Braemar Hotels & Resorts Inc.

Please stand by. We are about to begin. Good day, ladies and gentlemen, and welcome to Braemar Hotels and Resorts, Inc. Fourth Quarter 2018 Year-End Results Conference Call. Today's call is being recorded, and at this time I would like to turn things over to Jordan Jennings, Investor Relations for Braemar. Please go ahead.

Good afternoon, and welcome to today's call to review results for Braemar Hotels and Resorts for the fourth quarter and full year of 2018, and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer, Derek Eubanks, Chief Financial Officer, and Jeremy Walter, Chief Operating Officer. The results as well as notice of the accessibility of this conference call on a listen-only basis over the internet were distributed this morning in a press release that has been covered by the financial media. At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risk, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings relief and accompanying tables or schedules, which have been filed on Form 8K with the SEC on February 27, 2019 and may also be accessed through the company's website at www.bhreit.com. Each listener is encouraged to review those reconciliations provided in their earnings release together with all other information provided in the release. I will now turn the call over to Richard Stockton. Please go ahead, Richard.

Thank you. Good afternoon and thank you for joining us this afternoon to discuss our fourth quarter and full year results. Overall, we are very pleased with the operating and financial results Braemar generated in We're excited about the progress we are making on the continued growth and success of our platform. In January of 2017, we announced a revised strategy with a focus of investing in the luxury hotel segment. And since that time, we've taken concrete steps to realign our portfolio to the strategy, including selling two non-core properties, announcing an agreement to up-brand two properties and align them more closely with our luxury focus, and acquiring four high-quality luxury properties. We believe the continued execution on this strategy will lead to solid growth and strong financial performance for our company going forward. Our strategy to focus on the luxury segment of the hospitality market is supported by the current and historical performance of this segment. Empirical evidence has shown that over the long term, the luxury segment has had greater Red Park growth than the overall industry. Currently bolstered by strong consumer confidence trends and a healthy macroeconomic outlook, the luxury segment has outperformed the overall lodging industry over the last several quarters. According to Smith Travel Research, in the fourth quarter, luxury segment rev par growth was 3% compared to rev par growth of 2.4% for the entire industry. For full year 2018, luxury rev par increased 4.4% compared to rev par growth of 2.9% for the entire industry. Looking ahead, the economic outlook continues to be favorable and consistent with our long-term growth thesis for the luxury segment, STR and other industry forecasters are predicting modest overall REVPAR gains in 2019 for the industry, but the luxury segment expects to continue to outperform. By clearly aligning our platform with this segment, we believe Braemar is well positioned to capitalize on these trends and continue to outperform our REIT peers. Before turning to our operational results, I would like to take a moment to discuss the Enhanced Return Funding Program, or ERFP, agreement with Ashford Inc. that we announced in January. The ERFP is a $50 million funding commitment from Ashford, Inc. that is provided to Braemar to facilitate accretive growth. Simply put, Ashford, Inc. contributes 10% of the purchase price of qualifying acquisitions up to the agreed maximum funding commitment with no additional fees or future return on investment provisions. The program has a two-year term with one-year renewals and the ability to be upsized to $100 million based upon mutual agreement. This programmatic funding arrangement provides us with a competitive advantage and the potential to meaningfully drive our performance is significant. With the ability to add an estimated 100 to 200 basis points to unlevered returns on our future hotel acquisitions, we believe the ERFP will be a key differentiator behind our ability to increase shareholder value. To put the ERFP program to work immediately, in January 2019, we acquired the Ritz-Carlton Lake Tahoe located on the North Shore. We're very excited about the acquisition of this high quality resort and believe it's a great addition to our portfolio. Raymar will receive approximately $10 million of ERFP funding as part of the $103 million purchase price. We anticipate that this will increase our returns on this acquisition from a projected 10% to 12% unlevered IRR. This landmark luxury hotel, built in 2009, consists of 170 rooms with over 37,000 square feet of indoor and outdoor meeting space, and sits mid-mountain on the ski slopes of the North Star Ski Resort. With record snowfall propelling the 2018-19 ski season out of the gates, we are very excited about this property joining our portfolio. Let me now turn to our fourth quarter results. For the fourth quarter, actual ref bar growth was 9% for all hotels and was 7.2% for the full year. These significant increases are a direct result of our portfolio repositioning efforts to acquire higher RevPar hotels and dispose of our lowest RevPar assets. Comparable RevPar for hotels not under renovation grew by 7% during the quarter, while comparable RevPar for all hotels increased 3.2%. We reported adjusted EBITDA RE of $20.3 million and AFFO per share of 15 cents for the quarter. while full-year adjusted EBITDA RE was $119.3 million, reflecting 7.3% growth over the prior year, and AFFO per share was $1.55. Our overall portfolio TTM comparable REV PAR of $226 continues to be the highest in the lodging REIT sector. During the quarter, we continued to actively manage our insurance recoveries at the Ritz-Carlton St. Thomas related to Hurricane Irma. We're working closely with our insurers to both seek recoveries for physical damage to the hotel, as well as to minimize the impact to the property's P&L through BI