Q3 2022 Xenia Hotels & Resorts Inc Earnings Call
Good afternoon, ladies and gentlemen.
Thank you for attending today's Xenia hotels <unk> resorts.
Q3, 2022 earnings conference call. My name is Tia and I'll be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to your host Amanda Bryant VP of Finance you May proceed.
Thank you good afternoon, and welcome to Xenia hotels, <unk> resorts third quarter 2022 earnings call and webcast I'm hearing from our silver box, our chairman and Chief Executive Officer, Barry Bloom, Our President and Chief operating officer, and a T shirt or executive Vice President and Chief Financial Officer.
Michelle will begin with a discussion on our quarterly performance and recent transactions.
<unk> will follow with more details about our operating trends and capital expenditure projects and to teach will conclude our remarks with an update on guidance our balance sheet. We will then open the call for Q&A before we get started let me remind everyone that certain statements made on this call are not historical facts are considered forward looking statements. These statements are subject.
Risks and uncertainties as described in our annual report on Form 10-K, and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments forward looking statements in the earnings release that we issued this morning, along with the comments on this call are made only as of today November sector.
2022, and we undertake no obligation to publicly update any of these forward looking statements as actual events unfold you can find a reconciliation of non-GAAP financial measures to net loss and definitions of certain items referred to in our remarks. This morning earnings release, the third quarter property level portfolio information will be speak.
About today is on a same property basis for 32 hotels. This excludes Hyatt Regency, Portland, Oregon Convention Center and W. Nashville.
Archive of this call will be available on our website for 90 days I will now turn it over to Marcel to get started.
Thanks, Amanda and.
And good afternoon to all of you joining our call today.
As we reported this morning, we are seeing further momentum across the portfolio is business transient and group demand continues to recover.
Overall business picked up meaningfully in mid September providing encouraging evidence the seasonal transition in our business from primarily leisure demand to a more traditional mix of leisure corporate transient and group demand.
Revpar for the quarter declined two 6% compared to the same period in 2019.
Overall demand accelerate in September with Revpar growth of two 7% as compared to 2019, marking a reversal from modest revpar declines in July and August .
Driven by improved occupancy significantly close the gap to 2019 as compared to prior months.
Average daily rate growth in the quarter was a solid 15, 6% as compared to 2019.
Offset partially by about 12 points lower occupancy as compared to the third quarter of 2019.
We reported a net loss of $1 $7 million for the quarter.
Adjusted EBITDA was $53 8 million and adjusted <unk> per diluted share was 31.
Okay.
Same property hotel EBITDA of $52 2 million representing.
It is an increase of one 4% from the third quarter of 2019.
Marking the second consecutive quarter of growth relative to 2019.
Third quarter results were mixed compared to our internal expectations.
Same property Revpar matched our forecast for the quarter.
It's slightly more weighted toward ADR than occupancy.
Same property hotel EBITDA margin continued to show improvement over 2019, increasing by 48 basis points for the third quarter.
Which followed an outsized 365 basis point improvement as compared to 2019 in the second quarter.
The seasonal drop in margins that typically occurs in the third quarter relative to the second quarter was greater than we had projected.
Third quarter margin gains were more subdued due to several factors, including hotels being more fully staffed to meet anticipated customer demand.
Higher expenses in areas such as utilities.
Barry <unk> will provide additional detail on our third quarter operations and our expectations for the balance of the year in their prepared remarks.
Regarding the result of some of our newer assets. We are pleased that park Hyatt Avianca continues to perform in a highly encouraging manner.
The transformation of our renovation of the resort has allowed the property to significantly increase rates compared to those achieved pre acquisition.
As evidenced by our estimate October ADR increase of more than 50% compared to the October 2019.
We are forecasting that the property will achieve approximately $18 million in EBITDA in 2022.
This is already within the stabilized range, we projected upon acquisition.
However, we believe that significant upside remains as the property has not yet achieved that is expected to stabilize occupancy.
As the operating team continues to optimize its sales strategy and demand mix, we believe substantial embedded growth should be unlocked in the years ahead.
Barry will provide an update on the final component of the renovations, which we believe should further enhance highest abilities to optimize results at the resort.
Okay.
Okay.
Meanwhile, I had regency Portland continues on its path towards stabilization.
Benefited from a number of city wide groups and events in the third quarter as Portland's reopening is gaining momentum.
The property is making good progress building its book of group business.
Group pace for 2023 at the end of the third quarter exceeding the pace for 2022 at the same time last year by over 20%.
The property excellent physical condition is still essentially new hotel and its differentiated location surrounded by significant demand generators.
The Oregon Convention Center, and the motive center.
Continues to position us well to grow business brands in the leisure business doubled the group business that we expect will be a significant driver overall demand.
W. Nashville continues to ramp and its first full year of operations.
With third quarter results that were softer than projected.
Primarily because of weaker than expected summer occupancy and food and beverage revenues.
Importantly, both our asset management team and the hotel's operating team are continuing to learn the seasonality of the market in general and auto in particular.
An important lessons were learned as it relates to the optimal group and transient segment mix and rate strategy.
The property also continues to work on optimizing the operations and marketing of its high quality and distinctive food and beverage amenities that we expect will benefit us in the months and quarters ahead.
Okay.
As with many other assets in our portfolio. We are encouraged by recent demand trends as evidenced by the hotel achieved revpar of approximately $320 in October .
We continue to be strong believers in the Nashville market and ourselves ability to capture more than its fair share.
With extensive high quality facilities.
Nashville continues to be an exciting growth market as further evidenced by the recent announcements of the agreement to build a new multi functional stadium.
