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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone. Welcome to the Host Hotels & Resorts, Incorporated Third Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gee Lingberg, Vice President. Please go ahead.
Thanks, Nicole. Good morning, everyone. Welcome to the Host Hotels & Resorts third quarter 2018 earnings call. Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filing to the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and we are not obligated to publicly update or revise these forward-looking statements.
In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDAre and comparable hotel results. You can find this information, together with reconciliation to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC, and the supplemental financial information on our website at hosthotels.com
This morning, Jim Risoleo, our President and Chief Executive Officer, will discuss our recent transaction, provide an overview of our third quarter results and our outlook for 2018. Michael Bluhm, our Chief Financial Officer, will then provide further details on our third quarter performance, discuss margins, and the balance sheet. Following their remarks, we will be available to respond to your questions.
And now, I'd like to turn the call over to Jim.
Thank you, Gee, and thanks everyone for joining us this morning. We are pleased to report a quarter that once again exceeded our internal expectations on the bottom line and beat consensus estimates for adjusted EBITDAre and adjusted FFO per diluted share. While top line results were impacted by two hurricanes, we were encouraged that on a comparable hotel RevPAR increase of 1.6%, our operators were able to increase comparable hotel EBITDA margins by 50 basis points.
Adjusted EBITDAre increased 7.8% to $344 million and adjusted FFO per diluted share increased 12.1% to $0.37, beating consensus estimates by $18 million and $0.02 respectively. These results continue to demonstrate the benefits of our geographically diversified portfolio of iconic and irreplaceable hotels; our unprecedented scale and platform to drive internal and external growth; and the power and flexibility of our investment-grade balance sheet. Together, these key pillars form the foundation of Host, the premier lodging REIT.
As noted in our press release, we were very active on the capital recycling front in the quarter. This strategic activity followed through on two key initiatives we set early on in my tenure as CEO. Reducing our exposure to New York and exiting our international assets to focus our attention back to the U.S. where we have the greatest scale and competitive advantage.
In the quarter, we closed on the previously-announced sale of the W Union Square for $171 million. We also announced that the Westin New York Grand Central is under contract for $300 million, inclusive of the FF&E reserve. The Westin had significant money at risk and we anticipate the sale closing early in 2019.
Including the W New York which was sold earlier in the year, by early 2019, we will have sold three assets in New York for a combined EBITDA multiple of 28 times, significantly eliminating our exposure to profitability-challenged hotels in the market.
New York is a market that continues to face headwinds due to significant supply increases and continued expense inflation. For reference, since 2007, New York supply has increased by 55% or 43,000 hotel rooms at a compound annual growth rate of over 4%.
In the quarter, we also sold the retail, signage and theater condo space at the New York Marriott Marquis for $442 million. In partnership with Vornado, we redeveloped this space beginning in 2012. The sale was at a very attractive price and is another example of our asset managers identifying, implementing and executing on a real estate value creation opportunity.
The sale resulted in an EBITDA multiple of 26 times and 19 times on 2018 and 2019 respectively, with substantially all the proceeds used to close out the reverse like-kind exchange structure for the acquisition of the Andaz Maui which we purchased earlier this year. The balance of these proceeds were used to establish a new forward like-kind exchange escrow.
Our scale and platform provide us the opportunity to create value from our asset base. And we will continue to identify, evaluate and execute on value enhancement opportunities to drive shareholder value.
On the international front, we also sold the JW Marriott Mexico City for $183 million or approximately a 15 times EBITDA multiple on 2018 forecasted results. We held a 52% interest in the hotel in a joint venture with Marriott International. For reference, this was a previously unidentified asset sale we mentioned on our past two earnings calls.
As I mentioned earlier, we are going to focus our investment activity in the U.S. To that end, we have reached agreement with our two European joint venture partners to sell them our approximate 33% interest in the Euro JV. The gross asset value of our interest is approximately €700 million and equates to an EBITDA multiple of 17 times on 2018 forecasted results.
After accounting for fund level debt, we anticipate the sale will generate net proceeds of approximately €435 million, a portion of which we intend to use to repay our outstanding €207 million draw on our credit facility. This outstanding amount was drawn to hedge our equity interest in the venture. While we have been successful with our platform in Europe and very grateful to our partners for helping to build a strong business over there, we believe it is the right time for the company to focus its efforts where we can have the most impact for shareholders, which is owning a geographically diverse portfolio of assets here in the U.S.
After these two international sales, less than 2% of our EBITDA will come from outside the country, with only two hotels in Canada and three hotels in Brazil.
