Q4 2019 Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, thank you for standing by welcome to de Sunstone Hotel investors fourth quarter 2019 earnings call.
This time, all participants already listen only mode. Later, we'll conduct a question and answer session and instructions will be even at that time I'd like to remind everyone that this conference is being recorded today February 19th 2020 at <unk> PM Eastern time.
I'll turn the presentation over to hear and raise vice president of corporate financing Treasurer. Please go ahead Sir.
Thank you dare and good morning, everyone.
By now you should have all received a copy of our fourth quarter earnings release, and supplemental which were made available yesterday.
We do not yet 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 prospectus.
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 statements.
We also note that this call may contain non-GAAP financial information, including adjusted EBITDA adjusted at that though.
Well adjusted EBITDA margin.
We are providing that information at the supplement she information prepared in accordance with generally accepted accounting principles.
With us on the call today, or John Arabia, President and Chief Executive Officer, and Bryan Giglia, Chief Financial Officer.
After our remarks, he will be available to answer your questions.
With that I would like to turn the call every John Please go ahead.
Thank you aren't good morning, everybody and thanks for joining us today.
Well, we get todays call to review the successful 2019, including the better than expected fourth quarter and for your operating results and earnings which benefited from continued investments in our portfolio.
Next we'll provide her thoughts on the 2020 operating environment and discuss our approach to capital allocation.
Afterwards, Ron will provide an update on her fortress balance sheet and review the specifics of our initial 2020 guidance.
Let's begin with a recap of last year.
29 team, we continued to see the long term benefits from the investments made within our portfolio over the last few years.
Some of these investments, including the renovation to Boston Park Plaza.
Hi, its San Francisco resulted in meaningful Revpar index gains and profitability increases over the last few years, yes. We believe that these properties in general have reached stabilization.
However, we expect to continue to benefit from other investments.
Moving from a continued Revpar index gains in wireless as the hotel continues to benefit from a multi year ramp up.
The new ballroom at the Renaissance, Orlando, which is attracting higher quality in larger groups.
17 keys at Hyatt San Francisco late last year.
From a rooms renovations completed the Hilton San Diego be from.
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Renaissance Orlando is a great example, without making strategic long term investments translates into value creation.
Future earnings growth.
In January 2019, just over a year ago.
We opened a new 46000 square footage due to New York meeting space.
Which is not only generated great customer feedback, but has also helped the hotel produced the highest number of group room nights booked at the hotel in the single year.
Moving on to smaller yet equally important projects, we invested over $9 million into a variety of environmental projects during 2019, including.
Retrofitting additional lighting systems, installing low flow plumbing fixture and bulk amenity dispensers as well as upgrading separate building systems in order to reduce overall energy consumption.
These important projects not only reduce the environmental impact on our portfolio, but it's several cases also results in attractive economic returns.
We will continue to make these importantly, as she investments as we focus on ways to use more renewable energy.
Reduce or usage of single use items, such as plastic containers draws and trash bags.
They do increasingly incorporate more reclaimed and recycle materials indoor renovations.
In addition to capital investments, we continue our ongoing initiatives to recycle capital and to concentrate our portfolio into long term role that real estate.
Late last year, we disposed of the leasehold interest in the courtyard Phili arch.
$50 million.
The sales price equates to an estimated 5.8% cap rate on our full year 2019 forecasted at Hawaii, which is roughly 200 basis points lower than the implied cap rate on the remaining portfolio is calculated by our recent share price and our 2020 guidance.
That is we sold more to the lows quality hotels, and one subject to a ground Louise.
Price well in excess that implied by our current share evaluation.
So further consolidates our portfolio to walk from road and real estate or reduces our ground lease exposure.
Well Revpar comparisons don't always told the full picture.
It's worthwhile to know to totals 2019, Revpar and EBITDA per key was approximately 21% lower and 37% lower respectively was the case for the remainder of our portfolio.
Additionally, the CIO of one of our last ground lease assets reduce our total Absher hotel EBITDA subject to ground or air rights to approximately 15%.
Down from over 50% several years ago.
With only three leased hotels reining in the portfolio, we're very pleased with our success and reducing our leasehold exposure to one of the lowest levels amongst the hotel reach.
Now, let's talk little bit about recent operating results.
Despite a challenging operating backdrop, we were pleased that our results came in or the high end.
Hi end up or exceeded our guidance for the fourth quarter and full year.
