Hotels & Resorts, Inc. (BEE) Q2 2015 Earnings Conference Call August 6, 2015 10:00 AM ET
Executives
Jonathan Stanner - Senior Vice President, Capital Markets, Acquisitions and Treasurer
Raymond Gellein - Chairman and Chief Executive Officer
Diane Morefield - Executive Vice President and Chief Financial Officer
Analysts
William Crow - Raymond James & Associates
Shaun Kelley - Bank of America Merrill Lynch
Jeff Donnelly - Wells Fargo
Ian Weissman - Credit Suisse
Ryan Meliker - Canaccord Genuity
Wes Golladay - RBC Capital Markets
Chris Woronka - Deutsche Bank
Lukas Hartwich - Green Street Advisors
Rich Hightower - Evercore ISI
Operator
Good day, ladies and gentlemen, and welcome to the Strategic Hotels & Resorts Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded.
I would now like to introduce your host for today's program Jon Stanner, Senior Vice President, Capital Markets, Acquisitions and Treasurer. Please go ahead, sir
Jonathan Stanner
Thank you, and good morning, everyone. Welcome to the Strategic Hotels & Resorts second quarter 2015 earnings conference call. Our press release and supplemental financials were distributed earlier this morning, and are available on the company's website in the Investor Relations section.
We are hosting a live webcast of today's call, which can be accessed by the same section of the site, with the replay of today's call also available for the next month.
Before we get underway, I'd like to say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry, in which the company operates, in addition to management's beliefs and assumptions.
Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings.
In the press release and supplemental financials, the company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.
I would now like to introduce the members of the management team here with me today, Rip Gellein, Chairman and Chief Executive Officer; and Diane Morefield, our Chief Financial Officer. Rip?
Raymond Gellein
Thank you, Jon. Good morning, everyone. The second quarter for Strategic was another very productive quarter for our team. We produced solid top line and excellent bottom line growth despite some headwinds specific to the second quarter for a few of our assets. We are very active during the second quarter and continued to be so far in the third quarter executing nearly $2 billion of transactions including the sales of non-core asset in the Hyatt La Jolla, the purchase of another wonderfully located luxury asset in the Four Seasons Austin, as well significantly improving the quality of our balance sheet, which Diane will cover in more detail in a minute.
During the call, I will spend some time discussing what we saw from an operating perspective in the quarter and how we are interrupting the industry slightly slower results in the second quarter and any impact potential in the second half of this year and into 2016.
I’ll also talk about our recent announcement regarding our acquisition of the remaining interest in the JW Marriott Essex House for an implied valuation of just over $750,000 per key through one of the best located assets in New York.
In addition to talking about our balance sheet initiatives, Diane will take about our results in more detail as well as provide details on our updated guidance ranges for ‘15, which have adjusted to reflect our year-to-date performance, our outlook for the remainder of the year and our recent transaction activity.
Now as you are all away, there was a recently published article a numerous analysts’ reports speculating on the future of the company. Before I continue our formal remarks on the quarter, I want to note that is a matter of company policy, we do not comment on any market rumors and we’ll not answer any questions regarding such market rumors. And I thank you in advance for respecting our wished in that regard.
In terms of results, we had a solid second quarter as average rates increased 5.9% offsetting the small decline in occupancy the yield of 4.3% increase in RevPAR for our total U.S. portfolio. Total RevPAR for the quarter increased roughly 2% as our non-rooms revenues declined marginally year-over-year primarily as a result of a slight decline in occupancy particularly in group room nights but also due to a couple of difficult year-over-year comparisons which we’ll discuss in more detail.
Our top line growth in the quarter largely neared with the broader industry experienced coming in slightly below our expectations going into the quarter and clearly showed a robust growth we experienced in the first quarter when RevPAR in our portfolio increased over 12%.
In light of these results and some of the commentary provided by our peers, we’ve been very thorough in our efforts to determine if this is a discernable trend into a lower RevPAR growth environment, are nearly a one quarter soft patch similar to what we experienced at the end of the second quarter and beginning into the third quarter of last year when the timing of the World Cup coincided with the noticeable, but temporary slowdown in luxury of lodging demand.
In short, our view is at the trend feels more like the ladder is all of our production metrics remained quite strong and in fact accelerated in the second quarter and our piece numbers looking in 2016 are very promising. Let me give you a couple of examples.
First, our group room night production through the end of June was the best we’ve seen in the last five years. As we booked nearly 50,000 more group room nights for all future periods across the portfolio compared to the same time last year. This production was 20% greater than the full year average production for that same period. This is even more impressive given the headwinds we have in San Francisco with a Moscone Center renovation and expansion impacting group booking in the city through 2018 and obviously specifically impacting our Westin St. Francis, which is our largest group hotel.
Group pace for our portfolio for 2016 is trending very favorably with definite room nights on the books up over 53,000 room nights or nearly 13% compared to the same time last year with rates on those rooms up nearly 2.5% resulting in group room revenues pace being up over 15% for 2016. Naturally we expect this pace to moderate as we progress to the rest of the year and into next year but nonetheless these metrics represent our strongest July pace for the following we’ve seen this up cycle.
