Q1 2023 Sunstone Hotel Investors Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Sunstone Hotel investors first quarter 'twenty to 'twenty three earnings call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time I would now.
Like to remind everyone that this conference is being recorded today makes up 2023 at 12 P M. Eastern.
I will now turn the presentation over to Mr. Aaron Reyes Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone.
Before we begin I would like to remind everyone that this call contains forward looking statements that are subject to risks and uncertainties, including those described in our prospectuses.
10, Qs and 10-K.
Other filings with the SEC, which could cause actual results to differ materially from those projected.
We caution you to consider these factors in evaluating our forward looking statements.
We also note that this call may contain non-GAAP financial information, including adjusted EBITDA R E.
Adjusted SFO and property level adjusted EBITDA already.
We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles.
Additional details on our first quarter results have been provided in our earnings release and supplemental which are available on our website.
With us on the call today are Bryan Giglia, Chief Executive Officer, Robert Springer, President and Chief Investment Officer, and Chris <unk>, Chief operating officer.
Bryan I'll start us off with some highlights from our first quarter operations and recent trends.
Afterwards, Robert Berg discuss our capital investment activity and finally, I will provide a summary of our current liquidity position.
Recap, our first quarter earnings results.
And provide some additional details on our outlook for the second quarter.
After our remarks, the team will be available to answer your questions.
With that I would like to turn the call over to Bryan. Please go ahead.
Thank you Aaron and good morning, everyone.
We are pleased with our performance in the first quarter as we continued to deliver on our strategic priorities and achieved operating results that exceeded expectations, including profitability that was above the high end of our guidance ranges.
Our portfolio performed well and grew occupancy 16 points from the prior year with average daily rates up nearly 3%.
While the impact of the Omicron Barry made for easier comps in January and February . We also saw meaningful occupancy growth in March and are pleased by what we're seeing into April which continues to point towards sustained demand growth, even as we move into cleaner year over year comparable.
Areas.
What is particularly encouraging is that demand growth continues to diversify away from just leisure travel and is composed of more business transient and group events.
In fact, two of our top three highest occupancy hotels in the quarter, where the Hilton San Diego Bayfront and Renaissance Orlando.
Both large convention hotels that were able to replace and discounted transient demand with larger amounts of higher rated corporate group business.
The Renaissance Orlando set an all time monthly revenue and profit record in March demonstrating the strength of demand for group events and the success of the additional meeting space, we added several years ago.
Our hotels continue to command strong rates with total portfolio ADR of $314 in the first quarter, a 3% increase from last year and an 18% increase over 2019 on a comparable basis, which is the highest first quarter ADR the portfolio as ever.
Cheap or urban and convention hotels continued to see the biggest gains and grew rates nearly 16% in the quarter as compared to the prior year.
The Hyatt Regency, San Francisco once again led the portfolio with rates up an impressive 46%.
Together with 22 points of occupancy growth led to year over year revpar growth of nearly 120%.
That rate growth in the quarter wasn't limited to San Francisco as New Orleans Long Beach, San Diego, Boston and wildly out all drove double digit gains.
Our resort properties generated a combined rate growth of nearly 2% in the first quarter.
Which is a solid result, given the record performance in the prior year and for the comparable resorts rates are up an impressive 47% over 2019.
The combination of growth in occupancy and rate led to first quarter total portfolio revpar of $219 up 32% from the first quarter of 2022, which was the high end of our guidance range.
Non room revenue came in strong during the first quarter benefiting from continued increases in group activity.
Banquet sales per group room was $216 in Q1 up 19% to 2022 and up 18% to 2019 on a comparable basis.
Including the out of room spend.
Portfolio generated an additional $130 of revenue per available room in a quarter for total revpar of approximately $349 an increase of 34% from last year.
On the expense side, we continue to navigate the increases in cost we have seen over the last several years and look for ways to reduce expense pressures.
