Q3 2021 Sunstone Hotel Investors Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and to walk into the sandstone hotel investors' third quarter 2021 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
I would like to remind everyone that this conference is being recorded today November five 2020 wine at 12 o'clock P M Eastern time.
Now turning to the presentation.
So Mr. Aaron Vance Senior Vice President and Treasurer. Please go ahead Sir.
Thank you operator, and good morning, everyone by.
By now you should have all received a copy of our third 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 or E. Adjusted SFO and property level adjusted EBITDA sorry.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are Doug Pasquale, Chairman and interim Chief Executive Officer, Bryan Giglia, Chief Financial Officer.
Robert Springer, Chief investment Officer, and Chris After Povich, Chief operating officer.
On today's call Doug will discuss our recent value enhancing hotel transactions and provide his thoughts on the company's near term priorities and objectives.
Bryan will then discuss the current operating environment and recent trends in our business.
And finally, I'll provide a summary of our current liquidity position and a recap of our prior quarter financial results.
After our remarks, we will be available to answer your questions.
With that I would like to turn the call over to Doug. Please go ahead.
Thank you Erin Hello, everyone and thank you for joining our call today as many of you know I have been affiliated with Sunstone for quite some time now having joined the board in 2011 and taking on the role of chairman in 2015.
During my tenure I have facilitated the management team's efforts as they repair the company's balance sheet and upgraded its portfolio. Following the global financial crisis, and most recently as we navigated the unprecedented challenges brought on by the pandemic.
Now as interim CEO I've had the opportunity to become increasingly involved in the day to day operations of the company.
With that enhanced perspective, I'm more confident than ever that sunstone has the portfolio the balance sheet and the management team to deliver incremental value to its shareholders and do so on a more accelerated basis.
As a first step in this process, we announced a series of hotel transactions yesterday that reflect our renewed commitment to value creation through the sale of assets, which are no longer consistent with our strategy.
The selective disposition of core assets when pricing is compelling and through the acquisition of long term relevant real estate.
Going forward you should expect that sunstone, we'll do more of the same as we further position the company for growth by actively recycling capital and more effectively utilizing leverage and our tax attributes while still maintaining a solid balance sheet with capacity and flexibility.
Overall I am very pleased with the progress we have made in the first two months of my tenure and I look forward to continuing to work with the management team to unlock further value for our shareholders.
Before I turn the call over to Bryan I want to provide an update on the CEO search process being conducted by the board of directors.
When I assumed the interim CEO role I made it clear that my tenure in this position would be for a year or less and that the board was committed to identifying a permanent CEO, who would further advance our existing strategy.
The search committee was established in tandem with my appointment in the search process is underway.
While we intend to conduct an efficient surge, we will be thoughtful and farsighted.
We will not rush the process and we will do everything possible to ensure the right new leader is selected.
We expect to have an update as part of our next quarterly call.
And with that I will turn the call over to Bryan to cover some of the details of our third quarter operations, which came in stronger than anticipated and to share. Some encouraging recent trends we are seeing across our portfolio. They give us reasons to be more optimistic as we head into the final months of the year and into 2022.
No.
Thank you, Doug and good morning, everyone I'll start with a review of the third quarter operating results, which as Doug just mentioned materially exceeded our expectations with EBITDA more than doubling the prior quarter and marking the return to positive quarterly <unk> for the first time since 2019.
I will provide an update on the current operating environment and forward booking trends, which point to continued growth in the fourth quarter and into 2022, despite the effects of the Delta Varian.
Last I will provide some additional details on the exciting and value enhancing hotel transactions that were announced yesterday.
So let's begin with the third quarter operations, which came in stronger on both the top and bottom lines.
Total revenue was $167 million, an increase of 43% from the second quarter.
Driven by a nearly 10 point sequential increase in occupancy and an average rate for the comparable portfolio that not only grew 13% from the second quarter of 2021.
But it was also just about the third quarter of 2019.
These strong results were primarily the result of strong leisure demand over the summer vacation season that peaked in July and then moderated in August and September partly as a result of typical seasonal patterns, but also due to a short term pause in travel demand due to the spread of the Delta variant.
While occupancy increased to nearly 55% and benefited from growth in all segments transient demand remained a standout with room nights, increasing 27% compared to the second quarter.
Our total portfolio third quarter average daily rate was $30 higher than the second quarter and even when excluding montage Cheetos Berg, which ran a very robust average daily rate of nearly $250, our comparable portfolio ADR of just over 248.
$8 in the third quarter came in higher than 2019 levels.
A strong desire for leisure travel and a healthy U S consumer contributed to strong demand in certain markets and allowed our operators to push rates far beyond pre pandemic levels.
We achieved meaningful rate growth in key West Orlando, New Orleans and while at.
In fact oceans edge Saar rates increased an astonishing, 103% as compared to 2019 and wildly beach resort bested their pre pandemic rate by 40%.
