Earnings Call Transcript - SHO Q2 2022

Operator, Operator

Good morning, everyone, and thank you for being here. Welcome to the Sunstone Hotel Investors Second Quarter 2022 Earnings Call. I want to remind you that this conference is being recorded today, August 3, 2022, at 12:00 p.m. Eastern Time. I will now hand the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please proceed, sir.

Aaron Reyes, CFO

Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO and property-level adjusted EBITDAre. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. On today's call, references to our comparable portfolio will mean our 13 hotels portfolio, which includes the Confidante Miami Beach, but excludes Montage Healdsburg and Four Seasons Resort Napa Valley. Additional details on our second quarter performance 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 Ostapovicz, Chief Operating Officer. Bryan will start us off with some commentary on our second quarter operations and recent trends. Afterwards, Robert will discuss the transaction activity we completed in the second quarter. And last, I'll provide a summary of our current liquidity position, recent refinancing activity and a recap of our second quarter earnings results. After our remarks, the team will be available to answer your questions. With that, I'd like to turn the call over to Bryan. Please go ahead.

Bryan Giglia, CEO

Thank you, Aaron, and good morning, everyone. Overall, we are pleased with our performance in the second quarter as the growth that began in mid-February continued into the spring and early summer months. With accelerated corporate and group demand and continuing strong leisure travel, our portfolio generated its highest monthly occupancy since the onset of the pandemic. On the pricing side, our operators have remained disciplined in the revenue management approach and have maintained strong rates with nearly every hotel at or above 2019 levels in the second quarter. Our comparable portfolio achieved a second quarter average daily rate of $295, a 14% increase as compared with 2019. This is the highest quarterly ADR ever achieved for these hotels, driven in part by meaningful growth at our resort assets and by growing demand at our urban and group-oriented hotels. Our two wine country assets generated a combined second quarter ADR of nearly $1,350. We continue to be pleased with how these market-leading hotels are ramping up and the recognition they have received from numerous travel sites and publications. Including these two hotels, our total portfolio generated a second quarter RevPAR of $237 made up of a $320 ADR at 74% occupancy. Non-room revenue continued to be a bright spot during the second quarter. We once again saw significant sequential growth in food and beverage revenue, which increased 74% from the first quarter for our comparable portfolio and is within 3% of 2019 levels. While our second quarter outlet spend continued to grow. The primary driver of the higher out-of-room spend in the quarter was increased banquet contribution from the group activity at our hotels. Banquet and AV sales per group room was $212 for the comparable portfolio in Q2 and surpassed the prior high watermark for this metric from Q4 2019. We also saw meaningful increase in destination and facility fee revenue as these programs have now been rolled out to most hotels. Including the out-of-room spend, our total portfolio generated an additional $134 of revenue per available room in the quarter for total RevPAR of approximately $372. Turning to costs, while the property teams have been successful in reducing certain operating expenses and achieving permanent cost savings, our operators have not been immune from the labor and other cost pressures that have been impacting our industry. We are seeing some moderation in wage growth, and we continue to support our managers and their efforts to benchmark best practices and drive efficiencies where possible. In addition to labor, other items such as food costs have also been rising, and we are in close coordination with our operators to ensure they are adjusting menu offerings and prices accordingly. Despite these cost pressures, our comparable hotels generated a combined EBITDA margin of 35% during the quarter, which is in a similar range to that achieved for the same quarter in 2019. If we exclude the two hotels in our portfolio with significant renovation activity in the quarter, our pro forma comparable hotel EBITDA margin was a very strong 36.8%. While we are very pleased with our operators' ability to deliver this level of profitability, our focus is increasingly shifting to maximizing portfolio EBITDA as the hotels return to normalized occupancy levels. Now shifting to segmentation. Our comparable portfolio generated 214,000 total group room nights in the quarter, and the group segment comprised roughly 42% of our total demand. This group room night volume represents a 66% increase from the prior quarter, with average rates that were 7% higher than the same quarter in 2019. Group production for all current and future periods in Q2 was 197,000 room nights, which is consistent with the volume we put on the books in Q2 2021, but at a 40% higher rate. In terms of transient business, which accounted for roughly 51% of our total room nights in the quarter, comparable rate came in at $338 and was 24% higher than the pre-pandemic levels that we saw in the same quarter of 2019. Based on our second quarter