While hourly wage growth continues to hover around the high end of historical ranges. We have seen some recent moderation and has been able to drive efficiencies in certain areas to help offset higher labor costs.
Food and beverage margins for the total portfolio increased substantially from the prior year, given the improved banquet mix and a higher volume of group events.
Food and beverage margins for the comparable portfolio. We're also 80 basis points higher than 2019, which is a direct result of working with our operators to optimize menu offerings and review pricing to mitigate rising food and beverage costs.
Despite cost pressures, our total portfolio generated an EBITDA margin of 26, 9% in Q1, which is 330 basis points higher than the first quarter of last year.
Excluding our hotel in DC, which is under renovation the comparable portfolio EBITDA margin was nearly 31, 5%, which is consistent with the same quarter in 2019, even with nearly nine points of lower occupancy.
As we move further into 2023, our focus continues to be on maximizing portfolio EBITDA as we aim to bring each hotel towards optimal occupancy level.
Now turning to segmentation.
Our portfolio generated over 222000 total group room nights in the quarter and the group's segment comprise roughly 46% of total demand.
Q1 group room night volume represents approximately 90% of comparable pre pandemic amounts with average rates, 13% higher leading to a total group room revenue that was 2% higher than in the same quarter of 2019.
Group production for all current and future periods. In Q1 was 167000 room nights approximately 3% more than what we put on the books in Q1, 2022, and at 3% higher rates, leading to a nearly 6% increase in revenue production.
Relative to last year.
In terms of transient business, which accounted for roughly 49% of total room nights in the quarter.
<unk> rate came in at $327 or 23% higher than the pre pandemic levels. We saw in the same quarter of 2019.
As we move further into 2023, we are pleased by the trends we are seeing in transient bookings, particularly with business travel where our volumes are increasing but where we still have the most opportunity to grow occupancy across the portfolio.
Based on what we have seen so far this year, we remain encouraged about our outlook for 2023.
Lead volumes and group production our strong.
Group pickup is running higher than historical averages underscoring the trend that we have seen of groups booking closer in to their events.
Pace for the remainder of the year is 18% higher than 2022, driven by increases in both room nights and average rates.
We believe our portfolio is well positioned for the remainder of the year with a healthy balance of leisure group and business transient demand.
Group pace at our two wine country research the rest of the year is up 56% relative to last year and is composed of some very high quality events, which will come with attractive rates and meaningful ancillary spend.
Based on seasonal demand patterns for the market the resorts will generate the majority of their full year EBITDA in the second and third quarters.
Despite the rainfall that hampered results in the first quarter. It did not stop us from enlarging the lobby bar montage Ddos Berg, creating a new indoor outdoor destination with Christine vineyard in mountain views and expanding Hudson Springs or poolside restaurants.
Based on what we see today, we expect that the 2023 EBITDA contribution from these two resorts should increase meaningfully from last year as they continue to season.
The Renaissance DC is in the final stages of its transformation to the western DC downtown which will be completed and rebranded during the fourth quarter.
The hotel team has done a fantastic job during the renovation managing displacement and driving profitability.
Hotel has a solid base of group business on the books for the second half of 2023, which will lead to meaningful growth for the second half of the year.
In addition to the capital recycling, we completed last year and the investments we are making into our portfolio. Now. We also made further progress on our third strategic priority of returning capital to shareholders.
Since the start of the year.
We have completed over $20 million of share repurchases, which brings our combined total since the start of 2022 to approximately $130 million at a price per share that represents a compelling discount to consensus estimates of nev and an attractive yield on our earnings. Additionally.
Additionally, we took advantage of some volatility in the interest rate market to swap $175 million of debt in the quarter, bringing our split of fixed rate debt and preferred back in line at nearly 65% of total.
Glass, we addressed our only 2023 maturity by refinancing the existing $220 million mortgage secured by the Hilton San Diego Bayfront with a new two year term loan that can be extended for an additional year. If we chose.
