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Hersha Hospitality Trust (NYSE:HT)
Q3 2019 Earnings Call
Nov 6, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Hersha Hospitality Third Quarter 2019 Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference call over to Mr. Greg Costa, Manager of Investor Relations. Sir, the floor is yours.

Greg Costa -- Manager of Investor Relations and Finance

Thank you, Mike. And good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust third quarter 2019 conference call. Today's call will be based on the third quarter of 2019 earnings release, which was distributed yesterday afternoon. Prior to proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial positions to be considerably different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

Neil H. Shah -- President and Chief Operating Officer

Good morning, and thank you for joining us on today's call. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

Forecasts for 2019 global GDP growth continue to drift lower and this deceleration has spilled over into the US, as trade tensions and political uncertainty have resulted in a significant impact on corporate and consumer confidence, leading us to remain cautious in our near-term outlook for the lodging industry.

Last quarter, we anticipated the third quarter to be challenging in many of our markets, particularly in July and August, and we brought down our forecasts meaningfully to reflect this outlook. We remain constructive on September, but corporate travel did not rebound. Weakness in international demand persisted and Hurricane Dorian had a meaningful impact on demand and margins in South Florida. Star's top 25 markets recorded negative to flat RevPAR for the quarter. Of our six markets, only the Washington DC track showed positive RevPAR for the quarter.

2019 has been a challenging year for major urban gateway markets. Year-to-date, we have gained 290 basis points of market share, but baseline market performance has been flat to negative in our markets. We are confident that these markets will rebound in the coming years and our portfolio of segment-leading hotels will achieve our targets. In 2020, the majority of our markets have stronger convention and event calendars, most notably South Florida is expected to be the nation's leading market in 2020.

That said, for 2019, we are forecasting softer fundamentals for the rest of the year based on the September trend and early observations from October in our markets. We have taken a fresh approach to our near-term operating and capital allocation strategies and we will outline a few of these initiatives this morning.

Throughout the year, we have been highlighting the three company specific catalysts to drive our performance versus our markets. Our seven repositioned hotels, our seven recent acquisitions, and our two redevelopment projects in South Florida. The primary driver of results for the second consecutive quarter are our seven newly repositioned hotels. We invested $77 million into these legacy assets, where we added hotel rooms, activated restaurants and bars, and created event space, while delivering an upgraded guest experience. These hotels posted a weighted average RevPAR growth of 8.1% with 110 basis points of EBITDA margin growth in the third quarter. These assets have not only recaptured their position in the marketplace, but have established themselves as leaders within their respective comp sets. We anticipate continued outperformance from these hotels to drive meaningful growth for our portfolio for the foreseeable future.

Second, the seven hotels we acquired since June 2016, which reported weighted average RevPAR growth of 4.3% during the third quarter. These hotels provided a strong tailwind in 2018 as well, but their performance was obscured by the disruptive renovations we had ongoing throughout the year last year. We expect these hotels to continue to drive meaningful outperformance as they ramp and garner the competitive advantages of our cluster strategy.

Our third catalysts, the redevelopment of the Cadillac, and the Parrot Key Resort, continued to ramp, but was slower than expected. The two hotels are achieving or exceeding prior peak ADR, but occupancy end margins have been slower to build.

The second and third quarters in South Florida attractive value-oriented leisure traveler that was drawn to hotel openings in South Florida, Puerto Rico and the Caribbean that were closed last year from Hurricane Irma. This resulted in softer demand on the beach and in the keys, which coupled with expense growth hindered EBITDA production again this quarter. Adding to this was the threat of Hurricane Dorian, whose forecasted path led to widespread cancellation across our assets in the region. They had been fully occupied over Labor Day weekend, but these cancellations in conjunction with increased staffing required to secure the hotels for a potential impact led to an approximate $1 million EBITDA loss for our portfolio and significant margin impact.

At the Cadillac, despite the market wide pressure on demand and the impact of Hurricane Dorian, the hotel was able to generate sequential rate growth again this quarter, 18% above our prior peak year in Miami. Despite softer results in the second and third quarter, we remain constructive on our projections for the fourth quarter, as we are seeing an uptick in transient pace for November and December.

In Key West, the market demand waned, but the Parrot Key Resort was able to capture market share and the upgraded resort recorded ADR for the quarter surpassing prior peak levels. Demand in South Florida this year proved to be more challenging than anticipated when we underwrote these holistic transformations. While we remain confident that the two property stabilized EBITDA will surpass the levels we last saw during the markets peak in 2015.

I will now focus on the outperformance of our clusters versus their respective markets, beginning in our nation's capital. Our Washington DC portfolio was our strongest during the third quarter, generating 9.1% RevPAR growth and outperforming the market by 460 basis points, bolstered by favorable comps, Congress in session for three straight weeks in September, and performance at our St. Gregory, which underwent a holistic transformation during 2018. That hotel generated 15.5% RevPAR growth driven by 9.8% ADR growth and continued to gain share following the hotel's upgrade to a four-star lifestyle offering.

In addition, we underwent a strategic shift in our sales strategy at the newest asset in our portfolio, the Annapolis Waterfront Hotel, resulting in over 1,200 basis points of occupancy growth, leading to 19.4% RevPAR growth for the quarter. Pace was robust during the third quarter, and we believe the market is poised to continue this momentum in the fourth quarter with notable events such as the return of the IMF in October, an easier comp in November without midterm elections, and overall, strong market fundamentals in Washington. These factors lead us to believe DC will continue to be one of the better markets in our portfolio for the rest of the year and into 2020 with less new supply deliveries, a more robust convention calendar and easier comps.

