Feb 19, 2015
Executives
Gee Lingberg - Vice President W. Edward Walter - President, Chief Executive Officer & Director Gregory J.
Larson - Chief Financial Officer & Executive Vice President
Analysts
Smedes Rose – Citigroup Steven Kent – Goldman Sachs Richard Hightower – Evercore ISI Anthony Powell – Barclays Capital Management Joe Graff – JP Morgan Shaun Kelley – Bank of America Merrill Lynch Bill Crow – Raymond James & Associates Harry Curtis – Nomura Securities Thomas Allen – Morgan Stanley
Operator
Welcome to the Host Hotels & Resorts Incorporated fourth quarter and full year 2014 earnings conference call. Today’s conference is being recorded.
At this time I would like to turn the conference over to Gee Lingberg, Vice President.
Gee Lingberg
Welcome to the Host Hotels & Resorts fourth quarter 2014 earnings call. Before we begin, I’d 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 filings with 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 publically 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 EBITDA and comparable hotel results.
You can find this information together with reconciliations to the most directly comparable GAAP information in today’s earnings press release, in our 8K filed with the SEC and on our website at www.HostHotels.com. In our efforts to continually improve on our disclosures, we have added an EBITDA by market supplement to our website.
You can find this information on our investor relations section of our website under financial information. We hope that this information is valuable in understanding and analyzing our company.
Now with me on the call today is Ed Walter, our President and Chief Executive Officer and Greg Larson, our Chief Financial Officer. This morning, Ed will provide a brief overview of our fourth quarter results and then will describe the current operating environment as well as the company’s outlook for 2015.
Greg will then provide greater detail on our fourth quarter performance by market and discuss our margin results. Following the remarks, we will be available to respond to your questions.
Now, here’s Ed.
W. Edward Walter
As we predicted in October, our fourth quarter results were impacted by a combination of weaker group activity and disruption from renovations. Overall, we were pleased to record another very positive year for our company.
Revenue growth was strong and superior cost controls led to another year of excellent margin improvement. In addition, we made significant progress on several value enhancement projects and on our asset sales initiative.
Before we get into the details, let’s review our results for the quarter and the year. Adjusted EBITDA was $351 million for the quarter and $1.402 billion for the full year, representing a 7.4% increase over the prior year.
Our adjusted FFO per diluted share was $0.40 for the fourth quarter and $1.50 for the full year exceeding consensus estimates and reflecting a 14.5% increase over 2013. These results were impacted by several factors.
For the full year, our portfolio achieved a 77% average occupancy allowing our hotels to drive rate increases of nearly 5% resulting in an improvement in comparable hotel RevPAR of 5.7%. For the quarter comparable hotel RevPAR increased 3.2% due entirely to rate growth as occupancy declined by .6 points.
As outlined in our press release, we had a large number of room and meeting space renovations that began in the fourth quarter. These projects reduced our capacity to attract our customary level of corporate group business as well as some of our higher priced transient customers.
Overall, we estimate that our renovation activity reduced our quarterly RevPAR by 160 basis points. More specifically, demand in our group segment declined more than 1% in the fourth quarter but was largely offset by a 1% increase in average rate.
As we explained in October, the timing of the Jewish holidays clearly accelerated association business into the third quarter which resulted in the decline in demand from this segment in the fourth quarter. Despite this headwind we were quite pleased with our bookings in the quarter for the quarter which improved by more than 12% with rates up 15%.
For the full year group rate was up nearly 3% while demand was up over 2.5% resulting in an increase in group revenues of more than 5.5%. Looking at our transient business, in the quarter we experienced some weakness from the shift in holiday timing and renovations, but much less of an impact from what we experienced in the group side.
Demand decreased by less than 1% but importantly rate increased in all segments leading to an average rate increase of nearly 4% and revenue growth of over 3%. For the full year, our strong group demand allowed us to increase our transient rate by nearly 5%.
Combining the rate increase with the slight increase in demand, led to a more than a 5% increase in transient revenues. Food and beverage revenues increased by .4% for the quarter and 3.8% for the full year.
Banquet and AV revenues were up slightly in the fourth quarter but increased more than 5% for the full year, driving better margins in our food and beverage systems for both the quarter and the full year. The initial benefits of our latest round of cost cutting initiatives combined with lower incentive fees due to prior negotiations, resulted in comparable hotel EBITDA margin improvement of 15 basis points for the quarter and 120 basis points for the full year.
Now, let’s move to our transaction activity. On the disposition front, during the first quarter, we sold the Tampa Marriott Waterside, the Greensboro Highpoint Marriott and the Dayton Marriott for a combined total of $239 million.
The latter two transactions were completed by taking advantage of franchise conversion rights we had previously negotiated with Marriott International and the buyers have committed to significant capital improvement as part of the management transition. For the year, we completed more than $515 million in dispositions.
These transactions further reduced our exposure to non-target markets and to lower RevPAR hotels. We have one additional smaller asset under contract with an anticipated Q1 closing which has been included in our guidance for 2015.
On the development front in the fourth quarter we opened 149 room Novotel and the 256 room ibis Rio de Janeiro Parque Olimpico in Barra de Tijuca, both managed by Accor. The total investment in this project is $65 million.
