Q2 2023 Sunstone Hotel Investors Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by.
Welcome to the Sunstone hotel investors second quarter 2023 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time I would now.
Now like to remind everyone that this conference is recorded today August four 2023 at 12 P M Eastern time.
Now I'll 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 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 R E.
We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles.
Additional details on our second 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 After Povich, Chief operating officer.
Brian will start us off with some commentary on our second quarter operations and recent trends.
Afterwards, Robert will discuss our capital investment activity and finally, I will provide a summary of our current liquidity position.
A recap of our second quarter earnings results and provide some additional details on our outlook for the remainder of the year.
After our remarks, the team will be available to answer your question.
With that I would like to turn the call over to Brian . Please go ahead.
Thank you Aaron and good morning, everyone. We are pleased that our second quarter adjusted EBITDA and adjusted <unk> per share exceeded the high end of our guidance.
<unk> strong demand at our urban and convention hotels, combined with productivity gains operating efficiencies and expense controls led to increased hotel profitability.
The second quarter saw a divergence in trends across our portfolio as urban and convention hotels generated strong growth, while our resorts saw demand moderate as the quarter progressed.
These trends reinforce our focus on maintaining a balanced portfolio of high quality convention urban and leisure hotels and resorts.
Following a very strong revpar performance in the first quarter, we anticipated that growth would normalize in the remaining quarters of the year as we lap the impact of the Omar Khan variance.
While strong domestic leisure travel accounted for most of the industry growth coming out of the pandemic during the second quarter demand increasingly shifted to corporate travel and group events.
In Q2, our urban and convention hotels increased occupancy by 460 basis points and grew rate by four 2% as compared to the second quarter of 2022, which contributed to robust year over year revpar growth of nearly 11%.
Once again, San Francisco led the portfolio growing revpar by over 32% on further occupancy gains and higher rates.
So there is no shortage of negative press surrounding the San Francisco market. We remain encouraged by the hotels ongoing recovery and we continue to believe that the city is a desirable long term market in which to own a well located fully renovated hotels.
During the quarter, our hotel ran nearly 11 points of higher occupancy as compared to its competitive set has the property is able to capitalize on its more than 70000 square feet of meeting and event space to create its own in house group compression and not have to rely solely on the <unk>.
Convention center and citywide events.
In addition, our fully renovated guestroom product is allowing the hotel to drive higher rates and attract new and higher quality demand, which together with better occupancy contributed 224% Revpar index relative to competitive set in the second quarter.
We also saw strong growth at our hotels in Portland, Boston, and Orlando, which all generated double digit revpar growth in Q2.
Hilton San Diego Bayfront had its best second quarter EBITDA performance on record.
The recent comic con events in July was very strong as the hotel remain nimble and was able to resell all rooms that were canceled related to the Hollywood strikes at average rates that were nearly twice as high.
In total room revenue was up 10% relative to the comic Con event last year and our hotel led the competitive set over the multi day events.
As I noted earlier, the operating fundamentals at our resorts were less robust as domestic leisure destinations faced increased competition from U S travelers going abroad without offsetting benefit of inbound foreign visitation.
This was particularly the case at our Florida coastal hotels, which were early beneficiaries of very strong pent up leisure demand coming out of the pandemic, but have seen some normalization as travelers opted for other destinations and vacation options that had been limited in the last two years.
Despite this moderation our two Florida resorts maintain average room rates that we're at 46% higher than the second quarter of 2019.
We also saw a softer leisure trends in Napa and Sonoma has the wine country continued to be impacted by unseasonably cool and wet weather and the surge in international travel.
And while our hotel grew right to another all time second quarter record, beating the high watermarks that last year, and a staggering 53% increase as compared to 2019.
Despite still garnering very strong rates, our resort portfolio underperformed, our expectations, particularly in May and June which contributed to nine points of lower revpar growth for these properties as compared to our forecast at the start of the quarter.
While this trend continued into early July we have seen some pick up in forward bookings over the last couple of weeks, which is encouraging.
Overall, we think it is reasonable that this heightened preference by American vacationers for international travel will normalize as we move into next year as much of the pent up demand for trips abroad gets worked out this summer.
This should also be bolstered by increasing levels of foreign visitation to the U S, which continue to recover but remain well below pre pandemic run rates.
Overall, the combination of steady corporate and group demand and a slower leisure backdrop contributed to 280 basis points of occupancy growth across the portfolio in the second quarter and when combined with generally flat rates drove total portfolio revpar growth of three 6% as compared to the <unk>.