With an expected cost of more than $2 billion.
The new home of the past these items.
Yeah.
We believe both hydrating, Portland, NW Nashville will be meaningful growth drivers in the years ahead.
And we remain confident that both hotels will achieve stabilized EBITDA. We expect this with each of these acquisitions.
Okay.
Turning to more recent portfolio by trends, we are encouraged by the significant improvement we saw in business transient and group demand starting in the second half of September and continuing through October .
The success successfully transition from a primarily leisure demand field recovery to a more traditional mix of leisure business transient and group demand across our portfolio.
Based on preliminary results October Revpar was approximately $196, which was in line with October 2019 at 35% higher than October of last year.
Occupancy was approximately 71% at.
And ADR was up approximately 13% over 2019.
Okay.
The pickup in business transient and group translated into higher midweek occupancy with our portfolio consistently achieved an occupancy greater than 80% on Tuesday, and Wednesday nights in recent weeks.
Now turning to transaction activity.
In the third quarter, we entered into two separate agreements to sell two of our assets for a combined sale price of nearly $100 million.
In late October we saw Bohemian hotel celebration and celebration, Florida for $27 $75 billion or approximately $241000 per key.
We believe it was an opportunistic time to sell this hotel given its small size. The current investment appeal, Florida leisure markets and a significant upcoming required renovation.
Okay.
Okay.
We also entered into an agreement to sell Kimpton Hotel, Monaco, Denver for $69 $75 million or approximately $369000 per key.
Yes.
This transaction is expected to close before the end of the year.
These two dispositions are consistent with our strategy of monetizing assets.
We do not believe to be long term strategic drivers for our company, while continually improving quality and growth profile of our portfolio.
We maintain a strong presence in both the Orlando and Denver markets with existing high quality assets.
And we may make additional investments in these markets is appealing opportunities arise.
Including through internal investments such as the comprehensive renovation. We are currently undertaking at the Grand Bohemian Orlando.
Okay.
Meanwhile, the nearly $100 million in proceeds will improve our already strong liquidity position and provide us with increased balance sheet flexibility.
We initiated both of these disposition processes earlier in the year and are pleased with the pricing and both transactions. Despite the recent uncertainty and overall economic conditions in general and financing markets in particular.
On a combined basis the sale prices for both properties equate with 15 times 2019 wholesale EBITDA at $17. One times trailing 12 months hotel EBITDA through September 2022.
Okay.
We believe that these are very attractive multiples, particularly in light of potential alternative uses for our capital.
Okay.
Going forward, we believe we are well positioned to remain opportunistic as it relates to potential on strategy acquisitions, and we'll continue to evaluate a number of significant ROI opportunities within our existing portfolio that we believe could be meaningful drivers of earnings growth in the years ahead.
With that I will turn the call over to Barry who will provide additional details on our third quarter performance and update on our capital expenditure projects.
Thank you Marcel and good afternoon, everyone for the third quarter. Our 32 same property portfolio Revpar was $169 six.
<unk> occupancy of 64, 2% and an average daily rate of $247 74.
As Marshall mentioned in his remarks, the same property portfolio Revpar decreased by two 6% in the quarter as compared to the same period in 2019.
Quarter ended on a high note. However, with September same property revpar growth of two 7% compared to 2019.
This compares to Revpar declines in July and August at four 1% and six 5%, respectively as compared to 2019.
September strength was driven by a notable pickup in occupancy beginning in the middle of the month.
With expected seasonal patterns in business transient and group and generally coincided with a marked increase in return to office in return of business travel.
Overall September occupancy of 67, 2% with a post COVID-19 record relative to 2019 with occupancy down to 687 basis points.
Our 32 same property hotels, almost four achieve higher average day rates in the third quarter of 2022, and then get into third quarter of 2019.
Average day rate in the quarter increased 15, 6%.
Obviously pleased to see continued pricing strength and are optimistic regarding corporate and group rates, particularly as we achieve higher midweek occupancies in a number of our urban suburban markets, including San Francisco, and Dallas on Tuesday, and Wednesday nights, providing significant rate compression opportunities.
We continue to see significant continued great strength in our resorts and our drive to leisure markets with Revpar for the quarter compared to 2019 at 41% of <unk> 44, 5%, a consumer can area, Santa Barbara 41, 8% of Royal Palms, 27, 1% of Hyatt centric key west and 26, 8% Hyatt Regency Grand Cypress.
As Marcel noted our business mix shifted after labor day to reflect more group and corporate transient business.
In the quarter, our group business benefited from solid in the quarter fourth quarter bookings and double digit rate growth, resulting in group rooms revenue nearly fully recovered to the third quarter of 2019 levels.
Our performance reflects a healthy demand from corporate groups, particularly our larger group oriented hotels in Orlando, Scottsdale, San Diego and San Francisco.
We remain optimistic on the recovery in corporate transient business, which notably improved in September this trend has continued and strengthened.
Revpar growth.
Third quarter of 2019 remains significantly impacted and Marriott SFO down 29, 2% for the quarter and Hyatt Regency, Santa Clara down 36, 5% for the quarter, our revpar compared to the third quarter of 2021, with a 99% 158% respectively.
Okay.
In addition, our managers continue to point to improving corporate transient business fundamentals and expect this trend to continue with negotiated corporate rates are still on track to increase in the high single or low double digits next year.
Now turning to profit third quarter same property hotel EBITDA was $52 2 million an increase of one 4% on a total revenue decline of 0.7% compared to the third quarter of 2019, resulting at 48 basis points of margin improvement.
