Greetings, welcome to the Pebblebrook Hotel Trust first quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question today, you may press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you, sir. You may begin.
Thank you, Donna, good morning, everyone. Welcome to our first quarter 2019 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. Before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws, these statements are subject to numerous risks and uncertainties as described in our 10-K for 2018 and our other SEC filings, future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, April 26, 2019, we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com.
The first quarter of 2018 started off well for us as we exceeded our outlook for same-property total RevPAR, adjusted EBITDA, and adjusted FFO. In addition to the $252 million of property sales in February, we also executed a contract to sell the Hotel Onyx in Boston at an attractive price and multiple. Last night in the earnings release, we announced several operator and brand changes at our hotels. We've been busy since we last updated you just 60 days ago. In the first quarter, same-property RevPAR increased 4.3%, same-property total RevPAR increased 4.4%, which was above our outlook and driven by a strong growth in food and beverage revenue, which was up 5.3%. Our RevPAR increase was a result of a very healthy 5.3% increase in ADR, with occupancy declining 100 basis points.
Our best-performing markets in the quarter, as expected, were our hotels in San Francisco, which generated a RevPAR increase of 23.7%. This was above the San Francisco urban RevPAR gain of 17.8%. This growth was fueled by the more than 130% increase in convention center attendees in the quarter versus the prior year, as well as continued strong corporate and leisure demand in the market, which created many compression nights for our hotels throughout the quarter. Key West and Naples, Florida also were strong markets for us. Our Southern Florida markets grew RevPAR 7.1%, led by The Marker Key West and Southernmost Key West. We continue to see a resurgence in leisure travelers returning to South Florida following the decline in demand that we experienced after Hurricane Irma in September 2017, we expect this favorable trend to continue throughout 2019.
Boston was another solid market for us in the first quarter, producing a 7.7% RevPAR gain compared with a 1.7% RevPAR increase in the Boston CBD. This was driven by The Westin Copley Boston, which is ramping up nicely following its comprehensive renovation in 2018, as well as Revere Boston Common, which also had a strong quarter as it continues to ramp up with some healthy share gains following its redevelopment in 2017. Our underperforming markets were the ones we expected, though they performed slightly worse than we thought. In addition to supply growth, Chicago also suffered from a weak convention calendar and a tough winter as the Chicago CBD RevPAR declined 11.4%, with our Chicago hotels faring worse at down 16.5%. This was primarily due to the continued Marriott integration challenges at our Westin Michigan Avenue, where RevPAR declined 24% as our booking production, unfortunately, continues to be poor.
Our Hotel Chicago actually outperformed Chicago CBD as the hotel continues to gain share from its conversion to a Marriott Autograph. Portland was also a tough market as RevPAR was down 9.6% in the urban track, with our hotels declining 10%. West L.A. was another challenging market for us, again, primarily due to supply growth. West L.A. was down 3.6%, and our hotels declined 5.1%. Our weaker net market performance was largely due to the renovation at Mondrian and the negative impact from the dramatic decline in redemption rooms and revenue at our Méridien in Santa Monica due to the Marriott integration of its various loyalty programs. Overall, for the quarter, transient revenue, which made up about 72% of our total portfolio room revenues, increased 1.5% compared to the prior year. Transient ADR increased 3.8% for the quarter, driven by strong increases in San Francisco and South Florida.
Group revenues increased 13% in the quarter, with room nights increasing 3% and ADR increasing 9.7%. This was largely due to strong corporate group and convention-related demand, assisted greatly by San Francisco. Group room nights made up 27.3% of total room nights for the portfolio, up over 100 basis points from last year, and group revenues represented 28.4% of total room revenues in the quarter, up 237 basis points from last year. In terms of monthly RevPAR growth, we saw a 4.4% increase in January, a 9.9% increase in February due to a record convention calendar in San Francisco and the Super Bowl in Atlanta, which benefited our InterContinental Hotel in Buckhead. March was much weaker than expected as RevPAR was flat.
We believe the softness in March is likely due to several factors, including an additional Sunday in March versus last year, the holiday shift and extension of spring break into late April, revenue from the government shutdown which affected February and March, travel cancellations due to winter storms, as well as lower-than-expected income tax refunds, which seem to have impacted consumer spending throughout March. Leisure travel, as represented by weekends, was softer throughout the quarter versus business travel, which remained solid throughout the quarter. Although April RevPAR growth is forecasted to be the weakest month of the second quarter for us, primarily due to the holiday shift, May and June booking pace are looking positive, with May expected to be the strongest month in the quarter for us, reversing the trends we saw in industry in our portfolio during March and some of April.
June is expected to be a solid month for us as well, but not as strong as May. For the remainder of the year, meaning quarters two through four, pace continues to be positive. Group revenues are ahead by 1.8%, with transient up 3.5% and total revenues ahead by 2.6%, with 85% of it in rate. As a reminder, our Q1 RevPAR and hotel EBITDA results are same property for our ownership period and includes all the hotels we owned as of March 31st. We excluded Hotel Palomar Washington, D.C. and the Liaison Capitol Hill, since we sold these hotels during the quarter. Our hotels generated $100.1 million of same-property hotel EBITDA for the quarter, which is $1.9 million above the top end of our outlook and $3.4 million above the midpoint. This was due to the healthy total revenue growth of 4.4% that I discussed earlier.
