Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Sunstone Hotel investors third quarter 2019 earnings call.
Time, all participants are in listen only mode. Later, we will conduct a question answer session and instructions will be given at that time I would like to remind everyone that this conference is being recorded today November fast 2019.
<unk> PM Eastern time, I'll now turn the presentation over to <unk>, Vice President of corporate Finance and Treasurer. Please go ahead.
Thank you Chloe and good morning, everyone.
By now you should have all received a copy of our third quarter earnings release, and supplemental which were made available yesterday.
If you're not you'd have a copy you can access them on our website.
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 prospectuses 10-Q's, 10-K, and other filings with the FCC, which could cause actual results could differ materially from those projected.
We caution you to consider these factors in evaluating our forward looking statement.
We also note that this call may contain non-GAAP financial information, including adjusted EBITDA.
Adjusted FFO and hotel adjusted EBITDA margins.
We're providing that information as a supplementary information prepared in accordance with generally accepted accounting principles.
With us on the call today are John Arabia, President and Chief Executive Officer.
Ryan Julia Chief Financial Officer.
Robert Springer, Chief Investment Officer, and Marc Hoffman, Chief operating officer.
After our remarks, we will be available to answer your question.
With that I would like to talk to turn the call over to John . Please go ahead.
Thank you and good morning, everybody and thanks for joining us.
I'll begin today's call with a review of our third quarter operating results as well as an update on the current operating environment.
Next I'll discuss our approach to capital allocation, including our recent disposition.
Courtyard Phili Alex.
Afterwards, I will provide an update on our fortress balance sheet.
Discuss the specifics our updated guidance and provide a range for fourth quarter catch up dividend.
To begin in third quarter comparable portfolio Revpar increased 90 basis points over the prior year.
Comparable portfolio total revenues increased 1.8%.
So more to our performance in the second quarter.
Our third quarter room revenue growth was driven by nearly 3% increase in transient room revenues.
Which helped offset and nearly 4% decline in group revenues.
[noise] group business was a bit softer than we had anticipated during the quarter.
Terms of both room nights and reach.
Well, we were able to backfill most of the shortfall in group room nights, we transient demand, we witness west room rate compression on several nights that we had anticipated would have meaningful group compression.
Particularly in San Francisco.
Total comparable portfolio revenue benefited from room rate growth in both group and transient segments and from a 16% increase in other ancillary property level revenues.
So, let's dig a little deeper into the details of quarter quarterly operating results.
Our third quarter results benefited from a bulk market growth in Washington DC.
Continued outside growth and why why.
Better than expected market growth and Portland in Boston.
And finally from our recent capital improvements to marry up Austin long wharf.
Hilton San Diego pay for.
And GW New Orleans.
Offsetting those gains was general market weakness and soft citywide calendars in Chicago, San Francisco, Orlando, and New York City.
This was about $200000 last room revenue attributed hurricane Dorian.
Which reduced third quarter rough part revpar growth, but roughly 10 basis points.
Total food and beverage revenues were only up 60 basis points, which was largely the result of a roughly 4% decline in group room nights.
Despite this marginal growth in food and beverage revenues group food and beverage spend per occupied group increased a healthy 4.5% over the prior year.
We continue to benefit from our investments aimed to attract her quality group customers at while well Boston Park Plaza.
And rather sorts Orlando.
At the same time other ancillary revenues improved a healthy 16% during the quarter driven by a combination of increases in various industries as well as transient cancellation revenues as our operators are doing a better job collecting these fees.
Turning now to expenses.
Third quarter, we benefited from decreases in group commissions food costs and utility expenses during the quarter.
The third quarter expenses were negatively impacted by ongoing cost pressures, including certain allocated expenses from the brands.
Specifically sales of moral to expenses.
Which costs continue to rise at a rapid pace as hourly wages in the third quarter increase nearly 5%.
As discussed on our per earnings call insurance costs increased roughly 31%.
The quarter compared to last year, which had a 2020 basis point impact on margins.
So in total.
The 1.8% increase in comparable hotel revenues combined with a 3.3% increase in hotel operating expenses.
Resulted in property level EBITDA declined 1.5% in the third quarter.
Now, let's turn our attention to the fourth quarter and 2020, starting with group pace.
