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RLJ Lodging Trust (RLJ) Q2 2019 Earnings Call Transcript

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RLJ Lodging Trust (NYSE: RLJ)
Q2 2019 Earnings Call
Aug 08, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

This is the conference operator. Welcome to the RLJ Lodging Trust second-quarter 2019 earnings conference call. The conference is being recorded. [Operator instructions] I would now like to turn the conference over to Nikhil Bhalla, RLJ's treasurer and vice president of finance.

Please go ahead.

Nikhil Bhalla -- Treasurer and Vice President of Finance

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2019 second-quarter earnings call. On today's call, Leslie Hale, our president and chief executive officer, will discuss key highlights for the quarter and provide an update on the recent strategic initiatives; Sean Mahoney, our executive vice president and chief financial officer, will discuss the company's operational and financial results and guidance; Tom Bardenett, our executive vice president of asset management, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated.

Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. Finally, in order to assist investors with bridging to our prior guidance, we included tables in last night's press release to adjust our second quarter and 2019 outlook for the sale of 41 hotels.


I will now turn the call over to Leslie.

Leslie Hale -- President and Chief Executive Officer

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. We had a very successful and active second quarter, where we achieved not only solid operating results but also made meaningful progress on our key objectives. For the quarter, we delivered operating results in line with our expectations, with RevPAR growth of 0.7%.

In terms of our other priorities, we remain focused on selling noncore assets, maintaining a strong balance sheet, and deploying investment capital accretively. Since our last call, we achieved several milestones. We completed the sale of Kingston Plantation for $156 million at an accretive EBITDA multiple. We entered into an agreement to sell two portfolios of noncore legacy RLJ assets totaling 39 hotels for approximately $490 million.

We positioned ourselves to unlock significant value by entering into an agreement to terminate our NOI guarantee with Wyndham. And we also accretively repurchased over two and a half million shares with disposition proceeds. In aggregate, these transformational transactions significantly improved our portfolio quality, enhanced our growth profile, unlocked meaningful embedded value, and position us for incremental growth and NAV appreciation over time. In terms of dispositions during the quarter, we sold the two Kingston hotels in Myrtle Beach at an accretive multiple of 12.9 times.

Our team was able to successfully unlock incremental value by taking time to simplify the structure of the asset and to package the development opportunities for potential buyers. In the end, these steps enabled us to run a competitive process and achieve attractive pricing for this asset. We also opportunistically entered into two contracts to sell two portfolios with a total of 39 assets for approximately $490 million, which represents an accretive EBITDA multiple of 10.6 times. The first portfolio of 21 hotels closed in late June, and the second portfolio of 18 hotels is currently under a firm contract and is expected to close this month.

In aggregate, these sales exceeded our initial target of $100 million to $200 million of disposition proceeds. These 39 hotels, which represent 10% of our EBITDA, are primarily located in slow-growth, low RevPAR sub-markets and generate RevPAR that is $50 below our remaining portfolio. The sale of these assets have several strategic benefits and, as a result, we have enhanced our growth profile. Our year-to-date pro forma RevPAR growth is 90 basis points higher, or 1.8% excluding these assets.

We enhanced our operating metrics, the absolute RevPAR of our current portfolio increased to nearly $150, which is a 6% improvement, excluding these hotels. And we have enhanced our geographic footprint. Our reshaped portfolio draws a higher percentage of EBITDA from markets that we believe are well-positioned to outperform long term, such as northern and southern California. Additionally, we recently entered into an agreement with Wyndham to terminate our NOI guarantee at the end of 2019, three years ahead of the expiration.

Wyndham will remain obligated to fund the 2019 NOI guarantee payment of approximately $10 million. RLJ will also receive a $35 million lump sum termination payment, which we believe represents the fair value of the remaining term under the guarantee. We are currently evaluating the rebranding of these hotels, which is expected to occur in phases beginning early next year. The termination allows us to unlock substantial value embedded in these hotels through brand repositioning.

These eight hotels represent over 13% of our EBITDA and are located in prime locations within top markets, such as Boston, San Diego, Charleston, and Santa Monica. We are underwriting a 20-point improvement in the RevPAR index. We believe that this increase in RevPAR index will generate at least 200 basis points of incremental portfolio RevPAR growth over time. In aggregate, these transactions improve the overall quality of our portfolio and create the opportunity to further drive long-term shareholder value.