Same-property total hotel EBITDA margin declined 45 basis points and would've been an increase of 24 basis points, but for the impact of the forecasted increases in real estate taxes from Proposition 13 related to the California hotels acquired last year in our corporate transaction. Moving down the income statement, adjusted EBITDA was $90.5 million, which was $3.1 million above the upper end of our Q1 outlook range. This was a result of the same-property hotel EBITDA beat of $1.9 million, combined with $1.4 million of G&A expense savings compared to our outlook. These savings in G&A are largely related to the timing of expenses, so these should not be viewed as savings for the year. Adjusted FFO was $60.7 million, or $0.46 per share, which exceeded the upper end of our outlook range by $0.05 per share.
This resulted from the hotel EBITDA beat of $0.015 per share, the timing of G&A expenses adding another $0.01 per share, and a tax credit from our taxable REIT subsidiary, which was $0.03 above our outlook. This tax credit is largely due to timing, we expect this to be reversed in future quarters. Compared to the prior year, adjusted FFO increased 31.3% to $60.7 million, adjusted FFO per share declined 31.3% to $0.46 per share. This decline in adjusted FFO per share is largely due to the increase in diluted shares from 69.4 million shares to 131 million shares in the prior year period, due to our corporate acquisition in November.
On the disposition side, as you saw in our press release from last night, we executed an agreement to sell the Onyx Hotel in Boston for $58.3 million, which if completed, would be at a 15.3x EBITDA multiple and a 5.9% net operating income capitalization rate based on actual 2018 results, which is within our NAV range for the hotel and consistent with the values, multiples, and cap rate in our outlook. This sale is targeted to close by the end of the second quarter, and we've received a hard money deposit from the buyer securing the sale of the hotel.
We continue to make progress marketing for sale additional hotels in our portfolio and remain confident that we will achieve the additional $290 million of asset sales inclusive of the Onyx sale during the balance of 2019 and at the sales multiples and cap rates that we previously detailed in our 2019 outlook. At quarter end, our debt-to-EBITDA ratio, as forecasted, was at 4.7x . Our fixed charge coverage ratio was at 3.2x . 60% of our debt is at fixed interest rates averaging 3.4%, and 40% of our debt is at floating interest rates averaging 4.1%. With that update, I would now like to turn the call over to Jon.
Thanks, Ray. My focus today will be to inform you as to how we're doing with the integration, the strategic disposition plan, and strategic redevelopment plan for the new Pebblebrook. As it relates to the people integration, as stated last quarter, we're complete. We believe it's gone extremely well, and we believe this year's outlook reflects the $18 million plus of annualized savings in the G&A of the two companies. We believe we've successfully achieved what we estimated and promised related to corporate synergies, and that risk is off the table, if you will. As Ray mentioned earlier, assuming the Onyx sale moves forward to completion with the current buyer, we will have sold $1.16 billion of properties, of which all but $30 million come from the acquired portfolio.
When we first executed the deal, we indicated that our goal was to sell between $600 million and $1 billion of properties above and beyond the $715 million related to the three pre-committed hotels. We've sold $447 million of properties since then, assuming the Onyx sale closes, leaving us a relatively small amount of additional sales to meet the bottom end of our initial commitment, which we expect to do this year, as evidenced by the $289 million of additional sales contemplated by our current outlook.
To date, including the expected Onyx sale, our $1.16 billion of sales have been achieved at 5.55% NOI cap rate, well within the NOI cap rate range of 5.25%-5.75% that we estimated upfront, and below the 5.9% NOI cap rate we calculate the acquisition was completed at, including all transaction costs. In fact, if you exclude the Grand, which came out of the PEB portfolio, our NOI cap rate on the remaining assets are at 5.4%. Based on our strategic property review and current plan, we expect to sell an additional $350 million or more of property sometime next year following this year's activities.
By the end of our disposition efforts, we believe we will have sold around $1.8 billion of properties, optimized our portfolio for growth, and brought our debt to EBITDA ratio for leverage to a level that is at or below our targeted level of four to four and a quarter times. Given where we are today and what we have in the works related to sales, we believe we're close to completing this promised part of our overall strategic disposition plan, and should be in a position to check this objective off in the next couple of quarters, and completely eliminate this risk as well. We're almost complete with a plan for every hotel that we acquired.
Yesterday, in our press release, we announced a number of operator and brand changes we've made or are in the process of making in the portfolio, which we believe will provide opportunities to create value over the long term. In particular, the brand changes, both of which happened to occur last week, involved converting Hotel Colonnade Coral Gables from a Tribute to a Marriott Autograph Collection, and following the completion of a full hotel renovation, converting Hotel Modera to The Hotel Zags Portland, the sixth hotel in our proprietary Unofficial Z Collection brand, and the first Z hotel outside of San Francisco. Operator changes involve Benchmark Hotels & Resorts assuming management of Skamania Lodge on May 1st, which we believe will allow us to create some meaningful sales and marketing benefits between this resort and our Chaminade Resort & Spa in Santa Cruz, which is also managed by Benchmark.