EBITDA margin grew modestly in the quarter and was impacted by a combination of several one time, some ongoing factors, including labor and utility costs.
Let me expand a bit on labor, which we believe will be an ongoing factor on the margin side for the foreseeable future.
As we identified in the second quarter, we achieved somewhat outside margin expansion as a result of seasonally high revenues spire managers challenges fully staffing our hotels during.
During the third quarter, our operators were successful in filling many open positions, we're able to staff up to meet the strong recovery in demand we've seen in September and October .
Some of this labor was hired and trained by our operators early in third quarter, which put pressure on margins as our hotels continued return to a more normalized level of guest service and amenity offerings.
While most of our hotels are operating in staffing level between 90, and 95% of pre COVID-19 levels, increasing wage costs resulted in labor costs being nearly equal to 2019 levels and our rooms Department, our largest operating department in our hotels.
Growing overall margin by just 48 basis points labor costs and reached Department, we're generally well control labor cost up to 0.3% compared to the third quarter of 2019 on a revenue decline of two 6%.
And the food and beverage Department labor costs were down four 3% on a revenue decline of 2%.
Fixed departmental staff increased significantly during the quarter, particularly in sales and marketing, where our hotels have been aggressively re staffing positions in response to significant increases in group leaves.
This resulted in a 92% increase in labor cost and the department for the third quarter as compared to the second quarter. Our hotels also had success in bringing back personnel on their repairs and maintenance departments, resulting in a five 8% increase in labor costs between the second and third quarters.
Utility costs continued to increase and are typically much higher in the third quarter and in the second quarter within our portfolio. So the utility costs were 28%.
98%, Ireland Q3 than in Q2 were 14, 5% higher than the third quarter in 2019.
Turning to Capex during the quarter and year to date, we invested $18 8 million and $40 $7 million and portfolio improvements respectively.
At Park Hyatt <unk>, the comprehensive renovation of the golf course that began in the second quarter is now substantially complete.
Denise planning work on a significant upgrade to the resort spine wallets and energies, which will be branded as a mirror of all life imbalanced popped upon its completion early in the second quarter of 2023.
Thanks, James and Canary Hotel, Santa Barbara, we finalized planning with the Guestroom renovation, which is expected to begin in the fourth quarter 2020 to be completed in the first quarter of 2023.
The comprehensive renovation of Grand Bohemian Hotel, Orlando is well underway with renovation of all public spaces scheduled for completion in the fourth quarter of 2022, and the commencement of Guestroom renovations in the second quarter of 2023.
During the quarter, we substantially completed the renovation of bathrooms at Marriott woodlands in Houston, including the conversion of bathtubs to walk in showers, and approximately 75% of the guestrooms as well as the renovation of meeting space and Fairmont, Pittsburgh and meeting space at Royal Palms resort.
In the fourth quarter will be renovating reconfiguring suites at the Ritz Carlton Denver, which will result in three additional keys at the hotel.
During the quarter. We also worked on a number of projects to enhance the resilience of many of our assets, including the replacement of the Mark cases outside the meeting space and about the restaurant as well, it's fallen repairs at Hyatt centric key west.
The roofing and <unk> project at Loews, New Orleans related to Hurricane Isaac.
Restoration of the pools actually western Oaks in Galleria.
Next your coatings sealants and signage at Meredith.
Replacement of the roof at Renaissance Atlanta, Waverly, and we continue to work on a number of energy efficiency projects, including six chiller replacement. So we look to complete in 2022.
Finally, we continued our planning work on a comprehensive renovation of Kimpton Hotel Monica Salt Lake city, including the lobby meeting rooms restaurant and bar as well as the Guestrooms, which will include converting tubs showers, 35% of the inventory.
Renovation is expected to commence in the second quarter of 2023.
With that I will turn the call over to Ashish.
Thank you Barry I will cover two topics this afternoon.
First I will discuss our full year guidance and second I'll review I will review our balance sheet strength.
After the first topic, our full year guidance, our full year guidance is based upon current business conditions and does not anticipate changes to the economic environment or any additional COVID-19 related impacts.
Our same property demand outlook is unchanged.
As such our same property Revpar guidance is unchanged from prior guidance of down 5% versus 2019 at the midpoint.
Okay.
As to adjusted EBITDA, sorry, we currently expect to earn between 250 $258 million.
Relative to prior guidance our current outlook.
Is $2 million lower on the bottom end and $22 million lower on Capex.
Current midpoint of $254 million was $12 million lower than prior guidance.
Okay.
The $12 million variance is primarily driven by three items as follows number one same property hotel EBITDA margins number two W Nashville and.
And number three a combination of two factors the sale of the celebration hotel and the impact of Hurricane Dorian.
I will now get into more detail on each of these three items.
First on same property hotel EBITDA margins.
Few months ago, we had anticipated stronger margin growth in the back half.
With second quarter margins up 365 basis points versus second quarter of 2019, our expectation was for strong levels of margin growth in the second half.
Okay.
Relative to prior guidance the change for some same property hotel EBITDA margins represents $7 million of the variance.
The $7 million is driven by the items that Barry just discussed in particular higher hotel labor expenses as well as higher non labor expenses, such as utility costs.
We are seeing this impact more acutely than some of our larger hotels, which are still in early recovery from the pandemic.
The second item is lower earnings expectations for W. Nashville.
Which is outside of our same property set.
We had previously expected to earned $15 million and hotel EBITDA during 2022.
We now expect to earn $12 million and hotel EBITDA this year.
It's about $3 million of variance.
The third item, which resulted in about $2 million of variance in total is a combination of two factors.
First the sale of the celebration hotel last month and second the impact from Hurricane Dorian.