In addition to a stronger rate performance out of room spend also increase with food and beverage revenues higher by 79% in the third quarter as compared to the second quarter, representing a 47% increase in food and beverage spend per occupied room.
Other hotel revenues also increase as higher occupancy drove increased destination fees spa and parking revenues.
Banquet and catering contribution per occupied group room increased over the second quarter by $96 and achieved approximately 70% of 2019 levels.
Combined with stronger ADR growth in non rooms revenue generated a quarterly comparable 12 par at $207, a 41% increase from $146 achieved in the second quarter.
Turning to costs, we have been focused on working with our operators to deliver a safe and enjoyable guest experience, while looking for ways to achieve efficiencies and permanent expense reductions.
Year to date, we have eliminated nearly $11 million of costs from our hotels, which we believe will be lasting savings and can be sustained even as business levels and occupancies increase.
We recognize that there is a need to balance appropriate service levels and amenities with pricing and profitability and there will not be a one size fits all approach to margin enhancement in every hotel and so we are continuing to work with our operators to identify creative ways to drive profitability across the portfolio.
During the quarter, our comparable hotels generated hotel EBITDA margins of 24, 3%.
While this is below the low 30% range, we maintained historically delivering mid 20% margins at a portfolio wide occupancy of just below 55% is a significant accomplishment and gives us confidence that we will be able to achieve higher stabilized margins once demand returns.
Turns to a more normalized level.
The combination of higher rates stronger non room revenue.
Expense reductions and other cost controls contributed to third quarter EBITDA that exceeded expectations and represented a more than twofold increase over the prior quarter.
While strong demand for leisure travel seems to be well established at this point in fact Saturday of Labor day weekend was our portfolio's highest demand night of the year with occupancy of 84% at an average rate of nearly $275. We are also seeing positive trends in both.
Group and business transient demand that we expect will accelerate as we move forward.
Let's take a look at each of these segments in a bit more detail starting with group.
Total group room nights for the quarter increased only marginally from the second quarter to 82000 nights.
What is more important to note is that the group activity. We saw in the third quarter was increasingly comprised of more traditional corporate and association events as opposed to the rooms, only and event driven group business that composed much of the demand in the first two quarters of the year.
While we were certainly pleased to have that business at our hotels earlier in the year the return of traditional and higher EBITDA, producing corporate and association meetings and events is a very welcome sign that we are on a path to normalized levels of operations.
Corporate group activity in the quarter grew nearly 30% and the association business was more than five times higher than the previous quarter and generated 24000 room nights.
The Renaissance Orlando Hilton, San Diego, and GW Marriott, New Orleans had a substantial increase in association and corporate group business and the wildly Beach resort experienced a meaningful return of incentive business with 8000 incentive room nights at a very attractive rate of nearly 600.
Dollars compared to 6700 room nights and a rate of $400 in the same quarter of 2019.
The Delta there is impacted group business later in the quarter as our hotels experienced increased cancellations, a decreasing group lead volume and EBITDA.
Decline in overall group production.
The majority of the cancellations occurred in August and coincided with a peak in case counts witness in late summer from the spread of the Delta variant and we're skewed towards corporate group as oppose to association business.
Approximately 9% of our third quarter group room nights canceled, which were primarily for events in August and September and approximately 16% of our fourth quarter group rooms cancelled.
Canceled which were primarily for events in October.
We believe these headwinds from the Delta variant are largely behind US as group demand and lead volume began to Reaccelerate post labor day and have continued into the fourth quarter. In fact, we expect the fourth quarter production to be the strongest of the year.
Four or five large group hotels, which make up two thirds of our fourth quarter group room nights, 77% of our forecasting group room nights have already been picked up.
Moving on to transient which accounted for roughly 75% of our total room nights in the third quarter.
Total transient rate for the third quarter came in at 285 compared to 261 in the second quarter, an increase of more than 9%.
Even more encouraging was the increased contribution of business travel to the overall transient demand the.
The number of special corporate rooms increased 103% from the second quarter with rates higher by 20%.
Several of our hotels, including the Hyatt San Francisco, Boston Park Plaza, and Hyatt Chicago witnessed a meaningful acceleration in special corporate room nights during the quarter.
While our third quarter business transient volume was only 50% of pre pandemic levels future transient booking pace continues to grow every week and we expect this to accelerate into 2022 as companies increasingly returned to the office and business transient travel becomes more.
Widespread.
As I mentioned earlier, our operators have been able to aggressively push rates in response to very healthy leisure demand.
We saw strength in leisure rates at hotels across the portfolio, including key West Orlando, New Orleans, Napa Sonoma and wildfire.
The ability to achieve premium pricing has been most evident in our resort properties with montage kudos Berg, achieving a rate of approximately $250 for the quarter and oceans edge and while a beach resort seeing rate increases.