Our fourth quarter group pace has improved over the last three months.
We continue to anticipate a year over year moderation in group business in the fourth quarter due to weaker citywide calendars in Chicago.
Boston, San Diego and New Orleans.
However, we are hopeful that stronger citywide markets of Orlando.
Baltimore in San Francisco.
Well make up for some of the deficit in the quarter.
On a positive note group production during the third quarter for current and future years of 293000 room nights was marginally above EUR five year average for the third quarter.
More specifically Renaissance Orlando continues to help our overall numbers.
It is tracking significantly above its historic average.
Our beautiful new ballroom extra meeting space at the hotel had been very well received and are generating additional bookings.
Looking forward to 2020 remain in the early stage of our budgeting process.
While we will not provide 2020 guidance until our next earnings call. We can say that our current group pace is up in the mid single digit range.
Given this year's booking production, which was within the range of what we have produced over the last several years combined with stronger citywide calendars and our key large markets.
We are well positioned for 20 Twond.
Several of our larger markets, including Washington, DC, Chicago, Los Angeles, Boston, and San Diego, all have stronger citywide calendars as compared to 2019.
Meanwhile, we anticipate weaker convention calendars in New Orleans Orlando.
However, while these citywides are likely to be a bit weaker.
These cities next year.
It's or ROE or Renaissance Orlando NRG W., New Orleans are expected to offset citywide.
Soft calendars was strong in house group.
Separately, we expect while it outperformed the U.S. market next year, albeit not the white hot growth we've seen over the past few years.
We'll provide more details on our 2020 expectations on our next call in February .
Before I turn the call over to Brian , Let's talk a bit about our recent capital allocation initiatives.
I'm happy to announce the sale of the leasehold interest in the courtyard LTX for $50 million, which equates to an estimated 5.8% cap rate on our full year 2019.
Forecasted and Hawaii.
And as materially above the price, which many analysts investors value the asset.
Well this disposition was most likely expected as it is one of our smallest assets and the other growers.
The sale further consolidates our portfolio into long term relevant real estate.
Reduces our ground lease exposure, which was already materially lower than most of our peers.
And produces a sizable game it will be distributed to our shareholders.
Furthermore, the sale of one of our lowest quality assets at a cap rate almost 200 basis points inside the cap rate recently applied by our share price.
Just makes good business sense.
It adds to a war chest.
So what are our plans for a war chest.
Well, we continue to struggle with the car pricing expectations.
On long term relevant real estate and given both the recent range of our stock price.
As well as the ongoing disconnect between public and private pricing for hotel real estate we.
We continue to believe that the best use of our excess liquidity.
Well to be to repurchase our own shares.
Keep in mind that our purchases are not expected to be uniform of programmatic.
But there are likely to occur opportunistically from time to time the future.
With that occurred during the call over to Brian . Please go ahead.
Thank you John and good morning, everyone.
We ended the third quarter with significant financial liquidity, including more than 730 million of unrestricted cash and an undrawn 500 million revolving credit facility.
We have approximately 1.2 billion of consolidated debt and preferred securities outstanding.
And our current in place debt has a weighted average term to maturity of approximately 4.4 years and a weighted average interest rate of 4.2%.
Our Vale variable rate debt as a percentage of total that stands at 23% and 44% if our debt is unsecured.
Now turning to the fourth quarter and full year 2019 guidance you full reconciliation can be found in our supplemental and in our earnings release.
2019 guidance does not assume any additional share repurchases nor does it include the impact of any additional asset sales or acquisitions.
For the fourth quarter, we expect total portfolio revpar to range from down 1.5% to up half a percent.
We expect fourth quarter adjusted EBITDA to be between 68 million and 72 million and adjusted FFO per diluted share to be between 23 cents and 25 cents.
For the full year, we tightened the range of our total portfolio Revpar growth and now expected to range from up 1% to about 2%.
We also tightened the range of our full year 2019, adjusted EBITDA guidance to range from 313 million to 317 million and our full year adjusted FFO per diluted share to range from $1.90 to $1.11.
Now turning to dividends and consistent with our practice in prior years, we expect to declare a catch up dividend in the fourth quarter that will generally be equal to our remaining undistributed taxable income.