Hurricane Ian had a slight impact to revenues, including non rooms revenues at seven properties in our portfolio.
It also resulted in higher repair and maintenance costs due to minor damage at the seven properties affected by the storm.
Next I want to discuss the EBITDA guidance change by quarter.
<unk> is weighted more to the third quarter than the fourth quarter.
In other words of the $12 million variance our expectation about $8 million came in the third quarter, the remainder about $4 million reduction in our fourth quarter expectations relative to a quarter ago.
The other items that we provided full year guidance on in this morning's release have not changed much since last quarter.
Interest expense and cash G&A expense or unchanged our capital expenditure guidance is down $5 million now stands at approximately $85 million.
Turning ahead to our group revenue pace, our pace for the balance of this year is dramatically improved.
At the end of the second quarter pace for the fourth quarter was down over 20% versus the same time 2019.
We had strong group production during the third quarter with lots of bookings made for near in dates.
As of month end September our fourth quarter 2022 pace was about flat pace at the same time 2019.
Okay.
<unk> revenue pace for 2023 continues to improve as well.
We again had significant booking activity during the third quarter.
Evidenced by our pace for 2023, increasing materially at the end of the second quarter 2023 pace was down 30% and by the end of the third quarter It was down 19%.
Based on short term booking trends, we expect that variance to continue to lessen.
Group rates for 2023 are currently up almost 10% versus group rates at the same time last year.
Our confidence in the long term as reflected by our recent actions on both our dividend and share buybacks, we have recommenced, both paying a quarterly dividend and repurchasing shares.
Recall that we were restricted from either activity until this past August .
As to dividends our board of directors declared a third quarter dividend of <unk> 10 per share.
That level of dividend reflects an annualized yield of about 2% on a full year basis.
As to share repurchases, we repurchased nearly $2 million of stock in the third quarter and another $6 million in the fourth quarter to date.
Our recent average repurchase price was approximately $15 25 per share.
We have over $86 million remaining on our board share repurchase authorization.
We expect to continue to utilize this tool to drive shareholder returns.
And we continue to believe our stock price reflects a significant discount to value.
Moving ahead to my second topic, our balance sheet. It continues to be strong in the following four ways.
Number one our overall leverages manageable.
Our trailing 12 months leverage ratio ending September 30th was approximately five times.
Our leverage target is to be sub five times net debt to EBITDA.
We were running the company in the low three times below four times net debt to EBITDA range pre COVID-19.
We are on a path to get back into that low three times to low four times range.
In the meantime, we have significant cushion relative to our existing leverage covenant.
Okay.
Two we have a strong cash position.
Cash at the end of the third quarter pro forma for the sale of celebration in October was about $285 million.
This equates to about $2 50 per share.
Or over 15% of our current stock price.
And that does not include proceeds from the pending sale of Monaco Denver.
We expect to deploy this cash over time into value, creating investments, including internal and external opportunities or our own stock.
Number three we have no debt maturities until the second half of 2024.
At that time less than 20% of our total debt matures.
We have good relationships with our lenders and ample time to manage or extend those maturities.
And finally number four most of our debt is fixed currently about 80% of our debt is fixed rate.
On an annual basis, our current sensitivity to higher interest rates is about $2 $75 million for every 100 basis points increased in <unk>.
Sofa.
In terms of SFO 100 basis point increase in sulfur equates to roughly <unk> <unk>.
We will be looking to refinance or fix more of our debt over the next 12 months.
To wrap up the company continues to be well positioned for an extended lodging recovery.
With ample liquidity and dry powder as well as a strong base of assets still poised for recovery. We are looking forward to the next several years of growth in demand.
That concludes our prepared remarks today and with that we will turn it back over to <unk>.
To begin our Q&A session.
We will now begin the Q&A session.
He would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
As a reminder, if you are.
A speaker phone please remember to pick up your handset before asking your question.
The first question comes from the line of Bryan Maher with B Riley you May proceed.
Good afternoon. Thank you for those comments.
Martha.
Larry.
I will give us a little bit of more color on kind of the extent of the weakness in August maybe what the causes were as you saw it may be the segments, whether it more leisure more business smart groups, just a little more color there would be helpful.
Yes, I think it's pretty pretty simply leisure demand held up quite well for us in August I think when you look at the comparison of 2019 and I think we kind of all saw this that it was a little bit of a.
That well you would hope the business travel would be a little bit more robust in August that people really seem to stay off the road in terms of hard core business travel not only until after labor day, but as we saw actually further into the second week. After labor day, we really saw that corporate group demand really kind of.
Kick into gear in which really accounts for at least in our view most of the difference between the growth in September over 2019, and the decline in August over 2018.
And then on the rate increases we hear a lot in the media about people complaining about room rates in air fare rates are you seeing any pushback. There are people just complaining about it but that's still pending.
And we've seen.
The operators report to us that there is very little pushback on rates at the <unk>.
Time of booking clearly guests are not necessarily happy when they when they do that but quite frankly into our view the increases we've achieved in the hotel segment are far more reasonable than what we've seen in the airline segment. For example, a number of cases I think what's been important and a big part of our strategy. We've talked about for I think almost a year now.
Is it we have tried in our hotels to make sure that we're providing the services and amenities that are supportive of a higher rate structure, and we think thats one of the things that within our various markets has differentiated our hotels and let them perform well.
Okay and then just last for me when you think about everything we're reading in the press now versus one quarter ago, two quarters ago impending recession et cetera.
When you look back at booking trends 369 months ago, and you sit here today and you look out over the next kind of three six months.