insurance recoveries, which total $13.5 million for the full year 2018. As previously discussed, we didn't book any business interruption income in Q4 2018. However, we do expect recoveries to resume in the first quarter of 2019 and to continue at least through our planned reopening in October 2019. We also continue to be on track with the rebuilding and renovation program at the property, and Jeremy will provide more detail on our progress in a few minutes. We're also pleased with the progress we are making on the conversions of our Courtyard Philadelphia and Courtyard San Francisco properties to autograph collection hotels. Both projects remain on track to be completed this year, and their opening as autographs will mark the completion of our initiatives under our non-core hotel strategy and portfolio repositioning. Thus far, we have spent approximately $20 million on these conversions. and anticipates spending an additional $30 million in 2019. We're excited about the post-conversion upside of these two properties, given their strong performance during 2018, with 6.7% rev par growth at the Courtyard Philadelphia and 14.6% rev par growth at the Courtyard San Francisco, even while these properties were under renovation. Additionally, San Francisco's Moscone Convention Center expansion was completed in late 2018 which, when combined with only modest supply growth, continues to fuel our excitement for 2019 with the upcoming opening of our San Francisco Autograph Collection Hotel. Two of this quarter's best-performing assets were our Napa Valley properties, with comparable REVPAR up by 35.4% at Bartisano and 41.1% at Hotel Yonville during the fourth quarter, driven by strong gains in both rate and occupancy. We noted last quarter on our call that the fourth quarter was shaping up to be strong for our Napa Valley hotels as operations of the properties fully recovered from the fires in the fourth quarter of 2017. For these properties, comparable revpar growth was 37.9% during the fourth quarter, driven by occupancy growth of 24.1% and rate growth of 11.1%. While the strong revpar growth was driven by depressed occupancy levels in 2017, This robust Red Park growth resulted in Hotel Yontal increasing its share relative to both the California North Market and Napa Valley, California, sub-market by 28.8 and 14.2 percentage points, respectively. Bartosono similarly outperformed the market and sub-market. For the two properties combined, Hotel Yontal margin increased by 112%, resulting in a $1.9 million or 196% increase in Hotel Yontal. These results translated into 81% hotel EBITDA flow-through for the fourth quarter, which is a continuation of the strong 89% hotel EBITDA flow-through achieved during 2018. At Fartisano, construction continued on the three-unit presidential villa with structural framing currently underway. 2018 was our first full year of ownership of Hotel Yonville. While the year had its share of hurdles to overcome, mainly the recovery from the fires in the fall of 2017, during the year a comparable rev part grew by 4.9%. Hotel Ibida grew $1.3 million, or 24.5%, while Hotel Ibida flow-through was 74%. With the impact of the fires mitigated, we anticipate Hotel Yonfield to continue to perform well and be a valuable addition to our portfolio. In addition to the strong performance of our Napa Valley assets, the Hilton La Jolla Torrey Pines was also a strong performer for the quarter, with comparable REFAR of 12.5% driven by 11.5% rate growth. This REVPAR growth represents 7.4 and 0.7 percentage point increases in REVPAR relative to the San Diego-La Jolla-California submarket and the San Diego upper upscale class market respectively. The hotel has been focusing on group patterns and placement by deliberately moving groups to shoulder dates in order to capitalize on high occupancy dates with transient business. In addition to the strategic booking of group business, the hotel was able to drive transient rate during the San Diego CityWides. Total hotel revenue at Hilton Torrey Pines increased 14.4% during the fourth quarter, leading to hotel EBITDA growth of $735,000, or 27.2% over the prior year period. At our Capital Hilton in Washington, D.C., comparable rev parts decreased 6.6% during the fourth quarter, as October was impacted by the last two weeks not having any congressional activity leading up to the midterm elections. Additionally, October and November combined saw a 48,000 room night decrease in the market due to fewer city-wides. Increased supply in the market also impacted the average rate that the Capitol Hill was able to realize on weekends from leisure travel. As the partial government shutdown occurred at the very end of the fourth quarter, It had minimal impact on the quarter's results. However, we expect it will have a greater impact on the results for the first quarter of 2019. On another note, the hotel opened a new fitness center, continued to progress on the last phase of the meeting space renovation, and is preparing for the opening of its new retail tenant, CVS. One of our recent acquisitions, the Ritz-Carlton Sarasota, posted a 2% comparable red-par decrease during the fourth quarter. Red tide began impacting the Gulf Coast at the beginning of August 2018, and the Sarasota market has been one of the worst-hit regions. Despite the poor market conditions relative to the Sarasota Beaches Florida sub-market and Sarasota Bradenton Florida market, comparable red part of the property outperformed by 9 and 7.6 percentage points, respectively. During the fourth quarter, hoteling bid up low through was a robust 95%. And for the entire year, this figure was an exceptional 305%. Despite the headwinds mentioned earlier, the hotel exceeded 2018 operating income by 3.5%, or $568,000, through effective expense control. And we did not have to draw on the GOP guarantee negotiated with prior ownership as part of our acquisition. Additionally, the City Council approved beach restoration project that began in November reached the hotel's beach club this quarter, which should have a positive impact on performance. We believe we have made great progress in advancing our strategy in the quarter and expect these trends to continue through the first quarter of 2019. I'll now turn the call over to Derek.

