Q3 2024 Sunstone Hotel Investors Inc Earnings Call

Speaker Change: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors third quarter 2024 earnings call.

Speaker Change: 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.

Speaker Change: I would like to remind everyone that this conference is being recorded today, November 12, 2024, at 12 p.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Speaker Change: Thank you, Operator. 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.

Speaker Change: which could cause actual results to differ materially from those projected.

Speaker Change: We caution you to consider these factors in evaluating our forward-looking statements.

Speaker Change: We also note that commentary on this call will contain non-GAAP financial information.

including Adjusted EVA.RE, Adjusted FFO, and Property Level Adjusted EVA.RE.

Speaker Change: We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles.

Speaker Change: Additional details on our quarterly results have been provided in our earnings release and supplemental, which are available in the Investor Relations section of our website.

[inaudible]

Speaker Change: With us on the call today are Brian Giglia, Chief Executive Officer, Robert Springer, President and Chief Investment Officer, and Krzysztof Dopowicz, Chief Operating Officer.

Brian Giglia: Brian will start us off with some highlights from our third quarter, including commentary on operations and recent trends.

Robert Springer: Afterward, Robert will discuss our capital investment activity and provide an update on our Onda's Miami Beach transformation.

Speaker Change: And finally, I will provide a summary of our third quarter earnings results and share the details of our updated outlook for 2024.

Speaker Change: After our remarks, the team will be available to answer your questions.

Brian Giglia: With that, I would like to turn the call over to Brian. Please go ahead.

Thank you, Aaron and good morning. Everyone.

Brian Giglia: During the quarter, we successfully navigated a number of challenges stemming from multiple weather events, labor disruption at one of our largest assets, and an evolving leisure backdrop, which particularly impacted demand across the market on Maui.

Brian Giglia: Despite this, we still managed to deliver on multiple aspects of our strategy.

Brian Giglia: As we noted in our update from early October, our operations in the third and fourth quarter have been impacted by labor activity at the Hilton San Diego Bayfront.

Brian Giglia: After adjusting for the impact in San Diego, our third-quarter earnings results came in generally in line with revised expectations as solid business transient demand at our urban assets.

Brian Giglia: better ancillary spend across the portfolio and solid cost controls both at the hotels and at the corporate level offset softer rooms revenue growth at our leisure properties.

Brian Giglia: Despite a more muted near-term outlook, we continue to be optimistic about our earnings potential as we move into 2025, which is expected to benefit from recent acquisitions, completed repositionings,

Brian Giglia: stronger citywide, improved group pace, and an easier comparison related to disruption, specifically from the labor activity in San Diego.

Brian Giglia: Later in the call, we will share some additional commentary on these multiple drivers of growth, but before that, let's review some additional details on our third quarter performance.

Brian Giglia: During the quarter, we saw sustained strength in group activity and further recovery in business travel.

Brian Giglia: While leisure demand continued to moderate, we again saw encouraging signs at our wine country resorts.

Brian Giglia: Starting with the group segment, our portfolio was once again led by the newly converted Westin Washington DC downtown, which grew RevPAR by 33% and total RevPAR by 39%.

Brian Giglia: The post-conversion performance continues to exceed our expectations as it is attracting higher quality groups and appealing to a broader range of transient customers.

Brian Giglia: The renovated hotel increased total transient room nights by 29% year-over-year at an average daily rate that was 31% higher than what it achieved as a renaissance in 2019.

Brian Giglia: In the third quarter, the hotel led the comp set in ADR index, which speaks to the degree of transformation we have achieved at this property under the Weston flag.

Brian Giglia: Other than San Diego, we saw strength across our convention hotel portfolio, which turned in a combined total REV PAR growth of nearly 15% in the quarter.

Brian Giglia: as robust performance in San Francisco, Orlando, and San Antonio added to the tailwinds from D.C.

Brian Giglia: Our third quarter group production was robust with room nights booked up 11% over last year at higher rates, translating into a healthy 15% growth in revenue.

Brian Giglia: Even more encouraging is that we are seeing improved 2025 group pace across the portfolio including Hualeah, New Orleans, San Francisco, Wine Country, San Diego, and Washington, D.C.

Brian Giglia: As we sit today, our group bookings for 2025 have improved since the last quarter, with revenue now pacing up in the low double-digit range.

Brian Giglia: Trends in business travel improved further in the third quarter with strength in several markets including Boston, San Francisco, and Portland.

