Sunstone Hotel Investors Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 8 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. I would now like to remind everyone that this conference is being recorded today, August 4, 2023, at 12 pm Eastern Time.

Operator

I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward looking statements that are subject to risks and uncertainties, including those described in our filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward looking statements. We also note that this call may contain non GAAP financial information, including adjusted EBITDAre, Adjusted FFO and property level adjusted EBITDAre. We are providing this information as a supplement information prepared in accordance with generally accepted accounting principles.

Speaker 1

Additional details on our second quarter results have been provided in our earnings release and supplemental, which are available on our website. With us on the call today are Brian Giulia, Chief Executive Officer Robert Springer, President and Chief Investment Officer and Krzysztofzypovich, Chief Operating Officer. Brian will start us off with some commentary on our 2nd quarter operations and recent trends. Afterward, Robert will discuss our capital investment activity. And finally, I will provide a summary of our current liquidity position, recap our Q2 earnings results and provide some additional details on our outlook for the remainder of the year.

Speaker 1

After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Brian. Please go ahead.

Speaker 2

Thank you, Aaron, and good morning, everyone. We are pleased that our 2nd quarter adjusted EBITDA and adjusted FFO per share exceeded the high end of our guidance. Continued strong demand at our urban and convention hotels, combined with productivity gains, operating efficiencies and expense controls led to increased hotel profitability. The 2nd quarter saw a divergence in trends across our portfolio As urban and convention hotels generated strong growth, while our resorts saw demand moderate as the quarter progressed. These trends reinforce our focus on maintaining a balanced portfolio of high quality convention, Urban and Leisure Hotels and Resorts.

Speaker 2

Following a very strong RevPAR performance in the Q1, We anticipated that growth would normalize in the remaining quarters of the year as we lapped the impact of the omicron variant. While strong domestic leisure travel accounted for most of the industry growth coming out of the pandemic, during the second quarter, Demand increasingly shifted to corporate travel and group events. In Q2, our urban and convention hotels increased Occupancy by 460 basis points and grew rate by 4.2% as compared to the Q2 of 2022, which contributed to robust year over year RevPAR growth of nearly 11%. Once again, San Francisco led the portfolio, growing RevPAR by over 32% on further occupancy gains and higher rates. While there is no shortage of negative press surrounding the San Francisco market, we remain encouraged by the hotel's ongoing recovery And we continue to believe that the city is a desirable long term market in which to own a well located fully renovated hotel.

Speaker 2

During the quarter, our hotel ran nearly 11 points of higher occupancy as compared to its competitive set As the property is able to capitalize on its more than 70,000 square feet of meeting and event space to create its own in house group compression and not have to rely solely on the convention center and citywide events. In addition, our fully renovated guestroom product is allowing the hotel to drive higher rates and attract new and higher quality demand, which together with better occupancy contributed to 124 percent RevPAR index relative to the competitive set in the 2nd quarter. We also saw strong growth at our hotels in Portland, Boston and Orlando, which all generated double digit RevPAR growth in Q2. Hilton San Diego Bayfront had its best 2nd quarter EBITDA performance on record. The recent Comic event in July was very strong as the hotel remained nimble and was able to resell all rooms that were canceled related to the Hollywood strikes at average rates that were nearly twice as high.

Speaker 2

In total, room revenue was up 10% relative to the Comic Con event last year And our hotel led the competitive set over the multi day event. As I noted earlier, the operating fundamentals at our resorts were less robust as domestic leisure destinations faced increased competition This was particularly the case at our Florida Coastal Hotels, which were early beneficiaries of very strong pent up leisure demand coming out of the pandemic, but have seen some normalization as travelers opted for other destinations and vacation options that had been limited in the last 2 years. Despite this moderation, our 2 Florida resorts maintained average roommates that were 46% higher in the Q2 of 2019. We also saw softer leisure trends in Napa and Sonoma as the wine country continued to be impacted by unseasonably cool and wet weather and the surge in international travel. In Wailea, our hotel grew rate to another all time second quarter record, beating the high watermark set last year and a staggering 53% increase as compared to 2019.

Speaker 2

Despite still garnering very strong rates, Our resort portfolio underperformed our expectations, particularly in May June, which contributed to 9 points of lower RevPAR growth for these properties as compared to our forecast at the start of the quarter. While this trend continued into early July, We have seen some pickup in forward bookings over the last couple of weeks, which is encouraging. Overall, We think it is reasonable that this heightened preference by American vacationers for international travel will normalize as we move into next year As much of the pent up demand for trips abroad gets worked out this summer, this should also be bolstered by increasing levels of foreign visitation to the U. S, which continue to recover, but remain well below pre pandemic run rates. Overall, the combination of steady corporate and group demand and a slower leisure backdrop contributed to 280 basis points of occupancy growth across the portfolio in the 2nd quarter and when combined with generally flat rates drove total portfolio RevPAR growth of 3.6% as compared to the prior year.