performance and what we are seeing in July, we remain encouraged about the outlook for the remainder of 2022. Our recent trends reflect increasing lead volumes and strength in short-term booking activity with a higher contribution from corporate group events. Our group pickup in Q2 for the third and fourth quarters was nearly 170% of what was booked for the same time period in 2019. Group room nights for the third and fourth quarter 2022 are pacing at approximately 82% of pre-pandemic levels at an average rate that is 5% higher than 2019. This would imply that our overall group revenue pace for this time period is down only 15% from the same time in 2019. We have seen strong group booking activity in Boston and San Diego, where active citywide calendars should allow us to take advantage of compression in those markets. The group outlook at our Hilton Bayfront has improved as the year progressed and the second half of the year is down only 5% as compared to 2019, and the hotel's full year EBITDA should finish higher than 2019. Boston has also shown solid growth on the transient side with increased demand from both leisure and corporate travelers. While San Francisco has been slower to recover, we are encouraged by positive recent trends in the market as well. Our second quarter occupancy at the Hyatt Regency San Francisco more than doubled year-over-year, with rates higher by nearly 40%. Our newly renovated rooms are generating great guest feedback as they continue to come online. The city remains a supply-constrained, desirable long-term lodging market, and we expect it will continue on its positive trajectory as it catches up to the other major gateway markets. While the strength of the recovery has not been uniform across all markets and segments, we are increasingly seeing signs that travel patterns are normalizing. While leisure has led all segments, we expect increasing amounts of corporate and group travel to become a larger portion of demand as we head into the fall and that traditional seasonal patterns will increasingly reemerge. This is consistent with what we experienced in the second quarter with group and business transient strength in certain markets as well as a higher degree of seasonality in the quarter as our recent wine country acquisitions moved into their peak seasons. Our wine country resorts continue to ramp up nicely. And for the current year, we expect that they will generate approximately 80% of their combined full year earnings in Q2 and Q3 with the balance coming in Q4. As travel demand normalizes, we would anticipate the cadence of our quarterly profitability to also more closely resemble historical patterns with some adjustments needed for the current composition of our portfolio. Later, Aaron will provide some additional information on the historical distribution of our quarterly EBITDA to help put this into context. Based on what we see today, we expect that our comparable portfolios present growth in average daily rate for full year 2022 as compared to 2019 could be in the high single digits with full year occupancy about 15 to 16 points lower than 2019, which is weighed down by the Omicron impact earlier in the year. Moving to our transaction activity. Following the sale of three noncore hotels in the first quarter, we redeployed those proceeds plus additional capital in the second quarter into the purchase of the Confidante Miami Beach and the remaining 25% interest in the Hilton San Diego Bayfront. We are excited about these transactions and believe they will provide a combination of near-term cash flow from the Hilton San Diego Bayfront and long-term growth potential from the conversion of the Confidante into the Andaz Miami Beach. We continue to employ a balanced approach to capital allocation and returning capital to our shareholders. In addition to deploying capital into hotel acquisitions, which we believe will create long-term earnings growth, we also deployed an additional $34 million into the accretive repurchase of our own shares during the quarter, which brings our total year-to-date repurchase activity to nearly $80 million at an average price of $10.92 per share, a meaningful discount to publish estimates of NAV. Additionally, our Board of Directors approved a $0.05 per share common dividend for the third quarter. The reinstatement of our quarterly dividend is a product of our hotel earnings continuing to recover and the strength provided by our prudently levered balance sheet. While future dividends are always subject to expectations of earnings and liquidity, we believe we are well positioned to resume the same quarterly base dividend we had in place prior to the pandemic. To sum things up, as we move into the third quarter of 2022, we are encouraged by the recent trends we are seeing across our portfolio. We expect that our well-located urban and group-oriented assets will see continued growth in the coming quarters as demand for business travel and corporate events continues to catch up with the already robust leisure demand at our resort properties. Additionally, Sunstone continues to actively allocate capital investing in our portfolio, recycling sales proceeds into new growth opportunities and returning capital to our shareholders through share repurchase and dividends. We believe this is a winning formula that will provide long-term value to our owners. And with that, I'll turn it over to Robert to give some additional thoughts on our recent hotel transactions.