Fourth quarter comparable portfolio Revpar increased 80 basis points over the prior year and comparable portfolio total revenues increased 2.1%.
Bringing our full year, Revpar and total revenue growth to 1.9% and 2.9% respectively.
It's just as a consistent with our commentary in prior quarters.
We continue to seem a room revenue growth driven primarily by transient segments.
During 2019 transient room revenue grew approximately 3%.
Group revenue was roughly flat.
Overall, our fourth quarter room revenue exceeded our expectations and contributed to a full year revpar growth at the high end of our guidance.
In addition to stronger performance in the rooms Department total comparable portfolio revenue benefited from a 2.6% increase in food and beverage revenues.
A 14% increase.
And ciliary property level revenues during the quarter.
Well hotel revenues were stronger than anticipated hotel profits were negatively impacted by ongoing cost pressures, specifically in wages and benefits property insurance property taxes.
Nevertheless, comparable hotel level EBITDA exceeded our expectations for the fourth quarter.
Resulted in full year, adjusted EBITDA and adjusted FFO per diluted share that exceeded the high end up our most recent guidance.
Well, let's talk a bit about some of the positives and negative operating trends from the prior year.
Full year 2019 results benefited from continued outsize growth and why were from the contribution of our 2018 capital investments specifically the renovations that GW, New Orleans and married up Boston long Wharf.
As was the meeting space additions at Renaissance Orlando that I discussed earlier.
In addition, we saw better than expected market market growth in Washington, DC, and while the San Francisco market fell short very lofty expectations that weren't place at the beginning of year.
The city's still posted solid revpar growth in 2019.
Offsetting these areas of strength was general market weakness in Chicago Portland.
Yeah in New York City.
And disruption from the renovation work, we had to process the Hilton San Diego Bayfront and Renaissance Baltimore early in the year.
More recently operating trends in the fourth quarter were generally better than anticipated, particularly in December.
And we were more than they were more encouraging the nose witnessed in the third quarter.
Several markets exceeded our expectations, including why well long Beach, Chicago and San Francisco.
Transient business in particular.
Performed better in the fourth quarter was higher than anticipated room rate growth.
Stronger food and beverage outlets sales and higher ancillary revenues.
Offsetting some of the fourth quarter.
Was weakness in key west.
I'm square in San Diego.
Well, our fourth quarter leader labor productivity improved we were still negatively impacted by a 2.4% increase in hourly wage rates.
Higher cost from property insurance and loyalty program expense also constraint profitability.
Contributed to a 110 basis point reduction margins.
And a 1.4% decline in comparable.
Portfolio EBITDA in the fourth quarter, despite a 2.1% increase in comparable portfolio revenues.
Now, let's turn our attention to our outlook for 2020.
Our baseline assumption for this year is that the operating environment will be similar to that witnessed in 2019, including tepid Revpar and total hotel revenue growth.
We anticipate that the majority of our markets will experience limited revpar growth in 2020.
San Francisco as expected had solid levels of demand in 2020 by historical standards.
But the year over year comparisons as it is expected to be challenging given its strong performance in 2019.
In addition, we expect headwinds to persist in New York is the market deals with another year.
Elevated new supply.
That said, we anticipate healthy growth in key west and in those markets with strong citywide calendars, including Boston Chicago.
Chicago, Washington DC.
In addition, our recently completed renovations at the Renaissance Baltimore and Hilton San Diego pay from should result in revpar growth in excess of market levels.
Finally.
We expect Wailea Beach resort to once again be one of our strongest performers and 2020.
The hotel continues to gain share and further surpassed our expectations.
Well Revpar growth is expected to remain roughly flat, we expect to see a continuation of elevated cost pressures, primarily in wages and benefits property taxes and insurance.
Collectively these three line items make up just over half of our total hotel lever hotel level operating costs.
Additionally.
We are engaged in a dispute related to the scheduled ground rent increase at the Hilton times square that may not be resolved until later in the year.
During this dispute and appeal period, we will record the higher rent expense and will receive a refund.
If we're successful with our appeal.
From a capital perspective, the renovation work our renovation work is fairly limited and 20 220 and should result in less disruption compared to prior years.
Our primary project. This year is the full repositioning of the Marriott portal, which is currently underway and going exceptionally well.
The work includes the renovation of all 249 Guestrooms bathrooms. The addition of nine new guest rooms, and the complete redesign of all public spaces meeting areas and food and beverage outlets.