Speaker 2

While room revenue growth was below the low end of our expectations, We were pleased to see that out of room spend remained strong and came in above forecast, benefiting from continued Increases in group activity and increased ancillary revenues. Banquet sales per group room was $2.30 in Q2, which was above 2019 on a comparable basis. Our urban hotels saw strong out of room spend with Marriott Boston Long Wharf, JW Marriott New Orleans and the Bidwell Portland all generating spend per group room above the Q2 of 2022 Including the robust out of room spend, our portfolio generated an additional $146 revenue per available room in the quarter for a total RevPAR of approximately $3.92 an increase of 5.4% from last year. As the demand environment evolves, particularly at our resorts, we are working with our operators to drive efficiencies and mitigate costs where possible. Wage growth has continued to ease As some of the excess pressures come out of

Speaker 1

the labor

Speaker 2

market, food and beverage costs also improved relative to the prior year, driven by a combination of easing inflation, menu optimization and a higher mix of banquet business. As you have likely heard, the property insurance market for real estate of all types has been increasingly challenging in the recent years. Late in the Q2, we completed the annual renewal of our insurance program that covers most of our portfolio. And while our outcome was more favorable Than what I have heard from many others, we were not immune to rising costs. Despite the various cost pressures, Our total portfolio generated an EBITDA margin of 32.3% in the 2nd quarter, which was only 100 basis points lower than a very strong 2nd quarter margin performance in 2022.

Speaker 2

Our urban and convention portfolio grew margin by 10 basis points year over year, even with 80 basis points of margin headwind from the Renaissance DC, which is in the final phases of its repositioning to the Westin DC Downtown. Now turning to segmentation. Our portfolio generated 240,000 total group room nights in the quarter and the group segment comprised roughly 44% of our total demand. Q2 group room night volume represents approximately 96% of comparable pre pandemic amounts with average rates 10% higher leading to total comparable group room revenue that was 6% higher than the same quarter of 2019. For the total portfolio, group room rates were up 3% year over year with total room nights up 10%.

Speaker 2

Group production for all current and future periods in Q2 was 221,000 room nights, resulting in a 7% increase which accounted for 50% of our total room nights in the quarter. Comparable rate came in at $3.24 or 20% higher than the pre pandemic levels we saw in the same quarter in 2019. For the total portfolio, The transient rate was $3.45 and was down slightly to the prior year, driven by softening leisure demand. Partially offsetting the decline in leisure volume were increases in both average rate and room nights for our corporate negotiated channel, which posted revenue growth of 10% versus last year. This is indicative of the ongoing recovery in business travel and is encouraging as it is the segment where we have the most opportunity to grow occupancy across the portfolio.

Speaker 2

While the Q2 RevPAR performance came in below expectations, we continue to see areas for optimism And expect full year earnings growth in 2023. The outlook that Aaron will discuss shortly assumes that the demand Environment for leisure travel remains soft in the near term and while we have seen some encouraging data points in recent transient bookings, It is too soon to tell if it is indicative of a resurgence. We will continue to monitor these trends at our resorts, But we expect that our well balanced portfolio of urban and convention hotels will make up a larger contribution of our earnings in the coming quarters. Lead volumes and group production are strong. Group pace for the second half of the year is 6% higher than 2022, driven by increases in both room nights and average rates.

Speaker 2

The Renaissance DC is in the final stages of its transformation to the Westin DC Downtown, which will be completed and rebranded during the Q4 and contribute to further profitability growth later this year. Competition for international travel and inclement weather have combined to hamper the performance of both of our Wine Country Resorts. While the fundamental backdrop has not yet been conducive to demonstrate the full earnings power of these assets, These are world class resorts, and we have conviction that our attractive basis in each will give us the ability to create value from these investments over time. We remain focused on building the group base at these resorts, which will ultimately lead to transient rate compression. Record outbound international travel and lagging inbound visitations is negatively impacting Domestic summer travel, especially at high end resorts like these, as well as other domestic luxury destinations.