While our group strength for next year is broad based, we are expecting to have a particularly strong year at the Fairmont Scottsdale Princess, the Hotel del and the InterContinental Miami, hotels which we have, where we have some of our largest exposure to group business.
While second quarter results for the industry is generally come in below expectations, there were plenty of positives in our portfolio. There of our hotels achieved double digit RevPAR growth in the quarter led by the Four Seasons and Jackson Hole which had a 17.5% increase in RevPAR driven by a 15.5% increase in average rate. The Four Seasons Silicon Valley increased RevPAR by 13.4% as our ongoing pricing strategy there continues to yield impressive results.
The Hotel del grew RevPAR over 10% as the hotel increased occupancy 8 percentage points year-over-year, primarily the rest of the implementation of the new and very successful revenue management strategy.
Portfolio-wide we sacrificed some occupancy for higher rates which was again led by very healthy 7% increase in trends in ADR compared to the second quarter of 2014.
We did experience a couple of hotel specific group demand shifts that impacted our occupancy and with a relatively small portfolio; we are venerable to certain onetime non-repeat or extraordinary events having an impact on our overall portfolio occupancy.
With several these in the second quarter of this year and they combine to produce the majority of our year-over-year decline in occupancy and help explain some of the proceed softness in our top line results. First, both the Montage Laguna Beach and the Fairmont Scottsdale Princess we had multiple large groups in the second quarter of 2014 that did not repeat. And the second quarter of this year at the Montage, we’re down almost 2,900 room night as a result of two significant non-repeat corporate groups which reduced occupancy by over 9 percentage points for the quarter.
Occupancy declined over 8 percentage points at the Fairmont Scottsdale Princess in the quarter primarily as a result of two unexpected cancellations which were clearly one off in nature. One I think due to the company being sold and the second to CEO having a different situation that caused in the cancel of meeting.
We also lost 2,800 room night group that simply outgrew the hotel. However as many of your know, we’ve already broken ground on a 100 guest room expansion at the Fairmont Princess and this is the type of group we are optimistic we will be able to capture with more guest room and are already best in market meeting facilities and in fact we are already in conversation with this group for return in 2017 and 2018.
In addition, Southern California also suffered from unseasonably poor weather in May and June which disrupted some leisure trends in business that are resorts. There was an occupancy decline at the Montage. We lost a couple of points of occupancy at the Ritz-Carlton Laguna Niguel and at the c.
As you recall, the same resorts with the beneficiary of excellent weather in Southern California and very poor weather in the Northeast and the Midwest in the first quarter, our Four Seasons in Austin was also impacted by the flooding that occurred in that market at the end of May surely after we acquired the hotel.
Thus Mother Nature had a tailwind one quarter and a headwind the next and this quarter happen to be later.
Finally we’ve not completed what is a major upgrade to the pull areas to Four Seasons Hotel Austin which not only cause some disruption in the quarter but also created a bit of an eco-effect as trip advisor reviews guest of noisy work even after our renovation was completed. This clearly impacted occupancy during the quarter which declined roughly 3.5 percentage point year-over-year. But we are happy to report that we are reversing this trend as RevPAR increased over 6% in June and our market penetration is showing great improvement in July.
These are all three examples of what we would characterizes as temporary destruction disruptions in our business and not indicative of any macro trend of slowing demand growth. To the contrary, we continue to believe demand growth will outplay - outpace supply growth over the medium term in most markets in which we compete that are best class portfolios uniquely positioned to continue to reap outsized benefits.
However, we are keeping a very watchful eye on the supply pipeline particularly in certain markets such as New York, Chicago, Miami and Austin.
In terms of guidance, while we’re remained bullish long term, in the industry, we did narrow and lower the midpoint of our full year RevPAR and total RevPAR guidance range is that the result of the slower than expected second quarter and slightly more cautious outlook on a couple of hotels in the second half of the year. Diane will walk you through the details of all our guidance ranges but we have lowered our RevPAR growth guidance range to 5.5% to 6.5% for the year, a reduction of a 100 basis points at the midpoint. And our total RevPAR growth guidance range to 4% to 5%.
The midpoint of our RevPAR guidance range is 6% which we believe is still very healthy growth six years into a cycle and remains above most if not all of the midpoints of our peers ranges.
Let me walk you through the main drivers of our reduction of RevPAR growth guidance from when we reported our first quarter results.
First for the entire portfolio, our room revenue forecast for the full year has come down only a little $5.5 million which on a full year forecast of over $700 million of room revenue is less than a 1% reduction. This shortfall has split fairly evenly between the softness we described in the second quarter and a reduction in our third quarter forecast it’s primarily concentrated to two hotels, the Four Seasons in Washington and the Westin St. Francis in San Francisco.
We spoke previously about the impact of the Moscone Center renovation in our group pace of the Westin St. Francis for the back half of the year is down 25%. But keep in mind we are coming off particularly difficult comparison to the third quarter last year when the 1,200 room hotel ran a remarkable 95% occupancy for the quarter.