Demand to Boston remained strong during the third quarter and our cluster outperformed again growing RevPAR by 4.2% and outpacing the market by 460 basis points. The Envoy continues to be one of the best performing assets in our portfolio and the Boston market and generated a 11.9% RevPAR growth in the third quarter, exclusively driven by ADR growth. Additionally, we expanded our Lookout Rooftop in 2018, increasing our capacity by over 30% with expectations of growing F&B revenue through an increase in private events. Results this quarter were strong in this department and we continue to generate ROI from our recent capital infusion into this premier Seaport asset.

Boston faced a difficult convention calendar comparison this year, but it has been a standout market for us all year long, and we expect this momentum to continue in 2020 with a more robust convention calendar. That said, Q4 will be soft as October was challenging with the Jewish holiday shift, no postseason success for the Red Sox and a difficult comp with the Columbia Gas of Massachusetts explosion causing significant market compression, leading to 8.2% ADR growth for our cluster in Q4 2018.

Despite headwinds for international demand and the impact of Hurricane Dorian, our comparable South Florida portfolio generated positive RevPAR growth and outperformed the market by 590 basis points. The bright spot during the third quarter was at our Ritz Carlton Coconut Grove generating 29.9% RevPAR growth on an occupancy increase of approximately 1,500 basis points. The hotel underwent a transformation in 2018, and these renovations attracted higher trends in demand in the third quarter, which combined with continued success at the redesigned restaurant allowed us to capture incremental room revenue and grow margins by 470 basis points.

After softer second and third quarters, the fourth quarter is showing stronger pace around high demand weekends such as the Auto Show [Phonetic] and Art Basel. We believe the positive momentum in the fourth quarter will continue into next year supported by our ramp at the Cadillac and Parrot Key, the redeveloped Miami Beach Convention Center attracting high-profile events and the Super Bowl in February. Miami was also recently labeled as the city with the second highest growth economy in the country and among the most significant in terms of job creation. A growing in more diverse corporate base will increase hotel demand in the Coconut Grove market.

Philadelphia was a very strong market for our portfolio in the first half of 2019, as our recently renovated hotels took advantage of the city's robust convention calendar. However, the third quarter bumped up against a difficult comp with our cluster generating 10.2% RevPAR growth last year. Despite our 1.2% RevPAR loss this quarter in Philadelphia, the Hampton Inn did continue to take advantage of increased activity at the Convention Center, outperforming the comp set by 400 basis points by growing both occupancy and rate. We anticipate this trend will continue into the fourth quarter with a busy group calendar in November and December.

Despite the meaningful increase in new supply in Center City, we remain confident in the long-term demand fundamentals of Philadelphia, driven by the growth in investment in technology, media, healthcare and educational sectors across the city, and we believe our purpose-built cluster will continue to outperform their competitive sets.

Out on the West Coast, we had mixed results in the face of new supply and decelerating corporate travel, which led to a 2.2% RevPAR loss for our portfolio in the third quarter. The Hotel Milo in Santa Barbara was our best performing asset on the West Coast, generating 5.8% RevPAR growth. The hotel's newly implemented sales strategy allowed us to drive rates from a robust group calendar and favorable weather during September.

Despite new supply continuing to be absorbed in the Santa Monica sub-market, our Ambrose Hotel captured share and grew RevPAR by 3.1%, driven by a 4.2% ADR increase. The hotel's 2018 renovation has directly led to an increase in groups, our mid-week corporate and weekend leisure customer base. And up in Monterrey, our Sanctuary Beach Resort registered over 1,000 basis points in margin growth, as the hotel continues to ramp from its renovation in early '18.

Our hotels in San Diego, Los Angeles and Sunnyvale all face new supply and coupled with weaker corporate and international demand led to flat to slightly negative results. In Seattle, demand remains strong with 9.9% demand growth for the market in the third quarter. However, the new supply that has come online this year continues to have a significant impact on rate growth at the Pan Pacific. Our West Coast markets will continue to face these headwinds in the fourth quarter, which will impact RevPAR growth. This will be most notable in San Diego, which generated 21.2% RevPAR growth in the fourth quarter of 2018 on citywide events that do not repeat this year. However, we remain constructive for our West Coast hotels in 2020, with positive results thus far from our RFPs, significantly strong group calendars in Los Angeles and San Diego and continued absorption of new supply in Seattle.

New York City remained our toughest market from a growth perspective. Occupancy remained robust during the third quarter as our portfolio registered close to 97% occupancy. However, demand growth did not equate to rate growth as our portfolio generated a 2.9% RevPAR loss, which was impacted by our elevated supply deliveries, decelerating demand from the international traveler and from rate sensitive leisure travelers generating more stage than historically price agnostic business travelers.

Despite several challenging quarters in New York, there have been a few bright spots at the end of the month with demand during the UN General Assembly, the best market has seen in years and our portfolio taking advantage of this compression week outperforming the market by 210 basis points. For the week, ADR for our New York City portfolio was $385 at nearly 99% occupancy. For the quarter overall, however, our attempts to push ADR led to market share decline this quarter and with declining ADR margin suffered.

