Q4 2021 Host Hotels & Resorts Inc Earnings Call
[music].
Good morning, and welcome to the host hotels <unk> resorts fourth quarter 2021 earnings conference call.
Today's conference is being recorded.
At this time I would like to turn the call over to Jamie markets Senior Vice President of Investor Relations.
Thank you and good morning, everyone.
Before we begin please note that many of the comments made today are considered forward looking statements under federal Securities law.
As described in our filings with the SEC. These statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed.
And we are not obligated to publicly update or revise these forward looking statements.
In addition on today's call, we will discuss certain non-GAAP financial information such as <unk>, adjusted EBITDA Rd and hotel results.
You can find this information together with reconciliation to the most directly comparable GAAP information in Yesterdays earnings press release.
In our 8-K filed with the SEC.
And in the supplemental financial information on our website at hotels Dot com.
With me on today's call will be Genworth, Elio, President and Chief Executive Officer, and Bob <unk>.
<unk>, Vice President and Chief Financial Officer, with that I would like to turn the call over to Jim.
Thank you, Jamie and thanks to everyone for joining us this morning.
The uncertainty of COVID-19 barriers, we significantly outperformed expectations during the fourth quarter.
Substantially beat consensus metrics for the year with.
We delivered adjusted EBITDA.
$242 million.
Which exceeded our interest and capital expenditures by $68 million and achieved adjusted <unk> per share of 29 during the quarter.
In addition to delivering positive metrics each quarter, we achieved meaningful sequential increases each quarter throughout 2021.
Pro forma total revenues in the fourth quarter grew 20% compared to the third quarter, while pro forma hotel level operating expenses increased only 15%.
Revpar for the fourth quarter was $148 as volume and rates continue to hold up at our hotels in sunbelt markets.
This is the highest quarterly revpar, we have seen since the onset of the pandemic and closes out a year of strong sequential improvements.
Revpar improved 13% compared to the third quarter. Despite some softening of demand in late December due to the omicron barriers are.
Our recent acquisitions, which I will touch on shortly all contributed to our outperformance during the fourth quarter and are exceeding our underwriting expectations.
Preliminary January Revpar is expected to be approximately $105, a 130% increase over January 2021.
Our preliminary February Revpar forecast is expected to be 150 to $155 and we expect a significant pickup across business segments in March which is consistent with the recovery we experienced following the delta area.
In addition to delivering significant operational improvements we continue to be recognized as a global leader in corporate responsibility.
Our 2025 emissions target is verified by the science based targets initiative at the one five degree Celsius ambition level, making hopes the first hospitality company and among the first three real estate companies in North America.
Set emissions reduction targets in line with the Paris, agreement's highest level of ambition.
To complement our environmental targets, we were the first lodging REIT two issues social targets, including to diversity related targets and one employee engagement target.
We also continue to execute on our three strategic objectives.
All of which are aimed at elevating the EBIT growth profile of our portfolio.
As a reminder, our objectives include redefining the hotel operating model with our operators gaining market share our renovated hotels.
Strategically allocating capital.
As it relates to the last strategic objective during the fourth quarter, we acquired two hotels and sold six hotels.
Subsequent to quarter end, we sold one additional hotel.
This brings our total early cycle acquisitions to $1 6 billion.
At a blended 13 times EBITDA multiple.
Our dispositions to approximately $1 billion at.
At a $15 four times EBITDA multiple including estimated foregone capital expenditures of $290 million.
This is a continuation of our strategy to deploy capital into assets that we believe will elevate the EBIT growth profile of our portfolio.
As a refresher our 2021 acquisitions included.
Regency Austin.
Four seasons, Orlando at Walt Disney World Bakers.
Baker's key resort in key Largo.
The Lora hotel in Houston.
Leila Ventana Big sur.
Alita Savannah and hotel is that in Austin.
We also acquired the Royal kind of Holly and kind of Polycom golf courses and Maui.
All of our recent acquisitions are performing substantially ahead of our underwriting expectations.
For the full year 2021, EBITDA at our new acquisitions was $37 million higher than the full year 2021, EBITDA that was estimated at underwriting which represents a 73% increase and the golf courses were $4 million higher.
Turning to our fourth quarter acquisitions in December we closed on the Alita Savannah, a 173 key boutique hotel for approximately $103 million.
This newly constructed hotel opened in October 2018, and benefits from soft branding and Marriott's tribute portfolio.
With no expected near term Capex favorable operating cost and multiple demand drivers stabilization for the leader is expected in the 2024 to 2025 timeframe at approximately 11 to 12 times EBITDA.
In addition in December we acquired our second hotel in Austin Hotel, there that a 319 key luxury lifestyle hotels for approximately $246 million.
Including its $4 million FX any reserve.
The acquisition price represents a $13 two times multiple on 2019 EBITDA.
Funded the acquisition with approximately $140 million and proceeds from recent dispositions and assumed approximately $102 million of existing secured debt.
Located adjacent to Austin's popular Rainey Street Entertainment District.
Recently constructed hotel opened in 2015 and is poised to benefit from continued large scale development. We expect the hotel to stabilize at approximately 10 to 12 times EBITDA and the 2025 to 2027 time frame.
On the disposition front, we sold the 305 key W. Hollywood in December for $197 million or.
25 times 2019 EBITDA.
When calculating the EBITDA multiple we included $33 million of estimated forgone capex over the next five years.
This is a third ground lease assets, we sold in 2021.
In addition, subsequent to quarter end, we sold the 220 key Sheraton, Boston or $233 million or $14 two times 2019 EBITDA.
Calculating the EBITDA multiple we included $135 million of estimated forgone capex over the next five years.