For the remainder of the year, there are no additional asset sales or acquisitions included in our revised guidance. The combination of the disposition of the New York Marquis retail, the Euro JV interest, and the JW Marriott Mexico City sale incrementally reduced our full-year adjusted EBITDAre forecast by approximately $7 million. Again, we expect the Westin Grand Central to close early in 2019.
Given the significant amount of disposition activity, Michael will walk through the specifics of how those sales will preliminarily impact 2019 EBITDA in his prepared remarks. Michael will also discuss how our investment-grade balance sheet has never been in better shape and continues to get stronger. With leverage in only 2 times, over $1.2 billion of unrestricted cash, and $700 million of capacity available under our credit facility as of the end of the third quarter, we are well positioned to drive shareholder value, whether by acquiring assets, investing in our irreplaceable portfolio, or buying back stock.
I should note that the leverage ratio and cash balance I referenced do not include the proceeds from the pending Westin Grand Central and Euro JV interest sale. We continue to maintain a disciplined approach to capital allocation and are evaluating and monitoring several acquisition opportunities.
As it relates to investing in our portfolio, the company spent approximately $48 million in the quarter on redevelopments and return on investment expenditures, and approximately $71 million on renewal and replacement expenditures. Major projects completed in the quarter include meeting space renovations at 10 hotels, and restaurant and public space renovations at 4 hotels. For the full year, we expect to spend $280 million to $300 million on renewal and replacement capital expenditures and $190 million to $220 million on redevelopment in ROI projects.
Another exciting initiative we concluded in the quarter was an agreement with Marriott International to execute a portfolio of transformational brand reinvestment capital projects beginning this year with the San Francisco Marriott Marquis and carrying through the next three years. These portfolio investments will position the targeted hotels to compete better in their respective market and enhance long-term performance.
Some of these assets are among the most recognizable in our portfolio, including the San Francisco Marriott Marquis, The New York Marriott Marquis, the Boston Marriott Copley, the Orlando World Center Marriott, and the Ritz-Carlton Amelia Island among others. Marriott has agreed to provide us with priority returns on agreed upon investments, which will result in reduced incentive management fees. Additionally, they will provide operating profit guarantees as protection for the anticipated disruption associated with the incremental spend.
This transformational program is expected to increase our total CapEx spend by approximately $150 million to $200 million per year through 2021. We believe this is a great use of our capital. Transformational brand reinvention projects have typically resulted in meaningful increases in RevPAR yield index, which translates to strong improvement in EBITDA.
On the operations front, comparable RevPAR increased 1.6% on a constant currency basis, driven by a 1.5% increase in average rate and a 10 basis point increase in occupancy to 81.4%. Third quarter occupancy is the highest since the third quarter of 2000.
While our top line performance was in line with expectations and the bottom line results were better than expected, we were impacted by several factors in the quarter. We anticipated the timing of the 4th of July moving to a Wednesday and the Jewish holidays moving from weekends to midweek, but we could not predict the impact of hurricanes Florence and Lane.
An active hurricane season affected our Hawaii market in August and our Atlanta and Washington D.C. markets in September. While the D.C. markets did not experience a significant weather impact from Hurricane Florence, local governments in the area declared a state of emergency in advance of the storm which led to cancellations.
We estimate that the impact of the hurricanes cost us 30 basis points of RevPAR in the quarter. Year-to-date, comparable RevPAR on a constant currency basis increased 1.9% to $180, driven by a 1 point increase in average room rate and a 70 basis point increase in occupancy to approximately 80%.
We've reported adjusted EBITDAre of $344 million for the quarter and adjusted FFO per share of $0.37. Both were significantly above consensus estimates. Year-to-date adjusted EBITDAre is $1.19 billion and FFO per diluted share is $1.34.
As we look to the fourth quarter, our group booking pace is very strong with group revenues up 4.5% and projecting to be the strongest quarter of the year. With approximately 98% of our group revenues on the books for 2018 and occupancy levels at all-time highs, we continue to see the booking window extend.
While we are early in the 2019 budgeted process and have limited visibility at this time, the global economy continues to exhibit strength and appears supportive of industry growth. The economic indicators we closely follow – corporate profits, non-residential fixed investment, and consumer confidence – all remain strong and GDP continues to improve.
The pickup in business transient travel continues to gain traction and provides reason for optimism. This is bolstered by continued strong leisure demand, resulting from record levels of consumer confidence and low unemployment. Having said that, we continue to monitor the impact of a stronger U.S. dollar, potential global trade wars, rising interest rates and the performance of global equity markets and how that could affect lodging demand for the remainder of the year and into next year. Overall, though, we believe industry fundamentals are on solid ground.
