobby bar we are adding a combination game room restaurant and event venue. At Viceroy Santa Monica we are converting the indoor restaurant into a lobby bar with food opening it up to the outdoors adding a highly desirable outdoor bar and substantially improving the outdoor pool and venue experience. At Mason & Rook as part of the conversion to Viceroy we are increasing the amount of venue space making the existing meeting and venue space much more unique and attractive adding a lounge converting outdoor bar space to a year-round bar and event venue and adding a cafe.

At Chaminade Resort we are substantially increasing and improving meeting and venue space through numerous projects including combining two unattractive and underutilized meeting rooms to create a second major ballroom for the property dramatically improving and expanding the outdoor wedding and event venues and increasing and enhancing the outdoor bar seating. Our second phase project that we are master planning now involves adding significant active resort amenities such as ZiP lines and aerial adventure park in the forest on the property ax-throwing facilities as well as additional experiential indoor and outdoor wedding meeting and event venues on a portion of the property's underutilized 300 acres, which have spectacular views of the Santa Cruz Mountains and the Pacific Ocean. This is truly incredible real estate and at just 45 minutes from Silicon Valley. We're also working on adding three houses as well as other substantial glamping facilities.

Paradise point as part of the property's conversion to a Margaritaville Island Resort we expect to add multiple unique and highly desirable indoor and outdoor wedding meeting and event venues throughout the Property's 44 acres along with an additional and expanded bar restaurant and music venues on the property. These are just a few examples of our approach to creating value and better utilizing the strength of the very unique and flexible brand unencumbered real estate we own as a result of LaSalle portfolio acquisition. Not only will these projects allow us to drive significantly higher ADRs non room revenues and EBITDA but they're a key part of creating unique experiences that will make each property much more attractive to group and transient business both business and leisure customers. We look forward to announcing the rest of these very exciting and financially attractive projects in the coming quarters and providing you with the details of the opportunities to creatively redevelop and reposition these additional hotel properties.

Next I'd like to make a few comments about the progress on our strategic disposition plan. Including the Topaz for which we have a hard-money contract and assuming it transacts this quarter we will have sold 12 hotels from the acquired portfolio for gross proceeds of just over $1.3 billion at a combined NOI cap rate of 5.4% and a combined EBITDA multiple of 15.9x 2018 operating numbers. Our numbers also don't add in required capital even though most of the properties sold need significant capital. Recall that we acquired the entire company with all corporate and property transaction costs at a 5.9% NOI cap rate. So our sales of these less desirable properties have certainly been accretive to value due to higher sales prices than we paid for them. Our total disposition target for 2019 has been $600 million assuming that Topaz transacts will have achieved $482 million of sales.

The Topaz represents the last hotel we intend to sell this year, what remains to be sold this year to reach our $600 million sales target includes income-producing pieces of several hotels that we are separating through the condominiumization of the retail restaurant and entertainment and at least in one case the parking real estate separating that from the hotel real estate. Due to the extended time it's taken to complete these legal separations we no longer believe these transactions will close this year but we do currently expect that it's likely they'll be under contract by the end of the year with closing next year. We'll also be looking to sell an additional $300 million to $500 million of properties over the course of next year. All of these sales taken together assuming they happen should not only get us to our corporate leverage target but provide additional proceeds for either further debt reduction calling up preferred shares or repurchasing our stock all depending upon market conditions at the time. Finally I want to provide a quick update on our progress on our portfoliowide initiatives.

Before we move to Q&A, we continue to make progress on maximizing the opportunity to recontract many products and services that we purchase within our portfolio. We've now re contracted from us $5 million of annual run rate savings within the portfolio and have identified another $1 million of savings that should get finalized in the next quarter or so. We have another $4 million estimated and identified but with a longer lead-time to finalization. We're on a good pace and continue to believe that the $10 million of targeted annualized savings will be successfully achieved by the end of next year.

And as a reminder this potential $10 million of annualized savings was not underwritten as part of last year's corporate acquisition and represents an additional opportunity identified following the closing of the transaction. To wrap up we believe that regardless of the economic environment we find ourselves in over the next few years we have a significant number of organic substantial value creation opportunities within our new combined company that we have identified. And they fall within our core expertise having demonstrated a long track record of success executing on these types of value creation opportunities.