Robert Springer, President and CIO

Thanks, Bryan. We are very pleased to have closed on two hotel transactions during the quarter, which further enhanced the quality and value of our portfolio. Starting with our value-add acquisition of the Confidante Miami Beach, this off-market transaction represents a compelling opportunity to acquire well-located, fee-simple oceanfront real estate at an attractive purchase price and to utilize our in-house expertise and prior experience to renovate and reposition it as a premier beachfront resort under Hyatt's luxury lifestyle Andaz brand. The 339-room hotel sits on 1.5 acres and has a generous backyard. There is significant potential to enhance the property and transform its earnings potential. Post-repositioning, we expect the hotel to generate a very attractive 8% to 9% yield on our total investment, and we will own a fully renovated oceanfront luxury resort at an all-in basis of $900,000 per key in a market where per key valuations for similar assets are well in excess of $1 million. This is a type of investment we know well and have had great success with in the past. On the opposite coast, we also completed the acquisition of the remaining 25% interest in the Hilton San Diego Bayfront. This is a great group hotel in a premier convention market and consolidating our ownership of this asset makes a lot of sense for us. The hotel continues to perform well, and with the addition of a redesigned restaurant and marketplace, combined with a new 6,000 square foot waterfront meeting venue, we expect this hotel to continue to grow earnings as corporate meetings return. Our other two major renovation projects remain on schedule. The full rooms renovation at the 821-room Hyatt Regency San Francisco is slated to finish up in the fourth quarter. We have already begun selling new rooms, and they look great. Work is also progressing on the conversion of the Renaissance Washington, D.C. to the Westin brand. The meeting space has been completed, and we are now in the process on the rooms renovation and lobby upgrade, which are on schedule to wrap up during the second quarter of next year. While we will experience some displacement during the third and fourth quarters of 2022, these projects should provide meaningful growth next year, especially during the first quarter of 2023 when these large group hotels will be comping off of the Omicron impact from earlier this year. We are finalizing our next round of internal investments that will help to drive continued growth in the portfolio, and we will have more to share with you in the coming quarters. With that, I'll turn it over to Aaron. Please go ahead.

Aaron Reyes, CFO

Thanks, Robert. As of the end of the second quarter, we had approximately $153 million of total cash and cash equivalents, including $46 million of restricted cash. Subsequent to the end of the quarter, we completed an amendment to our bank credit agreement, which expands our term loan borrowing capacity, extends our maturity and restores full capacity on our $500 million revolving credit facility. We are very pleased to have completed the amendment, and we appreciate the support and partnership from our existing and new banking relationships. We continue to have one of the strongest balance sheets in the sector and retain additional capacity that we can use to grow per share earnings and NAV in the coming quarters. Shifting to our financial results, the full details of which are provided in our earnings release and our supplemental. The quarterly results, which surpassed our initial expectations reflect continued strength in leisure travel and strong sequential growth in corporate and group demand. Adjusted EBITDAre for the second quarter was $74 million and adjusted FFO was $0.30 per diluted share. As Bryan mentioned earlier, we are seeing indications that travel patterns are normalizing, which should result in the return of a more traditional seasonality into our quarterly earnings cadence. In 2018 and 2019, we generated approximately 30% of our full year corporate EBITDA in the second quarter. Given the Omicron-impacted start to the year and the anticipated contribution from our recent acquisitions, we currently expect that our second quarter will comprise approximately 33% to 37% of our full year EBITDA. While there is generally less variation in the distribution of our quarterly earnings in the second half of the year as compared to the first. Historically, our third quarter contributes more to our full year earnings than the fourth quarter. In 2019, our current 13-hotel comparable portfolio, which includes the Confidante Miami Beach, but excludes our two wine country resorts, generated RevPAR of $212 made up of a $252 ADR at an occupancy of 84%. As Bryan mentioned earlier, given what we see for the remainder of the year, we expect that the percent increase in the full year comparable portfolio ADR in 2022 could be in the high single digits as compared to 2019. While occupancy is likely to be 15 to 16 points lower than 2019, which is skewed by the Omicron impact earlier in the year. Given the impressive rates garnered by Montage Healdsburg and Four Seasons Napa, these two assets are expected to add approximately $25 to the total portfolio of ADR for 2022. As hotel demand continues to rebound, we expect to experience approximately $8 million of revenue displacement and $5 million of EBITDA displacement in the third and fourth quarters at our hotel in Washington, D.C. due to the in-progress renovation work. Now turning to dividends. Our Board has reinstated our base quarterly common dividend of $0.05 per share for the third quarter. This payout amount is consistent with the quarterly base dividend we distributed prior to the pandemic. Separately, the Board has also declared the routine distributions for our Series A and Series I 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.