In connection with the sale we are.
Providing a $163 million bridge loan to the purchaser, which we expect will be repaid within its first six month term.
Looking back on our transaction activity since 2018.
We have acquired $3 $2 billion of assets at a 14 times EBITDA multiple and disposed of $4 $5 billion of assets at a 17 times EBITDA multiple including $793 million of pork on Capex over the next five years with.
With these transactions, we have dramatically improved the quality of our portfolio.
Comparing pro forma 2019 results.
Current portfolio to 2017, we have increased the revpar of our assets by 11%.
EBITDA per key by 20% and the EBITDA margins by 120 basis points as we continue to evaluate capital allocation opportunities going forward.
Our efforts will remain focused on assets that further bolster our EBITDA growth profile.
As part of our capital allocation efforts in January we acquired a 49% interest in the asset management platform available investment groups to cultivate innovative hospitality opportunities within Noble's private fund platform.
We invested $97 million and its fee based asset management business, comprising $35 million of cash and $55 7 million of equity or 3 million operating partnership units, which are subject to a one year lockup period.
In the future. We also have the ability to acquire an additional 2006 to $2, 51% and noble which would bring our aggregate interest to between 75 and 100%.
In addition, we have made a $150 million LP commitment to the next noble fund.
Based on our current ownership interests, we are targeting average net expected earnings of $7 million to $10 million annually over the next three years.
Over the past three decades, <unk> has invested nearly $5 billion in acquiring and developing approximately 150 assets and the branded upscale select service and extended stay segments.
Ross 80 core markets in the U S.
The $19 93 by MIT Shah who remains the CEO . The noble team has a multiyear cycle track record and extensive experienced sourcing investment opportunities in real estate and capital markets.
Our investment represents yet another opportunity to elevate the EBIT growth profile of our portfolio by creating a new income source from recurring management and development fees and allowing for investment in select service hotels extended stay hotels and new development opportunities.
The partnership will combine <unk> strong track record development acumen, and the <unk> service and extended stay categories.
<unk> management experience with our scale market insights and data analytics to source differentiated investment opportunities.
By capitalizing on Noble's deep expertise, we will have the ability to incubate and invest in future lodging adjacent strategies.
Thereby creating additional path for long term strategic value creation.
Those strategies include property technology solutions development and alternative lodging.
Believe a funding vehicle is one of the best ways to gain chain scale diversification.
Noble's expertise with select service and extended stay hotels or preserve our focus on investing in upper upscale and luxury hotels and resorts.
Moving onto the fourth quarter operations, we continue to close the gap to 2019.
Transient demand in the fourth quarter with 82% of 2019 levels.
Paired to 77% in the third quarter and 58% in the first half of 2021.
And we are encouraged that transient rate in each of the four quarters in 2021 exceeded rates in 2019.
Our hotels also saw continued improvement in group during the fourth quarter compared to the third quarter.
Driven by demand growth of 15% and a 17% rate improvement.
Also bolstering our group results was the continued meaningful improvement in banquets.
Banquet and AV revenue was $150 million in the fourth quarter.
84% over the third quarter after having doubled from the second quarter to the third quarter.
So Rob will get into more detail on business mix in the fourth quarter shortly.
In addition to successfully deploying capital this year, we continue to focus on our three strategic objectives. As a reminder, we are targeting a potential $267 million to $342 million of incremental stabilized EBITDA on an annual.
Basis from the initiatives and projects underlying our strategic objectives.
Approximately $120 million is expected to come from the seven acquisitions, we completed in 2021.
$100 million to $150 million is expected to come from potential long term cost savings overtime based on 2019 revenues from redefining our operating model with our managers.
We have taken steps toward 50% to 60% of these savings to date.
Another 22% to $37 million of incremental stabilized EBITDA is related to our goal of gaining three to five points a weighted index growth at the <unk> Marriott transformational capital program hotels, and eight other hotels, where major renovations had been recently completed or underway.
In 2021, we completed three Marriott transformational capital program properties and subsequent to quarter end, we completed two more bringing the number of completed properties in this program to 12 out of 16.
In August we completed the final phase of construction at the New York Marriott Marquis and in October we completed the final phase at the Orlando World Center Marriott.
Closing out both of these three year transformational renovation programs.
Other properties completed over the past year include the Houston Marriott Medical Center, the Marina del Rey Marriott and the Ritz Carlton Amelia Allen.
We completed approximately 85% of the program as of year, Ed and we expect to substantially completed by the end of 2022.
The remaining Marriott transformational capital program properties include Boston Copley, San Diego Marriott Marquis.
Metro Center, and the GW Marriott in Houston.
We expect to receive approximately $11 million and operating profit guarantees under the Marriott transformational capital program in 2022.
Additionally, this year, we added three hotels to our list of major renovations.
The Westin Denver downtown.
Miami, Marriott Biscayne Bay, and the Westin, Georgetown and Washington DC.
Finally, the remaining 25% to $35 million of incremental stabilized EBITDA over time on an annual basis is expected to come from recently completed and ongoing ROI development projects.
Projects are at different stages of renovation and development and stabilization is expected to occur two to three years after completion.
To date, our ROI development project at the end as Maui villas and the one hotel Beach club have reduced return significantly greater than our original underwriting.
Our 2022 capital expenditure guidance range is $500 million to $600 million.
Which reflects our continued focus on reinvesting in our properties during the early phase of the recovery to position our portfolio for future demand.
Plan includes $245 million for.
For redevelopment and repositioning projects such as the completion of the Ritz Carlton Naples Beach transformation and tower expansion, a transformational renovation of the Fairmont Kea Lani and completion of the Orlando World Center, Waterpark and meeting space expansion.