Given our year-to-date performance, we are narrowing the range of our full year guidance as follows. Our revised comparable RevPAR guidance is now 1.9% to 2.1% for the full year. The slight reduction to the midpoint of our prior RevPAR guidance is due entirely to the impact of Hurricane Florence and Lane in the third quarter.
On the bottom line, we are increasing the midpoint of adjusted EBITDAre by $5 million to $1.55 billion on a revised range of $1.545 billion to $1.555 billion. This translates to an increase in the midpoint of adjusted FFO per share by approximately $0.01 to $1.75 on a revised range of $1.74 to $1.76. Including the $5 million raise to 2018 adjusted EBITDAre this quarter, we have raised guidance by $50 million at the midpoint since our earnings call in February.
In closing, we are pleased with another beat and race quarter as it continues to demonstrate the attributes of our premier lodging REIT. We are also pleased that RevPAR will be accelerating this year over 2017 with our revised midpoint 70 basis point higher than the 1.3% comparable RevPAR growth we reported last year.
Our diversified portfolio of irreplaceable assets, our unmatched scale and platform, and our investment-grade balance sheet positions us well to continue to outperform our peers in the near, medium, and long term.
With that, I will turn the call over to Michael who will discuss our operating performance and our balance sheet in much greater detail.
Thank you, Jim, and good morning, everyone. As Jim mentioned our scale and platform continue to drive operational outperformance. Let me provide some details on the results for the quarter. Despite the impact of holiday timing and weather events, our comparable RevPAR on a constant-currency basis increased 1.6%, driven by a 1.5% increase in average rate.
As we mentioned on the last call, the set up for the quarter was strong, given the group pace we had on the books and it played out as expected, which allowed us to compress business and grow RevPAR predominantly by average rate.
Group RevPAR was up 2.3%, led by association business, which was up 8.8%. Additionally, the strong group business enabled our managers to capture more profitable banquet and AV business. Our transient business was led by corporate travelers and business transient revenues increased 2.2%. We continue to see improvements in the business transient traveler as revenues in that segment increased for the third consecutive quarter and we remain optimistic that business travel will remain strong over the course of the remainder of the year, particularly as nonresidential fixed investment and corporate profits continue to project mid-single-digit increases.
Looking comprehensively at revenue, total comparable hotel revenues increased 2.8% driven by F&B revenue increase of 5.1%, of which the more profitable banquet and AV business was up 7.6%, and other business increase up 7.6% and other revenues increased 9.4%.
For the second consecutive quarter, group turnout was better than expected, which is reflected in the significant banquet spend. Additionally, our asset managers continue working with our property managers to find ways to increase high margin ancillary revenues at our properties. We continue to do a great job improving profitability at our properties and driving comparable EBITDA margin growth.
In the third quarter, comparable EBITDA margins grew 50 basis points. Margins benefited from strong productivity gains especially in F&B, an increase in ancillary revenues, reductions in undistributed operating expenses, and a one-time distribution related to the sale of Marriott centralized purchasing company.
As we anticipated, we continue to see the benefits from the MI integration take hold this quarter as declines in credit card expenses, loyalty program cost, and IT system costs contributed to the margin expansion. We believe that the benefits from the Marriott-Starwood merger will generate 40 basis points to 50 basis points of incremental margin improvement annually for the near-term.
Now, let me spend some time on specific performance in our individual markets. Our best performing domestic markets this quarter were San Francisco, San Antonio, Philadelphia and Miami. The RevPAR growth at our San Francisco hotels exceed our expectations with an increase of 7.5%, driven by a 6% improvement in average rate and a 1.1 percentage point expansion in occupancy. The large sales force city-wide that move from November last year into September this year boosted the entire market and allowed our hotels to drive transient average rate by 9.2%.
Our hotels in San Antonio increased RevPAR by 12.8% this quarter exceeding the STR upper-upscale results by 770 basis points. Strong city-wides led the solid corporate group business which contributed to
F&B revenue increases of 11.5% in this market.
The two hotels in Philadelphia grew RevPAR by 10.4% this quarter, driven predominantly by the Logan's 36% increase in group business, enabling the hotel to reduce discount channels and maximize transient ADR which increased over 15%. Our Philly assets beat STR upper-upscale results by 380 basis points.