Thanks, Richard. As Richard mentioned, during the fourth quarter, we did not recognize any business interruption income for the Ritz-Carlton St. Thomas. However, for the year, we recognized $13.5 million of business interruption income for the Ritz-Carlton St. Thomas, which is reflected in the other hotel revenue line of our income statement. These insurance recovery is related to the months of December 2017 through November 2018, and we expect business interruption income to resume in the first quarter of 2019 and continue until at least the reopening of the hotel as a Ritz-Carlton, which is anticipated to occur in October of this year. For the first quarter, we expect our BI income to be similar to what we booked in the first quarter of 2018 for the Ritz-Carlton St. Thomas. For the fourth quarter of 2018, we reported a net loss attributable to common stockholders of $14.4 million, or 44 cents per diluted share. For the full year of 2018, we reported a net loss attributable to common stockholders of $5.9 million, or 19 cents per diluted share. For the quarter, we reported AFFO per diluted share of 15 cents. And for the full year of 2018, we reported AFFO per diluted share of $1.55. Adjusted EBITDA RE for the quarter was $20.3 million, while adjusted EBITDA RE for the full year was $119.3 million, which reflected a 7.3% growth rate over 2017. At quarter's end, we had total assets of $1.6 billion. We had $993 million of mortgage loans, of which $47 million related to our joint venture partner share of the loan on the capital Hilton and Hilton La Jolla Torrey Pines. Our total combined loans at a blended average interest rate of 5% at year end, but after taking into account our recent refinancing, along with the financing on the Ritz-Carlton Lake Tahoe, our current blended average interest rate is approximately 4.8%. Our loans are entirely floating rate, and the vast majority of interest rate caps in place. As of the end of the fourth quarter, we had approximately 44% net debt to gross assets, and our trailing 12-month fixed charge coverage ratio was approximately 1.8 times. Our next loan maturity is not until March of 2020. Our cash and cash equivalents at the end of the quarter was $183 million, with an additional $76 million of restricted cash. The vast majority of that restricted cash is earmarked for CapEx projects, including our autograph conversions, so we have already set aside a significant amount of the CapEx we plan to spend in 2019. We also ended the quarter with networking capital of $188 million. As of December 31st, 2018, our portfolio consisted of 12 hotels with 3,314 net rooms. With the acquisition of the Ritz-Carlton Lake Tahoe, we now have 13 hotels with 3,484 net rooms. Our share count currently stands at 37.3 million fully diluted shares outstanding, which is comprised of 32.5 million shares of common stock and 4.8 million OP units. In our financial results, we include approximately 6.6 million shares in our fully diluted share count, associated with our Series B convertible preferred stock. With regard to dividends, the Board of Directors declared a fourth quarter 2018 cash dividend of 16 cents per share or 64 cents per diluted share on an annualized basis. This equates to an annual yield of approximately 5.1 percent based on yesterday's stock price. The Board also approved the company's dividend policy for 2019. The company expects to pay a quarterly cash dividend of 16 cents per share for 2019 or 64 cents per share on an annualized basis. On a trailing 12-month basis, this represents an approximate 41% ASFO payout ratio. On the capital markets front, during the quarter, we completed an underwritten public offering of 1.6 million shares of our 8.25% Series D cumulative preferred stock at $25 per share. Dividends on the preferred stock will accrue at a rate of 8.25% per year on the liquidation preference of $25 per share. We used the proceeds from this offering for the acquisition of the Ritz-Carlton Lake Tahoe. Subsequent to quarter end, we refinanced a mortgage loan with an existing outstanding balance totaling approximately $187 million. The new loan totals $195 million and has a five-year term. The loan is interest-only and provides for a floating interest rate of LIBOR plus 1.7%. The loan remains secured by the same two hotels, the Capital of Hilton in Washington, D.C., and the Hilton La Jolla Torrey Pines in La Jolla, California. Also, subsequent to quarter end, we closed on a $54 million non-recourse mortgage loan secured by the Rich Carlton Lake Tahoe. This loan is interest only, bears interest at LIBOR plus 2.1%, and has a five-year term. This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Derek. Comparable REBPAR for our portfolio grew 3.2% during the fourth quarter. However, for all hotels not under renovation during the fourth quarter, comparable rev par grew by 7%. Our portfolio's comparable rev par growth led to a share gain of 2.1 percentage points relative to our hotel's sub-market change scale. Holiday shifts did not significantly impact results during the fourth quarter, and the government shutdown led to minimal impact in December. For the year, comparable rev par for the entire portfolio decreased by 1.6%. However, this decrease represents 1.7 percentage point gains relative to our hotel's submarket chain scale. In addition, for the year, hotel EBITDA flow-through was robust at 137%, leading to hotel EBITDA growth of $4.1 million. Park High Beaver Creek Resort and Spa completed its first full year under our ownership. During the year, comparable REBPAR decreased 2.3%. primarily due to poor ski season weather and snowfall to the start of the year. However, comparable rev par actually surpassed that of the Colorado ski area sub market upscale and above change by 5.2 percentage points. Numerous expansion projects at the property have also been approved, including a ski valet locker room where each guest will have a private heated locker to store and dry their boots and other ski items. The major renovation of the lobby and antlers lounge will get underway this spring with the focal point being a completely redesigned antlers lounge with a newly built bar in the center of the room. A second fireplace will also be added to maximize the warmth and ambiance of the lobby, especially during the winter