Q4 2020 Sunstone Hotel Investors Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by.
Welcome to day Sunstone Hotel investors fourth quarter 2000 on 'twenty earnings call.
At this time all participants are in a listen only mode.
We will conduct a question and answer session and instructions will be given at that time.
I would like to remind everyone. At this conference is being recorded today February 12, 2021 at 12 <unk> P M Eastern time.
I will now turn the presentation over to Mr. Iron as senior Vice President and Treasurer. Please go ahead Sir.
Thank you, Kevin 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.
If you 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 prospectuses 10, Qs 10, Ks and other 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 EBITDA, adjusted SFO and property level of adjusted EBITDA.
We are providing that information at a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are John Arabia, President and Chief Executive Officer.
Julia Chief Financial Officer and.
And Marc Hoffman, Chief operating officer.
After our remarks, we will be available to answer your questions.
With that I would like to turn the call over to John. Please go ahead.
Thank you, Eric and Hello, everyone.
I can say without hesitation that I'm glad 2020 is behind us.
I firmly believe that better days lie ahead.
It goes without saying that 2020 post the most difficult challenges the hotel industry has ever faced.
And we were forced to do things, we never thought we would have to do.
That said in rising to the occasion, we and others working together also accomplished things we never thought possible.
<unk> stated youre not out of the woods, yet we have recently witnessed evidence of recovery in demand, including leisure commercial and group demand.
We believe if these trends continue.
Gradual recovery has started.
We are likely to resume hotel profitability sometime late in the second quarter or early in the third quarter of this year.
Today, I'll provide a recap of 2020, including our accomplishments here at sunstone as well as our annual and quarterly operating results.
We'll then provide comments on recent operating booking trends followed by an update on our liquidity.
And at an overview of our 2021 capital projects as we continue to focus on long term growth.
Brian will later provide more details on our recent earnings finance transactions liquidity and dividends.
So let's begin with a recap of last year.
Despite the extremely challenging operating environment, we were able to navigate the pandemic and execute on several transactions that increase the quality of our portfolio.
Reduced our debt and better position the company for long term growth.
During the year, we sold two hotels Renaissance Baltimore on the Renaissance early ex.
For combined gross proceeds of nearly $172 million.
These two transactions bring the number of hotel sold in the past three years.
Two of total of nine hotels for gross proceeds of approximately $575 million.
In July we sold the Renaissance Baltimore at a reasonable discount to pre pandemic pricing, which we believe was at good outcome considering the asset at a lower quality urban group oriented hotel, there was losing money and expected to lose money for some time.
In December we were fortunate to complete the sale of the Renaissance <unk> of what we believe to be of pre pandemic valuation.
This was a fantastic execution and a direct result of our strong balance sheet and nimble of investment team.
We did not have to sell this hotel nor did we need the incremental liquidity.
And because of this we were able to hold the line and extract premium pricing equating to a six 8% cap rate on <unk>.
<unk> thousand 19 actual earnings.
Additionally, during the fourth quarter, we reached a resolution with the lender of the mortgage on the Hilton Times square.
Bolting it on assignment at Luke.
Given the operating challenges as hotel phase prior to the pandemic, which were only exacerbate exacerbated by a proposed.
Uneconomic ground rent reset and an increase of property taxes.
We expect at the hotel to generate sizable cash losses for the foreseeable future.
While we were hoping for another outcome the.
The assignment of our interest in this hotel mitigated what we believe to be of deteriorating situation.
At all things considered.
What's the best outcome at a terrible situation.
The departure of these three hotels in 2020 further consolidates our portfolio into long term relevant real estate further reduces our ground lease exposure.
It is worthwhile to note.
By end 2019, Revpar and EBITDA per key of these three hotels in aggregate was approximately 19% lower end, 54% lower respectively.
And the remainder of our portfolio.
Additionally, the dispositions leave us with only two ground lease assets in the portfolio, which we believe compares of bubble burst across all publicly traded hotel Reits.
Despite the limitations on the current environment, we continue to make selected capital investments in 2020 that we believe will result in long term value creation.
During the year, we invested $51 million into our hotel portfolio with the largest project being the complete repositioning renovation of the Bidwell Portland.
Which turned out just beautifully.
As many of you know we take a long term view of our business and so despite the uncertainty facing the industry in 2020.
We chose to accelerate several highly disruptive projects were on hold waiting of quiet time to be completed.
At our Renaissance Orlando.
We completed the first phase of a refresh of the hotel large atrium lobby, including replacing nearly 50000 square feet of flooring.
Which would have otherwise resulted in millions of dollars of displacement.
The lobby looks amazing.
And we were able to complete this investment without any displacement or test impact.
At our Wailea Beach resort, we added 32, beautiful lanai decks, which have significantly increased the appeal of the revenue potential of these ocean front rooms.
Also on Wailea, we remain on track to complete our solar project in this quarter, which will eliminate approximately 650000 kilowatts annually of energy and reduce not only our carbon footprint, but also our energy bill by roughly $160000 per year.
And finally at our D. C. Renaissance, we have completed the refresh of our product share and the meeting space escalator modernization both of which of result would have resulted in meaningful group displacement during normal operating times.
In summary, despite very challenging times.
We had a productive year at sunstone.
Let's move on to 2020 operating results.
Of our 17 hotels 15 were in operation at the end of the year, which represents 92% of our rooms in the portfolio at nearly 98% of our comparable 2019 hotel EBITDA.
For the full year comparable portfolio of revenues were $233 million in Revpar was just over $46.
Which represent declines of 76% and 77% respectively compared to 2019.
Put this into perspective, roughly three quarters of our comparable revenues in the year were generated in the first quarter prior to the pandemic.
Full year comparable property level EBITDA was a loss of 64 million, which represents a decline of 120% relative to 2019. Despite a previously thought on it.
Hannibal, 56% decline at the same store operating expenses.
Three of our hotels Wailea Beach resort embassy suites, La Jolla, and oceans edge achieved.
Achieved positive EBITDA for the year.
While these results were not what anybody could have predicted that the started the year. We're thankful for the very difficult work, our operators and asset managers did this year to aggressively manage cost.
While maintaining a safe environment.
For our guests and hotel associates.
Moving on to the fourth quarter comparable portfolio of revenues were $32 million in Revpar was $25 36, which represents a decline of 86% at 87% respectively compared to the fourth quarter of last year.