Noble House Hotels & Resorts being installed to operate L'Auberge Del Mar, which fits in well with Noble House's extensive luxury resort experience, and their numerous resorts elsewhere in San Diego and along the California coastline, including our Hilton Resort & Spa in Mission Bay. Noble House also manages our LaPlaya Beach & Golf Resort in Naples, and both The Argonaut and Hotel Zoe in San Francisco. This change will occur on May 1st. Also in Mission Bay, Davidson Hotels, through their lifestyle division called Pivot, will be assuming management on May 1st of Paradise Point Resort & Spa. We'll be working closely with Davidson on our plans for the redevelopment, upscaling, and re-concepting of this incredible property that has such huge upside potential given its unique attributes and terrific location. In San Francisco, we'll be making two additional operator changes.
First, in mid-May, Access Hotels will become the manager of The Marker San Francisco. Access currently manages Hotel Spero, which is just one block from The Marker, and offers us significant operational and sales synergies by combining the management of both hotels with a single operator. Access, who is actively involved in the successful redevelopment and repositioning of Hotel Spero, will also be involved with us in the repositioning, renovation, and transformation of The Marker into an Unofficial Z Collection hotel by the first half of 2021. Second, next week, Schulte Hospitality Group will be assuming management of Villa Florence. Schulte will be actively involved with us as we plan the improvements to this extremely well-located hotel just down the street from the Sir Francis Drake. We've been working with all of our current and future operators very closely for some time now to provide for smooth transitions.
While we know there will be some short-term disruption to performance due to these changes, we believe we've properly accounted for the impact in our outlook, believe all of these changes will be far less impactful than brand integrations. Most, if not all of our existing executive management teams will remain in place at these hotels, which will minimize the disruption and ease the transition to the new operators. More importantly, we believe that all of these changes will ultimately improve performance at each of these hotels. Many of them were done to maximize performance due to both operational synergies as well as following redevelopments and repositionings that are planned at many of the hotels. Additional brand and operator changes are planned in the portfolio as we phase them in over the course of the year, we'll inform you of them over the next few quarters.
We also have a number of redevelopments and renovations planned throughout the portfolio over the next 30 months or so. The ones for this year have been announced and provided in our earnings release. As we finalize plans for additional projects, some of which will involve operator and brand changes, we'll provide them to you. For now, you should expect a total annual capital investment, including regular capital maintenance in the portfolio in 2020 and 2021, will be similar in total to this year. Roughly 50%-60% of the capital will represent renovations and redevelopments, where we would expect to earn substantial returns on our invested dollars, similar to our redevelopment and transformational projects at Pebblebrook over the last nine years. Speaking of redevelopments and renovations, our properties renovated last year are doing very well so far in 2019.
The 11 projects last year included the second phase of the redevelopment up and upgrading of La Playa, a complete rooms renovation at Hotel Zelos, a rooms renovation at Sir Francis Drake, the second and last phase of the renovation and conversion of Hotel Modera to The Hotel Zags Portland, the full redevelopment and transformation of the Serrano in San Francisco into Hotel Spero, the rooms renovations at Westin Copley and Paradise Point, the complete renovations of Chamberlain West Hollywood, Montrose West Hollywood, Harbor Court San Francisco, and The Heathman Hotel in Portland. In the first quarter, EBITDA was up a combined $7.1 million versus last year, this is even with an increase in real estate taxes of roughly $600,000 in the quarter at the five California hotels acquired last year due to automatic reassessments from Proposition 13.
These renovated and redeveloped properties are on track to achieve an improvement of $13 million in EBITDA for the year. Our 2017 redevelopments are also doing well so far in 2019. Revere Boston Common, Palomar Beverly Hills, and Hotel Zoe Fisherman's Wharf have all gained significant RevPAR share and improved EBITDA by a combined $600,000 even with the challenging West L.A. market and seasonally slow Boston market in the first quarter. We expect EBITDA at these 2017 redeveloped hotels to increase by roughly $1 million for the full year 2019. Ongoing ramp-up of EBITDA at these redevelopments over the next few years should continue to provide a fruitful organic tailwind to our operating performance.
In addition, the projects this year, next year, and in 2021 should continue to provide us with a pipeline of significant performance improvement and value creation that is similar to the projects we completed throughout Pebblebrook's first nine years of acquisitions and redevelopments. I wanted to also briefly discuss an additional benefit from the combination of the two companies' portfolios that we did not anticipate or underwrite. I'm specifically referring to the benefits of scale overall, as well as scale in our major markets.
Based upon discussions we've already had with many of our vendor partners, we believe there's an opportunity to reduce the cost of many of our products and services on a portfolio-wide basis over the next 20 months or so and deliver an annual run rate of savings of $10 million or more, which would mean value creation of $150 million or so at a 15 EBITDA multiple. This would represent about a 1% reduction of our total hotel portfolio-wide expenses, and all else being equal, improve EBITDA margins by about 60 basis points. We have a team of people focused on these efforts, and we should begin to reap some of these benefits next quarter and ramp to a full run rate of savings by the end of next year.