Higher year.
While room revenue growth was below the low end of our expectations. We were pleased to see that out of room spend remains strong and came in above forecast benefiting from continued increases in group activity and increased ancillary revenues.
Banquet sales per group room was $230 in Q2, which was above 2019 on a comparable basis.
Our urban hotels saw strong out of room spend with Marriott Boston long Wharf, GW Marriott, New Orleans, and the Bidwell Portland, all generating spend per group room above the second quarter of 2022 and 2019.
Including the robust the out of room spend our portfolio generated an additional $146 of revenue per available room in the quarter for a total revpar of approximately $392 an increase of five 4% from last year.
As the demand environment evolves, particularly at our resorts, we are working with our operators to drive efficiencies and mitigate costs where possible.
Wage growth has continued to ease as some of the excess pressures come out of the labor market.
Food and beverage costs also improved relative to the prior year driven by a combination of easing inflation menu optimization and a higher mix of banquet business.
As you have likely heard the property insurance market for real estate of all types has been increasingly challenging in the recent years.
Late in the second quarter, we completed the annual renewal of our insurance program that covers most of our portfolio and while our outcome was more favorable than what I have heard from many others, we were not immune to rising costs.
Despite the various cost pressures our total portfolio generated an EBITDA margin of 32, 3% in the second quarter, which was only 100 basis points lower than a very strong second quarter margin performance in 2022.
Our urban and convention portfolio grew margin by 10 basis points year over year, even with 80 basis points of margin headwind from the Renaissance D C, which is in the final phases of its repositioning to the western DC downtown.
Now turning to segmentation.
Our portfolio generated 240000 total group room nights in the quarter and the group segment comprise roughly 44% of our total demand.
Q2 group room night volume represents approximately 96% of comparable pre pandemic amounts with average rates, 10% higher leading to total comparable group room revenue that was 6% higher than the same quarter of 2019.
For the total portfolio group room rates were up 3% year over year with total room nights up 10%.
Group production for all current and future periods. In Q2 was 221000 room nights, resulting in a 7% increase in group revenue production relative to last year.
In terms of transient business, which accounted for 50% of our total room nights in the quarter comparable rate came in at $324 or 20% higher than the pre pandemic levels. We saw in the same quarter in 2019.
For the total portfolio the transient rate was $345 and was down slightly to the prior year driven by softening leisure demand.
Partially offsetting the decline in leisure volume where increases in both average rate and room nights for our corporate negotiated channel, which posted revenue growth of 10% versus last year.
This is indicative of the ongoing recovery in business travel and is encouraging as it is the segment, where we have the most opportunity to grow occupancy across the portfolio.
While the second quarter Revpar performance came in below expectations, we continue to see areas for optimism and expect full year earnings growth in 2023.
The outlook that Aaron will discuss shortly assumes that the demand environment for leisure travel remained soft in the near term and while we have seen some encouraging data points in recent transient bookings. It is too soon to tell if it is indicative of a resurgence we.
We will continue to monitor these trends at our resorts, but we expect that our well balanced portfolio of urban and convention hotels will make up a larger contribution of our earnings in the coming quarters.
Lead volumes and group production, our strong group pace for the second half of the year is 6% higher than 2022, driven by increases in both room nights and average rates.
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 and contribute to further profitability growth later this year.
Competition for international travel and inclement weather have combined to hamper the performance of both of our wine country resorts.
While the fundamental backdrop has not yet been conducive to demonstrate the full earnings power of these assets. These are world class resorts, and we have conviction that our attractive basis and each will give us the ability to create value from these investments over time.
We remain focused on building the group base at these resorts, which will ultimately lead to transient rate compression.
Record outbound international travel and lagging inbound visitations this negatively impacting domestic summer travel, especially at high end resorts like these as well as other domestic luxury destinations.
We are ensuring that our operators remain diligent in managing their operating models. So that when the transient leisure demand resumes. These resorts will be able to maximize flow through and profitability.
Our low leverage well staggered debt maturities and ample liquidity gives us the optionality to continue to pursue our strategic objectives of investing in our portfolio recycling sales proceeds into new growth opportunities and returning capital to our shareholders.
We are working through the final steps in the planning for the Andaz Miami Beach transformation and the model rooms had been completed.
We will be sharing some exciting new details with you related to the project in the third quarter.