Operator, Operator

Our first question will come from Anthony Powell with Barclays.

Anthony Powell, Analyst

So you reported some very strong, I guess, in the quarter and for the quarter group data and also for the year. I guess I wanted to ask what you're seeing for 2023, just so we make sure that we're not seeing any kind of pent-up demand concentrate in this year as people get back on the road for the benches in group.

Bryan Giglia, CEO

During the second quarter, group bookings were very strong. In Q2, we picked up 14,000 group room nights compared to 2019 when we only picked up 6,000. The lead volumes were also much stronger in Q2 than what we saw in 2021 and were about the same level as in 2019. Most of those bookings indicate a trend we've seen this year, where bookings, even for larger group business, tend to be more short-term. Therefore, the majority of those bookings were for Q2 or Q3 and Q4. Because of this, we haven't discussed the pace for 2023 much yet. I believe we'll focus on that more in the next quarter due to the shorter booking window compared to what we've traditionally seen. We do see good production, and based on our Q2 performance, we expect that booking window to start extending into Q3, Q4, and Q1 as we book this quarter. On the rate side, we continue to see strength for the remainder of the year, as Aaron mentioned, and we anticipate rates will keep moving up as we book groups into 2023. However, with the current shorter window, groups have adopted a more last-minute approach. We noted last quarter that larger corporate events were being booked within the same quarter, and that's the environment we've observed. But based on Q2, there is a significant amount of pent-up strength and demand. Additionally, looking at next year, we must recognize that Q1 will be a unique comparison due to the impact of Omicron this year.

Operator, Operator

Your next question will come from the line of Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth, Analyst

Can you comment on potential asset sales from here? How are you looking to shape the portfolio going forward? As markets like San Francisco continue to recover, how do you think about your assets there longer term and beyond just geography, what are the attributes of assets you may be looking to sell?

Bryan Giglia, CEO

Capital recycling will always be a part of our capital allocation strategy. Since 2020, we've sold about $440 million in non-long-term hotels and reinvested those proceeds into approximately $830 million in higher quality, higher growth assets, mainly resorts, along with the JVP at San Diego. Currently, our portfolio is much more balanced and of higher quality compared to what we had before, with a mix of roughly 44% group bookings, 25% business transient, and 31% leisure, which is a healthier mix than pre-pandemic levels. Looking ahead, there is no need to sell lower-performing assets to improve the portfolio's quality as it is already in an excellent position. Future asset sales will be based on opportunities that allow us to realize gains at private market values and reinvest those gains in a tax-efficient manner into new assets that show potential for additional growth. This growth can come from both urban and resort assets, and sales could come from either type of asset. The goal is to identify assets where we can achieve a value higher than our internal hold value and take advantage of market dynamics or special situations, as we did in La Jolla. We will then reinvest the proceeds into areas where we expect more growth. In regard to San Francisco specifically, we believe it remains a strong long-term market despite being slower to recover, and it continues to face supply constraints. The rates of transient and group bookings still have a notable way to go before reaching 2019 levels, but we have observed promising acceleration similar to earlier recoveries in markets like Boston. Different markets are rebounding at varying times and speeds, but our outlook for San Francisco in the coming quarters and years is positive. We anticipate meaningful growth in both revenue and profit as we progress through this year and into the next.

Operator, Operator

Your next question will come from the line of Chris Darling with Green Street.