So we'd now like to be happy to answer questions that you may have. And operator you may proceed with the Q&A. And before we do that just one reach out to our favorite team here in Washington the NAT so let's go NATs.

Questions and Answers:

Operator

Thank you [Operator Instructions] Our first question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question

Wes Golladay -- RBC Capital Markets -- Analyst

Good morning, guys. For Pebblebrook next year you had a lot of manager transitions brand integrations. Do you still have redevelopments next year as you do this year? What's the net impact of all the noise? Is it going to be lighter comparable worse?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. I think what we know right now. And keep in mind we don't have a single budget yet for next year but based upon the level of investment and disruption that we expect we think it will be roughly similar to this year. There'll be some additional operator and brand transitions next year as well. And so give or take a couple of million dollars in either direction. I think this year in total we are running about $8 million to $9 million of renovation and operator disruption. And I would think it's going to be in the same ballpark give or take a minor amount.

Raymond D. Martz -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

And Wes in terms of RevPAR disruption that's about 60 basis points or so in 2019 of impact from renovations.

Wes Golladay -- RBC Capital Markets -- Analyst

Alright, thanks a lot, guys.

Operator

Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question

Smedes Rose -- Citi -- Analyst

Thank you. I wanted to ask you have you talked about some of the impact of the transitioning to the new managers? How long does that usually take before things are kind of rated on that front? And kind of what specifically are the things that drag down results when you have a transition changes do with the way that bookings are made? Or is it on staff changes? Or maybe just some other specifics around that?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

So it's usually a combination of those things. So it would be an impact of business coming through your distribution channels. So typically you'll have a different GDS code as an example. So your customers are going to have to find you and your corporate accounts will need to find you with different online input information than what they were doing before. Occasionally there are changes in the executive teams and in the systems. And so those cause disruptions as well at the property level. Sometimes they're much more limited. So as an example we have had pretty much no negative impact at all with the Skamania Lodge in the Columbia River Gorge the entire executive team stayed on the system changes were minimal other than the GDS code.

And so there's an example of where it was limited Paradise Point when we changed from destination to Davidson. Again we kept the name. And so that didn't change. And the system changes were relatively minimal. So and the team did not change at the property level. So it really depends upon those primary categories. It's your technology and how it impacts your demand and your distribution channels and then your executive team leaders.

Smedes Rose -- Citi -- Analyst

And how long does it usually...

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes it varies on how much how many of those things have changed and how substantial but it can be as little as nothing and it can be as long as a year.

Smedes Rose -- Citi -- Analyst

Okay. And then just the other thing I just wanted to ask you mentioned better group bookings at the Chicago Weston. And you mentioned some weakness coming into this year with some changes on the Marriott system. Do you feel like that's behind you now? Are you happy with the way that the group bookings through the Marriott system are going? I know it's a lesser piece of your business overall relative to others but since you called it out I wanted to follow up on it.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. Well one it actually is still it's a material part of our business because those properties the three Westons as an example the two luxury collections the two Ws they're large. They're large properties. And so they do have a material impact on our business. I would say we are behind most of the Marriott issues. And I would say it's probably neutral to beginning to be a tailwind. We still have some sales issues in the San Diego cluster at our Weston where we have fallen behind from a pace perspective that impacted this year and we are behind next year in a market that has increasing group in the market next year. And our other properties are generally up in the San Diego market. So we have some work to do there. And then the loyalty changes so I don't think we are behind those because I don't think we are ever going to get back to where we are.

I think our properties because they came out of the Starwood system and we are probably one of few choices in markets now fall into a larger system where there are lots of choices. And I think we are never going to get that redemption business back. And so we have been working very closely with Marriott. They put a lot of resources on trying to replace that business with other business. And while we have not replaced at all we are making progress and that's a nice positive. So still have work to do. We've lost we lost a lot of share in our Marriott's. And we have beginning to gain a little back but we got a ways to go.

Smedes Rose -- Citi -- Analyst

Okay, thank you appreciate it.