Has there been any material change in kind of the velocity of bookings, yes can you give us any color. There is it the consumer moving at all as far as Youre seeing in the next quarter or so.
Okay.
Transient sites.
Window is still very very short so to glean anything from <unk>.
Transient pace is.
It doesn't do a whole lot either now or three or six months ago, what we're seeing on the ground.
It's pretty robust travel and midweek, particularly.
And what we've seen into trends and.
Kind of our daily occupants agents that we're getting back to a much more traditional.
Kind of a weekly change where the midweek days are really outperforming some of our weekend days now which is kind of as expected as we got into the fall, where we obviously do it markets buildings on the group side.
And <unk> went into a fair amount of detail on kind of what's happening with our group pace. We've seen a lot of very robust booking activity here over the last quarter or so.
Narrowing the gap.
Significantly we're actually eliminating the coffee here for the fourth quarter as compared to 2019, but also.
Really.
Seeing some really good bookings going into 'twenty three.
Also S pretty robust rates still going back to various points as far as number of saving a ton of pushback on rates increase was eight or on the group side or on the on the transient side and were hearing pretty good. Thanks from our operators too as it relates to.
Negotiated rates for next year, where we're thinking.
But we're also seeing the same type of results as far as rate growth. So.
So we're not really seeing anything as it relates to that side of the business and we're actually pretty encouraged with what we're seeing over the last few weeks as it relates to corporate travel.
Okay. Thank you that's all for me.
Thank you.
The next question is from the line of Michael Bellisario with Baird. You May proceed.
Thanks, Good afternoon, everyone.
Sure.
And then Marcelo.
Just first question for you just sort of in reaction to the stock price being down I suppose did.
Did you contemplate or maybe why was there no prerelease or intra quarter update to.
Better align analyst and investor expectations.
Had progressed.
No clearly youre seeing some of the softness in what we reported and what we really focused on today.
A lot of what.
What we saw really kind of towards the latter part of the quarter as it relates to the expense side of the business.
That's obviously, a little harder to see it really short term and what youre seeing on the top line. So the top line for the quarter remains very much intact throughout the quarter with our expectations.
We were also a little bit more surprise on the on the expense side of the business and I think both Barry and the team. So obviously went into a fair amount of detail there as far as what the.
What the challenges were on the bottom line side. So it was just something Thats, obviously to US also is a little bit more recent information when they do that takes a little bit longer too.
To work through it and triggering out what's going on with the top line.
Alright fair enough and then.
One for Barry just on the expense side.
Were there any brand or.
Market or regional differences in the margin pressures that you saw materialize in the third quarter.
Yes for sure certainly in the properties that had has not recovered they take a much bigger burden when we're bringing on the operator to bringing on fixed staffing in areas like sales and marketing and repairs and maintenance, which I alluded to but more specifically the large.
Margin pressure came from our largest hotels, which are largest non resort hotels, which on a relative basis are still significantly underperforming on the topline, but the operators and we agree a while ago that we need to really make sure that we've got in particular sales teams in place to not just be catching leads to be doing.
Outbound selling on leads and again, we think thats part of proof of them being successful and that is what's shown up in closing the gap on booking pace for Q4 and for 2023.
Okay. Thank you.
Thank you.
The next question is from the line of Dori Kesten.
With Wells Fargo. Please proceed.
Thanks.
With respect to acquisitions, how has your underwriting changed that theres still a few quarters ago.
Hello constant battle potential recessionary headwinds.
Yes, frankly that the pipeline isn't isn't particularly broad at this point, we're looking for obviously always keeping an eye on what's out there and what would make sense.
I think that it's appropriate to.
To be probably a little bit more patients.
As things progress here and as we get a little bit more visibility into what happens both of them.
The overall economic climate, but also what might happen with asset pricing, particularly with the way the financing markets have been for ourselves, we think that there might be some more interesting opportunities that will come down the path a little bit later on so we're being pretty patient in that regard.
And obviously, we have to take into consideration where interest rates are what we think is happening on inflation both on top line.
On the bottom line so.
We are looking at things, we're keeping an eye on things.
Alright.
Don't have an overly fill pipelines at this point.
Okay.
And when you look out over the next two years would you expect to have.
Hi.
We're waiting towards group.
And just thinking about the 99, 5%.
Back although still profitable for please go on.
Paul will talk more about building.
Building back a little.
Sorry building labor.
Our mobile strategy.
Well I think certainly when you look at the overall portfolio, that's what happened and to differentiate a little bit.
It's interesting the property is kind of fall into two clusters of properties that are more or less fully recovered occupancy or at the 95% FTE level. The properties that have not fully recovered or closer to the <unk>.
When you are a little bit sub 90 in terms of.
Ftes compared to to 2019, so thats, a little bit independent of <unk>.
Our mind small, but independent of group and more directly related to occupancy is the primary piece Thats still left.
Or it could be left is the.
The variable labor that relates to rooms expense in rooms cleaning that in terms of kind of fixed staffing around the property and getting things done whether that's in AMG or sales and marketing are for repairs and maintenance that the properties kind of reached relatively stabilized levels and third not a lot of open positions in those areas at this point.
Okay. Thank you.
Thank you.
The next question is from the lineup Alright, Clang with BMO you May proceed.
Thanks.
In October with business demand recovering revpar was flat versus 2019 versus plus 3% in September .
Why wouldn't there be normal above normal seasonal growth.
In October .
These are dragging in any way relative to normal seasonality or is there something else going on.
Well I think it's a great question Ari, we actually you obviously heard us talk quite a bit about how encouraged we are about what we saw in the trends in October and a lot of that has to do with the fact that our weak occupancies in October were pretty significantly above what we've seen in prior months. So we really are seeing that come back off of business business.