The renovation is intended to better position to hotel to compete with many of the independent lifestyle hotels in the Portland market.
We expect to incur $2 million a total revenue displacement in the first half 2020.
In connection with this project.
As we move in a 2020.
Current year group pace for the portfolio is up over 4%.
We have 81% of our groups already I already on the books, which is the highest crossover level do we've had in the last several years.
Our guidance for the first quarter and full year takes into consideration roughly $1 million lost revenue related to already identified group cancellations and attrition.
In San Francisco, San Diego, and Washington, DC attributed to the krona buyers.
We expect to mitigate some of this revenue loss through cancellation fees and additional transient bookings. So the net impact is expected to be less than $1 million mentioned.
However, it is important to note that our 2020 expectations or earnings guidance do not include any additional impact from the current of ours.
Which if were to have a negative impact on global economic growth and travel could materially impact our business our earnings and our outlook for 2020.
Simply too early to accurately assess the impact on our hotels or what it could mean for revpar growth margins and profitability for our portfolio.
So, let's talk a bit about the current investment environment.
As we've discussed on prior calls we continue to struggle with the current pricing expectations on long term relevant real estate.
During 2019, we actively underwrote several billion dollars, a single assets and portfolio transactions.
We've been on several of these potential investments, but in the end, we're not willing to pay the prices needed.
We compete for an acquisition.
Pricing expectations for high quality assets that fit our strategy remain elevated and translate into cap rates after property tax resets below 5% in most cases and in many cases cap rates in the mid threes to mid 4% range.
Looking forward, we continue to expect to underwrite new investments and remain hopeful that we will find the right opportunities will add to our shareholder value over time.
At the same time, we expect to dispose of the remaining hotels that do not fit our strategy at reasonable prices.
Considering the recent range of our stock price and the resulting implied valuation.
We continue to believe that the best use of our excess liquidity will likely be to repurchase our own shares.
Even if that means shrinking the size of the company in the short term.
As for this reason.
We increased the size of our share repurchase program from 300 million, which we had purchased 54 million.
To a new authorization of 500 million.
As we said before repurchase activity will not be programmatic.
Rather is likely to occur opportunistically.
And b share price dependent.
With that I'll turn the call over to Brian Brian. Please go ahead.
Thank you John and good morning, everyone.
We ended 2019 with significant financial liquidity, including more than $680 million total adjusted unrestricted cash and an undrawn 500 million dollar revolving credit facility.
We have approximately 1.2 billion of consolidated debt and preferred securities outstanding and our current in place that has a weighted average term to maturity of approximately 4.1 years and a weighted average interest rate of 4.1% our variable rate debt as a percentage of total debt stands at 23% and 44%.
Our debt is unsecured.
Now turning to first quarter and full year 2020 guidance a full reconciliation can be found in our supplemental and in our earnings release.
Our 2020 guidance does not assume any additional share repurchases nor does it include the impact of any additional asset sales or acquisitions.
As John indicated earlier other than what we've been able to identified to date. Our guidance does not include any potential additional impact from the Corona virus, which could have in material impact on travel hotel demand and profitability.
For the full year, we expect total portfolio revpar growth to range from down 1.5% to hop 1.5%.
We expect full year expense growth to increased 3% to 4% driven by 4% to 6% increase in wages and benefits, which make up 45% of our total costs.
This expense growth is expected to result in the same store margin decline of approximately 150 175 basis points.
Our full year 2020, adjusted EBITDA guidance ranges from 280 million to $305 million and our full year adjusted FFO per diluted share ranges from 95 cents to one dollar five.
Our outlook for 2020 includes approximately 2 million total revenue displacement and approximately $1 million EBITDA displacement related to our planned 2020 capital investment projects.
In addition, our guidance includes approximately $2.4 million additional expense related to a disputed ground rent increase at the Hilton Times square, which is scheduled to increase starting may 2020.
For the first quarter.
We expect total portfolio revpar to range from down half a percent to up one and half percent. We expect first quarter adjusted EBITDA to be between 54 million and 58 million and adjusted FFO per diluted share to be between 16 cents, an 18 cents.
Finally, this guidance reflects our existing 20 hotel portfolio and does not assume any additional hotel dispositions nor does it reflect the incremental future earnings potential that would result from the deployment of our cash.
Now turning to dividends our board of directors has declared a five cents per common share dividend for the first quarter.
System with our practice in prior years, we expect to pay a regular quarterly cash dividend five cents per share common stock throughout 2020.