Brian Giglia: The Marriott Boston Long War once again exceeded our expectations with total red part growth of 8.6 percent.

Brian Giglia: The hotel increased occupancy by over 500 basis points on higher rates as they took advantage of strong corporate demand on top of a solid base of group business.

Brian Giglia: In San Francisco, midweek transient demand outperformed, driving occupancy higher by nearly 800 basis points despite a softer group backdrop in the market.

Brian Giglia: In Portland, we were pleased to see further recovery this quarter with occupancy jumping more than 16 points compared to last year on stronger short-term demand and growing amounts of activity from both transient and group events.

Brian Giglia: This is an encouraging sign as Portland has been our most challenged market in recent years.

Brian Giglia: In Long Beach, our newly converted Marriott is being well received with strong early bookings including group pace that is up more than 50 percent as compared to 2019 and transient rate index that is up more than 30 percent over the last month.

Brian Giglia: We are seeing the benefit of our investment in this hotel in the fourth quarter as the hotel ramps up and gains share against its peers especially with the highest rated corporate guests.

We look forward to this talewind continuing through 2025.

Brian Giglia: Excluding Long Beach, which was still ramping up during the quarter, our urban hotel portfolio grew by a healthy 9%.

Brian Giglia: Leisure demand further moderated in the third quarter and we witnessed some ongoing normalization in pricing.

Brian Giglia: This has been particularly true in Key West, where rates grew to very robust levels following the pandemic, but where we have seen incremental price sensitivity in recent quarters.

Brian Giglia: As we discussed on our last call, the demand environment on Maui has been softer than expected resulting from more subdued vacation travel to the island following the fires last year.

Brian Giglia: At Waialea Beach Resort, both rates and occupancy came in below expectations last quarter.

Brian Giglia: While this more muted level of activity has carried into the start of the fourth quarter and is reflected in our updated guidance,

Brian Giglia: We have begun to see an increase in bookings and the upcoming festive period remains strong. In fact, total room nights are currently paced 20% higher than last year.

Brian Giglia: and while pricing has moderated, this still translates into 7% growth in room revenue for the FFESA period.

Brian Giglia: Looking further ahead, the market shows signs of improvement in 2025 with a more constructive group event calendar, driving strong group pace, and with the added benefit of our rooms and lobby refresh, which is underway now.

Brian Giglia: In other parts of our resort portfolio, the third quarter provided some more encouraging data points.

Brian Giglia: Our wine country resorts continue to season and are attracting more leisure customers in high-quality group events.

Brian Giglia: Montage Heetlesburg grew total REVPAR by 27% in the third quarter and benefited from multiple resort buyouts which translated into nearly 12 points of margin expansion.

Brian Giglia: Four Seasons Napa Valley could red part by over 5% despite comping over a significant buyout event that occurred in the prior year.

Brian Giglia: Our focus at both of these resorts continues to be on driving more business volume while managing expenses, and we are making progress.

Brian Giglia: In Miami, work continues on the transformation of the Andaz Miami Beach. However, the multiple weather events that impacted Florida in recent months, combined with additional time needed for permitting and inspections, has extended our project timeline by several weeks.

despite this delay and some incremental investment for the project.

Brian Giglia: We are confident that this will be a terrific asset and one that will result in meaningful value creation for our shareholders.

Brian Giglia: As the renovation is now in the final stages, the property is coming together nicely and we are confident that the resort is well positioned to deliver on our expectations.

Brian Giglia: Robert will share some additional details shortly, but our full focus is on completing the renovation and positioning the resort to contribute meaningfully to our 2025 earnings.

Brian Giglia: During the quarter, we took advantage of market conditions and repurchased $23 million of stock.

Brian Giglia: This brings our year-to-date total to just over $26 million at an average price of $9.83 per share, a meaningful discount to estimates of NAV.

Brian Giglia: Since the start of 2022, we have repurchased nearly $200 million of stock, and we have the balance sheet capacity to return incremental capital to shareholders as market opportunities arise.

while our outlook for 2024 has moderated.

Brian Giglia: It is being impacted by short-term factors, and we remain encouraged about the long-term growth potential we have embedded in our portfolio.

Brian Giglia: The guidance that Aaron will discuss shortly reflects the confluence of several short-term impacts to the portfolio, including disruption from severe weather that impacted our Florida assets.

Brian Giglia: lingering impacts from the labor activity in San Diego that have exceeded our initial estimates and a more muted leisure backdrop.

Brian Giglia: Despite a softer near-term outlook for the current year, we remain very excited about our setup for 2025, which should be among the most attractive in the sector.