As previously mentioned supply deliveries were higher in the third quarter, which impacted pricing power. We anticipate supply growth for the year to be 3.7% across Manhattan and will continue to pressure ADR and the gate RevPAR improvement in the fourth quarter. The shift of the Jewish holidays to the first two weeks of October were impactful and our New York portfolio bumps up against a difficult comp when our cluster generated 6% RevPAR growth in the fourth quarter of last year.

Before I transition to Ash to discuss our margins, the balance sheet and our updated 2019 guidance, I wanted to quickly update you on our capital allocation strategy. We began the year with expectations for meaningful EBITDA and free cash flow growth that we intended to use to reduce leverage. With lower expected free cash flows and an uncertain environment, we are accelerating our leverage reduction plan by actively marketing several hotels for sale. With the disparity between public and private market values in major gateway markets, we can accretively transact on two to four hotels or $50 million to $75 million in net proceeds within the next two quarters. Proceeds from these asset sales will be utilized to pay down our preferred C shares or debt.

We are very encouraged with the current interest in the assets that are being marketed and the inbound interest for other assets in our portfolio from a variety of domestic and international buyers. Depending on our outlook for 2020, we may increase the number of sales we target for 2020. We look forward to sharing an update with you on our fourth quarter earnings call, if not sooner.

During the third quarter, we also repurchased 659,000 shares at a weighted average price of $14.50, capitalizing on the market dislocation that took place in August, when the stock was trading more than 30% below our internal net asset value. We remain focused on our leverage reduction strategy, but we'll advantageously buyback shares when extreme periods of market volatility are prevalent.

Our industry has been in a low single-digit RevPAR environment and our outlook for the next several quarters shows that this trend will likely remain. In this environment, outperformance alone is not enough to drive growth. To reduce leverage, we are actively pursuing several hotel sales. To sustain our market leading margins, we are also executing a cost containment strategy that Ash will discuss in his remarks.

Our management team has successfully navigated three cycles together and can boost [Phonetic] the highest level of shareholder alignment in our sector. We are confident that the strategies we are deploying will lead to value creation for our shareholders, whether this cycle is over, or we are just in a growth pause.

Over the last several years, we upgraded our portfolio to one of the highest quality platforms in the industry. We did this by recycling close to $1 billion of hotel assets into new investments in the most sought-after markets in the country. By allocating approximately $200 million to reposition our highest potential hotels and by transforming two of our largest EBITDA producing assets following Hurricane Irma.

With all of this disruption behind us, along with our lower capex load for the foreseeable future and strategic leverage reduction plans in place, the stabilization of our portfolio is within sight. And with our stock trading more than 30% below our internal NAV and 8% dividend yield with one of the lowest payout ratios in the sector, we believe this is a great entry point for investors.

With that, let me turn it over to Ash, to discuss in more detail, our margin performance, balance sheet and our updated guidance for the year.

Ashish R. Parikh -- Chief Financial Officer

Great. Thanks, Neil, and good morning, everyone. As mentioned, macro headwinds and the continued strength of the US dollar were prevalent during the third quarter, leading to a slowdown in corporate transient and international travel, which substantially impacted pricing power and our ability to drive both top-line and bottom line growth, despite record occupancies throughout the portfolio.

Our RevPAR mix this quarter significantly impacted operating margins, as our occupancies remain extremely strong. In a number of markets, they hit new highs, while we experienced ADR losses from slowing trends and new supply deliveries. For example, as Neil discussed, in our New York portfolio we maintained extremely high occupancy of 97%. But realize a 2.9% ADR loss, leading to margin losses of 250 basis points. These assets deliver industry-leading GOP margins exceeding 50% and EBITDA margins exceeding 37%, but with all of the RevPAR loss coming from ADR is difficult to maintain these type of margins.

We witnessed a similar dynamic in our Philadelphia portfolio and in certain properties on the West Coast. These portfolio dynamics combined with disruption from Hurricane Dorian resulted in greater margin pressure than we anticipated 90 days ago. But in the face of these challenges, we remain encouraged that our portfolio was able to generate 33.6% EBITDA margin, one of the highest among our peers. Despite the difficult operating environment in the third quarter, our unique operating model in alignment with our management companies provided us flexibility to control labor costs, limiting our margin loss and even yielding margin expansion at several of our properties.

As forecasts for demand growth remains strong in our markets into 2020, we have an active measures to mitigate margin loss, while defending our occupancy and market share at the property. We believe our focus on cost containment initiatives will bolster the cash flow profile of our assets and drive EBITDA growth even if near term fundamentals remain muted. We've been working with our property teams to evaluate all operating departments to identify opportunities for operational inefficiencies, seeking out ways to reduce our property level expenses with minimal impact of the guest experience. And we have already started changing staffing model, restructuring operating model.

Additionally, we have realigned our revenue management and sales strategy to ensure that we continue to outperform our comp set, while limiting our [Technical Issues] to achieve these results. We are also evaluating our vendor contracts with a particular focus on items such as property maintenance and outsourced labor to ensure that our labor models are structured appropriately for the current operating environment.

And lastly, in coordination with our EarthView team, we continue to look at unique operational strategies to reduce our rooms department and utilities costs and continue to look at energy saving capital expenditures that generate immediate ROIs in the mid to high teens.

Before moving to capital expenditures, let me spend a minute on our margin performance at the Cadillac and Parrot Key. As Neil discussed, Hurricane Dorian's forecasted path had a significant impact on the overall performance of our South Florida cluster last quarter, but most notably at the Cadillac and Parrot Key Hotels. Last minute cancellations and increased staffing required to secure the hotel resulted in over 1,600 basis points of margin loss at the Cadillac and close to 1,300 basis points of impact at the Parrot Key, during the last two months of the quarter.