To the extent that the regular quarterly common dividends do not satisfy our annual distribution requirements for 2020, we would expect to pay catchup dividend that would generally be equal to our remaining taxable income.
Our total cash dividends for 2019, including our fourth quarter catch a dividend equates to an annual dividend yield of approximately 5.5%.
In addition to the common dividend. Our board has also approved the routine quarterly distributions for both outstanding series a preferred securities.
With that I'd like to now open the call to questions. Derrick. Please go ahead.
Thank you and ladies and gentlemen, if you'd like to ask a question at this time. Please signal that pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure immune function is turned off color signal to reach our equipment again that is star one.
We'll take our first question from Lukas Hartwich with Green Street Advisors. Please go ahead.
Thanks fundamentals continue to be pretty weak I'm just curious.
You kind of commented on hotel values. It sounds like there's still a robust did out there but are you seeing any impact to hotel values given this tough backdrop for fundamentals.
Hey, good morning, Lucas bifurcated into a couple of groups.
For those assets that are really.
Hi quality.
Hi ends iconic long term relevant real estate, there's still an incredibly strong bid for those assets.
There's a value add component or something interesting in terms of the ability to.
Bring in new management's or if the franchise is subject to change that I think that theres, a pretty strong bit for that as well.
For.
More commodity assets I think the.
Gets a little bit more difficult.
That's helpful. And then can you provide you touched on this a little bit the Wailea Beach resort continues to ramp.
In the past you've talked about the rate gap. There can you remind us what it was the prior to the renovation what you expected and where it is today.
Good morning, because it's Brian.
When we acquired the hotel.
And when we talk about the comps that we're talking about the while a luxury stat.
On a full year basis that hotel in 2014 was about $280 behind.
That said ending this year, we are 100 at our ending 19, we are $180 behind that says that we took the our index from 48% to about 70.
Great and then give a sense of what the EBITDA for key for those that comps at it.
No not not on EBITDA per key basis, we would have we would have revpar, but not EBITDA for Q.
[music].
That's it for me thank you.
Thanks Lucas.
Thank you we'll next go to Smedes Rose with Citi. Please go ahead.
Hi, Thanks.
I wanted to ask you just a little bit more about the Hilton Times square you mentioned that.
Some property taxes increases are going away on your full year.
Margin expectations and it seems like Thats, what maybe around 4 million or sale of incremental taxes.
And then you have about 4 million of interest expense fair and I'm just looking at the EBITDA that came in for the year and the fact that that debt I guess, it's be refinance coming into the year. Some just wondering if you can maybe talk about some of the.
I guess the issues facing you there and what may be your longer term plans are.
Hi, good morning Smedes.
The property tax did go up on that Oh, that's not part of the disputed amounts that we were talking about.
I think if you look across the board property tax.
In a lot of markets is an item where you continue to see.
Where you can see pressure, especially late in the cycle and so when you look at our fixed costs and many markets.
Boston.
Chicago continues to be a market Orlando.
These are all markets.
In New York, either markets, where we see potential.
Connecticut property tax increases.
For the Hilton Times square, specifically, what we have under dispute right now is about a 3 million dollar increase to the ground rent expense.
That is the lease has a reset that happens in mid 2020 this year.
The city of New York is our landlord they have noticed asset they believe that that.
Background value, which is how the rent is calculated has increased we believe very strongly that it hasn't given the pressures that that market has been under.
We are going through the arbitration process, now, which will take time, but.
But unfortunately press release, we are we are forced to pay the higher amounts during that arbitration period and then once we if we are if we prevail we would get a refund, but we will have to absorb that amount, which I think is about 30 basis points on margins.
Until we have a final decision.
When you look on a pro forma basis does increase to the hilton's costs, including the loan.
Interest expense.
Yes.
EBITDA being produced by that hotel is minimal if any.
And so we will.
The maturity isn't until later this year we will.
Assess any options, we have at that time and come up with what.
The best courses for us.
Okay. Thanks, and then John I, just wanted to ask it I mean, you you said the buybacks will be opportunistic versus programmatic, but you also made your commentary that suggests you think sockets significantly below.
With underlying asset value as I'm, just wondering why wouldn't you have them or kind of programmatic or aggressive repurchase program in place at these levels.
Yeah.
Smedes, we're really not going to comment on how we're going to approach the share repurchase, but clearly it's something we're.
Highly focused on something that we think represents our best incremental investment at least relative to any potential acquisitions.