Our group production remains healthy.

Brian Giglia: and layering on top of that, many of our markets with better citywide calendars.

Brian Giglia: Strong group pace in wine country, San Francisco, New Orleans, and Hualea, and growth at Ondoz and Long Beach should all lead to an impressive 2025.

Brian Giglia: In the meantime, we continue to thoughtfully execute on our three strategic objectives recycling capital, investing in our portfolio, and returning capital to shareholders.

Brian Giglia: And we expect the combined impact of these will drive incremental earnings and value in the years to come.

Robert Springer: And with that, I'll turn the call over to Robert to give some additional thoughts on our renovation activity and updated expectations for the Andaz Miami Beach. Robert, please go ahead.

Robert Springer: Thanks, Brian. During the quarter we made additional progress on several value enhancing projects. As we noted earlier, we completed work at the recently rebranded Marriott Long Beach downtown.

Robert Springer: We are quite pleased with the finished product and look forward to the hotel being one of several drivers of our growth next year.

Robert Springer: In New Orleans, we put the finishing touches on a renovation of our meeting space at the JW Marriott, which is now hosting a busy calendar of meetings in the fourth quarter and set to take advantage of strong group pace for 2025 with the added benefit of the Super Bowl.

Robert Springer: While the softer demand environment in Wylea has been disappointing, we are using the opportunity to move more efficiently through the soft goods rooms renovation and lobby refresh we have underway at the resort.

Robert Springer: We will be performing the remaining work around peak period and do not anticipate any meaningful disruption.

Robert Springer: While we have made substantial progress in the transformation of the confidant to Ondaz Miami Beach, it is a comprehensive and complex project with many moving pieces.

Robert Springer: Given some of the delays we experienced as a result of weather and an extended municipal permitting process that have impacted the pace of construction, we now anticipate debuting the repositioned resort in February of next year, about 60 days later than what we last shared with you.

Robert Springer: In addition, we now expect the total renovation investment, net of incentives, will be approximately $95 million.

Robert Springer: The incremental investment of $15 million is primarily the result of cost inflation above our initial estimates, some scope enhancement, and some additional spend associated with the longer timeline.

Aaron Reyes: The entire team is working to complete the project and reopen the transformed resort as quickly as possible to ensure we are able to deliver solid growth in 2025. We look forward to bringing you news of the resort's opening on our next call. And with that, I'll turn it over to Aaron. Please go ahead.

Aaron Reyes: Thanks, Robert. Our results in the third quarter were impacted by labor activity in San Diego.

Aaron Reyes: As we noted in the operations update we provided in early October,

Aaron Reyes: The headwind from this activity weighed on revenue growth and earnings.

Aaron Reyes: After adjusting for this impact, our third quarter earnings came in generally consistent with our expectations.

Aaron Reyes: As a benefit of better cost control, help to offset lower rooms revenue.

Aaron Reyes: Our quarterly results also reflect some headwinds from weather in Florida and from a more challenged operating environment in Maui.

Aaron Reyes: These were partially offset by stronger than expected performance in wine country and at most of our urban hotels.

Aaron Reyes: Comparable REV par growth, excluding the confidant Miami Beach, was effectively flat.

Aaron Reyes: but excluding the Hilton San Diego Bayfront, was an increase of 2.4%.

Aaron Reyes: Adjusted EBITDA RE for the third quarter was approximately $54 million and FFO was $0.18 per diluted share.

Aaron Reyes: Included in our earnings release this morning was our revised outlook for the year.

As we noted in our operations update last month.

Aaron Reyes: A new employment contract in San Diego was ratified in October.

Aaron Reyes: And while the hotel has resumed normal operations, there has been some lingering impact of bookings in the fourth quarter that have resulted in incremental earnings headwinds above our initial estimate.

Aaron Reyes: Our updated outlook also reflects some impact from the weather in Florida during the early part of the quarter and assumes a less robust leisure demand environment in Maui leading up to the festive period.

Aaron Reyes: Taken together, we now expect that our total portfolio full-year REVPAR change, which includes all hotels in the portfolio, will range from a decline of 3.25% to a decline of 1.75% as compared to 2023.

Aaron Reyes: If we exclude the confidant Miami Beach, REVPAR is expected to generally be flat to the prior year and vary in a range from a decline of 75 basis points.

to an increase of 75 basis points.