In Miami, our hotels increased RevPAR by 9.5%, while the STR upper-upscale – where the STR upper-upscale market declined 8.1%. As you may recall, our Miami Biscayne Bay Marriott had over 200 rooms out of service last year following Hurricane Irma, which are now all back in service. The hotel will continue to benefit from this in the fourth quarter and outperform the market.
Looking to markets that were more challenged in the quarter. Our hotels in Washington D.C. experienced a RevPAR decline of 8.6% in the third quarter as weaker city-wides and cancellations related to Hurricane Florence contributed to decline in demand. As Jim mentioned, while the D.C. market did not experience a weather impact, the local governments declared states of emergency in advance of the storm, resulting in cancellations. In addition, there were three fewer city-wides this quarter when compared to the same time last year.
In Los Angeles, RevPAR at our hotels decreased 7.7% in the quarter. The hotels were impacted by new supply downtown and with groups that did not repeat this quarter, which meant our managers are required to take more discounted business. In addition, our Westin LAX had difficult comps this year as the hotel benefited from the Marriott LAX renovation last year.
In the Florida Gulf Coast, RevPAR at our hotels declined 3.3%, resulting from a 1.5% increase in average rate offset by a 2.9 percentage point decrease in occupancy, due to the tougher comparables to the third quarter last year. As you may recall, certain of our hotels remained open and benefited from hurricane-related business last year. In addition the Ritz-Carlton, Naples Golf Resort had meeting space and ballroom renovations this year.
Our New York hotels RevPAR declined 2.8% this quarter with a decline in occupancy of 2.2% and a decline in ADR of 40 basis points. The declines were primarily driven by a decrease in transient revenues of 5.8% this quarter, partially mitigated by strong group business which was up 4.5%.
Moving away from our quarterly results and looking to our forecast for the full year, we expect our hotels in Miami, Philadelphia, Maui and San Francisco to outperform. Inversely, we anticipate our hotels in the D.C., Houston, Los Angeles and Atlanta market to underperform.
Now, let me spend a little bit of time talking about our capital position. In October, we paid a regular third quarter cash dividend of $0.20 per share which represents a yield of approximately 4.2% on our current stock price. In addition, this represents a payout ratio of 46% on our adjusted FFO per share. It remains our policy to pay out 100% of our taxable income to shareholders.
We continue to operate from a position of financial strength and flexibility. We are the only lodging REIT with an investment-grade balance sheet which we are committed to maintaining as we believe it is a prominent differentiator to our peers and provides flexibility, take advantage of value creation opportunities throughout the cycle.
As of September 30, 2018, we had unrestricted cash of almost $1.3 billion, and $702 million of available capacity under the revolver portion of our credit facility. Total debt was $4.1 billion with an average maturity of 4.3 years and a weighted average interest rate of 4.1%. In addition, we have no debt maturity
In addition, we have no debt maturities until 2020. Our leverage ratio is approximately 2 times as calculated under the terms of our credit facility providing a significant dry powder for opportunities to increase long-term shareholder value.
As Jim noted, we've been very active on the capital recycling front. Year-to-date, we sold five assets for a total sales price of $1.2 billion. Additionally, we have $1.1 billion under contract, the Westin Grand Central and our pro-rata portion of the Euro JV. Collectively, this $2.3 billion of asset sales, when closed, will have been sold at an approximate EBITDA multiple of 20 times 2018 forecasted EBITDA.
Upon closing of the two pending transactions, along with the repayment of the corresponding debt related to the Euro JV, and the payment to our minority partner in the JW Marriott Mexico City, our cash balance will increase by approximately $400 million to approximately $1.6 billion, and our capacity available on our credit facility will increase to $942 million. All of these recent sales and anticipated sales had been reflected in our guidance for 2018. However, to help with modeling for next year, the pro forma effect of our net acquisition and disposition activity is a decrease of $64 million from our 2018 forecast EBITDA.
Overall, we are pleased with our strong operating results which enabled us to increase our adjusted EBITDAre and adjusted FFO per share guidance for the year. Our performance continues to demonstrate that owning a portfolio of iconic, irreplaceable and geographically diversified hotels having the scale and platform to drive value, combined with a powerful investment grade balance sheet, is a strong strategic position to deliver significant value to our stockholders over the long term.
This concludes our prepared remarks and we are now interested in answering any questions you may have. To ensure we have time to address questions from as many of you as possible. Please limit yourself to one question.
Thank you. We'll take our first question from Anthony Powell from Barclays.