Chris Darling, Analyst

Bryan, I'm hoping to get your views on how the transaction market has evolved over the past 3 or 4 months. Obviously, fundamentals are continuing to accelerate, but we've also seen some choppiness in the debt markets, and I think there's some more macro fears out there. So just curious to get your views on how valuations evolved.

Bryan Giglia, CEO

Sure, I'll start and then Robert can add to that as well. Regarding the transaction market, there are two competing factors at play. On one hand, operations and cash flow are increasing, but on the other hand, interest rate hikes and debt market availability present challenges. For hotel owners, particularly private ones, the CMBS market serves as the primary funding source for hotel transactions. Historically, this market has seen periods where it experiences disruptions, significantly slowing down, and then eventually recovering. Currently, we seem to be in one of those disruptive phases, characterized by a fair amount of uncertainty, making the market less efficient than usual. This will undoubtedly slow the pace of transactions. However, I believe transactions will still occur, albeit at a much slower rate compared to the beginning of this year. Eventually, as has happened in the past, the market will recover, and transaction volumes will increase again. We are currently facing several factors, including interest rates and other economic concerns, that will affect pricing, cash flow from the hotels, and overall performance. While these can serve as offsetting elements, until the debt market stabilizes, the current environment may remain uncertain regarding potential impacts.

Robert Springer, President and CIO

Yes. Well said, I don't think there's much to add. I agree. I do think we will see a slowdown in transactions. I do think, as Bryan pointed out, the challenges in the debt markets will definitely slow down transactions, especially larger transactions as they're just harder to finance. Obviously, movements in the equity markets will also have an impact as REITs are making decisions on capital allocation. So we do expect that things will slow down here in the near term, but we still think the lodging recovery is very much intact. And as Bryan said, we feel that it's more a shorter-term impact than more of a longer-term statement on values or impact from there.

Operator, Operator

Our next question will come from the line of Patrick Scholes with Truist Securities.

Patrick Scholes, Analyst

With Europe opening back up again, have you seen any pressure on demand for some of the resorts, what I would call hot resorts that did exceptionally well over the last year or two, namely in Florida or Western resorts. Any pressure on demand from that higher-end customer choosing to look to go to Europe instead of staying domestically?

Aaron Reyes, CFO

Yes, Patrick. When we analyze the portfolio, particularly our few resorts, we've noticed some occupancy pressure during the summer months, especially in Key West, which shows a slight decline in occupancy according to STAR data. However, our rates remain strong. In Maui, we have a solid mix of group and leisure bookings. For Q2, Q3, and Q4, we don't anticipate any issues with demand; rates and group business are on the rise. As summer wraps up and school starts, we expect robust demand at our Napa hotels, which are still in the ramp-up phase. Although it will take time for them to stabilize, they are performing as anticipated. The Montage opened before the Four Seasons and is seeing strong group bookings, which will help us raise rates during peak season. The Four Seasons is catching up, and we anticipate continued growth there as well. Key West appears strong for Q4, and we are very optimistic about Hawaii for the remainder of the year.

Operator, Operator

Our next question will come from the line of David Katz with Jefferies.

David Katz, Analyst

So just given the commentary about what sounds like a slowdown in the availability or some of the challenging underwriting conditions for properties, how would you have us square that with the other update in terms of expanding your availability of capital. Was that just available now and so you took it or is that something that could wind up in the return channel or how would we think about all that?

Bryan Giglia, CEO

So with the credit facility, as Aaron mentioned, during a period when capital is becoming scarcer, we want to thank our bank partners for not only assisting us with the process of extending our existing debt but also permitting us to increase the term loan debt. Following the acquisition of Confidante and our interest in the San Diego joint venture, we had approximately $230 million drawn on our credit facility at that time. By raising the term loans from $108 million to $350 million, we were able to pay off the line draw, replenishing our line with additional capacity. While that capacity might not be immediately useful due to current market conditions, if an opportunity arises today amid some dislocation, we now have a completely undrawn line to tap into without needing to take on more debt or sell other assets for acquisition. As David has noted before, we certainly have more debt capacity, but accessing it can be more challenging during certain times, particularly now with some market dislocation. Hence, having full access to the line is crucial, as it allows us to be agile when others face constraints. This is why we deemed it essential to secure a more permanent or longer-term solution for that line draw while importantly replenishing the line to seize future opportunities.