Both transactions strengthen our already healthy balance sheet and further bolster our liquidity position.
To sum things up better than expected performance in the first quarter gives us confidence as we move further into 2023.
Our balanced approach to capital allocation in 2022, and 2023 will allow sunstone to benefit from multiple layers of growth in coming years.
We continue to execute on our strategic priorities and while the transaction environment remains challenging we retained significant investment capacity to deploy when opportunities arise and we will seek to actively allocate capital investing in our portfolio recycling sales proceeds into new growth.
<unk> and returning capital to our shareholders through share repurchase and dividends. We believe this is a winning formula that will provide long term value to our owners.
And with that I will turn it over to Robert to give some additional thoughts on our in process and upcoming capital investments.
Thanks Bryan.
We are pleased with the progress we have made investing in our portfolio. Since we last spoke with you earlier in the year. We have completed. The addition of the OLED Keno pool at Wailea Beach resort. This new health and lifestyle focused experience has been well received by guests in the initial days since opening and we expect it to enhance the overall guest experience.
And increase the appeal and value of the asset.
As Bryan noted earlier work is also progressing on the conversion of the Renaissance, Washington D C to the Western brand.
The project is expected to be completed in the fourth quarter and will contribute to year over year growth in the second half of 2023 as it has relaunched as a flagship western property.
We are also converting our Renaissance long beach to our Marriott and that project will be kicking off later this year, we expect the investment to better enable the hotel to compete for business and grow earnings with the Marriott flag driving higher group rate and transient occupancy.
The renovation will begin in the second quarter with the plan to relaunch in early 2024.
At the confidante Miami Beach, our renovation plans have now secured approval from the historic Preservation Board and work will soon begin.
We have been able to refine the plans and now expect to incur less displacement in 2023 than we previously expected. We look forward to sharing further updates on our progress as the transformation to the Andaz Miami Beach gets underway.
As the year goes on we will further realize the benefits of our recent investments and conversion activity and start to lay the groundwork for the next layer of growth in the portfolio recycling.
Capital will continue to be a primary component of our strategy as we look to harvest gains and redeploy proceeds into new growth opportunities.
The transaction market remains challenging given economic uncertainty and restricted financing that said, we maintain considerable balance sheet capacity, which allows us to be opportunistic and take advantage of dislocation. Additionally, we constantly look for ways to creatively grow and enhance the value of our portfolio and we look forward to <unk>.
Aaron further updates on our investment activity as the year progresses with that I'll turn it over to Aaron. Please go ahead.
Thanks Robert.
We ended the first quarter, we had approximately $146 million of total cash and cash equivalents, including $49 million of restricted cash.
We retain full capacity on our credit facility, which together with cash on hand equates to nearly $650 million of total liquidity.
As Bryan mentioned earlier, we recently closed on a new $225 million unsecured term loan and expect to use the proceeds to fully repay the mortgage loan secured by our Hilton San Diego Bayfront.
After this refinancing our next debt maturity will not begin until December 2024, and it is the only $72 million.
The pricing structure and covenant package for this new term loan are identical to our other existing bank debt.
And the all in cost of a new term loan is similar to that of the mortgage being repaid.
Given the challenge lending environment. We are pleased to have completed this refinancing and appreciate the ongoing support and partnership from our lending group.
As of the end of the first quarter, our pro forma net debt and preferred equity to EBITDA stood at only three seven times.
And our net debt to EBITDA with only two seven times, giving.
Giving us one of the strongest balance sheets in the sector.
During the quarter, we took advantage of the volatility in rates to throw up $175 million of our floating rate debt to fixed rate.
This will result in a decrease in near term interest expense and bring the portion of our total debt and preferred Dennis fix to 65% of total.
Shifting to our financial results the full details of which are provided in our earnings release and our supplemental.
Our quarterly profit, which surpassed our expectations and were above the high end of our guidance ranges reflect continued robust leisure travel with increased contribution from corporate and group demand.