What happening and we're certainly seeing strengthening on the group side.
The October situation is a little bit unique.
We haven't talked about this much in the last year or two because we were just doing comparisons.
So very low baselines, but what we are getting back into now is calendar changes.
What you saw in October is October of this year at five weekend again as far as this quarter, we can see in 2019 and as we can.
Asked another Sunday, which is pretty low in occupancy. So if you kind of strip that out we actually saw some positive movements in October .
Because last weekend.
The extra Sunday, leading into a Monday night of Halloween.
Two nights were particularly soft so those brought down the average, but otherwise we actually would have changed so pretty good growth for muscle.
Okay got it and then as you think about the margin profile of the business.
Was in 2019 and costs now coming back.
Have your views changed on the potential long term improvements that can be realized.
Well, we've we've spoken quite a bit about this question.
Questions in the past couple of years.
I think we as opposed to other people in the space have always been pretty cautious as far as talking about any kind of specific margin improvement that we felt were critical to kind of commoditized because we've always been very cognizant about the fact that we do think we have a better way of running hotels and more efficiently running hotels, but there is no getting away from the fact that there is good amount of cost pressure on the labor.
Syed on overall expenses and operating hotels. So we're pleased frankly that's.
Were still that were still were able to eke out 40 out of 48 basis point improvement in margins over over the third quarter of 19.
In an environment, where obviously, we're seeing a lot of pressure on expenses. So we are absolutely still running on a little bit more efficiently was clearly there.
Everyone is seeing it everywhere inflation is everywhere there is cost pressures everywhere and there is something that we always felt it was a little bit premature to talk about we're going to be able to achieve X basis points of margin improvement overtime.
I appreciate the color. Thanks.
Thank you.
The next question is from the line of David Katz with Jefferies. You May proceed.
Hi afternoon. Thanks for taking my question it covered a lot of the issues I wanted to raise but I did want to go back to.
Just to kind of the maturity flow, taking a little longer term right. There was a couple of mortgages and then there is the bank facility.
I think there is a 24 things so we should start to see and hear some stuff about it next year.
Is that is that about right and how are you thinking about your strategy here.
Yeah. Thanks, David.
Absolutely.
So we do have the line of credit, which matures in the first quarter.
2024, it's Undrawn and then we've got $275 million worth of debt that matures in the second half of 2024.
And so you should start to see us in a sort of address those next year.
Say that a few things about how we feel about those maturities, which I mentioned in my.
<unk> remarks.
That debt that matures reflects about 20% of our total debt so relatively manageable.
All of that debt is bank debt and we continue to have good relations with our banks syndicate.
Uh huh.
We did four amendments during COVID-19.
We're really supportive and cooperative and so that's our expectation right now.
Of that $275 million, some mortgage debt on a couple of properties.
<unk> performed well.
It's not a lot of debt relative to the value of those properties and how those properties yielding.
And then the remainder is one term loan and non drawn line.
And how I would think about those pieces.
Total $575 million with those capacity, but.
The line is undrawn, so it's home counter.
Terminal.
Say EBIT of $5 75 relative to our unencumbered assets.
It's a very manageable level 29 of our 33 hotels are unencumbered.
That's roughly $3 billion.
Asset value and Thats, how the bank syndicate.
Our level of bank debt relative to the pool of assets. So.
That's a little bit of how they think about it why our view is that it is quite manageable.
The only other thing I'll say is the commentary.
We've gone from our banks since we're always in dialogue with them did everything that we said we would during COVID-19.
We issued high yield debt and paid off some bank debt.
So we are viewed as.
A credible good credit.
Manageable level.
Relative to the size company and beyond.
Our asset base. So that's kind of the full story on how we're thinking about.
So the maturities in 2024 and the overall philosophy on the balance sheet.
Perfect. Thank you very much.
Thank you.
The next question comes from the line of Tyler Battery with Oppenheimer. You May proceed.
Good afternoon. This is Jonathan on for Tyler Thanks for taking our questions first.
First one for me following up on the discussion of the <unk>.
Just moving to a more normalized mix can you provide some additional color on the business mix now and how that compares to pre pandemic and the potential upside that remains there as we move further along in the normalization process.
Yes, sure I think.
If you piece together everything we've talked about.
And we still think that we know that relative to 2019, we're generating more leisure rooms to our portfolio than we had before.
Thinking about <unk>.
Q3 group business has has certainly.
Recovered on a revenue basis, a little less so on a room night basis, So theres still some opportunity to grow into that the biggest piece that still are missing from the business is that.
Is on the corporate transient side and as we've continued to see the smaller businesses. The local regional businesses are traveling as much or more than they had during COVID-19. The biggest gaps are still from the largest customers on whether thats.
Big four accounting firms a large consulting firms some of the fortune 500 companies their business is still down pretty significantly, but certain but certainly as reported by the properties as we can see in the weekly data and particularly as we've talked about a couple of times today that Tuesday, and Wednesday that occupancy that those travelers are continuing to come back more.
And more each week, we've seen again kind of since mid September and feel like ultimately the question is the timeline that business should stabilize around where it was before for our business, which is relatively equal parts in each of those segments.
Okay, great. Thank you for all the detail there and then switching gears to the common dividend any additional details you can share in terms of what factors contributed to that decision why do you think that level is appropriate and I'm also interested in your perspective on potential payout ratios going forward.
How do you think about the right payout ratio with the right level of quarterly payment today versus pre COVID-19 given all the movements that have occurred in the portfolio.