Okay. Thank you.
Thank you we'll next go to Anthony Powell with Barclays. Please go ahead.
All right.
Hello, guys.
John You mentioned that you saw better transient trends in December could you.
Describe if that was business or leisure transient and how those trends persisted or have a persisted into January and February here so far.
Yeah, we actually saw pretty good demand.
In both transient corporate and transient leisure in our portfolio in December it was fairly broad based.
While live just hit an absolute home run on the fourth quarter.
What we saw is compared to what we saw the couple of quarters.
Earlier than that.
2019 was a good portion of our hotels actually saw an uplift in what had been.
Expectations have been revised down during the year. So overall, we were fairly pleased what we've seen recently that you over the last six weeks as we've actually seen a little bit of an uptick.
And our transient bookings.
Where do you have a good amount of group business on the books for March but when we took a look at the first quarter.
We've been pleasantly surprised that after a few months of.
Transient weakness in terms of short term bookings that we had mentioned on our last call.
Six weeks have actually been pretty good.
Got it.
An uptick in transient bookings NN group pace up 4% and how does that but with the revpar guidance from negative 1.5 to plus 1.5.
Oh I was just one of the mini inputs when we look through each one of our hotels, it's one of the inputs. So.
Don't know done or what I can add to that Anthony if you look on a kind of our view on the quarterly basis.
The weakest quarter would be is expected to be fourth quarter this year certain markets.
Especially with the election DC is expected to be.
Okay fair in during that in during November.
They pulled back in business transient around the election is expected.
Into that that's in our.
Budgets in our forecast, which if that proves to be otherwise and then maybe you get a little bit more pickup in the fourth quarter.
Got it understood and just a.
Broadly how have you had it have you started to talk with the brands about how to address this this profitability issue that maybe owners are facing cross across the country. It seems like revpar of 1% Acosta for it.
Not going to really work for.
For either the owners the brand in terms of getting incentive fee growth had been talked about.
Grandstander fee brand standard changes or other ways to.
From a profitability up at the hotel level.
Yes, it's a constant communication between our operating partners and ourselves, but the simple fact of the matters.
Yes.
If the cost of labor is going up and there or.
It's become more difficult to find.
Folks to work at the hotels.
Obviously, those that is a cost pressure that it's just difficult to deal with I think it's premature.
The the minority on this but I think it is premature.
To start saying that we would have significant cutbacks in in terms of overall service levels, particularly the quality of the portfolio. We have I just think that that's a long long term decision to make.
Obviously, if we saw a material decline in terms of occupancy.
Occupancy and rates.
Everything is on the table, but I think that's probably premature at this point.
To move into into material way.
Okay.
Great. Thank you.
Thank you we'll next go to Bill Crow with Raymond James.
Good morning, Thanks, guys.
As you look out the next three or four months sure thing out there and the citywide schedule in markets like San Francisco San Diego.
See you highlighted earlier that the because there.
Because of the nature of the events may have more sensitivity to that Corona virus inbound international travel that are.
Risk here that that are going to make the headlines we have to worry about.
Yeah. There is theres always some level of concerned with a great on them like this bill.
And when we take a look at those markets that have the largest amount of inbound Chinese travel.
Those being San Francisco L.A., New York.
We've we are we're talking with our operators trying to assess risk and I think I think the potential risk could show up in a couple of different ways.
Direct path.
Could we see a decline in Chinese travel sure that for US represents about 50 basis points of our total revenues. So it's a very very small number.
[music].
When you take a look at the groups I think you'd see it manifests itself as we have seen it already in terms of potential group cancellations, which we've seen a couple of small ones or delegations from China.
Cetera, China Asia et cetera.
Coming so that will either force, a cancellation worse or more likely a higher level of attrition on certain groups.
So what we have been doing over the past week or two is working with all of our hotels in our operating partners to make sure that we're doing as good a job as we can in a very very cloudy environment. So to speak to make sure that we're managing our attrition.
To those groups are scrubs, so to speak well enough to make sure that we're opening up opened up.
Transients.
Transient channels just to make sure we can maximize the occupancy that we can.
So it is a very very fluid situation.
Thus far I would say that the impact is pretty modest.
But.
Given what we've seen in other parts of the worlds.
Theres, obviously more concerning scenarios that one could paint, although we don't see any evidence of that no.
Okay.
I would like to talk Big picture with each other I appreciate your thoughts.
We're convinced that.