Operator

Thank you. Our next question comes from the line of Aryeh Klein with BMO Capital Markets. Please proceed with your question

Aryeh Klein -- BMO -- Analyst

Thanks. From an asset sale standpoint in 2020 you mentioned the $300 million to $400 million in sales. As part of that are there specific markets you'd look to deemphasize? And then also you did raise the assumed cap rate on the portfolio and so given the challenges has there any been any change in buyer appetite and the pricing they're willing to pay?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. So as it relates to pricing the answer is no. We haven't seen any change. I think the midpoint of our range moved to 10 and that's just the way that when we look at each individual hotel and we adjust for renovation impact and operator transitions and hurricanes and other things there's been performance impact on 2019 numbers. And it depends on how it falls by property in terms of what it averages out to. And in this case it's averaged out to about a 0.1 point higher on 2019 numbers that are a little bit lower than 2018 numbers in the aggregate. I think as it relates to your other questions about specific markets we have sold down all-but-one property in New York we continue to have a negative view on that. And then I think as it relates to additional properties beyond the "non-hotel real estate" that we are looking to separate out and sell there are other some other markets that as evidenced by our sales in D.C. that we continue to want to deemphasize. So primarily East or Midwest markets being deemphasized and West Coast markets being emphasized.

Aryeh Klein -- BMO -- Analyst

And then you have the Donovan joining the unofficial Z collection. Are there any others as part of the 16 hotels you've identified that could also join that platform?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

There are. And we think within 24 months the unofficial Z collection is likely to be at 10 or more hotels of the existing portfolio. The next one after DC will be the redevelopment of The Marker in San Francisco. We think that renovation should begin late next year probably be complete in early 2021 and that would also become a member of the unofficial Z collection. Outside of that I wouldn't want to identify any specific properties but we have identified them internally.

Aryeh Klein -- BMO -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question

Stephen Grambling -- Goldman Sachs -- Analyst

I think could you just elaborate a little bit more on what you're seeing in the transaction market specifically as you think about the mix of buyers the speed of how these transactions are occurring and our general interest as the broader environment has softened a little bit here?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. I think the broad characterization for the buyers of the kind of assets that we are selling meaning major market in many cases unencumbered assets many with value creation opportunities I would say the buyer pool is primarily private equity and high net worth individuals with a few institutions sprinkled in a very occasional foreign buyer particularly if they're a brand company or have a partnership with a brand company that might be looking for distribution in the U.S. and their focus would be one of the major markets including where we might be selling. So that it's folks primarily taking advantage of the very attractive debt markets and/or looking to place capital from high net worth individuals who look at the alternatives and find hotels to be very attractive from a yield perspective.

Stephen Grambling -- Goldman Sachs -- Analyst

And just maybe a related follow-up to a degree. I guess if the current environment in terms of the soft RevPAR backdrop continues or even deteriorates further does that change how you think about how you'd operate the business or even pursue dispositions from here?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Well in terms of the additional sales that we have identified. Yes I mean the values will matter in terms of whether we ultimately pull the trigger or not. And so if the values at some point do get impacted that might change our decision on some of the potential sales. I doubt that would be the case on the non hotel pieces. I think those markets are probably a little bit more stable and hard to believe you can say the retail business is more stable than lodging but I think that a lot of the bad news has already come out. And as it relates to capital investment I mean there are projects that we will be doing that if we don't do them they're going to lose more share. There are properties that need to be renovated. They're losing share today and not putting the capital in is going to continue to damage their positioning in the market. There are some other projects like some of the ones we identified at Chaminade in the second phase that are ROI related. And perhaps we could defer those.

They'll always be available to be done and they're not necessarily going to have a direct impact on the position of the property which is already being repositioned with the current project. So it could change the way we look at that. It certainly could change what we do with any excess proceeds that get generated out of sales next year and what we do with those proceeds. And as it relates to operating the properties I mean until you, I think the way we approach it today is we are our focus is not on its not on I don't know I hate to say cost control you always you're always in an appropriate level of process and procedures and fundamentals of making sure you don't make mistakes and over time or scheduling or things that basically where you waste money on an operating basis but generally we don't make across-the-board cuts in this kind of environment.

We're really we wouldn't do that until we got into a recessionary environment where the customer understands that they're in an environment where they may get a little bit less for their money than what they used to get. Or they're going to be paying less and they're going to get less in an effort to reduce costs. Similar to what we did back in '08 and '09 and what we did back in 2001 and '02 where we had arbitrary reductions within the portfolio. And we just had to figure out what would have the least impact on the customer what wouldn't have an impact on the long-term value of the real estate. And let's try to save that money in the near term while we are in the depths of the recession and then we will put those things back as the economy begins to get better.