Robert will discuss some additional updates on the other investments we are making across the portfolio that should provide multiple layers of growth in the coming years.
While the transaction environment remains challenging we retained significant investment capacity to deploy when opportunities arise and we are actively searching out ways to recycle capital.
We remain committed to returning capital to our shareholders and as you saw in our press release. This morning. Our board of Directors has also increased our base quarterly dividend to better reflect the normalized taxable income our portfolio will produce over various cyclical periods.
And with that I'll turn it over to Robert to give some additional thoughts on our renovation progress as well as upcoming capital investments.
Thanks, Brian we started the year with several projects underway and I am pleased to report that we have made substantial progress.
The conversion of the Renaissance, Washington D C to the Western brand is in the final stages there.
Rooms are largely complete and renovation work is now progressing in the lobby and fitness center along with some exterior work.
The hotel is on schedule to be relaunched as a flagship western property in October and will contribute to earnings growth in the fourth quarter.
Work is now also underway to convert the Renaissance long beach to our Marriott as we shared with you before we expect the Marriott flag will enable the hotel to better compete for business grow earnings and ultimately increase the value of the asset.
The work will be substantially complete by the end of the year with a plan to relaunch the hotel under the Marriott brand in March 2024.
As Brian noted earlier, we have finalized the construction details and are preparing to begin work at the confidante as the resort begins its transformation to the Andaz Miami Beach, we will have additional details on our refined scope and timing later this quarter.
While the transaction market remains challenging recycling capital continues to be a primary component of our strategy as we seek to harvest gains and redeploy proceeds into new growth opportunities. We maintain considerable balance sheet capacity, which will allow us to take advantage of dislocation and opportunities that may arise as <unk>.
<unk> loans come due and as owners seek liquidity with that I'll turn it over to Aaron. Please go ahead.
Thanks, Robert we continue to maintain a strong balance sheet and as of the end of the second quarter, we had approximately $164 million of total cash and cash equivalents, including $56 million of restricted cash.
We retain full capacity on our credit facility, which together with cash on hand equates to over $660 million of total liquidity.
We have addressed all debt maturities through December 2024, and after the end of the second quarter, our net debt and preferred equity to EBITDA stood at three six times and our net debt to EBITDA was on a two six times.
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. Despite softer revenue growth reflects steady corporate and group demand with the moderation in domestic leisure travel.
Adjusted EBITDA for the second quarter was $85 million, which was just above the high end of our guidance range driven by stronger non rooms revenue and better margin performance across our urban and convention hotels.
We estimate that we incurred approximately $3 million of displaced EBITDA in the quarter related to the renovation work at our hotel in Washington D C.
Adjusted <unk> for the first quarter was <unk> 33 per diluted share, which was also just about the high end of our guidance range.
While the evolving demand backdrop makes forecasting incrementally more challenging.
Based on what we see today, we expect third quarter total portfolio of Revpar will range from a decline of 1%.
Two an increase of 2% as compared to the third quarter of 2022.
Based on this level of Revpar, we estimate that third quarter adjusted EBITDAR E will range from $57 million to $62 million and our adjusted <unk> per diluted share to range from 18 to 21.
Based on second quarter performance and our outlook for the third quarter. We now estimate that full year revpar growth is likely to be near the low double digit end of the range. We shared with you on prior calls.
Which excludes our hotel in Miami have assembly undergoing renovation.
Assuming this level of revpar growth it could translate into our full year adjusted EBITDAR range of roughly $255 million to $265 million.
Based on our current renovation timelines, we now anticipate that we will incur between $11 million to $13 million of EBITDA displacement in 2023 with.
With approximately $7 million of that total already incurred during the first half of the year.
Roughly $1 million expected in the third quarter and the balance in the fourth quarter as work ramps up in the <unk> in preparation for its conversion to R&R Miami Beach.
Now shifting to our return on capital.
We repurchased a modest amount of additional stock in the quarter, bringing our year to date totaled $21 million 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 an increase in our base quarterly common dividend to <unk> <unk> per share for the third quarter a.
A 40% increase over the prior amount.
While we continue to believe that our measured payout approach in the first three quarters of the year combined with a catch up dividend at year end is well suited to our dynamic sector.
We believe this higher base dividend amount better accommodate our commitment to returning more capital to shareholders.
In addition to the common dividend.
Our board has also declared the routine distributions for our series H Ni preferred securities.
And with that we can now open the call to questions.
So that we are able to speak with as many participants as possible. We ask that you. Please limit yourself to one question.