Our fourth quarter Revpar was challenged by the seasonal slowdown in business and the increase in both Covid cases, and stay at home restrictions, which had a temporary impact on transient reservations.
Nevertheless, our portfolio Revpar of just over $25 increase from the nearly $18 witnessed the third quarter end the $3 in the second quarter as we opened up additional hotels and as occupancy at several hotels increased particularly at our higher rated properties.
Demand in the fourth quarter came from a combination of leisure transient contract business and event driven groups that were primarily related to either government or emergency management business.
Fourth quarter group business, which was made up of non Congregating room blocks was generally limited to our hotels in San Diego and New Orleans.
We have also recently seen a very small but growing number of commercial transient rooms, particularly in October and November as work force started to return to traditional offices and get back out on the road.
Furthermore, in December we saw an increase in holiday travel at oceans edge Wailea Beach resort, the Renaissance Orlando and both of our hotels in San Diego.
Leisure demand continues to be the primary source of business for many of our hotels.
Our drive to hotels of resort destinations continue to outperform our city center hotels, particularly on the weekends as people seek travel opportunities away from their homes.
Our oceans edge resort in key west rent at 53% occupancy in the fourth quarter at a slightly higher rate in the fourth quarter of 2019.
Driven completely by of transient leisure business.
The spacious resort was six separate pools as an ideal destination for.
For socially distance vacation.
Okay.
Over the new years holiday oceans edge ran nearly 90% of occupancy with an average rate that was competitive with that of the prior year.
Similarly, our hotel on wireless continues to rebound despite the flight to nature of the Hawaiian Islands, which reopened for business in mid October.
It was significant testing requirements and limited open amenities.
As expected demand and while it has been building slowly with occupancy levels at the range of 19% to 23% per month.
As widely as occupancy builds we continue to maintain our premium pricing integrity and had been disciplined on our approach to revenue management as opposed to lowering prices in hopes of creating demand.
Our November ADR at the property was 13% higher.
Then the previous year at our ADR from Christmas and new years was over $725.
We continue to believe that our outstanding hotel product the desire by travelers to vacation in Maui will allow us to maintain our high rates, while building occupancy as more people feel comfortable traveling.
Now, let's take a look at our quarterly group performance.
Group business increased sequentially in the fourth quarter compared to the third quarter from 21000 room nights to 32000 room nights or about 24% of the total room nights achieved in the quarter.
Current group business.
<unk> to be composed primarily of government and emergency management related groups of.
All of which tend to book with little lead time.
That said, we have also started to see a few incidences of traditional groups keeping their meetings as planned.
For example, while certain isolated events that showed up where small compared to historic events at sports group kept their room block at our Renaissance Orlando in early January of two medical groups recently showed up at Wailea Beach resort.
Okay.
During the fourth quarter property level expenses declined by 70%, which includes the benefits benefit of approximately $8 $7 million of operational level credits of adjustments, including several real estate tax adjustments employee tax credits.
Despite such a material decline in cost the challenging demand environment resulted in property level adjusted EBITDA loss of $18 million in the fourth quarter.
Now of loss of $18 million is nothing to get excited about but it does show continued improvement from the third quarter, which had a loss of $32 million from our comparable portfolio.
Similar to the third quarter, the fourth quarter property level loss was several million dollars better than we had anticipated even after accounting for the credits we received.
We continue to work with our operators not only to reduce expenses in the short term.
But also to identify.
<unk> of other improvements to our operating model that are expected to generate sustained cost savings for owners as demand returns to our hotels.
So let's dig in more to the forward looking trends for both group and transient business starting with group.
We believe 2021 group business will ultimately depend on the speed and efficacy of the vaccine distribution and the degree to which that allows us to return to normal.
In the near term cancellations in the first quarter of 'twenty, one are trending in line with that of the fourth quarter of last year.
And we would expect limited group room nights outside of select government related groups.
Looking at the second quarter our.
Our group cancellations have increased over the last 90 days, but at a much slower pace than what we saw in recent quarters.
Yeah.
Several groups remain intent on holding their events in the second quarter, including a couple of association of events at San Diego and a few small city wides in Boston.
This gives us some confidence of the group room nights will begin to increase from the second quarter and then as the distribution of the vaccine becomes more widespread as travel restrictions and social distance requirements.
Group trends will accelerate in mid to late summer.
Given the expected vaccination trajectory.
On a planners have become more confident about holding their events in the third and fourth quarter.
And we've witnessed minimal group cancellations for that time period.
Based on these assumptions.
We expect our portfolio will perform materially better in the second half of 2021 at <unk>.
Specifically in the fourth quarter.
The recent pace of future group bookings also points to recovery.
Following the loosening of stay at home orders in the earlier part of this year, we saw a meaningful increase in bookings and group lead volume.
In January our portfolio of group lead volume was up 130% over December and.
And the total number of leads reached a level not seen since last March.
From a production standpoint, Hilton San Diego Bayfront at its highest January group production in the last six years with over 17000 room nights booked.
And Boston Port Plaza booked several large pieces of business for the third and fourth quarter.
In New Orleans Jazz Fest French quarter first of two other festivals of were scheduled for October and now every weekend in October has the potential from market compression, which is great and something we have not seen in quite some time.
Looking further at group bookings since the beginning of the fourth quarter, we booked 140000, New group room nights for all future months, excluding the rebooking of previously canceled groups.
While a portion of these bookings relate to isolated driven of that business. The remaining balance still represents an acceleration from previous months and demonstrates that there is pent up demand to hold meetings when conditions permit.
In addition to new bookings to date, we have rebooked at 266000 group rooms group room nights of the previously canceled or approximately 25% of all canceled group room nights since the start of the pandemic.
We would expect that number of rebook rooms to increase is another 3% of canceled rooms are at various stages of reworking their contracts.
On an incremental 24% of canceled room nights have expressed an interest.
And Rebooking and are working with our sales team to potentially secure new dates.
Taken together.
The new group groups booked since at the beginning of the fourth quarter end.
All rebooked groups and those in the contracting process represent approximately $100 million of group room revenue.
Proximately $125 million of total group revenue.
We are confident we would not have captured all of this business. If we did not keep sales professional on property to work with and take care of our meeting planners of group customers.