We have a similarly difficult comparison to back half of the year at our Four Seasons in Washington DC as the city hosted both the African Summit and the IMF meetings last year which generated tremendous demand for our hotel and room rates well over $1,000 a night. We anticipated being able to filling a portion of this business over the summer and some of it’s did not materialize including a large foreign delegation that decided not to come to the U.S. at the last minute for various political reasons.
The four quarter is still essentially in lined with our previous forecast and as I mentioned our forward-looking indicator into 2016 are outstanding.
So despite the reduction in our top line guidance, we’re maintaining our margin expansion guidance as a reflection of the tremendous job our team has done with holding expenses down. And importantly we are raising the midpoints of our comparable EBITDA and FFO ranges where the benefits of our recent transactions and balance sheet activity of more than offset any shortfall from operations.
So before I turn the call over to Diane, let me spend a couple of minutes on one, on our recent announcement of the acquisition of our partners’ interest in the JW Marriott Essex House and our views on the New York market generally in that hotel specifically. As most of you are aware, KSL, our former partner in the joint venture had a contractual put option for their equity position in the hotel that entitled them to an 8% compounded annual return. That option was set to expire in September and they elected to exercise their put in late July.
Pursuant to the terms of the joint venture agreement, we will issue them approximately $85 million of stock price to $12.82 per share. As calculated by the 20 day view app as of the day we receive the notice. This implied a gross valuation for the asset of approximately $398 million. So we currently own 514 hotel pieces in three additional condo units that are being held for potential sale and we value at approximately $6.3 million. We also have a little over $2 million of cash left in the JVs of the net evaluation attributable to the hotel equates to about $389 million or approximately $760,000 per hotel key, which we believe compares quite favorable to some of the other high profile and very low cap rate transactions we’ve seen in the market recently such as the Park Hyatt, The Bacara, The Waldorf Astoria and the New York Palace. And of course none of these hotels have our prime location right on Central Park South.
So while the cash flow of the property is not ramped up as quickly as we have - would have liked and admittedly not a quickly as we initially underwrote. We’ve made considerable progress at the hotel. EBITDA for 2015 is forecasted to be approximately $17.5 million which is over a six fold increase. From what the hotel earned when we first acquired it back in September 2012, we’ve improved the efficiency of hotel which is helped increase operating margin by over a 1,100 basis points over that same period.
And of course we still the beneficiary of our agreement with Marriott which guaranties $21.5 million of NOI annually.
As you all know, New York has been challenge market in the past couple of years and is continue to lag in the first part of this year as RevPAR for Manhattan was down a little over 2% in the quarter having been down roughly 4% in the first quarter. Despite those market conditions, the Essex House grew RevPAR roughly 1% in the second quarter and is roughly flat year-to-date which is encouraging performance in an otherwise sluggish market.
Longer term, we continue to be big fans than New York market and specifically are unique and very well located hotel.
With that let me turn it over to Diane to walk through the quarter and balance sheet more detail. Diane?
Diane Morefield
Thank you, Rip. Good morning, everyone. As reported, our second quarter comparable EBITDA was $88.4 million compared with $68.9 in 2014, which is over 28% increase. And our FFO per share of $0.25 for the quarter was a 19% increase as compared to the second quarter last year. These metrics were generally in line with consensus estimates and our expectations going into the quarter.
Net income for the second quarter include an approximate 40 million gain related to the sale of the Hyatt Regency La Jolla, which was partially offset by a $34 million loss on the early extinguishment of debt related to the penalty we incurred on the early repayment of the Westin St. Francis and Fairmont Chicago mortgage loans.
We also took 10.4 million impairment during the quarter to write down the carrying value of the Marriott Lincolnshire hotel.
As we’ve discussed on previous calls, this hotel is non-core and we formally engage the broker to market the hotel. As a result, under accounting rules, we have deemed our whole period have shortened and are required take an appropriate impairment.
We continue to work through the marketing process and we’ll update you as we make progress on the sale of this asset. These onetime charges have been excluded from our comparable EBITDA, FFO and FFO per share metrics consistent with our past reporting guidelines and standard practices within the REIT industry.
As Rip mentioned, a 6% ADR increase in the quarter was a main driver of our top line results. Transient rates increasing 7% in the quarter led by our urban hotels and particularly at the Fairmont Chicago and Westin St. Francis were strong compression for the group business allowed us to push transient rates 23% and 9% respectively during the quarter.
Group rate in the quarter increased just under 5% for our total portfolio is all of one hotel and the portfolio saw an increasing group rate year-over-year. Occupancy declined across the portfolio marginally and as Rip mentioned, this is almost entirely attributable to a few hotels with several non-repeats large event that took place in the second quarter of 2014 and were not back till this year.
For the total portfolio, occupied room nights declined by about 8,000 rooms year-over-year and almost of 7,400 of those nights can be explained by the two cancellations and the one non-repeat group the Fairmont Scottsdale Princess and the two non-repeat groups of the Montage Laguna Beach.
As a result, total RevPAR increased 2% for the quarter as non-rooms revenue was essentially flat year-over-year.
EBITDA margins expanded 40 basis points year-over-year when you adjust for certain onetime real estate charges and credits in both the second quarter of last year and this year.