season. Additionally, the front desk will be relocated to the center of the lobby and consists of three podiums where guests will register while seated comfortably. We anticipate these expansion projects will help drive future top line growth, which in conjunction with our profitability track record at this property should lead to a strong return on our investment. Now, over one year after the devastating hurricanes in September 2017, I'd like to provide an update on our progress at the Ritz-Carlton St. Thomas. During the fourth quarter, there was significant reconstruction activity at the property. While work has continued on the guest room buildings impacted by the hurricanes, in December work also began on one of the guest room buildings that had been operational, thus reducing inventory from 83 to 59 rooms. Operating room inventory was further reduced in February with another operational guest room building going under renovation. Construction will start on the last guest room building in March and the resort will be shut down entirely to guests from March until July. The lobby expansion area build-out and tile floor are substantially complete, as are the roofs. Despite the ongoing renovation, we have also been able to operate a portion of the hotel under a white label and realized comparable red-par growth of 5.8% during the fourth quarter. During 2018, we booked $13.5 million in BI insurance proceeds. And while we did not book any BI insurance proceeds for the months of September, October, and November during the fourth quarter, We expect to realize robust recoveries for the months of December, January, and February during the first quarter of this year. Continuing the theme of capital improvements, I'd like to provide an update on both of our ongoing courtyard renovations, conversions to autograph collection hotels. The Courtyard San Francisco Downtown, which continues to grow at a tremendous rate following its transformative guest room renovation, had 9.7% comparable Red Park growth during the fourth quarter. This Red Park growth represents an increase of over 15 percentage points relative to the hotel's competitors. This is a continuation of the strong performance seen for the full year of 14.6% comparable Red Park growth. With the conclusion of the major guest rooms renovation in the first quarter of 2018, we were able to position the hotel to not only grow Ikevincy but also grow rate, which grew 5.6% during the fourth quarter. For the year, hotel EBITDA grew $1.1 million. All major room items are substantially complete, with only a few go-back items remaining. Plans for the final stages of the autograph conversion have been finalized, including entirely new lobby, restaurant, coffee shop, as well as a remodeled exterior. Additionally, in December 2018, the Moscone Convention Center expansion was completed, which, when combined with the amount of supply growth anticipated for the market, continues to fuel our excitement for 2019 and the upcoming rebranding to an autograph collection hotel. As for courtyard Philadelphia downtown, in October, we started the guest rooms renovation, which will include new case goods, carpet, lighting, bathroom, barn doors, and shower conversions. By the end of the quarter, 57 guest rooms had been renovated and returned to available inventory. During the fourth quarter, comparable REVPAR growth was negative 10.9% as a result of a 12.1% decrease in occupancy due to the ongoing renovation. Results were also impacted by a decrease in citywide activity, specifically the lack of the International Chiefs of Police Convention in October, which caused a significant compression in 2017. However, even with the reduction in the citywide calendar in the renovation in the fourth quarter, the hotel grew a comparable rev par 6.7% during the year, which represents growth of 1.8 and 1.4 percentage points relative to the Philadelphia, Pennsylvania, and New Jersey upscale class market and the hotel's competitors, respectively. During the year, the property had hotel EBITDA flow-through of 58%. which resulted in hotel EBITDA growth of $1.8 million or 14.9% over the prior year period. We eagerly anticipate the hotel's conversion to the autograph collection in mid-2019. As Richard mentioned earlier, in January we acquired the Ritz-Carlton Lake Tahoe. The irreplaceable hotel represents the third Ritz-Carlton managed addition to our portfolio over the past few years, joining the Ritz-Carlton St. Thomas and the Ritz-Carlton Sarasota. The 170-room hotel contains nearly 15,000 square feet of indoor meeting space and a 17,000-square-foot spa and fitness center. This five-diamond-rated hotel boasts ski-in, ski-out access, an off-site lake club on the shore of Lake Tahoe, and access to snowboarding, skating, lake activities, biking, and golf. We're already excited about this acquisition. The hotel's performance in January exceeded our expectations. Early season winter snowfall created very strong demand that led to significant red-par growth for the month over the prior year. Very strong occupancy premiums coupled with high rates on the tail end of the holiday season and over MLK weekend drove top-line growth. During 2019, we will continue to invest in our portfolio in order to maintain competitiveness. In total, we estimate spending approximately $80 to $90 million in capital expenditures during the year, exclusive of capital expenditures funded with insurance proceeds. These expenditures will be comprised predominantly of the completion of the autograph conversions at our two courtyard properties, the aforementioned up branding of the Park High at Beaver Creek, and the strategic acceleration of capital projects at the Ritz-Carlton St. Thomas while the resort is under renovation. Finally, we have identified highly creative opportunities to add additional keys within our portfolio. Specifically, we will be adding 10 keys at the Ritz-Carlton Sarasota, two keys at the Hilton La Jolla Torrey Pines, and we are progressing work on the three key presidential villa at Bartisano, which is expected to be completed this summer. Looking forward even further into 2020 and beyond, we would expect our capital expenditures to reduce significantly as our major repositionings will have been completed. I will now hand it back over to Richard.