Based on our current outlet, we expect our fourth quarter distribution requirement to be between 50 cents and 60 cents per share.
The expected range includes approximately 14 cents per share gain from the sale of the courtyard lax.
The amount of our catch a dividend from ongoing operations is roughly equivalent to the fourth quarter 2018 catch up dividend after adjusting for dispositions.
Together with the dividends paid for the first three quarters of 2019, the midpoint of our catchup dividend range would equate to an annual dividend yield of approximately 5%.
We will finalize the amount to the catch a dividend later this quarter and it will be declared in December of this year.
Separate from the common dividend our board has already approved the routine quarterly distributions on both outstanding series of our of our preferred securities.
With that I'd like to now open the call to questions. Chloe. Please go ahead.
Thank you if he'd like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure immune function is turned to I've told you signaled to reach our equipment again press star one to ask a question we will pause for just a moment to allow everyone an opportunity to signal for questions.
My first question comes from Lukas Hartwich of Green Street Advisors. Please go ahead.
Thanks, I'm scratching my head a bit in terms of private market pricing for hotels, given low cap rates and almost no growth if not declining in July and just curious what your thoughts around that.
What are private market investors underwriting to kind of make these deals pencil.
Good question Lucas.
Well, we struggle without that as well.
It seems like some of the pricing we are confronting.
He is actually just ask operational in terms of sellers interests.
Pricing I said I think some of this too.
Not be surprised if we see.
A couple of assets to come to market, there will be price sensitive priced.
Based on.
The price in the on boarding assets the old strategic portfolio, which.
Many of you as a very robust pricing at 18 times.
The that are high quality portfolio.
We clearly have struggled with some of the pricing expectations by some sellers.
As evidenced by the fact, we haven't been active in the acquisition.
It's hard for us by and large to make sense of cap rates sometimes in the.
3% to 4% range just over that particularly when you put in.
Are you take into account property tax resets and alike.
When the outlook for.
Well why gross as probably never been lower over the past several years.
Obviously, there's idiosyncratic assets that.
We could change our minds, all and it wouldn't make sense.
But we would have to have a lot of convictions either about our ability to reposition asset manage market grows or index gains for that asset given those given the pricing expectations.
Great and then obviously, it's a tough on environment out there for hotel owners are looking back on your experience I'm curious are their operating environments that kind of remind you of today and are there any lessons that you're taking away from those environments and applying to the current.
Reality for for hotel owners.
I don't necessarily you know, there's only been so many cycles that I've lived through but.
It strikes me that each one of them as a little bit different.
The other why gross for this cycle has been somewhat muted all though it's gone on for longer.
Given everything we see we continue to have great conviction and owning great real estate long term.
And also owning that real estate leaves you know very low leverage vehicle.
To me that's that makes a lot of a sense considering we don't know exactly what's going to happen with your told me, but I think we're very well positioned.
That if the economy Reaccelerates I think we're well positioned there will have some excess cash that will need to make decisions on.
If the economy turned sour or materially declines were incredibly well position.
I think having excess leverage at this point it was cycle to me its asymmetric risk reward.
Great. Thank you.
Thanks.
Our next question comes from Anthony Powell from Barclays. Please go ahead.
Hi, good morning.
You mentioned that there are some there isn't anything like a there are some weakness in San Francisco just convention attendance.
Do you think babies change either in a unit in.
The desire for technology individuals to go to be Congresses, or just the attractiveness of Sam just where the city and how is that impacted your forecast for that market for fourth quarter and next year.
Too early to tell Anthony I mean, clearly.
Literally the third quarter for San Francisco was disappointing there are three groups in particular cloud These American dental and Oracle that just Didnt show up as anticipated and as a result, several folks who left scrambling to try to backfill with transit, which which was there it's just super compression nights.
We were all anticipating.
Didn't occur and we lost a little bit of rate compared to our forecast too early to tell if.
The what's going on with technology or unicorns are we work or all the rest are having an impact.
We will continue to monitor.
Right. That's all have thank you.
Well take our next question from Michael Bellisario from Baird. Please go ahead.
Good morning, guys, Hey, Michael for <unk>.