103% and 40%, respectively compared to the third quarter of 2019.
This level of rate growth should also translate into profitability that exceeds our underwriting at montage and that outpace pre pandemic levels at oceans edge and and wildfire.
Given the substantial pricing increase our operators have implemented we are closely monitoring guest feedback to ensure our satisfaction scores remain competitive and that we are balancing near term profitability with each hotel's long term positioning.
<unk> continues to command a strong tripadvisor rating, despite a $185 a higher rate than the third quarter of 2019, an impressive achievement, especially given its luxury peers.
As we move into the fourth quarter, we encouraged by what we're seeing for October.
Our preliminary results for the month show a reacceleration of demand with Revpar of approximately $150 made up of occupancy of 57% and a 264 average daily rate.
October Revpar is second only to our peak month of July and is above August and September by nearly 10% and 14% respectively.
Given the current trends, we expect a strong finish to the ended the year with November and December benefiting from increased levels of business transient and group demand.
And continued ability to drive strong leisure rates during the holiday season.
Shifting to our capital projects.
Invested $25 million into our portfolio in the third quarter with a focus on enhancing the quality and future earnings potential of the portfolio.
In July we completed work on Boston Park Plaza newest meeting space. The square, a 7000 square foot indoor space that will give the hotel incremental capacity to host in house group business and reduced its reliance on citywide events.
At the Hilton San Diego Bayfront, we completed a total redesign of the food and beverage options, including an addition of a market concept that will provide a better guest experience at a higher profit margin.
Additionally, in San Diego, we converted unused space into 6800 square feet of new high quality meeting space that looks out onto the San Diego Bay.
During the quarter. We also continued to make progress on the transformation of the soon to be rebranded Westin, Washington D C.
The ballroom and meeting space renovations will be completed by the end of the year and work on the guest rooms and lobby will occur in 2022.
Once the meeting space has completed the hotel will be able to host group business next year, while the rooms renovation is completed.
We are pleased with the reception the in process conversion is receiving for meeting and event planners and look forward to the incremental growth the hotel will generate as it captures higher rates and incremental share under the western brand.
Moving on to transaction activity as Doug noted yesterday, we announced three transactions that enhance our portfolio quality and strengthen our balance sheet and provide additional capacity for future growth and acquisitions.
First we completed the sale of the 348 room Renaissance Westchester for gross proceeds of approximately $19 million.
This hotel was a noncore asset in a challenged market that lack sufficient demand to merit reopening after operations were suspended at the onset of the pandemic.
The net proceeds from this sale.
After the payment of termination fees and severance costs was approximately $11 million and the disposition removes an asset that was expected to be a drag on cash flow and growth going forward.
Next we are under contract to sell the 340 room Embassy suites will jolla for $226 7 million or approximately 667000 per key.
This is a tremendous outcome and is a perfect example of the embedded value that can be generated from the ownership of long term relevant real estate.
In addition to being a high quality embassy suites, and a productive cash generator. The hotel sits on phenomenal real estate.
We were able to capitalize on its highly desirable location and sell the hotel to a buyer that we'll be able to better optimize the entire parcel.
We expect this sale to close during the fourth quarter.
Net proceeds after the mortgage loan are expected to be approximately $165 million.
Finally, we are excited to announce the acquisition of a four seasons resort Napa Valley.
This one of a kind asset located on the famous Silverado Trail is a terrific example of long term relevant real estate, we are acquiring the resort for gross purchase price of $177 5 million a meaningful discount to its development cost in.
In addition to the 85 room resort and its abundant event space and full suite of luxury amenities. The acquisition price also includes nearly four five acres of vineyards and the looser winery along with the inventory of prior wind vintages.
The investment in the four seasons Napa Valley is the perfect complement to our previous wine country acquisition montage Healdsburg, which.
Which we acquired in April and is already surpassing our expectations.
Between the four seasons and the montage, we will have approximately 10% of our asset value and one of the most supply constrained sought after and highest rated leisure destinations in the country.
We will own the two premier assets and established a market leading position in wine country with ownership of approximately 24% of our luxury room inventory and 32% of the luxury events space.
The purchase at a four seasons resort Napa Valley is consistent with our stated strategy of acquiring long term relevant real estate in the early phases of a cyclical recovery and its addition, further elevates our overall quality and earnings potential of our portfolio, we expect <unk> to contribute meaningfully.
Fleet to our per share future earnings as we deploy more of our balance sheet capacity and benefit from the strong demand for leisure travel.
To sum things up.
Third quarter results exceeded expectations as a result of continued strong leisure demand steady improvement in business transient travel and an improving group mix.
Although expectations for the fourth quarter have moderated due to group cancellations related to the Delta variant, we have seen demand reaccelerate in recent weeks and based on forward booking information. We are optimistic that these trends will continue in the fourth quarter and into 2022.