As we've noted on past calls, these assets remain in their ramp-up period. And in light of recent headwinds margins will stabilize at a slower rate than our top line results. The staffing, marketing and operating expenses incurred to drive revenues are critical to reestablishing these properties and our ability to stabilize these assets over the next 24 months will be driven by our operating expertise and the significant investments we've committed to the assets on the operational front.

As we look out to 2020 with a full year of stabilization in the rear view mirror and a more positive group and transient demand backdrop in South Florida, we are confident in our ability to reduce these expenses, allowing us to drive bottom line performance at these hotels. As discussed last quarter, the majority of our large-scale capital projects are behind us, and we continue to forecast limited renovation-related disruptions over the next few years, allowing us to focus on our asset management initiatives and to drive free cash flow.

During the third quarter, we allocated $12.7 million to capital projects versus $22.6 million in the third quarter of 2018. For 2019, we anticipate our total capital spend, including maintenance capex, but excluding deposits for 2020 capital projects to be in the range of $33 million to $35 million versus $90 million in 2018.

With the reduction in capex spending, calculated dispositions across the next several quarters and stabilization of assets that have undergone large scale renovations, our free cash flow is forecasted to increase allowing us to further reduce our payout ratio. We believe our payout ratio can remain close to, if not below 50% even with the planned disposition, reduce cap spending, stabilization of our assets and interest expense savings from our recent pre-financing activities. These items provide us a significant amount of cushion as we look at our dividend profile.

So we've been active in the debt markets with what appears to be a more accommodating near-term interest rate environment. During the quarter, we took advantage of the strength of the debt markets as we refinanced our $300 million Senior Unsecured Term Loan and entered into a series of new swap contracts to fix the interest rates on the remaining $400.9 million of Senior Unsecured Term Loan eliminating all of our debt maturities until 2021.

The term loan refinancing in new interest rate swap agreements, in conjunction with the mortgage refinancings we completed at our Hyatt Union Square and Hilton Garden Inn Tribeca in the second quarter resulted in estimated interest expense savings of $2.2 million in 2019 and $6.7 million of savings run rate in 2020. With the refinancing of these near term maturities, we continue to improve our financial flexibility as we have ample capacity with cash on hand and our $250 million revolver to execute our business [Phonetic].

So, I'll finish with our updated full-year guidance for 2019, which we presented in our earnings release published yesterday. As we discussed, third quarter trends for the lodging industry underperformed expectation and decelerating economic mix -- metrics have been impactful to consumer and corporate confidence. We saw rapid deterioration of RevPAR trends for the majority of the top 25 markets in September, which have carried into the fourth quarter in several markets, as October proved to be challenging with the shift of the Jewish holidays.

Pace of the fourth quarter is positive in our South Florida and Washington DC clusters, but we are anticipating continued softness in the remainder of our market. Accordingly, we are revising our full-year guidance to reflect the challenging operating environment.

We tightened the range of our forecasted comparable portfolio RevPAR growth, which is now between 0.75% and 1.25% as well as our EBITDA margin loss at 100 basis points to 75 basis points. We are now forecasting FFO per share between $1.94 and $1.99, and adjusted our full-year EBITDA range to be between $165.5 million and $167.5 million.

So this concludes my portion of the call. We can now proceed to Q&A, where Jay, Neil and I are happy to address any questions that you may have. Operator?

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Michael Bellisario of Baird. Please go ahead.

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

Good morning, everyone.

Jay H. Shah -- Chief Executive Officer

Good morning, Michael.

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

First question for you, maybe could you quantify the cost savings -- those cost saving initiative you talked about. And then just kind of what you're thinking about in terms of the timetable there to eventually realize those savings?

Jay H. Shah -- Chief Executive Officer

Sure. So Michael, we've started a lot of those initiatives, as we speak. We are continuing to look at all of the budgets for the properties, which are not finalized yet, but for a baseline we are targeting about $3 million of cost savings from these new initiatives. I think the majority of those will be enacted by the end of the year and we will realize those savings in 2020.

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

Got it. That's helpful. And then maybe can you just remind us again of your kind of your threshold for share repurchases. Your rationale for repurchasing shares during the quarter given that the fundamental outlook was weakening. And just how we should think about any opportunistic share repurchases and use of capital going forward, especially ahead of any disposition proceeds coming in the door?

Neil H. Shah -- President and Chief Operating Officer

Sure, Mike. Yeah, we were active in August, when we bought back about 659,000 shares, earlier in the year, we acquired about 273,000 shares. So for the year close to $15 million in buybacks. We target buybacks, it's clearly opportunistic. It's not a strategy. But when we are trading at more than a 30% discount to NAV, we are looking at the opportunity for buybacks.

Now, we are also focused on leverage reduction and that's always the balance in our mind. Throughout this year, we've been using free cash flow to pay down debt, as we mentioned, as we've been seeing our free cash flow expectations come down. We are now going to pursue some asset sales to help reduce leverage. Reducing leverage remains, I think our number one goal right now. But when there is very attractive pricing, a lot of volatility in the markets, we continue to have authorization to buy back stock.

I think as I mentioned, we are -- in our remarks, we were planning to have $50 million to $75 million proceeds from some sales. We are planning to use that for debt pay-downs and will continue to be opportunistic on the buyback front.