With regard to the Knickerbocker, we have a high degree of conviction in its underlying real estate value. The success of our recent disposition program allowed us to exceed our initial expectation of sales proceeds and significantly increase our balance sheet capacity. Therefore, with this positive backdrop, we will continue to be extremely disciplined and patient. As it relates to the Knick, we believe that this discipline will allow us to maximize the overall value for our shareholders.

Additionally, we are pleased that the Knickerbocker continues to outperform the New York market and generated 6.3% RevPAR growth for the first 6 months of the year. Now, as it relates to capital allocation, our dispositions have created significant investment capacity of over a billion dollars and further strengthens our fortress balance sheet. We will remain highly disciplined as we deploy this capital and have several options available to us to drive long-term shareholder value, including share repurchases and multiple value creation opportunities, which is brand conversions and ROI initiatives. As it relates to share repurchases, we have been active this year given the significant discount to our NAV.

Post our disposition, given the enhanced quality of our portfolio, this discount has widened, increasing the attractiveness of share repurchases as we look to recycle proceeds from asset sales. To this end, since our last call, we've repurchased $43 million of shares. Now, with respect to our operating performance, we achieved solid RevPAR growth of 0.7%, outperforming the industry in both the upscale segment in the top 25 markets during the second quarter. Similar to the industry, the Easter shift negatively impacted us in April, and having an extra Sunday was also impactful to June.

Our performance this quarter was driven by the continuation of solid RevPAR growth in markets such as Louisville and Northern California, where we strategically invested capital last year, as well as strengthened markets such as Chicago and Austin. In Louisville, our RevPAR increased by a robust 12.1%, driven by the continued ramp-up of the recently renovated Marriott Louisville downtown. The hotel benefited from a strong group base, which also drove a 13% increase in food and beverage during the quarter, a trend that we expect to continue in the second half of the year. Our positioning in this market will be further enhanced by the sale of three hotels in the outlying sub-markets of Louisville.

Excluding these assets under contract, our RevPAR in Louisville would have increased over 19% in the second quarter. Our Northern California hotels achieved solid RevPAR growth of 6.9% during the second quarter, continuing in a trend of outperformance since the beginning of this year. Our RevPAR exceeded the overall market by 750 basis points in the quarter. Although we expect third-quarter RevPAR to moderate due to non-repeat citywides, we expect a strong fourth quarter.

In New York, our hotels outperformed the overall market by 180 basis points, achieving flat RevPAR growth. Although the overall market was soft during the quarter, we continued to benefit from the outperformance at the Knickerbocker. Moving to Austin, our hotels achieved solid RevPAR growth of 1.4% despite renovations at one of our hotels. We continue to expect moderating trends in Austin during the second half of the year.

Austin remains a core long-term market for us, and we have taken steps to concentrate our portfolio in a CBD, which now represents 70% of our Austin EBITDA. Similarly, we have strengthened our footprint in Denver, south Florida, and Houston by selling several assets in slow growth, low-RevPAR sub-markets of these major MSAs. Finally, our performance this quarter was also aided by the strength in a number of other markets, such as Philadelphia, Atlanta, Boston, Dallas and Charleston, which achieved RevPAR growth of 2.7% in aggregate. An added benefit of our noncore asset sales is that our concentration in key long-term growth markets, such as Boston, Charleston, New Orleans and Waikiki will become more prominent, further illustrating the enhanced quality of our portfolio.

Overall, we are pleased with our second-quarter performance in light of the recent deceleration in industry trends. In terms of our outlook for the second half of the year, we expect the uncertainty created by the trade wars to lead to a continued softness in corporate spending. For the remainder of the year, with the exception of the incremental uncertainty around corporate demand, our expectations around trends in our markets generally remains unchanged. We expect to continue to see solid performance in markets where we invested significant capital last year, such as Louisville, northern California, and Tampa, where our pace remains robust for the second half of the year.

These tailwinds will be offset by weaker performance in Denver, Austin, and south Florida. The combination of our tailwinds along with our recent dispositions is allowing us to hold our full-year RevPAR outlook. I will now turn the call over to Sean for a more detailed review of our operating and financial highlights. Sean?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Thanks, Leslie. Before discussing our second-quarter results, please note the following. First, our second quarter and year-to-date operating results include our 127 owned hotels as of June 30, which excludes Kingston Plantation and the portfolio of 21 hotels that we recently sold. Second, our full-year outlook includes our 109 owned hotels after the sale of the 18-hotel portfolio.