Just on the L.A. Axell when can you kind of give us an overview of the buyer profile and then help us understand evaluation, a little bit better I'd I thought I remember from a couple conference calls ago. You mentioned there is a leasehold buyout option sometime soon there and how that may have impacted the headline pricing at all.
Yes, good stewards of leasehold interest a the lease payments were actually fairly robust relative to the auto why the buyer was a seaview investors a local private equity that owns several hotels not only immediately adjacent but literally on the same block.
They were by far the most likely buyer of this asset. This is one of those trades that I honestly believe it's a win win for both us and our buyer because I think they'll be able to do a lot with the asset given their concentration in the local market.
We wish them well it were moved to non core asset non strategic asset for us what we felt it was a really good price and I think there will be successful with it so.
Overall a win win.
As far as the lease hold buyout option, rather what Europe was up.
It's bad 18 years out so there was certain.
Right, but in the lease but there you know definitely not within the near term.
Got it that's helpful. And then does this pricing you achieved as a change the way you think about values for them, but with a better or worse I'm guessing better for any other properties within your portfolio.
Oh necessarily not necessarily I mean, we continue to believe there's a pricing discussion a disconnect between public and private pricing.
As we continue to sell assets, many times and cap rates within a lower than.
Where we are currently trading for some more lower quality assets. So I think that's a it gives us more conviction of.
Our overall view on any the and this disconnect between public and private pricing, which we're incredibly well positioned to take advantage of given our leverage profile.
That's helpful. Thank you.
Thank you Sir next question please.
Our next question comes from.
And that is rose from Citi. Please go ahead.
Hi, It takes me.
Sorry didn't.
John are you with the sale of the courtyard Lax are you now at a sort of end of the pruning of this portfolio or do you feel like this more to go.
No I think the Opportunistically, there's more to go clearly, we don't need incremental capital, but I think.
I feel comfortable to if we can continue to garner those prices.
We have been.
I think that there are more to go keep in mind, though that.
You know just like Kelway X. I mean, here's one of our 21 hotels at the time.
But it was $50 million I think lot of people valued at about 40 $40 million to $43 million.
It was 1% of especially one for what it's worth [laughter].
Forbad side and I'm very closely.
But.
The point is.
So we're not talking about even if we sold off another handful of assets were not talking about a lot of our asset value where it.
What I like to point to our investors and analysts is remember we have.
Seven assets that are worth.
At least.
$300 million have a couple.
Yeah that are worth a multiple of that.
So.
Keep in mind that even though we might be selling down certain assets, you're really doesn't move the needle from a total value perspective.
The good news is as we put all of our information out and Supplementals and people can.
Quickly ascertain that.
Okay.
And then sorry, if I missed this maybe in your opening remarks that.
The Florida.
He said Orlando and key west where those impacted significantly by Dorian.
In the quarter or yeah. They were about $200000 in rooms revenue Smedes as it was it was pretty de Minimis seems like 10 basis points of Revpar growth keep in mind to what you see in Orlando, We had always anticipated a softer quarter for Orlando or just saw Citywides, we had soft in house and it was just a fun.
Nominal comp.
Third quarter of last year that we don't believe it all that's indicative of future performance of that asset in fact in the prepared remarks spent a fair amount of time, just talking about the really robust pace their in house group pace that we have for that asset going forward.
That's in there I'd be Orlando and right.
Correct. It Orlando then there's also a couple of low at about <unk> of items going on in key west that we had some work going on at the asset were in closing the the restaurants and in addition to that the roots.
We had come to an agreement with the solar the asset to put on a new rules, which they participated in and just making sure that that building, which is already fortress like in terms of its hurricane preparedness.
Was completely top notch in that regards we did have some.
Displacement and disruption as you can imagine putting on new groups little building.
Great. Okay. Thank you.
Thanks Mitch.
Our next question comes from Chris Woronka from Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Wanting to work.
Hey, good morning.
Revisit capital capital allocation, maybe a little bit differently, which is.
John I understand your comments and know what do you look at this stuff every day.
Was there cone point were you.
You have to spend cash balance and what you know what if what if we're in a multiyear period of further zero to 1% growth and private money is still there I mean is there.