While our 'twenty 'twenty, one group room night pace is down materially compared to prepay debt pre pandemic levels.
We currently have approximately 290000 group rooms on the books for 2021.
Representing $62 million of group room revenue at a significant increase from the depressed 2020 levels.
In addition to the more optimistic outlook for group business.
Transient trends are also showing signs of improvement.
Particularly after the vaccine distribution began.
Looking at the historical historical trajectory in mid March 2020, net transient bookings quickly turned sharply negative meaning reservation cancellations materially outpaced new reservations as travel came to a historic standstill.
Weekly net transient reservations generally remain negative through the middle of July and then gradually increased through mid October as more hotels opened.
Around late October early November net transient room reservations remained positive, but decelerated as of the weather turned cooler.
And COVID-19 cases spiked.
That said.
I am pleased to report that net transient reservations have rapidly improved.
Since of vaccine distribution began.
And our weekly forward bookings, while still short of normal levels are at the highest levels that they have been since the first week of March 2020.
Following the onset of the pandemic the booking window grew increasingly short with most reservations being made within a few days of arrival.
We are now starting to see of booking window extend.
For example, oceans edge has a significant increase in transient bookings.
That span over a three month period.
Similarly, we are starting to pick up transient reservations as far out as the fourth quarter, particularly in places like wildfire.
For the second half of the year wildly has 13% more transient rooms on the books compared to the same time in 2019.
And the outlook has been improving weekly.
Well it is obvious that we still have a long way to go to get back to normal operating levels. The trend is clearly headed in the right direction, particularly as the majority of our portfolio is open and vaccine distribution continues to accelerate and show promise.
Now, let's talk a bit about our improving cash burn.
On our last call we provided an estimate of our monthly cash burn assuming the majority of our portfolio was in operations.
But would continue to run at very low occupancies.
At that time, we established that we would incur property level cash losses of approximately $10 million to $13 million a month.
And with and when combined with our with our corporate expenses debt service and preferred dividends represented a total monthly cash burn of $16 million to $20 million.
Before capex and extraordinary items.
Our actual cash or excuse me, our actual hotel level cash burn for the fourth quarter was approximately $9 million per month.
And when combined with our corporate cash requirements equated to a monthly burn rate of $16 million on average.
Which was at the low end of our estimated range.
We continue to fine tune, our operating model at the <unk>.
Prevailing occupancy levels and remain focused on minimizing operating expenses.
We currently expect at our first quarter monthly corporate cash burn rate before capital investment will range from approximately $14 million to $17 million per month, or a 14% decline from the previously provided range.
Furthermore, if occupancy begins to increase we would expect second quarter cash burn to decrease significantly.
And anticipate that our portfolio could achieve monthly profitability late.
Late in the second quarter early in the third quarter and at our monthly corporate cash usage could achieve breakeven levels by the end of the third quarter.
Yeah.
So, let's switch gears and talk a bit about our significant an enviable liquidity position.
We ended the year with $368 million of unrestricted cash and full availability on our $500 million credit facility.
Our year end cash balance included the proceeds from the sale of the Renaissance Sally ex as well as the repayment of the mortgage secured by the Renaissance DC, which was paid off just prior to year end.
The repayment of the D C loan eliminates roughly $10 million of annual debt service and will leave us with only three mortgages.
As our cash burn rate continues to decline we are increasingly confident that a notable portion of our existing unrestricted cash balance.
Is available for investments.
We believe are likely to become available in the next several quarters.
That is.
We're one of the few companies that is not dependent on credit facility draws or other borrowings to fund meaningful acquisitions.
From a capital perspective, we plan to invest approximately $70 million to $80 million into our portfolio in 2021.
Our allegiant largest projects this year will be the Renaissance, Washington, DC, where we have been working with Marriott.
On a plan to convert the hotel to the Western brand.
As part of the conversion nearly all areas of the hotel will be reinvented, including a full renovation of all 807, Guestrooms and bathrooms.
Conversion of a majority of bathtubs to showers. The addition of nine new keys upgrading the fitness center the redesign of all public spaces meeting areas of food and beverage outlets as well as enhancements to the exterior facade.
We believe the western brand will elevate the hotel's positioning allow it to be better compete for both group and transient customers and ultimately enhance long term earnings potential and value of the hotel.
The renovation work will begin later in 'twenty, one and the rebranding will occur in 2022 once the repositioning of substantially complete.
We anticipate that the total investment for the conversion will be approximately $70 million with nearly $30 million of that spend.
Occurring in the current year.
This investment is roughly $30 million over the cost of of cyclical renovation.
But one that we believe will generate a low to mid teens return on incremental investment.
Given the increased rate potential.
We are excited about this project and look forward to working with Marriott on another successful repositioning.
In addition to the conversion project in Washington D. C. We have several other value enhancing projects planned across the portfolio of this year at the <unk>.
<unk>, San Diego, Bayfront, where of renovating the ground floor by redesigning of re concept, Inc. A restaurant and converting a formerly leased restaurants based on the meeting space.
The new meeting space will enable us to sell more group rooms, and allow for the combination of indoor and outdoor waterfront meeting space that sits adjacent to our of outlawed.
At our Boston Park Plaza, we're converting another form of ground floor retail space into additional meeting and pre function space.
Similar to our successful Avenue 34 meeting space. We anticipate this will also be highly sought after for social catering events and were from.
Additional breakout space to attract large groups.
Finally, we are adding a second adult serenity pool at our Wailea Beach resort to better accommodate guest end of <unk>.
Further enhance our overall resort experience.
To sum things up.
We believe at at the worst is behind us.
We are now on a period of transition.
The vast majority of our portfolio is operating and we are seeing trends that give us increased optimism and confidence.
We were on the path to return to profitability in the second half of 2021.
And finally, our significant cash on hand, before drawing down on our credit facility not only provides us with stability. During these uncertain times, but will also allow us to fund attractive investments earlier than others.
Maybe focused on shoring up liquidity.
With that I'll turn it over to Brian.
Brian. Please go ahead.
Thank you John and good morning, everyone.
As of the end of the quarter, we had approximately $416 million of total cash and cash equivalents, including 48 million of restricted cash and an undrawn 500 million revolving credit facility.