So our 496 total RevPAR for the quarter is almost double the 259 RevPAR we achieved in our total U.S. portfolio. We continue to believe that EBITDA per available room is another meaningful way to evaluate our results. And for the quarter, we translated roughly $360 RevPAR into a $133 EBITDA per available room, which is easily the highest profitability per room among our peer group.
As we did last quarter, we’ve reported our results for about the total U.S. portfolio which does include three assets we acquired since late 2014 which are the Four Seasons in Troon Scottsdale, the Four Seasons in Austin and the Montage Laguna Beach. And we also report our same store portfolio which excludes these three hotels.
Our performance between those two portfolios were largely in line, although our same store portfolio performed slightly better during the quarter with RevPAR growth of 4.8% or 50 basis points higher than our total portfolio which is mentioned was largely impacted by the weather in both Laguna and Austin.
Finally, our year-to-date metrics are very strong. For our total U.S. portfolio, RevPAR increased 7.2% compared to the first six months of last year and EBITDA margins expanded 140 basis points again after adjusting for certain onetime items in both quarter.
As Rip mentioned, we have significantly improved our balance sheet during the second quarter through the initiatives we actually previewed during our first quarter earnings cal. During the quarter, we closed on a new significantly upsized five year 750 million unsecured credit facilities that consist of $450 million revolver and a $300 million term loan that was fully funded at closing. The facility has an according feature that allows us to expand up to a billion dollars of capacity and it’s currently supported by a pull of unencumbered assets.
We also improved the pricing on the facility but the revolving our price at LIBOR plus a 165 basis points and the term loan priced 5 basis points inside of that compared to the previous credit facility which accrued into a set LIBOR plus 200 basis points.
We simultaneously closed on the seven year 150 million term loan secured by the Ritz-Carlton Half Moon Bay and priced at LIBOR plus 240. This fund is structured to be repayable at any time and gives us another trounce of flexible debt that can be paid off with available cash flow overtime.
We also repaid the cross-collateralized in Westin St. Francis and Fairmont Chicago which totaled a little over 300 million in principal and we’re pricing in market fixed interest rate of 6.09% and want that to mature until 2017. This required us to make a $33 million yield maintenance payment which was essentially a prepayment of interest and will ultimately be recouped through lower interest expense over the next several years and again unencumbered to very assets for us.
So in total our balance sheet activity will save the company approximately 12 million in annualize interest expense and nearly 6 million for the second half of this year. Our balance sheet is in excellent shape and we have created significant financial flexibility with our now nine unencumbered assets which is over half of our portfolio.
Leverage on a net debt-to-EBITDA basis is forecast to be in the 4.5 to 5 times range in year-end. Over an 18 month period, we have taken advantage of the very attractive capital markets and now refinanced nearly every piece debt on our balance sheet and also eliminated our legacy high interest rate swap portfolio.
This is how produced our borrowing cost by approximately 240 basis points which are 28 billion of total debt saves company over 40 million in annualize interest expense. In addition, net of an account for the previous redemption of the nearly 290 million preferred equity which saved the company another 24 million annually.
So as a result of our comprehensive balance sheet strategy, our annual weighted cost of debt in preferred equity has been reduced by over 4% since the beginning of 2014. We’ve also lengthened our average debt maturity by over 1.5 years to roughly 5 years. We’ve smoothed out debt maturities over multiple years and have no debt maturing until 2018 which is a CMBS loan on the drove which were likely refinance and extend that maturity well beyond 2018.
We currently have 34 million drawn on the revolving credit facility and over 425 million of liquidity. From a transaction perspective, during the quarter, we closed on the disposition of Hyatt Regency La Jolla for 118 million. We previously owned 53.5% interest in the joint venture with GIC. And in connection with the sale, the joint venture retired 89.2 million of debt secured by the hotel and we used our excess proceeds to reduce outstanding revolver. We also close on the acquisitions of the Four Season Boston for a gross purchase price of 197 million which represents roughly 6.5 cap on our forecast 2015 NOI.
And again last week, we announced the KSL exercise their production for their ownership interest in the Essex House which eliminates our last remaining hotel joint venture and further simplifies our balance sheet.
Rip covered the details of this transaction but we are pleased to own a 100% of JW Marriott Essex House which has a significant upside.
Turning to guidance, again yesterday we narrowed our full year guidance rages for RevPAR and total RevPAR growth of 5.5 to 6.5 and 4% to 5% respectively. Rip outlined the key drivers of the reduction of our top line metrics but we still feel very good about the year and the 6% midpoint of our projected RevPAR growth represents very attractive growth.
We are maintaining our EBITDA margin expansion guidance range to between 125 and 175 basis points as our flow through remains quite strong and our expense control systems continue to mitigate expense.
We actually increased the midpoint of our comparable EBITDA on FFO per share ranges to account for a revised forecast and our recent transaction activity. With then clearly [ph] active to let me walk you through component of our guidance was changed since we reported our first quarter results.
From an EBITDA perspective, our second quarter results and forecast for the remainder of the year are decease by approximately 2.5 million which is more than offset by the addition of just under 5.5 million for the remainder of the year of incremental EBITDA forecasted to be earned at the JW Essex House as the result of our the KSL’s equity ownership.