Thanks, Jeremy. While we were pleased with our fourth quarter and full year performance, we were even more energized about our prospects and potential growth in 2019. While industry forecasts remain muted, our specific portfolio of investments should allow us to continue to drive material repart growth and added profitability. This concludes our prepared remarks, and we will now open the call up for Q&A.

Thank you. And ladies and gentlemen, if you'd like to ask a question, please press star then one on your telephone keypad. Please note that if you're on a speakerphone, to please pick up the handset or depress your mute function to allow that signal to reach our system. Again, that is star one to ask a question. And we'll go first to Chris Warnicka of Deutsche Bank.

Hey, good afternoon, guys. Congratulations on a really active year. I wanted to ask about on the Ritz-Carlton, what kind of ramp-up you expect once that reopens later this year, and can you still collect the BI insurance until it gets to your projected stabilized level?

Yeah, this is Jeremy. I think what you would assume as it relates to – You know, the ramp-up insurance, I would assume that you don't put that into your numbers. We can continue to, you know, as it gets closer to the fourth quarter when the Rich Carlton St. Thomas opens, maybe give you a little bit more insight on that. But I'd expect it to be a pretty quick ramp. Personally, I mean, there's just been a lot of, you know, pent-up demand in the Virgin Islands. We're aware of, as you may know, through Ashford Inc., we have an investment called REDD, which does some boating activities and water sports activities at the West of St. John. My understanding is that they had a great first month of being open and servicing that hotel, so there's been strong demand there. We've seen strong demand in the adjacent residences. you know, with the new product and folks that are just kind of eager to get back to the Virgin Islands, I'd anticipate it to ramp pretty quickly. So I would say, you know, hopefully we'd have a very strong first quarter of 2020 and you'd see some ramp in the fourth quarter. Hopefully that answers your question.