Adjusted EBITDA for the first quarter was $60 million.
Which was $7 million or 13% above the midpoint of our guidance range driven by stronger rates and better margin performance across the portfolio.
We estimate that we incurred approximately $3 million or just price to EBITDA in the quarter related to the renovation work at our hotel in Washington DC.
Adjusted <unk> for the first quarter was 21 cents per diluted share.
Which was <unk> <unk> ahead of the midpoint of our guidance range and benefited from stronger operations and lower interest expense due in part to our hedging activity.
While forward visibility remains limited and the macro environment is uncertain.
Based on what we see today, we expect second quarter total portfolio Revpar to increase between six 5% and eight 5% as compared to the second quarter of 2022.
As we shared with you on our last call, we anticipated that our comparable portfolio could see full year revpar growth in the range of low double digits to the mid teens as compared to last year.
Assuming a steady economic environment and excluding our hotel in Miami that will be undergoing renovation.
We continue to think this is a reasonable range and recent demand trends and better than expected performance in the first quarter gives us increased conviction.
For the second quarter, our adjusted EBITDA guidance ranges from $79 million to $84 million.
And our adjusted <unk> per diluted share ranges from 29 to 32.
Our second quarter outlook includes approximately $3 million of EBITDA displacement related to the in process conversion work at our hotel in DC.
We continue to refine their renovation plan for Andaz, Miami Beach, and now anticipate incurring less disruption this year, while the work gets underway.
For the full year, we project that we will incur between 13 million to $15 million of EBITDA displacement related to our renovation and conversion projects.
Now shifting to our return of capital.
As Bryan noted earlier since the start of the year, we have repurchased over $20 million of stock at an average price of $9 46 per share.
A meaningful discount to consensus estimates of NAV.
And a compelling implied multiple on our earnings.
In addition to the repurchase activity. Our board has declared a common dividend of <unk> <unk> per share for the second quarter as well as the routine distributions for our series G. H Ni preferred securities.
And with that we can now open the call to questions.
We are able to speak with as many participants as possible we ask.
Could you please limit yourself to one question.
Operator, Please go ahead.
Yes.
We will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad.
Your first question comes from the line of Duane <unk> pending worth of effort of.
Excuse me Evercore ISI. Please go ahead.
Hey, thanks.
Good morning, I'm wondering if you could just comment on the weather impact in the quarter and put some numbers to that.
Displaced revenue or maybe cancellation revenue.
And then just I know you said, one but just on the confidante, maybe you said it in the prepared remarks, but.
Can you help us think about the magnitude of the less displacement revenue this year. Thanks.
Afternoon Duane.
So on the for the weather, mainly California up and down the coast, we did see some impact.
When you look at San Diego.
Definitely on the leisure side, Yeah, we saw some we saw some impact there, but the group and the group that we had on the books was so strong and as we said in the prepared remarks, the pickup was higher than what we saw in.
Pre pandemic times, so that was able to backfill that demand.
San Francisco, we saw the same thing we saw very strong group, we saw increasing business transient we saw it.
Saw new business transient coming into the hotel.
Result of the renovation and a better room product. We had so it was able to backfill. There also I think where we did see some.
Some impact and we haven't we haven't quantified it exactly.
In wine country, there was for the luxury leisure tourists when it's raining.
Those shows.
Short term bookings do get impacted.
And the good news is we've got the first quarters.
Smallest and lowest.
Quarter of the year there those two hotels as we've said before really start generating the majority of their earnings they are actually the entirety of their earnings in Q2 and Q3.
And our group pace is strong there so we feel we feel pretty good so.
Probably all in all.
No.
Maybe a few million dollars of revenue at the most.
Luckily.
They are our convention hotels were able to outperform and backfill.
It really minimize that.
Yes.
Okay.
Thank you.
Your next question comes from the line of Anthony Powell of Barclays Capital. Please go ahead.
Hi, good morning out there just.