Hi. Good morning, everyone. You're building a pretty significant cash balance and investment capacity balance. What's the timeframe for investing in that capacity and if you are unable to transact on an acquisition of a hotel over the next few quarters, would you move quickly to buybacks or are you comfortable holding that cash for long period of time?
Anthony, thank you for the question. As we think about our capital recycling activity, I do want to point out that the assets that we sold have achieved superior pricing. And they have resulted in following through on two key strategic objectives that we set out about two years ago, when I first became CEO, and that's reducing our exposure in New York City to profitability-challenged assets and really becoming more focused on the U.S. So we've accomplished that in a very attractive manner.
With respect to use of proceeds, as we sit back and think about reallocating that capital, we believe that there are three areas that make sense for us. One is buying assets to further upgrade the overall quality and growth and free cash flow generation of the Host portfolio. The second is investing in our portfolio where we can drive meaningful returns by reinventing properties such as – we'll talk about later I'm sure the Marriott transaction that we did – or buying back stock.
So I don't think that we are in a rush by any means today to get the capital deployed. I will point out that we have not been shy about buying back stock in the past. Between 2015, 2016, we repurchased $890 million stock at an average price of about $17.15. So as we think about deploying capital, we really do run the screen on an acquisition or investing in our portfolio relative to buying back stock at current prices and that drives our decision making.
All right. Maybe just one more follow-up. I think there were some media reports a few months ago about you were thinking about selling a large portfolio of non-core assets at presumably higher cap rates than your recent deals, is that something you would still consider or have you been able to generate enough proceeds with these recent large, low cap rate transactions?
Anthony, we're not out to generate proceeds for the sake of generating proceeds. We're out to opportunistically take advantage of dislocation in the market and we start internally for every asset that we consider selling by doing our own internal hold value and that hold value takes into consideration our view of the likely performance of that asset over the near term, looking out over a 10-year timeframe. But obviously, it's a little difficult to forecast anything over 10 years. But certainly over the next three to five years, you can get a pretty good handle on it taking into account that the full capital requirements of any particular property and then, just kind of get back at what we consider to be appropriate discount rates using a market residual cap rate.
So, that's where it starts on dispositions. The same way we look at acquisitions. There are always a lot of media reports out there. We don't comment on anything until the deal is either done or we have a hard money contract.
Right. Thank you.
We'll take our next question from Chris Woronka with Deutsche Bank.
Hey. Good morning, guys.
Morning, Chris.
Yeah. Good morning. So, you're now, it seems like, pretty complete on the strategy to reduce New York. So, I guess the question is as you look across the board, does that – are there certain markets or segments where you'd like more exposure with a higher transaction? You picked up a couple resorts. You picked up San Francisco. Is there anything that kind of stands out to you, again, either market or segment wise?
We continue to like the resort market, Chris, given the dearth of new supply that that's being built in those markets today. It's particularly the type of properties that we feel we are very good at owning given the scale and access to data and information that we have which differentiates us from others. The business information systems, the business intelligent systems allow us to really understand where we can drive value in resort properties. So, we'll continue to be focused on resorts.
The other area that we feel we are differentiated in many ways is in big boxes. Again, the same metrics apply. We have an incredible database of information that allows us to benchmark any potential acquisition against the performance of our existing assets, and from a supply perspective, it is very low. I think it's less than 40 basis points.
So those are the two areas that we'll be focused on. Additionally, we will continue to think about assets that will outperform the rest of the portfolio, assets that are more sustainable from a CapEx perspective to fund capital needs out of the FF&E reserve, and thus will result in higher free cash flow generation.
Okay. Very good. Thanks, Jim.
Sure thing.
And our next question comes from Shaun Kelley from Bank of America.
Hey. Good morning, everyone. I was just wondering if you could comment a little bit more about what you guys are seeing on the Marriott integration front. I think last quarter you were very clear in your comments. Some other peers or competitors are out discussing that they are continuing to see some latent disruption issues. And then also if you could just kind of hit on the union point, if you have any hotels exposed, and if that's dragging down your 4Q expectations at all.
Sure, Shaun. Let me talk about the union point first and then I'll get to the Marriott integration question that you asked. We had experienced strikes at our Westin in Seattle and the Chicago River – Westin Chicago River North property. Both of those strikes have been settled. The union is currently striking in San Francisco and in Boston. We are monitoring the situation very closely and have a good handle on what's happening at the hotels.
I am not in a position, given the sensitivity of the negotiations, to talk about whether performance is up or performance is down at either property. I will tell you that we've taken the likely performance of those hotels into consideration as we've developed our forecasts for the balance of this year and our full year guidance.