We're equally excited about the informational benefits that we believe we and our hotel operating teams are gaining from having many more properties in most of our major markets. We believe this constant and detailed information-sharing between properties in the same market, which we're providing through detailed daily reports that we've created, should allow us to improve pricing behavior and ultimately improve RevPAR share in markets where we have significant numbers of properties, including San Francisco, West L.A., Portland, San Diego, Boston, and Washington, D.C. Finally, there are a number of operational synergies at the property level that we believe we will achieve through local consolidation of operations in close proximity to each other, which are managed or will be managed by the same operator.
Similar to what we've achieved at our three Z hotels around Union Square that Viceroy Hotels operates for us, our two hotels in Seattle that Kimpton manages for us, and the two hotels that we're about to put together in Union Square with Access at both The Marker and at Spero. While cost benefits may be limited to several hundred thousand dollars per property that we pod together, we also think it will help attract higher caliber executive leaders at our hotels due to the additional responsibilities and overall compensation that we can provide them with multi-property oversight. Coupled with the benefit of being the largest lifestyle-oriented hotel owner in the United States. We believe over time, we'll be able to improve the overall caliber of the senior leaders at our hotels, which should lead to outperformance versus other competitors in our markets.
I hope you can tell that we're very excited about the many benefits of the corporate acquisition we've just completed late last year, and the huge opportunity we expect from the new, larger, even more efficient Pebblebrook. We also hope that it's clear to you that we continue to work hard to accomplish the objectives we laid out when we first described our strategic plans. Achieving our financial objectives, while at the same time reducing the risk that resulted, albeit on a short-term basis, from the combination of the two companies. That wraps up our remarks. We'd now be happy to answer any questions you may have. Donna, you may proceed with the Q&A.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register questions at this time. Our first question is coming from Anthony Powell of Barclays. Please proceed with your question.
Hello, good morning, everyone.
Morning.
Morning. A follow-up question on the cost savings you mentioned. What is the RevPAR you need right now to break even on margins, and where can that go over the next few years as you benefit from some of these scale-related cost savings you mentioned?
Well, I think as it relates to the scale benefits, what we indicated is we think it's about a 60 basis point overall opportunity for the portfolio, assuming we achieve $10 million of savings. That's above and beyond anything that we forecasted that we've included in our outlook for this year. Obviously, we don't have an outlook for next year. I think that the first quarter is a good indication overall that if you take out the impact that we're going to have this year from Prop 13 reassessments, we probably need to be in the 3% range for RevPAR and total RevPAR, and to the extent that we can drive other revenues higher, while that does increase our expense rate.
One of the reasons our expense rate is higher than it has been historically is because when you have a 5.3% growth in your food and beverage, as an example, our margins in food and beverage are obviously a lot lower. What we're focused on is, while that may hurt our expense growth rate and even our margins, it does increase our EBITDA per key, which is what our ultimate focus is. We do think being able to drive food and beverage and other revenues higher, while that may not increase the margins per se, it will increase the EBITDA per key.
Anthony, just as a reminder, the Prop 13 impact to 2019's margins this year is about 60 basis points. After this year, as we get to 2020, those property taxes will increase at the CPI, the kind of 2% level. This year it's a headwind to us, but going forward, it'll be growing less than what we see property taxes at other non-California locations.
Got it. Thanks. You talked about some of the softness in March that the industry saw. Could you maybe talk about how maybe forward-looking metrics like group production or even things like food and beverage and AB spend at groups that were already in the hotels, how did those track in March? Did you see any kind of other softness or weakening in any other kind of metrics in March or April relative to your expectations?
Yeah. As indicated by the 5.3% increase in food and beverage revenues in the quarter, and keeping in mind that a good bit of the group growth, particularly that came from San Francisco, is convention related, and so the groups are not in-house. They are over at the convention center. So they do not tend to drive a lot of food and beverage revenues when they are out of house, if you will. So no, we did not see any change in any of the trends at all. When we looked at our bookings over the last 60 days since our last report to you, bookings in all three quarters, Q2 through Q4, they all increased, and our pace increased in all three quarters of the rest of the year. The softness we saw, which was weaker bookings in March primarily, was pretty limited to March.
All right. Great. Thank you.
Thanks, Anthony.
Thank you. Our next question is coming from Smedes Rose of Citi. Please go ahead with your question.
Hi. Thank you. I just wanted to understand the guidance a little bit. It sounds like the reason you're not carrying forward much of the beat that you put up in the first quarter is primarily due to the expected reversal of the tax benefit in the quarter. Is that right?
The tax benefit and the G&A.
Yeah. It's more just timing, Smedes. The $1.4 million of G&A savings, then the $4 million of the taxable reconsideration, that's really just timing. Yes, we shifted to future quarters.
Okay. For San Francisco, where you put up obviously very strong numbers, I think you had said you thought the first quarter would be the best in that market in terms of RevPAR. Are you still thinking 9%-11% for the year there?
For our portfolio, yes.
Okay. Just a final one from me, Jon. It looks like the Vitale is still with Two Roads Hospitality. Is your decision that property will work well within the overall Hyatt portfolio, or is that still to be decided?
Vitale is sort of an interesting situation and actually similar to The Marker. Both of those properties did not go with Hyatt Management, because they were restricted from being able to take over management of those properties. Those are with an operator called CoralTree , which is owned by Lowe Enterprises. Just as Destination was partly owned by Lowe Enterprises, or Two Roads was partially owned by Lowe Enterprises. We haven't announced anything related to Vitale, whether we're going to make any changes or not related to that property, but we will let you know if we do.