Yes sure. Thanks for the question so in terms of dividend the way our board looked at this is that the business is recovering and.
They view that this would be an appropriate level of dividend.
Given that we have more.
More visibility into the business and the demand has been strong.
And our expectation is that over time.
Our payout ratio would move to kind of the 65% of SaaS level, which was where it was.
So.
Yes.
Half.
The thinking right now that turned to that at some point in time.
And our our board tends to revisit.
Dividend.
Future so.
Well, obviously be updating you all on that.
Thank you.
Sure.
Very helpful. Thank you for all the color that's all for me.
Thank you.
The next question comes from the line of Bill Crow with Raymond James You May proceed.
Hey, good afternoon, guys I wanted to drill down a little bit Nashville.
20% Miss in the first year underwriting I'm just.
This is really before all the new luxury supply hit so.
How are you adjusting your kind of long term underwriting assumptions on that asset.
Yes.
Well I mean, a lot of bit supply ready asset at this point.
Fair number of assets have opened up over the last year.
Months.
So the bulk of the supply you are actually seeing coming in already.
Who are we.
<unk>, we talked about expecting about $13 million to $15 million of EBITDA for this year.
As we got a couple of months into with we we were more comfortable that we thought we'd end up on the high end of that range of around $15 million number. Unfortunately, the summer was weaker from both kind of the the occupancy side that we do think that that's really a matter of not really focusing on the right kind of segmentation mix.
All we need a little bit more groups than what we what we have on the books for.
Summer.
We sort of optimize the operations a little bit better.
Also some short term issues as it related to optimizing the food and beverage facilities.
We think that there is no upside could be to.
To be found there going forward. So if you look back at when we initially acquired also like I said, we expected about $13 million to $15 million. This year, we're going to end up somewhere in the $12 million range. So clearly a little bit south of where we thought it would be this year.
With everything Thats still going on at the property.
The focus that the team has.
Some of the changes that have been made.
At the operating team level as well, we think that our long term fees was up slowly remains in fact, there were very positive about all the developments that could tamper off and in Nashville.
So what we're seeing here really is in our minds kind of yes.
So growing banks.
I would describe it and we think theres.
Absolutely a lot of upside to come down we're very comfortable with us.
Are you if I could just probe a little bit more.
So we've talked before about the W brand and kind of it.
Yes, it's attempted rebirth I guess.
Now the supply that you referenced and I referenced has opened do you think youre, losing to other brands.
That have entered the market and do you still believe in the W brand over the long term.
Yes, Bill this is Barry we definitely do.
When you just maybe put a little finer point on what Marcel said.
April and May were tremendous for this hotel in October has been a tremendous bump as well with the property really experienced was just put it right out there it was a.
A bit of a miss on group strategy over the summer months like.
Like many markets. This property needs group business mid week, and they've done a great job of capturing that in the months, where there was both high demand and high rates, which is truly a good part of the explanation of April may and October summer months were a little different and the hotel have been operating in our rate strategy that it.
Worked with philosophically, which was to maintain very high rate for midweek group during the summer and the reality is that they were mispriced and were not able to pick up the right number of group rooms in summer strategy that.
Really hard to course, correct that quickly, but we have a lot of optimism about that strategy about the change that strategy as we look into next year and we look in general into months that maybe a little bit softer from a weekday demand perspective.
And I think I mentioned in my remarks, as well Bill.
October Revpar was about $320 at the hotel so I've got <unk>. After a number of those new additions that you are talking about open to open the market.
Clearly there is momentum there is.
Yes, I appreciate it if I could just ask one follow up question.
And maybe Barry for you.
Talk about the.
Level of staffing driving the labor.
Cost higher.
But where are we at a rate base. So we're still losing employees to other businesses.
The $20 $25 an hour sort of.
Warehouse and retail workers.
Or do you think rates have stabilized at this point.
Yes, we're seeing a lot less of the losing business losing.
Employees to other businesses as our operators report that to us and I think in most markets that not only is have the labor market stabilize a little bit in terms of wage rates, but also I think people will come around to understanding that in a stable environment. The hotel business is a great business to be in both.
At the at the property level at the management company level and at the HLA level. So the national level has been a lot of emphasis being put on Y hotel industry provide can provide a great career opportunity and that you can come in at an entry level and really have a lot of opportunity I think people are a bit much more receptive.
To that as the labor markets May have just tightened in general a little bit of there is not when you can go and apply for any position that you want out there in any industry. It would be certainly getting that opportunity. So.
That's what we've heard from the operators and I think Thats certainly kind of rings true in terms of what we are seeing we have seen in terms of filling open positions at what are now relatively stable wage rates.
Great. Thank you that's it for me.
Thank you.
The next question is from the line of Austin <unk> with Keybanc you May proceed.
Hey, good afternoon, everyone. So wanted to hit a little bit more on some of the challenged markets in the Bay area in Portland, and very I believe you've spoken about how citywide in group demand negatively impacted these markets.
Just curious how within sort of the pace of the group calendar.
How does it stack up specific for these markets.
As we look out into the late into this year and into 2023.
Yes, I'll start and Portland first where the.
Whereas the convention center really is still just not having the first benefit of having a true headquarters hotel that they've never had in 2019, so it's not a great comparison.
Their bookings are up fairly significantly for next year as other hotels in house bookings and I think we're pretty pleased with how Portland.
Come online after the pandemic and that that location and the quality of the asset have proven have proven their merit to a great extent.
San Francisco as I think you know has a somewhat better year next year in terms of cys compared to 2019, and certainly compared to the last couple of years, but.