Aaron Reyes: As a reference point for our guidance, the full year 2023 REVPAR metric for the total portfolio, including the Hyatt Regency San Antonio Riverwalk prior to our ownership, was $219.

Aaron Reyes: And for the total portfolio, excluding the concept at Miami Beach.

Prior to your rep part was $222.

Aaron Reyes: Including our revised outlook for the balance of the year, we now estimate that full-year adjusted EBITDA RE will range from $220 million to $230 million.

Aaron Reyes: An adjusted FFO per diluted share will range from 75 cents to 80 cents.

Aaron Reyes: Based on the revised timing for the opening of Andra's Miami Beach and our efforts to minimize costs while the work is performed.

Aaron Reyes: We now anticipate that the resort will generate less of a loss than the current year, which is included in our revised earnings guidance ranges.

Aaron Reyes: Our balance sheet continues to be one of the strongest in the sector.

Aaron Reyes: We retain full capacity on our credit facility, which, together with our cash balances, equates to nearly $700 million of total liquidity.

Aaron Reyes: Subsequent to the end of the quarter, we entered into a $100 million delay-draw term loan agreement with a group of our existing lenders.

[inaudible]

Aaron Reyes: We anticipate fully drawing the loan in early December and using most of the proceeds to pay off the maturing mortgage loan secured by the J.W. Marriott New Orleans.

Aaron Reyes: Following this refinancing, we will have a fully unencumbered portfolio with a balance sheet that offers additional capacity and significant flexibility.

Aaron Reyes: After giving effect to extension options available to us, our next maturity will not be until 2026.

Aaron Reyes: We appreciate the continued support of our bank group on this new loan.

Now shifting to our return of capital.

Aaron Reyes: In addition to the share repurchase activity that Brian noted earlier, our Board of Directors has authorized a quarterly-based common dividend of nine cents per share for the fourth quarter.

Aaron Reyes: Based on our updated outlook, we anticipate that this dividend, together with our dividends in the first three quarters, should satisfy our expected distribution requirement for the year.

Aaron Reyes: In addition to the common dividends, the Board has also authorized the routine distribution for our Series G, H, and I preferred securities.

Speaker Change: And with that, we can now open the call to questions.

Speaker Change: 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.

Speaker Change: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

Speaker Change: Your first question comes from the line of Michael Bellisario with Baird. Please go ahead.

Thanks. Good morning, guys.

Speaker Change: I just want to focus on 2025 impacts, maybe first from San Diego, can you maybe quantify

what transient, what group.

Speaker Change: canceled for early 25, and then also on Miami, I think you had been talking about maybe 12 million of positive EBITDA next year. Where does that shake out today? Obviously, directionally lower, presumably, but can you quantify the delayed opening there in Miami and what that might do to 25 numbers? Thank you. Sure.

Speaker Change: Starting with San Diego, obviously a lot of noise in the quarter, both third and fourth quarter. Again, the impact of cancellations and overall cost impact is.

Speaker Change: is confined to the fourth quarter and so we gave the update in October. The only thing that changed since then is was a little bit more EBITDA impact.

Speaker Change: and that didn't come from additional cancellations, that was more of...

cost inefficiencies during the time period when books got

Speaker Change: fully closed and the expenses sorted out. The hotel obviously just doesn't run very efficiently during that time period. And there were some also some you know some

Speaker Change: concessions given to some of the groups that were in-house. So when we look at 25

Speaker Change: You know, our view is that the hotel is back to normal operations at that time, so there will obviously be some...

Speaker Change: some, you know, expense normalization, and we'll see some, we should see some...

Speaker Change: Robert Springer, Aaron Reyes, Robert Springer, Aaron Reyes, Robert Springer, Aaron Reyes,

Speaker Change: So, that on top of the disruption this year should be a good year for San Diego. On Miami, again, with the opening pushback a few weeks.

Speaker Change: We are originally looking at about 12 million dollars of EBITDA compared to 2 to 3 million lost this year

Speaker Change: The beginning of the year is one of the high seasons there, and so that impact is probably a couple million dollars of EBITDA, so maybe going from $12 to about $9 for the full year.

Speaker Change: And then on the loss this year, the gap loss of negative three still has a pretty meaningful pickup year over year, and then the hotel will continue to ramp from that point.

Thank you very much. Thank you. Thank you.

Thank you.

Speaker Change: Our next question comes from the line of Dory Keston with Wells Fargo. Please go ahead.

Speaker Change: Thanks, good morning. Have your stabilized yield expectations changed at the ONDAHs with the new $95 million cost? And then just as a quick follow-up, the group revenue pace you cited up double digits in 25, was that including or excluding ONDAHs?