Speaker 2

We are ensuring that our operators remain diligent in managing their operating models so that when the transient leisure demand resumes, These resorts will be able to maximize flow through and profitability. Our low leverage, well staggered debt maturities and Ample liquidity gives us the optionality to continue to pursue our strategic objectives of investing in our portfolio, Recycling sales proceeds into new growth opportunities and returning capital to our shareholders. We are working through the final steps In the planning for the Andaz Miami Beach transformation and the model rooms have been completed, we will be sharing some exciting new details with you related to the project in the Q3. Robert will discuss some additional updates on the other investments we are making across the portfolio that should provide multiple layers of growth in the coming years. While the transaction environment remains challenging, We retain significant investment capacity to deploy when opportunities arise, and we are actively searching out ways to recycle capital.

Speaker 2

We remain committed to returning capital to our shareholders. And as you saw in our press release this morning, our Board of Directors has also increased our base Quarterly dividend to better reflect the normalized taxable income our portfolio will produce over various cyclical periods. And with that, I'll turn it over to Robert to give some additional thoughts on our renovation progress as well as upcoming capital investments.

Speaker 3

Thanks, Brian. We started the year with several projects underway and I am pleased to report that we have made substantial progress. The conversion of the Renaissance Washington D. C. To the Westin brand is in the final stages.

Speaker 3

The rooms are largely complete And renovation work is now progressing in the lobby and fitness center along with some exterior work. The hotel is on schedule to be relaunched as a flagship Westin property in October and will contribute to earnings growth in the 4th quarter. Work is now also underway to convert the Renaissance and Long Beach to a Marriott. As we shared with you before, we expect the Marriott flag will enable the hotel with a plan to relaunch the hotel under the Marriott brand in March 2024. As Brian noted earlier, we have finalized the Construction details and are preparing to begin work at the confidant as the resort begins its transformation to the Andaz Miami Beach.

Speaker 3

We will have additional details on the refined scope and timing later this quarter. While the transaction market remains challenging, Recycling capital continues to be a primary component of our strategy as we seek to harvest gains and redeploy proceeds into new growth opportunities. We maintain considerable balance sheet capacity, which will allow us to take advantage of dislocation and opportunities that may arise as existing loans come due and as owners seek liquidity. With that, I'll turn it over to Aaron. Please go ahead.

Speaker 1

Thanks, Robert. We continue to maintain a strong balance sheet. And as of the end of the second quarter, we had approximately $164,000,000 total cash and cash equivalents, including $56,000,000 of restricted cash. We retain full capacity on our credit facility, which together with cash on hand equates to over $660,000,000 of total liquidity. We have addressed all debt maturities through December And as of the end of the Q2, our net debt and preferred equity to EBITDA stood at 3.6 times and our net debt to EBITDA was only 2.6 times.

Speaker 1

Shifting to our financial results, the full details of which are provided in our earnings release and our supplemental. Our quarterly profits would surpass our expectations despite softer revenue growth, reflects steady corporate and group demand with a moderation in domestic leisure travel. Adjusted EBITDAre for the 2nd quarter was $85,000,000 which was just above the high end of our guidance range, driven by stronger non mortgage revenue and better margin performance across our urban and convention hotels. We estimate that we incurred approximately $3,000,000 of displaced EBITDA in the quarter related to the renovation work at our hotel in Washington DC. Adjusted FFO for the Q1 was $0.33 per diluted share, which was also just above the high end of our guidance range.

Speaker 1

While the evolving demand backdrop makes forecasting incrementally more challenging, based on what we see today, We expect Q3 total portfolio RevPAR will range from a decline of 1% to an increase of 2% as compared to the Q3 of 2022. Based on this level of RevPAR, we estimate that 3rd quarter adjusted EBITDAre will range from $57,000,000 to $62,000,000 and our adjusted FFO per diluted share to range from $0.18 to $0.21 Based on 2nd quarter performance and our outlook for the 3rd quarter, we now estimate that full year RevPAR growth is likely to near the low double digit end of the range we shared with you on prior calls, which excludes our hotel in Miami that will soon be undergoing renovation. Assuming this level of RevPAR growth, it could translate into a full year adjusted EBITDAre range of roughly $255,000,000 to $265,000,000 Based on the current renovation timelines, we now anticipate that we will incur between $11,000,000 to $13,000,000 of EBITDA displacement in 2023, with approximately $7,000,000 of that total already incurred during the first half of the year, Roughly $1,000,000 expected in the 3rd quarter and the balance in the 4th quarter as work ramps up at the Confidant in preparation for its conversion to Andaz Miami Beach.