Stephen Grambling -- Goldman Sachs -- Analyst

Make sense? Thanks so much for all the color.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Alright, thanks, Stephen.

Operator

Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird & Company. Please proceed with your question

Michael Bellisario -- Robert W Baird & Company -- Analyst

Good morning everyone. Just kind of on the fundamental front and then also your view of customer preferences. Have you seen any divergence in performance between your branded and independent properties kind of manager transitions aside within any maybe widening between renovated and non renovated properties? Just trying to think about how that might be impacting performance and which hotels you're targeting for sale versus repositioning?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

I'm not sure I fully comprehend that...

Michael Bellisario -- Robert W Baird & Company -- Analyst

Just in terms of I guess maybe just on the first part the branded versus independent any change in performance or the way you're viewing trends within your portfolio specific to the brand versus independent side?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

No. No. They're performing similarly in the environment as its changing.

Michael Bellisario -- Robert W Baird & Company -- Analyst

And then in terms of renovations I know you've talked about getting less list today or recently versus several years ago post-renovation. Is that still the case? Or does the focus have to be more on the ROI projects and all the stuff that you listed in your prepared remarks?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Think as the environment softens what happens is the upside stretches out. Your ability to get to the competitive positioning that from a RevPAR perspective that you would anticipate with the capital that you're investing might move from three years to four years as an example depending upon what those last few years look like. It's easier to gain share in a stronger environment and it takes a little longer in a softer environment. So from that perspective I mean we have tried to build that into our underwriting as we look at these projects. And they're so lucrative that whether its three years or four years or even five years in some cases it doesn't really impact the numbers because most of it is going to be achieved in the first couple of years.

Michael Bellisario -- Robert W Baird & Company -- Analyst

Got it. That's helpful. And then just one clarification. I think I heard you say 300 or 500 next year? How does that what's changed there versus the 350 to 400 that you kind of hinted at last quarter? And where does the 4Q unidentified disposition fall into each of those buckets?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. So the 300 to 500 does not include any of the six from this year whether it closes before the end of the year or closes early next year in terms of the non hotel pieces that are out on the market. The next year is a little higher. I think we had indicated that we were thinking about bringing some additional properties to the market given the pricing in the market. And that's what's really driving that increase in the upper end of that range.

Michael Bellisario -- Robert W Baird & Company -- Analyst

That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question

Bill Crow -- Raymond James -- Analyst

Good morning and thank you. Jon is there any reason to think that urban and top 25 markets can perform closer to the overall industry next year?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

There are lots of things that could cause that to happen in terms of improving the trend line and one of those would need to be a change in the international inbound travel. I think we are going to be down this year. That's the way the numbers are tracking and trending right now as the dollar strengthened over the course of the year. If we see a reversal in the dollar and it begins to move back in the other direction. You do have global travel growth running in the 4% to 5% a year range so we have been losing significant share. So that would be one way Bill. A second would be to get back to a more favorable rhetoric or environment that encourages folks to come here.

And also is follows the processes and procedures that were done prior to this administration so that getting a visa to come to this to the country for meetings or for travel is also back to I don't want to say a normal level but the level that it was at before the last couple of years. So those things would help. We're not going to solve the supply issue next year in the urban markets. As I said I think it's going to run both for our weighted average. But I think the Smith Travel urban category the major cities are still going to run in that 3% range. But after that they begin to come down and we should see some benefit at that point. The last piece would be to see a meaningful pickup in business travel which the major urban markets generally benefit from and when it softens, we generally suffer from. So any of those things could happen, but certainly not we don't see any indication of that just yet.

Bill Crow -- Raymond James -- Analyst

Yes. It seems like maybe we have to wait until after the election to see what happens in business travel. But as we think about fourth quarter and transitioning from a minus 2.2% RevPAR decline or RevPAR growth to 0% to 2% on the positive side how much of that is driven by really easy comps from last year? I heard your comments on group and pace being better but I think you also had some labor issues and integration issues that made for an easy comp? Is that am I remembering correctly?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. There were definitely some impacts from the strike. The strikes that occurred in the portfolio. I would say more of the impact from the strikes has to do with the bottom line than the top line. I mean interestingly markets like Boston the Copley actually did better last year. We actually had some group displaced because of the strike and reseller with transient at higher rates. And so on a RevPAR basis it was better. We lost some food and beverage and there and had a much higher operating cost for security in Boston Police and replacement workers in terms of people who flew in to help the team clean their rooms every day. But I would say the biggest impacts are the convention calendar Bill and at the edges there's some benefit from particularly EBITDA for the properties that had strikes last year.