Okay. Thanks a lot.
Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please proceed with your question.
Hey, good morning, guys.
Hey, Rich.
Morning.
Jon, I want to quickly clarify, with respect to the improvement in bookings for quarters two through four, is that a blanket statement across the portfolio, or is that isolated to a handful of markets? How do we think about that?
I don't think it's any particular market in terms of which one's improved. I can assure you they all did not improve in pace, and not every property in our portfolio did not improve in pace. Across the portfolio, in total, did improve in pace, and I don't think it was specific to any particular market.
Okay. That's fine. Secondly, maybe a little bit bigger picture, just in the context of heavy asset sales, obviously heavy capital spending and your year-end leverage targets, I want to ask a question about the dividend. Against sort of my definition of free cash flow, Pebblebrook is running around 80% maybe in terms of a payout ratio. I know people calculate it differently, but how much cushion do you want in that number, just given all the moving parts? As far as the dividend philosophy goes, I know different management teams think about it differently, in terms of what is sacrosanct or not. Obviously, there are REIT requirements that go along with that. Just how do we think about the moving pieces and Pebblebrook's dividend payout philosophy from here?
Our philosophy on dividend, as a company, is that dividend follows operating cash flow. I think on an operating cash flow basis, if you assume a 4% reserve against revenues for sort of regular capital maintenance, within the overall portfolio, I think we run around 70% or low 70s in CAD. You're looking at a 1.4-1.5 coverage over the common dividend as a result of that. We're obviously very comfortable at that level. The way we look at it is, we're not getting to the same level that you are when you say 80%. We view the capital investments within the portfolio, which have returns related to them, no differently than we would view an acquisition, if you will.
We don't look at that and say, "That's eliminating the coverage for our dividend." That's going to primarily be covered by free cash flow, after the regular capital maintenance within the portfolio.
Okay.
We're very comfortable with the dividend. Obviously, at a minimum, it needs to cover taxable income and with sales. It's a complicated situation, our objective is, if we can, and I think we can for the most part, avoid any additional dividends, special dividends that would have to be paid out.
That's great color, Jon. Thank you.
Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead with your question.
Good morning, everyone.
Good morning, Mike.
Morning.
Jon, can you maybe give us an update on kind of how you're thinking about balancing buybacks and leverage today, just in the context of the large NAV discount versus your internal estimate?
Sure. Our priority is to do what we said we were going to do when we made the acquisition late last year, which is, bring our leverage level down from the mid-fives to our target in the low fours. That would continue to be a priority from a timing basis. We're going to continue to use sale proceeds to reduce debt until we get down to that level. To the extent that we generate additional proceeds from additional sales and/or we see that that's committed, meaning it can always happen well before we actually disclose a sale. We could at that point and might at that point, use those proceeds to buy back our stock if there continues to be a significant discount between our NAV and where the stock trades in the market.
Got you. That makes sense then. Just maybe a follow-up on that, in terms of incremental asset sales beyond the placeholders that you guys have in guidance for this year, what are you seeing on the transaction front today that may or may not cause you to potentially sell more assets or accelerate the asset sales process?
Yeah. The acceleration of what we've talked about for next year, which is $350 million plus, those are assets. Everything in the program to date is identified internally. We made decisions based upon maximizing our long-term growth potential and value creation opportunities, with every asset in the portfolio. The additional dollars next year, because there's some things we need to do related to those assets, are not likely to get accelerated into this year. We could, on the other hand, make decisions to accelerate additional and make additional asset sales, similar to what we did three years ago in 2016, to the extent that the discount to NAV remains significant. That's something we'll look at over the course of the year.
We like to think it's going to narrow as we achieve our objectives and we deliver what we've said we're going to deliver, and we begin to minimize the number of moving parts within the company. The investment community will speak on their own, and we'll pay attention and make a decision that we think ultimately is going to create the most value for the shareholders.
Perfect. That's helpful. Thank you.
Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please proceed with your question.
Yeah. Good morning, guys. Can you comment on the level of RevPAR disruption you have this year for all the changes at the hotels? You mentioned a similar amount of spend for next year. Would you expect the disruption to be comparable?
Yeah. As it relates to the disruption from renovations, I think our estimate this year is 60 basis points. It's a little over $8 million of EBITDA, in terms of how that flows through. We think that'll be similar, Wes. Again, we're a long way from refining the exact scope and timing on every project for the next two years. We have some general parameters, and we're certainly going to try to do our best to manage to a similar level of disruption based upon the timing of when we do these projects. As it relates to the cushion for the operator changes, I can't give you a specific number for that.
In retrospect, we'll be able to tell you what we think the impact was based upon looking at share and where we might have had specific problems knowing that it might have affected bookings or overall business levels. In advance, we're basically estimating by the cushion that we're providing between what we think the assets would do and what they are likely to get impacted by. Timing matters. These are spread out over the course of the year. The estimate for disruption for operator and brand changes is for the whole year built into our full-year outlook. Some of it involves changes that are going to get made later in the year.