Good morning, Dory.

Speaker Change: 8-9% on our total investment in the property, obviously with the capital going up slightly from last quarter.

Speaker Change: which was a combination of some of the delays which just has more results and more overhead costs staying with the property for that extended time period, some cost inflation, a little bit of scope, and then also in a building of you know

actually multiple buildings with done in different

time periods, or both in different time periods.

Speaker Change: There are some unforeseen things that come up with some NEP structural that have to be addressed to make sure that we have a

Speaker Change: you know a world-class building to match the world-class asset that we are

that we are putting up.

Speaker Change: You know our Expectation is that our yield still stays in that range. I would assume that With the additional capital it moves down a little bit to that range They are within that range and then looking at 2025 Our pace

Speaker Change: It does exclude ondos, but we'll exclude that next year because that would create quite a bit of noise. And then when we look at, you know,

Speaker Change: The different the different hotels next year, you know that are driving the 2025 pace

Speaker Change: You know, we have very strong citywides in New Orleans, San Francisco has growth next year, Orlando is picking up, and then on top of that San Diego and Montage have really great

Pace for next year and then Wiley also

Thank you for watching. See you next time.

Speaker Change: Our next question comes from Keegan Carl with Wolfe Research. Please go ahead.

Speaker Change: Yeah, thanks for the time guys. I guess I just want to dive into your NAP assets a bit. Just wondering what the strategic opportunity is here and if it's actually a better opportunity to recycle the capital given the asset performance is improving.

Good morning, Keegan. No, great question, and...

Speaker Change: in line with what we've said. You know, our focus is to get these assets stabilized. You know, it was a very productive quarter for both.

Speaker Change: You know it gives you it gives us an opportunity to see both of them starting to fire on Closer to also, and there's as as they ramp up montage had a really strong you know group quarter and

Speaker Change: For these assets, a strong group quarter means that there are several buyouts, and that obviously helps the performance. Four Seasons had buyouts last year that these buyouts don't always repeat, but was able to backfill with a good amount of transient.

Speaker Change: customers. Also in the montage we've had the residences come online this year of the 26 residences, 11 are participating. We expect to pick up one or more over the next 12 months and so that's also contributing to the performance

Speaker Change: And as we look into next year, we have great pace. We have great pace at montage. We have good pace in...

Speaker Change: in Four Seasons, now our occupied rooms are up in Four Seasons, the rate is down. That is by design because of the ancillary spend that both of these hotels can generate.

while it's taking a while to

to get these.

Speaker Change: back into the market. We have them set from a cost standpoint, and now it's just working with the managers to get them to the right group mix.

Speaker Change: which for montages is probably about 60 percent. We're around 50 percent today. Four seasons closer to 45 percent and we're probably around 30-35 percent today.

Speaker Change: So, everything moving in the right direction and then to answer those questions.

Speaker Change: So the last part of your question is yes, is that it will ultimately result in a monetization of these assets and we just need to weigh what the right time is and when we can realize

Speaker Change: That's what we're tasked with now is to determine when that point is, but as we said at the acquisition of these hotels that we would eventually look to recycle them and recycle them maybe sooner than some of our other holds.

Thank you very much.

Speaker Change: Okay, we'll move on to the next question. Our next question comes from the line of Sneed's Rose with Citi. Please go ahead.

Speaker Change: Hi, I wanted to ask you, well actually I want to kind of maybe do two-fold question just to follow up quickly on your Potential asset sale of the wine country assets. Do you think you could sell them for

Speaker Change: at or more than what you purchased them for. But the other question I wanted to ask you as well is in San Antonio, it looks like you're running.

Speaker Change: ahead of your initial expectations for the 2024 contribution. Do you think that it's worth extrapolating that kind of run rate into 2025, where you could do more than, I think you thought about maybe $20 million of incremental EBITDA from that asset for next year?

Oat.

Speaker Change: Good morning SMEADS. On NAPA, both the wine country assets, you know where we are and we're not quite where we want to be on a cash flow basis. We see a good path to get us there at this point.

Speaker Change: But whether we whether a sale price would be You know, I think right now we're talking at probably slightly below to where our basis is in them And that's going to depend on

Speaker Change: you know, how much of the potential upside we get paid for today? Or do we need to wait a little bit more to to realize that cash flow and then realize that value? So that's that's the give-and-take with evaluating the timing of sale for these assets.