It is worth noting that our capital expenditure range at the midpoint is $125 million higher than last year.
Which is driven by increased investments in ROI development projects as well as more normalized maintenance capex spend.
To conclude my remarks, we made significant strides towards improving the quality of our portfolio in 2021.
Despite the recent volatility we remain encouraged by the recovery, we are seeing across the lodging industry.
Our capital allocation efforts over the past few years combined with the geographic diversity of our portfolio and our strong balance sheet.
Leave us very well positioned to create significant long term value for our stockholders with that I will now turn the call over to Sarath.
Thank you Jim and good morning, everyone.
Following Jim's comments I will go into detail on our fourth quarter topline performance margins on thoughts for 2022 and provide an update on our balance sheet and dividend.
Despite headwinds from two Covid variance, we continued to benefit from quarterly sequential improvements with 70 hotels, achieving positive hotel EBITDA for the entire quarter compared to 61 hotels last quarter.
Notably, our three New York City hotels to downtown Boston hotels, and the San Francisco Marriott, Marquis all achieved positive EBITDA in the fourth quarter.
Moving on to topline performance fourth quarter Revpar was the highest it has been since the onset of dependent.
In addition December had its highest monthly ADR in host history, which is indicative of the quality of our assets and the pricing power of this recovery.
While these improvements have been driven by leisure.
In Sunbelt markets in Hawaii, with soft fourth quarter, Revpar up 15% to $198 over the third quarter.
<unk> markets continue to deliver sequential operational improvements.
During the fourth quarter, our urban markets grew by 13% to a revpar of $108 once.
Again, we are presenting the best quarter of the recovery for these hotels.
Turning to business segments during the fourth quarter transient revenue improved 7% over the third quarter, driven by a 9% rate increase.
Transient revenue, a sunbelt and Hawaiian hotels was up 8% sequentially driven by a 12% improvement in rate.
Once again exceeded prior peak levels.
Drilling down to resorts.
<unk> grew transient revenue, 30% over the fourth quarter of 2019, driven by a 35% increase in rates.
Compared to the fourth quarter of 2019 and ton of Big sur one of our recent acquisitions grew revenue by over 130%, which was driven by a rate increase of 98%.
Context that rate equates to more than a $1000 increase.
All 16 of our resorts had rates, 20% higher than the fourth quarter of 2019.
Transient rate in our urban and downtown markets was up 7% over the third quarter with demand also up 1%, which was driven by our hotels in New York MDC.
Even with Omnicom concerns dominating headlines business transient demand improved by 5% over the third quarter with rate up 20%.
This was driven by significant growth in October , which had the highest amount of business travel room nights of any month since the onset of the pandemic.
Nearly half of our business transient rooms sold in the fourth quarter.
Urban and downtown markets, where demand was up 16% and the rate was up 10% over the third quarter.
Wrapping up on business transient with more encouraging news, we continue to see a return to traditional business travel.
In the fourth quarter, our operator's traditional top 10 accounts made up 70% of business transient rooms, which is up from 40% in the third quarter. These.
These accounts are all household names, representing a mix of financial services government contracting and consulting companies.
Turning to group.
This segment continued its upward trajectory, we were encouraged by net booking activity in the quarter for the quarter, resulting in 660000 group rooms sold for the fourth quarter.
This level of demand represents 60% of 2019 levels and is up from 52% in the third quarter.
Putting us at $1 2 million group room nights in the second half of 2021.
Group revenue increased 35% over the third quarter, driven by 15% demand growth combined with a 17% improvement in rate.
Most of the room night increase came from Boston, Phoenix, San Diego and San Francisco.
Corporate group room nights increased 11% over the third quarter with a 23% increase in rate.
San Antonio and Phoenix drove most of the demand growth in this sub segment.
In the fourth quarter corporate group room nights were 55% of 2019 compared to 29% for the first half of 2021.
Association groups also showed steady sequential improvements.
Fourth quarter Association group room nights increased 19% over the third quarter with a 15% increase in rate largely driven by our hotels in San Diego.
Association Group room nights were 45% of 2019 in the fourth quarter compared to only 11% for the first half of 2021.
Looking forward to our expectations for group in 2022, we currently have $2 8 million definite group room nights on the books, which compares favorably to the $2 5 million group room nights, we would've had on the books as of the third quarter after adjusting for our recent acquisitions and disc.
Physicians.
Group rate in 2022 remains up 1% to 2019.
And group demand is currently frontloaded with roughly 60% of definite group rooms booked in the first half of the year.
Last quarter, we provided a comparison to 2019 group room nights at that time.
Group room nights on the books represented 54% of 2019 actuals.
Adjusted for our transactions and including bookings from the fourth quarter 2022 definite group room nights now stand at 60% of 2019 Actuals and total group revenue pace is down just 20% to 2019, which isn't additional testament to the quality of our portfolio and the strength of the law.
<unk> recovered.
Moving onto expenses pro forma total hotel operating costs rose by 15% during the fourth quarter compared to the third quarter. Despite a 20% increase in total revenues.
Variable expenses were down 30% relative to a total revenue decline of 25% when compared to the fourth quarter of 2019.
Through February of last year variable expense declines were roughly in line with revenue expense decline, but this trend diverged as hotel struggled to staff up at the pace of demand growth.
Our managers hiring efforts were successful in the fourth quarter and the differential between our variable expense decline and the revenue decline narrowed compared to the third quarter.
Fixed expenses, including wages and benefits were 19% lower than the fourth quarter of 2019, and 9% higher than last quarter.