Is there an internal kinda trigger is probably the wrong word, but some kind of catalyst, where you change course, and say the new normal and we don't want to discern one and half percent on cash or whatever it is.
It's a consideration I don't I don't believe that we're going to be sitting on this much cash for that long of a period or other methods. If it's not share repurchase or to take care of that quote unquote problem by the way given given our what could happen, it's a high very high.
Quality quote unquote problem to have.
So I don't think will be sitting on it for a prolonged period of time.
Okay Fair enough and then.
What asks on somebody things that have been helpful. On the expense side, probably dating back to last year.
For the brand some of it more direct booking increases in beauty fees going down and stuff like that that's being driven by the largely by the brands how sustainable do you think that is over multi.
It was 18 19, just an abnormally good year for that kind of stuff or is this a secular change where we can continue to see lower costs, particularly on distribution I guess.
Excuse me good morning, It's Marc Hoffman on let me speak to the group side first.
We believe that the.
Numbers Lucerne 18 to 19 will continue out into 20 and 21 the change for the large hotel company group bookings down to 7%.
As you understand there are groups that are further out that werent booked at those rates. So we expect to see very similar savings and improvements in 1920 excuse me in 20, and 21 and 22 and it stabilizes out probably in 22.
We continue to see improvements in the cost as it relates to third party Oh Gee I used by the large levels and combine Marriott the organization and think that those will continue to incrementally improve over the next few years.
Okay. Appreciate that and then just last question for me is.
There's a lot of talk about corporate.
Demand and maybe some hesitancy to book given all all various news flow.
How much of that he would you guys took a step back I mean, how much of this do you think is demand problem versus maybe supply problem and I know for you.
Like markets every everything's different but when you say.
You know that supply is actually bigger problem in some markets than maybe we thought or do you think this really does come back to the transient demand.
I think its combination of things one certain supply.
Supply in certain markets is clearly above where we'd like it would be good news is that seems to be moderating in several of our markets.
Next year, but Chris I think you're hitting the nail on the head one of the weakness as we've seen recently is just in the quarter for the quarter, particularly corporate demand.
And while our overall production has been absolutely fine one of their production has really been focused on outer years, where we've come a little bit short and had to make up the transient demand is just really in the quarter for the quarter group.
That's been going on now for a couple of quarters, though.
The good news is when.
Good news is when we as of today one of the things that put in a positive category is at least for our portfolio. Our transient bookings, which are very very short term are actually up.
So we've been able to offset some of the weakness and last minute corporate group bookings with better than expected transient demand.
Okay understood very helpful. Thanks, John .
Thank you.
Our next question comes from David Katz from Jefferies. Please. Please go ahead.
Hi, David.
Good morning, everyone. So.
Within that transaction opportunity market <unk>.
Hi, I suppose it's fair to think of you as you know the type that would.
Take on a repositioning or somewhat of a fixer upper.
We then what you're seeing and you know the underwriting opportunities.
Are those kinds of things harder to find a and is there any difference between you know what from the cap rates being paid on.
Know fully formed properties any different from you know those repositioning or fixer upper opportunities.
Oh, I, Oh said, a little differently, David you know.
One thing I really respect about our team as we have the ability not only to do.
Massive repositioning such as well and take something like that on.
We can underwrite it we improve it we have grown in house design and construction I think we have a very solid track record on being able to do that.
But that would not preclude us if we found the right opportunity in buying something that was either stabilize that we'd like mark we like the market growth or do we thought had asset management initiatives or even something and we've contemplated from time to time, taking out brand new construction, if we really like the asset and believe it is.
Good investment so.
I'd say that our investment universe is actually from an asset perspective is actually a little wider than that.
You know there have been to use your parlance, a couple of fixer uppers out there that we have bid on that we have not been the successful better on a we continue to look.
None I think eventually will be successful in acquiring those but perhaps probably not right now in the cycle.
So just following that up is there some cyclical.
Arc.
You know, we can talk about in terms of those.
You know investment or fixer upper opportunities are there they just fewer and farther between at this point in a pretty long cycle.
I'm, sorry, though I don't know if I'm understanding your question correctly, you mind rephrasing, well, yeah, I mean, <unk> is it fair to assume that coming out of a downturn there would be.