We expect to be active on both the acquisition and disposition front as we look to increase our investments in target markets and remain focused on reducing our exposure to non-core markets and hotels located in suburban locations or secondary markets. While we have active pipelines for both sales and acquisitions given the difficulty in predicting the timing of completing these transactions, our guidance does not assume the benefit of any additional dispositions or acquisitions.
As we highlighted at our investor day last spring, we continue to look for ways to extract value from our assets in various and creative ways including the development of underutilized space in hotels, [indiscernible] excess land, rebranding or repositioning, or by restructuring management agreements and ground leases. With an acquisition market that is growing increasingly competitive, these types of value add projects will allow us to continue to provide strong returns for the company.
In 2014 we completed two notable value enhancement projects in the fourth quarter. First, in December we completed the development of the 131 Hyatt Ka’anapali Beach, a Hyatt resident club resort adjacent to our Hyatt Regency Maui Resort in [Baja].
We recognized EBITDA of $7 million for the full year from this project. The second project was at our New York Marriott Marquis Times Square Hotel as part of the redevelopment and lease of the retail space to Vornado Realty Trust, the new 25,000 square foot eight story high definition digital boulevard was activated in November.
The redevelopment of the entire retail space is expected to be completed late this year. For 2015, we plan to increase the pace and volume of these value enhancement projects to put us in a position to better drive long term outperformance in 2016 and 2017.
These projects include properties where we will be completing a rebranding or transformational renovation that will reestablish the property in its marketplace and provide meaningful increases to the hotel’s profitability going forward. The first example of this is The Axiom Hotel in San Francisco which will be managed by Kokua, an operator we have previously retained for our Hyatt Place in Waikiki.
As you know, we acquired the former Powell Street Hotel early in 2014. We closed the property on January 2nd to complete a transformational $30 million plus repositioning that will touch every corner of the hotel.
We anticipate that the asset will reopen later this fall. We are also very excited about our plans for the Four Seasons Philadelphia which will reposition the hotel as a contemporary independent luxury hotel in a vibrant part of the city.
We have retained Sage Hospitality as the manager and intend to use their F&B expertise to completely transform their current offerings to better attract our guest and local customers alike. In addition to creating a luxurious rooftop lounge we are adding a high end coffee bar, and under taking a complete gut renovation of the spa and fitness center.
We estimate the total project will cost $28 million to $30 million and we plan to shut the whole property down in June for the renovation and reopen at the end of 2015. In addition to these two projects, we are currently working on similar plans for a third hotel and hope to announce this exciting project later this spring.
Another major project is the development of the $106 million new Marriott Hall Ballroom and Exhibit Space at our Marriott Marquis San Diego Marina Hotel. Demolition of the existing Marriott Hall commenced in the fourth quarter and the new expanded meeting platform is expected to be completed in June of 2016.
This state of the art meeting space will benefit not only the Marquis property but also our neighboring Manchester Grand Hyatt, as those properties will be able to drive group business through the utilization of this fantastic new meeting space. Finally, at the Denver Marriott Tech Center, we have converted the asset to a Marriott franchise with Sage Hotels to implement a transformational renovation which will include creating an executive level tower that will house our new concierge lounge and fitness center and the other tower we are combining rooms and reducing the room count to allow us to attract both family weekend business as well as extended stay customers.
In addition, we will be upgrading the meeting space, F&B offerings, and creating a new lobby. The renovation is expected to begin in November and will cost $60 million plus.
We continue to be optimistic about fundamentals in our industry as we expect overall supply to fall short of long term averages for at least the next two years. Expected continued growth in the economy, strong capital investments, and growth in domestic travel should lead to revenue growth that comfortably exceeds inflation at a long term industry averages.
The results should be improved asset and company valuations in our industry. Our outlook recognizes the following factors.
Given that we finished the year with occupancy at 77%, our highest since 2000, we expect that the great majority of our RevPAR growth in 2015 will come from rate increases. Our maintenance capital expenditures, which are projected to increase approximately 5% to $330 million to $350 million, will have a more disproportionate business interruption impact than normal, because the renovations often include extensive bath and shower conversions which are more time consuming, and we are enhancing several lobbies.
A significant portion of the business impact will be felt in our group business as meeting space and lobby renovations discourage group bookings. Despite this concern, overall group bookings for the year are up modestly with the first half of the year looking quite solid.
Recognizing the inherent strength in transient demand, our focus over the last six months has been on pushing rate in our group business and our advanced bookings over that period reflect the nearly 7% increase in rate. While we view the overall supply picture as favorable, two of our key markets DC and New York, are experiencing elevated levels of supply and in the case of New York, face significant year-over-year headwinds.
As a result, these markets, which represent 27% of our revenues, our expected to underperform in 2015. With all of these factors in mind, we are expecting comparable hotel RevPAR for our portfolio to increase 4.5% to 5.5% in constant currency with our domestic portfolio to increase $475 to $575.
Four our international portfolio, primarily because of the extremely difficult comps JW Marriott Rio faces in the year after World’s Cup, we are projecting RevPAR on a constant currency basis to be flat to up 2%. This RevPAR growth when combined with our [indiscernible] impacted margin increases of 20 to 50 basis points, will result in adjusted EBITDA of $1.420 billion to $1.550 billion and adjusted FFO per share of $1.52 to $1.55.