Speaker 1

Now shifting to our return of capital. We repurchased a modest amount of additional stock in the quarter, Bringing our year to date total to $21,000,000 at an average price of $9.46 per share, a meaningful discount to consensus estimates of NAV and a compelling implied multiple on our earnings. In addition to the repurchase activity, our Board has declared an increase in our base quarterly common dividend to $0.07 per share for the 3rd quarter, a 40% increase over the prior amount. While we continue to believe that our measured payout approach The first three quarters of the year combined with a catch up dividend at year end is well suited to our dynamic sector. We believe this higher base dividend amount better accommodates our commitment to returning more capital to shareholders.

Speaker 1

In addition to the common dividend, our Board has also declared the routine distributions for our Series H and I preferred securities. And with that, we can now open the call to questions. So that we are able to speak with as many participants as possible, we ask that you please limit yourself to one question. Operator, please go ahead.

Operator

The floor is now open for your questions. You'll be provided the opportunity to ask one question. We'll now take a moment to compile our roster. Our first question comes from the line of Duane Pfennigwerth from Evercore. Please go ahead.

Speaker 3

Hey, thanks and good morning. Just with respect to 2024, could you speak to the puts and takes On earnings growth and maybe margins into next year as we think about these ROI projects, Assets that are ramping and some of the displacement impact this year.

Speaker 2

Sure. Good morning, Duane. I'll start and then I I'll let Aaron cover some of the displacement puts and takes. So when we look at next year first From a group perspective, while we're not we don't typically give group pace At this point, pace is positive for next year. So that's something that will Continue as we've seen in the Q2 and expect throughout the rest of the year that those markets, The convention, the urban markets, we continue to be strong next year.

Speaker 2

When you look at the citywide calendars, In 'twenty four, D. C. Is very strong, New Orleans is strong, San Diego is strong. And then when you look at DC specifically, we are completing the renovation in the Q3 of this year. So there's Some additional displacement that will happen during this quarter, although as we've said throughout the process, Because of the lack of availability in DC, we've been pleasantly surprised with our ability to Work around the displacement and work with groups to minimize that loss.

Speaker 2

And so DC will start to ramp In the Q4, now from the group perspective, there's already quite a big group business on the books and it's being sold as a Weston into next year. But from a transient perspective, the Western Flag will go out in the 4th quarter and it will start booking from there. So we have that ramping up. Our expectations on San Francisco is that while the market has its own challenges, we continue to utilize And take advantage of our meeting space and our ability to build on Create group compression of our own and not have to rely on citywides. And then the main Renovation next year that will be happening will be in Miami, which demolition will start In the back half of this year and then we will it will be under renovation for the majority of next year Looking to open up in the high season starting in December of next year.

Speaker 2

I'll let Aaron go through kind of the EBITDA displacement puts

Speaker 4

and takes

Speaker 2

for both time periods.

Speaker 1

Sure. So just to add to what Brian commented on, as we noted earlier in the call, what we're expecting for this year is $11,000,000 to $1,000,000 of EBITDA displacement and that split roughly kind of fifty-fifty between the first part of the year related to the work in D. C. And then the back half of the year primarily related So as we think about as we just move from 2023 into 2024, I wouldn't expect much in terms of the way of earnings on a full year basis from Andaz just given the work that will be happening in the back half by the first half of the year relative to the earnings that we generate once it's done. So that will be a net headwind from a displacement perspective.

Speaker 1

The positive I think that we'll have will be the renovation work at Long Beach That Robert had referred to and that conversion will take place early in the year, so we should see some lift there. And the primary driver will just be The Westin DC Downtown coming online as a fully flagship Westin should be a significant contributor for us. Okay. Thank you. Thank you.

Operator

Our next question comes from the line of Chris Darling from Green Street. Please Go

Speaker 2

ahead. Thanks. Good morning. Good morning, Brian. Going back to the Confidant.

Speaker 1

Good morning,

Speaker 2

guys. Brian, going back to the Confidant, could you offer any updated thoughts on the return profile there just given some of the recent Sure. Yes, so for it's numbers that everyone has seen For last quarter and probably going into Q3 this year too, The Miami market has definitely pulled back and has moderated still substantially higher than what it was in 2019, but a little lower than where it was in Quite frankly, we've seen that and I think others have talked about it too in most Of the higher end leisure market, domestic leisure markets, I won't be the first one to say this, but There's a lot more international travel happening than inbound international travel happening. We see that coming from The higher segments, and so the top Destinations are definitely feeling some of that moderation in Q2 and Q3. Miami is absolutely not immune from that.