Revpar growth was going to be in this kind of plus or minus 1% range for say the next three or four or five years.
Could you do differently.
Let's see Revpar grew alright, so, let's let's take that scenario, which had enough we have to be the case, let me just put that upfront, but it's a smarter your hypothetical your.
You're painting, so if revpar growth was let's say zero to 1% for most portfolios over a prolonged period of time.
Oh My gut tells me that expense growth will continue to outpace staff.
The World economy will stay in this type of picture.
That asset values will remain a bit elevated.
It will be an awful.
Environment in which to be a capital allocator.
If that happens I think what you'll see as a drain on earnings and a difficult environment in which to capital allocated.
That'd be that'd be a tough go bill.
And then one final one for me you talked about potentially shrinking the company.
Which I understand but at what point, just a dividend come into.
Consideration I don't mean, the Nicola quarter, I, just being that the total and maybe some reluctance to see see a big change in the fourth quarter dividend.
Yeah, one other things I'd love about our dividend strategy as we paid 100% of our taxable income or roughly on a percent of our taxable income.
Obviously, our nichols per quarter, the routine dividend is very safe.
As one would expect particularly with our fortress balance sheet.
We have paid out over the past couple of years a lot of.
Gains on sale.
Which has positively impacted or dividends.
So I would have to take that into consideration, but our expectation would be that we will just continue on that path of paying on 100% of taxable income.
And we think that that works with us.
Alright, Thanks John.
Thanks Bill.
Thank you we'll next go to Patrick Shoals with Suntrust. Please go ahead.
Hi, good afternoon.
You better.
Hey, John question for you.
Yesterday, there was an article in the Wall Street Journal discussing rising foreclosures and defaults in the New York City Hotel market.
When the sunstone step in to take advantage of something like that how you're thinking about.
Timing on.
That type of scenario. Thank you.
Well, we clearly have the ability.
As Brian just mentioned, we ever we have our own hotel to work through currently.
We will be happy looking at distressed situations and potentially taking advantage of those but.
Timing on New York, I think we're probably a little earlier.
Okay.
Okay. That's it thanks Chuck.
Yes.
Thank you, we'll next go to Chris Woronka with Deutsche Bank.
Hey, good morning, guys.
Because I wanted to ask on your full year guidance, how much of a maybe uplift in non room revenues, how do you underwrite that kind of stuff and.
There is there another pretty good uplift embedded in guidance for the year or do you assume something pretty modest.
Good morning, Chris.
Our expectation right now is that non room revenue will increase.
Between.
Two and 4%.
This year send the that's driven by some fees that went into place last year that are not fully.
They haven't fully anniversary yet.
So while on the food and beverage side, we definitely see that moderating and on the pain Quaid food and beverage side, we see that moderating from where we've had the last couple of years, but we have some of these other fees that are still ramping up.
Okay. That's helpful and then on the share repurchase I think you mentioned in the release.
Has done it 12, 66, which was really good timing on your part.
Did you stop that because of a was it an earnings blackout period. They came into effect or is it just you just decide to.
Stop at a certain level.
That was done in conjunction with their Tenbfive, one program and so that we headsets.
We had set our parameters before with into a blackout period.
So that was done automatically so to speak and we hit a prescribed level and amount so.
That that window typically opens back up to where we have more direct control on that opens up a couple of days afterwards.
Okay, Great and just on widely go back to the you gave out.
Our index, if you get yet to where you want to get too, which is I guess is 100% or better of the.
The market is that should we assume that that's going to pretty much flow straight through to the bottom line or is there any kind of step function in terms of incentive fees or other expenses that would.
Come into play there.
Yeah, well, one can always dream.
I really do not think that that hotel will ever get to 100% of.
Yes.
Index in what is a incredible.
Tom said, including the four seasons and what our friends over at host stone and beyond Daus and the the Fairmont. So financial success to US was closing that gap a bit and we have massively outperformed so I think theres little bit of or more revpar and.
Next game that.
Brian Brian had mentioned.
But.
We will not get to that point at one point this hotel versus the kind of Polycom upset.
Was probably in the 80 80 plus percent index.
And we've gotten the gotten the hotel up to about 120.
Percent index versus that comps at which we think is.
Is reasonable considering our location and the amenities that we now provide.
Okay very good thanks, guys.
Thanks, Chris.
Thank you. Our next question comes from Rich Hightower with Evercore. Please go ahead.
Hey, good morning, guys.