Now, with respect to Marriott integration, we continue to monitor it very closely. Of course, there were a few hiccups along the way, but really no measurable negative impact. What distinguishes Host from others who may have experienced more disruption is first, the scale of our portfolio, but really, the size of our hotels. Our properties have our sales management teams on site. So, there was not a need to transition those sales teams to regional offices, and the attendant disruption that came from that. And I understand there was disruption for others, but I can tell you we saw no measurable impact at our properties.
And more importantly, on a very positive front is that now our Starwood legacy hotels have access to 30,000 additional business-to-business accounts that Marriott had. And we've seen benefits already inuring to the Starwood legacy properties as a result of having access to that account information. So we receive benefits on the top line and lower cost on the bottom line as well.
Thank you very much.
And we'll take our next question from Michael Bellisario from Baird.
Good morning, everyone.
Good morning, Mike.
Good morning.
Just wanted to talk on – and ask on 2019 outlook – maybe one just on group pace and how you're seeing that shape up for next year. But then just high level, how you're thinking about the macro backdrop heading into next year, especially relative to the performance that you guys have achieved this year?
Sure. I'd talk about the macro backdrop a bit. And as I said in my prepared remarks, we think that industry fundamentals are on solid grounds today, and we're optimistic that steady as she goes will continue. The hotels are running at record occupancies. All of the indicators that we focus on non-residential fixed investment, consumer confidence, GDP, corporate profits, they're all strong.
As I mentioned, our third quarter occupancy was the highest it's been since 2000. So the table is set for continued growth. We're also and have been keeping a keen eye on supply. And while we'll have some new supply next year, it's manageable. And we expect it will see just a bit more in 2020 and then supply taper down. So our view is steady as she goes. Things are looking pretty positive next year given the fact that we're 100 months into the cycle right now.
So that said, we are keeping an eye on other things. We're keeping an eye on the impact the potential trade wars could have on the U.S. economy and U.S. businesses and business travel, the rising U.S. dollar, it's been bouncing around quite a bit, and rising interest rates and the volatility in the stock market. So, we're optimistic, but we are being thoughtful and being very aware with what's happening around us.
With respect to 2019 group pace, we are a bit behind in group room nights. As I mentioned, the hotels are running at record occupancies. However, our total revenue on the books between group room nights and F&B revenues is about flat to where it was this year. A part of that is being driven by fewer city-wides in a few markets. Boston, Chicago, San Diego and Washington, D.C. Additionally, we will see a little less group pace in a market like Orlando and a market like New York. The New York Marquis. But keep in mind what I said we're getting – that's because those two hotels will be part of the Marriott branch transformation program.
Really important to understand that that's not going to impact our bottom line because we are getting disruption guarantees. So we feel that the portfolio is really positioned to produce optimal revenue mix. We are not concerned about the lack of city-wide in the markets that I referenced. We feel good about what we have been seeing on short-term corporate group bookings and strong leisure and transient demand.
That's all helpful. And just one really quick housekeeping item just – what are the tax implications of bringing back the capital from the Euro JV relative to the $505 million of net proceeds you mentioned in that 17 times EBITDA multiple?
Yeah. Well, let's start with Europe first, just to understand the valuation of the sale and then we'll bring it back to today. So, our 33% interest was valued at $700 million. That valued the entire portfolio 2.1 – €700 million. That valued the entire portfolio €2.1 billion and the valuation on our interests was 17 times EBITDA. That is – the capital that we're bringing back, a portion of it is a capital gain and we will make a determination as to how we deal with that capital gain. We obviously had two options. One option is to distribute. The other option is to pay taxes on it and retain the cash.
So as we get into planning for next year and the budgeting process, I think we have to make this decision by the end of January and that's the timeframe within which we will operate.
Okay. That's helpful. Thank you.
We'll take our next question from Smedes Rose from Citi.
Hi. Thank you. I wanted to just ask a little bit about some of the parameters around the performance guarantees that Marriott is providing? And I guess – first, are they allocated on a per asset basis or is it a sort of a large sum that you can draw from depending on the amount of disruption? And then also, as the Marquis San Francisco kind of being retroactively added to this pool now? I couldn't tell from your opening remarks, if that was in that set or not?
Sure, Smedes. Let me let me back up before I answer your specific questions and maybe give you get a bit of color on the program. I think I was pretty clear in the prepared remarks as to why we think this is a good use of capital. But it might be helpful to frame it so that so then you can see how the priority returns and the disruption operating guarantees work.