I should note the following when comparing our 2015 adjusted EBITDA estimates to last year’s results. First, because our dispositions significantly exceeded our acquisitions in 2014, the overall net reduction in EBITDA compared to last year from investment activities is roughly $20 million.
Secondly, while we expect meaningful long term benefits from the brand conversions and major capital investments we are implementing in 2015, our seven non-comp hotels are expected to experience a net reduction in EBITDA of $25 million compared to last year as a result of the closing of all or a portion of the hotel. Finally, while only 8% of our portfolio EBITDA is generated from international properties, the significant appreciation of the dollar is currently projected to reduce the nominal value of our international EBITDA by roughly $17 million.
In summary, I am pleased to say that the lodging industry continues to be strong through the continued demand that exceeds low supply growth in most markets. Given the positive industry outlook and underlying economic fundamentals, we believe this cycle will continue to be strong throughout 2015.
The capital we are investing in our hotels ensure that our portfolio is in excellent condition and has the opportunity to achieve strong NOI growth. Our industry leading balance sheet is only getting stronger, our cost of capital remains attractive.
Thank you and let me turn the call over to Greg Larson, our Chief Financial Officer who will discuss our operating and financial performance in more detail.
Gregory J. Larson
Our hotels in the west continue to lead the portfolio in RevPAR growth. Excellent results from our properties in Hawaii, San Francisco, Florida, and Phoenix were offset by weaker results at our urban New York, DC, and Boston hotels.
One thing to note, our urban assets, especially those in New York, are operating at very high occupancies and as such RevPAR growth has been limited to increases in average rates. With the abundant supply in New York, the growth in average rate has flowed and the flat room revenues at our hotels in New York impacted our portfolio RevPAR growth by 100 basis points in the quarter.
In addition, as discussed during our third quarter call, a larger share of the renovations for 2014 occurred in the fourth quarter and the impact of those reservations have been greater than anticipated. While these capital improvements strengthen and create long term value in the portfolio, the negatively impacted the fourth quarter RevPAR growth results by approximately 160 basis points.
Many of the disruptive renovations will continue into 2015 and will adversely impact our short term results. Let me now provide some commentary around our markets.
We posted very strong results at our Hawaiian hotels as the Hyatt Regency Maui strategically reduced group volumes as well as higher rate transient room nights [indiscernible] our owners. This contributed to an increase in occupancy of three percentage points and growth of ADR of 10.5% resulting in impressive RevPAR growth of 15%.
Our hotels in San Francisco grew occupancy 2.3 percentage points and grew average rate 8.5% resulting in RevPAR growth of 12% in the quarter. All five of our comparable hotels in San Francisco posted double digit RevPAR growth benefitting from the strong group demand in the market this quarter.
Corporate group ADR increased 14% and transient ADR improved 10.4%. Our properties in San Francisco for the full year, grew RevPAR by an impressive 15%.
Our Phoenix assets also had a strong quarter with an increase in RevPAR of 8.8% driven by strong group business that also led to robust food and beverage growth of 23%. In Florida, our hotels also outperformed our portfolio in the quarter by significant margin with RevPAR growth of 9.4%, primarily driven by a substantial transient rate increase of approximately 10%.
We believe our Florida assets are poised for another strong year in 2015 as the group revenue pace is up over 9% in 2015. As expected, RevPAR growth for the fourth quarter in New York, DC, Boston, Houston, San Diego, and Canada was challenged.
The challenges arose primarily as a result of disruptive room, meeting, and public space renovations that were ongoing during the quarter at many of the hotels in these markets which negatively impacted RevPAR growth. New York and DC were impacted by supply increases that limited rate growth in those markets.
However, it is important to note that even with New York’s challenging supply environment, our hotels grew market share by 1%. In the first quarter of 2015, in addition to the continued impact of supply, the disruption to travel caused by severe snowstorms in the Northeast region will also impact RevPAR growth in New York.
Further, we have difficult year-over-year comparisons in the first quarter as our hotels in New York strategically took on group business during the Super Bowl last year with both our hotels in Times Square serving as the headquarters for the media and the NFL. All these actors will combine to negatively impact 2015 first quarter results.
In addition to the supply challenges, our hotels in DC had a disproportionate amount of disruptive capital expenditures in the quarter, limiting RevPAR growth. The JW Marriott was under rooms renovations and the Grand Hyatt was under meeting space renovations in the quarter which negatively impacted overall results for our hotels in the DC market.
These renovations will continue into 2015 further impacted the operations of these hotels or the next couple of quarters. Boston, while not impacted by renovations this quarter, had less city wise at the Heinz Convention Center and difficult comparisons due to the World Series last year.
For the first quarter 2015, the record breaking snowfall in Boston will negatively impact results. Houston and Calgary were impacted by falling oil prices in addition to the disruptive renovations at the JW Houston, Houston Airport, and Calgary Marriott hotels.
The negative impact from renovations at these hotels and the falling oil prices will continue into 2015. The 2.2% fourth quarter RevPAR growth for San Diego was primarily impacted by renovations at two large hotels in San Diego.