During the quarter, we utilized proceeds from the sale of the Renaissance Sally acts along with cash on hand to repay the $108 million mortgage.
Secured by the Renaissance, Washington, DC three.
On the repayment of this loan removes our highest cost piece of secured debt eliminates nearly $10 million of debt service per year.
And leaves us with only three secured mortgages remaining in the portfolio.
During the quarter, we also executed an amendment to our unsecured debt agreements, which provide for additional covenant relief and extend the financial covenant waiver period until the first quarter of 2022.
We appreciate the ongoing support of our high quality lending group throughout this process.
Our balance sheet remains strong with significant liquidity and continues to position us not only to successfully navigate the current operating environment.
Also allow us to take advantage of opportunities as they may arise as the industry recovers.
We continue to focus on managing our costs and minimizing hotel expenses, while maintaining our properties in good condition and opportunistically investing in projects that would have resulted in material of displacement.
Working with our operators, we have reduced operating expenses by approximately 60% to 70% since the start of the pandemic our.
Our current projected cash burn rate is now $14 million to $17 million per month before capital expenditures, which is reduced from our previous range of 16 of $20 million per month and down from the actual fourth quarter burden of approximately $16 million.
Shifting of fourth quarter financial results. The full details of which are provided in our earnings release and in our supplemental.
About fourth quarter performance was significantly better than third quarter.
Operations continue to reflect the most dramatic decline in hotel demand the industry has ever seen.
Fourth quarter adjusted EBITDA was at a loss of $19 million in fourth quarter adjusted <unk> per diluted share was a loss of <unk> 16.
While we were anticipating in the fourth quarter results, which show sequential improvement. The actual results also benefited from approximately $8 7 million of operational level credits and adjustments some of which may not repeat in the first quarter of 2021.
While we are not providing guidance at this time, let me provide of basic framework on how we are thinking about 2021 at.
As we've noted we expect our near term monthly corporate cash burn to be between 14 and $17 million before capex.
That is our assumption for the first quarter, which is marginally better but generally in line with the fourth quarter of last year at.
As the year progresses, we anticipate that the monthly cash burn will decline meaningfully and we expect to reach hotel profitability by the end of the second quarter or early third quarter.
The rate of acceleration will depend on the success of vaccine distribution. The continued easing of state and local restrictions and the return of group travel.
As John indicated we are seeing multiple signs of demand acceleration, especially in the back half of the year.
Turning to dividends, we have suspended our common dividend and will reach and we have suspended our common dividend until we return to taxable income, which may or may not occur in 2021.
Separately, our board has approved the routine quarterly distributions for both of our outstanding series a preferred securities.
And with that we can now open the call to questions. Kevin. Please go ahead.
Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad.
Please ensure that the mute function of your telephone is switched off to allow your signal to reach our equipment. We ask that you limit yourself to one question plus one follow up to level all of our participants the opportunity to ask a question.
Again that is star one to ask a question.
Our first question today comes from the line of Michael Bellisario of Baird.
Good morning, everyone.
Hey, Michael.
John first one for you just maybe on the prospects for external growth could you.
Maybe frame, how you're thinking about what an accretive transaction or the metrics of of potentially accretive transaction.
What looked like.
Really no change from before underwriting based on what we think the long term earnings potential of the asset.
Discounted at based on overall risk that we see for the asset.
We are clearly targeting long term relevant real estate.
Some of those hotels.
The discounts on those types of hotels I think has been.
Smaller than what we see from more commodity assets.
Debt of garner larger discounts to pre pandemic pricing from Michael.
I'd say, it's similar to how we underwrite assets in the past, albeit with a much different starting point now.
Got it thank you and then yes.
I do have one of my follow up on it on a different topic, thanks for that though.
On the Hyatt Regency in San Francisco.
Your property, but there was a new one of conversion announced in December and it's a lot of new Hyatt rooms coming into the market.
Did you have of say in that deal getting done at all on maybe more broadly how are you thinking about brand conversion that might occur and other.
Other markets that might impact your portfolio of both from a value perspective at performance ramp up perspective.
Yeah, No we did not have a say specifically in that conversion.
Fuel a lot better about.
Fact at those rooms already exist in the market on.
Already or a competitor to the hotel.
And so to me, it's much better than Esa.
Significant hotel had been built on.
On added to the comp set under this particularly under the same brand families. So not all of that concerned about it quite honestly.
But no we did not have a specific say in that.
And that New addition.
Are you seeing anything else similar to that in terms of conversions of big conversions and any other markets or do you kind of see this as more of a <unk>.
One off opportunity at in that market.
At probably a better question for some of our operating partners I mean, I can only really speak to conversions of our own portfolio and our Big News recently is I think very exciting news.
When you take a look at our Renaissance DC.
The Renaissance D C. The location of that asset has just improved.
So markedly over the past decade.
It really has become the center of D. C. With the addition of Citycenter anthem ROE the Apple store of the flagship at Apple store, that's in the Carnegie Library literally outside of our door.
And being so close to the Convention center.
And working with Marriott.
Come up with I think a phenomenal repositioning plan.
To take that asset upmarket and have it be of flagship property for the convention center and for commercial transient.
We think that we can capture rate of rate premium of it's already in the market.
Once we provide of product.
Debt I think will compete head to head with those assets and with a brand that I think will fit very well on that asset when we're done so.
Terms of rebranding conversion et cetera, we're actually really excited about that.
Perfect. Thanks for all of that.
Thanks, Michael.
Our next question comes from Lukas <unk> of Green Street.
Thanks.
On the western conversion of its really interesting hey, John.
On the western conversion of Dcs really interesting on that.
<unk> already performed pretty well on the market. So I'm just kind of curious what the aspirational goal is on things like Revpar index or other metrics like that.
Yes, we think we can move that asset at.
20 Bucks in 20 Bucks on ADR.
Even maybe even more.
And.
B.
Compete even better with two primary competitors, who which are great hotels in that market.
We think we'll compete head to head with them.
Just given that location.
<unk>.
For us, we we focus quite a bit of a great locations and then over time, we can adjust the portfolio offerings of the property offerings to match those locations.
And this is something that we've seen over the past 10 years at a location just keeps getting better and better and better and so this is something that we've been working on for some time.
And we're excited about yes, we think we can close the gap on some of those competitors.