Question on San Francisco you.
You did see a pretty big increase in the quarter that said Theres been talk about convention room nights in the market declining next year. So maybe just a broad overview of your old saw there and how you see the market evolving.
Yes.
Anthony.
It was a great quarter in San Francisco.
We were able to.
It really.
Really drive group business and in House group business, where we're fortunate to have a.
A good quantity of high quality meeting space, we have newly renovated rooms and so.
While a lot of the city Wides don't fully.
Get to our hotel or we have we have other business and in place even even the large ones where there is while there is some rate compression.
We don't participate in all of them.
So that's something that we continue to build on the success of this hotel will rely on in house in House group.
Pes and city wise for the rest of this year are actually pretty good, especially if he's in the fourth quarter. Our in house group pace is very strong.
As we get into next year, we will have to continue to to.
Book that.
The self contained groups.
But thats, where the hotel is focused on and that's really between that and then the business transient.
That.
Has been increasing.
Especially those companies located in Embarcadero area and what we've seen with the new renovation is that we're able to get accounts that would not have stayed at the hotel before and.
And so when we when we put that together that that's the key to our continued success there.
Thank you. Your next question comes from the line of Smedes Rose of Citi. Please go ahead.
Hi, Thanks.
Bryan just kind of interested in your thoughts about <unk>.
Trends in key west going forward.
As expected some sort of reset.
Given some of the advantages because market is hit during the pandemic here just kind of wondering where you think that sort of settles out relative to kind of the 18 19 level EBITDA versus what you saw.
'twenty to 'twenty one.
Yes.
Thanks Smedes.
Q S. Prior to the pandemic at oceans edge, we were embarking on a.
Our strategy change there, where we were we were going to.
Try to lower occupancy go after a higher rates.
Really.
Complete positioning the hotel as a luxury product.
And so that that was underway, obviously, the pandemic kind of slow things down, but coming out of the pandemic, we absolutely traded occupancy for rate and grew it substantially.
To compare to 2019.
Ed.
As we expected and we talked about the.
The market is absolutely moderated.
This year.
Are there other travel options.
Cruise options.
Yes.
Or also <unk>.
Something that that market competes against.
Our view is that things will somewhat stabilize.
<unk>.
Is it going to be at 2022 levels now and now that wasn't our expectation.
But we expect to continue to be able to grow that business and stabilized at rates.
Higher rates, the 19 lower occupancy better profitability.
Thank you.
Your next question comes from the line of Chris Darling of Green Street. Please go ahead.
Thanks, Good morning.
Morning, Bryan can you touch on.
Can you touch on your expectations for Revpar and EBITDA at Waialae answer the remainder of the year, just given you'll be lapping some tougher comps going forward.
Okay.
Yes.
<unk> had a great first quarter.
With really strong in house group.
Our expectation expectation for the rest of the year is that it will moderate.
Somewhat but we have we have good groups on the books.
And the market remains.
It remains very strong it remains a.
Rate integrity and the market has remained very very high. So that's obviously a very good thing for us we're still running that hotel.
<unk>.
10 points of occupancy and lower than where we were we were pre pandemic.
Obviously at much higher rates.
Where that ultimately settles out is probably a little bit higher than the occupancy, but it is not getting back to the 2019 levels, we're able to.
Yield the hotel better we're able to.
Provide a better guest experience and better overall profitability.
So as we look out to the rest of the year.
Compare looking back to two.
Two comparing to 2022.
So we still expect single digit growth.
There and.
As our.
We continue to upgrade.
The overall experience of the resorts and the profitability our new.
Exclusive pool.
Has just opened and that's going to be another area, where we can.
We can drive.
Overall experience and and also profit.
Thank you.
Next question comes from the line of Charles Shoals of Tour Securities. Please go ahead.
Okay.
Hi, how are you.
Patrick Scholes here.
Yes.
Greg a little deeper into the results on the four seasons resort in Napa Valley I get at that.