And finally, corporate adjusted EBITDA and FFO only include the operating results for RLJ's ownership period. With these housekeeping items out of the way, we are pleased to report that second quarter RevPAR grew 0.7%, which was driven by a 0.3% increase in demand and 0.4% increase in rate. May was our strongest month of the quarter, with 1.8% RevPAR growth. RevPAR was essentially flat in April and June at plus-0.4% and negative 0.1%, respectively.

It is notable that our portfolio outperformed upscale hotels and gained 110 basis points of market share during the quarter. Excluding the 18 hotels under contract, our second quarter RevPAR growth was 1.1%, representing a 40 basis point improvement. Total revenue grew 1.1% during the quarter, which exceeded our RevPAR growth due to a 10% increase in other departmental revenues, which was driven by the continued success of recent parking and other revenue initiatives. From a segmentation standpoint, our second quarter benefited from a 2.2% increase in group revenues, which was primarily driven by our hotels in northern California and Louisville, where group revenues increased 20% and 27% respectively.

That said, the group segment only represented approximately 18.5% of our second quarter room revenues. The strong group results were partially offset by a slight decline in transient revenues, which was impacted by a decline in government demand. However, we successfully backfilled the majority of the lost transient demand with incremental contract business. Turning to the bottom line, our second-quarter pro forma hotel EBITDA was $143.2 million.

Please note that our second-quarter pro forma hotel EBITDA guidance was reduced by approximately $16.7 million from the sales of Kingston Plantation and the 21-hotel portfolio. In terms of our operating margins, we were pleased that our asset management cost containment initiatives limited the increase in second quarter operating costs to only 2%, which limited our hotel EBITDA margin contraction to 59 basis points. Our team is continuing to implement best practices to manage productivity and labor cost in this full employment environment. We were pleased that we limited the increase in second quarter wages and benefits to only 3%, which was slightly better than expectations.

Our operating results also translated into solid corporate results. Our second-quarter adjusted EBITDA was $148.4 million, and FFO per share was $0.69. Please note that our second-quarter adjusted EBITDA and FFO guidance was reduced by approximately $1.1 million and $0.01, respectively, from the sales of Kingston Plantation and the 21-hotel portfolio. Now let's turn to capital allocation.

Our recently announced dispositions will not only transform our portfolio quality and improve our growth profile, but will also create significant investment capacity. As you would expect, we will remain highly disciplined as we evaluate our alternatives to deploy this capital. We have a range of highly accretive opportunities to pursue, including share repurchases, multiple brand conversion opportunities, including the eight Wyndham hotels, and $150 million to $200 million of high-impact ROI opportunities. Let me provide an update on our share repurchase activities so far this year.

Since our last call, we repurchased over 2.5 million shares for approximately $43.5 million at a significant discount to NAV. Since the beginning of the year, we have repurchased over 3.1 million shares for approximately $54 million at an average price of approximately $17.30 per share. We currently have just under $206 million of capacity on our share repurchase program. Looking forward, we expect to continue returning capital to our shareholders through share repurchases, depending on market conditions.

Additionally, we continue to view our dividend as a critical tool to return capital to shareholders. Our recent asset sales have further strengthened our already fortress balance sheet. We ended the quarter with $2.2 billion of debt, approximately $700 million of unrestricted cash, and net debt to EBITDA of 3.3 times. Pro forma for the impact of our dispositions, including the 18-hotel portfolio under contract, our net debt to EBITDA improves to 3.1X.

We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, over 93% of our debt is fixed or hedged. Our balance sheet remains highly flexible, and adjusted for all dispositions, 90 of our 109 hotels are unencumbered, which represents approximately 80% of EBITDA. As previously announced, during the quarter we refinanced $0.4 billion of debt, which extended our maturities, increased our flexibility, and reduced our annual borrowing costs by $2.5 million.

We will continue to explore opportunities to further ladder out maturities and lower interest expense. As it relates to capital expenditures, our full-year capital program remains on track and on budget. We continue to expect $90 million to $110 million in 2019 renovations and expect full-year renovation-related displacement of 40 to 50 basis points. Before turning the call back over to Leslie for closing remarks, I would like to provide additional color on the assumptions underlying our updated outlook.

Although our second quarter was in line with expectations, we have seen some softening in July and acknowledge that forward-looking data points indicate that there is incremental risk to lodging fundamentals for the second half of the year. We have incorporated the following assumptions into our 2019 outlook. Recent trends in business sentiment will continue through the end of the year. Northern California will continue to outperform.