Speaker 2

But when we go back to our investment here, The game plan followed a lot of what we did in Wailea. And it's a We have an asset in a fantastic location. Mid Beach has become a very high end destination. The Mon is under construction just the block down. You have the Faena, you have the addition.

Speaker 2

And so it is definitely The right zip code much like Wailea was. We have an asset that has a Fantastic footprint as far as the campus size and the ability to create a backyard destination. And so that's a big positive. And so when we look at the opportunity here, The opportunity is to draft. And while 2023 is down In the market, 2022 finished substantially higher for that market than where we had underwritten.

Speaker 2

And that way we can the even with the pullback, the amount of room that we Have is even more than we initially thought. So that all bodes very well. What we're also doing with Property and we're finishing up we finished the model room, backyard demolition will happen soon. We're working with There's some various partners that we'll be able to announce shortly. And so sometime in the quarter, we'll be able to provide a full picture Of what this asset is going to look like and what the resort will look like going forward.

Speaker 2

But what we have, we think It's going to be an exceptional room product, a fantastic food and beverage environment And a great pool experience. And a couple of things we've done with the rooms too is that we're making some modifications to make We have the right suite counts to make sure that we have the right product offering for that market. And so while all leisure markets have had Some big wins and some pullbacks. Miami is no different, but where we are, where we ended where the market ended last year And where we need to position this hotel, we feel better about it than we did when we executed the transaction. Understood.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Smedes Rose from Citigroup. Please go ahead.

Speaker 5

Hi, thanks. Good morning out there. I wanted to ask you, it looks like the pace of share repurchase slowed in the 2nd quarter and I wondering kind of how you're thinking about that going forward? Are you just kind of trying to preserve capital here with your upcoming CapEx projects? Or

Speaker 2

Yes. I think when we look at share repurchase, we would look at return of capital to shareholders. That's a combination of dividend and share repurchase and we did increase our dividend, our base dividend To more accurately address what our current structure is and what our current taxable income is to minimize The catch up dividend as much as possible knowing that that's a difficult thing to do in our space. And so when we look at allocating capital going forward, It really is just it's a continued balance of what we've been doing. It's making sure that we have the right amount of capital for Investing in the portfolio, future acquisitions, whether that comes from using balance sheet capacity or Recycling capital and then repurchase.

Speaker 2

And while yes, it did slow a little bit and sometimes You get into blackout periods where you have to set certain parameters far in advance. Yes, I think when you look back at 2022 and into 2023, we've been, for our market cap size at least, one of the more aggressive When it comes to share repurchase, we have a fantastic balance sheet. We have plenty of capacity. And so like you said, it really is just balancing everything. But again, when our share price gets to a certain level, we definitely have the capacity to go ahead and buy back.

Speaker 5

Thanks. And then can I just ask you on the NAPA properties? You mentioned, I know for a number of reasons It's probably been underperforming your expectations. I mean, do you think is it 2024 where you sort of start to realize better value there? Do you think more like $25,000,000 for the managers to get the kind of group business that you were talking about on the books that would cause some compression on the transient side?

Speaker 2

Yes. And it's definitely later than we initially thought and we're That's absolutely disappointing. But when we look at both of the resorts and they open Close to each other, several months apart. But when they both opened up, they both had it was in 'twenty two and you had The pent up domestic leisure demand that was really just through the roof and both hotels Out of the gate did very well from a leisure standpoint. And as we've talked about before, got a little bit Overly confident in that leisure demand and didn't do a good job of putting on the group base.

Speaker 2

Last year, we corrected that and have the hotels focus more on group base going into this year. And Four Seasons actually has fantastic group base in Q3 of this year. And so that has been Fixed and will be fixed going forward. But now with the strong group base, the leisure demand has Fallen off for all the reasons that has been mentioned on

Speaker 5

several of

Speaker 2

the calls. And so We haven't had the hotels firing on all cylinders yet. And usually when you have a newly opened hotel, what you'd like to do is get the revenue up to where you want it to And then you go and you work the cost model to make sure that the profitability is in there. Well, since we've seen the various components Of the revenue side just not working at the same time, we're now actively working with both of the management teams With the highest levels of both of those organizations working through fine tuning that cost model And Montage may be a little bit ahead of Four Seasons where even in the Q2 where you saw revenues were kind of flat, So a little bit more profitability in the prior year. So you're starting to see the beginnings of that.