Yeah, yeah, that's great color, Jeremy. Thanks. And then just kind of similarly on the autograph conversions, are you able to kind of pre-sell those yet as autograph collections, or do you have to wait? Just trying to get a general sense for the cadence of how those are going to ramp once these are done.

Yeah, that's a great question. And the answer is really yes and no. Yes, as it relates to group, we're definitely getting the sales team to quote higher rates for group pricing. But as it relates to transient, no, we cannot – marketed as an autograph. I mean, we haven't even announced publicly what the branding of each of those hotels. There's individual branding for each hotel at this point. But Marriott will not allow us to market that as an autograph to transient consumers until that completion is done. What I can say is we've done this before in Trust Portfolio with the conversion of the Crowne Plaza to Marriott Beverly Hills. And the ramp was very strong and relatively quick So we hope that we'd see something very similar in these two conversions as well. Keep in mind that our average booking window for our guests is really three weeks out. So I would just assume it would take at least a couple months initially to at least start getting some better demand for the autograph. But it would anticipate probably a full six months to a year to get the full ramp.

Okay, very helpful. Very helpful. And just more of a strategic question now. I guess you guys have continued to be pretty active on the asset front. What's the capacity or maybe the appetite to do more to the extent you find these hotels or resorts that are fitting your criteria?

Yeah, thanks, Chris. It's Richard Stockton. So I think we have – been pretty active on the acquisition front, as you said. And I think as we look to 2019, we're more likely to kind of digest those acquisitions and focus on our asset management initiatives. I mean, we're definitely keeping ourselves apprised of the market, but we like where we are in terms of our leverage at the moment. And so we're going to be focused on, you know, as Jeremy mentioned, the autograph conversions, bringing the Ritz Carlton St. Thomas back online. You know, as you know, We've got two potential residential developments in Sarasota and also Lake Tahoe. And so we focused on that. So I think that'll be really the majority of our focus for 2019 at least. And then come 2020, we'll assess where things are at that point.

Okay, very good. Thanks, guys.

We will go next to Jim Likens of DA Davidson.

Hello, everyone. The first thing I wanted to ask you is, and Richard just kind of hit on this at the very end, but at Tahoe, what the thinking is right now for the number of townhomes you might be developing, what the timeline might look like, and then also, same question, but for the potential villas at Sarasota.

Sure. So, at Tahoe, we're currently about to kick off our kind of concept design work. We've definitely done a lot of work on market feasibility. The plot of land that we have now was at one point entitled for up to 60 units, but that was more of a kind of a high-rise construct. And then there was another entitlement done for 14. We think the right answer is somewhere in between. What we want to build there is very high-end luxury townhomes at probably the highest price point that that market has seen to really appeal to the wealth coming out of the San Francisco kind of Bay Area. Now, in order to build in Tahoe, you do have somewhat of a limited construction season given the weather. So I don't expect to be coming out of the ground before next winter. So we'll spend this year getting our architectural plans in place, et cetera, to be in a position to build not this coming summer, but the following. So we're still a couple of years away from seeing the fruits of that labor. But rest assured, we're working furiously behind the scenes to prepare for that. In terms of Ritz Carlton Sarasota, obviously you can build any time you like all year round. And we've made significant progress on our architectural planning and site planning there. And the hope there is to build approximately 60 villas, which will be able to start marketing at the hopefully end of this year. So there'll be some activity on site starting this summer on that project. But again, that's a project that you won't see come to fruition for probably two, three years once we look at absorption rates and construction timetables and the like. But we'll continue to keep you updated on that.

So it's probably way too early then for you to offer any kind of estimates on how we might want to think about returns for those projects?

Yeah, that's right. I think to be safe, you can assume returns in line with what we've been targeting for our hotel investments. Hopefully, we'd want to exceed that. But that would be, just given our cost of capital, that would be a safe assumption.

Okay, and then also Jeremy's last comment about significant CapEx reductions. Any comment or any color on how we might want to think about what significant might be in 2020 and beyond?

I don't think we're prepared to give guidance on that right now as we sit in the first quarter of 2019. That's typically something we do. basically fourth quarter or first quarter of next year, probably fourth quarter of this year. But we're still kind of working through our capital plans. But I can tell you that we're just not going to have as much renovation activity than what you're going to see this year, especially from a CapEx perspective.

All right. Thanks, guys.