So as we step back and – yeah, San Francisco was, I would say, the – as we call it the Bell Cow here. The property needed to be reinvented. It's a main-in-main asset and one of the best markets in the country. So we had talked with Marriott about what could we do together to really – I'll use a word that you hear other times, really make that hotel relevant. To make it number one in its competitive set in the market.
And let me stop on competitive set for a moment, because our objective on every brand transformation project we undertake is to bring that property to number one in its competitive set. And we had worked out a deal with Marriott where they would provide us disruption guarantees and a priority return on the San Francisco Marriott Marquis.
So when we saw how that would work and we had the framework of a deal, we sat back and took a look at other assets in our portfolio that were going to need to be renovated over the next several years – beyond the next several years. And we looked at the total CapEx spend that was going to be required on those assets.
Our experience has been that if you completely transform a property, you can expect a meaningful lift in RevPAR yield index, somewhere around 3 to 5 points, and I think that's on the conservative side. But those are the numbers that we looked at.
So by pulling those renovation projects forward and increasing the spend over what we would have spent, but really when we get into one of the assets, we're going to completely renovate the entire property including: activating the lobby; activating the bar area; activating food and beverage; upgrading fitness facilities; doing tub-to-shower conversions in the guest rooms; in appropriate markets doing hardscape flooring in the guest rooms. To really make these hotels fit with what people are looking for today, and as I said, make them number one in their set.
And we came to an agreement that Marriott would provide us with additional priority returns on our investment, which serve to reduce their incentive management fees. And additionally, it's on a property-by-property basis.
Now to get to your question about disruption, to provide operating performance guarantees, to deal with the anticipated disruption on a hotel-by-hotel basis. And I want to point out that that is unique to anybody in the industry. This is capital 70% of it, plus we would have to spend anyway. But we are getting compensated for doing this, and we're really excited about it.
Okay. Fair enough, thank you. Then just Michael you mentioned the dividend paid in October as we head into yearend, would you expect to have to kind of true up in order to distribute 100% of taxable income above the $0.20?
Yeah. I think – I'm sorry. Yes. Again, our policy is to get 100% of our taxable income.
So you would expect this special dividend in addition to the regular dividend in the fourth quarter or...
We can't comment on that at this point.
All right. Thank you.
Our next question comes from Rich Hightower with Evercore ISI.
Hey, good morning, guys. I'm going to waste a bullet here on a follow up to Smedes question on the guarantee in terms of the mechanics. So when we talk about full operating profit protection, is that based on a prior time period or some sort of baseline projection for the asset just in terms of how we come up with that number? And then can you also walk us through the timing on the spending. Is it pretty ratable across the next four years in terms of that incremental $150 million to $200 million or is it more concentrated in certain periods over that four years? Just help us in terms of the modeling mechanics there.
Yeah. So let me clarify one thing, Rich. When we're talking about four years, it starts with 2018 because the Marriott Marquis in San Francisco, as we've talked about before, is a $110 million brand transformation. So it's 2019 and the next three years, and it is ratable over that period of time.
We spend, on average, roughly $500 million a year on maintenance, repair and replacement FF&E. And we've been doing that now for 25 years. Part of enterprise analytics is a group, it's capital financial planning. And every year, as we develop our capital plans, we determine what the attendant disruption is going to be and we factor that into our budget.
So, we have really solid data across all markets with all types of assets, and have a very good handle on what a room's renovation is going to do to the bottom line, what a ballroom renovation is going to do the bottom line, what repositioning the lobby will do to the bottom line. And that's how we developed the anticipated disruption in connection with the brand transformation project and that is the amount of guarantee that we negotiated with Marriott.
Okay, Jim. That is helpful color. Let me ask you one follow-up here. We haven't spent a whole lot of time on labor expense on this call as I think we have in the past. Can you – I know you said kind of a 3% to 4% CAGR is probably a good run rate for the next few years. Is there a way to break that down across East Coast, West Coast or union versus nonunion hotels, just so we understand the differentiation there as you roll up to the aggregate?
Yeah. There's really not, Rich. I think it really does vary by market and it's across the board and it's not consistent in any given market. It's really property by property.
Got it. Thank you.
Our next question comes from Jared Shojaian with Wolfe Research.
Hey, good morning, everyone. Thanks for taking my question. I just want to go back to some of your group comments, because I think last quarter you were seeing good production in terms of what you had on the books for 2019, as far as the bookings in the quarter for 2019. So to be a bit behind on group room nights in 2019, that seems like it's lower from where you were before, but can you just confirm if that's the case and maybe talk about why that is? And then if you could also just tell us your total group production in the quarter for all future periods? Thank you.