On San Antonio, we're very happy with the

Speaker Change: with the acquisition. It's performing well in line with with where we thought and as you said a little ahead the Alamo redevelopment is is underway. I think that

Speaker Change: You know next year our expectations are probably about the same we do have during the summertime of meeting rooms You know light renovation that's happening

Speaker Change: Similar to what we did in the in the third quarter and in JW second third quarter in JW New Orleans that you know we were able to quickly get in there and and update the meeting space and

Speaker Change: So I think for next year that you know our expectation is is San Antonio is in line, but when

We have the full Alamo.

Visitor Center, and...

Speaker Change: and historic site reopening in 27 combined with the retail opportunities that we have on the ground floor and in our garage building that sits right next to the Dalamo Center, we think that our long-term you know opportunities here are pretty meaningful and are very happy with where we sit right now in this investment.

Thank you, appreciate it.

Speaker Change: Our next question comes from Dwayne Fennegworth with Evercore ISI. Please go ahead.

Speaker Change: You called out Maui as one of the items that drove the change since your guidance revision about one month ago. Maybe you could talk a little bit more about what shifted in Maui and if you could remind us, did you have any relief business there that's in the comparisons and when did that relief business effectively roll off?

Speaker Change: Good morning, Dwayne. Okay, so when we did the update in October, that was...

Speaker Change: you know, confined purely to the labor impact in San Diego. We didn't provide anything else on the portfolio at that time because we were still within, you know.

Speaker Change: Closing up the quarter and not not seeing where everything was at that point. So that was

That was that update.

And Maui did underperform in Q3 and it continued

Speaker Change: into Q4 and continues into Q4 and though it's overall just a general leisure pickup has been slower in this market than some of the other markets.

Speaker Change: When you look across the portfolio, you know, our group is firing on all cylinders, our business transient is doing very well. Leisure is kind of hit and miss where wine country we're seeing.

Speaker Change: We're seeing very promising results in other markets like Maui, Key West, occupancy is there, but it's a rate sensitive, it's become a little bit more rate sensitive of a market, and Maui has

struggled over the last couple quarters. There is no

Speaker Change: relief business in there and we fully lapped that over last year and so that's not impacting anything now. The positive that we've seen in Maui

Speaker Change: A couple things, one is that group picks up and group picks up very strong next year. We have some decent group in the fourth quarter, but 25, I know we've talked about this before, there's a large group.

Speaker Change: That's on island for two years and then off island and this was an off island year So our group pace is very strong next year

Speaker Change: The, you know, the state of Hawaii has been putting money into some promotional campaigns.

Speaker Change: for to promote Maui post-fire. We're looking for, you know, to continue to do that. We're getting great help from the brands and other distribution channels to help bring business back in there. The biggest.

You.

Speaker Change: positive we've seen recently is what we've seen airline flights and seats decline steadily over or been down for over a year now. For the month of December where we've actually seen that switch and so seats and flights are up you know about 5% and that mainly coming from the West Coast but that's the biggest feeder market for Maui and so that's a

Speaker Change: You know that's a big positive where we've seen we actually see more more lift going into the island And I think where that's you know for the month of December where that's translated to is we've seen Festive very strong Festive is up

Speaker Change: Layering on top of that our very strong pace for next year You know gives us a lot more Optimism as we look at Maui going forward

Thank you.

Speaker Change: Our next question comes from David Katz with Jeffries. Please go ahead.

Speaker Change: I'm really sort of curious whether we get to, we get all the way back.

Speaker Change: right to where it was and and what the trajectory to that point really is or do we just find some new normal really with it and and what do you think that looks like if we can ask your crystal ball? Okay

Good morning, David. Good morning.

We'll look into the crystal ball here.

Leisure destination.

Speaker Change: you know, following the fire, you know, half, you know, call it half of the

Speaker Change: The leisure component of the island, so your Kanapali and Kapalua, were impaired for a period of time.

and

off-kilter and and the normal

Speaker Change: cadence of travel and and places to stay and you know the customer in Guadalajara is not exactly the same customer that stays up in Kanapali and so

Speaker Change: That's shifting back now and getting back to normal, you know with the the airlift improving the group demand is absolutely not the

Speaker Change: not an issue here. We continue to have a very strong funnel and the amount of production, not only, you know, for Maui specifically that we've seen in the second quarter and third quarter, but the rest of the portfolio.

Speaker Change: The group funnel and production levels are, you know, not only good compared to last year or 19, but good over the last 10 years. And so, and that's specifically, that's for the entire portfolio and specifically Maui.