Great and then my other questions just on the transaction market, obviously of your underwriting hotels.
And I'm just curious how the tone has changed post the vaccine used in November.
My gut would be that whatever the discounts were pre that news were larger than what they are today, but.
Obviously, we haven't seen many transactions closed post that news. So I'm, just curious kind of the tone of the conversations you're having.
Yes.
I think that's a fair assumption Lucas.
A lot has changed in People's psyche since the vaccine news was so positive we've seen it at the stock market, we've seen at in the financing market.
90 days ago I Couldnt tell you that there was enacted see MBS market for hotels for example.
And we have clearly seen a bit of of thawing.
I wouldn't say, it's healthy healthy level, yet, but at a bit of of falling into see MBS market where.
Banks are actually quoting see MBS for select service portfolios or maybe <unk>.
Certain specific.
Assets, particularly those that have.
Higher levels of occupancy.
<unk> say, it's available for all hotels, but all of those things I believe as your question suggests.
I believe that the ask on assets in the bid on assets is up from where it was 90 days ago.
I appreciate it thank you.
Thanks Lucas.
Our next question today comes from David Katz of Jefferies.
Hi, good morning, everyone.
Good to hear.
Healthy voices.
I wanted to go back kind of I know you offered a fair amount of commentary about group business and it's something we ponder a fair amount when we talk about bookings.
Because we expect that there should be a fair amount of pent up demand.
That.
Would come.
But the restrictions around those bookings are the flexibility within those bookings.
Cause us to just.
Think about the sincerity of those right of those bookings right end.
Presuming that it can come well they come would they come.
Is there any sort of depth of of color you can provide about that.
Sure.
David its obviously still a fluid situation, but instead of of meeting planners focusing on what are those restrictions are now.
Our conversations with the operators of meeting planners at then where are those restrictions going to be in 369 12 months.
And.
There is a building amount of confidence whether that's right or wrong. There is of building amount of confidence.
At by the time, we get to let's say late summer that certain groups will be allowed to to me.
By the end of the year will be even higher that's the expectation now.
As I said this remains very fluid fluid.
That can come quicker could be delayed.
Obviously, depending on.
The rollout in efficacy of of the vaccine.
And how comfortable people will feel but I will tell you that.
That desire.
To meet.
Is there.
The desire to travel.
Is there a simple evidenced by what we're seeing and talked about in our prepared remarks about what we're seeing from our group meeting planners and from transient guests and the fact that we have more reservations on the books right now for <unk> in December of this year than we did last year tells you something.
The fact that groups are trying to find spaces and are insistent that theyre going to have these meetings.
Tells you something.
So the desire and the ability of the desire to do at is there we just need to make sure that the vaccine rollout works and hopefully that's the case.
Alright, and then not certainly net.
Well, a little bit farther and I wanted to ask what insights or.
Any hard information, we may have available regarding business travel.
Weather.
The likes of us.
Our ability to travel irrespective of willingness and ability to travel.
How youre thinking about business travel.
And the mix as we go forward also.
So we started to see a little bit of a trickle.
Transient travel of BT accounts in the fourth quarter.
And it was small numbers.
But it was actually fairly widespread across the portfolio so business transient travel for our portfolio of the <unk>.
Typical time period, probably makes 35% of our total business in the fourth quarter at only made up about 3% to 4% coming through those channels.
But that was better than we saw before and again it was widespread so we are seeing.
Pharma universities defense contractors, some project business.
That has some hospital business that has started to show up.
I would not say that we've seen significant business from my understanding from let's say financial yet as a lot of those folks still are not back in the office nor traveling.
But some of the other businesses, we've actually seen a little trickles of business and we're seeing more and more.
BT reservations starting to come in again, it's lagging leisure, it's lagging group activity, but we're starting to see that business transient those BT accounts, starting to produce a little bit more particularly after the vaccine rollout began.
Thank you appreciate it.
Sure.
Our next question comes from Danny Assad of Bank of America.
Yeah.
Hey, good morning, everybody.
Hey, John I, just wanted to start out by saying this is probably the most positive tone, we've heard out of you in a few years.
So maybe you want to just drill down a little bit on some of these.
Trends, so can you help us with.
<unk> given us on maybe a little bit more insight on the type of groups that are confirming these events I know you kind of gave a little bit on what with David's question, but.
Just be a little bit more specific on are you seeing this group activity.
Any specific markets like San Diego or is that of the more broad based.
I'd say, it's a little bit more broad based at this.
Discussions with groups.
We have as I said in the prepared remarks of using the example of the Great group bookings that we had in San Diego in January which were just fantastic.
In the third quarter I bet, you, we see a little bit more smurf regional local association.
And there are a small number of citywide businesses that we think will show up could show up.
There's still some amount of uncertainty on.
There's a little bit of corporate group, So I would say it's fairly widespread.
And then and then for the leisure piece when you are talking about leisure demand acceleration.
Do you have a sense for how much.
How much of that is coming out of Hawaii gas, Hawaii skewing the numbers at all day.
Sounds like pretty positive on that so I was just wondering if.
Kind of how if there is of the portfolio looks ex Hawaii.
Yes.
Good question why delay on oceans edge are skewing those numbers, even though we're getting increased transient business even at some hotels like Hilton Bayfront. The traditionally arent leisure hotels, I think the desire for people to get out of their homes and do something more similar to normal I know for example in.
In.
San Diego Seaworld has just reopening and things like that that people want to get out even if it's a.
A close drive from their home.
But youre right down a bit.
Skewing those numbers a bit or are while at oceans edge.
I will tell you that as soon as the vaccines came out at it looked like the restrictions in Hawaii would continue to ease of.
Our phone has been ringing off the hook in <unk> in.
In fact of a message to all of you know if you plan on going on spring break summer break or were festive season start looking to make your reservations now because I honestly believe great hotels are going to fill up.
And.
<unk>.
There is not going to be rate sensitivity.
So.
Okay.
Thank you so much.
That's it from me.
Okay.
Our next question comes from Rich Hightower of Evercore.
Hey, good morning, guys.
Hey, rich.
John I kind of on a follow up a little bit on the last question in terms of SKU units within the portfolio.
And thinking about that sort of overall.
<unk> ability hurdle that you've talked about late <unk> early <unk>, how many hotels in the portfolio does that apply to end how do you see sort of skew then.