We will now take our next question from Michael Bellisaro of Baird.

Good afternoon, everyone. Just on that last comment on Sarasota, did I hear that correctly, that you'd consider that an on-balance sheet project? And correct me if I'm wrong, but I thought the original view there was to have a third party take that risk.

Yeah, you know, as we looked at it, we realized that, you know, the capital outlay, given that, you know, we can have construction financing in place with that project, is quite minimal. and the time cost and disruption of bringing in some sort of a joint venture partner wouldn't necessarily make a lot of sense given the size of the project. That said, the way these things are generally structured is you're essentially selling the land through a home builder who's your merchant builder, and then they're going vertical with financing. We're still working out all the details on that, but we're not at this point looking to bring in any sort of joint venture partner.

I guess maybe the high level just from a risk profile, structuring it this way, obviously higher risk I would think, but in terms of the amount of capital you'd have to keep on your balance sheet or deploy, it seems minimal given that it would be flipped via homebuilder. Is that the right way to think about it?

That's right. Yeah, I think the amount of capital that we have to put into the project is going to be not much more than our original land purchase price.

Got it. That makes sense. And then just high level on your underwriting, maybe looking back on the last few deals you've done because you focused on some seasonal resorts that are pretty weather-dependent. I guess, how do you account for that risk and then the inherent cash flow volatility in your underwriting? And how do you think about the risk premium that you associate to that cash flow profile for your particular assets, the resort, the higher end properties that are pretty weather dependent?

Yep. So in terms of forecasting weather, we don't try to do that. So when we do our underwriting, we look at primarily a five-year forecast, which is essentially, other than really the very near term, kind of the average performance over that five years. So we don't have to necessarily figure out when we're going to have how much snowfall. For instance, we just have to know that we're going to have snow over the next five years. In terms of pricing the risk, you mentioned you've got some weather dependent, whether it's Sarasota or mountain resorts. You've seen how we've priced it. We've priced to a 10% unlevered return on these acquisitions with the benefit of the ERFP program. We're at 12% on Tahoe. We think that's a significant enough premium to our weighted average cost of capital to accommodate that risk. So that's how we've done it.

Okay, that's helpful. And then maybe one for Jeremy, maybe as best you can on a normalized basis, because I know there are a lot of moving pieces last year and in 2019 too. But what are you guys expecting for 2019 cost increases at the property level? And then are you guys seeing any differences on the labor side or the cost pressure side between your resorts and then your urban hotels?

Yeah, that's a great question. It's so market – depending on market by market. Certainly, we just went through – you're probably familiar with the strike that happened in San Francisco, which impacted us in the fourth quarter at our courtyard in San Francisco, which started on October 4th and lasted through December 6th. And we reached agreement on that CBA. And I would say that the cost of benefits and wages – over a five-year time period for that hotel is about 45%. Seattle's had a lot of cost pressures as well. So it'd be another market that would be kind of closer to that range. When it comes to the resort markets, it's maybe a little bit less about cost pressure and it's just more about just getting labor and good labor at some of those locations. So Tahoe is something that they use a lot of contract labor. And it's fairly expensive, but I don't see a lot of cost pressures necessarily on a long-term basis there relative to maybe your western markets that we have in the Braymore portfolio. Certainly, there's a lot of living wage initiatives that you're familiar about that the industry is dealing with across the country, but primarily in urban markets and West Coast-dominant markets.

Great, that's helpful, thank you.

And as a reminder, ladies and gentlemen, to ask a question, please press star then one on your telephone keypad. We will now go to Brian Mayer of B Reilly.

Good afternoon. When it comes to the courtyard conversions to autograph, you know, in 2019, and maybe this is a question for Jeremy, What are you thinking about in the way of disruption? Is it in level of magnitude similar to what we saw in 2018 so far? Is it going to be more or less? What are your thoughts there?

Yeah, I can give you, let me break it down a little bit for you. We're going to have two floors out. Let's talk about quarter of Philly right now. Two floors out for most of the first quarter and all of the first quarter and then most of the second quarter. So we're projecting to have the rooms done in early to mid-June, if everything goes well. And the turns are lasting about, call it 40 or so days per room. We'll be done with guest rooms, and then we'll be completing following up with the lobby and the restaurant. And right now we're looking at June, July for the public space. In terms of San Francisco, we have go backs in the guest rooms, but we're keeping those very quick turns and we're doing it very selectively where we have availability. So our expectation is to have minimal room displacement throughout the year at Courtyard San Francisco. But there's going to be heavy disruption when it comes to the facade and the public space, but I think we do, quite frankly, a really good job in our stealth renovation program to mask that off from the guests as best as possible. It certainly is going to limit the experience at the hotel when you don't have as much public space available, but given the demand that we're seeing in San Francisco and particularly that part of San Francisco, I'm hopeful that we really are not going to have a lot of disruption associated with the renovation in the courtyard of San Francisco.