Okay. Can you expand upon what happened at The Méridien? You mentioned something about the loyalty program change. Is that a one-time thing at The Méridien?
Yeah. Basically what happened, and we've seen this in. Everybody who owns Marriott and Starwood properties has seen changes in their redemption, in the behavior of the customer in terms of redemption behavior, and use of their properties. It varies from almost insignificant to very significant. What's happened is as you've combined a program and your Starwood customers basically went from Starwood properties to a portfolio of opportunity for use of redemptions that include Marriott and Ritz properties. Santa Monica is a good example where it was our highest redemption property. We were running pre-integration, which started in August of last year as related to the loyalty programs. We were running mid-20s in terms of level of redemptions compared to our total occupancy in the hotel. That's a very high level, obviously.
It was the only Starwood property in the Santa Monica market. When they combined, and there are other Marriott properties in the market, and the way they assigned how many points you'd have to use between all the different properties, Méridien had the biggest impact of any property in our portfolio. The redemptions went from 25% down to the low to mid single digits. Basically, we lost 20% of our occupancy because of the combination of the loyalty programs. That's a large amount to replace on a short-term basis. We've been working hard ourselves and with Marriott to mitigate that, to drive replacement business into the hotel, but it's been a significant impact. We don't know whether 5% is going to be the long-term run rate or whether that'll rise a bit as they even out some of the redemption point requirements for a guest.
For now, we have to assume that that's a new long-term level, and we have to replace that business with other business.
Okay. Hopefully you can devalue the currency with that. That's it for me. Thank you.
Okay.
Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hi, guys. Good morning. I think most of the ground's been covered here, but sort of one follow-up on the larger scale benefits that you kind of outlined. Ray, I apologize if I missed it, but what was sort of the timing that you guys were thinking about? I assume this type of initiative will take some time to kind of get going. But what would be a reasonable ballpark, or over what time period would something like this take to roll out?
We're estimating over the next 20 months or so.
20?
Yep.
Two, zero?
20 months.
We expect to get to the $10 million plus run rate of savings by the end of next year.
Great. Then, the only other question I have was just, I think, Jon, you called out supply in a handful of markets. We've known about Portland for a while. L.A. is another one. Any sign of sort of, I guess, as you guys are looking out at pipeline or particularly CBD-level statistics in your specific markets, how is that supply outlook trending as we look out 12 and 24 months? Is there any kind of light at the end of the tunnel? Are some of these places remaining elevated and still managing to squeeze in whatever select service and all kinds of things, or is it getting tougher to see that in some of the markets you operate in?
I think for the most part, what we're seeing, and keep in mind, we're primarily the major urban markets. What we're seeing is that with the dramatic rise in development costs, without an equivalent rise in operating performance, that the development yields have come way down, which means for someone to develop, they either need lower cost of capital, or they need more equity capital, or both. What we're finding is, for developers, it's taking a lot longer to find the capital stack, if they want to proceed, and if they can convince their capital to proceed at these lower return levels. Starts are really declining as compared to deliveries, which means total rooms under construction are coming down in the urban markets. They're actually increasing in the suburban and secondary markets, which I guess is naturally what happens with capital availability in a cycle.
When we look out at our portfolio on a weighted average basis, because they bounce around from year to year, we're looking at around 3% or just over 3% supply growth for 2019, a similar number for 2020, and then a more meaningful drop down into the low two's for 2021. That would represent what I just said, which is fewer starts, longer delivery times, which is originally we thought 2020 would be that first down year. Because we've had deliveries stretch out, we actually had a decline in what we estimated in 2018, and we've had a bit of a decline in what we expect to be delivered in 2019 now as these delivery schedules stretch out, and that's why 2020 now is similar to 2019.
Shaun, just to add to that, bank financing for new construction is also becoming more and more difficult. If you take the average bank and they start looking out to 2021, 2023 for these construction loans, that's pretty risky, especially where we are in the cycle. That's also causing a hedge about capital for new development.
I think what sometimes gets lost is, we've been seeing in the major markets probably, I'd say on average, close to a 10% increase in development costs on an annual basis over the last three years. You take a market like San Francisco, we just heard a month or two ago that somebody's working on the development of a select service hotel in a tertiary part of the urban market in San Francisco, and they're looking at $600,000 a key, including land. The numbers are getting up pretty high. West L.A., Sunset Strip, you're looking at $1 million plus a key for development in that market, given the challenges of construction in that market.
We do think that's helping to slow down construction starts, and frankly, we're a bit amazed in some markets like New York, where new developments continue despite fairly rapidly declining bottom lines over the last few years.
Thank you very much. Appreciate all the detail and color.
Sure.
Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead with your question.
Hey, good morning, everybody. Jon, thanks for taking the lead-off slot here in earnings. Couple of questions for you. Marriott announced the completion of the negotiations with Expedia. I'm just wondering if they've shared those results with the owners, and if so, do you have a sense of any benefits that may accrue to your portfolio?
Yeah. They have shared the detail with the ownership community. I would say they did a very good job. They've improved flexibility and terms. There's a slight improvement in the cost. That would be the way I would categorize it. Beyond that, I don't think it would be appropriate to share any further.
That's fine. Jon, was the Onyx the result of a marketed transaction or is that a reverse inquiry?