Group business was negatively impacted by the meeting space renovation at the Manchester Grand Hyatt and the start of the Marriott Hall construction at the Marriott Marquis San Diego Marina. The construction of the Marriott Hall will be completed in mid-2016.
The meeting space renovations at the Manchester Grand Hyatt have been completed and the hotel will benefit from those renovations in 2015. It is encouraging to see a 6.5% increase in our San Diego hotels 2015 group revenue [indiscernible].
Shifting to our European joint venture, our hotels in Amsterdam, Brussels, Nurnberg, and Milan had excellent RevPAR growth ranging from 8% to 15% in the fourth quarter. This strength was partially offset by weakness in many of our hotels in the other European markets resulting in a 2.9% increase in the European joint venture’s comparable hotel RevPAR.
Food and beverage revenues increased .8% which led to a total revenue increase of 1.7%. Even with a total revenue growth of only 1.7% for the quarter, with good cost control measures these hotels grew EBITDA by 5%.
Looking to 2015, lodging fundamentals in our domestic hotel market with the exception of New York, DC, and Houston, will continue to be strong in 2015. We expect all but these markets to have strong year of RevPAR growth that will meet or exceed the midpoint of our domestic RevPAR guidance for 2015.
On the other hand, our own international properties will perform below our domestic portfolio primarily due to the expected significant decline in RevPAR at our JW Marriott Rio which is a result of the extremely difficult comp from last year’s World Cup. In addition, on a nominal currency basis, the strengthening US dollar will have a significant negative currency impact on our international properties affecting RevPAR as well as EBITDA generated from these hotels.
For the hotels in the European joint venture with the continued economic challenges in many of the European countries, we expect comparable portfolio RevPAR to lag US RevPAR growth, however, the six month long international art exhibition returns to benefit this year and Milan is scheduled to host the World’s Cup which is also a six month event in the city. These two large events will drive outperformance at our hotels in Venice and Milan in 2015.
Moving our margin our comparable hotel EBITDA margins increased 15 basis points in the fourth quarter on RevPAR growth of 3.2%. Lower RevPAR growth in the fourth quarter slowed the strong margin expansion we still had on the third quarter.
In addition, $4 million of severance costs associated with the Four Seasons Philadelphia and San Francisco Marriott Marquis further impacted margins by 35 basis points in the fourth quarter. On a full year basis, margins expanded a strong 120 basis points.
During 2014, we were able to drive this increase through initiatives such as renegotiation of several management agreements. As a result, incentive management fees for 2014 decreased 4.1%.
We renew our insurance each year and in 2015 we were able to decrease our insurance costs by 6%. The cost savings realized from time and motion studies and deep dives conducted at various properties contributed to excellent rooms and food and beverage flow through of 76% and 48% respectively.
We continue to expect that these third-party time and motion studies as well as the company initiated deep dives will continue to help improve our margins going forward. Looking to 2025, we believe RevPAR growth will primarily be driven by average rate growth which should lead to solid rooms flow through.
However, certain savings realized in 2014 will likely be difficult to replicate in 2015. Our incentive management fees will increase at a more normalized level and real estate taxes are projected to increase well above inflation as hotel values have grown.
As I mentioned previously, we also expect the strengthening US dollar to impact our EBITDA for the year. With this in mind, we expect 2015 comparable hotel EBITDA margins to increase 20 to 50 basis points which equates to 40 to 70 basis points without the USALI adjustment mentioned in our press release.
As a reminder, our operators adoption of the updated Uniform System of Accounts for the Lodging Industry, USALI, affects the comparability of our results. These changes include declassification of items such as service charges which will now be included in both food and beverage revenues and expenses in addition to certain other reclassification.
Accordingly, the adoption of USALI will negatively impact RevPAR growth by 10 basis points while food and beverage revenue will be positively impacted by 250 basis points. EBITDA margin will be negatively impacted by 20 basis points while growth in total EBITDA is unaffected.
With regard to dividend, we paid a regular quarterly dividend of $0.20 per share and a special dividend of $0.06 per share for the fourth quarter. Our total dividend for the year was $0.75 per share which represented a 63% increase over 2013.
Today, we announced that our first quarter common dividend will be $0.20 per share given our strong extended operating outlook and significant amount of free cash flow we are committed to sustaining this meaningful dividend. In summary, we expect overall lodging fundamentals to continue to be favorable in 2015.
Having said that, our portfolio in 2015 will face a short term negative impact as we work to improve our properties through renovation and take advantage of other value creating opportunities. We believe these efforts will continue to create long term value for our shareholders.
This concludes our prepared remarks, we are now interested in answering questions you may have.
Operator
[Operator Instructions] Your first question comes from Smedes Rose – Citigroup.
Smedes Rose
I wanted to ask just a little bit around the renovations having kind of an outsized impact for this year. When you think about that and the timing around renovations are they market dependent so the asset is just considered on its own and you need to do what you need to do, or can you look kind of holistically across the portfolio and maybe mitigate the impact better?
I’m just kind of curious how you think about that? It just seems you have a lot going on this year and I’m just kind of wondering how you came about the timing on that?