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

And then just lastly on the asset sales, how should we think about pricing from an EBITDA multiple or cap rate perspective and just kind of how you're thinking about which assets you're pursuing to sell?

Neil H. Shah -- President and Chief Operating Officer

At this time, Mike, we're focused on assets that have less EBITDA contribution to the portfolio and can sell at multiples greater than where we're trading, as a company today, we're focused on some assets in New York City, focused on some joint venture assets. We've gotten a lot of inbound interest in Miami. And so there select assets across the portfolio that we're targeting today, we've mentioned in our remarks, two assets to four assets $50 million to $75 million in proceeds. Depending on our outlook for next year, we could increase that the acquisitions market, the private market, in particular is very robust and the market is not, there has been less kind of high-quality urban gateway hotels available on the acquisitions market for the last year or two, and that's leading to a lot of pent-up demand from buyers for those kinds of assets. So we see it being very attractive and that's what's leading us to consider more asset sales.

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

That's helpful. Thank you.

Operator

And the next question we have will come from David Katz of Jefferies.

David Katz -- Jefferies -- Analyst

Hi, good morning everyone.

Jay H. Shah -- Chief Executive Officer

Good morning, David.

David Katz -- Jefferies -- Analyst

I wanted to just ask about the guidance and I appreciate all of the detail, Neil, that you gave upfront -- both of you that you gave upfront. I'd just like to get a clear sense for what your underwriting in that guidance? And does it leave some room to the downside, you know how in a scale of 1 to 5, how conservative, I suppose is one way to ask the question? That's what I'm looking for.

Jay H. Shah -- Chief Executive Officer

You know, David, we only have top line results for October right now. And as we looked at our forecasts as the remainder of November and December, we are seeing that there it has definitely been some slippage. We initially gave guidance back in July for both of those months and then we've tried to adjust our forecast accordingly. I don't think that in anyway we have set these guidance ranges to stand back to numbers are certainly that there -- these are the -- it couldn't go to the downside. I think the market will trend in, travel right now would be so volatile and the booking window is so sure that we looked at our October results for top line and just as we got it.

David Katz -- Jefferies -- Analyst

Got it. And I know you've talked about the asset sales in some parameters, but just timing and order of magnitude on when we might see those and just how big we might be talking about?

Neil H. Shah -- President and Chief Operating Officer

Sure. David, we're targeting two to four hotels for sale within the next two quarters. We'll hopefully be able to provide a little bit more of an update by our next quarterly call, the year-end call, early next year. And if we make faster progress, we will release accordingly. We're focused today on assets that aren't significant EBITDA contributors, because we are trying to bring down the debt to EBITDA metric. And so we are focused on high multiple, low EBITDA assets today. I think the -- as you've seen from the sales processes of some of our peer companies, as well as in the marketplace there is very strong values being paid by the private market in New York City, in Miami, in all of our markets for that matter, Los Angeles.

And so at this stage we're focused on smaller hotels, but that can release $50 million to $75 million or so of proceeds. Our preferred C tranche of preferred is, has a coupon of 6.875% and is $75 million in total. Our first step is to, to use proceeds to pay that down and that would be clearly accretive to cash flow. Now there are -- there, we continue to get inbound interest on some of our larger assets that have more EBITDA and we are exploring those kinds of offers as well. But at this stage, we don't believe that we're not planning to execute on those transactions, but we'll see how the world turns across these next couple of months and what level of cash flow we can expect next year and how much we can reduce debt with just organic cash flow in these two to four asset sales.

David Katz -- Jefferies -- Analyst

Got it. It's very helpful. Thank you.

Operator

Next we have Shaun Kelley, Bank of America.

Dany Asad -- Bank of America -- Analyst

Hey, good morning, guys. This is actually Dany Asad on for Shaun. And just one follow-up on the asset sale question. Are you targeting that you guys have given a lot of detail already, but are you targeting a specific asset type, so is it full service or limited service. And then given the health of where the transaction market is today and how each of those types are performing. Is there any particular reason you'd want to sell one over the other today?

Neil H. Shah -- President and Chief Operating Officer

Dany, on the two to four that we're exploring today, they are -- two our full service, two our select service. And so it's not a call on segment. It's really, what's driving it is, the multiples we can get in the private market for the assets. How much capex would be required, if we were to hold on to the hotels and try to make them grow more. And geographically, we see very strong bids for assets in New York City. And our outlook for New York is still mixed for the next year. So we are probably more focused there than other markets in our portfolio.

Dany Asad -- Bank of America -- Analyst

Okay. That's probably fair. Okay. And then just my follow up. So, if we're thinking about the cost savings initiatives that you guys have laid out this morning on the call. How do you protect, how do you balance protecting margins and like making sure you have the adequate resources to deliver next year, especially since occupancy there are so high across your portfolio and like -- and yeah, between those two?

Ashish R. Parikh -- Chief Financial Officer

Yeah. So, Dany this is Ashish. So, we are really targeting things that will be guest facing. For instance, I've mentioned several things in my script, but even when it comes to something like our EarthView program, we are looking at ways to focus on energy, water, chemical use, looking at staffing as it relates to those items, especially our laundry services and housekeeping. It really wouldn't be something that the guest would focus on. I'm also looking at more on property allocation that comes to sales and marketing, as it comes to revenue management, ways to consolidate those positions and ways to consolidate property level managerial position, ways to cut down on front desk.