Additionally, our investments both internally and externally we will provide additional growth as travel demand moves closer to pre pandemic levels. Furthermore, we are in the enviable position to use our strong balance sheet and debt capacity to grow the company and to create value for.
For our shareholders.
And with that I'll turn the call over to Aaron Aaron. Please go ahead.
Thank you Bryan.
As of the end of the third quarter, we had approximately $222 million of total cash and cash equivalents.
Including $42 million of restricted cash.
In addition to cash on hand, we also maintain full availability on our 500 million revolving credit facility, which equates to over $700 million of total existing liquidity.
We are slated to close on the acquisition a four seasons resort Napa Valley in the fourth quarter and expect to fund the transaction through a combination of cash on hand and from borrowings under our credit facility.
As Bryan mentioned earlier net cash proceeds from the sale of embassy suites, La Jolla are expected to be approximately $165 million. After the buyers assumption of the existing $57 million mortgage loan.
We expect the sale to also be completed in the fourth quarter.
Shifting to the third quarter financial results. The full details of which are provided in our earnings release and our supplemental <unk>.
The results reflect an improving operating environment, driven by continued strong leisure demand and increasing amount of commercial transient volume and improving mix of group business.
Third quarter, adjusted EBITDA was $35 million and third quarter adjusted <unk> was <unk> 10 per diluted share.
These results surpassed our previous expectation and marks a return to positive quarterly <unk> for the first time since the end of 2019.
During the third quarter, we recognized $1 $6 million of restoration expenses, and an impairment charge of $1 million as a result of damage incurred at our two hotels in New Orleans following Hurricane Ida.
The Hilton New Orleans, St. Charles sustained the bulk of the damage and we are working with our insurers to identify and settle a property damage claim, but we expect that future losses from the restoration work at this hotel will be mitigated by the property insurance deductible of approximately $3 million.
Now turning to dividend.
We have suspended our common dividend until we return to taxable income.
Separately, our board has approved the quarterly distributions for each of our series G. H Ni preferred securities.
And with that we can now open the call to questions.
So that we're able to speak with as many participants as possible. We ask that you. Please limit yourself to one question.
Operator, Please go ahead.
Thank you and ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your telephone keypad did withdraw your question. Please press the pound key and at CTO, Tony Mitchell questions. Your line finally, Palo at one moment. Please for first question.
Your first question comes from the line of Rich Hightower from Evercore. Your line is open.
Hey, good sorry, good morning out there guys.
So I wanted to go to.
One of the comments Doug made in the prepared commentary just in terms of accelerating the recycling of capital and so forth and using leverage and tax attributes maybe in a different way versus.
The prior CEO regime.
Clearly anything that has been announced recently or has closed recently or is pending would've been formulated under under <unk>.
John Arabia, and so implicitly that means you've got more sort of in the works. There. So maybe just help us understand the mix of before and after and then also addressing specifically some of those comments around leverage and tax attributes.
So thanks.
Thank you for participating so youre correct, I mean complicated con.
Convoluted transactions like the ones described take time to accomplish.
The real credit for that goes to the exec.
Executives in the room here for carrying it over the finish line, it's been a long arduous process and you're also correct that we have a lot of things in the works now.
And as we said from the very beginning the beginning of my tenure.
We intend to.
Utilize momentum and to continue this so this is because more of a regular and predictable occurring process, where youre seeing.
Transactions from the company over the course of many quarters and years to come so.
I really want to congratulate them for all their efforts to get these accomplished in a relatively short period of time, there was a lot of work to be done in.
And most outcomes we're not.
Certainly there was a lot of questions and ambiguities and decisions that had to be made so.
The intent now really is to continue this.
We don't intend to be and we will not be a one hit wonder.
The team is already in the recording studio working on we hopefully will believe it will be other hits and we're intent on creating an album.
Of things to come so.
Time will tell but I'm highly confident that what you see is just an indicator of good things to come down the road.
And rich when it comes to comment on tax attributes.
I don't think that this really differing view or a way that we're going to look at the tax attributes going forward.
We did use Nols throughout last cycle, we think that that is a good way to.
<unk> retained capital and.
Grow the company.
Allowed us last cycle to Delever, the balance sheet and accretive to the shareholders equity that way going forward.
We'll be somewhat fungible, but our Nols will allow us to.
Shield gains shield, some taxable income most likely a combination of both.
And allow us to especially if there are asset sales and when you look at an asset sale like like La Jolla, which has a very large gain to it.
That's one way that we can preserve some of that.
Value that we unlocked an NGO reinvested and try to do it again to create value for the shareholders.
Okay. Thank you and your next question comes from the line of Smedes Rose from Citi. Your line is open.
Hey, it's Michael Bilerman here with Smedes good morning.