Operator, Operator

Our next question will come from the line of Chris Woronka with Deutsche Bank.

Chris Woronka, Analyst

Question is kind of on margin potential. I know there's a lot of different ways to look at it. And I think you guys in Q2, had just a couple of hotels that because they're further behind on recovery drove down your overall potential. But going forward, as we add a little bit more occupancy back and rates, I don't want to call it top, but if one were to call a top on rate growth, do you think you can still get margin expansion or are we in a situation where inflation is kind of catching up and now you’re adding more variable expense at a time when rates are potentially getting close to a peak?

Bryan Giglia, CEO

If we examine the margin, your observation is completely accurate. San Francisco continues to be the largest factor impacting our margins from quarter to quarter. Based on our Q2 findings and our expectations for continued growth in Q3, Q4, and into next year, the large 800-plus room hotel in San Francisco will contribute positively to our margin story as it begins to normalize. Our position on margins has consistently been that we anticipate improvement of 100 to 200 basis points compared to 2019. Even if rates plateau or remain stable, they've significantly contributed to margin enhancements, along with cost reductions across our portfolio. In terms of various cost components, we expect labor costs to be within the 4% to 5% range, possibly leaning closer to 5% this year. On the food and beverage side, we have managed to offset some costs through pricing strategies and other methods. Additionally, long-term outcomes will be influenced by fixed costs like real estate taxes, which have been relatively stable this year, showing an increase of about 4% to 5%. Insurance costs have risen significantly in recent years. However, considering how the hotels are operating, the cost-saving measures we've implemented, and other efficiencies in the food and beverage area, we remain optimistic about achieving better margins as we return to normal volumes. Despite the various challenges we face, we are confident in our ability to improve margins once things stabilize.

Operator, Operator

Our next question will come from the line of Bill Crow with Raymond James.

Bill Crow, Analyst

A couple of quick ones here. Any material cancellation or attrition fees collected in the second quarter?

Bryan Giglia, CEO

Yes. Did you have another question, Bill? We can probably...

Bill Crow, Analyst

Yes. Sure. San Francisco and the group outlook, specifically in the first quarter of next year. I mean that's typically a really important quarter for the year overall. And I'm just wondering how that's starting to shape up?

Bryan Giglia, CEO

In the first quarter, we experienced an impact from Omicron, which led to cancellations totaling around $6 million, whereas typically they would be about 1% to 2%. In this recent quarter, cancellations amounted to approximately $1.8 million, compared to around $1.1 million to $1.2 million in the second quarter of 2019. We anticipate that cancellations will normalize to about $1.5 million per quarter moving forward. There were some one-off events, but nothing significant. Regarding San Francisco, it's a market that has underperformed until now. However, we have seen impressive growth as we entered the second quarter. Year-over-year growth remains below 2019 levels, but it is improving. Business travel has also picked up, particularly from financial and legal sectors. The outlook for San Francisco is definitely getting better. Looking into the first quarter of next year, rates are increasing. Chris, do you have anything to add?

Chris Ostapovicz, COO

San Francisco performed significantly better in Q2 than we anticipated, particularly regarding rates. However, the citywide production hasn't met our past expectations. Looking ahead to Q1, I am confident that it will be much better in 2023 compared to 2022, especially considering the impact of Omicron. We experienced cancellations during that time, particularly with JPMorgan's health care citywide event, but we don't expect similar cancellations now. Additionally, we completed room renovations throughout most of 2022, and we are currently selling those renovated rooms, which have been very well received. We are seeing improved rate traction that exceeds our initial expectations, and I believe we will perform well in Q1.

Operator, Operator

Our final question will come from the line of Smedes Rose with Citi.

Smedes Rose, Analyst

I just wanted to ask you a little bit about the capital return program you put back in the $0.05 dividend. Does that reflect just sort of confidence in the business going forward or is that something that reflects taxable income that needs to be distributed? And would you expect to need to do some sort of true-up at year-end? And then maybe just help us think about how you're thinking about share repurchase here since you still continue to trade at a pretty steep discount to at least consensus NAV.