We continue to see savings from reductions in above property services, which was still down substantially to 2019.
As expected on property sales efforts are ramping up which offset some of the expense savings in the quarter.
Our hotel EBITDA margin in the fourth quarter was 26, 9%, which is just about 80 basis points below that of the fourth quarter 2019.
When you consider that our revenue is still 25% below its fourth quarter 2019 level, our margins are quite impressive.
Increased levels of staffing and fixed costs that will be introduced in the second half of 2021.
Fourth quarter margin strength was primarily a result of higher resort rates better than anticipated food and beverage revenue and elevated cancellation revenues.
Turning to our outlook for 2022, we are still unable to provide operational guidance given the continued volatility surrounding COVID-19 .
We expect sequential quarterly revpar improvements driven by demand growth across our portfolio and continued rate strength at our resorts.
We also expect group and business transient to continue improving in our urban and downtown markets.
At some future Covid variant.
Lesson companies with turns of the office and traditional groups get back to meeting in person.
As a reminder, Easter is much later this year. So some of the pickup we would normally get.
End of the first quarter could bleed into the second quarter.
Although we are not able to provide operational guidance, we would like to provide expected ranges.
Corporate G&A and interest expense.
For the full year, we anticipate corporate G&A to be in the $103 million to $106 million range, and we anticipate our interest expense to be in the $146 million to $149 million range.
From a timing perspective, we expect these expenses to be relatively evenly spread over each quarter in 2022.
Turning to our balance sheet and liquidity position.
As we discussed last quarter, we were able to exit our credit facility Covenant waiver period three quarters ahead of this exploration.
And we achieved compliance with our bond indenture debt incurrence covenants.
As a result, we will.
Able to refinance a portion of our existing bonds with $450 million of new Cvs, Jay Green bonds at a two 9% coupon the lowest in the company's history.
We also extended our weighted average maturity from four to five one years lowered our weighted average interest rate to three 1% and pushed our next maturity out to early 2024.
In addition, during the fourth quarter and subsequent to quarter end, we paid down our outstanding revolver in full.
Together these actions will save us an estimated $5 million per quarter and interest expense.
Pro forma for the revolver pay down and the sale of the Sheraton Boston earlier this month.
We now have $1 8 billion and total available liquidity.
Price of approximately $200 million of cash $144 million of <unk> reserves and full availability of our $1 5 billion credit facility.
Wrapping up I am pleased to share that the board of directors authorized a first quarter dividend of three <unk> per share on host common stock.
All future dividends are subject to approval by the company's board of directors, but as the operational recovery continues we expect to be able to grow our dividend to a sustainable level.
To conclude.
We'll be proud of our achievements over the past year 2021.
Showed that a sustained recovery is underway and we are optimistic that 2022, we'll continue to build on the strong momentum of the past few quarters.
We remain very well positioned to execute on our goal of increasing the EBITDA growth profile and improving the quality of our portfolio.
With that we would be happy to take your questions.
To ensure we have time to address as many questions as possible. Please limit yourself to one question.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset is listening on speaker phone to provide optimal sound quality. Please hold while we poll for questions.
Your first question for today is coming from Smedes Rose. Please announce your affiliation and pose your question.
Hi, good with Citi.
I was just wondering.
And throughout if you could just talk a little bit about the.
The staffing levels, you've achieved your hotels it sounds like demand is coming back.
Faster than expected and kind of where are you on being able to.
<unk>, maybe it's around your thoughts on just kind of what the pace of kind of wage and benefit increases should be over the course of 'twenty two.
Sure Smedes I'll take the first part of it throughout can take the second part of it.
We added about 1000 positions in the fourth quarter.
And as you may recall.
And on the Q3 call.
Sure.
<unk>.
Stated that.
This happening levels were at 94%.
Our managers is our goal.
Typically they run at about 97% they never get to parity there were never at a 100%.
With the increase in business volume in the fourth quarter, even though we added 1000 physicians.
We still remain at about 94%.
I can tell you based on conversations we've had.
With our managers there is a degree of confidence there.
The open positions are going to be able to be filled as things open up as the bank gets behind us as children get back to school.
In person.
The country and as the various forms of stimulus burn off which many of them already have so with that I'll, let Rob talk about a point of view around wages wage increases and inflation.
Okay.
For 2022.
That thing year over year increase wage rates of somewhere around four to four 5%.
And this is in line with sort of what we had spoken about in terms of 19% to 20, <unk> CAGR you might recall, which we said would be somewhere around 5% to 7% in aggregate for our portfolio.
Okay. Thank you.
Your next question is coming from Bill Crow. Please announce your affiliation then pose your question.
Hey, good morning, guys Raymond James.
I do have a follow up for you, Jim, but let me start with <unk>.
Just thinking about the <unk>.
Transition from 'twenty, one to 'twenty two a couple of line items. If you could just quantify the total support you got primary out whether it's the <unk>.
Transformational capital program or other performance guarantees in 'twenty.
'twenty, one and what your expectations are for that in 2022, and I think Jim you mentioned $11 million.
The transformational side.
And then the second part of that.
<unk> is the <unk>.
You talked about $40 million of.
Cancellation and attrition fees in the second half of 2021, how much of a drag is that on margins.
As you try and replace that with actual business.
Sure So to answer the first part of your question.
Yes for 2022.
The amount that we're getting from Marriott in terms of the operational profit guarantee that is $11 million that compares to about $14 million.
<unk> four <unk>.
In 2021.
As it relates to the attrition and cancellation translation revenue could put into perspective, we did approximately $20 million of attrition cancellation revenue, we collected that in the fourth quarter.