Well, what I talked about last quarter was activity in the quarter. What I'm talking about today is actual – use it in a different way, pace – and what we're seeing from a pace perspective. And I don't think that there has really been any change quarter-to-quarter from what we've been seeing. We've been focused on the assets in markets where there are weak citywides. I will tell you this that our pace for 2020 and 2023 right now is up 6.4%. So we're very bullish as we see the booking window continue to extend and beyond 2019 and into 2020 and beyond.
Okay. Thank you. That's helpful. And just a quick housekeeping for me. Can you just tell us how much your competitive industry supply in your markets is up this year and next year, and then you had mentioned an acceleration into 2020. So that would be helpful to get that year as well.
I would say this year, next year roughly 2.3% to 2.5%, and then 2020, we're seeing a decline.
A decline. Okay. Thank you.
Yeah. A decline in 2020. Right.
And we'll take our next question from Robin Farley with UBS.
Hi. Most of my questions have been answered. I guess maybe just circling back from a moment to the Marriott deal just to better understand that. And I certainly understand from your perspective why you do it. It seems like a great deal if you have a guarantee to be made whole kind of well into the cycle here. But just to understand how it works when we think about those properties and how performance might compare next year versus this year.
When you talked about the process of kind of estimating the disruption impact and then Marriott would sort of guarantee that amount of disruption impact. But I assume if performance is down because of disruption, one can always debate sort of what the cause of it is. So I guess I just want to understand, is the guarantee that basically your first x percent of decline, whether that's 5% or 15% or 20%, whatever, that from the EBITDA in 2018 that you report, that the first x percent of that decline you're going to be made whole. Is that the way to think about? So from an EBITDA perspective, we wouldn't even know there's anything going on at those properties unless you dropped below a certain amount of decline. Is that the right way to think about it?
Robin, no. I think it is based on the anticipated disruption. So, you can paint two scenarios. One scenario is that we have a meaningful reacceleration in top line performance and an attendant increase in flow-through in EBITDA at a hotel that's part of this program. The operating guarantee still gets paid, okay? So it's regardless.
So, there is less...
And it goes the other way as well. If the EBITDA declines, the operating guarantee is set at a fixed amount.
Okay. So, you'll make that amount. In theory, if there were no disruption, you would have an increase in EBITDA from that property because you're going to get paid that amount anyway. Is that the way to think about it?
Yeah. I think that's the right way to think about it. Yes.
Okay. And I guess, I don't know, and maybe this is really a question for Marriott, because again it seems like a great deal for Host, and I guess I'm just trying to think about, the Host, more typically, you will do renovations and add meeting space and ballroom space, and you do this at properties all the time without typically getting that kind of guarantee. So, I guess just trying to understand what's different now. Was it just a decision on Host's part that you didn't want to have CapEx pick up to the level that maybe some of these properties required or like, I guess, why the change in what is sort of typically the case for kind of who bears the cost of renovations and the risk of disruption and all of that. I guess what's sort of behind that? Thanks.
A couple of things, Robin. Our renovations have typically been staged over a number of years. To paint the backdrop, you do rooms in a property in 2018, and then in 2019 or 2020 you might touch the meeting space. And then you're going to get into the F&B outlets in the lobby, and then you're right back to doing your rooms again. So the thought here was we accelerate the spend. We're going to spend a little more than we typically would have. But when we are done in a compressed period of time, we're going to have a fully renovated hotel that plays very well to the consumers and will clearly be number one in its competitive set.
I think what's important to Marriott is the fact that we own the best Marriotts in the system. Some of the assets that I mentioned, the New York Marriott Marquis, Orlando World Center, Boston Marriott Copley San Francisco and down the list. And I think from a brand perspective, to be able to showcase what brand transformation means, they've undertaken this exercise in other properties like the Charlotte Marriott, the Portland Marriott and a few others along the way. But to be able to showcase these assets, I think and I'm hopeful that other owners of Marriott hotels will follow down the same path.
Okay. Great. Thank you very much.
And that is all the time we have for today's Q&A session. I would like to hand the conference back over to our speakers for any concluding remarks.
Well, thanks everyone for joining us on the call. We appreciate the opportunity to discuss our third quarter results and outlook with you. We look forward to talking to you in San Francisco. And if you're not in San Francisco in February, to discuss our yearly 2018 results, as well as providing you with more insight into 2019. Have a great day.
And once again ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.