No, that was a fully marketed transaction.
Have all of them been fully marketed at this point?
No. Obviously, the ones that we did November 30th were not fully marketed. The Park Centrals, Gild Hall, and the Embassy in Philly. Everything else has been fully marketed.
Yes, The Grand, the Liaison, Palomar D.C. have all been marketed.
Yep.
Okay. Got you. Help us think about the setup for 2020. I know you're not giving guidance, the commentary earlier on the disruption on renovation being maybe similar this year or next year is helpful. We look at these giant comps out of San Francisco, a lot of that was due to weakness last year as opposed to necessarily extraordinary results this year. Help us think about what your portfolio faces in 2020 from a comp perspective.
I think a few things I would say, here's the challenge is that the only real information is the information on convention bookings, right? We don't have information on corporate transient bookings. For the most part, in-house group, that wouldn't be booked yet for 2020, unless you're a really large hotel. I think when it comes down and you look at the convention data, 2020 sets up as a better year overall for the major markets. Markets like San Diego, Chicago, Boston, D.C. are all much better in 2020 based upon what we see now in the convention calendars. Portland, much better. We think L.A. is flattish. New York City's not relevant. Philly's flat to slightly better, coming off a record year this year for convention bookings. Atlanta will be a little bit weaker because of the lack of Super Bowl.
Miami will be better, or South Florida, partly because of Super Bowl in Miami next year. The industry overall sets up better. San Francisco, I guess the way I would look at this year is this year is much more representative of the run rate in the city, albeit probably slightly elevated on a convention basis. Yes, clearly the growth percentages are as a result of coming off a year where the convention center was still under renovation and expansion. The run rate is much more representative of the market, the strength in the underlying economy locally. We haven't done work yet on how each of the days stack up versus this year. Frankly, we're not through enough of this year to be able to have a base for comparison that's accurate.
As we get through the year and we get into the summer, we can begin to look at next year as we start to prepare for budgets for next year in terms of how San Francisco shapes up. They're almost at 1 million rooms on the books, which would be the second highest ever. They're already at a level that's the second highest ever in terms of rooms on the books. We think San Francisco will be a good year next year.
We shouldn't take this year's up 24% in Q1 and anticipate that it's going to be down 15% next year. I mean, that's the wrong conclusion, it sounds like.
Correct.
That's it for me. I appreciate it, Jon.
Thanks, Bill.
Thank you. Our next question is coming from Stephen Grambling of Goldman Sachs. Please proceed with your question.
Hey, good morning. As it relates to some of the benefits from scale, perhaps as a follow-up to the question on OTA costs, can you provide a little more color on your overall distribution costs and mix of distribution channels now, how you might expect those to evolve?
Our transient business runs in the low thirties. 31, 32% of our transient comes through OTAs. That's all of them. I think as we look at the non-major brand properties in the portfolio, I think we run about 400 basis points higher on a commission basis than what we average on the brand levels. The one thing I would caution you about, the commission agreements with every organization are different. It's not just one number. It's what's important to the company and the properties in their portfolio. Some of the agreements are, they have different commissions on weekday versus weekend. They have different commissions for shoulder days. They have different commission rates for package business versus direct business. There's different commission rates for how far in advance a booking gets made versus how close it is. It's really based upon need.
Your commission rates generally are higher when there's need, the rates have tended to be lower when there's less need. There's also flexibility within different contracts which may or may not allow for closing out the OTAs and not having rooms available. That's relatively new over the last couple of years, particularly with the major brand properties. That's the color I can give you. Hopefully, that helps answer your question.
I guess one quick follow-up on that is on the unbranded side, is that something that you can then be in active negotiations now to potentially push down, either based on the comparison versus what Marriott did or based on your just incremental scale?
The answer is yes to both. Keep in mind that the negotiations are handled either at the brand or the operator level. We do have a relationship with the OTAs directly as well, but contractually, the business is done through the operating side. The independents or the small brand commissions and arrangements have generally followed the brand reductions over the course of the last 10 years, and we would expect that to continue. As it relates to us specifically, we have the benefit of seeing what all the different arrangements are, and hopefully, that allows us ultimately to get a better arrangement throughout our portfolio.
That's helpful color. Maybe one other quick follow-up, and this is a little bit more short-term, but given the calendar shifts and the puts and takes that you saw between March and April, is there any sense that you can give us for the combined March and April period or Marpril, whatever you wanna call it, where that was running relative to your expectations?
Well, March was well below our expectations. I'd say it was probably two to 300 basis points lower than what we thought originally, going into the year, where we thought March would come out. We thought March would benefit from the calendar shift, and we just really didn't see that in any meaningful way as we have in prior years. On a combined basis, I'm not sure actually that's the best way to look at it, frankly. I think they're separate and apart months, and you can look at the weeklies and see that the first two weeks in April did benefit from the shift, and the second two weeks, you've already seen one, you'll see the second come out next week. Those are to the detriment of the holiday shift.
We just put those months behind us and move forward with what we think will be cleaner, both from a weather perspective, from a calendar shift perspective, from a flight cancellation perspective, from Sunday to Sunday perspective, et cetera.
Helpful. Thanks so much.
Sure.