Doug I was wondering if you can just maybe maybe elaborate.
A little bit on the decision to sort of terminate John.
And that run a search and.
You talked a little bit about how you've been on the board for the last 10 years. Obviously, you know the long term history with this company.
I think this will be CTO number six or seven.
Over the last 15 years.
And so what are you looking for in the next CEO.
That the prior CEO wasn't delivering.
And at the same time can you talk a little bit about the board, which which also has gone through a pretty dramatic change.
Two new members just joined this past May I don't know how much they had.
Understanding of where the company was.
And so just help understand some of the dynamics because it doesn't feel as though some stone was underperforming to the degree that we've seen.
Some other key.
He has been terminated in the business.
Sure, let me try and address as briefly as I can because we've talked to many investors one on one and I don't I don't want to be too repetitive, but first of all well should be on the public domain right I think that the public at large and the investment community needs to understand it's not every day that the CEO gets terminated.
David.
Sure so.
First of all.
John and I have a.
Long and good history.
We've been we've known each other and have been friends for a long period of time.
And I have a great amount of respect for him and appreciation for all the things he contributed to the company.
John was a seven or so years ago going on seven years, John was we thought a really great candidate to assume the role of CEO because of what the company's needs where at that time, specifically, we were over Levered, we needed better corporate governance and some leadership.
In that regard and John had very strong beliefs about that.
And did really a fine job of helping us on those two fronts with the passage of time.
As a company grew and evolve.
It was the board's determination that notwithstanding the fact that over certain periods of time, the company performed well on a relative basis that.
There was significant more opportunity to create value.
In order to best accomplish that it was the board's view that.
<unk>.
New attribute trades were important including.
Someone who had more more of a.
Real real estate background and transaction background and so that was the primary fundamentals about that decision and it's it's really I think a fairly natural evolution of how companies should work.
Companies are supposed to grow they are supposed to evolve and for most company that means that at different times in its history it needs different leadership attributes.
And so that was the determination that was made.
Youre right, we have added new directors, but.
Those were for reasons that were sound and consistent with the times.
We're working hard on creating diversity on our board and we had some long tenured directors.
Whose time was approaching where it was best for them to cycle off they were terrific directors, but again, we thought board refreshment was order.
And so that influenced.
Decisions there.
We strongly believe we are on the right track.
We understand that.
Reasoning wasn't completely evident to people as I have said if it were evident to everybody.
What our thinking was and what the reasons were it means that we acted rehab.
Reactively instead are proactively.
It's true that John played an important role.
The transactions that we announced but again as I said nothing was assured nothing was done in a lot of work had to be completed to do that and I'm confident that John was in the room speaking he would be passing the credit to the same gentlemen, I'm passing the credit too so.
I understand why others questions, but.
The past is the past.
60 days, a lot has been accomplished and.
My track record for those of you who have known the is one when we commit to get something done we're going to get it done and and I believe as I said that a lot of things are in place now that will set the stage for many quarters to come.
The search process is underway and we're finalizing the attributes that we believe is necessary.
For our next CEO, we're well aware that.
There's been far too many Ceos in this company Thats among our top considerations as to identifying leadership that can provide stability and growth.
And better maximize shareholder value. So that's our commitment that's our intent and we're going to know if it's right or not as we go forward into the future and before.
Okay. Thank you and your next question comes from the line of Patrick <unk> from truly Securities. Your line is open.
Okay.
Sorry, I was on mute there.
Good afternoon, everyone.
Good afternoon Patrick.
In addition to looking for a new CEO.
Is the company being marketed for sale as sometimes happens when there is a void in leadership.
Yes.
Sure.
The board is completely focused on maximizing shareholder value and believes that the company has a clear path to achieve its goals.
As I mentioned, we are actively conducting a search process now to find a new CFO to continue executing on our capital recycling and growth plans.
And as you can see from yesterday's announced transactions, we're executing on that strategy.
I believe we're off to a great start and as I've said, a couple of times already we expect to continue to build on this momentum.
So.
We know our commitment.
Two <unk>.
Maximize shareholder value and that's what we're doing and we believe we have a very good strategic plan, we have a great balance sheet, we have a great management team and we have a very good portfolio that we have every intent on building and improving upon.
Okay. Thank you and your next question comes from the line of Anthony Powell from Barclays. Your line is open.
Hi, good morning out there just <unk>.
Shifting gears a bit question on pricing, especially on leisure resorts.
We've seen some extraordinary pricing here in your portfolio and elsewhere.
How do you underwrite pricing in ADR for things like before she does Napa over a long period of time or are you, assuming any kind of deceleration or backsliding.
As more travel options open in the next couple of years and just an overall sunstone opinion on the stickiness of resort pricing it will be super helpful.
Yes, good morning Anthony.
When we look at the two.
The two most recent acquisitions you montage here then.
The announced four seasons.