Third-quarter growth is expected to moderate but pick up again in the fourth quarter, which is a function of the timing of citywides and a favorable comp due to last year's strike in San Francisco. Louisville will also continue to outperform, driven by the continuation of post-renovation ramp-up and strong group production at the Louisville Marriott. And the fourth quarter will be impacted by softer citywides in Washington, D.C., Chicago, Houston, and San Diego. We are pleased that, despite recent industry trends, our dispositions enhanced our growth profile and allowed us to maintain our prior RevPAR growth outlook.

Our revised outlook assumes no additional acquisitions, dispositions, refinancings, or share repurchases. For 2019, we now expect RevPAR growth to range between flat and up 2%; hotel EBITDA margins in the range of 31.6% to 32.2%; consolidated hotel EBITDA to range between $449 million to $474 million; adjusted EBITDA to range between $455 million and $480 million; and adjusted FFO per share to be between $1.98 and $2.10, which incorporates shares repurchased to date, but no additional repurchases. Please refer to the supplemental information and a new investor presentation, both of which were posted on our website last evening. The supplemental includes pro forma results for our 109-hotel portfolio over the past four quarters.

I will now turn the call back over to Leslie for her concluding remarks. Leslie?

Leslie Hale -- President and Chief Executive Officer

Thanks, Sean. As we sit today, RLJ is ideally positioned with a portfolio rooms-oriented, high margin, premium branded hotels in growth-oriented markets. We have achieved this positioning by outlining a thoughtful strategy and meticulously executing on our objectives, including selling noncore assets and strengthening our balance sheet. With the recent transactions, not only have we enhanced our portfolio quality, but we have also created meaningful investment capacity to pursue highly accretive capital allocation opportunities.

As we move forward, we have multiple levers to create value, such as ROI projects, conversion opportunities, and share buybacks. We are truly pleased with our progress, and today, we are uniquely positioned to drive significant NAV appreciation long term. We will now open the line for Q&A. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Wes Golladay -- RBC Capital Markets -- Analyst

Good morning, everyone. Can you talk about the flexibility you have on the capital allocation plan with the stock currently yielding around 8%? Is that one of the top priorities right now on the buyback?

Leslie Hale -- President and Chief Executive Officer

Wes, obviously with $1 billion of capacity, we have a lot of optionality. What that allows us to do is not allow these things to be mutually exclusive. So we can do buybacks and also continue to invest in our portfolio. But clearly, buybacks, given where we are trading today, are the obvious choice from a prioritization perspective.

And at these levels, we do intend to continue to be active.

Wes Golladay -- RBC Capital Markets -- Analyst

And then, when we look at the $150 million to $200 million of ROI spend, how much of that is tilted toward the legacy FelCor portfolio?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Wes, it's Sean. It's actually a mix between legacy FelCor, as well as legacy RLJ portfolio. I think when you look at the repositionings, that $150 million to $200 million does exclude any capital that we think we're going to have to invest into the Wyndham portfolio as part of the conversions. But it does include the conversion of Mandalay Beach, which is a big chunk of that conversion.

But I wouldn't say that it's really slanted toward any one of the two portfolios.

Wes Golladay -- RBC Capital Markets -- Analyst

And can you clarify the 20 hotels that could potentially convert, or have the franchise agreements changing over the next few years, does that include the eight Wyndhams?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

It does, Wes.

Wes Golladay -- RBC Capital Markets -- Analyst

OK. Thank you.

Operator

Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Good morning, everyone.

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Morning.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Could you provide just a little bit more background on the dispositions, the process there? I know you were targeting $100 million to $200 million, but maybe how both of the deals came about, and then just how you thought about pricing, per-key pricing valuation of those portfolios versus what's remaining today for RLJ? That'd be helpful.

Leslie Hale -- President and Chief Executive Officer

So at the beginning of the year, we outlined our key priorities and outlined our strategy. And one of our priorities this year was to sell $100 million to $200 million of noncore assets. At that time, we obviously had thought about which pool of assets would potentially be assets that we'd be looking to sell, and we started the process from a marketing perspective. And the deals really came about, Mike, because we, through that process, identified some buyers who really -- their investment needs really matched the types of assets we were selling.