Bryan Giglia, CEO

Regarding the dividend, we view it as being connected to our taxable income, which is derived from the performance of our assets, including any gains or losses on sales and any net operating losses we may have. Currently, as hotel operations increase and group bookings recover, we are generating enough taxable income to support the dividend. Our past policy is to pay the base dividend in the first three quarters and then adjust in the fourth quarter. Right now, we believe that a $0.05 dividend, based on our recent cash flow from hotel rents, is adequate. As the situation improves and we find new ways to invest capital, any future adjustments to dividends will depend on those opportunities and how we approach returning capital to shareholders. We are focused on maintaining balance; for instance, we've adjusted our portfolio by increasing the proportion of resorts while reducing our reliance on urban and group properties, which now stands at 44% group, 31% leisure, and 25% business transient. We have been careful with our leverage, using some of our balance sheet capacity to achieve this. When considering capital returns, we aim for balance between share buybacks and dividends. We have various ways to return capital and hope to manage that effectively while promoting company growth. We’re sequencing our cash flow thoughtfully, including recent acquisitions that have strong cash flow potential despite upcoming renovations. Overall, we plan to continue balancing our approach to share repurchase and dividends as we return capital to our shareholders.

Operator, Operator

Our final question will come from the line of Michael Bellisario with Baird.

Michael Bellisario, Analyst

I have 2 questions. First one is very quick. I'll ask them both the other. Just one, you guys have an updated pro forma net leverage calculation you could share adjusted for the recent transactions. And then bigger picture in terms of fundamentals. I know you said you're not seeing any signs of slowing, but if you were to see some softness or were to see cracks emerge, what markets or what segments, customer segments that do you think you'd see that pop up first?

Bryan Giglia, CEO

Okay, I’ll address the leverage aspect first, and then Aaron can provide corrections if needed. The current situation with leverage is somewhat complex. A good way to approach it is by normalizing Confidante. It will naturally generate less cash flow in the short term after its renovation compared to its current state. We can use what we have today and factor in some future ramp-up, as we mentioned that the two wine country properties still have room for growth. We indicated our stabilized year would be around the 25% range. Therefore, when calculating net debt plus preferred to EBITDA, our portfolio likely sits between 3 and 3.5 times leverage. Part of this accounts for the role of Confidante, but I believe this is a reasonable approach as it reflects the current earnings capacity of our portfolio. Aaron, do you want to add anything?

Aaron Reyes, CFO

Yes, Mike, just to add to that. I think, Bryan, certainly in the neighborhood as you think about the pro forma adjustments. If you actually would just look at the face of the financial statements and then some of the information we've provided in our supplemental, you'd see that on a net debt-to-EBITDA only it's sub-4% on a current basis, but certainly, as you adjust for some of the stabilization of the new assets that you get to something with that 3 handle that it's pretty, very manageable on attractive leverage level.

Bryan Giglia, CEO

When we examine our portfolio, everything begins with real estate, and we aim to allocate our capital to areas that have multiple demand drivers. Take Wailea as an example; some families might choose Wailea now that they have Europe or other options available. This might lead to a return to more normalized trends there. The U.S. recently opened its borders to international travelers, and while Hawaii typically attracts fewer Asian travelers, about 8% or 9% of our historical room nights are from Canada. We've already seen those Canadian travelers returning quickly. In other markets, however, there hasn't been a significant influx of international visitors. As U.S. travelers explore other destinations, additional tourists can fill that gap. Regarding the lodging market, the main areas of concern seem to be the secondary or tertiary resort markets that have significantly raised rates over the past year and a half. Those markets will likely feel the impact first. For instance, if travelers want to go to Miami or Key West and those locations reach capacity, it will push demand to secondary and tertiary markets. I anticipate that if we start seeing signs of a downturn, they will likely manifest more in those areas than elsewhere. I wanted to thank everyone for the interest in the company, and we hope that everyone has a good summer break and get those kids back to school and look forward to seeing you all at conferences soon. Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude today's meeting. Thank you all for joining. You may now disconnect.