And when you compare that to 2019, it's only $5 million or above that actually when you look at the full year in terms of attrition and cancellation revenue. It is very similar.
Two what we collected in 2019, which is about sort of $55 million or so.
What's different is the way, we got there and the <unk>.
Mix of.
Attrition and cancellation revenue that we collected as different as business starts coming back we expect obviously the group cancellation revenues too.
To reduce however, there should be a pickup in transient cancellation revenue.
Overall cancellations.
Revenue mix perspective that we expect to change as we normalize.
Throughout this year, but when you look at sort of just COVID-19 to 21 total cancellation revenues, they're actually pretty similar in terms of total dollars collected.
Alright, Thats helpful and Jim said it was going to have a follow up for me to play Devil's advocate for a second.
You suggested that the <unk> investment was an efficient way to gain diversification across.
<unk> scale. So I think it was the perforation, obviously, but.
Is that something that investors have asked for from host because because you've done a really good job of just kind of concentrating on these.
Wonderful top 40, or maybe its top 50 assets now and I'm just I'm just wondering what drove you to think about that diversification.
Sure Bill happy to answer the question.
It's not something we've heard of.
Heard from investors quite frankly.
But as we think from a strategy perspective and.
Playing the long game here.
How can we transform.
<unk>.
Income stream of the company to make it more sustainable going forward.
One of the things that.
That has always been of interest to US is the fund management business.
So.
We talked a lot.
About strategy among the senior team and with our board about really three things that noble checks the box for US on fund management, how do we play in select service without.
It becoming a distraction and without it really.
If you will muddying up our story.
And.
We have a lot of expertise on the development side as well we have a really solid design and construction group I think they are the best in class.
Barring away with some of the projects that <unk> seen in some of the projects that we've completed so as we sat back and thought about those three objectives.
The best way to accomplish that is through an off balance sheet vehicle.
And.
No. We think is also best in class.
So investing in the new.
Local platform gives us the ability over time to grow a sustainable stream that is not subject to the cyclicality of the of the lodging industry. Its commitment fees its asset management fees. Its development fees. It gives us an opportunity to further deploy capital.
Into.
The select service space without again, it becoming a distraction for the management team at host.
MIT Shah and his team had been in business since 1993, they've invested over $5 billion and they have a very strong track record.
Again.
Select serve.
The way they have done it is a very attractive investment from our perspective, and we've made $150 million commitment to his next fund.
And lastly.
Yes.
Having the ability to.
Participate in.
Development projects in an off balance sheet structure is also something that was very attractive to us that's not something we ever wanted to do on our balance sheet is not conducive to the REIT model. So.
It's just a.
Another opportunity to elevate the EBIT growth profile of the company.
The way that it's not going to be a distraction, but is going to bring two very very successful best in class organizations together.
Great I appreciate the answers.
Sure.
Your next question is coming from Floris Van <unk>. Please announce your affiliation then pose your question.
Hi, Floris at Compass point.
Question.
Jim and maybe if you could touch on this and I guess so.
It's more regarding the valuation of hotels.
And I saw number one.
Three ground leases, you've got some more ground leases I don't think youre going to sell any of the San Diego ground leased hotels, but maybe if you can.
Which other hotels might be on the block.
And also talk about maybe if you could touch on I noticed the the one hotel had $68 million of hotel EBITDA.
This past year, how does that compare to pre COVID-19 levels and and how sustainable the one fear that we hear from some investors is we will achieve these resort hotels are have really strong EBITDA today, but could that falloff, how sustainable is the EBITDA from your top resort hotel.
And maybe talk about a little bit about the growth prospects for those assets.
Chris There is an awful lot in that one question. So let me see if I can take it apart for you a little bit I'll start with.
Your question regarding what other hotels might be on the block.
And how we are thinking about ground leases, we sold three ground leased hotel is probably not going to we're not going to sell.
The Manchester Grand Hyatt, San Diego Marina Marriott.
I'll, just I'll just say that.
Anytime, we think about an acquisition or a disposition.
Over shattering overshadowing that conversation is.
Will it elevate the EBIT growth profile of the portfolio and that really is our baseline as we sit down and look at okay is this asset going to grow.
Below.
Average or above the rest of the portfolio it hosts.
That is a gating issue for us and.
There are not all ground leases are created equal.
The.
The ground leases associated with the San Diego properties or with the port of San Diego.
They have I think a 65 year maximum term, but every time you invest capital in your assets you're able to.
Extend the ground lease up to that 65 year term limits, so not so with others.
That are in private hands.
And.
If it makes sense for us to dispose of assets that have ground leases that will certainly do that.
And.
Replace.
<unk>.
Recycle that capital either into additional acquisitions or into additional ROI projects.
As we're undertaking this year and as we have been undertaking again just to elevate the EBITDA growth profile of the company with respect to the one hotel in particular.
Yes.
I actually went through the supplemental myself yesterday, and when I saw that $68 million number I had to do the math does that eight eight times EBITDA on our purchase price.
And when we underwrote that deal.
We were at 13 times EBITDA.
And in the first year I think we came in at around $12 five times. So yes. The asset has performed extremely well, we couldnt be happier.
We believe that.
The strong leisure demand that we've seen during COVID-19 .
It's certainly sustainable for all of 2022.
There may be some moderating and tempering of the rates that we can charge at <unk>.
Some of our resort properties in.
In 'twenty three 'twenty four is international markets open and as American citizens.
Want to travel abroad, again, but don't forget when that happens international citizens youre going to be coming to the U S. At a market like Miami in particular is a gateway leisure market for international travel. So we're optimistic going forward.