Rich.
China and Brian Im asking this only because the 10-K just hit as I was thinking of the question to ask but can you walk us through the.
The impairment charge at the Renaissance Harbor plates and square that against the.
The renovation expense plan for this year really quickly.
And good morning, rich and the the renovation at Harvard Price was was completed last year and that was that a cyclical rooms renovation that was.
I had been schedule for for some time.
When it comes to impairments GAAP requires us on a quarterly basis to look for indicators impairment.
Which could be a declining they could be market conditions that could be.
Declining occupancy rates or something specific to hotel.
And.
Normal basis, we'll have a handful of hotels that might have an indicator of impairment from time to time.
The next step after you've identified does it indicators of impairment as you look at the on discounted cash flow the hotel your expectation of that over over what your hold period is.
And then typically since we're in intend light vehicle, we look at a 10 year old and Youre can be undiscounted cash flows through that time period, and then b the terminal value the hotel after that which usually doesn't need to any sort of impairment unless the hotel has been has had significant declines.
What we did in what led to 24 million dollar impairments on this hotel is.
If this hotel is not deemed to be a.
A long term.
Relevant hotel, we do now shortened the hold period for that hotel, which resulted in a lower cash flow total cash flow than what our book value wise and that led to the impairment.
Okay, and that's all in the impairment.
Charges against the the improved asset asset value and post renovation specifically.
Correct, it's it's compared to the netbook value, which would be the gross value less depreciation.
Okay. Okay.
That's fine.
My other question just a.
Just on the topic of expenses again can you guys I'm translate the.
The margin decline guidance into sort of same store expense growth expected for 2020, and then maybe break that down across the major categories that you mentioned labor.
Property taxes et cetera, just so we can look at it that way as well.
Yes. So if you look at and I think what we said in the prepared remarks was that the expectation of a total expenses were going to increase call it 3% to 4%.
That's if you look into different pieces of that so let's take a labor salaries and wages first that's going to be roughly 45% of our total cost if those are increasing 4% to 6% and then everything else.
From the hotel side of things are much less.
Closer to inflationary growth, even some some items that group conditions might be down a little bit.
The other expenses, though that in really it's the fixed expenses.
Those are seeing larger increases this year real estate and property tax continues to be.
Significant growth major markets, Boston, Chicago, New Orleans, all had major increases to two all property owners this year.
Ground rent at Hilton Times Square Airwatch tender appeal is also negatively impacting that and then insurance as you recall.
Property insurance rates went up significantly last year, our our policy starts in in July so that that has so half a year of impact. So the other half at the expense is your freight 55% expenses are safe increasing.
3% to 4%.
For me, maybe two and a half the 3.5% that's going to give you a combined increase of 3% to 4% where.
Yeah.
Total hotel expenses.
Got it okay. Thanks to the color there.
Thank you, we'll next go to David Katz with Jefferies.
Hi, good afternoon, everyone or good morning.
I wanted to go back to the share repurchase.
Aspect of it and without getting too specifics about execution I wanted to just revisit the philosophy.
Behind it.
In or should we take some meaning and.
The expectation that do you just have more capital then you can have a.
They sort of viable use for otherwise and this is sort of the default Avenue or you know is this something that there could be.
You know a.
And ongoing aspect of the capital structure, a capital utilization going forward.
Oh, Yeah, I think it's really more of the latter David that share repurchase is capital allocation tool made available to public companies that can arbitrage between public and private both ways.
So I think it's we have always said, it's not a signaling to use it to signal the market our shares are cheap.
We use that as a capital allocation tool and as we continue to look out in the environment and see.
Asking prices that are difficult to justify we do know that well not every single one of our hotels within our portfolio is long term relevant real estate when you take a look at the bulk of our value.
Anchored by properties like why like Embarcadero like long or keep going.
Most of our value.
Is in those hotels, and an easy way for us to buy more long term rolled and real estate.
Simply to buy back on stock.
We know the assets incredibly well.
Really know trends transaction costs.
Materiality to be discuss theres, no transfer taxes, et cetera, et cetera et cetera.
And.
There's some amount of scale that we can we can execute that investment.
On on behalf of our existing shareholders. So I don't think is something that's that's on the table all the time because hopeful that at some point, we get back to a point of trading at a premium den avian can grow this company and a beneficial way, but to the extent that.
We have to play the cards that were adult to us now and trading at a discount and Avi.
When I take a look at one of our.