Bill Crow -- Raymond James -- Analyst

Great. One more for me Jon. It was announced over the past week or so that Marriott is going to re launch the W brand and you have some exposure to that brand obviously what do you think that means to you, and from a certainly probably more expensive but any thoughts there?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. I mean I don't we don't really know enough about it Bill. They've not shared a whole lot at this point. I think that W will benefit as a brand from what I would describe as growing need to grow up. It's a luxury brand. And I think its 20 years old in some cases in terms of sort of the; I don't know the vernacular of the brand. And so I presume it will all help at the end of the day. We've recently renovated the WLA completely and we are just finishing up adding some meeting space that used to be a spa there and we just redid the W Boston completely. So as it relates to anything they might be doing physically those are things that would be many, many years off at our properties unless they were minor. But hopefully they can improve the positioning of the brand the vernacular make it a little more sophisticated than it is today which is more dated. And that would improve performance overall for the brand.

Bill Crow -- Raymond James -- Analyst

Okay, appreciate your time. Thanks.

Operator

Thank you. Our next question comes from the line of Jim Sullivan with BTIG. Please proceed with your question.

Jim Sullivan -- BTIG -- Analyst

Thank you. Good morning, guys. Quick question for you Jon. Obviously for many years you've chosen to overweight the West Coast and that served you well. And we have talked you've talked about the supply issues in both Seattle and Portland now for a couple of quarters. In this quarter three of the markets that under performed expectations were San Diego L.A. and San Francisco. And I just wonder as you think about that is it your view that the reason for that were they were all market-specific reasons? Or was there something that was generic that applied to all three that might suggest some weakness in demand in California generally?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. They were all local-market-specific issues Jim. San Diego was the convention calendar. L.A. is supply growth. But part of it is supply growth downtown versus in West L.A. and San Francisco was completely the convention calendar. I think what we have seen on the corporate side is very strong underlying corporate growth. And I guess maybe Jim maybe one thing that could be attributed to all the West Coast markets is just the international travel demand. And I would say that probably impacts them all. Different countries impact different cities differently but an overall weakness in international inbound would impact all five markets.

Jim Sullivan -- BTIG -- Analyst

One other factor. I know earlier in the year particularly in Southern California L.A. specifically the weather was a factor. We talked about that I think back in the after the first quarter when there was persistent rain. And we have a continuation of events whether its fires or other issues that have seemingly impact the state on a regular basis. Have you seen any increase in cancellation at all that one might attribute to concerns about factors like that?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

No. I mean back in the spring I wouldn't say cancellations but weak bookings when the weather forecasts were for rain in San Diego or L.A. or snow in Portland and Seattle. But in terms of the last quarter into October related to any fear of fires or anything else I'd say no we haven't heard anything from our properties related to either cancellations or frankly weak bookings.

Jim Sullivan -- BTIG -- Analyst

Okay, very good. Thanks, john.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Thanks, Jim.

Operator

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question

Neil Malkin -- Capital One Securities -- Analyst

Hey guys, good morning. Just looking at supply kind of peaking over the next couple of quarters give or take some delays look at demand trends and the hesitance on the business transient side or corporate confidence? I mean it is we in a lodging recession right now? Or are we heading there? I guess high-level views or whatever would be great.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Well it depends on what your definition of a lodging recession is. So interestingly I mean Ray mentioned 15 of our 20 markets were the actual markets not our properties but the markets were negative in the third quarter. That's definitely up from prior quarters. And if you look at 10 of the last 15 weeks that the industry has been negative. If you want to describe that as a mini-recession or recession. I mean you could describe it that way. I don't think we are in a macro recession at this point but we are definitely in a softer economic environment than we were a year ago and there probably are some economists out there who might say we are in recession as a on a macro basis or close to it but those I'm not sure there's much consensus that that's the case at this point.

So I guess it depends upon what how you describe it. And we have gone through these sorts of many recessions back in '13 and 2016 when business when corporate profit growth slowed or flattened out and we saw that come through in weakness in demand and then it popped back up as the economy got better. So I think it's purely definitional. And it's certainly not a recessional right now. And I wouldn't think on the macro side.