Other interesting data point with respect to our 16 resorts is that.
They are up more than 20% and ADR over 2019. So we've had extremely strong performance. We've had no pushback from consumers. The properties are all in terrific shape.
They need to have capital invested in them, we'll certainly invest the capital. So that we can continue to drive outsized rates.
Thanks, Jim.
Your next question is coming from Neil Malkin. Please announce your affiliation then pose your question.
Hey, everyone, Neil Malkin with capital one securities.
Hoping.
You could talk about the.
<unk>.
Kind of operating model that was one of the things that you said are.
Or is.
One of the three.
The facets that youre working on to improve the company and grow EBITDA et cetera.
I believe yesterday Hilton talked about I think.
400 to 600 basis points.
In terms of the.
The model or the margins.
I was just hoping maybe you could give some insight.
As we began a little bit further past covenant and you've kind of hammered out more of the brand standard.
Enhancements.
Does that 100 to 150 number or whatever that equates to in basis points does that seem.
Low now and do you think given the things you've seen with <unk>.
The staffing and efficiencies and <unk> and things like that.
That may wind up being low and that sort of the previously disseminated margin improvements are going to wind up being.
Light of what's actually going to happen.
Okay.
Hey, Neal Sarah so.
I think the way to think about it in terms of the margin expansion. It really will be driven by how quickly we get back to 2019 levels.
And you're right. So the $100 million to $150 million. We are still very very confident we can deliver that in incremental EBITDA based on 2019 numbers at all.
All depends on when we get back to the revenue and frankly, if we get back via rate for us, which it looks like we will obviously you benefit more on the margin front as a result of that so yes. There is definitely a possibility that you end up getting more of our margin expansion as a result.
Coming back to 19 levels right.
It relates to where we stand on our initiatives.
We talked about it in sort of three big buckets. One is the reduction of management staffing at all of our hotels and it was very hotel.
Specific went through every single hotel in sort of zero based budget.
Figure out what the ideal staffing level is normalized level.
And I'm happy to report that we had said about 25% to 30% of management staffing would be reduced permanently.
And that is has been the case and thats baked into our 2022 budgets. The second big bucket was reduction in above property charges.
Rich if you listened to the Marriott call.
<unk> has also resulted in savings and will continue to result in savings Thats also baked in.
The last bucket sort of twofold. One is as you said is the <unk>.
Modification or elimination of certain brand standards, and then also leveraging technology to drive improved productivity.
I will say of the 100 $150 million, 60%, we have already initiated and we are well underway to initiate the balance 40%, which is really the third bucket of brand standards and technology implementation on the brand standard piece. There are a lot of changes that have already taken place.
Whether thats removal of Compendiums or.
Making alarm clocks optional.
Or relaxation of rope slipper standards at the premium brands.
Including flexibility of operate operating hours for the club lounge.
Minimum.
Our is that not only for the club lounge would also premium restaurants relaxation of whether you read three new restaurants at non resort hotels. So we made significant progress on the brand standard front I think the piece, which we are still testing right now.
Housekeeping and we will have an answer on that at sometime middle of this year, but certainly not going back to where we were in 2019, it's really about providing more optionality and flexibility to the guests, but so making sure there is that guest satisfaction level.
Thats needed for the respective brands. So hopefully that gives you some color.
Yes, I appreciate that thank you.
Sure.
Your next question is coming from Jay Kornreich. Please announce your affiliation then pose your question.
Hey, its Jay Kornreich with SMB nikko, great to be on the call.
With the return of office inflection point likely now underway, which we expect to lead to a strong recovery in BT demand and you indicated seem seeing settlement in February do you consider getting more aggressive and shifting your acquisition pipeline to focus more on dense urban markets to get ahead of that instead of the resort and sunbelt strategy over.
The past year.
So J. Your question is are we going to move to where the puck is going or where the puck is already been right.
And the correct and the words of Wayne.
As we think about acquisition opportunities I will say a couple of things.
We don't have a red line through any market.
In the United States today.
And nor do we have a red line through any property type.
However, we have not seen a lot of opportunities in the major urban markets to date.
And we did have a keen focus last year on settled out and resort markets.
Even if we were to deploy capital into the major urban markets, assuming we could find the right asset.
At the right pricing.
And it worked for us.
I think the demographics of the nation are such that.
We will continue to deploy capital in sunbelt markets for a lot of reasons.
Just the the inflows of business the inflows of our people.
People.
The favorable operating environment, the low cost structure.
It makes those markets attractive to us and resorts today, we own 16 resorts.
It's the.
If you look at the supply statistics.
The lowest level of new supply in the nation is in the resort market.
And the second lowest level of new supply is in the big box hotels, many of which we own.
So we're very comfortable in both of those areas and.
As opportunities become available we will certainly evaluate them there just hasnt been anything in the market that's been of interest to date.
Okay I appreciate the color. Thanks, so much.
Your next question for today is coming from Stephen Grambling. Please announce your affiliation then pose your question.
Hey, it's even with Goldman Sachs, maybe a follow up on the urban market question are you seeing any change in the supply backdrop in these markets given how long some of these assets.
Effectively stayed negative EBITDA.
Would that potentially be.
Kind of for you maybe shifting back into those markets I should say shifting back, but maybe refocusing there.
Yes Stephen.
Fly has taken material hit.
A lot of the markets around the country I think that.
CBRE and FTR are true.
<unk> supply growth at just over 1% through at least 2023.
The total pipeline is down something like 8% to pre pandemic levels.
And there are a lot of projects out there, but they're just languishing right now.
The most comforting statistic around.
Supply is the in construction pipeline is now about 25% to pre pandemic levels.