Our 17 hotel portfolio in that sense.
So Richard you talked about how many of our hotels do we think could be profitable within the portfolio by the second or third quarter is at.
Yes, that's right.
Simpler way to ask what I, what I asked yes. Thanks [laughter].
I don't know if I have that in front of me, it's going to be of mix there will clearly be.
Some of the city center hotels that I would say will be behind that.
Some of the hotels that are already profitable or approaching profitability will be into profitability I don't have a number in front of you rich just hotel by hotel, but though there will still be some hotels that are losing money by the second and third quarter I would suspect.
The large AG commodity rich at the larger group hotels.
At <unk>.
Safe assumption there will be those will become profitable are expected to be profitable later than than the leisure or smaller City Center hotel.
Our expectation is or the <unk>.
<unk>.
The other hotels that have either more profitable in the fourth quarter or very close to profitable.
New Orleans assets.
Key west those those will lead and then the larger group hotels the expectation at Dennis will be later on as we move into the fourth quarter.
Okay.
What I thought that's a helpful on.
Explanation, though.
I guess and of similar way.
On.
And when we think about the sort of highly rated business at at assets like Wailea like oceans edge rate a lot of that.
Sort of.
Thanks to the mix at the hotel and perhaps limited inventory in the market at times or maybe it's just the neighborhood that its end rate thinking of wailea in that context, but as.
As we sort of see of broader reopening.
In urban markets in <unk>.
Big Box group group assets.
How do you expect that sort of rate integrity equation to play out as you then sort of competing with.
Other owners, whose balance sheets of differently structured maybe a little more distressed than what sunstone has you know how how do you expect the pricing dynamic to play out and does that factor into the assumptions that you make around your own portfolio is profitability.
It has been factored in which I would agree with you.
While <unk> side oceans edge of side specific weekends side.
Pricing I think will remain challenged for some time is in this transition period I don't see any way around it.
I mean, if if a market is running 30 or 40% occupancy.
And let's say, maybe even a little bit better on certain days mid week, youre still not going to get pricing compression for some time.
So I think it's going to be gradual we've assumed in our comments that our rate will be will be depressed will remain depressed in general until we get back to some level of normalcy with occupancy.
If you look at the group component.
Business that we are re booking into 'twenty, one and then business that's being rebooked into 'twenty to 'twenty. One is is.
Flat to down.
Our per center couple of percent to what it was originally booked in in 'twenty or early 'twenty one.
Business has been booked into 'twenty two is being at it has been booked at a premium to what we were getting.
For business that was booked in that reshaping, but for 'twenty canceled in 'twenty and rebound so from a group perspective, we're making sure that our operators are maintaining the pricing integrity.
And we're seeing that in the business that has been revoked.
Okay. Thanks for the comments guys.
Yeah.
Our next question comes from Anthony Powell of box.
Hi, good morning, guys.
At the.
Similar question at the guys Hassan on group.
What do you think meaningful areas of need to see precisely and in order to continue with their meetings.
Do we just need to see local more francisco away or do you see things like the attendees being vaccinated.
Testing, we can provide at the hotel or the meeting planners are asking for any new accommodation or any new types of meetings or any types of lay out what are they kind of looking for in order to make sure that they can actually proceed with these events.
I think it's all of the above I think theres a lot of individual conversations going on at each hotel what other spacing requirements.
What are at the local travel or gathering restrictions.
I think of lot of people are going on to the assumption that restrictions will continue to ease over time.
More and more people get vaccinated and as the case loads and hospitalizations decline.
So.
I think it's all of those things Anthony.
Got it and you've talked a lot about more transit demand in key West San Diego, Hawaii on when we decide what what about your large urban markets Boston D C.
Chicago, San Francisco are you seeing any kind of <unk>.
Signs of life, there and what do you think you would need to see in those markets in order to.
Get some transient business back because of just local attractions of being an open like theater and whatnot museums from the restaurants with a profit for leisure in those markets.
Yes.
Increases, but increases off of very very small basis in some of those city center locations.
So we are seeing a little bit of an increase in pickup and in transit reservations for example in in Boston.
Looking at our list right now in DC.
In New Orleans, and Chicago, but it's small increases are there increases off of a small base larger increases that we've seen I think at.
It makes sense is first going to be on leisure and then I.
I do believe I feel confident that we will see increases in business transient.
But that's obviously, where we're starting off of a lower base and I think it's just going to take a while.
Okay.
Just one more in terms of the transaction environment, you talked about discounts to prior COVID-19 levels being.
I guess at reducing as post vaccine time as we are in a post vaccine time period what about.
Deals, where the price and maybe at or above.
A couple of levels would you entertain those type of acquisitions, if if the asset demands it.
So far I don't think I've seen anything that's wood.
Sure.
Trade at a premium to pre Covid pricing.
I think theres been some some some decent transactions right around pre COVID-19 price.
To date, I don't think Theres anything that.
I thought that has been of premium there too.
The things that I think are getting closer to pre COVID-19 pricing.
Would be honestly.
<unk> long term relevant real estate, particularly in leisure markets of drive to markets.
Or if somebody just.
<unk> is making a bet on a certain really high quality asset over time.
Alright, thank you.
Yes.
Thanks Anthony.
Our next rate. Our next question comes from Smedes Rose of Citi.
Hi, Thanks, I just wanted to asking of you on pipe.
We authorized.
The buyback program for up to $500 million of.
Shares could you just talk about.
Where buybacks sort of line up and more.
As of cash as we think about the next few quarters.
Yes, historically, we have used the buyback as the capital allocation tool.
Early early last year I think we bought back just over $100 million worth of stock as we stand here today, we are up on that trade I believe.
Didn't think the pandemic was coming but.
Still bought at at a margin of safety that we thought would look good over time and I still feel confident about debt. So just philosophically, we believe the share buyback as an important tool.
If you have the right balance sheet debt cash.
The accomplishments of things.
At this company policy, we don't provide.
Pricing levels that we would we would buy back stock.
What our board did we as a board approved.
Both the ATM and the buyback as we do as annual practice just to make sure that we have those tools in place should something crazy happened or something some dislocation in the market that we've seen.
It seems that has occurred.
Here, just even recently not on our name but in other sectors.
So those are just tools in place.