Neil Malkin -- Capital One Securities -- Analyst

Yes. No I would concur on that. I just I know I don't think we have had a streak this long of negative RevPAR posting. But so I appreciate that. Other one for me is you talked about your expanded ROI initiatives three to four year out time line to stabilize talking about 10% IRR or ROI. I'm just wondering a couple of things. One is you baking in this current low to potentially may be going negative RevPAR environment in those underwriting decisions. And the 10% ROI is that assuming you hit that in year three or 4? Or is that like the IRR you're targeting? And then the last part of that would be the stocks down 3.5% today. I just wonder do you think that has anything to do with the fact that you're going full steam ahead into the ROI projects at a time when maybe the market thinks it's not a good idea. Or any commentary on that would be helpful as well.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Sure. So, on the last point we haven't I've been doing this for 21 years now. I'm the faintest idea why the stock goes up or down in any given day. And the project profile that we have laid out is no different today than it was last quarter or the quarter before and I think we have been pretty consistent in saying we'd be proceeding with those regardless of the economic environment for the most part. So I wouldn't have any idea why the market would be down. We thought we'd be up 5.5% today based upon what we reported because that seems to be the normal response the next day from releasing your earnings in the lodging space. And sorry what was the first question?

Neil Malkin -- Capital One Securities -- Analyst

Yes. The first thing was the, you talked about your IRR your ROI about 10%.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. So the 10% is stabilized EBITDA yield it's not an IRR. I want to be clear about that. The IRRs would be much higher than at 10. So these are stabilized EBITDA yields. Think about it as a 10 as 10x so if we trade at 15x there is a value creation of 50% of the investment. And yes we don't typically get there until three to four years after the completion and it's providing both nominal and relative performance yield. So in a down environment are we going to get a 10 and if we stay down? We wouldn't get a 10 nominally but we are going to get a 10% on a relative basis by significant out performance. So that's the way we have to look at it are we getting a good return on that capital. What would have been otherwise had we not invested.

Neil Malkin -- Capital One Securities -- Analyst

No that's fair. I guess the reason I'm asking is even though you're saying relative you'd outperform. If you invest money and the market is down 10% and you're only down 5%. I mean if you run that out as a starting point that it's going to be harder to get to a sort of desired return on that capital longer term, does that make sense?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. I don't I'm not sure that's accurate because if we are increasing food and beverage revenues because we have more venues I mean again that a lot of some of this revenue has absolutely nothing to do with RevPAR. Yes it has to do with the overall demand environment and the recessionary period but if we outperform if we drive ADR growth and therefore revenue growth whether it's nominally a relatively compared to where we would otherwise be we are going to get that return on that capital. And ultimately when the market comes back and we are at that higher penetration level and competitive level it's going to come through in driving very attractive returns nominally at that point on those dollars.

Neil Malkin -- Capital One Securities -- Analyst

Good point. Yeah. I appreciate the color things. There.

Operator

Thank you. Our next question comes from the line of Gregory Miller with SunTrust Robinson Humphrey. Please proceed with your question

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Thanks. Good morning. Since the last earnings call we saw the merger announcement of two very large third-party management companies Cambridge and Interstate. Do you view this consolidation trend as a positive or negative given Pebblebrook has many independent management companies as operators?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

That's a good question. Well we have been seeing it for the past few years right that both at all levels. We've seen it at the brand level. We've seen it at the operator level with not just that transaction but destination selling themselves to Hyatt with Kimpton selling themselves to IHG. There are a number of other independent operators and franchise operators that have consolidated as well. It comes with pluses and minuses frankly. I think that the smaller companies are going to continue to have a harder time competing because of the cost of technology and the channels and where the business comes from and where it's going to come from in the future. And so I think by combining there are clearly business model benefits on their side but for that we prefer not to see the consolidation on the operator side.

We like having lots of different operators. We like a lot of the smaller operators the people who run those businesses tend to be very actively involved. And very experienced and being in many cases very creative. But one of the things that we are doing is part of the genesis of or the rationale behind our own proprietary brands is that even if the operators consolidate if we don't have to change the name of the property or the brand and we are just changing or combining an operator at the lower level then we don't really we won't really see much of an impact on our performance. So from a defensive perspective there are some benefits to having our own brand or brands at the end of the day where we control whether there ultimately is consolidation at the property level within our portfolio.