The supply situation is you can't paint a broad brush with it.
The lowest supply markets are.
Hawaii.
San Diego, San Francisco and Seattle.
Unfortunately, there are still a lot of supply coming online in New York.
I think we're going to see that happen over the course of 'twenty, two and even 'twenty, three and Theres a lot of supply coming online.
Angelus so.
There are some.
Hotels that are not going to reopen in.
San Francisco and in New York, but it's.
It's nothing like.
The talk early in the pandemic about that.
A massive shift.
Hotel inventory coming out of the market so.
Again market specific asset asset specific pricing specific.
But we will.
Continue to.
Explore opportunities again with the sole objective in mind being elevating the EBIT growth profile of the company.
Helpful. Thanks, I'll jump back in the queue.
Okay.
Your next question is coming from Robin Farley. Please announce your affiliation then pose your question.
It's robin Farley with UBS.
Questions have been answered, but I guess, just maybe one more follow up on the transaction environment. Just given you had a great track record of transactions last year.
With kind of a more recovered market out there interest rates moving up I guess how.
How much opportunity how would you compare.
Environment generally in terms of opportunity for transactions.
Compared to where it was.
In the second half of last year, and if you can remind us if there is a certain dollar amount that you have to spend on acquisitions. This year like as a result of a 10 31 exchanges or anything like that that we should keep in mind too. Thanks.
Robin.
Second part of your question regarding certain dollar amount there is not.
We have been.
To like kind exchange.
Our sales proceeds really reverse like kind exchange or so sales proceeds into the acquisition that debt.
That we did last year most recently.
So.
The Sheraton Boston into the.
Hotel bans and so we're in a very good place with respect to <unk>.
Pressure to buy assets.
To protect the 10 31 exchange issue.
I think what happened with the.
The army crime variant coming to light in December .
Typically we would see.
A strong pipeline of assets at the Analyst Conference, which was held.
Third week in January this year.
Yeah.
I did not.
We as a company the right team did not hear of a lot of acquisitions in the market today, we think people will have.
Old back as a result of omicron.
And just wanted to wait and see.
With the impact was.
On hotel performance and as we've said.
$105 Revpar in January $150 to $155 Revpar in February a strong bounce back. So I would expect that we'll see more properties come to market in the second half of the year.
But at this point in time.
There just arent that many assets out there that.
That we're interested in and I might remind you that.
Seven assets, we bought last year five of them, we purchased off market. So we're going to continue to.
Have conversations with owners of.
Hotels that are of interest to us.
Okay, that's great thanks very much.
Yes.
Your next question is coming from Anthony Powell, Please announce your affiliation and pose your question.
Hi, Anthony Powell from Barclays. Just a question on the dividend, which was a nice surprise that how did you get to the <unk> quarterly number.
You didn't have to pay dividend, giving your Nols I'm curious how should we expect the dividend to trend over the next several quarters and you look at percentage of <unk> cash flow just more detail will be super helpful.
Sure Anthony.
No magic number that we sense. It really is what we're comfortable paying.
Paying based on the recovery trajectory that we are seeing it will all depend frankly on how that operationally recovery pans out.
Obviously, our goal is to grow that dividend and get it to a sustainable level.
But <unk> is what we're comfortable with for the first quarter, we will see how operations shape up and what happens in subsequent quarters.
We'll obviously be authorized by our board of directors.
So it could go up here even in the short term if things continue to improve is that a fair assumption.
That's fair.
Alright, great. Thank you good quarter.
Thanks.
Your next question for today is coming from Ari Klein. Please announce your affiliation then pose your question.
Thanks, Ari Klein with BMO.
Maybe on the Capex front, the Marriott transformational program wraps up this year in Capex, maybe assets that have been sold.
Is the 400 $500 million ex Marriott is kind of the right way to think about Capex beyond 2022, and what are some of the major ROI projects that are being contemplated beyond this year.
Sure.
Yeah.
Let me start with a couple of the major ROI projects that are in that number.
I do want to emphasize that.
The Capex guidance, we've given $200 million.
As related to two major ROI projects that we believe will.
Develop very <unk>.
<unk> delivered very attractive returns double digit cash on cash returns on the money, we're putting into them. The first is the Ritz Carlton Naples.
It's a complete transformation of that asset.
Every part of the of the resort, which is just a terrific hotel.
On the beach in Naples, Florida is being touched.
We are increasing the room count from 450 rooms to 474 rooms.
And we are combining 100 keys at that property just to give you some color.
To allow us to enhance the suite count from 35 suites to 92 suites. We're building at 74 key new tower.
And we're.
Building, a new club lounge that is frankly six times the size of the existing club.
Why is that important for context club rooms get an average annualized that ADR premium in excess of $220 and we just didn't have the space at that property too.
To sell the number of club rooms.
That the demand would warrant so we're very excited about that.
Things, we're doing at Naples. Additionally, we are.
Building, a new swimming pool, and pool bar and completely redoing the lobby.
This is anticipation in part a couple of things number one focus groups.
Work that we did indicated that it was time to really update this property that had been building 1985.
And really the bathrooms in particular.
Needed to be updated and we went from three picture bathrooms, either for fixture bathrooms throughout the entire hotel.
We wanted to get ahead of that.
The opening of a new four seasons down the road, which is about three years out so we'll be in very good shape another asset that.
We're investing in in a meaningful way a transformational way as the Fairmont Kea Lani.
On the avid Maui widely.
Then another terrific resort that we think.
It is going to develop going to deliver double digit returns and double digit cash on cash returns on our repositioning and.