<unk>.
It's certainly a less important quarter, but.
Revpar down 35%.
What happened there.
Matthew maybe weather a little bit but.
Can you give more color there. Thank you.
Absolutely no.
Weather as we said earlier was it was a factor.
But those two hotels when you look at the.
<unk>.
The transient demand.
Demand that was there in 'twenty to Q1, and Q2 was still heavily elevated.
In most markets and wine country, specifically yet.
The hotels performed.
The weather was a factor and performed.
Not quite in line with what we were expecting in the first quarter, but not that far off again and I know that this will be much.
Easier to see as we get the year.
Completed and through our supplemental and other information we gave you you'll be able to see.
And much more.
Granular level, but youll be able to see the quarterly.
Seasonality of.
This market, which is heavily skewed to Qs two and three.
And even.
This year four seasons is probably skewed more to Q3 than Q2. So when we look at the makeup and we look at.
What group as we have on the books.
At the montage paces up significantly for the second half of the year, mainly Q2, and Q3 pretty evenly distributed but we have $5 million of more group business that we had on the books in 2002.
Yes.
And we're talking at close to $1000 rate with $600 a night of ancillary spend at the four seasons, obviously, a smaller hotel, we have $2 million more than we had on the books in 'twenty two.
At roughly a thousand dollars a night of ancillary spend.
Most of that coming in Q3 with some very.
Very high rated corporate group business that will be very very profitable for us. So.
And I know the comparison will get easier to understand as the year goes on but the hotels are doing exactly what we expected them minus a little bit of rain in the first quarter and so.
Our expectations for the year, we expect.
Profitability to grow significantly.
50% to 70% more than what they did last year.
Cases are very strong and so.
Our view on these assets is unchanged. We are we are very excited about what they will produce.
And for you and our investors you'll start to be able to see that starting in Q2 and then in Q3.
Thank you <unk>.
Question comes from the line of Michael Bellisario of Baird. Please go ahead.
Good morning, everyone.
Good morning, Michael.
I want to go back to the comment you made about the transaction market being challenging.
I just want to dig in there a little bit more is that on the buy side from what youre seeing.
And then maybe more specifically on the sell side.
What if anything has changed and what have you learned so far there year to date on the sell side. Thanks.
So I'll start kind of maybe general and then Robert can give some more detail on.
Specifics.
Yes.
Given where the debt markets are where debt is available.
Available but.
Nick.
Expensive relative to historic rates and and not as plentiful as it once was.
It does make transactions more challenging.
It also makes larger transactions more challenging so sub $100 million hotels.
As far as if a buyer and seller can.
Come to an agreement you can get financing some form of financing for that.
It obviously becomes more difficult as you get to larger deals where.
The debt may not be available or sufficient debt based on current rates and coverage levels.
Required debt yields are youre, probably in the 50 ish percent LTV range.
And so while smaller deals are easier to get done as you get into the.
200, 300 $500 million hotel range, it starts to become a little bit more challenging.
Robert.
I think that covered it well I think we.
We have seen a couple of larger deals that have been able to get done.
Largely due to in place financing that was assumable.
Other than that larger transactions have been definitely more challenged.
And then I'd, probably no surprise on the buy side. It's just a question of finding buyers and sellers that have.
A similar view as it relates to valuation, which often just relates to growth expectations from here.
And.
In many cases based on where hotels traded.
Specialty resort hotels.
There was elevated expectations over the last several years.
And.
So I think on the buy side.
That's really the primary issue that's slowed down acquisitions is really finding.
Sellers, and where expectations meet our expectations, but I think Brian's comments summed it up pretty good.
Thank you there are no further questions at this time I will turn the call over to Bryan Julia.
Please go ahead.
Thank you and thank you everyone for your time today and interest we look forward to meeting with many of you over the coming weeks in upcoming conferences and property tours. Thank you.
This.
Today's conference call you may now disconnect.
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