Speaker 2

Now remember, these are luxury assets. And so it's very important that we balance the customer experience, the service levels with Our desire to have the right profitability, but we believe that there is plenty of opportunity here, Rightsizing and working through the cost model, working through different staffing and the way that things are done, where we can Extracts significant margin upside without impacting our guest experience. And so that's something that's underway now. Now what we will need is we'll need the leisure side to come back to reaccelerate. And if we can get into that next year, we're working the group based side is a continuation and we'll continue To be working through that, when the leisure comes back, we'll start to really see that.

Speaker 2

Our expectation and Time will tell is that a lot of this international travel will get out of the system this year and we should revert back to a more normalized Leisure demand as we get into next year. So yes, you should start to see some additional Earnings acceleration next year. Other things that are happening for the properties, we've continued to make Some enhancements at Montage, Four Seasons, our winery there, which is again, it's a resort Inside of a winery, and with everything, the vineyards and all the components of a winery surrounding it. So it's Quite a unique experience. Our winery is doing very well.

Speaker 2

We're actually looking for our profitability this year. And then another thing for the Four Seasons, which is a huge win is the restaurant Aura there was recently awarded a Michelin Star. And so everything is starting to really as far as recognition from the winery, recognition from the restaurant, Four Seasons obviously is a well regarded premier luxury operator. So It has the components right now of everything kind of lined up. We have the revenue.

Speaker 2

We have the expense plan. And when this ramps up, It's going to start putting off the earnings.

Speaker 5

Okay. Thank you. Appreciate it.

Speaker 2

Thanks, Vince.

Operator

Our next question comes from Chris Woronka from Deutsche Bank. Please go ahead.

Speaker 6

Hey, good morning, guys. My question kind of relates to the Hyatt San Francisco, I know you provided some color in the prepared comments, but obviously, it's an outlier relative to everything we see in San Francisco. There's Reasons for that you mentioned, but how sturdy is that demand? I mean, is that a function of other things going on with other hotels in the market? Is this some kind of contract business?

Speaker 6

I'm just trying to get a sense for what that could look like later this year and even next year Yes, if the office vacancies continue to rise.

Speaker 2

So San Francisco is and what we're seeing in the market The submarkets are performing differently. And being in Embarcadero and the financial area, We rely and have for several years now relied a lot less on The citywide compression and conventions. It would have to be a very large convention for it to really get out to us and impact us. And so what the hotel is focused on is we have good meeting space. We have a lot of meeting space relative to the size of our hotel.

Speaker 2

And so to use that to go after groups that are 10 to 100 room nights is really the kind of the bread and butter, 100 to 200. But Groups that need the space that are would be a much smaller group somewhere else. And so we're able to do that. We're able to then compress the transient demand and while the office vacancies are Not where anyone would want them to be. They are we are surrounded by office.

Speaker 2

And so there are companies that Our back to work certain days and with our new rooms product that we did and maybe we have some companies that are That we're staying at a higher price point hotel previously, but we are able to capture good corporate business that we couldn't get before with the room product that we had. And so that's what really the secret to the For this hotel is now the transient demand is strong, and is strong for the rest of the year. We anticipate meaningful EBITDA growth and EBITDA probably doubles this year Over last year, but we're still quite we're down quite a bit from 2019. And so it's a to your question is, is it a Sustainable model that we have there, yes, it is because it's is there some crew and some other things? Yes, there is that in the hotel.

Speaker 2

But we do have a good model, a good location and In a market that suffered and certain segments of it and submarkets of it will continue to suffer, Some of the products getting a little worn down there. And so we have a basically brand new product that we're offering guests. And so the hotel is really well positioned. Does that give it legs of growth for next year? It should have some growth.

Speaker 2

Yes, it should still continue to grow next year. But what we'll need is we'll need to continue for the market to continue and to get more people Into the city, the good news is, especially in our location, the city looks a lot better than it did previously. So look, we're optimistic. We think we have the right hotel in the right location, but it's still a long road ahead for San Francisco.

Speaker 6

Okay. Thanks, Brian. Appreciate all the color.

Operator

Our next question comes from the line of Michael Balisario from Baird. Please go ahead.

Speaker 2

Thank you. Good morning, guys.

Speaker 1

Good morning, Mike.

Speaker 2

Could you go back to you mentioned 9 point Shortfall at your resorts in the quarter, couple of parts here. How much of that was occupancy? How much of that was rate? And then the pickup that you mentioned in forward bookings Over the last couple of weeks, was that broad based, specific to any properties? And then what did the rate look like on those bookings?

Speaker 2

Thank you. Okay. So let's start we'll start with the resorts in the quarter. 2nd quarter was mainly a good piece of it was the majority of it was occupancy. ADR was down, but not as much as the occupancy.