Again, these are slow-growth, low-RevPAR assets that had capital needs, and so finding the right buyer was important. And that really allowed us to upsize it. And from a pricing perspective, we think the pricing reflects the profile of these assets, the market dynamics, and the capital needs. And any time that we sell an asset, we're looking to maximize that relevant asset, and I think that's what we did here.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

And then just back to the Wyndham deal, can you provide any initial thoughts on maybe how much capex you might have to spend either with or without potential for key money? And then what sort of disruption should we think about in 2020 as you guys renovate and reposition those hotels in terms of RevPAR and maybe margin impact?

Leslie Hale -- President and Chief Executive Officer

Mike, those are great questions, but it's too early for us to be able to provide that level of detail. Please know that this is a high priority for us and that we're working really hard. We're working with the brands to understand what's available, what options would we choose and underwrite that. And we look forward to being able to provide a wholesome update on our next call as we get more clarity around which branding and the timing, and we'll be able to provide some color on that.

Sean Mahoney -- Executive Vice President and Chief Financial Officer

And Mike, just to bolt on to Leslie's comment, I think the one thing that I would focus you to think about on the $35 million termination payment. That is simply an acceleration of the guarantees that we would have gotten otherwise under the NOI guarantee. And so, although the optics for EBITDA are a reduction of the 2021 and 2022 EBITDA, we are getting paid that upfront, and we'll have that capital with which to create value. And so I think that's an important way to think about it.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

And it's fair to assume that, of these eight hotels, you're going to keep all of them? Are any plans to potentially sell one or two?

Leslie Hale -- President and Chief Executive Officer

Mike, I would never say never, but one of the jewels of the merger transaction was this pool of assets. We understood how valuable the real estate is, and so the growth profile of these assets, based upon what we think we can do from a top-line perspective, is a key cornerstone of our growth profile, going forward. Additionally, we believe there's tremendous NAV appreciation in these assets. We think the cap rate that we'll be able to get post-renovation and post-conversion would be substantially different than what we can get today.

I would tell you that lots of people understand the value of these assets because the inbound calls that we've gotten on this are tremendous. There hasn't been an executive on our team that hasn't received several calls, because they understand how these assets and where these assets are located is prime real estate. And so we think it's a key component for us, going forward, but I would never say never about possibly selling an asset.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

That's all for me. Thank you.

Operator

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell -- Barclays -- Analyst

Hi. Good morning. The asset sale seemed to indicate a strong buyer interest in these select service assets. Is there any appetite on your part to sell additional assets, or are you pretty much done there?

Leslie Hale -- President and Chief Executive Officer

Anthony, these transactions represent the heavy lifting that we wanted to do to reshape our portfolio and the vast majority of our EBITDA is concentrated in assets that is aligned with our long-term vision. That said, when you have a 100-asset portfolio, we are going to be an active portfolio manager. And I would say that, on a go-forward basis, that we'll be more opportunistic with our sales is the way I would sort of think about it.

Anthony Powell -- Barclays -- Analyst

And Sean, you mentioned the dividend. As the asset sales has happened, coverage has come down a bit. How do you view dividend coverage? Are you comfortable with where you are in terms of coverage? And is the dividend kind of right-sized at the current level?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Sure, Anthony. I'll start with stating the fact that maintaining the dividend is a very important part of our overall story at RLJ. And so when we think about the dividends and the loss of EBITDA from the sales, you have to look at the other side of that equation, which is the investment capacity, which we've raised as a result of these sales and our ability to redeploy that in a way that helps take the dividend coverage back down to where it was before. There are both short term and medium to long-term tools that we have a short-term tool that we're going to have is through incremental share repurchases, which will have an immediate 8% yield on that capital from a dividend perspective.

The medium to longer-term tools that we're going to deploy are the ROI initiatives, the conversions, the brand repositionings, etc., to replace EBITDA as well. And with a billion dollars of investment capacity, that's a tremendous amount of embedded EBITDA that's going to sit within our portfolio as we redeploy.

Anthony Powell -- Barclays -- Analyst

Thank you.

Operator

Our next question comes from the line of Dory Carson [Sp] with Wells Fargo. Please proceed with your question.

Unknown speaker

Morning, everyone. Sorry. Can you talk to the operations of the Knick since you acquired FelCor? And what are you seeing in the higher-end New York City transaction market?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

On the operations side, Dory, we're very pleased with the performance so far. As you know, the Knick had a great first quarter, and even year to date, we're at 6.3% RevPAR. So we've been very pleased with the performance. In fact, even international demand was up at the Knickerbocker as we continued to ramp up the hotel, and it's up literally 23% overall and 9% of our overall portfolio in New York.