Roughly $120 million and allow us to better compete with the four seasons, which is adjacent to the property. So that's how we think about <unk>.
Capex.
We have I think this year.
Mentioned.
In my.
In my remarks.
<unk>.
We're going to.
In addition to finishing up the Marriott transformational capital program, we're going to completely reposition three other properties the Westin in Denver, the Westwood in Georgetown and the Miami Biscayne Bay Marriott.
I'll expect it to.
Meaningfully increase yield index as a result of the capital that we're investing so we're well on the way.
We're excited about.
Okay.
Three to five point gain in yield index, we think actually that.
We're going to do better than that because that 3% to five point gain that we had messaged at three point index is $22 million.
Those numbers were developed pre pandemic.
And over the course of the pandemic, we have been investing in our assets again, it's one of our three it's three strategic objectives to gain market share.
<unk>.
And we feel very confident that is as business returns.
Our assets are going to meaningfully outperformed the competition because those assets a either haven't been invested in or are there going to have to be taken out of service and theres going to be attendant disruption. So.
Stay tuned on that front.
Thanks for the color.
Your next question is coming from Chris <unk>. Please announce your affiliation then pose your question.
Hey, it's Chris from Deutsche Bank, Thanks for taking the question.
Jim as you guys think about the new cost structure that you've put in place and I understand you're still trying to hire some some employees to fill it out.
But we don't know exactly yet where all the brand standards are going to fall right on housekeeping and things like that by brand and price point. So the question is.
Is this just going to be an evolving situation or do you think do you think the brands get to a point, where they say this is a standard we're going with it and hire employees.
As needed just trying to get a sense for whether there is any kind of late.
Latent risk that we're going to end up with more.
More labor than we thought we might need a year from now.
Let me, let me start the answer Chris and then drop to jump in as well because he has been having.
The conversations at the brand level.
Yeah.
We started having conversations on brand standards pre COVID-19 .
So it's not something that.
The initiative wasn't.
Undertaken just as a result of the pandemic, but it was something that we.
We had conversations with our major managers on.
In 2018 actually.
In 2019.
It's very clear now that.
There is no one brand standard that fits all hotels.
Both of our major managers have.
<unk> seen significant reductions in head count at their headquarters.
Which really impacts.
Above property.
Costs and expenses.
<unk>.
So I think we feel very confident that.
We're not going to see creep coming back in.
With that said I'll, let Rob.
Drop.
Jumping in and maybe even talk about some of the more recent patients we've had.
Yes, I would echo what Jim said I don't think there is really risk in terms of keep coming back and we have confidence in that and when you look at the start.
Our success in expanding margin pre COVID-19 .
Which is pretty meaningful.
Later ourselves from our peers on the margin front.
Because we didn't let cost creep come back and this time around like I was saying earlier, we have zero base everything every single hotel is the first time, we have the opportunity because a lot of hotels.
Spend on their operation for management to really take a step back work very closely with our asset management and enterprise analytics.
Team to come up with what's ideal.
Really operating model should be in staffing levels could be once things get back to normalized level or anything that gets added back but there is an approval process that needs to go through and unless there is truly an ROI associated with that position being added back.
Certainly do not approve it so we are pretty confident of that.
If there is any position added back deliberately return associated with it otherwise, it's not going to be at.
Yes.
Alright.
Okay very helpful. Thanks, guys.
Your final question for today is coming from Rich Hightower. Please announce your affiliation then pose your question.
Hey, good morning, guys Evercore ISI. Thanks, Thanks for squeezing me in.
I guess.
Just two.
Maybe play Devil's advocate for one second here on the dividend at least over the long term I mean, certainly in the short term I totally understand.
A nominal dividend for sort of technical factors in terms of who can own the stock and so forth.
But you know given that we're early into the new cycle. As we are there is there is a lot of investment opportunity is probably coming down the pike, you've got significant Nols.
Probably.
Shields, you from having to pay a significant dividend for several years. So what's the thought about.
Paying more than a Penny then you have to pay.
Once once cash flows sort of stabilized you know why why why focus on a dividend do you think investors really care about it at the end of the day.
Hey, Rich one thing I want to make sure is clear we did not have a significant amount of Nols at the REIT level, a majority of our Nols at the Trs level. So therefore, the question doesn't have lives of shielding sort of our taxable income with Nols at the REIT level, the right level of NOL.
Wells that we did have.
Effectively plan to use if there is any gain.
On sale.
To offset that so it is.
I just want to make sure that's clear so whenever taxable income is going to be generated we will be.
Paying that off.
That out of as dividend. So I just want to make sure that that's clear rich yeah. That's helpful. Yeah. Thanks for that.
And then just more broadly than just.
Terms of the the opportunity landscape relative to the dividend not that they have to be mutually exclusive by any means.
Yes, rich I don't think they are mutually exclusive.
If you look at that.
The quantum of.
Cash that goes out with the <unk> dividend.
$21 million.
Order of magnitude.
Annualize that times four it's $80 million so.
There is a subset of <unk>.
Investors that aren't able to we're not able to own our stock and.
We have the balance sheet.
We have confidence in the recovery.
And.
We wanted to give everyone an opportunity to participate in that recovery.
Which is one of the reasons why we reinstated the dividend in <unk>.
Alright got it guys. Thanks for the color.
That is all the time, we have for questions today I would now like to turn the floor back over to Jim <unk> for any closing comments.
Well I'd like to thank everyone for joining us on our fourth quarter call today.
We appreciate the opportunity to opportunity to discuss our quarterly results with you.
I look forward to meeting with many of you at in person conferences in the coming weeks and months.
And stay healthy and thank you for your continued support.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Yeah.
Hi.