So we are looking at a lot of items that won't impact directly to guest there. There certainly will be some adjustments necessary from staffing, from managerial work, but this is something where -- it's not new, we work on cost containment plan. All the time, I think it's just an environment, its a little bit more unique in that. We're not seeing any type of demand shop. We're not seeing occupancies loading. So, you have to look at new ways that you can cut these costs, be late in the cycle without really impacting guests. And we feel very good about where we are today in identifying this opportunity.

Dany Asad -- Bank of America -- Analyst

Understood. Thank you very much.

Operator

And next we have Ari Klein of BMO.

Ari Klein -- BMO Capital Markets -- Analyst

Thanks. And maybe just following up on the asset sale question. Can you just talk about update us on your leverage targets and maybe timing on when you expect to get there?

Jay H. Shah -- Chief Executive Officer

Sure. Our leverage targets kind of remained four times to five times debt-to-EBITDA metric. We continue to -- we think that kind of the greatest contributor to bringing that in-line is going to be the ramp up of our newly acquired and newly repositioned assets, particularly the trends, the South Florida assets as they ramp up. So it's organic EBITDA growth is the primary way of getting there. We're also reducing capex spending in '19 and '20 and for the foreseeable future. And as we've discussed so far, we are now calculated -- we are considering calculated property sales to also bring that in.

We think that there is, where -- we believe that with the ramp up in the portfolio, with the pay downs we have planned and the property sales that we're considering. We believe we can get there within a couple of years. Obviously, it really does depend on how robust the markets are, or how difficult they are in 2020. But we think by 2021, we have -- we believe we can get there.

Ari Klein -- BMO Capital Markets -- Analyst

And then maybe just turning to New York markets obviously been pretty challenging. As you look to 2020, what kind of your expectations there -- any potential positive that you see. And then maybe can you quantify how much of a drag that market has had on EBITDA, year-to-date EBITDA margins year-to-date?

Neil H. Shah -- President and Chief Operating Officer

I'll take just the first part of it, just the outlook for New York next year, I mean, for the fourth quarter, we think it is going to continue to be challenging. We had tough comp in the fourth quarter for New York. But as we look forward to next year, there are some good signs. We never think of New York as a big convention kind of market. But there is a Convention Center there and it is growing and next year there is 10% to 12% increase in convention room nights expected in the market.

The big challenge in New York is the -- with the uncertainty in corporate transient and international demand, we've -- this year we started the year with government shut down and then we -- throughout the middle of the year and into the fall, we've had trade issues. We would expect that to be less of a drag next year, but obviously it remains uncertain. The strong dollar and international demand has been highly impactful in New York. We'd expect that to not be as much of a sharp reduction next year. And so that gives us a little bit of confidence. But primarily the supply side of the equation in New York, the demand is there, it's just, there's a lot of new supply, some of it hotel supply, some of it just continued penetration of the short-term rental space.

We do expect New York to still have meaningful new supply next year. We're finishing the year, this year, where we believe it's around 3.7% new supply growth in 2019. 2020 is going to be very similar to that.

There is -- and one fortunate thing about similar supply growth is that it's just where it's coming. This year we had it really hit every single one of our sub-market. Next year, it looks to be a little bit more isolated in the financial district in the far West side of Manhattan, where we do have assets, but we also have some other hotels in other sub-markets that should also be able to grow next year.

New York, according to the kind of consultant forecasts is expected to be a little better next year than this year, but we continue to think of it is a mixed market and not one that we are ready to bang the table about.

Jay H. Shah -- Chief Executive Officer

And just to add you and asked you know, how much of a contributor was New York to some of this adjustment in guidance. So, if you just take a look at our guidance from mid-year from July to the end of quarter four, we're contributing [Phonetic] about $1.5 million of EBITDA softness in the third quarter and four quarter that contributed to our EBITDA guidance adjustment.

Ari Klein -- BMO Capital Markets -- Analyst

Okay, great. Thanks for the color.

Operator

Next we have Bryan Maher of B Riley.

Bryan Maher -- B. Riley FBR -- Analyst

Yes, good morning. So, admittedly your clusters all have certain uniqueness to them. But when we look at the third quarter results and now after 4Q and 2020, what do you think are the biggest contributing factors to the reduction in your RevPAR expectation? is it more supply? is it lower demand? is it one-time impacts? Can you talk to that?

Neil H. Shah -- President and Chief Operating Officer

Sure. Bryan, we've been dealing with elevated levels of supply in these kind of global gateway markets for the last several years. And that does make any kind of softness in demand much more pronounced. But the supply we can predict upfront and we can see it, and we have visibility into it. So we would say that the biggest kind of impact is really been the softness in demand, and it's both corporate transient and international demand. You might say how could that be if you're at 95%, 97% occupancy, it's because the market mix has changed. We used to be able to count on at least 50%, 60% of our mix being our corporate transient, but these days in New York, there is a lot more leisure and they are much more price sensitive and much more willing to try short-term rentals or other alternatives.

So we do believe it's a demand issue. We have highly concentrated kind of positions in major urban gateway markets that are driven by corporate transient and international demand. And this year has been a very soft year for those two segments.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. And then when you think out the 2020, you've mentioned both in your release last night in your prepared comments, the healthier convention calendar. How much of uplift is that having on your thoughts for RevPAR next year? I know you haven't provided any guidance for 2020, but is it to that 50 basis point impact, I think it's a full percentage point impact to RevPAR because of the calendar?