Speaker Change: I think when we look out a year, you know, is it all going to snap back? No, it usually doesn't, but when we look out a year, two years from now, I'm expecting to see a Maui that's pretty similar to what we saw before because when you look at

Speaker Change: the different, you know, luxury leisure destinations that are, you know,

Speaker Change: domestic and have good airlift and are have been highly desirable for decades. I don't see a major change in Maui and and the rest of the island is

Speaker Change: you know going through its rebuilding process and that will only enhance the you know the future experience as a traveler comes to the island.

That's really helpful. Appreciate it. Thank you very much.

Chris Darling: Our next question comes from Chris Darling with Green Street. Please go ahead.

Chris Darling: Thanks, good morning. Brian, as you think about capital allocation priorities for next year, do you think you'll be a net acquirer or a net seller? And then to the extent, you know, you look at either new acquisitions or perhaps, you know, the next renovation project within your existing portfolio, what's your appetite these days to step out on the risk curve, similar to what you did with the OnDos?

Aaron Reyes Aaron Reyes

Brian Giglia: You know, from an overall standpoint, I think our capital allocation strategy doesn't...

Brian Giglia: change, right? And I think we continue to employ a balanced approach where we look throughout our portfolio for opportunities to invest in. We look throughout our portfolio for opportunities to harvest.

Brian Giglia: And once we have those, then we look for opportunities to either redeploy capital through...

Brian Giglia: acquisition or through share repurchase and you know in in our space I think we've all become very accustomed to is this is a very fluid process.

Brian Giglia: And so when we look at the different components, if you look at the renovation, our view is that if we're investing in the portfolio, it should be kind of somewhere in the teens' return. If you're looking at an acquisition, that's, you know, $10,000.

Brian Giglia: look for future deployment and allocation, it really just is us.

Brian Giglia: seeing what the landscape looks like, and then allocating based on that spectrum where we think the best returns are. And up to this point, I think we've been pretty balanced with it.

Brian Giglia: I like the point in time that we acquired San Antonio for the price we did and the yield that it's providing.

Brian Giglia: I like the investment opportunities that we have and that we made in DC that's producing

Brian Giglia: you know meaningful EBITDA lift and and we changed the earnings power of that asset when you look at the

you look at it it's

Brian Giglia: It's index that it's doing and it's, you know, it's REVPAR index is in the 130s now.

Brian Giglia: And it used to be 105 as a renaissance, OK? So that's just not.

Brian Giglia: you know, being able to be a Weston now and charge a higher rate, that's giving...

Brian Giglia: You know, taking share from the market because you have a better product and a better distribution and a better brand.

I'm on it now.

Brian Giglia: And so those are opportunities that we'll continue to look at to do.

Brian Giglia: But we have to be mindful of the overall impact to the portfolio and the size of the portfolio as we allocate into those. But those, you know, hopefully we'll always have something like that in the portfolio to mine value. And if we don't, then it's time to recycle the asset and find one of the other sources to deploy.

I appreciate the thoughts. Thank you.

Thank you.

Speaker Change: Our next question comes from the line of Stephen Grambling with Morgan Stanley. Please go ahead.

Speaker Change: Hey, thanks. Moving down the P&L a little bit, I may have missed this, but where do you think wage inflation, before considering any cost containment measures, is running next year? And are there any differences by market? And perhaps as a somewhat related follow-up, but are there any policies being proposed by the new administration that could impact the business, either as you're thinking about wages or otherwise?

Speaker Change: Morning, Steven. Yeah, I think for a while now we've been we've been saying.

you know, our view on wages is kind of...

four to six percent.

Speaker Change: And I think that, you know, over maybe over the last year, we started to move a little bit down that spectrum, but still well within that spectrum. My expectation is that it remains in that range for, you know,

you know, as far as policies and other...

Speaker Change: other changes I think it's probably a little too early to know what sort of impact that might be and so we'll have to wait and see but based on you know we just

are helping just finish with their employees.

being wrapped up.

Speaker Change: I think where we ended up is one well within that range that we're talking about and and so I wouldn't expect anything to

to push higher over the near term.

Speaker Change: and I guess the follow-up on the on the election administration anything that you've got your eye on there

No, I mean, we'll obviously be watching, you know,

Speaker Change: there's there's a lot of different from from you know from

Speaker Change: ranging from SEC items to labor items but you know that that's going to have to be a we're going to have to actually see what happens before we we can start to speculator or or

think about any changes.