We also increased our FFO forecast roughly $7 million as a result of lower interested expense achieved from the refinancing activity we just described which is just slightly offset by the incremental interest will recognize from the Essex House loan for the remaining 50% share we now own.
Finally our share will increase by roughly 6.6 million as a result of the KSL equity buyout. So we’ve narrowed and raised the midpoint of our comparable EBITDA range to 325 million to 340 million and revised our FFO per share range to $0.88 to $0.94 per share. It is important to point out that when we provided our original guidance at the beginning of the year, our guidance range for EBITDA was 300 million to 320 million and our FFO per share was $0.77 to $0.85 per share. So the lower end of our current guidance ranges are now actually above the high end that we forecasted for those metrics at the start of the year.
With that we’ll now open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Bill Crow from Raymond James. Your question please.
William Crow
Hey, good morning guys.
Raymond Gellein
Hi Bill.
William Crow
I appreciate all the detail and - Hi Rip. I appreciate the detail on the specific challenges you faced in the quarter. Let me ask you on the Essex House transaction. Any consideration to utilizing that put option is kind of a motivating factor to market the hotel as a whole as you said there have been some sales it’s some pretty price points low cap rates? And then as a second part of that question, how do you think about issuing stock in the 12-ves when it’s below any of the - and certainly I would say below where the street view fair market value of the company?
Raymond Gellein
Interesting two different questions, obviously owning all of the Essex House we think is good for on two fronts, one is we think it’s a wonderful well located hotel and has big upside and the second is if it turns - if someone were to come along and want to a pay a big price for it and that’s something we are always open to if that were to materialize and obviously there been some big transactions. So we’ll see but we do like owning the whole thing, so we are very pleased with that.
And then as it relates to issuing equity in the 12-ves, I think we would be hesitant to do that for the reasons that you just mentioned.
Diane Morefield
But the actual -
William Crow
Go ahead.
Diane Morefield
Bill, the [indiscernible] of 12.82 obviously that was just contractual. So it’s issued at what the contract calls for. Another way to think about it is there is no cause to issuing that at the 12.82 if you would do a marked deal arguably be 5% to 6% discount between discount and - I am sorry, banker fees. So, on a gross basis that would represent something more like 13.50 a share.
William Crow
Diane, was it contractual but it was had to be done in stock on was there an option to do?
Diane Morefield
Yeah.
William Crow
Okay. Okay, great.
Diane Morefield
It was contractual to be off stock.
William Crow
Okay. And then if you could just update us you’ve done a tremendous job at the balance sheet, you quantified the savings, the cash savings and it has yet to translate into a dividend for shareholder understand that the acquisition opportunities were more appealing. But can you just give us, I know it comes very quarter but can you give us your latest thoughts on the dividend?
Raymond Gellein
No, they really haven’t changed Bill. We talk about delivering being job one, we are now in the mid to high fourth if you will. Our goal would be to deal that - would be to be a bit lower than that. So my guess is job is to deliver, job two is if in fact there are additional opportunities that are out there that we’ve obviously been pleased to access over the last couple of years. And then the third one is the dividend, it seems like our shareholders are very supportive of that strategy. So there is no question we get there but I think we are still a little ways away and as you know we’ve got the NOLs that shelter us from needing to do it.
So my guess is, we’re probably focused a little bit more on job and job two still, but we’ll get there.
William Crow
The last question from me and thanks for that Rip, is just the balance between fixed rate debt and reporting rate debt and is maybe die in your philosophy on where that should be ultimately as we pen toward the back into the cycle?
Diane Morefield
Yeah, I mean obviously given that we paid off particularly the Westin St. Francis and Fairmont Scottsdale which was fixed rate, we announced due to more floating rate, however over 6% interest rate we just felt a bit lies to early retire that debt. So now we are around the 25% fixed, 75% floating. As Rip mentioned, from cash flow we probably pay off the line and some of the floating rate debt that’s fully payable. So we like having floating debt. I think generally we are comfortable toward the 50-50 range or might go slight above that given more still in a low interest rate environment. So we are very serious in looking at whether we refinance the downward fixed rate give that’s a large floating rate piece of debt of just fix a higher level of our debt synthetically by putting in interest rate swaps, picks interest rate swap, we’re kind of burned by that strategy the last time, but it’s very different in straight environment today, so we’re serious in looking at various options there to increase our fixed rate exposure.
William Crow
Great, thank you, guys, I appreciate it.
Raymond Gellein
Thanks Bill.
Operator
Thank you. Our next question comes in the line of Shaun Kelley from Bank of America Merrill Lynch. Your question please.
Shaun Kelley
Hi good morning, thanks for taking my question. I just wanted to ask about some of your urban versus your resort market exposure, so you guys have a few different things on particularly on some of the resort side and just I was kind of curious, did you see any noticeable difference in demand trends either between those two submarkets or between what you saw those types of hotels in the second quarter versus the first?
Raymond Gellein
Well, you know it’s interesting as we have those discussions, it’s - we have such - we have a relatively small portfolio, so I don’t know that there are huge trends there. I mean clearly we’ve been very pleased with the resort result other than with the weather related issues in California, our resorts have really done quite well. New York’s been challenged, the Westin St. Francis in the second quarter had very good quarter. So it’s very asset specific more than it is particularly resort in urban as I think the way we would say that.