Neil H. Shah -- President and Chief Operating Officer

I think it could be a point, a percentage point. I mean, it leads to compression in the markets. You know as we've been discussing, and I think a lot of, there has been a lot of research on this, but they are just the number of compression nights, and 2019 have been significantly lower than historical levels and some of that is new supply and some of it could be in our markets, the convention calendars in these markets.

As we look forward to next year, convention room nights, I'll just run through a few of our markets. In Boston, there is a 28% increase in projected room nights from the convention space. Los Angeles, up also over 20%. Miami is nearly doubling, nearly a 100%. And that's not just the Super Bowl. The Super Bowl does lead the first quarter to be very strong, but throughout the year, there is also a significant increase in that convention centers booking. As you know the Convention Center had been closed for renovations for several years. New York, I mentioned earlier is also up 10%. And Washington DC is up nearly 20%, 25%. So it's meaningful. And we believe that they can lead to compression. And if there is some improvement in corporate transient and international demand that could be something that could really lead to some significant performance in our markets.

Bryan Maher -- B. Riley FBR -- Analyst

Okay, thank you.

Operator

And next we will have Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning, guys. Want to ask a little bit about your independent hotels. I know you mentioned performance at a few of them in the quarter. I think you have maybe 17 in total. And the question is really, do you feel if some of the soft brand product that, that's coming into lot of [Phonetic] markets may be disproportionately impacts your hotels that are not yet affiliated with soft brands?

Neil H. Shah -- President and Chief Operating Officer

You know, Chris, I don't think so. We think about -- we're always looking at all of our hotels and all of the soft brands are always knocking on our door to put their brands on these hotels. But we just can't make the math work on a lot of them. We have many Autograph Collection hotels and they make sense and they lead to good results on those hotels. But for our pure Independence, it is -- it hasn't -- that hasn't been, we don't believe that adding a soft brand can help EBITDA production. Our independence -- our pure independence are smaller hotels and kind of great destination neighborhoods with a -- with kind of a design and kind of lifestyle, kind of positioning. But there are hotels that are -- where we've either leased out food and beverage, or we have limited food and beverage. And so we're able to drive not only better RevPARs than most of our branded hotels, but also generally better margins.

Our independent portfolio has continued for the last several years to be the highest growth part of the portfolio. And so, we don't believe that they are significantly impacted by the growth of other soft brands. It's about -- I think, on -- it's about $35 million to $40 million of EBITDA that we're generating from these independent hotels. We believe that they can -- they will continue to grow faster than the rest of our portfolio. And so we think that they are actually well positioned today. But they do big numbers in the transaction market, because it provides an opportunity for a new buyer to consider branding a hotel, or to reoriented and kind of change it. So, we are considering a handful of independent hotels in some of our sale discussions as well.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. I appreciate the color. And then just on the cost initiatives for a second. Sometimes, I guess there is a view that, when -- I don't know, if this is considered a break the glass kind of move. It doesn't sound like it. But, I guess, I'm trying to square kind of commentary about 2020 versus these cost cuts or lot of times viewed as a -- you're making a call that, that cost need to be cut, because revenues aren't coming through as expected. So, how do we kind of jive that, -- are these just things that may be we're -- we're being done before that in retrospect you wish you had, or is it something deeper than that?

Jay H. Shah -- Chief Executive Officer

Yeah. Chris, as I mentioned, we -- look, we are always looking at ways to cut costs. And this is not -- I wouldn't characterize it, break the glass as much as, just in different operating environment. And we are late cycle. We are running record occupancies and we're not forecasting those occupancies to drift down significantly, if at all. So we are just reevaluating sort of all of our budgets going to kind of zero base budgeting you know where we are selling the new initiatives that we can install at this point. And we're just focusing more of our time on that. As we have less disruption, less capital expenditures, we're not really -- in the acquisitions market at this time. So, we are focusing more on -- look, if occupancies hold up and rates remain challenging, we are still seeing property tax increases, insurance increases, how do we mitigate all of that to maintain our margin environment. And that's really kind of the focus right now.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Fair enough. And then just lastly from me, regarding the share repurchase, totally get the rationale for why you did -- what you did in the third quarter. I guess the question would be now that you're committing to an accelerated leverage reduction program and more asset sales. I mean, do you think you have -- realistically have some bullets left there, or do you think from here on out, it's pretty much straight debt reduction?

Neil H. Shah -- President and Chief Operating Officer

No. Chris, we are probably prioritizing debt reduction, but we still have bullets left. This portfolio is a very strong one. And then on a cash flow basis, we are very secure in kind of our dividend, we believe that we could withstand a significant downturn in the industry, not one that we expect, but we pressure test our company for it. And so we will continue to be opportunistic in the buyback market. I think that as we continue to find opportunities to sell hotels, we will balance buybacks with our leverage reduction strategy, but we believe we can do both.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Fair enough. Appreciate the color. Thanks guys.

Operator

Next we have Anthony Powell of Barclays.

Anthony Powell -- Barclays -- Analyst

Hi, good morning. You mentioned a few times that you're seeing is the higher mix of leisure customers in some of your markets. When we look at leisure travel trends across a variety of industries, the airline increases. They are pretty strong. So is there a way for you or the industry to do a better job of getting more pricing out of these leisure customers at any of the hotels?