Our clear advantages and that is our balance sheet.
We have the ability to execute on that so.
We've been as forthright I think as possible in saying that that remains are our most attractive investment alternatives.
Perfect and if I can just one quick follow up I know that we are we're always trying to measure.
The stack on your collective desks.
No deal opportunities that you think or viable. My question is is that this is the stack getting short progressively shorter or is it choppy how would you characterize that stack a viable opportunities to consider.
A couple of things that we're working on right now couple of things that we've bid on than the last just a kind of a month or two.
We have our fingers on a couple of things that we think might eventually come to market. We're hopeful we'll or that we're trying to do direct with somebody so it's it's sporadic.
But theres been some volume and when I mean volume.
We're talking we tend to go after fairly chunky assets I mean assets that are.
Probably pretty rare that we looked at an asset that's 30 40 $50 million not to say it couldn't be done.
A lot of the assets that we look at EUR 200, 300 $600 million.
So.
Its chunky.
Okay perfect. Thank you very much on.
Probably not a good financial terms, but I'll use.
Thank you, we'll next go to them into Switzer with Baird.
Thanks, Good morning, guys.
And I was hoping you could address just your lower projected capex spending I mean, your 2018 from being taken me create below your initial guidance I may 20, $20, a lower than what we're expecting it to how are you kind of 15 medically reduced capex spending do you see where do you still fundamentals or if they're stepping out that's driving.
I tried.
Well, one one reason that a number went down because we sold the courtyard a quarter ago. He acts which was slated for a pretty significant renovation.
And the other we decided to postpone the renovation on the rooms for the embassy suites, Chicago that will eventually be done.
But we just pushed it out a bit.
And then just the way that the calendar roles with how the overall overall portfolio the overall portfolios and really good shape.
There'll be some couple other renovations that happened 20, 120 to 23, but thats normal course of business I wouldn't say that theres anything specific in terms of delaying renovations, we believe strongly that.
That delaying renovations.
Just to try and save capital.
Is a bad business decision that has to start off with what does the hotel need at the hotel best positioned itself.
Clearly our balance sheet allows us to make those investments when we think it's the right time.
That's helpful. That's it for me thanks, guys.
Thanks, Matt.
Well.
Thank you and we do have a follow up question from Bill Crow with Raymond James.
Yeah. Thanks, John just a couple of points here.
The strength in December.
Some of that's been attributed to the change in the calendar as it is there anything to that or or was this real legitimate strength.
No.
Hopefully we saw the changes in the calendar happening in well, sometimes that throws throws us for a little bit of loop I think we have that covered it just happened to be stronger bookings short term and overall transient business and again, including including places like why were.
So overall it was it was little bit more broad based but when I say that lets keep in mind that this is this is one month and I wouldn't necessarily say one month sets, a new trend or a new direction and trend just like the couple of months before that that were little bit weaker than next anticipate I wouldn't say that though as you.
And then same same sort of question, but you both you and Hilton pointed to an uptick in demand over the last few weeks and transient demand looking forward and again.
Is that seasonal is it above and beyond what you would see in a seasonal recovery can you categorize it or no.
Yeah. Its adjusted for seasonality is where we're just taking a look at the total number of overall trends Yelp reservations made.
And on a rolling.
On an individual week basis, but then on a rolling six week basis, and we've seen a little bit of an uptick I think a couple of quarters ago. I had mentioned that we saw a little bit of weakness that we were continuing to monitor and just recently.
Despite all the concerns in the world about various things.
Past six weeks have actually been pretty good.
All right that's terrific. Thanks.
Thanks Bill.
Thank you. We also have a follow up question from Anthony Powell with Barclays.
Hi, This one more for me and Portland did you consider maybe switching to a different brand, besides an marriott and Portland, and W. or some other kind of more lifestyle brand as we renovate that that'll tell.
No that's probably a thought for a little later on we are we have a couple of years left in the franchise agreement. There. So that's a that's an opportunity for us in the future the to consider some of those options.
Okay.
Great. Thank you.
Thank you Anthony.
Thank you and gentlemen, we do have no further questions in the queue. At this time I'd like to turn the conference back over to John Arabia for any additional for closing remarks.
Hey, Thanks, everybody for your interest we are around today, if theres any follow up questions and if not we will be seeing many of you at several of the upcoming conferences.
Have a great day.
Yes.
Thank you and again that does conclude today's call. We do thank you for your participation you may now disconnect.
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