Shaun Kelley
Got it. And just a follow-up pretty specific but is it - this is - could you remind this is Essex House your nice hotel.
Diane Morefield
Yes.
Shaun Kelley
Great. Any directional number on, you did mentioned what the guarantee is and where the property is, I think forecasted for the year, but just any directional, where you think you can get that up to, just kind of ballpark for us?
Raymond Gellein
Well, I think a long run we truly believe that the hotel will perform above the Marriott guarantee. It’s going to take a little longer than we thought to get there but in fact we believe that this hotel in this location as we’ve reported in the formal remarks, we’ve even see some RevPAR growth in a RevPAR declining market. So we think that the hotel is getting some traction and we believe that it will perform above the Marriott guarantee long run.
Shaun Kelley
Perfect, that’s it for me guys. Thank you very much.
Raymond Gellein
You’re welcome.
Operator
Thank you. Our next question comes from the line of Jeff Donnelly from Wells Fargo. Your question please.
Jeff Donnelly
Good morning, folks.
Raymond Gellein
Hey Jeff.
Diane Morefield
Hey Jeff.
Jeff Donnelly
I hate to lead with the question on Lincolnshire but I just - I missed in your remark is that do you have a sense of the timing there, I just I missed your comment Diane?
Raymond Gellein
It’s been marketed, we’ve said it’s been marketed where I think that - I think we are making progress Jeff, we’ll announce it when it’s done but we are focused on marketing that hotel.
Jeff Donnelly
Okay and you know concerning the put option, I am just curious why do you think KSL opted to exercise its put option, just because it strikes me that their economic interest would have been better if they retain the minority interest in the asset versus converting your common stock. Just given where asset price is seem to be in New York, I was in search you might have a view on that?
Raymond Gellein
No, I am not sure that - we are not in KSL ahead at the moment. I mean I think that sort of the more obvious potential is that they are shorter term holders than a REIT, so they might have had other uses for the capital. We’re not obviously in their business but that would potentially be one reason. But other than that the put was in fact going to expire in September, so they obviously thought it was in their best interest to exercise the put in July.
Jeff Donnelly
Okay and then maybe switching gears just given where the transaction prices are in the market and by consummated as well as rumored for hotels around the country, can you maybe just help us understand how you are thinking about the where you see the public market value for your assets versus what you are seeing in the private markets. I know you are not going to be able to give people a specific figure, I guess I am just curious out there, is there sort of a range of discounts that you think you trade versus private market or are there certain transactions out there that weigh heavily on your thinking that you think kind of relate well to the Strategic portfolio?
Raymond Gellein
Well, we really don’t comment on our internal view of NAV. I mean obviously we look at the same transactions that you do, so when we see transactions in New York that we believe that acquiring the Essex House at $750,000 or $760,000 given the transactions that’s very positive. It’s a longer term growth there to get to maximize the value of that asset, but we do like the comps that in the marketplace. So it’s really city by city and we’ll see. So but I don’t think we won’t comment on that the NAV overall.
Jeff Donnelly
Okay and then maybe just one last question, since you are sort of buttoning up a lot of the issues like Lincolnshire, where do you stand with Hamburg, just another small?
Raymond Gellein
Very close.
Jeff Donnelly
Very close, very small.
Raymond Gellein
It’s very small, it’s a very small - it’s a sandwich leaf, but we’re working on moving that out. So we hope to have some information for you in the near future.
Jeff Donnelly
Okay, thank you guys.
Operator
Thank you. Your next question comes from the line of Ian Weissman from Credit Suisse. Your question please.
Unidentified Analyst
Hi, guys this is Chris for Ian. Just trying to get a sense of cleaner RevPAR growth number, when you look at the back half of 2015, can you talk about like the year-over-year impact of renovations and those renovations are having on RevPAR growth?
Diane Morefield
Much displacement for the year with probably about 4 million in revenue and a couple of million in EBITDA, obviously we announced that lows [ph] is in the fourth quarter and we’re starting Washington DC rooms renovation as well. So it’s still - some of it is sitting in the back half of the year.
Raymond Gellein
But it’s relatively modest.
Unidentified Analyst
Okay, so the year-over-year impact isn’t too harsh?
Raymond Gellein
Correct.
Unidentified Analyst
Okay and then just getting back quickly on the prepaying these 2017 maturities, if you were to think about the timing of why you’re doing that now, is that maybe to offset some of the softness in the core operations or did you see it was a good ROI investment on that $33 million prepayment party or does it potentially make assets further easier to trade? Is it kind of all three of those or what was the primary motivation there?
Diane Morefield
It wasn’t really related to anything to operations. We stepped back and I think we really outlined this on the first quarter as well. We stepped back at the beginning of the year and even though we didn’t have any maturities till 2017 at that point, given we’re paying the four months cuts [indiscernible] with cash that matured earlier this year. We thought it’s still a great capital market, still low interest rates, still a lot of availability for attractive debt structures on high end hotels and that point we’re still a completely secured borrower, which align with even secured buy assets. So we step back into what can we do to really push out maturities and become more of an unsecured borrower. So paying off the Westin St. Francis and the Fairmont Chicago early was part of that given those were mortgage loans and very large assets. And we know overall we were going to significantly reduce the cost of our debts, so it was really just a comprehensive balance sheet strategy completely unrelated to anything going on in the operating side of the business. And again it does freight up [ph] at some point we’ve mentioned this - if we decided to market the Fairmont Chicago, now having it unencumbered gives us a lot more flexibility.