W. Edward Walter
I think it sort of breaks into two categories. The first is where the redevelopment, the conversions of properties such as what we’re doing in San Francisco and what we intend to do at the Philadelphia Four Seasons and hopefully with a couple of other hotels, with those I think it really – we see such an opportunity to improve the cash flow from those assets that the timing simply was driven as much from the acquisition or in the case of the Marriott Hall it was when we were able to get the approvals to start the ballroom.
In the case of Philadelphia it was both resolving contractual issues with the Four Seasons originally and then ultimately having the opportunity to have flexibility to change the brand and change the hotel. I think in those cases to some degree I look at those similar to an acquisition that the timing was right, the opportunity was great, and so we moved forward with those as expeditiously as possible.
We do take into account with those – we try to look at what’s the best timing in the year to commence the renovations. One of the reasons why – the timing in Philadelphia is to close in June is to take advantage of the spring season including the May wedding season and then we will roll into the renovation with the goal being done for the fall.
In the case of the San Diego ballroom, we’ve actually had the approval to build that ballroom for quite some time now but we made a conscious decision to really plan far out in advance for when we would demolish the original ballroom and start to build the new one to give the hotel the ability to plan as much as possible around that timing and most importantly, from our perspective, to complete the renovations to the Hyatt meeting space next door so we were in a position where if we had in effect surplus rooms at the Marriott that they could take advantage of some of the meeting space that the Hyatt and have the two properties work together. With respect to the overall large cap ex hit that we generally described, I think some of that is a little bit it’s just this is the right time for each of those assets to pursue those renovations.
You heard a lot of them start in the fourth quarter carry into the first quarter, that’s all about trying to do these renovations at the point in time where they will least affect business. But the good news about our portfolio and our business right now is we’re 77% occupancy on a full year basis.
The bad news is when you’re that full unfortunately any kind of renovation work that you’re going to do is going to hurt you because you’re business is that strong. We were aggressive back in ’10 and ’11 about accelerating renovations at a point in time when we thought they would be less impactful from a business interruption standpoint and so you’ll remember we talked about increasing our spending then.
We’re trying to be as thoughtful as we can about what’s happening right now. It is the right time to do these things, but unfortunately we are paying a price in terms of business interruption.
Gregory J. Larson
The only thing I would add is we’re also fortunate enough, we have a tremendous amount of work going on both in Houston and Calgary and both of those markets were going to be fairly weak in 2015 so we’re fortunate on that front.
Smedes Rose
Then just as you look at the potential sale candidates, are you able to negotiate these franchise conversion rights or is that kind of played out now? It seems that that makes the properties easier to sell?
W. Edward Walter
It certainly does and we’ve referenced the fact that we have probably about 40% of our portfolio by number has some sort of contract flexibility. The bulk of that flexibility exists in assets that we have would generally be on, not necessarily specifically on sale lists today, but certainly covers most of the assets that we are targeting for sale.
We have a lot more opportunity on that front.
Operator
Your next question comes from Steven Kent – Goldman Sachs.
Steven Kent – Goldman Sachs
A couple of questions from the results, first just the strategic nature of New York City, and even DC for that matter, I get it from a long term perspective but the supply issues aren’t going to go away and they’re actually going to accelerate so is this a onetime event, or should we look at this as this could be pulling you down for a couple of years? Then, staying with that theme, have you started to see any impact of fx on visitation into DC or New York City, especially amongst the international leisure traveler?
W. Edward Walter
Let me answer the second question first. We are certainly concerned about the impact of the stronger dollar on international travel.
Clearly, international travel has been a driver in what we view as stronger than anticipated demand growth over the course of this cycle so that I think that is something to be watching. So far, we have not seen an impact from that in New York.
Some of that I would say we consciously sought out international business because we were trying to replace the hole that existed at those hotels from having had had the Super Bowl there the prior year, knowing that that was not going to repeat and there was also, I’m not remembering which one it was, but there was a fairly large group event too that was in town in January or early February of last year that also was not repeating. So, we had sought out additional international business and we were able to get that extra international business primarily through foreign travel.
What we’re hearing so far from the properties is that their international business has continued to be maintained strong. I think we’ll have to watch that as the year progresses because a lot of these sorts of international trips are planned way in advance so we’ll have to see if that situation remains the same as we work our way into the spring.
DC is frankly, less affected by international travel. We’re actually part of a group in DC that’s working to try to encourage incremental travel to DC from international locations and so I don’t think we’ve noticed anything in Washington that would suggest that had softened at all.
With respect to the two markets, you’re right the supply especially, in New York, I don’t know that we’re worried in the next two years about supply in DC, but supply in New York continues to be strong. It has continued to generate good demand growth.
Obviously, we talked a little bit about it already on the international side and the market has generally absorbed the new supply, but where the problems have come about is we haven’t been able to drive rate. Looking at the numbers, I’d have to say that looking at the next couple of years I do think that’s going to continue to be a challenge in New York.
I think New York from a capital perspective though continues to rank very highly as a place for both domestic and international investors to invest and so that has allowed cap rates in New York to remain low and we frankly don’t see that that situation is likely to change in the near term. So the value of the assets feel good to us but we would certainly like to see additional growth there.
DC on the other hand, I think DC’s strength this year will be more dictated probably in the short term, by how active the calendar is on the Hill and whether or not there’s a fair amount of legislative and lobbying activity. As we get into next year the conventions business in DC finally starts to improve in a material way.