Operator, Please go ahead.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if at any point you'd like to withdraw from the queue. Please press star one again.
Youll provided the opportunity to ask one question, we will now take a moment to compile a roster.
Our first question comes from the line of Duane <unk> work.
From Evercore. Please go ahead.
Hey, Thanks, and good morning.
With respect to 2024 could you speak to the puts and takes.
On earnings growth and maybe margins into next year as we think about these ROI projects.
Assets that are ramping and some of the displacement impact this year.
Sure Good morning, Duane I'll start and then I can.
Let erin cover some of the displacement.
Puts and takes so when we look at next year first from a.
From a group perspective.
While we're not.
Don't typically give group pace at this point.
Patient is positive for next year, so that's something that.
We will continue as we as we've seen in the second quarter and expect throughout the rest of the year.
That those markets.
Convention the urban markets, we continue to be continue to be strong next year.
When you look at the citywide calendars.
<unk>.
In 24 D. C is very strong New Orleans, the strong San Diego is strong.
And then when you look at DC specifically.
We are completing the renovation in the third quarter of this year. So there is some additional.
Displacement that will happen during this quarter, although as we've said throughout the process.
Because of the lack of <unk> availability in DC, we have been pleasantly surprised with our ability to work around the displacement and work with groups to minimize that loss.
And so.
D C will start to ramp.
In the fourth quarter down from the group perspective, Theres already do quite a bit of group business on the books and it's being sold as a western into next year.
From a transient perspective, the western flag will go out in the fourth quarter and it will start booking.
From there so we have that we have that ramping up.
Our expectations on San Francisco is that while the market has its own challenges, we continue to utilize and take advantage of our meeting space and our ability to.
To build on.
Create group compression of our owned and not have to rely on city wides.
And then the main the main renovation next year that will be happening will be.
In Miami.
Demolition will start.
In the back half of this year and then we will.
It will be under renovation for the majority of next year.
We're looking to open up in the high season.
Starting in December of next year I'll, let Aaron go through Canada.
The EBITDA displacement put and takes for the time both time periods.
So just to add to add to what Brian commented on as we noted earlier on the call. What we're expecting for this year is 11% to $13 million of EBITDA displacement and that's split roughly 50 50 between in the first part of the year related to the work in D. C. And then the back half of the year, primarily related to the work and beyond us and so as we think about as we just.
Move from 'twenty three into 'twenty four I wouldn't expect much in terms of the way of earnings contribution on a full year basis from from Andreas just given the that worked out what happened in the back half of the first half of the year relatively earnings that will generate once it's done.
So that'll be a net headwind from a displacement perspective, the positives I think that we'll have will be the renovation work at long beach that down Robert had referred to.
When that conversion will take place early in the year. So we should see some lift there and then the primary driver will just be.
The western DC downtown coming online as a fully flagship west denim it should be.
<unk> was a contributor for us.
Okay. Thank you.
Thank you.
Yes.
Our next question comes from the line of Chris Sterling from Green Street. Please go ahead.
Thanks, Good morning.
Going back to the cockpit.
Good morning, guys, Brian going back to the confidante could you offer any updated thoughts on the return profile. There just given some of the recent trends we've seen in that market I know you've spoken to conservative underwriting in the past, but would be helpful to hear any updated perspective.
Sure.
Yes, so for.
Its.
Numbers that everyone has seen for.
Last quarter end, and probably going into into third quarter. This year too.
Miami market has definitely pulled back and has moderated still substantially higher than what it was 19, but a little lower than where it was in 'twenty two.
Quite frankly, we've seen that and I think others have talked about it too.
Most of the higher end leisure market domestic leisure markets.
I won't be the first one to say this but there is a lot more international travel happening then inbound international travel happening.
We see that coming from the higher segments.
<unk>.
And and so.
The top destinations are definitely feeling some of that moderation in Q2, and Q3, Miami is absolutely not immune from that but when we go back to our investment here.
Yes.
The game plan, followed a lot of what we did.
In <unk> and it's a we have a we have a asset in a fantastic location.
Mid beaches become a very high end destination.
<unk> is under construction.
Blocked down you guys have.
<unk> you have the addition, and so it is definitely.
The right.
ZIP code <unk>.
Have an asset that has a fantastic footprint as far as the campus size and the ability to create APAC yard destination.
And so that's that's a big positive.
And so when we look at the opportunity here the opportunity is to draft and.