Raymond Gellein
But overall it was a way to reduce our cost going forward in a material way at a great time when interest rates are quite low, so we were very pleased with the execution.
Unidentified Analyst
Got it. Thank you very much.
Operator
Thank you. Our next question comes from the line of Ryan Meliker from Canaccord Genuity. Your question please.
Ryan Meliker
Good morning, guys. Just a couple of clarifications and then one question, most of mine have been answered. With regards to with the group production numbers that you talked about, obviously that’s very attractive, was that for the month of June or for the entire second quarter?
Raymond Gellein
It’s year-to-date.
Ryan Meliker
Year-to-date, okay. So year-to-date you’re up 50,000 rooms, great. And then with regards to the put option with KSL, was the put option specific for stock or was there OP units and option? It was just a little surprising to see private equity to take the tax event of tax when these OP units were an option.
Diane Morefield
It is stock.
Ryan Meliker
Okay, it’s helpful. And then the third question is - I want to make a comment or is a - so we keep hearing about all the foreign capital chasing the US trophy assets, you guys have obviously found a few good acquisitions to make throughout the first half of this year, does that dynamic shift in the back half of this year and in the next year? Do you think you’re more of a net seller than a net buyer given the level of foreign capital chasing these assets?
Raymond Gellein
Well, we’re always open to foreign capital paying a really advantageous price, so I think we’re quite open to that. We are likely cautious about additional acquisitions, we’ll do it if we think we can add substantial value to it, but I think you’re probably right that we’re not as optimistic, if you will or aggressive in the acquisition market at this stage although we’re looking at several, but we’ll be pretty careful at this point.
Ryan Meliker
Alright, that’s it for me. Thanks a lot.
Raymond Gellein
Thanks.
Operator
Thank you. Your next question comes from the line of Wes Golladay from RBC Capital Markets. Your question please.
Wes Golladay
Yeah, good morning to everyone. When you look at the second guidance, how are you seeing that shape up among the various segments? You mentioned group production was pretty strong, so I’d imagine group incrementally better or would that imply you’re seeing some weakness in transient right now or is it just my reading too much into that?
Raymond Gellein
No, it’s really the - we’ve got some softness as we said in San Francisco and that really is group driven, right. So I think that the transient market is held up pretty nicely, you’ve also got some softness in DC from a group perspective year-over-year because of the IMF that we talked about. So I’d say that if there was softness for us it’s more on the group side in the back half of the year, but having said that we gave you some pretty aggressive numbers for forward looking group business into ‘16, especially we said at Fairmont Scottsdale Princess and at the in Miami. So we’re seeing good group in ‘16 and beyond, but the third and fourth quarter especially the third quarter is where we’ve got some softness in those two assets and is mostly group focused.
Diane Morefield
Yeah, I think to give color for the full year, earlier in the year we were projecting that our total group room nights would be about 20,000 than our actual group room nights in 2014. We’re now forecasting it to basically be flat to last year, so the you know the city didn’t pan out quite as high as we thought it would this year and that ripples through the revised guidance as well as total RevPAR and again part of it we experienced in the second quarter and some of it will be in the second half of the year.
Wes Golladay
Okay and then looking at that page for next year, you mentioned room rates are about 2%, are you going to get I guess better terms on total spend or is this more of a mix shift, more association in this page right now as bringing the room rate to only about 2%?
Raymond Gellein
Well, we’re very pleased with both the velocity and the volume of group room nights being up and getting the 2.5% rate increase. So the whole - we’re on up a pay standpoint 15%, which is pretty healthy. From a group spend perspective, I don’t think we’re seeing a trend down, but I’m not sure that it’s about the same. So from a contract standpoint and obviously what we saw in the first quarter with groups spending above and beyond their contract, but that tends to be short term experience for us. So we’ll see what happens when they show up.
Wes Golladay
Okay, thanks a lot and that’s a great page for next year.
Raymond Gellein
It is. Thanks.
Operator
Thank you. Your next question comes from the line of Chris Woronka from Deutsche Bank. Your question please.
Chris Woronka
Yeah, good morning guys.
Raymond Gellein
Hi Chris.
Chris Woronka
Just want to follow up a little bit on the group, mainly in the second quarter, but also for the third. Have you scrubbed that down and can you attribute it to any industry or specific - kind of getting at the energy angle, but maybe it’s something else. Is there any kind of common theme between the groups that cancelled on you?
Raymond Gellein
No, not really. As I said it was episodic to the two - literally there was a company that got sold that didn’t show up. It was the CEO that was either ill or had a change in circumstances and didn’t come that cancelled another group. So it was really episodic, it was - we haven’t seen any trends and in Q3 it’s mostly related to the Westin St. Francis and the Moscone Center, which we’ve been talking about for some time. So when you’ve got - the Citywide’s down in San Francisco you’re trying to fill it in with transient and we think we’ll be able to do that. That’s a very strong market, we just don’t get the group spend, so that’s why you saw - when that and you see our total RevPAR not have the same leverage that it will have if the group business was strong. So that’s mostly the story.