As I think you know Smedes, we are not allowed per our covenants to buy back stock right now.
Hopefully, we get back into compliance at a certain point here on the not so distant future, where we have those abilities granted back to us.
Okay, and then I just wanted to ask you on the western conversion.
You mentioned about a 20 dollar move in rate to help the <unk>.
Returns you talked about this at Marriott, helping at all to incentivize that or.
On.
They just sort of standby.
And for maintenance of manager there.
Oh, no I mean, well first of all we're approaching this together as there are operating partner there financially or are they supporting at no I wouldn't say financially they are supporting it but.
They have they have various incentives to make this work.
And I think those incentives are aligned for example, when I take a look at what we did and why of lab.
Marriott rightfully is making a heck of a lot more money than they would of if we if we hadn't repositioned at hotel and that's you know that's a good thing.
Because that project has been even in spite of the pandemic that projects, but at a homerun.
Okay, No that's fine.
Didn't know if there are maybe like any sort of operating guarantees or a break on fees or anything while you get at it.
Because if there's not that's fine I was just wondering.
No.
Thank you.
Okay.
Thanks Nathan.
Our next question comes from Alexander of <unk> of Morgan Stanley.
Hey, Tom at.
So when you're underwriting deals can you just talk about.
Your consideration when underwriting a balance somebody knew at that are new to market at that might ocean dads.
Most of you know you've done more on kind of repositioning assets like while at thank you.
Sure. It's all of the same process. It's what do we think the assets what do we think that the asset can do over time relative to the competition and given the demand drivers in the market and then we approach it as.
Does the property at a capital or not or asset management.
What I like about our overall strategy and tactics as the focus is always going to be on long term relevant real estate.
But there are several ways to get there.
Whether that's buying something brand new that requires asset management require of buying something that is deemed stabilize such as the Hyatt embarcadero, but our asset managers came in and found.
Lots of ways to increase profitability of an increased profitability of the air through food and beverage repositioning of the food and beverage.
<unk>.
Working with Hyatt came up with different sales strategies to group up the hotels of that worked out.
Incredibly well over the past several years, so obviously, excluding the pandemic.
But then I also think a core competency of ours is deep value turnaround.
And when I take a look back at the initial reaction to taking on Boston Park Plaza and Wailea was initially fairly negative.
Boy, Oh boy those those projects of turned out great.
I'm glad we did them and it's something that I think we do well and something that our operating partners.
Have a great level of confidence that we will achieve.
I think it's worth mentioning that those operating partners give us an incredible amount of room to do what we do.
Because they know that we will do at right and as of.
A high risk of being successful.
Oh boy of color and then just as a follow up.
Any updated thinking on the long term cost structure of your hotel versus pre COVID-19 levels.
Cost from readout in patents at bad <unk> five how are you thinking about it.
Yeah, I like the old, saying never let a crisis go to waste Theres, a theres a lot of.
There's a lot of discussions that Marc Hoffman and other owners are having with.
With Marriott Hilton Hyatt and other operating partners and what are the operations of the hotels look like in the future.
And.
The on property opportunities would be work force innovation.
Organizational changes at <unk>.
Management restructuring, but then there's also a lot of of.
Fees coming from fees and services coming from some of our operating partners that I think need to be rationalized.
Which we've talked about in previous calls of at various conferences.
I think theres a real could.
Could we get all things held constant at 100 to 200 basis points and EBITDA margin over time, that's sustainable I think that's real.
Thanks, John.
Thank you.
Our next question comes from Chris <unk>.
Hey, Chris.
Hey, good morning, guys.
<unk>.
Yes, I'm here can you can you hear me.
Yeah sure Tim go for it.
Okay, Hey, guys. Thanks.
First question was kind of on the on the Renaissance Western conversion in D. C. I think you still have.
Three other Renaissance at two of which I think our end markets you really like long term.
Are there going to be similar opportunities on on that.
Or is this really just kind of a very one off.
So far this is of one off project.
But.
We're open to discussion on open to evaluation of the future.
Okay.
Fair enough and then.
As you may begin to see more acquisition opportunities put in front of you.
Does this concept of a new normal.
<unk> your thinking at all in terms of markets that you might investing now that you might not have.
Previously, whether it's a nashville or in Austin or other places.
It's funny, we've looked at national several times, so I would say that thats always been on the list, although the supply data, while the demand dynamics down there of great to supply dynamics down there just really give us pause.
While we love the market long term.
Does it change way, we look at certain markets, maybe a little bit on the margin I.
I think anytime you go through something this significant and see the reaction.
Whether or not its potential change in demand drivers.
The reaction from either of property taxes with cost of labor what have you at should cause you to pause and reflect on what you felt were.
Normal operating or investing parameters previously so I would say on the margin. Yes. We have we have changed our view on a couple of markets, maybe a little bit maybe.
Maybe a little bit worse in certain areas.
I will tell you at Hasnt changed my it Hasnt changed my viewpoint on owning LTR of fueled stronger about that now than I did before I feel worse about owning commodity assets now than I did before.
The simple fact that LTE or are we always thought would hold its value.
And that has clearly come through in this downturn, we're getting calls from folks looking to buy great assets from us and the conversation is very simple.
Those assets of <unk>.
Their value.
And we would expect to continue to outperform overtime, because thats where people want to go.
That's what people want to own.
Okay very helpful. Thanks, guys.
Thanks, Chris.
Okay.
Our next question comes from Bill Crow of Raymond James.
Okay.
Yes, good morning, guys I appreciate the time and the kind of a thing.
John.
Yes.
On the citywide front and it's early I get it but.
Can you point to any events coming up this year that would be kind of at scenario of coal mine in a good way that would signal that that group's her back something we can we can keep our eyes on.
Hey, Bill its Marc Hoffman I can't point to a specific group, but I think as John talked about with the timing of the vaccine I think is the most important thing there are some key city wides in in Boston, There's a few in Chicago and then really in Q4 there are several.
Scattered around the country. So I think it'll depend on how they hold and most importantly, it will all depend upon what the city of municipalities decided.
Okay.
You can say boy in June we've got this chance.
But if it doesn't happen that's a setback because there's nothing like that.
I can really point to thus far.
Sure.
Bill I don't think of it I don't think at pin it on one group out there for example.
Yeah, I think I think we will.