While 2023 is down in the market 2022 finished substantially higher for the for that market than where we had underwritten.
<unk>.
That way we can.
The even with the pullback the amount of room that we have is even more than we initially thought so.
That all bodes very well what we're also doing with the property and anywhere we're finishing up we finished the model room backyard demolition will happen, so and we're working with some various partners.
That will be able to announce shortly and so sometime in the quarter, we will be able to provide a full picture of what this asset is going to look like and what the resort will look like going forward.
<unk>.
But what we have we think is a is going to be a subs and.
Exceptional room product.
Fantastic.
Food and beverage environment.
And a great pool experience.
Sure.
And a couple of things we've done with the rooms too is that were making some modifications to make sure. We have the right sweet counts there make sure that we have the right product offering for that market and so while all leisure markets that has.
Some big wins in some some pullbacks Miami is no different but where we are where we ended where the market ended last year, and where we need to position. This hotel.
We feel better about it than we did when we when we executed the transaction.
Understood. Thank you.
Our next question comes from the line of Smedes Rose from Citigroup. Please go ahead.
Hi, Thanks.
Good morning up there I wanted to ask you it looks like.
It looks like the.
Pace of share repurchase.
In the second quarter and Im just wondering kind of how you are thinking about that going forward or are you just kind of trying to preserve capital here.
Capex projects are.
Yes.
I think when when we look at share repurchase we look at return of capital to shareholders.
That's a combination of divvy.
Dividend and share repurchase and we did we did increase our dividend our base dividend.
To more accurately.
Dress what are our current structure is and what our current taxable income is minimized.
The catch up dividend as much as possible knowing that that's a difficult thing to do in our space.
And so when we look at allocating capital going forward. It really is just it is a continued balance of what we've been doing is it's making sure that we have the right amount of capital for.
Investing in the portfolio.
Future acquisitions, whether that comes from using balance sheet capacity or <unk>.
Recycling capital and then and then repurchase and while yes, it did slow a little bit and sometimes you get into.
<unk>.
You get into blackout periods, where you have to set certain parameters far in advance.
Yes, I think when you look back at 2022 and into 2023, we've been.
For our market cap size of lease one of the more aggressive.
When it comes to share repurchase we have a fantastic balance sheet, we have plenty of capacity and so like you said it really is just balancing everything.
But again when our share price gets to a certain level, we definitely have the capacity to.
To go ahead and buyback.
Thanks, and then can I just ask you on the Napa properties you mentioned.
I know for a number of reasons, it's probably been underperforming your expectations I mean do you think.
Is it 24, where you sort of start to realize better value there or do you think it's more like 25 for their managers to get.
The kind of group business that you were talking about on the books that would cause some compression on the transient side.
Yes.
<unk>.
<unk>.
Its definitely later than we initially.
<unk> and <unk>.
That's actually an absolutely disappointing.
But when we look at both of the Resorbs and they opened close to each other.
Months apart, but.
When they both opened up they both had it was in 'twenty two and you had.
Pent up domestic leisure demand that was really just through the roof in both both hotels out of the gate did very well from a leisure standpoint, and and as we've talked about before it got a little bit overly confident in that leisure demand and didn't do a good job of.
Putting on the group base.
Last year, we corrected that and have the hotel's focus more on on group base.
Going into this year end and four seasons actually has fantastic group base in Q3 of this year and.
And so that that has been fixed and will be fixed going forward right now with a strong group base.
The leisure demand as has fallen off for all the reasons that has been mentioned.
On the cost.
And so.
We haven't had the hotel's firing on all cylinders yet.
And usually when you have a new reopened hotel what you'd like to do is get the revenue up to where you want it to be and then you go in and you work the cost model to make sure that the profitability isn't there, but since we've seen the various components of the of the revenue side just not working at the same time, we're now.
Now actively working with both of the management teams with.
With the highest levels of both of those organizations working through fine tuning that cost model.
And manta.
Montage, maybe a little bit ahead of four seasons, where even in the second quarter, where you saw revenues were kind of flat you saw a little bit more profitability in the prior year. So youre starting to see the beginnings of that now remember these are luxury assets and so it's very important that we balance the customer experience the service levels.
With.
Our desire to have the right profitability, but we believe that there is plenty of opportunity here.
Right sizing and working through the cost model working through different staffing in the way that things are done where we can.
Extract significant margin upside without impacting our guest experience.
And so that's something that's underway now know what we will need as we will need the leisure side too.