We would be expecting better results in 2016 from DC.
Gregory J. Larson
I think the only thing I would add and you probably know this as well, DC was actually a really strong market in the fourth quarter with RevPAR for the industry up over 8%. Unfortunately for us, because we have two very large hotels in renovation, our RevPAR growth was only 2.5%.
But, I agree with Ed, when you look at the future of group bookings pace in ’16, ’17, and beyond it looks pretty exciting and as Ed said, supply growth in DC remains at 2% or below for the next couple of years so we do feel pretty good about DC especially once our hotels are fully renovated.
Steven Kent – Goldman Sachs
Just one separate note and aside, I’m intrigued by the move, the changing of the Four Seasons in Philadelphia, and I know you announced it a couple of months ago, but could you see yourself doing more and more of that or was this just a one off? I’m just intrigued by how you’re thinking about the portfolio and brand affiliation versus non-brand affiliation.
W. Edward Walter
I think you should assume that we’re going to try to do more of these types of projects. The one that we referenced that is premature to announce would be somewhat similar in approach and I think as we look at how we would like to invest we would look at both opportunities in the portfolio where we have flexibility to convert to this type of approach, or certainly to acquire new assets that are either independent or soft branded already, or have the potential to be that.
Operator
Your next question comes from Richard Hightower – Evercore ISI.
Richard Hightower
A couple of questions here. The first one is a follow up on New York, I think a lot of the REITs this quarter and previous quarters have kind of made the same point, the fundamentals are opportunely going to underperform but cap rates continue to fall in the market yet no one seems to be interested in selling anything and I’m wondering if you guys have an opinion on that?
Then my second question is in the release I think you mentioned some incentive fee changes in a handful of contracts and also some ground lease renegotiations that helped EBITDA. I’m wondering if you can quantify maybe what the potential opportunities in the rest of the portfolio are on that front?
W. Edward Walter
As it relates to New York I’d say we certainly each year go through the portfolio and think about what the best strategy is for each individual asset and we certainly doing that on an ongoing basis, looking at our assets in New York to determine if now would be a good time to sell them. The number of cases in our New York assets, we have different elements of them that we’re working on where we think we can enhance value.
There also are some things happening within the city with respect to rezoning opportunities which can potentially be beneficially value to the hotels too. I think we like the exposure that we have in New York although we obviously wish that the performance was a little bit stronger.
As I said, we are comfortable on the valuation side. I wouldn’t say that we’re necessarily looking at those values saying, “Now, is the right time to sell those assets,” but that’s an ongoing conversation within the company and we’ll continue to look at that opportunity.
As it relates to the management fee side, I would say that we were able to, on several assets, negotiate as part of broader considerations whether it was extension of an agreement, whether it was part of a capital plan, and a desire on the part of the operator to have us invest and on our part to invest more in the asset or other circumstances to meaningful reduce our incentive management fees in 2014. Now, as we go through 2015 we still retain the benefit of those negotiations.
We’ve effectively reset our incentive management fees at a lower level as a result of those negotiations. We’ll get the benefit of that in ’15 but in ’15 we are returning to a more normal growth rate and incentive management fees based on the growth rate in EBITDA in the hotels.
I would say that there are probably going to be opportunities to do this. I don’t know that I can see on any the horizon immediately but part of the benefit of having a broad portfolio and broad relationships with operators is that overtime these sorts of opportunities present themselves and when we’re there we try to take advantage of them.
Gregory J. Larson
We did mention a couple of ground leases that we’ve been working on and we’re working on several others as well, but what we really did is one ground lease we extended by 30 years so that’ll just make it much easier to sell that asset one day, when we elect to do that. Then on another ground lease we actually fired the lease and so again, that will make it much easier for us to sell that asset going forward.
Operator
Your next question comes from Anthony Powell – Barclays Capital Management.
Anthony Powell
Just watching on the timing of the renovations given some of the positive views that we’ve heard from you and others on the [indiscernible] cycle for this year and ’16, why not maybe wait on some of these renovations and take advantage of the overall positive environment that we’re seeing right now?
W. Edward Walter
I think that’s a fair question and to be honest, we are doing that with some hotels. As we’re thinking through the capital plan for hotels, we’re going to be thoughtful about which of the renovations it makes sense to do now and which of the renovations that we should try to postpone.
To some degree, the existing condition of the hotel drives part of that answer. If we feel that we are not benefitting fully from the market in our current condition, given the fact that we remain confident about the outlook for the lodging cycle for the next two years, this isn’t sort of the decision where you’re sitting here saying, “Well, don’t do it in ’15 because you can do it in ’16 or do it in ’17,” because we’re not looking at the outlook thinking that there’s going to be some drop off in that time period.
The postponement decision is more than just a year or so. In some cases too, like with what we’re doing in Washington, the reality is that we knew group bookings were not as strong in ’15 as they were going to be in ’16 so this was the right time to go ahead and do the room renovations at the JW Marriott and to tear up the lobby and transform the lobby at the Grand Hyatt.