Speaker 2

And As we look in the Q3 July

Speaker 5

specifically, we're going to

Speaker 2

we'll see some more we'll see some more rate Deterioration. And where we're seeing that is really, it's a the question of is And I think it was asked on one of the calls yesterday, is this just demand or is it demand or in rates getting cut? And the answer is, It's a little bit of both, but on the rate side, what we're seeing is of the leisure segments, It's the retail segment that was the weakest in Q2 and the weakest in Q3. And maybe just to simplify that retail segment, That's the brand.com customer. We think that that's the customer that is more likely The international trip now and so while that customer has gone away In the leisure segment, we're not seeing that in the BT or other segments.

Speaker 2

But if that customer has gone away for the short term, Our expectation is that they come back. And so the occupancy and rate mix is more a function of the retail customer going away and more wholesale, more discounted channels, More OTA that you would have typically had. On The BT and the transient pickup over the next those are bookings over the next 6 months. That's being heavily led by our urban assets. And so the San Francisco is a big piece of that.

Speaker 2

Portland has actually picked up some Boston Long Wharf, Even San Diego, where some of that is you'll have government or government related, a lot of Defense contractors, aerospace, that sort of thing. So and then Long Beach is another one where we're seeing a lot of pickup on the government and contractor side. Great. Thank you. Thanks, Mike.

Operator

Our next question comes from Dorey Kestin from Wells Fargo. Please go ahead.

Speaker 7

Hey, thanks. Good morning. I believe back in June, you mentioned the potential to increase the Total cost of the Andaz renovation, I think it was from, is it $60,000,000 or $70,000,000 Is that still being considered?

Speaker 2

So we are in our final stages of finalizing everything and Just final twice there. So what we're going to do is sometime in Q3 when we and really what's holding this up now is just Finalizing our partnerships to announce because we want to provide a complete picture. We will Update both the costs, any scope changes, where the final room count is going to be, who the Food and beverage operators are going to be and then provide some photos and the Yes, renderings of that. And then on any scope changes, we'll update our projections to include Returns on the scope changes. So I'm kind of dancing around your question right now and I will say that We will have a more fulsome update during the quarter.

Speaker 2

That said, the construction costs Have increased over that time period or over this time period, while shipping is really the only thing that has come down. So normal inflation in the expense side should be expected, But we'll provide a total view of everything. And I think once everyone sees the opportunity, To see some

Speaker 1

of

Speaker 2

the name brand recognition that we'll be able to bring to the Andaz, It will be pretty exciting.

Speaker 7

Okay. Are you able to put a little finer point around what the potential Placement could be for next year for that project?

Speaker 2

I think if you look to what we said for this year Before we were able to get the timing and everything down is that we said that we would be Close to 0 this year, and I think the hotel is going to put off about $4,000,000 to $5,000,000 of EBITDA. And so and it did 12.5 in 2022. And so looking at 2023, The majority of your earnings comes in the Q1 or so of the year and then the very end of the year. We plan to be open for the end of the year, but it will probably be minimal earnings coming off that hotel next year.

Speaker 7

Sorry, the last part kind of broke up. You said your earnings next year should be comparable to this year?

Speaker 2

It will be minimal earnings from the hotel next year.

Speaker 7

Okay. And then just last one. Based on what you all are working on today, Would you expect to be recycling capital by year end?

Speaker 2

We are hopeful to be able to recycle capital by year end. Part of our plan is to be able to be active recyclers Of our real estate and when we get to the point at which we're done with our investment Lifecycle of each hotel, it's time to move on to something new. It's been challenging up to this point. Smaller deals obviously easier to be done than larger deals. We have recently seen several CMBS deals get done.

Speaker 2

So for larger assets. So larger cash flowing assets are now And lease financeable, and so that should help things move along. But we are absolutely endeavoring So we'll be able to hopefully get some recycling done this year.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from Bill Crow from Raymond James. Please go ahead.

Speaker 4

Hey, good morning, guys. I'm trying to make this quick. I have 3 quick ones. One is a yes and no. We'll start with that one.

Speaker 4

Do you have any asset and this Following up on Dory's question, do you have any assets currently in the market

Speaker 2

for sale? We have Normally, we don't talk about deals until they're done, but we I will tell you, we always have At least one asset in some form of either marketing, soft marketing or in talks with others.

Speaker 4

Okay. Appreciate that. Brian, I guess when I looked at your results last night, I was surprised that the RevPAR missed relative to your guidance That was provided a month in and I get that it's resort driven. Is that was that a failure of Kind of in the quarter, for the quarter demand to materialize? Was there cancellations in there?