Come back to Reaccelerate and if we can get into that next year, we're working with a group base side is a continuation and we will continue to be to be working through that when the leisure comes back we'll start to really see that our expectation and.
Time will tell is that a lot of this international travel will get out of the system. This year and we should revert back to a more normalized.
Leisure demand as we get into next year. So yes, you should start to see some additional.
Earnings acceleration next year other things that are happening for the properties.
<unk>.
We've continued to make some some enhancements and montage.
Four seasons, our winery, there, which is again is a resort.
Inside of a winery.
And with with everything the vineyards and all of the components of a winery surrounding it.
Quite a unique experience our winery is doing very well, we're actually looking for profitability. This year and then another thing for the four seasons, which is a huge win is the restaurant aura. There was recently awarded a Michelin star and.
So everything is starting to really.
As far as recognition from the winery recognition from the restaurant four seasons, obviously is <unk> is.
Well regarded.
Premier luxury operator so.
It has the components right now of everything kind of lined up.
Yes.
We have the revenue we have the expense plan and when this ramps up.
It's going to start putting off the year.
Okay.
Okay. Thank you I appreciate it thanks guys.
Our next question comes from Chris <unk> from Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Yes.
Good morning, My question kind of relates to the Hyatt.
San Francisco I know you provided some color.
Color in the prepared comments, but.
Obviously, it's an outlier relative to everything we see in San Francisco There is reasons for that you mentioned, but how.
<unk> 30 is that demand I mean is that is that a function of other things going on with other hotels in the market or is this some kind of contract business just trying to get a sense for what that could look like later this year and even next year if the if the office vacancies continue to rise.
Hum.
So San Francisco is and what we're seeing in the market now are the submarkets are performing differently and being an in embarcadero in the financial area.
We rely and have for several years now relied a lot less on the citywide compression and conventions. It would have to be a very large convention for it to to really get out to us and impact us and so what the hotel is focused on is.
We have good meeting space, we have a lot of meeting space relative to the size of our hotel and so to use that to go after groups that are.
No.
10 to a 100 room nights is really the kind of the bread and butter 100 to 200.
Groups that need the space that are would be a much smaller groups somewhere else.
And so we're able to do that we're able to then compress the transient demand and while the office vacancies are.
Our.
Not where anyone would want them to be they are.
We are surrounded by office and so there are companies that are are back to work certain days and with our new rooms product that we did and maybe we have some companies that are that were staying at a higher price point hotels previously, but we are able to capture good corporate business.
Yes.
That we were putting good before with the room product that we had and so.
That's really the secret to their success for this hotel is now the transient demand is as strong.
As strong for the rest of the year.
We anticipate.
Meaningful EBITDA growth and EBITDA is probably doubles this year.
Over last year, but we're still quite we're down quite a bit from 19 and so it's a.
Now to your question is is it a sustainable model that we have there.
Yes, it is because it's.
Is there some crew and some other things yes. There is there is that in the hotel, but we do have we do have a good a good model a good location and in a market that has suffered and we'll.
Certain segments of it in sub markets and that will continue to suffer.
Some of the products getting a little worn down there and so we have a basically brand new product that we're offering guests.
Guests and so the hotel is really well positioned.
Does that give it legs of growth for next year. It should have some growth there should subs continue to grow next year, but what was the years will need to continue.
For the the market continuing to get more people into the city. The good news is especially in our location.
The city looks a lot better than it did previously so look we're optimistic.
We think we have the right hotel and the right location.
But it's still a long road ahead for San Francisco.
Okay. Thanks, Brian I appreciate all the color.
Our next question comes from the line of Michael Bellisario from Baird. Please go ahead.
Thank you good morning, guys.
I could.
If you go back to that you mentioned nine point shortfall at your resorts in the quarter.
A couple of parts here, how much of that was occupancy how much of that was rate and then the pickup that you mentioned in forward bookings over the last couple weeks was that broad based specific to any properties and then what did the rate look like on those bookings. Thank you.
Okay. So let's start we'll start with served resorts in the quarter.
Second quarter was mainly.
A good piece of it was the majority of it was occupancy.
ADR was was down wed not not as much as the occupancy and.
But as we look in the third quarter.
July specifically working we'll see some more occupancy or we'll see some more rate.
Deterioration.
And where we're seeing that is really.
It's a question of us and I think it was asked through our material cost yesterday, who is this just demand or is it demand or in rates getting caught and and the answer is it's a little bit of both but on the rate side. What we're seeing is of the leisure segments. Its the retail segment.