There has been as we've seen in other leisure destinations and in Maui and also.
Also in key west Theres been tremendous rate growth over over this last year.
Our expectations are it really depends on property by property, but with the two Napa Valley properties.
There is theyre ramping up there both brand new assets.
There will be opportunity for occupancy growth over the coming years.
The rate growth by no means has as.
Has as big of the increase in rate over this time period, there may even be a time where rate would be flat for a time period as occupancy grows.
But we do think that these are these are new assets that will be ramping up and there is opportunity on both rate and occupancy side are stabilized.
Rates that we're looking at in both hotels.
Is not dramatically higher and stabilizes over a couple year period than where we are today.
The rates are higher right now than where we had where we were.
We're underwriting.
There is also opportunity when you look at a market like key west.
We're oceans edge has you know as we said 100% rate increase.
Well that's part of it.
Executing on the strategy of that hotel and positioning it to perform better against the.
Against the downtown set in key west and so really leveraging off of the hotels.
Room size location amenities in that and so that is part of that is the demand for leisure and then part of that is just the long term strategy and executing on that plan.
Okay. Thank you and your next question comes from the line of David Katz from Jefferies. Your line is open.
Hi, good morning, everyone and thanks for taking my question.
I wanted to just talk about the balance sheet.
Even the transition that's underway.
I Wonder if you could comment on.
The perspectives.
The balance sheet.
Could be argued as under Levered.
How you think about whether that is or isn't correct.
What kinds of ways or avenues would you like the next chapter to pursue.
In order to put it where you think it should go up.
Sure Good morning, David.
The overall view on leverage.
Hasnt changed.
As far as this is a highly volatile.
Asset class that.
You need to maintain a low levered balance sheet throughout all phases of the cycle I mean, that's always been the way we've looked at things and.
And we have said in the past that our leverage towards the end of last cycle was much lower than than where our target was.
Part of that worked out okay given the.
<unk>.
What we had thought and what we have gone through since then.
But.
To Doug's point earlier about being more active on the recycling front.
And during that time period, what we ended up doing was taken absolute debt.
That the cycle was going to was going to turn and while we were recycling capital.
Could we have acquired a property or two during that time period. It probably long long term would have would have worked out.
That said as we go forward.
We do have tremendous.
Capacity in the balance sheet.
We are never looking to be one times levered again, but the expectation from us will be that we will be in that.
Bottom third of our peer set as far as far as leverage goes and there will be times and as we said we will look earlier in the cycle as we are doing now and as we are deploying capacity now will grow that will grow the balance sheet.
Average will will move up.
But as you know if you look at it on a on a pro forma basis on a normalized basis for call. It 2022 are our balance sheet snaps back to kind of a three ish times levered balance sheet, which allows us to do deals like the four seasons allows us to recycle capital and.
If we find a deal that makes sense, if we find a value add play or something that we we think we can make strong returns for our investors that balance sheet capacity is there to use.
In addition to capital recycling, we will do throughout the cycle.
Okay. Thank you and your next question comes from the line of Thomas Allen from Morgan Stanley. Your line is open.
Hey, good morning can you just help us estimate what your leisure versus corporate mixes now pro forma for all the all the deal and then curious how to think about the strategy going forward, where do you want it to go thank you.
Good morning Thomas.
One second while I, okay. So.
Where we are as of.
As of the quarter.
Yes.
Well I guess on a pro forma basis kind of on.
Called the pre Covid with age with a stabilized level for the acquisitions.
About 28%.
Leisure about 36% business transient.
And then the rest of it is.
Group and.
Association. So when you look at that and you look at the type of hotels that have worked well for us through even during the pandemic, but we like to have a group component to our hotels.
And we like the group with the business transient or group with leisure, obviously, something like <unk>, where we have a strong leisure component in that leisure can.
Take up the group demand when group demand falls off have worked out better than the urban transient hotels that are group and business transient.
Looking forward, we do think that.
The.
Urban hotels and the group the group business transient hotels will have better growth than the leisure hotels next year, and so that will always be an important component of our of our segmentation.
But when you look at it overall, there's probably a little bit more room in the portfolio for a little bit more leisure.
Last two deals. We've done are are or have announced are two hotels that have strong leisure components also have group.
Components in Napa Valley.
It just so happened that both of those are where leisure. The next deal or two may or may not be leisure, but I think overall over longer periods of time that we'd like to take that call it 28% mix.
And move it up a little bit more.
Hey, Thank you and your next question comes from the line of Michael Bellisario from Baird. Your line is open.
Thanks, Good morning, everyone.
Doug question for you.
The company issued stock in June it was just about $13 a share I think the signaling done was that was around <unk>.
So my question is do you agree that that price was plus or minus representative of NAV at the time and then how has your view of.
The portfolio has that changed since then especially relative to some of the transactions.