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Thanks, john. That's all for me.

Operator

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question

Anthony Powell -- Barclays -- Analyst

Hi, good morning. Maybe a follow-up on my question. You've expanded the Z collection quite a bit you call it unofficial. Why not make it official? Is there a way to benefit from an official brand? And is there a group sales benefit or branding benefit? Just commentary on that would be great.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Sure. So it's unofficial because it truly is unofficial at this point meaning it doesn't really mean anything yet. It's been created or we are creating it out of a bunch of individual properties that we named with the Z but in many cases have very similar DNA and attitude and personalities. But I think we have said before the "unofficial Z collection brand" itself doesn't drive anything right now because we haven't connected anything. If you mean why don't we move forward and connect it and try to get some benefit out of them all being part of that unofficial Z collection the answer would be yes that is in fact what we are doing what we have commenced this year and what we would be doing when we add a brand website for the unofficial Z collection.

What we won't do is add our own GDS. We'll still book through the existing channels that our properties book through. But if we can create a connection in the eyes of the consumers even in a market like San Francisco or D.C. or Portland where there'll be crossover of customer from one to the other we will get benefit out of the brand the brand ultimately whether we call it official or unofficial at the end of the day. So we are going to be proceeding with trying to connect the properties in order to create value out of having seven-six or seven-eight or ultimately 10 in the next 24 months. But today it doesn't mean anything yet.

Anthony Powell -- Barclays -- Analyst

Got it. And one more just the various I guess public safety and quality of life issues at San Francisco seem to be getting a bit loud and more press. Press has talked about and whatnot. Do you think those have had an impact on transient demand in the market? And if so what can you do as a property owner and the market to do about it?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes. So I do think it is getting more press. I think it's a good and bad thing. In the short term it's a bad thing that it's getting more press. In the long term it's a good thing because it's important for the city and the community in San Francisco to understand the impact on their business their city their neighborhoods and their employment at the end of the day. And so ultimately there are lots of cities who have done a very good job with addressing the needs of the homeless the needs of people who have mental health issues. And I think the good thing about the mayor and increasingly the council in San Francisco is a recognition that there's a lot that can be done to address these issues to improve the quality of the environment for the people who live there who work there and who come to visit.

And I think we view ourselves as a meaningful part of the community the business community. We've been there for a long time. We'd like to be there for a long time. We're working closely not only through the Hotel Association but actually on our own meeting with members of the government providing solutions that we have seen best practices that have worked in other cities connecting them with these organizations in other cities that they might not be familiar with. And so we are taking a very active role in trying to help both from a time perspective from an idea perspective and from a financial perspective.

Anthony Powell -- Barclays -- Analyst

Got it. And just a follow-up. I mean have you heard of any groups canceling or moving conventions based on this issue?

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Yes there has been a couple at least Anthony that has written letters to the authority copy the city. One of those I think was the auto dealer association in 2020 it's either 2021 or 2023 that I don't know if they canceled or they just they didn't repeat. And I think there's been one other convention I think a medical convention that made a decision to go elsewhere and was very clear about the rationale.

Anthony Powell -- Barclays -- Analyst

Okay, thank you.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Alright. Thanks very much.

Operator

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Jon Bortz for any closing remarks.

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

So just thanks for participating. One reminder Wells Fargo and Raymond James along with Pebblebrook will be holding a L.A. Hotel tour the day before NAREIT begins on November 11. And if you're not if you haven't signed up for that but would like to please reach out to us and or Wells Fargo or Raymond James and we'd be happy to add you to the tour. Otherwise we look forward to giving you an update on the year's performance in February of next year and we will see you at NAREIT in Los Angeles next month. Thank you.

Operator

[Operator Closing Remarks]

Duration: 81 minutes

Call participants:

Raymond D. Martz -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Jon E. Bortz -- Chairman of the Board, President and Chief Executive Officer

Wes Golladay -- RBC Capital Markets -- Analyst

Smedes Rose -- Citi -- Analyst

Aryeh Klein -- BMO -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Michael Bellisario -- Robert W Baird & Company -- Analyst

Bill Crow -- Raymond James -- Analyst

Jim Sullivan -- BTIG -- Analyst

Neil Malkin -- Capital One Securities -- Analyst

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Anthony Powell -- Barclays -- Analyst

More PEB analysis

All earnings call transcripts

AlphaStreet Logo