That was the weakest in Q2 and the weakest in Q3, and maybe just to simplify that retail segment. That's that's the brand dot com customer.
We think that thats the customer that is.
More likely the one taking the international trip now and so while that customer has gone away.
In the leisure segment, we're not seeing that in the BT or other segments, but.
If that customer has gone away for the short term our expectation is that they come back and so the occupancy.
And rate mix.
<unk> is more a function of.
The retail customer going away and more wholesale more more discounter channels.
More of that.
That you would have typically had on.
On the.
The BT in the transient pick up over the next.
Those are bookings over the next six months.
That's being heavily led by our urban assets and so the.
San Francisco is a big piece of that Portland has actually picked up picked up.
Boston long wharf.
Even given San Diego.
Where some of that is.
Youll have government or government related a lot of our defense contractors aerospace that sort of thing.
So.
And then long Beach is another one where we're seeing a lot of pickup on the government and contractor side.
Okay.
Okay.
Great. Thank you.
Thanks, Mike.
Our next question comes from Dori Kesten from Wells Fargo. Please go ahead.
Hey, Thanks, good morning.
And we went back in June you mentioned the potential to increase that.
Total total cost of the Andaz relation industry.
60 to 70.
It still being considered.
So we are.
And our final stages of.
Finalizing everything.
As final twice that.
So.
What we're going to do is sometime in the third quarter, when we and really whats holding this up now is just finalizing our partnerships to announce because we wanted to.
We want to provide a complete picture.
We will.
Gait, both the cost any scope changes.
Where the final room count is going to be who the food and beverage operators are going to be.
And then provide some photos and and.
<unk>.
<unk>.
Renderings of that and then are there any scope changes.
We'll update our projections to include.
Returns on the scope changes.
So im kind of dancing around your question right now and I will say that we will we will have a more wholesome update during the quarter.
That said the construction costs have increased over that time period.
At this time period, while shipping is.
<unk> is really the only thing that has come down.
So <unk>.
Normal.
Inflation in the in the expense side should be expected, but we will provide.
A total view of everything.
And I think once everyone sees the opportunity.
Some of the.
Okay.
The name brand recognition that we'll be able to bring to the <unk>.
It'll be pretty exciting.
Okay.
Are you able to put a little finer point around what the potential.
Placement could be for next year for that project.
I think if you look to what we said for this year before we were able to get the timing and everything down down is is that we said that we would be.
Close to zero this year and I think the hotel is going to put off about four.
$4 million to $5 million of EBITDA.
And so and it did 12 and a half in 'twenty two.
So.
Looking at.
At 23.
The majority of your earnings comes in.
First first quarter or so of the year and then the very end of the year.
We plan to be opened for the end of the year, but it will probably be minimal earnings.
Coming off that hotel next year.
Okay.
Sorry, the last part kind of broke up you said your earnings next year to be comparable to Campbell see it'll be it'll be minimal earnings.
From the hotel next year.
Okay, and then just last one based on what.
What you all are working on today.
Would you expect Q be recycling capital by year end.
We are hopeful to be able to recycle capital by year end.
So part of our plan is to be able to be active recyclers of our of our real estate and when we get to the point at which were.
John with our investment lifecycle of a leased hotel, it's time to move on to something new.
Yes.
It's been challenging up to this point.
Smaller deals obviously easier to be done than larger deals we have recently seen.
Several <unk> deals get done so for large for larger assets. So larger cash flowing assets are now in lease financeable and so that should help things move along.
But we are we are absolutely endeavoring to be able to.
Hopefully get some recycling done this year.
Okay.
Okay. Thank you.
Our next question comes from Bill Crow from Raymond James. Please go ahead.
Hey, good morning, guys try and make this quick.
Good morning, I have three quick ones once a yes, no we will start with that one gibney ASUR and this is following up stories question do you have any assets currently in the market.
Michelle.
We have had and normally we don't talk about deals until they're done but we.
I will tell you we always have at least one asset in some form of.
Either marketing soft marketing are in talks with others.
Yes.
Right.
Brian I guess when I look at your results last night a surprise.
Revpar Miss relative to your guidance that was provided a month in.
Yes.
<unk> resort.
Is that was that a.
Kind of in the in the quarter for the quarter demand materialize was our cancellations in there.