Many more opportunities for ample opportunities to <unk> to buy and reposition then there would be much later in the cycle and where we sit today.
I don't know about that.
Yeah, I don't know about that and and perhaps I missed spoke a bit that you know we would given the right pricing. It really comes out of pricing given the right President we would even take on a pretty significant repositioning opportunity late in the cycle. When you think about how much time it would take for us to.
Get too.
The renovation of an asset understanding the asset to designing the asset.
Going through any permitting or a approvals that we needed.
We're talking about potentially a couple of years.
So up.
It would really come down to us would come down to present.
Well, let Michael Bender.
Thank you very much.
Our next question comes from Dori testing from Wells Fargo. Please go ahead.
The door.
Are you there.
Doherty on mute, perhaps I think we urgent.
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It's opening an office I'm going there.
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Hey, guys.
Hello.
Hey can you hear me.
Yes.
Yep.
Oh, sorry.
Yeah, sorry about that we unfortunately, we lost our telephone system.
Oh I'm sorry go ahead.
Please go ahead sorry.
You bet, the said before that unit or purchase I think about 509 in stock and I mean at or below three times would you be comfortable at those levels. If the assumption is that we could be in several years that.
Essentially no growth.
Topline growth.
Yeah.
Sure.
And that would get us up to let's say close to $500 million share repurchase get as close to three times debt and preferred to EBITDA. That's a that is an area soon after three times as a.
Comfortable area that we have always said.
Would be our leverage target late in the cycle clearly.
No we would anticipate in a downturn.
This that leverage level would go up meaningfully meaningfully being perhaps five and a half six times, which.
We could easily operate to completely without incurring.
Incremental defensive costs and still remain still maintain some level of optionality.
So yes, that's getting up to three times is as we've said no isn't a problem.
Okay. Thanks.
Thank you.
Next question please.
Well take our next question from Thomas Allen.
Please go ahead.
Q I'm sort of her and her prepared remarks, you highlighted markets that have stronger and weaker citywides next year anyway to quantify that for US just so that we can have a better sense, that's kinda trajectory of those markets. Thank you.
Oh, let's see.
It should be good whole. Please if the funny part is I ran into another phone.
And another office and have none of my notes in front of mind So [laughter].
Let me grab those real quick and be happy to yours I tell you what Thomas we can follow back up with the how about that.
Okay Perfect and then just another question I mean, you highlighted that.
I've been some cost pressures from the brand sales on a loyalty one of the brand Star Charlie today, just about thing a big increase in redemptions net net are you happy with those costs or is it something that but like do you think that delevering deliver had good return on investment.
Yeah.
Overall, we are pleased it's not a straight line and there are times that you know like this month, we saw an increase in certain sales cost in certain loyalty costs.
But overall, we applaud the larger brands efforts in reducing those costs overtime, and we think will they'll continue to go in that direction.
So Tom it's just getting back to your comment a Washington D.C. in terms of room nights next year for 2020.
Quite strong up 40 or roughly 40%.
Boston is up eight citywides and up roughly 25% room nights.
San Diego was up 4% to 5% Chicago up 12% both of those being room nights.
San Francisco is a little bit of wildcard I think most of us anticipated a leg down into 2020, but considering.
The difficulties with some of the large citywides. It this year I think that's more of wildcard.
And you know could be flat to even up a little bit.
And then you know for Los Angeles, which is a huge market. So it's it's tough to just take look at Citywides, particularly start looking at helping extra long beach or the west side or what have you a room nights are up as well.
The to the two markets really focused on.
In terms of room much snags citywide room nights next year really New Orleans down 19, 20% in Orlando, which is basically flat. The good news is is both of our hotels are both the JW, New Orleans, and the Orlando Renaissance have really strong in house group bookings.
Next year, so we feel good about that for on a relative basis.
Helpful. Thank you.
Perfect. Thank you.
[noise].
And the other questions operator.
It appears there are no further questions on the answer question answer session for today at this time I would like to turn the conference back over to John Arabia for any closing remarks. Thank you.
Got you so much everybody sorry, first technical difficulties or we are around today, if there's any follow up questions and we look forward to soul.
Many of you would they read next week take care.
This concludes today's call. Thank you for your participation you may now disconnect.