Diane Morefield
Yeah and the mix in nature of our top groups are still very consistent with the healthcare/pharmaceuticals, financial services, technology. We’re not really seeing any change in those trends.
Chris Woronka
Okay thanks, that's helpful. Just to clarify, are there for the groups that cancelled on you, are there any fees that are going to be coming in the second half that are in the guidance or?
Diane Morefield
Yeah, some of them rebooked for future period, so there are really pay cancellation fee as long as they rebook, so nothing material, that's going to come through in the second half.
Chris Woronka
Okay, great. And then just finally on some of your market of more international visitation San Francisco, Miami, New York, maybe a little bit of Chicago, are you seeing anything there as you look out or have you seen anything in the second quarter regarding I guess trends in international inbound demand?
Raymond Gellein
No, we are watching it pretty carefully, it is not, it just - we don't think it's been an issue, we had some thought that Canada had been an issue in one asset, but there was - it just hasn't been that is in Scottsdale but it really hasn't been material to us at this point in time. We watch it carefully especially in New York and San Francisco, Miami, but Miami's markets are haven't been sort of European focus. So it hasn't affected that and Miami is actually performing wonderfully well. So far so good.
Chris Woronka
Okay, very good. Thanks guys.
Raymond Gellein
You bet.
Operator
Thank you. Our next question comes from the line Lukas Hartwich from Green Street Advisors. Your question please.
Lukas Hartwich
Thank you. Good morning guys.
Diane Morefield
Good morning, Lukas.
Lukas Hartwich
Hey I just have a couple quick ones. Thanks for the color by the way on '16 group pace, I think that's really helpful. What percentage of your group business for '16 is on the books at this point?
Raymond Gellein
About 50%.
Lukas Hartwich
50%, okay. And then some of your peers have commented on some weakness in LA recently this past quarter and I know that lows there was going through some renovation. So I am just curious was the weakness you saw in that market, is it related more so to renovations in your care or do you think the due also see that weakness in LA?
Raymond Gellein
Ours is almost totally the poll renovation because that's in the middle of the hotel, but loud it was - it was part of the carriage below so it was - there was all kinds of disruption. And then we said in the formal remarks the trip advisor was all over at same for a while same talking about the noise. So we’re pretty sure that’s the case and in fact the assets come back in both June and July. So we think we past it and it’s been reasonably strong. So I think it was almost totally related to the renovation.
Lukas Hartwich
Great, that’s it for me. Thank you.
Operator
Thank you. Our next question is a follow-up from the line of Bill Crow from Raymond James. Your question please.
Raymond Gellein
He is back.
Diane Morefield
First and last Bill.
William Crow
I am back, sorry. I am curious weather the KSL has a lockup period on the shares or whether there is restriction on them selling for either formal restriction or maybe a more implied or implicit restriction?
Raymond Gellein
No, there is no restriction Bill, there is a registration process, so we are in the middle of doing that, so as we get through that and there is, but is no implicit or explicit lockouts.
William Crow
Great, that was it for me. Thanks.
Operator
Thank you. Our question comes from the line Rich Hightower from Evercore ISI.
Rich Hightower
Hi guys, good morning.
Diane Morefield
Hi Rich.
Raymond Gellein
Hi Rich.
Rich Hightower
A quick one on just trying to unpack the margin guidance a little bit and I appreciate Diane’s comments kind of telling us what the moving parts where, but it appears that most of what changed wouldn’t have effect margins per say unless I’ve mistaken. So I am just wondering with RevPAR coming down a 100 bps at the midpoint and even more than that at the high end, what gives you confidence that you can maintain the margin expansion guidance in the release?
Diane Morefield
Again, we do our forecast bottom up by hotel and fair to say it’s really a result of we continue to maintain cost creep and so the 125 and 75 basis point for the full year we’re very confident in. Yeah, it’s really as cost management.
Raymond Gellein
Yeah, the asset management teams where they have seen softness, they’ve really focused on labor and making sure that that we’re staffing at appropriately, they are very good at that and so we are pretty confident that we can maintain those margins.
Rich Hightower
Okay, that’s helpful. And then one quick one, Rip just curious if you can give us a preview on potential renewal of your employment contract?
Raymond Gellein
You know I am fully engaged in running the company and having good time. As we successfully execute the business plan and I am in regular discussions with the board and but one think I can assure you is that the future transition in the CEO role will be very smooth when we get there.
Rich Hightower
Sounds great. Thank you.
Operator
Thank you. This does conclude the question-and-answer session of today program. I would like to hand the program back to Rip for final remarks.
Raymond Gellein
Thank you all for joining us. It was a very productive quarter. We look forward to talking in after the third quarter. Thanks.
Diane Morefield
Thank you.
Operator
Thank you, ladies and gentlemen for your participating in today’s conference. This does conclude the program. You may now disconnect. Good day.
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