And when we look at the hotel, we're very pleased with the continuation of growth. We have high expectations in the back end of the year, as well. So we're pleased with what the Knick has been doing. On an overall market basis, I'll kick that back over to Leslie in regards to New York in general on the transaction side.

Leslie Hale -- President and Chief Executive Officer

Yeah. No. Yes. I would say that on the transaction side, obviously for assets that have stories in New York and that are iconic, there's interest in it, obviously you have to have the right buyer associated with that, high net worth individuals, family offices and people who are looking past yield and are focused on long-term real estate value in New York.

Unknown speaker

OK. Thank you.

Operator

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Good morning, everyone. Just curious how quickly we should think about you redeploying some of this available dry powder, and if you could ballpark maybe your ROI and redevelopment spend targets for 2020?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Sure, Austin. I think on the short-term, you'd expect us, certainly on the share repurchases, to continue to be active for the balance of the year. We have $206 million remaining on our share authorization program. You should expect us to be methodical and systematic about how we redeploy that capital within share repurchases.

For 2020 and beyond, I think what you should expect on the ROI initiatives, what we've said is there's $150 million to $200 million of optionality there that we expect to invest over the next two to three years. I think on the Wyndham portfolio as well, with potential conversions, we expect those conversions to happen over phases over the next three years. And so I think what you'd expect is that we're going to redeploy that over time. We don't have a set target for 2020, or even 2019.

I think what you should expect us to do is be opportunistic redeploying that capital based on what the market offers us, but you should also expect us to be aggressive to the extent that the market presents those sorts of options to us. But we're going to be focused on deploying that capital on the most accretive option possible.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

And then, what percent of the portfolio would you say remaining has similar characteristics to the assets you've recently sold in the two legacy asset portfolios? And just thoughts around continuing to sell those.

Leslie Hale -- President and Chief Executive Officer

Look, I would say, Austin, as I said before, the vast majority of our EBITDA is concentrated in the asset set that fit our long-term aspirations for our portfolio. So there's a handful of assets left, but it's not meaningful.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Going back to the dividend, I guess longer term, how do we think about a target payout ratio and how you think about setting that over time?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

So the payout ratio is one of the variables with which we set the dividends. The other is you want to make sure that we have a competitive dividend to our peers on a yield basis. We also, as a REIT, have to pay out essentially 90%, but really 100% of our taxable income. And so all those factors come in.

I think we believe that our dividend is an important part of the RLJ story, as I articulated before, and so I think we think maintaining the dividend and protecting the dividend is core to our offering to the shareholders and a way for us to return capital to the shareholders.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Neil Malkin -- Capital One Securities -- Analyst

Hey, guys. Good morning.

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Good morning.

Neil Malkin -- Capital One Securities -- Analyst

Just a question on south Florida and Fort Lauderdale, elevated sales there, and in West Palm Beach. I think that with the Miami Convention Center reopening, that helped drive incremental demand on a sustained basis. Are the dispositions a function of just that needing to be in the heart of demand? Or are you trying to avoid supply? I guess, what's the rationale there? Because I thought south Florida was the strong market and market you guys liked.

Leslie Hale -- President and Chief Executive Officer

I mean, look, I would say that you're spot-on in terms of the key driver. Our goal is to own assets that are premium branded, rooms-oriented, high-margin hotels located in the heart of demand. And these assets have moved away from that definition, and so we look to sell those assets. And you saw that moving away from that thesis and the function of how the growth profile has been slow and the RevPAR isn't where we want it to be in terms of approaching a full-service type asset with the flex service margins.

And Tom can talk about the market profile.

Tom Bardenett -- Executive Vice President of Asset Management

Yes. So a little bit of color around Miami. We're excited about 2020, as you know. The Super Bowl is coming there.

And the convention center's ramping up. It'll be over roughly 200,000 rooms, which is a good starting point as the convention center opens up and has opportunity to get volume. The other thing about south Florida, as Leslie spoke about heart of demand, Key West has been a great market for us now. This is the first time all rooms are back open in Key West, and we're getting some great RevPAR results down there at 6.9 in the second quarter.

And then, the other hotels that we remain to have are our Embassy Suites in Miami, Lauderdale, as well as Deerfield Beach, which came with the FelCor transaction. And those hotels have great locations in heart of demand, on the beach in Deerfield, right on 17th Street near the marina, and then Miami near the airport. So we're feeling positive about the hotels that we have and continue to reinvest in those opportunities.