Announced and completed thus far.
Hey, Mike Let me start off with this one.
The.
All all equity issuance and and repurchase for that matter are.
Okay.
Have been and will continue to be something that we we discuss very frequently and closely with the board and so while as you know we do not comment specifically on an NPV. We did issue shares during that time period, so that should.
That can give some level of indication of where our head was.
As we look forward there is.
As to the path and trajectory into next year and as we look at pace as we look at other metrics in confidence grows that the.
The portfolio will continue to perform into next year, we look at market comps of where things are trading.
Yeah.
Embassy suites of oil alone obviously that sale.
Added value to an EV.
Somewhere around close to $100 million more than what you know.
The view of value of that was so that obviously will increase the NAV.
And just the overall growth of the of.
The portfolio.
And current pricing.
I think if you look at it to where wherever and Navy was then there have been a couple specific events and then general increases in value that would would notch that FSAM.
I would just add that to NAV.
Think we would all agree is an important indicator an important metric to think about and to reference.
But in terms of capital raising or whatnot, it's not in my view the only one you have to.
It's an input.
The overall business, which is <unk>.
Investing in real estate. So there are a lot of considerations of NAV and.
An important one but it's certainly not an exclusive one in my view and it's very dynamic and it moves around quite a bit.
Periodically and particularly when you are at inflection points or maybe at inflection points from different.
Things going on in the marketplace in the capital markets.
And looking at our past transactions over a longer period of time, whether it be share issuance or repurchase.
We have a pretty solid track record demonstrating that.
We are we are very mindful of our shareholders' equity and we do a or at least try to do a very good job of making sure that we are we are careful.
An issue or a repurchase at appropriate levels.
Okay. Thank you and your next question comes from the line of Chris <unk> from Deutsche Bank. Your line is open.
Hey, good morning, guys.
Wanted to ask a little bit about the four seasons acquisition I know you've put it kind of stabilized yield target out there could we get a little more color.
Higher level on how you are kind of underwriting like room versus non room revenue, we're trying to get a sense for you guys. It seems like a pretty big operation, that's a pretty small room count do you have any ability to.
Make additional ROI investments there thanks.
So let's start with just kind of a recap of the asset first first this is a.
As we've said with with montage and now with four seasons.
Developing assets in the valley takes a long time.
What we are acquiring is 22 five acres right off the Silverado trail, including also which includes four five acres of vineyards.
It actually the hotel.
Has incredible amenities, including a working winery on site, which allows guests to have the.
It'd be great to glass experience.
Which is unique to <unk>.
To that hotel and no other hotels in the area.
We are buying at an attractive valuation.
Especially given what it would cost too.
To recreate that asset today.
As you said the yield we projected 6% to 7% stabilized cash yield on the hotel.
Based on other.
Transactions, we're seeing in the markets and maybe some.
We expect the yields on limited service hotels.
We think that this on a risk adjusted basis is a very compelling investment and a very compelling return, especially relative to what we're seeing in the market.
And then as we own the two hotels we have.
We will have about greater than 20% of the luxury room supply about 30% of the.
Meeting event space supply that is.
It's also the newest events space. So it's purpose built.
To handle.
Corporate functions and <unk>.
Really kind of.
Integrated seamlessly throughout the property.
From that standpoint, we are we are very excited about these.
Transactions.
I, let Robert give you a breakdown of the other revenue, but as you as you said, yes 85 rooms.
It will have a very desirable food and beverage operation and we'll have the winery operation.
So spa.
So and then fantastic meeting facilities.
And I think I think that covers most of it I mean, the one thing that wasn't touched upon as they are also for sale residential homes here that will have the option to join a rental program.
It's not that terribly uncommon for these type of ultra luxury developments these days.
And we are bullish about.
The opportunity for those type of product to join the hotel.
Rental situation, we think there's customers that.
Seek out that type of product specifically and.
I enjoy and we'll pay for that type of product, but if you. If you. So hopefully you'll have an opportunity to see it.
It's an impressive campus.
Going through and just stating the amenities doesn't really give them credit.
We do think the amenities will attract more than just the.
The base of hotel customers Bryan mentioned, the winery restaurant the spa.
And quite frankly, the introduction of <unk>.
A leading.
Luxury ultra luxury brand into one of the highest demand luxury leisure markets in the U S that they frankly havent had.
<unk> two.
We think will be an avenue to a strong amount of customer interest.
Large amount of meeting space multiple venues and event bar and so on and so forth.
Thanks, Chris.
Okay. Thank you and your next question comes from the line of Steven from Jain from Goldman Sachs. Your line is open.
Hi, Thanks, I will take one more but at the Apple here when when you were talking about or thinking about acceleration of growth, where do you think sunstone can have a differentiated view or.
<unk> approach in the current transaction market to create value.
Hey, Steven It really comes down to as.