Okay. And then moving on to the villa development projects, I just want to be clear. These are going to be what townhomes that you're going to sell. They're not going to be villas added to hotel inventory. Is that correct?

Correct. Yeah. hoping to entice the buyers into participation in a rental program if possible. And that's a little bit subject to negotiation agreement with Ritz-Carlton. But the idea is to sell them.

Okay. And then just lastly for me, we're starting to hear some of the companies we cover who had hits from the hurricanes over the past couple of years. seeing their insurance costs go up. Are you seeing something similar at Braemar?

We had a decent increase at the last renewal, which is already kind of reflected in the fourth quarter. Our renewal is June 1st, and so given the recent hit that we had in terms of spike in We're hopeful that we're going to end out of this on this renewal with modest increases. But it's difficult to say. We're just right at that time where we're finalizing our strategy. We've got all of our packets together and we're about ready to go to market. And so I think that certainly by the time we do our second quarter call, which should be early May, we're going to have much more clarity on what we think that's going to be.

Okay, thank you.

Oh, yeah, sorry, first quarter call in May is what I mean, but in the second quarter of this year.

Okay, thanks, Jeremy.

And we will now take a question from Tyler Battery of Janney Capital Markets.

Hey, good afternoon, everyone. So just a couple follow-up questions from me. First, I wanted to ask on supply, I think in the past you guys have talked about 2% supply growth going forward. So is there any change to that? And can you also talk about some of your markets that have a little bit of outsized supply in 2019?

Yeah, this is Jeremy. I can take that. We're right almost in line with, if you look at the Smith Travel projections, it's just under 2% for the next two years. And that's revenue weighted for all our hotels. And so we project that out for the next two years. And then in terms of markets, really for the first time, we're not seeing a big outlier. It's pretty consistent, ranging from low 1% to maybe as high as just under 4%. The market with the most supply, and this was something that we factored into our underwriting, is Sarasota. And so we anticipated that. And in fact, a lot of it's already been absorbed. And so over the next two years, we're projecting 3% to 4% in Sarasota, and that's the highest market.

Okay, got it. That's helpful. And then I wanted to ask, with other revenue on the income statement, obviously that line item, the flat year over year, but you didn't have any BI running through that in the fourth quarter this year. So is there anything unusual that was driving that line item?

Let's see. You're looking at other hotel revenue, Tyler?

Yes.

It was relatively flat?

I don't know how much BI we actually booked in the fourth quarter of 2017.

You're asking why it was down so much or why we had BI in Q4 of last year but not this year and why it was relatively flat?

Yeah, yeah, I just assumed that that line-up might have been down a little bit more just given you had – I think you had a decent amount last year in the fourth quarter. Maybe that's right.

Yeah, it's a combination of the addition of the Sarasota, Ritz-Carlton, which we did not have in the fourth quarter of last year, and just lower – well, the less, I guess, higher revenue from the – from the assets that were impacted that did not require BI.

Okay, that makes sense. I figured it was the Sarasota impact, but just wanted to double check on that. Maybe the last question for me, probably for Jeremy too, just, you know, when you look at Key West, obviously very strong repar growth, the second half of 18, you know, you had some favorable comps there just given the weather. I mean, everything pretty much back to normal there in the market, you know, as far as trends that you're seeing, you know, maybe into this year.

Yeah, I think so. I mean, you've got to go back to 2015 for when Key West more or less peaked. If you recall, in 2016 we had a little bit of impact from Zika, and then obviously 2017 was Hurricane Irma. And so there's heavy impact actually over the last two years, and so we're starting to see that surge in demand come back to that market. And, you know, it's a market that we tend to be long-term bullish on, given the fact that you're not going to see any new supply there. that comes into it. So I think it's safe to say that it's more in a normalized state going forward.

Okay, great. That's all from me. Thank you.

And with that, that does conclude today's question and answer session. I would like to turn the conference back over to management for closing remarks.

We'd like to thank you all for joining us on our fourth quarter earnings call this afternoon, and we look forward to speaking with you again next time. Thank you.

And with that, ladies and gentlemen, that does conclude today's call. We thank you again for your participation. You may now disconnect.