Our property at the airport Marriott.
Really.
Only been only benefit from that during true compression from really large.
Really large events and part of the strategy there for many years and certainly part of the strategy going into next year has been for the hotel to really focus in on bringing in its own in House group. It's got it's got some very nice meeting facilities that have often been underutilized because the hotel had the benefit of so much great transient business historically, but the hotel is really making a pivot.
To do that.
In Santa Clara and continuing the bay areas those areas you're focused on business in the Santa Clara Convention Center is weaker next year.
We have not historically driven a lot of business out of that center, which has really been relied more heavily on local events and things like that so again that property is kind of double down on its efforts to be out there looking for a business that can be accommodated within the hotel.
And again all of that is all of that net net is reflected in the booking pace, we've talked about for 2003.
No that's helpful and I recognize overall the booking trends for group are improving and I. Appreciate all the update you provided is there anything any signs of anything that would give you pause on further improvement from here for next year, either select cancellations you've seen are a decrease in that conversion rate of leads to bookings.
Just anything that you can share.
Yes, no no.
We continue to see obviously see group leads become a hectic continuing to grow.
Just to tie a couple things together that I talked about in the prepared remarks and in some of the Q&A is that we've made a concerted effort in our portfolio to make sure that our operators have hired enough salespeople to quite frankly processing out of business that is coming in.
But also to really focus on hiring additional labor.
Out there truly selling and proactively looking for business with that strategy has paid off for US. We think as we look at how the properties performed from a group perspective in Q3, and where we are in Q4, I think that's going to be a material part of of a positive strategy for the portfolio as we work through next year.
Yes, I mean, I would just add that the.
Production that I talked about in the quarter was its really remarkable I mean in the third quarter or in the quarter bookings for the second half we're up three times the level that they were in the third quarter of 2019.
So we put a tremendous amount of it has.
As confirmed books.
And group business continues to be very short term in nature.
I would also say that rate progression as a big positive now if you go back to.
And to the second quarter and looked at our pace for 2023.
Rates were up about four 5%.
By the end of the third quarter or 23 group rates graph.
So.
Again.
Real positive from that perspective as well.
It is broad based I mean, there are a lot of our big group hotels are now seeing good production it's not.
Certain markets.
Types of assets.
How has continued right direction.
That's helpful. Thank you.
Thank you. The next question is from the line of Stephen Grambling with Morgan Stanley You May proceed.
Hey, Thank you.
We've been hearing about outperformance from some of the hotels with refreshes or renovations during the pandemic kind of across the broader group I guess are you seeing any outsized benefits.
From these ROI projects that you've that you've already done and as we think about the ROI that's assumed on what youre doing in the future any thoughts on how that may be similar or different. Thanks.
Well clearly the most obvious example, and our portfolio is what we did in <unk>.
<unk> got quite a bit.
Sure.
Third remarks bus tour that property to deal with.
The effects of Covid in the middle of doing this whole project and already being in the stabilized range of where we thought. This this hotel would end up from an EBITDA perspective, which is very significantly above where it was operating before it's obviously highly encouraging and with that asset, particularly we're nowhere near stabilized occupancy. So we think that bears.
A lot of upside there. So it is a project that's.
That we'd like to talk about and that we focus on quite a bit because it is an asset that actually was screaming forgot type of ROI investments, where we identified the absolute right type of level of investment to make when we acquired it I know a lot of people were looking at and conducted Mike.
The amounts might be very different from what we ended up spending on it and we think we might be absolutely right investment amount at the hotel and are getting the appropriate returns for it.
As an example for some of the things that we may be looking at in our portfolio and particularly when there is a chance for us to kind of catch up to to assess where we think it is.
Where it could more appropriately operates after making the right kind of investment.
I think yes.
The other project that I think is certainly had a a post COVID-19 benefit there was a real ROI project was the new ballroom that opened at how do we see Grand Cypress at the end of 2019 and wall <unk>.
It's a little hard to measure.
Because group business there has been good but it has not fully recovered.
We know that in fact during the toughest.
Toughest days of Covid, having that extra ballroom was a tremendous ability for.
<unk> for the asset in terms of spacing out groups and as we look to booking.
Hotels book this year it looks in the booking 2023, and 24 and beyond having that second ballroom has really changed the game for them in terms of their ability to stack in house groups instead of relying instead of having to have just one in house group and what we have seen the properties performed tremendously well this year and continue to perform very well on the leisure and transient side the transient.
As your side in part because the hotel has been able to compress rates when they have two groups in housing of two ballroom simultaneously and we did a small project there with where we renovated the restaurant in 2019 never really got off the ground, but then further re concept at the end of 2021 with the celebrity chef Richard blades.
Which has become a significant draw the hotel for transient and group as well so we've seen real benefit and returns on that on the work we've done at that hotel as well and again look to doing absolutely similar things and every one of the more comprehensive renovations that we talked about in the prepared remarks and in our earnings release.
Just to add.
One more comment I would say, we do look at the returns on ROI projects, we underwrite all of that.
I feel confident that well.
Returns.
Type returns that we're getting from these projects.
We're also looking at after the Capex whats our overall basis in the asset.
The comparator other.
Other assets in the market.
So there are a few things we're looking at continue to feel good about that.
Thanks.
Some of the projects.
Eric just talked about.
Okay.
Great color. Thanks, so much.
Thank you.
There are no additional questions at this time.
Ill pass it back to Marcel for boss for closing remarks.
I can tell you thanks, everyone for joining us today, and we look forward to seeing many of you over the next few weeks.
Okay.
That concludes today's conference call. Thank you you may now disconnect your line.