Speaker 4

I'm just trying to figure out what the miss was.

Speaker 2

So cancellations are pretty static To where they were, they're up a little bit to 2019, but that's more a function of DC where we have group contracts and we're under renovation. And so some of them we Are able to work it out with the groups and some of them were not. And so I think we're probably from a total dollar amount, maybe up $800,000 $900,000 to where we were in 2019 in cancellations, but that's predominantly TC. It's to your first point. It's a very short term visibility That you have on transient demand and in certain markets and then Wileo was one of them We had some we had shortfalls in Q1 and then we opened up certain channels and they filled.

Speaker 2

And Q1 was fine. It was great. When we got into 2nd quarter And starting really kind of accelerating in June, in May June is that those bookings didn't were not happening like they happened in Q1. And when we look at the different markets and it tends to be the higher end and luxury Leisure domestic markets and when you go, you can look at our portfolio, you can look at others that have given numbers, you look at the start data, It's the higher end markets. It's the Florida Coastal and Southern California, Northern California In Hawaii, domestic Hawaii, call it, I know Oahu has inbound From Japan that it's benefited from.

Speaker 2

And so it was the typical pickup started to slow down And that coincided with this imbalance between international outbound and inbound travel.

Speaker 4

Yes. Thank you for that, Brian. And that's the 3rd question I wanted to ask because it came up, I know, on host call and I asked Jim a similar question. We've been tracking this inbound, outbound differential for more than a year and it's not getting much better. You made a comment, you hoped that this would kind of normalize by next year, but we had 3 years where people weren't able Travel internationally, so I'm curious why it might normalize that quickly.

Speaker 2

We are seeing international airfare become Very expensive. And then I just there was an article out yesterday too Showing that domestic airfare has come down a little bit. And so while it tends to be the more Affluent traveler that's doing these type of trips, the cost of that international ticket does Weigh on the overall cost. And so and then that in our European Trips, something that people do every year or every couple of years. So, look, you're absolutely right.

Speaker 2

It's The time for visas and other things to get into this country has been difficult. The inbounds, Prior to the pandemic, we did about 10% international business and it's kind of hard to calculate because Our hotels may do 10%, but maybe the markets that we're in have compression from more That's stated in other places, and we're half of that now. And so China is a piece of that, especially on the West Coast. European inbound is a piece of that. I mean, even in Wailea, the biggest international is Canada and we've seen a decline from that.

Speaker 1

Yes.

Speaker 2

The airline fares are probably the one thing that gives us a lot of confidence That once that because that's what we see. When we see the prices of fights to Hawaii go down, we see demand go up. And so but we'll have to watch it.

Speaker 4

I appreciate that. Thanks for the color, Brian.

Speaker 2

Thanks, Bill.

Operator

Our final question comes from the line of Floris Van Draenkum from Compass Point. Please go ahead.

Speaker 2

Hey, thanks guys. Encouraging progress in the wine country and San Francisco. My question has to do with the dividend. Again, you raised the dividend. What would the dividend have been raised If you did not have any tax loss carryforwards?

Speaker 2

Well, we're The dividend right now, that decision was independent of our tax loss carry forwards. Now we have substantial Carry forwards and our plan is to use those for our capital recycling to make it We'll have as we sell hotels, we'll have gains. You can always take care of that through a 1031 exchange, but that sometimes Timing needs to be on your side for that. So by keeping our NOLs to shield those gains, if we're unable to do a tenthirty one, That allows us to be more efficient with recycling that capital. So right now, What the increase today was, was when we came out of the pandemic and taxable income started to flow back in, We went back to our previous dividend, which was based off of a different portfolio, based off of a different capital structure, Based off a different depreciation, so all these factors are we just kind of went back to what we were doing.

Speaker 2

As we look forward and wanting to maintain a dividend that can handle normal cyclical fluctuations And minimize the amount of a catch up dividend at the end of the year, this was a step, maybe a little overdue step that It could have happened earlier this year, but this is a step that we needed to take. We still anticipate and we'll have an update next quarter. We still anticipate to have A catch up dividend at the end of the year. This will not Q3 and Q4 dividend will not take care of that full taxable income. But we will have more information on that, projections on that and then views on the base dividend going forward on our next call.

Speaker 1

Thanks. Appreciate it.

Operator

I would now like to turn the call over to Brian Gilia for closing remarks.

Speaker 2

Well, thank you, everyone, and thank you for the interest in the company, and we look forward to meeting with many of you in upcoming

Operator

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Sunstone Hotel Investors Q2 2023
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