Neil Malkin -- Capital One Securities -- Analyst

And then just going back to a question I think Austin was getting at maybe a different way, the assets you sold obviously in these two portfolios had a lot of associated capex the buyer would need to pay. Just wondering, was your remaining I think 109 assets, how many of those have that elevated capex requirement? Just thinking about appropriate cap rates for the valuation or the NAV.

Leslie Hale -- President and Chief Executive Officer

Obviously, we chose not to allocate capital toward those assets because we didn't think that was the right capital allocation for us. But the assets that we hold today, we've chosen to invest in those assets and put the capital toward it. So I would say, again, with the vast majority of our EBITDA concentrated in assets that we own, those are the assets that we have been investing in. There's a handful of assets that still fit the slow-growth, low-RevPAR profile, but the vast majority of what we have today is concentrated in what we want to own and is in line with our vision.

Neil Malkin -- Capital One Securities -- Analyst

Just going back to the Wyndham, just in your initial thoughts, would you care to share, of the potential type of strategy there, would it be independent, soft brands? And then, would you expect, just given the nature of the repositioning, would you expect those to be shut down for periods of time?

Leslie Hale -- President and Chief Executive Officer

I would say that we're looking at all brand options, including independent, for these assets. We're going to run the analysis and determine what's the best option for the relevant asset. And in terms of the conversions, we would expect to operate them while we convert.

Tom Bardenett -- Executive Vice President of Asset Management

One of the things I would add on, too, is our partnership with Wyndham is very important to us, and the field and regional teams have been doing a great job in maximizing performance at this point in time. And this strictly is opportunities for index opportunities and mix changes. But I wanted to make sure I put that on record.

Neil Malkin -- Capital One Securities -- Analyst

Thanks, guys.

Operator

Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Tyler Batory -- Janney Capital Markets -- Analyst

Hey, good morning. Thank you. Just a couple of follow-up questions from me. Can you just remind us where you're comfortable on the leverage side of things and how you guys are thinking about leverage in relation to your outlook for the industry and some of the uses of capital, as well?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Sure, Tyler. I mean, our long-term goal for net debt to EBITDA is approximately four times. With these dispositions, we are about a turn below that. We think maintaining some incremental balance sheet capacity at this stage of the cycle, particularly in light of some recent headwinds, it feels like a prudent thing to do for our shareholders.

And we also think that there'll be good opportunities with which to deploy that capital, share repurchases being the most front and center today. But we're very comfortable at our leverage levels today. When we think about leverage, we think about leverage over an entire cycle, and we peg our leverage at any one point in time to what the leverage would be and what we would view as a relatively draconian downturn scenario. In other words, we stress test our leverage at all times, and wanting to make sure that if, in fact, that a draconian downturn happened, that our balance sheet would be well-positioned to not only survive but thrive during a downturn and create value for our shareholders most likely through returning capital through share repurchases.

So we're very comfortable where we are today and expect to continue to be opportunistic.

Tyler Batory -- Janney Capital Markets -- Analyst

How about on the preferred that's outstanding? Do you guys have any potential thoughts, or maybe creative ways to take that out?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Sure. The preferreds are not callable under the contract. I think that is an instrument that is relatively expensive relative to our debt, and something that we're going to continue to monitor. But when we look at opportunities to deploy capital on the balance sheet, that is certainly one of them.

There are some -- I would be remiss not to note that we have senior debt that we have a call option for mid next year that, based on where that coupon is, it's 6% versus where we could borrow today will create incremental FFO for our shareholders of over $10 million a year. And so that's another tool that we can use that there's already a vehicle built into that instrument. But the preferreds are definitely one that we would also think about, Tyler.

Tyler Batory -- Janney Capital Markets -- Analyst

Last question from me. Any update on supply outlook, how that's changed with the 109 hotels that you have now versus last quarter when you still had 127?

Leslie Hale -- President and Chief Executive Officer

Yes, Tyler. There's a couple ways to kind of look at supply. You can look at it just on an absolute basis. And what I would say, if we just look at growth within our markets, it has improved with the dispositions.

But the other way to look at supply is look at where our assets are located relative to that supply. And I would say that, from that perspective, our positioning has moved and improved dramatically. Let's take Austin, for example. Prior to dispositions, about 40% of our EBITDA was coming out of the CBD.

Today, 70% of our EBITDA is coming out of the CBD. The RevPAR in that market, what we reported was 1.4%. If you take out the assets that we have pending, the RevPAR growth would have been 3.5%. Louisville's another example of that, where we sold the outlying assets and we reported RevPAR growth of 12%.