It is going to hurt us, it hurt us in the fourth quarter, it will hurt us in the first quarter, but as we get into the second half of this year and as we get into next year in DC, we’re going to have fully renovated hotels that are going to be, I think, doing quite well in what will be a stronger market.
Anthony Powell
Kind of along the same lines you seem to be changing a lot of the management contracts into third-party, you’re going more independent, do you mean to do that on a larger scale across your portfolio and if so, what kind of long term cap ex spend do you believe will be associated with that?
W. Edward Walter
I would say we are going to continue to look at opportunities to switch from – what we’re trying to do across the board here is match the right operator and the right brand with the right hotel. So, with large hotels we continue to be comfortable that the major brand operators are the best solutions for those type of hotels.
They have the best marketing platform, the best sales platform to drive large groups into our larger hotels. As we look at some of our smaller hotels we’re not always convinced that they’re the best solution and so that’s why in Denver we made the solution to convert to a Marriott franchise and brought in Sage Hospitality which is a very strong operator based in Denver, knows the market extremely well to run that hotel.
We have some flexibility through the portfolio to take similar type steps. I wouldn’t say that we’re talking about dozens of opportunities like that, but we have, I would say, it’s probably somewhere in the five to 10 hotel opportunities to do things like this in the next three to five years.
We’ll continue to look at those opportunities as to whether or not that’s the best solution for that individual hotel. Depending upon what we chose to do in connection with that conversion, there may be a renovation that’s timed with that.
In some cases the renovation is a good way to sort of announce the arrival of a new operator and new approach to the hotel. But I don’t know that in the grand scheme of things that’s going to radically cause a big change in our overall cap ex program.
Operator
[Operator Instructions] Your next question comes from Shaun Kelley – Bank of America Merrill Lynch.
Shaun Kelley
I just wanted to ask for the Hawaiian timeshare development which you guys called out as contributing around $7 million, if I caught it correctly, for 2014. Do you have a general estimate of what’s kind of built into your guidance or a range of what’s built into the guidance for 2015 that you could share with us?
Gregory J. Larson
Just over $12 million.
Shaun Kelley
What’s the general life cycle here? How long would that project last for sellout?
Is it a couple of years or is it going to be more front end loaded?
Gregory J. Larson
I think it’s going to be right around four years for us. It’s going to depend on obviously, the pace of sales but I think right around four years for us.
Shaun Kelley
Then my other questions would be obviously, New York and DC have sort of dominated the discussions but you guys also called out Houston and Calgary given some of the oil exposures. Could you give us just a little bit of a sense of A) how much earnings contribution or revenue contribution you’re getting to be from what you consider oil sensitive markets and B) just what you’re seeing in behavior in some of those hotels, bookings, cancellations, are you seeing outsized moves at this point or would you say that it’s just a little bit lackluster and people are more in wait and see?
W. Edward Walter
I don’t know that right off the top of our head we have a Calgary or Houston number although, intriguingly the additional disclosures we provided will give you some insight into that. I think it’s probably about 4% to 5% would probably be roughly what we get from there.
We have seen in those markets some general weakness, but I’ve got to be honest, with the level of capital that we’ve been – the fact that we’ve had room renovations going on at those hotels and both of those room renovations have involved bathroom renovations, which as I described in my comments, are just more impactful and more time consuming, the bulk of what we have seen in terms of weak operating results we are attributing to the renovation disruption.
Gregory J. Larson
I agree. In Houston for fourth quarter for the industry RevPAR was up over 8.5% and our Houston properties had a decline over 5% because of the disruption that Ed mentioned.
W. Edward Walter
I think the sense that we have from talking to the GMs there is that there is – it has gotten weaker, there is some reduction in corporate level activity. It doesn’t feel like the bottom is dropping out of the market by any means, but Houston has had an incredible run over the last four or five years.
It’s really been one of our strongest markets in terms of performance. It will not be one of those this year.
Operator
Your next question comes from Bill Crow – Raymond James & Associates.
Bill Crow
If I go back to your analyst investor day I think you talked about the conundrum of getting net debt to EBITDA down to like 1.5 turns by mid ’16 and $700 million of free cash flow before the dividend if those numbers are in the ballpark and here we are, we’ve gone through another year and the 800 pound gorilla has sat out the dance again from an acquisition perspective and that seems to be a pretty consistent theme throughout this cycle relative to your size and the size of your peers and we haven’t heard anything about repurchasing the stock. You’re down 6%, 7% year-to-date, worse performer in the group today of course, and I’m just wondering what your thought process is from the allocation of capital perspective and returning capital to shareholders?
W. Edward Walter
Well, that’s a great question. I think I would say the net debt to EBITDA number that you quoted is where things would happen were we not to do anything because certainly our net debt to EBITDA is nowhere near that level right now, I think it’s more around 2.5 times which is a level that we’re certainly very comfortable at.
As you’ve seen us do, we’ve increased the dividend pretty materially over the course of 2014. As we generate cash flow from operations, as we generate cash from sales, I’d say I think our answer to this is going to be consistent to what we said in the past which is the first thing we’d like to do is invest that either in our existing assets, as you can tell from everything we’ve talked about today whether in our comments or our press release, there’s a fair amount of that happening already.