And I'm, just kind of figure out what the what the Nashville, So cancellations are pretty static to where they were theyre up a little bit to 19, but thats more a function of DC, where we have group contraction were under renovation and so some of them. We are able to work it out with the groups and some of them are not and so I think.
We're probably from a.
Yes.
Total dollar amount, maybe up eight $900000 too.
To where we were in 19 and cancellations, but thats predominantly Tc.
It's to your first point.
Hey.
They're short term visibility that you have on on transient demand and in certain markets and while <unk> was one of them was.
We had some we had shortfalls in Q1, and then we opened up certain channels and they felt.
In Q1, which was fine it was great.
When we got into into second quarter in and starting.
Really kind of accelerating in June .
In May and June is that those bookings didn't were not.
Happening like they happened in Q1.
And when we look at the different markets and it tends to be the higher end luxury leisure domestic markets and when you go you can look at our portfolio you can look at others that have given numbers you look at the star data.
It's the higher end markets of Florida coastal Southern California.
Northern California.
Sure.
Hawaii.
Domestic Hawaii call. It I know Oahu has has inbound from from Japan that has benefited from and so it was the typical pickup started to slow down.
And that coincided with this imbalance between international outbound and inbound travel.
Yes.
Thank you for that and that's the third.
A question I wanted to ask because it came up I know post call.
Jim will similar question, but we've been tracking the inbound outbound differential for more than a year and it's not getting much better.
You made a comment you hope that this would kind of normalize by next year, but we had three years, where people were unable to travel internationally.
Curious why it might normalize that quickly.
We are seeing international air fare become very expensive and then I just there is.
Article about yesterday too.
Showing guys domestic air fare has come down a little bit and so while yes.
It tends to be the more.
Affluent traveler thats.
Doing these type of trips.
The cost of that and that international ticket those weigh on weigh on the overall cost.
So and then that in.
Our European.
Trips something that people do every year or every couple of years.
So.
Youre absolutely right.
Hey.
The time for <unk> and other things to get into this country has been difficult the imbalance.
Hey.
Prior to the pandemic, we did about 10% international business and it's kind of hard to calculate because.
<unk>.
Our hotels may do 10%, but maybe the markets that we're in half.
<unk> compression from more that state and other places.
And were half of that now.
And so.
<unk>.
China is a piece of that especially on the west coast.
European inbound as a piece of that and even in <unk>.
Biggest international is as Canada, and we've seen a decline from that.
So.
Yes.
The airline fares are probably the one thing that gives us a lot of confidence that that once that because that's what we see when we see the prices of fights to Hawaii go down we see we see demand go up and so.
But we'll have to watch it.
No I appreciate that thanks for the color Brian .
Thanks Bill.
Okay.
Our final question comes from the line of Floris Van <unk> from Compass point. Please go ahead.
Hey, Thanks, guys.
Encouraging.
Progress in the wine country in San Francisco My question has to do with the dividend again, you raised the dividend what would the dividend has been raised to if you. If you did not have any tax loss carryforwards.
Well aware.
The dividend right now that decision was independent of our tax loss carryforwards now we have substantial cash.
<unk> forwards and our plan is to use those for our capital recycling to make it so.
We will have as we sell hotels will have gains.
You can always take care of that through 2031 exchange, but that sometimes.
<unk>.
Timing needs to be on your side for that so by keeping our Nols to shield those gains if we're unable to do a 10 31 that allows us to be more efficient with recycling that capital.
So right now.
What the increased today wise.
When we came out of the pandemic and taxable income started to to flow back and we went back to our previous dividend, which was based off of.
A different portfolio are based off of a different capital structure based off of different depreciation. So all these factors are we just kind of went back to what we were doing.
As we look forward and wanting to maintain a dividend that can handle normal cyclical fluctuations.
And minimize the amount of a catch up dividend at the end of the year. This was a step.
Maybe a little overdue step that could have happened earlier this year, but this is a step that we needed to take.
We still anticipate and we'll have an update next quarter, we still anticipate to have a catch up dividend at the end of the year. This will not Q3, and Q4 dividend will not take care of that full taxable income.
We will we'll have more information on that projections on that and then views on the base dividend going forward.
On our next call.
Thanks I appreciate it.
I would now like to turn the call over to <unk>.
Brian Julia for closing remarks.
Well. Thank you everyone and thank you for the interest in the company and we look forward to meeting with many of you at upcoming conferences and investor meetings and have a good day. Thank you.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Yes.
Okay.
[music].