Excluding those assets, it would have been up 19% because we moved 100% of our EBITDA into the CBD. And so again, it's not just looking at absolute percentages, but also looking at where our assets are located to that supply but, more importantly, where is it located relative to demand. And again, our thesis is making sure that the assets we hold are located in the heart of demand.

Tyler Batory -- Janney Capital Markets -- Analyst

That's it for me. Thank you.

Operator

Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning, everybody. I think most of my questions have been asked and answered, but just one quick one for Sean or Leslie. Sean, I think in the prepared remarks, you mentioned something about the forward guidance, or the dispositions enhanced your growth profile and allowed you to maintain your forward guidance.

If I heard that correctly, can you just give any sense of how much of a tailwind some of the dispositions or some of these lower-growth markets would have been to the portfolio?

Leslie Hale -- President and Chief Executive Officer

Shaun, what I would say is that, overall, we're really pleased with our ability to hold our guidance in an otherwise choppy environment for lodging. And the dispositions really was a primary driver in our ability to hold that guidance. If we had not achieved the dispositions, we probably would have moved the midpoint by 50 basis points, plus or minus, not dissimilar from our peers. At the same token, I also want to say that our guidance does reflect the softness.

Here it is implying flat. So our ability to hold is definitely driven by the dispositions, which we believe further illustrates the strategic benefit of what we did. But at the same token, we believe our guidance is achievable and it reflects the softness that we're seeing on the business transient side.

Sean Mahoney -- Executive Vice President and Chief Financial Officer

And to provide a couple of data points to Leslie's comments, so on the first half of the year, the removal of these 39 assets added roughly 100 basis points to our RevPAR growth for the first half of the year. So our 109-hotel portfolio generated 1.8% RevPAR growth for the first half of the year. And so, when you look historically, that's pretty compelling. When you look in 2018, it was about 50 basis points growth enhancement from the removal of those assets.

And so I think that's another data point. Forward-looking on the deck that we published last night, which we'd encourage everybody to spend time with, we put a marker out there which we think our long-term growth will be enhanced by 50 basis points from the removal of these assets on a go-forward basis. And so I think they're data points that just help reaffirm some of the comments that Leslie made.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

Thanks for that. That's a lot of color and very helpful. Just to be 100% clear then, because of the way you guys do it and you go back and restate on the pro forma basis, this is purely from these hotels generating lower RevPAR growth. There's nothing in the forward forecast that would be just due to mix shift from lower absolute dollar RevPAR and keeping higher dollar RevPAR.

Am I understanding that correctly?

Sean Mahoney -- Executive Vice President and Chief Financial Officer

That's correct. From a forward-looking basis standpoint on these hotels, we took out all the sold hotels for our full-year guidance. But to echo Leslie's comment, we are sober on the trends that we see for the back half of the year, particularly business transient. And so the assumptions that are underlying our back half of the year guidance, which is flat RevPAR, includes a softer business transient environment but doesn't really change our thesis for what markets within our portfolio we believe are going to outperform, which northern California and Louisville are big drivers of that, as well as the other segments.

I mean, group continues to perform well for us, as well as the industry. And our contract business has been a strong performer for us as well. We expect that to continue, particularly as we think about mix shifting away if business transient trends continue.

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst

I get it. Thank you, both.

Operator

Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back to Ms. Hale for any final comments.

Leslie Hale -- President and Chief Executive Officer

Thank you, operator. As you all can tell, we've been extremely busy this quarter successfully executing on our key priorities, and we wanted to give you a comprehensive update today. I want to take a moment to thank the entire RLJ team for their relentless effort and unwavering commitment. Our success would not have been possible without the many contributions from them.

We are very pleased with all that we have accomplished, and we appreciate the ongoing support of our investors. Enjoy the rest of your summer, everyone, and we look forward to reporting on the continued progress in the third quarter.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Nikhil Bhalla -- Treasurer and Vice President of Finance

Leslie Hale -- President and Chief Executive Officer

Sean Mahoney -- Executive Vice President and Chief Financial Officer

Wes Golladay -- RBC Capital Markets -- Analyst

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Anthony Powell -- Barclays -- Analyst

Unknown speaker

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Neil Malkin -- Capital One Securities -- Analyst

Tom Bardenett -- Executive Vice President of Asset Management

Tyler Batory -- Janney Capital Markets -- Analyst

Shaun Kelley -- Bank of America Merrill Lynch -- Analyst


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