Jay H. Shah -- Chief Executive Officer

Yes. I think there will be opportunities. I think, as Neil and Ash have both mentioned, the consumer is -- has -- is and always will be a bit more of a price shopper. That being said, I think, we haven't been able to compress in our markets, because of this continued supply increase. And I think what, what gives us some confident as we look into 2020 is that those supply isn't tapering meaningfully in across our market portfolio, is actually peaking next year. The demand fundamentals are growing at a higher rate than they have. And so we're seeing a narrowing in the delta between supply and demand that gives us confidence for the coming year to be able to have more compression nights in our markets and be able to drive with some pricing power and traction.

Anthony Powell -- Barclays -- Analyst

Right. Okay. And also you talked a few times about a short-term rentals. There is a referendum yesterday in New York [Phonetic] City about Airbnb that resulted [Phonetic] new restrictions there. Do you see that as a new method for the industry to regulate that short-term rentals have been more over the coming years?

Jay H. Shah -- Chief Executive Officer

Yeah, I don't know, what method -- I don't know the specifics around that. But I think there is clearly been a regulatory, cities are sensitive to it. And we're seeing it all over the world that this kind of rentals, short-term rentals not only hurts hotels, but really hurts the affordable housing market and leads to just more -- released [Phonetic] stress to these markets like in Madrid or in major cities in the Europe as well as the US.

And so I think the growth rate of these short-term rentals will likely continue to decline. It's just -- at the same time, there is -- they are getting more and more part of the leisure customers kind of alternative in their mind. And so we do see further penetration of it. And then it is -- and it comes up in all of these kind of major urban gateway markets that we're in today.

We think it's declining in terms of impact, but it's still very real and significant today in most of our markets. Santa Monica, has done a very good job of kind of preventing, and you see we are having very strong performance there. But most other cities are either not regulate -- not enforcing the regulations enough, or they haven't gotten to that point yet. And hopefully across this next year, we'll see more of it, more regulations for that.

Anthony Powell -- Barclays -- Analyst

So do you think the impact has been less this year or more, because it seems like this year in some of the markets, there has been a bit more chatter about just the impact of short-term rentals relative to let's say '18 or '17?

Jay H. Shah -- Chief Executive Officer

Yeah. I think the growth rate has come down, but the impact was more significant. We think that they've penetrated a little bit more, especially with this leisure customer. And again this is a function also that we have less corporate transient in these markets. So we're having to go after the leisure market. And then the leisure market they are price sensitive, because they are, they are looking at short-term rentals as an alternative.

Anthony Powell -- Barclays -- Analyst

Okay. Thank you.

Operator

Next we have Barry Oxford of D.A. Davidson.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks guys. You talked very nicely about the supply issues in the Europe. But you also referenced the West Coast and in particular, Seattle. Can you give us a little color as far as maybe new product that you guys see coming online out there, or do you see those markets kind of firming up in 2020?

Neil H. Shah -- President and Chief Operating Officer

Yeah. In Seattle, in particular, the biggest impact was this 1,200 room Hyatt that opened late last year, and that's had a very significant impact on all Seattle hoteliers. It was a major Convention Center hotel that opened before the Convention Centers expansion was complete. And so that has been a really significant impact this year. We expect that to be absorbed by next year given how strong demand has been in the market. But that said, there are still a couple of hotels that will open in 2020 in Seattle. They are not nearly as large, but they do play in the same geographic markets as we do. So we don't think it's going away, the kind of supply challenge in Seattle, but it should be less impactful than the 2019 supply side.

On the West Coast, you started with the West Coast, I just mentioned LA and San Diego had a lot of new supply in '19 as well. We are seeing some in 2020, but we feel like in San Diego, well, in San Diego and Los Angeles, it's -- we still have new supply coming online in the select service space in Los Angeles and San Diego next year. So we would consider peak new supply to be 2020 for some of those markets on the West Coast.

Barry Oxford -- D.A. Davidson -- Analyst

Great. And then switching gears, when you were talking about lower capex, we see quite a substantial reduction from '18 to '19. What type of reduction do you think we'll see in the capex spending from '19 to '20?

Ashish R. Parikh -- Chief Financial Officer

Hi, Barry. This is Ashish.

Barry Oxford -- D.A. Davidson -- Analyst

Yeah.

Ashish R. Parikh -- Chief Financial Officer

Now, we are not forecasting any increase in capex. So probably target the same general level of capex in 2020.

Barry Oxford -- D.A. Davidson -- Analyst

Okay. Perfect. Thanks guys.

Ashish R. Parikh -- Chief Financial Officer

Thank you.

Operator

Well, at this time, we will then conclude the question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Gentlemen?

Neil H. Shah -- President and Chief Operating Officer

Well, thank you everyone for your time. Today, I know -- many of you have a lot of calls to go at the rest of the day, but please feel free to give us a ring directly here at the office. Jay, Ash and I are standing by for any additional questions. Thank you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Greg Costa -- Manager of Investor Relations and Finance

Neil H. Shah -- President and Chief Operating Officer

Ashish R. Parikh -- Chief Financial Officer

Jay H. Shah -- Chief Executive Officer

Michael Joseph Bellisario -- Robert W. Baird -- Analyst

David Katz -- Jefferies -- Analyst

Dany Asad -- Bank of America -- Analyst

Ari Klein -- BMO Capital Markets -- Analyst

Bryan Maher -- B. Riley FBR -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Anthony Powell -- Barclays -- Analyst

Barry Oxford -- D.A. Davidson -- Analyst

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