As you said, it's what is that differentiating view.
There are there's a lot of capital out there.
There are all of our peers and private equity looking at different deals and what what at the end of the day causes someone to be.
At the end of the day and most the most aggressive.
Individual asset comes to comes down to where you've had success and where your core competence competency is in and what you what your view of that asset is and so when we look.
Through our successes and.
Assets, where we've had we've created the most value.
Those are ones, where we can look and try to find them.
Maybe we will see more in an acquisition than someone else.
We are definitely not shy of doing the larger value adds those have been some of the most rewarding.
Transactions that we've we've done they do take time they take capital.
That's why we have the balance sheet that we have but we will we will look to do to do big turnarounds and then we will also look in in markets, where we think that we can.
Use our asset management.
To to get more out of the asset if you remember when we acquired the.
The Hyatt San Francisco.
There was a rooms renovation that happened, but quite frankly, it was just a pretty average.
Cyclical rooms renovation.
But we did see.
Time of of asset management opportunities, where we could we could you know.
Remixed the hotel and drive rate and get our food and beverage margin up from basically nine two.
Two.
Into the teens and so that's something that.
We look to our past to help determine where we're going to pick our spots and invest our shareholders' capital to get them the returns that they require.
Let me just add to that.
Good commentary by Bryan, Let me just add to my experience being in and around reach for.
For quite a while and running nationwide health properties and being on several reports is that you have to be in the market at the investors are entrusting their capital to you to invest in real estate in our case and hotel real estate.
And to do that well I think you have to be in the market. All the time, meaning youre constantly looking for acquisition opportunities and you're constantly looking for disposition opportunities to do that well you have to be agnostic about your assets.
<unk> underwrite them every year and you ask yourself. The question would I buy this hotel based on what I think its future prospects are or not and you make decisions on that I think.
The team is evolving to the point that they are increasingly agnostic.
Subscribe to that notion that that's a good way to view it and you have to accept the market is the market right you do what you can through relationships in off market transactions to.
To try and acquire intelligently, but the market's the market and you can choose either to retreat and go to the sidelines and hope for conditions to become more favorable or stay in the market and you invest intelligently, sometimes you do that relatively.
Aggressively and so because you do it more aggressively sometimes you do it not at all but it's not because the market you just believe that the choice at this particular point in time is to not make investments or you just haven't matched things up.
You too much on the sidelines My view is good luck, finding the perfect alignment, where the capital markets and the real estate markets and everything else is in perfect alignment. So.
I believe that we know how to make really intelligent decisions to value add to assets.
<unk> assets in our portfolio and exist with like the La Jolla transaction and I hope people really reflect on that that's a terrific transaction, we unleashed a lot of capital.
People did not ascribe to that hotel because they didn't understand the land value. So there's a lot of opportunities. There you have to be in the market. You have to have good people you have to be working to grow the business on an intelligent basis and every year, our portfolio should improve and it will.
Great. Thank you and your next question comes from the line of Chip from Snow Clark Your line is open.
Hey, guys. Thanks for taking my call.
Hey.
Good to talk to you guys again.
Yes.
Through the proxy.
By my calculations, there was a two and a quarter of million signing bonus for Doug and $5 million retention bonuses, and obviously, the $11 million and severance.
It's just a dead weight so.
That's $20 million to $25 million.
The explanation.
Given.
On a disorderly transition.
Is.
Is unsatisfactory.
Saying, it's the right time to move on and creating a disorderly transition that cost shareholders $20 million. I think is is very disrespectful to shareholders.
Just wanted to give you guys another chance.
And to give shareholders.
Something that makes it a little bit more sense.
There's a lot of a lot of our money went out the door.
A lot of them on this transition and he was arguably the most well light CEO in the space and all the other.
All the good things Youre talking about he set up.
So I don't disagree that John was very well liked I am among his biggest fans.
And so let's start with that and and now I'm going to set a decide I wish John nothing but the best I hope at some point in time, we're able to rekindle our friendship he's a very intelligent man. He's a good man we made the decision that his skill set did not match with the needs of the company are that cost money that's how.
Business works, that's how it was set up youre going to be able to tell if we made a good decision or not based on what we do from here and I'm, telling you and I think the actions suggest what was accomplished in the last 60 days that we pushed a lot of things over the finish line, we found value in la Jolla that we weren't even sure existed.
And there's more of these things to come so I respect your opinion I understand it but it doesn't change my point of view and I don't think it changes the board point of view one Iota. We know we've got a lot to prove we know that there were costs incurred we expect to get a good return on that investment.
Hey.
That's the end of our Q&A session I'll hand, the call back to Mr. Bryan Julia for closing remarks.
Thank you everyone for your time today, and the interest and support in the company. We look forward to meeting with many of you.
In the upcoming conferences over the next several weeks. Thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now.
Disconnect.
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