We’re putting a lot of capital to work and we’re putting it to work in areas that we think will frankly drive better performance than what we would expect to get out of an acquisition. But in addition to doing those types of investments, we would like to acquire additional assets.
You could say we’ve sat out the dance and I would say to some degree we’re trying to be thoughtful about underwriting and recognize that cycles do come to an end and take that into account in our underwriting and I think some of the folks that we’re competing with may have a slightly different perspective about how to approach that. The bottom line is that we certainly feel good about our overall portfolio and are only looking for opportunities to enhance it as opposed to being worried about just getting bigger.
As we generate those extra proceeds from sales and/or from operations I’d say first of all we would look to enhance the dividend in part because the dividend will probably, if it comes from sales will be generating incremental taxable income from those sales which [indiscernible] some incremental distributions and that’s part of the reason why we had to do the special dividend as part of our most recent distribution, is because we did have taxable income that had to be distributed. Buying back stock is something that is clearly something we’re looking at.
I think we have a few things that we have in the pipeline right now that we would like to see how they play out, but we are certainly open to buying back stocks. We’ve done it in the past and [indiscernible] a more productive use of the capital then we would intend to return it one way or the other.
I think then the issue there just becomes trying to understand what might generate the best long term return to the shareholders, whether it’s through a dividend or whether it’s through buying back the stock.
Gregory J. Larson
Or, really a combination of both a strong dividend and buying back the stock.
Operator
Your next question comes from Harry Curtis – Nomura Securities.
Harry Curtis
Can you talk about or give a little bit more color on when you believe that your current renovation program will result in stabilized EBITDA going forward? Is it the end of 2015, is it the middle of ’16, and what are the odds that you do, at that point, begin to layer in other renovation projects?
W. Edward Walter
I guess as we look at the major renovations that we were talking about, the ones that really are causing the $25 million worth of disruption, with the exception of the San Diego ballroom, I think most of those projects are going to be completed at some point this year. In general, I would be expecting that the loss in EBITDA that we’re experiencing in ’15 will be restored in ’16 by virtue of the fact that those properties will be open and operating.
Over the course of ’16 and into early ’17, we would expect to see meaningful EBITDA enhancements from all the investments that we’ve made that would then start to kick in and we’d start to get the benefit out of the investment activity that we’ve had. Without putting too fine number on it, if we’re going to suffer $25 million of displacement this year, we would expect to make that up and our outlook for ’16 and ’17 is we recruit at least that incremental.
Harry Curtis
Then the follow up is, in the fourth quarter with New York City occupancy at roughly 88%, what is it that your managers are nervous about when driving rate more aggressively? It would seem that despite the capacity growth at 88% occupancy one would think there would be a greater opportunity to push rate?
W. Edward Walter
I would agree with you, it would seem that the level – I think some of the – our world has gotten a little bit more transparent in terms of pricing over the last decade and the reality is that because the New York market – a sizeable component of it is driven by leisure, people are quick to price compare. So, what we’ve been finding is that when properties try to push rate, they have to be very thoughtful and sort of tactical about how to do that.
At times of the week, at times of the month we are able to drive month but you’ll find that people do move as they start to see rates push beyond certain levels and our world’s gotten easier for people to do that to be honest.
Operator
Your next question comes from Thomas Allen – Morgan Stanley.
Thomas Allen
Can you help us with color on what your EBITDA exposure was to each of your major markets in 2014?
W. Edward Walter
I don’t have that information right in front of me, but that’s exactly what our new disclosure is designed to provide you so if you go to the website you’ll be able to get a pretty good insight into that.
Thomas Allen
Then just on your Hawaii business, you highlighted it was strong in the fourth quarter, it seems like that’s getting the benefit of the rooms that were converted into timeshare, but we’re getting mixed messages from companies on the potential strength of Hawaii in 2015 just given everything that’s going on with the weakening yen and that market being driven by Japanese customers. Can you just help us how to think about that market?
W. Edward Walter
I think you’re right that that’s one of those markets that is susceptible to challenges based upon the strength in currency. I think in our Waikiki asset we have seen some signs there that Japanese travel has not been perhaps as strong as it has been in the past.
Having said that, our outlook for Hawaii this year is right down the middle in the portfolio in terms of RevPAR growth. I think where we’re being helped is Maui is more US focused than internationally focused.
Our booking pace at our hotels is up very strongly in ’15 and also is up quite strong in ’16. I’d say that Waikiki and Oahu is probably a little bit more exposed to some of the challenges from international travel, but Maui is looking quite strong this year.
Gregory J. Larson
You’re correct, fourth quarter was extremely strong for us in Hawaii with RevPAR up almost 15%, but you’re also right about 2015 that when we look at Hawaii I think it will be a good year but it won’t be that strong. I think RevPAR growth in Hawaii next year will be right within our domestic overall portfolio.
Operator
That concludes today’s question and answer session. Mr.
Walter, at this time I will turn the conference back to you for any additional or closing remarks.
W. Edward Walter
Thank you for joining us on the call today. We appreciate the opportunity to discuss our year end results and outlook with you.
We look forward to talking with you in the spring to discuss our fourth quarter results and to provide more insight into how 2015 is playing out. Thanks everybody.
Operator
This does conclude today’s conference. We thank you for your participation.
You may now disconnect.