We'll get a better picture as time goes on because each different each different either company Association et cetera is going to.
Either be more aggressive more conservative just the hotel lineup well for what they need to do does the low. This is location of those restrictions more accommodative or more restrictive I think there's too many variables to put to let's say is.
As housewares in Chicago going to show up or something like that price.
Yeah.
Okay. That's helpful.
Pointed out at the.
The meeting planners are more optimistic which is their job I hope they are but other Ceos more optimistic do you think they are willing to spend.
The money to either host the event were send people to events are on do you think we've seen some.
Permanent level of attrition at group events and I know, we have to kind of think ahead on this.
Too early now but.
You thought from that perspective.
So, let's first take associations I think the associations absolutely want to meet.
Are there large meetings are typically one of their biggest fundraisers for the association of itself and so.
Let's all face at while we're all getting used to zoom and Webex and all of these other things.
For meeting of group of several hundred people, it's absolutely awful.
It just doesn't work you don't get the same benefit.
Of being in person.
And so because of those reasons I think associations.
Clearly are going to want to travel more at our ANSI to get back out there once it is safe.
That's what we're all focusing on.
For the corporations.
Bill.
I would I would push it back to you a little bit too.
What what kind of end of industries are doing well versus not doing well, obviously hotels cruise lines Airlines restaurants. Those types of industries are really on the back foot right now and struggling financially. So I could see some of those types of industries, saying no. Some of the other types of industries that I think are at.
Absolutely doing well.
They are cash rich of share prices are high.
They are competitive.
Those types of industries, I think do exceptionally well and it's not a limitation you don't have the CFO, saying, hey, we need to cut expenses I think quite the opposite there on a growth mode. So I would say that theres a bit of haves and have nots at least from what I see.
I appreciate it.
I'm sorry go ahead go.
No go ahead John.
No.
In the beginning should we expect to see greater attrition at any group that shows up absolutely at.
Absolutely.
For example of an association shows of we're all we're all used to going to NAREIT.
What I expect the NAREIT and whenever the next day at NAREIT shows up.
I expect attrition to be up meaningfully attendance down meaningfully from where it was at 19.
That's.
Absolute assumption people should take away.
At the meeting what are other properties are doing is we're also scrubbing those numbers pretty meaningfully when we're thinking about room showing up.
Yes, I appreciate that if I could just ask yet.
On the external growth front.
At my takeaway I think I capture rate was you don't really expect to see distressed pricing on long term relevant real estate, assuming it doesn't need of major makeover, new management or anything else.
You're just not going to see that distress and those sort of assets in certain of your unwilling to sell at distressed levels.
And I guess my question is.
As you think about and I think last quarter I ask you whether you had bid on on the assets and you said, yes.
Can you address that or not of gross debt at this time.
But are you seeing.
Do you think there's more of them.
Petition different competition.
Less disciplined money out there.
Looking at some of these deals.
Yes, there was a lot in there bill.
So couple of comments none of us.
Great conversation.
A couple of comments.
LCR I think is trading at a more modest discount than commodity still trading at a small discount, but just again not as wide as.
Let's say.
Tertiary 30 year olds branded full service hotel.
Were those discounts we've seen enough trades at those discounts can be 20%, 30% pre COVID-19 pricing unless somebody gets lucky and funds I think the rate buyer.
So that's one point amount.
Amount of capital debt has been raised our understanding is the amount of capital being raised to put to work to hotels.
Is pretty significant.
And as evidenced by the fact that our investment team.
It gets calls every other day looking for looking for product.
To for people to buy from us to be clear.
So that's another point.
Thank you will start seeing a more active transaction environment.
As the sea MBS market force now that might take time and I don't want anybody taking away that there is a really active see MBS market. It's falling I wouldn't say, it's robust at this point, but as time goes on with the amount of liquidity in the system I would expect that to continue to improve which.
Should help the transaction market. So I think youll start to see more trades and you should start seeing better clarity into where pricing is is on assets.
Think of hit all your topics Bill did I Miss something.
No I think you got John I appreciate there's always always at a good conversation at the family as well and we'll talk to you soon.
Thanks, Bill you as well at boys of Great West Great. Thank you.
Today's final question comes from Macquarie.
Yeah. Thanks, So I think you said dori.
Dori how are you.
Hey, John Brian Mike.
So just another look at leisure pricing when leisure demand.
We accelerated do you expect to see an increased.
Increased use of loyalty points or do you think of silver mean.
And some of our cash pay.
Yeah, we've actually seen quite an increase of people are starting to really redeem their points.
Mark do you of any insights on to that yes.
I think we'll continue to see.
As demand comes back on occupancy comes back to of the premium locations clearly right now and while a lot of our demand in the 30% to 40% range, depending upon future reservations is loyalty.
And I think Youll continue to see that in places people want to go New Orleans, Boston et cetera.
Can you can you walk through on what kind of.
Headwind that is on rate for you guys.
If you if you removed.
Thank you and then 80% net of redeeming and receipt of cash Rutledge Nemo and at what could make.
Okay.
Yes.
The only really meaningful hotel for us with points is really wildly at the rest of our portfolio of some very small percentage of their business for redemptions wildly of we have a very strong redemption rate and what happens. There is we end up selling up so almost almost all if not the majority of our redeemed rooms by.
Up to further views. So we appreciate the redemption basin and <unk>.
Certainly at times like this and it doesn't affect our rate as John said were up 13% in rate year over year end, even with the slow demand in our future rates that we're looking out six months look very solid.
Thanks, John.
John.
Yes.
Yes go for it.
The other thing Youre at.
It was in Mark's comment in November we were at 13% day rate.
Okay.
And if we fast forward three years, when you got John on on how leisure and business transient and group demand shifts within your portfolio.
Going forward three years, how does leisure versus commercial shift.
Too many variables in there Dori I don't.
Yes.
Too many variables to make an educated guess.
We.
It will really come down to those hotels that we acquire in those we sell.
But I don't have I don't have a specific answer part of it.
Okay. Thank you.
Well, thanks, everybody really appreciate again the interest in sunstone and other call went quite long today I appreciate all of your questions and your interest please stay safe and.
Get back out on the road.
Have a great day, we're around if needed.
Ladies and.
That concludes today's conference call. We thank you for your participation you may now disconnect.
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