Speaker Change: Got it. Thanks so much. I'll jump back into the queue.

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Speaker Change: All right, our next question comes from Chris Veronica with Deutsche Bank. Please go ahead.

Hey, good morning guys. Thanks for taking the questions.

I guess.

on four seasons. If we

Speaker Change: It's good to see progress in the quarter, and I know you said more is on the way, and I understand the differences in, you know, buyouts and groups and everything like that, but you look at the margin structure of the property. It's very small. It's 85 rooms. It's much smaller than your average four seasons.

is there, do you guys feel like the brand...

Speaker Change: You've maxed out what the brand can do or is willing to do in terms of whether it's staffing or Services that are offered or it's just kind of the unique nature of that property Is there anything that can improve the structural margins or do you just have to get Ock and rate? And Trev part to a certain level

Morning, Chris.

Speaker Change: It's a little bit of all of the above, but we definitely need more occupancy. I think the rate is strong enough, you know, the rate will move, but we're happy with where the rate is and we've actually, you know, we're happy that they've moved.

Speaker Change: They've rationalized the rate at certain time periods to make sure that they get the occupancy in there to get the total spend in there.

Speaker Change: On the cost side, if you recall, we, you know, last year we went through a process with

Speaker Change: with Montage and they made great strides and you're seeing the the impact of that and the P&L now and and that was

Speaker Change: That was phase one and then we went over to our manager at Four Seasons and brought, you know, a lot of the same thoughts and other, some other changes.

Speaker Change: and had them go back and look at the cost structure. And that was just recently implemented where they really work with us. And while there are certain...

Speaker Change: components that have to remain to make sure that it is a luxury experience. There are other things that the guest doesn't really ever see or notice or

Speaker Change: you know, value. And those are the things that we want to make sure that we we maximize and that the manager is

Speaker Change: is doing things as efficiently as possible. So a lot of that went in.

Speaker Change: And you should expect to start seeing that in the quarters moving forward. A little hard to see it in Q3, especially when you have the efficiency of a buyout, and that come out one quarter and not in the other. But going forward, those

Speaker Change: those steps have already been taken and they've been implemented and they're in process now.

Okay.

Very helpful. Thanks. Thanks, Brian.

Speaker Change: Our final question for today comes from Flores Zandicom with Compass Point. Please go ahead.

Hey, thanks for taking my question.

Speaker Change: So, one of the things that you indicated that sort of caught my attention as well, Brian, the ancillary revenue opportunity, I think you were referring to the San Antonio Riverwalk Hotel, but how much of an opportunity is this in your portfolio, in particular the billboards?

Speaker Change: potential retail, what do you have today in terms of ancillary revenues and where do you think you could drive this going forward?

I think San Antonio, well, you know, we

Speaker Change: We've had experience with all this in the past and billboards is probably the most difficult in our portfolio just because of a building type or certain regulations and so I don't know if there's really billboard if there was billboard opportunity we would have taken advantage of it.

because we know how lucrative that can be.

Speaker Change: San Antonio is unique in the portfolio just because of the amount of retail. And again, it's not, you know, for us it's a lot. You know, it's a...

Speaker Change: walk-through That has some retail on each side and then at the end of that is the entrance to the well What is being redeveloped right now, but will be the entrance to the Alamo Center and then next to that is our parking structure that also has some ground floor retail

Speaker Change: So, while it's an opportunity here, we're probably talking in the, you know, incremental hundreds of thousands of dollars of pickup, which for the hotel is, you know, is meaningful and good value creation.

Speaker Change: throughout the rest of our portfolio you know we've I think we have mined this pretty well but I wouldn't say that there are

You know

There's nothing to this scale in the existing portfolio.

incremental. Now it doesn't mean that there's not some...

development opportunities throughout our portfolio where we have excess land.

Speaker Change: which could be a combination of retail, lodging, and other. So those are still, you know, still things that we are mining throughout the portfolio.

Speaker Change: you know, we built a ballroom in Orlando several years ago. There's the addition for, you know, ability to put additional keys in certain assets. So that's stuff we're still working on. And when we have updates on that, we will share it with our investors.

Thanks.

Speaker Change: All right, I will now turn the call back over to Brian Giglia, Chief Executive Officer, for closing remarks.

Speaker Change: Thank you everyone for your interest. We look forward to meeting with many of you at the upcoming conferences. Thank you.

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Speaker Change: Thank you everyone. That concludes today's call. You may now disconnect.

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