Thank you. Our next question is coming from Jim Sullivan of BTIG. Please proceed with your question.
Thank you. Jon, I just have a couple of questions on some individual assets that you've talked about or listed in your strategic plan update in the release. You noted the change of management at Skamania to Benchmark, which as you note, has been managing Chaminade for a long time. Both of those assets have a significant amount of land around them, and I know that that land provides recreational amenities, which is part of the attraction at both of those properties. Is there any scope to increase room count at either of those assets or facilities in terms of meeting space or what have you, that could be important material changes for those two assets?
Good question, Jim. We're at very early stages for master plans for both properties to utilize all the excess land. It is quite substantial, and in fact, we probably use it a lot more at Skamania, though not all of it, than we do at Chaminade, where really very little of the land has been utilized for recreational activities. I'll give you what we've done. Part of what you ask, we have started and are in the process. We've added four tree houses at Skamania. We added a zip line through the trees. We've added an aerial adventure park in the trees. We've added, of all things, axe throwing at Skamania. We were thinking of an investor outing there. We have a golf course there, which has 18 holes.
I think it's a very challenging course because it's very narrow, and really needs more land, and we just don't think it's the best use for the land. We're in the process of evaluating eliminating the golf course, replacing it with some probably more contemporary golf activities that'll generate much more profit. Look at the utilization of the excess land, either for additional rooms, we're looking at more tree houses. We're actually going to add two more this year. We have added outdoor meeting space, a pavilion, which is being completed, I think, in the next couple of weeks, for event and meeting activities. Great views of the Columbia River Gorge.
We're going to be looking at doing those kinds of things at Chaminade as well, and then to the extent there's excess land for residential that we can sell off, as an example, we're going to look to do that.
Interesting. Okay. Moving down to San Diego, in your 2020 plan, you list Paradise Point, which is an asset where the results have been kind of flattish for about four or five years. You've indicated a comprehensive renovation and transformation program. I know you may not have the details in terms of the total spend there, but is that likely to be the most material spend in 2020?
Yes. It's one of our biggest properties. It's 461 keys. It's 44 acres. It's got a lot of food and beverage and meeting facilities, and we think there is a significant opportunity to re-enhance the property and bring it up a level that it's probably sunk down too, similar to what we did back in 1999 and 2000, when we did a comprehensive redevelopment of the property. That is likely to be the largest expenditure, and total project in the whole portfolio.
Finally from me, the Unofficial Z Collection continues to grow, and now outside San Francisco. I wonder if you can help us understand how the growth in the collection is potentially leading to some value creation opportunities. I don't mean immediately, but does the growth in this collection create some value as a brand, even though it's unofficial, as you think about it going forward?
Well, I think what we're trying to do is grow it while maintaining the optionality for future long-term value. As we grow it, as we develop out the skeleton of it as a brand, we begin to incorporate that brand narrative and DNA throughout the marketing and sales materials. We develop a separate website for the collection, and establish the activations consistently through the Z Collection in terms of how the properties get used. I do think ultimately there's likely to be some value, but I can't quantify it, and I can't tell you what it would be. I also think it reduces the possibility of integration and disruption from integration to the extent we have some of these small brands and operators who sell their businesses, and we go through these integrations, in a way, we control our own fate by having our properties.
In many cases, they're our own when we name them Argonaut, or we name them something else other than a Z. That doesn't necessarily always flow through to a perspective of a brand buying lifestyle-oriented operating companies. Perhaps this is a way to make it a little more clear, how we view them.
Okay, very good. Thank you.
Thanks, Jim.
Thank you. Our next question is coming from Lukas Hartwich of Green Street Advisors. Please proceed with your question.
Hey, guys. This is David on for Lukas. Just a quick one for me. I'm wondering on the $10 million of costs you guys had called out, could you just highlight maybe some of the big line items that helped you get to that number?
No, can't really do that. Not because we have an issue with you knowing, but we kind of view this as proprietary. I think the way to think about it is, it's, for the most part, everything that we purchase in goods and services through our hotels at our non-major branded properties and to some extent, even at some of our branded properties.
Okay. Fair enough. Thanks.
Thanks, David.
Thank you. Our next question is a follow-up coming from Stephen Grambling of Goldman Sachs. Please go ahead.
Hey, thanks for sneaking me back in. Just one follow-up on CapEx and free cash flow. I guess, as competitors are also investing in their assets, what do you generally view as the rule of thumb for the appropriate CapEx spend to hold your competitive positioning as we look maybe a couple of years out?
Yeah, I think from a perspective of the properties that we've redeveloped and therefore gotten to that full competitive positioning that you're talking about, we do think that it probably relates a little bit more to per key, and that would vary through the portfolio. I do think using 4% of revenues, because of the volume of revenues that get done at these properties, it's probably 4%, 4.5% within the portfolio.
Great. Thanks so much.
Thank you.
Thank you.
That brings us to the end of our question and answer session. I would like to turn the floor back over to Mr. Bortz for closing comments.
Hey, thanks, Donna. Thanks everybody for participating. We got a lot to do, so we got to get back to work. And we know you all have a lot to do too, but thanks for spending time with us, and we look forward to updating you over the next quarter, and with our earnings release 90 days from now. Have a good one.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.